The financial inclusion community has made great strides in recent years, such as mainstreaming financial inclusion into the agenda of most funders. However, many important challenges remain that will require more efforts on funders’ part. These range from the need to adapt funding strategies to the changing environment to showing impact on poverty reduction. So what are the latest trends in funding for financial inclusion? Is funding growing or declining? And is it being allocated effectively? The recent CGAP Funder Survey, which covers 23 major funders, has some good news for the financial inclusion community in that funding levels are not declining, but it also points to areas where the community can be more strategic in its investments.
Are funders prioritizing financial inclusion?
Funding for financial inclusion is doing well. Total commitments to financial inclusion have grown at 9 percent between 2015 and 2016 and are expected to increase further in the next three years. Total commitments in 2016 was $37 billion.
Many funders view financial inclusion as an enabler of the Sustainable Development Goals (SDGs), even though it is not a standalone goal itself. For this reason, they are increasingly integrating financial inclusion objectives into projects that focus on economic growth, women’s empowerment, agriculture and other development objectives. The number of projects that include financial inclusion as a component has tripled in the past five years, from 10 percent in 2012 to 33 percent in 2016. On the other hand, only 2 out of the 23 funders who reported to the survey have a dedicated financial inclusion department.
The expectation that financial inclusion drives development seems to also influence the allocation of funders’ financial inclusion portfolios, as the following highlights show.
Does funding focus on countries that need it most?
Obviously, there is no simple answer to this question. If we are comparing funding for financial inclusion and the SDG Index, which ranks countries’ SDG progress on a scale from 0 (worst) to 100 (best), we find that two-thirds of active financial inclusion projects target countries with an index lower than 60. Two-thirds of projects in Sub-Saharan Africa have an index ranking below 20, and the bulk of funding to South Asia goes to countries with an index below 40.
Sub-Saharan Africa, the not-so-low-hanging fruit
About 30 percent of active projects and a quarter of active funding commitments target Sub-Saharan Africa. It is obvious why Africa has the largest concentration of funding. Only 28 percent of the adult population in the region has an account at a formal financial institution. In most regions, account penetration is twice as high. Poverty is also particularly acute in Sub-Saharan Africa. Forty-seven percent of the region’s population lives on less than $1.90 per day — a figure three times higher than the global poverty rate. All of this makes Sub-Saharan Africa an especially challenging — but important — region to target for financial inclusion.
Embracing the digital revolution
Where infrastructure doesn’t reach, mobile phones do. Digital solutions have gained much attention from international funders, and by 2016 all funders who reported to the survey had at least one active project that includes digital financial services. Forty percent of these projects target Sub-Saharan Africa, where 12 percent of the adult population has a mobile money account. The global average is only 6 percent.
Rural and agricultural finance
Among the world’s 2.6 billion people living on less than $2 a day, there are an estimated 500 million smallholder farmers’ households, representing 2 billion people. They rely to varying degrees on agricultural production for their livelihoods. A total of 647 projects, close to 25 percent of all active financial inclusion projects reported to the Funder Survey, aim to improve access to rural and agricultural financial services. Looking at national statistics on rural poverty for each country, we notice that half of the financial inclusion projects target countries with rural poverty indices above the global average of 37 percent.
The “invisible money”
Thirteen percent of total funding for financial inclusion does not appear on the maps above because it goes toward 256 multi-country projects. Most of this funding has historically targeted microfinance investment vehicles that on-lend to financial services providers around the world. However, in recent years, multi-country projects have started to tackle digital finance solutions and infrastructure issues, which are now focus areas for around 20 percent of financial inclusion projects.
Financial Inclusion in India has deepened remarkably but only in the area of opening of bank accounts -- it falls far short of needs in terms of access to credit. Much effort is needed to deepen financial inclusion to provide credit to low income rural and urban households, small and marginal farmers and small-scale rural industries. Because of lack of credit for value addition activities, India is struggling to accomplish Prime Modi's vision to double farmer incomes by 2022.