Bank Negara issues Discussion Paper on Financial Inclusion Framework 2023-2026

Bank Negara Malaysia (‘BNM’) issued a Discussion Paper on Financial Inclusion Framework 2023-2026 (‘Discussion Paper’) on 3 February 2023.
The Discussion Paper sets out the proposed features of BNM’s Financial Inclusion Framework 2023-2026 (the ‘Framework’). The vision of the Framework is to “Advance financial inclusion to elevate the financial well-being and standard of living of all residents of Malaysia” (‘Vision’) by: 
  1. enabling everyone to benefit from an accessible and inclusive financial ecosystem; 

  2. equipping individuals and businesses with affordable and suitable financial solutions; and 

  3. empowering consumers with the financial capability to make sound financial decisions and meaningfully participate in the financial system. 
The Framework will be issued under the relevant provisions of the Financial Services Act 2013, the Islamic Financial Services Act 2013, the Development Financial Institutions Act 2002 and the Money Services Business Act 2011.
The Framework, which is aligned with the Financial Sector Blueprint 2022-2026, is a principle-based four-year strategic roadmap to advance financial inclusion as a means to an end, instead of an end in itself. It takes into account barriers and challenges to financial inclusion identified in the Financial Capability and Inclusion Demand Side Survey 2021 - 2022 and the SME Financing Survey 2021.
At a national policy level, the advancement of the financial inclusion agenda remains a key priority under the Twelfth Malaysia Plan 2021 – 2025, with the aim of ensuring that all Malaysians have meaningful access to quality and affordable financial services.
The Framework includes the following features: 
  1. a more expansive and holistic approach to transition the focus from accessibility and usage to achieving broader development outcomes as well as financial resilience and well-being; 

  2. seven policy objectives to address the remaining gaps and accelerate the advancement of financial inclusion; 

  3. four strategic enablers to support the effective implementation of the Framework; 

  4. principle-based guidance to identify the unserved and underserved - covering broader challenges of exclusion beyond geography, and includes various aspects of financial vulnerabilities;  

  5. two cross-cutting themes as underlying implementation principles; and

  6. list of key performance indicators (KPIs) that will account for the quality of financial services and components of financial capabilities and health. 
Guidance on Unserved and Underserved Segments
The Framework provides principle-based guidance1 to assist financial institutions in defining the ‘financially unserved and underserved segments’ based on the following six key characteristics: 
  1. physically challenging to reach given geographical accessibility; 

  2. unable to conduct digital transactions, due to a lack of digital literacy or connectivity; 

  3. face difficulties obtaining financial services given their risk profiles; 

  4. face difficulties accessing financial products due to information asymmetry or concerns on commercial viability especially in new growth areas; 

  5. likely to be more vulnerable due to personal circumstances, including changes in personal circumstances, exposing consumers to greater risk of experiencing harm; and 

  6. gaps in financial literacy which hinder the effective take-up and meaningful usage of financial products and services. 
Desired Outcomes
The four desired outcomes to attain the Vision under the Framework are: 
  1. access to affordable and suitable financial products and services; 

  2. responsible usage of financial products and services; 

  3. financial innovation that delivers value for all; and 

  4. financially capable consumers with good financial health. 
Policy Objectives and Strategies
The seven policy objectives and strategies to address the remaining gaps and accelerate the advancement of financial inclusion are as follows: 
  • Policy Objective 1: Expanding access to financial services for the ‘last frontier’ i.e. the unbanked population, particularly in the remote and underserved areas;

  • Policy Objective 2: Promote secure and inclusive digital financial services;

  • Policy Objective 3: Enhance the Small and Medium Enterprises’ financial ecosystem; 

  • Policy Objective 4: Improve access to and usage of risk protection;

  • Policy Objective 5: Strengthen financial institutions’ role and capabilities in promoting financial inclusion;

