A Review of Financial Inclusion 2012: Aligning for Real Progress

Our collective efforts to advance financial access for the poor made good progress last year. Providers and regulators around the world accelerated efforts to translate their better understanding of demand-side needs into new product and policy approaches. Business model innovation aimed at increasing reach and lowering costs continued apace, in particular through the use of new technologies. And leaders from nearly 40 developing countries and emerging markets with a combined population of 1.7 billion committed to advance financial inclusion domestically because they know that an inclusive, local financial system that reaches all its citizens is an important ingredient for economic and social progress.


Two boys adjust dry rice flour to dry in the sun.

Photo Credit: Siu H Ket

While there will be setbacks and while we will make mistakes, I think the stars have started aligning for real progress to be made in the next five years toward full financial inclusion – where everyone has the choice to access and use the broad range of financial services they need to improve their lives.

Better Meeting Underlying Client Needs

Over the past years, we sharpened our understanding of the financial services needs of poor households. Globally, an estimated 3 billion people live below $2 a day. They typically live and work in the informal economy, not by choice, but by necessity--often in multi-generational, multi-occupational households. In economic terms, they are producers and consumers at the same time. As such, they have a broad range of financial services needs to accumulate assets, create income-generating opportunities, manage risks, and smooth consumption. We know from the financial diaries literature that they are very active managers of their financial lives.  They have to: they are vulnerable and have no margin for error. When they don’t have access to formal financial services, it doesn’t mean that they don’t use any. It means that they have to rely on the age-old informal mechanisms: family and friends, the rotating savings club, the moneylender, the pawnbroker, cash under the mattress, long-term savings in the form of livestock. These mechanisms are incomplete and can be very unreliable, risky, and expensive.

Last year saw increasing progress in translating this understanding into better product offerings and policy approaches. For example, a set of providers across the globe accelerated experimentation with innovative products that better match people’s savings needs and behaviors. Green Bank in the Philippines offered its SEED (Save, Earn, Enjoy, Deposit) commitment savings product, which enables clients to withdraw from the account only once their goal date or amount is reached. Jipange KuSave in Kenya tested the provision of interest-free loans with a third of the amount held back as savings. Opportunity Bank in Malawi has a commitment savings product for farmers that allows them to lock away their post-harvest pay-out and distribute it over the year to smooth cash flows. And Bancomer in Mexico started developing a savings product concept that mirrors the savings behavior of low-income Mexican households who literally use different cookies jars to separate savings for different future purposes.

Similarly, policymakers began recognizing that statutes on the books that ignore the reality of low-income families are of limited value. They started to incorporate demand-side insights into their approaches. In Mexico, for example, the financial consumer protection agency “mystery shopped” financial services to assess the validity its disclosure norms and found widespread misinformation that prompted a rethink of their approach. In the Philippines, consumer testing of credit contracts led to reforms to the Truth-in-Lending Act.  And in Senegal, policymakers used consumer surveys to test and improve the functioning of dispute resolution mechanisms.

Some of the fundamental tenets of financial intermediation (e.g., the time value of money in savings and credit or the need for actuarially relevant risk-pooling in insurance) cannot be reinvented. But a lot can and must be done in product and policy design to better meet underlying needs and behaviors. Financial services providers and policymakers have started to learn from other fields, and each other, to make a real difference.      

Continued Business Model Innovation to Increase Reach and Lower Costs 

The business model challenges for providing different financial services to low-income households in the informal economy are quite different. For loans, they main economic challenge is to provide credit to people who don’t have a salary or other collateral and to manage credit risk and repayments. The ingenious innovation of the social collateral made the microcredit revolution possible and proved that poor people are creditworthy and can be served in a financially viable fashion at scale. For small denomination, high frequency savings, or domestic remittances by contrast, however, the main economic challenge is the need for ultra-low transactions costs. A lot of the business model innovation over the past years focused on increasing reach and reducing transactions costs well below the levels that would be associated with traditional bricks-and-mortar banking. 

