Amando M Tetangco, Jr: Mainstreaming financial inclusion as a strategic
objective
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the BSP-BIS Research Conference of Financial Inclusion
and Central Banks, Cebu, 3 June 2016.
* * *
Good morning everyone. On behalf of the Bangko Sentral ng Pilipinas, I welcome all of you
to Cebu.
This conference, which the BSP is privileged to co-host with the BIS, is actually the result of
a discussion in the Asian Consultative Council (ACC) of the BIS. It was early 2014 in Sydney,
if I am not mistaken, when BSP suggested to the ACC governors, that a possible area of
research for the BIS Hongkong Office (under the ACC process) could be the relationship
between financial inclusion and financial stability. In particular, we suggested that the BIS
Hongkong Office investigate whether increased financial inclusion contributes to or detracts
from financial stability. Necessarily, Dr. Remolona and his team would also have to
determine the possible transmission mechanism for this linkage.
That suggestion came at a time when revisions to the G20 Financial Inclusion Action Plan
(FIAP) were being undertaken during the Australian G20 Presidency. By that time also, the
United Nations had already underpinned the importance of financial inclusion as an
imperative in the attainment of a wide range of targets under the Sustainable Development
Goals. The UNSGSA, Her Majesty Queen Maxima of the Netherlands, had also by then
already conducted intensive meetings on financial inclusion with the Standard Setting Bodies
that included the BCBS, CPMI, FATF, IADI and IAIS.
Clearly, the once-peripheral issue was then becoming mainstreamed in the global discourse.
The BSP Experience
At that time, we were also trying to better understand this issue for our own policy work in the
BSP. You see, by 2014, the BSP already had over a decade of experience with microfinance
as a flagship program for poverty alleviation.
Our efforts started as an advocacy, with the belief that creating an enabling policy and
regulatory environment could catalyze market players to see microfinance as a sound and
viable undertaking. We endeavored to create a supervisory and regulatory framework that
recognized the peculiarities of microfinance while striving to maintain alignment with
international standards. Such balance allowed the entry of banks into the microfinance
market by reducing barriers and providing incentives, while at the same time, ensuring that
players act, and their operations conducted, in a safe and prudent manner. In particular, we
put in place the needed measures that cover the full credit cycle of microfinance from loan
application to full repayment.
Following the principle of proportionality, we allowed less documentary requirements and
enabled the use of group support or liability arrangements, cash flow based and character
lending, and high frequency amortizations. We balanced that with demanding and timely loan
review and loss provisioning. We also provided a mechanism for unregulated microfinance
institutions to formalize themselves into banks.
Regulations were likewise established to leverage off technology to more efficiently and
costeffectively reach out to more microenterprises across our archipelago of 7,107 islands. And
in 2007, we created a full-time unit in the BSP to look into financial inclusion issues.
This approach enabled over 170 banks - mostly our rural banks - to deliver microfinance
services to nearly 1.5 million microentrepreneurs. The outstanding loans to these
microentrepreneurs are at PhP 11.3 Billion, a 333% increase from the 2002 levels of PhP 2.6
Billion. The banks have also enabled these clients to save for the first time in their lives. At
present, these microentrepreneurs have accumulated savings of around PhP 4.5 Billion.
Moreover, the generation of related new business opportunities that cater to the low income
and the unbanked, e.g., micro-insurance, micro-housing loans and remittances, has enabled
them to expand their markets and client base without compromising, in fact in some cases,
even strengthening their institutional stability.
While these numbers were encouraging, and as we were getting more microenterprises into
the formal financial sector, we also knew that we needed to better appreciate how these
newly on-boarded enterprises would affect (in the long run) the financial markets they were
entering.
Fortunately, the rest of the ACC governors went along with our suggestion in 2014, and so
we are here today. But, as you can appreciate from the topics of our conference, the BIS has
pushed the envelope further on that research agenda. For the next day and half, we will be
covering the full mandate of central banking, not just financial stability but monetary policy
and the growth objective as well. This agenda certainly reflects that financial inclusion is
multi-faceted.
