Safeguarding Financial Inclusion During Crises: Lessons for Policymaking

Executive Summary

Systemic crises have well-known impacts on financial stability and economic growth, but they can also reverse the hard-won gains of financial inclusion. The effects of crises are especially severe among vulnerable households and micro-, small-, and medium-sized enterprises (MSME) that have limited access to formal financing and few assets to fall back on, thus eroding their ability to absorb or even recover from shocks.

To mitigate impact, financial safety net authorities (FSNA) have developed a comprehensive toolkit that combines financial sector-specific interventions with broader macroeconomic stabilization measures. The tools are designed not only to support economic recovery but also to prevent emergence of future crises. Predictably, once a crisis occurs, instrument selection aims to restore financial stability, in line with authorities’ core mandate, frequently overlooking financial inclusion, particularly when it is most critical.

This Working Paper challenges the prevailing notion that the trade-off between inclusion and stability is inevitable when in the throes of resolving systemic crises. In fact, financial stability and inclusion can—and should—be addressed concurrently. Such alignment, however, does not occur fortuitously. To achieve it, FSNAs should deliberately integrate inclusion considerations into their crisis response and design interventions tailored to the specific needs of vulnerable populations.

This Working Paper calls for a determined calibration of the policy mix to ensure that it can support those most affected following crises events. From an empirical analysis of 58 countries, microdata from more than 300,000 individuals, surveys of various central banks, and case studies from Indonesia, Lebanon, the Philippines, and Thailand, this Working Paper offers guidance to FSNAs when integrating inclusion into crisis preparedness, response, and recovery efforts. Key insights are summarized as follows:

• Some tools and their combinations, once strategically applied, can positively affect financial inclusion. For example, capital injections combined with lending programs or restructuring in the post-crisis phase, can be leveraged to support financial inclusion. While these interventions may not uniformly affect financial inclusion outcomes, they nevertheless can minimize the impact of crises on the vulnerable while authorities are acting to restore stability. Some of these measures, however, may prompt moral hazard and demand increased fiscal space for their credible implementation. Moreover, determining the ideal policy mix will be challenging and will require careful assessment of country specifics.
• Responding before a crisis unfolds will enable authorities to contain financial distress without undermining inclusion goals. The timing of intervention, therefore, is as important as the intervention itself. For instance, there are small or even negative effects when liability and blanket guarantees are combined with rules such as bank holidays. However, when these tools are deployed proactively in the case of milder events (e.g., prior to a full-blown crisis and at a time when authorities can contain financial distress), their effects can become significantly positive.
• Broad-based macroeconomic or sectoral policies are generally ineffective in improving financial inclusion among the most excluded populations. Excluded individuals are difficult to reach, even when applying the most effective interventions. It therefore emphasizes the need for purposeful policymaking, not only during the immediate crisis-response phase but also throughout the consolidation period, so that financial access for the most vulnerable is not only preserved but also actively expanded.

FSNAs have more power and more responsibility than they may realize. They have the responsibility, capability and means to apply the tools at their disposal to support inclusion, as well as the ability to adapt and innovate. As such, it is possible for them to set the course with regard to systemic crises in ways that will minimize their exclusionary impact. The following insights aim to guide their efforts:

• Consolidation strategies must specifically account for the distributional consequences of crisis response and the need for targeted support. The often-inevitable short-term pain of macroeconomic consolidation must be offset with interventions that will cushion impact on the vulnerable. This should include traditional cash-transfer programs, liquidity support for microfinance institutions, and credit for MSMEs.
• Some crisis events require innovative, context-specific interventions beyond the traditional toolkit. Responses that are delayed or narrow in scope will reverse years of progress in terms of financial inclusion. In certain cases, and in order to sustain the credit flow to those who need it most, ensuring the operational resilience of microfinance institutions can be more cost-effective than providing broad cash transfers. During the COVID-19 pandemic, for example, authorities provided innovative solutions to ensure that MSMEs and households were able to keep afloat. However, introduction of clear exit clauses, transparent timelines, and emphasis on the extraordinary nature of such measures are essential to contain fiscal costs, limit moral hazard, and encourage market discipline.
• Granular and timely data are critical for interventions to be effective. Access to real-time and disaggregated information on households and enterprises will generate well-targeted interventions. With such knowledge at hand, the risk of exclusionary outcomes will be reduced and crisis management efforts will be enhanced.