Muhammad bin Ibrahim: Innovative financial inclusion
Opening remarks by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the Global Symposium on Innovative Financial Inclusion, Kuala
Lumpur, 21 September 2016.
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While the global economy is still recovering from the Global Financial Crisis, the focus on
boosting global growth has never eclipsed the financial inclusion agenda. In fact,
policymakers continue to recognise the importance of financial inclusion and have accorded
it as a global priority to address the widening income inequality gap, to promote the
economic empowerment and protection of low income households and SMEs and to unlock
the growth potential of the fast-expanding middle class population. Expanded opportunities to
save securely, to invest in productive activities and to protect against unforeseen shocks,
would meet the needs of the underserved. This would drive domestic demand, a key engine
of growth for many economies. Between 2011 and 2014, the World Bank estimates that 500
million people have gained access to formal financial services for the first time. If our efforts
continue, we are on our way to assisting the remaining 2 billion adults that remain financially
excluded.
A succession of technology breakthroughs combined with the ubiquity of mobile devices
present significant opportunities to scale up financial inclusion to an unprecedented level.
Beyond the socio-economic demands, there is a moral obligation for us to do more to help
the millions who are still living in abject poverty and highly vulnerable to financial hardship,
with no means to change their circumstances.
This global symposium presents an opportunity for us to explore solutions from different
perspectives.
I see this as having "an eye for innovation". Indeed policy makers are now improving their
capabilities in technology and innovation, recruiting talent, establishing dedicated team and
intensifying partnership with the private sector, to help them see things a little differently.
While there is no shortage of ideas on new and innovative ways to increase financial
inclusion, the key challenge to my mind is the ability to scale up and achieve sustainability.
The symposium's theme refers to "harnessing innovation", but one needs to truly understand
innovation in order to successfully tap on such innovation to attain the dual objectives of
scale and sustainability in inclusive finance.
With that in view, my remarks this morning will focus on three areas where an eye for
innovation is needed:
a. First, putting on a new lens to spot the opportunities from existing innovations that
can be tailored to financial inclusion;
b. Second, identifying and working on our blind spots by driving efficiency gains with
technology-enabled financial inclusion; and
c. Third, having a clear picture of the policymakers' role in promoting an enabling
environment for financial innovation and technology.
Putting on a new lens: Exploiting mainstream innovations with a financial inclusion
focus
Today, financial innovations have penetrated, and continue to permeate almost every aspect
of financial activity. This has been driven by faster computing speed, lower cost of storage
and faster problem-solving capabilities.
Technology is being used by financial institutions to improve operations - from improving
customer experience to constructing better models to manage risks more efficiently and
effectively. In many cases, strategic partnerships with fintech companies have been
established to achieve similar outcomes. The advent of robo-advisers and algorithmic
underwriting are some of the examples.
These developments have largely evolved within the mainstream customer segments and
have proven to be effective. Clearly, opportunities exist to leverage on capabilities that are
already in place to create specific applications for financial inclusion. With proven application,
the prospects for achieving greater scalability, faster time to market and increased take-up
are correspondingly greater.
For years, financial institutions have invested heavily in technology that has helped improve
the collection and mining of financial and non-financial data to gain richer insights into
customer preferences and behaviours. These same capabilities create immediate
opportunities to identify specific barriers to financial inclusion for different target groups
whose needs are shaped by very different priorities, experiences, values and norms. For
example, cultural biases can be an important factor that is not fully appreciated and
understood as a factor that limits higher levels of financial inclusion among women. Among
lower income groups, a more granular level of analysis on income patterns is needed to
structure solutions that address the irregularity in loan repayments.
Financial inclusion for the ageing population is another critical area that requires more
understanding. It is important that new products, delivery channels and technologies also
work well for our senior citizens that are financially excluded. Many financial products and
services offered today have age limits that create barriers to access financial services. This
ought to be changed to ensure inclusive financial systems for the ageing population
segment. Technologies that enable better data collection and analytics can support deeper
research to fill this gap while mitigating the risks to providers of financial solutions.
Beyond data applications, opportunities exist in other areas. For example, distributed ledger
technology eliminates the need for centralised transaction validation and shortens the
settlement chain, effectively lowering costs of real-time remittances. By incorporating
adequate Know-Your-Customer (KYC) requirements, distributed ledger has the potential to
address de-risking. Robo-advisers could potentially be adapted to increase financial literacy
and support customers in less accessible locations. The adoption of open Application
Interfaces (API) facilitates a sharing environment whereby improvements build on existing
innovations could shorten the time to market for more offerings.
These are just a hint of many more examples that can be examined. What is needed is a
rethinking of today's most promising financial innovations for applications and new gains in
financial inclusion. Or to put it another way, we need to look at not just innovative financial
inclusion, but inclusive financial innovation!
Identifying and working on our blind spots: driving efficiency gains to promote
sustainable financial inclusion
The reduction of poverty and greater social empowerment through financial inclusion has
been one of most enduring achievements of our era. Building on this momentum, our
ambitions to pursue deeper financial inclusion over the next decade must be rooted in a deep
understanding of the unique circumstances faced by the 2 billion people who remain
excluded from the formal financial sector. This involves increasing the arsenal of financial
inclusion tools that can overcome both the geographical and cultural barriers to deliver
meaningful financial services to this segment.
Ultimately, the provision of financial services to the underserved and unbanked must be
economically viable for providers. In this aspect, the smart usage of technology can be a
game changer in lowering the cost of financial intermediation.
