Financial Inclusion - Going Beyond Microfinance

Microfinance, which has its roots in microcredit, has evolved in recent decades. In the 1970s, social innovators introduced the concept that small amounts of short-term capital (microcredit) can help poor people in the informal economy engage in productive activities and grow their way out of poverty.

Experience and research revealed the limits of microcredit as an anti-poverty tool. This led to the recognition that poor households need access to a full range of financial services, not only to generate income, but also to build assets, smooth consumption, and manage risks. The term ‘microfinance’ thus has evolved to refer to a broad set of financial services tailored to fit the needs of poor individuals.

Enter the term, ‘financial inclusion’. Financial inclusion has a wider meaning, and it encompasses a wider range of players and institutions. It refers to individuals and businesses having the opportunity to access and the ability to use a diverse range of appropriate financial services that are responsibly and sustainably provided by formal financial institutions.

Whereas microfinance advocates generally work with the microfinance institutions that grew out of the microcredit revolution serving the poor, financial inclusion advocates more often work with a broad range of providers to achieve their goals, including those that do not necessarily focus exclusively on poor people. Both the microfinance sector and the global financial inclusion agenda recognize the importance of building consumer financial capabilities and consumer protection policies that account for the conditions and constraints of poor families in the informal economy.

Financial inclusion is the pursuit of making financial services accessible at affordable costs to all individuals and businesses, regardless of net worth and size, respectively. Financial inclusion strives to address and present solutions to the constraints that exclude people from participating in the financial sector.

Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.

Being able to have access to a transaction account is a first step toward broader financial inclusion since a transaction account allows people to store money, and send and receive payments. A transaction account serves as a gateway to other financial services, which is why ensuring that people worldwide can have access to a transaction account is the focus of the World Bank Group’s Universal Financial Access 2020 initiative.

The financial sector is continually coming up with new and seamless ways to provide services to the global population. The increase in the use of technology in the financial industry (fintech) seems to have filled the void of inaccessibility to financial services. The advent of fintech has created a way for all entities to have access to all financial tools and services at reasonable costs.

Examples of fintech developments that have increasingly been embraced by financial users include crowdfunding, digital payments, peer-to-peer (P2P) or social lending, and insurance telematics. While these innovative services have disrupted the financial world by including more participants in the money sector, there is still an untapped portion of the world population that remain unbanked or underbanked.

With the rise and rise of fintech, financial inclusion seeks to promote the betterment of the world's population through the use of financial services and tools available in an increasingly digital-based economy.

The World Bank’s Universal Financial Access 2020 initiative is taking measures to ensure that the unbanked community has access to traditional platforms like checking accounts by 2020. People who have basic transaction accounts are classified as the underbanked, which refers to adults who have secured the traditional tools for conducting transactions (such as a bank account), but who are not privy to the digital incorporation of these transactions (such as digital payments).

With little access to banks, especially in rural areas, underbanked users mostly carry out transactions in cash or checks, making them vulnerable to theft and street frauds. Even access to bank locations for conducting transactions like cash deposit, check cashing, money order, and funds transfer may come at high costs in terms of banking fees.

Fintech, telecommunication, and financial institutions are working hand-in-hand to create mobile payment and microlending facilities for financially underbanked users.

The United Nations Sustainable Development Goals (SDGs) represent the shared aspirations of countries and development actors and go well beyond poverty alleviation. They incorporate the need to promote prosperity and people’s well-being, reduce inequality and protect the environment. While the SDGs do not identify financial inclusion as an independent objective, they acknowledge that it is central to achieving many of them. In fact, financial inclusion is mentioned in seven of the SDGs, and there are four financial inclusion indicators to track progress.

Globally, about 1.7 billion adults remain unbanked— without an account at a financial institution or through a mobile money provider, according to the latest Global Findex. In 2014, that number was 2 billion. Because account ownership is nearly universal in high-income economies, virtually all unbanked adults live in developing economies.

Although few people in developing countries have access to a bank, many have mobile phones. This opens up a whole new possibility for the unbanked to access mobile money accounts and other text- or app-based financial accounts. Furthermore, having access to the internet through their phones helps some people overcome some of the key barriers to financial access and provision: long distance to a financial institution and high cost of providing services.

In addition, rapidly advancing technologies are supporting innovative business models. Big tech platforms are increasingly entering the financial services space through startups, presenting a new opportunity for the unbanked to be financially included in developing countries.

The benefits of financial inclusion extend beyond individuals and households. Shifting cash payments to digital delivery -- whether it is social welfare transfers made by governments to citizens; or people paying their taxes, fees and bills to governments; or payments made between people - can improve their efficiency and reduce the amount of money lost to corruption.

Digital payments can also provide the backbone for new types of delivery for basic services, such as solar energy and water particularly to remote areas where national grids are too expensive. Digital payments also support education delivery. As such, global leaders are increasingly recognizing the role that financial inclusion can play in helping the world achieve many of the Sustainable Development Goals.

Researchers are continuing their work to identify the ways that financial inclusion affects the lives of poor people, including the potential for negative impacts such as abusive lending from lack of transparency and overly burdensome debt loads, and ways to limit and manage those risks.

Financial products for agriculture, health insurance, and other areas are inspiring scalable solutions through careful designs that meet client needs within their local contexts. Governments are encouraging these and other new models through policies that encourage innovation, partnership, and responsible finance.  At the same time, new data efforts are enabling countries and service providers to know more about unbanked markets and client needs, and to measure progress against nationally determined targets.

According to FINCA, when poor families have access to financial services, they have the opportunity to earn more, build their assets, and cushion themselves against external shocks. FINCA states that there are 5 ways financial inclusion changes lives. These are:  

-         Household income

-         Build assets

-         Increase security

-         Reduce vulnerability

-         Create jobs

Financial inclusion is a supporter and accelerator of economic growth, job creation and development.  Affordable access to and use of financial services helps families and small business owners generate income, manage irregular cash flow, invest in opportunities, strengthen resilience to downturns, and work their way out of poverty.

A purpose of financial inclusion is to help people and communities meet basic needs such as nutritious food, clean water, housing, education, healthcare, and more. An inclusive financial system is essential infrastructure in every country.

While financial inclusion alone cannot bring people out of poverty, it can help people build better lives. It can allow individuals to start businesses and help small businesses grow into larger ones.  Financial services can help small farmers tap into the formal economic system for a two-way flow of information and income. Entire economies can grow more quickly and in ways more favorable to poor people.