Financial Inclusion - Why It Matters
Imagine you have no access to any bank accounts, credit cards, overdrafts, loans, mortgages and insurance. You would need to save up for a car, your washing machine, TV, camera, smartphone, wedding, starting a business, etc. You would also have to build up a good buffer for any unforeseen circumstances. Of course, you would live in constant fear that what little savings you have, would get stolen. Since you live in a country with high inflation, the prized stove you are saving up for, gets dearer each month. You could see yourself having to turn to your wider family or friends for financial support – and they would turn to you. Of course, payments such as school fees, rent, electricity, etc. would all have to be made in person, taking time and/or incurring transport costs. For individuals, life without access to bank accounts and loans is very limiting and often stressful. Growing a business under these circumstances is very tough indeed!
In simple terms
CGAP describes financial inclusion as:
“Financial inclusion efforts seek to ensure that all households and businesses, regardless of income level, have access to and can effectively use the appropriate financial services they need to improve their lives."
In general, financial inclusion means affordable access to all the following:
payments (cashless transactions)
Not just a personal problem...
On a macro scale, economic growth and social progress are hampered when large parts of a population lack access to financial services. Following a review of relevant literature body, CGAP's focus note 92 concludes:
“the degree of financial intermediation is not only positively correlated with growth and employment, but it is generally believed to causally impact growth.”
However, it also warns of a generalisation as some conditions, such as weak institutional frameworks (financial regulation) or high inflation constrain this impact. While benefits of deeper financial intermediation initially widens the income-gap between rich and poor, cross-country studies have shown that higher financial inclusion reduces income inequality in the long-term.
A study of 185000 households in Kenya mentioned in the World Bank 2017 Findex report revealed a major impact of mobile money services on income-earning potential and the reduction of extreme poverty by 22%. Digital financial services enables poor households to receive payments from relatives and reduces the transfer costs. Increased access to financial services improve savings as well as increasing spending on more nutritious food and education.
This seems to be related to the CGAP authors reference of a World Bank study suggesting that better financial inclusion can bring higher financial stability as more savings accounts broaden the funding base for banks. Lastly, switching the processing of social benefit programmes from cash to digital payments generally reduces transactions costs and corruption. Lower transaction costs also benefit rolling out of development initiatives and increases the viability of low-cost solutions (collection of small payments) such as solar power and associated appliances.
Investment and private consumption, key drivers of economic growth, are directly correlated to the degree of financial inclusion. Therefore, it is very high on the agenda of most governments. The next post in this 3-part series looks at how it is measured and how much progress has been made so far.
CGAP, Focus Note 92, April 2014, Financial Inclusion and Development: Recent Impact Evidence, Robert Cull, Tilman Ehrbeck, and Nina Holle
Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. Washington, DC: World Bank.