8 July 2020

The COVID-19 factor: pandemic risk could be transformative for financial and social inclusion

This article was published by The Economist Intelligence Unit on 8 July 2020.

By Katya Kocourek

Despite the prospect of a prolonged recovery to economic normality, COVID-19 could be transformative for financial and social inclusion in some emerging markets.

Alfred Hannig, executive director of the Alliance for Financial Inclusion, a global network of members drawn from over 90 different countries, tells Katya Kocourek how and why the pandemic could shine a light on previously neglected issues with positive consequences in some emerging markets.

Phases of coronavirus

The crisis brought about by the COVID-19 pandemic is different in many ways to the global financial crisis of 2008-09. It has assumed different guises since taking hold of international markets and communities at the end of 2019, with far-reaching consequences for economic growth in the near term.

The so-called first phase has been characterised by a healthcare crisis of global proportions and prompted decisive action from central banks and governments worldwide. But what are the implications of these actions as the crisis moves into its second phase, particularly in emerging markets that have not traditionally had easy or straightforward access to financial systems?

These markets include communities where there has been an uptick in the forced displacement of people and rising poverty levels in recent months. There is nevertheless hope, according to Mr Hannig, as “many countries have recognised the need for financial and social inclusion over the past decade”.

Multiple solutions will be required. These include greater collaboration between regulators and policymakers in the post-covid world as the combined efforts of both try to steer a path towards a sustainable recovery in areas that have been highlighted as acute during the crisis: a) digital usage in poorer communities; b) empowering women; and c) the critical role of small and medium-sized enterprises (SMEs).

Legacies of lockdown

The speedy response from financial regulators and central banks to the social and economic impact of coronavirus has become a marker of the new era, as have the containment measures that followed. According to Mr Hannig, there has also been “more momentum” in local responses across emerging markets, particularly in areas like Know Your Customer (KYC) and remote account opening for individuals and businesses.

Digitisation of payment services—which was already well underway before the lockdown—is a major focal point. At the start of the crisis Ghana’s central bank increased transaction limits on mobile money transfers and mobile money daily limits, while the Kenyan regulator issued directives to allow for more mobile money transactions. Both initiatives have successfully reduced reliance on cash-based transactions. But what will these developments mean for the second-phase of covid-19 amid an easing of lockdown measures?

The regulatory and policy frameworks that are emerging suggest that there is scope for more innovation in the digital finance space. For example, the intergovernmental organisation that sets international standards, the Financial Action Task Force, has called for wider use of fintech (financial technology) and regtech (regulatory technology) to support migration towards digital activities—including payments and KYC checks—while greater digital infrastructure usage during lockdown has also been highlighted by the World Bank.

Financial inclusion as opportunity

Apart from the risks associated with digital usage in areas that may not have adequate consumer protection against cybercrime and fraud, greater flexibility in technology opens the door to financial inclusion in some of the worst affected emerging-market communities where the post-covid recovery is expected to be slow.

Set against this challenging context, “financial inclusion will be seen as one of the solutions so that people see an opportunity rather than a threat,” says Mr Hannig. However, this is unlikely to be achieved without a leading role being played by regulators and international organisations in shaping public perceptions of the fallout.

Coronavirus may yet become a crucible for changing perceptions of gender. “We have seen a change of mindset within the world of financial regulators towards female leadership” in recent years, explains Mr Hannig. Ranked fifth in the UN’s 17-point list of Sustainable Development Goals (SDGs), gender equality and female empowerment have been highlighted by many financial regulators as a priority.

As the world emerges from the worst excesses of this crisis, more attention will need to be paid to regulatory and social barriers that exist in some emerging markets in order to bring this SDG to the fore. “When we work on the responses to the crisis,” says Mr Hannig, “it will be important to work on recommendations like female inclusion”.

Green shoots?

With economic recovery still a distant prospect in countless places, it is clear that when green shoots begin to emerge some countries will be better placed than others to deal with the fallout. “Recovery needs to happen soon,” explains Mr Hannig. “If we don’t start to see an economic pick-up in the second half of 2020 it could be disastrous, especially for poorer populations as they will find it very difficult to catch up.”

SMEs could have a significant role to play, particularly in countries where the sector provides an important source of employment. These include South-east Asian economies like Malaysia and Thailand; parts of Latin America that have been badly hit by the crisis, including Mexico and Brazil; and further afield in countries like South Africa, where the SME segment is strong.

Mr Hannig notes that while SME activity should play a “role in driving these economies to more positive ground”, in countries where the informal sector is important, things could be quite different. “[These countries may] struggle to keep pace with the others during the first part of the recovery phase.”

Green finance may come to fill an important gap in this regard, particularly among those financial institutions that offer green finance solutions in markets facing significant climate change challenges. Again, much will depend upon environmental and social risk management guidance provided by financial regulators. This could be yet another area in which the crisis has a positive impact. “[This is] an important moment in time,” concludes Mr Hannig, and opportunities must not be wasted.


The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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