New Brookings report highlights advances in financial and digital inclusion

Utilizing quality, affordable formal financial services effectively enables individuals to save for the future, invest in their livelihoods and families, and protect themselves in the case of financial emergencies. At the macroeconomic level, financial inclusion provides opportunities to promote economic growth, reduce income inequality, and combat poverty.

Yet while the economic and societal benefits are evident, achieving financial inclusion is a considerable undertaking that requires significant national-level commitment from govern-ment officials, financial service providers, telecommunications bodies, retailers, and other nonbank entities such as post offices. Moreover, advancing access to formal financial services is a necessary, but not sufficient, ingredient for financial inclusion, as a thorough understanding of appropriate financial services and products is needed to leverage them in a way that promotes financial health.

Globally, there has been tremendous progress in promoting inclusive finance: Between 2011 and 2014, financial exclusion declined by 20 percent globally. Yet further efforts are needed to promote access to and usage of formal financial services among the remaining 2 billion adults without formal financial accounts. The second annual Brookings Financial and Digital Inclusion Project (FDIP) report assesses a wide array of geographically, politically, and economically diverse countries to identify areas of strength and opportunities for growth with respect to the acceleration of financial inclusion. As in the 2015 FDIP Report, the FDIP team evaluates four dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services. Below we highlight several of the central enhancements to and findings from the 2016 report.

What is new in 2016 FDIP report?

The 2016 FDIP Report builds upon the 2015 report findings in three key ways. First, the 2016 report amplifies the geographic diversity of the FDIP country sample by adding five new countries: the Dominican Republic, Egypt, El Salvador, Haiti, and Vietnam. The report features detailed overviews of the financial inclusion landscape in these five countries, as well as updates surrounding financial inclusion developments in the 21 countries included in the 2015 FDIP Report.

Second, the 2016 report features a number of enhancements to the scorecard metrics that reflect our heightened focus on the usage and quality dimensions of financial inclusion. For example, the new metrics feature an indicator examining financial consumer protection frameworks, as well as an indicator assessing the frequency of account withdrawals at financial institutions.

Third, the report hones in on the financial inclusion challenges facing women, refugees, and under-resourced migrants. As noted in our previous post on the gender gap in financial inclusion, women worldwide remain disproportionately excluded from the formal financial system. Moreover, a June 2016 report published by the United Nations High Commissioner for Refugees found that 65.3 million individuals globally were forcibly displaced by the end of 2015 – the highest number recorded since the aftermath of World War II.

The global gender gap in financial inclusion, as well as the staggering number of individuals affected by war, persecution, and other forms of conflict and violence, underline the need to find viable ways to ensure women, refugees, and other displaced and marginalized populations have access to the financial resources they need to ensure the well-being of themselves and their families.

What are some of the key findings from the 2016 FDIP report?

The 2016 report offers good news regarding the global financial ecosystem: Many countries from across the income and geographic spectrum are making progress toward their financial inclusion goals.

For example, on the country commitment side of the 2016 scorecard, countries such as the Philippines have published national financial inclusion strategies. In terms of mobile capacity, El Salvador earned the highest score among the five new FDIP countries, boosted by robust levels of unique subscribership and 3G network coverage, as well as an array of mobile financial service offerings. On the regulatory environment side, Peru officially launched the first fully interoperable mobile money platform, BiM, in February 2016. With respect to adoption of formal financial services, the Dominican Republic earned the highest score among the five new FDIP countries.

To further expand and accelerate access to and usage of affordable, quality financial services, the 2016 FDIP Report highlights four priority areas that warrant additional action moving forward:

1) Establishing specific, measurable financial inclusion targets

Quantifiable goals can drive country commitments and policy changes and help policymakers and non-government entities assess progress toward financial inclusion. Considerable opportunities for growth with respect to instituting concrete targets remain; about one-third of FDIP countries have not yet developed publicly available, quantifiable financial inclusion goals.

