Research Paper on Financial Inclusion by the Banking Sector
Hence, view that being “banked” is more than just about the possession of a armor banking product, more critically it is about the consumers’ ability to engage the financial system and develop a transactional profile that will ultimately assist in their ability to access credit and generate long term wealth [Banknote ALP Team, October 2012]. The Financial Services Charter defines being not banked as not having access to any financial products that are on offer from the banking institutions, whilst it defines being under-banked as having access to a limited number of products available from the banking sector.
The purpose of this study is to explore what vehicles are available for use by he banking sector so that it can expand its services to those who are not banked and to those who are under-banked. The primary mode of research used in this study was secondary data which is available electronically (or desktop research). There were a few interviews conducted to industry experts, especially those who are directly involved with financial inclusion at their respective banks.
The limitations of this research included unemployed young people as it is reasonably presumed that they are not financially excluded but rather economically inactive. Other limitations of this research included illegal immigrants because it can also be reasonably presumed that the law precludes them from being economically active (at least legally) and that it is beyond the control of the respective financial institutions. The scope of this research did stretch so forth as to include unemployed adults, as it can be reasonably presumed that they are economically active, except informally.
These are adults are assumed to be economically active because they buy airtime, buy food, and buy other essentials with the little income that they receive. The scope also included unemployed pensioners; particularly those re regular recipients of government grants – the reason for this was that a lot of these pensioners, usually being the sole bread winner, have dependents; who by virtue of this force theses pensioners to participate even more in the economy than they would otherwise would have like to.
There are many reasons for financial exclusion by the banks which will be later explored in this study. Some of the mediums explored in this research for the purpose of including a greater majority Of the population in the “financially included spectrum” included the prevalence of mobile banking in some countries, such as in Kenya. Kenya have a mobile banking platform called Weeps owned by the telecoms giant Safari-com.
The reason for the prevalence of mobile banking is that they are extremely accessible platforms than the usual “bricks and mortar” because of the huge costs involved in setting up these branches whilst a majority of the South African, and even African, have access to handheld cellophanes. If one considers that those that are not in possession of a cellophane have access to it via an immediate family member; then to purport the prominence of these handheld devices is an understatement. Another medium explore in this research included correspondent banking.
Correspondent banking is the formation of a professional relationship services. Table Of Contents 2. Scope Statement 2. 1. Opportunity Project 3. Research Methodology…….. 8 4. Literature Review 4. 1. Financial . 10 4. 2. Banked and under-banked markets -? . Between banks and retailers for the purpose of extending these ban king introduction ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; initiative 8 2. 2. …… 13 4. 3. Challenges in enabling engagement with the formal financial system for the embanked and under-banked 4. . South Africans formal financial star cuter. For serving the lower-income markets ….. -? 18 4. 7. Unpacking the Strokes Grahame …………… 13 . 13 4. 5. Strategies 16 4. 6. The Mains . 19 4. 8. The 0 4. 9. Mobile phone banking for meeting the needs of the unbaked and under-banked…………. 21 4. 10. Correspondent banking arrangements…….. 22 5. Results of research 5. 1 . Secondary (desktop) …. 23 5. 2. Interview research…. … 24 6. Discussion of results. ….. ……. …… 2 6 7. 8. Reference List…. …. … … 28 List of Figures Figure 1: Finances Categorization 1 2 List of Tables Table 1: Banked vs.. Unbaked percent take.. …. 18 1. Introduction The Banking Association of South Africa (BAAS) refers to financial inclusion as having “access and usage Of a broad range Of affordable, quality financial services and products, in a manner convenient to the financially excluded, unbaked and under- banked, in an appropriate but simple and dignified manner with the relevant client protection and financial education”.
The current reality is that approximately 13 million, or a quarter of the total population, remains financially excluded. One of the core contributing factors to this level of exclusion was the systematic efforts of the apartheid regime which sort to limit access to education and therefore social and financial freedom to many South Africans. [Banknote ALP Team, October 2012] A broad range of reasons can be ascertained to reasons for financial exclusion by the banking sector.
These reasons can be split between the potential clients and the banks. The reasons cited by the residents included the following according to a study by the Funfair Trust in 2011 : Affordability: a lot of the residents cited affordability because they just could not empowered the reasons for (what they believed to be) the excessive cost they had to bear for maintaining a relatively dormant account and also for having to pay the huge transactional fees.
