101737 Lessons Learned Series Strengthening Financial Sectors NOTE NUMBER 2 December 2015 Developing a National Financial Inclusion Strategy: The Paraguay Experience AUTHOR: Context MARLON ROLSTON Paraguay’s real gross domestic product has grown RAWLINS an average of about 4 percent per year since 2005. Financial Sector Specialist, But that growth has not permeated to all segments FIRST Initiative of society, and poverty remains stubborn. Poverty, particularly extreme poverty, is entrenched in the CO-AUTHOR: rural areas. Approximately 40 percent of the popu- lation live in rural areas, including more than half JANE C. HWANG Senior Financial Sector the poor and more than two-thirds of the extreme Specialist, Latin America poor.1 Low access to formal financial services, espe- and the Caribbean Region cially among the rural poor, is one of the major development challenges in Paraguay. According to the 2013  Paraguay Financial Inclusion Survey © Dmitry Kaminsky. Further permission required for reuse. (EIF),2 29 ­percent of adults report having an account at a formal financial institution, a commonly used global metric of financial inclusion. This places agent, or ATM. This significantly affects their ability Paraguay well below the regional average for Latin to save monetary assets that are readily accessible in America and the Caribbean of 51 percent.3 For the times of acute need and emergencies. Enhancing financial inclusion is critically impor- 71 percent of adults who lack a formal account, tant to economic growth, poverty reduction, and approximately 3.2 million people, this exclusion is reducing income disparities and therefore is at the even more acute among the poorest in Paraguay. core of Paraguay’s poverty reduction strategy. It is Eighty percent of the poor do not have accounts at a one of the pillars of the National Development Plan,4 formal financial institution. The variation in owner- ship of formal accounts tracks closely with demo- which has a series of objectives and development graphic and socioeconomic characteristics. Data goals targeted for achievement by 2030. show that the largest gaps are across income and Financial inclusion has been at the center of Paraguay’s education lines, although there are also significant programs on poverty reduction. differences between rural and urban populations, across employment categories, and among regions. —Santiago Peña, Minister of Finance, Paraguay For example, 14 percent of Paraguayans reported The government has been increasingly engaged that they saved at a formal financial institution in  expanding access to financial services to a The FIRST Lessons Learned within the last 12 months. A demographic segmen- greater  percentage of the population. More than series is a synthesis of tation of this same data shows savings rates of 19 50 initiatives led or promoted by ministries, multi- FIRST’s experiences and percent in urban areas, 12 percent in rural areas, lateral organizations, donors, NGOs and other lessons gained from technical and only 7 percent of those in the lowest quintile of ­private sector entities have been aimed at improving assistance engagements poverty. The government has adopted a specific financial inclusion. These efforts however were funded by FIRST. focus on the underserved and unserved, particu- not  well coordinated and in some instances there larly the extreme poor (10  ­ percent of population) For more information, visit were overlaps. and the poor but not extreme poor (11  percent of https://w w w.firstinitiative​ population). The majority of the poor and extreme About two years ago, we started to develop this idea of .org/ or email us at first@ poor live in a geographic district that is not served having a national strategy on financial inclusion and worldbank.org by a bank, finance company, cooperative branch, it was amazing how we found a lot of efforts of public 2 | Lessons Learned Series | December 2015 institutions, private sector institutions that were moving towards this Figure 1. Five Key Lessons Learned objective but on an uncoordinated basis. 1. Robust and in-depth analytical work is needed to understand the —Santiago Peña, Minister of Finance, Paraguay contextual constraints The government recognized the need for a National Financial 2. High-level government support and commitment Inclusion Strategy (NFIS) that was comprehensive and widely sup- ported among stakeholders. As such the Central Bank of Paraguay 3. Appropriate implementation support framework (BCP) approached the Financial Sector Reform and Strengthening 4. Broad-based stakeholder involvement including the private sector (FIRST) Initiative to provide policy advice and technical assistance to support the development of an NFIS and to support the initial stages 5. Implementation focused strategy with robust monitoring and of implementation. evaluation FIRST Initiative’s Response The FIRST Initiative responded by supporting the development of In addition to a well-designed strategy, the process used in the devel- a  National Financial Inclusion Strategy, with the objectives