Overview of financial inclusion, regulation, financial literacy, and education in Central Asia and South Caucasus

Morgan, Peter J.; Zhang, Yan; Kydyrbayev, Dossym Working Paper Overview of financial inclusion, regulation, financial literacy, and education in Central Asia and South Caucasus ADBI Working Paper, No. 878 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Morgan, Peter J.; Zhang, Yan; Kydyrbayev, Dossym (2018) : Overview of financial inclusion, regulation, financial literacy, and education in Central Asia and South Caucasus, ADBI Working Paper, No. 878, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/190299 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series OVERVIEW OF FINANCIAL INCLUSION, REGULATION, FINANCIAL LITERACY, AND EDUCATION IN CENTRAL ASIA AND SOUTH CAUCASUS Peter J. Morgan, Yan Zhang, and Dossym Kydyrbayev No. 878 October 2018 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. Suggested citation: Morgan, P. J., Y. Zhang, and D. Kydyrbayev. 2018. Overview of Financial Inclusion, Regulation, Financial Literacy, and Education in Central Asia and South Caucasus. ADBI Working Paper 878. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/financial-inclusion-regulation-literacy-education-centralasia-south-caucasus Please contact the authors for information about this paper. Email: [email protected]; [email protected]; [email protected] Peter J. Morgan is senior consulting economist and vice-chair of research at the Asian Development Bank Institute (ADBI). Yan Zhang is a project consultant at ADBI. Dossym Kydyrbayev is managing partner of the Rakurs Consulting Group. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2018 Asian Development Bank Institute ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev Abstract Financial inclusion and financial literacy are receiving increasing attention for their potential to contribute to economic and financial development while fostering more inclusive growth and greater income equality. In general, the progress of financial inclusion and financial development in the economies in Central Asia and the South Caucasus (CASC) has lagged that of other Asian economies, partly due to the disruptions and instabilities following the breakup of the Soviet Union in 1991. The purpose of this study is to survey the experiences of the CASC economies to assess factors affecting the ability of low-income households and small and medium-sized firms to access financial services, including financial literacy, financial education programs, and financial regulatory frameworks, and to identify policies that can improve their financial access while maintaining financial stability. It aims to identify successful experiences and lessons that can be adopted by other emerging economies. Keywords: financial inclusion, financial literacy, financial regulation, consumer protection, banks, microfinance, insurance, pensions, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan, Uzbekistan, Central Asia, South Caucasus JEL Classification: G21, G28, I22, O16, O17 ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev Contents 1. INTRODUCTION ......................................................................................................... 1 2. DEFINITIONS OF FINANCIAL INCLUSION ............................................................... 2 3. RATIONALE FOR FINANCIAL INCLUSION ............................................................... 3 4. STATUS OF FINANCIAL INCLUSION FOR INDIVIDUALS AND SMES IN CASC .... 4 4.1 Banking Services ............................................................................................. 5 4.2 Insurance ......................................................................................................... 8 4.3 Pensions .......................................................................................................... 9 4.4 Remittances .................................................................................................... 9 4.5 Kinds of Financial Institution Involved ........................................................... 10 4.6 Inclusion-related Financial Products and Services ........................................ 11 4.7 Innovative Delivery Technologies .................................................................. 12 5. BARRIERS TO FINANCIAL INCLUSION .................................................................. 12 6. REGULATORY FRAMEWORKS ............................................................................... 14 6.1 Institutions Responsible for Regulation ......................................................... 14 6.2 Licensing Status of MFIs ............................................................................... 14 6.3 Risks Being Addressed by Regulation .......................................................... 16 6.4 Consumer Protection ..................................................................................... 16 6.5 Deposit Insurance ......................................................................................... 17 6.6 Fintech-related Regulation ............................................................................ 17 7. POLICIES TO PROMOTE FINANCIAL INCLUSION ................................................ 18 7.1 National Strategy ........................................................................................... 18 7.2 Specific Strategies ......................................................................................... 20 8. FINANCIAL LITERACY AND EDUCATION .............................................................. 22 8.1 Status of Financial Literacy ........................................................................... 23 8.2 Financial Education Strategy ......................................................................... 23 9. CONCLUSIONS AND THE WAY FORWARD ........................................................... 26 REFERENCES ..................................................................................................................... 30 ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 1 1. INTRODUCTION Financial inclusion is receiving increasing attention for its potential to contribute to economic and financial development while fostering more inclusive growth and greater income equality. G20 leaders approved the Financial Inclusion Action Plan and established the Global Partnership for Financial Inclusion1 in 2010 to promote the financial access agenda. Furthermore, the Asia-Pacific Economic Cooperation (APEC) Finance Ministers’ Process has a dedicated forum looking at financial inclusion issues,2 and the implementation of the Association of Southeast Asian Nations (ASEAN) Framework on Equitable Economic Development has made the promotion of financial inclusion a key objective (ASEAN 2014). Development organizations have been responsive as well; for example, the Asian Development Bank approved 121 projects (amounting to $2.59 billion as of 2012) to support microfinance in Asia and the Pacific (ADB 2012). Many individual Asian economies have also adopted financial inclusion strategies as an important part of their overall strategy to achieve inclusive growth. One key indicator of household access to finance is the percentage of adults who have an individual or joint account at a formal financial institution, such as a bank, credit union, cooperative, post office, or microfinance institution (MFI), or with a mobile money provider. According to the Global Findex database for 2017,3 which is based on survey interviews, the worldwide average for this measure is 69%, and the total number of adults without accounts is about 1.7 billion, down substantially from 2.7 billion in 2011, but still high. Asia’s statistics show that there is still much to achieve toward access to