Empowerment Through Financial InclusionAddress to the International Forum for Financial Inclusion
By Christine Lagarde
Managing Director, International Monetary Fund
Mexico, June 26, 2014
As prepared for delivery
Good morning. Buenos días.
It is a great pleasure to be here with you. Let me start off by thanking President Enrique Peña Nieto for inviting me to speak before you today, and Minister Videgaray and Governor Carstens for their warm welcome.
It is a privilege to be in the company of distinguished guests and participants from across the region to discuss such an important topic—financial inclusion. What is it exactly? In a word—the “unbanked.” It is our effort to bring the more than 2.5 billion people—mostly poor, mostly women—who currently lack access to basic financial services into formal financial networks.
The merits of financial inclusion are strongly rooted in empowerment. Access to credit is a key link between economic opportunity and economic outcome. By empowering individuals and families to cultivate economic opportunities, financial inclusion can be a powerful agent for strong and inclusive growth.
As Carlos Fuentes once said: “Culture consists of connections, not separations.” I would add that a great culture also consists of inclusion.
For the past several years, Mexico has been a global champion of financial inclusion. During its presidency of the G-20 in 2012, financial inclusion was a key pillar of Mexico’s agenda. It was also in Mexico that the Maya Declaration was agreed—a set of global and measurable commitments to unlock human potential through access to financial services.
Here in Mexico, important strides were made in extending financial services across the country. The number of financial institutions almost doubled over the past four years, covering nearly three-fourths of municipalities.
Yet, only 27 percent of the adult population has access to financial services, compared to 40 percent for the Latin America and Caribbean region, and only one in every five women is served by a formal financial institution. So it is very encouraging that Mexico is now launching its own national strategy for financial inclusion, with a strong focus on women.
Today I would like to share my perspectives on three aspects of financial inclusion:
(i) First, why financial inclusion is important, especially for women;
(ii) Second, how can we promote financial inclusion—the roles for both the private sector and the government; and
(iii) Third, the nexus between financial inclusion and broader financial stability.
1. Importance of Financial Inclusion
Let me start with why financial inclusion is important.
One of the biggest economic stories of our time is the reduction of poverty around the globe. Many low-income and emerging economies are catching up with richer nations in terms of per capita income.
I have to commend policymakers in the region, past and present, for achievements over the last decade—in reducing poverty, building the middle class, and promoting prosperity for all levels of society. Extreme poverty, measured as life on less than US$2.50 per day, has been halved. And for the first time in recorded history, there are now more people in the middle class than in poverty. Mexico epitomizes these achievements—with extreme poverty falling by 60 percent and the middle class doubling in size over the past ten years.
Yet, despite this progress, poverty is still high. The Latin America region remains by many measures the most unequal in the world. Women, in particular, often bear the brunt of poverty and limited access to economic opportunity, including unfavorable financial access.
There is also large income inequality on a global scale. The 85 richest “people” in the world control as much wealth as the poorest half of the global population—about 3.5 billion people. Inequality in access to opportunity is often a prime culprit—be it the opportunity of education, health, or financial services.
Inequality is not just a moral issue—it is a macroeconomic issue. Our research tells us that countries with higher inequality tend to have lower and less durable growth. Inequality chokes the prospects for individuals to realize their full potential and contribute to society. Whether it is through personal experience or empirical evidence, one thing is clear—growth has to be more inclusive, and for this finance has to be more inclusive.
For the poor, access to basic financial services such as payments, savings and insurance holds out the potential to generate huge benefits. With improved financial access, families can smooth out consumption and increase investment, including in education and health. They can also insure against unfavorable events—and therefore avoid falling deeper into poverty, which is often the case with such incidents.
For firms, especially small and new ones, access to finance can encourage investment in new and more productive technologies. It can also help them expand—hire more people and even mature to a larger scale.
There is also an important gender dimension here.
