Making the poor bankable

Including and integrating the poor and marginalised in a society in its financial system is the only way of making them bankable. Being included into a group, into a community, into a process, is an essential part of a process of empowerment. Isolation necessarily weakens any person or entity.

Financial inclusion is essential for providing financial and economic empowerment and stability to vulnerable and marginalised people. Formal financial systems, commercial banks, stock exchanges, by their very nature, exclude the financially vulnerable and weak.

Such marginalised groups are forced to rely on family, friends and fools (sympathetic people who are a soft touch for a hard luck story and disburse cash readily), usurious money lenders, pawn brokers, etc. for emergency financial requirements.

Financial inclusion

In a modern economy, financial inclusion is understood to mean the delivery of banking services at affordable costs to vast sections of the disadvantaged and marginalised low income segment of society.

Unrestrained access to public goods and services is accepted as essential for open and efficient social system. Banking services are considered to be in the nature of a public good; it is essential that availability of banking and payment services right across the community without exception or discrimination should be the prime objective of public policy.

The term financial inclusion has gained importance since the early 2000s, as a result of research showing a direct correlation between poverty and financial exclusion. In developing countries, regulators in charge of monetary policy have made financial inclusion a common objective as a methodology for poverty alleviation and eradication of absolute poverty in their economies.

Indian innovation

India has come up with an innovative idea in its march forward to achieve Total Financial Inclusion (TFI). The Reserve Bank of India (RBI) has directed commercial banks to build up financial links to the thousands of self help groups, mostly founded by women.

By assisting these SHGs in accepting their deposits and lending funds to them, the members of the SHGs are connected to the formal financial system through this link.

The RBI has instructed the commercial banks that a proportion of their total portfolio should be earmarked for lending to the SHGs and that actual disbursements should be reported in their annual reports, in order to facilitate monitoring.

UN’s main goals of financial inclusion

Kofi Annan, some time ago, as Secretary General of the UN, said: “The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people for the full participation in the financial sector. Together we can build inclusive financial sectors that help people improve their lives.”

The UN has stated the main goals of financial inclusion as follows:

•    Access at a reasonable cost of all households and enterprises to the range of financial services for which they are bankable, including savings, short and long term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances.

•    Sound institutions, guided by appropriate internal management systems, industry performance standards, and performance monitoring by the market, as well by sound prudential regulation where required.

•    Financial and institutional sustainability as a means of providing access to financial services over time.

•    Multiple providers of financial services, wherever feasible, so as to bring cost-effective and a wide variety of alternatives to customers (which should include any number of combinations of sound private, non profit and public providers.

Sri Lanka’s standing

It would be an interesting exercise to rate Sri Lanka’s standing on the attainment of these goals.

Regarding access to savings and credit, our standing is probably high, for two reasons. The successor to the Post Office Savings Bank, the National Savings Bank, has a long history of mobilising savings and also a good outreach to all parts of the island, using modern technology. Areas affected by the conflict would have been outside its reach, but this situation is now being remedied.

The licensed commercial banks, finance companies, cooperatives and building societies are all entitled to take deposits from the public and these deposits which are recoverable are savings. The Samurdhi scheme’s compulsory savings will also fall into this category.

The second reason for the ability to save being high is the number of not for profit and for profit micro finance institutions operating in the country, set up in terms of an existing law, which take deposits from members, pay interest and lend money to their membership. Services such as leasing, factoring, mortgages, insurance, pensions, etc. are probably limited to a fewer number, although micro insurance is now being promoted in a systematic manner.

With foreign employment being such an important sector and most commercial banks having online systems for depositing and withdrawing funds, remittances both international and domestic are probably of a high level.

Havala or informal international remittance systems probably do not pay a big role today, although at one time they may have. The international war against terrorism has brought such Havala and informal money transfer under intense scrutiny as they are suspected to be a method for terrorist organisations to transfer funds.

Regulatory environment

Regarding institutional arrangements and prudential regulation, the situation cannot be said to be satisfactory. In the recent past scandals such as Pramuka Bank, Golden Key and Ponzi schemes such as Sakvithi and Danduwan, etc. have queered the pitch.

In addition the legal provision under which lawful institutions, which are not licensed commercial banks, cooperatives, building societies or finance companies, which take deposits from their membership, the Proviso to Section 76(A) (1) of the Banking Amendment Act No. 35 of 1995, is not being implemented.

The regulatory environment cannot be said to be sound. All over Sri Lanka various institutions hold themselves out as lawful deposit taking institutions, whereas their legal status is suspect. Much more stringent regulation is essential.

In the microfinance sector the existing regulatory framework is not being implemented and a draft law has been under discussion for some time. Pawn brokers (Pawn Brokers Ordinance of 1942), money lenders (Money Lending Ordinance of 1918) and Rotating Savings and Credit Associations (ROSCAs) known as cheetus in Sri Lanka (Cheetu Ordinance of 1935) are all regulated by existing long-standing laws, but implementation and regulation is lax.

