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Financial Inclusion; Lessons from the Asian Tigers (Demo)

The term, “Tiger” is used in describing Nations which have continually experienced rapid economic growth over the last five to six decades, and are still currently doing so. The Four Asian Tigers refer to Taiwan, Hong Kong, South Korea and Singapore which took its independence from Malaysia. Malaysia belongs to a new class of emerging Asian Tigers, called the “Tiger Cubs”.


Why Consider these Nations?

Nigeria, Ghana, and Kenya share with these Asian Tigers, a history of colonialism, an agrarian economy before industrialisation, and a similar level of development five decades ago. However, these Asian Tigers have consistently grown an average of 7% a year since the 1960s.  Hong Kong and Singapore have emerged as major global financial hubs, while South Korea and Taiwan have attained global leadership in electronics and information technology.

Success, they say, leaves a trail. The successful transition of these Asian Tigers from independence to industrialisation and from low-income to high-income countries has made them a development model for many other developing Nations; their level of achievement in financial inclusion offer lessons for Developing Nations.


Financial Inclusion in Numbers

Financial Inclusion can be measured by a mix of indicators that range from both the demand to supply side of financial services. However, now commonly adopted are indicators used by the Global Partnership for Financial Inclusion (GPFI). Most important of these indicators are the percentage of the adult population (15+) with formal accounts, their access to credit at a financial institution, the percentage of SMEs with accounts and the points of services such as branches, ATMs, and PoS for every 100,000 adults.

Based on the percentage of formal accounts as a basis of financial inclusion, 2014 data from Global Findex revealed the financial inclusion of these nations in consideration;  Taiwan (91%), Hong Kong (94%), Singapore (96%), South Korea (94%), Malaysia (81%), while this stands at 41% in Ghana, 44% in Nigeria and 75% in Kenya (thanks to M-PESA).

 It is not a magical feat, how these Nations have achieved a high rate of financial inclusion. Their paths, though unique, have seen the implementation of similar initiatives which other developing Nations can learn from.


Sector Reforms that Lead to Robust Regulations and Specific Actions

It is not just about financial inclusion, it is about the financial sector as a whole. For Malaysia, the Asian financial crisis of 1997-98 led to reforms in its financial sector. These long-term, dynamic and robust reforms progressed from, consolidating the banking system, to the creation of a financial sector development master-plan, then to developing a financial sector blueprint. These transitions within three decades have been able to bank on the successes of the previous while learning from the failures of the previous and catering for the emerging needs in each decade. Resulting from these are a reform of the Nation’s development financial institutions and issuing regulations requiring banks to provide financial services to the poor at affordable fees.

These efforts were outlined in a World Bank publication, Financial Inclusion in Malaysia; Distilling Lessons for Other Countries. Key to their success was the broadening of the mandate of the Bank Negara Malaysia (BNM), the Nation’s central bank, to proactively advance financial inclusion. Though traditionally not in the mandate of most Apex banks, Malaysia went as far as amending the Central Bank of Malaysia Act to grant the central bank the legal authority to proactively promote financial inclusion. This has also made Malaysia one of the pioneer countries in explicitly granting the central bank the mandate of financial inclusion.

Malaysia today has one of the highest financial inclusion rates among middle-income Nations, with 92% as of 2015, after making a jump from 66% to 81% within 2011-2014 according to the Global Index Database. This success has led to the recognition of Malaysia by the World Bank as a model country in financial inclusion.


Financial Institutions Are and Remain Relevant in Driving Financial Inclusion

Fintechs have today become the poster child of financial inclusion, especially in developing nations where there is a high penetration of mobile devices. However, this has been more of a potential than reality. Data shows that during the development phase of the Asian Tigers, traditional financial institutions, private and state-owned have been the key driver of financial inclusion. This remains so until today, with most fintechs only focusing on access, convenience or affordability.

For Taiwan which had achieved 96% financial inclusion by 2014, there are 29 FI branches and 136 ATMs for 100,000 adults; 164 FI branches and 770 ATMs for every 1,000 square km (FSC Taiwan). Identified by FSC Taiwan on its road to financial inclusion are to:

  • Broaden the reach of the formal financial system and expand the range of reliable financial services for the underprivileged available in the formal system.
  • Encourage financial institutions to provide services that match customer’s need while increasing customers’ awareness and understanding of financial services.
  • Increase usage frequency of financial services and foster fintech development to create convenient and cheaper financial services.

