Saturday, October 03, 2015
Let's Make the Vatican Bank a Bank
James S. Henry & Laurence J. Kotlikoff
The American Interest (Published: October 2, 2015)
Pope Francis has a bank and wants to help the poor.
The poor need low-cost banking services. It's a match made in Heaven.
On his recent visit to the United States, Pope Francis received a warm reception at the UN and Congress for his constructive, thoughtful messages on issues like climate change, poverty, inequality, and immigration. Goodness knows His Holiness doesn’t need more work, but we’d like him to adopt one more priority. Fortunately, this one is a natural for the Vatican in more ways than one. Not only does it complement Pope Francis’s social concerns, but it’s something he’s already working on: banking for the poor.
About a decade ago, in June 2005, a new President took office at the World Bank: Paul Wolfowitz, fresh from the Bush Administration. We had our doubts about his Iraq adventure, but we were willing to give him the benefit of the doubt because we thought he had an opportunity to change the behavior of an institution that is a key player in the global war on poverty. So we wrote an op-ed for the Wall Street Journal called “Why Can’t the World Bank Be More Like a Bank?“
Back then, in addition to advisory work and “poverty counting,” the World Bank was still focused on project lending—an activity that a growing number of other public and private institutions were able to do, often more effectively. In that piece we proposed that the Bank should focus on critical areas that are underserved, partly because they are just not as profitable. Banking for the poor” was at the top of our list.
At the time, by that most people meant micro-finance—namely, the provision of small loans to tiny businesses and individuals. But we preferred to start with the other side of the balance sheet: payments, deposits, savings, and investment. Worldwide, after thirty years of donor- and equity-based micro finance, at most 130 million customers had received loans. But there were still more than 2.5 billion people without bank accounts. In our view, that was the bigger problem. Here is how the problem looked then, and still, pretty much, looks today:
Domestic Payments and Savings: First, billions of poor people lacked ordinary bank account services—mainly facilities for payments and savings. This compelled them to rely far too heavily on “mattress money” for savings and payments. This was not only inconvenient; it also increased the risks of theft, extortion, and corruption, and made it more difficult to advertise for business and accept payments (especially for the self-employed and small businesses), to save, and to accumulate the collateral required for loans.
Remittances: Closely related to the first point, given the rapid expansion of international migration, there was a growing need for low-cost remittance services for overseas workers from poor countries who wanted to send payments back home to their families, to schools and to doctors.
Reserve Savings Basket: Third, there was a huge need for a credible global financial institution to provide simple, low-cost, and secure savings accounts denominated in a basket of reserve currencies, as an alternative to unstable home currencies.
To his credit, Wolfowitz invited us down to a meeting at his DC office and expressed enthusiasm, especially if we could make something work with non-profits or NGOs in Iraq. But he didn’t last long enough at the Bank to make a difference. Since then, his successors have devoted increased attention to what they now call “financial inclusion” and “financial literacy,” but there is still a long way to go, especially with respect to remittances.
Indeed, since then, the need and opportunity for Banking for the Poor, ”BFP”—hey, every anti-poverty program in history has its acronym, and this is ours—has if anything increased. In particular, in the past decade the number of international migrants living abroad has soared to more than 250 million, while remittances have reached $450 billion a year, more than three times annual total official development assistance of $135–150 billion.
Amazingly, for many poor countries, private remittances by the foreign diaspora of low-wage workers are now by far the largest source of foreign exchange, exceeding foreign aid, exports, and foreign direct investment.
For example, take the tiny impoverished Caribbean country of Haiti, the poorest in the Western Hemisphere. Since the 2010 earthquake, which claimed at least 100,000 lives, the island has received a large amount of foreign aid and World Bank loans. But its most important single source of foreign exchange is the 2.2 million Haitians who work outside the country. Their “external GDP” is about three times the island’s, and each year they remit at least $2 billion, more than 20 percent of the country’s GDP.
Furthermore, like remittances to many other poor countries, most of this is still subject to a 5 to 10 percent “cartel tax” exacted by the international remittance cartel, led by Western Union and its local bank partners. In Haiti’s case this cartel is composed of six dominant banks, including Western Union’s key partner, SogeBank, which controls at least a third of the market. Not surprisingly, Haiti’s transfer charges are among the highest in the hemisphere.
In theory, with more than seven billion cell phones on the planet and a plentiful supply of e-wallet applications, this should be an easy problem to solve technically. But again, Haiti is a great negative example. In 2010–13, when the Gates Foundation and a local cell phone company tried to deploy an e-wallet application in Haiti without the remittance cartel’s support, they failed.
Neither the World Bank nor anyone else has so far been able to help break the international remittance cartel in Haiti or most other places.
