Financial Inclusion – Access to Financial Services
What is financial inclusion? How is it interrelated to microfinance?
In 2003, the United Nations identified four main goals focused on access and delivery of financial services, particularly to low income segments of society: 1) reasonable cost for services; 2) sound institutions and prudential regulations; 3) financial and institutional sustainability; and 4) multiple providers of financial services.
Over the past ten years, financial inclusion has gradually become an increasingly conspicuous part in the development community discussions. The concept is really quite simple: improve people’s lives by increasing their access to basic financial services such as insurance, savings accounts, loans, and remittances. By doing so you empower them to smooth their consumption over time, avoid potentially dangerous shadow markets, undertake entrepreneurial pursuits, and broaden their financial horizons, among other things. This, it is presumed, will help them to improve their quality of life, and hopefully lift them out of poverty.
As this concept has increased in popularity so has institutional involvement. For example a recent study by McKinsey & Co. found that full financial inclusion for billions of the world’s poor is achievable but it will require scaling and innovation, and mobile banking will play a key role in delivery of financial services. The World Bank has created the Financial Inclusion (Global Findex) Database to measure how people in 148 countries – particularly the poor, women, and rural residents – save, borrow, make payments and manage risk. The Boston University Center for Finance, Law, and Policy created the “Financial Inclusion Guide” for microfinance and related practitioners. And, the Center for Financial Inclusion has committed to building a growing movement to reach full financial inclusion by 2020 by engaging in debate and action.
In 2009, the Alliance for Financial Inclusion (AFI) issued the Maya declaration whereby central banks among the developing nations accepted financial inclusion as their common objective. The topic has even been a buzzword of recent G20 summits, and in 2010 the G20’s Financial Inclusion Experts Group (FIEG) released its nine “Principles for Innovative Financial Inclusion”, intended to “form the basis of a concrete and pragmatic action plan for improving access to financial services amongst the poor.” Then this past year in Baja California the topic gained more momentum when the Mexican G20 leadership pressed for a greater focus on the issues affecting the developing world.
So how big of a problem is this?
According to the G20 Financial Inclusion Action Plan, as of 2010 more than 2 billion adults lacked access to basic financial services, and millions of micro, small, and medium sized enterprises (MSMEs) lacked sufficient access to credit.
This is where microfinance comes in. Originally designed for the allocation of credit to the unbanked, microfinance institutions (MFIs) have been slowly expanding their range of services to satisfy the needs of the perpetually unbanked. In addition to credit, MFIs have been among the first institutions to provide underserved populations with access to bank accounts, remittances, savings accounts, insurance and other financial services.
Many MFIs now offer a wide range of financial services utilizing a variety of delivery channels, from brick-and-mortar banking facilities, to mobile banking, to POS (point of sale) devices, and agent services as well as financial education and livelihoods training programs. For example, Bandhan, the Kashf Foundation, Grameen, and BRAC all offer financial products that extend beyond microloans. As MFIs introduce financial inclusion programs to best serve their customers, many are gaining an awareness of customers’ needs and customer service. To adopt suitable financial inclusion strategies, researchers are helping MFIs identify market and client segmentation. CGAP’s 2011 study of financial access noted that the ‘microcredit revolution’ demonstrated that poor people in the informal economy form valuable clients, and financial services can help improve household welfare and stimulate enterprise development. Identifying suitable products for such clients is challenging, as shown in a recent CGAP study on “Applied Research Methodologies for Financial Inclusion”. By studying the needs and expectations of low-income Brazilians in relation to financial instruments, researchers are finding that not all financial products are suitable for every consumer.
Given the increasing importance which the international community has been putting on the concept of financial inclusion, it is quite likely that this trend towards the expansion of financial services will only grow stronger; and microfinance will continue in its ongoing evolution.