Financial Inclusion: Helping Countries Meet the Needs of the Under-Banked and Under-Served

Financial inclusion, which advances universal access to and use of financial services, is crucial to inclusive growth and to poverty reduction. The World Bank Group takes a comprehensive approach to promoting financial inclusion among the 2.5 billion adults who lack access to formal financial services. The WBG works with governments and regulators to catalyze private sector investment and innovation, helping increase access for low-income customers and micro, small and medium-sized (MSME) enterprises to appropriate financial services.

Synopsis

In 2012, the World Bank reached 24.5 million MSME clients with an active loan portfolio of more than $3 billion, and with lending and technical assistance projects in more than 70 countries with about $1.4 billion in IBRD and $600 million in IDA funding. IFC’s Investment and Advisory work has reached more than 1,000 financial institutions in nearly 100 countries and has helped facilitate 19.7 million microloans and 3.3 million small- or medium-sized enterprise (SME) loans.

Challenge

About 2.5 billion adults lack access to formal financial services, limiting their ability to benefit from economic opportunities, improve their health and education, and raise their income levels. The Bank’s Global Financial Inclusion Database (Global Findex) reported that three-quarters of the world’s poor lack a bank account because of poverty, costs, travel distances and the often-burdensome requirements involved in opening an account. Less than 25% of adults earning less than $2 a day have access to an account at a formal financial institution. Being “unbanked” is linked to income inequality: The richest 20% of adults in developing countries are more than twice as likely to have a formal account.

Financial inclusion is an important driver of economic growth and policy alleviation. Access to finance can boost job creation, raise income, reduce vulnerability and increase investments in human capital. When MSMEs have limited access to finance, the economy suffers a series of negative consequences: Economic and social opportunities are restricted, enterprise creation and growth are restrained, households and enterprises are more vulnerable to threats, and payments are more costly and less safe.

Solution

The Bank is the leading global development partner for governments and regulators on financial inclusion, providing policy advice, data and diagnostics, technical assistance for legal and regulatory reforms, institutional development, risk-sharing, and financing. Our principal emphasis is on the regulatory, policy and institutional framework that enables and underpins the safe and efficient provision of financial services to low income customers and to MSMEs, although the World Bank also supports the provision of financial services through capacity-building and financing. The World Bank focuses on three main aspects of financial inclusion: access, usage, and quality. Financial infrastructure and financial consumer protection/literacy are essential for financial inclusion to succeed on all three aspects, contributing to financial sector stability as well as to poverty reduction.

The highly complementary nature of the World Bank and IFC’s clients (public sector/private sector) and financing instruments (through government/directly to the private sector) provide a powerful framework for cooperation to further financial inclusion. The Bank brings together over 200 financial sector specialists working on financial inclusion and the related areas of financial consumer protection, financial capability, remittances and payments. The World Bank supports increased access to a range of financial products and services through lending and technical assistance on a variety of factors contributing to financial inclusion including financial consumer protection, financial capability, MSME finance, payment systems, remittances, and credit reporting. The World Bank also supports countries to implement national strategies for financial inclusion, through data, technical assistance, financing, and capacity building.

" If you don't get a loan, it is hard to improve your socio-economic welfare. "

Toms Tibigambwa

Rwanda

Results

With continuing support from the World Bank Group, the Alliance for Financial Inclusion, and others, 38 countries have now made headline commitments to financial inclusion targets and action plans, with countries such as South Africa, India, the UK, and Brazil leading the way in prioritizing financial inclusion. The World Bank is committed to supporting low- and middle income countries in designing reforms and other initiatives to meet those commitments and goals, including through a planned new Financial Inclusion Support Framework.

To provide the necessary financial infrastructure that underpins financial inclusion, the World Bank has led comprehensive reforms of national payments system in over 100 countries. These reforms have included pillars such as Legal Framework, Large Value Payments, Retail Payment Systems, Government Payments, Interbank Money Markets, Securities Settlement Systems, International Remittances, Oversight Framework, and Cooperative Frameworks. The World Bank has also led standard-setting efforts in the area of financial infrastructure and, in the last decade, has identified and supported global adoption of minimum international standards that, where met, have resulted in increased safety, reliability, and efficiency.

