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S/FIN/W/88/Add.1

13 June 2016

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Committee on Trade in Financial Services

FINANCIAL INCLUSION AND THE GATS - BARRIERS TO FINANCIAL INCLUSION AND TRADE IN SERVICES -

NOTE BY THE SECRETARIAT1

Addendum

This Note has been prepared at the request of the Committee on Trade in Financial Services, to serve as background information for discussions on the trade-related aspects of financial inclusion.

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1 INTRODUCTION

1.1. This Addendum has been prepared at the request of Members, in order to further discuss barriers to financial inclusion (an issue referred to in paragraph 4.1 of the previous Note (S/FIN/W/88)). In keeping with the Committee's focus, and in light of Members' comments, the Note discusses the barriers to financial inclusion from a trade perspective, exploring not only the nature of those barriers but also the role that trade – and trade policy – in financial services plays in overcoming such barriers. Before discussing the barriers to financial inclusion, it is worth recalling that, as explained in Section 2 of the previous Note, financial inclusion is a complex and multi-dimensional issue, and as such it has acquired a multitude of meanings. A distinction is usually drawn between access to and use of financial services, the former being primarily about the supply of services, whereas the latter is basically determined by demand (World Bank, 2014). However, although it is possible to distinguish between access to and use of financial services, both concepts are closely related and policy makers tend to adopt a broad definition of financial inclusion that focuses on its various dimensions, notably access to financial services, use of financial services, and quality of financial services. In keeping with the rest of the Note, a broad approach to financial inclusion is adopted, looking into both the access to and use of formal financial services.

1.2. Financial inclusion is not only about access to credit, but involves the availability and use of a wide range of financial services, including deposit-taking services, payment and money transmission services, insurance services, advisory services, and other auxiliary and intermediary services. Our understanding of financial inclusion is also broad in terms of the channels used to supply those services. We consider that banks' branches, banks' agents (e.g. retailers), automated teller machines (ATMs), point-of-sale (POS) terminals, mobile phones, as well as the Internet, are only different ways to access financial services, and not different products per se.

2 THE NATURE OF BARRIERS TO FINANCIAL INCLUSION

2.1. Ideally, inclusive financial markets allow the poor to access and make use of a full range of financial services. In such markets, consumers know their financial needs, have information on and understand the financial services and products being offered, and may access financial service suppliers in a reasonable, timely and cost-effective manner. At the same time, financial service

1 This document has been prepared under the Secretariat's own responsibility and is without prejudice to the positions of Members or to their rights and obligations under the WTO.

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- 2 - suppliers understand the characteristics and potential of poor and low-income clients, and offer services that meet their needs and are affordable for them. In addition, financial service suppliers have viable business models, and dispose of a reasonably extended delivery network. However, specific constraints prevent an efficient match between demand and supply of financial services, limiting the access to and the use of financial services (CGAP, 2015).

2.2. Asymmetric information (which leads to adverse selection and moral hazard problems) and high transaction costs are pervasive in certain environments, and can generate first-mover dilemmas and coordination problems that prevent the expansion of financial services to all segments of the population. For example, a bank or mobile network operator (MNO) investing in a technology or a business model that would allow it to reach underserved customers has to bear significant risks and the initial costs of introducing new technology and creating an agent network from scratch. If the initiative fails, the innovator may have to bear significant sunk costs. Even if the project is initially successful, the advantages from being a first mover into a market may be eroded by competitors who take advantage of the former's initial spending (e.g. agent training, infrastructure and awareness campaigns) to build their own services offering. Problems of this sort can lead to underinvestment in innovations that could potentially mitigate asymmetric information and high transaction costs. (World Bank, 2014).

2.3. Barriers to financial inclusion are of a very diverse nature, and may arise from demand factors, supply factors, inadequate regulatory frameworks, institutional weaknesses, and deficient infrastructure (Staschen and Nelson, 2013). Moreover, although each of these contributors may be isolated for the purposes of the analysis, they are usually interconnected and reinforce each other.

2.1 Demand-side barriers

2.4. Demand-side barriers restrict the capacity or willingness of individuals to access and use available services and products. The main factors hindering demand for financial services include lack of income, culture, religious beliefs, absence of formal identification systems, low levels of financial literacy, distrust of financial institutions, and lack of necessary documentation and/or collateral to support financial transactions.

2.5. The World Bank's Global Financial Inclusion (Global Findex)2 database provides, for example, information on self-reported barriers to bank account ownership – a basic indicator of the degree of financial inclusion or exclusion (Demirgüç-Kunt et al, 2015).3 Globally, the most common reason not to own a bank account is lack of enough money to use the account: 59% of adults without an account considered this as a reason for being unbanked, though only 16% cited it as the sole reason (Figure 1). 4 Lack of enough money is the most commonly reported barrier to account ownership not only globally but also in almost all developing regions, the only exception being Europe and Central Asia, where the lack of need for an account turned out to be the most commonly cited reason, reported by 55 % of those without an account at a financial institution, followed by lack of money, cited by 51 per cent of respondents. It is not only the lack of income that hinders financial services demand, but also income volatility. Indeed, many times, an increase in interest rates responds to the bank's inability to measure the volatility of repayments, according to the income flows for each type of client. (ABSA, 2012). In addition, lack of regular income usually implies lack of necessary documentation (e.g. salary slip) to access basic financial services, such as bank accounts and credit.

2.6. At the global level, the following most common reasons reported for not having a bank account are that the respondent has no need for an account (because all transactions are carried out in cash) and that a family member already has one, both cited by 30% of respondents to the Global Findex survey. Interestingly, only 4% and 7% of respondents cited having no need for an

2 The Global Financial Inclusion (Global Findex) database provides in-depth data showing how people save, borrow, make payments, and manage risk. It is the world’s most comprehensive set of data providing consistent measures of people's use of financial services across economies and over time. The database was launched in 2011, and further updated in 2014. It provides more than 100 indicators, including by gender, age group, and household income. The indicators are based on interviews with about 150,000 nationally representative and randomly selected adults age 15 and above in more than 140 economies. 3 Respondents were allowed to give multiple reasons for not having an account at a formal financial institution, and they cited 2.1 on average (Demirgüç-Kunt et al., 2015). 4 The following paragraphs draw heavily on the information on self-reported barriers in Demirgüç-Kunt et al., 2015).

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- 3 - account and/or that a family member already owned an account, as the sole reasons for not having one. This may suggest that, in fact, voluntary financial exclusion does not exist, and that once other barriers to account ownership are reduced – such as the cost of service and the distance from financial institutions – these respondents might be interested in having an account (Demirgüç-Kunt et al., 2015).

2.7. Apart from lack of enough money, self-reported reasons for not having an account at a financial institution vary widely across economies and regions. In Asia and the Pacific, the second most common reason, cited by about 35% of adults without an account, is that a family member already has one; while in Sub-Saharan Africa distance to financial institutions is the second most common reason, cited by 27% of those without an account.

2.8. In the Middle East, however, 41% of adults without an account said that they cannot obtain one, probably due to prohibitive costs and documentation requirements for opening an account. However, virtually no one reported this as the only reason for not having an account. This suggests again that if the costs or the documentation requirements were reduced, respondents might find it easier to own an account.

