Strategic approach towards banking the unbanked persons in Sri Lanka

Wednesday, 28 September 2016 00:01 -     - {{hitsCtrl.values.hits}}

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Financial inclusion has drawn the heightened attention of policy making authorities worldwide. This should also be a vital element in policy architecture for the financial sector in Sri Lanka. Hence, identifying key attributes for a national framework for financial inclusion would be of paramount importance. Such elements should also be more attentive towards the resilience of the financial system. 

Access to safe, convenient and affordable financial services by the poor and vulnerable groups, is generally considered as financial inclusion. However that definition would not as it is be compatible to the country specific circumstances of Sri Lanka. Inclusive finance is a pre- requirement for fast-tracking growth and minimising income disparities, and poverty. It also has the potential to untitled-1upgrade economic stability which is an essential constituent of financial stability.

Mere expansion of financial institutions however does not always lead to financial system stability as there may be adverse effects of ‘too much of finance’. When the financial sector of a country is under-developed, vulnerable segments of the population resort to informal sector institutions aggravating the risks towards financial system stability. Hence, ensuring an elusive balance between financial inclusion and financial sector stability needs to be emphasised.

Researches have estimated that approximately 2.5 billion adults of the world are financially excluded. Concept of financial inclusion has now broadened to include all categories of people who make little or no use of financial services. It can be suggested that in respect of Sri Lanka not only the ‘unbanked’ people but also ‘under-banked’ people need to be included in financial inclusion strategy. 

Making under-banked segment of the population who have never transacted with insurers and capital market would also be an effective approach. Reasons for voluntary financial exclusion such as lack of money, religious reasons, distance to financial entity and cost of financial services, need to be addressed in devising a national financial inclusion framework.

Measuring financial inclusion

Compared to other countries in the region Sri Lanka’s financial inclusion record is more satisfactory. It has been reported that more than 82.5% of households in the country have access to financial institutions for loans and savings. However, no deep review of ‘effectiveness’ and ‘efficiency’ of financial services in Sri Lanka in terms of ‘quality’ of financial services and ‘stability’ of such institutions have been carried out. Even in the global literature, firm consensus is found for evaluating efficiency and effectiveness of a financial inclusion framework. 

It can be argued that banking density alone would not be a criterion on financial inclusion status. Contribution of financial services to upgrade the living standards of poor people and opportunities available for them to explore the businesses should also be enhanced along with increase of institutional outreach. 

No uniform method is available for measuring financial inclusion. Scope of any index for this purpose should be extended beyond the banking sector, to include other sectors of the financial system such as capital market and insurance. Accessibility, availability and affordability of financial services, impact thereof on financial system stability, level of customer satisfaction and public confidence in the financial system could be considered as appropriate benchmarks in this regard.

Mutual reinforcement of financial Inclusion and financial system stability

No widespread attention has been paid on the role played by the financial inclusion in achieving financial system stability. It is accepted that financial stability forms consumer trust in the financial sector as a whole, making it more likely that individual will want to be included. Therefore deepening of financial sector should be planned carefully as it would lead to instability. 

Greater financial inclusion could also contribute to a better transmission of monetary policy. Hence it is suggested to balance these two approaches with a view to maximising the synergies. Diversification of bank assets by including small savers would lead to increase both the sise and stability of the deposit base. In such events banks’ dependence on ‘non-core’ financing which tends to be more volatile during a crisis would be lower and it would underscore systemic stability.

Tightening the loose ends of financial regulatory framework

In planning financial inclusion, access to formal sector services needs to be reiterated. Informal financial service providers such as money lenders, money changers and deposit mobilisers who operate without due authority, attract poor people who have been excluded from formal sector. However consumer rights are not safeguarded by such institutions and they pose a threat to systemic stability. Therefore clear demarcation between formal and informal institutions needs to be drawn in promoting financial inclusion. 

Strengthening corporate governance structures of formal financial insitutions is another vital element in a strategic approach. As per the Basel Committee of Banking Supervision effective corporate governance practices are essential to achieve and maintain public trust and confidence in the banking system. 

Enhancing efficiency of the judiciary system is another significant attribute for promoting financial inclusion. It has been reported that an estimated 1,318 days are taken to enforce a contract in Sri Lanka, while in Singapore it takes just 150 days. If cases related to financial transactions are delayed people would be reluctant to participate in more innovative financial services. In such events justice would be denied due to the delay. Maintaining high quality rule of law will endorse financial inclusion. 

