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Financial inclusion

Credit is a powerful tool if it is used effectively and when it is made available to the credit-worthy among the economically active poor people with the ability to use loans and the willingness to repay them. But it has to be bundled with other services to maximise impact on livelihoods.

Moin Qazi | New Delhi |

It is now being increasingly recognized in the development discourse that if we want human development to be equitable and inclusive, we have to address the problem of social exclusion. Inclusive development can ensure that the benefits of a growing economy percolate to all segments of society.  One of the key pillars of inclusive growth is access to finance.

Financial access facilitates day-to-day living, and helps families and businesses plan for everything from unexpected emergencies to long-term goals. Financial access provides individuals and businesses with the tools and resources to invest in education and housing, capitalize on business opportunities, save for retirement and cope with various economic shocks.

There is growing evidence that appropriate financial services have substantial benefits for consumers, especially women and poor adults. The use of financial products ~ such as payments services, savings accounts, loans, and insurance ~ has been found to play an influential role in inclusive growth and economic development.

The benefits of financial inclusion are clearly established. Access to financial services opens doors for families, allowing them to smooth out consumption and invest in their futures through education and health. Access to credit enables businesses to expand, creating jobs and reducing inequality. Financial inclusion is the bridge between economic opportunity and outcome.

Financial inclusion is also a core element of any development strategy. For example, access to formal financial institutions allows poor households to expand consumption, absorb disruptive shocks, manage risks, and invest in durable goods, health, and education. Access to and integration of every individual into the formal economy is essential for the building of a stable economy.

Inclusive growth is widely recognised as having four mutually supporting pillars ~ an employment-led growth strategy, financial inclusion, investment in human development priorities and high-impact multi-dimensional interventions (win-win strategies). In the absence of proper formal financial systems, low income populations have to rely on informal means of managing money, like cash-on-hand, family and friends, moneylenders, pawnbrokers or keeping it under the mattress!

These choices are expensive, insufficient, risky, and unpredictable. Life is one long risk for the poor as they are just a tragic event away from financial catastrophe. Without inclusive financial systems, individuals and enterprises lose promising opportunities, have their potential to use entrepreneurial abilities constricted or have capital constrained to their own savings and earnings.

Managing money is hard, and it’s harder when you live on an earning that makes you plan your life on a day-to-day basis.  There are a variety of choices that women have as a result of having financial access: they can invest in businesses and use proceeds from their businesses to invest in their households.

When farmers are given appropriate financial products and weatherbased index insurance, they are able to choose the types of crops they produce, resulting in increase in production. Financial inclusion carries benefits even beyond the improvement in individual lives. By moving away from cash and using digital payments to distribute government wages and social benefits, governments cut costs and reduce leakages.

Digitizing social transfers has the potential to introduce millions of adults in emerging economies into the financial system. This has many positive ripple effects on the broader financial system. Financial inclusion prevents people from sliding into poverty by softening the impact of unexpected expenses.

When hit with the death of a breadwinner, a savings account or an insurance policy can be all that stands between a family’s impoverishment and stability. Digital payment services also allow people to collect money from far-flung friends and relatives when faced with economic pressure. When more people have access to affordable and highquality financial services, they have more opportunities to thrive. This is especially true for women, who are often underserved by traditional financial institutions.

They require financial products and services that appreciate their experience and perspective. Financial inclusion of women enhances their self-confidence and places the power of decision-making in their hands, resulting in large development payoffs. It is often cited as an essential tool in helping women rise from poverty. The theory goes that when you empower women financially, they’re able to secure their families’ welfare and create pathways toward education and improved quality of life for their children.

Ensuring that women have access to formal financial services ~ transactions, payments, savings, credit, and insurance can help address many economic gaps. The Sustainable Development Goals (SDGs) framework encompasses specific focus on women’s financial inclusion as part of a broader commitment to women’s empowerment in economic opportunity and other domains.

Going far beyond Millennium Development Goal 3, SDG 5, “Gender Equality,” prioritizes women’s equal rights to economic resources and assets, aims to eliminate violence against women and girls, seeks to recognize and value unpaid work, and promotes the enhanced use of enabling technology. For millions of individuals in the lower deciles of the economic pyramid, access to financial services is extremely difficult, expensive, and harrowing.

It constrains their ability to plan for their family’s future and traps households in cycles of poverty. More broadly, it limits the economic growth potential of a country. People need to protect themselves against hardship and invest in their futures to cope with risks such as a job loss or crop failure ~ all of this can push families into destitution. Many poor people around the world lack access to financial services that can serve many of these functions such as bank accounts.

Instead, they rely on cash, which is not only unsafe but hard to manage. Most of the initiatives in the field of financial inclusion have so far been supply-driven ~ delivery of banking services to the poor people, if need be at their doorstep. However, they have not been able to achieve the goals for which they were designed. Most of them were based on a misconceived premise and assumption.

One important lesson they offered is that the availability of finance is a necessary but not a sufficient condition for poverty reduction. It is certainly not an end in itself. We live in an era of large-scale disruptions and fast-paced technological advances that are transforming many aspects of our lives: health, education, transport, communications, among others. But changes taking place in one area are particularly key for our future: fintech or financial technology.

During the Covid pandemic, Fintech helped governments quickly and securely reach people with cash transfers and other forms of financial assistance and reach businesses with emergency liquidity. It allows people to transfer funds and to pay bills from their home, or in a market or store setting, with limited physical contact. The coronavirus crisis has highlighted the benefits of digital financial services in many different dimensions and its critical role in achieving the Sustainable Development Goals.

In this race to financial inclusion, we will be missing the mark if we believe that financial inclusion will by itself eliminate poverty. No one can deny that having access to financial services is sometimes important for the poor, and we should certainly help the process wherever we can. However, this is not the same as arguing that financial inclusion should replace/displace other development community programmes using the same funding and targeted at the same poor communities, such as in healthcare, education, or infrastructure.

Financial literacy, access to financial tools and economic empowerment underpin the development of healthy and stable communities. But it needs to be complemented with a host of other services. Financial services alone cannot vault the poor out of poverty. They can enable economic enfranchisement but cannot solve social exclusion, which has to be addressed by tackling the entire combination of problems.

The issues include unemployment, discrimination, poor skills, low incomes, and poor housing. We need to remind ourselves of the memorable poser of Dudley Seers, first president of the prestigious European Association of Development Institutes (EADI), on development: “The questions to ask about a country’s development are: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality?”

Credit is a powerful tool if it is used effectively and when it is made available to the credit-worthy among the economically active poor – people with the ability to use loans and the willingness to repay them. But it has to be bundled with other services (such as training) to maximise impact on livelihoods. Financial inclusion is a means to an end ~ or many ends ~ not an end in itself. It should therefore be considered an enabler of a number of  Sustainable Development Goals.

The SDGs are about unlocking the bottlenecks that are preventing individuals from reaching their potential ~ access to education, access to water/sanitation, global health challenges. Financial inclusion deserves a place among these goals. Greater financial inclusion contributes to poverty reduction, economic growth and jobs, greater food security and agricultural production, women’s economic empowerment, health protection through tools that enable so many opportunities and help manage financial risks.

(The writer is the author of Village Diary of a Heretic Banker. He can be reached at [email protected])