Financial inclusion moves to centre stage as world grapples with recovery

Stringent regulation has potential to strangle growth—Deloitte expert

South Africa and other developing countries can lead the world in a discussion about financial inclusion, specifically improving access to financial services to the poor, as developed countries in Europe and the United States grapple with recovery from the global financial crisis. At the same time, banking regulators in Africa must be careful not to tighten regulation to a point that it strangles growth as banks struggle to finance infrastructure development on the continent.

This is according to Chris Harvey, the United Kingdom based head of Global Financial Services Institutions at Deloitte, who spoke to journalists at a round table in Johannesburg following the recent World Economic Forum, held in Davos, Switzerland.

Harvey says social inclusion, specifically financial inclusion, emerged as an important topic of discussion at the forum, which was attended by heads of state, including President Jacob Zuma, and business leaders from around the world, including South African banking executives.

“Developing countries also have inclusion challenges, such as how to cater for the millions of unbanked people” says Harvey. South Africa made financial inclusion one of the pillars of the Financial Services Charter, which was first adopted in 2004. The charter had a target of bringing a financial service facility with a 20 km radius of every South African. At one point, South Africa had an estimated unbanked population of 13 million, or two out of five adults. South Africa responded by launching the Mzansi account, pioneered by the four major banks and the South African Post Office and drew in millions into the banking system.

In South Africa and elsewhere in the developing world, technology has since changed the discussion on access to financial services on its head. That is because mobile technology has now facilitated various methods of payment and money transfer, while cellphone banking and shopping till based withdrawal has eliminated the need for a bricks and mortar branch.

Anushuya Gounden, the head of the Africa Desk at Deloitte says technology has facilitated a cheaper and quicker transfer of remittances, or payments to family and relatives in a different country, which now account for a significant portion of foreign direct investment into Africa.

Harvey also warns against the “unintended consequences” of regulation that African governments must guard against as they look to finance development, especially in infrastructure. He points to instances where regulators have gone to untenable extremes in response to the financial crisis.

He cites the example of Switzerland, where banks are now required to hold 19% reserves in Tier 1 capital. “This makes it difficult for banks to play their role in stimulating the economy,” says Harvey. That is because banks have less money available to lend when they have to hold a higher proportion of capital in reserves. Harvey says the European Union guidelines of holding 10% of reserves as Tier 1 capital is more prudent and balanced.

South Africa is among a handful of countries, such as Australia, Canada, Chile and Peru, that managed to avoid a banking crisis because of prudent regulation. Harvey notes the difference in mood between banking executives in the developing world and their counterparts in the developing world.

“Bankers in developing countries are thinking about growth,” he says, noting that their primary concern is how best to pursue the opportunities it presents. This contrasts sharply with bankers in the Western world who, he says, are in “the throes of compliance and restructuring” as part of recovery from the financial crisis.

Harvey says the experience of the past twenty years has shown that the likelihood of a foreign bank coming into a market like South Africa or other parts of Africa and becoming dominant has receded. This means that the best way for a foreign bank to enter the market is through a partnership with a local bank, or even an outright purchase of equity.

Harvey concludes by noting that for the first time since the outbreak of the financial crisis and the recession that it sparked, the “gloomy time” and mood of pessimism is lifting from the secluded resort in the Swiss Alps where the World Economic Forum is held.