With more than 700 deaths reported over three days last week, and with a confirmed 800,000 more migrants waiting in Libya to attempt the crossing into Europe, it is becoming increasingly clear that Italy could become the new Greece in the global refugee crisis, and that the central Mediterranean could become the new Aegean.

The dirty deal cut between the European Union and Turkey this spring seems to be working: It’s effectively shut down the eastern Mediterranean route to Europe. But it has also pushed those attempting to reach the continent onto the arguably more dangerous central Mediterranean route, which claimed thousands of lives last summer. Now we’re seeing the consequences.

It’s clear that this crisis will not be resolved in Libya. The country may be ground zero for migration from North Africa to southern Europe—the result of a power vacuum left by Western powers after the fall of Muammar al-Qaddafi in 2011—but coming up with a solution that involves this troubled country will be difficult, to put it mildly. Libya is a failed state. Or rather, it is a jigsaw of four ethnic groups (Arab, Berber, Tuareg, and Toubou) and several dozen Ashraf tribes with no serious central authority to speak of. While a unity government and a draft constitution are in place, the former effectively controls only parts of Tripoli, while the latter is littered with both procedural deficiencies and substantive flaws.

Libya is also a security nightmare. The Islamic State controls over 150 miles of the coast around the city of Sirte, while dozens of militias vie for supremacy in localized, low-intensity conflicts throughout the country. The increasing military involvement of both the United States and its European allies in Libya is testimony to the concern elicited by the Islamic State’s presence. Were this not enough, Libya has a terrible record when it comes to its treatment of migrants and asylum seekers. The country never signed up to the 1951 Refugee Convention and its 1967 Protocol; it is host to detention centers where migrants survive in atrocious conditions; and it has signed up to appalling migration deals with Italy under Silvio Berlusconi. Multiple reports talk of the regular abuses, which include abysmal sanitary conditions, beatings, torture, hard labor, and even murder, which migrants have suffered in the country.

Up until recently, European officials appeared to be discussing plans to strike a deal with Libya similar to the one cut with Recep Tayyip Erdogan’s government in Turkey. Italian Interior Minister Angelino Alfano, for example, repeatedly claimed that what Europe needed was a migration compact with Libya along the lines of the one Brussels signed with Ankara in March. But such a deal, for the time being at least, is hardly a likely prospect. The deal with Turkey rested on the assumption that, with the right incentives in place, Ankara could exercise a baseline level of control over its borders. Brussels should not worry about Libya’s willingness to fulfill the key provisions of a similar migration compact. What Europeans should be concerned about, rather, is that the Libyan state—with its malfunctioning government, which lacks a bare minimum of administrative capacity—has no ability to fulfill them.

In the long run, Libya and Europe need to seek a comprehensive solution to this migration crisis. But with the high season for smuggling and trafficking across the Mediterranean almost upon us, an interim solution is critical.

Libya, which sits 280 miles from the southernmost point of mainland Italy, is the primary launching point for those seeking to cross from Africa to Europe. But it remains only one variable within the broader migration equation. An interim solution for the current crisis needs a broader focus and should involve three geographic areas: Libya, the countries sharing land borders with Libya, and the Mediterranean Sea itself.

In Libya, EU governments should pressure the unity government to immediately sign up to the 1951 Refugee Convention and its 1967 protocol. These would provide a firm legal framework within which all stakeholders would have to operate. Signing them would make it clear that Libya is ready to respect the rights of migrants under international law. And, crucially, it would mandate Libya to respect refugees’ right, in particular, to non-refoulement—that is, to not be returned to countries where they risk physical harm or abuse. Secondly and where the security situation allows, the International Committee of the Red Cross, the International Organization for Migration, and the Office of the United Nations High Commissioner for Refugees should be provided with all necessary means to massively scale up their presence in the country. By doing so, they would be able to become crucial representatives for the rights of migrants and asylum seekers.

Finally—and with the explicit permission of the unity government—the European Union should start patrolling Libyan territorial waters, while international humanitarian organizations must take over the management of Libyan detention centers where migrants are held. Because Libyan authorities do not exercise any meaningful control over the coastline and because they lack the resources to adequately administer the detention centers they are supposedly managing, these measures would only technically—but not substantively—infringe upon the central government’s sovereignty.

Europe must also seek to form partnerships with Libya’s neighbors—a strategy it appears to be beginning to pursue. Countries sharing land borders with Libya have a significant comparative advantage over Tripoli when it comes to being candidates for partnerships: They have (relatively) stable governments. Algeria, Chad, Egypt, Niger, Sudan, and Tunisia face tremendous challenges in a variety of policy areas, yet they have the bare minimum of what it takes to resolve those challenges: established state structures.

These countries are often the countries of origin or earlier transit for the sub-Saharan migrants who converge on Libya as a springboard to Europe. Crucially, the European Union has a well-established relationship with all these governments through the second revision of the Cotonou Agreement between the European Union and African, Caribbean, and Pacific countries. More specifically, the Khartoum Process for East Africa, the Rabat Process for West Africa, and the EU strategy for the Sahel provide regional frameworks within which Europe and its partner countries can address migration issues. These regular and structured dialogues between European and African governments provide a system of financial and diplomatic rewards for African countries that proactively engage with migration issues. In particular, they’ve resulted in concrete projects that aim to discourage irregular migration by establishing readmission agreements while providing legal avenues for those trying to get to Europe, such as temporary migration plans.

It is high time for Brussels to further increase cooperation by providing additional resources to address migration issues: Europe must enable its African partners to set up projects that contribute to creating employment opportunities, ensuring food and nutrition security, improving migration management, and promoting conflict prevention. The EU Emergency Trust Fund for Africa should substantially be boosted for this purpose.

Europe appears to be taking steps to make migration control a cornerstone of its relationship with its African neighbors. Ad hoc migration compacts are in the works with selected origin and transit countries, including Ethiopia, Mali, Niger, Nigeria and Senegal, and proposals are being made to launch a comprehensive €62 billion investment plan to tackle the long-term root causes of economic migration. The EU has renewed its focus on re-admissions to these countries, prioritizing speedy returns for those whose asylum claims are rejected over establishing formal readmission agreements, which is a sign of Europe’s determination to push this through—though also a warning of the potential dodginess of the various deals in the making.

Lastly, Brussels must do its homework where it is most able to bring about change: in the Mediterranean Sea and along Europe’s southern coast. The EU’s naval Operation Sophia in the south-central Mediterranean is trying to tackle migrant smuggling at sea. Its geographic scope, however, is significantly more limited compared with the Operation Mare Nostrum carried out by the Italian Navy and later superseded by Frontex’s Operation Triton. This should be expanded again. At the same time, the mandate of the operation should be widened to explicitly encourage search-and-rescue operations on top of its primary aim of disrupting smugglers’ networks. On its Italian shores, Europe should intensify its support for Italian authorities engaged in the establishment and management of so-called migrant hot spots. Indeed, while Rome has fulfilled most of its obligations by setting up new headquarters and boosting its processing rates, its European partners are struggling to make available specialized personnel for the hot spots and to relocate migrants already in Italy.

The ideas above are only a short-term interim solution, however. In the medium to long term, the international community needs to address the tremendous underlying challenges producing chaos in Libya. The newly established Government of National Accord must secure the support of all ethnic groups and major tribes. Having done that, the Islamic State must be rooted out through a very high-intensity but hopefully brief and localized conflict. Finally, a minimum degree of administrative capacity must be re-established beyond Tripoli.

All of the above require meaningful engagement with Libya on the part of Europe that will probably take years to reap benefits. Until that is forthcoming, an interim solution must be found, for the sake of the hundreds of thousands of lives at risk.

The piece was originally published in Foreign Policy. 

In the three months since the EU-Turkey migrant pact came into force, the number of migrants arriving on Greek shores has dropped precipitously. But the number of migrants making the even more dangerous crossing to Italy has increased substantially. After months of chaos, Rome—having adopted a variety of measures in partnership with European authorities—is now much better prepared than last summer to deal with a new migrant surge. But, despite its efforts, Italy—like its peers—cannot possibly cope on its own with a new wave of migration on the order of magnitude as the one witnessed last summer.

Yet that possibility is real. With almost 19,000 arriving from Libya in the first three months of this year, an EU-Libya migration compact is urgently needed. But for it to work, Europe as a whole must engage with Libya comprehensively and across policy areas. That will require time—and an interim solution in the meantime. 

Fewer arrivals in Greece, more in Italy

Notwithstanding its many flaws, the EU-Turkey deal appears to be working at deterring people from making the treacherous crossing from Turkey to Greece. Although weather conditions have improved, the number of migrants reaching Greece dropped by 90 percent in April, to less than 2,700. Syrians, Pakistanis, Afghans, and Iraqis made up the bulk of new arrivals, as has been the case for the last few months. Further north, along the Western Balkans route, the number of migrants reaching Europe’s borders in April dropped by 25 percent, down to 3,830. In this case, Macedonia’s de facto closure of its southern border with Greece clearly contributed to stemming the flow. 

With the Eastern Mediterranean and the Western Balkans routes sealed, the Central Mediterranean pathway presents new and worrying trends. In the month of April alone, 9,149 migrants arrived in Italy. As in the past, they were overwhelmingly from Sub-Saharan Africa (mostly Nigeria), many of them economic migrants unlikely to be granted asylum. For the first time since May 2015, more migrants are now reaching Italy than Greece. Many more are likely to have lost their lives trying to do so. 

For the first time since May 2015, more migrants are now reaching Italy than Greece.

Learning from past mistakes 

Italy is doing its homework. A revamped headquarters for the European Union Regional Task Force (EURTF) overseeing migrant arrivals across the Central Mediterranean opened at the end of April in the town of Catania. Five of its six hotspots—first reception centers fully equipped to process new arrivals—are now in place, with a combined reception capacity for 2,100 people and the involvement of Frontex, the European Asylum Support Office, Europol, Eurojust, the International Organization for Migration, and the Office of the United Nations High Commissioner for Refugees. Fingerprinting rates have now reached virtually 100 percent at all active hotspots. Long-term reception capacity across the country is currently at 111,081, and plans are in place to boost this to 124,579. This would probably not be enough to host the share that the country could be expected to take under a permanent and fair pan-European relocation mechanism. And yet, at least for the time being, the European Commission judged the Italian reception system to be more than sufficient.

Within this context, European partners seem to be slowly becoming more confident in Rome’s willingness to take up its responsibilities. It is no coincidence that on the same day that German Finance Minister Wolfgang Schäuble invited Vienna to support Italy in its efforts to control migrant movements within the Schengen area, Austria’s Interior Minister Wolfgang Sobotka announced that work on building a “migrants protection fence” at the Italy-Austria border was halted. 

A sustainable solution before it’s too late

Still, should a new massive migrant wave reach its shores, Italy could not cope on its own. Indeed, no single European country could. Should such a new wave materialize, Libya would be by far the most likely country of origin. Italy is the key to fighting ISIS and stabilizing Libya, but it would be unrealistic to expect Italy to do so on its own. 

The current European migrant crisis is part of a broader global refugee crisis and Europe has a shared interest and responsibility in dealing with it. Because of that, an EU-Libya deal is now necessary. This must—and can—be better than the agreement between the EU and Turkey. But a strategic pan-European approach is urgently needed. As Mattia Toaldo recently highlighted, a joint EU-Libya migration plan would be one of five priority areas for Libya. These would also include supporting a Libyan joint command to fight ISIS, a diplomatic offensive in support of the recently-established unity government, a reconciliation of local militias through power devolution, and the re-launch of the country’s economy. In April, Italy shared proposals with its European partners for a new migration compact with Libya but which also involves the broader region. That might be wise: since Europe is certainly unable to stabilize Libya in the short term, its leaders should start thinking about the country as a variable within a far broader equation. 

What can Italy do in the meantime?

The European Union should step up its support for Italy and an interim solution to migrant crisis in the Central Mediterranean must be found. Meanwhile, Italy has to brace itself for the potential arrival of over 800,000 migrants currently in Libya and waiting to cross the Mediterranean. While Rome could never cope with such a surge in migrant flows on its own, it still can—and must—plan for such an eventuality.

