Call for proportionality in ECB’s revisions to options and discretions policies

BRUSSELS, 30 August 2021 – The European Savings and Retail Banking Group (ESBG) submitted on 23 August its response to the European Central Bank (ECB) public consultation on updates to its harmonised policies for exercising the options and discretions allowed under EU law when supervising banks.

The ECB is proposing revisions to its policies primarily to account for legislative changes adopted since they were first published in 2016. Most of the revisions pertain to options and discretions in the application of liquidity requirements. The consultation relates to many aspects of supervision, including permissions for banks seeking to reduce their capital, the treatment of certain exposures in the calculation of the leverage ratio as well as some exemptions from the large exposures limit.

Call for proportionality

In the area of consolidation, ESBG considers that the ECB’s requirement for the application to use a consolidation method other than the equity method is disproportionate. Institutions would have to regularly determine the equivalence method (which they would rather avoid) in order to provide the evidence as required by the ECB. Institutions that have already received exemption approval for the old portfolio as of the reporting date of 31 December 2020 will hardly be able to prove the disproportionate effort of applying the equivalence method in the application for newly acquired participations that are immaterial in terms of amount. Hence, the ECB requirement should be deleted or limited to cases where the sum of the relevant book values reaches a size that is relevant for the banking group.

Also in the area of consolidation, under commercial law (National Generally Accepted Accounting Principles – nGAAP), insignificant participations are generally exempted from the consolidation requirement. In the case of larger institutions, these exemptions soon exceed the EUR 10 million mark, up to which non-inclusion would be allowed even without a case-by-case decision. However, the ECB requirements makes it necessary to apply for individual case decisions for a large number of participations with very low book values in each case. In this respect, we believe that the ECB should not generally classify the case-by-case decision under Article 19(2) CRR as an exceptional case, but should consider it as a regular process.

Regarding liquidity waivers, ESBG believes that when one is granted the respective liquidity reporting requirements should also be waived. The systematic denial of waiving individual liquidity reporting requirements would contradict the objective of the waiver itself and would continue to be a reporting burden for European banks.

In addition, we ask the SSM to allow the utilisation of the effective maturity for internal rating-based foundation (IRB-F). Considering the coming changes regarding the use of internal models, we in fact expect the IRB-F portfolio to expand, particularly for short-term intra-bank exposure. Finally, a narrow definition of cash clearing operations via the ECB Guidelines should be rejected



How to get a historic bilateral deal to share agent banking infrastructure

Scale2Save Campaign

Micro savings, maximum impact.

Scale2Save Partners go from competition to cooperation


Originally published on FinDev Gateway

By Kimathi Githachuri, Scale2Save Local Technical Specialist

On a warm quiet morning in Uganda last October, FINCA kicked-off retail cash-in and cash-out transactions through agents of its traditional rival, Centenary Bank. It was a low-key event, muffled by COVID-19 restrictions, that did not reflect the extraordinary nature of the occasion. For the first time in the history of African banking, two erstwhile competitors were, on their own accord – without regulatory prodding – choosing to share service-distribution infrastructure, for the benefit of end-user low-income customers, in a bilateral arrangement.

Enticing two competing financial institutions to work together is not an easy task. Particularly if the proposal is about convincing rivals, who operate in the same geographic environment, to share infrastructure in a way that might advance the interests of one of them.

It is therefore no wonder that eyebrows were raised when, just a couple of months to the onset of the pandemic, the WSBI Scale2Save programme made the proposition to FINCA Uganda and Centenary Bank to consider sharing agency banking infrastructure.  Smarting from the rejection of a similar proposition made to two of its partners in one of other five focus countries, the Scale2Save team was better armed to respond to the anticipated preliminary objections.

Who are the partners?

Centenary Bank, on the other hand, is the country’s leading commercial microfinance bank, serving more than 1.8 million consumers.. It built its reputation earlier on in rural development banking and servicing the Catholic Church, which is its single largest shareholder. The bank has evolved and now attends to the needs of a wider range of retail and corporate customers through an expanded product portfolio. Centenary was amongst the first banks in the country to roll out agent banking operations, and currently boasts the largest network of agents of any bank in Uganda.

