Creating a Digital Path for the Unbanked
In the Philippines, cloud-based technology is being used to address the financial exclusion that helps fuel poverty and inequality.
Poor access to financial services is one of many factors behind poverty and inequality throughout the developing world, alongside insufficient infrastructure in poor regions, low education in poorer households and their limited access to public health services, and a highly informal labor market.
Yet for the most part investment that boosts inclusion has been weak in the Philippines and elsewhere. People in poor areas outside urban conglomerates like Metro Manila, on far-flung islands and in remote and rugged areas, have instead had to get by with limited access to finance. Financial services that many urban dwellers take for granted such as savings accounts, credit, remittances, or insurance are hard to come by, and seemingly intractable poverty has reigned for decades.
For example, only 31% of Filipino adults held an account at a formal financial institution in 2014, according to the latest available data. This is compared with 36% in Indonesia, 78% in Thailand, and 81% in Malaysia. Only 12% of Filipino adults have borrowed from a formal financial institution, the lowest in the region.
Without doubt, this plays a role in rural poverty in the Philippines and contributes to relatively high household inequality. The Philippines’ estimated Gini coefficient was 0.44 in 2015, compared with 0.40 in Indonesia that same year and 0.38 in Thailand in 2013, the higher value indicating greater inequality.
In the Philippines, an initiative is underway to address these issues. Cantilan Bank, in collaboration with software-as-a-service company Oradian, has launched the country’s first cloud-based core banking system in all of its 43 branches across 12 provinces in the Mindanao and the Visayas region. Featuring enhanced security and lower costs than similar “on-premise” systems, cloud-based services allow banks to better service remote clients.
Founded in 1980 and headquartered in Cantilan, Surigao del Sur, on the island of Mindanao, Cantilan Bank is a leading community bank. It serves provinces with more limited access to financial products and services and considerably higher poverty incidence. In the Caraga region of northeast Mindanao, for example, only an estimated 24% of families recently had bank deposits. About 7 out of 10 adults instead kept savings at home. The main source of borrowing has been family, relatives, friends and informal lenders.
In 2018, Cantilan Bank began to shift from a conventional on-site core banking system to the cloud, and final migration of all branches was completed in September 2018. With a green light to go ahead from the Philippines’ central bank in January 2019, Cantilan switched off its long-standing older system to become the country’s first bank to fully rely on cloud-based core banking using an external service provider.
The project provided invaluable lessons. Importantly, the central bank used the Cantilan case to “sandbox” the associated regulatory issues of this new digital approach to reaching customers—providing a safe and sound environment for careful scrutiny—giving its go ahead only after the pilot testing. The successful pilot has significantly encouraged support for regulatory sandboxes to overcome ongoing reticence toward digital financial solutions as the way forward for reducing financial exclusion. ADB is supporting this work in the Philippines and is in the process of developing pilot projects integrating digital financial solutions in Georgia and Papua New Guinea.
Cantilan plans to build on its new digital core banking system and begin offering innovative mobile and digital payments and banking solutions which will better meet the needs of its clients. By being on the cloud, it will also be easier to integrate with other technology providers.
Experience in other countries indicates that there is promise for such initiatives in unbanked regions. In Nigeria for example, after implementing a cloud-based core banking platform, LARDI, a microfinance finance institution, quadrupled outreach from 30,000 to 115,000 individuals through digital financial services over four years. In the same country, the Development Exchange Centre, also a microfinance institution, is demonstrating the scalability of cloud technology compared to systems that require on-premise servers and data centers. Between 2013 and 2016, the institution expanded its footprint from 79 to 112 branches.
In the Philippines, the work by Cantilan and its partners has energized government efforts to expand financial services in underserved areas of the country. Authorities are exploring projects to support a public private partnership model for agriculture insurance and to pilot solutions to increase agriculture value chain finance for small entrepreneurs. They are also developing use cases for increasing access to financial services through the new digital national identification and to boost capacity of financial service providers, like Cantilan Bank, through a matching grant technology fund.
All, by aiming to boost financial inclusion, hold promise for reducing poverty and income inequality.