FinScope – supporting strategies for market-led

financial inclusion

Mark NapierFinMark Trust

23 September 2008Livingstone

Structure

FinScope – some comparative dataRural/urban povertyRural/urban savings behaviour

How FinScope should be used with other researchZambia’s supply side study

Access policy – what can governments do To direct or not to direct?

Addressing market failure

“The problems [ie market failure] that arise spring …..not from the existence of markets per se ..[but from] …such concerns as inadequate preparedness to make use of market transactions, unconstrained concealment of information or unregulated use of activities that allow the powerful to capitalise on their symmetric advantage.

These have to be dealt with not by suppressing the markets, but by allowing them to function better and with greater fairness, and with adequate supplementation. The overall achievements of the market are deeply contingent on political and social arrangements.” – Sen (Development as Freedom)

What is FinScopeTM?

FinScopeTM, a FinMark Trust initiative, is a nationally representative study of

consumers' perceptions on financial services and issues, which creates insight to how

consumers source their income and manage their financial lives. The sample covers the

entire adult population, rich and poor, urban and rural, in order to create a segmentation,

or continuum, of the entire market and to lend perspective to the various market

segments.

Financial sector development in Africa – FinScope playing

its part

Zambia

South Africa

Namibia

Botswana

Kenya

Tanzania

Uganda

Ghana

Malawi

Morocco

Mozambique

Nigeria

Rwanda

Access strand compared

Comparative access strands

7

Source: FinScope Namibia 2007

Namibia - significant differences between rural and urban residents in their

experience of poverty and deprivation

Namibia - significant differences between rural and urban residents in their

experience of poverty and deprivation

56%

50%

42%

33%29%

23%18%

8%13%

5%

19%

33%

24%29%

19%25%

0%

10%

20%

30%

40%

50%

60%

Gone withoutcash income

Gone withoutelectricity inyour home(apart frompowercuts)

Gone withoutenough food

to eat

Gone withoutmedicine or

medicaltreatment thatwas needed

Gone withoutclean water todrink or cook

with

Felt unsafefrom crime inyour home

Gone withoutfuel to heat

your home orcook yourfood (apartfrom fuelshortages)

Gone withoutshelter

Rural Urban

Experience of poverty: In the last 12 months has your household…(Often/ sometimes)

Ad

ult

s (

%)

South Africa:Rural 56%Urban 29%

South Africa:Rural 40%Urban 38%

South Africa:Rural 44%Urban 19%

South Africa:Rural 31%Urban 5%

8

Source: FinScope Uganda 2006

Uganda - there are significant differences between rural and urban

adults in basic living standards

Uganda - there are significant differences between rural and urban

adults in basic living standards

42%40%

17%16%

20%

6%

0%

15%

30%

45%

Household members have at least onepair of shoes?

Every child in the household (under 18years) have a blanket?

Household members have at least twosets of clothes?

Rural Urban

Answered “No” to…A

du

lts (

%)

9

Source: FinScope Tanzania 2004

Tanzania - formal savings penetration is low for both urban and rural adults but the way people

save is largely the same in urban and rural areas

Tanzania - formal savings penetration is low for both urban and rural adults but the way people

save is largely the same in urban and rural areas

45%

32%

8.5%4.7% 3.2% 2.3% 1.6% 1.0% 0.8% 0.7%

0%

10%

20%

30%

40%

50%

Savings inkind eg

livestock,bicycle, radio,

agristock

Keep in asecret hiding

place

Given to afamily or

friend to keep

Merry -go-round

Savingsaccount at

SACCO

Complusorysavings exNSSF/ZSSF

Saving it witha

businessmanfor

safekeeping

Microfinanceinstitution

Group at myworkplace

(not aworkplaceSACCO)

ASCA

Top 10 savings products(Rural)

Ad

ult

s (

%)

Ad

ult

s (

%)

Top 10 savings products(Urban)

