The current financial crisis offers an opportunity to rebuild the financial sector in Ireland in order to become more inclusive of all sectors of Irish society, including those experiencing poverty and social exclusion, according to a new study by Trinity College's Policy Institute and funded by the Social Inclusion Division, Department of Social Protection. The new publication Understanding and Combating Financial Exclusion and Overindebtedness in Ireland: A European Perspective was launched recently by Professor Patrick Honohan, Governor of the Central Bank.
In modern societies, every citizen needs to have appropriate access to a current account, a debit card or credit in order to lead a normal life. However, Ireland has the lowest level of access to current accounts in Western Europe, some of the population relies solely on moneylenders to access credit, and an increasing number of borrowers are facing overindebtedness. Financial inclusion is therefore a key social policy issue for a cohesive Ireland. However, it is also an extremely complex one as it requires reconciling the interests of low and moderate income people and the banks.
This study examines how Ireland could promote financial inclusion. It provides an in-depth analysis of the responses implemented in the United Kingdom, France and Belgium and assesses what policies would be appropriate in an Irish context. The paper sets out guidelines to address access to basic banking services and affordable credit as well as appropriate responses to overindebtedness.
Professor Patrick Honohan, Dr Georges Gloukoviezoff and Chair of the Policy Institute, Professor James Wickham.
Commenting on the significance of the findings, Dr Georgesand Gloukoviezoff study author and former Visiting Research Fellow at The Policy Institute said: "The guidelines in this study provide an appropriate framework to deal with financial exclusion in Ireland by building on its current strengths while also learning from experiences in other European countries."
"Financial exclusion and overindebtedness are serious issues in Ireland which impact on poverty and inequality. These issues are not only a technical challenge but a political one which require strong commitment from the government. A financial inclusion strategy needs to be implemented to address these issues. The findings in this report will hopefully contribute to this process"
The findings in the report cover a number of areas:
â¢ The dependency of citizens on financial services is made problematic by the profitability constraint on providers. As a result of the market logic, financial service providers define norms and rules of access and of use that are inappropriate for a cohort of the population. Given that every relationship has to be profitable, personalised products and advice are considered too costly to be provided to the poorest borrowers.
â¢ This report provides a revised definition of the process of financial exclusion: the process of financial exclusion is the process whereby people face such financial difficulties of access or use that they cannot lead a normal life in the society to which they belong.
â¢ Recognising that self-regulation and corporate social responsibility (CSR) have systematically failed to promote financial inclusion in United Kingdom, France and Belgium, despite marginal improvements, a regulatory framework based on transparency and accountability is needed in order to limit the influence of market logic without suppressing its positive elements.
â¢ Considering what has proved successful in France and Belgium, an effective regulatory framework requires:
- The definition of precise targets on financial inclusion based on a range of indicators.
- Carrying out independent assessments of the policies implemented and the results obtained regarding the targets adopted.
- Implementing incentives and sanctions in a way that ensures the involvement of all stakeholders.
Basic banking services
â¢ In order to improve access to basic banking services it could be made compulsory to receive social benefits and wages through a bank account. However, as the British, French and Belgian examples show, this promotes financial inclusion only if appropriate basic banking services are available.
â¢ An appropriate basic banking service should:
- include basic services to manage personal finance (e.g. a current account, a debit card, flexible account opening requirements around identification, no minimum or monthly balance, etc.);
- be provided at no cost and the charges incurred when customers break a term of their contract (unauthorised overdraft, failed standing order, bounced cheque, etc.) should be capped;
- be provided by every financial service provider; the An Post network could be used by other providers when customers would prefer to have access through the post office or when there is no bank branch in a locality.
â¢ In order to promote responsible credit it is necessary to ensure that there are alternative financial responses when consumer credit is not the solution. It involves questioning the level of wages, the characteristics of social welfare benefits and the quality of public services, even though these appear to be distinct issues from financial inclusion
â¢ An effective regulatory framework to promote responsible credit would need to reconcile the interests of the lenders with those of the borrowers. Such a goal could be achieved by ensuring that inappropriate lending practices are not profitable or are impossible. Potential solutions include regulation on prices and arrears management as well as better evaluation of credit applications. Credit unions could play an important role within this strategy.
â¢ Addressing the financial difficulties of households within a more appropriate framework requires a personalised, comprehensive and gradual approach. This approach could be seen as a three-step process:
- First step: commercial negotiations. MABS could advise the debtor and negotiate with the creditor(s) in order to find an appropriate solution;
- Second step: amicable collective debt settlement procedure. Very similar to the commercial negotiation except that creditors' participation is compulsory;
- Third step: judicial collective debt settlement procedure. Where an amicable phase has failed, the judge makes a decision about a repayment plan or a total write-off, allowing a fresh start for the debtor.
â¢ At each step MABS and registered debt advisers could intervene in order to provide their expertise to debtors and to facilitate negotiation with creditors.
Based on the assessment of work in the United Kingdom, France and Belgium, this report provides guidelines regarding the promotion of access to appropriate basic banking services and responsible credit. However, while these recommendations are based on evidence, it is clear that there is no one way to promote financial inclusion. The success of such a strategy relies on its ability to complement the specific context of a society. It also relies on a culturally defined definition of financial exclusion, agreed by all the key stakeholders. The guidelines provided in this report will hopefully contribute to this discussion.
About the Author
Georges Gloukoviezoff is Doctor in economics and specialises in questions of financial inclusion. His work deals with difficulties of access to basic banking services, over-indebtedness as well as potential solutions such as basic bank accounts, microcredit and financial regulation. He has been involved in numerous research projects at national and European level. In 2010 his book on financial exclusion was published in France: "L'exclusion bancaire. Le lien social à l'épreuve de la rentabilité" (Presses Universitaires de France). He is a former Visiting Research Fellow at The Policy Institute, director of G2 Research (Dublin, Ireland) and member of the board of the National Observatory of Poverty and Social Exclusion (Paris, France).
About The Policy Institute
Based in the School of Social Sciences and Philosophy at Trinity College Dublin, The Policy Institute aims to promote active debate and engagement between the academic and policy communities. The Institute's programme of activities has included:
â¢ Delivering conferences and lectures which highlight the contribution of philosophy and social science to current public issues. This includes the Henry Grattan Public Lecture Series and the Dublin Forum aimed at Dublin City policy makers.
â¢ Publishing a series of Studies in Public Policy which provide rigorous, but accessible analyses of policy issues. Understanding and Combating Financial Exclusion and Overindebtedness in Ireland: A European Perspective is the 26th publication in this series.
â¢ Supporting Visiting Research Fellowships. Georges Gloukoviezoff is a former Visiting Research Fellow of The Policy Institute with funding provided by the former Combat Poverty Agency, merged in July 2009 with the Office for Social Inclusion to form the Social Inclusion Division of the Department of Social Protection.