The Need for Financial Inclusion Success Stories
Next week, policymakers and regulators from more than 80 countries, who have formed the Alliance for Financial Inclusion (AFI), will meet in South Africa to update each other on progress they have made in their own countries to advance financial access for poor households and small enterprises. More than twenty-five AFI members made specific financial inclusion commitments at last year’s AFI global forum.
These commitments and a similar set of efforts that a number of countries showcased at the recent G20 summit in Los Cabos in Mexico present an important opportunity for the global development community active in this field to bundle its support behind those countries determined to reach more of their economically active citizens who remain excluded from formal financial services and have to rely on the informal ones that are often less reliable and more expensive. As national leaders advance their national financial inclusion strategies, they can draw on important lessons learned from the successes and failures to-date.
1. Learning from the earlier demand side lessons
The initial microcredit revolution showed that poor families in the informal economy are valuable clients, and that it is possible to serve them in large numbers sustainably. Today, the $70 billion micro-credit industry that grew from these innovations with its estimated 200 million clients remains a notable success of sustainable, non-government and private sector growth catalyzed by highly-targeted public subsidies.
But over the past few decades we have also 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.
New strategies need to recognize these broader needs. They also need to recognize the importance of financial literacy, building consumer financial capabilities, and for consumer protection regimes that take the conditions and constraints of poor families in the informal economy into account.
2. Capturing the benefits of business model innovations
The microcredit revolution found an ingenious way to provide credit to the poor without collateral: using the joint-liability loan that replaced physical collateral with social collateral to allow the poor to pledge for one another. But the business model challenge for other financial services is different. For small denomination savings and remittances the key challenge is the need for ultra-low transaction costs; for insurance, risks must be pooled and managed at actuarially-relevant scale. There is no such thing ‘as small is beautiful’ in insurance.
New strategies need continued product and business model innovation so that we can reach more people with a broader range of products at lower costs. Such innovation is already happening, for example leveraging mobile-phone based business models. But ultimately no single type of provider will be able to overcome the very different product-specific business model challenges. What is needed instead is a variety of financial service providers that create an ecosystem that serves the poor profitably and responsibly.
3. Creating an enabling and protective environment
Responsible market development requires a regulatory environment that balances the needs of advancing access to finance, along with ensuring stability of the financial system, and consumer protection. Globally, policy makers are recognizing that financial exclusion is a risk to political stability that impedes economic advancement. The global financial Standard Setting Bodies are changing their guidance to respond to this need to facilitate financial inclusion. National leaders are experimenting with new approaches such as tiered know-your-customer requirements that lower the threshold identification requirements for low-ticket size transactions. Governments around the world are also increasingly focusing on creating the domestic infrastructure that supports market development, such as nationwide unique identities to facilitate customer enrolment and protection.
More than half of working-age adults globally, an estimated 2.5 billion people, are excluded from formal financial services according to the new World bank/Gallup new Findex data. An increasing body of evidence shows that appropriate financial services can help improve household welfare and spur small enterprise activity. There is also macroeconomic evidence that shows that economies with deeper financial intermediation tend to grow faster and reduce income inequality.
This explains why a large number of countries are making commitments to advance financial access and are pursuing national financial inclusion strategies. Supporting their efforts is both an opportunity and an imperative. We urgently need meaningful financial inclusion country success stories for others to emulate.