Shap­ing the Fi­nan­cial Fu­ture

The ju­di­cious im­ple­men­ta­tion of the ini­tia­tives un­der­taken by in­ter­na­tional fi­nan­cial in­sti­tu­tions can im­prove the stan­dard of liv­ing of a large num­ber of peo­ple.

Southasia - - CONTENTS - By Ma­jyd Aziz

Mark Twain, the Amer­i­can au­thor and hu­morist, once noted that “ev­ery­one talks of the weather but no one does any­thing about it.” It seems that this iconic quote can be ap­plied, to a large ex­tent, to the global de­bate about pro-poor eco­nomic poli­cies. There has hardly been a week gone by with­out any con­fer­ence, sem­i­nar or pop­ulist an­nounce­ment by state lead­ers re­gard­ing the alle­vi­a­tion of poverty around the world.

The hy­per­bole is ever-present in th­ese ac­tiv­i­ties and a long list of things-to-do is cir­cu­lated, de­lib­er­ated and dis­cussed. The fo­cus is wellinten­tioned but the im­ple­men­ta­tion leaves much to be de­sired. This lack of an in­clu­sive ap­proach has ag­gra­vated the global ini­tia­tive to bring about eco­nomic san­ity. The dilemma that is still the cause of so­cial and po­lit­i­cal un­rest, big time de­pri­va­tion and en­hanced non-le­gal ac­tions by peo­ple.

Around the world, the elec­tion man­i­festos of po­lit­i­cal par­ties pro­claim in ex­u­ber­ant terms their pri­or­i­ties if elected to power. The pri­or­ity is in­vari­ably an agenda of poverty alle­vi­a­tion through a num­ber of ini­tia­tives and projects. The di­rect fi­nan­cial cost of th­ese mea­sures is never taken into con­sid­er­a­tion. Re­sort­ing to catch­words and dem­a­goguery is the mar­ket­ing ploy dur­ing elec­tion­eer­ing and the hap­less crowd ea­gerly lis­tens and raises full-throated slo­gans. For them, ev­ery elec­tion is one step away from de­liv­er­ance from mis­ery. Re­al­ity sets in soon and the gap be­tween the rich and poor fur­ther widens.

This nar­ra­tive is not an iso­lated per­cep­tion but is univer­sal and more so in less de­vel­oped coun­tries. The huge fi­nan­cial re­sources re­quired to cut down the poverty fig­ures take a heavy toll on gov­ern­ments. Do­mes­tic as­sets are not enough to bring about the at­tain­ment of the ob­jec­tives. Of­ten, the elec­tion prom­ises suc­cumb to grandiose projects that are gen­er­ally not ben­e­fi­cial for the less-priv­i­leged and also re­flect the ut­ter dis­re­gard by the rulers for the na­tion’s prime im­per­a­tives. This also man­i­fests a dis­dain for so­cial jus­tice, prag­matic wel­fare of the peo­ple and hu­man val­ues.

The ac­cess to fi­nance in a coun­try like Pak­istan is trag­i­cally very limited and di­rectly af­fects the pop­u­la­tion, es­pe­cially the lower tier of in­come groups. It also dis­cour­ages mi­cro and small-sized en­ter­prises from ex­pand­ing or sur­viv­ing. The un­rea­son­ably high fi­nan­cial trans­ac­tion costs, non-dis­sem­i­na­tion of credit avail­abil­ity, in­de­fin­able in­cen­tives, gen­der dis­crim­i­na­tion and poorly de­signed or non-trans­par­ent poli­cies are the neg­a­tive as­pects of what­ever fi­nan­cial ac­cess is cur­rently avail­able. Thus, the lack of pre­scribed

ac­cess to fi­nance im­pacts the wel­fare and sus­tain­abil­ity of small en­ter­prises as well as low-in­come house­holds. This is un­doubt­edly the crux of the mat­ter.

The in­ter­na­tional fi­nance in­sti­tu­tions, such as the World Bank, the IMF or the Asian De­vel­op­ment Bank are gen­er­ally cas­ti­gated for their macro-eco­nomic recipes that fo­cus on elim­i­nat­ing sub­si­dies, in­creas­ing the rates of es­sen­tial ser­vices like elec­tric­ity and gas, lib­er­al­iza­tion of trade, broad­en­ing the tax base through value added tax, etc.

