In 2014, the Royal Monetary Authority of Bhutan (RMA), the country’s central bank, made a commitment under the Alliance for Financial Inclusion’s <a href="http://www.afi-global.org/publications/2359/The-2016-Maya-Declaration-Report">Maya Declaration</a> to develop a national financial inclusion strategy. It backed the overall pledge with specific commitments detailing the main pieces of the strategy. Since then, it has diligently put these pieces into place. Over the past three years, the RMA created regulations for microfinance organizations (deposit-taking and non-deposit taking) and agent banking. It set up a mobile payments system, a credit bureau and a collateral registry. This is an impressive set of accomplishments for a country starting from a relatively blank slate in these areas.

But is it enough? I wonder whether these initiatives will spark the provision of financial services that contribute to the inclusive economic growth Bhutan is seeking.

Bhutan is a special place – a hidden Himalayan kingdom sometimes called a Shangri-La. It is a mountainous country with only 800,000 people scattered across hills and along narrow valleys. Only 7 percent of Bhutan’s land is arable – the rest is too steep. And yet, according to the <a href="http://www.baowe.org/">Bhutan Association of Women Entrepreneurs</a>, a local NGO, the livelihoods of 80 percent of the population depend on agriculture. Bhutan is dwarfed by neighbors with enormous populations: India, on which it depends heavily, Bangladesh and China. Even Nepal has more than 20 times more people. At the recent <a href="http://www.centerforfinancialinclusion.org/events-a-presentations/857-befit-international-financial-inclusion-summit">BEFIT financial inclusion summit</a>, representatives from the region came to share their experiences. But if your experience is all about building for scale – as, for example, with the 15 million clients of India’s Bandhan Bank – what advice do you have for tiny Bhutan? If your rural areas are very densely populated – as in Bangladesh – what can you conclude about reaching the widely dispersed rural dwellers in Bhutan? Ironically, the best point of reference for Bhutan might be the small Pacific Island nations whose people drift across dozens of islands, or Bolivia – another mountainous country surrounded by larger neighbors.

The most obvious first challenge for Bhutan is to reach people across distances, and that is why it has been a priority to introduce agent banking. I think everyone recognizes that mobile phones will be key to universal coverage, and, indeed, 86 percent of people in Bhutan have a mobile phone. The RMA will need to continue working with the telecoms regulators toward full mobile penetration and high bandwidth coverage that will support mobile financial services across the country. Meanwhile, and for at least the next several years, banking agents will be essential for creating localized access. The RMA is seeking ways to ensure that agents operate responsibly across the country.

In my own vision of a financially inclusive Bhutan, I see savings and credit groups spreading across the country and linking to banks via mobile phones and banking agents. It strikes me that promoting savings groups and pairing them with mobile banking is potentially the most powerful financial inclusion strategy Bhutan can adopt. I say this in large part because the sparse population and rugged terrain will make it difficult, if not impossible, for a traditional microlender operating outside the main cities to be financially viable, even with mobile banking, whereas savings groups can continue to operate long after the initial start-up subsidies. This appears to be playing itself out in the experience of <a href="http://renew.org.bt/">RENEW</a>, a German-backed microlender offering a Grameen Bank-style group loans. While RENEW is the largest microfinance institution and undoubtedly well-run, its prospects for financial viability remain elusive. Unfortunately, the savings and credit group methodology, which has been so successfully promoted across Africa by Care, Oxfam, and others, is not known in Bhutan, and even the Indian self-help group experience seems under-represented. There are only a few very small cooperatively-owned savings and credit groups in the country. Introducing this methodology in Bhutan could well be a major step forward. It would require an acknowledgement by the RMA that informally-based financial services can be beneficial – a concept that is currently somewhat equivocal, evidenced by a government effort to crack down on informal moneylenders.