2.9. In Latin America and the Caribbean the two most commonly cited reasons for not having an account, after lack of enough money, are that accounts are too expensive and that the respondent has no need for an account. But almost no one cited either of these reasons as the only one. This again may suggest that as barriers are eliminated, those who are now without an account are likely to be interested in having one.

Figure 1. Self-reported barriers to use of an account at a financial institution

Source: Demirgüç-Kunt et al (2015)

2.10. Unaffordability is also an important barrier to financial inclusion beyond Latin America and the Caribbean, as well. Globally, 23% of adults without an account at a financial institution cited this as a reason. Fixed transaction costs and annual fees tend to make small transactions unaffordable for large portions of the population in developing economies. High costs can not only restrict access to a bank account, but may also restrict access to credit. (World Bank, 2014).

2.11. Globally, more than 20% of adults without a bank account consider that the long distance to the nearest financial institution is an important barrier. Documentation requirements are another important barrier to account ownership, cited by 18% of adults without an account across all

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- 4 - regions. These requirements may, in particular, affect persons living in rural areas or employed in the informal sector, who are less likely to have formal proof of domicile or salary slips.

2.12. Lack of trust in formal financial services and service suppliers also hinders financial inclusion. A financial relationship is based on trust, which is difficult to establish. Moreover, while trust takes time to build, it may vanish very quickly. Distrust in formal financial services can stem from cultural norms, discrimination against certain segments of the population, past episodes of government expropriation (in the large sense, including of financial assets), or economic crises and macroeconomic instability. For example, in countries where the real interest rate has been historically very volatile, savers have a low confidence in the banking system. The main reason is that high volatility has been often related to economic policy measures that resulted in considerable losses for depositors, such as freezing deposit accounts or converting foreign currency deposits into local currency at undervalued exchange rates (ABSA, 2012). While globally lack of trust has been cited as a barrier by 13% of adults without an account at a financial institution, in Europe and Central Asia that percentage of respondents focusing on this barrier is much higher (30%). Mistrust also results from the fact that poor and low-income persons are often intimidated by banks' formalities, the complexity of financial products, and poor customer care (ABSA, 2012).

2.13. Cultural, social, religious, and demographic factors may also hinder demand for financial services. The Global Findex database shows that religious reasons (e.g. the prohibition of all forms of interest) have been cited as a barrier by 5% of adults without an account in developing economies. Other barriers in this category can arise from formal rules (e.g., minimum age to open a bank account, formal guarantees, and national identification), or even gender discrimination, especially towards women. Indeed, the unfair and unequal distribution of power, resources and responsibilities in favour of men often leads to discriminatory practices, which inhibit women's access to finance. For example: financial products, like bank accounts, sometimes require the husband's signature, or evidence of property rights; or lower wages and income can make bank accounts unaffordable for women (Banking on Change Partnership, 2013).

2.14. Finally, in a sector marked by information asymmetry problems, lack of financial literacy may severely hinder demand for financial services (Banking on Change Partnership, 2013). This is a problem not only in less developed economies: consumers in developed or advanced economies may also suffer from financial illiteracy. It is generally recognized that lower income individuals tend to be less financially literate. In a recent survey conducted by the Alliance for Financial Inclusion (AFI, 2010), lack of financial literacy topped the chart of the main obstacles to financial inclusion (Annex Table 1).5 Respondents to this survey (financial service providers, investors, and members of support organizations involved in microfinance) viewed financial literacy as an enabling factor that unlocks other key dimensions of financial inclusion, such as consumer protection, new product development, and prevention of over-indebtedness (Gardeva and Rhyne, 2011).

2.15. Specific barriers, apart from some of those evoked earlier, may hinder SMEs' demand for credit. Surveys of small firms suggest that while some of them are excluded from bank finance because of high interest rates, lack of appropriate collateral and cumbersome paperwork, a large proportion simply have no demand for or good projects to finance, or does not have the financial and managerial knowledge to successfully invest a loan (Demirgüç-Kunt, et al., 2007, and IPA, 2015). Accessing other sources of funding may not be straightforward either: one reason why more SMEs do not list on stock markets is because the fixed costs of an initial public offering (IPO), as well as the costs implied by ongoing reporting requirements, can be very high (World Bank, 2014).

2.2 Supply-side barriers

2.16. Supply of financial services to the poor may be hindered also by barriers affecting service supply, i.e., factors directly affecting the suppliers of financial services, and which relate largely to the way the financial services industry has traditionally operated. These barriers include the lack of

5 The AFI survey was conducted in late 2009 and early 2010. It was sent to nearly 80 central banks and other policymaking bodies in Africa, Asia and Latin America, and was followed up with a sample of 20 countries through in-depth telephone interviews to gain further insight (AFI, 2010). The survey gauges the views of 301 industry participants from around the world. Respondents are financial service providers, investors, and members of support organizations involved in microfinance.

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- 5 - adequate financial products and services, lack of knowledge about these market segments, underdeveloped and inefficient distribution channels, and lack of reliable information on individuals' or firms' credit records (CGAP, 2015).

2.17. Inadequate products and services are often cited as a key barrier to financial inclusion. Poor and low-income persons have very specific financial needs, which are often not met by standard financial services designed for more financially literate clients with higher and more stable income sources. For example, the promotion of financial inclusion has resulted in many cases in the introduction of no frills bank accounts, which may be maintained with any minimum balance requirement, and which may benefit from certain services free of charge (e.g. free quarterly statements, minimum number of cheques free of charge), but which may still be subject to various fees and charges that may still be too onerous for low-income persons (e.g. ATM withdrawal fees, charges for bounced cheques). As a result, poor persons continue to use informal financial services, such as rotating savings and credit groups for savings and credit, as well as cash as their only means of payment. The prevalence of products unsuited to their needs may be partly due to another underlying supply-side barrier: limited know-how of mainstream providers about how to design, price and market financial services for low-income persons, and limited understanding of client needs and lifestyles (e.g. cash flow and asset accumulation) (Gardeva and Rhyne, 2011).

2.18. Lack of product diversification is also an important barrier in this context. In practical terms, the promotion of financial inclusion often has been left to the microfinance industry, which has traditionally focused exclusively on micro-credit, and has been unable to significantly broaden its product range. As a result, only a narrow market segment among low-income persons is actually reached by the microfinance business models. As mentioned above, financial inclusion is about more than just credit. Low-income consumers need not only access to credit but also to basic savings mechanisms, payments services, and some forms of insurance (Gardeva and Rhyne, 2011).

2.19. Underdeveloped and inefficient delivery channels play a significant role in hindering financial inclusion. It is estimated that 75% of the world's poor live in rural areas where there are fewer access points for financial services and where mobility constraints and weak infrastructure make travelling to the closest access point even more costly and difficult (World Bank, 2014). However, high fixed and recurnning costs make establishing bank branches an expensive delivery channel for poor and sparsely populated areas. In turn, high branching costs in rural areas are associated with insufficient physical infrastructure (e.g. underdeveloped transportation, communications and electricity distribution).

