10 Priorities For Financial Inclusion In 2013 And Beyond

A woman makes fish sauce A woman makes fish sauce
Half of working-age adults globally have no access to formal financial services.They typically live and work in the informal economy – not by choice, but by necessity.  To create income-generating opportunities for themselves, manage risks, and smooth expenditures they have to rely on the age-old informal mechanisms such as borrowing from families and friends or the money lender, saving under-the-mattress or through rotating savings clubs, accumulating capital in vulnerable livestock, using informal money transfer services.  These informal mechanisms can be very expensive and unreliable.

Because they recognize its importance for economic and social progress, global and national policymakers have made it a priority to advance financial inclusion so people can access and use the appropriate financial services that help them improve their lives.  To make real progress, we at CGAP believe the field has 10 priorities over the next 5 years.

  1. Understand the impact of financial services on the lives of the poor.  This is foundational.  If what we try to advance doesn’t improve the lives of the poor, we are doing something wrong.   A lot of effort is going into better understanding impact, which is good.  We are learning from a new body of financial access evaluations, what works for whom and why.
  2. Translate client insights into better product offerings and service delivery.  The financial diary literature has helped us understand that poor households in the informal economy need and use a broad range of services – savings, credit, insurance, remittances.  The priority for us now is to translate our increasingly better understanding of how people manage their financial lives into new products and delivery models that work better for them.  The recent examples of new commitment savings products that mimic people’s constraints and behaviors are an example of promising progress.
  3. Start better understanding traditionally un- and underserved segments.  This is most importantly true for smallholder farming families.  By livelihood, they are the biggest segment of people living below $2 a day globally – an estimated 500 million families.  Traditional microfinance has not reached smallholder farming families because their incomes vary through the year and depend on agri-cycles and fluctuating food prices. They often live in areas that lack basic infrastructure and connectivity.  Even recent advances in supply-chain based agri-finance reaches an estimated less than 10 percent of small holder farming families - those who are part of tight value chains of cash crops such as sugar or coffee.
  4. Continue pushing for technology-enabled business model innovation.  Business model innovations, in particular leveraging cell phones, promise to reach more people at lower transaction costs with a broader range of products.  Lower transaction costs through digitized financial services benefit clients directly.  Better data that helps with underwriting and managing credit and insurance risk holds the promise of creating further client benefits.
  5. Create success stories for local-market provider eco-systems.  The provider economics and the required competencies are very different between credit, savings, insurance, and remittances.  No one set of providers will be able to deliver all services.  What’s required instead is a local eco-system of providers with many points of service in the community, low-cost payment systems, and fewer well-capitalized and well-regulated entities at the financial markets backend to aggregate and manage risks. 
  6. Support governments to catalyze domestic financial inclusion.  Governments as owners or providers of hard and soft infrastructure such as physical outlets in remote areas or unique national IDs, as rules makers for the use of infrastructure, and as a big source of transaction volume for example through their own payment transactions with citizens can do a lot to catalyze this eco-system development.
  7. Strike the right balance between an enabling and a protective regulatory environment.  To enable development of promising product and business model innovations, the regulatory environment needs to understand demand- and supply-side realities.  The recent push towards risk-weighted Know-Your-Customers norms in Mexico and Pakistan with lower documentation requirements for smaller transaction sizes is a good example of pragmatic regulation aimed at increasing financial access.  At the same time, regulation must ensure that consumers are protected, for example by requiring adequate pricing disclosure and recourse and conflict resolution mechanisms.
  8. Help forge new global consensus about how to balance financial inclusion and other policy objectives.   Financial inclusion is not a standalone objective for global and national policy makers.  They have to understand and optimize the linkages between inclusion, financial stability, integrity, and consumer protection.  G20 leaders have begun addressing these linkages and will continue to work towards a better understanding under Russia’s 2013 G20 leadership.   
  9. Ensure smart subsidies towards sustainable market development.  Global donors and national governments who want to advance financial access realize that this has to be done in the context of a responsible market development effort.  Subsidies towards this market development should be smartly targeted to provide public goods that individual market players might not easily coordinate around such as data exchange and infrastructure investments, or towards demonstration effects aimed at crowding-in other sources of capital and talent.  
  10. Work towards an ambitious aspiration. Progress towards financial inclusion requires a broad-based effort across better tailoring to demand side needs, continued innovation on the supply side, and supportive policy and infrastructure environment. To galvanize and sustain momentum, we need to work towards a collective and ambitious aspiration where essentially everyone has the choice to access and use the broad range of appropriate financial services that they need to improve their lives. Nothing less should do.

