Fi Financial Inclusion in Africa, i l I l i i Af i Monetary - - PowerPoint PPT Presentation

Fi i l I l i i Af i Financial Inclusion in Africa, Monetary Policy and Financial y y Stability: Country Experiences

Michael Atingi Ego Michael Atingi Ego Deputy Director, African Department

Outline of Presentation

• Introduction
• Conceptual Basis
• Access Possibilities Frontier: Policy Space
• Pushing the Frontier Outward: Trends

– Uganda: credit‐led inclusion – Kenya: payment‐led inclusion

li i f li

• Implications for Monetary Policy
• Pushing the Frontier: IMF Initiatives

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Pushing the Frontier: IMF Initiatives

Overview Overview

• Definition: The extent to which individual households and

firms can directly access financial services.

• Relevance: Poses challenges for macro‐stability and sustained

th d t /i lit d ti growth and poverty/inequality reduction.

• Barriers: transaction costs (scale) and risks.
• Measurement: (i) number of users of basic financial services;

Measurement: (i) number of users of basic financial services; (ii) subjective assessments of the quality of the financial services that firms obtain; (iii) physical and cost barriers to access.

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Financial Inclusion – Stylized Facts Financial Inclusion Stylized Facts

Financial outreach varies across countries in Africa

GNQ SYC

8000 10000

SYC ZAF

60 70

BWA GAB MUS ZAF

4000 6000

ZAR MDG MOZ NGA RWA SWZ UGA ZMB

50

DZA AGO BDI CMR CPV TCD COM ZAR COG EGY ETH GHA KEN LSO LBR MDG MAR MOZ NAM NGA RWA SLE SDN SWZ TZA TUN UGA ZMB ZWE

2000

BDI CMR EGY GHA LBR MDG MAR SDN TZA

30 40 20 40 60 ATMs per 100,000 adults US$ GDP percapita (2000) Fitted values 20 40 60 ATMs per 100,000 adults GINI index Fitted values

Source: Staff calculations.

Financial Inclusion – Stylized Facts Financial Inclusion Stylized Facts

Financial outreach varies across countries in Africa

GNQ LBY SYC

8000 10000

SYC ZAF

70

BWA GAB MUS ZAF

4000 6000 8

CAF MOZ RWA SWZ UGA

50 60

DZA AGO CMR CAF TCD COM COG ETH GHA KEN LSO MDG MRT MAR MOZ NAM RWA SLE ZAF SWZ TZA TGO TUN UGA

2000 4

CMR GHA MDG MRT MAR TZA TGO UGA

30 40 10 20 30 40 Commercial bank branches per 100,000 adults US$ GDP percapita (2000) Fitted values 3 10 20 30 40 Commercial bank branches per 100,000 adults GINI index Fitted values

Source: Staff calculations.

Useful Conceptual Framework Useful Conceptual Framework

• Access Possibilities Frontier (APF): the maximum potential

( ) p clients base that can be served by financial institutions prudently.

Given the existing technological and the macroeconomic and – Given the existing technological and the macroeconomic and institutional framework (state variables).

• Financial Possibilities Frontier (FPF): the maximum

sustainable level of financial system depth.

– Given the existing level of income, population size, density, age, other (state variables).

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Financial Possibility Frontier

• The access possibility frontier raises the issue of determining the

level of deepening that can be realistically achieved.

Depth determined by:

• Structural factors (SD)

C

Stylized Financial Possibility Frontier

ccnn

• Policies (position relative to

the SD line)

C

Financial Possibility Frontier

l Depth

Structural Depth (SD)

Situating countries:

• Low possibility frontiers

Fi i l t b l th

A B

Financia

• Financial systems below the

frontier

• Moving beyond the frontier

St t l F t Structural Factors

Financial Possibility Frontier

• The financial possibilities frontier can shift over time.
• Technological advances can make it possible for countries to

support higher levels of financial activity.

• Institution building such as upgrading legal and contractual

frameworks (e.g., defining property rights over land), and ( g , g p p y g ), improvements in information frameworks (e.g., credit registries) can also push out the frontier over time.

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Policies to Push the Frontier Outward Policies to Push the Frontier Outward

• Balance between market‐friendly actions, appropriate macro‐prudential

h d f l l b f bl l

• versight, and careful calibration of public policies.
• Develop information and market infrastructure, address collateral issues,

and limit excessively intrusive interventions and dominance. y

• Interventions that support technological innovation, promote

competition, and create infrastructures can help achieve economies of scale and reduce costs in financial services provision scale and reduce costs in financial services provision.

• Require a concomitant widening of the regulatory and supervisory

perimeter to minimize regulatory arbitrage and financial system risks.

• Rapid expansion of non‐bank intermediary sector, which traditionally has

been outside the regulatory remit, can pose challenges for financial stability. y

9

Trends Affecting Access and Financial P ibili i F i

• Steady increase in financial inclusion in Africa over the past decade.

Possibilities Frontiers

• Banks still dominate landscape but new nonbank institutions cover

more people.