Frankly, women, not only in Mexico but across the world, face a range of barriers in access to financial services. For instance, with limited property rights, women tend to own fewer assets than men. If you combine that with low levels of wages and labor force participation, women are often left with insufficient collateral to obtain credit.
Moreover, in settings where loan officers are mostly men, women might find themselves at a disadvantage. Cultural and educational hurdles can work against women tapping into appropriate financial services that can appreciably improve their livelihoods.
In Mexico, for example, less than 50 percent of women are part of the labor force, compared to 85 percent for men. Lower education and managerial experience relative to men also act as barriers to financial access for women—and when they do, they are less capable of securing favorable terms. These women, their families, and society as a whole are deprived of the benefits that could be reaped if they were allowed to live up to their full potential.
These barriers need to be addressed head on. By reducing poverty and increasing job creation, financial inclusion is a key ingredient of inclusive growth—it can help close this gender and inequality gap.
2. Promoting Financial Inclusion—A Collective Responsibility
Which brings me to my second topic—how can we expand the reach and scope of financial services?
I see promoting financial inclusion as a collective responsibility. It is a task for both the government and the private sector. Each has a role to play—the private sector in harnessing technology and adapting to consumer needs, the government in creating an enabling environment for greater financial inclusion. Civil society also has a role to play, of course, by providing informal support and oversight.
Private sector initiatives—harnessing technology and adaptability
Let me start with the private sector. There are great examples, including in this region, of private sector initiatives that have improved access by the poor to financial services. I have no doubt that our speakers here today will illuminate us with their own experiences and expertise on this subject.
Let me touch briefly on how technological innovation and tailored business models can help.
Technological innovation is perhaps the most promising way to advance financial inclusion. Why? Because it lowers the costs of serving low-income clients. It makes the provision of financial services viable to suppliers and affordable for users.
Mobile banking is one innovation with dramatic potential for expanding financial inclusion. Mobile phone diffusion often exceeds bank network distribution. Kenya’s mobile payment services, M-PESA, is a well-known example. It is operated through a private telecommunications provider and has nationwide coverage independent of traditional banks. Today, more than 75 percent of the Kenyan population has access to financial services—the highest in Sub-Saharan Africa.
Similar schemes are also popular in Latin America, with M-PESA-style service in Paraguay and in Mexico, although here it operates through the formal banking sector.
Governments as well can harness the power of mobile banking, by disbursing transfer payments using formal bank accounts. Mexico’s Oportunidades offers a good example of how government-to-person (G2P) payments helped draw previously unbanked beneficiaries into the formal financial network.
By the same token, products and business models that are tailored to meet consumer needs matter in expanding use of financial services. In countries such as Brazil, India, and Mexico, the use of banking correspondents (who rely on a combination of card- and mobile-based technologies) extended the reach of financial services to previously unbanked customers and locations.
In Chile, supermarket chains are gradually building credit histories for their unbanked clients. They start by extending small store credit, and expand that credit based on repayment record. These payment histories can translate into broader access to credit. This is financial empowerment in action—especially when combined with measures to protect consumers and financial education to prevent over-indebtedness.
Government role—creating an enabling environment for financial access
Private sector initiatives, however, can and should be complemented by government policies.
Some of the barriers to greater financial inclusion arise from distortions in the economy. Measures such as interest rate subsidies or directed lending are often used to provide short-term relief to borrowers. Yet these measures can harm competition and undermine financial stability over the longer run.
The thrust of government policy should therefore be on creating an enabling environment for financial inclusion. How? I can think of three areas:
First, encouraging healthy competition. Healthy competition among providers encourages the development of new and specialized financial products, including those that tap into the promise of technology. It also empowers consumers—they have more options and the choice of products that serve them best. Beyond fostering inclusion, financial innovation can also increase financial depth.
Second, creating an enabling regulatory environment. A key challenge here is to establish a prudent yet uncomplicated regulatory framework for the products that can support financial inclusion. Policies such as granting exemptions from onerous documentation requirements or requiring banks to offer basic accounts can be particularly helpful.
