Currency Markets (11)
Fund Flows (27)
General Emerging Markets (188)
Global Banking (21)
Latin America/Caribbean (168)
Foreign Banks’ Credit Share Carousel
2019 April 1 by admin
The BIS quarterly review continued a theme of global financial crisis retrospectives with an examination of foreign bank control of overall lending in major emerging economies, which aggravated Europe’s plight in particular amid cascading upsets the past decade. The current 12% -15% share may be half the previous average, but country concentration among a handful of institutions is higher at 75% with private borrowing prominent, as official access is mainly through bond markets. Such non-bank lines increased 5% annually, while traditional cross-border loans are flat, and trends vary by location, sector and over time. Mexico, Poland and Chile have the most reliance since foreign groups also have big local operations, with business in the first getting half of credit from the common source. At the opposite extreme is China, as well as households as a class, and funding techniques as risk measures are not explored as a further layer, with domestic deposits the safest alternative. Concentration declined before the 2009 collapse, but now Indonesia and Turkey depend heavily on respective Asian and European bank facilities. Private sector claims in a geographic cross-section are lodged three-quarters in the top three international banks, according to the analysis. Units from Belgium, Germany, the Netherlands and Switzerland retreated while ones in Australia, Canada, Japan and Spain became more active. The US and UK have the most outstanding, and official outweighs private sector dominance in places like South Africa. Stability concerns have transformed over the period but remain pressing with these patterns, and bond dependence is a separate issue for consideration.
A recent US-German academic study shows emerging market bonds outperformed rival classes over history despite frequent default periods with their underlying return premium. The authors trace the record from the 1800s through the Argentina “century sale” and IMF rescue last year, which narrowly avoided another interruption after seven previously. Sovereign hard currency performance was 5% above the US and UK over 125 years, and the controversial century instrument could retrace its secondary issue price in the coming months as the category recovers strongly so far with US Federal Reserve tightening caution. Corporate bonds drew an alarm over “fallen angels” with the next downturn, as BBB-rated ones now are 30% of the investment-grade space that could tip into junk. Developing market issuance quadrupled the past decade, with China’s alone over half a trillion dollars, the Paris-based OECD reported. Over the medium term $4 trillion must be refinanced globally, as economists predict end-decade recession, but for now investors are enjoying solid fixed-income gains after 2018’s negative results on JP Morgan’s hard and local currency benchmarks. According to its investor survey at the Americas corporate conference, the relative good times should last with steady GDP growth and commodity prices, and minimal drag from trade confrontation and incremental rate hikes. In Latin America, Brazil was a favorite under the new business-friendly administration followed by Argentina, while Mexico was the laggard with expected downgrades under the populist AMLO regime. State oil behemoth Pemex received budget help but is set for a downgrade, and the sovereign outlook went negative with fiscal policy unreliability a credit blemish.
Global Banking Gyrating Compass Compensation
2018 May 3 by admin
The World Bank’s annual Global Financial Development report charts the South-South shift in particular regionally in global banking the past decade from the traditional Northern advanced economy outward pattern upon post-2008 crisis “exits.” It balances the costs and benefits of cross-border integration infusing capital, expertise and technology while also potentially magnifying shocks and boom-bust cycles. The world’s largest financial institutions which may be too big to fail are under increased regulation and surveillance, but developing country views remain mixed on foreign entry as it relates to skills building, small business credit and other areas original research can help address. According to a recent client survey of 200 public and private sector leaders in 40 nations opinion was split as 70% praised international banks’ product contribution, but an equal portion accused them of “cherry picking” prime customers and overly complex organizations creating instability. Regional competitors got more favorable marks than overseas-based ones, but stronger host and home country supervision was a consensus recommendation. Net foreign establishment has been negative since 2010, but emerging markets have taken 60% of the total as this group is half the industry in Europe, Latin America and Africa. The Southern share of syndicated lending has doubled to 8% by the latest figures, with East Asia accounting for one-third the amount. Neighborhood “brick and mortar” operations have likewise spread in the MENA region, and Brazil, China, India and South Africa are respective hubs in their geographies. However the review describes “globalization backlash” since 2007 ushering capital flow curbs in the form of macro-prudential policies and separately funded branches and subsidiaries. It urges institutional and infrastructure reforms to support the trend, since liberalization can be countered by “political entrenchment.” Credit registers and contract enforcement are important, and are more likely to drive household and small firm rather than blue-chip company focus. Greenfield investments as opposed to mergers and a diversified service mix may yield more positive long-term effects, but often options are limited under bilateral and multilateral trade agreements. In supervision while Europe is moving to joint arrangements under its Single Mechanism Southern Hemisphere pacts are in their infancy.
