Poor Market Practices Create Distrust-CBSL
By Paneetha Ameresekere
Poor market practices by financial service providers (FSPs) can create distrust, especially among consumers with low incomes and financial literacy levels, the Central Bank of Sri Lanka (CBSL), in a recent report, said.
The report titled ‘National Financial Inclusion Strategy for Sri Lanka (2021-2024)’ devised by CBSL with technical inputs and financing by the International Finance Corporation (IFC) and co-financed by the Australian Government and released on 4 March 2021 warned that this (poor market practices) can reduce financial inclusion, as consumers turn to informal sources for finance or opt out of the financial sector entirely.
Several stakeholders have contributed to the NFIS led by CBSL and with technical and financial assistance from the IFC, a World Bank adjunct wholly dedicated towards the uplift of the private sector, in partnership with the Australian Government, it added.
The report also said that the majority of mobile money accountholders in Sri Lanka use their account to send money or reload their phone, while less than 30 per cent use their accounts to make merchant payments, said that in addition to low overall ownership of mobile money accounts, there is also low regular usage of mobile money accounts among those who do subscribe to mobile money accounts.
The most common reasons for not using them include not seeing the need and not knowing how to use it, the report said.
While most Sri Lankans have access to a mobile phone (80 per cent), however, access to a (non-mobile) internet connection (19 per cent) and access to a computer (25 percent) both remain low, the report said.
In terms of mobile penetration, the survey notes that 82 per cent of the respondents owned a mobile phone. “A gender gap is noted where 86 per cent of men compared with 79 percent of women owned a mobile phone,”the study added.
Subhead: Feature Phones
Feature phones (not as advanced as a smartphone) remain the popular choice (61 per cent) compared with smartphones, the study further said.
“Meanwhile, the digital gender gap is further evident in Sri Lanka with just 1.2 percent of women using mobile money compared with 4.9 percent of men, even though over 80 per cent of Sri Lankans have mobile phones and mobile money services are available to 90 percent of mobile phone subscribers, nonetheless only two percent of adults in Sri Lanka actually own a mobile money account, which is considerably lower than the regional average four percent in South Asia (2017 Global Findex),” the study said.
Further, access to suitable credit products from formal providers remains a significant barrier for both individuals and micro, small and medium enterprises (MSMEs).
However, supporting the growth of MSMEs is a priority for the national policy agenda as they represent over 90 per cent of businesses, employ around three million people and are a major contributor to employment and Sri Lanka’s economic growth, the study said. Nonetheless, they face numerous obstacles including difficulty in accessing appropriate, affordable financial products and services.
Poor market practices by financial service providers (FSPs) can create distrust, especially among consumers with low incomes and financial literacy levels, the study warned. This can reduce financial inclusion, as consumers turn to informal sources for finance or opt out of the financial sector entirely, it said.
This has to be looked at in the context that despite high levels of awareness of various sources of borrowings, particularly from banks, actual usage was considerably low, the study said.
Borrowing from pawning centres appears to be more popular among Sri Lankan adults. Women’s reliance on the informal sector for borrowing was greater at 62 per cent when compared to their male counterparts (52 per cent)-See below.
This was despite the fact that the policy efforts to improve delivery channels across the country have been successful as seen in the expansion of bank branches, the study said. Howbeit, policymakers are already implementing initiatives to strengthen protection for financial consumers, the study added.
Under the National Financial Inclusion Strategy (NFIS), existing efforts to develop regulatory frameworks for financial consumer protection and enhance supervisory activities will continue and will be expanded, it further said. The aim is to protect consumers and contribute to increasing the adoption and use of financial products in Sri Lanka.
Nonetheless, poor financial literacy among individuals and MSMEs in Sri Lanka decreases the uptake and usage of financial products and services which in turn prevents consumers from reaping the benefits of financial inclusion, the report warned.
Low financial literacy also puts consumers at risk of unscrupulous market practices, the report further warned. Against this backdrop, improving the population’s financial literacy will help to increase financial inclusion in the country, it added.
Howbeit, comprehensive and robust data are essential to ensure evidence-based policies and will help to monitor results and evaluate the effectiveness of any initiatives. Therefore, developing mechanisms for data reporting among agencies to provide easy access to accurate, relevant, and timely data are essential, it also said.
Strong financial infrastructure, for example, credit bureaus, payments systems, and collateral registries, can help FSPs evaluate customers effectively, provide affordable products and reach remote consumers via low-cost channels, the report further said.
Efforts are already underway in Sri Lanka to expand the existing credit information system and secured transactions framework, and these will be supported under the NFIS, it added.
