Financial inclusion contributes to economic development while fostering greater income equality and more inclusive growth. The purpose of this post is to make an overview of the concept and its importance, especially in emerging markets. It also explains how the development of fintech can help to expand access to financial services.
Considered the building block both for reducing poverty, for economic growth and prosperity, financial inclusion definition refers to the process of providing disadvantaged segments of the society with equal opportunities to access financial services.
In other words, both low-income individuals and companies can access in a timely manner affordable financial services and products that are accessible and fit their needs. These include bank accounts for usual transactions, payments, savings, credits, and insurances – all delivered in a sustainable and responsible way.
A transaction account (or checking account) serves as a gateway to other financial services. It facilitates daily life and helps both families and businesses plan everything – from current payments to short, medium, and long-term goals and solutions to face unexpected events.
As owners of bank accounts, people are more likely to use other financial products and services, such as:
- savings accounts to deal with unforeseen situations
- accessing loans for business expansion or purchase of goods, for investments in education and health
- contracting insurance services.
These are just a part of a wide variety of methods to improve the overall quality of life. They are also the main reason for which World Bank Group has committed in the Universal Financial Access 2020 Initiative to enable 1 billion people to have access to a transaction account.
What Is Financial Inclusion and When This Concept Appeared?
The term “financial inclusion” traces its roots to the late 1990s and early 2000s, as a direct result of identifying financial exclusion and its direct correlation to poverty. To improve the overall quality of life, the United Nations Capital Development Fund (UNCFD) promoted access to microcredit for the disadvantaged.
In the following years, the concept of microfinance became broader, and many organizations began to provide access to basic financial services, not just microcredit.
Starting with 2005, UNCFD has focused its strategy on accelerating and developing financial inclusion. Thus, the focus was on creating favorable environments for a wide range of retail financial service providers, both politically and legislatively.
As a result of all these initiatives, financial inclusion has a steadily increasing trend. According to the 2017 Global Findex database, 1.2 billion adults worldwide have gained access to an account since 2011, including 515 million since 2014. Today, 69% of adults have an account, with 7% more than in 2014 and 18% more than in 2011. In developing countries, this share has risen from 54% to 63%.
However, close to one-third of adults worldwide – 1.7 billion – are still unbanked, according to the latest Findex data.
This means they don’t have an account at a financial institution or through a mobile money provider. As account ownership is almost universal in high-income economies, virtually all unbanked adults live in developing economies and half of them live in just seven countries.
Also, nearly half of unbanked people include women, poor households in rural areas or out of the workforce.
Why Is Financial Inclusion Important?
For people, lacking access to basic financial services it means they:
- don’t have any safe place for saving money;
- can be easy targets for unscrupulous creditors;
- can’t build credit history;
- have little to no options to receive money at low cost — whether it’s about customer payments or remittances from relatives working abroad;
- excepting the few cases in which they can pay cash, people have no other reliable, secure, and easy way to make payments to providers, for medical services, or education.
In this context, even if financial inclusion is not explicitly targeted, it has been identified as an activator for 7 of the 17 Sustainable Development Goals (SDGs). Adopted by all Member States of the United Nations, SDGs are a blueprint of achieving a more sustainable and better future for all people. It is made in a global partnership of all developed and developing countries.
They address the global challenges humankind faces and recognize that ending poverty and other deprivations must go hand-in-hand with strategies for improving health and education, reducing inequality, and spurring economic growth – all while tackling climate changes and protecting the environment. The seven Sustainable Development Goals interacting with financial inclusion are:
- eradicating poverty (SDG 1)
- ending hunger, achieving food security, and promoting sustainable agriculture (SDG 2)
- having good health and well-being (SDG 3)
- achieving gender equality and economic empowerment of women (SDG 5)
- promoting economic growth and creating quality jobs (SDG 8)
- supporting industry, innovation, and infrastructure (SDG 9)
- reduce inequalities by supporting the marginalized and disadvantaged (SDG 10).
Also, the G20 committed to advance financial inclusion worldwide and reaffirmed its commitment to implement the G20 High-Level Principles for Digital Financial Inclusion.
Financial Inclusion in Emerging Markets
In many emerging markets, gaps in the banking system have limited business development and hampered overall economic growth. For example, many traditional banks are reluctant to offer their financial products and services to poor people as well as small companies and micro-businesses.