The evidence shows that South-South banking can smooth the credit cycle and increase per capita growth 1%, while relying more on local deposit bases. However regulatory capacity is weaker in these jurisdictions and affords less risk-sharing. Alternative capital market sources are now available that financial sector policies must also incorporate even as only large borrowers may retain bond access in difficult times. Stock markets in turn may have relatively unsophisticated disclosure norms that erode confidence and raise crisis odds when a multi-line conglomerate pursues both commercial and investment banking. Fintech is another sensitive subject with thousands of active firms and dozens worth more than $1 billion. Digital models may not have safety nets, data privacy and fraud protection and screening algorithms could be inaccurate or manipulated. On line platforms have only begun to draw oversight complicated by footprints in multiple countries under mass marketing. A “sandbox” approach is increasingly common to devise consumer safeguards and conventional bank ties stoke tremors from this technology earthquake, the Bank cautions.
Household Debt’s Untidy Room Ramifications
2017 October 15 by admin
The IMF’s fall Global Financial Stability Report cited the development contribution of rising emerging economy household debt the past decade to a median 20 percent of GDP, one-third the industrial world level, but cautioned about longer term recession and crisis scenarios as deleveraging occurs with overhangs. Developing countries may be “less prepared” to handle the squeeze with institutional limits such as missing personal bankruptcy codes. For the highest debt quartile the average was one-third of GDP in 2016, in part due to cross-border liquidity expansion from loose monetary policy. Credit access can lift domestic demand and consumer wealth, but future adjustment may be sharper with global interest rates around zero for so long. Housing and other investment returns may not meet expectations and borrowing often goes for non-productive purposes. From the supply side bank balance sheets can suffer, and risks be exacerbated with foreign currency-denominated loans. Ratios are under 10 percent of GDP in Argentina, Egypt, the Philippines and Ukraine; and over 50 percent in Malaysia, South Africa and Thailand. One-third the total is mortgages and most are recourse-based, allowing other family collateral seizure upon default. In advanced economies Australia and Canada stand out for their breakneck pace beyond historical norms, and leading emerging markets Chile, China and Poland have also built up fast. Since 2008 the yearly clip was 6.5 percent, well over output growth. Low income households are typically excluded in early industry stages but often turn to micro-finance sources that may not be tracked or regulated. Econometric models indicate that a 5 percent household debt increase over 3 years will halve future growth over the same period. The drag is mainly due to the mortgage element that accompanies house value correction, especially in emerging markets with narrower asset class diversification. An open capital account and fixed exchange rate heighten risks, including banking crisis probability that spikes at 65 percent of GDP, according to empirical work. Financial sector depth and quality bank oversight can cushion the medium-term negative correlation, and stricter capital requirements and dividend suspension may be effective counters. Shared credit registries and education to ward off predatory practices are important steps, the Fund asserts. Macro-prudential measures, such as on loan-to-value and debt-service-to-income, and consumer protection rules are valuable. Mortgage contracts can also be designed for more risk-sharing and resets in the event of extreme circumstances, the chapter suggests.
