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2013/SFOM11/WKSP/010 Session 3

Legal and Regulatory Framework to support Financial Inclusion and Infrastructure

Submitted by: World Bank

Workshop on Financial InclusionManado, Indonesia

23-24 May 2013

Legal and Regulatory Framework to support Financial Inclusion and Infrastructure

www.worldbank.org/financialinclusion www.worldbank.org/paymentsystems

Massimo Cirasino, Manager, Financial Infrastructure and Remittances May 24, 2013 APEC Workshop on Financial Inclusion, Manado, Indonesia

Financial Inclusion : universal access for individuals and SMEs, at a reasonable cost, to a wide range of financial services, provided by

responsible and sustainable institutions

INDIVIDUALS/MICRO-ENTERPRISES SMALL AND MEDIUM ENTERPRISES

Credit • Consumption smoothing • Investment in human development

(health, education etc.)

• Financing for working capital and for investment

• From financial institutions or through supply chain

Savings • Cushion in case of shocks • Low risk source of self-financing

• Firms rely primarily on retained earnings (savings) for financing

Insurance • Risk management tool for managing shocks

• Lowers risk of business activity

Payments • Electronic/innovative retail payments, Government payments (including Benefits Transfers) and remittances

• Firms rely on payments for efficient, low cost, safe transactions

• Positive correlation for credit for SMEs/firms but more mixed results for individuals/households.

• Impact of other financial services likely positive for both individuals and firms but more systematic evidence needs to be gathered – clearest positive link is for savings

• Further research needed to establish causality on poverty and growth

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Governments can accelerate FI through G2P payments: • Only 25% of LICs process cash transfers and social

benefits electronically • Challenges to making payments electronically include:

delivery mechanisms, account opening restrictions, financial literacy/consumer protection

Brazil: Financial Inclusion Enabling Framework

Government/Regulator actions were informed by survey data and analysis, and included:

• correspondent banking (use of agents) was permitted

• banks were encouraged to provide simplified current & savings accounts

• call centers for consumer protection were introduced

This led to a dramatic expansion of financial service access points, with every municipality now covered.

Bolsa Familia grant delivery (Brazil) • cash payments converted to electronic

payments (significant cost savings) • cash transfers of less than $45 to 12.4m

recipients

Before After

82% cost

reduction

2.6% 14.7%

Regulatory reforms can stimulate FI: • Prioritized and sequenced reforms, informed by

data and diagnostics • Reforms can cover: non-bank financial institutions,

insurance, consumer protection, microfinance, factoring, payment systems, credit reporting…

Public Sector: enabling legal framework/infrastructure, transactions volume

Private Sector: innovation, investment, financial service delivery

[Cost of delivery as % of total]

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Consumers able to access and benefit from

Financial Services

Financial Consumer Protection

Regulatory Framework & Enforcement, Market

Conduct

Access to Financial Services

Knowledge & Actions only effective if suitable

financial services are available

Awareness, Information- availability

Dependent on Disclosure, Business

Practices, Transparency

Financial Capability

Knowledge (Literacy), Attitudes, Skills,

Behaviors

• Access to finance alone does not necessarily lead to beneficial usage. • Consumers need to have the knowledge and confidence to be able to take advantage of improved

access to financial services, and to be protected from misconduct and fraud.

Financial Consumer Protection & Financial Capability critical for fast and beneficial growth in FI

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Transformational change is now possible

• New country data available across countries: Global Findex, Global Payments Systems Survey, Financial Consumer Protection & Literacy Surveys

• G20 Financial Inclusion Indicators

Increasing data availability

for evidence-based policy making

• Payments systems in place

• Mobile phones widely available

• Banking correspondents enabled by Points of Sale, regulations

• Credit Reporting Systems improved

Focus on policy, regulations and

financial infrastructure to accelerate private

sector innovation, investment

• G20 priority since 2008

• WB engagement with Standard Setting Bodies

• Alliance for Financial Inclusion (AFI) - network of regulators and other agencies from over 80 countries

• 38 country commitments to improve Financial Inclusion

Global consensus on the importance of FI leading to country

commitments to action

Conditions in place for rapid improvements

in Financial Inclusion

New Business Models now

viable

Conditions in place for rapid improvements

in Financial Inclusion

New Business Models now

viable

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Financial Inclusion Strategy: Public Sector actions

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Public Sector Actions to promote Financial Inclusion

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POLICIES AND REFORMS PROMOTING FINANCIAL INCLUSION

REGULATORY &

SUPERVISORY

REFORMS

Introduction of low income bank accounts

Competition Framework, Bank/NBFI licensing

Consumer Protection Frameworks, Dispute Resolution Systems

Regulatory & Supervisory Frameworks for

Micro/SME finance, Factoring, Leasing, Microinsurance...