finance, as East Asia, the Pacific, and South Asia combined account for over 40% of the world’s unbanked adults, mainly in India and the People’s Republic of China (Demirgüç-Kunt et al. 2018). In general, the progress of financial inclusion and financial development in the economies in Central Asia and the South Caucasus (CASC) has lagged that of other Asian economies, partly due to the disruptions and instabilities following the breakup of the Soviet Union in 1991 (Yoshino and Morgan 2017). Since gaining independence from the Soviet Union, many CASC countries have experienced similar economic backgrounds. The populations lacked trust in financial institutions and were not ready to go through difficult procedures to get their services. Moreover, a number of financial crises have challenged CASC countries and their banking sectors. The global financial crisis had a spillover effect on all seven countries. In Tajikistan, the remittances of labor migrants fell from $3.7 billion in 2013 to $1.9 billion in 2016, which required major devaluation of the Tajik somoni. The fall of oil prices had negative shocks on the oil-exporting economies, leading to currency devaluations in Kazakhstan and Azerbaijan. Policies aimed at promoting financial inclusion and financial literacy generally have not been pursued as actively as in other Asian regions. The purpose of this study is to survey the experiences of the CASC economies to assess factors affecting the ability of low-income households and small and mediumsized firms (SMEs) to access financial services, including financial literacy, financial education programs, and financial regulatory frameworks, and to identify policies that can improve their financial access while maintaining financial stability. It aims to identify successful experiences and lessons that can be adopted by other emerging 1 Global Partnership for Financial Inclusion. http://www.gpfi.org/. 2 The annual forum was held most recently in Viet Nam in July 2017. 3 See https://globalfindex.worldbank.org/#data_sec_focus ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 2 economies. The countries examined in this study are Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan. 2. DEFINITIONS OF FINANCIAL INCLUSION Financial inclusion broadly refers to the degree of access of households and firms, especially poorer households and SMEs, to financial services. However, there are important variations in term usage and nuance. The World Bank defined financial inclusion as “the proportion of individuals and firms that use financial services” (2014, 1), while the Asian Development Bank stated that it is “ready access for households and firms to reasonably priced financial services” (2015, 71). Atkinson and Messy defined financial inclusion as: the process of promoting affordable, timely and adequate access to a wide range of regulated financial products and services and broadening their use by all segments of society through the implementation of tailored existing and innovative approaches including financial awareness and education with a view to promote financial well-being as well as economic and social inclusion (Atkinson and Messy 2013, 11). The Alliance for Financial Inclusion (2010, 6) has “four commonly used lenses through which financial inclusion can be defined, in order of complexity: access… quality… usage… welfare”; and the vision of the Consultative Group to Assist the Poor (CGAP 2013, 4) is for “a world where everyone can access and effectively use the financial services they need to improve their lives [which] does not mean developing separate financial markets for the poor”. Finally, Chakraborty (2011) defines financial inclusion as “the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream institutional players”. The World Bank definition focuses on the actual use of financial services, while the other definitions focus more on the potential ability to use such services. Moreover, ‘access’ does not mean any kind of access, but implies access at a reasonable cost and with accompanying safeguards, such as adequate regulation of firms supplying financial services, and laws and institutions for protecting consumers against inappropriate products, deceptive practices, and aggressive collection practices. Of course, it is difficult to define ‘reasonable cost’ in cases where the amounts involved are small or information asymmetries exist. Therefore, a key question is the extent to which the government should subsidize such services or intervene in the market. This perspective also highlights the need for adequate financial education, as consumers cannot take proper advantage of access to financial services if they do not understand them properly. The CGAP definition alludes to the issue of ‘mainstreaming’—that is, access to mainstream financial institutions. The positive effects of financial access may be limited if poor households are limited to specialized institutions and financial products, such as MFIs, which have unique aspects such as group responsibility and rigid payment schedules, but do not necessarily provide a stepping stone to more conventional financial access. Access to financial services has a multitude of dimensions, reflecting the range of possible financial services, from payments and savings accounts to credit, insurance, pensions, and securities markets. Another important dimension is actual usage of such products and services; for example, campaigns to increase the number of bank accounts fail if those accounts end up being rarely or never used. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 3 Finally, the concept of financial inclusion also implies financial exclusion, also known as being ‘unbanked’. Financial exclusion is defined as not using any financial services or products of formal financial institutions, including MFIs. However, it is important to distinguish between those who, for whatever reason, do not wish to or need to use such services and products, and those who wish to use them but cannot do so due to insufficient funds, poor access, high costs, ignorance or lack of understanding, lack of trust, or identity requirements. 3. RATIONALE FOR FINANCIAL INCLUSION There are various arguments in favor of greater financial inclusion. Poor households are often severely cash-constrained, so innovations that increase the efficiency of their cash management and allow them to smooth consumption can have significant impacts on welfare. Relying on cash-based transactions imposes many costs and risks; for example, the bulk of transactions can entail carrying large amounts of cash, possibly over long distances, which raises issues of safety. Also, many studies find that the marginal return to capital in SMEs is large when capital is scarce, which suggests that they could reap sizeable returns from greater financial access (Demirgüç-Kunt and Klapper 2013). This is particularly important in Asia due to the large contribution of SMEs to total employment and output. Greater financial inclusion can also contribute to reducing income inequality by raising the incomes of the poorest income quintile (Beck, Demirgüç-Kunt and Levine 2007). It may also contribute to financial stability by increasing the diversity of, and thereby decreasing the risk of, bank assets and by increasing the stable funding base of bank deposits (Khan 2011; Morgan and Pontines 2014). Greater financial access can also support shifts by governments toward cash transfer programs rather than wasteful subsidies, and the greater transparency associated with electronic funds transfers can help reduce corruption. A growing body of evidence suggests that access to financial services can reduce poverty, raise income, and promote economic growth. However, the conclusions are, in some cases, still tenuous, as many