South Africa’s multinational banking groups have been targeted by ruling party and anti-poverty activists for loan forgiveness, amid accusations of deceptive and punitive rates, as debt burdens have wracked private consumption. A dedicated retail provider with close ties to them was forced to shut down with an extreme portfolio and capital gap, as the central bank now comes under broad pressure to focus less on financial stability than economic aid. Lawmakers reportedly are considering charter changes which would mandate stronger defense of average savers. International financial services firms have likewise come under harsh view with questionable allegiance to the business elite lodged in families with fortunes often predating independence and the end of apartheid. A newcomer clan, the Guptas of Indian background, allegedly worked with foreign auditors and management consultants to misrepresent its company accounts and wangle insider deals with the Zuma administration leaving a household odor.
The BIS’ Deliberate Debt Composition Unraveling
2017 September 25 by admin
The Bank for International Settlements, in its latest quarterly survey of cross-border banking and bond flows, unveiled a deeper statistical set covering euro and yen-denominated activity and a recent profile of emerging market government patterns in two dozen countries. The amount doubled the past decade to almost $12 trillion, with China and India accounting for three-quarters. Composition “changed significantly” with 80 percent through local and international bonds compared with 60 percent fifteen years ago, and concentrated in the former at fixed rates and longer maturities. The foreign currency share halved over the period to 15 percent, and the dollar’s portion was 75 percent. International issues comprised one-third of outstanding official securities in Saudi Arabia, Turkey, Indonesia and Poland, and Mexico is the top issuer overall with almost $70 billion placed over several decades. With few exceptions like Argentina, where over half of Treasuries are dollar-quoted, this structure has progressively faded as Turkey for example redeemed the remaining stock five years ago. Maturity has “risen sharply” and is just below the advanced economy 8-year average, with South Africa’s the longest at 16 years, outpacing the US, Australia, Germany and Canada. The fixed-return slice in turn jumped to 75 percent from 60 percent in 2000, in contrast with the industrial world’s 90-95 percent standard. Malaysia, Taiwan and Thailand issue only this type, and Chile’s fraction of the total quadrupled to 40 percent since 2005. Inflation indexing has also taken off in Latin America in particular, and is one-third of Brazil’s local debt. The BIS concludes that currency mismatch and rollover risks are reduced to aid sustainability, with the caveat that longer duration could now further erode market value with future global interest rate rises.
The quarterly roundup tracked less than 5% increases in cross-border bank claims and debt placement worldwide, with dollar credit to developing country borrowers at $3.5 trillion at end-March. Middle East and Africa oil exporters got another $60 billion and Asia and Latin America $40 and $20 billion respectively, while Europe allocation fell $25 billion. Credit above GDP growth trends signal alarm in China and Hong Kong, although debt service ratios remain manageable, according to the report. Industry association EMTA’s Q2 trading volume tally came out at the same time, with a 15 percent annual and quarterly decrease to $1.1 trillion attributed to greater passive ETF inflows. Local instruments were over 55%, with Brazil, Mexico, South Africa, China and India the favorites. Eurobond action was close to $500 billion, again with Brazil at the top followed by Argentina. CDS turnover not yet in the ETF frame was also down 9% to $260 billion. With domestic bond market opening Chinese assets now account for almost one-tenth of activity, helping to offset uncertainty in other asset classes like private equity which has noticeably slackened since 2015, according to a September Preqin study. Only forty funds worth under $10 billion have closed year to date, with deal value at $35 billion. It casts a shadow on the region as the biggest market, but two-thirds of fund managers polled expect to deploy more capital over the coming year, despite exit and valuation concerns that can decompose the landscape.
The BIS’ Layered Globalization Glee
2017 June 24 by admin
The Bank for International Settlements hailed globalization’s “profoundly positive” results the past half-century in its annual report, due to the “deeply symbiotic” connection between trade and financial openness. It acknowledged inequality and instability with the process, which can be better governed and managed as an economic development strategy both domestically and globally. The proliferation of foreign assets and liabilities and currency hedging, often through banks following cross-border customers, can be divided into three increasingly complex layers moving from simple commodities sale and associated credit to direct transactions for balance sheet purposes. Around half of trade is invoiced in dollars and one-quarter in euros, and basic letters of credit are used in one-sixth of deals. As the global value chain and FDI have deepened in recent decades, more specialized products like derivatives have spread, and in the final phase since the 1980s purely financial engineering supercharged integration so that emerging market international exposure almost doubled to 180 percent of GDP. Developing economies represent half of the worldwide manufacturing chain, with China alone taking one-fifth. As with multinational companies in commerce, global banking groups dominate finance with vast country and regional networks unable to be reflected accurately in nation-based reporting and statistics. Emerging markets’ inward investment contains both debt and equity flows, with the latter implying long-term commitment and the former short-run intra-firm borrowing and speculation. Their exposure has jumped toward offshore money centers as treasuries became more sophisticated and allocations did not involve plan and equipment outlays.