  • Policy Objective 6: Improve targeted support for the vulnerable segments; and 

  • Policy Objective 7: Equip consumers with improved financial capabilities. 
Further details of each of these policy objectives and their intended outcomes are available in the Discussion Paper.
Cross Cutting Themes
The two thematic considerations that will be integrated within the financial inclusion strategies across the board are: 
  1. embedding gender equality considerations within financial inclusion initiatives for greater socio-economic outcomes, such as identifying specific barriers faced by women, increasing usage of gender disaggregated data, developing customised value propositions for women’s needs and ensuring targeted financial education and capacity-building programmes for different sub-groups of women consumers; and 

  2. strengthening impact measurement, evaluation and monitoring  of financial inclusion efforts across the industry to promote greater accountability, including establishing a monitoring and evaluation (M&E) system, developing impact metrics and standardised reporting templates to facilitate disclosures by financial institutions, enhancing value-based scorecards under the Value-based Intermediation (VBI) to ensure information published is well-aligned to international practices. This will also enable financial institutions to demonstrate and improve their commitment to the broader Environmental, Social and Governance (ESG) goals and Sustainable Development Goals (SDGs) agenda. 
Strategic Enablers for Successful Implementation
The Framework identifies four strategic enablers involving industry-wide efforts that support the successful realisation of the policy objectives and strategies for financial inclusion: 
  1. strategic collaborations - forging strategic partnerships among relevant stakeholders in both the public and private sectors for the implementation of financial inclusion strategies, with regular monitoring of progress and evaluation of progress; 

  2. data sharing – enhancing industry-wide data sharing access for development of better targeted financial solutions and to enrich creditworthiness assessments for thin-file consumers;  

  3. infrastructure - focus will continue to be given to ensure the financial infrastructure (e.g. interoperable payment systems, credit reference and reporting firms, credit guarantees) is effective in serving a dynamic and inclusive financial system. The acceleration of digital financial services, broader digital infrastructures and reliable connectivity, including in rural and remote areas, are crucial to ensure that hard-to-reach segments can participate meaningfully in the financial system; and 

  4. conducive regulatory environment - the Framework takes into consideration the continued need to ensure a regulatory environment that facilitates financial inclusion, including facilitating the provision of financial services that are safe and reliable, easing entry barriers for non-traditional financial service providers and improving consumer protection standards. 
Monitoring and Evaluation Framework and Development of Key Performance Indicators
To ensure that the financial inclusion strategies are implemented as planned, reviewed and adjusted when necessary and to achieve the Framework’s desired outcomes, BNM will develop a structured M&E process to track the performance and progress of the strategies outlined in the Framework. The key elements in the M&E process are: 
  1. implementation - developing a programmatic roadmap to implement strategies under the Framework; 

  2. monitoring – establishing KPIs and targets based on the Framework’s desired outcomes; 

  3. reporting – periodic reporting of implementation progress by relevant stakeholders; 

  4. evaluation -  undertaking a mid-term review in 2024 to evaluate progress of the Framework and to adjust strategies to ensure continued relevance and effectiveness; and 

  5. communication – communicating and publishing the progress of the Framework on an agreed platform for greater transparency. 
BNM will, in consultation with relevant stakeholders, develop a comprehensive and appropriate set of KPIs and targets. The KPIs and targets will be published as part of the Strategy Paper’s addendum in 2023.
Feedback on Discussion Paper
Feedback on the Discussion Paper is to be submitted to BNM by 31 March 2023. In particular, financial institutions are invited to respond to the survey and provide their feedback in the form set out in Appendix 1 and Appendix 2 respectively.
Article by Grace Teo Shi Kay (Senior Associate) and Francine Ariel Paul (Senior Associate) of the Corporate Practice of Skrine.

1 The guidance is aligned with the definitions provided under the relevant policy documents issued by the Bank - Agent Banking Framework 2021, Licensing Framework for Digital Banks 2020, the Fair Treatment of Vulnerable Consumers Exposure Draft and the Licensing Framework for Digital Insurers and Takaful Operators 2022.

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