2) Collecting and analyzing data relevant to financial access and usage, particularly among underserved groups

For a number of key issues in financial inclusion, data are often limited. Examples of these issues include the frequency of formal financial account usage (particularly regarding digital financial services), consumer confidence in formal financial services, and the costs of utilizing formal financial services. Without consistent, comparable data across countries, it is challenging for researchers and other financial inclusion stakeholders to identify what approaches to financial inclusion are working, and why.

3) Advancing regulatory changes designed to facilitate financial inclusion

Regulations should promote a level playing field for financial service providers and ensure adequate consumer protection for customers. Facilitating the entry of diverse service providers into the financial ecosystem through enabling and inclusive regulation can promote competition, reduce costs, and advance access to financial services in rural and other underserved areas.

4) Enhancing financial capability among consumers

Improving access to formal financial services requires ensuring that consumers are aware of the suite of services available to them and find value in actually leveraging those services. Government leaders, non-government entities, and financial service providers should work together to implement policies and initiatives that recognize the importance of financial capability through targeted data collection and capacity-building programs.

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Introduction

Review of 2015 Findings

Evaluating progress toward adoption of affordable formal financial services matters because financial inclusion is a key ingredient in promoting household well-being and broader economic development. The first annual FDIP report and scorecard, published in August 2015, addressed fundamental questions regarding ways to advance inclusive finance, including 1) Do country commitments make a difference in progress toward financial inclusion?; 2) To what extent do mobile and other digital technologies advance financial inclusion?; and 3) What legal, policy, and regulatory approaches promote financial inclusion?

To answer these questions, the 2015 FDIP Report examined the inclusion landscape across 21 economically, geographically, and politically diverse countries by examining country-specific legislation and news stories, reviewing multinational datasets, and corresponding with financial inclusion experts in the focus countries and beyond. This research and engagement process enabled the FDIP team to compile a picture of the global financial inclusion landscape, and yielded the following key takeaways:

• Country commitments to advancing financial inclusion matter.

• The movement toward digital financial services will accelerate financial inclusion.

• Geography generally matters less than policy, legal, and regulatory factors, although some regional trends in terms of financial services provision are evident.

• Central banks, ministries of finance, ministries of communications, banks, non-bank financial service providers, and mobile network operators have major roles in achieving greater financial inclusion and should coordinate closely with respect to policy, regulatory, and technological advances.

• Full financial inclusion cannot be achieved without addressing the financial inclusion gender gap and accounting for diverse cultural contexts with respect to financial services.

These recommendations regarding digital financial services and digital financial service mechanisms (e.g., merchant payments and smartphones, respectively) are reflected in the 2016 FDIP metrics. As we note below, this year’s study added several new metrics designed to assess progress toward financial inclusion. We also extended our analysis to several new countries in addition to the 21 studied last year.

New in 2016: Enhancements to the report and scorecard

Following publication of the 2015 FDIP Report, our team solicited feedback from a diverse array of financial inclusion experts, including private and public sector representatives and experts at non-government entities. We also participated in and hosted a number of public and private convenings to engage with other financial inclusion experts. For example, a Brookings roundtable on gender disparities in access to and usage of financial services informed our recommendations regarding “Financial Inclusion for Women.” Additionally, we sought engagement with financial inclusion stakeholders by providing a dedicated comments portal regarding our work.

Input from diverse financial inclusion stakeholders improved our efforts to identify additional countries for the 2016 FDIP country sample, augment and enhance the 2016 FDIP Report metrics, capture updates on progress toward greater financial inclusion across our focus countries, develop policy recommendations (e.g., regarding financial capability and the gender gap in access to and usage of formal financial services), and focus on key demographics – specifically, women, migrants, refugees, and youth – that are disproportionately affected by barriers to financial services.

Based primarily on takeaways from conversations with key stakeholders, we have broadened our 2016 country sample by adding the Dominican Republic, Egypt, El Salvador, Haiti, and Vietnam. Adding these countries enabled us to enhance the geographic diversity of the FDIP sample by including countries in the Caribbean, Central America and North Africa. As was the case during the consultation process for the 2015 report, we benefited from high levels of engagement with in-country experts, enabling us to supplement our analysis of publicly available primary and secondary sources with perspectives from financial inclusion stakeholders with long experience in these countries.

