Speech

Financial Inclusion: Bridging Economic Opportunities and Outcomes

September 20, 2016

Good morning. It is an honor for me to speak today before such a distinguished group on the theme of financial inclusion. I would like to thank the colleagues from the BCEAO and Senegal for their close cooperation in organizing this conference—one of several the IMF has organized on this theme over the past few years here in Africa and in other regions.

It is very important that we are meeting on this topic. Access to financial services as part of the development process is an increasingly important element of your work and the Fund’s advice, research and technical assistance in this region.

The numbers are stark: about two billion people worldwide currently lack access to basic financial services. Most of them are poor, and a large proportion are African.

Many of your countries have taken great strides extending financial services in recent years. Here in Senegal, the share of the population with a bank account more than doubled to about 12 percent between 2011 and 2014. Benin, Mali, Niger and Togo also have done well. Mobile banking is complementing traditional banking services.

But there is a long way to go. Even with mobile banking, only one in three adults in sub-Saharan Africa has access to banking services; in WAEMU we are talking less than 18 percent. Too many households lack bank accounts; too many small businesses have no recourse to loans. You are running the development race weighted down by exclusion

The benefits of financial inclusion and inclusive growth are clearly established. Access to financial services opens doors for families, allowing them to smooth out consumption and invest in their futures through education and health. Access to credit enables businesses to expand, creating jobs and reducing inequality. Financial inclusion is the bridge between economic opportunity and outcome.

The imperative to address this issue has never been more important—clearly because of the benefits it will bring your countries, but also because of the challenges posed by the global economy. We are experiencing a period of disappointing global growth that is expected to continue into 2017. Slower demand from the advanced and emerging economies has hit Africa hard since 2014, particularly the natural resource exporters.

Several of your countries continue to post high levels of growth, but others in Africa are struggling after more than a decade of expansion. There is no reason for complacency. It is essential to put in place policies that can sustain or reinvigorate growth, and financial sector development and inclusion need to be part of this effort. In fact, IMF analysis has shown that more inclusion boosts growth. So for once, it is possible to have both: higher growth and more inclusion.

So in the time that I have remaining this morning, I would like to set the stage for our discussions by offering a few big picture perspectives on how best to deepen financial inclusion, and the all-important connection between inclusion and financial stability.

Lessons from Experience

There are many success stories across the globe that we can look to in seeking the right approach to financial inclusion. In Asia, countries like China, India and Indonesia all are pursuing paths that have rapidly brought millions into the financial mainstream. In East Africa, the achievements of Kenya and other countries in advancing mobile banking can provide a model for other countries.

Experience offers several key lessons.

First and most broadly, financial inclusion must be seen as closely intertwined with the process of financial sector development. If inclusion means access to banking, then those services need to be closer to where the people are—offering deposit-taking, payments processing, microfinancing, mortgages, insurance. In other words, all of the products and services that fuel investment, create jobs and stimulate growth.

Central banks inevitably play a crucial role in creating the enabling environment for financial access. It is their role to get the right balance between ensuring access to financial instruments and protecting banks from instability and risks.

Beyond the central bank, governments have a responsibility to provide the laws and regulations that encourage both financial sector development and inclusion. Regulations are particularly important; for example, basic things like documentation requirements for opening an account. Potential customers may be excluded if they are required to provide a fixed address or proof of employment in the formal sector. Technological innovations like mobile banking will require specific regulations. There also may be a need for laws that allow entry into the industry for institutions offering Sharia-compliant financial products—a key issue in several African countries. Central banks also can play a key role in many of these issues.

Of course, financial inclusion is not just a matter for government. Many other actors are required—particularly the private sector, but also civil society.

I am sure we will delve into some of these topics in more depth today.

Technology and Inclusion

I have already touched on the role of technology in encouraging inclusion, but allow me to elaborate. Technological advances already have shown real results in improving access to financial services, notably by lowering costs and extending services into areas where bank branches may not exist.

The latest Findex report prepared by the World Bank tells an encouraging story: of all the regions in the world, Sub-Saharan Africa has the highest proportion of mobile bank accounts. This offers the potential of a much more rapid increase in access than the traditional banking system could have provided.

In Kenya, the mobile payment service M-PESA has become an integral part of the market economy and is being extended to neighboring countries. Over the past decade the proportion of Kenyans lacking access to financial services has fallen to 17 percent from 41 percent. Now a mobile savings scheme is offering consumer credit as well.

Mobile banking has a foothold in West Africa as well, but it has less coverage. But it is noteworthy that in Cote d’Ivoire the number of mobile accounts has exceeded traditional bank accounts.

Overall, I find it interesting that the Kenyan mobile banking system has developed with a telecommunications company playing a key role. In other countries the services operate through the banking sector. So I will be very interested to hear your views about the right approach to expanding the service during our discussions today.

Let me now take a closer look at the question of financial stability. We are well aware that talk of deepening financial inclusion is often accompanied by expressions of concern about the implications for systemic stability. This is a valid issue. Extending credit to unproductive projects or unfit clients can expose lenders to higher risks; it can also expose ill-informed borrowers to increased risk of debt distress.

But improving financial access need not lead to instability. Inclusion does not mean lending to everyone at any cost.

This is where regulations—and supervision—are so important. Durable and efficient financial inclusion requires a balance of innovation with safeguards for financial soundness. It means helping consumers, especially the most vulnerable, to benefit from access without diving deeper into debt. So well-designed financial regulations—including strong prudential oversight—can ensure that loans are channeled to the most productive uses. Many countries have achieved this balance, and financial inclusion has increased.

Encouraging Active Inclusion

Before concluding, allow me to make one other observation about financial inclusion. Access to financial services is not necessarily the same thing as active participation in the financial system. Take the example of South Africa: so-called “no frills” bank accounts have generated a significant increase in the number of accounts. But after five years, 42 percent of those accounts were inactive. So while many customers have benefited, a large number have not.

The lesson from this experience is that there is a need for active efforts to assist the newly included to take advantage of the services placed at their disposal. This requires training—particularly in record-keeping, budgeting and planning for small businesses. Clearly, it also requires work for the jobless and underemployed so that they can have an income to save and invest. But that is a topic for another conference.

Our task is to ensure that financial inclusion empowers individuals, families and small businesses, particularly in impoverished communities; along with the well-functioning financial systems that can empower them and strengthen economies. At the IMF, we see financial inclusion as a key pillar of economic development. Together with the World Bank and other regional institutions, we have worked with many African countries on reforms that can support greater inclusion.

We will continue to expand our knowledge of the issues, and develop and share best practices with our membership, to encourage the policies that enable more and more people to take advantage of opportunities to improve their lives. This effort is just beginning. I very much look forward to hearing you views on these issues today. Thank you.