How­ever, the pro-poor and uni­ver­sally ap­pli­ca­ble ini­tia­tives un­der­taken by th­ese IFIs are also note­wor­thy. This new ap­proach seems to be a vi­sion­ary par­a­digm shift and the ju­di­cious im­ple­men­ta­tion of th­ese ini­tia­tives would bring about the de­sired en­hance­ment in the qual­ity and stan­dard of liv­ing of the dis­pos­sessed and de­prived pop­u­lace of the world.

The IMF has de­vel­oped the use of the Fi­nan­cial Ac­cess Survey (FAS) that en­ables pol­i­cy­mak­ers to map out the dy­nam­ics of pro­mot­ing fi­nan­cial ser­vices and reg­u­lat­ing and su­per­vis­ing fi­nan­cial in­sti­tu­tions. Ac­cord­ing to the IMF, the FAS is “the sole source of global sup­ply-side data on fi­nan­cial in­clu­sion, en­com­pass­ing in­ter­na­tion­ally com­pa­ra­ble ba­sic in­di­ca­tors of fi­nan­cial ac­cess and us­age. It pro­vides pol­i­cy­mak­ers and re­searchers with an­nual ge­o­graphic and de­mo­graphic data on ac­cess to ba­sic con­sumer fi­nan­cial ser­vices world­wide.”

The FAS map­ping of Pak­istan re­veals some key in­di­ca­tors re­gard­ing ac­cess to fi­nance. The charts here from the FAS re­veal a very low ex­po­sure to com­mer­cial bank­ing, es­pe­cially when there is a grow­ing in­crease in num­ber of bank branches. It shows that there are only four com­mer­cial bank branches for ev­ery 100,000 adults. There are less than 14 bank branches in ev­ery 1000 square kilo­me­ter ra­dius while ATMs are about six for ev­ery 100,000 peo­ple. More­over, most of the for­eign com­mer­cial banks are lo­cated in the ur­ban ar­eas and ba­si­cally the gov­ern­ment-owned banks, such as the Na­tional Bank of Pak­istan or the Zarai Taraqiati Bank Ltd (erst­while Agri­cul­ture De­vel­op­ment Bank Ltd), have more ex­po­sure in ru­ral ar­eas.

Since most banks have strin­gent rules and ex­ces­sive pa­per­work, the or­di­nary cit­i­zen is usu­ally dis­cour­aged from en­ter­ing the por­tals of th­ese fi­nan­cial in­sti­tu­tions. Fur­ther­more, only about 15 per­cent of house­holds have de­posit ac­counts or bor­row from banks. That is why the sav­ings rate is also very low.

The IFIs can in­clude a sub­stan­tive pack­age of ini­tia­tives in the ap­proved loans given to var­i­ous na­tions. For a coun­try like Pak­istan, there is a vi­tal need to pro­vide loans on a lower markup for fi­nanc­ing of low-cost hous­ing projects across the coun­try. Presently, there is a sig­nif­i­cant short­age of over nine mil­lion hous­ing units in Pak­istan and it is in­creas­ing ev­ery day.

One ma­jor rea­son has been the high cost of con­struc­tion as well as ei­ther the non-avail­abil­ity of land or its ex­or­bi­tant cost. Thus, hous­ing mort­gages for a 25 year ten­ure at sin­gle fig­ure markup rates would at­tract more peo­ple to ob­tain hous­ing loans and en­cour­age them to move to sub­urbs or to set­tle­ments away from the ur­ban ar­eas. More­over, an up­surge in hous­ing con­struc­tion would be ben­e­fi­cial for more than 45 an­cil­lary in­dus­tries and cre­ate abun­dant jobs. This recipe for eco­nomic de­vel­op­ment in the oth­er­wise shaky business and in­dus­trial en­vi­ron­ment is very much needed in Pak­istan.

