Cash Transfers and Financial Inclusion

The world has always needed humanitarian assistance, but even more so now, especially after escalations from the Syrian civil war and more recently, increasing climate-related disasters. Traditionally, aid as been in both cash and kind, but humanitarian aid has been moving more towards cash given that it allows recipients to be more empowered and to prioritize their needs better.

So far, cash transfers/Cash & Voucher Assistance (CVA) has now constituted about 10% of all humanitarian funding and is a key method of aid during the Syrian crisis..

It has been expected though, that cash transfers under the CVA would have long-lasting empowerment implications for recipients, in particular, getting them included in the formal financial system. Interestingly, this has not been the case. This World Bank and CGAP research therefore looks at humanitarian assistance in Lebanon and Jordan (arising from the Syrian crisis which has displaced more than half of the Syrian population) to understand why, and what can be done to ensure that cash transfers/CVAs translate to lasting value around financial inclusion.

The hope for cash transfers in promoting financial inclusion

Using cash transfers in humanitarian aid to promote the sign-up and active use of financial products (like savings, payments, credit and insurance) is a long-term play. But it is one that if done right, can be critical for the long-term empowerment and resilience of refugees and others going through crises because it provides that first step – access to a financial account.  

The overall idea is this. The government has basic regulations and infrastructure in place to facilitate easy financial account opening (and all the trappings that go with this, like identity verification, due diligence, and letting non-bank actors provide these services). Humanitarian and government agencies can then transfer cash to the recipients’ accounts and the recipients in turn can use these funds – to either pay for services or save it in their accounts. Eventually, the recipients build a financial history (through payments and savings) that enables them to access even more services such as credit, insurance and investments – ultimately helping them be more resilient.

At least, this is how it should go for the 1.3 million and 1.5 million Syrian refugees living in Jordan and Lebanon respectively. But the study shows that it’s not this simple.

What are some of the challenges that plague this journey, and how can they be addressed?

Some key lessons learned

Collaboration is critical. Like in many things, collaboration means efficiencies, less wastage, and easier coordination. Similarly, humanitarian agencies collaborated amongst themselves, as well as with (to some extent) government agencies to target recipients and avoid overlaps, disburse funds in a coordinated and more efficient manner, and reconcile said funds. Such humanitarian aid cannot be successful without this.

Digital transfers have worked well. In both Jordan and Lebanon, digital transfers were used significantly more than physical cash transfers, and this meant reduced transfer costs for agencies! In both countries, prepaid cards were loaded and could be used to withdraw cash from the ATM or/and used on POS devices at selected partner businesses. In Lebanon, biometrics have even been used to enable card-less ATM cash withdrawals.

This success has helped create awareness and get people comfortable with digital payments (whether using a card to withdraw at an ATM or to purchase items via POS).

But this method of digital transfers doesn’t facilitate financial inclusion. Digital transfers have primarily been made into prepaid cards. The benefits of this are many, e.g., it is much easier for a refugee with no official papers to get a prepaid card; loading requires no work from recipients and minimal work from agencies; and overall, the process is faster.

But disbursing into prepaid cards also means that the recipients still have no actual financial account in their name. Rather, the funds still reside in a pooled account owned by the agency, and that agency manages the disbursement. Ultimately, recipients are still unable to save money, transfer it to friends and family, transact across the country or world with any business, receive money from parties other than the humanitarian agencies, and generally create a financial footprint that can be linked to them as individuals.

Facilitating financial inclusion through CVAs

Through the lessons learned from Jordan and Lebanon, as well as other cases, CGAP has identified some building blocks that need to be in place for cash transfers to be definitively linked to financial inclusion and ultimately, to resilience of people in crisis.

Prioritization of financial inclusion by both humanitarian and government agencies: Nothing can be done without willingness from leadership, so this is the first building block that must be laid. Both governments and donors therefore need to clearly and explicitly make financial inclusion a priority objective so that products, solutions and approaches flow from this objective. E.g., setting such a priority might mean that a different solution e.g., light bank accounts with debit cards, is prioritized over the cheapest solution e.g., prepaid cards. Or even encouraging recipients to save their funds rather than expecting them to withdraw and use it all (and punishing them if they don’t).

Enabling regulations and infrastructure: It has been well-proven that non-bank actors reach the unbanked more efficiently and faster than a typical bank. However, they need to be empowered by regulations to do so e.g., being able to use third-party agents to cash-in and cash-out funds. And if banks can reach the unbanked, they also need to be backed by regulations to create products that might be more appropriate – e.g., light bank accounts by performing tiered due diligence on potential customers. Regulations around identity documents that can be accepted to open a bank account are also critical.

Meanwhile, in terms of infrastructure, enabling interoperability between ATMs, POSs, and even mobile money systems so that issued cards can be used anywhere (regardless of whether the business is an agency’s partner) is a key requirement to promote digital payments. Also, having a national payment system that is real-time promotes trust and comfort because that way, digital payments are immediate - a good mimic to cash payments.

Helping Financial Service Providers (FSPs) buy into the business case: People going through humanitarian crises are typically at the bottom of the pyramid – e.g., more than 80% of refugees in both Lebanon and Jordan are living below UN-defined poverty lines. It is therefore tough for FSPs to see why they should invest in this segment of people. But there is a long-term case to be made around this so that FSPs see the recipients as their actual clients. To enable this, government agencies and donors (because they have prioritized financial inclusion) may need to provide some subsidies or incentives e.g., around financial literacy, establishing regulations that enable certain accounts which have lower operating costs, etc. This will boost the creativity of FSPs and encourage them to look for ways to retain this new segment of clients, while also providing cross-services (e.g., micro-investments) to them.

The way forward

To be fair, creating financial inclusion is not a typical objective for humanitarian agencies. Understandably, they would typically be concerned with relieving immediate needs for people in crises, as well as keeping their expenses low so that their Dollars can go further towards actual aid.

But such short-term relief does need to be balanced by long term resilience objectives – and this may be a goal that’s pushed and prioritized first by the government agencies.

What is clear is that governments, donors and Financial Service Providers need to continue to collaborate, not just in execution, but in first setting priority objectives for financial inclusion. That way, the different build blocks discussed above can be laid down through a coordinated and efficient manner for the long-term resilience of people in crises. How else will they be empowered to rise above poverty and thrive in their new communities?