2.20. Lack of interest on the part of traditional financial service suppliers also hinders supply (Banking on Change Partnership, 2013). Many financial institutions may not try to reach low- income clients because they do not find viable business cases on serving this market segment, and as a consequence are also reluctant to conduct their own market research. Therefore, they also rarely invest in training their staff in the supply of services to low-income populations.

2.21. Lack of information in a broad sense is also a major cause of financial exclusion. Insufficient information about borrowers' credit and repayment history, for example, limits the supplier's ability to assess repayment capacity, discouraging them from serving new, low-income clients. Basic information, such as clients' identities, is sometimes difficult to verify simply because identification documentation is missing or can be easily faked (Hanning and Jansen, 2010). Opacity affects not only households but SMEs as well. In developed countries, financial institutions assess loan applicants using information supplied by credit bureaus. In emerging markets, however, credit bureaus often do not exist. Instead, banks rely on other time-consuming methods to obtain credit histories directly from loan applicants, which further increase the cost of assessing SME loan applications, making banks reluctant or unable to lend to SMEs (IPA, 2015).

2.22. Financial inclusion may also be hampered by weak or inefficient industry-level coordination (CGAP, 2015). With the emergence of new business models for delivering financial services to the poor, coordination is needed among a more diverse set of actors, including technology firms, mobile network operators, and financial institutions. However, if the different systems and networks are not interoperable, the financial services offered will be of poorer quality or more expensive, or both (Claessens and Rojas-Suarez, 2016).

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2.23. Payment systems are the backbone of the financial system, enabling the transfer of funds. However, electronic retail payment systems in less developed economies are usually inefficient and not widely available to low-income populations, especially those in remote areas. This is a problem that affects all types of payments and money transfers, including international remittances (CGAP, 2015).

2.3 Inadequate regulatory frameworks, institutional weakness, and underdeveloped financial infrastructure

2.24. Many barriers that appear to be either demand- or supply-side in nature have their roots, or are largely determined, by inadequate regulatory frameworks, institutional weaknesses, or underdeveloped financial infrastructure (CGAP, 2015). For example, lack of consumer protection, poor contract enforcement, regulatory impediments to bank branch establishment and expansion, and even uncoordinated approaches to regulation of the financial inclusion "ecosystem", just to name a few, constitute factors that may perpetuate financial exclusion.

2.25. Experience has shown that governments have an important role to play in building an inclusive financial sector (Claessens et al., 2009). However, direct policy interventions, even if well-intended and inspired by successful experiences elsewhere, may end up having the opposite effect of what was desired or expected (United Nations, 2006). For example, depending on the context, interest rate caps, usually thought as the only recipe against the high interest rates applicable in the market segment that serves poor and low income persons, can make it impossible for financial institutions to cover costs, undermining their long term sustainability in those market segments. State-owned institutions lending at subsidized rates, as well as directed lending policies, can distort markets or create disincentives for private service suppliers to offer financial services to low-income persons (Claessens and Rojas-Suarez, 2016).

2.26. Lack of consumer protection may also hinder financial inclusion. In particular, information asymmetry between consumers and banks regarding financial products and services puts potential new customers at a disadvantage. This imbalance is greatest when customers are less experienced, as is likely the case with unbanked populations (Hanning and Jansen, 2010). Another important aspect of consumer protection is competition policy, insofar as healthy competition among providers rewards better performers and increases the power that consumers can exert in the market (Claessens and Rojas-Suarez, 2016).

2.27. Lack of adequate information is a key factor hindering financial inclusion. Many countries still lack modern national identification systems, collateral registries and credit bureaus, and standards for product information disclosure. Without access to accurate information, clients find it difficult to assess the quality, risks, costs, and benefits of financial products and the trustworthi- ness of financial institutions, limiting effective demand and uptake for financial services. Likewise, providers find it costly to evaluate clients’ risk profiles and the potential of new market segments without more accurate information on client financial use, habits, and preferences and their real risk profile, providers lack the incentive to adapt and innovate. Even for those providers that do introduce innovative business models, such as DFS, client uptake may be low, as the clients may lack sufficient information as to how these services benefit them (CGAP, 2015).

2.28. Evidence points to a function for governments in dealing with these shortcomings. Governments can help by creating the associated legal and regulatory framework (for example, by protecting creditor rights, regulating business conduct, ensuring the enforcement of contracts, and protecting consumers), supporting the information environment (for instance, by establishing national identification systems, promoting the establishment of collateral registries and credit bureaus, and setting standards for product information disclosure), and educating and protecting consumers.

2.29. Restrictive, outdated, and unresponsive regulatory frameworks have also adverse effect on financial inclusion (CGAP, 2015). The emergence of new services and new business models for delivering financial services to the poor require regulatory frameworks that allow for innovation, while ensuring financial integrity and stability, as well as the protection of consumers. However, regulatory frameworks are usually outdated, or are not updated as frequently as they should. New business models, which span the financial, distribution, telecommunications and ICT sectors, raise new challenges for coordination among regulators.

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3 THE ROLE OF TRADE IN SERVICES

3.1. International trade in services – defined, as in the GATS, to include the supply of services across the border, the consumption of services abroad, and the supply of a services through the establishment of a commercial presence or through the temporary presence of a natural person – can contribute significantly to financial inclusion.

3.2. As explained previously, financial inclusion is a complex issue. The basic objective is to bring essential financial services (e.g., payments, money transmission, deposit taking, lending, insurance, and savings) to those who have no access to the formal financial system, such as the poor, small and micro-entrepreneurs, and rural populations. Clearly, a wide range of financial products is needed to meet the needs of different segments of society.

3.3. The channels used to reach out to the so-called "unbanked" population are of a diverse nature (e.g., bank branches, including mobile ones, agents, ATMs, POS (point-of-sale) terminals, mobile phones, and the Internet). All these channels represent different ways of supplying financial services – but not different financial services per se. They require the participation and interaction of a myriad of service suppliers, including traditional financial service suppliers as well as telecommunications operators, technology companies, and retail agents.

3.4. The advancement of financial inclusion requires therefore the development of an "ecosystem", that is, a community of multiple providers of services interacting through different business models with the fundamental objective of bringing necessary financial services to the financially excluded (CGAP, 2013). The list of providers that reach the poor usually includes microcredit institutions, mobile network operators, traditional banks doing agent banking, specialized banks (such as the recently established "payment banks" in India), agents (such as retailers), the postal service, state-owned banks, payment platforms, aggregators, as well as finance and technology companies. 6 Those providers interact against the backdrop of a broad policy environment that includes different regulators.

3.5. Mobile financial services, which are generally considered to offer high potential for promoting financial inclusion, provide a clear example of the ecosystem approach to financial inclusion (CGAP, 2015). Mobile financial services can be classified into two broad categories: 1) mobile banking, which entails the use of a mobile device to remotely access a bank account, whether for information (e.g. alerts, account balance and history) or for transactional purposes (e.g. bill payment, brokerage); and 2) mobile money and payments, where a mobile phone is used to make payments and transfers of money (e.g. salary disbursements, pensions, government allowances, domestic and international remittances). The latter may include peer-to-peer applications, allowing users to use their mobile phones to send money directly to family and friends at different locations, even abroad. Banks are not the only participants in these businesses – other service suppliers, such as mobile network operators, mobile banking technology providers, payment card companies, and providers of payment platforms accessible through remote devices, are also key. In addition, although mobile technology is central to these business models, mobile financial services supply is more than just technology – it requires a cash-in, cash-out infrastructure, usually accomplished through a network of "agents" (e.g. retailers, merchants, the post offices), who make it possible to turn cash into electronic value (and vice versa). Finally, a host of supporting services, such as credit information and collateral registration, are also necessary.

3.6. This "ecosystem" provides an opportunity for the expansion of trade in many different services, such as deposit-taking, lending, payment and money transmission, credit reference and analysis, financial intermediation and advise, insurance, telecommunications and ICT-related services. At the same time, in allowing the deployment of these "ecosystems" not only within national boundaries but also across borders, trade in services may significantly contribute to financial inclusion and development.

6 Payment aggregators provide services and infrastructure to link the systems of entities that want to send money to or receive money from end customers and those of payment instrument providers (e.g. MNOs offering mobile money services or banks offering mobile banking). See "Understanding the East African Aggregator Landscape", by CGAP, available at http://www.cgap.org/blog/aggregators-secret-sauce-digital- financial-expansion.

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3.7. The remainder of this section provides examples of how trade in services contributes to financial inclusion.7

3.1 The case of Pan-African banks

3.8. Trade in services is already contributing to financial inclusion in various ways. The most obvious one is through the cross-border expansion of banks that, building on their experience with inclusive finance in their home markets, replicate their business models in other countries in pursuit of business opportunities and as a way of reaching economies of scale.

3.9. Cross-border banking in Africa is a case in point.8 According to the IMF (2015), the expansion of so-called Pan-African banks (PABs) "is contributing to improve competition, support financial inclusion, and give rise to greater economies of scale. In addition, PABs have been filling the recent gap left by European banks and are becoming the lead arrangers of syndicated loans".

3.10. Cross-border banks in Africa have deployed different market strategies and degrees of engagement in host countries. In fact, it has been argued that the major potential contribution of cross-border banking towards financial inclusion lies in the transfer of innovative banking models from countries where banks have engaged in both developing outreach, for example in the form of agency banking and collaboration with mobile money providers, and in deploying new products targeting micro-lending (Beck et al., 2014)

3.11. Beck et al (2014) made an inventory of 45 banks headquartered in 21 African countries with branches and/or subsidiaries in at least two other African countries.9 The largest Pan-African banks are Ecobank (headquartered in Togo, majority-owned by South African investors, and present in 32 African countries), United Bank of Africa or UBA (headquartered in Nigeria, majority-owned by Nigerian investors, and present in 19 African countries), Standard Bank Group or Stanbic (headquartered in South Africa, majority-owned by South African investors, and present in 18 African countries), Banque Marocaine du Commerce Extérieur or BMCE (headquartered in Morocco, majority-owned by Moroccan investors, and present in 18 African countries), Attijariwafa Bank (headquartered in Morocco, majority-owned by Moroccan investors, and present in 12 African countries), and the Banque Centrale Populaire du Maroc or BCP (headquartered in Morocco, majority-owned by Moroccan investors, and present in 11 African countries).10

3.12. The experience of these banks provides telling examples of how cross-border banking may contribute to financial inclusion. Ecobank, for example, partnered with Airtel to offer mobile- banking services in 14 countries. In Nigeria, Ecobank put in place a Sustainability Framework for Socially Responsible Finance, which includes micro-finance and micro-banking, as well as other community engagement initiatives. Ecobank's financial inclusion programmes target primarily the economically active poor, namely micro entrepreneurs trading in goods and services in urban and rural areas (e.g., artisans, traders, fashion designers, hair dressers, and a host of other micro businesses). Access to credit is facilitated, inter alia, through internet banking and mobile money, Point of sale terminals (POS), and text banking. In Nigeria alone, as of end-2014, Ecobank had provided credit for over N1 billion to more than 2,600 customers, and had received deposits from 1,5 million micro-savers.11

3.13. Another case in point is Attijariwafa Bank, a leader in microfinance in Morocco, which has 11 subsidiaries in 11 African countries, totalling 613 branches in the group's international network. Attijariwafa Bank caters to the low-income segment of the market through a subsidiary named

7 While the cases presented in this section are the result of research by the Secretariat, Members are welcome to provide additional information and feedback. 8 Cross-border banking is understood here in a broad sense, as comprising not only the supply through mode 1 but also the establishment of premises abroad. 9 See Annex Table 1.3 in Beck et al. (2014). 10 Information drawn from Annex Table 1.3 in Beck et al. (2014). 11 Ecobank Nigeria Limited, Annual Report and Financial Statements, 31 December 2014. Available at: http://www.ecobank.com/upload/20150424114643650413NqzAyDndnW.PDF. In 2016, the Ecobank Group won the Award for Financial Inclusion delivered by the African Bankers Association. The prize is awarded to banks that have succeeded in delivering financial products and services to wider parts of society, particularly to the most disadvantaged and low income segments.

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Wafacash. Widely extended throughout Morocco, Wafacash has also applied for licenses in Western Africa and Central Africa.12

3.14. More modest in size, Letshego, a bank headquartered in Botswana, specialized in microfinance, has lending and deposit-taking subsidiaries across ten countries in Southern, East and West Africa, including Nigeria and Tanzania. It has 268 representation points, servicing a base of over 300,000 borrowers and 100,000 savers.

3.15. Formal financial institutions also participate in "linkage" activities13, offering group savings products. A recent report commissioned by the Banking on Change Partnership (2015) identified five banks that offer group savings products in more than one market: 1) Barclays/Absa, which operates in Ghana, Kenya, South Africa, Tanzania, Uganda, Zambia; 2) Bank of Africa, which operates in Kenya and Uganda; 3) Kenya Commercial Bank, which operates in Kenya and Rwanda; 4) Opportunity International Bank, which operates in Malawi and Uganda; and 5) FINCA, which operates in Malawi, Tanzania, Uganda, and Zambia.

3.2 The case of microfinance commercial banks

3.16. When the microfinance movement started in the late 1980s, very few financial institutions showed interest in exploiting this market. Hence, most microfinance banks were started with philanthropic backing from institutions that were able to risk the financial capital in order to achieve potentially huge social returns. In recent years however, microcredit was proven to be a viable business model, and fully sustainable commercial microfinance intermediaries have emerged. These intermediaries provide loans and voluntary savings services to the economically active poor at reasonable cost. Their loan portfolios are financed by savings, commercial debt, and for-profit investment in varying combinations. Even though it has been argued that microfinance commercial banks are not suitable vehicles to finance the needs of the extremely poor populations, they can still promote financial inclusion among some of the vast segments of the unbanked market.

3.17. Interestingly, some of the microfinance banks have gone on to become microfinance multinationals. Such is the case of Compartamos Bank in Mexico, the largest microfinance bank in Latin America, offering not only lending but also insurance services, and serving more than 2.5 million clients. The bank was founded in 1990 and is headquartered in Mexico. Originally funded mostly by philanthropic capital, in 2000 Compartamos was incorporated as a for-profit company, and obtained a commercial banking licence in 2006. The following year, Compartamos raised U$S467 million through an IPO. In 2011, the group expanded operations to Guatemala and Peru, where it acquired another microfinance institution – Financiera Crear, Grupo Compartamos, the holding company, was renamed as Gentera in 2013.

3.18. Another notable case is that of Access Microfinance Holding AG ("Access Holding"), which was established in 2006 by a group of international shareholders from the public and private sectors. Access Holding is organized as a Joint Stock Corporation under German laws. The head office of Access Holding, the parent company of the Group, is located in Berlin, Germany. The business purpose of Access Holding is to build up and control a network of commercial banks in developing and transition countries (the "Access Group") focusing on micro, small and medium- sized enterprises (MSMEs). The Access Group currently comprises 10 financial institutions located in Sub-Saharan Africa, Central Asia, the Caucasus and South America.14 As of December 2015, Access Bank Group had assets in excess of US$13 billion.

3.19. The ProCredit group is another example of a commercial, development-oriented bank. The parent company of the group is ProCredit Holding, a Frankfurt-based company which guides the group. At a consolidated level the group is supervised by the German federal banking supervisory

12 Interview with Ismail Douiri, co-chief executive officer of Attijariwafa Bank based in Casablanca, conducted by Knowledge@Wharton, on 29 February 2016. Available at: http://knowledge.wharton.upenn.edu/article/moroccos-leading-financial-institution-is-banking-on-a-pan- african-strategy/. 13 "Linkage" is the process through which informal savings groups are able to access products and services from formal financial service providers (FSPs). 14 Access Bank Azerbaijan, AccèsBanque Madagascar, AccessBank Tanzania, AB Microfinance Bank Nigeria, AccessBank Liberia, AccessBank Tajikistan, AB Bank Zambia, AB Bank Rwanda, MFO Credo Georgia, and AccessCrédito Brazil.

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- 10 - authorities (BaFin and Bundesbank). The ProCredit group is made up of a bank in Germany (ProCredit Germany) and development-oriented banks operating in Eastern Europe and Latin America15 All of the subsidiaries have full banking licences. Except for the bank in Germany, all are specialized in the supply of financial services to micro, small and medium-sized businesses. Other service suppliers are usually part of the commercial microfinance business model. For example, the ProCredit group also comprises a number of important support companies (all majority-owned by ProCredit Holding), which provide different services, including the ProCredit Academies; and Quipu, the group software company. Access Holding has a strategic partnership with LFS Financial Systems GmbH, a German consultancy firm which provides managerial and other technical services both to the holding company and its network banks.

3.3 The case of branchless banking in Pakistan and Senegal

3.20. Branchless banking16 initiatives have also provided an opportunity for trade in services to contribute to the supply of financial services to the financially excluded. Pakistan and Senegal provide interesting examples in that regard.

3.21. The Government of Pakistan introduced branchless banking regulation in April 2008.17 Since then, the branchless banking industry has thrived, reaching 13.2 million accounts in September 2015, and processing more than 100 million transactions during the quarter July-September 2015. 18 There are seven participants in this market, holders of branchless banking licences: Easypaisa, Omni, Timepey, Mobicash, HBL Express, Upaisa, and Mobilepaisa.

3.22. The origins of branchless banking in Pakistan shows how trade in services can contribute to financial inclusion. One of the main suppliers in the market, Easypaisa, was launched in 2009, as a joint endeavour between Telenor Pakistan and Tameer Microfinance Bank. While Tameer Microfinance Bank Limited (TMFB) is the first and largest Microfinance Bank in Pakistan, and it is of Pakistani origin, Telenor Pakistan is 100% owned by the Telenor Group, a Norwegian provider of high quality voice, data, content and communication services in 13 markets across Europe and Asia. Telenor Group is among the largest mobile operators in the world with 180 million mobile subscriptions and a workforce of approximately 33,000. Telenor Pakistan has reported a subscriber base of over 31 million, making it Pakistan's second largest mobile operator.

3.23. Another significant player in this market is Dubai Islamic Bank Pakistan Limited (DIBPL), a wholly-owned subsidiary of Dubai Islamic Bank UAE (DIB). The parent company DIB is a listed company in Dubai. DIBPL obtained a license to operate in Pakistan in 2005, and was later on authorized to supply branchless banking services as well. Today DIBPL stands at 243 locations (200 branches and 43 branchless banking booths) in 62 cities across Pakistan, and has a customer base of over 200,000.

3.24. Senegal's experience is also noteworthy. As early as 2006, the Central Bank of West African States (BCEAO), which regulates banking in the 8 countries of the West African Economic and Monetary Union (WAEMU), issued regulation on electronic money, paving the way for nonbanks to receive an e-money issuer licence. Six years later, 12 branchless banking initiatives had been launched in 6 of the 8 WAEMU countries. But among all these countries, Senegal stands out, hosting the broadest range of actors and branchless banking business models, showcasing an ecosystem that includes commercial banks (BICIS, a subsidiary of BNT Paribas), microfinance institutions (ACEP and PAMECAS), mobile telecom operators (Orange), nonbank e-money issuers (FERLO), technology companies (Cellular Systems International), and regional banking switches for interbank payment systems (GIM-UEMOA).

15 ProCredit Bank Albania, Banco Los Andes ProCredit Bolivia, ProCredit Bank Bosnia and Herzegovina; ProCredit Bank Bulgaria, Banco ProCredit Colombia, Banco ProCredit Ecuador, Banco ProCredit El Salvador, ProCredit Bank Georgia, ProCredit Bank Germany, ProCredit Bank Kosovo, ProCredit Bank Macedonia, ProCredit Mexico, ProCredit Bank Moldova, Banco ProCredit Nicaragua, ProCredit Bank Romania, ProCredit Bank Serbia, and ProCredit Bank Ukraine. 16 Branchless banking is defined as the delivery of financial services outside conventional bank branches, often using agents and relying on information and communications technologies to transmit transaction details – typically card-reading point-of-sale (POS) terminals or mobile phones (CGAP, 2010) 17 http://www.sbp.org.pk/bprd/2008/Annex_C2.pdf. 18 State Bank of Pakistan (2015), Branchless Banking Newsletter, Issue 17, July-September 2015. Available at: http://www.sbp.org.pk/publications/acd/BranchlessBanking-Jul-Sep-2015.pdf.

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3.25. Within WAEMU, Senegal's experience shows the potential of trade in services, both in terms of the supply of financial services by suppliers of other Members to unbanked consumers in Senegal (e.g. Orange Money and CSI), and the supply of financial services from Senegal to unbanked consumers abroad, in particular in other West African countries.

3.26. For example, in 2014 BICIS (a subsidiary of BNP Paribas, headquartered in France) and Sonatel-Orange Group (a subsidiary of Orange, also headquartered in France) launched Mobibank in Senegal, a new banking service that allows customers to make payments from a mobile phone, and makes it possible to customers to conduct banking transactions in real time between a BICIS account and an Orange Money account.

3.27. Wari Gateway is a technology platform developed by Senegalese entrepreneurs CSI (Cellular Systems International), which offers a money transfers solution on the basis of a wide and dense network of agents. Wari, as the brand is known in Senegal, focused originally on the Senegalese unbanked, which make up 94% of the population. Customers are not required to open an e-wallet account; CSI has instead opted to offer simple products at agent points. In Senegal along, in a typical day, Wari supports 65,000 transactions through a network of about 2000 agents.

3.28. After initial success in Senegal, CSI has launched the Wari platform in a host of other African countries, from the Ivory Coast in the west, to Tanzania in the east. However, in approaching those new markets, Wari has developed a different strategy. Recognising its lack of knowledge of those markets, Wari chose to provide the technology and build partnerships with local institutions and businesses, such as post offices, petrol stations, and even telecommunications operators, that understood local needs but were not able to fully serve them. Within the Wari platform, CSI offers e-payments, e-wallets, payment cards, virtual accounts for salary or aid disbursement payments, and has focused on accessing local, regional and international remittance corridors. CSI has developed a presence in seven European markets, the USA and Canada, largely by partnering with companies such as Transfast, Valutrans, Remit Synergy, and other international remittance companies. Today, Wari conducts around 1.5 million transactions per day or 40 million transactions per month, the vast majority of which is occurring outside of Senegal.

3.4 The case of mobile payments in Rwanda and South Africa

3.29. Developments in the mobile payment business also demonstrate the potential for trade in services. In South Africa, for example, three very different types of service suppliers (Mobicash, a cashless financial platform, Boloro, a mobile payments network, and Big Save Group, one of the largest wholesalers operating within South African townships servicing tens of thousands of small scale "scaza" shops)19 launched a joint mobile payments ecosystem in May this year. The objective is to roll out Mobicash and Boloro services across Big Save's thousands of scaza community members, accelerating financial inclusion and financial interoperability to formerly disenfranchised businesses and communities. As an identity solution, MobiCash uses multi-factor authentication mechanisms such as fingerprints and voice biometric technology prior to authorizing any funds transfer. Boloro is a mobile payments network offering consumers the ability to securely pay for goods and services using any kind of mobile phone and any source of funds.

3.30. In fact, both Mobicash and Boloro are foreign-owned. MobiCash, headquartered in Hong Kong, is a cashless financial platform that allows unbanked customers easy access to banking and payment services. It currently offers its mobile banking platform in 13 African countries including Rwanda, Uganda, Burundi, Kenya, Ghana, Tanzania, Cameroon, DRC, Malawi, Zambia, Zimbabwe, Botswana and South Africa. Boloro South Africa is a subsidiary of Boloro Global Limited, which is headquartered in New York City. Boloro also operates in South Asia, Middle East and Africa and will soon launch operations in Latin America, the Caribbean and East Asia.

3.31. Rwanda is another case in point. In May 2016, KCB Bank and GoSwiff, a global payment acceptance solutions provider, launched a mobile point-of-sale (mPOS) service for Rwandan merchants, to drive financial inclusion and digital payments in the country.20 The introduction of

19 A "scaza" shop is an informal convenience shop business in South Africa, usually run from home. 20 A mobile point-of-sale (Mpos) is a smartphone, tablet or dedicated wireless device that performs the functions of a cash register or electronic point of sale terminal. Any smartphone or tablet can be transformed into an mPOS with a downloadable mobile app. Typically, when the business owner registers the application,

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- 12 - the mPOS solution, a first of its kind in Rwanda, follows an earlier roll out of a similar mPOS service in Kenya. The new mobile payment service will make it possible for businesses of any size to accept digital payments in Rwanda, including insurance premiums and public disbursements, with the simple use of a mobile application and a mPOS terminal.

3.32. Both KCB Bank and GoSwiff are foreign-owned. KCB Bank Group, established in Kenya in 1896, is East Africa's largest commercial Bank. It has subsidiaries in Burundi, Rwanda, South Sudan, Tanzania and Uganda. Today KCB Bank Group has the largest branch network in the region with over 250 branches, 962 ATMs and 11,000 agents offering banking services on a 24/7 basis in East Africa. Incorporated in 2010, GoSwiff, a leading provider of payment acceptance services, is headquartered in Singapore and currently has operations in 25 countries around the world, including Rwanda.

3.5 The case of payment banks in India

3.33. Financial inclusion strategies may also be based on the establishment of alternative financial institutions, specifically conceived to cater for the financially excluded. These strategies also provide an opportunity for trade in services through the establishment of foreign suppliers. Recent developments in India are noteworthy in that regard. As part of its revamped strategy to further financial inclusion, in November 2014, India issued guidelines for licensing of so-called payment banks. 21 A payment bank is a differentiated bank whose business scope is limited to the acceptance of deposits (up to Rs. 100,000 per individual customer), issuance of ATM/debit cards (payments banks, however, cannot issue credit cards), payments and remittance services, acting as business correspondent of other banks, and distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.. Importantly, they are not allowed to undertake lending activities at all.

3.34. The new guidelines allow various types of entities – so-called "promoters" – ranging from telecommunications companies and prepaid payment instrument issuers (PPIs), to supermarket chains and non-banking finance companies (NBFCs), that are owned and controlled by residents in India, to apply for a payment bank licence. They can also choose to have a joint venture with an existing scheduled commercial bank to set up a payments bank. However, scheduled commercial banks can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949 – currently, 74%. Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote payment banks. The maximum permitted shares of foreign banks in payments bank is in line with the Foreign Direct Investment (FDI) policy for private sector banks – currently 74%.

3.35. In August 2015, the Reserve Bank of India granted "in-principle" approval to the following 11 applicants to set up payments banks, nine organizations (Aditya Birla Nuvo Limited, Airtel M Commerce Services Limited, Cholamandalam Distribution Services Limited, Department of Posts, Fino PayTech Limited, National Securities Depository Limited, Reliance Industries Limited, Tech Mahindra Limited, and Vodafone m-pesa Limited) and two individuals (Shri Dilip Shantilal Shanghvi, Shri Vijay Shekhar Sharma).22 These entities, which are required to have an initial capital of Rs. 100 crore each, will have to start operations within 18 months. Vodafone m-pesa Ltd is a wholly-owned subsidiary of the British multinational telecommunications company Vodafone.

3.6 Mobile financial services in Africa and the Middle East

3.36. Since the launch of M-Pesa in 2007, mobile financial services have revolutionized African countries' local economies, enabling large segments of unbanked population to access basic financial services.23 M-Pesa is a mobile phone-based money transfer, financing and microfinancing service, developed by British company Vodafone and launched commercially by the company's affiliates in Kenya and Tanzania, Safaricom and Vodacom, respectively. Now well established in the payment services supplier sends the business owner a card reader that plugs into the mobile device's audio jack. Some payment service suppliers also provide optional hand-held docking stations (called sleds) that allow the mobile device to read barcodes and print receipts. 21 https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1089PBR1114.pdf. 22 https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=34754. 23 In Kenya, only 29% of adults have access to a bank account but 68% of adults now actively use mobile money services.