Examples of recent World Bank technical assistance include:

In Indonesia, the World Bank has provided a range of technical support and data since 2007 to support the Government and central bank in preparing its new Financial Inclusion Strategy and has provided financing in support of financial inclusion and financial infrastructure reforms through IDA, IBRD, and Trust Fund support. These reforms could help an estimated 140 million unbanked Indonesians receive access to financial services.
In Mozambique, from 2006 to 2012, the Bank helped authorities create and implement a financial sector development strategy. It also provides analytical support and financing to support the development of a financial inclusion action plan or strategy and supports financial consumer protection reforms to help the majority of the Mozambican population, which remains financially excluded.
In Brazil, legal reforms advised by the World Bank over the last decade led to a dramatic expansion of financial service access points, resulting in coverage for every municipality by 2010.
In the Middle East and North Africa region, where only 18% of adults have a bank account, the World Bank and IFC have worked together to start a MSME Finance Facility that provides comprehensive support and financing to expand financial services for MSMEs. With an initial allocation of $100 million ($50 million from the African Development Bank and the remaining $50 million from the World Bank), the facility offers i) IBRD Adaptable Program Loans (APL); ii) the IFC's $150 million risk sharing facility for Small and Medium enterprises (SMEs); and iii) joint World Bank-IFC technical assistance. This facility is helping to significantly lower the estimated $200 billion credit gap faced by MSMEs in the region.

A woman sells mangoes at a vegetable market in Madagascar.

Yosef Hadar/The World Bank

Bank Group Contribution

Data: The World Bank is a leading global source of data on financial inclusion, including through the Global Findex survey, Enterprise Surveys, and the Global Payments Systems Survey. Country level surveys and assessments underpin public sector reforms and private sector actions, and inform a coordinated and effective approach. They also enable progress in reaching financial inclusion targets and in implementing actions outlined in financial inclusion strategies, as well as the impact of those actions. The Consultative Group to Assist the Poor (CGAP), a multi-donor partnership supported by over 30 development agencies and private foundations and housed at the World Bank, also provides important research and thought leadership for financial inclusion and microfinance.

Lending: The World Bank has an active lending portfolio for access to finance of more than $3 billion globally, including $600 million in IDA and $1.4 billion in IBRD lending, in more than 60 countries. Principal lending tools include:

Development Policy Loans (DPLs), based on a series of policy, regulatory and institutional actions/reforms agreed with the Government
Investment loans, with credit lines for MSME and low income individual lending by financial institutions, and/or support to credit guarantees (risk-sharing) to encourage financial institutions to lend more of their own resources to MSMEs and low income individuals

In fiscal year 2012, IFC committed an additional $546 million in 51 projects with financial institutions to support microloans.

Technical Assistance: The World Bank has technical assistance projects in more than 60 countries, including technical assistance and advice for reforms, institutions and capacity-building, systems development, analytical reports and data, and knowledge sharing.

The Bank has also been working with governments to design and implement national financial inclusion strategies. Governments are increasingly demanding assistance in innovative areas including Government-to-Person (G2P) payments and financial consumer protection. Totaling more than $6 million in 2012, technical assistance has largely been funded by the Responsible Financial Inclusion and Financial Infrastructure trust fund and the Financial Literacy and Consumer Protection trust fund (see more below), along with FIRST, a World Bank-managed, donor-funded initiative that supports low- and middle-income countries in their efforts to strengthen financial sectors and ultimately achieve greater economic development and poverty alleviation.

Trust Funds: the Bank has continued to expand its support to countries on Financial Inclusion, including with new trust funds: $4.5 million from the government of Switzerland for a Financial Literacy and Consumer Protection trust fund, and $3.5 million from the government of Australia as a first contribution (for remittances and payments) to a new programmatic Responsible Financial Inclusion and Financial Infrastructure trust fund. Funding support is also received from USAID, Russia, Austria and Italy.

