Diana Mejía
Especialista Senior en Inclusión Financiera CAF - banco de desarrollo de América Latina y el Caribe
COVID-19 has exposed the importance of universalizing financial inclusion, understood as affordable, timely and adequate access to a wide range of regulated financial products and services, and expanding their use to all segments of society.
The following are some actions that can help governments in the region promote greater financial inclusion and thus mitigate the effects of the pandemic on the most vulnerable groups.
- Access: Increasing access to banking services through digital financial products
A crucial task is to ensure that everyone in the region has access to an account, whether transactional, savings or an electronic wallet, to receive the subsidy payments that governments are disbursing to the most vulnerable groups. According to Global Findex, 45.6% (207 million people) of the adult population in Latin America have no access to the financial system.
The top challenge is to bring banking services to informal workers and migrants, for whom a major effort must be made in terms of opening simplified accounts and other instruments such as e-wallets, through Fintech companies. By having an account or e-wallet (as in the case of BIM in Peru), individuals can make payments and do business without physical contact. But above all, an immediate connection is established between government and citizens, between buyer and seller, and between the company and workers, without the need for face-to-face contact or exchange of banknotes and coins, which are a possible focus of contagion. In fact, countries such as China and South Korea have restricted the use of cash and even ordered to disinfect banknotes in circulation in an effort to reduce sources of contagion.
Another important aspect is to support microfinance institutions (MFIs) in their account digitalization processes to help their customers not have to rely on cash. In this connection, development banks and international organizations could work with MFIs to implement swift improvements to their digitalization processes and also promote partnerships with Fintechs that have developed solutions that might be suitable for MFIs.
- Use: Designing financial literacy programs aimed at instilling behavior changes
Based on the results of the financial capacity surveys in Latin America conducted by CAF, most people in the region lack basic financial literacy, understood as the knowledge, attitudes, skills and behaviors needed to make sound financial decisions. Survey results show that a large number of Latin Americans save very little or no money, are unable to make ends meet, to plan for their retirement, or are over-indebted and are unable to buy or use insurance.
It is therefore important for governments and financial institutions to design financial literacy programs aimed at vulnerable people through broadcast channels such as radio programs, short videos or games, which have proven effective for people in poverty and with low educational levels. These programs should focus on behavior changes, such as the importance of having a budget, saving to have a financial cushion, and increasing resilience to shocks such as COVID-19.
- Quality: Financial products and services that solve customer problems
The quality of financial products and services refers to the extent to which financial products and services meet the needs of individuals and MSMEs. In this context, MFIs need to overcome their current operational challenges while tailoring their products and services so that their customers can cope with the financial stress caused by this crisis. In this sense, MFIs must identify the needs of their customers at this juncture, specifically how to support them in mitigating the health crisis, which has become a financial and food crisis for low-income households, as well as micro and small entrepreneurs served by MFIs, in order to help them respond by tailoring their financial products and services to ensure business continuity. Best practices can range from health advice, technical advice on cash flow management, advice on rethinking MSME business goals to align them to new market trends, financial products focused on the most pressing health and education needs, to digital initiatives that can address social distancing problems and other innovative ideas.
In addition, it is important that MFIs identify best practices and innovations to overcome their operational challenges, ensure business continuity at this juncture, alternative communication methods for customer interaction, adoption of new digital initiatives, management of financial reliefs for customers, communication with advisors who are unable to work on the field, strategies to manage liquidity and a deferment or rescheduling of lines of credit, among others.
- Financial health and wellbeing: the ultimate end of financial inclusion
The current crisis has exposed the urgent need for individuals and MSMEs to increase their financial well-being, understood as the state in which a person can fully meet their current and ongoing financial obligations, feel confident in their financial future, and is able to make decisions that allow them to enjoy life (Consumer Financial Protection Bureau).
According to a study byCAF and BBVA Research based on the results of financial capacity surveys, in the seven countries under study, on average, 69% of people are able to cover their expenses only for less than three months after losing their main source of income, and 15% for just one week. These figures highlight the financial vulnerability of a large portion of the region’s population. In fact, according to a CAF study in these seven countries, the average financial welfare index is 59 out of 100.
As Elisabeth Rhyne mentioned in a recent blog post, if financial health had been a public policy priority, policymakers would have been more prepared to deal with the economic consequences of this crisis, as they would have urged and supported individuals and MSMEs to build a financial cushion to help mitigate the consequences of the pandemic.
In this sense, governments and financial institutions must incorporate financial health as a priority by making systematic measurements to help people and MSMEs define and implement strategies to improve their financial health, to help them become more resilient and less vulnerable to shocks such as the COVID-19 crisis.