[caption id="attachment_23720" align="aligncenter" width="620"]<img class="wp-image-23720" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/06/bhutan_2.jpg" alt="Royal Monetary Authority staff" width="620" height="430" /> Royal Monetary Authority staff take a break[/caption]

The policy makers in Bhutan are interested in financial inclusion primarily as an inclusive growth strategy, which is why the legislators and cabinet ministers who attended BEFIT were especially focused on financial inclusion helping small businesses – or in local parlance, cottage and small industries (CSIs). The Bhutanese I spoke with were especially concerned about youth unemployment and the perceived lack of entrepreneurship – “The young just want to be tour guides or civil servants.”  This is why one of the government’s financial inclusion initiatives was to set up a no-interest revolving loan fund that lends only to start-up projects. While inspired by the best of motives, my sense is that such lending to new projects is ill-advised, not only because it requires heavy ongoing subsidy, but also because it is not necessarily a favor to young first-time entrepreneurs, who are highly susceptible to failure. Business failure combined with debt can bring on significant negative consequences; shared equity may be a better approach. Debt is more appropriate for the more established businesses targeted under a new private investment fund, the Bhutan Fund, now in formation. The Bhutan Fund seeks to develop export businesses, such as horticulture, that can feed into the enormous markets just beyond Bhutan’s borders. However, for most CSIs, the existing microfinance program, RENEW, possibly combined with expertise from an experienced microlender that provides individual loans, such as those from Bolivia, would be a more accessible approach.

Bhutan’s financial system is, understandably, very small – consisting of five banks, two insurance companies, a pension fund and three microfinance institutions (only one of which has any scale). The advantage of having a small system is that the central bank can work together with the financial system to implement good ideas quickly. We see the fruits of that kind of cooperation already in the progress Bhutan has made on its Maya commitments.

The leaders of Bhutan’s government, central bank and major financial institutions are determined to continue advancing financial inclusion. It will be fascinating to watch them select the best and most relevant concepts from around the world and come out with a system that is uniquely their own.

Image credits: Elisabeth Rhyne

Have you read?

<a href="https://cfi-blog.org/2017/06/01/seeking-happiness-and-financial-health-in-bhutan/">Seeking Happiness and Financial Health in Bhutan</a>

<a href="https://cfi-blog.org/2016/07/01/mexico-launches-comprehensive-financial-inclusion-strategy/">Mexico Launches Comprehensive Financial Inclusion Strategy</a>

<a href="https://cfi-blog.org/2016/10/26/new-report-highlights-gains-in-financial-inclusion-led-by-india-digitization-on-the-rise/">2016 Global Microscope Highlights Gains in Financial Inclusion, Led by India; Digitization on the Rise</a>

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Finding a Bhutanese Path to Financial Inclusion

Bhutan

Financial Inclusion Strategy

Policy, Regulation and Government Initiatives

Blog Post

[caption id="attachment_23681" align="alignright" width="225"]<img class="wp-image-23681 size-medium" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/06/bhutan-photographers.jpg?w=225" alt="BEFIT photographers" width="225" height="300" /> BEFIT photographers. Photo Credit: Elisabeth Rhyne[/caption]

Imagine a country unlike any you have ever seen – a mountainous land without Starbucks, where pop stars sing praises of the king, and men wear skirts with knee socks. You might be tempted to relegate the country to the category of charming or exotic. But that would be a disservice to Bhutan, which presents itself as kind, intelligent and ready to participate in the modern world.

I attended the <a href="http://www.centerforfinancialinclusion.org/events-a-presentations/857-befit-international-financial-inclusion-summit">Bhutan Economic Forum for Innovative Transformation’s summit</a> on “Equitable Growth through Financial Inclusion” held last month in Thimphu, Bhutan’s capital city, and that provided me with an opportunity to hear in depth about its unique development philosophy – Gross National Happiness (GNH). Before we turn to the connections between GNH and financial health, here is some important context.Bhutan is a Buddhist constitutional monarchy. Each of those three concepts makes an essential contribution to its national character.

Buddhism permeates Bhutan’s cultural identity and shapes the government’s aim of creating a “just and harmonious society.” The Gross National Happiness concept is an attempt to incorporate Buddhist principles into governance.

Bhutan has an unusual monarchy. Unlike the legacy monarchies of other countries, Bhutan’s monarch is modern – just over 100 years old. It was established in 1907 with the First King, and is now led by the Fifth King. Bhutan seems to have been exceedingly lucky in its monarchs, with each king shaping the country in beneficial ways. And unlike the fading monarchies of Europe, the monarchy in Bhutan is central to the society. Our conference began with a tribute to the monarchy and expression of gratitude to the king. And the highlight for the foreign guests was a chance to talk with him.