Some statistic data related to the emerging markets show that:
- with 980 million women without a bank account, they represent 56% of all unbanked adults globally, with 60% in China and India, 65% in Bangladesh, 56% in Colombia;
- nearly 25% of unbanked adults live in the poorest 20% of households within their economy;
- 30% of unbanked adults are between 15 and 24 years old;
- 50% of unbanked adults living in emerging economies have primary education or less. This share is even higher in some economies, such as Ethiopia (92%), Tanzania (86%), and Pakistan (75%).
Before Covid-19 emerged, the World Bank estimated that the global unbanked population would fall to 10% by 2022. But COVID-19 is predicted to plunge 420 million people into extreme poverty and risks reversing the improvement in living standards by three decades.
This will be a significant setback to achieving the UN’s 2030 Sustainable Development Goals.
But where mainstream financial institutions don’t meet the needs of a large part of the population, innovation and technology are stepping in to fill the gap.
What Has Been Done Until Now to Boost the Financial Inclusion?
Since 2010, more than 55 countries have made commitments to financial inclusion. And more than 60 have either launched or are developing a national strategy.
Countries that have achieved the most progress toward financial inclusion adopted one or more strategies, such as:
- policies delivered at scale, India being a great example. In 2010, the Indian government started Aadhaar – a biometric identification system that was integrated with two other major pillars of the reform: mobile communication and financial access. Known under the name of JAM – Jan Dhan (financial inclusion), Aadhaar (biometric ID), and mobile connections – this trinity covers more than 1.2 billion residents, meaning near 95% of the Indian population and approximately all adults;
- leveraging government payments – according to Global Findex data, 140 million account owners opened their first account to receive government transfers and almost 120 million adults opened their first account to receive public sector pensions;
- taking a strategic approach by developing a national financial inclusion strategy (NFIS) which brings together diverse stakeholders including financial regulators, telecommunications, competition, and education ministries;
- have paid attention to consumer protection while implementing sustainable and responsible financial products and services.
To implement the online financial services, the emerging economies created the needed legal and financial framework, but also facilitated the building of the physical infrastructure to implement these policies.
As result, the share of adults using digital payments rose by 12%, to 44% percent in 2017. In Sub-Saharan Africa, mobile money account ownership grew from 12% to 21%, while that share reached 55% in Kenya, 68% in China, and 62% in Thailand.
Still, despite a general increase in the use of digital payments, the gender gap remains unchanged since 2014, at 5%.
The penetration of mobile payments in emerging economies encouraged traditional banks to adopt innovative solutions. The efforts, innovative thinking, and dedication of a few fintech players to act on the emerging markets have altered the opportunities for both businesses and private people. As a result of advanced technology, traditional banking players have somehow been forced to innovate and bank more inclusively.
This way, the disadvantaged can start to access additional financial products, such as microlending and peer-to-peer lending (P2P).
According to Research and Markets, the global P2P lending market was valued at $26 billion in 2015 and is estimated to reach $460 billion by 2022, having an annual rate of growth of 51.5%.
How the Online Investing Platforms Contribute to Financial Inclusion
Although having an account is the basic concept and represents the first step towards financial inclusion, the real benefits come from using that account. They start with making and receiving regular payments, and continues for example with taking a loan, saving money, or investing.
In the past two decades, private savings as a share of GDP have increased significantly in many emerging Asian economies (particularly in China), have fluctuated widely in Latin America, and fallen in many poor African countries.
However, more than 1 billion potential investors don’t have or have limited access to professional and secure saving and investment options.
In this context, blockchain-based investment platforms like SWIC represent a great opportunity, especially for small investors that are usually ignored as a target group.
There are a few reasons to consider this:
- due to usage of the mobile technology, both unbanked and underbanked people can secure their savings and access professional investments;
- once on the platform, people have access to free financial education (e.g., SWIC Academy);
- by acquiring basic knowledge and information and having access to the financial literature, users are more able to set and also achieve long-term investment/saving goals;
- the platform offers both providers and users the opportunity to expand into new markets worldwide.
In the long run, all this leads to financial stability both for private people and businesses and a wider financial inclusion.