Centenary Rural Development Bank Ltd, as the Bank is officially known, is a founding member of the Agency Banking Company (ABC), a multi-laterally shared agency banking implementation managed under the Uganda Bankers Association (UBA), the umbrella lobby for financial institutions in Uganda. It contributes more than 50% of its existing 5,000 strong agency banking network under the ABC arrangement – thus already enabling multiple financial institutions access to its own successful channel. Due to the restrictions already mentioned above, FINCA is not allowed to participate in this effort.

What is in it for the Partners?

An agency banking operation would provide FINCA the opportunity to compete with other FSPs on equal footing for new customers and extend service distribution to existing customers.

Under the Scale2Save programme, access to the agency banking channel provided by Centenary affords FINCA the opportunity to expand its digital banking footprint, effectively completing the customer journey puzzle; where customers are on-boarded using its mobile banking channel and access to, and deposit of, funds using an agency banking network that is already ubiquitous and fully operational.

The motivation for Centenary Bank to offer its investment – which conservatively costs anything from a million US dollars to roll out – to be unreservedly accessed by a third-party institution and its customers is that it gets to optimise the capacity of its agents, which offers improved returns for the agents, as well as some marginal revenue increment to the bank.

Under the Scale2Save programme, Centenary can also test, re-design and recast its technology and operational capability to support other micro-finance deposit taking institutions (MDIs) like FINCA, using its proprietary agency banking channel. This is an arrangement that the ABC is currently not able to facilitate.

 What were the Enablers?

Organisational Chemistry: During the negotiations of the Centenary-FINCA deal, we were lucky that both organisations’ CEOs had great camaraderie, which had a reverberating effect on the rest of the rank and file in the two institutions, leading to great working chemistry. Outstanding issues that would ordinarily get in the way of the preliminary and technical engagements were quickly resolved.

Product and Technology Design: Discussions included technical design elements and commercial components touching on pricing and market engagement. Eventually, a decision was made to limit provision of FINCA services to cash in and cash out payments only. Both parties considered third-party customer on-boarding at the agent a touchy issue – both from a competitor as well as regulatory perspective – and was therefore excluded as part of the initial offering.

Regulatory Support: Against the expectations, Bank of Uganda was refreshingly supportive of the agreement, and advanced specific advisory that would balance the aspirations of the partners, while ensuring that the provisions of the law and regulations were adhered to. Finally, the central bank gave its approval.

The Net Effect

Six months into the launch of the service, transactions through-put have an over 95% success rate – considered high for such a novel deployment. More than USD7million worth of transactions have been made by FINCA customers in at least 1,500 Centenary Bank agents spread across the country. Up to 80% of these transactions have been deposit transactions, underscoring the critical role distribution plays in mobilising deposits and catalysing savings. Besides improved access in remote locations, FINCA customers can maintain a healthy credit score while meeting their credit repayment obligations.

In addition, Centenary Bank agents are happy to benefit from additional transactions, which could eventually encourage further investments in the agency banking channel. Centenary Bank also gets the benefit of a proven test case on supporting MFIs/MDIs and other unregulated entities in mobilising deposits and customer support for their financial services.


On the European Commission's Artificial Intelligence Act

The Commission aims to turn Europe into the global hub for trustworthy Artificial Intelligence. If we share this idea on the principle, it should be recognised that this is a risky bet.

The European Commission published a proposal for an Artificial Intelligence (AI) Act at the end of April. In parallel, it has set up a public consultation for stakeholders to provide feedback on the draft text, which ended on 6 August.

AI technology has only slowly began arriving on the market and as applications become more sophisticated, they will likely often become very unpredictable in their development. To ensure legal certainty, a level playing field and no obstacles to innovation, a clear definition of artificial intelligence is needed. This would cover the Commission work, as well as national data protection authorities, the Council of Europe initiative, and the OECD framework on classifying AI systems. ESBG members very much welcome the proposed technology-neutral and future-proof definition of AI, and the Commission’s risk-based approach to enable a proportionate regulation.

The Commission aims to turn Europe into the global hub for trustworthy Artificial Intelligence. If we of course share this idea on the principle, it should be recognised that this is a risky bet. Indeed, if European values are not ultimately adopted on an international scale, non-European solutions are potentially more efficient because they have been developed in less restrictive regulatory environments and could compete with European solutions.

With regards to the acceptance of data usage, members would like to use real datasets instead of the Commission proposed ‘synthetic’ datasets. These would mimic real life situations and allow AI training in a realistic setting, without the risk of second order bias (e.g., ethnicity indication based on living area or income).