While policy tools support financial inclusion, an enabling regulatory environment is equally essential to achieve progress in the four areas of Sri Lanka’s NFIS vis-à-vis ‘Digital Finance,’ ‘MSME Finance,’ ‘Consumer Protection’ and ‘Financial Literacy and Capacity Building’ respectively, the publication said. Three core enablers which will help to achieve progress in these areas according to the study were ‘Data,’ ‘Infrastructure’ and ‘Policy Tools and an Enabling Regulatory Environment,’ it said.
‘A balanced regulatory framework will also help FSPs to be flexible and innovative, while mitigating risks to consumers and the nation’s financial stability,’ the report said.
However, effectively implementing the NFIS requires high-level support and ongoing coordination among public and private sector stakeholders, the report said. It identified these stakeholders as being the CBSL; Ministries of Finance, Digital Infrastructure and Information Technology, Education, Industry and Transport; State ministries of Samurdhi, Home Economy, Microfinance, Self-Employment, Business Development & Utilization State Resource Development and Skills Development, Vocational Training, Research and Innovations; Departments for Registrations of Persons, Cooperative Development and Agrarian Development; Colombo Stock Exchange; Credit Information Bureau; LankaClear; Public Utility Commission of Sri Lanka; Insurance Regulatory Commission of Sri Lanka; Securities and Exchange Commission of Sri Lanka; Telecommunications Regulatory Commission; Finance Commission; Financial Ombudsman of Sri Lanka; Sri Lanka Banks’ Association; Lanka Microfinance Practitioners Association and Finance House Association of Sri Lanka respectively.
Nonetheless, a clear governance structure is necessary, with a formal set of functional entities overseeing implementation, monitoring progress and providing policy guidance throughout the life of the NFIS, the report said.
With this purpose, a governance structure for Sri Lanka’s NFIS is proposed. Those are: National Financial Inclusion Council: ‘The Council will provide overall leadership, policy guidance, and strategic direction for the NFIS and oversee the NFIS implementation with support from the ‘Management Committee’ and the Secretariat. The Secretariat will be established at the CBSL while the Management Committee will include ‘Working Groups’ comprising ‘Digital Finance and Payments,’ ‘MSME Finance,’ ‘Consumer Protection’ and ‘Financial Literacy and Capacity Building’ while the ‘Enablers’ will include ‘Data,’ ‘Infrastructure,’ ‘Policy Tool and Enabling’ and ‘Regulatory Environment,’ respectively, the report said.
The National Financial Inclusion Council will be co-chaired by Finance Ministry Secretary and CBSL Governor. The Council will meet at least twice a year, it said.
NFIS Secretariat: The Secretariat at the CBSL will ensure coordination and monitoring across the different entities contributing to NFIS targets and will provide technical and administrative support to the National Financial Inclusion Council, Management Committee, and working groups which each carry different levels of responsibility.
The working group clusters are to be formed under the titles of ‘Digital Finance and Payments Group,’ ‘MSME Finance Group,’ ‘Consumer Protection Group’ and the ‘Financial Literacy and Capacity Building Group,’ respectively.
The Secretariat has responsibility for monitoring and evaluation (M&E), coordinating the day-to-day execution of the M&E system and providing technical expertise to strengthen the M&E capabilities of implementing institutions. Each implementing entity will be responsible for reporting their status, obstacles to completion and estimated completion dates, the study said.
The NFIS 2021-2024 provides a standardised and coordinated approach, including an action plan for all stakeholders to improve financial inclusion in Sri Lanka. It sets out how the strategy’s objectives can be achieved in a timely manner and encourages existing and new parties to create new initiatives to improve financial inclusion, the report added.
Strengthening Data Infrastructure: Access to high-quality relevant data is the foundation of a robust M&E system as it provides greater insight into the full breadth of the objectives and actions defined in the NFIS. It is critical to prioritize efforts that will increase the scope and quality of Sri Lanka’s financial inclusion data infrastructure. It is especially important to improve demand-side measurement and supplement it with better quality and more frequent supply-side financial inclusion data, the study said. The data should be collected directly from FSPs and cover MSME finance, financial literacy, and the usage of digital financial services (DFS).
Access to Borrowings: Whilst access to accounts provides an entry to the formal financial system, this access however seems to be under-utilised in terms of borrowing. According to the FIS, only 49 per cent of respondents in a survey conducted, reported any borrowing, the report said.
Of this 49 per cent, 52 per cent had borrowed from formal financial institutions, i.e. banks, finance companies and leasing companies, while 48 per cent had borrowed from semi-formal and informal sources i.e. micro finance institutions (MFIs), Government community programmes, family and friends, cooperatives and moneylenders.
Despite high levels of awareness of various sources of borrowings, particularly from banks, actual usage was considerably low. Borrowing from pawning centres appears to be more popular among Sri Lankan adults. Women’s reliance on the informal sector for borrowing was greater at 62 per cent when compared to their male counterparts (52 per cent), it said. (Concluded)