Three measures could be taken to address this challenge. First of all, Italy could consider setting up a seventh—and possibly even an eight—hotspot. This would be an important step given that an idea Italian Interior Minister Angelino Alfano floated—to set up “hotspots at sea”–is unlikely to be viable on both legal and humanitarian grounds. Second, Italy should increase its long-term reception capacity to around 150,000 people. The exact number would depend on the calculations that the European Commission is currently finalizing. Crucially, this should mirror the number of individuals beyond which an emergency relocation mechanism would be activated to re-distribute asylum seekers from Italy to another EU member state. Finally and should a sudden surge in the number of arrivals materialize, Italy could prepare contingency plans to mobilize virtually its entire navy to support ongoing EU efforts with its Operation Sophia. These policy proposals involve a significant effort in terms of state capacity. Yet, Italy has both a moral responsibility as well as a vested interest in implementing them. 

"At the end of the day, we need to remember that Daesh is more a product of the civil wars than it is a cause of them. And the way that we’re behaving is we’re treating it as the cause.  And the problem is that in places like Syria, in Iraq, potentially in Libya, we are mounting these military campaigns to destroy Daesh and we’re not doing anything about the underlying civil wars.  And the real danger there is—we have a brilliant military and they may very well succeed in destroying Daesh—but if we haven’t dealt with the underlying civil wars, we’ll have Son of Daesh a year later." – Ken Pollack

“Part of the problem is how we want the U.S. to be more engaged and more involved and what that requires in practice. We have to be honest about a different kind of American role in the Middle East. It means committing considerable economic and political resources to this region of the world that a lot of Americans are quite frankly sick of… There is this aspect of nation-building that is in part what we have to do in the Middle East, help these countries rebuild, but we can’t do that on the cheap. We can’t do that with this relatively hands off approach.” – Shadi Hamid

In this episode of “Intersections,” Kenneth Pollack, senior fellow in the Center for Middle East Policy and Shadi Hamid, senior fellow in the Project on U.S. Relations with the Islamic World and author of "Islamic Exceptionalism: How the Struggle over Islam is Reshaping the World," discuss the current state of upheaval in the Middle East, the Arab Spring, and the political durability of Islamist movements in the region. They also explain their ideas on how and why the United States should change its approach to the Middle East and areas of potential improvement for U.S. foreign policy in the region. 

Show Notes

Fight or flight: America’s choice in the Middle East

Security and public order

Islamists on Islamism today

Temptations of Power: Islamists & Illiberal Democracy in a New Middle East

Ending the Middle East’s civil wars

A Rage for Order: The Middle East in turmoil, from Tahrir Square to ISIS

Building a better Syrian opposition army: How and why

With thanks to audio engineer and producer Zack Kulzer, Mark Hoelscher, Carisa Nietsche, Sara Abdel-Rahim, Eric Abalahin, Fred Dews and Richard Fawal.

Subscribe to the Intersections on iTunes, and send feedback email to intersections@brookings.edu.

It’s easy to imagine a future in a decade or less when most people will have a smartphone. In our recent paper Pathways to Smarter Digital Financial Inclusion, we explore the benefits of extending financial services to the mass of lower-income people in developing countries who are currently dubious of the value that financial services can bring to them, distrustful of formal financial institutions, or uncomfortable with the treatment they expect to receive.

The report analyzes six inherent characteristics of smartphones that have the potential to change market dynamics relative to the status quo of simple mobile phones and cards. 

Customer-Facing Changes:

1. The graphical user interface.
2. The ability to attach a variety of peripheral devices to it (such as a card reader or a small printer issuing receipts).
3. The lower marginal cost of mobile data communications relative to traditional mobile channels (such as SMS or USSD).

Service Provider Changes:

4. Greater freedom to program services without requiring the acquiescence or active participation of the telco.
5. Greater flexibility to distribute service logic between the handset (apps) and the network (servers).
6. More opportunities to capture more customer data with which to enhance customer value and stickiness.

Taken together, these changes may lower the costs of designing for lower-income people dramatically, and the designs ought to take advantage of continuous feedback from users. This should give low-end customers a stronger sense of choice over the services that are relevant to them, and voice over how they wish to be served and treated.

Traditionally poor people have been invisible to service providers because so little was known about their preferences that it was not possible build a service proposition or business case around them. The paper describes three pathways that will allow providers to design services on smartphones that will enable an increasingly granular understanding of their customers. Each of the three pathways offers providers a different approach to discover what they need to know about prospective customers in order to begin engaging with them. 

Pathway One: Through Big Data

Providers will piece together information on potential low-income customers directly, by assembling available data from disparate sources (e.g. history of airtime top-ups and bill payment, activity on online social networks, neighborhood or village-level socio-demographic data, etc.) and by accelerating data acquisition cycles (e.g. inferring behavior from granting of small loans in rapid succession, administering selected psychometric questions, or conducting A/B tests with special offers). There is a growing number of data analytics companies that are applying big data in this way to benefit the poor.

Pathway Two: Through local Businesses

Smartphones will have a special impact on micro and small enterprises, which will see increasing business benefits from recording and transacting more of their business digitally. As their business data becomes more visible to financial institutions, local firms will increasingly channel financial services, and particularly credit, to their customers, employees, and suppliers. Financial institutions will backstop their credit, which in effect turns smaller businesses into front-line distribution partners into local communities.

Pathway Three: Through Socio-Financial Networks

Firms view individuals primarily as managers of a web of socio-financial relationships that may or may not allow them access to formal financial services. Beyond providing loans to “creditworthy” people, financial institutions can provide transactional engines, similar to the crowdfunding platforms that enable all people to locate potential funding sources within their existing social networks. A provider equipped with appropriate network analysis tools could then promote rather than displace people´s own funding relationships and activities. This would provide financial service firms valuable insight into how people manage their financial needs.

The pathways are intended as an exploration of how smartphones could support the development of a healthier and more inclusive digital financial service ecosystem, by addressing the two critical deficiencies of the current mass-market digital finance systems. Smartphones could enable stronger customer value propositions, leading to much higher levels of customer engagement, leading to more revelation of customer data and more robust business cases for the providers involved. Mobile technology could also lead to a broader diversity of players coming into the space, each playing to their specific interests and contributing their specific set of skills, but together delivering customer value through the right combination of collaboration and competition.

Recent reports have highlighted how mobile-based financial services are transforming banking and payments in Kenya, Bangladesh, and Peru, and all the hype about how they are about to explode everywhere else. For all of the promise that digital financial systems have for lowering costs and helping people all over the globe, it is unfortunate that their development is hampered by regulation that protects the interests of the largest providers. These regulations create significant barriers and raise the total costs to achieve universal financial inclusion.

It is indeed conceivable that purely digital financial transactions could be handled at vanishingly small unit costs, from anywhere. But the cost that won´t go away is that at the interface between the new digital payment system and the legacy payment system – hard cash. Cash in/cash out (CICO) points are like tollgates at the edge of the digital payments cloud.

Cash is Still King

Even in areas with flourishing mobile banking usage, people tend to cash in every time they want to make a mobile payment, and to cash out immediately and in full every time they receive digital money. Rather than displacing cash, digital platforms have made local cash ecosystems more efficient. Without full backward compatibility with cash, digital payment systems could not take root.

The bigger issue is not the size of the CICO toll, but the fact that small players cannot expect to have the transaction volume to sustain a widespread CICO network. The incumbent banks and telecommunications firms have built in competitive advantages. They can quickly form agreements with brick and mortar shops, attract users from the current customer base, threaten new entrants, and aggregate enough transactions to induce CICO outlets to maintain sufficient liquidity on hand.

Therefore, the competition in digital financial services will not be determined primarily by what happens within the digital payments market itself, but rather by what happens in the contiguous cash market. The power of digital services is their ability to transcend geography, and yet success in the digital payments space will go to whoever has the best physical CICO footprint.

Regulators treat the digital payments service and the CICO service as conjoined twins: each digital financial service provider must have its own base of contractually bound CICO outlets. When the two services are bundled it is not surprising that the tough economics of CICO —and, therefore, the incumbent— dominates.

A Two Market Regulatory Approach

In a recent paper, I argue it is necessary to split up these two markets, from a regulatory point of view. The market for effecting electronic payments (issuing payment instructions and debiting and crediting electronic accounts accordingly) is logically distinct from the market for exchanging two forms of money (hard cash versus electronic value).

Most regulators approve of stores receiving electronic money from customers in exchange for packs of rice on a store shelf. But, if that same electronic money was exchanged for cash then it would violate the law in many countries.

In the latter case, the store is presumed to be an agent of the customer’s financial service provider, and the store cannot offer the CICO service without an agency contract from that provider. But why? The cash that was offered was the store’s as is the account that would receive the electronic payment, and the transaction would have occurred entirely through a secure, real-time technology platform that banks offer all their clients.

A Regulatory Fix

Of course, purely financial transactions are usually held to higher consumer protection standards than normal commercial transactions. My proposal is not to deregulate CICO, but to create a new license type for CICO network managers. Holders of this license would carry certain consumer protection obligations (such as ensuring that tariffs are explicitly posted at all CICO outlets, and that they have a call center to handle any complaints that customers may have on individual CICO outlets) – entirely reasonable expectations for retailers, even if we normally don´t ask them of rice sellers.

But once you have a CICO license, then you could sign up any store you wanted and crucially, offer CICO services on the platform of any financial institution in which you have an account. In other words, you wouldn’t have to beg the incumbent to give you a special agent contract. All you would need to do is to open a normal customer account with them, which the incumbent couldn´t deny you.

This one little change would completely shift the competitive dynamics of digital financial services. Under the current direct agency model, incumbent firms have no incentive to make it easier for competitors to create CICO outlets. Whereas under the independent CICO network manager model, all licensed CICO networks would have the incentive to offer CICO services for all providers, no matter their size: with a full suite of available services, they will find it easier to sign up stores to work for them, and these stores will find it easier to convince more users to walk into their stores.

Incumbents would still be free to establish their own proprietary CICO networks, as today. But they would have to compete with independent CICO networks that are now able to aggregate business from all financial service providers, creating true competition.

All players could then claim a comparable physical presence as the incumbent. They would all benefit from the same branded competition between CICO networks. They could compete strictly on the basis of the quality of their digital financial services offering.

Unbundling the regulatory treatment of digital financial services would help competition reach every segment of the business; the current integrated model only serves the interests of the largest telecommunication companies and banks in the land.

A wave of retrenchment by global financial institutions may be undermining years of progress in providing the world’s poor with financial services.

What appeared to be only a vague concern a year ago is now front and center in discussions regarding global financial regulation. The reason: new regulatory and legal uncertainty regarding financial services, stemming from record fines levied on a handful of banks for failures to comply with international sanctions and anti-money laundering rules. A recent successful civil action in the U.S. against Arab Bank has further increased banks’ worries about their possible civil liability. Rightly or wrongly, the financial industry is reading these actions as raising the bar for compliance. As a result, we are seeing key and vocal market players use these developments to justify a wholesale retreat from services that are a lifeline for millions of people at the bottom of the economic pyramid.

For example, late last year a big bank in Australia sent letters to companies providing remittance services laying out a stark choice: close their accounts, or the bank would unilaterally shut them down. Accounts held by remittance companies have also been closed by banks in the U.K., the U.S., and New Zealand. If these remittances providers do not find alternatives, we may experience a global reduction in remittance services, and—due to reduced competition—increased cost to use those that remain in operation.

Remittance services are not the only targets. Trade finance and civil society organizations have also been affected. For instance, in the Netherlands an NGO involved in supporting the peace-building work of women's groups and women leaders in the Middle East and North Africa was recently refused a bank account by a large international bank. After the NGO explained to the bank that its work entails working with partners in the region, the bank decided not to provide a bank account in order to avoid any risk of funds (indirectly) ending up in Syria. And there are many examples like this, hampering the work of NGOs and humanitarian organizations, particularly in areas of conflict where they are most needed. In recent months, stories like this have become too numerous—and too widespread geographically—to be ignored; this is a global phenomenon.

This trend of account closures has become known as “de-risking”—a term that confuses more than it clarifies. Risk management, when properly carried out, is an essential and healthy component of running a bank. Under international financial industry norms, banks are expected to use a risk-based approach to evaluate whether to do business with a potential customer, and to monitor transactions for signs of suspicious activity. If there is a reasonable basis to believe a particular client creates significant risks regarding money laundering (ML) or terrorist financing (TF), a bank is fully justified in ultimately refusing to offer services.

