Regulatory Complexity and Financial Inclusion

> Posted by Sonja Kelly, Fellow, CFI

When I started my doctoral research on financial inclusion policy and regulation, I was secretly thinking, “Surely this cannot be too complicated—it’s just the regulator directing financial institutions to make services available for excluded people.” Now, five years into my PhD, I’ve finally admitted what I should have known from the beginning: regulation of financial services providers is almost impossibly complex, and making sense of financial inclusion policy and regulation requires a great deal of creativity, especially given all of the different factors that supervisors have to consider beyond prudential supervision.

Prudential banking supervisor’s responsibilities beyond prudential supervision (percent of respondents)

A new publication on the range of regulatory issues that affect financial inclusion confirms this. Supervised by the Basel Consultative Group and researched by CGAP (in full disclosure, I was a part of the team), the publication describes the regulatory approaches to financial inclusion in 59 jurisdictions from all world regions.

Here are some of the findings from the publication that I find most relevant to how we think about financial inclusion:

National strategies for financial inclusion are few, but policy statements are many.

Only 37 percent of respondents reported having a national financial inclusion strategy or a microfinance strategy. However, 62 percent of respondents had a specific policy statement establishing a financial inclusion mandate or goal at the organizational or national level. This is consistent with the Global Microscope 2014 finding that while two-thirds of countries surveyed have some kind of commitment to financial inclusion, only one-third have a national strategy to carry out commitments.

Differentiation matters to financial inclusion.

Prudential banking supervisors, generally speaking, apply “differentiated” licensing requirements to different types of institutions. In other words, microcredit institutions are treated differently than commercial banks, recognizing their different risk profiles. One common example is different minimum capital requirements. In lower-middle income countries, the minimum capital requirement for banks is almost $60 million. For other deposit taking institutions it is less than $15 million.

Prudential banking supervisors must get along well with others.

On average (beyond just prudential regulation), respondents had four regulatory and supervisory bodies that were engaged with the formal financial sector. Higher income respondents were more likely to have more than four, and lower income respondents were more likely to have less than four. With multiple regulatory and supervisory bodies comes the necessity for collaboration and communication. Prudential banking supervisors are highly likely to communicate regularly with the consumer protection or market conduct agency—which is good news for those advocating for strong consumer protection principles in the financial sector.

Capacity for prioritizing financial inclusion in supervision is low, but supervisors are still moving forward.

Supervising the financial sector is a difficult job—especially when there are many institutions that serve base of the pyramid customers. For some jurisdictions, for example, there is only one supervisor to 300 financial cooperatives. Only about a third of respondents provide specific training to supervisors on the needs associated with serving poor and low income customers. Nevertheless, almost all respondents reported actively supervising most institutions using techniques like reviewing manuals and materials, analyzing customer complaints, sampling loan portfolios, and reviewing customer records. While capacity and training may be low, active supervision is high.

Low and lower-middle income countries “win” when it comes to attention paid to supervising mobile and agent banking.

Respondents from low and lower-middle income were more likely than others to report that they have implemented measures that would address agent and mobile banking. The reported concerns included data security, agent fraud, disputed transactions, cybercrime, and other security issues.

There is no one unified approach to consumer protection.

The list of consumer protection issues covered by regulation are wide-ranging, from setting up complaints resolution systems to protecting data privacy to providing consumers with documentation. Some of the least cited issues included allocating resources toward financial education and the approval of contractual language by the supervisory authority. Some of the most cited issues included prohibiting abusive practices and pricing transparency.

Following on to the publication, the Basel Consultative Group is creating a guidance paper using the Basel Core Principles as a framework. This range of practice survey and the guidance paper will be helpful in better understanding what responsible financial inclusion practices look like at the prudential level.

*Graph Source: Basel Committee on Banking Supervision (2015). ‘Range of Practice in the Regulation and Supervision of Institutions Relevant to Financial Inclusion’ (Basel, Switzerland: 2015). Data collected in 2013.

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