of opment of the strategy in Paraguay resulted in immediate and tangi- ­ determining the national direction, articulating a vision, and ble benefits and have significantly increased the chances of successful expanding financial inclusion of the population in Paraguay. The implementation. The inclusiveness of the process led to increased aim of FIRST’s support was also to enhance synergies, coordinate financial inclusion knowledge and capacity building of the Authorities and  sequence the multiple initiatives, ensure that the initiatives and deepened the cooperation and collaboration of all stakeholders addressed impact assessment and quality control to make financial including the private and public sectors. The consultative process has inclusion sustainable, set national indicators, develop an action plan, already led to expressions of interest in financial and technical support and support the implementation of the NFIS. The FIRST Initiative by donors, which is critical to the implementation of the agreed-upon provided technical assistance in the amount of $325,000, which sup- reforms. The strong ownership of the development of the NFIS by the ported the development of the NFIS5 the governance structure, the government of Paraguay is a positive factor for prospective donors, drafting of three technical notes (demand side, supply side, and legal as it is often correlated with the success of a program. Another sig- and regulatory constraints),6 dissemination activities, and stakeholder nificant achievement is that there is national consensus for financial consultation. inclusion reform towards economic growth and poverty reduction. The Authorities now have a more coordinated and prioritized approach to FIRST has played an important role in Paraguay’s effort to first have managing the reforms, and they continue to leverage the public-­ private approved a national strategy on Financial Inclusion. We were able to put together with the support of the World Bank and have the national strategy approved in less than 12 months. The staff of the World Bank was up to the Figure 2. Objectives of NFIS challenge in having this momentum in implementing this national strategy with the speed and the intensity that we wanted. —Santiago Peña, Minister of Finance Paraguay First, the World Bank project team and consultants (the Team) sup- Reduce the financial Promote outreach of ported the government of Paraguay, various ministries and agencies, and vulnerabilities of financial services in a the BCP (together, the Authorities) in the establishment of the National families at the base competitive and of the pyramid. secure marketplace. Committee for Financial Inclusion by providing technical input for the drafting of a National Decree, followed by the formulation of the techni- cal analyses. The analytical work provided the basis for the development of the strategy. The government of Paraguay officially launched the NFIS Promote financial Aid economic at a public event on December 2, 2014. inclusion while development and maintaining a balance growth through with financial sector MSMEs and large Five Key Lessons from Paraguay’s Experience in the stability, integrity firms access to Development of an NFIS and the education/ financial products. protection of Paraguay’s experience in the development of an NFIS provides some consumers. key lessons for other countries. (See figure 1.) The Authorities devel- oped a comprehensive and focused strategy that has four high-level objectives for an inclusive financial sector. (See figure 2.) Note: MSME = Micro, small, and medium-size enterprises. December 2015 | Lessons Learned Series | 3 partnership through the working groups. In addition, the strategy This new research has allowed for deeper insight into crucial topics such leverages and builds on some of the financial inclusion initiatives that as remittances, insurance and the fast growing mobile financial services were already in place. industry. —H.M. Queen Maxima of the Netherlands and Lesson 1: Robust and in-depth analytical work is needed to U.N. Secretary General’s Special Advocate for Inclusive Finance understand contextual constraints for Development in her congratulatory remarks (sent by video) at the launch of the NFIS in Paraguay In-depth data analysis is necessary to achieve a thorough understand- ing of the constraints that prevent financial inclusion and to provide a focus for the development of the NFIS and to set its p ­ riorities. At the Lesson 2: High-level government support and outset, there were weaknesses in the quality of the data available from commitment is paramount existing sources, including (1) the risk of double counting persons who High-level government support and project champions were key fac- had accounts at different institutions; (2) the difficulty in obtaining accu- tors in the success of Paraguay’s program. The project received the full rate and updated data on small and medium-size enterprises; and (3) the support of the highest political leadership and of key influencers unavailability of data on the large informal