Designing enabling policy and regulatory frameworks for inclusive growth require a good understanding of the linkage between financial inclusion and the real sector to alleviate poverty. Any discussion on lessons learned tend to focus on the issue of the merits, efficacy and justification for financial institutions and intermediaries to make decisions for savings, investment and consumption, participation in productive activities, and coping with unexpected shocks.
I pursued a different track while speaking at a recent international seminar on Bringing Indonesia's Microfinance and Financial Inclusion to the World organized by the Indonesian Financial Services Authority (OJK). Using an expression used by Daisaku Ikeda in a write-up Turning Swords into Plowshares "Asians use negative expressions and forms to convey positive messages", I highlighted examples where outcomes of policies on financial inclusion, have resulted in unintended consequences in the form of unforeseen costs and adverse reactions, although they were well-intended and well-analyzed.
Why is the negative expression preferred? I explained how Mahatma Gandhi translated "Ahimsa ", a Sanskrit word negative in the form into English as "Nonviolence". Earlier ancient Chinese Buddhist scholars had translated it as "Pu-Hai" meaning "non-hurting". The positive form is "Maitri", in Sanskrit; "Jen", in Chinese or "Universal Love". If a man wishes to love people and other beings he must first not hurt them. If he preaches "Love" but does not practice "Ahimsa" or "Pu-Hai", then his "Love" is may be viewed as a false expression. This negative way of saying positive things is inherent in ancient Asian tradition and culture. Therefore embracing the lessons learned from failures should not be viewed as a cliché.
Not so long ago, illiterate women beneficiaries of ex gratia payments from the government had to go through a prolonged process to get their bank accounts opened. Banks used the ‘know your customer' guidelines in the prevention of money-laundering law as an excuse. After formalities were completed and checks were presented, payment was denied as they had become time-void. Nobody advised them on how to get the checks revalidated.
Small farmers and businesses are unable to procure bank loans to get cash to buy raw materials, seeds, fertilizer, and hire labor as they can't provide collateral, like the land title as a guarantee. Many are tenant farmers who share their harvest with landowners and often go into debt. Loan applications made by these tenant farmers to the bank were denied. It was later found that this was because the landowners had already borrowed using the same parcel as collateral.
The public perception is that loans actually benefit big farmers, businessmen, and traders. As a result, informal credit sources continue to thrive among small businesses despite various formal financial institutions offering lending packages to them. Many don't bother to visit the bank because of the fulfillment of a plethora of documentary requirements and red tape. Instead, when in need of money, they approach the local moneylender. In addition to paying interest, they also agree to sell their produce to the moneylender, who sets the price. This dual role as financier and buyer is quite common and puts the moneylenders in total control.
Crop insurance is the least of priorities when there is often not even enough money for food. Farmers have to face many odds including pests, typhoons, and floods. In areas falling on Typhoon Haiyan's path, standing paddy crop waiting for harvest were totally destroyed. Insured farmers were denied compensation, as insurance cover was for the loss of yield, and which had expired. Insurance schemes need to be carefully designed to provide comprehensive cover for risks along the value chain — yield loss of standing crops, prevention of sowing/ planting risk, post-harvest losses and localized risks, including inundation.
On another occasion, families of farmers were denied life insurance claims from an insurance company despite submission of required documents to the company. Upon inquiry, it was revealed that death due to suicide was excluded. In one region recently devastated by the earthquake, the high deductible amount on the insurance policies led to the denial of admissibility of the claims or reduction in liabilities by the insurance companies. Considering the adverse impact of the earthquake on the general people's lives, less than fifty per cent of claims were reported paid, one year after the event.
The lack of trust in the financial services sector today partly reflects a failure by providers to articulate the value they are offering, leading to erroneous suspicions that their main priority is to make short-term profits. They need to find innovative ways to explain how customers can benefit from the services they are providing, and by responding to their needs by offering tailor-made solutions. Society's trust in financial institutions needs to be repaired and the policy and regulations have an important role in supporting the process and protecting the customers.
Digital financial services promise to provide a historic opportunity to transform the ability of small businesses and households to access finance, information and markets. If done right, mobile services can provide different alternatives. They can reach people in remote areas, deliver valuable information and services to a broad customer base, and allow two-way communication. But the devil is in the detail.
Increasingly a number of governments are switching to electronic delivery of government-to-person (G2P) payments to deliver financial services. Making use of branchless banking channels, such as debit cards and mobile phones also reduces leakages by establishing a unique identifier for recipients and putting the payment instrument directly in the hands of recipients. Personal identification numbers (PINs) or fingerprint technology helps in reducing some kinds of fraud, like making payments to the wrong individual or making double payments.
While the biometric card or unique mobile number serves as an identity proof of sorts, the ground realities are quite different. Beneficiaries of conditional cash transfers in rural areas have given away their automated teller machine (ATM) cards and PINs to a trusted agent who withdraws money for a fee from the ATM, which is often located at a distant location. On many occasions, these cards are deposited with moneylenders to facilitate payment of their loan installment. The same is true with mobile phones, which are used as a shared service amongst many homes amongst the poor for communication. As one would normally perceive, not every poor adult owns a mobile phone. In addition, lack of familiarity with technology, an explosion of ill-conceived applications and an absence of trust in financial institutions have all contributed to slow uptake of digital financial tools.
Financial literacy has a pivotal role to play in financial inclusion. And who can do it better than women? Home is the best school. When women assume this role, they also educate their family, their community, and the future generations.
The economic potential of women entrepreneurs also remains largely untapped in Asia. Lack of access to finance is a persistent barrier that limits women's ability to start or expand their businesses. Promoting inclusive business opportunities by involving women will enhance in economic, social, and environmental impact leading to sustainable development.
Success brings its own rewards, but failures also bring important lessons to make improvements, for policymakers and regulators. Even the most carefully crafted policy or regulation may not be able to anticipate the effects of its implementation in totality. Identifying points of failure and making small changes can result in reaping disproportionate gains.
This justifies the need for greater stakeholder participation and transparency in the policymaking and regulatory process. It can help in developing a consensus and help in avoiding the most harmful unintended consequences while implementing policy measures.
Today, Indonesia is embarking on an ambitious program to move financial inclusion from the margins to the mainstream with a new generation of financial services. It will be worthwhile to learn from the successes of implementation of financial inclusion policy and regulations, as well as the failures to lift millions out of poverty and lower income inequality.