Today, more than 8 billion people populate the world, of whom around 7 billion persons live in emerging and developing countries. There is a steady global population growth of 100 million people every year.
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All the while, the economy in emerging and developing countries is growing faster than in industrialised countries. This draws attention to how effectively address resource consumption in emerging and developing countries, while generating prosperity at the same time. Most low- and middle-income countries lack a functioning financial market with differentiated products which in turn promotes short-term thinking and action. We need to keep in mind that in Luxembourg and other high-income countries, almost all of life’s major risks are spread across financial markets and pooled capital. Every risk is ultimately distributed across the financial system and thus socialised.
This social service aspect that comes with financial markets is missing in many southern regions of the world. More than a billion adults do not have a bank account and cannot transfer money, save it safely, let alone invest it. Millions lack the financial knowledge and financial products or suffer excessive fees to use access sensibly. These persons and their families are directly exposed to risks such as crime, accidents and natural elements, as well as the consequences of ageing. As a result, people spend money on short-term existence rather than on investing in equipment or education. Likewise, having many children is often the only viable form of retirement provision. Financial exclusion from the banking system and capital market leads to short-term spending behaviour, with serious consequences for the economy and the environment.
The widespread gap in connecting people to a financial system also has negative effects on the domestic economy: local banks cannot refinance from saving deposits, nor can innovation be financed through investments. Last but not least, the state cannot collect taxes, pay for development projects, or support its population in times of crisis. All this points to the importance of the financial affiliation for the individual, nature and the economy.
Financial inclusion is an overarching interest and an essential step towards greater sustainability for more than 80% of the world’s population. To promote financial inclusion, the ADA Chair in Financial Law (Inclusive finance) and the Alliance for Financial Inclusion, an association of more than 90 financial market regulators and central banks from emerging and developing countries, have developed a concept for sustainable and inclusive financial market regulation. Inclusive sustainable finance is intended to create reliable, affordable, differentiated and stable financial services in emerging and developing countries, with the objective of promoting sustainable action.
The fundamental idea is that if you focus solely on strict environmental regulations, this will destroy the economy, which is supposed to pay for the transformation towards more sustainability through its profits. The requirement to only use electricity from renewable sources would bring many parts of the world to a standstill. What is required is a regulatory approach that involves most parts of the population in the transformation process and takes advantage of their innovative and economic power, or, in other words, is “inclusive”. The basis for inclusive and sustainable regulation is the analysis of where projects make sense from an economic and sustainability perspective and are therefore worth using the extremely scarce resources in the countries of the Global South. And there are examples that demonstrate how this
can work. The Fiji Islands digitised their financial system back in 2016 so that island residents had access to mobile banking despite frequent storms. In Egypt, approximately 60,000 bakeries baked their bread using coal-fired ovens; a central bank loan programme to purchase gas stoves was able to increase the operating efficiency, integrate bakers into the financial system as well as reduce CO² emissions and dependence on coal imports. In Nigeria, the central bank has obliged local banks to gradually reduce the oil sector’s share of loans, while that of small companies is to increase.
There are still numerous challenges, including the individual need to ensure daily survival, the lack of local environmental expertise, the unavailability of central environmental and financial data from regulators, scarce public resources, a weak institutional environment with high transaction costs and uncertain contractual compliance, and the lack of a traditional banking infrastructure in agricultural regions. In addition, many people lack documentation such as passports or identity cards. In many cases, new approaches are necessary: biometric identification via mobile phones can replace an official passport system, while environmental data is collected and processed by development partners via satellite. Banks are also being replaced by regional credit unions and payment service providers operating via mobile phone networks.
A lot can be learned from emerging and developing countries. Firstly, a sustainable transition can only be achieved hand-in-hand with the economic transition. Secondly, there is a need for a clear focus: a regulator must identify and promote “smart projects” that increase cost and sustainability efficiency. Thirdly, each country has its own challenge: Morocco lacks water, Bangladesh has too much of it. The most important thing to realise, however, is that mistakes are unavoidable. Regulators must constantly review their actions and take corrective actions. There is neither a blueprint nor a panacea for an inclusive, efficiency-based sustainability transformation. Politicised persistence is misplaced; creativity, vitality and analytical processing are required.
Findings on how inclusive sustainable finance regulation impacts financial market stability will be presented by a working group of the ADA Chair and the Alliance for Financial Inclusion at the global sustainability conference COP 28 in Dubai.
The panel discussion, taking place on December 1st at 12.30, can be followed live on the EIB Live Event YouTube channel.