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Financial inclusion: What’s the big deal?

13 Mar 2021

Albeit you and I have convenient access to fund transfer services in a few taps on a smartphone and access to loans and insurance more easily than before, about 26% of Sri Lanka’s population did not even have access for a savings account at a financial institution as of 2017, according to the 2017 World Bank Group’s Global Findex. Yes, you read it right – they do not have access to a savings account, for exactly which the urban population has the luxury of many smart tools and digital knowledge. While bank branch penetration in the country has been impressive with a bank branch density of 16.5 per 0.1 million Sri Lankans as of 2018, as per the Central Bank of Sri Lanka (CBSL), the aforementioned 26% is a grave concern as the percentage indicates financially excluded people in the country. In terms of the global population, only 69% of adults have access to a bank account, and about half of these unbanked people are women. Jesse Louis Jackson, an American political activist, Baptist minister, and politician, once stated that “capitalism without capital is just plain-ism and we cannot live off-ism”. As the global financial system – or Sri Lanka’s financial system, to be precise – does no longer revolve barter deals, a method of exchanging goods and services among a small circle of people prior to the introduction of currency, it is of paramount importance that this quarter of Sri Lanka’s adult population should be financially inclusive. In an effort to ensure financial inclusion for Sri Lankans, the CBSL launched the National Financial Inclusion Strategy (NFIS) two weeks ago and the Market Mine of The Sunday Morning Business this week is taking a look at financial inclusion in Sri Lanka, as there could not be a better time to talk about it, going ahead.   [caption id="attachment_124433" align="alignright" width="341"] International Financial Cooperation[/caption] Financial inclusion Financial inclusion, according to the World Bank’s definition, means individuals and businesses having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit, and insurance – which are delivered in a responsible and sustainable way. It ensures that people have access to transaction accounts which, according to the World Bank, is the first step forward in financial inclusion, as such accounts permit people to send and receive payments while also depositing or withdrawing money. A transaction account serves as the basement to other financial services as account holders, and people are more likely to use other financial services such as credit and insurance to start and expand their businesses, invest in education or health, manage risk, and weather financial shocks that can improve the overall quality of their lives. One might pop the question as to why this 26% cannot go and open bank accounts as it is not that hard and Sri Lanka’s bank branch penetration is impressive. However, they cannot due to several barriers. The foremost barrier is extreme poverty, as the Corporate Finance Institute (CFI) mentions. People with little to no money similarly have little to no need for financial services. So it is not just opening a bank account; there is a underlying issue that needs to be addressed. In addition to widespread extreme poverty which still exists in many areas of Sri Lanka, CFI adds that there are also other significant barriers that often make it difficult for poor and low-income people to access basic financial services. “Financial institutions, such as brokerage firms and banks, often impose strict and detailed documentation requirements for opening an account or making money transfers. People who lack the required documentation are then effectively shut out from accession financial services,” CFI notes. Furthermore, a lack of nearby financial institution offices, high minimum balance or opening account balance requirements, and a lack of knowledge on how to avail themselves of or use financial services provide further barriers to financial inclusion.   Why is financial inclusion important? When about a quarter of Sri Lanka’s population is financially excluded from basic financial services, it could create crippling financial problems for people, as they may not have ways to receive payments or settle higher amounts for basic services such as education fees and electricity. As CFI mentions, imagine how much of modern commerce is conducted through online platforms and how much of our day-to-day goods and services are brought or ordered online. The numbers are staggering, and the increasing number of food delivery services, e-commerce sites, etc. are proof for this. “Now, think about how an individual with no bank account or credit card could go about ordering something online, like at Amazon.com,” CFI adds. It is not only beneficial for the account holders, but also for the companies as it provides means of storing money, managing payments and cash flows, accumulating savings, accessing credit, and making investments. Providing greater financial inclusion to small businesses is important because they help in creating more jobs and improve the standard of living within a community. As the CFI further states, bringing entrepreneurs and their businesses into the formal financial sector is an important first step to building better-connected financial markets and ultimately global markets. It allows those operating in mature markets who have capital to connect with the next generation of young entrepreneurs in emerging markets who need capital. In order to do this, however, every adult in Sri Lanka should be financially inclusive.   [caption id="attachment_124434" align="alignleft" width="346"] Central Bank of Sri Lanka[/caption] Financial inclusion in Sri Lanka  Financial inclusion initiatives that have been taken since the 1800s in Sri Lanka are an interesting topic to talk about. A recent World Bank report notes that the arrival of the British in 1828, as well as the establishment of the commercial plantation sector, saw the start of formal financial services in Sri Lanka. According to the report, a parallel informal financial sector also emerged, composed primarily of moneylending and pawnbroking. As pawnbroking became popular, laws were enacted to protect customers and implement anti-usury policies. The 20th Century saw the rise of the co-operative movement as an organised mechanism to serve the farming community’s financing needs. “Sri Lanka’s central banking system was formally established in 1950, following independence from the British,, where the Central Bank of Sri Lanka’s primary objective initially was on monetary policy. In later years, the CBSL formally took on the role of managing and deploying development finance lending programmes on behalf of the government under a dedicated regional development department. The opening up of the economy in 1977 paved the way for financial institutions to