Zamani Abdul Ghani: Scaling up financial inclusion through branchless
banking
Remarks by Mr Zamani Abdul Ghani, Deputy Governor of the Central Bank of Malaysia, at
the Microfinance Policymakers Forum "Scaling up Financial Inclusion through Branchless
Banking", Kuala Lumpur, 2 December 2009.
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Introduction
Good afternoon and welcome to Malaysia. It is very encouraging to see so many senior
policymakers gathered here today to participate in this Microfinance Policymakers Forum.
Thank you for taking the time to be here and for contributing your knowledge. The motivation
for today's event has its roots in the forum of the United Nations Advisory Group for Inclusive
Financial Sectors which was held in May this year in Kuala Lumpur. As many of you may be
aware, in recognition of the importance of financial inclusion, the United Nations established
the United Nations Advisory Group on Financial Inclusion in 2006. The group advises the
United Nations and member states on issues relating to the advancement of the financial
inclusion agenda on a global scale. Since its establishment, many successes have been
achieved. These include increasing the public awareness on the importance of financial
inclusion, assisting governments in the design of regulatory systems that facilitate the
creation of financial services for the poor, encouraging the use of holistic measures to gauge
the progress of financial inclusion as well as collecting and disseminating best practices to
further advance financial inclusion.
One of the topics that received considerable attention at the UNAG forum was branchless
banking. Governor Dr. Zeti Akhtar Aziz had proposed a regional forum to exchange
experiences and understanding amongst central bankers and financial policy makers on
issues such as institutional structure, regulatory framework and supervision requirements
and the application of technology for promoting access to financial services.
Branchless banking offers the means to provide the full range of financial services such as
payments, deposits, credit and micro-insurance services without the use of physical bank
branches, thus reducing significantly the cost structure. The financial services could be
provided through mobile telecommunications networks or network of non-bank
intermediaries, such as supermarket chains or post offices.
For the purposes of this Forum, I would like to focus my remarks on three key areas. Firstly,
how payment systems technology is supporting branchless banking to improve access to
financial services. Secondly, the policy and regulatory concerns pertaining to branchless
banking. Thirdly, Malaysia's experience in developing a more inclusive financial sector and
supporting branchless banking activities.
Payment systems technology for branchless banking
The most critical enabler of branchless banking relates to the role of payment systems
technology, principally the use of mobile phone as a banking channel and payment device.
The pervasive availability and use of mobile phone around the globe and familiarity amongst
its users makes it a very cost-effective distribution channel to improve accessibility to
financial services to the unbanked and underserved segment of the population. This is
further complemented by the proliferation of payment cards, particularly electronic money,
which enables banking and payment services to be conducted without a bank account or
visits to traditional bank branches. According to data from the Consultative Group to Assist
the Poor, or CGAP, there will be more than 120 mobile money schemes in developing
countries by the end of 2009, more than double the number in 2008. CGAP estimates that by
2012 some 1.7 billion people will have mobile phones but no bank account, and 20 percent
will be using mobile money.
A key challenge, to implement a commercially viable and workable mobile banking solution,
especially where population density is low, is to achieve a critical mass of users required to
reap economies of scale to keep transaction cost low. This is even more relevant if the aim is
also to promote financial inclusion as financial services would have to be offered at
affordable costs. Thus, a requirement for an open and interoperable mobile platform that
facilitates the participation of many service providers and that offers a broad range of
services is critical in developing a sustainable and efficient solution for both providers and
users.
The other type of branchless banking is the use of non-bank financial service providers, also
referred to as Business Correspondents in certain jurisdictions. This approach combines
mobile banking solutions with person-to-person contact, except that the customer is not
engaging with a bank, but rather with a supermarket counter staff, grocery shop owner, post
office or village headman. The elements of trust, Know Your Customer and value-added
advisory services can be more effectively met using this approach, without the corresponding
high investment cost of establishing physical banking branches. Today's forum provides an
excellent opportunity for all of us here to exchange ideas and experiences in these areas.
Policy and regulatory concerns pertaining to branchless banking
Let me now turn to my second point, which is about the policy concerns of regulators in
relation to branchless banking services. The first concern is related to the need to
continuously balance between prudential controls and allowing innovation to flourish within
the financial sector. To site a recent well known example, the events in the US sub-prime
markets and derivative products serve as a good lesson where innovation significantly
outpaced the capacity of the regulatory environment to exercise prudential oversight, and
prevent distress to the financial system.