earlier studies relied on macro data, which were subject to numerous issues such as endogeneity and missing variables (see Honohan 2004; Beck, Demirgüç-Kunt, and Levine 2007; World Bank 2008).There has also been a large volume of research on the impacts of microfinance (McKernan 2003; Pitt et al. 2003; Kaboski and Townsend 2005), but the reliability of the results of many studies suffers from possible selection bias (Karlan and Morduch 2009). More reliable studies with randomized control trials or natural experiments are rare. Some found evidence that increased numbers of bank branches reduced poverty and raised income and employment levels (Burgess and Pande 2005; Bruhn and Love 2013). In fact, in a recent survey of the literature on the subject, the World Bank concluded that Considerable evidence indicates that the poor benefit enormously from basic payments, savings, and insurance services. For firms, particularly the small and young ones that are subject to greater constraints, access to finance is associated with innovation, job creation, and growth. But dozens of microcredit experiments paint a mixed picture about the development benefits of microfinance projects targeted at particular groups in the population (World Bank 2014, 3). Given that so much emphasis in the literature has been placed on microcredit, this assessment suggests caution in this area. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 4 4. STATUS OF FINANCIAL INCLUSION FOR INDIVIDUALS AND SMES IN CASC Table 1.1 gives an overall picture of the status of financial inclusion in the CASC countries by listing several main indicators from the World Bank and IMF surveys related to financial inclusion. It shows there is great variation in terms of the development of financial inclusion in the region, even though the levels of financial inclusion are generally low. Secondly, financial inclusion levels for individuals and firms are not necessarily similarly developed. For example, the percentage of firms with bank loans is higher in Armenia than in other countries, but the percentage of individual adults with formal accounts is lower than in Georgia and Kazakhstan. Use of digital financial services such as e-money or mobile phones is generally low, although increasing rapidly in a number of countries. Table 1.1: Main Financial Inclusion Indicators for CASC Countries Armenia Azerbaijan Georgia Kazakhstan Kyrgyz Republic Tajikistan Uzbekistan Branches of commercial banks per 100,000 adults* 23.1 10.7^ 32.7 3.0 8.4 5.0+ 36.1 Automated teller machines (per 100,000 adults)* 61.1 32.7 74.3 74.0 31.2 9.1+ 21.6 Share of adults with formal account (% age 15+)# All adults 47.8 28.6 61.2 58.7 39.9 47.0 37.1 Women 40.9 27.7 63.6 60.3 38.9 42.1 36.0 Adults belonging to the poorest 40% 34.4 18.1 46.1 48.8 35.7 38.5 29.7 Young adults (% ages 15–24) 46.8 12.6 30.7 36.9 27.0 49.3 20.9 Adults living in rural areas 46.8 20.2 55.1 56.7 39.1 46.3 34.4 Saved at a financial institution in the past year (% age 15+) # 10.0 4.5 4.6 13.9 3.0 11.3 2.3 Borrowed from a financial institution in the past year (% age 15+) # 28.5 13.1 23.7 20.0 9.4 14.7 2.1 Firms with a bank loan or line of credit (%) $ 46.2 15.8 35.8 19.2 29.1 14.6 26.4 Small firms with a bank loan or line of credit (%) $ 30.9 15.6 30.4 15.0 24.6 15.1 26.4 Firms using banks to finance investments (%) $ 17.4 27.1 22.1 16.3 18.4 13.2 16.1 Firms using banks to finance working capital (%) $ 39.2 17.6 27.6 13.0 23.3 19.2 13.1 Made digital payments in the past year (% age 15+) # 39.8 12.9 29.6 38.2 28.6 40.3 33.6 Mobile phone used to pay utility bills in the past year (% age 15+) # 3.3 1.3 2.3 8.6 0.5 2.3 2.5 Mobile phone used to send domestic remittance in the past year (% age 15+) # 15.9 9.8 6.9 16.4 17.6 19.5 5.4 Sources: * IMF, Financial Access Survey, 2016; # World Bank Global Findex Survey, 2017; $ World Bank Global Financial Development Database, 2013; + National Bank of Tajikistan (2016). ^ 2015; -- not available. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 11 Table 1.3: Outstanding Loans by Type of Financial Institution, 2016 (% of GDP) Type of Institution Armenia Azerbaijan Georgia Kazakhstan Kyrgyz Republic Tajikistan Uzbekistan Commercial banks 41.8 44.2 55.1 30.4 20.4 15.1 26.4 Subtotal for SMEs – – 7.5 – – – – Credit unions and financial co-ops – – 0.0 – 0.2 – – MFIs – <1.0 4.4 0.2 2.2 3.1 0.1 Other deposit takers 3.3 – – – – – – Other depository corporations – – 55.1 – 20.6 – 26.4 Other financial intermediaries 0.2 0.8 – 3.4 – – – Total 45.3 44.9 114.7 34.0 43.4 18.2 52.9 Note: Tajikistan data from National Bank of Tajikistan; – not available. There is no separate category of MFIs in Armenia. Sources: Authors' calculations. Data from IFM Financial Access Survey, 2016; GDP data from World Bank WDI Database; Azerbaijan MFI data from Ibadoghlu, chapter 3. There is great variation in the development of MFIs. MFIs have grown very fast in Kazakhstan, where, as of September 2017, there were 160 microfinance organizations registered, versus 136 at the beginning of 2017. In the first six months of 2017 the MFI loan portfolio increased by 30% and reached $0.4bn, although this is still a tiny fraction of the total SME and retail bank loans of $26 billion (Kapparov, chapter 5). In Georgia, the number of registered microfinance organizations increased dramatically from two in 2004 to 81 in 2016, while total assets of MFIs grew from 0.02% of GDP to 8% of GDP between 2006 and 2016, and loans reached 4.4% of GDP in 2016, the highest in the region (Babych, Grigolia, and Keshelava, chapter 4). By 2011, the number of MFIs and credit unions reached a peak of 651 units in the Kyrgyz Republic and the share of loans reached 8% of GDP (Hasanova, chapter 6). However, this share shrank to less than 3% of GDP by 2016 as a result of regulatory tightening and the conversion of some MFIs to bank status. In Tajikistan, MFIs have perhaps the highest share of total loans at 17.7%, partly reflecting the relatively low level of financial development there. In Uzbekistan, loans of MFIs have been rather stable—about 3% of commercial bank loans. On the other hand, as highlighted by the World Bank (2016), the non-bank credit sector is underdeveloped and offers limited credit opportunities for Azerbaijani SMEs, with total loans of less than 1% of GDP (Ibadoghlu, chapter 3). MFIs in Uzbekistan also have very small loans, only 0.1% of GDP (Ahunov, chapter 8). There is no separate legal or regulatory definition of microfinance organizations in Armenia, but the share in GDP of credit by credit organizations performing MFI activities rose from 0.3% in 2004 to 7.8% in 2016. 4.6 Inclusion-related Financial Products and Services To promote financial inclusion, governments and credit organizations have provided various specialized products and services. Innovative products and services also include various microproducts, such as no-frills bank deposits, microcredit and microinsurance, agent banking, and microbranches. In Azerbaijan, agriculture-related financing products are provided, such as harvest insurance, index-based weather insurance, and index-based livestock mortality insurance. These products and services allow farm households to smooth fluctuations in household income due to seasonality and mitigate external risks associated with farming. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 12 Most MFIs in the Kyrgyz Republic practice group lending. Over half of the credit portfolios of MFIs are group, collateral-free loans (from 53% to 71% of the total loans). Having restricted access to collateral, women became the majority of MFOs borrowers—on average 70% during 2006–2016. The accessibility of loans, simplified procedures of obtaining them, and branches in rural areas have made microfinance attractive for the low-income rural population. Relatively liberal laws inspired the establishment of over 650 MFIs; by 2011, MFIs’ loans constituted almost a half of the total credit portfolio (Hasanova, chapter 6). 