The sched­uled com­mer­cial banks are also ta­per­ing down their ex­po­sure of lend­ing to SMEs. This has grad­u­ally be­come ad­verse to the growth and pro­lif­er­a­tion of the SME sec­tor be­cause the bur­den of cost of cap­i­tal is beyond their ca­pac­ity to ser­vice their debt obli­ga­tions. More­over, the de­nial of credit by com­mer­cial banks also com­pels many SMEs and MSMEs to source fi­nanc­ing from the mi­cro­cre­dit in­sti­tu­tions or in­for­mal fi­nanciers, al­beit at a very high markup rate. This too is another dis­cour­age­ment of easy fi­nan­cial ac­cess for those who have less col­lat­eral or who are un­able to ob­tain third party guar­an­tees. A glance at the chart here demon­strates this tough sit­u­a­tion.

The ad­vent of branch­less bank­ing and the use of mo­bile phones for

wide­spread bank­ing ac­cess has been greatly ap­pre­ci­ated by the peo­ple as this pro­vides them with al­ter­na­tive bank­ing fa­cil­i­ties, is prox­im­i­ty­con­ve­nient and does not com­pel users to main­tain bank ac­counts. In a pre­vi­ous ar­ti­cle ‘Mo­bile Bank­ing: The Fin­ger­tip So­lu­tion’, this writer em­pha­sized that “the fa­vor­able at­ti­tude to­wards mo­bile bank­ing is a man­i­fes­ta­tion of con­sumer fi­nan­cial em­pow­er­ment. The cus­tomers are get­ting has­sle-free ser­vice and in close prox­im­ity to their home or place of work. The guid­ing line for ser­vice providers is, and should be, that cus­tomer be­hav­ior is re-defin­ing the ways of con­ven­tional bank­ing and that cus­tomers are less in­ter­ested in vis­it­ing branches and wast­ing pre­cious time.”

Among eight Asian coun­tries, the fig­ures of for­mal fi­nan­cial ac­cess for Pak­istan are de­press­ingly low. Only 15 mil­lion Pak­ista­nis have bank ac­counts while there are 130 mil­lion SIM users across the coun­try. There is for­mi­da­ble scope for pro­mo­tion of branch­less bank­ing in the years to come and this would def­i­nitely make a mon­u­men­tal dif­fer­ence in the at­ti­tude of peo­ple and may also en­cour­age sav­ings at the grass­roots level.

Her Majesty Queen Máx­ima of the Nether­lands who was des­ig­nated as the UN Sec­re­tary-Gen­eral's Spe­cial Ad­vo­cate for In­clu­sive Fi­nance for De­vel­op­ment, in a speech high­lighted the im­per­a­tive need for pro­vid­ing fi­nan­cial ac­cess to those who are de­nied this due to the con­ven­tional rules and cus­toms preva­lent in most of the coun­tries. She said, “Fi­nan­cial in­clu­sion means univer­sal ac­cess, at a rea­son­able cost, to a range of fi­nan­cial ser­vices, pro­vided by a va­ri­ety of sound and sus­tain­able in­sti­tu­tions. We there­fore have ad­vanced from the term "mi­cro­cre­dit", stress­ing also the im­por­tance of sav­ings, mort­gages, in­surance, pay­ments and re­mit­tances. When talk­ing about ac­cess to fi­nance around the world, the chal­lenges are huge. De­spite some im­por­tant de­vel­op­ments over the past 10 years, over 2 bil­lion peo­ple still do not have ac­cess to fi­nan­cial ser­vices. This means that over 2 bil­lion peo­ple lack the tools that will help them gen­er­ate in­come, help them to re­duce life's uncer­tain­ties, and pro­tect their fam­i­lies from un­fore­see­able shocks.”

Queen Máx­ima pro­posed that “na­tional strate­gies and vi­sions need to be de­vel­oped. Th­ese strate­gies need the en­gage­ment of gov­ern­ments, the coun­try's reg­u­la­tors and su­per­vi­sors, fi­nan­cial in­sti­tu­tions (in­clud­ing NGO's) and even tele­com providers or re­tail­ers. All of th­ese should work to­gether to in­crease ac­cess to fi­nan­cial ser­vices.”

The Wash­ing­ton-based Cen­ter for Global De­vel­op­ment (CGD) con­sti­tuted a task force in June 2008 of lead­ing ex­perts from around the world - in­clud­ing Dr. Ishrat Hus­sain, the for­mer gov­er­nor of the State Bank of Pak­istan - to iden­tify the key prin­ci­ples that ini­tia­tives and pro­grams for im­prov­ing ac­cess to fi­nance need to meet to be con­sid­ered sound and suc­cess­ful.

