The InterDependent

In rural areas of the developing world, it can often be difficult to find a bank, making it almost impossible for individuals and families to take advantage of financial services like savings accounts, wire transfers, microcredit loans and insurance. Without these services, people cannot, for example, accumulate interest on their earnings or send remittances to their families elsewhere. People in these situations are also more susceptible to outside financial crises because they are vulnerable to cash-flow disruptions.

Of the world’s 2.5 billion poor (those who live on less than $2 a day), only 10 percent are able to use formal financial services.

As the demand for savings accounts and other business transactions continues to rise, various groups around the world -- nongovernmental organizations, microfinance institutions, banks, telecom companies and governments -- have been introducing over the years decentralized ways of providing financial tools, most generally called mobile banking.

Efforts in offering these services in the developing world was the focus of the first Global Savings Forum, held in Seattle in November and convened by the Bill and Melinda Gates Foundation, which announced $500 million in grants to help people increase their access to savings accounts. According to research, when the poor in the developing world are offered savings accounts or loans, they choose savings at rates up to 12 to 1. (Those in poor countries are not new to investing their assets for the future, but they do it in informal ways, say, like buying livestock.)

Saving options can also improve the lot of women in particular, as well as help families manage risks like illness and job loss and other outside forces.

Branchless banking, often through mobile phones, has expanded opportunities for people in rural areas of dveloping countries.

The way it works is a person sends a payment by text message to a recipient’s phone, then the receiver goes to a local participating store to withdraw the cash.

One successful program is M-Pesa in Kenya, a program started in 2007 by the Vodaphone subsidiary, Safaricom (M is for mobile, pesa is Swahili for money). The service has handled transactions totaling $1.7 billion since it began and now has 13 million users. Tanzania also has an M-Pesa program, with six million users.

In the Philippines, the first country to develop a mobile banking service, G-Cash uses an ATM card to process transactions. A product of G-Xchange, which is a subsidiary of Globe Telecom, G-Cash has been popular in a country that is already comfortable with texting, making it a convenient fit.

Such services can also potentially increase markets for banks, asthey allow the financial institutions to reach more consumers while decreasing costs associated with building new branches. Yet the early successes of these services has not resulted in private businesses moving en masse into this niche.

Incentives, often in the form of “smart subsidies” are often needed, said John Tucker, deputy director for inclusive finance for the United Nations Capital Development Fund, part of the UN Development Program.

Such was the case with G-Cash, which started as a research projected financed by the United States Agency for International Development. It is also the case with another new project in Haiti, underwritten with $10 million from the Gates Foundation and the US aid agency, to provide financial services by mobile phone and help speed the delivery of cash assistance to victims in that country after the earthquake.

Mobile banking has the potential to synchronize with the growing explosion of mobile phone use. A recent Group of 20 report said that 72 percent of the adult population in the developing world does not have a basic bank account, while 57 percent of people in the developing countries have mobile phone service, according to the International Telecommunications Union, an UN agency.

Providing financial tools to the poor falls under the concept of financial inclusion – taking broad innovative steps to offer assistance through methods other than humanitarian aid or similar interventions. .

The purpose is to “build sustainable, inclusive financial systems that provide households with tools to manage vulnerabilities and make the most of opportunities,” said Anita Gardeva, a senior analyst for the Center for Financial Inclusion at ACCION International, a microfinance and microlending group.

Microcredit, part of the financial inclusion umbrella, has opened doors for rural farmers and entrepreneurs in the developing world, but as shown in India recently, it can also result in crippling indebtedness and leave people exposed to scams.

“For many people, credit is debt,” Tucker of the UN said. Besides microcredit, the expanding tool case of financial services now includes “experimenting with microinsurance, developing housing microfinance, using postal banks to deliver services, creating biometric ATM cards,” Gardeva said.

The shift toward financial inclusion has also shown that programs to alleviate poverty can work better if private, public and nonprofit sectors are all involved.

“Financial inclusion is now on the agenda of many international bodies, not only within the UN system,” said Beth Porter, policy coordinator for financial inclusion at the UN Capital Defense Fund. Such international institutions include the World Bank, the International Monetary Fund and global bodies like the G-20 and the Financial Action Task Force, an intergovernmental body that combats money laundering and terrorist financing.

Financial inclusion was also promoted in the outcome document for the 2010 UN Millennium Development Goal Review Summit and is the focus of working groups created by the G-20.

Sometimes such financial tools, however well intended, create unexpected consequences. With M-Pesa in Kenya, a brief released by the Consultative Group to Assist the Poor said that the program had not only increased income levels, but it had also affected family dynamics. Men who work in the cities and send money home to families in the countryside might end up going home less often and acquire a “city wife.”

There is also consensus among experts that if financial inclusion is to generate positive change, it needs to focus on quality by ensuring that services are affordable, transparent, suitable to client needs and provide client protection, Gardeva said.

At the same time, regulators are concerned about adopting financial inclusion services that may compromise economic stability and national security. This is why policy makers want to ensure that financial transfer networks do not aid terrorist groups’ transactions indirectly. Such due diligence requires proper regulation and coordination among different sectors and government agencies.

Some parts of the world may not see financial services for quite some time, as more pressing matters – major instability or other disasters – need to be addressed first. Until then, branchless banking and the like will remain a mirage.