New Basel Report Documents Financial Inclusion's Mainstreaming

Just five years back, “microfinance” was a frontier topic for the Basel Committee on Banking Supervision, the body that sets the gold standard for banking supervisors around the world. The Committee’s 2010 guidance paper "Microfinance activities and the Core Principles for Effective Banking Supervision" was one of the first issued by a major financial sector standard-setting body to address a financial inclusion topic directly. In its report issued last Friday, "Range of practice in the regulation and supervision of institutions relevant to financial inclusion," the Basel Committee documents far reaching and rapid mainstreaming of financial inclusion in the work of banking supervisors. 

The fast pace of change in the financial inclusion landscape is presenting supervisors with new issues and challenges. Developments in digital financial inclusion, in particular, are posing new challenges for how authorities define their regulatory scope and allocate supervisory resources. The report reveals the extent to which supervisory and regulatory practices are evolving in response to the emergence of new institutions, financial products and intermediation channels that service poor and low-income customers in different jurisdictions.

The mainstreaming that the report represents is evident first in the increased interest in financial inclusion among banking supervisors demonstrated by the robust response rate to the 36-page survey instrument developed by the Financial Inclusion Workstream of the Basel Consultative Group (the outreach arm of the Basel Committee, which prepared the report): 59 jurisdictions, large and small, representing all income categories and from every region of the globe contributed valid responses. By comparison, only 32 jurisdictions responded to the much shorter and less detailed survey instrument supporting the Committee’s 2010 microfinance activities guidance.

This mainstreaming is further evident in the increasing importance of financial inclusion as a topic in the daily lives of policy makers as demonstrated by the high percentage of jurisdictions – almost 70% – reporting a formal policy declaration of some sort supporting financial inclusion or current plans to develop one. Among such jurisdictions, the central bank and/or banking supervisory agency is the most likely to have the lead in implementation.

Beyond these impressive high-level figures, the mainstreaming is also evident in subtler indicators, such as much more finely tuned differentiation in the regulatory and supervisory approach among different types of deposit-taking institution and between deposit-taking and non-depository credit providers – especially those most likely to target or reach base-of-the-pyramid consumers. Whereas the survey supporting the 2010 microfinance activities guidance distinguished only between banks and “other deposit-taking institutions” (with questions also asked for comparative purposes about the treatment of all non-depository microlending institutions), the survey supporting the 2015 range of practice report polled respondents on their potentially differing regulatory and supervisory treatment of up to six different categories of  institution (if present in the jurisdiction in question): commercial banks, other banks, financial cooperatives, other deposit-taking institutions, microcredit institutions, and non-bank e-money issuers or distributors. The report is careful to note that a differentiated approach to regulating and supervising different types of institution does not necessarily translate into a proportionate approach (as called for in the Basel Core Principles as revised in 2012).  The data resulting from the more nuanced questions nonetheless present a detailed picture of the tensions supervisors face in handling an average of four different categories of institution present in their domestic financial sector landscape. 

By far the most significant factor distinguishing the 2015 range of practice survey and the data it yielded from the survey supporting the 2010 microfinance activities guidance lies in the consideration of a full range of financial products and services offered by deposit-taking institutions to base-of-the-pyramid customers, as well as the emergence of innovations in digital financial inclusion and separate treatment of financial consumer protection issues with respect to base-of-the-pyramid customers. On many of these topics – so critical to serving the financial service needs of those currently excluded or underserved – the report represents the first time they have been addressed directly in a Basel Committee publication.  

The more detailed survey instrument used, the impressively robust survey response rate, and broader scope of issues covered, combine to yield interesting data that cannot be summarized in a single blog post. We look forward to highlighting specific topics from the report in greater depth in upcoming blog posts during the coming weeks.