1. Workshop on Financial Inclusion – APEC 2013 23 – 24 May 2013 North Sulawesi- Indonesia

2. Regulatory Framework to Promote Financial Eligibility of Poor Households and SMEs Workshop on Financial Inclusion – APEC 2013 23 – 24 May 2013 North Sulawesi- Indonesia

3. Presentation Outline The Financial Exclusion Problem The Concept of Financial Eligibility Role of Regulation Regulatory Experience of Selected Countries Conclusions

4. An Acute Global Problem Note: According to latest available data, the adult population now is about 5.08 billion Financial Exclusion Figures Billions

5. Asia is home for 59% of the Unbanked Adults An Acute Global Problem Millions

6. MSME’s in Emerging Markets Estimated Number of MSMEs Millions

7. MSME’s in Emerging Markets 85% MSMEs that suffer from credit constraints 70% Do not use financing from financial institutions at all & want it 85% Unserved or underserved MSMEs in East Asia, South Asia, and Sub - Saharan Africa

8. MSME’s in Emerging Markets Many formal SMEs are unserved or under-served 45- 55% of 25 million to 30 million formal SMEs do not have access to formal institutional loans or overdrafts Over a quarter of the formal SMEs do not even have a bank account Estimated credit gap for formal SMEs in East Asia alone is in the range of $250 billion to $310 billion Source: Stein P. et al. (2010). Two Trillion and Counting. Source: IFC and Mckinsey and Company Study (2010)

9. The Financially Excluded are a diverse group disadvantaged and vulnerable groups low income households Poor people without permanent residential address handicapped persons undocumented migrants women-owned SMEs SMEs in rural areas Newly established SMEs A Diverse Group

10. Self –Reported Barriers

11. Financial Eligibility Lower income people and most SMEs are categorized as unbankable partly because they are unable to meet the requirements of banks for account opening, saving or credit. If a SME must submit a tax return to borrow from a bank, those without tax returns are made ineligible. If regulations do not permit financial institutions to accept movable assets as collateral for loans, most SMEs will not be eligible to borrow

12. The Role of Regulation If the regulatory approach is not risk-based, negative impact on the poor A risk-based approach is key to financial inclusion: Taking a Risk-Based Approach to AML/CFT safeguards Simpler KYC norms/CDD measures for small value accounts Flexible type of documentation that are within reach of poor people Applying a “Progressive” or “Tiered” KYC/CDD approach

13. Reserve Bank of India (RBI) regulation in the early 1990s allowed banks to open savings accounts for Self- Help-Groups (SHGs) 60% of the SHGs faced challenges in complying with KYC norms In March 2013, RBI simplified KYC norms for SHGs Verification of all SHG members no longer required For credit access, no separate KYC if verification has already been done for savings account Pro-Poor Regulatory Measures: India

14. AML/CFT regulations authorize banks to open Basic Savings Bank Deposit Account (BSBDA) without normal identification documentation Only customer’s signature or thumb print and a self- attested photo is needed BSBDAs as of 31 Dec 2012-171.43 million

15. Pro-Poor Regulatory Measures: Philippines Central Bank regulations relaxed identification document requirements Allowed banks to accept documents that are within reach of poor people Barangay certification or certification of a local leader is accepted as proof of identification and residence

16. Pro-Poor Regulatory Measures: Philippines Philippines required SMEs to provide tax return and audited financial statement Most SMEs financially ineligible In early 2012, Central Bank exempted small enterprises from these requirements increasing financial eligibility of the SMEs

17. Pro-Poor Regulatory Measures: Fiji Identification document can be provided by a “suitable referee” Suitable referees include village headmen, religious leader; and Official of the Fiji Sugar Corporation sector office [for sugar cane farmers and laborers]

18. Pro-Poor Regulatory Measures: South Africa Regulation provides for a form of simplified CDD for products meeting specific requirements No need for the verification of residential address This exemption enabled banks to launch the Mzansi account

19. Pro-Poor Regulatory Measures: Mexico The Transparency Law of 2007 made it mandatory for banks to offer a fee-less basic deposit product Financial authorities (CNBV, SHCP and Banxico) joined efforts to identify regulatory barriers to financial inclusion Major barrier identified was the undifferentiated implementation of KYC requirements

20. Pro-Poor Regulatory Measures: Mexico In 2011, Mexico reformed its legal framework for AML/CFT Established a system that divides bank accounts into four levels Introduced simplified KYC and CDD requirements for account opening that are tiered in line with risk levels By July 2012, the number of level 1-3 bank accounts reached a total of 9.4 million

21. FATF and pro-Poor Regulations FATF recommendations strongly support adoption of RBA to AML/CFT safeguards Revised FATF recommendations allow for simplified CDD measures with a lower risk of ML and TF FATF encourages regulators to consider applying “Progressive” or “Tiered” approach to KYC/CDD FATF Recommendations provide adequate flexibility for pro-poor regulation But some countries are yet to take advantage of this flexibility

22. SSB’s New Outlook on Financial Inclusion Since the call from G20 Leaders in 2010 for Standard Setting Bodies (SSBs) to find ways to promote financial inclusion significant progress has been to make the SSBs more sensitive to FI issues. The Alliance for Financial Inclusion (AFI) and other Implementing Partners of GPFI have been promoting dialogue with SSBs and FATF and BCBS have issued guidance papers. The 5 th G24-AFI Policymakers’ Roundtable on Financial Inclusion, held on 17 April 2013 endorsed a proposal for SSBs to participate in peer learning to support countries in implementing balanced policies.

23. Conclusion Regulatory framework has a profound impact on financial eligibility of poor households and SMEs But regulators struggle to keep abreast of new technologies and business models SSBs have advocated a risk-based approach to balance financial stability/integrity with financial inclusion. Peer learning through AFI plays a critical role in helping countries to implement balanced regulatory frameworks

24. Discussion