Financial inclusion refers to the timely delivery of financial services to disadvantaged sections of society. Recent research shows that a well-functioning and inclusive financial system is linked to faster and equitable growth.
This simple definition encompasses two primary areas. Firstly, financial inclusion refers to the poor having access to a range of formal financial services, from simple credit and savings services to the more complicated such as insurance and pensions. Secondly, financial inclusion implies that disadvantaged customers have access to more than one financial services provider, which ensures a variety of competitive options.
The Committee on Financial Inclusion defines financial inclusion as “…ensuring access to financial services and timely, adequate credit where needed, to vulnerable groups such as weaker sections and low income groups, at an affordable cost”. The wording reveals a bias towards credit. In fact, until recently, the discussion on financial inclusion in policy circles tended to revolve around the extension of institutional credit at the expense of providing savings, in spite of evidence that poor people save.
Measures of Financial Inclusion
While in developed nations almost everyone has access to banking services, in less developed countries, access is often limited to small segments of the population. Further, as one might expect, levels of income inequality are negatively correlated with levels of financial inclusion .
Thus, the egalitarian Northern European countries like Sweden and Denmark– States with low levels of inequality–have extremely high levels of financial inclusion while mid-level egalitarian countries like the UK and the USA show inclusion levels of 91% and 88%,
respectively. Finally, high levels of inequality, such as those which persist in South Africa and Tanzania, correspond to higher levels of exclusion.
Is Financial Inclusion Important?
Thus, the question becomes, does a well-developed financial system serve the poor?
There are, in fact, ample justification and evidence indicating that a well developed financial system can be an effective poverty alleviation instrument. Firstly, there are large costs to small and poor entrepreneurs for the market imperfections in a poorly developed financial system. These barriers include informational asymmetries, transaction costs, and contract implementation costs, lack of collateral, credit histories, and contacts. For these entrepreneurs, broad access to financial services would smoothen project financing, positively impacting growth and poverty alleviation.
Studies also show that small firms in countries with greater outreach and access face lower financing obstacles and grow at a higher rate. Access to finance is also an important incentive for new ideas and technologies. In addition, a strong financial system encourages expansion in the market and competition for existing firms. It ensures that poor households and small entrepreneurs need not depend upon middlemen.
Child labour, which is positively correlated with poverty, has been found to be influenced by the financial inclusiveness of a country. This could be because poor households in countries that have well-developed financial systems in place are less vulnerable to economic shocks. Finally, provision of financial services to poor people need not only be for increasing income, empowering women, or starting small businesses – it may simply aim to help them to manage better whatsoever, the little money they already have.
Rural households may feel intimidated by banks and develop a belief that banks are intended for more educated and richer individuals. This self-exclusion by low-income households may be as important a cause for exclusion as direct exclusion by banks. Lastly, banks have historically promoted banking transactions specifically at bank branches. As prior microfinance practice has shown, poor clients, especially in rural areas, may respond better to ‘doorstep’ banking, that is banking which takes place at a location which is both convenient and comfortable, usually the client’s home. Research also points out that currently banks do not have the option to recruit local staff. This might allow the bank staff to better respond to client needs.