Accessibility: some respondents cited that banks were just not within close proximity to their residential areas and that for them to have and maintain bank accounts they would have to extra costs in the form of transportation, which in essence would actually contribute to the fees involved in maintaining a bank account. Awareness: some respondents felt that not enough effort was being put into educating hem about the imperativeness of having a bank and also more importantly the different product on offer which would suit their needs.
Appropriateness: some respondents felt that they did not see the need for having a bank account as they earn very little or no income, but they did see a need for having a convenient method of paying their bills… And such they were not aware of any available products that would offer them such a platform. The reasons cited by the banks for financially excluding customers who fall in the lower-income segment of the population (L SMS 1-5) are the following:
Accessibility: the banks feel that people in the lower-income segments are located in remote areas which makes them unreachable, and that because of their remoteness it would be extremely challenging to penetrate these markets. High setup costs: it is of the opinion of the banks that the costs involved in setting traditional channels for serving these markets far outweigh the probable benefits. Traditional channels include bank branches with human capital and Atoms. High operational costs: Another contributor to the proclaimed high costs is the acquisition cost, I. E. He costs involved in getting ND individual to open an account and maintain. The reason being that a lot of the people in the lower-income segment have little or no regular income which means that their cool_Joints will be relatively dormant. Lack Of collateral: banks will usually require collateral if they are to extend credit and the common form of collateral required is the form physical property, I. E. Residential property. Due to the fact that people in the lower-income segments are rural -based, they usually do not own any residential property which makes them risky clients, and thus not an attractive prospect.
High Isis: an example of the high risks involved in serving the lower-income segment is that Atoms located in remote areas would be prone theft. Regulations: the South African Reserve Bank requires banks to hold a certain minimum amount which is called the Capital Adequacy Ratio (CAR), and the reason for this is to price in for any amount of risk the bank is exposed to. Resulting in banks having to hold more capital if they are serve these markets. It is imperative that new solutions are found for the purposes of greater financial inclusion within the economy at large.
Although these markets may appear unprofitable at first glance, innovative solutions can be used to turn these markets into profitability. The Financial Services Charter, which is a voluntary agreement between amongst South Africans financial institutions, specifically sought out to make the South African financial system more inclusive, by fundamentally improving access to financial services. The Mains initiative launched under the Charter remains the most extensive initiative implemented in South Africa specifically aim at banking the unbaked and increasing financial inclusion.
The Mains account is a low cost entry-level bank account developed by the South African banking industry and launched collaboratively by the four largest commercial banks together with the state-owned Postbags in October 2004 (Bankable Frontier Associates, March 2009). By December 2008, more than 6 million South Africans gained access to the Mains account. In this sense, Mains was a tremendous success as it significantly increased the number of adult South Africans with a bank account.
However, as a vehicle for banking the unbaked, the Mains product was undermined by the significant levels of inactivity evident in the account base. By 2009, almost half 42%) of the total opened accounts at the four private banks were “inactive” according to the Charter definition [Bankable Frontier Associates, March 2009]. Therefore, though low income earners opened the accounts, many did not actually alter their behavior and engage the financial system and many more actually reverted back to utilizing other methods of transacting I. . Cash. The Mains debacle is testament of the importance of matching products to customers’ needs as opposed to a one-size-fits-all approach. Different customers have their own set of needs which can be very profitable if testified. The key to satisfying these markets is maintaining congruency between what the needs of the customers are and ensuring that the satisfaction of these needs is affordable for these customers. 2. 1 .
Opportunity Statement The project will focus on investigating South Africans banking sector and determine how the sector is striving to achieve greater financial inclusion especially to the previously excluded. Specifically, the project will: Investigate efforts to encourage transacting or savings usage to create tangible value for the low income, unbaked client, leveraging the link with tillers. In order to do so, we would need to design a solution which is easily accessible and is priced at the correct level with added solution features that create value in the everyday lives of the Unbaked and under-banked.
The intended result is for the unbaked to switch from informal to formal banking vehicles that are commercially viable for the bank institutions and to increase usage on current inactive entry level accounts. Thereafter, investigate the prevalence of mobile banking platforms. 2. 2 Project Exclusions Social Grant recipients are excluded as there are developments underway to ensure that grants are received through bank accounts. The unemployed are excluded as it is assumed that their requirements to engage with the bank institutions are limited.
