What is Financial Inclusion and Why is it Important?

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:

  • Make day-to-day transactions, including sending and receiving money;
  • Safeguard savings, which can help households manage cash flow spikes, smooth consumption and build working capital;
  • Finance small businesses or microenterprises, helping owners invest in assets and grow their businesses;
  • Plan and pay for recurring expenses, such as school fees;
  • Mitigate shocks and manage expenses related to unexpected events such as medical emergencies, a death in the family, theft, or natural disasters; and
  • Improve their overall welfare.

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.