The iconic success of these efforts to-date is the mobile-phone-based money transfer service M-PESA in Kenya, which by now has 16 million customers. More than 80 percent of working-age adults in Kenya used a mobile phone to send or receive electronic money according to a 2011 survey. Last year saw growth in electronic money also outside of Kenya in other parts of East and West Africa and Asia. In Kenya itself, the ubiquity of a reliable, electronic retail payments system has made new business models viable which rely on collecting small user fees that would be prohibitively expensive to administer in cash.  For example, M-Kopa recently launched a lease-to-own solar power energy device collecting daily payments of 40 shillings ($50 cents) through M-PESA. Similar products are offered to finance community-based water stations (Grundfos Lifelink) and crop insurance for farmers sold in small denominations per individual bag of seeds (Kilimo Salama). These examples of financial innovation for the poor are particularly promising because they link the potential benefits of an inclusive financial system tangibly to other development priorities such as climate change adaptation and local food security.

The real power of new technologies to change the way we do things often takes some time to unfold. In financial services, we now see emerging markets leapfrogging the developed world and its legacy systems. Providers in developing markets don’t speak of financial inclusion as a development objective or moral obligation. But they see the opportunity and the business imperative if they want to reach more than the affluent, urban middle and upper classes, and they are going to seize it.         

Policymaker Commitment to Financial Inclusion

Policymakers know that the appropriate use and access to financial services improves household welfare. They increasingly appreciate that an inclusive financial system that reaches all citizens allows for more targeted and efficient execution of other social policies, for example through conditional payment transfers in education and health. As a result, a number of governments are switching their social payment transfers to electronic platforms. Policymakers also know that at the macro-level the depth of financial intermediation is positively correlated with economic growth and negatively with inequality as measured by the Gini coefficient.

As a result, policymakers at the global and national level last year ratcheted up their commitments to financial inclusion as an important element of their development agenda. Led by its emerging market members, G20 leaders have put their support behind financial inclusion. At the Mexico G20 summit last summer, 17 countries led by the Presidents of Chile, Indonesia, and Mexico publicly committed to advance financial inclusion. As part of the Alliance for Financial Inclusion (AFI), a network of Southern financial regulators, 35+ countries made similar commitments.

Policymakers face rapidly evolving technologies and a changing provider landscape. They need to weigh competing objectives and focus their limited resources. But an increasing number of them are determined to create the right enabling and protective environment.   

Poised for Real Progress

Last year’s new Global Findex data confirmed that half of all working-age adults globally and more than three quarters of the poor are excluded form formal financial services.  Across all regions and income quintiles, women are disproportionally affected. So are the young, the old, and rural populations. 

Poor households in the informal economy are active manages of their financial lives, but whose needs are not met; financial services providers see the opportunity, but need to innovate more aggressively; and policymakers are committed to do the right thing, but need to accelerate their pace, I think the right connections can be made, and we at CGAP at committed to contribute so that we can collectively make real progress towards full financial inclusion over the next five years.    


The 2012 CGAP Annual Report is now available online

Topic: Policy


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

While Reviewing financial inclusion activities in 2012 and for 2013 , following concerns question the values of the financial mission more particularly in developing countries in Asia and Arica
1. Exclusion in financial inclusion- Bottom in poverty pyramid is remaining excluded even after the advent of technology based ‘e ‘ money or mobile money as it covers perhaps viably the top layer in the pyramid or small trader/business segment of rural area . To cite an example the much publicized iconic products like M-Pesa , Jipange-ku sav have failed to reach the bottom in the poverty triangle . The term ‘ poor’ is misleading unless one understands the dynamics of poverty and capability differentials in the pyramid So long the bottom also is a constituent of poverty , poverty cannot be reduced unless these ultra poor segment is also included. Further the financial inclusion experts should not fail to perceive the unintentional negative consequences in terms of widening inequality gap even in poverty pyramid from the outcome of financial intervention as means of poverty cure.
2. Exclusion of included – It is irony to observe that even included are found excluded subsequently.. The facts on what has happened after inclusion at household level are assumed leading to unintentional consequences . Further, the exclusion phenomenon after inclusion remain non transparent and is hardly covered in M&E system. For example, in south Asia financing through group system ( SHG-India , Gramin groups in Bangladesh) is popular and is practiced as strategic mode of financial inclusion. But many study reports point out persisting phenomenon of drop out and mortality of groups and in-operative /defunct accounts in other system indicating exclusion of once included ceremoniously. This fact which merit attention for sustaining the inclusion is not seriously looked into.

