> Posted by Dave Grace, Managing Partner, Dave Grace & Associates
This week I received my self-addressed postcard from the Financial Inclusion 2020 Global Forum reminding me of my personal commitment to help ensure the safety of consumers’ savings and rights as they join the financial system. My first reaction was how slow the post is, but on deeper reflection I recognized that the postcard arrived just at a time when I needed a reminder of my commitment.
In addition to the new connections made at the Global Forum, two comments stood out for me; one was rooted in the past and the other in the future.
Remembering the Past
When Michel Khalaf from MetLife described the company’s roots as an insurer for the working class and the legions of agents who went door-to-door collecting weekly premiums of $.05 or $.10 and dispensing financial advice, I instantly understood something important about my grandfather. Until then, I had just thought of him as a MetLife agent in the steel belt towns of the northeastern U.S. in the 1920s and 1930s. He left school at age nine to help the family make ends meet when his own father prematurely passed away. He first worked shoulder-to-shoulder in the coal mines with many other immigrants. His math skills and ability to work across ethnic groups enabled him to leave the mines and become a top agent for MetLife. He knew firsthand how dangerous the mining work was and how a temporary or permanent injury could be a huge setback for these vulnerable families. Once the Great Depression hit and people could not access their deposits in banks, many of his clients turned to my grandfather for financial help. He had some liquidity and became a de facto deposit insurer, paying people what he could and in the process becoming a larger creditor of the illiquid banks.
Anticipating the Future
While Michel Khalaf’s comments helped me piece together my own family history, what stood out more was the collective prediction by attendees in London that the most important story in the next five years will be the presence of a “bank run” on mobile money.
If we think this is likely, don’t we have some obligation to try and prevent it? After the Great Depression, a system of deposit insurance was created in the U.S. to re-instill confidence in the financial system and ensure small depositors would receive their funds if their bank failed.
While most mobile money deployments are mitigating liquidity risk among the mobile network operators (MNOs) by requiring a 1:1 cash liquidity reserve, gaping holes exist for consumers regarding the solvency risk of the banks holding the efloat accounts for mobile money.
Currently 112 countries have deposit insurance and another 40 countries have systems under development. However we’ve yet to see any country in an emerging market cover mobile money with deposit insurance (the FDIC does cover certain open system stored value systems in the U.S.). Of the dozens of mobile money deployments worldwide only six countries (Kenya, Tanzania, Rwanda, Uganda, South Africa, and the Philippines according to GSMA and Intermedia) have achieved penetration rates of 10 percent or more of their adult populations, raising the question of whether Kenya’s success is an outlier due to unique market characteristics and unlikely to be repeated.
At the same time an astonishingly few deposit-taking microfinance institutions (48 percent), financial cooperatives (28 percent), or postal banks (14 percent), which together serve an estimated 600 million people in emerging markets, have access to deposit insurance, according to survey results released by the Alliance for Financial Inclusion last week.
I believe the lack of financial infrastructure supporting consumer confidence in deposit-taking non-banks and mobile money has resulted in the slower uptake of these bank alternatives. Expanding the scope of deposit insurance to cover savings in deposit-taking non-banks that serve the poor and rural areas and in mobile money accounts will be critical to preventing bank runs in a financially inclusive world. While this will have implications for oversight of such non-banks, without expanding the concept of deposit insurance we’ll be left to the unreliable and ad hoc solutions like those my grandfather provided some 80 years ago.
Dave Grace is the Managing Partner of Dave Grace & Associates, an international boutique consulting firm which focuses on financial cooperatives, supervision, deposit insurance and financial sector strengthening. Its clients include the World Bank, International Monetary Fund, the Alliance for Financial Inclusion, United Nations, the Center for Financial Inclusion, Filene Research Institution, financial cooperative associations, and central banks. Prior to launching his firm Mr. Grace was Senior Vice President for the World Council of Credit Unions, Inc. (WOCCU) for 14 years.
Image credit: The Center for Financial Inclusion
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