The environment within which branchless banking will flourish requires a great deal of
innovation in terms of executing transactions, maintaining proper audit controls and ensuring
fraudsters do not take advantage of unsuspecting customers. As regulators we are
particularly concerned where deposits are accepted by non-bank entities, acting in the
capacity of an agent to a financial institution. This is because while financial institutions need
to comply with minimum prudential regulations, such as capital, liquidity and submission of
financial data on a regular basis to the supervisory authorities, non-bank financial service
providers are typically not subject to such requirements, and in the event of financial distress,
depositors may be at risk. In order to address this concern, the regulators need to ensure a
sound regulatory regime which is sufficiently accommodative to balance prudence and
innovation. This not a simple issue, and this Forum has been designed to explore critical
aspects of achieving this fine balance.
A second key policy concern relates to undermining confidence in the payment systems. As
different intermediaries get involved, there is an increase in the risk of losing transaction
integrity, corruption of data or breach of payment settlement terms. The loss of faith in the
safety and security of transactions, in particular payment transactions, can result in
widespread loss of consumer confidence. Another area relates to policies governing
competition as different players position themselves in the branchless banking arena? Issues
such as licensing, pricing, alliances with different financial institutions and compliance with
prudential regulations need to be considered carefully. The public and consumers may lose
confidence if there is no sense of order in how the payment system is evolving, or there is
wide disparity in charges and fess.
There is a need for the major stakeholders to align with some form of regulatory approach or
framework which would provide a basis for assessing risks, and to implement regulations
that are proportionate to the risks identified. In this Forum, some of the key elements of such
a regulatory framework will be dealt with, such as Know Your Customer, compliance with
Anti-money Laundering regulations, Consumer Protection and achieving greater levels of
system interoperability amongst service providers. As such, branchless banking will require
an inter-disciplinary approach given the different types of expertise needed to drive this
important agenda.
The third area of policy concern I would like to touch on relates to the issue of accountability
with cross-sector regulatory requirements. There must be clarity over the accountability for
the integrity of transactions, security of information transmitted, adherence to a consistent set
of regulations and proper maintenance of the system. And it is important to note that higher
standards of control will also result in higher costs to the service providers. Cross-sector
policy issues must be resolved, and clear accountability with respect to the operations of the
system must be established. Systems of governance to engage with different legislative
requirements, from capital requirements to anti-money laundering regulations, must be in
place. Players need to have the requisite skills and knowledge to address issues promptly
with different stakeholders, such as customs, immigration, police and international agencies
like Interpol. Even if the non-bank players do not need to directly engage with these issues,
they must have high degree of awareness in order to work effectively with their partner
financial institutions.
Measures taken in Malaysia to develop a more inclusive financial sector
Allow me to now share Malaysia's experience in addressing financial inclusion and
branchless banking. In Malaysia financial inclusion has been a high priority in our national
agenda for many decades. Since the establishment of the Central Bank, there has been a
conscious policy to have an extensive commercial banking branch network across the
country, to ensure the outreach, in particular, to cover the non-urban areas. Malaysia now
has 10.2 branches for every 100,000 individuals as opposed to the global median of 8.4
branches for every 100,000 individuals. In Malaysia, more than 80% of the population also
have some form of savings account. This has also contributed to the financialisation of
savings in the country. Deposits as a percentage of gross domestic product is 180%. This
means that savings is mobilised even from small savers into the formal financial system. This
allows the savings to be channelled to productive economic activity.
To further drive the provision of basic financial services to the underserved, the National
Savings Bank in Malaysia has been mandated in 2006 to enhance the outreach of deposit
services and micro-financing. Their efforts, together with those of commercial banking
institutions and government mandated micro-financing agencies, have resulted in a
significant expansion of micro-financing. Micro-financing has increased from RM151 million
in 2000 to RM2.2 billion in September 2009, representing an annual average growth rate of
34%.
The Bank also reviewed its existing legislation, and this year the new Central Bank Act of
Malaysia 2009 came into effect a week ago, on 25 November 2009. One of the changes
introduced as part of clarifying the mandate of the Bank was to explicitly articulate the Bank's
developmental role in having a more inclusive financial sector.