sector and the vulnerable throughout the process. The President of Paraguay set the tone by taking populations. Therefore the Team and the Authorities undertook in-depth on the leadership of the financial inclusion agenda and providing the data collection and analytical work to provide a strong basis for the official national endorsement of the government. The government of development of the strategy. The first step was the analysis of the Paraguay demonstrated its support by passing the Decree 1971 on demand-side constraints using the data collected through the EIF sur- July  22, 2014, issued by the Office of the President, which established vey, which measured the financial behavior of adults in Paraguay. These a  National Financial Inclusion Committee. The committee consists of data were used to identify priority populations, set national financial senior representatives from the BCP, the Ministry of Finance, the inclusion targets, and design reforms and interventions to advance National Institute of Cooperativism (INCOOP), which regulates coop- financial inclusion. The demand-side analysis was complemented by eratives (including savings and loan cooperatives), and the Secretary of supply-side analysis, that is, the availability and quality of financial prod- Technical Planning (STP) and is chaired by the Minister of Finance. ucts (savings, credit, payments, and insurance) and service providers, Several other key senior government officials championed the project focusing mostly on formal providers, and to a lesser extent, semiformal and supported and influenced the process in a positive way. Moreover, and informal service providers. The Team then supported the analysis of the development of the NFIS is strategically relevant to the achievement the legal and regulatory constraints to financial inclusion. These three of the Paraguay’s universal access goal, which is included in its National technical assessments served as the analytical basis for the development Development Plan 2030 and reinforced in its commitment under the of the NFIS. Maya Declaration.7 The analyses undertaken by the Team, which were based on data The use of a presidential decree, the link to the national development collected in 2013, updated and expanded the data available from plan, and the staffing of the National Financial Inclusion Committee Global Findex 2011. The analyses provided more current data on with very senior officials, demonstrates the importance of financial which to develop the NFIS and led to a deeper understanding of the inclusion to Paraguay and its prominence as a national priority. At the financial inclusion landscape in Paraguay. Further, the data collec- launch of the NFIS, H.M. Queen Maxima of the Netherlands recognized, tion was refined to more accurately capture the Paraguayan context— in her congratulatory remarks, the importance of strong political will including the unique role of cooperatives and mobile money—and and support to the success of development of an NFIS and commented additional categories were included, such as payments, insurance, and that “Paraguay’s example offers an inspiring lesson to the World on how financial capabilities. A good example of how in depth and tailored quickly progress can happen when the political will is strong and part- analysis can inform policy design was seen in Paraguay where the ners share a common vision.” adult population was segmented into five groups according to income level. This provided a focus for the strategy, its policy actions, and an Lesson 3: An appropriate implementation support understanding of the financial services needs of specific segments of framework is essential the population. An appropriate implementation support framework (ISF) to man- The data and diagnostics were also used as a baseline to set the age and lead the reform effort is essential to the objectives of the financial inclusion targets and to monitor progress made toward their financial inclusion agenda. The ISF in Paraguay used a multitiered achievement. approach for the development and implementation of the NFIS recom- mendations. The ISF provides clearly defined roles and responsibilities Equally impressive has been the rigorous and thoughtful process leading and recognizes the importance of including stakeholders at various up to the strategy’s creation. Recognizing the vital role of data on levels. (See figure 3.) During the NFIS development phase, the ISF development of effective plans and policies, [Paraguay] generated solid included tiers 1 and 2—the government and functional levels. new demand- and supply-side data to augment the Global Findex report. Following the development of the NFIS, the ISF was expanded to 4 | Lessons Learned Series | December 2015 Figure 3. Implementation Support Framework President & GOVERNMENT National Financial Inclusion Committee Executive Secretary of Financial Inclusion FUNCTIONAL & Technical Team Savings Credit Insurance Payments Financial Consumer Vulnerable working working working working education protection populations IMPLEMENTATION group group group