Legal framework for market participation of the BoP
Description
A legal framework for market participation makes it easier for the BOP to take part in companies’ value chains. Policies that empower the BOP through the legal system include formalizing informal firms; granting official identification document; and ensuring low-income people and groups have the appropriate land titles.
A thorough understanding of the workings of the BOP market is a precondition for improving the legal framework for market participation. For informal markets for example, reliable data on the number of people involved, transaction volumes, or typical conflicts and business issues are rarely available, as these transactions and businesses never show up in revenue offices or courts. Participatory research with the target group will not only reveal challenges, but will also point to potential solutions.
Case Example
Mexico: Flexible requirements to open low-value, low-risk accounts
A significant percentage of the population in Mexico lacks access to formal financial services, even the most basic ones. In the interest of fostering the design and supply of products focused on serving the unbanked, financial authorities joined efforts to identify aspects of the regulatory framework that could pose obstacles for expanding financial access.
One of the main obstacles identified was the unequivocal implementation of Know Your Customer (KYC) requirements. Agent banking – an approach in which an agent acting on behalf of a financial institution opens bank accounts – allowed for an increase in the number of access points within unbanked areas. However, enforcing KYC requirements as part of the account-opening procedure makes it too cumbersome and/or expensive for agents to effectively operate.
Financial sector authorities in Mexico have adopted a tiered approach to allow for more flexible account requirements for low-value, low-risk accounts that are subject to increasing caps and restrictions on permitted transactions. Opening requirements increase progressively as such restrictions on transactions are eased.
Through dialogue with Mexico’s Secretariat of Finance and Public Credit (SHCP) and its Financial Intelligence Unit, Unidad de Inteligencia Financiera (UIF), stakeholders were able to identify regulatory obstacles to the agent banking approach. These discussions allowed for the development of innovative approaches that might help both to enhance financial inclusion and to advance AML/CFT objectives. Lastly, cooperation with financial authorities and relevant policy makers worldwide is also of great help as it is helpful to observe the obstacles that need to be tackled and draw lessons from practical approaches, in order to adjust them so that they suit national circumstances.
Further Examples
- Albania: Case Study: Edipack: A Paper Recycling Pioneer
- Argentina: President Cristina Fernández de Kirchner enacted law criminalizing child labour and another one extending private household workers´ rights
- Brazil: Policies for the Formalization of Micro and Small Enterprises in Brazil
- Paraguay: Case Study: The ´Aguateros´ of Paraguay
Additional Resources
- Chen, M.A. (2007). Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment. Department of Economic and Social Affairs (DESA) Working Paper No 46. New York: United Nations.
- Development. Alternatives, Inc., & Bannock. Consulting Ltd. (2005). Removing Barriers to Formalization: The Case for Reform and Emerging Best Practice. Washington, DC: U.S. Agency for International Development.
- International Labour Organization (2014). Transitioning from the Informal to the Formal Economy. Report V(2) from the International Labour Conference 103rd Session 2014.
- Ishengoma, E., Kappel R. (2006). Economic Growth and Poverty: Does Formalisation of Informal Enterprises Matter? Hamburg, Germany: German Institute of Global and Area Studies (GIGA).
- Singh, A., Jain-Chandra, S., & Mohommad, A. (2012). Inclusive Growth, Institutions, and the Underground Economy. International Monetary Fund (IMF) Working Paper No. 12/47. Washington, DC: IMF.
- Vanek, J. et al (2014). Statistics on the Informal Economy: Definitions, Regional Estimates & Challenges. Women in Informal Employment Globalization and Organizing (WIEGO) Working Paper No 2. Cambridge, MA: WIEGO.