Steve Waddell

Blog Post

Financial inclusion is a large systems change challenge – it’s one that integrates a basic new goal into the working of the financial system. This is a very different challenge than simply opening a new branch or even policy reform. What are the implications of large systems change for traditional governance structures? Put another way, if an industry is significantly disrupted, does this affect the way it is governed? I recently dived into the question looking at the impact of financial inclusion on financial sector governance, including central banks. The was done in collaboration with <a href="https://www.brookings.edu/experts/ann-florini/">Ann Florini</a>, a governance expert and professor at Singapore Management University, and <a href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=1&amp;cad=rja&amp;uact=8&amp;ved=0ahUKEwiw5uq83N_NAhXQZj4KHRrCB98QFggeMAA&amp;url=http%3A%2F%2Fwww.zadek.net%2F&amp;usg=AFQjCNETdEHnteysLQBfEHyR7FZMcKFn3A&amp;sig2=8onYHzeccpGF64fDPHcHOg">Simon Zadek</a>, a visiting professor there and Co-Director of the <a href="http://networkingaction.net/2015/11/an-audacious-change-effort/">UNEP Inquiry into the Design of a Sustainable Financial System</a>.

The three of us have common interest in how multi-stakeholder processes might impact governance. Such processes in the case of financial inclusion involve business, government and civil society interests. With many diverse parties at the table, and many more such multi-stakeholder processes, is financial sector governance also becoming more multi-stakeholder? We decided to investigate the question of financial inclusion with a descriptive analysis of what has been happening in Kenya. We came to the topic with the understanding that multi-stakeholder process governance in itself is not necessarily good or bad compared with traditional government-dominated governance, but experience might indicate that it is necessary for advancing public good. The Center for Financial Inclusion defines full financial inclusion as:

“…a state in which everyone who can use them has access to a range of quality financial services at affordable prices, with convenience, dignity, and consumer protections, delivered by a range of providers in a stable, competitive market to financially capable clients.”

Financial inclusion has become an increasing focus in international development efforts. We decided to look at Kenya in particular, since progress there is so remarkable. By 2015, 75.3 percent of Kenyans were formally included, a 50 percent increase over 2005. The key drivers of this change were the advent of low-cost and easily accessible mobile banking technology and entrepreneurial mobile network operators (MNOs) and supportive regulators. Together they allow customers to transfer money via mobile phones, with the support of agents – typically small vendors of various goods – who sell mobile money in exchange for cash. When banks also became active participants in this space, the range of services expanded. These changes raised big issues for the central bank, as the regulator of financial institutions. Its traditional primary responsibilities were supporting economic growth and financial system stability, and the decision to expand this mandate to include financial inclusion represented a big challenge.

To assess change in Kenya’s system, we <a href="http://networkingaction.net/2015/07/large-systems-change-an-emerging-field-of-transformation-and-transitions/">looked</a> at three points in time: before, during change, and projected after change. The analysis emphasized the <a href="http://networkingaction.net/2016/05/societal-change-systems-versus-production-systems/">distinction between the production system</a>, which churns our financial products and services to consumers, and <a href="http://networkingaction.net/2016/05/societal-change-systems-versus-production-systems/">the change system</a> comprising all initiatives aiming to integrate financial inclusion into the production system. Activities of each of these systems are described in the accompanying table below.

A form of <a href="http://networkingaction.net/2010/03/strategic-mapping-for-networks/">value network analysis</a> was then developed for the three snapshots, shown in three maps. Figure A is the historic state. During the change process, a myriad of new organizations appeared to grease the wheels and support the changes towards inclusive finance; these are mainly international actors such as foundations and donor agencies (e.g., DFID, USAID) and national organizations supported by them, which involve many multi-stakeholder processes. They are represented on the side of Figure B.

Although the change is still underway, the projected resulting state is described in Figure C. It is much like Figure A, with the addition of several new producers, including the MNOs and agents. Simon likened the change to an elastic band “snapping back” to resemble its initial state. The multi-stakeholder processes support the change, but disappear afterwards.

This suggests that there was no transformation in the governance system, and that it simply adjusted to incorporate the new imperative of financial inclusion. It appears that financial inclusion did not challenge any of the basic logic of the governance system. Of course, this finding might be different for other industries and country contexts. For example, in the forest industry, multi-stakeholder processes such as with the Forest Stewardship Council have become important in many parts of the world.

For more, read our paper "<a href="http://networkingaction.net/wp-content/uploads/The-Evolution-of-Governance-Ecosystems-16-08-16.pdf">The Evolution of Governance Ecosystems: Transformation or Reform?</a>"

Steve Waddell is the author of <a href="http://networkingaction.net/product/a-truly-path-breaking-work/">Change for the Audacious: a doer’s guide to large systems change for a flourishing future</a>.

Have you read?