Let me briefly summarise the initiatives taken by Bank Negara Malaysia which are supportive
of branchless banking activities. Given the extensive network of physical branches and ATMs
in the country, branchless banking has not yet experienced significant take up. Nonetheless,
the use of e-money for tolls and parking bays has increased significantly, and a number of
operators are seeking to expand the market.
In terms of addressing the policy concerns, measures were taken to put in place the payment
infrastructure, promote a broad product range to cater for the different payment needs of
consumers and business sectors and the formulation of a transparent and cost-effective
pricing framework to provide the incentive structure that would spur the adoption of electronic
means of payments. Another important measure relates to the setting of common standards
to address the interoperability of systems including standardising the payment messaging
format to enable the wider acceptance of electronic payments. Finally is the need to ensure
the security and integrity of the payment system which requires the supporting regulatory and
legal framework to be in place. The Payment Systems Act, the E-money Guideline issued by
Bank Negara Malaysia and the Exchange Control Act rules for cross-border remittances
serve as the main regulation in this area.
In addition to e-payment channels and e-money as a mode for pursuing the financial
inclusion agenda, there holds much promise in the usage of agents or non-bank
intermediaries to extend the outreach of financial services to the underserved in the Asian
region. In Malaysia, we have facilitated the utilisation of post offices as a delivery channel for
banks to provide simple banking services, including opening of accounts, cheque and cash
deposits, cash withdrawals, funds transfers and remittances, and loan repayments. By
engaging the services of post offices, the banks are able to leverage on the wide dispersion
of post office branches in non-urban areas as well as the communities' familiarity and trust
associated with services offered by post offices. Malaysia's approach in the regulatory
framework for such arrangements places the responsibility the banks to put in place the
necessary safeguards and controls. Such controls include requirements to set transaction
limits, establish sound reporting and monitoring mechanisms, and conduct periodic
assessments towards ensuring that the integrity and quality of financial services provided is
maintained at all times.
In addition, substantive consumer education and protection measures have been
implemented, which would also be applicable broadly to branchless banking related issues.
A specific department known as Consumer and Market Conduct Department was established
in 2006 to spearhead the initiatives. These initiatives included financial education at schools
and for the general public; greater disclosure requirements about the features of financial
products and the associated risks; the Financial Mediation Bureau to provide an avenue for
redress; the Credit Counselling and Debt Management Agency to assist individuals in
financial distress; and a public service centre at the Central Bank and all its branches to
provide information and advice. The market conduct regulations also give the regulator
powers to oversee fees and charges to ensure the quantum is reasonable for the services
provided. These measures are broad enough to provide consumer protection in relation to
branchless banking in general terms. However, they may be less effective in addressing
some of the unique aspects of branchless banking, such as disputes with non-bank agents
located in remote or rural locations. Perhaps this forum could consider some of these
aspects.
Collaboration in terms of sharing best practices, standards and regulations would reduce the
cost as well as expedite the development of more inclusive financial sectors. We need to be
mindful of the fact that for effective collaboration to take place, we must have common goals
to bind our work. In this case, that common goal is the development of more inclusive
financial sectors, by making available a broad range of financial services to the poor and
micro enterprise segments of society and the economy, as well as those living in remote
areas.
Before I conclude, let me again stress that the development of more inclusive financial
sectors is an important objective, and as policymakers we need to pursue this without
compromising on the prudential standards that sustain confidence in the financial system.
Branchless banking has tremendous potential to increase the outreach of financial services
provided the different players and regulators are able to work within common regulatory
framework. And finally that we must adopt a collaborative stance in pursuing this important
global agenda which can make a real difference for the millions of people that remain caught
in poverty.
On behalf of Bank Negara Malaysia I would also like to thank our principal facilitators for the
workshop from the Consultative Group to Assist the Poor, the subject matter experts from
World Bank, the representatives from Maxis Communications Malaysia and Global Exchange
of Philippines, and the representative from Group Speciale Mobile Association who joins us
from London. I also welcome the participation of the Alliance for Financial Inclusion in this
Forum, and we look forward to working with all of you on developing more inclusive financial
sectors in the Asian region. Finally, I would like to thank all the participants who have come
in from all over Asia to support this Forum. I wish you a fruitful forum and hope that you will
form valuable professional relationships during this event.