Financial inclusion regulation: challenges for emerging markets and developing countries

  • Babak ABBASZADEH, Toronto Centre
  • Ruth DE KRIVOY, Former Governor Bank of Venezuela
  • Timothy LYMAN, CGAP
  • Wimboh SANTOSO, Financial Services Authority of Indonesia (OJK)
  • Dirk ZETZSCHE, University of Luxembourg


Babak ABBASZADEH, of Toronto Centre (TC), opened the session by thanking e-MFP for inviting TC to organize this session. He highlighted that this was Toronto Centre's first year as a member of e-MFP. He explained that TC was established in 1998 to promote sound financial governance, stability and inclusion by building the capacity of financial sector regulators and supervisors in emerging markets and developing countries. Since inception in 1998, TC has trained over 10,000 financial sector regulators and supervisors from 190 countries and territories.

Abbaszadeh introduced the session noting that two billion adults worldwide lack access to financial services and women are the majority. Inclusive financial systems are a powerful instrument in promoting gender equality and poverty reduction. He underlined that micro­finance's challenges are usually looked at from an industry perspective, but regulatory framework aspects also have important implications for the social mission. While microfinance and other financial inclusion tools can promote greater access to credit, lack of adequate regulation and supervision imposes risks to financial stability and consumer protection.

After introducing the panellists, Abbaszadeh engaged in Q&A rounds with them, which defined the session's structure.


The first question was directed to Timothy LYMAN, from CGAP, concerning a possible trade-off between financial inclusion and stability, given that the financial crisis triggered in part by the so-called "sub-prime crisis" in the US and UK, linked with mortgage-related credit to first time home buyers. Lyman stated that the preachers of the doctrine that financial inclusion comes at the expense of stability are dying fast, and that the linkages between the goals of financial sector regulation are much more complex. He elaborated that CGAP confirmed this hypothesis through a study case in South Africa, in 2012, validated in widely diverse research and publications since. The study looked at policy objectives around: financial inclusion, systemic stability, integrity, and consumer protection. The well-documented data revealed that trade-offs exist between these policy objectives, but so do synergies. However, synergies are not very likely to happen unless policy makers recognise that they take effort and conscious attention. The data additionally showed that financial inclusion is not only linked to stability, but also to integrity and especially to consumer protection. If we fail in these other areas, the objectives of financial inclusion are not served: indeed poor people can be seriously harmed. Lyman concluded that the financial crisis should be seen as resulting in substantial measure from a failure in consumer protection, and not from a simple trade-off between financial inclusion and stability.

Wimboh SANTOSO, Chairman of Indonesia's Financial Services Authority was asked to share some of Indonesia's lessons regarding financial inclusion, since the country won the 2017 Global Inclusion Award. Santoso explained that Indonesia has 350 million inhabitants spread across an archipelago of 70,000 islands. With the exception of the Java Island, the rest of Indonesia is low-income and remote, albeit rich in natural resources. In this context, financial inclusion has been key to support economic growth. Santoso stated that this goal was not easy to attain; the lack of technology made it especially difficult to reach out to remote areas. Mobile technology has changed this scenario, making these areas accessible to financial institutions. The development of FinTech in Indonesia is enormous, growing at a yearly rate of more than 5%. The Indonesian government's target is to reach a 70% financial inclusion by 2019.

Abbaszadeh then asked Ruth DE KRIVOY, Former Governor of the Bank of Venezuela, whether the potentials in Latin America regarding financial inclusion are realized. She explained that there has been important progress in the region, but that there is a long way to go. De Krivoy illustrated that only 50% of the population in Latin America and the Caribbean has a bank account, compared to a share of 94% in OECD countries. More dramatically, only 2% of the population has a mobile account, compared to 12% in Sub-Saharan Africa. She argued that the use of bank accounts has to deepen, along with the use of mobile phones for financial transactions. A concerted action is urgently needed by financial institutions and regulators, alongside customer literacy and trust in finance. De Krivoy revealed that entering a world of formality is difficult in a region where the informal sector is highly active, and that this generates a vicious circle of mistrust in financial institutions.

Dirk ZETZSCHE, Professor of Law and ADA Chair in Financial Law (inclusive finance) at the University of Luxembourg, provided a corporate finance law perspective to Abbaszadeh's question on the necessary conditions for a healthy climate for sustainable finance and finance inclusion. Zetzsche stated that we first need to understand the need for a financial system at an individual level (reducing risks, providing market access and reducing production costs) and social level (catalysing ongoing sustainable growth). He argued that people tend to focus on the front-end of the operational dimension, and often forget the importance of the meso-level and its role in the financial inclusion ecosystem, i.e. the intermediaries that provide funding to the microfinance institutions and banks with a social mission. In addition to providing public funding, these intermediaries also act as catalysts to attract private funding. They can provide monitoring and mutual learning in areas such as advanced risk management, proper data usage to connect supply and demand, reporting and promotion of success stories.

Abbaszadeh's next question round focused on the importance of global standards. Lyman commented on the voluntary endorsement of and collaboration with the G20 Global Partnership for Financial Inclusion (GPFI) by financial sector standard-setting bodies. He noted that, during the financial crisis, the G20 imposed a lot of mandates on these bodies, but no obligation to participate in the work of the GPFI. This originated from an extensive work done by CGAP and other GPFI Implementing Partners, notably technical experts with the World Bank Group, in creating awareness on why financial inclusion matters to the standard setters, and vice versa.

Santoso commented on the collaboration between Indonesian supervisors and regulators in promoting financial inclusion, stemming from Indonesia's participation in various international fora such as the Financial Stability Board and Basel Committee, and whether this collaboration has helped Indonesia and other ASEAN countries. He emphasised that global standards are essential in creating harmonisation in financial inclusion, and that such standards must be robust to prevent instability. At the same time, global cooperation platforms enable these standards to recognise the characteristics of specific members.

De Krivoy commented on Abbaszadeh's question on how to equip local agents to foster innovation. She noted that the implementation of international regulations on innovation at the national level is problematic. While the regulatory framework is not attractive to innovators, supervisors are averse to risk. MFIs are also reluctant to change; innovations are seen as large investments in technology, security and compliance. De Krivoy stated that not only must international standards be more assertive, but a process of trust building needs to happen at the national level. She also emphasised the need for appropriate regulatory tools and legal support to regulators.

In his last remarks, Zetzsche recognised the contributions of electronic financial systems to supranational bodies in fighting terrorism, corruption and illegal trade; however, he emphasised the need to find a balance between electronic and cash economies for people's daily needs, using the example of a power outage lasting several days. Zetzsche also discussed the preconditions for implementing a regulatory sandbox, and brought attention to the importance of combining regulators' and supervisors' expertise when tackling specific risks; a sandbox is neither a solution to all issues in a financial system, nor per se a kickstart of innovation; many factors must come together to provide a sustainable, stable and innovative financial ecosystem. Abbaszadeh added that regulatory sandboxes have been most successful in unitary government systems.

A member of the audience emphasised the importance of Indonesia's savings-based financial system in protecting it from the Asian financial crisis. Santoso agreed, and underlined FinTech's role in strengthening the financial system, coupled with client protection regulation. The role of tools such as The Smart Campaign's Client Protection Principles within FinTech was also discussed. Lyman saw both potential opportunities and also some risks in using Smart Campaign principles in the FinTech context in that they are voluntary and don't reach "bad actors," who are already a concern in the digital lending space.