 “De-risking,” however, is very different. The influential Financial Action Task Force (FATF), the standard setter for combating money laundering and terrorist financing, noted in an October 2014 statement that “de-risking refers to the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” The result, criticized by FATF, is the “wholesale cutting loose of entire classes of customers.”

Our concern lies not with the principle that some clients may be too risky for banks. Rather, the problem is the magnitude of de-risking. Current de-risking measures are excluding many clients that conduct legitimate transactions. And, because de-risking ends up pushing clients and transactions towards the informal and shadow financial system, it can actually increase global risks in this area.

It is therefore urgent for the international community to act. We need to better grasp what is really happening, and why. We believe that the solutions going forward will have to build on three pillars:

1. Public authorities need to provide more meaningful information on ML/TF risks to the financial industry, clarify their regulatory expectations, and adopt a genuinely risk-based approach in their supervisory and enforcement actions.
2. Financial institutions need to step up their understanding of the risks of their customer base, and direct internal control efforts accordingly. Risk management approaches should focus more on individual clients, and not write off entire sectors.
3. Countries with significant inflows of remittances need to improve the effectiveness of their regulatory regimes to combat ML/TF, and to provide more comfort to global financial institutions with banking relationships with clients in the developing world.

Millions of people in developing countries depend on remittances to help pay for basic necessities like food and shelter. In recent years we have seen important progress with banks and mobile network operators introducing innovative ways to serve the poor—including “mobile money” solutions that have enormous potential for enabling cross-border transactions. It would be a shame to see that trend reversed. Let’s not have those at the bottom of the economic pyramid pay for the criminal behavior of a few, and let’s make sure that enforcement action really targets the “bad guys.” Preserving access to the global financial system for the poorest and most vulnerable is a critical imperative, both economically and ethically.

We tend to think of having a formal identity as an enabler for social and economic inclusion, but in fact identity can have entirely the opposite effect. Once socioeconomic interactions are based on a standardized notion of identity, it is likely that social status based on past achievements, family histories, personal connections, political backing, wealth and education levels will influence socioeconomic outcomes — thereby potentially reinforcing the established class hierarchy. Systems that are based on anonymity might in fact be the most equitable and inclusive, in the sense of ensuring equal participation by all, by systematically stripping out social status.

But anonymous systems carry a high cost in terms of efficiency. Reputations would be impossible to establish, contracts would be hard to enforce, and there would be more insecurity as it would be much harder to track and clamp down on illicit activities. It is therefore not at all certain that the poorer segments of the population would be better off in absolute terms if the economy worked on the basis of anonymity.

The need for digital identities for inclusive access

In fact, giving lower-income people digital identities would make it possible for them to participate in the modern digital economy in many ways: to open accounts and receive moneys from anyone, assert their rights over digital services they have contracted and digital assets they have purchased, settle disputes, etc. But establishing a formally recognized identity can be a major hurdle in itself, especially in countries that do not have digitized national ID schemes.

It is ironic that the difficulty of establishing formal identity in the first place often prevents so many lower-income, and especially rural, people from accessing digital services. Identity systems with selective coverage of the population create a double whammy of inequality: on the one hand, these partial systems help the haves to carry their social and economic status symbols and reputations into every market interaction they are engaged in, and on the other they negate digital visibility and access to digital services for the have not´s.

We argue in a new research paper that it should be the government´s responsibility to ensure that every citizen in fact has a digital identity, not merely to create a platform that enables people to have digital identities. The Indian government´s Aadhar push to provide everyone in India with a unique number ID linked to biometrics is a good example of such a policy.

The demands of identity verification systems

The problem is that different policy agendas converge on the issue of identity and have different requirements for a digital identity platform. What works as an identify standard for financial systems may not be good enough for law enforcement agencies. The risk is that governments adopt the highest standard, with the result that the inclusion agenda and the needs of the poor are ignored.

If there is no centralized government system for identity, then what we need is a system that:

1. Lets the issue of identity be resolved in the first instance within the communities where poor people live, shop and work (e.g. through attestation by known local figures)
2. Draws people into seeking and improving their digital identities over time, much in the way that they develop their social network over time.

This is the notion of social identity. Let people with meager resources help each other overcome their limitations: each may have very little voice, but collectively they represent a potentially vast information system for official identification purposes. That is hard to reconcile with the way governments and formal institutions tend to handle identity verification: in silos, contained within databases and cards. We need more flexible notions of identity, which build layers of identity information and verification through social networks – as well as bureaucratized ID-seeking processes.

Editor’s Note: This blog post is part of a series on the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard, which were launched at a Brookings public event on August 26. Previous posts have highlighted five key findings from the 2015 FDIP Report and explored groundbreaking financial inclusion developments in India. Today’s post will compare financial inclusion outcomes and opportunities for growth across several Asian countries included in the 2015 Report and Scorecard.

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Of the 21 countries ranked in the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard, no countries in Asia placed in the top 5 in the overall ranking. However, all of the FDIP Asian countries have demonstrated progress within at least one of the four dimensions of the 2015 Scorecard: country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services.

This blog post will dive into a few of the obstacles and opportunities facing FDIP countries in central Asia, the Middle East, and southeast Asia as they move toward greater access to and usage of financial services among marginalized groups. We explore these countries in order of their overall score: Turkey (74 percent), Indonesia (70 percent), the Philippines (68 percent), Bangladesh (67 percent), Pakistan (65 percent), and Afghanistan (58 percent). You can also read our separate post on financial inclusion in India, available here.

Turkey: Clear economic advantages, but opportunities for enabling regulation and greater equity remain

Turkey is one of the few upper-middle income countries in the FDIP sample, ranking in the top 5 in terms of gross domestic product (GDP) measured in US dollars. Turkey’s fairly robust banking infrastructure contributed to its relatively strong adoption rates: As of 2013, the International Monetary Fund’s Financial Access Survey found that Turkey had about 20 bank branches per 100,000 adults (the 4^th highest density rate among the 21 FDIP countries) and about 73 ATMs per 100,000 adults (the 2^nd highest density rate among the FDIP countries).

According to the World Bank’s Global Financial Inclusion (Global Findex) database, about 57 percent of adults in Turkey had an account with a mobile money provider or formal financial institution as of 2014. Turkey’s performance on the adoption dimension of the 2015 Scorecard contributed to its tie with Colombia and Chile for 6^th place on the overall scorecard.

With that said, Turkey received lower mobile capacity and regulatory environment scores, ranking 16^th and 17^th respectively. Although Turkey’s smartphone and mobile penetration levels are quite robust, a limited mobile money provider landscape, combined with a lack of regulatory clarity surrounding branchless banking regulations (particularly agent banking), constrained Turkey’s scores in those categories.

Nonetheless, there is promising news for Turkey’s financial inclusion environment. In 2015, Turkey assumed the G20 presidency and has renewed its focus on financial inclusion in association with this transition. Turkey’s 2014 financial inclusion strategy is one example of the country’s commitment to advancing inclusion.

To date, financial inclusion growth in Turkey has been limited, as evidenced by the results of the 2011 and 2014 Global Findex. However, if the country’s stated commitment translates into concrete initiatives moving forward, we can expect to see accelerated financial inclusion growth. This will be critical for facilitating access to and usage of quality financial services among the nearly 60 percent of women in Turkey without formal financial accounts. Reducing the approximately 25 percentage point gap in account ownership between men and women — one of the highest gender gaps among the 21 FDIP countries — should be a key priority for the country moving forward.

Indonesia: High mobile money potential, but enhanced awareness needed to drive adoption

Recent changes to Indonesia’s regulatory environment have facilitated a more enabling digital financial services ecosystem, although there is still room for improvement in terms of reducing supply-side barriers. Increasing mobile money awareness could help leverage Indonesia’s strong mobile capacity rates to increase access to and usage of formal financial services. However, moving from a heavily cash-based environment to greater use of digital financial services will take time: A 2014 InterMedia survey in Indonesia found that although 93 percent of bank account holders could access their accounts digitally, 73 percent preferred to access their accounts via an agent at a bank branch.

The differing mandates of Indonesia’s new financial services authority, Otoritas Jasa Keuangan (OJK), which focuses on branchless banking (specifically agent banking) and Bank Indonesia, which focuses on electronic money regulation, may have created some confusion regarding the regulatory environment. Solidifying the country’s financial inclusion strategy and clarifying the roles of the various financial inclusion stakeholders could provide opportunities for greater coherence in terms of financial inclusion objectives.

OJK’s recent branchless banking regulations have led to several positive changes within the regulatory environment. For example, these regulations enabled financial service providers to appoint individuals and business entities as agents and to provide simplified customer due diligence requirements. The 2015 FDIP Report highlights in greater detail some possible improvements to the branchless banking and e-money regulations.

On the mobile capacity side, Indonesia tied for the second-highest score on the 2015 Scorecard. Indonesia is one of the few countries where mobile money platform interoperability has been implemented, allowing different mobile money services to “talk” to one another in real time. Indonesia also boasted the third-highest 3G network coverage by population among all the FDIP Asian countries, as well as the third-highest unique subscribership rate among these countries. However, only about 3 percent of adults were aware of mobile money as of fall 2014, according to the InterMedia survey.

In terms of adoption, the 2014 Global Findex found that women in Indonesia actually had slightly higher rates of account ownership than adults in general, although there is still significant room for growth across all adoption indicators. Given Indonesia’s strong mobile capacity ranking, increasing awareness of mobile money services could drive growth in the digital finance sector. Clarifying existing regulatory frameworks and removing some remaining restrictions regarding agent exclusivity and other agent criteria could further boost financial inclusion.

Philippines: Strong commitment, but geographic barriers have inhibited scale

The Philippines tied with Bangladesh to garner 15^th place for adoption, which contributed to the country’s overall ranking (also 15^th place). In both Bangladesh and the Philippines, about 31 percent of adults had an account with a mobile money provider or formal financial institution as of 2014. According to the 2014 Global Findex, the percentage of women with formal financial accounts was about 7 percentage points higher than the overall percentage of adults with accounts — a rarity among the 21 FDIP countries, which generally exhibit a “gender gap” in which women are less likely to have formal financial accounts than men.

The Philippines’ efforts to foster financial inclusion earned it the second-highest country commitment and regulatory environment rankings among the FDIP Asian countries. The Bangko Sentral ng Pilipinas (BSP), the Philippines’ central bank, has issued a number of circulars providing guidance regarding electronic money and allowing non-bank institutions to become e-money issuers. The BSP also has the distinction of being the first central bank in the world to create an office dedicated to financial inclusion. Most recently, the BSP launched a national financial inclusion strategy in July 2015.

On the mobile side, according to the GSMA Intelligence database, as of the end of the first quarter of 2015 the Philippines had the highest unique mobile subscribership rate among the FDIP Asian countries, as well as the second-highest rate of 3G network coverage by population among these countries.

In terms of mobile money, the Philippines is home to two of the earliest mobile financial services products, Smart’s Smart Money and Globe’s GCash. It also boasts the second-highest rate of mobile money accounts among adults in all the FDIP Asian countries, according to the 2014 Global Findex.

There is still significant room for improvement in adoption of traditional and digital financial services in the Philippines. The country’s geography has posed a challenge with respect to advancing access to financial services among the dispersed population. While the extent of banking infrastructure has improved over time, as of 2013 610 out of 1,634 cities and municipalities did not have a banking office, and financial access points remained concentrated in larger cities. Expanding agent locations and facilitating interoperability could enhance mobile money adoption, mitigating the consequences of these geographic barriers.  

Bangladesh: Rapid growth, but high unregistered use and low adoption overall

While Bangladesh performed strongly on the country commitment and mobile capacity dimensions of the 2015 FDIP Scorecard, it received one of the lowest adoption rankings among the FDIP Asian countries. According to the Global Findex, about 31 percent of adults age 15 and older had an account with a formal financial institution or mobile money provider as of 2014. Indicators pertaining to the country’s rates of formal saving, credit card use, and debit card use all received the lowest score.

Bangladesh has a robust mobile landscape, with fairly strong unique mobile subscription rates — as of the first quarter of 2015, it was tied with Indonesia for the third-highest unique mobile subscribership rates among the FDIP Asian countries, after the Philippines and Turkey. This mobile coverage is combined with a multiplicity of mobile money providers (although a 2014 InterMedia survey noted that nearly 90 percent of active mobile money customers used the bKash mobile money service).

