3.9 Attract retail remittances through innovative methods: The denial of access to the retail payment system was also seen in small-scale cross border transfers. Bank and nonbank financial institutions and money transfer agents use their own costly and proprietary instruments for remittance transfers. The inability or inaccessibility to use the full potential of the formal remittance infrastructure has resulted in the mushrooming of popular informal systems, such as “Hawala” and “Undial”, with a significant loss of foreign exchange to the banking system and perhaps to the entire country, indicating the loss of opportunities due to the inheritance of ad hoc retail payment systems. Penetrating successfully into this critical area of business is a challenge, but there are plenty of opportunities for banks. The “Padala” system in the Philippines and the agency banking system through mobile telephones introduced recently in Sri Lanka are examples of success stories. In the Philippines, telecom companies offer remittance services through mobile phones and e-money, i.e. stored value. The sender pays cash to one of the service providers, who sends a secure text message to  4  BIS Review 61/2008  the mobile phone of the receiver in the country. The “last mile” of service is provided by banks and financial institutions, the postal network or their agents or representatives. If remittances can be channeled through a single low-value bulk payment mechanism, the cost per transaction could be reduced. Once domestic connectivities are upgraded, they can be extended to cross border retail payment systems by ensuring safe and efficient remittance transfers.

While the efficient functioning of the financial system was vital for the economic recovery in Asia, more important was the comprehensive set of policies that produced the recovery. Within a year of the introduction of the pro-growth measures, most of the crisis affected economies experienced a strong recovery. More recently, the global financial crisis has seen several rounds of wide ranging direct market interventions to restore the smooth functioning of these markets. Described as actions taken in the most extraordinary and exceptional circumstances, it demonstrates that this phenomenon of severe market dislocations has the potential to occur even in the most developed of the financial systems. As these massive interventions continue, primarily in the public and private securities markets, the concern is on its potential consequences on other parts of the world, in particular, to the emerging world. In the now more interconnected and interdependent world, these actions are already creating significant shifts in capital flows. Important for the emerging world is the ability to intermediate such surges in capital flows and to manage the risks associated with such liquidity inflows and its potential to undermine the current recovery. A further element that has frequently been underestimated is the role of behaviour which has had a major influence on the dynamics of the financial markets. Extreme forms of such behaviour are evident in asset and foreign exchange markets. While the former is prone to boom and bust, the latter is prone to overshooting.