An estimated 2 billion working-age adults – more than half of the world’s total adult population – do not have an account at a formal financial institution. Financial inclusion efforts seek to ensure that all households and businesses, regardless of income level, have access to and can effectively use the appropriate financial services they need to improve their lives.
Currently, the world’s poor live and work in what is known as the informal economy. Even though they have little money, they still save, borrow and manage day-to-day expenses. However, without access to a bank, savings account, debit card, insurance, or line of credit, for example, they must rely on informal means of managing money. This includes family and friends, cash-on-hand, pawn-brokers, moneylenders, or keeping it under the mattress. Sometimes these choices are insufficient, risky, expensive, and unpredictable.
Being included in the formal financial system helps people:
The benefits of financial inclusion are not only significant for individuals but for economies as well. Financial inclusion is linked to a country’s economic and social development, and plays a role in reducing extreme poverty. (See more on impact.)
Recent research indicates that financial inclusion is not only positively correlated with growth and employment, but it is generally believed to causally impact growth.
Poor people need many kinds of financial products and services, and a broad and growing range of groups work to reach them with savings, insurance, transfers, payments, and credit services.
Traditional providers of such services are banks (state-owned and private), microfinance institutions, credit unions, and cooperatives. In addition, other entities are using technology to develop new delivery methods to bring these services to the poor in rural or remote areas where traditional banks cannot reach. This includes mobile network operators, retailer networks, and postal networks.
Microfinance is the provision of financial services to low-income people.
The definition of microfinance, which has its roots in microcredit, has evolved in recent decades. In the 1970s, social innovators from the Global South introduced the concept that small amounts of short-term capital (microcredit) can help poor people in the informal economy engage in productive activities and grow their way out of poverty. The early success of microcredit demonstrated that poor families in the informal economy are valuable customers and that it is possible to serve them in large numbers in a sustainable way.
Over the past few decades, we learned that poor households need access to the full range of financial services to generate income, build assets, smooth consumption, and manage risks—financial services that a more limited microcredit model cannot provide. Now the term “microfinance” generally refers to a broad set of financial services tailored to fit the needs of poor individuals.
The global financial inclusion agenda recognizes these broader needs. It also recognizes the importance of financial literacy, building consumer financial capabilities, and for consumer protection policies that take the conditions and constraints of poor families in the informal economy into account.
Most poor people in developing countries still rely on physical delivery of cash to make payments or access financial services. This can be inconvenient and expensive for customers, who may have to travel hours to reach a bank or financial institution. It can also be expensive for financial services providers, who don’t have the infrastructure to serve customers in remote or rural areas. Mobile financial services provide a pathway to formal financial access in areas that physical banks cannot reach.
New financial service delivery models are emerging that leverage technology to deliver financial services in faster, cheaper and more convenient ways. The number of unique mobile subscribers has grown dramatically in the last decade, from about one billion in 2003 (just under one in six people) to 3.4 billion in 2013 (47 percent of people). As of August 2014, more than 7.1 billion mobile connections existed globally, and four out of five connections are in the developing world. New technology takes advantage of this mobile prevalence to make financial transactions more accessible and reliable. In many countries, such as Kenya, a person’s mobile phone is now in essence their bank account.
M-PESA, a service that allows for money transfers via a cell phone, is probably the most well-known application of mobile technology for financial services. Over two-thirds of Kenya’s adult population now uses the service to pay for every day expenses, such as taxis, utility bills or even individual purchases. M-PESA originated in Kenya, but as of July 2014, there were 246 additional mobile money services worldwide.
Although this is a promising area, much work is needed to increase the use of accounts. As of June 2013, only 30 percent of registered mobile money accounts globally had been used at least once in three months. This low use rate creates major challenges for the mobile money business model to work.
Governments support financial inclusion in at least three key areas:
Momentum is growing behind financial inclusion both globally and at the national level. Policy makers increasingly recognize that financial exclusion is a risk to political, social, and even financial stability, impeding economic advancement, and that financial inclusion presents an opportunity to improve lives. The G20 governments have embraced the challenge, putting financial inclusion on their development agenda in 2009 and launching the Global Platform for Financial Inclusion. Leaders from 50-plus developing and emerging market countries also have committed to advance financial inclusion domestically. This political tailwind, combined with continued business model innovations and an increasingly better understanding of how poor people use financial services, has set the stage for ultimately bringing to all poor households the financial services they need to improve their lives.
Financial Inclusion is inherently linked with financial stability, integrity and consumer protection, and inclusive financial systems can help governments achieve other development objectives.
An increasing body of evidence shows that appropriate financial services can help improve individual and household welfare and spur small enterprise activity. Different types of financial products can benefit poor people in different ways.
Research also shows that more inclusive financial markets are directly linked with economic growth and employment. Additionally, policymakers increasingly recognize that a financial market that reaches all citizens allows for more effective execution of other social policies and development priorities.
