What’s the linkage between consumer protection and financial access?

Klaus Prochaska

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Armenuhi Mkrtchyan, Head of Consumer Rights Protection and Financial Center at the Central Bank of Armenia, discusses consumer protection at the 2015 Global Policy Forum in Maputo, Mozambique in September 2015.

In a recent World Bank Private Sector Development blog, Ros Grady, Senior Financial Sector Expert at the World Bank, questioned if there was a linkage between consumer protection and meeting financial inclusion targets. “Financial consumer protection frameworks, properly designed, implemented and supervised,” Grady continues, “instill trust in consumer products and services of the financial sector. Such frameworks can thus be important enablers for the uptake of financial products and services.”

The statement is intuitive and very much in line with the work that the Alliance for Financial Inclusion (AFI) and its Consumer Empowerment and Market Conduct (CEMC) Working Group promote. But how does it actually hold up against empirical evidence? As a network of financial inclusion policymakers that promotes and develops evidence-based policy solutions, AFI naturally has a keen interest in evaluating if and how financial consumer protection advances financial inclusion. AFI recently conducted data analysis that offers some additional insights and nuance to those interested in the link between consumer protection and financial access.

Over the past year, AFI has conducted an extensive data collection on the legal and regulatory environment for financial inclusion in countries where we have member institutions. The research was supported by the Cyrus Vance Center for International Justice, leading international law firms Linklaters LLP and White & Case LLP, and local counsel from more than 44 countries.

We collected data on specific financial inclusion policy indicators and primary legal sources in AFI’s main policy areas, namely consumer empowerment and market conduct, financial inclusion data, financial integrity, digital financial services and financial inclusion strategies. The data collection was supplemented with legal analysis which bridges the superficiality of policy indicators that have to be answerable with “yes” or “no”, with the legal text, which always is more complex than that.

For 2014 AFI has collected data for 44 countries in which we have member institutions. The data will be made available in the AFI Policy Profiles which will be accessible through the AFI Data Portal.

The availability of sortable indicators on financial inclusion policy allows us to correlate them with financial inclusion metrics and draw some conclusions. In this blog I’d like to use our findings to contribute to answering the question posed above.

Specifically we correlated CEMC policy indicators with the recently updated financial inclusion data from the World Bank’s FINDEX. We compared average growth of financial inclusion between countries with certain policies and countries without them (note: the growth of financial inclusion was measured by the change in the indicators: “Percentage of adults having an account at a bank or another type of financial institution” based on the Findex 2011 and 2014). While from these simple correlations we definitely cannot draw causal effect of policies on actual financial inclusion, I still think the results deserve to be presented and discussed. At the very least they can contribute to the growing body of evidence in financial inclusion policy impact and provide insights for further in-depth research.

The first indicator we collected data on is if a country has specific regulation on financial consumer protection. Of course the fact that specific financial consumer protection regulations exist doesn’t say anything about the quality of the provisions therein. However, let’s for the purpose of this blog post assume that financial consumer protection regulations from the AFI network get it right significantly more often than not.

What we find is the existence of specific financial consumer protection regulation is correlated with somewhat slower growth of financial inclusion. Countries without it grew by 11.4% on average while ones with specific consumer protection grew by 9.6%.

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In light of this result it becomes harder to say that financial consumer protection is a driver of financial inclusion growth, but which kind of financial inclusion growth are we talking about anyway? One way of interpreting the data is that the existence of provisions to protect consumers increases the quality of services and thereby limits “bad” growth. Countries with financial consumer protection regulation are experiencing a more tempered but also supposedly more balanced growth in financial inclusion than countries where financial service providers are subject to less control.

The next question we asked was to which type or types of financial service provider(s) these specific consumer protection regulations applied. When we separate the correlations of growth with the different types of institutions governed, the results paint a more pronounced but also differentiated picture.

On one hand financial inclusion growth is much higher when financial consumer protection regulation does not apply to non-bank and retail credit providers. Again, in line with the previous argument this can be interpreted intuitively: Consumer protection regulation keeps the predatory non-bank and retail lenders in check and allows fewer providers to provide services than in environments where they are left unchecked. It is however very interesting to see that when insurance providers and e-money issuers fall under financial consumer protection, this is correlated with higher growth in financial inclusion. At least for non-bank issued e-money an intuitive interpretation of the data could be that e-money is a relatively new financial product and extending financial consumer protection to it, instills trust and uptake. Non-bank issued e-money still largely is used as a money transfer and payment instrument, and as such it doesn’t have the same potential of undesirable “bad growth” as inappropriate credit.

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The next question we asked was if a country had a government institution that had the explicit task of monitoring compliance and enforcing financial consumer protection. The results of our correlations show somewhat higher financial inclusion growth in countries where the government does not monitor and enforce provisions. This result can be interpreted in line with the previous correlation and a plausible interpretation could follow the same logic: Countries that actually monitor compliance and enforce the existing rules disincentivise abusive providers from entering or staying in the market, and thereby “trim the unwanted edges” of financial inclusion growth.

