The tightening of international banking standards is making it difficult for low-income people in the global south to get access to banking service
When people in developing countries don’t have access to a bank account, physical proximity to a bank is usually the first challenge that springs to mind, but sometimes the reason a person is unable to access a secure place to store their savings is as simple as them not having a piece of paper to prove who they are.
Banking regulations vary between countries, and some allow banks to set their own rules about what proof of identity they accept for new customers to make sure no one is excluded.
- In South Africa Standard Bank accepts a letter verifying a person’s address from a tribal chief for certain accounts,
- while Postbank offers a Mzansi account, which does not require any proof of address but only offers basic transactional services and has a balance limit of 25,000 South African Rand (£1,362).
However, international banking standards set by the intergovernmental Financial Action Taskforce recommend that people opening an account provide specific documents.
These “know your customer” (KYC) guidelines are not new, and have prevented poorer communities from accessing bank accounts for years. But there is increasing concern that KYC is becoming more restrictive, making access to finance harder for local banks and populations and damaging developing economies’ opportunity to grow.
KYC requires banks to check that potential customers are not involved in money laundering or terrorism by providing a verified proof of identity and address when opening an account. This is difficult for people living in informal housing or rural areas, who rarely have utility bills or lease agreements as proof.
Richard Ketley, director of international economics consultancy firm Genesis Analytics, says although South Africa allows its banks to offer simple accounts without proof of address, some banks have ceased offering them because they were unprofitable. He says the South African government has also failed to address the needs of migrant communities, who do not have identification documents. Not having a bank account means people risk losing their savings and makes them targets for criminals.
- “In many lower-income markets research shows poor people are enormously exposed to loss of savings through theft,” he says. “
- They keep money under the bed, get robbed, the house burns down, or they bury money and someone else digs it up.”
Instead of loosening KYC criteria to improve financial inclusion, however, banks are tightening implementation more than ever before.
Three years ago, partly in response to the global financial crisis, the Financial Action Taskforce recommended that countries toughen sanctions against banks that fail to deliver on anti money-laundering and terrorism checks.
In August 2014, Standard Chartered had to pay $300m to the New York State Department of Financial Services after its screening systems failed to spot suspicious transactions in UAE. As a result, the bank closed thousands of accounts with small and medium-sized enterprise customers in the country.
Do banks matter in developing countries?
Closing such international accounts, known as ‘derisking’, hurts developing countries because without relationships with big international banks, accessing finance for importing and exporting goods and transferring money abroad becomes harder and more expensive.
Roy Melnick, an associate director working on money laundering for PwC South Africa, says the global standards for safeguarding are there for good reasons, but derisking disproportionately affects innocent people. “Probably 99.9% of the population is law-abiding, it’s that 0.1% that make it so much more difficult for the rest,” he says.
Banks have become particularly cautious of money transfer services such as Western Union, which are perceived as particularly open to abuse.
Somalia has no formal banking service, so when Barclays Bank tried to close its Somali MSB services in 2013, removing the only money transfer service available in the country, it faced outcry. The issue was taken to the high court, which ruled Barclays must continue its Somali banking services. The example illustrates how vulnerable some countries are.
The cost of meeting regulations is another reason banks are increasingly closing international relationships. Banks have to prove annually they have sufficient money laundering and terrorism prevention procedures in place for every bank with which they connect. According to KYC Exchange Net AG managing director Joachim von Hänisch, this can cost the bank £10,000 for each reporting process. The bank running the checks also incurs expenses.
- “If a bank isn’t making enough money from a relationship with another bank then it’s simply not worthwhile,” he says. Banks see derisking as a simpler solutio
Hänisch’s company addresses the problem by encouraging banks to use a standard, online reporting platform, KEN, that enables local banks to produce a single report a year. Three international banks have already signed up to the system since it launched in January 2014. Hänisch says it saves banks time and money, and could dissuade them from closing relationships.
The European Bank for Reconstruction and Development (EBRD) is also trying to tackle the problem. As a non-commercial entity, it finances trade in eastern Europe and the Commonwealth of Independent States, but carries the risk itself. Deputy director of financial institutions Rudolf Putz says in countries such as Ukraine, Belarus and Armenia, EBRD is one of the few international institutions still providing trade finance facilities. “We have sufficient staff and money to analyse and take risk, which commercial banks would not be able to do,” he says.
He is concerned that if countries are unable to access trade finance from international banks, people will be forced to manage money in riskier ways. Ironically, this is exactly what KYC set out to prevent.
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