<a href="https://cfi-blog.org/2015/08/20/accelerating-agent-banking-in-kenya/">Accelerating Agent Banking in Kenya: Part One</a>

<a href="https://cfi-blog.org/2016/04/25/is-weak-governance-to-blame-for-bank-collapses-in-kenya/">Is Weak Governance to Blame for Bank Collapses in Kenya?</a>

<a href="https://cfi-blog.org/2016/06/01/arifu-digital-delivery-of-nudges-and-information-in-kenya/">Arifu: Digital Delivery of Nudges and Information in Kenya</a>

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/figure-a.png"><img class="aligncenter wp-image-21796" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/figure-a.png" width="721" height="464" /></a>

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/figure-b.png"><img class="aligncenter wp-image-21797" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/figure-b.png" width="711" height="650" /></a>

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/figure-c.png"><img class="aligncenter wp-image-21798" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/figure-c.png" width="690" height="601" /></a>

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<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/table.png"><img class="aligncenter wp-image-21801" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/table.png" width="703" height="396" /></a>

Governance and Large Systems Change: The Case of Financial Inclusion

&gt; Posted by a Nairobi-Based Consultant

Kenya and Nigeria are often heralded as two of the most dynamic economies in Africa. They could soon have something else in common: interest rate caps.

Banks in Kenya have urged President Uhuru Kenyatta to dismiss a <a href="http://www.businessdailyafrica.com/MPs-move-to-rein-in-bank-interest-rates-with-Bill/539552-3318034-item-0-102g1ui/index.html">new bill</a> which caps loan interest rates and provides for sanctions (fines and prison) directly to the CEOs of banks that fail to do so. This is not the first time such a proposal has come forward; the last one having come at a time the incumbent president was Minister for Finance. Should the President sign off on the bill it will become law, and lending rates will be capped at 400 basis points above the Central Bank discount rate which now stands at 10.5 percent.

Understandably, the prospect of such limits has caused anxiety amongst lenders. Through the Kenya Bankers Association, Kenya’s bankers immediately lodged appeals to the government arguing that capping interest rates is counterproductive and against the free market economy premises Kenya enjoys. We are yet to see how the financial markets react.

For their part, politicians are perturbed that banks have not done anything to reduce their lending rates in spite of the current low cost structures brought about by the benefits of disruption and instead have continued to reap “obscene” profits, seemingly insensitive to complaints from customers on the burden of high interest rates. The current average lending rates are about 18 percent although some borrowers pay as high as 24 percent and more for short-term as well as medium-term loans (and generally more for loans from online lenders and microfinance institutions).

Obviously, the timing is not innocent, but rather coincides with the elections coming in the next year. The President might be pressured to sign the bill to appease the lower customer segment, who are the majority voters.

One cause of public frustration over rates may stem from poor transparency, as many lenders disguise their prices to keep customers from recognizing what they are actually paying. Kenya’s consumer protections are not as well developed as they could be – as shown by Kenya’s poor scoring on this dimension in <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">the Global Microscope 2015</a>.

Kenya is not the only country to be actively contemplating interest rate caps. Similar proposals emerged in Nigeria a few months ago. In Nigeria the lending community strongly appealed to prevent the caps. The outcome is not yet clear. Rumors exist that the government in Nigeria has been considering reversing their proposal, but there is no formal feedback yet posted to this effect.

From the perspective of the participants in CFI’s <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship Program</a>, such as a former bank executive in Nigeria, caps are not conducive for business and indeed sometimes harm the very customers that governments are trying to protect.

Back in Kenya, we are yet to hear the clear stand of the Central Bank, and we expect that the President will not sign without listening to the Governor. On Wednesday, the Central Bank received a delegation of Kenyan banks led by the Kenya Bankers Association, <a href="http://kba.co.ke/images/stories/bankingMOU.pdf">committing</a> in a good will gesture to reduce interest rates as well as eliminate some non-interest rate charges. In response, the Central Bank <a href="https://www.centralbank.go.ke/images/docs/media/2016/PRESS_RELEASE_-_KBA_MOUfinal.pdf">stated</a>, “The CBK welcomes the move. It is a step in the right direction.”

On Friday, the Speaker of the National Assembly <a href="http://www.nation.co.ke/news/Uhuru-to-assent-or-reject-Bill-on-interest-rates-on-Monday/1056-3342706-be9ckiz/">announced</a> that the bill was being reviewed by the Attorney General and himself. It is expected that the Speaker will forward the bill to the President today. Once the President receives the bill, he has 14 days to accept or reject it.

It seems to me that we have not seen the last of interest rate caps and regulations in this industry, in Kenya and Nigeria – and indeed in Africa and elsewhere.

Have you read?

<a href="https://cfi-blog.org/2016/03/30/interest-rate-caps-in-nigeria-may-not-be-good-for-clients/">Interest Rate Caps in Nigeria May Not Be Good for Clients</a>

<a href="https://cfi-blog.org/2016/02/23/dla-piper-drafts-legal-framework-to-support-financial-inclusion/">DLA Piper Drafts Legal Framework to Support Financial Inclusion</a>

<a href="https://cfi-blog.org/2016/04/25/is-weak-governance-to-blame-for-bank-collapses-in-kenya/">Is Weak Governance to Blame for Bank Collapses in Kenya?</a>

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Steve Waddell

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