group working working working group group group include seven working groups, based on the seven key areas of the Lesson 4: Broad-based stakeholder involvement, including NFIS, to support the implementation of the recommendations. the private sector, is critical Each  working group comprises both private and public sector It is important to engage key stakeholders, especially in the private representatives. The expanded ISF will remain in place throughout the ­ sector, as early in the process as possible and to keep them engaged implementation phase of the NFIS. throughout. The Team and the Authorities recognized the impor- At the highest level, the overall responsibility for financial inclu- tance of broad-based stakeholder consultation both for obtaining sion reform rests with the President of Paraguay and is supported valuable perspectives and for gaining buy-in and support for the by the  National Financial Inclusion Committee, which has overall ­ process. The general public, and the private and public sectors were responsibility for the oversight, coordination, and implementation involved as early as the data gathering and diagnostic stage. Cross- of the NFIS. The National Financial Inclusion Committee com- sections of the population were surveyed to assess the type and level prises the  heads of the Ministry of Finance, the BCP, the INCOOP, of financial services demanded. Interviews were conducted with and the STP. At the functional level, an Executive Secretary of financial services providers, to analyze the supply of financial services, National  Financial  Inclusion was appointed to act as a coordina- and with regulators. Once the technical notes and draft strategy were tor of the NFIS process. The Executive Secretary is the  national prepared, a large representative group of stakeholders was invited to a and international advocate of financial inclusion, ensures the prog- forum to provide feedback on the draft strategy, which had been cir- ress and successful implementation of the strategy, and oversees culated in advance. The stakeholders included private sector organiza- the ­technical  working groups that are established by the National tions, such as banks, cooperatives, NGOs, multilateral agencies, and Financial Inclusion Committee. The Executive Secretary is supported public sector representatives, such as the Ministry of Finance, the by an inter institutional technical team comprising representatives BCP, the INCOOP, the STP, and other ministries and public financial from the four aforementioned organizations, which actively lead and institutions. A substantial number of comments was received, which participate in the different working groups. The Executive Secretary the Team and the Authorities reviewed, responded to, and incorpo- is appointed by and reports to the National Financial Inclusion rated into the final strategy. The NFIS was then endorsed by the Committee. President of Paraguay at a public event that was attended by senior The commitment of human and financial resources is critical to government officials, private sector representatives, international successful implementation. A dedicated full-time team to manage the donor agencies, and NGOs. Much of the work was done and continues process is critical to the program’s success. Although the commitment of to be done with active participation of both the private and public the members of the working groups is evident, the reality is that many sectors as they participate in the working groups established for the of the working group members have primary responsibilities in addi- implementation of the NFIS. tion to their financial inclusion work. The risk therefore is that of a loss The recognition and inclusion of prospective donors as a key of momentum and focus. Thus, going forward full-time staff should be stakeholder group proved hugely beneficial. Various donor agen- dedicated to ­ executing the strategy. The government would need to cies  were included throughout the process including the German secure funding and to provide the necessary annual allocation to support Society for International Cooperation, Ltd., the Spanish Aid the ongoing implementation efforts and funding of the technical team and Agency,  and the Inter-American Development Bank, which pro- the Executive Secretary. vided  useful insights and feedback based on their international December 2015 | Lessons Learned Series | 5 experience with similar  work. This was invaluable. Now that strategy is complete,  some donors have been in discussions the  ­ with  the Authorities on funding the ­ implementation of specific ­priority areas. Close collaboration and consultation with the financial sector regulators is critical to understanding the interdependence of financial inclusion and financial stability. In Paraguay, the regula- tors were actively involved in the design of the NFIS and are involved and represented at all levels of the implementation support structure. Both the BCP and INCOOP are represented on the National Financial Inclusion Committee, as well as at the technical level