8.1 Policy and Regulation Play a Critical Role in Increasing Youth Access to Financial Services
While most practitioners are still experimenting with YFS at the client-level, others are beginning to look more closely at macro-level changes that can increase a young person’s access to quality financial services. Research organizations and advocates, including the World Banks’s Consultative Group to Assist the Poor (CGAP), Child and Youth Finance International (CYFI), and the Center for Social Development (CSD) are working to better understand the role that child-friendly banking regulations and policies can have on increasing the quality and variety of financial services available to young people. Over the past two years, these industry leaders researched financial sector and youth policies across the globe and worked closely with local research institutes and financial services providers, such as New Era and the Bank of Kathmandu, both of Nepal, to explore how to work within existing policy and regulatory frameworks and experiment with new ones to promote YFS.
- YFS are an important part of financial inclusion strategies.
CGAP’s research on youth-friendly financial policy is driven by the link between financial access and financial inclusion. While the organization recognizes that the inclusion of youth into the financial sector is not a standalone policy solution for reducing poverty, CGAP believes that offering young people the opportunity to open and manage a savings account may be one tool to helping young people build a stake in their financial future, ultimately helping to promote economic growth and social and political peace.1
- Policies initially designed to protect children and young people may serve as a constraint to increasing their access to financial services.
In 2010, CYFI, in partnership with global law firm Clifford Chance, undertook a research project to better understand the current regulatory environment for child-friendly banking and how it impacts children’s and young people’s access to financial services. The study aimed to identify existing policy constraints and promising examples for increasing young people’s inclusion into the formal financial system. One key finding is that nearly every country studied has some sort of existing policy that affects young people’s economic development, vocational training, and access to financial services, and determines whether or not children and young people can access financial services.
- Moreover, these policies and regulations tend to vary significantly across nations. Here are some of the study’s specific findings:2
- Ability to contract: In all of the countries surveyed, the legal age of majority is 18, except for in Egypt and Singapore (21 years), Scotland (16 years), and Japan (20 years). At this age, a person can enter into contracts, including opening a bank account and/or accessing credit, among other things. This age limitation can significantly impact a FSP’s ability to serve younger clients without the involvement of a parent or guardian.
- Identity: In most countries, a person is required to show identification in order to open a bank account. This policy, derived from Know Your Client (KYC) regulations, is required of banks in order to comply with world-wide anti-money laundering and combatting the financing of terrorism (AML-CFT) regulations. However, in many of the countries that are exploring youthinclusive financial services, poor people, and especially young people, often do not have access to government-issued IDs. As a result, even if a nation does have youth-friendly regulation in terms of age of contract and/or minimum age to open a bank account, youth are often kept from opening an account by the inability to produce an official form of identification.
Greece, South Africa and Kenya are just a few of the countries with particularly strict ID requirements. In these countries, individuals are required to show both a birth certificate or ID and a proof of residence in order to open a bank account. Unable to comply with these requirements, many Kenyan youth provide fake documentation in order to obtain a bank account, resulting in even more stringent regulation.
- Stakeholders are finding ways to work within the stipulations of their legal system.
Policy and regulatory changes can take years to accomplish. Policymakers also require sufficient evidence (which can take years to generate) to support policy changes. As a result, some government bodies and financial institutions have found flexible ways to work within existing policies and regulations so that young people may access financial services immediately.
- Ways to approach age limitation: In some Eastern European countries, such as Romania, Russia, and Ukraine, youth are given the right to open and manage their own bank accounts at the age of 14. In other countries, such as the United States of America, Canada and Indonesia, there is no national law or policy on the minimum age to open an independent bank account. Instead, each financial institution has the liberty to declare its own policies.
While Belgium and the Netherlands allow individuals to open and manage a bank account at the age of majority (18 in both countries), they have developed a “child proxy” system whereby a child’s parent or legal guardian can open an account on behalf of the child before s/he reaches the age of majority. The child proxy can also decide how much ownership the young person has over his/her account. For example, the child proxy may determine that the youth is responsible enough to fully manage the account or may limit the young person’s freedom and require that the child proxy be present for the child to engage in any type of transaction. Poland and Germany have a similar child proxy requirement, but have an additional stipulation, whereby if a youth over the age of 14 has an income, s/he can set up a payroll account that is fully separate from his/her parent or guardian. The account is a direct deposit account and the youth has full control over it.
Regulators and banks in other countries have found similar solutions for parents and guardians who want to give their children more independence and ownership over their bank accounts. In Chile and Bolivia, a parent or guardian must be present for a youth to open an account. However, in order to maneuver around the minimum age to operate an independent bank account (18 years in both countries), many banks have developed debit/ access cards that are linked to the account, rather than to the name of a specific account holder. Thus, a guardian can choose to give a youth under the age of 18 full access to his/her bank account.
8.1.1 Bright Ideas: From Privilege Banking to Mass Banking in Nepal
In the late 2000s, the Nepalese Ministries of Youth and Finance began promoting new approaches for the welfare of children and youth. The Central Bank, which is the primary enforcer of the Nepalese financial sector’s regulatory environment, also began promoting more liberal financial sector practices in order to narrow the growing gap between domestic savings and investment needs.