expand and develop new financial products and services to cater to the growing needs of a more open economy beyond the plantation sector,” it added. Meanwhile, in an Asian Development Bank (ADB) research paper, former Institute of Policy Studies (IPS) Executive Director the late Dr. Saman Kelegama and IPS Research Fellow Ganga Tilakaratne noted that Sri Lanka’s financial system consists of a wide range of service providers which include: (i) Formal financial institutions like regulated banks and leasing and finance companies; (ii) semi-formal institutions like co-operatives, NGO/MFIs, CBOs, and state programmes like Samurdhi; and (iii) informal sources of finance such as money lenders and rotating savings and credit associations (ROSCA) like the urban popular “seettu”. The World Bank report further notes that in 2019, Sri Lanka’s national poverty headcount ratio has also continued to decline, with extreme poverty restricted to a few geographical areas of the country. Despite this, a number of Sri Lankans still live just above the extreme poverty line. It is estimated that 8.7% of the population survives on $ 3.20 per day. “Against this backdrop, ensuring inclusive growth will be crucial to sustaining Sri Lanka in the upper-middle income bracket in the years to come. Inclusive growth is a long-term concept, where the idea is to encourage productive employment rather than simply income redistribution. Inclusive growth entails improving the pace of growth, expanding the economy’s size, and providing a level playing field for investments, all leading to more productive employment opportunities,” the World Bank report added. A couple of years back, a National Financial Inclusion (NFI) survey was initiated by the CBSL and the International Finance Corporation (IFC), the first such focused survey on financial inclusion for Sri Lanka. Data indicators capture Sri Lankans’ behaviour relating to saving, borrowing, making payments, and managing risks, as well as with respect to financial capability.   NFIS of Sri Lanka In January 2018, IFC, a member of the World Bank Group, stated that it is partnering with CBSL to develop the country’s first NFIS to promote a more effective and efficient process to improve financial inclusion across Sri Lanka. According to the World Bank, a NFIS can be defined as roadmaps of actions, agreed and defined at the national or subnational levels, which stakeholders follow to achieve financial inclusion objectives. More than 50 countries have made headline financial inclusion commitments as of the end of 2014. Many of them are developing NFISs to ensure resources and actions are put in place to achieve those commitments. On 24 March this year, Sri Lanka launched its very own NFIS. According to the Central Bank, with an aspiring vision of “Better Quality Inclusion for Better Lives”, the NFIS strives towards a financially inclusive Sri Lanka where all individuals and enterprises in Sri Lanka are well informed and have fair, equitable access to a range of high-quality, appropriate, secure, and affordable financial products and services they can use to contribute to economic growth and improve their living standards. The development of the NFIS was a multistakeholder effort led by the Central Bank which encompasses the expertise of various public and private sector institutions across the economy. The NFIS is strategically designed to align all isolated efforts of financial inclusion taken by various entities in the economy into a single direction, having noted the potential higher yield of these efforts. For this invaluable journey, the technical and financial assistance for the NFIS development project was provided by the IFC under the “IFC-DFAT Women in Work Project”, funded by the Department of Foreign Affairs and Trade (DFAT) of the Australian Government. As part of the NFIS, a time-bound action plan which sets up delegated actions for each stakeholder has been introduced. The monitoring and evaluation of the NFIS Action Plan and provision of appropriate policy guidance will be carried out by the national-level management entities of the NFIS as well as the Regional Development Department of the Central Bank, with the support of the NFIS Secretariat. With the launch of the NFIS, Sri Lanka joins more than 60 countries around the world that have taken similar initiatives to improve financial inclusion landscapes to reach sustainable and inclusive economic growth.   What does Sri Lanka’s NFIS entail? The Central Bank has set up a couple of pillars under the NFIS. The first pillar is digital finance and payments.   Objectives of pillar one: Strengthen the role of the National Payments Council (NPC) and develop a National Payments Strategy under the leadership of the NPC, encompassing the entire gamut of payment and settlement systems; develop a strategy and responsibilities to grow digital payments; digitise schemes and services of the Sri Lankan Government; streamline the Know Your Customer (KYC) process to ensure standardisation and introduce a tiered approach with proportionate barriers to entry that are dictated by respective risks; develop an enabling regulatory environment with timely, transparent, and consistent guidance to the market; support the development of a fintech ecosystem with an emphasis on financial inclusion; generate more demand to expand the use of mobile and electronic means of payments; and strengthen the development of digital infrastructure to facilitate digital payments.   Objectives of pillar two: Assist the formal financial sector to scale up MSME (micro, small, and medium-sized enterprise) lending and expand the range of high-quality products, with a specific focus on green and sustainable finance as well as vulnerable groups, and strengthen market-friendly policy approaches to increase government-assisted MSME finance support programmes.   Objectives of pillar three: Assess the population’s level of financial literacy and identifying key gaps; improving the co-ordination of financial literacy efforts; increasing financial literacy among consumers, particularly vulnerable groups, including women, youth, the poor, and those with poor educational backgrounds; increase the capacity of MSMEs on the attributes required to gain access to the formal financial system; and improve the effectiveness and efficiency of delivery channels for financial literacy. The Central Bank is also planning to set up a National Financial Inclusion Council, management committees, working groups, and a NFIS Secretariat in order to achieve the aforementioned objectives. The NFIS 2021-2024 provides a standardised and co-ordinated approach, including an action plan for all stakeholders to improve financial inclusion in Sri Lanka. Since Sri Lanka has a long track record of not keeping up with plans and promises, the full implementation of NFIS itself would be a victory in Sri Lanka’s attempt to become fully financially inclusive.

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