The 2016 FDIP Report features detailed summaries of the financial inclusion landscape across our focus countries. For each of the newly added nations, we assess that country’s financial infrastructure and mobile ecosystem, key regulatory and industry developments, and recommendations regarding next steps for enhancing financial inclusion. With respect to the 21 countries that were featured in the 2015 report, we highlight key updates in the financial inclusion sector since spring 2015 and identify action items to advance inclusive finance.

The 2016 FDIP research continues to examine a range of traditional and non-traditional financial services relevant to individuals at the margins of, or outside, the formal financial system. As in our 2015 report, the 2016 study focuses primarily on basic, formal financial services (e.g., payments and savings) since these services typically constitute the entry point and area of greatest immediate need for individuals whose previous engagement with the formal financial sector has been limited. While we do not look extensively at informal financial services, consumer engagement in informal or “semiformal” services such as informal savings clubs is quite common among underserved populations globally: According to Global Findex data, “[a]bout 9 percent of adults – or 17 percent of savers – in developing economies reported having saved [semiformally] in the past 12 months” as of 2014. Thus, formalizing certain financial services could provide a valuable pathway into the formal financial system for many underserved populations.

With respect to the 2016 scorecard, we have retained our approach of assessing access to and usage of financial services through four “dimensions”: country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services. Each dimension, in turn, comprises a set of indicators that capture data relating to that dimension. We have made several enhancements to the indicators within the 2016 scorecard, which are detailed in the Methodology section of the report.

Key findings

The 2016 FDIP Report shows that substantial progress has been made toward advancing financial inclusion in many countries. Kenya retained its position as the highest-ranked country in the study by a 5 percentage point margin. The other top-scoring countries include Colombia (earning 79 percent of the total possible score), and South Africa, Brazil, and Uganda (tied at 78 percent each). Kenya, South Africa, Brazil, and Uganda held their places in the top five-ranked countries between 2015 and 2016, while Colombia moved up five percentage points and therefore joined the top performers. Colombia’s progress was driven in part by the development of new financial inclusion targets and its strong mobile capacity as measured by our updated FDIP mobile capacity metrics.

In general, we found that the right blend of stakeholder buy-in among the public and private sectors and an enabling regulatory environment were crucial for amplifying access to formal financial services. That finding was true for a diverse range of nations. According to the World Bank, of the five countries that ranked at the top of the 2016 scorecard, one is a low-income economy, one is classified as a lower middle income economy, and three are characterized as upper middle income economies. As discussed in more detail below, this diversity demonstrates that while there is no single path to facilitating financial inclusion, engagement in multinational knowledge-sharing networks and investing in digital financial services can help countries develop successful and sustainable approaches to making progress toward inclusive finance.

The biggest improvement in scores between 2015 and 2016 was made by the Philippines, which increased its overall score by eight percentage points. The increase was driven in part by the launch of its national financial inclusion strategy, as well as its strong performance in terms of mobile capacity. For example, the Philippines boasts among the highest rates of smartphone penetration across our country sample. Along with Indonesia, it was the only lower middle income country to receive a top score for its level of smartphone adoption.

While the Philippines held the highest adoption rate of mobile money accounts across FDIP countries in Southeast Asia as of 2014, there remains a significant untapped opportunity for increased takeup of digital financial services. Moving forward, one factor that may promote increased adoption of digital financial services in the Philippines is a recent mobile money interoperability arrangement between PayMaya Philippines (formerly Smart eMoney, Inc.) and Globe Telecom’s GCash service.

