A decade ago, the finance ministers of the Asia-Pacific region established the Asia-Pacific Financial Inclusion Forum (APFIF) to identify policies and regulations that could expand the reach of financial services to the underserved, especially those at the base of the economy. Since its establishment in 2010, APFIF has contributed to policy reform and capacity building across APEC economies on a range of financial inclusion themes such as financial literacy, remittances, supply chain financing, consumer protection, and credit information systems.
APFIF has just released its latest recommendations report, this time focusing on policy and regulatory responses to the devastating impact the COVID-19 pandemic has had on low-income households and the financial institutions that serve them. The report points out that governments in developing countries have mainly responded to the pandemic by supporting the formal sector, with much less support for informal sector workers who make up the vast majority of their populations.
The report calls for recognizing microfinance providers as essential services and ensuring they have sufficient liquidity to maintain their operations. At the same time, acknowledging that their clients need repayment moratoriums and other relief, it recommends temporarily easing prudential regulatory requirements––with clear rules for re-establishing the pre-crisis status once the effects of the pandemic wane.
Such emergency support makes up only a small portion of APFIF’s recommendations. Most of the recommendations promote long-term structural change. The rationale for these recommendations is that “Governments should actively seek opportunities to rebuild the microfinance sector in ways that enhance its effectiveness in serving the base of the economy”.
However, these long-term recommendations focus almost exclusively on a single solution: promoting digital financial services (DFS). The crux of the argument is that the lockdowns and social distancing requirements severely curtailed normal transactions, and that DFS is necessary to ensure that clients have continuous accesses to financial services, even in a crisis.
The emphasis on DFS is not surprising. Like the rest of the industry, APFIF sees opportunity in the digital revolution and has been developing recommendations for policymakers and regulators on data use and analysis, innovative technologies such as blockchain, digitizing micro merchants and creating effective digital ecosystems enabling participation of individuals and enterprises at the base of the economy.
Still, the fact of the matter is that the industry and its stakeholders, including high-powered organizations like APFIF, have been promoting DFS for more than a decade and yet the “digital revolution” has still not arrived.
To put things into perspective, the modern approach to microfinance was developed in the early 1990s, and before the end of that decade it was being successfully replicated and adapted to country contexts around the world. Although DFS has had a similar time to mature and received substantial financial assistance from development agencies during that time, no model or app exists that has been both readily adopted by low-income clients and adaptable to different country and market contexts.
ACCESS Advisory also recognizes the potential in DFS. However, it has consistently taken the position that the expectation that DFS will revolutionize financial inclusion is hopelessly techno-utopian. Our view is that technology does not solve problems––it helps people solve problems. As long as the thrust of DFS remains focused on replacing staff and client interactions and decision-making with machine learning, the result will either be disappointing or, worse, perverse.
We will be discussing our position on DFS in coming blog posts. For now, you can read the 2020 APFIF recommendations report here:
https://www2.abaconline.org/assets/2020_APFIF_FINAL_REPORT_1.pdf