Competitiveness only on paper?

However, the competitiveness of the environment is said to be high. Borrowers have many choices; even the poor and the marginalised can choose between the Samurdhi banks, the Micro Finance Institutions (MFIs), the cooperative rural banks, licensed pawn brokers and the varied subsidised schemes offered by State banks and even the Central Bank.

However, in reality the competitiveness may be on paper – otherwise how can one explain the popularity of pawn broking of gold jewellery for the purpose of raising capital for rice cultivation in the teeth of so many low interest theoretical cultivation loan schemes proffered by various financial institutions?

One commercial State bank with an extensive rural network has admitted that 40% of its lending for agriculture is through pawn broking services. This is the reality although the State and commercial banks offer all sorts of low interest so called ‘farmer loans’.

Clearly there is a need for a financial instrument which would provide credit for agriculturists, who have no other option but to pawn the family gold jewellery to raise funds for land preparation, seed material and related activities. They have no other alternative collateral other than gold, which is acceptable to the financial institutions.

The existence of usurious money lenders in our villages, to which so many poor and marginalised village folk are beholden to, notwithstanding the vast outreach, in theory, of the State and commercial banks, is due to the same reason.

Prime target

Financial institutions in the formal sector see these unbanked marginalised people as a prime target. In India the fact that Nandan Nilekani’s (former Senior Executive of Infosys) Unique Identity Authority of India is taking steps to give a unique identity number (what we Sri Lankans already have – the NIC number) and a biometric Adhara identity card, which can be verified in real time online (unlike our NIC) will mean that even illiterates who can establish their identity through the Adhara card become bankable.

Chairman K.V. Kamath of India’s ICICI Bank is thinking about appointing an agent in each village who would be given the equipment and technology to link up on line with the banks system and validate the Adhara identity card in real time, to transact business with such clients.

Sustainability

Financial and institutional sustainability will vary from sector to sector. There is a high risk in the MFI sector in Sri Lanka due to a regulatory lacuna. In India after some issues on high interest rates and borrower suicides due to inability to meet commitments to multiple lenders, the RBI has issued rules to supervise MFIs.

Further, the very low interest rates being paid on deposits leaves room for operators of Ponzi schemes to tempt depositors who rely for survival on interest on their savings deposits to risk their money in Ponzi schemes which are inherently unsustainable.

On the supply side/provider aspect of financial services, especially credit, there is certainly a multiplicity of providers, both public and private, but the fact that the sector, which has probably the largest number of poor depositors and borrowers, the MFIs are not regulated, except by market forces, is a disturbing feature.

Potential of micro finance

The potential of micro finance is huge. The MFI sector has a humongous outreach in Sri Lanka. The concept of individual small loans to groups of marginalised poor, with inter se guarantees as collateral, has a long history in Sri Lanka and the rest of South Asia.

The cooperative rural banks have a history going back to the early 1900s. Financially powerful and mature financial institutions like the Janashakthi Banks of the Women’s Development Federation of Hambantota, the Arthacharya Foundation, Sareeram of Batticaloa and the Wilpotha Kantha Ithurum Parishramaya are among the multitude of partner MFIs supported by the Janasaviya Trust Fund (JTF) and its successor, the National Development Trust Fund (NDTF).

The JTF also supported existing MFIs such Sarvodaya Seeds, Sewa Lanka, TCCS and the National Youth Savings and Credit Cooperative (NYSCO) to expand.

Nobel Laureate Prof. Mohamed Yunus of Bangladesh’s Grameen Bank carried the concept to the world and the Micro Finance Summit popularised it further. Of course Prof. Yunus had to pay a price for Grameen’s success when political jealousy and connected machinations in Bangladesh resulted in him being removed from Grameen. But this serves only to validate the success of the concept.

Indeed, one time UN Civil servant and current Member of India’s Parliament from Kerala, Shashi Tharoor, writing in his seminal publication ‘The Elephant, the Tiger and the Cellphone’ has, under the title ‘Heroines of Rural Development,’ written about the Society for Rural Improvement (SRI) of Kerala’s Palakad District, an organisation of 7,000 women, an MFI organised on the Grameen model, by a non resident Indian, who had returned to India from the USA, Dr. Ron Prabhakar.

Tharoor says: “We know from example after example around the world that, over a very short time, poverty and maternal and infant mortality can be dramatically reduced, while education and gender equality can be dramatically advanced. Rural micro credit projects like SRI are showing the way.”

One remedy

In Sri Lanka the extensive reliance on pawn brokers’ services and money lenders clearly show that the poor have not been made bankable. One remedy would be to bring the micro finance sector into the mainstream and link the commercial banks to them, similar to the approach taken by the RBI linking SHGs to the commercial banking sector in India. But this would need some out-of-the-box innovative thinking from the powers that be.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)