The lowest income economy among the countries ranked at the top of the FDIP scorecard was Uganda. Uganda’s high score was driven in part by its strong levels of mobile money adoption (the second-highest among the FDIP countries as of 2014) and the amendment of the 2004 Financial Institutions Act. Among other provisions, the amendment provides a legal basis for the regulation of agent banking and empowers the central bank to establish more than one credit reference bureau. These changes should facilitate greater competition within the financial services ecosystem and drive expansion of affordable financial services among low-income consumers.

The other low-income country that demonstrated a particularly strong performance on the FDIP scorecard was Rwanda, which ranked among the top 10 countries overall. Rwanda provides an effective example of how country commitment to advancing financial inclusion and the promotion of digital financial services can lead to a more inclusive financial ecosystem. Rwanda is tied for the highest regulatory environment score among the FDIP countries and earned a strong score of 94 percent on the country commitment dimension. Robust data collection initiatives have documented Rwanda’s progress toward financial inclusion. For example, Rwanda’s 2016 FinScope survey, which assesses access to and usage of financial services in addition to financial capability, behavior, and trust in financial institutions, found that financial exclusion had dropped by 17 percentage points since 2012. This reduction was caused by a significant increase in the proportion of adults who have or use a product or service from a formal financial institution. Mobile money has contributed to enhanced adoption of formal financial services in Rwanda, which ranks fourth among the FDIP countries in terms of mobile money account ownership.

Among the new countries that were added to the FDIP study in 2016, El Salvador demonstrated a particularly strong performance on the FDIP scorecard. It received the highest regulatory environment, mobile capacity, and country commitment scores among the new FDIP countries. While its adoption dimension score was lower than those for the Dominican Republic and Vietnam, El Salvador has made tremendous progress in advancing financial inclusion, more than doubling the percentage of adults with an account at a financial institution between 2011 and 2014. As in Rwanda, mobile money has contributed to the expansion of financial inclusion in El Salvador: Indeed, El Salvador is among the top 15 mobile money markets in the world when measured by 90-day active accounts as a proportion of the adult population. We expect that increasing smartphone penetration will further propel the adoption of mobile money services in El Salvador.

Among the countries featured in both the 2015 and 2016 FDIP reports, scoring changes were generally positive. Countries that experienced scoring improvements tended to demonstrate advances on more than one indicator. For example, Peru increased its indicator scores within the country commitment, mobile capacity, and regulatory environment dimensions by launching a national financial inclusion strategy, demonstrating a significant increase in its market penetration of unique subscribers, and implementing an interoperable digital payments platform.

Calls to Action

Based on our research, we identify four priority areas that warrant additional action on the part of the international financial inclusion community: 1) establishing specific, measurable financial inclusion targets; 2) collecting and analyzing data relevant to financial access and usage, particularly among underserved groups; 3) advancing regulatory changes designed to facilitate financial inclusion; and 4) enhancing financial capability among consumers.

Establishing measurable financial inclusion targets

• National financial inclusion authorities should set specific, measurable targets with respect to financial inclusion. In doing so, financial inclusion leaders should be attentive to underserved demographics, including women.

  • Why it matters: Quantifiable goals can drive country commitments and policy changes with respect to financial inclusion. Initiatives such as the 2013 Sasana Accord reflect the international community’s recognition of the value of measurable goals in driving financial inclusion progress. As an example, a report by the Global Banking Alliance for Women, Inter-American Development Bank, and Data2X found that “financial inclusion plans that had specific gender targets in addition to their gender strategies were most successful in ensuring that sex-disaggregated data was produced.”

  • Next steps: Scores across the country commitment dimension of the 2016 FDIP Scorecard demonstrate that while the majority of FDIP countries have established a national financial inclusion strategy, there remains a need to hone in on specific quantifiable goals and to disaggregate those goals by target populations (e.g., women) in order to promote accelerated progress toward financial inclusion. For example, of the top five scoring countries across our FDIP scorecard, about 80 percent have established quantifiable goals relating to financial inclusion, indicating that there is still room for progress in terms of establishing concrete financial inclusion targets – even among countries that have demonstrated significant national-level interest in advancing financial inclusion.