28% 28%

12% 9.2% 6.3% 3.9% 3.3% 2.6% 2.4% 2.1%0%

10%

20%

30%

40%

50%

Keep in asecret hiding

place

Savings inkind eg

livestock,bicycle, radio,

agristock

Merry -go-round

Given to afamily or

friend to keep

Complusorysavings exNSSF/ZSSF

microfinanceinstitution

Savingsaccount at

SACCO

Insuranceschemes

Employersavingsschemes

ASCA

Uganda 51%

Uganda 7.1%

10

Source: FinScope Zambia 2005

Zambia - noticeable differences in savings / investment vehicles used by rural and urban adults but generally a

poor savings culture

Zambia - noticeable differences in savings / investment vehicles used by rural and urban adults but generally a

poor savings culture

13%10% 9.5% 8.9% 6.7% 4.5%

1.9% 1.7% 1.1%0%

20%

40%

Investment inland for

agriculturalusage

Investment incattle orlivestock

Investment inagriculturalequipment

SavingsAccount

Investment inyour ownexistingbusiness

Life insurance Investment in aplot of vacant

land ûresidential orcommercial

Investment inanother house/ flat / propertythat you rent

out

Pension /NAPSA

Top 10 savings/investment products(Rural)

Ad

ult

s (

%)

Ad

ult

s (

%)

Top 10 savings/investment products(Urban)

22%

13%8.3% 6.1% 5.9% 5.7% 3.8% 3.0% 2.2% 1.9%

0%

20%

40%

SavingsAccount

Investment inyour ownexistingbusiness

Pension /NAPSA

Investment inland for

agriculturalusage

Investment inanother

house / flat /property thatyou rent out

Life insurance Investment ina plot of

vacant land ûresidential orcommercial

Investment incattle orlivestock

Fixed DepositAccount

Improvingyour home

Zambia - supply side project complements the demand side

Demand side offered insights into constraints to access

Supply side perspective needed to complete the picture

it maps the supply of finance by institutional type it identifies the scope and scale of accessible supplyit looks for gaps in the platform for accessible supplyit looks also for obstacles to expanded accessible

supplyand it recommends practical options for improvement

. . . at Kw 60,000 a month to run the average bank account is far too expensive for mass rural

use . . .

K 0 thou

K 100 thou

K 200 thou

K 300 thou

K 400 thou

K 500 thou

K 600 thou

K 700 thou

0%

25%

50%

75%

100%

125%

150%

175%

Household income (Kwacha thousand per month) Income relative to average for all rural households

At this level a typical bank account would cost around 10% of monthly cash income to run

Rural population is particularly excluded from banking because of affordability

Lower priced accounts might open up banking to the top 40% of urban

households

K 0 thou

K 500 thou

K 1000 thou

K 1500 thou

K 2000 thou

K 2500 thou

K 3000 thou

K 3500 thou

K 4000 thou

0%

50%

100%

150%

200%

250%

300%

350%

400%

Household income (Kwacha thousand per month) Income relative to average for all urban households

At this level most Zambian bank accounts would cost around 3 % of income

But a few might even

be affordable here

Light Blue = Other banksDark Blue = Legacy banks

5% cost ratio

10% cost ratio 20% ratio40% ratio80% ratio KEY: Bubble size denotes number of branches

0

50

100

150

200

250

300

350

400

450

0 500 1000 1500 2000 2500 3000 3500 4000 4500Average income earning assets per employee (2005, Kwacha million)

Op

erat

ing

co

st p

er e

mp

loye

e (2

005,

K m

n)

A few commercial banks have the potential to position themselves to do more mass-market

business

Individual Zambian banks plotted by assets and costs per employee

Local banks follow smaller

balance / lower cost model

but cru

cial v

ery lo

w

balance

segm

ent

not yet r

eached

International banks follow high

balance / high cost m

odel

About half of the poorer, less densely populated districts have no financial

institution outlet at all

OUTLET NUMBERS BY TYPE AT DISTRICT LEVEL BY POPULATION DENSITY / POVERTY RATIO

<=

= M

ed

ian

– |

M

ed

ian

+ =

=>

<== Lusaka

HIGH DENSITY LOW POVERTY

HIGH DENSITY HIGH POVERTY

<= Higher Density – => <= Median + | Median – =>

LOW DENSITY LOW POVERTY

25

35

45

55

65

75

85

95

110100100010000100000

Population Density (population per Km2)

