By Tilman Ehrbeck
In the sustainable development priorities for the next 15 years adopted by heads of states in New York this week, the United Nations has highlighted financial inclusion as an important enabler for poorer households in the informal economies of the global south to increase resilience and better capture opportunities.
While I agree with the prominence of financial inclusion in the global development agenda, a general audience would be forgiven for asking questions like “Didn’t the reckless extension of unaffordable mortgage credit to low-income consumers in the U.S. start the global financial crisis of 2008?” or “Isn’t there significant doubt about the efficacy of the earlier microcredit efforts in developing countries?”
There are several clear reasons why the development community views financial inclusion as an important ingredient for economic and social progress:
1) Compelling, evidence-based narrative
The starting point for the financial inclusion narrative is the empirical reality of poor households and small businesses in developing countries and emerging markets. Even in middle-income countries such as Mexico, half of the economy is informal. In India, the share of self or informal employment is greater than 80 percent.
Poor and low-income households in the global south are often multi-generational and multi-occupational, mixing for example some small-scale farming with other self-employment and seasonal or temporary employment of other family members. They live and work in the informal economy by necessity, not by choice.
In economic terms, they are consumption-smoothing households and capital-consuming, often reluctant entrepreneurs at the same time. From the financial diaries literature, we know that they need and use a broad range of financial services -something between 12 and 15 informal financial tools in place at the same time. Without access to modern financial intermediation, they need to rely on the age-old, informal mechanisms, such as rotating savings clubs, the moneylender or pawnbroker, which often are unreliable and expensive.
Comprehensive evidence indicates the benefits of financial inclusion. A series of randomized-controlled evaluations shows how individual financial services help households and small businesses smooth consumption, build working capital, accumulate assets, and better manage the financial consequences of unforeseen events. Financial inclusion helps spur local economic development. At the macro-level, the research shows that deeper financial intermediation contributes to economic growth and reduces economic inequality.
The resulting evidence-based narrative appeals to hearts and minds. Financial inclusion helps disadvantaged families in the informal economy, and it does so by strengthening their resilience and enabling them to capture opportunities, rather than by telling them what to do.
2) Southern-led agenda
Starting with its roots in the microcredit innovation, financial inclusion has been a southern-led agenda. It was social entrepreneurs in the global south, from BRAC and Grameen in Bangladesh, to BRI in Indonesia, and Banco Sol in Bolivia, who first understood the empirical reality and successfully demonstrated that poor and low-income families need financial intermediation and can be served sustainable at scale.
The global financial crisis changed the world policymaking architecture from the northern-dominated G7 to the more representative G20. Starting with the Pittsburgh Summit of 2009, there were some 10-plus new, large emerging market economies around the table, including populous Brazil, China, Indonesia, and India, for whom inclusive economic growth, and thus financial inclusion, was a domestic policy priority. Their newfound weight started to influence the financial standard-setting bodies on Basle, such as the Basle Committee for Banking Supervision and the Committee for Payments and Market Infrastructure, which were instructed to look for synergies between their core mandates and financial inclusion.
Today, the Alliance for Financial Inclusion (AFI), a peer-network of some 120 predominantly southern countries that connects central bank governors and other financial policymaking bodies, is arguably at the gravity center of the global financial inclusion push. Many of AFI’s central bank members have included financial inclusion in their domestic mandate alongside financial stability and integrity. This southern leadership gives the effort credibility and authenticity.
3) Ambitious, yet attainable future
Financial Inclusion is one of the few development goals that seem to be achievable in the foreseeable future. As the World Bank in its call for action has recognized, the vast majority of working-age adults could have access to basic transaction services by 2020. Riding on digital payments rails, a near universal ability to access and use broader-based financial services covering savings, credit, and insurance by 2030 is feasible.
The key for this optimism is the spread of mobile phones. Already today, some 1.7 billion adults, who are currently excluded from the formal financial system, have mobile phones. The Economist and other pundits reckon that most working-age adults will have a “super-computer” in their pockets by 2020, given the drop in the costs of smartphones — already below35 — and data services.
The pioneering mobile-money service M-PESA has reached almost ubiquity in Kenya since its inception in 2007. Neighboring Tanzania started later, but thanks to a more competitive underlying mobile-telephony market, it has reached a steeper adoption trajectory and more than doubled financial access from 27 percent to 55 percent of working-aged adults in the five years between 2009 and 2014. These East African success stories have already demonstrated mobile money’s benefits in the context of lowering costs for domestic remittances, but equally importantly in making a host of broader service offerings viable, from short-term, high-frequency savings; to alternative data-driven, short-term credit underwriting; to micro-leasing of residential solar energy units.
4) Cost effectiveness of intervention
In many developing countries, in particular in Sub-Saharan Africa, the traditional brick-and-mortar banking sector reaches the relatively small percentage of urban, salaried employees –around 20 percent or less of working-age adults — and often invest their deposits in government treasury bills, with limited financial intermediation to support the real economy. Against that backdrop, financial inclusion is really a much needed financial systems deepening.
The new technology-driven business model innovations and service offerings have the proven potential to reach far more people with a broader range of financial services at far lower cost. They do so in a profitable fashion and require relatively little backing in terms of regulatory clarity and some soft infrastructure investments from the government’s purse. Compared to the public finance requirements in other important development areas, such education and healthcare, supporting local, savings-led financial system’s deepening is a relatively low-cost, high-effectiveness intervention.
In the context of its new 15-year Sustainable Development Goals, the United Nations has followed the G20, the World Bank, AFI, and others in elevating financial inclusion high on the global development agenda. Between a compelling, evidence-based narrative, credible southern leadership, an ambitious yet attainable path forward, and the relative cost-effectiveness of supporting the overall effort, the international community has a good shot at achieving the objective of providing poor families and small businesses in the informal economies of the global south with the broad range of financial intermediation they need to improve their lives.