1. What is financial Inclusion?
Financial Inclusion is the ability of underrepresented individuals and businesses to access needed, useful and affordable financial services and products that cater to their actual needs in an equitable and sustainable way irrespective of the location. Financial Inclusion covers products and services such as banking, payments, remittances, credit and insurance.
What are the objectives of financial inclusion?
The main objectives of financial inclusion include:
- To help the underrepresented individuals and businesses secure financial services and products at economical prices such as deposits, fund transfer services, loans, insurance, payment services, etc.
- To establish sustainable financial institutions to cater to the needs of the underrepresented
How do you measure financial inclusion?
There are varying ways to measure financial inclusion and researchers, governments and policymakers often interpret data differently. Currently, financial inclusion is measured using 3 indicators:
- Usage – Do you have a bank account? Do you have a savings account) Can you easily borrow money from a financial institution?
- Access – Do you have access to a bank branch? Do you have access to an ATM? Do you have access to a banking agent?
- Barriers – How far do you have to travel to access financial services? How much does it cost you? Do you trust the financial services? Are there additional documents required to access the financial services?
2. Why does financial inclusion matter today?
In 2020 there is still a segment of the global population who are “underbanked” (around 1.7bn people who do not have or have ever owned a bank account) and one of the main factors for a significant number of the unbanked people is not always their income level.
Irrespective of country, about half of unbanked adults come from the poorest 40% of households within their economy. The major obstacles to financial inclusion in these communities are:
- Minimal education
- High unemployment (which only accounts for a fraction of the explanation)
- Account costs regarding set-up and maintenance
- The lack of physical accessibility to banks
3. What are the challenges of financial inclusion?
There are a lot of challenges that have slowed or hindered full or extensive financial inclusion over the years. They include:
Investing in financial education
There is widespread lack of education when it comes to utilization of the right products and services. This has resulted in a segment of the population not utilizing the financial services. It is imperative to invest in financial education in order for the “underbanked” to make financial decision making and to benefit from utilization of the right financial products that best suits their needs.
Simplifying account opening documentations
The need for formal identification documents should be simplified to allow individuals who lack these documents to participate in financial services. A formal photo ID is required before an individual can open a bank account. IDs are also needed for claiming social benefits and the transfers of funds. However, the process of obtaining a photo ID is not always easy for a lot of people. This is where governments can step in and simplify and streamline the process for obtaining a formal photo ID card.
Having the governments underpin and endorse financial technology
There still lacks a wholehearted endorsement of emerging financial technologies from a lot of governments. This has over the years led to a mistrust of financial technology. Governments should actively participate in the establishments of clear guidelines and regulations to ensure that consumers are adequately protected and have access to key product information to allow them make informed decisions.
Addressing gender inequality
Women make up a majority of the “unbanked” and “underbanked” individuals around the world especially in developing countries. Although they form a larger share of the self-employed category in developing countries, women have a lower chance of securing credit from banks. When a credit line is extended, they often have to pay higher interest rates than the men.
Reasons why women are denied credit in developing countries
- Lack of collateral
- Poor credit history.
Why do women in general enjoy less access to financial services?
- Lack of money or regular income
- Lower levels of education and financial literacy
- Legal and societal restrictions
- Lower rates of mobile phone ownership
- Lack of decision-making power
To solve the issue of gender inequality, stakeholders need to undertake 2 key efforts to remove the impediments that women face when trying to gain access to financial services. These efforts can include:
- Improve the rate at which women get formal IDs to open a saving account to build up a credit history from an early age.
- Increase investment into financial awareness programs to encourage women to make better-informed financial decisions.
Improvements to the financial infrastructure
With increase access to the internet, people are still receiving their wages in cash. The government and the private sector should work hand in hand to ensure that wages are deposited into the bank accounts; help accelerate the use of bank accounts.
4. How can financial inclusion be achieved?
What role does technology play in financial inclusion?
Over the last decade, the biggest barrier to financial inclusion was the inability to explain how technology addresses need especially for the unbanked and under-banked.