CGAP is focusing its own contributions on these priorities and remains committed to be of service to the broader financial inclusion community.

---- The author is the CEO of CGAP. You can follow him @TilmanEhrbeck.

Photo Credit: Hao Tran

Topic: Policy


23 January 2013 Submitted by Judith Pryor (not verified)

Thank you, Tilman, for this great post on CGAP’s priorities for financial inclusion. At the Overseas Private Investment Corporation (OPIC), advancing financial inclusion is also one of our top priorities. Rates of financial inclusion are low throughout much of the developing world, but particularly low in Sub-Saharan Africa. In order to help increase access in Sub-Saharan Africa, OPIC provided finance and political risk insurance for investments made by the Access Africa Fund. The Access Africa Fund has helped enable smaller microfinance institutions in countries like Cameroon, Ghana and Kenya to provide access to micro and small entrepreneurs. You can read more about OPIC’s efforts in advancing financial inclusion here:….

25 January 2013 Submitted by John Gitau (not verified)

You have set the financial inclusion agenda so clearly and inspirationally. The 10 goals sound encompassing.. Its now everybody to do their part in their areas of competence.

I am glad that goal 2 de-odourizes your introduction which made informal economy sound undesirable. Strengethening the informal economy is a goal on its own rather than wanting to formalize it. Something should be done to blur the dichotomy.

Goal 4 seems like the show stopper and if done well, goal 5 becomes superfluous. With relevant mobile user interfaces, a consumer is able to access financial services provided by ubiquitous financial services providers. They don't need to be confined to a geographical space to provide services. Here, it is the suitability and electonization of access of products that is important. Fortunately, a village shop keeper can be a provider of almost all fiancial services if he represents the various financial services providers. If a consumer can save, borrow, transfer, buy insurance, pay services through the phone from his or her comfort, that should be the ideal to work towards( I have borrowed this thought from Ignacio Mas)

The rest are superble and thanks Tilman for simplifying the financial inclusion landscape.

27 January 2013 Submitted by Tilman Ehrbeck (not verified)

Thank you, John. Informality in my assessment is tricky.

At the macro-level, in cross-country comparison, informality is correlated with poverty (see for example recent IFC jobs study). At the individual level, I think it's probably fair to say that many would prefer a job over subsistence self-employment. So, it's not "either-or."

In the long-run, formal sector employment growth is probably the preferred route, and countries should make the investments in infrastructure, institutions, and education to achieve it. But for the forseeable future, informality is a reality to be dealt with. Even in middle income countries, half of total employment is in the informal economy. In India, its 85+%. The less regular the family income, and the less the state provides social protection for health issues or in old-age, the more poor families have to fend for themselves and need financial services such as savings, credit, and insurance to do so. That's what we work on -- fair financial access for the poor. It's of course not the only thing poor families need, but it's an important element that could help them improve their lives.

