Raja Gopalakrishnan, COO of International for Fidelity Information Services: How...

Nov 2014
Global, November, 13 2014 - There are many examples around the world on how simple yet effective financial products and services have helped to raise the poverty line and improve living conditions. We discuss some of them here.

Financial inclusion is more than just getting no-frills accounts opened for unbanked customers. It is initiating a large number of unbanked people into formal banking and gradually introducing them to an array of financial products that help them to gain access to cash, credit, insurance and investment options to create long-term wealth.

However, the biggest challenge to this is resistance to change. For the unbanked to join the financial mainstream, there must be a mindset change among the people to drop their inhibition against trying something new and overcome old habits of resorting to informal banking methods.

In India where the financial inclusion programme is particularly daunting due to the sheer size of the country and population, it is imperative for authorities to learn from the successful models available globally. There are many examples around the world on how simple yet effective financial products and services have helped to raise the poverty line and improve living conditions. We discuss some of them here -
Basic Banking Through BCs: The Business Correspondent, or BCs, model which was first adopted by Brazil in the 90s has emerged as the most innovative way of taking basic banking  services  to the unbanked population. This model allows banks to penetrate remote areas without having to open branches - the business correspondents would be responsible for specific territories and function as mobile bank branches to facilitate the open of bank accounts, deposits and withdrawals.

The success of business correspondents in Brazil can be measuredby the number of accounts opened in 3 years. In 2000, about 1,600 out of 5,560 cities had no banking services. By 2003, no Brazilian city was without banking services and more than 15 million new bank accounts were opened through the BC model.

India adopted the model in 2006, and as of end March 2013, there are 221,000 business correspondents operating. Although the BC model has many shortcomings, including safety issues, delayed payments, low frequency of transactions and inactive bank accounts,  the government considers this model as an effective means for last mile financial connectivity.

Remittance/payment service: Mobile wallets and prepaid cards have been instrumental to facilitate people without bank accounts to access remittance and other payment services. M-Pesa in Kenya is a leading example of how technology can help to take basic financial services out to the unbanked. Launched in 2007 by Safaricom, which is partly owned by Vodafone, M-Pesa is a mobile phone-based money transfer and microfinancing service used by 19.3 million customers to deposit, send and withdraw money. The impact that M-Pesa had in Kenya was a significant 25 per cent increase in financial access as it has pushed the number of people in the formal financial fold up to 83 per cent in the country.

Prepaid cards have also become a popular instrumentof remittance for millions of immigrants the world over. It is a simple and low-cost means for cash disbursement and remittance without a bank account.  Prepaidcards are available at many retail outlets andcan be easily loaded or reloaded and cashed out. Mobile phones maybe used during top-ups - the sender simply needs to know the card number to load money into the prepaid card and once the card is reloaded, the cardholder will be alerted witha text message tohisregistered mobile number.  As there are negligible fees in using prepaid cards compared to other financial methods, this becomes an attractive method for remittance.

In many countries, prepaid cards and mobile wallet technologies are used to disburse benefits under social security schemes. Cash can be withdrawn from ATMs and other designated outlets. Prepaid cards are also accepted in many merchant outlets as a mode of payment for purchases. While India has not allowed the cash-out facility on prepaid cards launched by non-banking entities, the Reserve Bank of India (RBI) has begun a pilot project using Aadhar-based biometric validation to allow cash-out facility from prepaid cards andmobile wallets in the future.

Microcredit: There are several models of microcredit available globally—community-based, intermediary-based, co-operative societies, etc. The Grameen Bank model in Bangladesh has emerged as one of the most successful microcredit models. The group-based credit approach to use peer pressure within a group ensures that this model is sustainable as it encourages borrowers to adopt good credit habits of repayment, learn to manage their financial affairs with discipline and allow the borrowers to develop good credit standing. 

Under this model, a bank branch is set up in a locality covering 20-22 villages. In a group of five individuals looking for loans, only two members of the group are approved for loans in the first stage and will be monitoredby the bank for adherence to the repayment schedule over a period of time. If the two borrowers diligently comply with timely repayments, other members of the group become eligible for their loans. The model is thus using peer and community pressure as collateral against the loan.

Although the main objective is microcredit, this model has also been effective towards encouraging savings as it is mandatory for members to deposit weekly savings. These savings deposits in turn form part of the fund that is disbursed as loans providing a viable business model for the bank.

Another successful microcredit model in operation is MC2 in Cameroon. It is based on a community-banking model whereby savings from a community of poor is mobilised at the initial stage, and external funding is raised thereafter. Subsequntly, loans are only granted for income generating activities for the poor. The bank also funds socio-economic activities such as setting up of health centres, schools, community halls, etc.

Interest rates vary widely from 15-45 per cent depending on the source of funding. Under the Grameen Bank model, interest rates can be as high as 30 per cent while under MC2, a loan is available at less than 15 per cent  interest.

Micro-insurance: Bundling insurance with savings-linked products or loans is a common strategy to market the benefits of covering risk through insurance. MicroEnsure, founded in 2002 and funded with a grant from the Bill and Melinda Gates Foundation, launched a savings-linked insurance product in Ghana in association with a bank to great results. The bank had been experiencing low balances and limited transactions in more than 85 per cent of the bank accounts. To encourage higher account balance, depositors who held a minimum balance of US$60 each month were offered free life insurance with coverageof up to $180.

In a similar example here, IFFCO-Tokio launched a credit-linked livestock insurance product for farmers, distributed though cooperative banks, in 2009.

Pension and other investment products: Pension products aimed at low income groups can be delivered via the business correspondent model. The Swablamban scheme under the National Pension System (NPS) is one such example, where one can contribute as little as Rs 1,000 a year towards the NPS. Some business correspondents also sell simple investment products like debt mutual funds, bank deposits, etc. to financial inclusion customers.

The Success Mantra
Success of financial inclusion products depends in some way on the demography. Authorities and financial institutions must realise that the one-size-fits-all strategy will not work for financial inclusion due to varying levels of financial and technology awareness, customer expectations and behaviour.

M-Pesa,which succeeded in Kenya, was not replicated with similar success in other African countries because the rural immigrant population is larger in Kenya than other neighboring countries. The high literacy rate in Kenya was also one of the factors for M-Pesa’s success. Success of the MC2 microcredit programme illustrates that a financial inclusion program has to be linked to the greatersocio-economic development of a region and not merelyto the economic aspect.

In the end, simple processes, simple technology and simple products are crucial to the maturation of the financial inclusion product cycle.

Source : Business World

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