Partners

The Bank works globally with standard-setting bodies to develop guidelines, standards, and good practices and with the G20 to develop guidance for regulators and policymakers and to catalyze new actions in support of financial inclusion. The Bank and IFC, along with CGAP and AFI, are implementing partners for the G20 Global Partnership for Financial Inclusion (GPFI).

The Bank increasingly adopts a joint approach with IFC on financial inclusion, given the complementarity in terms of different instruments, approaches and focus. The Bank also works closely, where appropriate, with a variety of organizations to advance financial inclusion, including the Alliance for Financial Inclusion (AFI), financial sector development trusts, the United Nations Capital Development Fund (UNCDF), the Organization for Economic Coordination and Development, the German government’s development agency GIZ, the U.S. Agency for International Development, the Australian government’s development agency AusAid, the Swiss government’s development agency SECO, the Bill and Melinda Gates Foundation, and regional development banks.

Of Note

Alliance for Financial Inclusion: A global regulator network focused on financial inclusion.
CGAP: leading knowledge partner for the Framework, including for microfinance and for mobile payments.
UNCDF: plans diagnostics and surveys in a number of low income countries linked to its new MAP initiative, which will feed into the Financial Inclusion Support Framework.
Financial Sector Development Trusts (FSDTs): active in a number of countries Sub-Saharan Africa.

Moving Forward

To ensure that countries have access to comprehensive technical assistance, capacity-building support, and knowledge for meeting their national financial inclusion commitments and targets, the World Bank is creating a Financial Inclusion Support Framework to support country priority actions in areas such as MSME Finance, Financial Infrastructure, Financial Capability and Consumer Protection, Mobile and Government Payments , Remittances, and Agricultural Finance. The Framework will support up to 15 countries over five years with a projected $70 million in technical assistance and capacity-building, to be complemented by a potential $700 million in additional World Bank Group financing and investment. The Framework closely complements the IFC’s SME Finance Initiative and CGAP’s knowledge agenda.

The World Bank is stepping up its support for monitoring and impact evaluation to strengthen the impact and quality of financial inclusion policies and initiatives. The World Bank monitors progress on the G20 Basic Set of Financial Inclusion Indicators that were endorsed by the June 2012 G20 Summit and is supporting the G20 in developing a broader set of indicators that cover innovative approaches, such as mobile phone banking and the use of agents for delivering financial services, and the quality of financial inclusion (through consumer protection and financial capability measures).

The World Bank will continue to develop guidelines, good practices, and toolkits to inform more effective financial inclusion policies, regulations, and private sector actions. Recent guidelines include: Financial Inclusion Strategies Reference Framework (at the request of the G20 Presidency), Good Practices for Financial Consumer Protection, and General Guidelines for the Development of Government Payment Programs.

Beneficiaries

In 2011, with development assistance from the World Bank's Financial Sector Development Program, the National Bank of Rwanda implemented a real-time gross settlement system for high-value payments. Thanks to a modern and interconnected payments system, thousands of teachers, students, civil servants, and urban workers are now able to make payments, pay bills, borrow money, save, and invest through their commercial banks, including some of the estimated 4 million unbanked Rwandans (Global Findex – 2011 data). The modernized financial environment is benefiting Rwanda’s low-income citizens by giving them access to broader financial services.

Urban workers like Dominique, who sends home US$20 a week to support his family outside Kigali, can trust that their hard-earned money is safely reaching their intended beneficiaries. “I send money to my brother because it's better than going 80 kilometers to give it to him. It's a good system because sending and receiving money is easy and fast,” he says. “No time is wasted.”

In Kigali, high school teacher Toms Tibigambwa has finally realized his dream of building a house for his family. Ever since the Rwandan National Bank began paying his salary on-time, he has been able to make regular loan repayments. “Because the pay is little, saving it is rather hard. If you don't get a loan, it is hard to improve your socio-economic welfare,” he said. Thanks to the Rwandan government's commitment to a modern banking infrastructure, Toms is now getting the opportunity to make things better for himself and his family.

These results support the following Millennium Development Goals: