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Innovating Financial Inclusion: Postal Savings System Revisited Aladdin D policy brief No. 2016-3 (August) Innovating Financial Inclusion: Postal Savings System Revisited Aladdin D. Rillo, Senior Economist, ADBI Jeffrey Miyamoto, Associate, ADBI Key points • The postal savings Mobilizing domestic financial resources like savings is crucial for Asia’s developing system in Asia has economies. Savings are important because they permit investment, which in turn gone a long way from increases the productive capacity of an economy. They also play a significant role in being a traditional financial intermediation in a sense that savings funds intermediated by the banking vehicle for mobilizing system can be used as credit to finance development activities. Unfortunately, due to savings to becoming a potent new tool for different levels of financial sector development, access to financial services such as financial inclusion. credit, savings, and payment services remain limited in developing Asia. For example, • While postal financial only 36% of adults in East Asia and the Pacific have formal savings accounts and 11% inclusion has much have access to formal credit, as of 2014. to offer, its success depends much on best practices Against this reality, Asia needs to explore other strategies and to improve financial and sustainable access. In this regard, the role of the postal network is crucial. With more than business models of 600,000 branches worldwide, post offices provide alternative infrastructure to rural postal finance. populations to access a wide range of financial services that traditional financial • To maximize the institutions cannot provide. Considering the potential of post offices to expand benefits of postal finance, key challenges financial services in rural areas, the development of a postal savings system may be on regulations, a good strategy for developing Asian countries to increase financial inclusion, reduce technological poverty, and achieve higher economic growth. innovation, implementation capacity, and cooperation need to be Why postal savings? effectively addressed. The postal savings system or the use of the postal network to mobilize savings has its origins in 1861 when policy makers in the United Kingdom recognized the difficulty of including the less wealthy in the nation’s system of formal finance. At the time, banks only catered to the highly wealthy and had a presence only in the large cities. Allowing the post office to handle deposits was an affordable way to include more people than ever before in the financial system, giving people a venue for deposits outside the home. The rationale for the introduction of postal finance in 1861 remains at play today in emerging economies, where formal financial institutions tend to serve only the small number of very wealthy. In Asia, the postal savings system became a vehicle for promoting a more balanced economic development over a century ago, by mobilizing savings and providing financial services to the poor and lower-income people. In Japan, for example, the postal savings system has long served the needs of middle, low-income, © 2016 Asian Development Bank Institute and rural people for financial services, and it has provided financing for public ISSN 2411-6734 Regional Conference on Postal Saving System in Asia: What We Know and What to Expect? 23–24 February 2016 This work is licensed under a Tokyo, Japan Creative Commons Attribution- NonCommercial-ShareAlike 4.0 The event was organized by the Asian Development Bank Institute. International License. capital investment. As early as 1875, areas. This is over four times the number the government’s post office began of rural banking branches of traditional offering savings accounts and money financial institutions. In terms of number orders. The range of financial products of bank accounts, India Post’s 238 million became ever expanded over the century accounts outnumber any other single that followed, including features such institution by far, but there is still plenty of as insurance coverage. Owing to its room for growth compared to the reach expansive reach—the number of post of traditional finance in aggregate (India branches performing financial functions Department of Posts 2016). was nearly double that of all other financial institutions combined in 2015— and its government-backed credibility, Role of postal savings the Japan Post evolved into one of the in financial inclusion biggest financial institutions in the world, holding a greater amount of deposits Asia seems to be in a natural position than every other private bank in Japan to promote postal savings because (Scher and Yoshino 2004). of the extensive postal network and infrastructure in the region that can serve Through this position of strength, the as access points for delivery of financial postal financial system was important services. Around 48% of post offices in for the modernization of Japan. Savings the world—roughly around 320,000— in the post bank were essential for are located in Asia (Figure 1). On average, projects including housing, infrastructure, every 72 square kilometers is served by and business development. These a post office branch, a coverage ratio far contributions created a virtuous cycle; greater than other parts of the world. all these factors made Japan wealthier, The coverage area is not only a token leading to higher savings deposited in the presence. In fact, Asian economies enjoy postal system, and allowed the financial good access to the full range of postal system to invest in projects of ever greater services such as direct delivery of mail to scale and complexity. the home (Figure 2). In India, government-backed postal banks One advantage of the postal savings came into being in 1882, among the oldest system compared to the banking of post banks in Asia. Upon independence system is its ability to use existing post in 1947, the Government of India began offices to bring basic financial services integrating the postal finance services to underserved areas and communities into a long-term campaign to modernize. (Figure 3). By providing access to services The responsibility of this effort came such as deposits, payments, and insurance, under the purview of the newly created post offices increase competition for the National Savings Organisation in 1948. underserved segments, thus generating Because of the country’s large number a positive impact on employment and of less wealthy people, the emphasis of supporting rural and regional economic the post bank has been to target the development (Boon 2016). country’s many small savers. Although the banking system has increased its reach Post offices also provide solutions to massively since, more is still needed. Of critical challenges in financial inclusion India’s 1.2 billion people, 40% of the adult such as accessibility and affordability population still does not have banking (Berthaud 2014). Around 32% of adults access. The postal service is going to play a in developing Asia and the Pacific still do powerful role in closing that gap because not have access to bank accounts, while it is better primed than traditional finance more people remain unbanked, 55% to reach the rural regions. Out of 150,000 in South Asia and 41% in Central Asia. post offices, over 130,000 service the rural In economies where postal accounts are ADBI Policy Brief No. 2016-3 (August) 2 Fig. 1 Number of post offices by region, 2014 Europe and Commonwealth of Independent States, , Middle East and North Africa, , Asia and the Pacific, Latin America and the Caribbean, , , Sub-Saharan Africa, , Industrialized countries, , Source: UPU (2014). Fig. 2 Type of postal service available by region (% of population) Europe and Commonwealth of Independent States . Middle East and North Africa . Latin America and the Caribbean . Sub-Saharan Africa . Industrialized countries . Asia and the Pacific . Home delivery Having to collect from post oce No postal services Source: UPU (2014). offered, roughly 12% of the population are the second greatest contributor to uses this service either exclusively or as a financial inclusion, with over 1.6 billion complement to traditional formal finance. people worldwide holding some form of postal account. In general, women, the poor, and those who live in rural areas are most likely to Evidence also suggests how postal finance use postal finance. As a result, the mixture can be used to address geographic, of postal services with finance has long gender, and growth gaps brought about been seen as having high potential to by financial exclusion (Ansón 2016). First, bolster financial inclusion for those who because the postal system can be far- tend to be naturally denied access to flung, postal finance can bring financial formal finance. Indeed, postal accounts inclusion to those who live outside major 2 Innovating Financial Inclusion: Postal Savings System Revisited 3 Fig. 3 Direct postal financial inclusion a simple cash-merchant post office that collects savings, to a partnership with financial institutions, to an unlicensed Payments postal savings bank, and finally to a postal bank providing a wide range of financial services (Figure 4). In some countries, Savings postal finance takes the form of a joint POST Banked venture between the private and public Unbanked OFFICE sectors. In other countries, postal finance Loans has evolved over time, from post office savings banks to licensed postal banks. According to a database published by Insurance the Universal Postal Union in 2011, postal services in developed markets
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