Poverty

ratio

(pro

portio

n o

f pop

ula

tion

belo

w p

overty

line)

LEGEND:Bubble size showsnumber of branches per district:

1 branch only

10 branches

20 branches

100 branches

`

State Private FIs banks/BS

MFIs

25

35

45

55

65

75

85

95

110100100010000100000

Spatial data (eg FinScope) can help banks’ rollout strategies by identifying population groups with

particular characteristics

Access frontier

Redistribution

Development

EnablementCurrent market

Already use Have access but

do not use

Could have access

but do not

Unlikely to ever

have access

Current frontier

Market potential

“supra market

zone”

“Pro-market activism”

or

“market-led coercion”

“Laissez-faire” State intervention

The progression of state action in the market

State provision

Moral suasion“stick”

Incentives“carrot”

Market structureand conduct

Provision ofmarket information

State owned banks

Directed lending

Interest rate regulation

Coercion (stick)

Moral suasion/Charters

Tax incentives

Market structure/conduct

Levies

“Quid pro quo” for licences

Infrastructure provision

Competition enquiries

Enabling environment

Privatisation

Liberalisation

Deregulation

See “Innovative Experiences in Access to Finance: Market Friendly Roles for the Visible Hand?” - de la Torre, Gozzi, Schmukler (2006)

Examples of “market friendly coercion”

Mexico – Law of Transparency and Management of Financial Services, 2007

Basic bank accounts to be offered for freeGeneral price controls – BoM can object to interest rates and feesDisclosure of standardised fees and rates

Brazil – Law 10735, 2003

Banks to allocate 2% of deposits towards productive microlending – capped interest ratesBanks required to employ “direct relationship methodologies” in SME lending

Colombia Banca de la Oportunidades ($220m)Targeted subsidies (or other incentives) to existing MF providersDesigns and promotes regulatory reformsFunds research, collects and disseminates data

Pakistan For every 5 new branches, banks must open 1 in an “underbanked” areaBasic bank accounts to be offered on a “non-remunerative” basisFiscal incentives to stimulate housing finance

Parallel processes in support of access in SA –

coordination?

Policy and regulatory Financial Sector CharterAccess Cooperative Banks Act Dedicated Banks Bill (?) Reviews of anti-competitive behaviour in banking and insurance Social security reform Still no national policy on financial literacy

Access 60% bank account usage (up from 46% in 2003) – impact of Mzansi 44% bank account usage in LSM1-5 vs 80% target of “effective access” in Charter Very limited actual usage of bank accounts Low penetration of insurance Access now much more mainstream

Market conduct eg. provision of financial advice, home loans disclosures

Targeted investments Success in housing finance and SME but not (yet) in infrastructure and agri

Consumer protection – National Credit Act

Charter Council/Executive administratively weak negative consequences of politicisation

State-owned DFIs 3rd review just concluded State to intervene directly in SME and housing finance

The future? Unresolved issues over ownership of industry Interpretation of targets in 2008 Where will the momentum carry?

“Mzansi” basic bank account – powerful contributor to incidence

of bank usage

Banking status(Adults aged 18 or more)

Nu

mb

er

of

ad

ult

s (

18

+)

Source: FinScope 2003 – 2007According to FinScope 2007 31% of those in LSMs 1-5 with an Mzansi account bank at the Postbank. Within that market 48% of those with an account at the Postbank have an Mzansi account

LSM 1 - 5 LSM 6 - 10

Bank account – not Mzansi Any Postbank account incl. MzansiBank Mzansi (not Postbank) Unbanked