Awareness of mobile money as a service in Bangladesh is very high, although understanding of the concept is less prevalent — in 2014, about 91 percent of respondents in an InterMedia survey were aware of at least one mobile money provider, although only about 36 percent were aware of mobile money as a general concept.

Unregistered use of mobile money accounts is high. While about 37 percent of adults had a mobile money account or bank account or both as of 2014, according to the InterMedia survey, only about 5 percent had registered mobile money accounts, while 4 percent had active, registered mobile money accounts (meaning an account that is registered and has been used in the previous 90 days).Transitioning to registered accounts will help enable individuals to connect with more extensive financial services, such as receipt of government payments.

Overall, adoption of mobile money and the expansion of agent locations have been increasingly rapid in Bangladesh — as of 2014 Bangladesh was one of the fastest growing markets in terms of total accounts globally. Over 60 percent of respondents in a 2013 InterMedia survey stated that they “fully” or “rather” trusted mobile money. Moving forward, increasing financial capability might help individuals feel more at ease registering their accounts and using them independently of an agent.

Pakistan: Public and private sector initiatives advance inclusion

Pakistan ranked 7^th in terms of the percentage of adults with mobile money accounts among the 21 countries, achieving the highest percentage of all of the Asian FDIP countries. Yet there is significant room for growth — as of 2014, only about 6 percent of adults had a mobile money account.

The State Bank of Pakistan (SBP) has clearly expressed its commitment to advancing financial inclusion, which earned the country a commitment score of 100 percent. The SBP developed Branchless Banking regulations in 2008, with revisions in 2011. These regulations were explicitly intended to promote financial inclusion. More recently, the country’s National Financial Inclusion Strategy was launched in May 2015. In terms of quantitative assessments of financial inclusion, the SBP tracks supply-side information on branchless banking in its quarterly newsletters.

Recent public and private sector initiatives may help advance mobile money adoption. For example, a re-verification initiative for SIM cards was mandated by the government and initiated earlier in 2015. Mobile network operators have been promoting registration of mobile money accounts since the biometric re-verification process is more intensive than the identification requirements needed to register a mobile money account.

Earlier, in September 2014, the EasyPaisa mobile money service decided to eliminate fees related to money transfers between Easypaisa account customers and cash-out transactions for a set period. As of April 2015, the number of person-to-person money transfers had increased by about 2500 percent.

Still, barriers to financial inclusion remain. A 2014 InterMedia survey noted that while distance was less of a barrier to registration than previously, distance did affect the frequency with which users engaged with mobile money services. Therefore, expanding access points could further facilitate use of mobile money. Increasing the number of registered accounts could also provide individuals with more opportunities to engage with financial services beyond basic transfers — the InterMedia survey found that as of 2014, about 8 percent of adults were over-the-counter mobile money users, while 0.3 percent were registered users.

Afghanistan: Commitment to improving infrastructure and adoption

Instability and systemic corruption in Afghanistan over the past several decades have damaged trust in formal financial services and limited the development of traditional banking infrastructure. In addition to having one of the lowest levels of GDP among the 21 FDIP countries, as of 2013 the Financial Access Survey found Afghanistan had the lowest reported density of commercial banks per 100,000 adults. Even among individuals who can access banks, adoption of formal accounts is constrained by a lack of trust in formal financial services.

On the mobile side, Afghanistan has fairly widespread 3G network coverage (over 80 percent of the population, according to the GSMA Intelligence database), which helped boost its mobile capacity ranking to 2^nd place. However, Afghanistan received the lowest score possible for each of the 15 adoption indicators. According to the 2014 Global Findex, financial account ownership as of 2014 was at about 10 percent of adults, and financial account ownership among women was at only 4 percent. Tracking gender-disaggregated data at the national level could help the government better identify underserved populations and target financial solutions toward their needs.

The government has made an effort to promote financial inclusion and digital financial services. For example, Da Afghanistan Bank committed to the Alliance for Financial Inclusion in 2009, and the Republic of Afghanistan is a member of the Better Than Cash Alliance. In 2008, the Money Service Providers Regulation was issued, with amendments instituted a few years later pertaining to e-money. The Afghanistan Payments Systems, which is still being fully operationalized, aims to allow payment service providers such as mobile network operators to connect their mobile money systems.

While several mobile money options are available, adoption of these services is low. According to the 2014 Global Findex, about 0.3 percent of adults had a mobile money account. Implementing interoperability across platforms might help increase the utility of mobile money services for consumers, and as in Turkey, developing specific agent banking regulations could provide clarity to the sector and drive innovation.

By expanding financial access points, educating consumers about traditional and digital financial services, and monitoring providers to ensure consumer protection, Afghanistan’s regulatory entities and financial service providers may be able to better reach underserved populations and inculcate trust in formal financial services.

Editor’s Note: This post is part of a series on the 2015 Brookings Financial and Digital Inclusion Project (FDIP) Report and Scorecard, which were launched at a Brookings public event in August. Previous posts have highlighted regional findings from Southeast and Central Asia, the Middle East, and Africa, as well as selected financial inclusion milestones from FDIP countries. This post focuses on key financial inclusion achievements and challenges regarding the five Latin American FDIP countries: Brazil, Chile, Colombia, Mexico, and Peru.

Financial inclusion growth and opportunities in Latin America

With its well-developed banking infrastructure and growing mobile ecosystem, Latin America presents a unique set of opportunities and obstacles with respect to promoting greater financial inclusion. From 2011 to 2014, there was a 12 percentage point increase in the number of adults in Latin America and the Caribbean with formal financial accounts, according to the World Bank’s Global Financial Inclusion (Global Findex) database. As noted in the 2015 GSMA report “Mobile financial services in Latin America & the Caribbean,” in 2014 Latin America and the Caribbean saw the fastest growth of any region in terms of new registered mobile money accounts.

Moreover, these accounts are often used for more advanced transactions that go beyond simple transfers: As stated in a 2015 post published by the GSMA, “ecosystem transactions (transactions that involve third parties, e.g. bill payment, merchant payment or bulk payment) already make up 27% of transaction volumes in Latin America & the Caribbean.” In contrast, only 6 percent of transaction volumes over the same period were considered ecosystem transactions in East Africa, where mobile money has been most widely adopted and used.

Moving forward, facilitating greater adoption of a suite of digital financial services (e.g., savings) will be a vital component of promoting sustainable financial inclusion in the region. Recent regulatory changes in several Latin American countries designed to promote a greater diversity of service providers should propel financial inclusion growth, although a need for regulatory clarity persists in some places. Financial inclusion strengths and challenges germane to our five Latin American FDIP countries are explored below.

Brazil: Branchless banking leadership combined with dynamic mobile market

Brazil achieved the highest ranking of any Latin American country on the Brookings 2015 FDIP Scorecard, ranking 3^rd overall with a score of 78 percent. Brazil’s economy is the largest in Latin America, with a GDP (in current US dollars) of about $2.3 trillion as of 2014; for comparison, Mexico, the Latin American country with the second largest economy, had a GDP of about $1.3 trillion within that same period.

Brazil received strong country commitment and mobile capacity scores (89 and 83 percent, respectively) in the 2015 FDIP Scorecard and earned the highest regulatory environment score among the Latin American FDIP countries, which also included Chile, Colombia, Mexico, and Peru. As noted in the 2015 FDIP Report, Brazil launched a National Partnership for Financial Inclusion in November 2011, which has supported the development of a number of enabling financial inclusion initiatives. In 2013, Law 12865 and associated regulations permitted non-banks to issue e-money as payments institutions. Brazil boasted the largest mobile market in Latin America as of 2014, with a unique subscribership rate of about 57 percent in 2015 (a lower unique subscribership rate than Chile’s by about 7 percentage points, but otherwise higher than that of any of the other Latin American FDIP countries).

Brazil received 4^th place on the 2015 FDIP Scorecard for adoption of selected traditional and digital financial services. As with many other countries in Latin America, branchless banking (i.e., access to formal financial services beyond a traditional brick-and-mortar bank) through “agents” is popular in Brazil — as of 2014, Brazilian banks’ agent networks had a presence in all of the country’s approximately 6,000 municipalities, contributing to formal account growth. Chile was the only Latin American country that received a higher ranking for the adoption dimension, placing 2^nd. In terms of account usage, government-to-person payments comprise a significant source of activity for formal accounts: The 2014 Global Findex report noted that among recipients of government payments in Brazil, 88 percent received their transfers directly into an account.

Yet according to the Global Findex, about 32 percent of Brazilian adults age 15 and older still do not have accounts with a formal financial institution or mobile money provider. As with the other Latin American countries in the FDIP sample, mobile money adoption in Brazil has remained low: Brazil received the lowest score (one out of three possible points) for all six mobile money indicators included in the 2015 FDIP Scorecard. However, given that as of 2014 Brazil had the fifth-largest global smartphone market in the world in terms of subscribers, a combination of growing smartphone penetration and an increasingly enabling regulatory environment should drive greater adoption of digital financial services in the future.

Chile: Opportunities for enhanced e-money regulatory clarity

Chile tied with Colombia and Turkey for 6^th place on the overall 2015 FDIP Scorecard. Chile’s financial inclusion environment is characterized by a firm national commitment to financial inclusion (earning a country commitment score of 89 percent) but a less developed mobile money environment than the other Latin American FDIP countries. While Chile’s unique mobile subscribership rate and 3G network coverage rate by population are higher than and on par with other countries in the region, respectively, Chile’s mobile money offerings are limited. The lack of a robust mobile money market contributed to Chile’s mobile capacity score of 72 percent, the lowest score among the FDIP Latin American countries.

Chile’s regulatory environment score (67 percent) was also the lowest of the Latin American FDIP countries, primarily due to a lack of regulatory clarity surrounding digital financial services. Developing or clarifying regulations pertaining to electronic money in particular could potentially drive more engagement with the sector and advance the diversity of mobile money providers and offerings. Further, supporting the interoperability of digital and traditional financial services could enhance the utility of these products for customers.

Given that 37 percent of adults in Chile did not have an account with a formal financial provider as of 2014, there is also room for growth in terms of expanding financial inclusion. However, it should be noted that Chile earned the highest adoption ranking of any Latin American country featured in the 2015 FDIP Scorecard. While Chile’s adoption levels with respect to mobile money services were limited, adoption rates of other formal financial services were among the highest of the FDIP countries. Chile received three out of three possible points for all but one indicator (savings at a formal financial institution) related to traditional financial services. Chile’s performance on the adoption dimension of the scorecard contributed to its 6^th place ranking overall.

While Chile’s mobile money adoption rates are low, use of other digital financial services is increasingly popular. For example, as noted in the “2015 Maya Declaration Progress Report,” since 2012 the number of CuentaRUT accounts (accounts that feature debit cards associated with a savings account provided by Chile’s BancoEstado) has increased by about 47 percent. As of 2014, there were over 7 million active CuentaRUT cards in Chile.

Colombia: Regulatory advancements coupled with sustained country commitment

As noted above, Colombia tied with Chile for 6^th place on the overall 2015 FDIP Scorecard. Colombia has demonstrated strong commitment to financial inclusion, including through involvement in multinational organizations such as the Alliance for Financial Inclusion (AFI). An example of Colombia’s national-level financial inclusion commitment is the 2006 establishment of Banca de las Oportunidades, an entity charged with fostering regulatory reforms conducive to financial inclusion. Another key player in the financial inclusion space is the Intersectoral Economic and Financial Education Committee, created in February 2014 under Decree 457.

In terms of the country’s regulatory environment, Law 1735 of 2014 permitted new institutions, called Sociedades Especializadas en Depósitos y Pagos Electrónicos, to offer mobile financial services. As part of the law, proportionate “know-your-customer” (KYC) requirements were also instituted for under-resourced customers in order to facilitate greater access to financial services among low-risk populations. In July 2015, Decree 1491 implemented Colombia’s financial inclusion law and highlighted the regulatory regime for the mobile money market. Colombia’s regulatory environment earned a score of 89 percent, ranking it 2^nd among the Latin American FDIP countries in this dimension.

On the supply side, banking correspondents (also known as agents) have been utilized to extend financial access to underserved populations.  As of 2015, all of Colombia’s 1,102 municipalities had at least one financial access point, defined as bank branches, banking correspondents, and ATMs. Another innovative approach to branchless banking in Colombia is bank Davivienda’s initiative to use DaviPlata mobile wallet accounts to distribute government transfers to more than 900,000 recipients of welfare program “Familias en Accion.”

