Lecture 1: Overview of

Financial Systems

-Prof. Walid Hejazi

 

Welcome to the first 2014-2015 Global Ideas Institute Lecture!

Over the next six months, you will learn from a variety of internationally recognized experts on topics ranging from the operability of the global financial system to the local challenges facing micro-finance institutions in India. The GII Booklet Series will supplement each lecture by providing additional information and insight into the topic of financial inclusion. We strongly encourage you to look into the topics presented in both the lectures and printed booklet to engage with this material between GII sessions. Exploring the social, cultural, political and economic contexts surrounding the GII Challenge is crucial to form a holistic understanding and integrated solution. We look forward to engaging you in the conversation at each lecture and online.

Good luck!

- The GII Program Team

Access to banking breaks down along regional and demographic lines

 India has a population of approximately 1.25 billion people, similar in size to China’s population of approximately 1.36 billion people. However, people in China have much more access to

banking services than people living in India – China has about 1,429 bank branches for every 1000 km2, while India has only about 30 banks for the same area. The number of ATMs per 1,000 km2 is also smaller, and the per capita numbers paint a similar picture.

Microfinance Institutions can make a difference

While access to traditional credit in India is difficult, microfinance institutions (MFIs) have helped by providing small loans to people, like farmers and entrepreneurs, who use the money to purchase supplies and equipment for their business. Microfinance institutions operating in India include Kiva and the Grameen Bank.  

For more information, visit: http://grameenfoundation.in http://www.kiva.org/india

23! of India’s

population does not have access to formal

financial services.  

There are three major costs that Microfinance Institutions have to cover when making microloans: 1. Cost of Money it Lends 2. Cost of Loan defaults 3. Transaction costs

[Note: 1 and 2 are proportional to the amount loaned]

India has one of the largest microfinance sectors in the world, with over 70 million borrowers. However microfinance services are mainly concentrated in Southern Indian states, leaving many with little access to financial services. Furthermore, these microfinance organisations are subject to legislation that requires a minimum loan term of 3 years; making other microfinance orginizations less likely to participate in India's economy.

Golden  Investments  Gold is considered an important form of savings and material wealth in Indian culture. Women often keep gold as a financial asset and long-term savings, as its value continues to increase over time. Notably, the use of gold as a financial instrument varies across cultures. It is important to consider socio-cultural factors around considerations of value, especially for an asset as omnipresent as gold.  Mobile   banking remains a promising solution to financial inclusion in India. An example of mobile banking is M-PESA. M-PESA’s mobile money system allows individuals to use their mobile phones to transfer money, pay bills, and has recently added a line of savings and loan products to their services. M-PESA was originally launched in Kenya and is used by over 17 million people. It is estimated that over 25% of Kenya’s gross national product flows through the system.

http://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18 One of the major challenges to mobile banking is the legal and regulatory framework in India. Mobile companies are not allowed to operate as banks and cannot offer credit and loan services.  NOTE: India is currently changing some of its regulatory framework to provide some flexibility for mobile companies. Currently, Royal Bank of India is looking at creating a special category of banks called payment banks. Payment banks will be allowed to offer savings accounts and remittance services but cannot offer loans to their customers. http://www.telegraphindia.com/1141006/jsp/business/story_18897893.jsp#.VGmZUr72r8k    

     

Top  Tweet  –  Financial  Data  Resource                  

http://datatopics.worldbank.org/financialinclusion/country/india      The World Bank World Databank is a great resource for specific data on financial topics in India and elsewhere. This databank, part of a survey on how financial inclusion correlates to other economic indicators worldwide, shows that many of the structures we take for granted as part of a banking system in Canada simply do not exist elsewhere. For instance, where 88% of Canadians have access to a debit card, this is only true of 8% of Indians. Only 2% of Indians have credit cards, and only 8% have received a loan from a banking institution in the past year.

                 

Please remember to follow GII on twitter (@GlobalIdeasTO) for more links and resources!