Transparency for affordable finance
In Germany early this year, I had the honor of receiving the Karlsruhe Sustainable Finance Award given to the Development Bank of the Philippines for its water and forest financing projects. The organizers likewise run a global sustainable finance conference where Jennifer Tankard of UK’s Community Development Foundation was a speaker. She discussed the role of transparency as a key to providing affordable finance to low income communities.
While one would readily assume that financial exclusion is problematic in a developing country like the Philippines, it was a revelation that the same problem exists in the UK. Tankard reports that in the UK: 1.4 million people do not have a bank account, a fifth of households have no insurance protections and 8 million households have no savings.
In order to confront the financial exclusion issue, a partnership of national organizations called the Community Investment Coalition campaigned to develop a voluntary disclosure framework by financial institutions. The objectives were to achieve more transparency, more diversity of providers, more innovation, sustainable local economic growth and better financial literacy.
A catalyst for progressive change
It was agreed that data disclosure by finance service providers could be a catalyst for progressive change. It will identify overall availability of banking services in deprived communities. It will allow for more effective targeting of scarce resources to deprived areas by government, economic regulators and social investors. Finally, it will enable cross-reference with other measures of deprivation at the local level to better inform local economic and community development strategies.
The UK initiative cited the Community Reinvestment Act in the USA as a best practice model. The CRA requires that institutions ensure access to financial services in any community where they take deposits. The performance of financial institutions is assessed on this basis and this assessment is supported by the release of information concerning their lending patterns and service provision.
The CRA has been credited in several studies to encourage financial institutions to lend to redlined neighborhoods. Lending to low and moderate income and minority borrowers increased in a faster pace than lending to higher income borrowers. And the US Department of Treasury found that the CRA accounted for up to 20 percent of the growth in low and moderate income lending among CRA lenders.
Support targeted intervention
In 2013, Community Investment Coalition lobbied for transparency to increase competition and tackle financial exclusion by supporting targeted intervention. The banks and the British Bankers Association were initially strongly against the data disclosure. But with the backing of politicians from all political parties, the Church of England and small business representatives, and with promise of data protection, a modified voluntary disclosure agreement was reached, covering 60 percent of the markets.
Danny Alexander, the chief secretary to the Treasury announced the voluntary framework in July 2013. “The government is committed to creating a strong and safer banking system that serves the UK economy… business will be able to see exactly where the major banks are lending—up to within a few streets of their premises… It is a major step forward in terms of transparency and should encourage competition by helping small lenders to identify gaps in the market and allowing business to hold their local banks to account where they aren’t lending.”
An insightful analysis of underserved communities
The CIC believed that transparency will allow society to cut through the banks “spin” and build an evidence base to identify underserved markets, market opportunities and areas where the markets are unlikely to meet local financial needs. Today, the data are being used for detailed and insightful analysis of UK communities that are underserved by UK’s main high street banks. While there is initial success, more variables are needed for full disclosure. A number of high profile/highly regarded reports are now referring the data even as there is a need for granularity. However, even banks originally against the idea are less hostile, as it helps restore trust. And it is expected that other financial providers will join the framework.
The experience of the UK and the USA in getting banks to be more transparent on how they lend to underserved communities is instructive. Advocates of inclusive finance should probably take a page or two from this initiative in order push the agenda to improve access of small businesses and other underserved sectors to financial services. Regulators especially should be more open to making lending data more available to the public in order to develop evidence based programs to address gaps and deficiencies.
An AIM-MBM and Harvard MPA graduate, Mr. Benel Lagua is in the faculty of the De La Salle University’s Ramon V. del Rosario College of Business teaching courses in financial management. He is likewise EVP and Chief Development Officer of the DBP.
The views expressed above are his own and does not necessarily reflect the official position of his office, De La Salle University, its administration and faculty.