Workshop on Financial Inclusion – APEC 2013

23 – 24 May 2013North Sulawesi- Indonesia

Regulatory Framework to Promote Financial Eligibility of

Poor Households and SMEs

Workshop on Financial Inclusion – APEC 2013

23 – 24 May 2013North Sulawesi- Indonesia

Presentation Outline

•The Financial Exclusion Problem•The Concept of Financial Eligibility•Role of Regulation•Regulatory Experience of Selected Countries•Conclusions

An Acute Global Problem

Note: According to latest available data, the adult population now is about 5.08 billion

4.7

2.52.2

0

1

2

3

4

5

Total AdultPopulation

Unbanked Banked

Financial Exclusion FiguresB

illion

s

Asia is home for 59% of the Unbanked Adults

An Acute Global Problem

876

612

0100200300400500600700800900

1000

East Asia South Asia

35% 24%

Million

s

MSME’s in Emerging Markets

365-445

170-205

75-91

120-149

050

100150200250300350400450500

Global East Asia South Asia Other Regions

Estimated Number of MSMEs

Million

s

MSME’s in Emerging Markets

85%MSMEs that suffer from credit

constraints

70% Do not use financing from financial institutions at all &

want it

85%Unserved or underserved MSMEs in East Asia, South Asia, and Sub -Saharan Africa

MSME’s in Emerging Markets

Many formal SMEs are unserved or under-served

• 45- 55% of 25 million to 30 million formal SMEs do not have access to formal institutional loans or overdrafts

• Over a quarter of the formal SMEs do not even have a bank account

• Estimated credit gap for formal SMEs in East Asia alone is in the range of $250 billion to $310 billion

Source: Stein P. et al. (2010) . Two Trillion and Counting.Source: IFC and Mckinsey and Company Study (2010)

The Financially Excluded are a diverse group

• disadvantaged and vulnerable groups• low income households• Poor people without permanent residential

address• handicapped persons• undocumented migrants• women-owned SMEs• SMEs in rural areas• Newly established SMEs

A Diverse Group

Self –Reported Barriers

Financial Eligibility

•Lower income people and most SMEs are categorized as unbankable partly because they are unable to meet the requirements of banks for account opening, saving or credit.

•If a SME must submit a tax return to borrow from a bank, those without tax returns are made ineligible.

•If regulations do not permit financial institutions to accept movable assets as collateral for loans, most SMEs will not be eligible to borrow

The Role of Regulation

If the regulatory approach is not risk-based, negative impact on the poor

A risk-based approach is key to financial inclusion:• Taking a Risk-Based Approach to AML/CFT

safeguards • Simpler KYC norms/CDD measures for small

value accounts• Flexible type of documentation that are

within reach of poor people• Applying a “Progressive” or “Tiered”

KYC/CDD approach

Reserve Bank of India (RBI) regulation in the early 1990s allowed banks to open savings accounts for Self-Help-Groups (SHGs)

60% of the SHGs faced challenges in complying with KYC norms •In March 2013, RBI simplified KYC norms for SHGs•Verification of all SHG members no longer required •For credit access, no separate KYC if verification has already been done for savings account

Pro-Poor Regulatory Measures: India

Pro-Poor Regulatory Measures: India

• AML/CFT regulations authorize banks to open Basic Savings Bank Deposit Account (BSBDA) without normal identification documentation

• Only customer’s signature or thumb print and a self-attested photo is needed

• BSBDAs as of 31 Dec 2012-171.43 million

Pro-Poor Regulatory Measures: Philippines

• Central Bank regulations relaxed identification document requirements

• Allowed banks to accept documents that are

within reach of poor people

• Barangay certification or certification of a local leader is accepted as proof of identification and residence

Pro-Poor Regulatory Measures: Philippines

• Philippines required SMEs to provide tax return and audited financial statement

• Most SMEs financially ineligible • In early 2012, Central Bank exempted small

enterprises from these requirements increasing financial eligibility of the SMEs

Pro-Poor Regulatory Measures: Fiji

• Identification document can be provided by a “suitable referee”

• Suitable referees include village headmen, religious leader; and

• Official of the Fiji Sugar Corporation sector office [for sugar cane farmers and laborers]

Pro-Poor Regulatory Measures: South Africa

•Regulation provides for a form of simplified CDD for products meeting specific requirements

•No need for the verification of residential address

•This exemption enabled banks to launch the Mzansi account

Pro-Poor Regulatory Measures: Mexico

•The Transparency Law of 2007 made it mandatory for banks to offer a fee-less basic deposit product

•Financial authorities (CNBV, SHCP and Banxico) joined efforts to identify regulatory barriers to financial inclusion

•Major barrier identified was the undifferentiated implementation of KYC requirements

Pro-Poor Regulatory Measures: Mexico

•In 2011, Mexico reformed its legal framework for AML/CFT

•Established a system that divides bank accounts into four levels

•Introduced simplified KYC and CDD requirements for account opening that are tiered in line with risk levels

•By July 2012, the number of level 1-3 bank accounts reached a total of 9.4 million

FATF and pro-Poor Regulations

•FATF recommendations strongly support adoption of RBA to AML/CFT safeguards

•Revised FATF recommendations allow for simplified CDD measures with a lower risk of ML and TF

•FATF encourages regulators to consider applying “Progressive” or “Tiered” approach to KYC/CDD

•FATF Recommendations provide adequate flexibility for pro-poor regulation

•But some countries are yet to take advantage of this flexibility

SSB’s New Outlook on Financial Inclusion

•Since the call from G20 Leaders in 2010 for Standard Setting Bodies (SSBs) to find ways to promote financial inclusion significant progress has been to make the SSBs more sensitive to FI issues.

•The Alliance for Financial Inclusion (AFI) and other Implementing Partners of GPFI have been promoting dialogue with SSBs and FATF and BCBS have issued guidance papers.

•The 5th G24-AFI Policymakers’ Roundtable on Financial Inclusion, held on 17 April 2013 endorsed a proposal for SSBs to participate in peer learning to support countries in implementing balanced policies.

Conclusion

• Regulatory framework has a profound impact on financial eligibility of poor households and SMEs

• But regulators struggle to keep abreast of new technologies and business models

• SSBs have advocated a risk-based approach to balance financial stability/integrity with financial inclusion.

• Peer learning through AFI plays a critical role in helping countries to implement balanced regulatory frameworks

Discussion