Among many efforts to narrow the gap in a country where two thirds of the population does not have access to the formal financial sector, the Central Bank emphasized savings promotion to make the financial sector more inclusive of marginalized populations. It wanted to promote a change from “privilege banking” to “mass banking” by diversifying
products, enacting interest rate differentials, incorporating mobile banking services, diversifying modes of advertisement, and encouraging small depositors.
One innovative product developed by the Bank of Kathmandu, in collaboration with the YouthSave Consortium,3 features accounts owned by minors in trust of a responsible adult (majors – adults - own the account themselves), promoted through campaigns in schools and other community-based mechanisms. YouthSave partner Save the Children will also be providing accompanying financial education to youth clients through a partnership with local NGOs in select communities.
- Ways to approach identity requirement: CGAP reports that in The Philippines, where it is particularly difficult for youth living in rural areas to access formal identification (ID), the Central Bank has taken steps towards financial inclusion by mandating an alternative form of ID. A young person without a formal ID can obtain a certificate signed by the village head to guarantee his or her identity. Banks are required to recognize this as an acceptable form of identification.
Individual banks have also found solutions to help enable youth and other poor clients to access financial services, while upholding the KYC policy. One bank in Mali, Nyèsigiso, developed an identification form that requires the same information that is recorded on a national ID card, such as the ID holder’s name, address, and photograph. To certify the young client’s identity, the bank will accept the completed ID form signed by two other group members, in lieu of a national ID.
8.1.2 Bright Ideas: Innovative Space for YFS Policy Change
|CGAP suggests that before implementing changes to existing policy and regulation, countries should create an innovative space for experimentation with YFS policy. CGAP acknowledges that the YFS sector currently lacks evidence to support legal changes towards a more liberal financial sector policy. However, in order to obtain this evidence, Financial Service Providers (FSPs) must be given the opportunity to explore outside of the usual regulatory confines. CGAP suggests a closely monitored innovative space with strict boundaries and conditions (number of accounts, volume limitations, etc.) under which a specified number of FSPs can experiment with different rules for a predetermined timeframe, at which point the sector||
would have the necessary data to evaluate whether or not real policy/legal/regulatory changes should be made. One example is the recently launched “Kiddie Account Program” in the Philippines, spearheaded by the Central Bank, which allows children over seven years old to open savings accounts. CGAP and others in the YFS policy space look forward to following the results of this first-ever central bank-led YFS initiative to increase children’s access to savings in a developing country.4
- Changes to non-financial policy can also contribute to increased youth access to financial services.
Economic development and youth-focused initiatives may spur young people’s inclusion in the financial system and can be leveraged to overcome many of the challenges outlined in this section. For example, Kenya’s Youth Enterprise Development Fund supports this finding as it incentivizes FSPs to promote business development services (BDS) and incentivizes youth to start saving so that they can become eligible for a loan. In another example from Kenya, where youth have access to free public education, policy-makers are exploring the possibility of requiring IDs for the national exam process. As a result, each youth who takes this exam would be issued an ID, which would make the identification requirement for a bank account much less of a barrier for most youth.5
Summary of Key Lessons Learned on YFS Policy and Regulation
The industry leaders mentioned in this section have only begun to scratch the surface of how reshaping local banking or child protection regulation can enhance youth access to financial services. Their identification of ways to work within the confines of existing policy can serve as helpful guidance for developing immediate solutions to serving younger clients. Over the longer term, these experiments will hopefully generate the evidence necessary for influencing youth-friendly policy reform.
- 1. For more information, please visit www.cgap.org to access CGAP’s forthcoming publication, Financial Inclusion: The Youth Frontier, due Spring/Summer 2012. For additional discussion on market research presented by MEDA, CHF and Freedom from Hunger, please visit Making Cents International’s 2010 State of the Field in Youth Enterprise, Employment and Livelihoods Development publication on page 53. For additional discussion on Population Council’s research, please visit Making Cents International’s 2009 State of the Field in Youth Enterprise, Employment and Livelihoods Development publication on pages 169 and 173.
- 2. To view a table that summarizes financial regulation on bank accounts for minors, see http://www.yfslink.org/files/CYFI%20Financial%20Regulation%20Country%20Summary%20Table_Jan24_2012.pdf/view.
- 3. YouthSave is a consortium project led by Save the Children, with Washington University’s Center for Social Development, The New America Foundation (NAF), and CGAP, in partnership with The MasterCard Foundation. Its goal is to develop and test youth savings products in Colombia, Ghana, Kenya, and Nepal.
- 4. For more information, please see CGAP’s blog post on policy innovation in The Philippines at http://youthsave.org/content/ blog-philippines-driving-innovation-youth-savings.
- 5. For additional discussion on Kenya’s Youth Enterprise Development Fund, please visit Making Cents International’s 2010 State of the Field in Youth Enterprise, Employment and Livelihoods Development publication on page 71.