Developing countries have identified access to affordable financial services such as credit, insurance and secure savings as critical to economic growth. Intent on boosting its peoples’ wealth by 2020, Malaysia is among the leaders in devising ways to bring its population into the formal financial system.
Some 2.5 billion adults globally have no access to financial services, according to the World Bank. These people often depend on informal money lenders where interest rates can be punitive, but which are quick and convenient to access.
Formal services, in contrast, may be geographically or technologically inaccessible, and require a swathe of identification documents not easily available to this demographic. Fees might also be prohibitive since the cost of setting up branches in remote areas will be passed on to the customer.
This situation creates a vicious cycle of poverty where borrowers become increasingly indebted, holding back a nation’s economic performance. It follows that financial inclusion could give a fillip to economic development by boosting savings, which in turn facilitates the further expansion of credit.
“Financial inclusion is no longer a fringe subject,” said Alfred Hanning, executive director of the Alliance for Financial Inclusion (AFI), a global network of financial policymakers from developing and emerging countries, at the IMF-World Bank 2013 spring meetings in Cape Town.
To help turn Malaysia into a self-sufficient industrialised nation by 2020 — a government goal since 1991 — financial inclusion was defined in the Central Bank of Malaysia Act of 2009 as a primary function of Bank Negara Malaysia, the central bank. Three years later, at AFI’s global policy forum in Cape Town, Hannig hailed Malaysia as “an example for other countries to follow to promote financial inclusion”. In September 2013, BNM hosted AFI’s Global Policy Forum.
“Incorporating financial inclusion into the central bank’s Act was very beneficial,” said Eliki Boletawa, policy manager at AFI headquarter in Bangkok. “This allowed BNM to provide an enabling business environment with a diverse range of financial service providers competing to offer customised products that suit the target market.”
Technology is playing a significant role in helping banks deliver affordable financial products and services. “A challenge for the population of developing countries is access to physical financial centres, since the cost of travel for many people is a burden,” said Boletawa.
In response to this, BNM in 2012 issued new regulations to roll out agent banking. This means that licensed financial institutions can now provide banking services to customers through third-party agents, such as post offices, who can then hook into the banking system by using a cellphone or other forms of mobile technology. The agent, in turn, can deal directly with clients using that same technology. The upshot is that the set-up and operational costs of providing financial services via agents is much lower than conventional bank branches, said BNM in an email.
“This resulted in an increase of branchless banking and widespread access of financial services to the underserved and previously unserved rural areas,” said Boletawa. Now, 88% of sub-districts with a population of more than 2,000 are served with financial services access points, versus just 46% in 2011, according to BNM data.
Further progress seems likely after BNM’s wholly owned subsidiary MyClear this year launched MyMobile, the first interbank mobile banking facility to tap into the country’s mobile phone network. Able to cover 100% of Malaysia’s sub-districts, users can access a suite of financial products from a basic, low-cost mobile phone. This was done with the participation of the country’s three largest banks CIMB, Maybank and Public Bank and the country’s three largest telco operators Maxis, Celcom and DiGi.
“In Malaysia, we see a number of the banks being farsighted in terms of mobile, digital and internet offerings,” said Sushil Saluja, managing director for financial services in Asia-Pacific at Accenture, a management consulting and technology services company. He cited the example of RHB Banking Group, one of Malaysia’s largest financial institutions, whose newly launched branch network offers customers a paperless account opening process, with instant loan approval and fund disbursements. Exceptionally low cost, “Easy” can provide cheap credit previously unavailable to Malaysia’s underserved banking market.
Plugging the data deficit
Malaysia has also addressed another major obstacle to financial inclusion: a lack of data. “One of the great challenges in developing countries is the lack of financial records for financial institutions to make informed lending decisions,” said Rachel Freeman, manager for access to finance advisory services in East Asia Pacific at International Finance Corporation, a part of the World Bank focused on private sector development.
“There is information asymmetry: financial institutions don’t have the right information, while potential customers aren’t clear what information they should provide,” Freeman said in a phone interview.
To fill this void, BNM established Credit Bureau Malaysia (CRM) which assists in building credible credit records from transactions outside the regulated banking system such as with suppliers, landlords and utility companies, said BNM in the email.
This data are housed in a computerised database system, the Central Credit Reference Information System, and processed into credit reports, which are then made available to financial institutions on request. Crucially, banks in Malaysia are required to provide both negative and positive information to the credit bureau. “Often, financial institutions only want to provide negative information because they don’t want to share information on their better clients,” said Freeman. “But it’s important to collect both negative and positive information to provide an incentive for the general population to build a record.”
As well as striving to increase the availability and offering of financial products and services, Malaysia has created a framework for financial consumer protection, market conduct and financial literacy. “Consumer protection is an explicit mandate of the central bank,” said the AFI’s Boletawa. “The enactment of [a] consumer credit law has resulted in consumers being well informed of their rights, and [about] where to go should they have a complaint or an issue with a financial service provider,” he said.
In addition, Malaysia last year pioneered a financial inclusion index linked to key performance indicators of its financial inclusion initiatives and measuring the impact of those initiatives. “This was so innovative and so forward-thinking of them,” said Boletawa. “This kind of tool is essential in order to gather sound data and track progress to draw up the appropriate policies to deepen the reach of financial inclusion,” said Boletawa. The financial inclusion index estimated in 2011 that for Malaysia as a whole the score was 0.77 out of a total score of 1.00 (1.00 represents full inclusion). In 2012, the score had increased to 0.86, according to the central bank’s email.
Greater corporate inclusion
Malaysia’s financial inclusion strategy is far-reaching. “There is a conscious effort by regulators and policy makers to ensure that all parts of the market have appropriate institutions that facilitate credit between savers and investors,” said Ahmad Zulqarnain Onn, CEO of Danajamin, Malaysia’s first and only financial guarantee insurer.
Danajamin, which was established in 2009, focuses on guaranteeing the corporate debt of medium-sized listed companies. Only highly rated issuers were able to tap the bond market in the wake of the global financial crisis due to a general flight-to-quality among investors, explained Zulqarnain. This meant that lower-rated investment-grade companies were unable to secure long-term debt through the capital markets and instead resorted to short-term bank loans. “Danajamin allows companies, particularly those with long-term funding requirements, to use our guarantee facility to access long-term capital through the bond market,” he said from his office in Kuala Lumpur.
Danajamin has helped to bring M$6.7 billion ($2 billion) to market. It is also bringing in banks to guarantee a portion of some of those transactions, taking that total to M$10 billion. “We have helped catalyse lending activities in this space by our mere presence in the market,” said Zulquarnain. Longer term, Danajamin aims to reduce its participation in each transaction so that private market participants can support a deal using their own balance sheets, he said.
Commenting on Malaysia’s financial strategy as a whole, Zulquarnain said: “As a country we have been good at making sure that where there are gaps, there are institutions and initiatives to plug those gaps.” Today, a total of 92% of the adult population have deposit accounts, said BNM in the email.