We also believe that there should be a provision in the draft text to protect European AI developers and users at international level. AI does not discriminate against physical locations, and many different countries across the world have different interpretations of copyright and liability when it comes to AI applications.

Finally, we call for clarity on the scope of the text when it comes to biometric identification of natural persons. It is not yet clear if financial services firms and their providers, who rely on biometric identification to onboard customers remotely (and comply with KYC – know your customer requirements) will be included in the scope of the full set of requirements in the AI regulation.

We support the Commission in its efforts to create a clear legal framework for artificial intelligence which does not inhibit innovation and at the same time provides security for all market participants. We are particularly pleased with the Commission’s philosophical approach to promoting “digitalisation with a human face”. We believe that trustworthy AI in cooperation with human expertise will be of great value to European society. We particularly emphasise the interaction between man and machine. We firmly believe that both humans and machines are irreplaceable. However, we must ensure that new regulation does not inadvertently cripple our markets, dampen innovation and opportunities.



Financial News & Views: August 2021 Edition


Month: August 2021

How to spend it, or not (page 2)
How much for that banknote? (page 2)
Challenges and priorities for retail banking post covid (page 3)
Scale2Save case study presents six innovative business models (page 5)
Hitting the ground running (page 6)
Social taxonomy: keep it simple (page 7)
How to discourage savings: put the interest rates below zero (page 8)
How Great it is to be Small! (page 8)


Financial Services That Work for Young People

Scale2Save Campaign

Micro savings, maximum impact.

How Social Norms Impact Financial Resilience Among the Youth in Africa
Descriptive social norms are unwritten rules that people follow unconsciously. These rules shape society and culture, and help differentiate one context from another. Social norms apply to people across age groups, but young people between the ages of 15-24 feel particular pressure to conform to them, as they’re in the process of building the foundations for adulthood and the responsibilities that come with it.

FSPs have proven they are capable of reaching and including vulnerable groups of the population, but they face challenges in assessing how social norms and expectations might affect young people and their inclusion. Our research finds two elements relevant to determining young people’s financial behaviors: social norms related to age and expectations related to life stages.

A typical household is made up of adults (parents or guardians), young adults, youth, children, etc., and the age of these residents naturally affects their position and roles in the household. These household structures influence financial inclusion and the social norms and expectations placed on young people by their families, friends and other community members. And these social norms are often first taught at home. Young people’s understanding of these norms — and the ages at which they adopt them — can partly be deduced by studying population pyramids that show the life stages of people in typical households, and when young people transition from one stage to the next. For example, the age until which young people are expected to remain in education is determined by how many young people, at any given age, are still in education and the age at which they usually lead their own household. Graph one below shows analyses of these household transitions for Nigeria and Senegal.

We found that the transition to heading a household, in line with increasing expectations to become more financially independent, starts around the age of 15 across the three research countries, and may continue well beyond the age of 30. This should encourage FSPs’ interest in actively serving people as young as 15, because social norms themselves do not appear to limit young people’s financial inclusion. Rather, social norms create pressures and expectations for financial inclusion as young people become old enough to head their own households, but young people are unable to meet those expectations because FSPs are hampered by regulations that hinder their ability to cater to their needs. For example, because FSPs in these research countries do not allow for the autonomous use of accounts by people in their mid-teens, young people cope with these pressures by accessing formal financial services through mobile providers that aren’t subject to those restrictions.

But though social norms can be seen as an enabler of financial inclusion for young people in general, they can also hold young women back from using digital finance, accessing sources of funding and becoming economically independent. For example, women in Morocco who feel free to work before marriage face social pressure to stop working after marriage because, they said, working while married suggests their husband could not care for them financially. This sort of social norm is sometimes validated and perpetuated by FSPs’ policies, hampering women’s access to finance and capital. For instance in Nigeria, these policies may even prevent young women who are employed from accessing loans, unless they are married and their husbands have a job. This policy approach suggests that social expectations are that all women should be married, and all husbands should have a job.

Likewise, social expectations in Senegal put pressure on young men to secure an income and achieve enough financial independence to head and support their household, which might include multiple generations. The expectation and pressure young men feel in Senegal increases with age, survey respondents said, because both the size of the household and occupants’ needs increase. Hence, FSPs could support young people better if they came to understand the ways these social norms impact financial inclusion at different customer ages.

