Publications

Financial Inclusion in the technology-led globalization age

Executive Summary

The importance of financial inclusion to development is nowadays widely recognized in the international development community and by policymakers in developed and developing economies. Globally, there is still an estimated of 1.7 billion adults do not have access to a transaction account that can be used to receive payments and make deposits. Given this fact, the Arab region's financial services industry and policymakers have taken over the past five years significant steps to recognize and address challenges to meaningful financial inclusion.

In this context and as the Arab region refines its financial inclusion strategies and while many foundations and drivers exist for achieving financial access objectives, it appears that the potential impact of modernizing payments systems in the region and expending digital financial services through a more extensive acceptance of electronic payments is substantial.

On another hand, cross border payments are becoming increasingly more prevalent in today’s global economy at a time where the dynamism digital innovation has brought new opportunities. This is also acute for cross-border retail payments as we may soon live in a world where not only large corporates, but also retailers, SMEs, and individuals use international payments regularly, using a range of solutions and providers through integrated commerce or trade interfaces. Particularly, the continued expansionary growth in remittances flows and e-Commerce further highlights the need for more attention to be placed on cross-border retail payment activities and how the ecosystem is evolving and finding efficiencies with which to facilitate such transactions.

In this regard, the need to diversify payments systems platforms and payment service providers to facilitate seamless cross-border payments at scale in the Arab region has never been greater, given that digitally enabled financial inclusion can help bring 63 percent of the Arab region’s individuals and MSMEs into the formal financial sector. Moreover, the region is home to a forecasted record-level of remittance flows of USD 60 billion in 2019, however, efforts to employ remittances in the formal financial system face several challenges, the most important of which is the high cost of sending and receiving remittances across the Arab region.

In addition, the economic and financial trends in the region point towards an acceleration of low-value payment flows, considering the growing international trade and labor & capital mobility within the region. This trend is expected to continue due to the multi-lateral policy initiatives aimed at enhancing intra-Arab regional economic growth. In fact, the Arab region presents an attractive hub for low value payments which comprise 70 percent of total transactions received in 2018. Moreover, the low value payments also comprise an important share of total transactions within the region, estimated at 60 percent in 2018.

However, cross-border regional payments are facing increasing challenges and pressure. On the one hand, traditional channels and tools are facing increased stringency for compliance requirements, in addition to risks and  also risks and challenges from fast-growing technology companies who have developed new business models that are attracting new customers and increasing their market share, especially in the context of the emergence of disruptive technologies, which is, from another hand, challenging Central Banks’ ability to trace and oversee cross-border transactions. At the forefront of these challenges are high transaction fees, lengthy compliance processes and long end-to-end transfer times are the main pain points associated with the current cross-border payments models.

To address these challenges, new technology and regional arrangements may complement the traditional channels and provide a more inclusive and efficient gateway to payments and cross-border remittances for both individuals and businesses alike. In addition, technological infrastructure is developing, such as faster payment systems, along with the potential for more transparent and simpler product offerings enabled by richer data and lower-cost processing. These new building blocks may make a difference on their own and, more importantly, may be combined in powerful ways to bring end-to-end solutions to financial inclusion.

Although a single global payment area is not likely to emerge any time soon, parties should nonetheless be able to pay everywhere, despite varying standards and infrastructures. In this perspective, this study highlights some of the key channels through which cross-border retail payments are made, provides an overview of the various interactions and dimensions of cross-border retail payment in the Arab region, touches on developments in the industry and the ongoing efforts to promote cross-border funds transfer in the context of increasing role of regional cross-border payment and settlement platforms.

Moreover, the study explores various prospects and opportunities that “Buna Platform”, an Arab regional payment and settlement system, can provide in expanding access and usage of financial services.

Finally, the study provides some high-level recommendations on what would need to be implemented at both policy-makers and market-players levels, including the development of  mobile payment platforms as well as a regional digital settlement currency, all with ultimate objective of support to the financial inclusion agenda in the Arab region.

PDF icon Financial Inclusion in the technology-led globalization age

Enabling Environment for Agricultural Finance in the Arab Region

In the framework of Financial Inclusion for the Arab Region Initiative (FIARI), the Arab Monetary Fund in collaboration with the World Bank and with support of the Financial Inclusion Task Force in the Arab Region has released a new publication on Regulatory Environment and Policy Interventions for Agricultural Finance in Arab Countries. It presents findings of a diagnostic of agricultural finance in Arab countries from July-October 2018.

