Can India Achieve Financial Inclusion within the Next Few Years?

Thanks for an interesting post and for highlighting the important steps the Indian government is taking with respects to financial inclusion. However, there is a key area omitted in the discussion: the reluctance of a large share of the Muslim population of India (est. at 177 million people) from using interest-based financial services and the reluctance of the Reserve Bank of India (and the government) to facilitate the establishment of Islamic banks. This does appear to be changing with reports of a committee within the RBI, but unless there are sharia compliant alternatives available, financial inclusion will exclude a large segment of the population.

Thanks for this comprehensive post! Things are surely going to change soon in India. New government's slogan also says "acche din aane wale hain” which means good days are going to come soon. We have witnessed a lot of regulatory changes over last 10 years and now we are very close to a big bang in the financial inclusion space in India.

Now, all the stakeholders involved are realizing the importance of not just focusing on increasing access of financial services for the low income households, but also on enhancing the value offered by these basic banking accounts. Also, the focus has shifted to offering multiple financial products to address diverse needs of low income people to encourage them to shift from informal sources to formal channels.

Thank you for replying Mr. Ehrbeck. I understand and agree with your points about the challenges in identifying specific areas of demand that can be served by Islamic banks in India where there are no Islamic banks now. As you mention, the RBI does seem to be offering greater flexibility about potential for Islamic financial institutions and there are some institutions working on alternative methods (e.g. Zayd Chit Fund, a sharia compliant chit fund based in Bangalore).

It is hard to project what the ultimate take-up would be in demand for Islamic banking and/or Islamic microfinance. In some contexts (e.g. in the GCC), Islamic banks have started as smaller windows for conventional banks to serve their customers and prevent them from switching to standalone Islamic banks which has over the course of 40 years allowed growth of Islamic banking assets to rise to ~25% in the UAE, ~35% in Kuwait and over 50% in Saudi Arabia.

These aren't necessarily good analogues for the growth in India since they are middle- or high-income countries with small, relatively homogenous populations. Perhaps a better example would be more diverse Indonesia where Islamic banking is just a few percent of total assets, but has a wide variety of institutional forms (from rural banks, BPRS, to bait-ul-maal wat tamweel, BMTs, Islamic banks). It is also growing at an exceptionally rapid pace from this small base and has appealed to larger financial services companies like Allianz which offers microtakaful products.

While there is not much hard data on the prospects in India, there is a large population of Muslims (~170 million) so if there is even a slightly lower participation rate in formal financial services compared with non-Muslims, it would translate into a significant absolute number of people who are financially excluded. The two markets that CGAP has identified in two very good reports on Islamic microfinance (and products developed as part of the Islamic microfinance challenges) should be studied in more detail to get a better perspective on what issues/concerns consumers have about different products and how much of an issue cost is for their decision.

If cost is very important, then the lack of availability of Islamic microfinance (and high cost or shortage of funds to supply finance for the few operations in place) may be causing the low realized participation rate even though many would prefer to use Islamic products if only the pricing gap were not so wide or supply of financing were more available.

No, India can not achieve financial inclusion in next few years for the following reasons: Firstly, RBI has no faith in Indian private institutions when the matter of handling savings of public are concerned. Secondly, the claimed over two hundred thousand agent network simply does not exist operationally, more than 25 %.. Thirdly, the Indian banks do not offer basic bank account or small accounts freely, these being latest innovations still not adopted by field staff. Fourthly, RBI and Government of India have complicated Know Your Customers guidelines by frequently tweeking these, under Prevention of Money Laundering Act. Fifthly, too much discussion on new banks, small banks, payment banks,etc., have taken away the focus from the public sector banks who have slowed down their FI efforts, especially in difficult poor states. Sixthly, RBI has been wrongly claiming that financial inclusion efforts are viable, but the banks do not believe it internally. Seventhly, Indian economists have been diverting the attention/ efforts toward credit inclusion thus down playing the whatever achievements made by banks.Seventhly, G2P or Direct Benefit Transfer programme of previous government was discredited by the current regime, which will require policy U turn by the new government. Eighthly, unique ID programme also met the same fate at the hands of current dispensation, virtually killing an important national initiative, just because it was not passed by Indian Parliament and was an executive decision. Ninthly, we Indians have centuries of history behind us in denying benefits to poor and down trodden, and our financial and political leadership which mostly comes from higher castes have no commitment to real financial inclusion outcomes for the poor or the economy. Financial inclusion is like a river bridge whose construction requires all its supporting pillars to achieve a common height before the roof can be laid. It is almost impossible for a five thousand years civilisation to change in a few years even in the limited aspect of eliminating exclusion.
( Centre for banking for poor, Karnal 132001, India)