James Militzer

How Smart Policy Can Promote Financial Inclusion: A Q&A with Alfred Hannig, founder and executive director of the Alliance for Financial Inclusion

With crowd-sourced loans bouncing from country to country online and telcos beating banks at their own game, it can be hard to even keep up with the innovations that are reshaping global finance. Imagine how hard it is to regulate them.

Alfred Hannig is the founder and executive director of the Alliance for Financial Inclusion, an international initiative dedicated to providing the world’s 2.5 billion unbanked people with safe access to the formal financial system through smart policy initiatives. He spoke with NextBillion Financial Innovation recently about the challenges regulators face when balancing innovation and consumer protection.

James Militzer: Can you give an example of a country that’s regulating its financial industry in a way that protects consumers and fosters stability without stifling innovation or putting up barriers to inclusion? What are they doing right?

Alfred Hannig: There are many countries doing this quite well today. Some examples include the Philippines, Peru, and Tanzania, all of which have fairly open approaches to innovation, ensuring a proportionate risk-based approach to regulation with polices that provide space for innovation.

South Africa and Mexico have a long and successful history in enabling progressive regulations, allowing a tiered approach to customer due diligence and recognizing the reduced risks posed by low-risk clients. In 2001, South Africa first issued ‘Exemption 17’, which dispensed the obligation to collect and verify the address details of presumed low-risk clients. Exemption 17 was further revisited in 2004 when the Mzansi account was launched to further expand the list of recognized identification documents. As for Mexico, it has developed a tiered approach with no identity requirements for tier 1 clients, which includes the poorer segments of the population.

JM: Can you give an example of a country that’s doing the opposite – either over or under-regulating – and some examples of the real-world impact of these policies on people?

AH: Regulators are by nature very cautious when considering the potential abuse of the financial sector by criminals. Some measures may adversely impact financial inclusion efforts when not calibrated to meet the national context and reality.

In 2010, for example, Fiji introduced a requirement for any person who wanted to open a bank account to produce a national tax identification. This posed obvious challenges to financial inclusion efforts in the country, and discussions had to quickly be held between the policymakers and regulators in order to align the various regulations and find a common ground for financial inclusion.

JM: What do you consider to be the biggest risks/opportunities in mobile banking, and how can policy makers and companies mitigate those risks without excluding people?

AH: With the dramatic increase in the number of mobile phone subscribers as well as developments in mobile technologies around the world, the use of mobile and related agent banking can significantly reduce the costs, as well as the reach of financial service providers. Mobile banking allows banks and other financial institutions to substitute traditional fixed costs associated with brick and mortar branches for the variable costs associated with mobile channels as well as various agent-outsourcing arrangements. The use of mobile banking models based on new communication technologies and the ability of financial providers to make use of pre-existing third-party infrastructure makes it possible to provide financial service access to a greater number of clients at a lower cost than has been previously possible.

From the customer’s perspective, mobile banking and the use of agents provides significant advantages in time, convenience, cost and security. In many countries, we see that mobile phone agents are becoming one of the primary connections between customers and financial institutions. In addition to helping progress in terms of financial inclusion, nonbank agents can bring other benefits, such as contributions to economic and social development. Some of the biggest obstacles to supporting mobile banking have included anti-money laundering and counter financing of terrorism (AML/CFT) controls and the ability to offer services such as e-money.

Regulators in several countries are now coming together to address these obstacles and supporting specific e-money regulations to address controls and provide greater access to mobile banking services. For example Peru, El Salvador, Kenya, Tanzania, Nigeria, Ethiopia, Indonesia, Pakistan, Bangladesh, and the Philippines have all providing regulations that permit e-money and tiered AML/CFT regulatory frameworks.

JM: Speaking of mobile banking, did the Kenyan government do anything in particular that encouraged the success of M-PESA, and if so, could their approach be easily replicated in other countries?

AH: Kenya provided an open enabling environment for e-money issuers that made it possible for the success of M-PESA. Other countries that have provided similar open approaches include countries such as Tanzania, Peru, and the Philippines, all of which have allowed a fairly broad range of both banks and non-bank financial institutions to provide e-money services that can directly promote the uptake of mobile banking and mobile payments in general.?

JM: What role should regulation play in promoting responsible microfinance?

AH: Regulators and governments can play an important role in ensuring responsible access to financial services in general by promoting greater transparency on pricing and practices, consumer protection standards, and greater use of credit information sharing. This can promote better understanding on behalf of clients and customers but also promote greater transparency and more responsible financing by financial service providers.

JM: Are there any financial innovations (or innovative regulatory approaches) you’ve seen that you’re particularly excited about?

AH: Apart from mobile banking and broader mobile financial services, we also see an important role for e-money in general as well as agent banking. New developments in technology are also promising, such as mobile POS platforms, cardless ATM services, and new players that offer a broad range of payment, credit, or other financial services.

With appropriate risk-based approaches to new technologies and new players, we see that regulators can play an important enabling role in supporting a range of both new and old financial service providers that, working together, can provide greater financial access.

financial inclusion, governance, microfinance