The road to monetary and financial stability goes through financial inclusion

There have been easier times to be a central banker. A global pandemic, armed conflicts, inflation and a cost of living crisis, supply chain disruption, mass migration, and the impact of climate change have created a global “polycrisis“. Those responsible for keeping prices stable, maximizing employment and enabling economic growth have a lot on their plate 

In 2008, when central banks and financial regulators from the developing world came together to form the Alliance for Financial Inclusion (AFI), the organisation I lead, the world was dealing with a global financial crisis. AFI members saw financial inclusion as an opportunity to strengthen central banks’ core objectives of delivering monetary and financial stability – as a complementary, rather than a competing, priority. 

Today, it is broadly accepted that inclusivity is key for economic and social development, and that social wellbeing (of which financial inclusion is a key element) is too important an issue for central banks not to address, particularly in the Global South.

A decade of impressive progress… 

For the last fifteen years, countries around the world have put major efforts into financial inclusion policy and regulatory reforms. This has included the widespread adoption of national financial inclusion strategies as well as transformative policies on digitization, Gender Inclusive Finance and Inclusive Green Finance.   

And the results speak for themselves: the World Bank reports that between 2011 and 2021, the percentage of adults with an account at a bank or regulated institution such as a credit union or mobile money service provider increased by half, from 51% to 76%. 

Global account ownership, 2011-2021

… which is now under threat 

The current polycrisis, and particularly the resurgence of global inflation, is putting strong pressures on central banks to adopt a narrower focus on ensuring price and financial stability. While these are indeed important policy priorities to protect living standards, and to ensure trust and confidence in the financial system, we now face the risk of financial inclusion being deprioritized or even crowded out from the policy agenda. 

As such, we need more than ever to reinforce the message that financial inclusion is a complementary, not a competing, objective to monetary and financial stability.

What do we mean by financial inclusion being ‘complementary’? 

Financial inclusion increases the retail deposit base and the effectiveness of monetary policy transmission, which helps financial markets become more efficient, and enhances monetary stability. Financial inclusion policies that bring about reduced transaction costs, for example interoperable digital payments, lead to better alignment between supply of, and demand for, capital. 

Financial inclusion also reduces dependencies on foreign capital, thereby strengthening the domestic financial sector. It creates a more stable and reliable funding base by drawing informal savings into the system, and by diversifying the depositor base that supplies these funds, lowering risks. 

The events of the last fifteen years have made clear that when times are tough, financial inclusion must be kept high on the policy agenda, even when (indeed, especially when) policymakers are addressing macroeconomic imbalances or financial market stability. 

The COVID-19 pandemic emphasized how financial inclusion plays an important role in crisis mitigation, economic recovery and resilience building. Digital financial inclusion became an essential lifeline for vulnerable individuals and communities to receive social transfers and remittances. 

Today, more than ever, the world needs financial inclusion 

Currently, 1.4 billion adults remain outside of the formal financial system, including many of the most vulnerable individuals and communities. If we neglect financial inclusion now, it could have a tremendous negative impact on disadvantaged groups: women, youth, the elderly, persons with disabilities, refugees, and many others.  

It is therefore vital to maintain momentum and guard against complacency. Unless we retain financial inclusion as a key policy priority, countries risk losing the impressive gains they have worked so hard to achieve.