Collecting and analyzing data

• Key financial inclusion stakeholders, including industry players, non-government organizations, international financial institutions, and government entities should coordinate with respect to data-sharing and harmonization.

  • Why it matters: For a number of key issues in financial inclusion (e.g., frequency of account usage with respect to formal – and particularly digital – financial services and trust in financial services), publicly available data are often limited to only a few countries, are not nationally representative, and/or subscribe to varying definitions of financial inclusion that inhibit comparability across countries. The lack of consistent, multinational data constrains the ability of researchers to identify what approaches to advancing financial inclusion are working, and why.

  • Emerging opportunities: In recognition of the challenge posed by disparate or unavailable data, the new insight2impact (i2i) initiative, established by the FinMark Trust and the Centre for Financial Regulation and Inclusion (Cenfri) in 2015, aims to “drive collaboration to improve the sophistication, accuracy, and consistency of data used in the design of effective programmes, policies, and products.”

  • Next steps: Policymakers, industry leaders, and other financial inclusion experts should participate in multinational knowledge-sharing networks and initiatives such as the i2i initiative and the AFI Financial Inclusion Data Working Group98 to explore how best to collect, disaggregate, and harmonize data.

• Banks and other financial service providers should gather and report supply- and demand-side sex-disaggregated data. Public sector financial inclusion authorities should coordinate with financial service providers to collect and harmonize data in order to identify gaps and market opportunities.

  • Why it matters: Too few countries collect sex-disaggregated data, and this lack of data constrains the ability of financial inclusion authorities to identify market opportunities and make the business case to providers with respect to targeting women customers.

  • Next steps: National financial inclusion authorities should leverage this data to inform the development or revision of countries’ financial inclusion strategies, quantifiable targets, product design, and relevant financial and telecommunications sector policies. Data aggregators such as the International Monetary Fund’s Financial Access Survey, the “global supply-side source of data on access to, and use of, basic consumer financial services by resident households and nonfinancial corporations,” could possibly then incorporate this national sex-disaggregated data into their databases to facilitate comparisons across countries.

• Telecommunications industry representatives and government entities should collaborate to 1) identify and analyze the cost barriers faced by individuals with respect to mobile phones; and 2) promote access to mobile phones and mobile financial services among women and other underserved groups by participating in international knowledge-sharing networks.

  • Why it matters: Access to digital financial services has the potential to reduce the gender gap in financial inclusion, but the gender gap regarding access to and use of mobile phones constrains the utility of this channel for promoting women’s financial inclusion. A recent study from the GSMA found that women were 14 percent less likely than men to own a mobile phone, and in some regions the gap was much higher – for example, in South Asia, where women were 38 percent less likely to own a mobile phone. The study noted that cost remains the greatest barrier overall to women owning and using a mobile phone. The study found that among women who had not used a mobile phone in the previous three months (including those who would have had to borrow a phone), the cost of handsets was a particularly significant barrier, in addition to other factors such as security concerns and lack of identification documents.

  • Next steps regarding data: Organizations such as the GSMA have tracked the effect of mobile sector taxation on the cost of mobile ownership, and organizations such as InterMedia have examined user perceptions of the costs associated with mobile money. However, country-specific information on the total cost of mobile ownership (including handset costs, connection costs, and call, SMS, and data usage costs) do not appear to be publicly available. The existence of comprehensive, global data surrounding these costs would provide greater insight into barriers with respect to mobile phone adoption. This data would also enable researchers to generate recommendations for helping ensure that mobile phones (and by extension, digital financial services) are available to consumers who need them most.

  • Next steps regarding international collaboration: In February 2016, the GSMA announced the launch of the Connected Women Commitment Initiative. This initiative, which involves mobile operators representing over 75 million mobile internet and mobile money customers, aims to connect millions of women in low- and middle-income countries to these services by 2020. Among FDIP countries, operators in Indonesia, Bangladesh, Rwanda, and Turkey had committed to the initiative as of February 2016. Joining such an initiative could help countries to engage in knowledge-sharing regarding mechanisms for facilitating affordable access to mobile phones and mobile financial services and promote enhanced progress toward an inclusive mobile ecosystem.