4.7 Innovative Delivery Technologies Innovative delivery technologies, such as mobile phones, e-money, and internet banking, can also help bridge distances and save time. Digital banking services are developing very rapidly in the region, but from a very low base (Table 1.2). In Armenia, mobile phone, point-of-sale (POS), and non-cash transactions have been growing exponentially since 2012, albeit from a small base. The number of active mobile money accounts increased seven times from 2012 to 2016 (Nurbekyan and Hovanessian, chapter 2). Azerbaijan has introduced a national electronic payment system, which has led to a large increase in utilization. Mobile phone banking has also experienced an upsurge in Uzbekistan due to recent regulatory changes (Ahunov, chapter 8). In Georgia, the most commonly used technologies include internet banking, telephone banking, mobile banking, and SMS banking. Georgians actively use electronic payments to pay public utilities and purchase goods (Babych, Grigolia, and Keshelava, chapter 4). According to the survey by the IFC (IFC 2014), in Tajikistan, very few types of banking service are currently available online; the software used by banks and MFIs does not allow some operations to be implemented (Mogilevskii and Asadov, chapter 7). Nonetheless, several Tajikistani MFIs have started using payment service provider (PSP) terminals for loan repayment. 5. BARRIERS TO FINANCIAL INCLUSION Barriers to financial inclusion can be classified as supply side, demand side, and institutional aspects. Supply-side barriers reflect limitations in the capacity or willingness of the financial sector to extend financial services to poorer households or SMEs. These can be further subdivided into three categories: market-driven factors, regulatory factors, and infrastructure limitations. Market-driven factors include aspects such as relatively high maintenance costs associated with small deposits or loans, high costs associated with providing financial services in small towns in rural areas, lack of credit data or usable collateral, and lack of convenient access points. The provision of financial services in rural areas can pose particular problems in countries with geographically difficult to reach rural areas, which leads to a high cost of financial services. In Georgia, for example, the cost of providing services outside major cities is high, particularly for MFIs whose clients are mainly lower-income households. Six percentage points of the interest rate for MFIs on household loans can be attributed to operational cost requirements (Babych, Grigolia, and Keshelava, chapter 4). The lack of credit data and reliable financial records also worsens the problem of information asymmetry that discourages banks from lending to poorer households and SMEs. This leads to the expansion of the informal credit sector. In the Kyrgyz Republic, the shadow economy is estimated at 40% of GDP, and many entrepreneurs operate ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 13 in the quasi-formal sector (Hasanova, chapter 6). Not having transparent accounts and activities prevents entrepreneurs from getting sufficient finance, while persons receiving informal wages cannot prove their creditworthiness and must borrow from pawnshops or relatives. Regulatory factors include capital adequacy and supervisory rules that may limit the attractiveness of small deposits, loans, or other financial products for financial institutions. Strict requirements regarding the opening of branches or ATMs may also restrict the attractiveness of doing so in remote areas. Identification and other documentation requirements are important, both with respect to know-your-client requirements and monitoring of possible money laundering and terrorist-financing activities, but these can pose problems for poor households in countries that do not have universal individual identification systems. Regulatory requirements, such as restrictions on foreign ownership and inspection requirements, can also restrict the entry of MFIs. Regulatory requirements need to be calibrated to be commensurate with the systemic financial risks posed by various financial institutions and the trade-off between financial stability and greater financial inclusion. In Tajikistan, for example, the regulators tend to be slow to understand market evolution, leading to a reluctance to experiment with new technology-based financial products (Mogilevskii and Asadov, chapter 7). Infrastructure-related barriers include lack of access to secure and reliable payments and settlement systems, the availability of either fixed or mobile telephone communications, and the availability of convenient transport to bank branches or ATMs. Numerous studies have identified the lack of convenient transport as an important barrier to financial access (see, for example, Tambunlertchai 2015). This poses difficulties for reaching people living in rural and low-income areas, particularly in Kazakhstan, Armenia, and Tajikistan, where rural-urban disparities are large. Demand-side factors include a lack of funds, lack of knowledge of financial products (i.e., financial literacy), and lack of trust. Lack of trust can be a significant problem when countries do not have well-functioning supervision or regulation of financial institutions, or programs of consumer protection that require adequate disclosure, regulation of collection procedures, and systems of dispute resolution. For example, in the Kyrgyz Republic, state institutions regulating the financial sector have the lowest level of trust after police services (Hasanova, chapter 6). The lack of trust is partly associated with the collapse of the Soviet Union which resulted in the loss of households’ savings from the Soviet-era banks. The Government of Armenia has started to implement a promised compensation plan; however, the scarring effect of this episode remains (Nurbekyan and Hovanessian, chapter 2). Lack of knowledge and low financial literacy are a general problem in this region. Low financial awareness, limited knowledge, and lack of financial attitude are serious problems in Georgia, Kazakhstan, Armenia, and Azerbaijan. This is discussed further in section 1.7. Institutional barriers include the inefficiency of bankruptcy laws and high collateral requirements due to weak credit assessment systems. For example, the bankruptcy law does not function efficiently and is seldom used in Azerbaijan. In Azerbaijan, due to the absence of a collateral registry system for movable collateral (other than vehicles), most lenders require that real estate collateral covers a significant portion of the loan value, and several only accept real estate collateral in practice (Ibadoghlu, chapter 3). Collateral requirements are particularly high in Uzbekistan, and rank as the third important reason for firms not using formal finance. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 14 6. REGULATORY FRAMEWORKS Table 1.4 summarizes the major features of regulations related to financial inclusion in the subject countries, including regulatory agencies, identification-related measures, regulation of MFIs, regulation of lending (mainly interest rate caps), and consumer protection. 