NOTE 5

NOTE 5: ON FINANCIAL INCLUSION:

Although I thought of starting the cycle on Microcredit in this Note, some worrying and other interesting news on financial inclusion have led me to address this issue first.

Before going on I have two caveats to mention:  First, I am a fan of the information technology and communications,

my first computer was a Radio Shack Model I in 1980 and from that time to the present I have always used the latest in the market. With the operating system CP/M in the 90s before the e-mail, I had in my computer a BBS that allowed my clients to connect through a dial up modem to send and receive mails from me and from each other. I make this introduction because being 71 years old; I do not want to be look at as a reluctant and retrograde grandfather in relation to this matter. In the photo ypu

left you can appreciate my current work study which shows the opposite.

Second, in 1973 I had the opportunity to cooperate in Brazil with the Savings Promotion Center  -  Centro de Promoção  da  Poupança (CPP)that was a part of the savings and loan housing finance system. The CPP was led by my friend and mentor Col. Augusto Machado Pericles Neves, as Superintendent of the Center. This great effort in a country, that had at that time; 90 million people, with a 2000% rampant inflation: 700 Savings and Loan Associations and the CPP were able to open 20 million new savings passbook accounts (Cadernetas of Poupança) in 5 years, this should give much of a thought, working with the nails at a time when there were no PCs nor the Internet, so everything was done by hand. I think to have enough credentials to comment on what today is called "Financial Inclusion", because even when we did not call it that way, it was what we were doing and very successfully.

I think that the information technology and communications (ITC) is extremely useful and necessary, but my experience has shown me that these are not necessarily the best option, much less the only solution to all banking possibilities, which leads me to raise serious doubt on the perception that the financial industry has of “mobile banking” as the main and perhaps the only tool of financial inclusion. I think that before talking about the issue of financial inclusion, first it must be define what it is the banking of the excluded, so as to have clear what it is and what it is not, it would be very frustrating, at least to me, that the enormous and costly efforts did not achieve the expected results due to a lack of focus.

First I would like to distinguish between financial products and financial services associated with financial products: A financial product is a tool for the systematic realization of the bank intermediation, so it should have three areas: (a) The uptake of funds, (b) Provide loans with the raised funds and (c) A shareholding company, a mutual, or cooperative that manages this process, with the equity contribution of its owners. Among the financial products are demand accounts and term deposits, microcredit, leasing, etc. Each of these operate the same way regardless of how you call them, what changes is the type of beneficiary, the conditions and the requirements. The revenues generated by financial products originated in the spread or the difference between what it is charge for loans and the interest rate paid for the deposits. When the financial institutions receive deposits from the public, these are monitored by a supervisory banking authority.

Now let us talk about financial services: These have nothing to do with financial intermediation and are of three types: (a) The payments, deposits and money transfer systems, (b) The direct customer’s access to its financial information and (c) Third party collection or payment of its products or services (Electric bills, recharging phone, paying social subsidies, etc.) also called mediation, because the IMF has no direct responsibility on these products. As you can see all of the above require a financial product. For example: Bill payment to third parties require a deposit account, a credit card requires a consumer loan or a debit card a deposit account or prepayment as collateral. No financial service can exist without a financial product and that includes ATMs, banking agents, night deposits and mobile banking. The income from financial services are the fees charged when using these, this revenue is direct and the services have no associated financial costs, as it is the case of the financial products.

Now, speaking of "mobile banking" being use generically as identifying a payment means, of which M-PESA®; born in Kenya and spreading around the World has become an icon. In some subtle way, is suggested as the “only” option for financial inclusion which is wrong, because it is not a banking product. But what is it really a banking product?, does M-PESA® promotes financial discipline?, does it motivates to save or make on time payments when borrowing?. No, it does not; because M-PESA® is not a financial product and operators as Safaricom are not financial institutions, these are communications companies. The same applies to money remittance companies that are not required to be regulated or supervised by the banking authorities. In theory these service providers only receive money and deliver it elsewhere, being used for whatever purpose: Consumption, payments, family support, etc. These difference makes the name "mobile banking" as being incorrect and confusing when applied only to money transfer, as it should be really called "mobile money", as it is identified by Regulators and Scholars. It is not a simple thing, because as is happening in M-PESA® or any prepaid card or "electronic purse" when its contents remain unused through time, these become savings; therefore functioning as it does the informal savings groups, without any regulation or warranty, this is illegal and risky in virtually all countries of the World, and the wrong use of this terminology is misleading the public and this is a serious matter.