Foreigners are excluded on the basis of the high barriers to entry and concerns around strategic relevance and the market view of foreign nationals. 3. Research Methodology have approached my research as follows: Qualitative and Quantitative Research: have prepared structured questions for interviews with well-established bankers for the purpose Of deciphering what really led to such low penetration levels in these markets. This enabled me to conduct an analysis on the outcomes. The interview questions are available on the appendix at the end of the document.
Desktop research: Various resources were solicited as part of my Literature Review to understand the size of the market, the extent of the challenge and possible interventions that have been developed with an aim of bringing the unbaked marketing into the mainstream of the economy, bank strategies and solutions to service the low end of the market. The literature review is divided into the following topics: 4. 1 . Financial inclusion 4. 2. Banked and under-banked markets . 3. Challenges in enabling engagement with the formal financial System for the unbaked and under-banked markets 4. 4. South Africans formal financial structure 4. . Strategies for serving the lower-income markets 4. 6. The Mains initiative 4. 7. Unpacking the Strokes market 4. 8. The crammer Bank 4. 9. Mobile phone banking for meeting the needs of the unbaked and under-banked 4. 10. Correspondent banking arrangements 4. 1. Financial inclusion The Finances survey uses the following broad categorization (depicted in figure A on the next page) to describe financial inclusion. Financial inclusion is defined as “a process that ensures the ease of access, availability and usage of the formal financial system for all members of the economy’ (Karma, 2008, p. ). Financial inclusion is defined as a process that ensures the ease of access, availability and usage of the formal financial system. Ease of access is defined by proxies such as number of bank branches, number of Atoms per 1 000 population, and even transportation costs. Availability and usage are measured by the utilization of bank products and services on offer (Karma, 2008). Banking inclusion (or exclusion) is seen as analogous to financial inclusion (or exclusion) because banks are seen as the most appropriate and well positioned tools for the most basic formal financial services.
The effects of financial exclusions are burdensome for the vast majority, including and especially, the economy at large. ‘The economy at large’ in this instance refers to retailers, manufacturers and the government. There are a number of consequences for financial inclusion, including the following: The lack of efficient financial formal systems makes poor people susceptible to inefficient provisions at high costs (for instance, with high transaction rates, excessively high interest rates on loans or poor returns on savings – thereby entrenching poverty.
Restriction of economic opportunities is also such a consequence, e. G. Capital for entrepreneurial activities. The poor are vulnerable to adverse events (due to a lack of insurance and secure savings products) e. G. Retrenchments at work. The absence of savings products makes it difficult to build up capital. Economic growth is below potential as the level of investment IS reduced. These consequences strongly raise the argument Of minimizing financial exclusion, especially by the banking sector. 4. Unbaked and under-banked markets The South African unbaked and under-banked market of about 13 million low income earners refers to mainly to South Africans who have a need to save or move money on a regular basis, but are not utilizing the formal banking system to do so. The following are broad categories of the unbaked and under-banked segments: Low Income Earners – wages or salary earners Social Grant recipients Unemployed – no regular income Informal Traders and micro-enterprises Foreign Nationals – asylum and migrant workers Cash recipients – People receiving money from others, for e. Family Youth – Pre-labor market One of the critical factors that lead to the drafting of the Financial Services Charter and the improvement of banking access is the accepted recognition that long term wealth creation is primarily driven by the long term appreciation of asset portfolios, specifically stocks, properties and bonds and household’s ability to own such long term assets is intrinsically linked to their ability to access credit. As formal financial institutions rely on customers transactions profile as a key proxy for credit worthiness, access to credit is Hereford highly depend on access to transactional products and solutions.
The ability of the consumers to engage the formal financial system and develop a transactional profile is critical therefore for social transformation. Ultimately assist in their ability to access credit and generate long term wealth. 4. 3. Challenges in enabling engagement with the formal financial system for the unbaked and under-banked markets 4. 3. 1 . Cost of providing access As a result of the lack of infrastructural investment in South African townships and rural towns by the previous government, new infrastructural investment s now required in order make formal financial channels accessible to communities.