A variety of donors support financial inclusion efforts. They include: national governments; private foundations; bilateral donors, such as the United States Agency for International Development (USAID) and the Department for International Development (DFID); multilaterals, such as the United Nations and the World Bank; regional banks, such as the African Development Bank and the Asia Development Bank; and development finance institutions (DFIs), such as the International Finance Corporation (IFC) and KfW.
Over the past decade, there has been a dramatic shift in the focus of donors and DFIs from microcredit to the broader concept of financial inclusion. Donors have continued to play a critical role in supporting financial service providers and their innovations through direct investment and technical assistance. Donor efforts are most successful when they are coordinated, catalytic and responsive to the market.
Data on the financial and social performance of over 2,000 participating microfinance institutions (MFIs) are available on the MIX Market website. The data includes client outreach measures, simplified financial statements, and a number of standard financial performance indicators. In addition, the Microcredit Summit Campaign collects outreach data annually from hundreds of MFIs around the world. Summary information is published annually in its State of the Microcredit Summit Campaign Reports.
Other data sources for information regarding financial inclusion and related topics include the following:
Global Findex—The only global demand-side data source allowing for global and regional cross-country analysis. It includes data from 148 countries and collects information on 506 indicators from at least 1,000 individuals over age 15 within each country.
The IMF Financial Access Survey (FAS)—A comprehensive global supply-side data set on financial inclusion. The FAS database currently contains annual data for 189 jurisdictions, including all G20 economies, covering nine years (2004–2012). Countries are responsible for managing their data and metadata.
FinScope—A nationally representative survey that helps explain how individuals manage their financial lives. It also provides insight into attitudes about and perceptions of financial products and services. The sample size varies widely across countries, and to date, surveys have included responses range from 1,000 to 21,000 individuals.
Financial Inclusion Tracker Surveys (FITS)—Nationally representative surveys designed to collect trend data about households’ financial behavior. The Bill & Melinda Gates Foundation’s Financial Services for the Poor team, in partnership with InterMedia, designed these surveys to run over three years in three countries. The sample size is 3,000 households in Uganda and Tanzania, and 5,000 households in Pakistan; the survey will measure the same households throughout the entire period.
GSMA Mobile Money Adoption Survey—Global adoption survey to give managers of mobile money deployments better insights into the performance of their service relative to each other. Initiated in 2011 by Mobile Money for the Unbanked, the 2013 survey represents 114 service providers from 57 countries, with 100 submitting information on mobile money, 18 on mobile insurance, and 12 on mobile credit and savings.
For more information on data sources, see 10 Useful Data Sources for Measuring Financial Inclusion.
The Consultative Group to Assist the Poor is a global partnership of more than 30 leading organizations that seek to advance financial inclusion. CGAP develops innovative solutions through practical research and active engagement with financial service providers, policy makers, and funders to enable approaches at scale. Housed at the World Bank, CGAP combines a pragmatic approach to responsible market development with an evidence-based advocacy platform to increase access to the financial services the poor need to improve their lives.
Learn more about CGAP’s Focus Areas.
Financial inclusion is an issue of growing importance to policymakers due to its potential to contribute to key development objectives such as economic growth and increased welfare. At the same time, the global financial crisis has highlighted the need for responsible delivery of financial services. In late 2008 and 2009, as the G20 moved decisively to assume the role of chief shaper of the international financial architecture, these two closely tied policy priorities – financial inclusion and responsible finance – began to emerge as increasingly important for the powerful global body.
At their Pittsburgh Summit in September of 2009, the G20 Leaders issued their first pronouncement on financial inclusion and committed to improving financial services for the poor. In June 2010 the Leaders endorsed nine high level Principles for Innovative Financial Inclusion at the Toronto G20 Summit. The Principles lie at the heart of the multi-year Financial Inclusion Action Plan approved by the Leaders at the Seoul Summit in November 2010. The G20 Leaders confirmed their commitment to financial inclusion by approving a Financial Inclusion Action Plan, and creating a new body in late 2010 to implement it: the G20 Global Partnership for Financial Inclusion (GPFI). CGAP is one of seven key Implementing Partners for the GPFI, along with the Alliance for Financial Inclusion (AFI), the Better Than Cash Alliance, International Finance Corporation (IFC), the International Fund for Agricultural Development (IFAD), the Organisation for Economic Co-operation and Development (OECD), and the World Bank. The GPFI functions as an inclusive platform for G20 countries, non-G20 countries, and relevant stakeholders for peer learning, knowledge sharing, policy advocacy and coordination.
The GPFI carries out its work through Subgroups, each chaired by up to three G20 countries, under the overall direction of the G20 “troika” (the current G20 President, as well as the immediate past and future Presidents). CGAP and the other GPFI Implementing Partners staff the work of the Subgroups.
There are five GPFI Subgroups:
1) Subgroup on Regulation and Standard-Setting Bodies
2) Subgroup on SME Finance
3) Subgroup on Financial Inclusion Data and Measurement (mandate completed)
4) Subgroup on Financial Consumer Protection and Financial Literacy
5) Subgroup on Markets and Payment Systems
For further information, please visit www.gpfi.org.