Building An Enabling and Protective Policy Environment

After extensive external and internal consultations, the CGAP Board (ExCom) approved the next five-year strategic direction for CGAP at its annual meeting in Amsterdam. The strategic direction lays out five priority themes, desired outcomes, and activities against each priority. We're highlighting these themes in a special blog series. The third post of the series below describes CGAP's approach to building an enabling and protective policy environment for financial inclusion.  

“This is not going to only be a government-only solution – this necessarily must bring in the private sector in innovating and delivering financial services.  We are positioning our role as being an enabling regulator, a regulator that can make things happen through appropriate application of proportionate policies.  .  . . [Yet] while we allow the market to lead, we cannot afford as regulators, to get left behind. We have to stay very close to the innovators just to make sure things don’t go out of hand. Because at the end of the day, we are concerned that the target market are people who may not have had extensive experience of use of financial services. And they are also in that regard potentially vulnerable.”

- Deputy Governor Nestor Espenilla, Bangko Sentral ng Pilipinas

There are two sides to the financial inclusion policy coin: enabling the innovation that will reach excluded customers and at the same time affording them the protection they need to assure that their experience with formal finance is favorable and they become regular users.  A session at CGAP’s annual meeting this month explored both sides – the enabling and the protective – with a panel of seasoned policy advisors and decision makers. Video clips from CGAP interviews with Philippine central bank Deputy Governor Nestor Espenilla and his colleague Pia Roman set the context.   

“Nestor makes it sound easy,” remarked session moderator Anu Bajaj of DFID, as she probed Carlos Lopez-Moctezuma for his insights on what the ‘make or break’ policy and regulatory issues are in order to enable providers to innovate and deliver inclusive financial services.  “It’s not easy,” replied Carlos, from his vantage point as the former chief of staff to Mexico’s Superintendent of Banks and Securities. Carlos played a leading role in Mexico’s recent ground breaking innovation-focused reforms. He now gets to see how these reforms look from the industry side working on inclusive product offerings with global financial services giant BBVA. “In fact, the incentives for banking supervisors are asymmetric when it comes to financial inclusion: you are rewarded for keeping providers and the system safe and sound, and it tends to make you risk averse when it comes to innovations to bring new customers into the system.”

But is there necessarily a tradeoff between protecting the stability of providers and the system on the one hand and bringing excluded customers into the system on the other?  Bajaj played panelists another clip from Nestor on this point:  

“In trying to reach out to the unbanked and underbanked, we are very mindful of our responsibility to maintain the safety and soundness of the financial system, we are very mindful of the responsibilities to maintain the integrity of the financial system, we are mindful of the responsibility to make sure financial consumers are not exploited.” 

Mikhail Mamuta, President of the Russian Microfinance Center and an advisor to Russia’s chief nonbank regulator, agreed with Nestor’s emphasis on these four linked policy objectives – inclusion, stability, integrity and consumer protection – noting that policy makers should focus their energy on “maximizing synergies among them while minimizing the tradeoffs.”

Beyond financial sector regulation and supervision, policy makers working on financial inclusion increasingly recognize the importance of connecting the goal of inclusive financial markets to broader economic and social policy objectives – particularly inclusive growth.  A video clip from Nestor’s colleague Pia Roman cued up this topic, pointing out that the policy approaches that enabled mobile financial services to reach the remote Philippine island of Rapu Rapu will end up “spurring the level of economic activity on this island, and increasing [residents’] capacity to save and invest for their futures.”  

“These connections to the real economy are important,” stressed Narda Sotomayor of the Peruvian Superintendency of Banks, Insurance Companies and Private Pension Funds.  “They are the reason my agency works so hard on financial inclusion.”

The session also touched on the mutually reinforcing nature of financial inclusion policy-making at the global level and at the country level. For example, pioneering policy approaches shared among members of the Alliance for Financial Inclusion (in which all three panelists have been very active) help to inform guidance from the key financial sector standard-setting bodies on topics important to financial inclusion.  This guidance, in turn, helps to improve policy making at the country level. The G20’s encouragement, through the Global Partnership for Financial Inclusion, and the global and country level advocacy of the UN Secretary General’s Special Advocate for Inclusive Finance for Development, Her Majesty Queen Máxima of the Netherlands, reinforce this virtuous circle.  

CGAP’s plans for engagement on policy in the next five years build on this global and country level momentum.  A key focus will be on one of the themes discussed during the session: maximizing synergies among four linked policy objectives – financial inclusion, stability, system integrity and consumer protection. Ensuring that policy makers – both domestically and through global bodies – understand and optimize such linkages will play a critical role in their efforts to build enabling and protective policy environments for responsible market development.