Financial inclusion challenges

Benel D. Lagua

Posted on April 22, 2016

A 2006 World Bank report shows a strong correlation between reduction in poverty and the development of financial sector. While the movement for financial inclusion attends to the needs of the poor, it improves the overall economy even more. Policy makers realize that it is not enough to target the affluent, as financial services for the poor will contribute to a more stable society for which increased investments across all sectors becomes a beneficial consequence.

As the experience of the Philippine performance reveals, overall growth will not automatically translate into benefits across all sectors, especially the poor. Growth must target the poor and must consider the segmentation between the more productive and less productive sectors. It cannot be one size fits all. Policy must consider the extent of mobility across all sectors so the less privileged can benefit from improvements in another arena.

Financial inclusion is the process of providing access to financial services for all -- savings, credit, investment, money transfers and other products. And this must be made available in a timely basis and at an affordable cost. It is especially critical for those who are considered to be at the bottom of the pyramid -- people who are unbanked and struggling in an uncertain world of financial exclusion and insecurity.

The challenge of financial inclusion, however, is daunting. When the aim is to create jobs, what is more effective? Is it lending to the very small businesses, often referred to as micro-enterprises, or lending to the slightly larger business or small and medium enterprises (SMEs)?

One researcher, David Roodman, has asserted that “on current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero.” Mr. Roodman found that many loans barely improve people’s poor circumstances. He also reports that the impressive repayment records of microcredit come at a large price to borrowers, most of whom are terrified to face consequences of non-payment because of peer pressure. Mr. Roodman bewails that microfinance has ignored the best way for people to improve their prospects which is by saving money. Microfinance lends to people who might never be able to get out of the debt cycle and gives them little incentive to generate their own funds.

It can be argued that the Roodman view is extremist and contrary to the findings for which Mohammad Yunus earned his Nobel Prize. Still, it is a view worth very serious consideration if only to improve on existing modalities for the development of a savings focused microfinance system.

Arguably, SME lending needs further boost, especially in the Philippine context where the overall growth rate of credit has benefitted primarily bigger clients, as seen in the data on SME loans. According to Bangko Sentral ng Pilipinas (BSP) figures, the total loan portfolio of the Philippine banking sector has grown substantially, but has outpaced SME lending.

As the country elects its new set of leadership, clearly the financial inclusion paradigm will be an issue the next administration will face. Most of the pronouncements coming from the candidates are motherhood statements. Financial inclusion is a more complex, nuanced and tricky issue for which simply making funds available alone creates a serious moral hazard problem.

Today, BSP has put together a National Strategy for Financial Inclusion with four systems, namely policy and regulation, financial education and consumer protection, advocacy programs and data and measurement. It is multi-dimensional and multi sectoral and should be a good starting point for whoever takes the helm of the country. And the Department of Trade and Industry (DTI) has put MSMEs front and center of the recent Asia-Pacific Economic Cooperation agenda, with a set of priority action plans a good leader must study.

I wrote this column to supplement my piece in a joint economic forum of the foreign chambers -- French, German, Spanish and British. In the forum, we were asked our Presidential preference and I had to recuse as my position as a career officer working for a government bank prohibits me to say so.

I however disagree with one panelist who stated it’s now a two-way race alluding to the two survey frontrunners. I still think it’s a four-way race too tight to call. Also, while I focused on challenges for the next administration, I think the BSP and DTI have both laid the groundworks that the next administration, from whatever leanings, should build on. I worry about the tendency of new leaders to discard what they think is not their own. Whoever wins, my prayer is that the next leader’s agenda build on strengths and correct weaknesses. While the present administration hasn’t been perfect, it has made good strides that should be a foundation for concrete follow-up.

Finally, it is unfortunate that someone labeled the conditional cash transfer (CCT) as a pure dole-out system. Simply put, the CCT pays people to engage in a specific activity say, education and health care. It encourages the poor to behave in ways with long term economic effects. Handled properly, the CCT forms part of the toolbox for financial inclusion.

Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.