The agriculture sector plays an important role in supporting a sustainable development trajectory for the Arab world. Almost a quarter of the working population in the region is involved in agricultural activities, while the agriculture sector on average contributes to 5.9 percent of the GDP. There is great potential to modernize the agriculture sector, thus empowering rural population and reducing the income gap between rural and urban areas. A modernized agriculture sector will also help better manage scarce water and land resources, alleviate the region’s heavy reliance on food importing and reduce its exposure to international food market risks. 

Current investment to the agriculture sector is nevertheless limited for the needed transformation. On average, agriculture sector receives disproportionately low level of credit from private sector comparing to the sector’s contribution to national economies. Non-performing loans ratios are particularly high for agricultural loans in Arab countries, which might further deter financial institutions from serving the market. Only 27.6 percent of rural adults have an account at a financial institution, comparing with a world average of 64.4 percent. Only 4.8 percent of rural adults have borrowed from a financial institution.

An enabling environment- with targeted and effective agricultural finance policies and regulations, along with established financial infrastructure- is essential to ensure a well-functioning financial system that promotes the development of agricultural finance. This analysis focuses on assessing the financial regulatory and policy environment as well as financial infrastructure for agricultural finance in Arab countries. It aims to assist policy-makers in identifying regulatory barriers and gaining knowledge on best practices.

Governments and central banks play an important role in promoting agricultural finance. A paradigm shift from direct public financing to creating an enabling environment to maximize private sector financing has proven to be more effective and sustainable. Targeted and effective agricultural finance policies, smart regulations, well-established financial infrastructure are essential components of an enabling environment.

The diagnostic focuses on regulatory frameworks and policy interventions that fall under the domain of central banks.

The diagnostic focuses on regulatory frameworks and policy interventions that fall under the domain of central banks. To collect information on relevant regulation and policy, a standardized questionnaire was circulated to Arab Central Banks and Monetary Authorities. Analyses of regulatory and policy environments throughout the report were exclusively based on responses to the questionnaire. Findings on the regulatory and policy environment for agricultural finance are as below:  Findings on the regulatory and policy environment for agricultural finance are as below:   

There exists limited regulatory framework to support the establishment and operation of local financial institutions. Appropriate prudential regulations for MFIs and financial cooperatives support sustainable development of local financial institutions such as MFIs and financial cooperatives, and untap their potential in serving the unbanked population.

The Arab World is making great endeavors to promote e-money activities but there is a need of regulatory guidelines to support other innovative ways of delivering financial services such as agent banking. Leveraging the extensive outreach of non-bank institutions help promote financial inclusion in rural areas. 

Secured transaction laws as well as other legislations relating to agricultural collateral such as warehouse receipts law need to be further improved in the region. Many smallholder farmers do not have access or ownership of immovable asset and are unable to pledge it to secure loans. Regulation can play a key role in facilitating the recognition of available collateral for farmers.

Credit guarantee mechanism and interest rate cap are the most commonly used agricultural finance policy tools in the region. Morocco, Egypt, West Bank and Gaza and Lebanon have established credit guarantee mechanisms for agricultural loans, though agricultural loans only account for a small portion of the guaranteed loans. In addition, features of those credit guarantee mechanisms vary across countries as to coverage and fees. Effectiveness of those policies depend largely on the country contexts and are not measured in this report.

A few Arab countries are at the frontier of establishing enabling financial infrastructure United Arab Emirates, Bahrain, Egypt, West Bank and Gaza and Saudi Arabia have established comprehensive rules and practices to improve the coverage, scope and accessibility of credit information. This is reflected as obtaining full score on Doing Business-Credit Information Index by those countries/economies. However, only United Arab Emirates, Egypt, and Palestine Territories have a collateral registry in operation in the region.

In summary, though the Arab world has made great endeavors to create an enabling environment to promote agricultural finance in certain aspects such as e-money and credit information availability, there lies significant room for the region to improve its regulatory and policy environment. A combination of policies and actions are needed.

The report also includes a toolkit detailing what regulatory and policy tools are available and how they could be adopted by governments and central banks. To better understand both the supply and demand side in facilitating access to agricultural finance at the country level, or to implement reform based on global best practices, policymakers need to conduct in-country agricultural finance diagnostics which is beyond the scope of this report.

PDF icon Enabling Environment for Agricultural Finance in the Arab Region

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Financial Inclusion Measurement in the Arab World

Requirements of adoption a National Comprehensive Strategy to enhance the financial inclusion in Arab countries

The Inter-relationship between Financial Stability and Financial Inclusion

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