It’s a tough time to be a banker.
Last month, during Germany’s “Blockupy” protests in Frankfurt, police warned bankers not to wear suits and keep a low profile as 25,000 marchers swarmed the streets with banners reading “Break the Banks’ Power!” Earlier in Spain, riot police protected Caja Madrid bank as citizens made clear their view that the bank “cheats, defrauds and throws people out of their houses.”
In Mexico, which last week hosted the G20 summit, the picture is starkly different. Ever since its watershed elections in 2000, which ushered in an era of transparent, participatory governance, Mexico has used its banking system to lift the poor into the middle class and reduce poverty. The strategy has been successful: It has provided savings accounts to millions of low-income households and increased incomes in some locations by up to 7 percent. It makes sense, then, that Mexico made banking the poor the G20 summit’s No. 2 priority.
In Mexico, Vicente Fox’s 2000 election marked the end of 71 years of domination by a single political party, and led to widespread expectations of a more open, participatory and transparent government. At that time, as described by a recent report by the Center for Global Development (CGD), about half of Mexico’s population lived in poverty, and even in metropolitan areas, about three-quarters lacked access to financial services. Unlike past governments, the Fox administration saw a clear link between the lack of access to savings and poverty. This realization prompted the government to initiate what the World Bank has described as “the most ambitious effort to massively scale-up access to financial services for poor and marginalized people in the world.”
Though the reforms initiated by Fox were wide-ranging, two facets are particularly replicable: the mobilization of savings through the creation of the National Savings and Financial Services Bank (BANSEFI), and the loosening of requirements for entities that wanted to conduct banking activities. Because traditional banks were generally not interested in developing products — like savings accounts — tailored to the poor, the government funded that work. In addition, government funds enabled different outlets to provide banking services, which increased competition for low income account-holders.
Though not without flaws, the impact of these policies over the past 10 years is staggering. The reach of BANSEFI and related savings institutions is almost 25 percent greater than commercial banks, and almost five times greater in poor localities. What is most promising about this development is that, after seeing over a 200 percent growth in deposits in its first seven years, BANSEFI is now turning a profit.
The most salient example of a non-traditional outlet successfully providing financial services was Banco Azteca. Launched by Grupo Elektra, one of the largest retailers of electronic and household appliances in Mexico, Banco Azteca opened 250,000 savings accounts in its first three months of operation. A recent comparison of Elektra stores that opened banks with those that didn’t underscored the power of accounts: Municipalities with an Elektra-sponsored bank reported an average income increase of 7 percent, and total employment by 1 percent.
Evidence of the positive impact of financial inclusion is not limited to Mexico. For instance, between 1977 and 1990, the Reserve Bank of India forced commercial banks seeking to open a new branch where one already existed to open four branches in locations with no banking coverage. This expansion accounted for up to 60 percent of all rural poverty reduction during the period, according to a World Bank study. Studies from Kenya, Ethiopia and Tanzania also suggest that increasing credit availability for farmers allows them to raise income through purchasing more inputs.
Of course, simply giving the poor bank accounts is not enough to lift them out of poverty. Households that are unfamiliar with formal financial services need education on how they work. More importantly, they have to gradually build trust in an unfamiliar system, and banks must learn how to meet their needs. Lastly, low-income households are a heterogeneous community, so the creation of a variety of individual products will be necessary to capture this market.
The economic crisis has laid bare the potential for banks and the financial system to damage the long-term well being of low-income and middle-class households. At the same time, the experience of countries like Mexico shows that banks can also play a critical role in reducing poverty and increasing the incomes of poor households. Of the many challenges Mexico took upon itself leading the G20 summit in Los Cabos, probably the most significant was convincing the world that financial services have an important role to play in improving the lives of the poor.