Deposit-taking non-bank financial institutions (NBFIs), such as microfinance institutions (MFIs), financial cooperatives and postal banks, together serve approximately 596 million people  in the global south. These institutions have many of the characteristics which research shows are key drivers for expanding access and reducing poverty: (i) proximity to customers; (ii) offering savings products; (iii) offering a full suite of products; (iv) cheap entrance costs and; (v) experience serving low income groups.
For these institutions to be important conduits in reaching the next 2.5 billion people with affordable and quality financial services, what policy and product changes need to occur in NBFIs? This research question led AFI to conduct a survey this past July that received the highest response rate ever experienced by the organization. The survey did not look at informal savings groups (tontines, ROSCAS, tandas or village savings groups), but rather benchmarked deposit-taking MFIs’, financial cooperatives’ and postal banks’ access to financial infrastructure compared to commercial banks. The survey results indicate two problematic trends, one positive trend, and highlight important opportunities for policy interventions.
- Little Oversight of Deposit-Taking NBFIs: Only 15 percent of postal banks, 26 percent of financial co-ops and 50 percent of deposit-taking MFIs are prudentially supervised, yet all of these institutions mobilize public deposits. In some instances other government entities or entities outside of the government may have some oversight—this is most prevalent with financial cooperatives where a general registrar of cooperatives performs limited oversight. If low and moderate income groups are going to keep their savings in NBFIs, shouldn’t these have oversight proportional to savings held in commercial banks? If not, do we really want deposit-taking NBFIs as part of the financial sector landscape?A colleague from the National Bank of Rwanda commented during this year’s 2013 Global Policy Forum (GPF) in Malaysia that supervision of NBFIs does have a cost, but this is the price to pay if we’re really committed to financial inclusion.
- Limited Access to the Financial Infrastructure: With such low levels of prudential oversight it is not surprising that policymakers have not allowed NBFIs access to financial infrastructure (see below). AFI’s survey shows that payment systems (98 percent) and card networks (95 percent) are the most pervasive components of financial infrastructure for banks while deposit insurance (70 percent) continues to lag. The largest gap between commercial banks and NBFIs lies in their access to central bank borrowing. The smallest is in deposit insurance. Rightly so, many of the components of financial infrastructure require institutions to: establish reserve accounts (central bank borrowing), have extra liquidity (card networks and payment systems), have sufficient IT systems (credit bureaus and payment systems) and/or be prudentially supervised (deposit insurance, central bank borrowing). These will be costs for NBFIs that are part of the financial infrastructure.Where prudential supervision is non-existent, institutions more easily become weakened. Stability is further threatened when traditional safety nets to secure confidence in banks (i.e., access to emergency liquidity, deposit insurance) are not available to deposit-taking NBFIs.Similarly, if NBFIs are going to profitably serve large numbers of consumers that are accustomed to cash transactions, they have to be able to convert these transactions into digital form (i.e., mobile, cards or standing orders). Their lack of direct access to payment systems or card networks limits a NBFI’s willingness to invest in upgraded systems.
- An optimistic outcome of the survey is that 65 percent of supervisors are working on reforming how they oversee NBFIs in their country. It’s not known what shape their reforms will take, but a large majority of supervisors at the GPF session on NBFIs were in favor of ensuring NBFIs have access to financial infrastructure (i.e., 52 percent central bank borrowing, 77 percent deposit insurance, 85 percent payment systems). More work in this area is needed and in 2014 AFI will publish a case study on NBFI oversight.
A key theme of the 2013 GPF was the possibility of finding policy interventions that can make an optimal impact on stability and financial inclusion. I believe opening up financial infrastructure to deposit-taking NBFIs is at the nexus of these two goals. Digital financial services is the only way NBFIs can effectively bring in another 600 million clients by 2020 and access to financial infrastructure is an important first step along this route.
ABOUT THE AUTHOR
Dave Grace is managing partner of Dave Grace & Associates a consultancy and research firm based in the United States. He is a consultant for the Alliance for Financial Inclusion (AFI) and a former central banker.
Categories: General Financial Inclusion