The CGD Podcast: No Trade-Off Between Financial Inclusion and Stability – Liliana Rojas-Suarez

Date: March 29, 2016
Host: Center for Global Development
Guest: Liliana Rojas-Suarez, CGD Senior Fellow

Episode Overview

This episode explores the dynamic between financial inclusion and financial stability, challenging the common perception that empowering more people through formal financial systems might endanger the stability or integrity of those systems. Host Rakesh Mohan Dhani talks with Liliana Rojas-Suarez about regulatory frameworks essential for expanding access without sacrificing security, examining 25 actionable policy recommendations from a new CGD report. The conversation focuses on practical pathways for regulators, with lessons drawn from countries pioneering financial innovation.

Key Discussion Points and Insights

1. Why Regulation Matters in Financial Inclusion

• Regulation as a precondition:
  Regulation is fundamental to allow innovation in the financial sector. Without enabling regulatory frameworks, even basic technologies like electronic money cannot function in many countries.

  “There is no innovation that actually comes to life without the rules that determine how it's going to operate.” — Liliana Rojas-Suarez (01:31)

• Regulators’ traditional priorities:
  Regulators tend to prioritize stability, integrity, and consumer protection; integrating inclusion is seen as secondary or even risky by some. The report seeks to show that inclusion and stability are not mutually exclusive.

2. The Compatibility of Inclusion and Stability

• Not just compatible, but mutually reinforcing:

  “Not only they are compatible, but they are necessary… If you have an unstable financial system… nobody is going to be willing to put their savings in any financial institution… At the same time, the more financial inclusion you have, that also contributes to stability because you are moving the funds… from the informal to the formal system.” — Liliana Rojas-Suarez (03:21)

• Moving informal financial activity to regulated systems brings stability and integrity, reducing vulnerabilities to unregulated lending.

3. Risks of Cash-based Economies & the Value of Formal Systems

• Challenging beliefs about cash:

  “Having cash is the most dangerous thing that you can do because you can lose it quickly. There’s no records of funds.” — Liliana Rojas-Suarez (04:59)

• The presence of a digital or bank record gives consumers both rights and security, something cash cannot provide.

4. Agnostic Approach to Innovation

• The CGD report emphasizes encouraging various models, from mobile money to traditional banks, without bias. The aim is to foster an environment that lets the most effective solutions emerge naturally.

  “We remain agnostic, we welcome different innovations… We are not trying to say one way is going to be the panacea... Facilitate the operation of multiple systems and let the best go ahead and move forward.” — Liliana Rojas-Suarez (05:57)

5. Three Guiding Regulatory Principles (06:45 – 10:03)

• Principle 1: Functional Approach
  Same function, same regulation—unless risk differs.

• Principle 2: Risk-based Approach
  The riskier the activity, the higher the regulatory burden.

• Principle 3: Balancing Ex Ante vs. Ex Post Regulation
  Pre-announced (ex ante) rules are standard, but giving space to intervene as markets evolve (ex post) is less common in financial regulation, more so in other industries.

  “The ability to intervene farther and give more freedom to markets and then let’s see how operates... that’s what we call balancing.” — Liliana Rojas-Suarez (09:15)

• The report aligns with principles familiar and acceptable to regulators, especially after the learning from repeated financial crises.

6. Three Clusters of Recommendations (10:31 onward)

A. Competition Policy (10:31 – 13:35)

• Innovation requires new entrants; regulation must encourage newcomers while maintaining stability.

• No country has perfect competition—dominance and lack of interoperability remain issues even in trailblazers like Kenya.

• Case Study: Tanzania and Interoperability:

  “The IFC acted as an honest broker in the discussions between the different providers of mobile digital financial services… To me that is an example that deserves more attention, including the capacity to see whether it can be replicated in other countries.” — Liliana Rojas-Suarez (12:21)

B. Level Playing Field (13:43 – 17:54)

• Regulation should not favor one provider (e.g., banks vs. fintechs) over another when delivering the same function, unless risks are different.

• Case Study: India’s Payments Banks:

  • Payments banks collect deposits and only invest in government securities, making them low-risk.
  • By contrast, e-wallets can be riskier if their asset side is not regulated or transparent.
  • Regulators can demand that e-wallets back their funds in protected accounts, leveling the playing field.

  “I can require that the funds that are being collected are being placed in a deposit in a pool account that is also protected by the deposit insurance. So I can make it as safe. And many countries are actually following that route.” — Liliana Rojas-Suarez (17:21)

  • Incentivizes riskier entrants to raise standards and ensures consumer protection.

C. Know Your Customer (KYC) (18:10 – 20:27)

• Biggest Challenge: Many countries lack reliable ID systems, making KYC requirements a real barrier for the excluded poor.

• Balance risk and inclusion:

  “If I constrain the amount of transactions to very low amounts... when you create what is called say a basic account, then the requirements on know your customers for these people could be much lower than for regular accounts.” — Liliana Rojas-Suarez (19:55)

• Effectively, tiered KYC and simplified accounts can include more people without sacrificing anti-money laundering goals.

Notable Quotes & Memorable Moments

• On Regulation and Innovation:
  “There is no innovation that actually comes to life without the rules that determine how it's going to operate.” — Liliana Rojas-Suarez [01:31]

• On Inclusion and Stability:
  “Not only they are compatible, but they are necessary...” — Liliana Rojas-Suarez [03:21]

• On Cash vs. Digital:
  “Having cash is the most dangerous thing that you can do because you can lose it quickly.” — Liliana Rojas-Suarez [04:59]

• On Regulator Mindset:
  “What many regulators in the financial system may not agree [with] is... balancing ex ante vs. ex post [regulation].” — Liliana Rojas-Suarez [09:15]

• On Level Playing Field:
  “Regulation should not be favoring one player versus another.” — Liliana Rojas-Suarez [13:43]

Important Timestamps

• [01:22] – Why regulation matters for inclusion
• [03:21] – False trade-off between inclusion and stability
• [04:59] – Dangers of relying on cash
• [05:57] – Agnostic approach to innovations
• [06:45] – Three guiding regulatory principles
• [10:31] – Recommendation clusters: Competition, Level Playing Field, KYC
• [12:21] – Case study: Tanzania’s digital financial services and IFC's role
• [14:19] – Case study: Payment banks in India vs. e-wallets
• [18:27] – Barriers to inclusion caused by strict KYC; tiered risk-based KYC
• [20:27] – Summary and encouragement to read the full report

Conclusion

The episode makes a strong case: integrating more people into the financial system not only fortifies development but actually strengthens system stability, provided regulation is well-designed. Emphasizing competition, fairness, and adaptive KYC, Liliana Rojas-Suarez outlines a practical, risk-sensitive blueprint for policy makers to advance inclusion without undermining financial soundness. Listeners interested in operational details and examples are encouraged to consult the full report at cgdev.org.