Third, strengthening financial infrastructure. A key requirement for greater financial inclusion is appropriate information. Policies that can facilitate access of banks to borrower information, including through credit information systems and legal registries for movable collateral, can be instrumental in increasing lending to small and medium enterprises.
3. Financial Inclusion and Financial Stability
So we know how the private sector and the government can both act to promote greater financial inclusion. But what does that mean for broader financial stability—my third topic for today.
Financial inclusion creates opportunities for many consumers who had previously been excluded from financial markets. If not well managed, financial inclusion—and credit expansion—can undermine financial stability. Extending credit to unproductive projects or unfit clients can expose lenders to higher risks; it can also expose ill-informed borrowers to increased risk of debt distress.
We are all well aware of the dangers of overextension of credit—too little or too much of it are both undesirable. In Octavio Paz’s own words, “Too much light is like too much darkness, you cannot see.”
“Responsible” financial inclusion requires balancing opportunity and innovation in financial markets with safeguards to prevent excesses, both the supply and demand side. It means helping consumers, especially the most vulnerable, to benefit from access in a responsible way, without diving deeper into debt. Having in place well-designed financial regulations can ensure that loans are channeled to their most productive use.
How can we achieve this in practice? Effective consumer protection and market conduct regulations are key aspects of a responsible finance agenda.
Consumer protection is particularly important because it ensures responsible access to credit. Policies that improve transparency in financial markets through disclosure requirements can also help—by increasing information available and making it easier to understand.
Mexico again offers a good example here. As part of its financial reform, a universal credit bureau for all financial institutions is being created, along with an information bureau that publishes lending rates and complaints about unfair practices. These measures are crucial in building consumer confidence in accessing financial services.
By the same token, financial literacy can also support responsible financial inclusion. And here I see a role for everyone—the government, private sector, and civil society—in building financial capacity.
To access credit, young and micro entrepreneurs often need support to build capacity in accounting, record keeping and project planning. Such help can be critical in supporting both an expanded and responsible access to credit. Financial literacy can also reduce gender gaps in access to finance, especially when the driver is lower education of women.
The Mexican government has several good initiatives in place, such as the program Educacion Financiera, Tu Ganancia. By developing basic financial skills such as budgeting and discovering low-cost sources of credit, this scheme can help consumers make informed and responsible financial choices.
The private sector also has its own schemes. Not only has Banco Compartamos in Mexico made it viable to serve low-income clients, it has also developed financial education programs and products tailored to women. Another true story of financial empowerment!
Let me conclude.
In today’s increasingly interconnected world, linked by ever growing financial flows, more than a third of the global population is still financially excluded. It is an economic and a moral imperative that we reach them and empower them.
Financial inclusion can help. And if supported by robust policies, it can go hand in hand with financial stability. Financial inclusion empowers individuals and families, especially women and the poor, and well-functioning financial systems enrich whole countries.
Many of you have come to this conference with bright ideas to boost financial inclusion—ideas that only wait to be implemented. I am confident that Mexico’s strategy will provide the appropriate framework for society, as a whole, to embrace those policies and initiatives that can raise financial inclusion to levels seen across the region.
We at the IMF recognize and support financial inclusion as a key pillar of financial development and inclusive growth. Together with the World Bank and other regional institutions, we have worked with many countries in the region on financial sector reforms. We will continue to develop and share best practices with our membership, both bilaterally and in the context of multilateral initiatives such as the G-20.
I would like to leave you with another thought from Carlos Fuentes based on his book Por un Progreso Incluyente: “Un progreso incluyente debe conjugar, en un país como México, las exigencias del cambio y las de la tradición…. Nuestra modernidad no puede ser ciega, puramente imitativa...Debe ser una modernidad inclusiva.”
In Mexico and around the world, financial inclusion is key para un progreso incluyente.