With respect to demand side figures, Colombia tied with Mexico for 7^th place on the adoption dimension. As of 2014, about 38 percent of adults in Colombia had an account with a formal financial institution, and about 2 percent of adults were mobile money account holders. In terms of advancing future mobile money use, Colombia received the highest score of the Latin American countries on the mobile capacity dimension; thus, Colombia is well-positioned to advance access to and use of mobile money services in the future. Promoting usage of appropriate, quality financial services is critical, as dormancy rates have been identified as an obstacle to financial inclusion; about half of accounts in Colombia (including savings accounts, simplified accounts, and electronic deposits) were identified as dormant in 2014.

Mexico: Recent reforms may enhance competition and drive digital takeup

Mexico ranked 9^th on the overall 2015 FDIP Scorecard, with adoption of traditional and digital financial services as its highest-ranked dimension. Among the Latin American FDIP countries, Mexico features the greatest parity in terms of formal financial account ownership rates among men and women, at about 39 percent each.  In terms of national-level commitment to financial inclusion, Mexico tied with Peru for the highest ranking among the Latin American countries. AFI’s Maya Declaration was signed at the 2011 Global Policy Forum held in Riviera Maya, Mexico, signaling Mexico’s public commitment to financial inclusion.

With respect to mobile capacity, as of the first quarter of 2015 Mexico’s unique subscribership rates were the lowest of the Latin American countries. Mexico tied with Chile and Brazil for 3G network coverage by population. In terms of mobile money, Mexico’s market is still developing; several providers were available as of May 2015, but the extent of offerings was somewhat limited. As noted in the GSMA’s “Mobile Economy: Latin America 2014” report, new telecommunications reforms recently passed in Mexico are expected to affect the mobile market and potentially increase competition among the telecommunications sector. This increased competition could in turn drive the development of a greater array of innovative, affordable mobile money products.

Regarding Mexico’s regulatory environment, the country has been lauded for its risk-based KYC requirements that enable underserved individuals to access low-value accounts without fulfilling the full array of traditional identification processes, which can sometimes be burdensome for under-resourced groups. Under Mexico’s four-tiered KYC system (introduced in 2011), “level one” (very low-risk) accounts feature monthly deposit limits and a maximum balance limit of about 400 dollars; accounts can be opened at a bank branch, banking agent, over the internet, or by telephone. Higher-tier accounts have more stringent KYC requirements. A 2015 AFI article noted that Mexico's banking and securities regulator, the Comisión Nacional Bancaria y de Valores, indicated about 7.5 million new accounts were opened between August 2011 and September 2012, including over 4 million “level one” accounts.

Mexico tied with Colombia for 7^th place on the adoption dimension of the 2015 FDIP Scorecard. About 39 percent of adults in Mexico held accounts with a formal financial institution as of 2014, while about 3 percent of adults held mobile money accounts. As with other countries in Latin America, debit card and credit card use were much higher than mobile money use as of 2014, although usage of both kinds of cards was lower in Mexico than in several other Latin American FDIP countries such as Brazil and Chile. Initiatives such as the Saldazo debit card, which enables customers to use a debit card associated with a savings account and does not require a minimum balance, have helped drive adoption of digital financial services in Mexico.

Peru: Enabling regulatory environment, but constrained adoption of financial services

Peru presents perhaps one of the most interesting paradoxes among the FDIP countries. While Peru’s regulatory environment has been consistently recognized as among the best in the world for enabling financial inclusion, adoption of formal financial services remains quite low. Peru received 17^th place overall on the 2015 FDIP Scorecard, which can primarily be attributed to its low adoption score: Peru received a 15^th place ranking on the adoption dimension, the lowest score among the Latin American FDIP countries. However, we anticipate that recent regulatory changes in Peru, coupled with increasing smartphone penetration rates (Peru’s 2014 adoption rates were about 12 percentage points below the Latin American average), will facilitate adoption of digital financial services and drive greater financial inclusion in the future.

With respect to the supply side aspect of financial inclusion, as of 2014 about 92 percent of Peru’s population lived in a district with access to financial services, according to the Superintendencia de Banca, Seguros y AFP (SBS) del Peru. Nonetheless, demand side figures lag behind: The Global Findex found that only about 29 percent of adults had an account with a formal financial provider as of 2014. Peru received a “1” for two-thirds of the non-mobile money indicators on the adoption dimension of the 2015 FDIP Scorecard, and mobile money adoption was negligible. Moreover, as of 2014 there was a 14 percentage point disparity in financial account ownership between men and women, the highest financial inclusion “gender gap” among the Latin American FDIP countries.

However, given Peru’s strong national commitment to financial inclusion (reflected in Peru’s country commitment score of 94 percent) and legislative initiatives designed to promote an enabling regulatory environment, we fully anticipate that financial inclusion growth will accelerate in the future. For example, Peru recently finalized its national financial inclusion strategy, as discussed in our earlier post. Moreover, Peru has adopted laws and regulations that permit a greater diversity of players to enter the financial services market. Law 2998 of January 2013 allowed both banks and non-banks to issue e-money, and October 2013 regulations issued by the SBS enabled e-money issuers to follow a simplified account opening process. These initiatives should facilitate greater access to and usage of formal financial accounts in the future.

In terms of electronic payments specifically, diversifying the mobile money market and increasing unique subscribership could help facilitate greater adoption of mobile money services. Demand side factors, such as ensuring that services are a good fit for customers, are also critical — as evidenced by the fact that Mexico, which had comparable smartphone adoption rates to Peru and lower unique subscribership rates as of 2014, features significantly higher rates of mobile money adoption across all demographics than Peru. Peru is making a concerted effort to develop innovative electronic platforms — for example, the Peruvian Association of Banks (ASBANC) is working on the creation of an electronic money platform accessible by both financial institutions and telecommunications companies. Implementation of this interoperable platform is expected to promote further adoption of digital financial services.

While significant progress has been made in terms of facilitating greater access to and use of financial services among underserved populations, barriers to financial inclusion remain. The global dialogue surrounding the financial inclusion gender gap (referring to the disproportionate exclusion of women from access to and usage of formal financial services) has intensified as key stakeholders—including financial service providers, regulatory bodies, policymakers, civil society entities, and consumers—explore how best to engage prospective women customers in ways that meet the needs of both consumers and providers situated within different market contexts.

As part of the consultation process for the second annual Brookings Financial and Digital Inclusion Project (FDIP) report and scorecard, to be published in late summer 2016, the FDIP team held a roundtable in March 2016 to facilitate dialogue and knowledge-sharing regarding the issue of gender disparities in access to and usage of formal financial services. The first FDIP report and scorecard, published in August 2015, are available here.

The roundtable provided an opportunity for participants to discuss the legal, policy, and cultural drivers of the gender gap, highlight examples of enabling approaches in countries that have made strides in reducing the gender gap, and identify action steps for governments, financial service providers, and consumers in terms of promoting greater equity within the financial landscape. Before diving into the key themes and action items explored at the roundtable, below is some background on the nature and implications of the gender gap.

What is the financial inclusion gender gap, and why does it matter?

From 2011 to 2014, the percentage of women in developing economies with formal financial accounts increased by 13 percentage points, according to the World Bank’s Global Financial Inclusion (Global Findex) database. In relative terms, these gains were comparable to those among men in developing economies during the same time period—but in absolute terms, there remains considerable room for growth, as half of women in developing economies still did not have formal financial accounts as of 2014.

While there is good reason to celebrate the tremendous gains made across the financial inclusion landscape in recent years, significant opportunity for expanding access to and usage of financial services among women remains. Globally, the financial inclusion gender gap remained at seven percentage points between 2011 and 2014, and in developing economies the gap was even higher, at nine percentage points.

The FDIP focus countries reflect this global trend. Of the 21 FDIP focus countries examined within the 2015 FDIP Report and Scorecard, only four (Indonesia, the Philippines, Mexico, and South Africa) exhibited either gender parity or a greater percentage of women than men who reported using mobile money within the previous 12 months or holding an account at a bank or another type of financial institution.

The gender gap is of course not the only global disparity in terms of access to and usage of financial services—for example, rural and low-income populations are often underserved by formal financial service providers compared with their more urban and wealthier counterparts. (You can learn more about financial inclusion among these underserved groups across different economic, political, and geographic contexts in the 2015 FDIP Report and Scorecard.) Indeed, in 2014 the gap between account ownership among the poorest 40 percent of households in developing economies and the richest 60 percent of households in developing economies was about five percentage points higher than the gender gap in developing economies.

However, as noted by the Global Findex, the global financial inclusion gender gap remained essentially static from 2011 to 2014, while the financial inclusion income gap was reduced by several percentage points. Additionally, the increase in ownership of formal accounts among the poorest 40 percent of households in developing economies was slightly higher proportionately than the increase in ownership of formal accounts among women in developing economies over the same period. In short, the gender gap is particularly noteworthy for its persistence over time and for the broad scope of the underserved population it represents.

Investing in women and girls should be a shared priority across public and private sector stakeholders given the economic and civic implications of female participation in the formal financial ecosystem. From a micro perspective, having convenient access to a suite of quality financial services enables women to invest in themselves, in their families, and in their communities by saving for the future, paying for educational and health expenses, putting money toward small businesses, and engaging in other productive financial activities. Participants at the roundtable noted that a less tangible—but no less valuable—outcome of facilitating access to and usage of formal financial services among women is the sense of empowerment many women feel when they are equipped with greater control of their finances.

For businesses, reaching an untapped segment of the market with products and services that individual customers find useful would augment providers’ revenue. From a macroeconomic perspective, women’s economic empowerment has increasingly been regarded as “contributing to sustained inclusive and equitable economic growth, and sustainable development,” as noted in a recent study by the Global Banking Alliance for Women in partnership with Data2X and the Multilateral Investment Fund of the Inter-American Development Bank.

If women’s participation in the financial ecosystem is so advantageous, why hasn’t the gender gap improved?

A number of legal, policy, and cultural restrictions have constrained access to and usage of financial services among women. A few examples of these constraints are described below; additional information on access and usage barriers is available in the 2015 FDIP Report.

• Legal, regulatory, and policy barriers: The World Bank Group’s Women, Business, and the Law project has examined data regarding legal and regulatory restrictions on entrepreneurship and employment among women since 2009. The project’s 2016 report found that about 90 percent of the 173 economies covered in the study had at least one law impeding women’s economic opportunities. For example, in some countries women are not permitted to open a bank account or are required to provide specific permission or additional documentation that is burdensome (or even impossible) to obtain. Restrictions on whether property is titled in a women’s name can also impede access to finance since titled land is often a preferred form of collateral among banks. Moreover, women are less likely than men to have the identification documents needed to open formal financial accounts. Among adults without an account at a financial institution as of 2014, 17 percent of women stated that a lack of necessary documentation was a barrier to their use of an account. Promoting a unique, universal identification system can facilitate access to formal labor markets and formal financial services.
• Cultural barriers: One example of a cultural constraint on usage of financial services among women is that many women may be more comfortable utilizing formal financial services when they can interact with a female point of contact, which is often not a readily available option.  
• Technological barriers: Digital financial services such as mobile money can help mitigate financial access barriers, in part by enabling women to more easily open accounts and to complete transactions through their phones without visiting a “brick and mortar” store. However, the gender gap in mobile phone ownership and usage must be addressed to fully take advantage of the benefits of digital financial services. The GSMA’s 2015 report noted that the most frequently cited barrier to mobile phone ownership and usage was cost, and cultural dynamics in which men prohibit women from owning or using a phone also contribute to the gap. Incongruous policies in some markets such as more stringent registration processes for SIMs and mobile money accounts than for bank accounts can also inhibit adoption of digital financial services.

What are examples of initiatives to facilitate greater financial inclusion among women?

Participants highlighted several examples of initiatives that were designed to promote women’s financial inclusion. For example, Diamond Bank in Nigeria and Women’s World Banking developed a savings product called a BETA account that could be opened over the phone with no minimum balance and no fees. The product was designed to be affordable and convenient for individuals engaging in frequent deposits, with agents visiting customers’ businesses to facilitate transactions. Other add-on products are being built around this basic product to provide more opportunities for individuals to use the financial services most useful to them. While the product was developed for women, it is available to both men and women.