Implications of Financial Inclusion
Indeed, financial inclusion cuts across multiple macroeconomic goals. Financial inclusion has
been seen to contribute to broad-based economic growth and development; as well as
complement other policy objectives such as reducing inequality and promoting financial
stability and integrity. Financial inclusion also has important implications for monetary and
financial stability policy.
These are bold claims, yet the work of many of you in this room have strengthened these
convictions through your academic work in collecting and analysing evidence, some of which
we will have the opportunity to discuss in this conference. (e.g., from Professor Beck's early
work in looking at financial intermediation and growth (2000) and more recent ones on
finance, inequality and the poor (2007) to Dr. Hannig's discussion on financial inclusion and
financial stability (2010) and Professor Karlan's numerous work on looking at impact of credit
(2007) or other financial services in households.) In no small measure therefore, you have
contributed to what could be likened to an evolution: a gradual - yet almost natural -
advancement of financial inclusion as a widely-accepted policy objective.
In this conference, we hope to further enrich the discourse through exchanges among central
bankers and our select group of experts and see how we can pursue financial inclusion as a
complement to our primary responsibilities as central bankers.
A good way of achieving this is, to keep in mind that while financial inclusion has benefits, it
also brings changes to the nature of the risks we face. Two that come top of mind are: 1)
changes in the behavior of market participants; and 2) changes in the design and delivery of
financial products. Related to these is a third, that is, the potential changes in the reaction
function of policy makers.
To illustrate the first kind of change - the change in market behaviour. Newly-included
agents may not necessarily behave in the same manner as those who are "already served"
and "have been served" for some time now. Because banks are more familiar with the latter,
the melding of the two client bases may create new operational challenges for the banks'
frontline staff.
Change in agent behavior also affects monetary policy. Mehrotra and Yetman (2014) argue
that when more clients are able to smooth consumption, authorities have more monetary
policy space to concentrate on fighting inflation. The underlying principle is that smooth
consumption patterns help reduce the cost of output volatility. [I will leave this for James to
further explain during his presentation tomorrow.]
For the second type of change: on ways to design and deliver products to improve access to
financial service. Financial product providers need to be mindful that, while most of the new
entrants (generally the poor) have had to be savvy to deal with their unpredictable cashflows
to "survive", they are not (necessarily) as capable in dealing with a whole array of new
financial products. Moreover, banks must also be careful to extend certain types of credit to
certain clients. This could just expose lenders to higher risks and it can also expose
illinformed borrowers to increased risk of debt distress.
These concerns related to product development highlight the need for proportionate
regulation that adequately balances the need for flexibility and openness to innovation, on
one hand, with that of mechanisms to ensure that risks are properly managed, on the other.
This will allow market contestability and the development of market-based solutions to serve
markets that were traditionally unserved or underserved.
We've already seen innovative market-based approaches to improve credit access for
microfinance borrowers. We've witnessed the move from brick-and-mortar offices to
alternative Financial Service Providers such a micro banking offices and e-money issuers.
Addressing Technological Innovation: Thru Financial Education, Consumer Protection
and Proportionate Regulation
Innovations, particularly through financial technology, can indeed be the catalyst for greater
financial inclusion. Technological innovation has the potential to reduce costs and accelerate
the on-boarding of currently excluded markets into the formal financial system. In addition,
technology solutions promise to enhance regulatory capacity and tools to supervise the
market, and facilitate regulatory compliance and reporting of financial institutions. Some
examples of these include:
1. Big data analytics and algorithms that can be used to address information assymetry in
financial service provision (e.g., analytics of social media behavior can predict financial
behavior of target clients);
2. Crowdfunding platforms that may be utilized for generating funds for SMEs, start-ups and
innovators. (e.g., peer-to-peer lending or equity crowdfunding)
3. Digital currencies. (When this is safely managed, this may facilitate payments, money
transfers and e-commerce.)
