Fostering financial inclusion

Inclusive growth, or shared growth, is supposed to allow people to equitably share the benefits of economic development, making poverty reduction efforts more effective by creating productive economic opportunities for the poor and vulnerable sectors of society. This refers not only to people's material well-being, but also to human rights and democracy.

There is no doubt that it is impossible to achieve inclusive growth without promoting financial inclusion. Access to basic financial products and services, such as savings, loans, payment, money transfer and insurance, is badly needed by people on low incomes.

Unfortunately, in the today's world, about 2.5 billion adults - 263 million of whom are in China - are "unbanked", that is, they do not use formal financial services to save or borrow. About 2.2 billion of these "unserved" adults live in Africa, Asia, Latin America and the Middle East. Last year, China Banking Regulatory Commission figures showed that 2,945 townships in China did not have access to local banks.

Over the past 20 years, financial inclusion has increasingly become a central theme for politicians, policymakers, bankers and regulators in developing and developed nations both. An inclusive financial system ensures that small- and medium-sized enterprises have access to much-needed finance, and enhances the agricultural industry and entrepreneurial activities as well as employment.

Furthermore, financial inclusion provides poor people with greater capacity to increase their income, build assets and cope with shocks, promoting economic growth and poverty alleviation.

Microcredit companies and agents have played an important role in financial inclusion. As a key strategy, many countries have adopted a series of policies encouraging microfinance.

Grameen Bank, which started in Bangladesh, provides poor people with small, collateral-free loans, surprisingly perhaps, the bank even opened branches in Brooklyn, New York, Omaha, Nebraska, and San Francisco in the United States, demonstrating that there is a huge potential for microfinance even for the richest country with the most advanced banking system.

There are about 7,000 community banks in the Americas, focusing on small business lending, instead of relying on statistical models and collateral; they utilize an in-depth knowledge of the local economy and customers by building longstanding personal relationships when making credit decisions.

Though the global financial crisis also hit some community banks hard, the majority of the smallest banks actually increased their small business lending during the crisis.

The good news is, in China, microcredit companies, of which more than 1,334 have been registered, have been seen as an integral part of financing for farmers, the self-employed and small enterprises. The potential of the Chinese microcredit market has attracted the attention of private and foreign capital searching for business opportunities, and the scale of this microfinance will grow rapidly in the years to come.

In many countries, large banks can serve as an engine for financial inclusion. Taking full use of their advantages of extensive network, information and communication technology, along with different business delivery models, mainstream banks can enter these vast untapped markets in a cost effective way, quickly turning inclusive finance into a commercially viable business.

The Bank of China is the first to try this in China. It is working with Singapore-based Temasec as its strategic partner to launch a pilot program setting up joint venture village banks in China. So far, we have six village banks operating formally, and another 14 will be operating before the end of this year. On a recent visit, I was deeply impressed by these totally new grassroots banks that are introducing international experience into Chinese rural markets where underserved customers are being provided with convenient, flexible, transparent, affordable and efficient financial products and services.

Every year across the world, 150 million newcomers access financial markets. Given that the new customers are inexperienced, and to protect them, it is imperative for the banking industry and its regulators to enhance financial education, raising their awareness about financial products, as well as their rights and obligations.

It is worth emphasizing that financial inclusion must be developed without compromising risk management.

An inclusive financial system needs to constantly improve customer identification, impose limits of credit, re-engineer the business procedures and mitigate moral hazards to protect credit bubbles from occurring.

It makes sense to focus on reform of the global financial regulatory architecture and address the "too-big-to-fail" problem, but that is not enough. We should recognize the importance of striking a better balance between the large, complex financial institutions and the small, simplified credit firms, and between maintaining the safety of financial systems while also promoting credit availability.

In implementing stricter regulation and supervision of the financial industry, it is necessary to assess and minimize the impact of this on financial inclusion.Inclusive growth allows people to contribute to and benefit from economic development. Taking financial services to as many poor people as possible should be a key driver for that process.

This is a world agenda, which is not only an obligation, but more importantly, an opportunity.