• Widespread use of informal financial services.
• Two successive innovations:
• Credit‐led inclusion

– Microfinance (MFI) and cooperatives have become an important segment

• f the financial system.

– Overcoming (idiosyncratic) risks.

• Payment‐led inclusion

– Mobile finance services (MFS) – Mobile finance services (MFS). – Overcoming scale barriers and transaction costs.

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Limited household and firm access to finance

Cross‐country comparison in financial access Cross country comparison in financial access

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The Case of Uganda The Case of Uganda

• Enabling legislation for microfinance and savings and credit cooperatives

(SACCOs), played a key role in spurring access to financial services.

• Credit guarantee mechanisms allowed for risk sharing between banks and

guarantors in agricultural loans leasing and innovative collateral helping guarantors in agricultural loans, leasing and innovative collateral, helping expand agricultural credit.

• Number of SACCOs doubled in two years to reach 2,800 in 2011.

y ,

• Greater access to be balanced with rapid proliferation of unregulated

entities and distortions created by government support.

• Potential for emerging new technologies to facilitate access further.

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Microfinance Expansion Microfinance Expansion

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The Case of Kenya The Case of Kenya

• Kenya is at the cutting edge of the MFS revolution.
• M‐Pesa, supported by flexible regulation, helped lower

costs and promoted access to payments services to costs and promoted access to payments services to underserved segments of the population.

• Formal institutions now able to offer new integrated

mobile‐based payments services and banking products.

• Better regulation rather than more regulation,

encourage prudent market behavior.

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Kenya: Mobile Transfers Revolution Kenya: Mobile Transfers Revolution

Source: Central Bank of Kenya

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Implications of Innovations for Monetary Policy Implications of Innovations for Monetary Policy

• Move from frameworks centered on periodic quantitative targets for

money aggregates towards more flexible operational targets and liquidity management.

• Velocity and money multipliers subject to fluctuations that complicate
• Velocity and money multipliers subject to fluctuations that complicate

monetary policy analysis:

– Unstable and/or unpredictable money demand. – Unstable relation between the intermediate target (broad money) and the operational Unstable relation between the intermediate target (broad money) and the operational target (reserve money) under a money targeting framework.

• Relationship between inflation and broad money growth has weakened

ti i t b f t l d i l i l ti

• ver time, in part, because of payment‐led inclusion revolution.
• Less cash outside the banking system could improve the transmission

mechanism in IT‐like monetary policy regime. mechanism in IT like monetary policy regime.

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The currency in circulation as a share reserve money is d li i i ll th t i declining in all three countries.

Currency Outside the Banks (As a share of base money)

0.76 KEN UGA

Beginningof significant increase

0 62 0.69

in access to finance

0.55 0.62

MFS introduction

0.48

Structural break (8 months later)

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Sources: Countries authorities.

Money multipliers are broadly increasing y p y g

Money Multiplier

4.00 6 50 7.00 KEN (LHS) UGA (RHS) 3.50 6.00 6.50

Uganda: Beginning of significant increase in access to finance (Dec.

3.00 5.50 2.50 4.50 5.00

Kenya: Introduction of MFS

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Feb-02 Aug-03 Feb-05 Aug-06 Feb-08 Aug-09 Feb-11 Aug-12 Sources: Countries authorities.

Velocity of money is declining in the two countries‐‐ i di ti f i i fi i l d th indication of increasing financial depth.

Velocity

3.10 7.00 Uganda (LHS) Kenya (RHS)

y

2 50 5 00 6.00 2.50 4.00 5.00 1.90 3.00 2000 2002 2004 2006 2008 2010 2012

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Sources: Countries authorities.

Pushing the Frontier Outward: IMF initiatives Pushing the Frontier Outward: IMF initiatives

• The Fund recognizes the heterogeneity across its

membership membership.

• Enhanced focus on financial systems in Article IV:

– Provide context: peer comparison; go beyond Provide context: peer comparison; go beyond soundness indicators, leverage FSAP findings, etc. – Informing policy advice

C t i t f i l t ti f i li i

• Constraints of implementation of macroeconomic policies
• Advice on financial regulation and supervision.
• Addressing information gaps:

g g

– Financial Access Survey. – Establishment of a new joint IMF‐World Bank macrofinancial data portal for LICs macrofinancial data portal for LICs.

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Conclusion

• Policies to broaden financial access require a concomitant widening

Policies to broaden financial access require a concomitant widening

• f the regulatory and supervisory perimeter to minimize regulatory

arbitrage and financial system risks.

• More generally, the rapid expansion of the non‐bank intermediary

sector, which traditionally has been outside the regulatory remit, could pose challenges for financial stability. p g y

• Balance between market‐friendly actions, appropriate macro‐

prudential oversight, and careful calibration of public policies.

• Implications for the conduct of monetary policy need to be thought

through as financial inclusion gains ground.

• Better integrating existing data sources encouraging the collection of
• Better integrating existing data sources, encouraging the collection of

more data and qualitative information, and making them more accessible for bilateral surveillance are important steps.

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Thank you y