Between de-risking and financial inclusion

Financial inclusion, or inclusive financing, is the delivery of financial services at affordable costs to all segments of population, especially the disadvantaged and low-income segments of society.

De-risking refers to financial institutions exiting relationships with and closing the accounts of clients considered “high risk”. 

There is an observed trend towards de-risking money service businesses, foreign embassies, non-profit organisations and correspondent banks, which has resulted in account closures in different countries around the world.

Anecdotal evidence indicates that de-risking practices will likely result in the further isolation of vulnerable communities, particularly women, from the formal financial sector and may have wide-ranging humanitarian, economic and security implications.

Some banks are no longer offering financial services to entire categories of customers that they associate with higher money-laundering risk.

Money transmitters, charities and FinTech companies are among the sectors particularly affected by banks’ de-risking.

At the same time, some banks are also refraining from providing correspondent banking services.

When asked, banks said that this helped them comply with their legal and regulatory obligations, internally and abroad.

However, effective money-laundering risk management need not result in wholesale de-risking.

Banks’ commitment to the literal decisions related to combating the financing of terrorism and their keenness to implement them is contradicted by other principles everyone is seeking to implement, i.e., to enable everybody to access funding sources and to achieve financial inclusion to improve opportunities for economic growth.

Calls from and studies on the banking sector by international organisations in many countries to give more chances to individuals and companies to access different sources of funding are offset by decisions issued by the United Nations and by local laws and regulations issued to combat financing terrorism and money-laundering.

Some say that de-risking represents a market failure. 

All invested stakeholders (banks, regulators, and bank customers and clients) appear to be acting rationally and in their own best interest, but in so doing, they created unintended consequences for the goal of financial inclusion.

To balance these two extremely contradictory objectives requires high skills from the banking sector, starting with regulators and central banks down to the banks operating in the market.

There is no doubt that financial crimes and their impact are among the most serious issues facing the economy and society.

The greater the volume of money laundering the worse the economic imbalances, and economic and social injustice.

By trying to control and reduce financial crimes, more funding restrictions will be added on both customers and financial institutions. That is due to the fact that all financial dealings pass through complicated proceedings, even those that are innocent.

Overlapping global economies and the intensity of cross-border financial transactions led to heightened risks resulting particularly from the bleaching of organised crime, drugs and terrorism financing and other social illnesses. That is because money launderers and terrorist financers are looking for safe havens for their funds.

Due to globalisation and the opening up of financial markets, and the fact that the crime of money laundering transcends state boundaries, the need has emerged to create international collaboration mechanisms to confront these crimes.

Introducing this crime to the core of the legislation in each country and holding an international treaty for the exchange of information among countries could also help in tackling these crimes.

Although de-risking is partly intended to reduce the vulnerability of the formal financial sector to abuse from money launderers and terrorist financiers, many have argued that the practice in fact has the opposite effect.

With the closure of accounts at many major financial institutions, customers have been forced to rely on smaller banks and credit unions that may not have adequate capacity to deal with higher-risk customers.

The ironic result of de-risking is re-risking; customers are sent to financial institutions that probably cannot handle it.

It is important to apply national programmes to “know your customer” (KYC) instructions and laws that help combat the phenomenon of terrorism financing and money laundering, but we must also facilitate financing for those who are outside this circle, as this creates a suitable environment for achieving economic growth.

Jordan is one of the first countries in the region that started to work on a strategy and programmes to promote financial inclusion.

The establishment of a private credit bureau in Jordan and the report to be released in this field could be an important document that will help protect good clients to be away from the circle of doubt and suspicion, and therefore have access to finance in a timely manner.

Thus, by activating the credit query process, a balance will be achieved to avoid risks.

The writer is director general of the Association of Banks in Jordan. He contributed this article the Jordan Times.