But age alone isn’t the only factor that can impact financial inclusion in the communities we studied: Stages of development were also an important factor.

Stages of development are periodic phases that characterize developmental milestones and can alter a young person’s life trajectory, such as completing school, finding employment or becoming a parent. They can be categorized by age and are often gendered. The surrounding social context also influences how young people experience each stage of development.

For example, the parental household is typically a springboard for young people transitioning through life stages, from education to employment. We found that even among young adults (aged 18-25), parents remain a financial support mechanism and social norms partly influence how much of this support young people receive from parents. For instance, parents in Morocco supported their children attending university more than those not pursuing education, while in Nigeria and Senegal, financial support from parents decreased steadily over age groups, regardless of whether the children were pursuing education. This is because young people remain financially vulnerable during the initial stages of their growth toward independence, at least until they marry.

Marriage itself represents another key life stage that has an important impact on social norms and financial inclusion efforts. Once married, women in Senegal are expected to cook for the whole household. So young unmarried women have more time and flexibility to study or work full-time. This, however, was not the case in Nigeria, where both young women and men in our study agreed that marriage did not determine the limitations of young women’s work and financial aspirations (though as mentioned above, remaining single was a limitation in accessing loans). These social norms mean that young women in Nigeria are better placed to negotiate financial independence from their husbands, whereas young women in Senegal must adapt to new responsibilities after marriage that could impact their financial resilience negatively.

These findings suggest that financial service providers in these countries need a new approach to serving young customers and potential customers. To improve financial resilience and allow young people to benefit from opportunities, FSPs working to build digital services for young people must also take into consideration their life stage development and social norms. Generally, we find that FSPs are not very strong in customer-centric and outcome-focused design. This needs to change if they are to reach new young customers.

Such an approach will help FSPs understand how and under which circumstances young people’s resilience and opportunities are impacted by the expectations of their surrounding communities. The approach must include research to gain an understanding of young people’s realities and needs, which could inform the creation of detailed depictions of potential customer personas, market scoping exercises and customer journey maps. These methods must be based on young people’s experiences because the best way to understand them is by talking to them. By building this understanding, FSPs will be better able to support young people — and more likely to retain them as active customers in the long term.

Lise Paaskesen is an independent consultant at Lise Consultancy, and Weselina Angelow is program director at Scale2Save at the World Savings and Retail Banking Institute.

Social norms also shape people’s experiences in using financial services. But according to the findings of the Young People in Africa study, the opposite can also happen — i.e., financial service providers (FSPs) can influence social norms through the services they offer. The 2019 study — conducted by Scale2Save, a World Savings and Retail Banking Institute programme for financial inclusion in Africa supported by the Mastercard Foundation — included 909 stakeholders in Morocco, Nigeria and Senegal. It examined young people’s experience through a mixed research approach: financial diaries and macro quantitative data analysis, both complemented by qualitative research to better understand young people’s aspirations, support structures and financial behaviors. The findings suggest that FSPs have the potential to improve young people’s opportunities and resilience by offering services that foster more autonomy, decision-making and bargaining power, thus contributing to changing social norms in those areas. Below, we’ll discuss these findings and their implications for FSPs and their customers in Africa and beyond.

Most of the young study participants were economically active, preferred to diversify their sources of income, saved in case of unexpected emergencies and increased their savings in line with rises in income. Our research revealed that the formal financial system works much better for young people older than 18, which leaves many younger people marginalized by the sector. However, this does not mean that under-18s cannot benefit from being financially included: They also feel social pressures to grow their finances. Hence, young people — those aged 15-18 in particular — have found a way to negotiate these social pressures by accessing digital routes. In some cases, they are even closing the digital access gap between them and their older peers. In Nigeria and Senegal, for instance, it is increasingly possible to use the formal financial system’s digital infrastructure without owning an account or wallet in one’s own name, opening the door to greater access to digital products among young people who use accounts opened by their relatives. However, this is not possible in Morocco, where young people are disproportionately represented among the financially unserved population.

Data analysis based on Findex data (see table one below) shows that among all young people, regardless of the life stage they are in, digital access to finance is higher than access via an FSP, even by their mid-teens (age 15-17). Note: In this chart, digital access refers to both access to formal FSPs’ digital products (via an account opened by an adult) and digital access via their own accounts at mobile money and other non-FSP providers.

Source: Findex and Young People in Africa research report, pp.14-15