Warrior from Samburu tribe using laptop in Kenya
2020-01-17
By Robin Newnham, AFI Head of Policy Analysis

Five key financial inclusion policy trends for 2020

As the global population grows and becomes increasingly tech-savvy, it is giving rise to exciting new trends in financial inclusion policymaking that will drive debate for years to come. Amid these changes is a constant steam of new developments in digital financial services that are helping lead innovation while also challenging regulators by raising important questions over security, consumer protection, financial literacy and sustainability.

As we welcome a new year, keep reading to learn more about five key financial inclusion policy trends for 2020.

1. Youth inclusion will be a policy priority for many regions

In many developing and emerging countries – where more than nine out of 10 of the global youth population already reside –, rapid population growth has resulted in a youth bulge in regions such as Sub-Saharan Africa, the Middle East and North Africa, South Asia and Central America.[1] This presents both an opportunity and a policy dilemma.

Economic, social and indeed financial inclusion of the youth population will be key to realizing the benefits of this demographic dividend. Yet youths (aged 15 to 24 years old [2]) are less likely to own a bank account than older adults, and only 15 percent have savings at a formal financial institution. [3]

Indeed, given the key role of access to financial services in facilitating entrepreneurship and employment options, it is no surprise that the financial inclusion of youth has risen to the forefront of the policy agenda. Governor John Rwangombwa of the National Bank of Rwanda, for example, called for “policymakers to double efforts in supporting and investing in youth, because they present an opportunity for accelerated economic growth”, at the recent opening of the 2019 AFI Global Policy Forum in Kigali.

Financial technology (FinTech) innovations hold potential in realizing the youth dividend, bringing advanced analytic solutions to overcome the traditional barriers of lack of collateral and credit history encountered by excluded youth populations.

2. Climate action and financial sector policymaking nexus will strengthen

The voice of youth has been heard loudest in the call for urgent action to address the global climate emergency.

Events in 2019 made abundantly clear that damaging climate-related events – from Cyclone Idai in Mozambique to Hurricane Dorian in the Bahamas – will disproportionately impact developing countries. At the same time, the role that financial inclusion can play in strengthening the climate resilience of impacted communities is becoming more evident.

One example of innovation in this field is OKO Finance, which provides crop insurance to farmers though digital channels and collected first prize in AFI’s inaugural FinTech Showcase competition.

The rapid growth of pay-as-you-go solar, which has already provided cost-effective solar technology to more than one million homes in Africa through mobile money networks, further shows how developing countries can leapfrog when it comes to their energy needs.

In 2020, members of AFI will be advancing further inclusive green finance solutions in the buildup to the critical COP-26 conference in Glasgow.

3. Forced displacement will start to be mainstreamed in financial inclusion strategies

The climate emergency is playing an ever-increasing role in driving forced displacement, which in 2019 rose to levels unseen since World War Two, taking the total to 70.8 million according to the UN High Commission for Refugees. [4]

This trend is likely continue into 2020 as climate change, armed conflict and political instability remain as drivers of displacement in many regions.

Financial inclusion of such forcibly displaced persons (FDPs) is increasingly being recognized as a central component in providing safety, security and dignity to those fleeing conflict or persecution.

In December last year, a coalition of partners including the governments of Germany, the United Kingdom and the Netherlands, as well as international organizations including United Nations agencies, International Rescue Committee and AFI, launched the “Roadmap to the Sustainable and Responsible Financial Inclusion of Forcibly Displaced Persons”.

Central banks, such as the Banque Centrale de Mauritanie, National Bank of Rwanda and Da Afghanistan Bank, have also taken proactive steps to integrate FDP’s inclusion within their national financial inclusion strategies and national risk assessments for Anti-Money Laundering and Countering the Financing of Terrorism (AML-CFT). 

4. Digital identity solutions will start to scale and achieve inclusion impact.

Currently, a critical barrier keeping FDPs and other vulnerable populations out of the formal financial system is an inability to verify their identities.

Furthermore, AFI research has also shown that traditional Know Your Customer (KYC) norms can disproportionately exclude women from the financial system. Digital identity solutions have the potential to address these gaps, with AFI’s inclusive FinTech strategy emphasizing that “digital ID is the basis of a strategy for digital financial inclusion”.

The quality of digital identity systems is also critical, in particular the need for consumer consent, data security, privacy and portability. Examples from AFI member countries such as Peru and Malawi provide an illustration of the potential to rollout digital ID systems and E-KYC regulations at pace and scale while ensuring quality.

In 2020, we can expect more developments in this area particularly building on lessons learnt from testing digital ID solutions in regulatory sandboxes in countries such as Papua New Guinea, Thailand, Malaysia and Mozambique.

5. Virtual assets use cases will grow despite more regulation

Owing to its potential to enhance compliance with global AML-CFT standards, digital identity was high on the agenda of the Financial Action Task Force (FATF) in 2019.

The same was true of virtual assets with FATF bringing forwards new guidance to address the financial integrity risks associated with these technologies. [5]

Virtual Assets – or cryptocurrencies – fell into the spotlight again with the June 2019 announcement of the impending launch Facebook Libra, and its heralded promise for financial inclusion, prompting a backlash from many quarters including standard setters, national governments and regulators. Even so, virtual assets use cases of relevance to financial inclusion have started to emerge in areas such as remittances and micro-payments.

More regulation is now highly likely as jurisdictions seek to strike the right balance between inclusion, integrity and stability in the context of these new technologies. We will also undoubtedly see an acceleration in central bank digital currency (CBDC) projects with central banks from China to the Bahamas announcing plans to launch CBDCs.