Since the financial crisis a decade ago globalization has been “in check” due in part to lingering trade weakness, but conventional measures of assets and liabilities to output overstate the correction as developing market openness has continued “unabated,” the report insists. Pullback has centered on cross-border bank loans, particularly from Europe, as portfolio fixed-income and stock volume increased. “Deglobalization” is debunked by careful definitions of the prevailing data, which shows lenders in forty jurisdictions reporting a 20 percent drop in cross-border claims from 2007-13 on a balance of payment basis, which can double count and ignore local lines of the consolidated unit. Scrubbing the numbers by bank nationality, Europe’s retreat is pervasive but can be attributed largely to cyclical deleveraging needed to meet stricter BIS capital and liquidity rules. Financial linkages also transfer technology and boost inclusion by allowing low-income borrowers access to new channels, but can favor capital over traditional labor returns to create wealth disparities. In historical experience cross-border credit flows have been pro-cyclical to amplify booms and busts, and the dollar has soared in risk aversion periods as well to harm emerging market accounts. Since the 2008 crash global monetary policy has also been ultra-sensitive to US Federal Reserve moves, and in addition to building foreign reserves macro-prudential tools have been a crucial defense, and joint regulatory approaches have been forged between geographic and functional financial system blocks. Currency swap mechanisms and tax harmonization can go further, especially with long-run interest rate correlation so tight in recent years. In a sampling of 35 countries, 25 had close spillovers from Fed rate and quantitative easing decisions, and simultaneous shocks could add another layer to the future one-world story.
Bank Capital’s Stealth Stressful Stretch
2017 April 28 by admin
The IMF’s Spring Meeting Global Financial Stability Report departed from previous warnings and hailed emerging market “resilience” with higher growth and commodity prices, and lower credit expansion and corporate leverage, but pinpointed bank capital strains in China and elsewhere despite the positive general shift. It also challenged current optimism about the “benign” rate normalization path in advanced economies, especially in the US, which could stoke asset class risks and volatility and capital outflows concentrated in local bond markets with large foreign investment and frontier destinations with thin reserve and policy buffers. Protectionism either by default or design would hit export revenues and balance sheets and lenders to that sector. Fund flow herd behavior has traditionally come from retail participants, but institutions have pared exposure in recent quarters and big multi-strategy pools unwinding positions can have outsize effects. Last year one firm divested almost 15 percent of a single country’s sovereign bonds in a reallocation, according to the study. Rising costs will add $135 billion in nonfinancial debt, and BRIC borrowers could be most vulnerable. Manufacturing exports as a share of GDP are steep across the universe range including Mexico, Malaysia and Thailand and equity markets have underperformed relative to benchmarks with cross-border trade barrier threats and rethinking of bilateral and multilateral agreements. With reversal metal and oil prices could likewise sink again after recovery the past year and layer another 1 percent onto the company borrowing total. A 300 bank sample shows “comfortable” Tier I capital, with the amount outside China up 20 percent since 2014, but asset quality doubts persist Brazil,. India and Russia have increased bad loans and reduced profits and 40 percent of the cross-section has poor loss coverage. Around $120 billion in further provisions is needed, equal to 5 percent of capital and cutting the Tier I ratio below 10 percent for one-third of the banks, while stronger systems like Colombia and Indonesia would be spared. Foreign exchange risk is another element regulators should closely monitor, and they should offer hedging tools if commercial alternatives are not readily available, the Fund suggests. China is a more urgent case where many mid-tier institutions overly rely on wholesale lines and have asset-liability mismatches, and recent state bank repo operations to inject liquidity may offer only temporary calm.