Ac­cord­ing to Nancy Bird­sall, Pres­i­dent of CGD, the Task Force de­lib­er­ated on “ten prin­ci­ples to deal with three is­sues: (1) ex­pand­ing fi­nan­cial ac­cess, in­clud­ing best prac­tices for stim­u­lat­ing in­formed de­mand as well as for ad­e­quate com­pe­ti­tion among sup­pli­ers; (2) reg­u­la­tion of fi­nan­cial ser­vice providers, and (3) avoid­ing dis­tor­tions when pub­lic re­sources are used to pro­vide fi­nan­cial ser­vices.”

Ms. Bird­sall added that “in the spirit of CGD’s goal of gen­er­at­ing ideas to support ef­forts by de­vel­oped

coun­tries to im­prove the well­be­ing of the majority of the poor and near poor in the de­vel­op­ing world, we also hope that the prin­ci­ples will be use­ful to donors and bi­lat­eral and mul­ti­lat­eral or­ga­ni­za­tions that play a key role in de­sign­ing, ad­vo­cat­ing, and in a num­ber of cases, fi­nan­cially sup­port­ing rel­e­vant pol­icy ini­tia­tives for im­prov­ing fi­nan­cial ac­cess.”

The non-avail­abil­ity of the de­sired fi­nan­cial prod­ucts, high cap­i­tal cost, low rate of re­turn on sav­ings ac­counts, lack of proper knowl­edge about fi­nanc­ing, low lit­er­acy level es­pe­cially in ru­ral ar­eas, and the nar­row base of con­sumer credit, etc., have all been crit­i­cal fac­tors in struc­tur­ing fi­nan­cial ac­cess for guide­lines. The sys­tem of ex­or­bi­tant rates of usury by loan sharks, the pro­lif­er­a­tion of Ponzi-type scams, the mis­use of credit fa­cil­i­ties, the evo­lu­tion of un­reg­u­lated fi­nan­cial preda­tors and the ex­pen­sive in­puts of raw ma­te­rial or un­af­ford­able land prices are also some de­bil­i­tat­ing fac­tors which take ad­van­tage of avail­able fi­nan­cial prod­ucts and ini­tia­tives.

CGD notes that “ac­cess to fi­nance is about who gets of­fered what prod­ucts at what price. Limited ac­cess to fi­nan­cial ser­vices re­duces wel­fare and slows firm growth; in ad­di­tion, it can in­crease the risk of fi­nan­cial in­sta­bil­ity as the poor seek to de­velop their own means of in­for­mal ac­cess.

Ac­cess for low-in­come house­holds (or in­di­vid­u­als) and small firms is more limited than it should be be­cause of in­for­ma­tion fric­tions, dis­torted in­cen­tives and, above all, dis­pro­por­tion­ately high trans­ac­tion costs. Some of th­ese can be al­le­vi­ated through pol­icy ac­tions and some may be wors­ened by side-ef­fects of poorly de­signed pol­icy.”

The onus lies on the gov­ern­ments and the cen­tral banks to work out prag­matic fi­nan­cial ac­cess poli­cies in con­sul­ta­tion with do­mes­tic fi­nan­cial in­sti­tu­tions as well as trade and in­dus­try rep­re­sen­ta­tives. Con­tin­ued ap­a­thy would be an anath­ema to the wel­fare and pros­per­ity of the na­tions. The IFIs and rec­og­nized think tanks can ac­ti­vate the spur mode that would en­able gov­ern­ments and fi­nan­cial in­sti­tu­tions to rev­o­lu­tion­ize their com­mit­ments to the peo­ple and pro­vide them af­ford­able ac­cess to fi­nance. Ed­ward Os­borne Wilson, the Amer­i­can bi­ol­o­gist who is known as the Fa­ther of So­cio­bi­ol­ogy, re­marked that “the great chal­lenge of the twenty first cen­tury is to raise peo­ple ev­ery­where to a de­cent stan­dard of liv­ing while pre­serv­ing as much of the rest of life as pos­si­ble.”

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