Access to Finance
Some 3 billion adults - more than half of the population in developing countries - have little or no access to formal financial services. A large majority of low-income households are underserved in terms of the quality and quantity of products and services available to them. As a result, they must rely on informal options that are often more expensive and less reliable. Restricted access to finance limits people’s choices and economic opportunities. Even when financial institutions would like to expand their services to underserved segments of the population, the poor financial infrastructure in many developing countries often limits them in doing so. Financial exclusion carries risks—such as threats to financial integrity and international security (for example, the money laundering and terrorist financing risks of cash transactions, often conducted across borders, through informal providers); social and political instability; and even financial instability (for example, political unrest touched off by pyramid schemes, organized as informal savings and investment opportunities, that trigger lack of confidence in the banking system).1
FIRST has funded some 50 access-to-finance TA projects for a total of about US$12 million. FIRST’s efforts support the underserved and financially excluded through TA projects aimed at expanding access to financial services for low-income households and for SMEs, strengthening consumer protection, and building essential financial infrastructure. Projects span the financial spectrum—banking , microfinance , rural cooperatives , housing finance , micro-insurance , remittances , consumer protection , secured lending , pensions , payment systems , and credit bureaus . Projects cover many dimensions of access issues, ranging from developing legal, regulatory, and supervisory frameworks to supporting product development, innovation, and strategy building.
1“Global Standard-Setting Bodies and Financial Inclusion for the Poor – Toward Proportionate Standards and Guidance,” white paper prepared by the CGAP on behalf of the Global Partnership for Financial Inclusion.
FIRST committed about US$ 5 million in supporting crisis preparedness projects, helping more than 40 countries to improve the state of their preparedness to avoid and manage financial crisis, and thereby reduce the ensuing costs.
Financial crises have become an all too common occurrence over the past 20 years, largely as a result of changes in finance brought about by increasing internationalization and integration. As domestic financial systems and economies have become more interlinked, weaknesses have begun to significantly affect not only individual economies but also markets, financial intermediaries, and economies around the world. Most crisis simulation exercises lead to follow-up TA requests to FIRST to implement the recommendations of an action plan and to strengthen a crisis preparedness framework.
Strategic FSAP Implementation
FIRST funds FSAP follow-up projects in all sectors.
Systematic follow-up on the recommendations of financial sector diagnostic work can be challenging, even for committed financial sector authorities. Diagnostic work such as the World Bank/IMF FSAP can help national financial sector authorities to identify the key legal, regulatory, and supervisory impediments to development of the sector. However, implementing such diagnostics can be a complex undertaking in the face of limited capacity to prioritize the recommendations and to translate them into manageable, actionable steps. This situation is often compounded by difficulty in raising the necessary TA funding for implementation work.
FIRST Financial Sector Development Strategies (FSDS) address these challenges through a logical and sequenced approach, delivering a logical, relevant, and clearly defined strategy and action plan to strengthen the financial sector with the critical short-term outcome of catalyzing significant donor funding to take implementation forward.
The FSDS process consists of three key stages:
1. Effective prioritization and country ownership
The Financial Sector Development Strategy project starts with a prioritization and sequencing of reform recommendations through the country’s strategic lens. In addition to the FSAP, the process incorporates the country’s own specific national priorities such as an existing national development plan or sub-sector development strategy, or other donor assistance strategies as well as new priority areas for financial sector development, to ensure country ownership and relevance of the strategy.
2. Implementation road map
Once the recommendations are prioritized and discussed with the authorities, a comprehensive action plan is developed. To that effect, expert FIRST funded consultants conduct additional analytical work as necessary and then work directly with the NSC, subcommittees, and other stakeholders to prepare an overall cohesive and comprehensive sector development strategy, including a detailed, time-bound, and budgeted action plan to ensure the plan is concrete and can be implemented.
3. Donor coordination and leverage
For a small upfront investment, the FSDS can catalyze significant additional donor resources. The FSDS culminates with a presentation of the strategy and action plan to relevant donors and stakeholders to obtain their financial and technical support for the implementation of each recommendation. FIRST’s experience to date shows that the FSDS is a highly effective tool for catalyzing financial support for implementation work.
Since its inception in 2003, FIRST has committed US$24 million in supporting projects that have led to improvements in the legal and regulatory frameworks of about 100 countries. Table below lists the allocation of these projects by sector.
Projects to Improve Legislation by Sector, cumulative as of June 30, 2011
FIRST’s TA in legal reform is most effective when it is part of organized policy planning and implementation. As such, those FIRST legal projects that closely follow on FSAPs or ROSCs prove more sustainable. They also are the most likely to demonstrate immediate impact in the legal environment. Such projects have proven fundamental to building financial systems that are strong, resilient, and stable.