• Financial service providers should consider how best to leverage technology (either directly or through technology companies) to assess non-financial data that can advance access to credit among consumers who need it within the context of strong consumer protection frameworks.

  • Why it matters: As noted in the 2015 Omidyar Network report “Big Data, Small Credit,” in many emerging markets consumers face barriers to accessing formal credit services, particularly the absence of information about customers’ creditworthiness. However, the rapid proliferation of digital technology among consumers has yielded an increasingly deep “digital footprint,” including social media activity and mobile phone usage patterns, that can offer financial service providers alternative modes of assessing creditworthiness. Thus, these digital mechanisms can provide customers with opportunities to access formal financial services by yielding information relevant to credit assessments.

  • Next steps: Governments should ensure that strong financial consumer protection frameworks are coupled with regulatory provisions that enable financial service providers to explore means of leveraging the proliferation of available consumer data to facilitate access to financial services among those who need them.

Advancing an inclusive regulatory environment

• Regulators should engage in sustained dialogue with private sector representatives and other financial inclusion stakeholders to develop and refine regulations that promote a level playing field for providers and ensure adequate consumer protection for customers. As noted by the Center for Global Development Financial Regulation Task Force’s 2016 Report, “[a] level playing field in financial services is enabled by regulations ensuring that functionally similar services are treated equally as long as they pose similar risks to the consumers of the service or to the financial system as a whole.”

  • Why it matters: Technological advancements have amplified opportunities for customers to access financial services through digital channels, but they have also increasingly blurred the traditional distinctions between financial and industry sectors for regulators, particularly with respect to the telecommunications field. New service providers often face regulatory barriers or uncertainties that make it difficult to bring financial services to disenfranchised individuals.

  • Next steps: Ensuring that private sector voices are represented in dedicated financial inclusion bodies will help facilitate coordination among public and private sector bodies with respect to developing new financial regulations or adapting existing regulations to fit emerging services. Both digital and traditional providers should be permitted to adapt know-your-customer requirements and other combating the financing of terrorism and antimoney laundering mechanisms to reflect the level of risk posed by underserved customers engaging in low-value transactions in order to scale adoption of these services among the target market.

Enhancing financial capability

• Government representatives should work with financial service providers and non-government financial inclusion experts to improve financial capability among consumers.

  • Why it matters: To move beyond the objective of advancing access to financial services to facilitating effective usage of those services, consumers must understand what services are available, how those services will be helpful to them in their daily lives, and how to effectively leverage the given products or services. Consumers who fully understand the scope and impact of their financial options possess a greater ability to confidently access and effectively deploy formal financial services.

  • Emerging opportunity: While traditional, classroom-based financial education initiatives to promote financial literacy can provide individuals with a foundation to make healthy financial decisions, an increasing emphasis on translating financial knowledge into corresponding behavior has emerged, particularly given mixed evidence on the effectiveness of traditional financial literacy programs. This is why financial capability, defined by the Center for Financial Inclusion at Accion as “the combination of knowledge, skills, attitudes, and behaviors a person needs to make sound financial decisions that support well-being,” has “emerged as a strategic policy objective that complements the financial inclusion and financial consumer protection agendas.”

  • Next steps: Government leaders, non-government entities, and financial service providers should work together to implement policies that recognize the importance of financial capability through 1) targeted data collection and 2) capacity-building programs. Entities such as the World Bank have made important advances in gathering data on financial behavior and attitudes. Developing a framework at the national level for evaluating these topics would enable governments to collect and analyze financial capability data consistently. Moreover, public and private sector stakeholders should work together to develop and evaluate financial capability interventions. Programs that use innovative modes of information delivery (e.g., entertainment), provide helpful reminders, leverage social networks (e.g., family members), and introduce interventions at “teachable moments” (e.g., career transitions) have been shown to promote consumer education and skills that are conducive to financial health.