Meanwhile, with the help of strong local government in middle-income countries like Brazil and South Africa, banking for the poor has become a proven concept over the past decade, with hundreds of thousands of new accounts established for very poor people. But on a global level, the cause still lacks a real champion—especially one willing to help crack the remittance cartel.
But what about the UN and its brand new Sustainable Development Goals (SDG), you might ask? Doesn’t Pope Francis have the UN’s ear? And isn’t banking for the poor of interest to the UN SDG Committee? Well, true: 15 years ago this month, the UN convened a summit of 155 world leaders—the largest in history to that point—to declare eight new “Millennium Development Goals” for the year 2015. But banking for the poor was not on that list. Now, as that 15-year milestone passes, it is clear that there has been a bit of a shortfall, especially outside China, and especially for metrics like absolute poverty, “enrollment in school”, and several other MDGs that have proved hard to measure.
We can debate exactly how large the shortfall has been. But the clearest indicator is that on the MDGs 15th anniversary the UN has just convened another even larger summit of world leaders, including Pope Francis, to declare yet another 17 new SDGs, this time with 169 targets and 1,063 indicators! Basically these subsume the original eight MDGs, and give world leaders another generous 15 years to realize them. Private sector managers around the world only dream of living under such lax standards: “Let’s see: I get 15 years to reach my goals, and if I miss them, I get new goals and 15 more years? Nice!”
Remarkably, with all this “development banking” expertise at hand, that there is not one mention in all 17 new SDG goals of the fact that, as of 2015, more than 2.5 billion of the world’s poor still lack bank accounts and, therefore, access to the essential financial services that the rest of us take for granted.
If we’re really interested in the “sustainability” of investment, education, consumption, production, and employment, as the SDGs are supposed to achieve, the provision of low-cost financial services to the poor should be a core goal, not a peripheral one. (We might start by adding basic financial services to the minimum basket of goods and services that one has to consume in order to avoid being considered one of the “global poor.”)
Given that the World Bank and its fellow development banks have not been able to break the remittance cartel, should some other institution take the lead? Obviously, the Vatican Bank has new leadership and may be searching for a new mission.
The New Vatican Bank
Ever since Pope Francis became pontiff in 2013, one of his key concerns has been to clean up the Augean stables of the so-called Vatican Bank—formally known as the Institute for the Works of Religion, founded by Pius XII in 1942. Over time, the combination of secrecy, tax immunity, sovereign immunity, and global reach proved simply irresistible to a wide range of shady partners seeking laundry services, from the CIA and the Italian Mafia to big-ticket tax dodgers all over the world.
Technically, the bank now still takes some deposits, as a kind of pass-through shell bank, and manages Church business, but it doesn’t make loans. It has recently declared itself the Vatican’s “central bank,” but that might refer to any number of financial activities. The bank is still being reorganized, but Pope Francis has already succeeded in installing new management and establishing new procedures for transparent operations at the Vatican Bank.
This is a good start, but we invite Pope Francis to go farther. The SDGs may not recognize it, but world’s poor really do desperately need financial services. And they could really use a first-rate financial institution that will be in their corner —that will lead the way in working with other financial institutions around the globe to marshal new technology, cut through cartels and regulatory barriers, and design low-cost e-payments, e-savings, e-lending, and financial literacy services that the poor need to not just survive but prosper. He could start off by setting a goal of eventually providing free remittances to the poor—a target that is well within the reach of mobile technology.
Now cynics may say that in fact the Vatican Bank has limited facilities and staff, and lacks the global distribution network, technology, and expertise in “BFP” needed to pull this mission off. But what are business partners for, if not to fill in the gaps in institutional capabilities? After all, it is not as if there is a shortage of financial institutions in the world. They just need to a little moral fiber and encouragement.
In fact, the Catholic Church ideally suited to organize this effort. Not only does it have international aid organizations like Caritas that work with the poor every day, but it also has a huge global network of schools, hospitals, churches, and…why not train priests and nuns to help ordinary folk with financial literacy?
Most important, though, if we’ve learned anything from forty years of experience with experiments in banking for the poor and micro finance, what’s been missing is not technology or networks or even capital, but a serious full-time commitment to serving the poor. Pope Francis clearly has that in spades.
So let’s stop waiting around for other institutions to solve this problem. Let’s reinvent the Vatican Bank and unleash it to do what global financial institutions should have been doing all along. It’s a match made in Heaven!
James S. Henry is an investigative economist and lawyer and a senior fellow at Columbia University's Center for Sustainable Investment. Laurence J. Kotlikoff is professor of economics at Boston University and president of Economic Security Planning, Inc.