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The last question was if a government institution published regular reports with the statistics on complaints and enforcement action. Interestingly here we saw a positive relationship with financial inclusion growth. It is striking that monitoring and enforcing consumer protection has a negative correlation with financial inclusion growth while publishing regular reports on complaints and enforcement actions shows a positive outcome.

One explanation could be that enforcement alone inhibits a few selected “bad” service providers but doesn’t affect the rest of the market, while publishing regular reports on it instills the trust in financial products and services that Ross Grady discussed. Publishing regular reports on complaints raises awareness for the consumers and allows the financial service provider to improve on the areas highlighted. It also acts as an indicator for regulators to identify systemic issues and put in place corrective measures or policies. If we can draw a lesson from this analysis (admittedly quick and dirty), then it would be that financial consumer protection regulation and enforcement alone do not drive financial inclusion growth, but adding the publishing of complaints and enforcement statistics does.

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ABOUT THE AUTHOR
Klaus Prochaska is Head of Policy Analysis & Capacity Building at the Alliance for Financial Inclusion.

6 replies

  1. I wanted to raise two concerns here:
    First,the implication throughout this piece that correlation somehow equals causality, especially when you are talking about small percentage point differences in massively complicated variables like market-wide financial access, which can be influenced by all kinds of factors, including economic growth, that have nothing to do with CP regulations or policy. So there is a danger here that a reader will take away an inaccurate and unsubstantiated conclusion that consumer protection regulation is bad for financial inclusion. Given that AFI speaks to regulators primarily, this is all the more problematic that you have made this implied linkage without doing rigorous analysis.

    Second, you do not start your graphs at the “0” of the Y axis, and appear to do so to falsely make a 9.6% versus 11.4% gap look larger visually than it is numerically, which is misleading and misrepresentative.

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    • Hey Rafe, thanks for your comments. You are right and I thought I was quite explicit about this not describing in any way a causal relationship. Please check my text again where I say: “While from these simple correlations we definitely cannot draw causal effect of policies on actual financial inclusion, I still think the results deserve to be presented and discussed. At the very least they can contribute to the growing body of evidence in financial inclusion policy impact and provide insights for further in-depth research.”

      My intention with this blog is to invite the financial inclusion community to move the discussion on financial inclusion policy forward in light of the newly available data in the AFI Policy Profiles. Great to see that you are interested!

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      • Klaus,

        That’s a fair point, you do make that statement explicitly up front that you are not claiming causality. However, subsequent statements like “In light of this result it becomes harder to say that financial consumer protection is a driver of financial inclusion growth,” are statements that are discussing causality, or at the least indirectly implying causality–in this case refuting positive causal relationships between CP and FI, which implies a negative causal relationship.

        There are also similar allusions to causality that are couched in hypotheticals or supposition, such as:

        “This result can be interpreted in line with the previous correlation and a plausible interpretation could follow the same logic: Countries that actually monitor compliance and enforce the existing rules disincentivise abusive providers from entering or staying in the market, and thereby “trim the unwanted edges” of financial inclusion growth.”

        but I don’t think a reader will always be able to parse out that this article is not claiming as true what is written in a way that implies it could very likely be true–nor is there any evidence why this conclusion is deemed “plausible”, while any other explanations are not–and because of that I worry readers will be misled.

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      • Rafe, I would not underestimate the readers of this blog, but in any case I am certain that between my explicit disclaimer in the article and your comments, our readers will have a clear picture. What I hope is that the data we do have will encourage further debate, and inspire others to engage in further research, so that we can build a comprehensive picture together. By offering hypothetical interpretations of the data I intend to whet peoples appetite to do just that. Thanks for engaging!

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  2. Dear Klaus,
    Thanks for your extremely interesting blog. I would be very interested to see the research behind your findings. Ros Grady

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  3. These are important issues to discuss. The data could be useful to inform such a debate — it would be important to look closely at whether the differences in financial inclusion growth rates between countries with and without financial consumer protection (FCP) regimes are different in a statistical sense. It is also critically important to distinguish between correlation and causality. Are the countries with substantial FCP measures in place more mature markets with more capacity (where one might expect slower growth)? How might the fact that there are so many brand new FCP laws and regulations having just been put in place but not yet implemented and enforced in quite a few countries (ref the periodic World Bank survey) relevant to this discussion? Given the challenges of achieving well-enforced FCP regimes, perhaps the most important questions are “Which measures are most important to create the right preconditions for healthy financial inclusion, and how can they be implemented in such a way that the welfare of lower-income and more vulnerable consumers is meaningfully enhanced?” If consumers are encountering formal financial markets with higher levels of transparency, fair treatment and effective recourse, we might find empirically that this is still not enough to ensure good user value and meaningful benefits — but it would be surprising (and would also require a different empirical analysis) to conclude that this made them worse off. Over time, it will be good to triangulate questions raised and correlations generated by this new AFI data base with additional market-level data (including but not limited to Findex) and other such studies (e.g., the Economist Intelligence Unit-Center for Financial Inclusion “Microscope” report, which came out a few months ago).
    Kate McKee, CGAP

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