6.1 Institutions Responsible for Regulation Central banks have major responsibilities in regulating and supervising banks and other financial institutions in all CASC countries except Azerbaijan. In Armenia, the central bank is the single financial regulator. In Azerbaijan, the Financial Markets Supervisory Authority supervises banks and non-bank credit institutions (NBCIs, including MFIs), the Ministry of Finance supervises insurance companies, the Tax and Civil Code Authority supervises leasing companies, and the Financial Market Supervisory Authority takes responsibility for consumer protection. In Georgia, the central bank supervises all depositary and lending institutions. In Kazakhstan, the central bank is responsible for the regulation and supervision of banks, insurers, pension funds, investment funds, credit bureaus, and securities markets. In the Kyrgyz Republic, the central bank is the main regulator of financial institutions in the country. In Tajikistan, the central bank oversees licensing, regulation, and supervision and is authorized to issue normative acts for banks and MFIs, establish financial standards, impose sanctions and penalties, and request reports. In Uzbekistan, the central bank regulates both banks and MFIs. Regulatory frameworks still have room for improvement. For example, in Tajikistan, supervision of financial institutions is still mainly compliance-based, with little focus on good governance and risk management. Regulation and supervision need to be strengthened to better manage credit, market, operation, concentration, interest rate, and liquidity risks, as well as to improve the corporate governance and internal control systems of the financial institutions. Adoption of international financial reporting standards, more advanced risk assessment tools, stress testing, and crisis management tools are among the main measures that need to be introduced (Mogilevskii and Asadov, chapter 7). 6.2 Licensing Status of MFIs A consistent financial inclusion policy requires a coordinated regulatory approach. Microfinance organizations typically have greater restrictions imposed on them in terms of their activities compared with banks. Therefore, they tend to be regulated separately from the system for banks, which are typically supervised by the central bank or financial regulator, and are usually regulated more lightly than banks. This is particularly the case for Azerbaijan and Armenia. In Azerbaijan, the minimum required charter capital for registering an NBCI is only AZN 300,000, whereas for banks the amount is AZN 50 million. In Armenia, the regulations for banks are much more stringent. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 15 Table 1.4: Regulatory Frameworks for Financial Inclusion in CASC Economies Country Regulatory Agencies ID-related Measures Regulation of MFIs Lending Regulations Consumer Protection Armenia Central Bank of Armenia (CBA) is the single financial system regulatory authority Electronic ID cards and social cards Credit organizations cannot take deposits; subject to lower capital requirements and fewer restrictions than banks; no legal definition of MFIs Interest rate caps; only licensed institutions can lend The Center for Consumer Rights Protection and Financial Education within the CBA; deposit insurance; Financial System Mediator (FSM) Azerbaijan Financial Markets Supervisory Authority (FMSA): banks and NBCIs (including MFIs); Ministry of Finance: insurance companies; Tax and Civil Code Authority: leasing companies Law on non-bank credit organizations (2010); lower capital requirements for NBCOs than for normal banks; no specific law on MFIs Interest rate cap at 15% Financial Market Supervisory Authority Georgia National Bank of Georgia (NBG): commercial banks and non-bank financial institutions (excluding pawnshops and online loan providers); State Insurance Supervision Service of Georgia: insurance companies and pension schemes Law on microfinance organizations: MFIs cannot take deposits but can borrow; pawnshops and online loans are regulated by the Civil Code of Georgia Interest rate cap at 100%; total fee of loan must not exceed 150% of loan amount itself; limits on foreign currency loans Reflected in lending regulations Kazakhsta n National Bank of Kazakhstan (NBK): banks, insurers, pension funds, investment funds, credit bureaus, and securities markets. Based on the goals in the Concept for the Financial Sector Development of the Republic of Kazakhstan until 2030 (2030 Concept) NBK Resolution No. 386 requires registration of MFIs FinTech Association: voluntary threshold for MFIs of a maximum penalty for debtors of 300% of the principal balance National law on consumer protection, but nothing specific on financial services; NBK tasked to establish call centers; Committee on Consumer Protection in Financial Services Kyrgyz Republic National Bank of the Kyrgyz Republic (NBKR) Only credit unions and MFIs with license can take deposits; Law on Microfinance Organizations (2002); higher requirements on capital; restrictions on multiple lending; introduction of maximum level of fines Interest rate cap at 15% over weighted average interest rate; minimal collateral size; maximum ratio of credit payments to borrower’s income Deposit insurance for all banks; a number of legislative acts to protect financial consumers' rights Tajikistan National Bank of Tajikistan (NBT) Law on microfinance organizations (2012); NBT's regulations on three types of microfinance organization; among MFIs, only MDOs can take deposits Caps on foreign exchange, interest rates, and risks NBT consumer protection division Uzbekistan Central Bank of Uzbekistan (CBU) regulates both banks and MFIs MFIs regulated by CBU (law on banks and banking) Liberalized access to foreign exchange for small businesses and private individuals Law on Protection of Consumer Rights Sources: Chapters in this volume. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 16 However, having a variety of lenders can spawn a multitude of regulatory frameworks, which can lead to inconsistencies and gaps. For example, in Azerbaijan, the Law on Non-Bank Credit Organizations (2010) defines the rules for the establishment, management, and regulation of non-bank credit institutions, with the aim of better meeting the demands of legal entities and individuals for financial resources and creating suitable conditions for access to financial services. The Law on Credit Unions (2000) determines the economic, legislative, and organizational bases for the establishment and operation of credit unions. Azerbaijan has laws for non-bank credit institutions rather than defined ‘microfinance’ laws, and allows a greater number of activities, although deposit-taking is expressly forbidden for non-bank credit institutions. In the Kyrgyz Republic, in response to the rapid growth of MFIs, the central bank has strengthened its regulation of MFIs since 2010 by raising capital requirements to reduce the number of non-working and small MFOs, restricting the amount of multiple lending, and introducing fines. Table 1.4 shows that some countries do not allow some or all MFIs to take deposits. In Armenia, only banks can take deposits from natural and legal persons (Law on Microfinance Organizations 2002). In Azerbaijan, non-bank credit institutions (NBCIs) are divided into two groups: those with the right to accept collateral deposits and those without that right. In Tajikistan, the legislation identifies three types of MFI: microcredit deposit organization (MDO), microcredit organization (MCO), and microcredit fund (MCF). Of these three, only MDOs can offer deposit products. In Kazakhstan, MFIs need to obtain a banking license in order to take deposits. In the Kyrgyz Republic, only credit unions and MFIs with licenses can take deposits. In Tajikistan, MDOs are the only MFIs allowed to offer deposit products based on a license issued by the NBT. MFIs are not allowed to take deposits in Uzbekistan. 