Also in Nigeria, MasterCard and UN Women have partnered on an initiative that aims to educate women on the benefits of a national identification program and enroll half a million Nigerian women in this program so that they receive identification cards that include electronic payments functionality.

What can be done to advance gender equity within the financial ecosystem?

One of the central questions discussed during the roundtable was how to reconcile the sometimes diverging mandates of businesses, public sector actors, and the development community in order to foster a sustainable financial and economic ecosystem. In short, businesses must generate profits to be sustainable, while development community and public sector entities often focus on longer-term micro- and macro-economic growth and development. The challenge with these potentially competing time horizons is that initiatives involving a complex network of participants (such as those to cultivate women’s financial participation) may take time to scale. Moreover, some of the major factors contributing to the financial inclusion gender gap (such as lower financial literacy levels among women) will require a long-term approach to fully address.

The good news is that serving women customers ultimately meets the complementary objectives of benefiting providers by expanding their customer base and benefiting consumers by enabling them to use financial services to improve their lives and invest in their communities. Thus, leveraging data to present the business case to providers (see point 1 below) and promoting dialogue across public and private sector representatives (see point 2 below) will enable different players in the financial ecosystem to identify the best approaches to closing the gender gap in ways that are sustainable for consumers and providers.

While the list below is certainly not exhaustive, it highlights several pathways for promoting women’s financial inclusion.

1. Generate data to better serve customers and attract providers: While we delineate the gender gap in terms of men and women, women (like all customer segments) are not monolithic. Thus, the intent of demand- and supply-side data collection should be to inform the development and delivery of a suite of products and services that target customer segments and to make a business case for offering those products and services. Many financial institutions have historically refrained from collecting data disaggregated by sex because doing so was perceived as discriminatory and/or ineffective given the issue of duplicability in reporting. Government leadership on collecting sex-disaggregated data can help ameliorate this issue. An in-depth look at the process of collecting and analyzing sex-disaggregated data is provided in the recent case study on Chile published by the Global Banking Alliance for Women, Data2X, the Economic Commission for Latin America and the Caribbean, and the Multilateral Investment Fund of the Inter-American Development Bank.
2. Promote inward and outward-facing stakeholder collaboration: Financial service providers and non-government entities active within the financial services landscape should find champions of women’s economic empowerment within their organizations to help build strategies for reaching women customers with appropriate products and services. Representatives from both the public and private sectors should work together to facilitate dialogue and collaboration across relevant stakeholders such as telecommunications providers, formal and informal financial institutions, public sector representatives, and consumers. This objective should be reflected in countries’ national financial inclusion strategies where possible.
3. Engage in client-centric design: Providers should deploy relevant data to evaluate customers’ needs and reflect those needs in product design, provision, and promotion. By thinking about the customer experience of access and usage holistically, providers will have the potential to sustainably amplify adoption of financial services.
4. Invest in financial education and financial capability among women and girls: Many women feel that they do not have enough money to hold an account with a formal financial institution, as evidenced by the 2014 Global Findex results noting that 57 percent of women without an account at a financial institution cited having insufficient funds as a barrier to account ownership. Financial inclusion stakeholders should aim to familiarize prospective female customers with appropriate, affordable financial services and promote sound financial behaviors that will help spur greater financial inclusion.
5. Adapt anti-money laundering/countering the financing of terrorism requirements to reflect perceived risks: Enabling risk-based “know your customer” (KYC) processes such as the tiered KYC approach applied in the Diamond Bank example above or in other countries such as Mexico reduces access barriers to formal financial accounts. For more information on KYC processes among different countries, please see the 2015 FDIP Report and Scorecard.
6. Formalize informal financial entities as appropriate: According to the 2014 Global Findex, about 160 million unbanked adults in developing economies saved through informal savings clubs or a non-family member. Vetting and formalizing certain informal providers to ensure adequate consumer protection while preserving services that are familiar and accessible to customers could advance women’s financial inclusion.
7. Leverage digital financial tools to facilitate greater access to and usage of formal financial services:
• Digital platforms can help reduce disparities in access to identification documents. For example, an initiative in Tanzania allows health workers to deliver birth certificates using a mobile phone. Birth certificates facilitate access to healthcare, education, and other important government services, including government-to-person payments.
• Digital financial services such as mobile money can provide greater privacy, convenience, and security to customers who have been disproportionately excluded from the formal financial system. For more information on developing enabling infrastructure and policy environments to support mobile money access and usage, please refer to the 2015 FDIP Report.
• Using “big data” generated by and about consumers on digital platforms helps providers better evaluate the creditworthiness of individuals who may previously have been excluded from the formal financial system due to a lack of or minimal credit history. Since women often lack credit history, these innovative measures to assess credit risk and collateral issues can contribute to women’s economic empowerment by facilitating access to credit. As with all financial services, these “big data, small credit” propositions should be coupled with adequate consumer protection and privacy mechanisms.

Editor’s Note: Brookings will hold an event and live webcast on Thursday, August 4 to discuss the findings of the forthcoming 2016 Financial and Digital Inclusion Project (FDIP) Report. Follow the conversation on Twitter using #FinancialInclusion.

The 2016 Brookings Financial and Digital Inclusion Project (FDIP) Report, the second annual report produced by the FDIP team, assesses national commitment to and progress toward financial inclusion through traditional and digital mechanisms in 26 countries.  

As in the 2015 report, the FDIP team analyzed four key dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of formal financial services. The 2016 report amplifies the geographic diversity of the FDIP country sample by adding five new countries and features descriptions of the financial inclusion landscape in all 26 countries.

The 2016 FDIP Report finds that significant progress has been made toward advancing financial inclusion in many countries, and robust commitment to strengthening the digital financial services ecosystem is evident across diverse geographic, political, and economic contexts.

On August 4, the Center for Technology Innovation will discuss the key findings of the 2016 FDIP Report and host a conversation with public sector representatives about key trends, opportunities, and obstacles regarding financial inclusion in their respective countries and around the world.

Below we provide some context regarding the role of financial inclusion within the global drive for sustainable development.

What is financial inclusion?

The common themes that emerge from many definitions of financial inclusion are the ability to access formal financial services and to utilize those services in a way that promotes financial health.

For example, the Center for Financial Inclusion at Accion defines financial inclusion as a “state in which everyone who can use them has access to a range of quality financial services at affordable prices, with convenience, dignity, and consumer protections, delivered by a range of providers in a stable, competitive market to financially capable clients.”

In short, financial inclusion in itself is not the end goal, but instead serves as a key mechanism for advancing the well-being of individuals, families, and communities. At the macroeconomic level, financial inclusion provides opportunities to advance economic growth, reduce income inequality, and combat poverty.

For the purposes of FDIP, we primarily focus on individuals’ access to and usage of affordable, secure, basic financial services and products, such as person-to-person payments and savings accounts. However, we also recognize the important role that more extensive financial services (e.g., microinsurance and microcredit) can play in enabling individuals to plan for the future and absorb financial shocks. Where possible, we highlight examples of a broad suite of financial services within the country profiles of the 2016 report.

To learn more about the 2016 FDIP Report, please register to attend the launch event in-person or watch the live webcast.

Editor's Note: This piece originally appeared in Foreign Policy.

The killing of Nasir al-Wuhayshi, reportedly via U.S. drone strike, is not just another notch in the belt of America’s long campaign against al-Qaida and its allies. Wuhayshi was one of al-Qaida’s top remaining leaders, and he is the highest-level death the organization has suffered since Osama bin Laden was killed in 2011. Wuhayshi headed al-Qaida’s most active affiliate, the Yemen-based al-Qaida in the Arabian Peninsula (AQAP), and was the designated successor of al-Qaida leader Ayman al-Zawahiri. His killing adds one more element of uncertainty to the turbulence in Yemen and may set AQAP on a new path. Which path, however, remains an open question.

Wuhayshi helped transform AQAP from a fractious organization on the edge of defeat to one that menaces both Yemen and the United States. A decade ago, Yemen’s jihadi movement seemed near defeat. In the aftermath of 9/11, the Yemeni government rounded up jihadis and imprisoned Wuhayshi, and it was Saudi Arabia, not Yemen, that was the focus of jihadis in the Arabian Peninsula. In 2003, al-Qaida sponsored the original AQAP’s uprising against the Saudi government. Several years later, most of AQAP’s Saudi members were dead or in jail, and its remnants had fled to Yemen. There, they mixed with Yemeni jihadis, including important figures like Wuhayshi, who had escaped from Yemen’s jails in 2006. In 2009, two regional Islamist groups merged and formally anointed themselves AQAP, basing their operations in Yemen and trying to unseat the government. As Osama bin Laden’s former secretary, Wuhayshi became the group’s leader and embraced al-Qaida’s emphasis on attacking Western targets.

The group made fitful progress, at times taking territory but often losing it quickly after alienating locals and proving vulnerable to government counterattacks. But when the government of Yemeni President Ali Abdullah Saleh fell in 2012 during the Arab Spring, AQAP tried to step into the void. Saleh’s successor, Abed Rabbo Mansour Hadi, pursued AQAP vigorously, but his weak government was unable to score any lasting successes.

In addition to its prowess in Yemen, AQAP has long been al-Qaida’s most active affiliate when it comes to taking on the West. The organization was behind the 2009 Christmas Day attempt to down a U.S. airliner over Detroit, a near-miss only foiled by the bomber’s incompetence and the quick thinking of the plane’s passengers. AQAP tried again in 2010, this time attempting to down U.S. cargo planes. The organization also attacked Western targets in Yemen, and puts out Inspire, a stylish English-language online publication that is one of al-Qaida’s more effective attempts to influence Western jihadis.

These AQAP efforts to attack the United States and the West, in general, led to a greater U.S. focus on Yemen and more drone attacks there. In 2011, the United States killed Anwar al-Awlaki, a U.S. citizen and AQAP member who helped lead the terrorist group’s campaign against targets in the United States and Europe. Awlaki has continued to inspire terrorists after his death, with Boston Marathon plotters downloading his sermons before their attack. Awlaki also inspired the Fort Hood shooter in 2009 and the attacks on the Charlie Hebdo office in 2015.

Wuhayshi’s death, however, comes as Yemen is falling apart. Earlier this year, Hadi’s government fell to the Houthi rebels, Yemeni Shiites who oppose both Yemen’s traditional order and the Sunni fanatics of AQAP who see Shiites as apostates. Alarmed by Houthi ties to Iran, Saudi Arabia has led an intervention in Yemen on Hadi’s behalf, bombing the Houthis and trying to reverse their gains. AQAP seems to be flourishing amid the chaos, as its enemies turn on one another.

But with Wuhayshi’s death, AQAP may find it difficult to further exploit the Yemeni civil war. Personal connections, reputation, and charisma play a bigger role in leadership in the jihadi cause than do formal rank, and it is not clear if Qasim al-Raimi, the designated new leader, can retain the support of the AQAP rank and file. There is always a chance, of course, that Raimi proves an even more effective leader than Wuhayshi, and some observers see him as “more dangerous and aggressive.” (Lest we forget: In 1992, the Israelis killed Hezbollah’s Secretary-General Abbas al-Musawi, one of the group’s most competent leaders. Musawi was replaced by Hassan Nasrallah, who has proven one of the most effective terrorist and guerrilla leaders in modern times.)

The bad news is that Raimi and AQAP may seek revenge, both out of genuine anger and to score points within the jihadi community. Al-Qaida’s chief bomb-maker, Ibrahim al-Asiri, may still be out there and has likely passed his sophisticated techniques on to others in Yemen.

The bad news is that Raimi and AQAP may seek revenge, both out of genuine anger and to score points within the jihadi community.

Over time, however, Wuhayshi’s death may push AQAP to focus even more on Yemen and less on the West. His close, personal ties to the al-Qaidacore may have been part of why AQAP was a steadfast ally of Zawahiri in his power struggle with the Islamic State. The opportunities and risks in the civil war are both tempting and frightening for AQAP. On the one hand, by taking up arms against the hated Shiites, AQAP can position itself as the defender of Yemen’s Sunnis, a strategy that has worked well for the Islamic State in Iraq and Syria. AQAP might gain more recruits and local support, while drawing foreign fighters and money from Sunnis eager to find yet another Shiite-Iran axis to oppose. Not surprisingly, AQAP has stepped up its operations against the Houthis in recent months.