25 January 2013 Submitted by Dr.V.Rengarajan (not verified)

These listed priorities albeit touch on demand side at surface level , focus more on streamlining supply side mechanism . These priorities need to be redesigned taking cognizance of more insights in the demand side as suggested below
1. Lack of benign client’s identification and product appropriateness and affordability retort the inclusion process .This apart What is missing in the WB analysis and approach for FI is lack of emphasize on adequate physical infra also for the sustainable inclusion. For example in India persistent low CD ratio over four decades in eastern parts with poor economic growth ,suggests low penetration of inclusion
2. Contextually in the global platform with regional imbalance in economic growth and diverse human capability and the needs, pro poor product diversification should be accorded priority. Further, sequencing the development inputs is required contextually. In high income countries priority is for credit for housing due to economic deprivation while developing countries demands more protection from vulnerability in health sector. Further, with the given human behavior pattern and financial input (micro credit) with multiple utility option , how does mere FI or mere access to financial services solve the poverty and inequality a million $ question? All these facts calls for a prudent financial inclusion plan for each region/place.
3. Most of approach or strategy of FI focus on mere inclusion or access somehow with too much on demand side assumption on utilization . Financial crisis as evidenced in housing mortgage loan failure in high income countries and MF crisis with overheating household economy is a pointer for present aggressive FI mission. These warning signals should not be ignored
4. While FI is for unbanked who are by and large poor with their socio economic profile , how the means like credit, card, debit card, mobile credit are useful except delivery of credit in particular ?
5. What are issues concerned with already included and getting excluded subsequently ? What are the cost involved ( details given in one of CGAP blog on the topic by Dr Rengarajan)? Exclusion of included erstwhile unbanked is common in community models (SHG)and banks as well how to take cognizance of this in FI now? Paying attention to these drop out clients should be accorded top priority in the list referred.
6. Empowerment of the excluded clients need to be done for their entitlements of right to inclusion and client protection with appropriate and affordable integrated financial services sequentially according capability in the pyramid. . The means like One size fits for all products and digitalized delivery of micro credit (mobile magic) may help inclusion for the supplier but it does more harm to the clients in demand side unless managed prudentially and ethically
7. Regulatory mechanism need to supervise the functioning of inclusion through MF more from demand side perspectives also for serving the said purpose in social sector rather than mere creating institutions and pumping the financial services indiscriminately with too much of assumption in demand side
8. More community based system need to be encouraged for inclusion with accountability
9. For effective inclusion , Result based M&E system need to be integrated in the management from planning instead of an isolated exercise at the instance of funding/donor institutions. At the end ( key paper RBM&E forum Bangkok Integrated M&E with illustration for MF industry and also youtube (by Dr Rengarajan)
10. The sustainable inclusion for the said purpose need to be judged through qualitative indicators from outcome mapping and not gratified with quantitative output indicators
In regard to responsible financial inclusion of the unbanked poor , attention is drawn to the discussion topic “the ten commandments for the MF arsenals in the battle against poverty in CGAP Linked group ,and comments , may be useful for value addition in the priority listed from demand side perspectives

Dr Rengarajan

27 January 2013 Submitted by Tilman Ehrbeck (not verified)

Thank you, Dr. Rengarajan, for your comments. You mention one issue that I think is really important: the drop out of previous served households falling bank in the ranks of the financially excluded. This happens in particular on the savings side.

People are signing up for accounts which might not offer any value, or even worse, where hidden charges and fees eat up small balances. That's why priorities 1&2 are so important. We need to ensure that the services offered really improves household welfare, and that means for a starter, that they need to meet real needs.

Incidentally, the ordering of the 10 priorities wasn't meant to imply a ranking within. It rather followed a logic from demand to supply to regulatory & infrastructure environment.

29 January 2013 Submitted by Dr.V.Rengarajan (not verified)

Thank you Tilman for considering very important point on drop outs for inclusion in the list of priority lists making inclusion a responsibly inclusive enough
Reg drop out phenomenon, it is found more in micro credit services not necessary micro savings. Even it happens in savings it is not harmful since most of the poor have kind savings in the form of cattle and jewellary for protection against any risk.. But where as it is more painful in the case of drop outs in micro credit services as it happens predominantly here. To quote Microfinance status report India reveals that drop out rate in SHG .system was 8% of members per group and 43% SHGs reported .incidence of dropout of members .. Here credit indiscipline and group pressure for recovery play a role among other reasons fro drop out A multi disciplinary study is needed for understanding the ground realities for sustaining the inclusion in future at least and re inclusion of these nascent exclusion.

.I agree with the logic from demand to supply to regulatory & infrastructure environment.but in the process no leakages or pilferage or compromises in the rationale followed. Then only improvement in the livelihood of the poor could be ensured through the means of financial services better with integrated with other needed social inputs on the lines of graduation model of CGAP-BRAC model
In fine I am happy to note demand side perspectives getting recognized at top level particuaalry micro financial services and financial inclusion mission for which I have been doing advocacy since last few years
Thank you for sharing my views.
Dr Rengarajan

31 January 2013 Submitted by Hemant Baijal (not verified)

Thank you Tilman for spelling out these important priorities on financial inclusion. We at MasterCard feel that there is a growing consensus around the need to further our efforts to deepen the usage of financial products and services by the underserved communities. Providing access is a necessary but not a sufficient condition. To obtain sufficiency, one most ensure that products that are offered meet the payment needs of the target communities. In many respects, it comes down to the “last mile” – enabling access to AND usage of financial tools that improve the livelihood of people. To paraphrase a famous proverb: “it takes an eco-system” of governments, businesses, NGOs partnering around product, distribution, business models and education. I know that action speaks louder than words – so while there is much more to do I view the progress that is being made in South Africa, Kenya or Nigeria as a promising sign.

Add new comment