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 Ann Florini, a governance expert and professor at Singapore Management University, and Simon Zadek, a visiting professor there and Co-Director of the UNEP Inquiry into the Design of a Sustainable Financial System.
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 looked at three points in time: before, during change, and projected after change. The analysis emphasized the distinction between the production system, which churns our financial products and services to consumers, and the change system 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 value network analysis 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 “The Evolution of Governance Ecosystems: Transformation or Reform?“
Steve Waddell is the author of Change for the Audacious: a doer’s guide to large systems change for a flourishing future.
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