To achieve these, Taiwan incentivizes its banks to open more branches in rural areas by not subjecting them to the upper limit of branches that can be opened in a year. A similar initiative by Hong Kong’s Monetary Authority to make banks become more accessible to customers has seen banks in Hong Kong deploy in public estates and remote areas mobile branches on wheels.

Today, Taiwan has a high ratio of credit card adoption, with 2 credit cards per adult, 61.4% of total loans being for private businesses, with 51.9% for SMEs and has the second highest insurance penetration rate. Taiwan no doubt owes its financial inclusion success to these financial institutions and is now opening doors to fintechs to easily collaborate with them.


Strategic Investment in Modern Payment Infrastructure

Engagement of relevant stakeholders and reforms are not enough to drive financial inclusion, they have to be backed up by massive investments in supporting infrastructure. Though Malaysia does not have a high physical reach of financial institutions in comparison to the four Asian Tigers, it has achieved success in financial inclusion through a massive investment in a robust IT infrastructure. There has been an explosive growth of POS terminals that rely on this infrastructure for processing payments, making it stand at 10.7 POS terminals per 1,000 inhabitants as of 2017.

These POS terminals, equipped with wireless GPRS are used for Agent Banking. In comparison to branches and ATMs, agent banks require a minuscule amount of investment to set up, there is also a need for transactions to be done electronically. These electronic transactions rely heavily on a modernized payment infrastructure. Malaysia integrated its National identity system to its payment infrastructure such that these POS terminals utilize the citizens’ identity cards (popularly known as MyKad) and a thumbprint biometric reader to verify the identity of persons transacting at the Bank’s Agent premises.

In 2011, before the Agent Banking initiative was operational, only 46 percent of the sub-districts in Malaysia had access to financial services. In 2015, three years after it was implemented, 97 percent of the country’s sub-districts had gained access to basic financial services. During the first five years of Agent Banking in Malaysia, it has facilitated 100 million transactions for a total amount of US$ 2.1 billion.  The same infrastructure for agent banking also supports internet banking, ATMs, and e-payments; making it possible for financial institutions, utility companies, retailers and others to roll out innovative financial services.


Regulatory Sandboxes to Foster Innovation

As fintech innovations emerge, these Nations have taken the lead in the implementation of regulatory sandboxes to test innovations. Since all the risk associated with innovation cannot be fully anticipated, a regulatory sandbox gives a “safe” operating room to pilot these innovations. Common to all the Asian Tigers in consideration is the setup of a regulatory sandbox. Only 22 other Nations of the world currently have an established regulatory sandbox or has made official propositions to do so.

However, a regulatory sandbox only leads among other packs of initiatives to foster innovation.  The Hong Kong Monetary Authority has taken this further with the launch of a Fintech Career Accelerator Scheme to “nurture talents to meet the growing needs of Fintech in Hong Kong”. South Korea has created an Open API platform and test beds to provide a common API applicable to banks for FinTech testing applications effectively. MAS in Singapore has set up their Financial Sector Technology and Innovation (FSTI) scheme, both of which facilitate proofs-of-concept of FinTech applications for the industry.

As of April 2017, 6 banks have tested over 15 projects in the sandbox and 9 projects have been completed in Hong Kong. In Malaysia, services from the financial comparison, insurance aggregation, money changing service and remittance provision are being run in the sandbox, while it has also been used to pilot an insurance distribution platform in Singapore.


Where We Are Now

Several of these lessons are being put in place by emerging African economies. The Central Bank of Nigeria (CBN) has set a target of 80% financial inclusion of the adult population by 2020. This is to be achieved through Nigeria’s Financial System Strategy 2020 (FSS 2020) similar to that of Malaysia. Kenya has made official announcements to set up a regulatory sandbox to foster fintech innovation, while Sierra Leone now has one in place. The bank of Ghana has in its objectives for developing the country’s payment and settlement systems the need to promote financial inclusion without risking the safety and soundness of the banking system.

As seen from the Asian Tigers, there is a need to move beyond just plans, talks, and objectives. Speedy, robust and measurable actions are required to make financial inclusion really inclusive.














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