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- 13 - both Kenya and Tanzania, M-Pesa (a mobile financial services initiative developed by Vodafone and launched commercially by the company’s Kenyan affiliate Safaricom, continues to have a strong and growing presence in Africa. Since 2013, it has been extended to the Democratic Republic of Congo, Egypt, Lesotho, Mozambique and South Africa. In 2015, M-Pesa completed its establishment in India, where it has a partnership with ICICI Bank. M-Pesa has also established in Romania – its first European market. 24 –There are now 19.9 million active users of M-Pesa worldwide, and in 2014/15 3.4 billion transactions were processed.

3.37. Orange Money, launched by the French company Orange in the Côte d’Ivoire in December 2008, is similar to M-Pesa. Orange Money is currently available in 14 countries in Africa and the Middle East: Botswana, Cameroon, Côte d’Ivoire, Egypt, Guinea, Jordan, Kenya, Madagascar, Mali, Mauritius, Morocco, Niger, Senegal, and Uganda.

3.38. Similar to the previous ones, Tigo is the mobile financial services initiative championed by Swedish telecommunications company Millicom. Tigo currently offers services that range from international remittances and money transfers, to interest earning mobile money accounts, micro- credit, payments and billing. The Tigo brand has developed as Tigo Money in Latin America, Tigo Pesa in Tanzania, and Tigo Cash in the rest of Africa. Tigo is currently present in 9 markets (Ghana, Tanzania, Chad, Rwanda, Senegal, El Salvador, Guatemala, Paraguay and Honduras). In Latin America, for example, Tigo Money represents 42% of all active mobile money accounts in the region.

3.39. Another noteworthy experience in this field is that of Fundamo, a wholly-owned subsidiary of Visa Inc., headquartered in South Africa, and one of the largest specialist providers of mobile financial services in the world. Fundamo's mobile financial services platform has been deployed in more than 34 countries across Africa, Asia, and the Middle East, offering mobile financial services to unbanked and under-banked mobile subscribers including person-to-person payments, bill payments, and branchless banking.

3.7 Mobile cross-border remittance services in Africa

3.40. Mobile cross-border remittance services continue to grow dramatically in Africa. These services are delivered through different business models and partnerships. The most prevalent business models for providing mobile international remittance services in Africa are the following (Moyo and Rehak, 2014):

 Operator-to-third-party. This involves partnership between an operator and an international remittance provider or financial institution. Users send money to another country via, for example, Western Union, and recipients receive it in their mobile wallets (or alternatively collect it from the local Western Union agent). This is the most common type of mobile remittance business model.

 Intra-operator. Customers of the operator in one country can transfer money, using an existing mobile money account, to a customer of the same operator in another country. Millicom for example pioneered a cross-border mobile money remittance service in February 2014 between Tigo Tanzania and Tigo Rwanda.

 Inter-operator. This involves co-operation between different operators, enabling them to reach countries that are outside their footprints.

3.41. In 2015, there were 29 cross-border mobile money initiatives connecting 19 countries – and, by volume, international remittances was the fastest growing product with 52% growth (GSMA, 2015). The majority of these initiatives are in Africa, but others are being developed in the Philippines and Singapore, as well as in Qatar (GSMA, 2015).

3.42. Partnering with an international financial institution is still the most common approach, because such players have established regulatory permission for cross-border money transfer, and

24 In Romania, 39% of the population does not have bank accounts. The service offers access to mobile money transfer and payment services to approximately 7 million Romanians who rely mainly on cash transactions.

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- 14 - have a commercial presence in many countries. Table…highlights selected partnerships between mobile operators and third-party remittance providers.

Table 1. Selected cross-border remittance partnerships in Africa

Operator (country) Partner (country)

Bharti Airtel (India) eServGlobal (Kenya, Sierra Leone, Tanzania)

MTN (South Africa) eServGlobal (Ghana), MasterCard (Ghana), MFS Africa (Côte d'Ivoire, Rwanda), Western Union (Côte d'Ivoire, Ghana, Uganda), World Remit (Uganda)

Orange (France) MFS Africa (Madagascar)

Vodafone (United Kingdom) Money Gram (Democratic Republic of the Congo, Egypt, Kenya, Lesotho, Mozambique, South Africa, Tanzania)

Source: based on Moyo and Rehak (2014)

4 CONCLUDING REMARKS: THE ROLE OF TRADE POLICY

4.1. The preceding discussion has shown that many obstacles stand in the way of financial inclusion. Those obstacles range from demand-side factors (e.g. lack of income, distrust of formal financial institutions), to supply-side factors (e.g. unviable business models, inadequate product offering, inefficient and underdeveloped delivery networks), to weak institutional frameworks, to geographical constraints, to inadequate financial regulation and subsequent legal uncertainty. Moreover, they are also likely to vary greatly in intensity and importance from country to country.

4.2. Fulfilling the goal of financial inclusion therefore means advancing on multiple fronts simultaneously.25 Striking the best balance in the choice and sequence of reforms in each country represents a major policy challenge in its own right, and has been analysed in detail elsewhere (Demirgüç-Kunt, et al., 2007 and World Bank, 2014). While regulatory changes are often needed to promote financial inclusion, progress in improving financial inclusion must be compatible with the achievement of the traditional objectives of financial regulation and supervision, namely, safeguarding the integrity and stability of the financial system, and protecting financial service consumers. In order to achieve these objectives, governments must ensure appropriate prudential regulation and supervision of all financial services and service suppliers, together with strong consumer protection, anti-discrimination legislation, contract enforcement, protection of property rights, and even financial education programs.

4.3. Financial inclusion initiatives may also benefit from a well-designed trade policy in services. As shown in the previous section, various types of services and service suppliers operating through different business models are needed in order to bring financial services to poor and low-income populations and regions. Trade in services may therefore significantly contribute to furthering financial inclusion. Financial policy-makers and regulators may not think specifically of "trade" when designing and implementing financial inclusion initiatives and policies. However, insofar as foreign service suppliers participate in these market segments, and the supply of various different services through any mode of supply is affected, financial inclusion-related regulations become also trade policy. Just as fulfilling the goal of financial inclusion requires moving on multiple fronts, so too, reaping the potential benefits of trade in services to financial inclusion requires a holistic approach to trade policy in this area.

4.4. While no panacea for financial exclusion, trade policy in services can significantly complement, and contribute to, financial inclusion initiatives. Trade policy in services is about reducing barriers to entry and competition, ensuring a level playing field among market participants, guaranteeing transparency of regulations and policies, and fostering diversity of products and services. As explained in Claessens and Rojas-Suarez (2016), "[c]ompetition matters for financial inclusion, especially in developing countries, because a market open to fair competition leads to a greater variety of products and services, higher efficiencies, and lower

25 For discussions on regulation aimed at promoting financial inclusion, see Claessens and Rojas- Suarez, 2016, Demirgüc-Kunt et al., 2007, United Nations, 2006, and World Bank, 2014.

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- 15 - costs, which ultimately means potential consumers currently on the side-lines will be more easily included."

