The other emerging economies ( 1,12 MB )

 

  Beyond stability in terms of conflict and politics, the existence of an extensive financial system with broad access for the population is fundamental to a country's socio-economic progress. A formal financial system that encourages households to save, provides security for payments and facilitates credit is essential for future planning, trade development and business investment. For example, a study by Honohan(1) shows that an increase of 10 percentage points in access to financial services (measured as the ratio of credit over GDP) results in a fall of 0.6 percentage points in the Gini(2) inequality coefficient , among other socio-economic repercussions.

  But, in the past, many emerging countries or frontier markets in Africa, Asia and Latin America have encountered a kind of vicious circle in which the financial system's limited development acts as a barrier to greater economic progress and vice versa. Reality shows that the degree of access to a traditional financial system is very limited in most of these countries. In general, there are few bank branches, measured both in terms of coverage of the area and also in relation to the number of inhabitants. Consequently, a large proportion of the population is not served by systems that lack depth. In terms of the ratio of private credit over GDP, this appears to be around 100 percentage points higher in developed countries than in the rest, as shown in the graph above. This limits private investment and therefore economic growth.

  (1) Honohan, P. (2007). «Cross-Country variation in household access to financial services». The World Bank, Trinity College and CEPR.

  (2) The Gini coefficient is used to measure income inequality. It's a number between 0% and 100% where 0% represents perfect equality (everyone has the same income) and 100% represents perfect inequality (one person has all the income and the rest none).

  But why, historically, has an extensive financial system not been developed in these countries? Mainly because constructing a traditional financial system such as the one we know in developed countries, based on an extensive branch network, is very costly. For example, infrastructures and communication systems are required but they are not always available in emerging countries where, moreover, the population is sometimes highly dispersed in geographical terms.

  However, nowadays, thanks to new technologies, there are alternatives that can boost financial inclusion at a lower cost, without the need for an extensive branch network. This is possible thanks to mobile phones strongly penetrating many emerging countries and even frontier markets, allowing them to skip certain technological stages. For example, in 2008 Latin America already had more than 370 million users and this figure is expected to reach 530 million in 2012, placing the average penetration of mobiles in the region above 80 lines for every 100 inhabitants,(3) much higher than the landline penetration and, obviously, than banking. Providing financial services via mobile phone can, therefore, extend access to these services to a highly significant portion of the population at a much lower cost (economic and also in terms of time) than through traditional banking. In fact, some successful models already exist with this focus. By way of example, there is Paggio in Brazil, Easypaisa in Pakistan and Smart and Globe in the Philippines. But the M-PESA(4) system in Kenya is the ultimate exponent, given its fast penetration and success.

  While in developed countries, mobile banking has adopted models providing additional services, i.e. it's a new channel for customer service within a multi-channel model, in emerging countries it is adopting a transformational model. M-PESA, set up in 2007 by Safaricom (Kenya's leading mobile operator), allows part of the Kenyan population that had been excluded from financial systems to exchange money via their mobile terminals. Safaricom and M-PESA are creating a new way of banking in these countries whereby, by simply sending a text message, you can deposit and withdraw money, transfer it, pay bills and top up mobile credit.

  M-PESA has expanded very quickly in the country thanks to its extensive agent network, cash management and the high added value it offers to the population. In April 2011, it already had more than 14 million clients (approximately 40% of the population) and is growing by more than 10,000 clients per day. And the volume of transactions reached around 450 million euros that same month. M-PESA is already one of the services that provides the greatest revenue for Safaricom but, more importantly, it is contributing to Kenya's economic development as it has encouraged the development of trade thanks to the population being able to make payments while avoiding the insecurity of carrying cash.

  (3) Analistas Financieros Internacionales (2009), «Telefonía móvil y desarrollo financiero en América Latina».

  (4) M is from Mobile and Pesa means money in Swahili.

  However, to really encourage financial inclusion providers must go one step further and not only offer transactions but also financial products, such as savings, insurance, financing, etc., because this is what will help to construct the underlying fundamentals for economic development. Aware of this, Safaricom is also leading the field in this area. Due to issues related to regulations and the assumption of risk, it has taken out agreements with several financial institutions to develop its commercial products and services and has set up M-KESHO. The service is built on the M-PESA platform to also offer interest-bearing savings accounts, insurance (principally non-life) and loans, mostly linked to advances on wages or other income.

  In summary, the progress made by mobile telephony is a great opportunity for a new banking model to penetrate emerging countries and frontier markets. Transactional coverage via text messages is a fundamental first step that helps to develop trade and familiarize the population with the banking system at a very low cost. With this base, more financial services can gradually be offered, also with credit products, in which traditional credit institutions can also take part to help to manage risk and provide financial advice, remotely or through traditional branches. Consequently, mobile banking provides the chance to break the vicious circle that has prevented these countries from developing financially, gradually closing the gap between the indicators for access to banking services in developed countries and in the rest.

  This box was prepared by Anna Mialet Rigau

  Economic Analysis Unit, Research Department, "la Caixa"

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