Arab Policy Forum on Financial Inclusion: Addressing Challenges of Financial Inclusion in the Arab World

By Masood Ahmed, Director, Middle East and Central Asia Department
Abu Dhabi, December 10, 2013

Good morning—As-salaam Alaykum!

Honorable Ministers and Governors, distinguished participants at the 5th Annual Arab Policy Forum on Financial Inclusion:

Let me start off by thanking the World Bank, the Consultative Group to Assist the Poor, the German Development Cooperation (GIZ) and other organizers of the Arab Policy Forum for inviting us to deliver this address.

I would also like to commend the Forum for turning the spotlight on financial inclusion in the Arab World—a topic that we believe is key to addressing the challenges of boosting growth, creating jobs, and reducing poverty.

My main message today is this: increasing access to financial services is a crucial element in reviving growth in the region and creating jobs for its growing populations.

I. Importance of Financial Inclusion

Now we all know from personal experience that economic opportunity is strongly linked to access to financial services. Such access provides prospects to build savings, obtain credit, and to invest.

We also know that to provide jobs and increase living standards, the MENA region needs to grow faster than it has done over the last decades. Increasing access to finance could help in closing this growth gap.
Indeed, our empirical studies show that raising access to finance in the MENA region to the average of the world could boost per capita GDP growth by between 0.3 and almost 1 percentage point annually. This highlights the importance and relevance of the topic that you are discussing today.

II. State of financial inclusion in the Arab world

So let me start by looking at the state of financial inclusion in the Arab world today. Now, we do know that the Arab world still has the lowest level of financial inclusion in the world, measured by the proportion of individuals and enterprises using financial services.

I have been struck by two numbers:

First, only 18 percent of the population in our region has an account with a financial institution compared with 43 percent for developing countries as a whole. And for women in the region, this figure is only 13 percent.

Second, only 8 percent of total bank loans go to small-and-medium enterprises, which we all agree are the engines of private sector growth and job creation.

So, why is financial inclusion so low in the Arab world? There are a number of reasons for this: (1) undeveloped financial infrastructure; (2) lack of a clear framework for non-bank financial institutions; (3) lack of competition and missing markets; (4) limited availability and diversity of specialized financial products and services; and (5) barriers to women in accessing finance.

Let me just say a word on each:

First, and foremost, financial infrastructure in many countries of the region is underdeveloped. In particular, credit information is weak compared with other regions.
Second, there is a need for a clear and coherent supervisory and regulatory framework for non-bank financial institutions. For example, microfinance legislation has been introduced in some countries, and that is very welcome, but others still need to follow.

Third, there is also a lack of competition and missing markets. Competition amongst banks which are the dominant financial institutions in the region—is lower than in other emerging regions. Financial institutions catering to the needs of the poor and to micro and small-and-medium enterprises are largely underdeveloped.

Moreover, specialized financial products and services are limited. For example, Islamic finance which has been expanding in recent years in the Arab world, with popular products like the Sokouk, Mourabaha, Ejarah, and Mousharaka. Nevertheless, the pace of progress towards accommodating Islamic finance has been uneven across countries.

And finally, women face a range of barriers to access financial services. Combined with limited property rights in some countries, high levels of unemployment and low levels of wages and labor force participation, often leave women with inadequate personal collateral to obtain credit. And indeed, banks’ efforts to recruit female clients and recruit female staff are still also uneven across the region.

III. Policies to Promote Financial Inclusion

So what can be done to promote financial inclusion?
You will be discussing this issue at the conference today. But let me offer you a few areas for your consideration:
First, improving financial infrastructure. Well, this can be done through enhancing payment systems and credit reporting and through strengthening creditor rights, enhancing collateral regimes and modernizing insolvency laws.

Second, enabling the regulatory environment for micro and small-and-medium financial institutions to flourish. For instance, postal institutions have well established physical infrastructure and networks in rural and urban areas. Hence, they are well placed to serve the poor, particularly in remote areas. They should be supported to achieve that. In addition, new actors could be enabled to provide low-income financial products. They should facilitate graduation of NGO-microfinance institutions, into non-bank financial institutions or even banks, if they can demonstrate sufficient capacity. We can draw upon the success stories of Bolivia and Mongolia in transforming microfinance institutions into banks.

Third, encouraging fair competition. More competition within the financial sector would encourage financial innovation by allowing a diversity of skills and products catering to the varying needs of clients.

Fourth, diversifying products, including the development of Islamic finance products. In particular, faster expansion of Islamic finance, properly regulated, would further foster financial depth and inclusion by catering to individuals who do not participate in the conventional financial sector for religious reasons.
Fifth, developing the capacity of micro and small-and-medium entrepreneurs. We know that to increase their access to finance,

young, micro, small-and-medium entrepreneurs often need support to build capacity in accounting, in record keeping, and in project planning.

And finally, creating an enabling environment for women to access finance. I believe that there is a need to remove the obstacles and change attitudes that hold back women’s access to finance. This would be a step towards allowing women to contribute more fully to their own economic potential, and to national economic development.

IV. Creating an enabling environment for women’s access to finance

As we all know, this is an area where some countries in the region lag. For the entire MENA region, the gap between male and female participation in the labor force over the past decade was almost triple the average gap of the emerging market and developing economies. Now, if this gap had simply been double instead of triple, the gains for the region, countries of the Gulf included, would have been enormous. We calculate almost $1 trillion in additional output, over that decade, amounting to annual gains of about 6 percent of GDP.

To address these obstacles, obviously, efforts need to include training programs for women, especially those who are starting their own businesses. Financial institutions should also be encouraged to employ more women which would help to attract female clients who would prefer to deal with female staff.

Finally, actively encouraging the adoption and dissemination of new technologies. Now, we are entering an age where mobile payments, mobile banking, and biometric identification make it easier and cheaper for people to use financial services. Progress made by countries as diverse as Kenya and Bangladesh, Tanzania and Pakistan in adopting mobile payments and banking is remarkable and provides us with good examples of how technology can foster financial inclusion.


Ministers, governors and participants, let me conclude with what the IMF can do to support your efforts, and the importance of cooperation in reaching financial inclusion in the region.

The IMF supports financial inclusion as a key pillar of financial development and inclusive growth.

Many of the financial sector reforms in the MENA countries have been undertaken in cooperation with the IMF, the World Bank and the regional institutions.

We are also providing policy advice in our Article IV consultations and technical assistance on many aspects of financial inclusion that lie within our own area of expertise.

We also work to ensure that financial sector issues are an integral part of national economic programs that are supported by the Fund through financial assistance.

We collaborate with international standards setters and regional financial institutions.

Indeed the Fund has also been participating in several multilateral initiatives to promote financial inclusion. This includes the G-20 Financial Inclusion Expert Group and the UN Advisors Group on Inclusive Financial Sectors.

We believe that improving financial inclusion in the Arab world requires cooperation amongst regulators, government agencies, private sector, civil society, and it should take place at the regional level as well. And for that reason, I am very encouraged that the Arab Monetary Fund has created a Financial Inclusion Working Group, which will meet for the first time immediately after this forum.
Honorable Ministers and Governors, distinguished guests:
I believe that the region is facing a historic opportunity to engineer a better future for its people. The social and political transitions underway in many countries of the region underscore the need to embrace new policies. Policies towards a more inclusive growth model of which financial inclusion would be an important element.
I wish you all good luck and great success in your discussions today.

Thank you—shukran!


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