AQAP also has an opportunity to govern. And the bad news for the West is that it has learned from its own many mistakes on this front. In the past when AQAP made gains, it tried to impose a strict version of Islamic law that alienated local communities. Now when its fighters seize territory, theywork with local tribal figures and other elites, avoiding the most controversial measures and trying to portray themselves as guardians, not overlords.

Wuhayshi’s death also comes at a time when the broader jihadi movement is split between backers of al-Qaida and supporters of the Islamic State, a struggle in which AQAP has long played an important role. As al-Qaida’s most active anti-Western affiliate, AQAP was important to Zawahiri’s claim that he was leading the struggle against the United States. Its strength in Yemen, moreover, also expanded al-Qaida’s presence and prestige to an important part of the Arab world. Islamic State supporters have already conducted attacks in Yemen, and the death of Wuhayshi offers them a chance to expand their influence there. The core leadership of AQAP is not likely to join the Islamic State, but some of its cells and supporters could break off if Raimi proves a weak leader.

For now, Wuhayshi’s death means the United States has another point in the struggle against the jihadi movement. In the long term, successful disruption is more likely if the United States and its allies can keep the pressure on AQAP, forcing its leaders to go on the run and hindering their ability to communicate — particularly difficult challenges for a group in transition under new leadership. Wuhayshi’s death also comes on the heels of the deaths of several other AQAP members, including its top ideologue and spokesman. Having to hide also makes it difficult for the group to govern, as its exposed leaders run the risk of being killed. But AQAP has lost many leaders before, yet remains a force to be reckoned with. So at best, this should be seen as winning a battle, not the war.

As noted in our recent Brookings Institution report, unmanned aerial vehicles (UAVs), commonly referred to as drones, are an emerging technology that requires the attention of local governments. Unfortunately, regulations governing their usage are significantly lagging the pace of innovation. Individual citizens who do not want these devices flying over (or even near) their property due to privacy or safety concerns have limited options. You can stay in your home and turn the music up until it goes away. Or you can go about your business and ignore the possibility that the drone has a camera to see inside your home. Others might prefer a more active response. In fact, there have been several recent instances where residents have taken it upon themselves to remove these drones from the skies…by force.

Misuses of drones

The usage of UAVs and the lack of a functional regulatory environment have not been without incident. Fire personnel in southern San Bernardino County were fighting the first major fire of the season and had to abort their tanker flights due to someone flying a drone at approximately 12,000 feet and interfering with the safety of the pilots. Just two weeks later, firefighters in Southern California were using several manned aircraft to help put out 20 car fires on an interstate highway that were caused when a wildfire jumped the highway unexpectedly.  Pilots had to ground the planes when it was reported that five drones were flying around the area to get a good look at the fires (two of which were witnessed actually chasing the tanker planes!).

In addition to the general lack of common sense by a few users interfering with life-saving aircraft around the U.S., Britain, Poland, and elsewhere, there have been an increasing number of incidents involving drones accused of serving as remote “peeping toms.” UAVs have also crashed into cars and homes; they have even been used to smuggle drugs across the U.S.-Mexico border in addition to smuggling marijuana into prisons in South Carolina and in Ohio.

Uneven regulations

When it comes to regulations around drones, we are living in the proverbial wild-west. A few states, like Nevada and Wisconsin, have passed legislation to prevent the weaponization of drones. But in July, a YouTube video went viral of a teenager in Connecticut who modified his drone to fire a semi-automatic handgun successfully. When confronted by law enforcement officials, they determined that no laws had actually been broken. Virginia was the first state legislature to put in place a two-year moratorium on drone usage by state or law enforcement agencies. That moratorium expired July 1^st. By the end of 2014, 36 states had introduced legislation aimed at protecting individual privacy in some manner. Only four of those passed last year. Currently, there are 17 states with some form of drone regulation on their books, and several other states still have legislation pending. Most of the laws that have passed, such as those in Idaho and Florida, focus on limiting police usage of drones by requiring probable cause warrants.

Nevada has been one of the more active states in the drone legislation arena. In addition to their legislation prohibiting the weaponization of civilian drones, the state also has passed legislation to provide homeowners rights to sue drone owners who fly their drones over personal property in certain circumstances. Furthermore, Nevada now requires law enforcement agencies to get warrants when using drones near any home “where there is an expectation of privacy.”

Potential benefits and rulemaking challenges

We do acknowledge and are excited about the positive benefits that drone technology is poised to provide. Amazon has been testing their commercial “Prime Air” package delivery system under an experimental testing agreement with the FAA since early 2015, which will likely impact the nature of their almost two year old partnership with the U.S. Postal Service. Drone startup company Flirtey successfully demonstrated their ability to deliver medicine to a rural medical facility in Virginia as part of their proof of concept efforts this July. Drones may even represent the future of pizza delivery.

The challenge this rapidly developing technology is creating is well ahead of local government efforts to rein in excessive activities. State and local governments need to engage on this policy issue more proactively. To do so, however, requires a delicate balancing act of the multiple competing interests of legitimate commercial uses, policing, public safety, privacy, and private property concerns. And this balancing has to take place in an environment where federal law remains unsettled too.

One thing we would definitely caution against is ‘regulation by default.’ To date, the efforts to regulate drone policy has focused on the drones themselves. As is commonly the case with new technology, governments typically engaged with a heavy hand that sometimes misses the opportunities afforded by the new technologies to improve city services and quality of life. Examples of this possible overreaction is Iowa City, Iowa and Charlottesville, Virginia, both of which were early adopters of complete bans on all surveillance drones within city limits back in 2013.

Local governments need to accept that drone technology is here for the near future. They must recognize that technology is not the problem, but how it is used can be a potential problem. Given the potential drawbacks and benefits, there is justification for reasoned regulation of drone technology.

Event Information

On September 30, 2011, the U.S.-born radical Islamic cleric, Anwar al-Awlaki, was killed by an American drone strike in Yemen, marking the first extra-judicial killing by the United States government against a U.S. citizen. Placed at the top of a CIA kill list in 2010 by the Obama administration, al-Awlaki was known for his intimate involvement in multiple al-Qaida terrorist plots against U.S. citizens, including the 2009 Christmas Day airline bombing attempt in Detroit and the 2010 plot to blow up U.S.-bound cargo planes. His calls for violent jihad remain prominent on the Internet, and his influence has turned up in many cases since his death, including the Boston Marathon bombing of 2013 and the Charlie Hebdo shootings in Paris early this year. In a new book, “Objective Troy: A Terrorist, A President, and the Rise of the Drone” (Crown, 2015), The New York Times national security reporter Scott Shane, drawing on in-depth field research in Yemen and interviews with U.S. government officials, charts the intimate details of the life and death of al-Awlaki, including his radicalization, his recruiting efforts for al-Qaida in the Arabian Peninsula, and the use of drone strikes by the United States to prosecute its counterterrorism goals.

On September 17, the Intelligence Project hosted Shane to examine the roles played by al-Awlaki in al-Qaida plots against the United States, al-Awlaki’s continued influence on terrorism, and the current state of al-Qaida today. Brookings Senior Fellow Bruce Riedel, director of the Intelligence Project, provided introductory remarks and moderated the discussion.

Audio

• Anwar al-Awlaki, Yemen, and American counterterrorism policy

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150917_awlaki_yemen_transcript

Editor's Note: This piece originally appeared on Lawfare.

The United States began to use drones in Yemen in 2002 to kill individuals affiliated with al-Qaida in the Arabian Peninsula (AQAP) and its predecessor organizations and disrupt its operations there and abroad. Since then, over 200 strikes have killed over a thousand Yemenis, tens of children, and at least a handful of U.S. citizens – one of whom was a deliberate target. The program has drawn widespread condemnation from human rights organizations and some UN bodies, yet it remains in place because the administrations of George W. Bush and Barack Obama view it as a success, as both have publicly stated.

Criticism of the program often takes the form of debates about which legal regime is relevant to judging a state’s use of targeted killings, which critics call “extra-judicial executions” or simply “assassinations.” While dissent has been strongest in academic and human rights communities, some scholars have echoed the arguments made by states that the imperatives of self-defense permit states to carry out such killings as legitimate acts of war. The Lawfare consensus seems in favor of these strikes.

I share the views of the moral and legal dissenters and hesitate to move beyond those debates because I don’t want to suggest that I accept the program’s legality. 

But I do want to engage those who do view the program as working — after all, if the U.S. administration did not believe it was working, it wouldn’t need to justify it legally. But by what metrics should we consider judging its success?

Perhaps the most obvious metric is whether AQAP leaders are actually being killed and, even more, whether their deaths substantially disrupted the group’s activities in Yemen or its ability to pursue objectives outside of Yemen. For advocates of this metric, the program has been successful in the short term — individuals killed – even if the longer-term impact is less clear because new leaders seem to step in with regularity.

Yet the success in taking out AQAP’s leadership is overstated. The numbers of AQAP members and supporters officially reported as killed are questionable, and probably grossly exaggerated. This is because the U.S. administration considers all adult males in the vicinity of the strikes to be combatants, not civilians, unless their civilian status can be established subsequently. Full investigations are neither desirable nor pragmatic for the U.S. government – particularly now that Yemen is the site of a civil and regional war. Even more troubling is that at times the U.S. may not even be certain of its primary targets. It frequently uses language that is so conditional that there seems to be more than a bit of guessing about the identities of those being targeted.

But I would like to focus on different metric: the longer-term impact of the drone strikes on the legitimacy and attractiveness of al-Qaida’s message in Yemen and its ability to recruit among Yemenis themselves. Drone strikes are widely reported in local media and online and are a regular topic of discussion at weekly qat chewing sessions across the country. Cell phone calls spike after drone strikes, which are also widely reported on Twitter and Facebook. The strikes are wildly unpopular, with attitudes toward the United States increasingly negative. An Arab Barometer survey carried out in 2007 found that 73.5 percent of Yemenis believed that U.S. involvement in the region justified attacks on Americans everywhere.

The narrative that the West, and especially the United States, fears the Muslim world is powerful and pervasive in the region. The U.S. intervenes regularly in regional politics and is a steadfast ally of Israel. It supports Saudi Arabia and numerous other authoritarian regimes that allow it to establish permanent U.S. military bases on Arab land. It cares more about oil and Israel than it does about the hundreds of millions in the region suffering under repressive regimes and lacking the most basic human securities. These ideas about the American role in Middle East affairs – many of them true – are among those in wide circulation in the region.

Al-Qaida has since 1998 advanced the argument that Muslims need to take up arms against the United States and its allied regimes in the region. Yet al-Qaida’s message largely fell on deaf ears in Yemen for many years. Yes, it did attract some followers, mostly those disappointed to have missed the chance to fight as mujahidin in Afghanistan. But al-Qaida’s narrative of attacking the foreign enemy at home did not resonate widely. The movement remained isolated for many years, garnering only limited sympathy from the local communities in which they sought refuge. 

 The dual effect of U.S. acceleration in drone strikes since 2010 and of their continued use during the “transitional” period that was intended to usher in more accountable governance has shown Yemenis how consistently their leaders will cede sovereignty and citizens’ security to the United States. While Yemenis may recognize that AQAP does target the United States, the hundreds of drone strikes are viewed as an excessive response. The weak sovereignty of the Yemeni state is then treated as the “problem” that has allowed AQAP to expand, even as state sovereignty has been directly undermined by U.S. policy – both under President Ali Abdullah Salih and during the transition. American “security” is placed above Yemeni security, with Yemeni sovereignty violated repeatedly in service of that cause. Regardless of what those in Washington view as valid and legitimate responses to “terrorist” threats, the reality for Yemenis is that the United States uses drone strikes regularly to run roughshod over Yemeni sovereignty in an effort to stop a handful of attacks – most of them failed – against U.S. targets. The fact that corrupt Yemeni leaders consent to the attacks makes little difference to public opinion.

Regardless of what those in Washington view as valid and legitimate responses to “terrorist” threats, the reality for Yemenis is that the United States uses drone strikes regularly to run roughshod over Yemeni sovereignty in an effort to stop a handful of attacks – most of them failed – against U.S. targets.

