Exclusive finance: How unmanaged systemic risk continues to limit financial services for the poor in a booming sector
This paper evaluates the incentives created by public and private supervision for managing systemic risk in the inclusive finance sectors of developing and emerging economies. Investors and regulators often rely on risk assessments and standards created for large, developed country banks when evaluating inclusive finance intermediaries (IFIs); however, the business models of IFIs and the context of developing and emerging economies tend to make them more vulnerable to certain systemic risks such as price volatility (e.g., inflation and exchange rate risks), political instability, and natural disasters. We evaluate a sample of over 900 IFIs, finding that their capital holdings are generally unaffected by these systemic risks. In this sample, regulation does not generally increase capital reserves, but we find that regulated IFIs in jurisdictions vulnerable to disasters and price shocks hold slightly greater capital reserves than those in less vulnerable regions. Two priorities for enhancing public and private supervision are implementation of requirements sensitive to the risks of individual IFIs and recognition of a broader set of risk management mechanisms than is generally found in current standards.