China’s massive infrastructure programs are feeling the pinch and the World Bank estimates that spending must double over the coming decades to accommodate the 9.5 billion world population in 2050. The respective shares of multilateral development agencies and private partners, at $75 billion and $150 billion, already trail the annual $1.5 trillion required, and OECD member mutual, pension and insurance funds, with $70 trillion under control should join the effort in light of lagging returns in other categories. The current developing economy pipeline is estimated at $1 trillion, focused on Asia, Europe and Latin America., and portfolio allocation should be boosted by an infrastructure bond index under creation at fund researcher Morningstar. The Bank has an array of dedicated project and policy facilities and has linked with the G-20’s global platform created when Australia was chair in a strategy to double guarantees by end-decade. The IFC has a private co-lending arrangement and the new IDA $2.5 billion low-income window has blended and currency pools for better scaling up to the crushing task, according to executives in charge of internal rebuilding.
Financial Cooperation’s Benefit Benediction
2017 April 3 by admin
Global trade associations and think tanks, wary of Trump Administration “America First” stances leaving currency and trade policies in limbo at its inaugural G-20 meeting, have prepared position papers outlining the merits of regulatory and crisis cooperation through international financial bodies the past decade. The Institute for International Finance released an update on Basel III banking and broader Financial Stability Board capital and liquidity standard harmonization praising the exercise even as it criticized delays and overreach. Risk weighting formulas for the biggest worldwide institutions are in a final phase and may shun internal calculations allowed under previous regimes. The Peterson Institute for International Economics in a separate document warned that President’s executive order rolling back the Dodd-Frank law would undercut the common norm drive since 2008, at the same time that his budget would slash development bank funding. Treasury Secretary Mnuchin had an initial cordial conversation with IMF Managing Director Lagarde, and the analysis notes that previous Republican President Bush bashed the organization before embracing it on Turkey and other rescues, but the current team may maintain distance and insist on historic revamp. The FSB’s work plan is unfinished and the US will soon name a new representative. Pending legislation in Congress would bar Federal Reserve participation in such rule setters as February’s executive decree orders a review of commitments to the Basel Core Principles which could relax current and future regulation. It seeks a “level playing field,” but foreign counterparts including the UK and European central banks fear it could unravel agreements to date and trigger a prudential “race to the bottom.” As to the global financial safety net bilateral and regional swap lines cannot approach the IMF’s $1 trillion in available resources, topped up with American support also for quota and governance reform agreed in 2009 but only completed in 2015. The US 16.5 percent voting share still offers a veto but near-term refusal to contribute or membership withdrawal could jeopardize 30 percent of permanent firepower and accelerate big developing country moves toward alternative structures. Under the 2015 bill authorizing voting changes the Congress already required closing of the exceptional access window for outsize bailouts such as in Greece, which was judged to affect Eurozone health more generally.
The World Bank’s IDA facility was replenished in 2016 with a $4 billion US pledge over the next three years, in addition to $1.5 billion in other unfulfilled development bank obligations. President Kim recently traveled to Africa and previewed $60 billion in medium-term conflict state assistance focused on refugee and fragile populations. Treasury appropriations were reduced several hundred million dollars and the State Department and AID economic accounts were slated for 30 percent adjustments, despite a letter from hundreds of former high-ranking officials emphasizing aid and diplomacy’s importance. Republicans in Congress who opposed the previous administration’s governance and funding decisions have insisted that approaches are long overdue for overhaul and have weighed in on Greece’s 7-year emergency program by discouraging more IMF outlays. European parliamentarians have also turned on their negotiators as another big repayment comes due in June, with Athens balking at further austerity as critics decry its enduring exceptional claims.