Applicable rules and regulations however need to be appropriate and proportionate, to enable financial institutions to be responsive to a market with evolving, and unserved needs.Delicate balance should therefore be established between business expansion and regulation. There should also be a proper resolution mechanism to ensure orderly exit of failing financial institutions from the system without causing a burden on tax payers. 

Impact on inclusive growth and poverty alleviation

Financial inclusion should go hand in hand with economic development in order for creating a sustainable financial empowerment of the people. Inclusive economic development is considered as economic growth coupled with equal economic opportunities. Therefore, financial development should be designed in a manner to include all sections of the society in the growth story. Since financial instability could derail the growth, and harm the poor, designing financial development should have a focus on systemic stability.

Maximisation of untapped potential of the capital market of Sri Lanka, by increasing participation of retail investors, upgrading unit trusts to the status of mutual funds would be helpful for furthering development of financial sector. Unexploited market share of insurance sector of the country also can be included in such plans for fainancial sector development. 

It is considered that poverty will not be alleviated without including disadvantaged persons in the process of economic development. Hence financial inclusion policy can be used as an effective tool for the purpose of poverty alleviation. People live in poverty stricken areas transact with informal sectors and incur high cost of finance mainly due to arbitrary interest charged by informal sector. However mere opening of savings accounts for poor people and borrowings by them for consumption purposes would not satisfy the holistic approach towards poverty alleviation.

Financial tools for promoting effective financial inclusion 

Matuarisation of the consumer into the saver and then into the investor should be a focus of national financial inclusion strategy. In fact wrong financial tools or mismanaged financial services can reverse the expected goals and hamper the inclusive growth. Therefore financial tools which will encourage active participation of excluded populations in financial transactions needs to be emphasised. Requirement to have a minimum account balance, personal introductions, rigid documentation and various charges by financial institutions have discouraged some categories of citisens to engage with mainstream financial sector. 

In addition time dimension of the product is also of paramount importance. The relationship between the customer and the bank needs to be of a more permanent nature which follows much stable policies in the good times and bad times. 

Not only individuals but also small and medium enterprises should be given a prominence in financial inclusion agenda. It is said that financial products delivered to the unbanked population should be aimed at overcoming market imperfections and providing vulnerability reduction. Aggressive loan recovery procedueres adopted in micro finance sector would be of disadvantageous in such a context. It is said that people have become poor not because they were unwise or lethargic. They are poor because of the deficiency of assistance from the financial institutions to widen their economic opportunities. 

Welcoming approach towards poor customers would lead to tap huge business potential coming from unmet demand for financial services. The focus should be on creating customised, composite and simple financial products, which are compatible to the income and consumption pattern of customers. There should be a distinction between Corporate Social Responsibility projects and the financial inclusion. A product called ‘No frills’ saving accounts in India, ‘Smart cards’ in Indonesia, innovative choice of collateral and ‘Msansi Account’ in South Africa are such examples.

Micro finance is also considered as an effective tool to promote inclusion. It is said that ‘micro finance is double edged sword; it can either reduce the financial vulnerability of household or push them further into debt. Sustainability of micro finance institutions should therefore be emphaised while focusing on ‘poverty lending approach’ to achieve inclusion goals. At the same time the issue of ‘too many clients of too many micro finance institutions have taken on too much debt’ needs to be strategically addressed. Proper regulatory framework for micro finance sector would be helpful in achieving the said objectives. 

Contribution of technological innovations 

Technological innovation can be considered as most promising mechanism to develop financial inclusion. Main advantage of using innovative methods such as mobile banking would be the low cost. M-PESA mobile banking platform launched in Africa takes priority among well-known examples for financial inclusion through mobile banking. In India ‘Financial Inclusion Technology Fund’ was established to create technology infrastructure with comprehensive credit information. 

Measures should also be taken to use mobile penetration of Sri Lanka, closing the gap of access to finance as done in other emerging economies. Lack of awareness about mobile banking seems acts as a major impediment for expansion of mobile money systems in Sri Lanka. It is a myth that poor are averse to new technology. The relality is the poor people can be intergrated in inclusive growth through innovative financial tools.

Financial inclusion Vs. Consumer Protection

Another significant aspect that requires the attention in planning financial inclusion is consumer protection. Consumer protection in broader sense is considered as the laws and regulations that ensure fair interaction between service providers and consumers. If the enforcement of laws related to consumer protection is weak, expansion of financial services would exaceberate violation of consumer rights. Due to the cost, time and other practical difficulties involved in legal actions related to financial services people are discouraged to try their complaints in courts.

