Promoting Financial Inclusion - United Nations Development ...

4. The KCC, an excellent idea from the
perspective of the user, is constrained
and ill-administered on account of
the limited interest rate (just 9% on
crop loans) earned by the banks. The
margin between the cost of funds and
the lending rate is insufficient to cover
both the administrative cost and the
high risk associated with agricultural
lending. Hence, all the problems in the
KCC with credit limits that are too
low and with onerous documentation
procedures.
5. Repeated attempts to revive the
cooperatives with cash injections to
wipe out losses, provide training to
managers, now also to improve the
information technology environment
while the real issue is the governance
failure of such institutions. This is a
matter that is unlikely to be effectively
addressed in an environment repeatedly
re-charged by elections at multiple levels
of the political system. It is politically
correct to “revive” cooperatives but
perhaps the re-vitalisation of the RRBs
through a politically difficult process of
privatisation would be more effective
for financial inclusion.
In most of these issues, regulators and
governments have sought to protect the
poor and incidentally their own reputations
(regulators) or popularity (governments) by
the adoption of low risk strategies. While
this may be seen as a prudential approach,
the welfare minimising implications of such
strategies need to be considered.
• Does the lack of deposit services for
the poor result in more loss of savings
through theft from their homes than
what would result from any institutional
misappropriation?
• Does the lack of cover due to an
inefficient claims management system
for microinsurance cause more welfare
losses for the poor through variable
incomes and insecurity than any claims
misappropriation by local institutions
would cause?
• Do low priced products necessarily
mean low volume availability?
• Do 120 million low income families
deserve to be financially excluded?
Perhaps the price of prudence in the
regulation and promotion of financial
services for low income families is
substantial welfare foregone. Perhaps
this price is substantially higher than the
cost likely to be incurred on regulation
and supervision of a more dynamic system
of inclusion through the formal financial
system risk associated with a bolder, more
experimental approach. It is a matter
of consideration for all stakeholders
involved.
EXECUTIVE SUMMARY
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