The last 24 months have seen an increase in Easy-to-understand technology which is now giving rise to engaged participants and users. Since 2015 financial inclusion has been underpinning a lot of innovations in FinTech.
Over the last 2 years, the “unbanked” and “underbanked” segments have been the core focal point for a lot of technological innovations within the payment industry and banking as a whole. What’s still not ideal is the fact that the payment sector within the FinTech space has not seen substantial investment covering financial education.
Let’s face it; attempts to venture into financial inclusion have always been historically a corporate social responsibility gimmick.
The financial inclusion imperative will continue to drive digital banking innovation over the next decade, especially in Asia and Africa. Startups will continue to position better position themselves to take advantage of the previously underdeveloped market.
What role does government play in financial inclusion?
In collaboration with FinTechs, governments should continue to take part in efforts to accelerate financial inclusion. Here are templates that governments can follow:
- Brazil – The National Bank of Brazil released new regulation for credit startups to increase competition and reduce interest rates for end-customers.
- Mexico – Mexico recently enacted a FinTech law to promote financial stability while also introducing a regulatory sandbox under which FinTechs can operate.
- India – In an effort to streamline the account opening documentation requirements, the Indian government launched “Aadhaar”, which is an effort to get the country’s entire 1.25bn population onto a single biometric card system embracing 1600 languages and almost 300m illiterate adults. Today 99% of India’s adult population is covered on “Aadhaar” and the system is working towards narrowing the gender and economic class gaps through granting its citizens access to financial services across the country.
5. What are some good financial inclusion examples?
There are currently a lot of competition involving mobile network operators (MNOs), payments providers (like Mastercard and VISA), and other FinTechs developing solutions to serve the previously the “underbanked” populations. Banks have recently joined the fray through collaborations.
Examples of financial inclusion for the youth
Nala Money is focusing on the youth by simplifying the process of sending money for the youth by adding a PFM (Personal Financial Management) to their mobile application. By listening to the youth, Nola has been able to capture and solve some of the frustrations that the youth have with mobile payments such as checking SMS transactions.
Examples of financial inclusion for the poor
M-Shwari is a paperless banking service that enables the poor to open and operate an M-Shwari bank account through their mobile phone, through M-PESA, without having to visit any bank to fill out bank account opening forms.
Why is it M-Shwari useful for the poor?
- It also provides the poor the ability to move money in and out of their M-Shwari savings account to their M-Pesa account at no charge.
- It gives the poor an opportunity to save as little as Ksh.1 (less than 1cent) and earn interest on the saving balance. This cash is moved into the savings account using a mobile device handset via the M-Pesa Menu.
- Enable the poor to access micro credit product (loan) of a minimum of Ksh.100 anytime and receive the loan instantly on your M-Pesa account.
Examples of financial inclusion for farmers
FarmDrive is connecting farmers to financing. FarmDrive uses mobile phones, alternative data, and machine learning to close the critical data gap that prevents financial institutions from lending to creditworthy smallholder farmers. FarmDrive collects and aggregates alternative datasets (e.g. social data, agronomic data, environmental data, satellite data, etc.) to build credit scores for smallholder farmers.
MyAgro is a mobile savings system enabling farmers to pay for crucial inputs like seed and fertilizer in pre-paid installments.
Agrilife is a cloud-based technology platform designed to use mobile phone and web platforms as the channels to enable smallholder farmers in groups to access financial services, markets, and other relevant services. Agrilife collects key data on the farmers and farmer groups, such as bio-data, produce data, and farm status data, which helps in making the farmers visible.
Examples of financial inclusion for women
The adoption of M-Pesa has brought significant positive changes for the women. How has M-Pesa achieved that?
- Women in Kenya now have the ability to save their money in a safe place and are less likely to use their money when they saved it in M-Pesa rather than in their homes.
- With their money saved with M-Pesa, Women now have the ability to save for more costly activities and purchases, helping their families or expanding their business and more importantly, sending their children to school.
- M-Pesa can now be attributed to the decrease in transportation expenses since they do not have to transport the money leaving them with more money and free time to expand their business and make a greater profit.