Enable use of agent networks for delivery of FS

Legal framework for electronic payments, including e-signature law

Proportionate regulation/supervision of non-bank deposit-taking FIs

FINANCIAL

INFRASTRUCTURE

Collateral Frameworks: Movable Collateral Registries, Collateral Law

Credit Information/Reporting Framework

Payments Systems Development

ID schemes to facilitate bank account opening and financial transactions

Appropriate accounting and auditing requirements for SMEs

PUBLIC INTERVENTIONS

Partial Credit Guarantee Schemes

Apex Facilities

Financial Awareness, Market Transparency

G2P Payments, CCTs – linked to financial accounts

Platforms to expand access to supply chain finance for MSMEs

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Regulatory Framework to Promote Financial Eligibility of Poor Households and SMEs

Three Illustrative Examples

Leasing

Mobile Money

Credit Reporting

Clarify rights and responsibilities of

the parties to a lease

Remove contradictions

within the existing

legislation

Create non-judicial

repossession mechanisms

Ensure tax rules are clear and

neutral

Clarify the rights of lessors and lessees under bankruptcy.

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A legislative framework for leasing should

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Regulatory and Supervisory Frameworks Enabling Regulatory Frameworks for Alternative SME Finance

Products: Leasing

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A conceptual framework for mobile money

Mobile money is a confluence of three independent innovations, two

of them already well-established retail payments concepts:

E-Money – Prepaid Payment Product where the underlying funds are stored on a

device (e.g. chip card), or in the system of the issuer (e.g. PayPal) which is then

accessed through various channels – for example using a card or at the internet

etc. In some jurisdictions the issuer need not be a bank, as the product is not

deemed to be a deposit product. <<Europe and many countries have had this

for at least a decade>>

Rapid spread of mobile telephony (incidentally mostly using prepaid connections

as opposed to post paid), coupled with inherent capability to exchange data and

basic computing capability. <<This is akin to the development of internet as a

channel for exchange of payment information>>

Concept of business correspondents/agents – leveraging existing

businesses/shops as a channel to offer payment services using their own

cash/flow, leveraging technology like those developed for card payments at the

point of sale. <<Brazil introduced this many years ago>>

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World Bank-CPSS General Principles for International Remittance Services – A valid framework for Mobile Money as well

GP 1: Transparency & consumer protection

The market for remittance services should be transparent and have adequate consumer

protection

GP 2: Payment system infrastructure

Improvements to payment system infrastructure that have the potential to increase the

efficiency of remittance services should be encouraged

GP 3: Legal & regulatory environment

Remittance services should be supported by a sound, predictable, non-discriminatory

and proportionate legal and regulatory framework

GP 4: Market structure and competition

Competitive market conditions, including appropriate access to domestic payments

infrastructure, should be fostered in the remittance industry

GP 5: Governance & risk management

Remittance services should be supported by appropriate governance and risk

management practices

Responsibility of Remittance Service Providers to support implementation

Responsibility of regulators and public authorities to ensure implementation

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World Bank General Principles for Credit Reporting Systems : leveraging credit information for responsible finance for households

and SMEs

GP1: Credit Reporting systems should have relevant, accurate, timely and sufficient

data –including positive- collected on a systematic basis from all reliable,

appropriate and available sources and should retain this information for a

sufficient amount of time

GP2: Credit Reporting systems should have rigorous standards of security and

reliability and be efficient

GP3: The governance arrangements of credit reporting service providers should

ensure accountability, transparency and effectiveness in managing risks

associated with the business and fair access to the information by the users

GP4: The overall legal and regulatory framework for credit reporting should be

clear, non predictable, non discriminatory, proportionate and supportive of

consumers rights. The legal and regulatory framework should include effective

judicial or extra-judicial dispute resolution mechanisms

GP5: Cross-border data transfers should be facilitated, where appropriate,

provided that adequate requirements are in place

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World Bank General Principles for Credit Reporting Systems : leveraging credit information for responsible finance for households

and SMEs: main areas to be covered

Element Description Definitions Interpretation of certain terms related to credit

reporting

Establishment

Applicable law Define scope and limit liabilities including cases

where more than one jurisdiction is involved

Entry requirements Criteria to provide the service such as licensing,

registering, technological capacity, staff skills

and reputation Exit measures Criteria to ensure continuity of the service

Data collection Scope of data (including type of participants,

negative or positive information, publicly

available information and method of

contribution) Permissible purpose Defines the restriction to access information

regarding purpose and users Confidentiality Provide criteria to use information

Use of information Defines controls for adequate use of information

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World Bank General Principles for Credit Reporting Systems : leveraging credit information for responsible finance for households

and SMEs: main areas to be covered

Element Description

Definitions Interpretation of certain terms related to credit reporting

Operation

Data Quality Lawful and fairness, accuracy, up to date

and completeness of data Security Design criteria to ensure protection

against data breaches, data loss and data corruption

Obsolescence Time and calculation method for data to

be distributed

Compliance

Enforcement Ensure compliance with law and

regulation Dispute Settlement Mechanisms and procedures to dispute

settlement including limitation of liability

and libel actions Oversight Attribution of the role to specific capable

authority and definition of scope