The Basel Committee’s Bruising Balance Sheet Shaft
2016 September 22 by admin
Banking industry associations representing and working in emerging economies have intensified criticism of Basel Committee credit, trading and operating risk proposals as detrimental with their limited supplemental capital market reliance. The Institute for International Finance in a September paper singled out the standard approach replacing internal ratings system as overly rigid in its unintended “downstream impact “on trade finance, corporate borrowing and hedging, and infrastructure, although it also contains pro-active provisions on house loans and other areas which are beneficial. Export credit is estimated at $10 trillion annually and is low-risk as a collateralized, self-liquidating product, but the regulators’ so-called conversion factor drawn from external agency ratings may raise counterparty percent weightings by triple-digits, according to an International Chamber of Commerce study. Companies depend on banks rather than bond markets, which are thin and illiquid even for big countries like Brazil, Turkey, Mexico and India where the turnover ratio is barely 0.1 percent. Foreign lenders have been steadily retrenching the past decade, with their share of total banking assets down to 15 percent from 25 percent at the peak. Borrowers outside Latin America “typically” lack external credit ratings and are thus subject to 100 percent set aside under the draft Basel formula, which also applies for the first time to subsidiaries of large consolidated groups with holdings over EUR 50 billion. Unhedged foreign currency facilities carry a further 50 percent charge without proof of revenue streams in that unit. Emerging market derivatives are more costly under the model since they are uncollateralized and require additional information technology outlays that may be prohibitive. Infrastructure as an asset class falls under the Specialized Lending category with “adverse treatment” that fails to account for individual transaction features and historically low default rates. Often official credit agencies offer guarantees and other risk mitigation and financing structures have ample equity and senior debt safety cushions, the IIF argues.
On sovereign bonds the G-20 has been debating separately a framework for GDP-linked instruments, which would allow developing economies to deleverage with public debt levels at their highest since the 1980s amid volatile and declining growth. The central banks of Argentina and Canada presented a joint review for the Hangzhou China summit, and Germany as next year’s host agreed to keep the idea on the agenda. The authors note as in Argentina’s case that “warrants” tied to output thresholds have been a sweetener in commercial restructurings, but a full-fledged risk-sharing bond has yet to be issued to reduce solvency crisis odds. Countries worry that the yield premium demanded will be too steep and not change overall sustainability, while traditional investors like pension funds face difficulty pricing the equity-like component and placing allocation within the existing spectrum. They may also insist on greater returns due to novelty and illiquidity despite the innovation’s potential value to global financial system functioning, as with recent legal breakthroughs on collective action clauses. Government national account measurement and reporting is another concern prominent in Argentina’s episode, and accuracy and frequency challenges may be referred to the IMF under an indicative term sheet under preparation at the Bank of England with public and private sector consultation. It should be simpler than warrant guidelines and have international and domestic law versions for balance sheet flexibility.
Digital Finance’s Tentative Thumbs Up
2016 August 11 by admin
The Brookings Institute published the second annual edition of its digital and financial inclusion report surveying two dozen low and middle-income economies, with strides toward the 2030 Sustainable Development Goals despite large gender, technology and regulatory gaps. It describes formal banking provision, but finds that almost one-fifth of savers in underserved populations use informal clubs. The US is outside the scope, but 8 percent of households lack accounts and consumer protection is still evolving toward payday lenders and similar nonbank channels. The Treasury Department and Agency for International Development have teamed on “empowerment initiatives” particularly targeting marginalized communities along the Texas-Mexico border and in Appalachia. Africa is well represented in the top ten performers, with Kenya number one at an overall 85 score and South Africa, Uganda, Rwanda and Nigeria in the group. Latin America’s contingent is almost equal from Colombia, Brazil, Chile and Mexico, while the Philippines rounds out the pack and Turkey and India are just behind at over 70 results. Egypt was at the bottom with the only total below 50, ranking in back of Afghanistan, Ethiopia and Haiti as measured by country commitment, mobile capacity, regulatory climate and adoption. A new addition, El Salvador, was singled out for progress, while Peru was praised among existing members for designing a national inclusion strategy, which will be the responsibility of recently-inaugurated President and former investment banker known as PPK to implement. During the campaign income inequality and social safety nets were major issues, and the incoming administration will promote rural and indigenous citizen financial service access as a priority, officials insist. Next-door Colombia sets specific benchmarks for adult product penetration (75 percent) and active accounts (55percent). Mexico collects both demand and supply-side data and stresses education and an access point for every 10,000 savers in its approach. African countries lead in mobile money application but lag in capacity pending greater “buildout,” according to the study.
