The Banking Executive Magazine - February 2022

The Horizon Of Digital Financial Inclusion In Arab Banks The benefits. Having digital access to financial services may be transformational. The World Bank identifies benefits of digital financial inclusion for the fi- nancially excluded and underserved as: • accessing formal financial services such as payments, transfers, sav- ings, credit, insurance, securities; • providing a path for the financially excluded into the financial system • providing a path for the financially excluded into the financial system through government-to-person payments including conditional cash transfers, that can enable dig- ital stored-value accounts; • providing additional financial serv- ices tailored to customers' needs and financial circumstances through the payment, transfer, and value storage services embedded in the digital transaction platform, and the data generated within it; • reducing risks of loss, theft, and other financial crimes posed by cash-based transactions, as well as the reduced costs associated with transacting in cash and using infor- mal providers; • promoting economic empower- ment by enabling asset accumula- tion and, for women in particular, increasing their economic partici- pation. T he risks. While the years of experience with digital financial services often give providers significant advantages, the particular risks introduced by the new services are: • introduction of non-financial firms deploying new technologies; • new contractual relationships be- tween financial institutions and third parties, including the use of agent networks and other out- sourcing arrangements; • different regulatory treatment of deposit-like products (compared to deposits); • unpredictable costs to inexperi- enced and vulnerable consumers; • use of new kinds of data and new uses of data introducing both new privacy and data security issues. Digital financial inclusion carries risks for the same vulnerable finan- cially excluded and underserved cus- tomers that benefit from the opportunities. These risks include: • novelty risks for customers due to their lack of familiarity with the products, services, and providers and their resulting vulnerability to exploitation and abuse; • agent-related risks due to the new providers offering services are not subject to the consumer protection provisions that apply to banks and other traditional financial institu- tions; • digital technology-related risks caused by disrupted service and loss of data, including payment in- structions (for example, due to dropped messages), as well as the risk of a privacy or security breach resulting from digital transmittal and storage of data. The regulation and supervision. Customer uptake of digital financial services in many markets suggests that on balance risks may not be per- ceived to outweigh the benefits of being financially included. Nonethe- less, the case is strong for appropriate regulation and supervision. The key regulatory issues raised by digital financial inclusion relate to agents, anti-money laundering and countering financing of terrorism (AML/CFT) rules, regulation of e- money, consumer protection, pay- ment system regulation, and competition. Many of these issues fall within multiple regulators com- petencies, requiring effective com- munication and collaboration among them. The models of digital financial inclu- sion emerging in countries around the world introduce new market par- ticipants and allocate roles and risks. The engagement of mobile network operators (MNOs), as e-money is- suers or as a channel for a bank or similar provider, presents certain po- tential risks that differ from ap- proaches without MNOs. Fintech is not the only channel through which innovation can drive financial inclusion. Co-ordinated governmental and regulatory action also plays a crucial role in inspiring greater financial access for the un- derserved. The Alliance for Financial Inclusion (AFI), for example, is a pol- icy-leadership alliance owned and led by member central banks and fi- nancial regulatory institutions with the mission of empowering policy- makers to increase the access and usage of quality financial services for the underserved through formula- tion, implementation and global ad- vocacy of sustainable and inclusive policies. Its core vision is to make fi- nancial services more accessible to the world’s unbanked populations, and it has partnered with regulators, international organizations and pri- vate-sector leaders to achieve this, specifically by driving practical solu- tions and facilitating the implemen- tation of impactful policy changes through its cooperative model that embeds peer learning, knowledge exchange and peer transformation. Central banks and financial-regula- tory bodies from more than 80 emerging and developing countries are just some of the AFI’s members, and in 2018, they signed the Sochi Accord (FinTech for Financial Inclu- sion). The accord pledges to strengthen the group’s determination and affirm its commitment to lever- aging digital financial services and fintech for financial inclusion. It also aims to accelerate the access and ISSUE 158 FEBRUARY 2022 the BANKING EXECUTIVE 43