Balancing Risk and Access in Financial Inclusion

or Spare a Thought for the Poor Can’t-Win Regulators.

Regulators are about as popular among Financial Inclusion enthusiasts as a football (soccer) referee. Referees get credit for slowing the pace of the game, blinking and missing a bad tackle, misjudging offside (after all we have a much better view, don’t we?), and being out-and-out spoilsports. If a referee ever had a truly perfect game, nobody would even notice.

Regulators are in the same bind. It seems that whatever they do, they are in for major criticism, whether from financial institution management or shareholders, consumer advocacy groups, the global finance community or their own governments. This is hardly surprising, since their job is to balance between several mutually-exclusive goals. But finance processionals should understand this as much as anyone – our whole business is balancing risk and reward, on our own behalf and on behalf of our stakeholders.

Here’s a couple of examples of categories of conflict regulators must be concerned with:

1.  Deciding who can provide what kinds of financial services is fraught with conflicts. Imagine a world with only one sport (football of course) where only men can play. Women and children desperately want in, and they march on football authority headquarters, reviling the commissioner at the tops of their voices.  So the powers-that-be change the rules to let anybody play. Two weeks later the world is screaming abuse at the poor commissioner because children are being hurt, and men are being taken out with abandon by female players. What about non-bank financial providers? This gets complicated, but here are just a couple of considerations.

• If only banks are allowed to play, then competition suffers, and banking products continue to be targeted toward better-off segments of society.
• If anyone is allowed to play, then the whole system becomes unstable, with risk to safety of deposits, poor treatment of consumers, and market risk abounding. Unless everyone is regulated as though they were a bank, in which case we’re pretty much back to the previous case.

2.  Under the principle of proportionality, regul       ators are working on reduced requirements for capital adequacy, KYC documentation, supervision, etc. It’s a bit like a soccer referee reckoning that a six-year-old has less control, and would inflict less damage, than an adult, and so going easy on the rules. But how much is enough?

• If the rules are too tight, or are enforced too strictly, then simple financial products become too expensive to develop and operate, and de fact financial exclusion continues. In addition innovation in financial products is stifled (a good example would be indirect deposit-taking via agents or via a Mobile Network Operator)
• If the rules are too loose, then regulated financial institutions are disadvantaged against the under-regulated ones, and significant risks arise for consumers, shareholders and markets.

The global regulatory bodies (like Bank for International Settlement, and Basel Committee on Banking Supervision) have been grappling with these challenges for the past few years. The Basel committee has an updated version of its Core Principles and has subsequently published Guidance on how these might be applied for Financial Inclusion. The BIS has also published recent research on how regulation is working out in practice for financial institutions of all kinds, from commercial banks to financial cooperatives and e-money service providers, in 59 countries across all regions.

Football players and supporters routines complain about officials and referees, without always appreciating the no-win position they can sometimes be in. What works much better is for all of us to participate in arriving at the best possible balance of free-flowing play and management of risk of rules or bones being broken. Financial Inclusion regulation seems pretty much the same.