A decade ago (and thanks to the Fourth King), Bhutan’s monarchy became constitutional, making it a democracy, with lawmaking in the hands of an elected parliament led by a prime minister. That the current prime minister was formerly the leader of the opposition shows that elections are contested. The prime minister is leading a “brand Bhutan” project, which you can hear about in his <a href="https://www.ted.com/speakers/tshering_tobgay">TED talk</a> on Bhutan’s approach to climate change.

It takes this background to understand why Bhutan originated the concept of <a href="http://www.gnhcentrebhutan.org/what-is-gnh/the-story-of-gnh/">Gross National Happiness</a>. GNH combines deep Buddhist principles with today’s emphasis on evidence-based policy. Bhutan is very much in the 21st century. It seeks economic growth through a market economy, and it’s just as focused on metrics as any other government. The Bhutanese leaders recognized that economic growth has its downsides and that if the country’s aim is a just and harmonious society, Gross Domestic Product is at best incomplete and at worst misleading. So it set out to develop a framework to look at all the dimensions of national happiness.

[caption id="attachment_23679" align="alignleft" width="225"]<img class="wp-image-23679 size-medium" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/06/bhutan-rma-staff.jpg?w=225" alt="Bhutan Royal Monetary Authority staff" width="225" height="300" /> Bhutan Royal Monetary Authority staff. Photo Credit: Elisabeth Rhyne[/caption]

The GNH office within the government surveys the population and screens policy proposals with reference to nine domains: Living Standards, Education, Health, Environment, Community Vitality, Time-Use, Psychological Well-Being, Good Governance, and Cultural Resilience and Promotion. It is certain that when Bhutan develops a draft financial inclusion strategy, it will be subjected to GNH scrutiny. When trade-offs occur between economic growth and other values, growth does not necessarily prevail. Among the consequences of the GNH focus are Bhutan’s approach to tourism (limited and high-end, for maximum revenue with minimal environmental impact and disturbance to culture), environment (60 percent of the land area to remain perpetually forested), and health and education (free for all, funded by exports of hydropower to India).

This brings us to financial health, which I view as a bridge that links financial inclusion to Gross National Happiness. Just as GNH sets the well-being of people and society as the highest value to maximize, so financial health sets consumer well-being as the apex of financial inclusion—above the profits of financial service providers, which exist to promote consumer well-being, and above additional tax revenues made possible by formalization. Financial health, as the Center for Financial Services Innovation <a href="http://cfsinnovation.org/research/financial-health/">originally defined it</a> and as we affirmed in <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/807-beyond-financial-inclusion-financial-health-as-a-global-framework">our research in India and Kenya</a>, measures whether financial services are working as intended: supporting consumers’ day-to-day money management, protecting them against shocks and helping them achieve big goals. The financial health framework is exactly what we need to determine whether financial inclusion is contributing to GNH.

A financial health approach to financial inclusion would involve designing products specifically to promote financial health. In this approach, there is no assumption that formal services are a priori preferable to informal services. Among lower income people, especially in a country like Bhutan where so many people live in remote areas, most of their financial lives take place in the informal sector. Additionally, sometimes financial patterns have cultural significance. Bhutan operated as a barter economy well into the 20th century, and barter is still used in many rural areas. Who knows, maybe someone could think up an innovative service built on the existing culture around barter.

The financial health concept recognizes that the financial capability of consumers determines whether they will be able to use their financial services effectively. A financial health approach to financial inclusion therefore would set capability-building interventions alongside service provision as twin goals and would incorporate capacity-building elements directly into financial products. The wide disparities between urban and rural Bhutanese call for different approaches to capability building, in light of lower literacy in rural areas, as well as different financial services for people with agrarian versus urban livelihoods.

The financial health approach also helps solve the difficult challenge of measuring impact. If financial services are to have an impact on ultimate well-being, that impact will be demonstrated through the achievement of financial health, which is to say through using financial services to smooth day-to-day finances, reduce the impact of shocks and reach longer-term goals (especially through productive investments). So, instead of the frustration of trying to directly assess whether financial services are reducing poverty, the financial health framework examines the intermediate steps toward that ultimate goal. I can envision the GNH team in Bhutan incorporating a financial health perspective into their detailed GNH surveys.

Bhutan is just beginning its financial inclusion journey (stay tuned for another post on that). It will be interesting to see whether the Gross National Happiness development philosophy will lead the country toward a strategy that looks different from that of other countries.

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Bhutan

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Finding a Bhutanese Path to Financial Inclusion

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