32% 30% 28% 28% 30%

4% 4%2% 5%

64% 66% 67% 63%56%

4% 4% 5%8%

0%

20%

40%

60%

80%

100%

120%

2003 2004 2005 2006 2007

76% 75% 70% 72%

3% 4%6% 7%

21% 24% 27%20% 17%

72%

2%2%

2%

1%

0%

20%

40%

60%

80%

100%

120%

2003 2004 2005 2006 2007

Why an access policy matters

Vision justifies the actions – coherenceShould emphasise the underlying purpose

rather than simply technical solution Government accountability Government policy harmonisation Clear statement of guiding principles makes it

easier to modify (accelerate?) market reforms in the future

Possible structure of inclusion policy

POLICIES

VISION

PRINCIPLES

GOALS

“That, by 2015, x% of … will…”

“In respect of financial markets, Government will: catalyse intervene enable subsidise…etc...” “To:

develop appropiate legal framework

support diversity of supply

etc…”Establish deposit insurance scheme

Enact national financial literacy policy

Liberalise e-money issuance etc. etc.

Conclusions

Key questionsWhat does the financial access landscape

look like?What is our vision for financial inclusion?What indicators should we use to track our

progress towards that vision?What role should government be playing in

the financial sector (ie. guiding principles – interventionist vs laissez-faire)?

What are our overarching goals?What are our specific policy objectives?

Thank you

www.finmarktrust.org.

za

Effective policy choices - Asia

INDIA PAKISTAN THAILAND PHILIPPINES

ACCESS TO BANKING

Central Bank asks banks to provide basic bank accounts.Banks asked to consider introducing General Purpose Credit Card.

Central Bank requires commercial banks with 100 branches to open at least 20% of new branches in underserved areas.Central Bank requires all commercial banks to offer basic bank accounts.

Umbrella apex organization to support community savings and microfinance groups.As a regulatory incentive, lower risk weights are attached to loans for the underserved.

National MicrofinanceStrategy being implemented to improve enabling environment for microfinance.

HOUSING FINANCE

National Housing Bank (NHB) transfers government support through lower-cost loans. NHB launching a pilot issue of mortgage backed securities.Tax incentives to housing finance borrowers.

Fiscal incentives for banks to lend and prospective home owners to borrow.Liberalisation of credit regime for housing loans. Rationalisation of stamp duties, registration fees and property taxes.

Government Housing Bank provides better services for poorer customers. A National Real Estate Information Centre supplies financial institutions with data on the demand and supply of real estate.

Guarantee scheme to encourage banks to channel resources into home building.Loans to community associations in depressed areas for housing development. Subsidy to provide amortisation support to low income groups.Loans to low-cost housing developers.

FINANCIAL LITERACY

Central Bank has launched financial literacy program including animated stories.

New Government led financial literacy program.Nationwide financial literacy campaign by Microfinance bank.

Stock Exchange runs road shows to educate households on effective saving strategies.

Central Bank recently embarked on broad-based financial literacy campaign.

Prepared for FinMark Trust by Karen Ellis and Rohit Singh, Overseas Development Institute

Effective policy choices - Americas

USA Brazil Mexico Colombia% population banked

91% 43% 25% 41%

GNI/capita (current $)

$44,970 $4,730 $7,870 $2,740

Name of measure Community Reinvestment Act

Law 10,735 Law of Transparency…

Banca de las Oportunidades

Date of measure 1977 2003 2007 2006

Nature of measure Requires banks to serve areas from which they draw

resources

Requires banks to make certain

amount of portfolio available for microcredit

Gives power to cap prices;

requires banks to issue low-cost

basic bank accounts

Funding pool promoting regulatory

reforms, related subsidies and

other initiatives

Penalty for non-compliance

Deny expansion requests; public pressure from

public disclosure

Set aside applicable amount and prevent any return on that

capital

Unclear N/A(Incentives only)

Impact to date Positive; but diminishing as US

banking sector evolves

No study yet available

No study yet available

No study yet available

Prepared for FinMark Trust by David Porteous and Jeff Abrams, Bankable Frontier Associates