Adam Mooney is the CEO of Good Shepherd Microfinance, Australia’s largest microfinance organization.
As the first day of spring arrives in the Southern Hemisphere, we see new buds emerging, fresh blooms, and a new sense of hope and optimism. In Perth, Western Australia, the Global Partnership for Financial Inclusion (GPFI) meets Monday, September 1 at a forum to stimulate, coordinate, and reflect on action to bring about financial inclusion. I am hopeful as the GPFI prepares recommendations for the G20 meeting in Brisbane in November this year, it will commit to powerful actions to boost the well-being of at least 2.5 billion people living in poverty around the world.
There is clear evidence that improving the economic well-being of the poorest third of the world’s population will have a profoundly positive impact on all people. Economic mobility and resilience at the family and community level directly leads to increased security, human connectedness, and hope for everyone. It also enables self-directed action to realize one’s own dreams and aspirations, however modest, leading to overall contentment. Yet despite such a compelling economic and social case, poverty and inclusion remain ideologically contested concepts where causality is often polarized into either inadequate human behavior or opaque environmental factors.
Speaking at the C20 Summit last month, I suggested that targeted inclusive finance around the world can and will be a key driver of economic growth, especially through production, employment, and education. It is not a coincidence that the number of people living in poverty is the same as those that are unable to access appropriate financial services, as measured by the World Bank’s Findex reports. These reports state that only half the world’s adults have bank accounts and of those, only 15 percent believe that their needs are understood and met by the products they have access to.
Impatient hidden investors are shifting bank priorities
Banks around the world are being more selective in who they transact with after the global financial crisis, with a few honorable exceptions. New prudential requirements like Basel III, designed to stabilize the system, along with overzealous consumer protection, have seen banks divert focus to high and middle income clients as they seek to return to pre-crisis profitability and total shareholder returns. David Murray, Chair of Australia’s Financial System Inquiry, has observed that the average institutional investor time horizon has reduced from seven years a decade ago to less than one year now.
In fact, this is the stated aim of many institutional investors, sitting behind faceless nominee companies on a bank share register – to pressure board chairs and CEOs to “harvest” the business through efficiencies (often staff cuts) and revenue enhancement (often fees which are loosely driven by an unconscious client action) in the near term of 12 months. We need to increase the transparency around company ownership to see who is really creating this unconscionable pressure on executives. This change creates an environment where clients on low incomes, who may take longer to realize financial well-being, are not seen as desired or lucrative. It is now widely acknowledged by banks that the previous internal justification for voluntary “concept testing” of inclusive finance access programs – to stave off or influence regulation – no longer exists after the global financial crisis. Instead, banks are now discretely changing their focus away from access towards cheaper financial capacity programs that suggest customers on low incomes should get their act together before access to products is available.
Pricing – “Let them have money!”
Another driver of financial exclusion is the reluctance of banks and others to innovate to reach new markets and to consider pricing that would make inclusive finance more sustainable. Pricing is regarded as the Achilles heel of the microfinance industry, with well-meaning people feeling pity for people on lower incomes rather than finding a way to see that effective prices are essential for making this market viable. A more honest and creative consideration of pricing is needed where interest rates and fees are determined by a combination of customer “capacity to pay” and the “human purpose” of the loan (survival, security, resilience, or recreation) – see slide 26 here. Simply saying that “these poor people don’t need credit or shouldn’t be charged interest” through pity or an extension of charity, has led to only 250 million people, or 10 percent, of the 2.5 billion that need microfinance actually getting it. This modern day invoking of Marie Antoinette to suggest that we “let them have money” will not serve anyone well.
So what should we (through the G20 and GPFI) do?
It was encouraging to all in 2010 when in Seoul, the G20 committed to a Financial Inclusion Action Plan, to coordinate partnerships and actions to bring about financial inclusion in all countries. Whilst good progress has been made overall, a communique in September 2013, lauded success in four areas: (i) analyzing work already done; (ii) calling on actors to consider financial inclusion; (iii) calling on countries to innovate to reach SMEs, and; (iv) calling on governments to assess financial inclusion baselines. All of this is essential; however, it shows just how difficult it is to make progress through a multilateral approach, which often seeks to include all by suggesting simple actions that even the least willing participant will accept.
Each G20 country should be encouraged to develop its own Financial Inclusion Action Plan, tailored to local and international interests, but sharing information on what works well across the G20.
In contrast, Australia’s G20 hosted agenda in Brisbane in November focuses narrowly on remittances. Yes, great advances in technology have enabled good progress in sending money to other places, like M-Pesa in Kenya and Wing in Cambodia. However, what is the point in extending this around the world when we need income generating microfinance activities that stimulate enterprise development, rather than income transferring activities? The aim overall should be for countries to enable all citizens to define their own economic well-being and then go about realizing that well-being through personal and community strengths and capability building.
Think global act local
Country Financial Inclusion Action Plans should cover three years and state a vision for financial inclusion in that country, outline why this is in the national interest, list actions that are time specific, have a performance measure, and name a single officer accountable for undertaking the action. Annual reports should be made on progress and a body of experts convened to govern the work. The plan must engage the corporate sector including banks, telcos, and energy retailers, as well as postal services, schools, government at all levels, community organizations, and others to work together to focus on their individual spheres of influence. The GPFI can and must play a key role in enabling and coordinating this.
In Australia, for example, a visionary National Financial Inclusion Action Plan in 2015, launched jointly by the Prime Minister, Business Council, Council of Social Services, and Bankers’ Association might look like this:
It would set a vision for an Australia that values the aspiration, hope, and well-being of all its citizens and a financial system that enables the strengths of all people to be fully applied to realize economic well-being, however it is defined by citizens. Economic growth should be a stated aim, through progressive economic mobility of citizens along an inclusion continuum, away from crisis and hardship towards stability, income generation, and longer term resilience.
All Financial Inclusion Action Plans would contain perhaps 10 actions across three areas: Relationships, Impact, and, Learning. A bank, for example, would commit to relationships with the range of for profit and non-profit organizations that interface with people’s lives, to understand the interconnectedness of their activities, including an overall client financial situation bureau. An energy retailer chasing an overdue payment from a client in hardship will understand that cutting off power to demand payment will impact on next week’s rent or mortgage payment and jeopardize tenancy, potentially exposing the client to financial crisis, homelessness, and other expensive social services.
Banks would also commit to impact related actions to track the satisfaction of clients against the clients’ aims, rather than the bank aims, as is generally the case now. “Disclosure” aims of regulators would be replaced by “verified client understanding” aims whereby there is reverse onus of proof on banks to demonstrate that, in the event of dispute, the client understanding and expected benefits from the product at the point of sale, in their own words, best matched the product they were offered. If a bank representative is unable to offer a product or service, informed appropriate referrals to alternative providers would also be enabled and supported by a responsible referral code, reducing the number of clients referred to exploitative fringe lenders.
Other actions would be determined by the actor’s sphere of influence and must be mutually beneficial to the client and the actor, for this to be sustained. Government and central banks should fill the void of market failure where other actors perceive no or little incentive to act.
Just as we sow seeds in the right seasons and climactic conditions, so too must we take global actions for the economic climate settings now, to reap the benefits now and later. The economic case for financial inclusion is compelling and clear. GPFI’s initial actions have been successful in enabling international collaboration and shared focus and this is inspiring and gives hope. This hope would be most welcome in Brisbane in November 2014 when the G20 considers this important area of human endeavor and economic and social progress, including the role of inclusive finance.
Another version of this post appears on the Good Shepherd Microfinance blog.
Have you read?