4. RegTech or using technology to enhance regulatory capacity and enable regulators to
analyze data to ensure timely supervision and intervention.
As traditional players (such as banks) interconnect and engage new players (such as fin tech
companies - which are often not within central bank supervision), there is a greater need to
look at the entire chain of financial services being offered. The challenge for central banks
and regulators here is to stay abreast with emerging business models and innovation, to
understand the inherent risks of these new models, and to know how to proportionately
manage the risks. This will require capacity to undertake the said functions.
A number of central banks, including the BSP, have turned to the "test and learn" approach,
more recently known as the "regulatory sandbox" to address this gap.
The "sandbox" approach presupposes a dialogue and collaborative relationship between the
central bank and the industry innovators. It acknowledges that financial inclusion solutions
often arise from these innovators because the latter have greater flexibility and technical
capacity to create products and generate systems to deliver them.
Essentially, the sandbox provides an opportunity for innovators to connect to banks and
other financial system players with clear authority from the regulators. Providing a sandox for
these players gives the regulators a "ring side" seat that helps them assess potential risks to
guide them in deciding when and how to regulate the new market, if needed. The ultimate
objective is to be aware of the risks, employ mitigating actions as needed, but in a manner
that also enables financial inclusion.
While we need to allow ample space for the market to create cost-effective solutions that
work for financial inclusion, prudence dictates that regulators must also be on the lookout for
activities that impact financial integrity and consumer protection negatively. We need to have
market conduct and consumer protection regulations that are infused with the philosophy that
all financial consumers, including the less sophisticated and often low-income clients must be
treated with dignity and respect, their consumer rights upheld and their financial well-being
protected. The regulators must act as the "honest broker" between the clients and the
financial institutions. In addition, we should also make the deliberate decision to provide
financial education to financial inclusion clients with the view of anticipated positive returns
over the long-run.
Finally, the changes that increased financial inclusion brings calls for greater coordination
among regulators. Coordination could positively help harmonize regulations, address
regulatory gaps and level the playing field.
Financial Inclusion as a Policy Priority
Mindful therefore of these risks but also aware of the benefits that financial inclusion offers,
can there be too much financial inclusion? Is financial inclusion a worthy policy objective to
pursue?
My response here would have to be - that as in all things, there must be balance. (Like in the
fairy tale Goldilocks - not too hot, not too cold... not too big, not too small.... but just right!)
To achieve such balance, there should only be financial inclusion, to the extent that there is
sufficient quality capacity to supervise. There should only be financial inclusion to the extent
that the players can be properly incentivized and are able to process financial information.
There should only be financial inclusion to the extent that the regulator is able to provide
adequate financial consumer protection. When these conditions are present, we can say we
have responsible financial inclusion.
Clearly, this balance would have to be jurisdiction-specific. But a common framework and a
set of working principles for implementation could be derived. The framework and principles
could then be the bases for closer dialogue among stakeholders, including central banks,
other regulators, the standard setting bodies and the private sector.
Much has already been done to bring us closer to that common understanding of these
things. But much remains.
In this dynamic and ever evolving pursuit of financial inclusion, we must continue to
strengthen our evidence base to inform our policies, stay abreast with developments and
ensure that our actions remain relevant, constantly challenge and question our positions if
only to ascertain that they are the right ones.
I believe this conference can largely contribute to this important exercise.
The work of pushing forward responsible financial inclusion is huge. And it is important that
the pursuit of financial inclusion would not be to the detriment of other policy objectives.
Hopefully, after today, we have more clarity in what we need to do as central bankers.
Central banks who believe that a strong and stable economy and financial system is only
truly relevant if it benefits the majority of our population.
On that note, I look forward to our discussions in the next day and a half. Thank you for your
attention.