Now, I think that the "mobile money" systems are absolutely necessary and have proven in time its value, so their utility is not a matter of discussion. International remittances are an example and have been operating since the 90s, but these are not doing financial intermediation. Venture a little further and ask yourself: Do the systems of "mobile money" create financial discipline?. I will tell you in my opinion what is financial discipline; it is how to manage the money in a safe and efficient way to create state or assets to the bank’s customer, so that it should involve both sides of the coin: Deposits (Savings, checking or term deposits) and loans, the first to create wealth directly, because it is an obligation that the MFI assumes with its clients. The second is a requirement that customers acquire with the IMF, it is an asset of the institution and a liability to the customer and If the customer is not able to generate its own assets with borrowed money, his economic condition worsens (Many unfortunately are not capable to do so). Both the savings and loans create discipline on both deposits/payments, otherwise the control of the money is lost, exacerbating the condition of the estate of the customer and can lead to his(her) ruin. The money transfer does not promote this discipline.

It is clear that any financial inclusion action must necessarily involve a financial product and my experience has been that it should start with the savings account. Savings seems to be pointed in all studies as demanded at all social levels, including the poorest, as I have shown in previous Notes. However, the reality is that there are barriers to the unbanked imposed by financial institutions to the savings accounts: (a) High amounts for account opening, (b) Fees for account maintenance, (c) Fees for accounts inactivity; (d) Limitations imposed by the identification requirements; (e) high minimum balances and (f) In the case of Credit Unions, too high the amounts of the compulsory equity certificates. All this makes them inaccessible to many low-income people to formalize their way of saving, forcing them to remain in informal savings with the risk of losing their money (ROSCAs, Chains, Pasanakus , etc.).

While I never considered M-PESA® as a tool of financial inclusion, the initiative of the Commercial Bank of Africa (CBA) to launch the savings account M-Shwari® with M-PESA® is really an action of financial inclusion, not only because it leaves M-PESA® as what it is: a complementary service of a financial product, it is a savings account and it adds a method of payment and deposit to the account M-Shwari®, I think it is a new experience that requires a more in-depth analysis that I will comment in the next Note. But now I want to comment a few points on this subject before finishing this Note: The M-Shwari® account not only has the advantage of operating through M-PESA®, the requirements have also been reduced: The amount of opening and minimum balance in the account is ksh 0, the CBA has eliminated the banking fees, it has a minimal mobilization requirement of Ksh.1 (1 U.S. $ = Ksh 86.18), there are no transaction fees from M-PESA® to deposit or withdrawing in the account M-Shwari®, it allows transfers to other users of M-PESA® (With fees), produces Mini Statements, earns an interest rate from 2% to 5% depending on the balance, the account balance is displayed after each transaction and finally, introduces a new concept for a savings account operated by a bank supervised by the Central Bank of Kenya (KCB). But it also shows drawbacks, not all access points of M-PESA® are also points of  "Customer Service" for M-Shwari®, I gather that this is because the KCB enforces the CBA to have their staff attending the M-Shwari® accounts in the M-PESA® service points and CBA is not serving the M-Shwari® in their traditional “mortar” branches, which greatly reduces the account’s customer service, because an expensive infrastructure would be required to service them everywhere (There seems to be 1 M-PESA® Service Center with M-Shwari® attention for every 1.500 collaborating shops providing M-PESA® transfers). Finally there is something it does not sound too good to me: There is a loan automatically associated with the savings account that is awarded based on information from Kenya’s Credit bureaus and limit the approved loan’s amount according to volume of money of transferred through M-PESA®, wait a minute: Are we talking about savings or is it about lending.  Although the customers must wait six months after opening the M-Shawri® to access these loans, the product still is still attractive for Kenyans. The amounts of the loans are low (between Ksh 100 to Ksh 2,600, the second is equivalent to US$ 42) and the maturing period is of 30 days, with a possible extension to 60 days (This loan is not useful to make grow assets and could damage the customers in the Credit Bureaus). The Islamic customers were included by not charging interest; just a flat service fee of 7.5%, but the final rate is equivalent to an annual interest rate of 90%. While it is true that in February 2014 the CBA showed a delinquency of 3% on this loans, versus 5% in the bank industry’s loan portfolio, it represented in number 140,000 loans and the unpaid loans portfolio could reach and perhaps exceed that of the bank industry’s level if the CBA raises the loan limit from Ksh 2,600 to Ksh 3,600. The success of M-Shawri® has been undeniable, as having started in November 2012 it reached 1.2 million accounts by the end of March 2013, for that reason I am following closely this very interesting and innovative initiative.

Very best regards

Jose Linares Fontela

jlinaresf@gmail.com