Interoperable digital payment platforms are an overriding supervisory challenge for central banks and service providers, with the Philippines’ GCash and PayMaya a good recent example of innovation and oversight coordination. India followed in 2015 with an agreement in principle among a dozen users for a common network to be established under Reserve bank rules. However a sizable gender disparity lingers in the developing world with women nine points behind men on formal financial system engagement. The Brookings project urged more information collection, detailed targets, country models such as Zambia’s female enterprise credit push, and biometric features to facilitate digital preference while safeguarding privacy. It added that post offices should be core to outreach as World Bank and Gallup surveys have found them to be popular and comfortable transaction locations. Migrants and refugees are also “under-resourced” and three countries in the ranking, Turkey, Pakistan and Ethiopia are among the top refugee hosts globally. Youth need to be served and branchless banking is natural given constant movement from influx to accommodation and resettlement. Language is another barrier, and technology for verifying identity in food and allowance allocation could be adapted for microfinance and small business credit, and relief organizations are already working with development partners on these more inclusive schemes, the document concludes.
Financial Inclusion’s Anguished Acceptance Angles
2016 July 15 by admin
Mainstream global banks through the IIF and microfinance provider Accion International released a survey of two dozen emerging market experiences with financial inclusion, which highlighted traditional bank importance as a channel while relating commercial and policy obstacles hampering progress. The definition goes beyond simple account-holding to encompass a full credit and insurance product range and associated education and training. Unbanked and under-banked customers in low and middle-income economies are a $400 billion market, according to management consultant Accenture and of the $700 million new accounts opened in this category from 2011-14, 90 percent were in brick and mortar intermediaries with the remainder mobile-phone innovators. The bottom income category with deposits rose from 40 percent to 55 percent of the total over the period, but less than 5 percent were in mobile money, and the focus of the IIF-Accion survey is thus on retail commercial banks. Among well-known names with a long history are Turkey’s Isbank, South Africa’s Standard Bank, and Pakistan’s Habib Bank, and they combine business development with social responsibility mandates and target rural and remote households, informal entrepreneurs and women without credit scores. Kenyan and East European banks have insurance company partnerships, and ATM and e-money technology evolution are priorities. They try to compete with platforms like Peru’s BiM that can be accessed with cheap smart phones, the report points out.
Digital payments for government, business and personal purposes are used for processing and cross-selling, often through payroll advances to companies. However connectivity can be compromised by lagging infrastructure and power supply, and a big deterrent is the lack of trust in the automated chain. Banks have put agents in place to assure clients and ensure quality control, but turnover is a problem and the cultural preference for cash is strong throughout the developing world. Commercial banks can have dedicated microfinance divisions such as HSBC in India and Santander in Brazil, which has over 350,000 borrowers with an average loan of $800. Rural credit unions in China sponsor these schemes, and fintech firms have also entered the space upon launch. Data collection and analysis through proprietary programs are advancing rapidly, with Commercial Bank of Africa an example of an algorithmic approach for immediate approval of one-month facilities. Credit bureaus contribute to this information, but their output is often inadequate or missing for a real-time customer profile. Even with aggressive recruitment “dormancy” is an issue with 40 percent of South Asian adults not tapping their account for a year or more, or running it down to zero balance. According to a Global Financial Literacy study, only one-third of clients have proper understanding of savings alternatives, and banks have started their own public service efforts in addition to simplifying offerings. Reaching break-even level and profitability are long struggles, and even when the latter is accomplished it only lasts for 3-5 years until margin and scale squeezes. Policymakers can aid growth through less onerous identity and criminal reporting requirements, removal of interest rate restrictions, better data sharing protocols and improve regulator capacity. The Basel Committee could also ease capital rules for this limited high-risk activity, and regular official dialogue should also be private sector-inclusive, the report recommends.