Financial Inclusion – True and Equitable

By Ghiyazuddin Ali Mohammad, Senior Policy Manager, Digital Financial Services, AFI

“We are caught in an inescapable network of mutuality, tied to a single garment of destiny. Whatever affects one directly, affects all indirectly”  – Martin Luther King Jr, Letter from Birmingham Jail

The deaths of George Floyd and Breonna Taylor that sparked protests and civil unrest in the United States and beyond offer a grave reminder that discrimination based on race, religion and gender remains a reality today, and stand exposed amid the ongoing COVID-19 crisis that is disproportionately devastating minority and marginalized groups.

Generations of systematic discrimination has led to gaping disparities in income and wealth. While the median net worth of a white household has risen steadily to USD171,000, this is roughly 10 times that of black households, which also lag behind in most economic indicators, including income, home ownership, small business ownership and cash in hand to weather economic shocks.

In my home country of India, marginalized caste groups earn 20-30 percent less than the national average, while Muslims and Buddhists have the lowest asset ownership among all religious groups. In South Africa, the country with the highest income inequality in the world, 75 percent of the population is black and earn on average one third the monthly salaries of their white peers.

While it takes decades – if not longer – to eradicate deep-rooted societal prejudices, a good place to start is with fair and just policies, especially those that reduce economic inequality.

Here, financial inclusion plays a critical role. By providing opportunities to participate in formal financial services – especially minorities, women, elderly, disabled, youth and other marginalized sections of society – it builds resilience against persistent discrimination. By helping poor and vulnerable groups to save, invest and access credit, buffers are built against financial shocks and emergencies.

As a reflection of current social norms and contracts, implicit and explicit bias, the financial sector is neither neutral nor devoid of discriminatory practices. Therefore, we must ask ourselves, what can policymakers and financial service providers do to promote equal economic and financial opportunities, and contribute to equitable growth?

• Awareness and training: Training and sensitization workshops can raise awareness of underlying race relations and discrimination issues that, as humans, we are all blinded without realizing it. Training based on behavioral insight can raise awareness of sub-conscious biases and help reduce them. Training should target regulators, policymakers and financial service providers, including managers and staff who regular deal with customers, such as branch staff, digital financial services agents, call center and customer service staff.
• Diversity and inclusion – looking inwards: Regulators and financial service providers must proactively build diversity of race, gender and other minority groups within their workplace. Diverse perspectives help regulators tackle complex challenges to achieve stability, integrity, consumer protection and financial inclusion. The US Dodd Frank Act, for example, requires regulatory agencies to create offices that oversee institutional diversity, increase participation of minority and women-led businesses and work with regulated entities to improve diversity. Diversity is also good business. Studies have shown that companies with ethnically, culturally and gender diverse executive teams are more likely to outperform on industry-leading profitability, and that closing the gender gap in women’s access to financial products and services could unlock USD330 billion in global annual revenue.
• Building social safety nets: While providing access to formal financial services makes a protective net available, it must be complemented with additional safety measures such as insurance, targeted subsidies and cash transfers. This is especially prevalent now as COVID-19 disproportionately affects women- and other minority-owned businesses. As part of a national economic recovery plan, Malaysia plans to raise a MYR500 million (USD117 million) sukuk to finance women-owned microenterprises.

• Consumer protection and market conduct: Policymakers should encourage equal and respectful attitudes, behaviors and actions among financial service providers through moral suasion and regulatory mandates, such as equal access and opportunity. The US Equal Credit Opportunity Act makes it illegal for providers to deny access to credit on discriminatory grounds. Regulators must also ensure that there is no price discrimination in accessing financial products and services. A study of US banks showed that minimum opening deposits and checking account fees were significantly higher in communities of color. In Mozambique, financial services legislation prevents discrimination against any financial service consumer. As a general principle, it should be a consumer right to receive fair, honest and non-discriminatory treatment.

• Technology and bias: Increasing digitalization and data usage in delivering financial services can extend existing biases. Exclusion mean that vulnerable and marginalized populations leave limited data trails, translating into inappropriate and exclusionary predictive models that can be exacerbated if developers pass their implicit or subconscious bias into algorithms. Regulators must work with private sector players and broader stakeholders to promote the fair and ethical use of artificial intelligence and data in financial services. Singapore’s monetary authority has developed principles to promote the responsible use of artificial intelligence in the financial sector.

While there are many more measures that policymakers and stakeholders can take, there is an urgent need to promote equity, diversity and inclusion across the value chain from the communities that we serve to financial service providers, regulators and broader stakeholders. Regardless of where we come from, let the dignity and self-respect of marginalized groups be at the core of our endeavors. Now is the time to move from a human-centered to humanity-centered approach in financial inclusion.