Financial inclusion with caution

Regulations, in a financial system provide the assurance that only the financial institutions that are worth operating operate and the general public’s interests are protected. If the regulations rigorously protect the interest of the public it builds faith in the financial system. This also relieves the people from doing their own research and analysis before opening a simple saving account. Not to mention that vast majority of the population can neither be expected nor will be able to carry out financial analysis of a financial institution with the limited publicly available information.

In many countries, we can put in our savings in a bank with a high degree of assurance that our money would be safer there than even with us. This trust is based on the faith on the management capacities of the financial institutions, checks offered by regulator and recourse mechanisms available in case of any losses.

However, in absence of these one has to be very cautious, particularly if you are an agency working on financial inclusion and asking low income people to link with banks.

One has to understand that all financial institutions are exposed to credit risks, operational risks and liquidity risks. These risks may manifest even in the most advanced and regulated markets and can lead to losses. We have seen financial crisis even in most sophisticated markets.

Financial inclusion agenda is being hotly pursued in almost all developing countries and with good reason. However, not every country in the world has the kind of regulations, management capacity and recourse mechanisms available that may be required to protect people’s interest. Is it then fair to ask people to put in their money in any institution where it may not be safe?

In a recent visit to one of the African countries, we found that while microfinance was regulated, the regulations did not have any minimum capital requirement, no capital adequacy requirement and to top it all, all MFIs were allowed to accept deposits. Not a surprise, that many institutions in the country had folded up in last couple of years due bad portfolio quality, frauds and political turmoil; people had lost savings.

Thus, development agencies pursuing financial inclusion and linkages have the added responsibility of doing macro analysis of these aspects. This is particularly true for countries having weak financial systems, small market base, corruption and political instability. The bad news is, that we do not have dearth of such countries and most of these countries are those where financial inclusion agenda is being pursued.

It is imperative, that development agencies and international NGOs develop their own capacities to be able to see through these risks. They also need to develop their own financial inclusion frameworks which subsume macro analysis, analysis of institutions and training of community on their rights and recourses available, should the financial institution they are linked with get in trouble.

In nutshell, the safety of a formal bank, a formal finance company, a mobile network operator or the financial system itself cannot be taken for granted or at face value.

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