Five years ago, we decided to document our understanding and experiences of financial inclusion in the form of a book. The idea was conceived in a small restaurant in one of the backroads around Gulshan. Insulated from the active streets, it is easy to forget you are in Dhaka, the capital of Bangladesh.
As two outsiders, we were constantly fascinated by the geography, history, local power structures, social norms, and governance issues. It was an excellent learning opportunity. We soon realised our little appreciation of the “complexity” on the ground. Discouraged but not disappointed, one of the most important issues that we learnt was the extent many poor men and women lack access to relevant and quality financial services and products.
Financial inclusion – what it is and what it is not
We certainly wanted to go beyond the academic debates, which have largely been on specific issues of microfinance – the most widespread and fondly promoted tool to address financial exclusion. Rather our focus was on strong evidence and relevant experiences coming from researchers, policy makers and development practitioners.
The experiences documented in our book confirm achieving inclusive and sustainable access to financial products and services goes beyond simply enabling poor women and men to have access to credit, or open a bank account. A number of countries have made good progress in making microcredit accessible to millions of poor and disadvantaged women and men. At the heart of the challenge has been the lack of a systemic approach to the problem addressing:
- Development of suitable, affordable and accessible products and services;
- adequate knowledge and skills to identify and use products and services;
- information or intermediation for aligning incentives and capacities such as reduction of perceptions of risks, understanding services, making responsible choices
- Conducive financial inclusion policies and regulations focusing on quality of products and services
What have we learned?
The who question: users are diverse
Supply-driven financial inclusion has for long ignored the diverse characteristics and financial behaviours of users. For example, access and use of financial products and services are affected by livelihood sources (regularity of income and amount sought); lifecycle stage (education, income source/job, family); locality (urban, semi-urban or rural); and emergencies (sickness, death, natural disasters). The diversity of users calls for a continuous understanding of their demands based on good research and analysis that should look into not just symptoms but rather root causes.
For example, one root cause for the lack of relevant and quality financial services and products for poor and disadvantaged women and men is the mismatch between demand and supply of products and services. Providers may not have the capacity or the incentive to develop suitable financial products or services that meet the demands of users. This is where initiatives should support to enable or stimulate providers to develop relevant financial products and services, or users to develop the right skills to access and use services and products.
Most users are financially excluded but they are financially active
Five years ago, we thought that financial exclusion meant “financial inactivity” of those who are excluded. The definition of being financially inactive suggests access to and usage of formal financial products and services, in particular, opening bank accounts. We now think that this is a narrow definition which only looks at access and ignores usage and quality issues.
The financial inclusion discussion is also full of questions such as “can the poor save?” We again came to learn that such understanding and discussion is less relevant. Why? Because it does not accurately represent the complexities of how financially excluded women and men make ends meet through a range of financial activities for paying, saving, transferring and investing. Here is an example: an informal finance scheme in Ghana called Susu provides the opportunity, particularly to the urban poor, to save and access their own money and also gain limited access to credits needed to start up small venture projects that in many cases benefit the entire community.
We found out that being financially active by itself, however, is not a sufficient condition for overcoming poverty and vulnerability. We are not ignoring the fact that informality serves to protect financially excluded women and men in the short-run. But we are also aware of cases that informality can be insufficient, risky, expensive and unpredictable. Many poor rural borrowers of loans in Bangladesh recycle money from one informal source to another, often trapping themselves in (over)indebtedness. Added to such a challenge is the lack of good financial literacy – awareness/improved attitudes, knowledge and skills to make decisions about savings, investments, borrowing and expenditure in an informed manner.
Why should we shift the focus from demand-supply relationships to the bigger picture in financial inclusion?
We should not lose sight of the bigger picture in financial inclusion. This means poor and disadvantaged women and men do not exist in isolation from other services (e.g. skills, infrastructure) and actors (e.g. service providers, local authorities, etc.). This is what we call “financial ecosystem”. We show in the book that supply-demand relationships often occur under or are influenced by other services such as training, coordination and information, research and development, infrastructure, and advocacy. There are also rules and norms that affect the financial behaviour of users, such as users’ protection, financial supervision/regulation, and informal values (e.g. local power structures). Shifting the focus from a simple demand-supply transaction, as has been the case in microfinance, to a broader “financial ecosystem” enables efforts to better understand the root causes for the failure or underperformance of financial systems.
For example, improving financial literacy of users sustainably requires addressing the lack of skills by engaging relevant providers (e.g. schools, consulting firms or local service providers) that often exist around the supply-demand relationships between users and providers (e.g. banks, traders or MFIs). In countries such as India, development in information and communication technologies (ICTs) is increasingly playing important roles in reaching women and men in remote areas for financial products and services, even though mobile phone coverage and connectivity is poor and unreliable. This leaves a huge number of the population still out of service, mainly in rural, remote and inaccessible areas.
Rules and regulations, which are again often found around the supply-demand relationships of financial services and products, are also critical. For example, Chinese rural migrants (“urban villagers”) are unable to use financial products and services due to barriers including government policies and rules imposed by institutions.
And more shifts: from access and usage to quality
We also understood that having access and use did not mean poor and disadvantaged women and men have adequate and “full” financial inclusion. Ensuring quality financial products and services requires understanding and acting upon the “political economy” of financial inclusion.
If we are to improve the financial inclusion of poor and disadvantaged women and men, it is necessary that we have a better understanding of context-specific local structures and incentives shaping the actions of key actors in financial inclusion – from governments to private sector enterprises, NGOs and civil societies, as well as communities and households. A financially “healthy” user balances income and expenses; builds and maintains reserves; manages existing debts and has access to potential resources; plans and prioritises; manages and recovers from financial shocks, and uses an effective range of financial tool.
A good example is the Kenyan M-Pesa initiative – technology is used to set up a platform allowing customers to make payments conveniently and simply, giving users access to support, cash conversion, and better quality of service. The key to the success has been the business model to operate in a market niche to provide both formal (banks, ATMs and Automated Clearing Houses) as well as informal features (personal trips, friends and public transport networks).
Building a “business case” for sustainable financial inclusion
Our interest in the book is to highlight the importance of developing a compelling business case to support a sustainable agenda for financial inclusion. We are convinced that we should go beyond a pure “moral imperative” thinking of inclusion. Our thinking is supported by the recent initiative, the Addis Ababa Action Agenda for financing development. It made clear that financial inclusion efforts will need to be aligned with private sector incentives and capacities to make an appealing offer to businesses and articulate clearly what the “value proposition” is to consider financial inclusion of poor and disadvantaged women and men.
The book emphasises that long-term and bigger impacts come from encouraging behavioural changes of relevant actors and stakeholders in financial inclusion. These can be product developers, as well as in the services and rules, such as skill providers, standard setters etc. The development and introduction of innovative ideas and business models, services, or advocacy for changes to policies and regulations should be at the heart of every financial inclusion initiative.
Lastly, we place high importance on “strategic partnerships” to enable a range of financial product and service providers to perform key functions or rules in a way different from how they are currently performed or offered. By partnerships, we mean more than formal and material commitments, but also relationships built on mutual interest, trust and opportunities for cooperation to leverage outcomes, and deepen and widen impacts.
Zenebe Uraguchi is a development economist with multi-country experience working for a multinational private company, an international development bank and a research institute. He currently works with HELVETAS Swiss Intercooperation, based in Switzerland, as Programme Coordinator for Eastern Europe and Senior Advisor in market systems development.