This in turn will unlock opportunities to progress from the single, narrowly-focused products
which are typically offered by traditional financial institutions today, to a broader range of
relevant products and services tailored for the underserved segments. The ability to clearly
demonstrate and consistently track efficiency gains over time can attract more providers into
this space, while driving continuous efficiency improvements in delivering financial services
to the underserved.
Great strides have been made in developing better measures of financial inclusion. We have
moved beyond measuring access, to including measures of the usage and quality of financial
inclusion services. We need to go further to include measurement on how efficiently we are
increasing financial inclusion. Such measures do not exist widely, if at all, and have yet to be
systematically propagated. This blind spot ignores one of the most important aspects of
innovative strategies for financial inclusion, which is the potential to drive down the costs of
delivering financial inclusion initiatives. A framework for evaluating financial inclusion
efficiency can provide powerful incentives to harness technology in the most optimal way.
This should drive lower the costs of delivering inclusive financial services over time, and
thereby enhance the viability for both Governments and private actors.
Sustainability also calls for the strengthening of financial institutions that provide services to
low-income and vulnerable groups. The misconduct or underperformance of such institutions
can have a disproportionate impact on the poor simply because they have lower buffers. It
can also significantly set back financial inclusion efforts by further entrenching the mistrust of
formal financial institutions. It is therefore, critical for such institutions to exemplify strong and
socially responsible corporate governance, and to have the appropriate technical expertise
that will enable them to expand product offerings, increase outreach and develop alternative
delivery channels. They must also be adept at identifying and managing financial and
operational risks inherent in their business models. This requires investments in systems and
in the development of talent with deep knowledge within the institutions.
Only then, can financial institutions expect to support the low income and vulnerable
segments of our communities as long-term partners to create opportunities that will improve
lives.
A clear picture of policymakers' role in promoting an enabling environment for
financial innovation and technology
Finally, policymakers can play a meaningful role to promote an enabling environment for
innovation to support financial inclusion initiatives. I shall focus on three areas.
First, regulation should aim to be technology-neutral and outcome-focused, proportionate to
risks and harmonized across sectors. A technology-neutral approach allows policymakers to
assess the merits of innovations based on the outcomes, without fear or favour for the
underlying technology. Regulation should be proportionate to the risks that products or
institutions present to the broader financial system. This requires continued efforts to
strengthen the capacity among national regulators and supervisors to assess the benefits
and cost of regulation. Only then can we really move from proportionality as a concept to
practice. Regulation between different sectors should also be harmonised to focus on
activities that should be regulated, rather than the institutions conducting such activities. For
example, if an e-commerce platform collects, pays interest on and mobilises deposits, a
banking license may be necessary as public interest is involved.
Second, communicating clear expectations to the market while incorporating feedbacks
through engagements with the private sector is important. Countries such as Australia, Hong
Kong, the UAE, the UK, Singapore, and Malaysia have issued discussion papers, introducing
a sandbox approach which allows fintech solutions to be tested in a controlled environment,
with appropriate risk mitigation in place.
Dedicated resources have been allocated to collaborate with private sector innovators and
assess the feasibility of technology. Jointly, these efforts serve to build public-private
consensus on how to deploy financial technology, by:
a. Conveying national-level support for fintech innovations that place the customer
firmly at the centre;
b. Providing clarity to the public on the applicability of regulations to fintech solutions;
and
c. Supporting regulators and supervisors in understanding how underlying
technologies function, as well as the benefits and risks.
Third, it is important to address the role of Governments in national financial inclusion
strategies. This is particularly relevant in encouraging e-payments as a key lever to expand
the outreach of formal financial services. A clear commitment by Governments can secure
the political capital needed to create the infrastructure and policies to accelerate financial
inclusion such as unique identifiers and mandatory electronic G2P payments. Policymakers
should also seek opportunities to promote the interoperability of supporting infrastructure for
new financial innovations. This will preserve healthy competition and strong incentives for
providers to continue innovating value-add solutions that meet the real needs of consumers.
More often than not, small changes lead to major breakthroughs, if approached with an open
mind and shared interests between providers and policymakers to genuinely serve the best
interests of the unserved segments of society. In Malaysia, the agent banking initiative was
an experiment in policymaking and regulation that has proved to be highly successful in both
protecting the integrity of financial transactions, while significantly increasing financial
inclusion. The agent banking initiative leveraged on existing high-volume touch points such
as sundry shops, petrol stations and post offices to reach the rural population and perform
basic banking transactions on behalf of financial institutions.
The technology involved was hardly state-of-the-art, relying on POS terminals with real time
connectivity, to back-end system of banks as well biometric identification, to meet the
KnowYour-Customer requirements. Yet, it has enabled 99% of Malaysians, particularly those in
rural areas, to conveniently access financial services, while saving up to 80% of costs in
building brick-and-mortar bank branches.
In February 2016, Bank Negara Malaysia also facilitated the implementation of the
Investment Account Platform (IAP) which expands opportunities for retail and institutional
investors to finance viable SME ventures more efficiently in a Syariah-compliant manner.
Again, this was only possible because of technology.
Conclusion
This symposium is the inaugural gathering of public sector regulators, private sector
innovators and funders that is specifically focused on how financial innovation can support
financial inclusion. In its own way, this symposium sets out to disrupt the ordinary in order to
achieve the extraordinary; invoke curiosity to inspire creativity; and challenge the
conventional to embrace novelty.
With open minds and thoughtful exchanges, the next two days present an excellent
opportunity to generate a critical mass of ideas that form the foundation for new strategic
partnerships to be built, and existing ones strengthened. The time is now to deliver on the
financial inclusion promise to the 2 billion unbanked and vulnerable people who continue to
live in the most challenging financial circumstances. With an "eye for innovation", I am certain
we can spot the opportunities that will deliver that promise.