General FI

Why financial inclusion?

In order to provide greater financial access for the poor.

Financial inclusion aims at drawing the "unbanked" population into the formal financial systems so that they have the opportunity to access financial services ranging from savings, payments, and transfers to credit and insurance.

Efforts to document the financial lives of the poor show that a key challenge facing low-income households is that earning below the international poverty line of on average US$2 a day in practice means that on some days households earn less, and on other days they earn more.  To deal with this highly variable household cash flow , households engage in active money management to try and make ends meet each day and plan for the next.  This money management aims to smooth consumption and reduce vulnerability to various shocks, such as health risks, as well as to cope with major life cycle events.  These households rely on a variety of informal financial instruments in the daily management of their cash flow and risks, and in their endeavors to build assets through saving.

The emergence of formal and semi-formal financial services to meet some of the needs of poor households is changing the landscape of the financial system.  Over the past few years, microfinance has undergone rapid transformation as its links to the formal financial system have been expanded through linkages to the capital markets and the graduation of mature microfinance institutions into intermediaries that accent savings. Growing theoretical and empirical evidence suggests that financial systems that serve low-income people promote pro-poor growth.  Lack of access to finance, therefore, adversely affects growth and poverty alleviation.  It makes it more difficult for the poor to accumulate savings and build assets to protect against risks, as well as to invest in income-generating projects.  As a result, the interest in financial sector development has increasingly focused on the factors that determine not only the depth but also the breadth of access, in a move toward inclusive financial systems.

The unbanked

Despite the rapid growth of microfinance over the past two decades, around 2.5 billion people -- more than half the world’s adult population -- still lack access to credit, insurance, savings accounts, and other formal financial services.

The opportunity

The recent global financial crisis has gained momentum for fundamental regulatory change.

Many of the smartest policies for increasing access to formal financial services have been innovated in developing countries – those who live with the challenges of financial exclusion every day. As demonstrated by mobile money transfer and payment services in Kenya and the Philippines, the use of correspondents to deliver banking services in Brazil, and the accomplishments of Indonesia and Thailand in reforming state banks, developing countries hold the solutions to unleash the power of greater financial access. Yet knowledge of these solutions is scattered in pockets around the globe.

Peer-to-peer learning and networking can help spread these innovations more widely and enable other developing countries to scale up successful financial inclusion policies.

The challenge

Physical infrastructure and lack of institutional support head the list of challenges.

It is well documented that access to savings accounts, insurance and other financial services is crucial to allow poor people to invest in their homes and small businesses, weather the impact of economic shocks, build up savings as financial cushions against unexpected events, and manage uneven cash flows and seasonal incomes. Yet, an estimated 2.5 billion people – over half the world’s adult population – do not have access to formal financial services, representing a huge untapped potential for economic and social development. 2.2 billion of these unserved adults live in Africa, Asia Latin America, and the Middle East.

There are multiple barriers to expanding financial inclusion that vary from country to country. Key barriers include the high transaction costs of delivering small-scale financial services across large geographic distances, infrastructure constraints such as lack of roads, fixed telephone lines, and ID systems, and insufficient information amongst both providers and consumers. The lack of data on the state of financial inclusion is another main constraint, both to advance financial inclusion and to evaluate the impact of policies aimed at improving access.

The role of policy

Research shows that policy plays a key role in creating an enabling environment.

As the benefits of financial inclusion for individual welfare, poverty alleviation, and economic growth are recognized, policymakers are including access to formal financial services for the poor on the agenda and as a policy goal. Government policy towards financial inclusion cuts across policymaking bodies and can be used to create an enabling policy environment for the provision of financial services to the poor, to actively promote both the demand for and the supply of financial services to the unbanked, and even to provide financial services both directly and indirectly.

Amongst the solutions used in developing countries to increase financial access, AFI has identified solutions that have demonstrated particular success in reaching the unbanked and where a variety of policies have played a role in unleashing their potential. The growth of agent banking, mobile phone financial services, formalized microsavings, state institutions, and consumer protection can increase financial inclusion with appropriate policies in place.