6.3 Risks Being Addressed by Regulation Several types of risk are addressed by regulation on financial inclusion. The first is foreign currency risk. For example, in Georgia, loans of up to 100 thousand GEL for individuals (not legal entities) may be issued only in national currency. Loans that are issued in the national currency but indexed or linked to the foreign currency are not considered as national currency loans. This regulation aims to facilitate the de-dollarization of loans and further reduce foreign currency (FX) risks for borrowers (Babych, Grigolia, and Keshelava, chapter 4). Similarly, in Armenia, consumer credit can be extended only in local currency. In Tajikistan, capital requirements exist to control foreign exchange, interest rate, and other risks. 6.4 Consumer Protection Consumer protection programs are seen as necessary supports for financial inclusion efforts, together with financial education and effective regulation and supervision of financial institutions. Consumer protection can help address the issue of trust as a demand-side barrier to financial inclusion. Consumer protection programs are at various stages of development in the CASC region. Most countries in the region have issued laws to protect consumer rights (see Table 1.3). For example, in Uzbekistan, the State Committee on Privatization regulates consumer protection. In Kazakhstan, the national law on consumer protection covers consumer protection and access to safe and high-quality goods, but has nothing specific on financial services. The situations are similar for the Kyrgyz Republic and Georgia. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 17 Other institutions also help consumers protect their rights. In Armenia, the Center for Consumer Rights Protection and Financial Education within the CBA is responsible for consumer protection. Its responsibilities include creating a legal system to assure consumer protection, promoting programs on financial knowledge and education, and operating consumer services websites and hotlines. In Tajikistan, the central bank has a customer compliance department which tracks customer complaints and feedback on financial institutions’ activities. In 2017, the Office of the President of Uzbekistan started to directly receive consumer complaints using hotlines and online channels (Ahunov, chapter 8). However, consumer protection seems less well developed in Azerbaijan, which has no functioning out-of-court dispute resolution system. The Financial Markets Supervisory Authority (FMSA), which has primary responsibility for protecting financial consumer rights, is still under development and has weak capacity (Ibadoghlu, chapter 3). 6.5 Deposit Insurance Deposit insurance is widely implemented in the CASC region to protect bank depositors. Deposit guarantee funds are established in several countries to provide guarantees up to a certain amount of deposit. The Deposit Guarantee Fund of Armenia is a non-commercial organization founded by the Central Bank of Armenia in 2005. The maximum amount covered by insurance for local currency deposits is 10 million drams (USD 20,700) and foreign-currency deposits are covered up to 5 million drams (Nurbekyan and Hovanessian, chapter 2). The Azerbaijan Deposit Insurance Fund (ADIF) was founded in 2007. It provides insurance only for depositors, not for investors. A deposit insurance scheme was launched in Georgia in 1 January 2018. According to the scheme, all bank deposits in Georgia are insured for up to GEL 5,000 (USD 2,066 equivalent) (Babych, Grigolia, and Keshelava, chapter 4). In Kazakhstan, the Kazakhstan Deposit Insurance Fund (KDIF) provide guarantees for all retail deposits denominated in national currency up to 10 million tenge (USD 30,000). This threshold can incentivize big depositors to split their deposits between several banks and accounts to guarantee their safety (Kapparov, chapter 5). The Deposit Protection Agency of the Kyrgyz Republic was established in 2011. In Tajikistan, the Deposit Insurance Fund (DIF) was established in 2003. Its assets reached TJS 260 million, or 6.3% of total deposits, as of the end of 2016. In Tajikistan, the deposit amount covered by the fund in case of bankruptcy of a credit organization has been increased from an initial TJS 7,000 to TJS 14,000 in 2015 and TJS 17,500 in 2017 (approximately $2,100). Uzbekistan has explicit deposit insurance that has covered all banks in the country since 2002. A blanket guarantee on deposits was implemented under a Presidential decree in November 2008 and, since October 2009 the statutory limit of 250 times the minimum wage has been removed (Demirgüç-Kunt et al., 2018). 6.6 Fintech-related Regulation New delivery technologies, such as mobile phones and e-money, hold promise for promoting financial inclusion but need appropriate regulatory frameworks to achieve their potential while being consistent with financial stability and other regulatory requirements. In many cases, service providers are not banks, which makes a consistent approach more difficult. In Armenia, there are also no regulatory barriers ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 18 for innovative technologies, such as telephone banking. In Azerbaijan, according to the Global Innovation Index (Gİİ) survey in 2017, Azerbaijan ranked 82nd among 127 countries. According to the 2016 FinTech Index Report, Azerbaijan is rated as having a relatively unstable political and regulatory environment, but a very supportive infrastructure and ecosystem for fintech (Ibadoghlu, chapter 3). 7. POLICIES TO PROMOTE FINANCIAL INCLUSION 7.1 National Strategy The notion of financial inclusion is quite new to the CASC countries, but it is becoming a major goal for these governments, and the authorities are beginning to include it in their national strategies along with financial education. Overall, there have been no systematic financial inclusion strategies or policies in CASC countries, and there are few targeted policies now. Most government efforts in this area have only short-term effects. Strategies are needed to set priorities and coordinate overall approaches to expanding financial inclusion. National-level strategies are most desirable, followed by strategies of the central bank, ministries, and/or financial regulatory bodies. Table 1.5 shows a range of approaches in the CASC region. The Kyrgyz Republic and Azerbaijan have the most well-articulated financial inclusion strategies, which are incorporated into their national economic planning strategies. Kazakhstan, Tajikistan, and Uzbekistan have long-standing policies to support SMEs’ support programs, but no articulated national strategies for financial inclusion as such. In Armenia, some elements of a financial inclusion strategy are incorporated in the National Strategy for Financial Education. Azerbaijan and the Kyrgyz Republic have included their policies for financial inclusion in their national development strategies. The Azerbaijan 2020 Vision highlights the role of entrepreneurship and SMEs in economic development, although it contains no specific strategies for financial inclusion. The microfinance sector/financial inclusion strategy has been developed by the Central Bank of Azerbaijan (CBAR) in consultation with all relevant departments, including Banking and Supervision, Credit Registry, Legal, Payments, Consumer Protection, Strategic Management, and Research. In the Kyrgyz Republic, the National Strategy for Sustainable Development 2013–2017 envisaged measures for SME development, improving access to long-term loans for women entrepreneurs, and a program for women’s entrepreneurship development. In Armenia, the government established the Small and Medium Entrepreneurship Development National Center Fund (SME DNC) in 2002 to provide state support to SMEs, including resources allocated from the state budget and technical and financial assistance. Nevertheless, there are gaps in the development programs and approaches in these countries. An absence of comprehensive and centralized implementation of the financial inclusion promotion programs can leave the strategies without significant results. Apart from common issues affecting the status of financial inclusion, each country has specific problems affecting development, ranging from dependency on remittances to credit excesses in some more advanced countries. In Azerbaijan, overdue credits have become excessive and there is a lack of policy to resolve this issue. There are gaps in legislation, especially related to the protection of financial rights of customers. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 19 Table 1.5: Strategies and Programs for Financial Inclusion Country National Central Bank Ministries/Regulators Private Sector Armenia SME State Support Programs implemented by SME Development National Center Fund; pension reform in 2014 Various strategies and initiatives targeting different financial inclusion dimensions (financial infrastructure, system mediator, guarantor fund, consumer right protection, etc.) Moveable Collateral Registry (MoJ); Agriculture insurance pilot program (MoA) Azerbaijan Azerbaijan 2020 Vision and other programs highlight the role of entrepreneurship and SMEs; Strategic Roadmap for Development of Financial Services in the Republic of Azerbaijan’ but no specific strategies for financial inclusion Microfinance sector and financial inclusion strategy SME subsidy programs under Economy Ministry; also Presidential Decree of 17 September 2017 Azerbaijan Microfinance Association (AMFA) Georgia No comprehensive national financial inclusion plan; SME development included in Georgia 2020 SocioEconomic Development Program; SME Development Strategy of Georgia 2016–2020 NBG received major grant from IFC in 2014 to increase access Several projects to improve financial inclusion with international funding, implemented by Credo Microfinance, FINCA Bank, TBC Bank Kazakhstan People's IPO program to increase investments and retail saving ; unification of pension funds; 1 Trillion Tenge and Nurly Zhol programs in 2014–2017 to promote infrastructure and SME lending; DAMU Entrepreneurship Development Fund Kyrgyz Republic Microfinance development strategies (2006–2010, 2011–2015) and other mid-term programs; Law on State Support for SMEs Tajikistan Signatory to Maya Declaration toward engaging 30% of the population in the formal financial sector, particularly through digital services Several programs aiming at specific groups of beneficiaries Uzbekistan Credit Bureau, National Collateral Registry to support lending Uzbek Association for Microfinance Institutions and Credit Unions Sources: Chapters in this volume. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 20 7.2 Specific Strategies Central banks, ministries, and other regulatory authorities have implemented various specific strategies and policies targeting different dimensions of financial inclusion. These include accessibility, electronic ID, innovative products and services, credit databases, credit guarantees, and subsidies. Some examples are described below. 7.2.1 Accessibility Accessibility refers to all possible ways, including ATMs and remote access channels, that enable a customer to select and use any financial service. Penetration heavily depends on the availability of financial and ICT infrastructures in urban and rural areas, income levels, and education. Kazakhstan and Tajikistan are very active in launching mobile banking, and mobile devices provide convenient product usage in any part of the country. However, in Tajikistan, only a few types of operation are currently available. 7.2.2 Electronic ID Electronic IDs are not much developed in the CASC region. The main example is electronic ID cards and social cards in Armenia. The voluntary ID cards have a memory chip which contains citizens’ data (Nurbekyan and Hovanessian, chapter 2). 7.2.3 Innovative Products and Services Enhancing financial inclusion requires a diverse range of financial products and services. Countries need to identify and design products and services appropriate for different target groups. Kyrgyzstan implemented several programs, like the Concept for Stock and Bond Market Development until 2018 and the Concept for Insurance Market Development for 2013–2017. However, these programs were not popular because people were not used to investing in stocks and bonds. Tajikistan is one of the most remittance-dependent countries in the world. The Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the World Bank provide Tajik commercial banks and micro-finance organizations with low cost financial resources, but they are not enough, considering the high demand in rural areas of Tajikistan. Some international organizations have developed programs aimed at specific groups—for example, the EBRD has supported female entrepreneurs with $1 million in the Women in Business initiative. 7.2.4 Credit Databases Information asymmetries, such as the lack of credit data, bankable collateral, and basic accounting information, often discourage financial institutions from lending to SMEs. Innovations to provide more information in this area, such as credit databases, credit guarantee systems, and rules to expand eligible collateral, can ease these asymmetries and increase the willingness of financial institutions to lend. Financial education for SMEs can also encourage them to keep better records. Finally, the development of new investment vehicles, such as venture capital, specialized stock exchanges for SMEs and new firms, and hometown investment trusts, can expand SMEs’ financing options. Most CASC economies have been active in setting up credit bureaus and expanding and consolidating credit databases on households and SMEs, but such efforts in most cases are still at an early stage, while in other economies, such efforts have not yet started. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 27 choices for religious reasons, so the degree of involuntary financial access is probably less than indicated by the overall figure. Azerbaijan, Kazakhstan, and Tajikistan have relatively low levels of SME loans. Moreover, variations in financial access by rural or urban areas, or by income or age group, can be very large. Although remittances play a large role in a number of countries, banks typically are not targeting this market with specific products or services. Access to other financial products such as insurance is quite low. Lack of trust in the financial sector remains a problem in the region, reflecting the legacy of financial and economic turmoil following the breakup of the former Soviet Union. This is especially the case in Armenia and the Kyrgyz Republic. Inefficiency of bankruptcy laws and high collateral requirements due to weak credit assessment systems also present barriers to financial access. Corruption is also a significant problem in a number of countries. Widespread participation in the informal sector makes it difficult for workers and firms to provide data showing their creditworthiness. The CASC region economies notably lack strong financial inclusion strategies. The Kyrgyz Republic and Azerbaijan have the most well articulated financial inclusion strategies, which are incorporated into their national economic planning strategies, but concrete impacts are still limited. There are a number of individual policies to encourage SME finance, such as loan guarantee programs, credit databases, and subsidized loans, but no overall financial inclusion strategy. MFIs are growing rapidly in some economies, mainly Georgia and Kazakhstan, but have actually dwindled in the Kyrgyz Republic and are weakening in Azerbaijan in terms of asset quality, while there is no separate category for MFIs in Armenia. There are few specialized products or programs for promoting financial inclusion among poorer