How to achieve financial inclusion via capital markets

In recent times, financial inclusion have caught our diverse understanding, and we may fairly question: is registering for mobile accounts (wallets) or the practice of money transfer via mobile phone a significant achievement for “true” financial inclusion? If not, what could be the ideal measure of financial inclusion? According to the Alliance for Financial Inclusion (AFI), the first dimension to measure financial inclusion is access to the financial services and products that formal institutions offer. To achieve meaningful access, we have to consider other aspects of the financial market’s ecosystem – i.e. deposits, borrowing, investing, insurance, retirement funds, trading electronic funds, etc. I will dwell on how “true” financial inclusion can be achieved via capital markets products and services using this idea of electronic funds.
Although the economy has made significant strides in recent years along with higher savings and investment rates, inclusive growth continues to be a challenge. We are, not only lagging many emerging economies, but also, we have a comparatively lesser degree of “true” financial inclusion as compared to some countries in frontier markets. By financial inclusion here we mean ease of access, convenience and low-cost availability of financial products and services to all sections of the population. Meaning, faster and more inclusive growth prompts inclusion of diverse economic activities and geographical regions in the financial system.
The role of capital markets is vital for inclusive growth in wealth distribution and making capital available to investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ enterprise needs and risk appetite. Innovation, investment advisory, financial education and proper segmentation of financial users constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.
With a long-term growth trajectory, considerable financial deepening, increasing foreign cash-flows and increase in credit, deposits and bank assets as a percentage of GDP, rapid financial inclusion appears a reality if it can be coordinated by various financial institutions and with the application of technology. Lack of institutional co-ordination, competition, technology and financial literacy are cause of lower market penetration. Alongside these, the capital markets also have challenges of excessive concentration of trading at member level, company level and also geographically. The market also needs fair amount of development work on the bond market (especially micro-savings bonds, municipal bonds), interest rate futures, SME segment in the stock market and in the cash market.
Financial deepening also implies a larger focus on the debt and equity markets than physical assets and as a country we lag behind on this front. We, in the capital markets need to cast off the conventional notion that financial inclusion is a part of social responsibility and should realize that it can foster profitable business. We need to see into it that we facilitate domestic and international investments, not only into money transfers, for the people without a bank account. We can enhance savings by households or can encourage our society to be that among highest savers in the region, which currently is a challenge given that less than 1 per cent of the population participates in capital markets. Given a savings rate of about 30 per cent and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system (especially the capital markets) and channelizing them into productive investments. Through financial inclusion, capital markets can generate productive investments.
True financial inclusion would need financial literacy and matching technology to enhance accessibility besides adequate competition to cause more substantial marketing. The agency model can be replicated for increasing financial literacy and thereby increasing direct participation of masses in the financial system.
Capital markets entities and intermediaries could adopt innovative practices and work with banks and non-banking bodies (agents) like post offices, etc., that can provide distribution outlets for these products. Financial service providers in the capital markets can foster financial literacy on the lines of initiative such as brokers creating association with public entities such as the Post Office to provide price information and investment based-inputs to savers who could potentially be converted to investors. The postal network can also be used for distribution of financial products and services.
Financial inclusion also demands greater integration of network of banks, the exchange, insurance companies, and other financial bodies to facilitate and benefit from cross selling. Banks have a larger role to play given that over 10 million account holders and over 500 branches with about 40 per cent and 25 per cent branches in semi-urban and rural areas respectively. Nearly 50 per cent of the country’s total savings go into bank fixed deposits which could easily be converted to capital markets products. Banks can, thus, play a key role in fostering financial inclusion using capital markets products and services.
The regulator has permitted banks to enter into agreements with stock brokers and mutual funds for marketing and distributing of capital markets securities and mutual fund products. Some stock brokers are also permitted to offer discretionary portfolio management and investment advisory services. This aspect of business has the great potential to constitute more of the financial market sector products in relation to financial inclusion but has not yet been fully explored. Capital markets products, such as mutual funds play an important role in mobilizing the household savings and bringing them to capital markets.
Going forward, the regulator may consider approval of online distribution of capital markets products and services through the stock exchanges and pursue efforts to encourage retail investors to invest in such financial products. The network of brokering companies spread is only in Dar es Salaam, they are yet to outreach other urban centers or semi-urban areas, such online access could increase brokers’ focus on retail investors. Such cross-selling facilities creates enough products and services for each intermediary to have economies of scale and also promotes financial inclusion.
Mobile and internet are likely to trigger faster growth in our capital markets. Internet stock trading is popular among retailers in other parts of the World. In Tanzania, where there are about 20 million internet users, such internet penetration rate is about 35 per cent of the population, this signifies the great potential for internet trading of capital markets products. Currently, mobile telephony serves the people’s need for information access. The penetration of mobiles is more than internet, with over 40 million subscribers. In the near future, a mobile trading revolution is likely to generate financial inclusion faster.
Greater financial inclusion is required for growth and development of SMEs, which contribute heavily to our GDP and in generating large scale employment opportunities. Special focus should be given to the Enterprise Growth Market (EGM) segment of the DSE which targets to empower SME to access funds from capital markets, helping the SME sector grow by assisting them in raising risk capital and, thereby, contributing to diversification of their sources of finance. The EGM is also meant to provide an exit route by building bridge between SMEs and the private equity and venture capital. Capital markets can play a significant role in creating financial inclusion by making available multiple financial products and services to the masses. This requires conscious efforts to identify the respective target segments and enhance the penetration through financial education, product innovation, diversification, customization and simplification. The experience of mobile money informed us that we have the sophistication and professionals with vast business potential and what is needed is proper financial integration and efforts by capital market players to tap into this potential and assume new roles and responsibilities.

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