Maximum benefits of Financial Ombudsman mechanism and Credit Counselling Bureau are not obtained by the people due to the lack of awareness. Paying more attention on consumer rights protection by financial institutuins and introducing data protection mechanisms with international best practices would enhance the public confidence in financial system. 

Combating money laundering Vs financial inclusion policy

Combating money laundering should not be an impediment to promote financial exclusion. When financial institutions are implementing anti money laundering regulations in an overly cautious manner, legitimate customers who have genuine obstacles such as lack of proper documentation and technical knowledge would be excluded from the financial services. However, financially excluded and underserved groups should not be ‘automatically’ classified as ‘low risk’ customers as such a liberalised approach could then be misused by the money launderers and terrorist financiers.

Role of financial literacy 

Financial education has been considered as a key requirement to achieve the objective of financial inclusion under the global policy agendas. Although Sri Lanka has a high literacy level, financial literacy rate does not seem to be satisfactory. Hence there is an apparent need to enhance financial education of unbanked population in order to enable them to reap maximum benefits from financial services and contribute to the growth process of the country. 

Raising awareness of the school children on the difference between authorised and unauthorised financial institutions, Ponsi schemes and prohibited schemes, investment diversifications, basic financial regulations, through organised awareness programmes would be beneficial. Enhanced financial literacy along with consumer protection has been recognised as interweaving threads in the policy fabric of financial stability. 

Empowering women for enhancing financial inclusion 

It is considered that women’s empowerment and economic development are closely interrelated. Policies to include women in financial services through access to small unsecured, term loans in cash, easy repayment mechanisms, and opportunities for making late payments, quick procedures to obtain loans without intrusive procedures would be importatnt in this regard. Sri Lanka scenario is considered female labour migration can be discouraged through effective inclusion policies while addressing serious social issues related to migrant labour. 


 It can be suggested that a process of ensuring access to adequate range of safe and affordable financial products and services needed by low income groups of rural and urban sector, and under banked groups, in a fair and transparent manner by mainstream institutional players would be an appropriate strategic policy for banking the unbanked segments in Sri Lanka. It would also be an approach which ensures the wider participation of financial sector in inclusive growth strategy of the country. However, financial inclusion requires a careful planning due to the risks associated with rapid deepening.

In the context of Sri Lanka instead of mere expansion of financial outreach, quality of such services, their effectiveness and efficiency need to be enhanced. An appropriate financial inclusion indicator compatible to the country specific circumstances should also be adopted in devising such a framework. Acheiving financial system stability through a facilitative regulatory and supervisory structure would also be imperative in enhancing financial inclusion. 

The regulatory architecture should ensure that formal financial system delivers affordable financial services to the excluded population, with greater efficiency without compromising on the safety and soundness. Innovative business strategies coupled with technology can be used to promote efficient and effective services to excluded population at the bottom of the pyramid. 

Micro Finance sector focused on ‘responsible finance’ can play a vital role in mitigating poverty. Sustainability of micro finance institutions should also be ensured through appropriate and proportionate regulatory structure. As the financial empowerment of women can contribute to upgrade the living standards of financially excluded families, special attention in that regard needs to be paid in framing a national policy for financial inclusion.

Effective consumer protection and market conduct regulations should also be key aspects of this agenda. Policy measures pertaining to financial literacy coupled with policies for enhancing ‘financial capability’ would be an intergral element in the same strategy. 

Inter agency coordination among policy making authorities and financial sector regulators could be emphasised as another requirement. Instead of mere focusing on increasing financial products and services, ensuring sustainability of financial istitutions aiming at financial system resilience should be given priority in a strategic approach for financial inclusion. 

As Dr. Subaro (2011) once noted financial institutions must see ‘financial inclusion’ as an ‘opportunity’ not as an ‘obligation’. Such a paradigm shift would join strategic elements of financial inclusion policy, while ensureing cohesivenss of the same.

The writer is an Attorney-at-Law. She holds a LLM with Distinction in Banking and Finance Law from the University of London and LLB (Hons) from the University of Colombo. She is also a fellow of International Compliance Association of the UK and she was ranked the world first in examination of Diploma of International Compliance conducted by International Compliance Association in 2014.  Ms. Thennakoon started her carrier as a lecturer in law of the Open University of Sri Lanka and currently she is a Senior Assistant Director of the Central Bank of Sri Lanka. The views expressed are however that of the writer and do not reflect the views of the institution she represents.

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