households, especially in rural regions, although Azerbaijan is an exception. Most CASC economies have some kind of credit bureau, and that of Georgia is highly rated, while a number of economies also have credit guarantee programs. Mobile phone banking, e-money, internet banking, and other forms of fintech (financial technology) are developing rapidly in the region, except Tajikistan, but from a very low base. All of the country chapter authors recommend the development and/or strengthening of financial inclusion strategies where they do not currently exist or are insufficient. Such strategies should comprehensively involve public and private stakeholders, including all relevant ministries, the financial sector, and civil society institutions. They should also set clear goals and key performance indicators to measure the progress toward achieving those goals. It is important to link the goal of financial inclusion to other overarching goals such as inclusive and sustainable economic growth and financial and social development. A comprehensive strategy for SMEs should be developed. Credit guarantee schemes should be introduced in countries where they are not already available, such as Azerbaijan. Credit databases and credit bureaus should be strengthened. Collateral registries should be adopted and expanded beyond physical property to facilitate SMEs’ access to credit. Alternative sources of funding such as venture investment funds, business angels, peer-to-peer lending, and crowdfunding platforms should be encouraged. High interest rates remain an obstacle to borrowing in a number of countries, and the factors behind such rates need to be investigated to identify possible policy interventions, without undermining the need to price risk appropriately. For example, insufficient competition in the banking sector can push up interest rates in some countries. Increased competition among financial service providers needs to be encouraged to bring down prices and promote innovation. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 28 For households, state support programs for financial institutions aimed at increasing coverage and the level of access to financial services in remote districts should be provided. An adequate infrastructure to support financial operations and transactions in rural areas could be created in post offices. Importantly, postal services enjoy the trust of the rural population, and post offices can become an important financial access point for households in rural areas. Promotion of the shift from cash to digital payments can also be consistent with a financial inclusion strategy. Insurance services have been under-utilized in some countries. Where lacking, compulsory third-party motor liability insurance can be a big leap forward, and significant opportunities remain in health and agriculture insurance. Mandatory health insurance provides another potential avenue to provide access to health insurance besides employer health plans, as it can eliminate adverse selection and increase the quality of health services due to increased competition. Financial inclusion policies need to be supported by adequate information. Countries should increase the frequency of surveys about lending, borrowing, and the savings behavior and practices of households and SMEs. Collecting such information should be a priority goal of national statistical agencies. Financial regulation in the CASC economies is generally relatively consistent, with the central bank typically having oversight of all lending institutions. However, there are still shortcomings. For example, in Tajikistan, supervision of financial institutions is still mainly compliance-based, with little focus on good governance and risk management. Also, the regulators there tend to be slow to understand market evolution, leading to a reluctance to experiment with new technology-based financial products. Adoption of international financial reporting standards, more advanced risk assessment tools, stress testing, and crisis management tools are among primary measures that need to be introduced. Governance of regulators also needs to be strengthened, including greater independence and transparency to increase the trust of the population in the financial system. Transparency and proper information disclosure by commercial banks and MFIs need to be improved as well. Regulatory issues related to the participation of mobile network operators in innovative financial services need to be resolved. Regulatory ‘sandboxes’ should be created to test innovative financial products and services. Finally, improving macroeconomic policy management can also help to increase trust in the financial system by reducing the volatility of inflation, interest rates, and the exchange rate, thereby reducing the incentive for dollarization. Consumer protection efforts in CASC economies are generally rudimentary, with few specific rules covering consumer finance, mainly interest-rate caps on loans. Armenia is one exception, as the central bank’s responsibilities include creating a legal system to assure consumer protection, promote programs on financial knowledge and education, and operate consumer services websites and hotlines. Consumer protection policies should be expanded to cover misleading advertising, excessive collection practices, and dispute handling and resolution processes, and consumer hotlines should be established where they do not exist. Financial literacy levels in CASC economies are generally low, although actual survey evidence is still spotty. More national surveys of financial literacy are needed in the region, with consistent and internationally comparable methodologies. ADBI Working Paper 878 Morgan, Zhang, and Kydyrbayev 29 Among the CASC economies, Armenia, Azerbaijan, Georgia, and the Kyrgyz Republic are the most advanced in the area of financial education, as they have already established national financial education strategies. The Kyrgyz Republic is notable for developing a financial education program for schools, although it has not been implemented yet. So far, Kazakhstan, Tajikistan, and Uzbekistan do not have such programs. All country paper authors also recommend strengthening financial education strategies and programs. Effective national strategies for financial education seem to contain four key elements: (i) coordination among major stakeholders, including regulatory authorities, the education ministry, educational institutions, financial institutions, and civil society institutions; (ii) an emphasis on customer orientation and addressing both demand-side and supply-side gaps; (iii) a combination of broad-based functional interventions, such as in school curricula, and targeted programs for vulnerable groups according to the availability of resources; and (iv) adoption of a long-term timeline with flexibility to respond to changing needs. Programs for financial education should include its introduction into the school curriculum at various levels, as well as programs for specific target groups such as SME entrepreneurs, including separate programs for women entrepreneurs, farmers and migrants, women, poor people, disabled people, pensioners, and other vulnerable groups. Financial education programs can involve financial service providers, industry associations, NGOs, mass media, higher educational institutions, municipalities, and financial consultants. Key issues to be addressed include managing borrowing costs prudently and developing long-term savings goals. Monitoring and evaluation of national strategies for financial education is vital for experience and program adaptation. With the appropriate incentives, thinktanks and universities can help in monitoring and evaluating efforts. 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