4.5. Trade policy in services can contribute to financial inclusion in at least three ways. First, it can help ensure that a full range of institutional options is available to a large spectrum of service suppliers who are important for the development of an inclusive finance market. Provided regulation is neutral with regard to the development of the different business models and leaves the actual choice to the service suppliers involved, the prevalence of one model over another would certainly depend on specific country-circumstances and customer needs. Typical models include the following:

a. Traditional full-service banks, which offer a range of financial services, such as deposit and savings accounts and loans (some of which can be offered digitally).

b. Branchless banking or agency banking, whereby commercial banks are allowed to contract third parties (usually other service suppliers) to act as agents on behalf of the bank (e.g. supermarkets, grocery stores, gasoline stations, and lottery outlets) and offer basic financial services.

c. Specialized payment banks, which differ from traditional full-service banks in that they have a much more limited business scope.

d. Digital service suppliers (DSPs), including telecommunications service suppliers, and other non-bank DSPs, such as money transfer operators, payment card companies, on- line payment platforms and aggregators.

4.6. Second, trade policy in services can support the introduction of new products and technologies. As shown previously, new financial services and products, as well as novel distribution channels, have emerged over the last years. These have the potential to contribute enormously to the three key elements of financial inclusion: access, use and quality. These new technologies can be especially useful for low-income populations in developing countries because they offer a chance to leapfrog outdated financial systems and obtain the financial services they need. The latter include not only lending, but also other banking services (such as deposit-taking), as well as payment and money transmission services, and savings and insurance products.

4.7. However, the development of the different models described above is sometimes hampered by out-dated regulatory frameworks that rely on the supply of banking and other financial services exclusively by full-service banks. Trade policy could contribute to the availability of financial services by ensuring that, provided all companies involved in the supply of financial services to low-income persons – banks, MNOs, and others – are subject to regulation aimed at protecting consumers and safeguarding financial stability and integrity, no unnecessary barriers to entry and competition are applied. Functional regulation (i.e., identical rules applicable to functionally identical services, regardless of the institutional form of the provider), together with product regulation restricted to the fulfilment of consumer protection and financial stability objectives, have been advocated as a means to promote the expansion of products available to low-income segments of the market (Claessens and Rojas-Suares, 2016).

4.8. Finally, trade policy in services can contribute to the well-functioning of inclusive finance markets, by supporting the development of the financial infrastructure.26 Indeed, trade policy can help in various ways, by eliminating restrictions preventing nonbanks from accessing the national payment system, by allowing the entry and operation of digital payments platforms, by ensuring the interoperability of different payments systems and networks, and by fostering the development of regulatory frameworks for the expansion of credit bureaus and collateral registries.

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26 Financial infrastructure comprises a set of market institutions, networks and shared physical infrastructure that enable the effective operation of financial intermediaries, the exchange of information and data, and the settlement of payments between market participants. Broadly speaking, it includes collateral registries, credit bureaus, credit ratings agencies, and payment and settlement systems; entities whose services are covered by the definition of financial services used in the GATS.

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ANNEX

Table 1. The 2010 AFI Survey results: Overall Rankings

OPPORTUNITY OBSTACLE 1 Financial education (66) 1 Limited financial literacy (57) 2 Expanding the range of products (65) 2 Limited institutional capacity among MFIs (54) 3 Credit bureaus (60) 3 Microfinance's single-product approach (52) 3 Mobile (phone) banking (60) 4 Limited understanding of client needs (52) 5 Client protection regulation (59) 5 Political interference (51) 6 Capacity building for microfinance institutions 6 Lack of credit bureaus (48) (55) 7 Full-inclusion financial institutions (51) 7 Product cost-structures (48) 8 Improved regulation and supervision of 8 Inadequate regulatory framework for MFIs (46) microfinance (48) 9 Correspondent/Agent banking (47) 9 Insufficient infrastructure (44) 10 Improved demand-side information (38) 10 Inadequate client protection (42) 11 Strengthening financial infrastructure for 11 Poor business practices (41) electronic (non-cash) transactions (35) 12 Reaching out to new client groups (34) 12 Costs of building/operating branches (39) 13 Competition (32) 13 Weak legal infrastructure (32) 13 Prudential regulation and supervision (in 13 Lack of network cooperation (32) general) (32) 15 National identification documentation (31) 15 Limited know-how of mainstream providers (28) 15 Mobile (branch) banking (31) 15 Appropriate funding (28) 17 Village savings and loan associations/self-help 17 Unsustainable growth (28) groups (31) 17 Expansion and improvement of microfinance 18 Commercially oriented entrants (27) associations (31) 19 Microfinance transformation (27) 19 Non-business-friendly environment (27) 20 Building investor markets (24) 20 Regulation that lags technology (25) 21 Commercial bank downscaling (22) 21 Financial regulatory priorities (24) 22 Collateral and secured transactions reform (20) 21 Lack of demographic information on the excluded (24) 23 Self-regulation (18) 23 Impact of financial inclusion (23) 24 Matched savings and/or cash transfer schemes 24 Documentation requirements (22) (17) 25 Non-traditional providers (15) 25 Lack of interest by providers and policymakers (22) 26 Linking government transfers to deposit 26 Weak industry voice (20) accounts (14) 26 Product bundling and cross-selling (14) 27 Public mistrust of financial institutions (19) 28 Mandates to provide no-frills bank accounts (12) 28 Client risk (17) 29 State bank reform (9) 29 Negative press image (17) 30 Directed credit/service mandates (4) 30 Transient, migrant, displaced populations (10)

Source: Gardeva and Rhyne (2011) Note: n=301. Numbers in parenthesis indicate the percentage of respondents placing an item in their top ten.

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REFERENCES

Aggarwal, Shilpa and Leora Klapper (2012), "Designing Government Policies to Expand Financial Inclusion: Evidence from around the World", unpublished working paper, World Bank.

Alliance for Financial Inclusion (AFI) (2010), "The AFI survey on financial inclusion policy in developing countries: Preliminary findings" (April 2010).

Association of Supervisors of Banks of the Americas (ASBA) (2012), "How to Contribute to Financial Inclusion? Inventory of Products and Services Available in the Region".

Ayyagari, Meghana and Thorsten Beck (2015), "Financial Inclusion in Asia: An Overview", ADB Economics Working Paper No. 449, Asian Development Bank (September 2015).

Banking on Change Partnership (Barclays, CARE International and Plan UK) (2013), "Banking on Change: Breaking the Barriers to Financial Inclusion".

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Claessens, Stijn, Patrick Honohan, and Liliana Rojas-Suarez (2009), "Policy Principles for Expanding Financial Access: Report of the CGD Task Force on Access to Financial Services", Center for Global Development (CGD).

Claessens, Stijn, and Liliana Rojas-Suarez (2016), "Financial Regulations for Improving Financial Inclusion: A CGD Task Force Report", Center for Global Development (CGD).

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Demirgüç-Kunt, Asli, Thorsten Beck, Patrick Honohan (2007), "Finance for all? - Policies and pitfalls in expanding access", World Bank policy research report.

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Innovations for Poverty Action (IPA) (2015), "Access to Finance for Small and Medium Enterprises".

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