False Fears About FAB

Philanthropy or capitalism? Nature or nurture? Butter or marmalade on your toast? False dichotomies make fun debating points but shed little light on important questions. So it is with Reuters blogger Felix Salmon’s recent critique of the new Financial Access at Birth (FAB) campaign as top down rather than bottom up.

FAB is a simple idea: from 11 November 2011 (11/11/11) every child born on the planet should get a bank account with $100 that they can access when they reach sixteen years of age. It is the brainchild of Bhagwan Chowdhry, a finance professor at UCLA, who argues that financial inclusion for every citizen is a powerful way to beat poverty. (Disclosure: Michael has joined the FAB campaign as one of the founding members, along with the philosopher Peter Singer and former IMF chief economist Raghuram Rajan, among others.)

Felix has no objection to the idea in principle – he just thinks that it’s impractical because the banks won’t be interested and, even if they were, the costs of putting in place the technology would be prohibitive. Better, he argues, to build financial inclusion from the bottom up: “Those schemes aren’t as ambitious, but at least if they break they don’t end up costing billions of dollars.”

Felix is right that bottom-up credit co-operatives and micro-lending schemes have a good track record in building financial inclusion but they also have a problem with scale. It will take decades for these disparate initiatives to reach the hundreds of millions who are unbanked and the financial services they offer are quite limited. Don’t the poor deserve something better sooner?

Felix is also right that the mainstream financial institutions have not yet extended their reach into the poorest communities because there is little profit to be made. But “yet” is the point. The elegance of FAB is that it creates a business opportunity, an incentive, for the banks to get into these markets. In the same way that the Gates Foundation and governments have used Advance Market Commitments to ‘pull’ private investment into medical research into vaccines against diseases that only kill poor people, so FAB aims to pull the banks into providing financial services and leverage their capital and knowledge to make it work.

Felix protests that “the FAB campaign seems to be operating in something of a vacuum: rather than trying to coordinate closely with international development institutions like the World Bank or the Inter-American Development Bank, it’s barging ahead on its own”. Again, he is half right: there are lots of different players working on financial inclusion at the moment – official agencies like the ones he mentions, philanthrocapitalists like Pierre Omidyar, social entrepreneurs like Muhammad Yunus, and big corporates like Citigroup and FAB will only succeed if it works with these groups.

Yet Felix sounds like a typical aid bureaucrat when he sneers at FAB for not building a grand coalition at the outset. The aid world has long been dogged by too much consensus-building that leads to nothing. The biggest impact that the philanthrocapitalists have had on development is to cut through the process and focus on outcomes. (Michael has seen this from the inside having worked for more than a decade at the British aid ministry DFID.) FAB is a bold attempt to build a coalition of governments, philanthrocapitalists and for-profit institutions with a vision for global financial inclusion. It is risky but it is a risk worth taking to help all the useful work that is already taking place get to a scale where it really can transform hundreds of millions of lives.