Social transfers and financial inclusion

Delays, leakages and frauds are presumed to be the major factors that mar the effectiveness of the states cash transfers and other welfare payments meant for the underprivileged. To address the systemic lacunae and increase financial inclusion, some middle-to-low income countries, including Pakistan, are looking at routing the government-to-person cash transfers through branchless banking channels.
The effectiveness of electronic welfare payments in reducing waste and financial exclusion hasn been established yet. However, a recent study conducted by the Consultative Group to Assist the Poor, a reputable research and policy center at the World Bank, has attempted to explore the link between electronic social cash transfers (G2P) and financial inclusion.
The study focused on four middle-income countries, Brazil, Colombia, Mexico, and South Africa, all having relatively well-developed financial infrastructure in urban areas and conducive BB regulations. The G2P social transfer programmes in the four countries cover about 30 million recipients, over a sixth of the 170 million poor people estimated by CGAP to be under G2P coverage globally.
The CGAP study is interesting in the sense that it has researched the viability of G2P programmes in these countries from the perspective of all the stakeholders: the government agencies, the payment recipients, and the service providers.
According to the study, depending on the payment approach, the transition from cash to electronic means is affordable for the social agencies. However, the cost of deploying the requisite infrastructure and servicing for limited-purpose instruments (pay orders, magnetic-stripe cards) - which are financially restrictive vis-à-vis storage and access - is higher than opening and servicing a recipient banking account.
"At the very least, limited-purpose instruments should be implemented in a way that makes it possible to easily transition to mainstream financial accounts later", recommends the study.
While the recipients deemed the electronic payment convenient compared to physical cash; the study highlights that very few of them automatically use their new bank account for other financial services (e.g. savings) owing to confusion, unawareness and financial skepticism. The study calls on the social agencies and FIs to communicate clearly and consistently, and if possible, offer additional incentives.
The study emphasises the importance of government fees for the service providers business case. "Without these fees, the business case for providing small balance accounts rests on achieving huge economies of scale, using low-cost channels like agents to squeeze every element of cost to a minimum, and over time, providing additional services to the same clients to generate more revenue."
In the end, the study warns that social agencies continued preference for limited-purpose instruments may increase costs and not lead to greater financial inclusion. It underscores that only a well-designed social cash transfer payment strategy, which is built on a countrys general retail payment system, can accelerate the move from cash to electronic means and later on to fully inclusive formal financial services.
The studys conclusions hold value for the policy- and decision-makers in Pakistans budding BB sector. Besides payments to IDPs and flood-affected ones in recent years and a couple of BISP pilot projects, Pakistan is yet to embark on a wide scale rollout of G2P payments via BB platform. Hence, it is imperative to learn from the experience of other countries to chart a seamless course at home.