The United States cut aid to Yemen in 1990 when the newly united Yemeni state, which had just rotated into the Arab seat on the UN Security Council, voted against authorization for a U.S.-led coalition to reverse the Iraqi invasion of Kuwait. Yemen suffered a tremendous economic blow, as the United States joined Kuwait and Saudi Arabia in unilaterally severing aid to what was then and still is the poorest Arab nation. But with the rise of jihadi activism on the Arabian Peninsula over the next decade, and particularly after the bombing of USS Cole in 2000, Salih welcomed the return of U.S. aid to Yemen. This included a strong security dimension as the United States began tracking those suspected of involvement in the Cole attacks and other al-Qaida activities. Conspicuous caravans of FBI agents became a topic of local conversations, so the return of a U.S. presence in Yemen was also more visible than it had been previously. Salih claimed to have had advance knowledge of every drone strike.

Saudi Arabia has meddled in Yemen at least since the fall of the northern Mutawakkilite monarchy in the late 1960s. The Saudi intervention that began with air strikes in March of this year and escalated to ground troops is thus only the latest — and most egregious — of the kingdom’s efforts to affect Yemen politics. This background is necessary to understand that if Yemen is a “failed state,” despite scholarly protestations otherwise, it is at least in part due to decades of external actors violating Yemeni sovereignty with near impunity. The drone program, like the Saudi-led war, is merely a recent and overt example.

I lived in Yemen for several years spread over the period from 1994-1999. During that time, the optimism about the democratic opening of 1990 gave way to increasing frustrations as Salih solidified his control over united Yemen. He defeated the southern leadership in the 1994 war and curtailed the freedoms and pluralism that marked the early unification period, but open public debate has always been vibrant. Travel throughout Yemen was easy at that time, the only obstacle being the need to hire an all-terrain vehicle and driver who knew the many poorly marked roads.

The Yemenis I met cut across social classes and regions, but were overwhelmingly welcoming and friendly toward Americans. In my research on Islamist political parties in Yemen and Jordan, I talked to hundreds of self-described Islamists. I spoke to people in the larger cities, the smaller towns, and in rural areas. We spent long hours talking about Islam and debating the contemporary political problems facing Yemen, the United States, and the world. In 1995 we spoke extensively about race and class in America as Yemenis watched the O.J. Simpson trial on CNN International. I often marveled at the knowledge Yemenis had of the U.S. political system; I wondered if most Americans had comparable knowledge of any other country at all. I was welcomed into homes and shared holidays with families.

What strikes me now is how most Islamists saw jihadi groups as having no place in Yemeni politics. There were jihadis in Yemen, of course, primarily the “Afghan Arabs” who had returned from fighting abroad in Afghanistan and other theaters of jihad and faced difficulties reassimilating. Islamists donning mustaches complained about Taliban proclamations that adult male Muslims must sport a beard at least a fist long. They also complained of the Saudi-sponsored “scientific institutes” that taught the super-conservative Wahhabi take on Islam. Salih had even enjoined these extremists to launch deadly attacks against Southern socialists in the first years after unification. Most of the individuals influenced by these trends eventually found their way into al-Qaida circles.

But they were relatively few. Al-Qaida found little success in attracting Yemenis who were not already drawn to jihadi ideas. The al-Qaida recruiting pitch of attacking foreign powers inside of Yemen simply rang hollow. Even the 2000 attack upon USS Cole — a warship docked in Aden — was not widely viewed as the legitimate targeting of a foreign military power intervening in Yemeni politics. Al-Qaida had to resort to extremist tactics precisely because its ideas did not attract a following significant enough to spark a popular mobilization.

For al-Qaida, the drone program is a gift from the heavens. Its recruiting narrative exploits common misperceptions of American omnipotence, offering an alternative route to justice and empowerment. Regardless of American perceptions about the legitimacy or efficacy of the attacks, what Yemeni could now deny that the United States is waging an undeclared war on Yemen?

Most recently, this narrative of direct U.S. intervention has been further substantiated by U.S. material and intelligence support for the Saudi-led military campaign aimed at the return to power of the unpopular and exiled-President Abed Rabbo Mansour Hadi. Photographs of spent U.S.-made cluster bombs are widely circulated. Nor have drone attacks ceased; alongside the often indiscriminate Saudi-led bombing, American drones continue their campaign of targeted assassination. 

One might think that the Saudi attacks would not help al-Qaida, but it is contributing to al-Qaida’s growth in Yemen. The indiscriminate targeting of the Saudi-led campaign undermines any sense of security, let alone Yemeni sovereignty. And AQAP-controlled areas like the port of Mukalla are not being targeted by Saudi or Gulf troops at all. The United States aims to take up the job of targeting AQAP while the Saudi-led (and U.S.-backed) forces focus on defeating the Houthis and restoring Hadi to power. But the overall situation is one in which those multiple interventions in Yemen are creating an environment in which al-Qaida is beginning to appeal in ways it never had before.

For al-Qaida, the drone program is a gift from the heavens. Its recruiting narrative exploits common misperceptions of American omnipotence, offering an alternative route to justice and empowerment.

For these reasons, the U.S. use of drones to kill even carefully identified AQAP leaders in Yemen is counterproductive: it gives resonance to the claims of the very group it seeks to destroy. It provides evidence that al-Qaida’s claims and strategies are justified and that Yemenis cannot count on the state to protect them from threats foreign and domestic.

U.S. officials have argued that the drone program has not been used as a recruiting device for al-Qaida. But it is hard to ignore the evidence to the contrary, from counterinsurgency experts who have worked for the U.S. government to Yemeni voices like Farea Muslimi.

It’s not just that drone strikes make al-Qaida recruiting easier, true as that probably is, but that they broaden the social space in which al-Qaida can function. America does not need to win the “hearts and minds” of Yemenis in the service of some grand U.S. project in the region. But if America wants to weaken al-Qaida in Yemen, it needs at a minimum to stop pursuing policies that are bound to enrage and embitter Yemenis who might otherwise be neutral. 

There is an old saying that when the only tool you have is a hammer, everything starts to look like a nail. The U.S. military — let alone its drones — is not the only tool on which the United States can rely. But when the measure of success is as narrow as the killing of a specific person, the tool gets used with increasing frequency. Indeed, drone strikes have significantly expanded under the Obama administration.

It is crucial to see the bigger picture, the one in which long-time Yemeni friends tell me of growing anti-U.S. sentiment where there was previously very little. Public opinion toward America has clearly deteriorated over the past decade, and to reverse it may take much longer. But the use of drones to kill people deemed enemies of the United States, along with the Saudi-led war against the Houthis, is expanding the spaces in which al-Qaida is able to function.  

The death of Afghan Taliban leader Mullah Mansour in an American drone strike is a significant but not fatal blow to both the Taliban and their Pakistani Army patrons.

The critical question Afghans and Pakistanis are asking is whether this is a one-off or the beginning of a more aggressive American approach to fighting the war in Afghanistan.

Mullah Mansour became the Taliban's leader last year after it was revealed his predecessor, Mullah Omar, the founder of the Taliban, had been dead for two years from unknown causes.

Mullah Omar's death in a Pakistani hospital in Karachi had been covered up for two years by the Pakistani Army's intelligence service, the Inter Services Intelligence Directorate or ISI, and the cover-up allowed the ISI to manipulate the Taliban very effectively behind the scene. Mullah Mansour was the ISI's handpicked successor.

There was resistance to his selection by some Taliban commanders, but the ISI forced them to acquiesce.

Since the fall of Kabul to American and allied forces after 9/11, the Taliban leadership has made its headquarters in Quetta, the capital of Baluchistan province in Pakistan.

For 15 years the Quetta Shura, as the assembly of leaders is known, has been protected by the ISI in its Pakistani safe haven where it is free to plan operations, conduct training, raise money and prepare terrorist attacks to strike American, NATO and Afghan targets in Kabul and elsewhere. While drones pummeled Al Qaeda targets elsewhere in Pakistan, the Taliban leaders were immune.

So this operation is unprecedented, the first ever effort to decapitate the Afghan Taliban. Mullah Mansour apparently was killed in Baluchistan very close to the Afghan border. He pressed his luck too far it appears. It's too soon to know the details of how he was found, but he was likely visiting front-line commanders.

The ISI will find a successor. They will work with the powerful Haqqani network, inside the Taliban, which has its own sanctuary in Peshawar Pakistan. The challenge will be to hold together the fractious movement, especially as the so-called Islamic State (ISIS) is trying to rally dissidents to its cause and create an Islamic State Vilayet, or province, in Afghanistan. The ISI and the Haqqanis are prepared to be ruthless to keep control of the Taliban.

The elected Pakistani government led by Prime Minister Nawaz Sharif has been trying to persuade Mullah Mansour and the Quetta Shura to join in peace talks with the Afghan government, which is led by President Ashraf Ghani. The US and China have encouraged the political process. But Sharif has no power over the Pakistani military and its ISI minions.

Indeed, now that Prime Minister Sharif is engulfed in a scandal caused by the Panama papers, his goal is simply to survive in office, and some Pakistani political commentators expect the army to oust Nawaz Sharif in a soft coup this summer. The Afghan peace talks are not likely to get going as long as the army calls the shots in Pakistan.

The killing of Mansour in an unprecedented operation has produced elation in the Afghan security forces, who hope it does it actually does mark the start of more aggressive attacks against the safe havens in Pakistan. But that's probably a misplaced hope. A discreet operation in the border region is not the equivalent of hitting targets deeper inside Pakistani territory.

Inevitably, the attack will be another blow to U.S.-Pakistan relations, even if both Washington and Islamabad try to paper it over. The U.S. Congress, after years of passively accepting Pakistani duplicity, has become much less willing to fund arms deals and aid to the Pakistani army. A recent administration proposal to sell F16 jets to the Pakistani military at sweetheart prices has been killed, wisely, on The Hill.

The next U.S. president will confront a complex and worrisome challenge in Afghanistan and Pakistan. It is not quite as bad as the disaster President Barack Obama inherited eight years ago, but it is one of the toughest foreign policy issues the next team will face. What do the candidates think they can do about it? It's not too early to start pressing them for answers.

This piece was originally published by The Daily Beast.

An American drone strike that killed leader of the Afghan Taliban Mullah Akhtar Mohammed Mansour may seem like a fillip for the United States’ ally, the embattled government of Afghanistan’s President Ashraf Ghani. But as Vanda Felbab-Brown writes in a new op-ed for The New York Times, it is unlikely to improve Kabul’s immediate national security problems—and may create more difficulties than it solves.

The White House has argued that because Mansour became opposed to peace talks with the Afghan government, removing him became necessary to facilitate new talks. Yet, as Vanda writes in the op-ed, “the notion that the United States can drone-strike its way through the leadership of the Afghan Taliban until it finds an acceptable interlocutor seems optimistic, at best.”

[T]he notion that the United States can drone-strike its way through the leadership of the Afghan Taliban until it finds an acceptable interlocutor seems optimistic, at best.

Mullah Mansour's death does not inevitably translate into substantial weakening of the Taliban's operational capacity or a reprieve from what is shaping up to be a bloody summer in Afghanistan. Any fragmentation of the Taliban to come does not ipso facto imply stronger Afghan security forces or a reduction of violent conflict. Even if Mansour's demise eventually turns out to be an inflection point in the conflict and the Taliban does seriously fragment, such an outcome may only add complexity to the conflict. A lot of other factors, including crucially Afghan politics, influence the capacity of the Afghan security forces and their battlefield performance.

Nor will Mansour’s death motivate the Taliban to start negotiating. That did not happen when it was revealed last July’s the group’s previous leader and founder, Mullah Mohammad Omar, had died in 2013. To the contrary, the Taliban’s subsequent military push has been its strongest in a decade—with its most violent faction, the Haqqani network, striking the heart of Kabul. Mansour had empowered the violent Haqqanis following Omar’s death as a means to reconsolidate the Taliban, and their continued presence portends future violence. Mansour's successor, Mawlawi Haibatullah Akhundzada, the Taliban’s former minister of justice who loved to issue execution orders, is unlikely to be in a position to negotiate (if he even wants to) for a considerable time as he seeks to gain control and create legitimacy within the movement.

The United States has sent a strong signal to Pakistan, which continues to deny the presence of the Afghan Taliban and the Haqqani network within its borders. Motivated by a fear of provoking the groups against itself, Pakistan continues to show no willingness to take them on, despite the conditions on U.S. aid.

Disrupting the group’s leadership by drone-strike decapitation is tempting militarily. But it can be too blunt an instrument, since negotiations and reconciliation ultimately depend on political processes. In decapitation targeting, the U.S. leadership must think critically about whether the likely successor will be better or worse for the counterinsurgency endgame.