3. Adequacy of micro credit - Is financial inclusion with mere micro credit either through branch or branchless or both the modes, sufficient for the said social task? We had enough bitter lessons on MFI failures and MF crisis due to the above fact. Despite the warning signals , financial inclusion with micro credit alone trend continues for further aggravating poverty defeating the very purposes of micro finance and financial inclusion.’ Credit also school of thought’ need to promoted during financial inclusion campaign to ensure delivery of Micro finance package with savings + credit +insurance + pension +transfer facility etc and make financial inclusion a responsible and meaningful one . Depending on demand side needs designing and sequencing the financial products also assume importance for prudent financial inclusion.
4. Working of financial inclusion- The last but not the least financial inclusion will not work without the presence of physical infrastructure ( roads, bridges, transport, power, communications ,marketing etc) in the given area. In this regard, many countries in Asia and Africa are lacking . Putting the last (credit) first will fetch intended result . Acceleration for inclusion and viability for business model are necessary for supply side but not sufficient for achieving intended outcome – a sustainable dent in poverty canvas.
Dr Rengarajan

12 January 2013 Submitted by Avik Kedia (not verified)

Dear Dr Rengarajan,
Heartening to read your article. Accept my two bits please - Firstly, microfinance in India continues to "mean" microcredit, because the business of loans is the only business that is economically viable. Secondly "Complete Financial Security" for BOP is a mirage and will remain for some time, unless donors/sponsors/pathbreakers take the lead and support smaller organizers like ours with much much needed innovation grants. Do check out if you get time

Time to think beyond microcredit...I say.

Avik Kedia
Sanchayan Suraksha

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

Thank you Mr Avik Kedia for your response with good word on my postings.
Reg your first point it is unfortunate that under the popular brand name ‘Microfinance’ micro credit , a mere money lending services without making subtle difference with other sources particularly traditional money lenders with almost high interest rate , has been allowed to dominate in rural financial landscape for the social tasks of poverty cure. This is where shoe started pinching since money lending business cannot survive without economic viability in the supply side more particularly in unethical competitive market . This unregulated environ has brought unintended outcome in poverty sector As an economic student I agree the need for viability for business but it should not at social cost in poverty sector. In fact indiscriminate ate micro credit has helped neither alleviated poverty nor reduction in inequality. Now it is encouraging to observe the emergence of integrated product financial plus non financial services ( forward& backward linkages ) in the industry towards ensuring viability in both demand and supply side. That is to say the micro finance in true sense of the term, need to be designed more socially and ethically besides economically. This kind of log frame alone makes financial inclusion a meaningful one tangibly benefiting the included poor . This task could be possible only if one perceives what is happening after inclusion at poor man’s household level of the included from demand side perspectives.
Second, once we enter in Micro finance arena with social mission(poverty reduction) , inevitably, the intervention should start from the end(ultimate goal) point for resulting intended outcome . For this one need to start from BOP with sequentially arranged pro poor integrated inputs (BRAC-CGAP ultra poor graduation model ) so that both financial and non financial security are ensured for their sustainable graduation either individually or collectively.
But unfortunately most of donor assisted project it is satisfied with kind of M&E showing immediate output in terms of quantitative achievements against target irrespective of outcome and impact in the long run. Be it smaller organization or bigger one, they should be encouraged to provide complete security with needed inputs to BOP in the process of their graduation. Further this calls for Result based M&E system fully integrated in project management itself (right from planning) for effective causal claims for the intended outcome instead of isolated manner at the project end just for serving funding agency only. (Pl refer Ist Pan Asia Africa RBM forum meet Bangkok Nov.2012– Key paper Integrated approach for M&E Part 1 &2 – and you tube,
In the last, thank you for your website and appreciate your financial package beyond micro credit. I am interested in knowing how this financial services are provided matchingly to the needs of same cohort of poor in different layers in the pyramid. Aadhar identity card (like pan card) may be useful for the poor clients. Further non financial services need to be considered (as explained above) along with these services for desired outcome in this sector. Partnering for this endeavor may also be thought of . In the context of complexity in the MF intervention process for poverty cure, financial inclusion is necessary but in no uncertain term, insufficient.
Thank you for sharing my views
good wishes
Dr Rengarajan

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