in the working groups. The involvement of the regulators in the development of the financial inclusion agenda is essential because the innovations neces- sary for progress in financial inclusion change the nature and levels © Vepar5. Further permission required for reuse. of risk that regulators must manage. The financial services regula- tors also identified regulatory barriers to implementing the proposed reforms. demand-side financial inclusion survey to measure progress against the 2013 baseline survey. The initial survey is expected to start in 2017 Lesson 5: Focused strategy with a robust monitoring and with results available in 2018. evaluation framework The strategy must be focused on implementation, include a clear Conclusion action  plan, and provide a robust monitoring and evaluation (M&E) The development of an NFIS is a critical step toward increased framework. The Authorities in Paraguay developed a time-bound, financial inclusion, shared prosperity, and lower levels of poverty. The ­ prioritized set of actions to be implemented. The action plan contains key ­ availability of affordable credit and savings can lead to greater income performance indicators (See annex I.) that incorporate approximately sixty security, smoother consumption and investments, and poverty policy actions distributed across seven working groups. Each policy action reduction. Paraguay has rightly recognized the importance of greater ­ includes a clear description of the task, the level of priority of the task, and financial inclusion for the achievement of its national development an estimated date by which it should be completed. The policy actions were objectives. It is important to note, however, that the strategy is a agreed upon through a consensus building, consultative process that means to an end and not an end in itself. Therefore, the Authorities included both p ­ rivate and public sector representatives and other key should continue to leverage the momentum gained thus far and push stakeholders. through to implementation. A strong framework is essential not only A robust M&E framework is critical for evaluating (1) whether the to support the development of a well-designed strategy, but also can project is on track; (2) the need for adjustments along the way; and be leveraged to support the implementation of the financial inclusion (3) whether the project’s objectives are being achieved and having the reforms. desired impact. The Authorities have developed a comprehensive M&E At the time of writing (October 2015), the implementation of the framework that includes key performance indicators for each thematic NFIS had just begun. The Authorities can point to several successes area, specific targets, the agency responsible for implementation, data to date. There is now a national consensus for reforms to achieve collection and reporting, and the frequency of reporting. National tar- a more inclusive financial sector, economic growth, and poverty gets were developed with the input of stakeholders. Indicators for finan- reduction. The inclusiveness of the planning process has increased cial inclusion were used to set the targets and will be used to monitor national knowledge on financial inclusion, improved the ability of progress toward their achievement. The core indicators used were con- the Authorities to build capacity, and contributed to a strong spirit of sistent with the G20 basic set of financial inclusion indicators prepared cooperation among private and public sectors and other stakeholders. by the Global Partnership for Financial Inclusion subgroup on data and The Authorities should continue to leverage the public-private part- measurement. nership in the implementation phase. In addition, the early inclusion To support the M&E, each working group is required to report of donors has already led to commitments of financial and technical its progress quarterly to the Executive Secretary. The Executive support, which are critical to the implementation of the agreed-upon Secretary, with the support of the technical team and the working reforms. groups, will report annually on its activities and progress toward the Given the strong framework used for the development of the achievement of the key performance indicators and the action plan. strategy and the commitment of the stakeholders, Paraguay is poised for ­ The annual report will be submitted to the National Committee for successful implementation. The authors encourage readers to monitor Financial Inclusion. In addition to the reporting on activities com- Paraguay’s progress toward greater financial inclusion, poverty reduction, pleted, the Authorities have committed to periodically conduct a full, and shared prosperity. 