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While we worry about the unbanked population that faces significant costs for trivial transactions, there is also a not insignificant share of the population that is unwilling to have bank accounts for religious reasons. Islam and some strands of Christianity forbid the use of interest. Islamic banking has emerged in response and is offering deposit accounts that do not provide interest, but shares in the bank's profits. If this becomes more commonplace this could have important implications for how we think about banking, regulation and systemic risk in this sector.
Cagri Kumru and Saran Sarntisart show that if such a sizable population exists, then it is welfare improving to have an alternative banking system in place. It seems kind of obvious that it would be a loss to society not to capture these savings for growth-enhancing loans. The paper also shows that this alternative banking sector would emerge endogenously. The market forces are thus doing the right thing. What we need to be careful about is how to adjust the regulatory framework to not mess things up unnecessarily. And I see no reason why we should resist the emergence of such a banking sector.
Cagri Kumru and Saran Sarntisart show that if such a sizable population exists, then it is welfare improving to have an alternative banking system in place. It seems kind of obvious that it would be a loss to society not to capture these savings for growth-enhancing loans. The paper also shows that this alternative banking sector would emerge endogenously. The market forces are thus doing the right thing. What we need to be careful about is how to adjust the regulatory framework to not mess things up unnecessarily. And I see no reason why we should resist the emergence of such a banking sector.
2 comments:
Thanks for the post. This is an interesting topic and represents a great market for social entrepreneurs. Brett King has some interesting articles about banking for the unbanked and services that could significantly reduce the transactions costs for these individuals.
I remember reading about a new firm that focused specifically on the unbanked and all transactions would take place online. Any ideas about new companies moving into this space?
There is a difference between those who do not bank for religious reasons, addressed in my post, and those who cannot because banks are not interested in them and charge them high fees, which Joseph Kaupp seems to address. And for the latter, I do not think the cost is a major issue. There is simply nothing in them for the banks. As they are usually very poor, they would also have no easy access to a computer for Internet banking.
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