Aim for full financial inclusion in the Middle East

It was in 2016 that the Council of Arab Central Banks declared April 27 as the ‘Arab Day of Financial Inclusion’.

Banks have long since evolved from their conventional image as lending institutions to full-fledged financial hubs serving as the nucleus of all economic activities and financial transactions. Those opting to stay out of modern banking and financial services are considered outside the purview of the economic mainstream.

There is no denying the fact that financial inclusion in a country or region has direct bearing on the socio-economic development of its citizens. Countries with more “unbanked population” are the ones with the smallest GDP per capita, such as Somalia (61 per cent without a bank account) and Yemen (94 per cent without a bank account). But there are people who have only one bank account which they use to receive their salaries, subsidies or cross-border remittances, and withdraw all the money they get at once. They are also called “underbanked”.

According to World Bank data from April 2018, the number of unbanked adults has fallen to 1.7 billion from 2.5 billion in 2011 and is continuing to fall, even taking into account population growth. Since 2011, an additional 1.2 billion people have connected to the financial system for the first time, and half a billion within the past three years.

Significant underbanked rates in Mena

The report also states that in the Arab world stretching from Muscat to Casablanca, only 8 per cent of the adults belong to the banked population, while 23 per cent are underbanked. As many as 69 per cent of adults remain unbanked in the region.

This means that the financial inclusion opportunity in the Arab world is 92 per cent. Countries with the highest GDP per capita have significant underbanked rates, in the GCC for example. This is mainly due to the large expatriate population working in these countries with low and middle-income salaries.

While the GCC countries have made significant progress on financial inclusion, there are gaps in some important areas. Small- and medium-sized enterprises (SME), women and youth continue to enjoy relatively low access to finance in the region. Some of the reasons that perpetuate this trend include social norms, low representation of women in the labour market, as well as entrepreneurship and youth unemployment.

A recent policy report by International Monetary Fund (IMF) recommends structural reforms to strengthen access to finance for SMEs, women, and youth. According to the report, addressing institutional weaknesses and promoting financial sector competition will help boost access to finance for SMEs.

Female and youth employment

“Reforms to enhance financial literacy and improve SME governance structures and insolvency frameworks are critical. Other reforms encouraging female and youth employment and the use of emerging technologies in finance also appear promising,” says the report.

A combination of buoyant economic activity, a booming Islamic finance sector, and a series of reforms have contributed to the development of bank and equity markets in the region. The Islamic finance industry which has grown by 10-12 per cent annually is expected to play a significant role in narrowing the financial inclusion gap. This has deepened the financial system, but it still lags behind advanced economies.

Another area of reforms to foster financial development is developing debt markets and making stock markets more accessible to a larger pool of companies and investors.

The IMF report says, “To grow domestic debt markets, the authorities should develop a government yield curve, seek to increase market liquidity through secondary market trading, and ensure requirements for private issuance are not onerous. Stock market reforms should focus on enhancing corporate governance and investor protection, removing restrictions on foreign ownership, and encouraging financial market competition. The latter would also help the development of non-bank financial institutions.”

Financial inclusion in developing countries

When it comes to the developing countries in the region, opportunities to expand financial inclusion are significant, particularly among the youth, women, and the low-income segment. These countries, whose total population amounts to 380 million people, have the highest unemployment rate for youth in the world.

More than 60 million jobs need to be created by 2020, to absorb new job market entrants and stabilise youth unemployment. According to ‘Global Findex Report 2017’, financial inclusion in these economies has increased by 10.6 percentage since 2014 to reach 43.5 per cent of adults with an account in 2017.

“However, the region has the world’s largest gender gap, with only 35 per cent of women holding an account, compared to 52 per cent of men. Social norms and legal barriers are often the main obstacles facing women in accessing financial services in the region,” says the report.

However, financial service providers in countries such as Lebanon, Jordan, Palestine, and Yemen are providing financial and non-financial services to improve people’s resilience and help sustain livelihoods. Jordan, Egypt, and Iraq have registered significant advances in account ownership levels among adults to reach 42.5, 32.8, and 22.7 per cent respectively in 2017, almost doubling their 2014 levels.

These improvements are mainly due to a strong commitment to financial inclusion at the policy level in those countries.

One of the prerequisites to achieve effective financial inclusion is creating an enabling policy and regulatory environment as well as improving access of people from all walks of life to safe and innovative financial services. Some of the principles include cultivating a government commitment to financial inclusion to help alleviate poverty, implementing policies that promote competition, and provide market-based incentives for delivery of sustainable financial access, and use of a broad range of affordable services (savings, credit, payments and transfers insurance) as well as diversity in service providers.

Financial inclusion must continue to be a primary policy objective amongst governments, banks, corporations and the community at large to ensure greater socio-economic development.

— Sonny Zulu is country head for Retail Banking at Standard Chartered.