6 | Lessons Learned Series | December 2015 Annex I. Key Performance Indicators (KPIs) Vision Quality and affordable financial services for all people in Paraguay who want them through a diverse and competitive marketplace Objectives 1. Reduce the financial vulnerabilities of families at the base of the pyramid; 2. Promote outreach of financial services in a competitive and secure marketplace; 3. Aid economic development and growth through access to financial products for micro, small, and medium-size enterprises and large firms; and 4. Promote financial inclusion while maintaining a balance with financial sector stability, integrity, and the education and protection of consumers. Thematic Area KPIs to be Achieved by 2018 Quick Wins Savings Increase savings account ownership from 29% to 50% and Issue guidelines on requirements for opening savings usage from 14% to 30% of the adult population accounts Credit Increase responsible credit to MSMEs from 30% to 40% and Ensure that BCP’s and INCOOP’s credit risk information increase the share of responsible borrowing at formal systems communicate with each other financial institutions from 23% to 28% of persons over age 15 Insurance Increase insurance coverage from 26% to 36% of adults Feasibility of implementing agricultural insurance for small and medium-size producers Payments Decrease the use of cash or checks for salary and wage Convert the central government’s outgoing and incoming payments from 76% to 20% payments to electronic means Financial Education Increase the percentage of adults age 15 and older who Develop financial education tools and guidelines for use by receive training and support in managing personal finances educational institutions, social service agencies, and financial from 10% to 20% institutions that emphasize the needs and characteristics of vulnerable populations including credit cards, interest payments, loans, savings, and insurance Consumer Protection Require that all financial services providers publicize Improve the transparency of interest rates and fees through appropriate arrangements to manage customer complaints total cost of credit disclosure for all lenders Vulnerable Populations Offer appropriate financial services to all 69 financially Leverage the widespread use of mobile phones and coverage underserved districts in the country with a priority on the 17 of mobile network operators to further the expansion of vulnerable districts that are part of the government’s plan to saving among vulnerable populations end extreme poverty Notes 3. Global Findex 2014 was used for the LAC data while the 2013 Financial Acknowledgments: The authors thank the FIRST Initiative’s Senior Inclusion Survey (EIF) was used for Paraguay. The data may not be perfectly comparable because the methodology used by Global Findex Program Manager, Consolate K. Rusagara, for overall guidance and is slightly different from that used in the EIF. However the essence of the supervision; and Rekha Reddy, Caroline Cerruti, Michael Edwards, and comparison is valid. Paraguay was not included in Global Findex 2014. Leyla Castillo for providing peer-review comments. 4. http://www.stp.gov.py/pnd/wp-content/uploads/2014/12/pnd2030.pdf. 5. http://documents.worldbank.org/curated/en/2014/12/24299747​ 1. The categories of poor and extreme poor are calculated using the cost of /­paraguay-national-financial-inclusion-strategy-2014-2018. a basic food basket and the cost of a total basic basket. These costs are 6. The demand side, supply side, and legal and regulatory technical compared with the per capita family income obtained from the household notes are available in Spanish and English at https://www.bcp.gov.py​ permanent survey. If per capita income is below the value of the basic /­estrategia-de-inclusion-financiera-i459. food basket, households are categorized as living in extreme poverty. If per 7. The BCP committed to actively engage in the corporate governance and capita income is higher than the value of the basic food basket, but lower implementation of the NFIS and to reach a deposit to GDP ratio of 50% than the value of the total basic basket, the household is considered poor. in 2015. Currently the ratio of deposits to GDP is 41.7%. 2. For its initials in Spanish (Encuesta sobre Inclusión Financiera).The EIF was carried out in November 2013 through face-to-face interviews and updates and expands the 2011 Global Findex data for Paraguay. The References 2013 EIF results are largely consistent with the results from 2011 Global Grace, Dave; Hwang, Jane; Mora, Alfonso Garcia. 2014. Paraguay - National Findex data collected in Paraguay, though there are signs that progress financial inclusion strategy 2014-2018. Washington, DC: World Bank Group. was made in the two years between the surveys, particularly with respect http://documents.worldbank.org/curated​/en/2014/12/24299747​/­paraguay​ to mobile money. -national-financial-inclusion​-strategy-2014-2018. © 2015 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of FIRST Donors, The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. This work is subject to a CC BY 3.0 IGO license (https:// creativecommons.org/licenses/by/3.0/igo). The World Bank does not necessarily own each component of the content. It is your responsibility to determine whether permission is needed for reuse and to obtain permission from the copyright owner. If you have questions, email pubrights@worldbank.org. SKU K8582