Guest Articles

September 22

Robin Newnham

COVID-19: Burden or Boon for Financial Inclusion?

When the Alliance for Financial Inclusion outlined our Five Key Financial Inclusion Policy Trends for 2020” on January 17 of this year, the spread of the novel coronavirus was still in its infancy, with little sign of what was to come. The previous week, officials had just confirmed the first death from the virus in China, the first case outside of China (in Thailand), and the potential for human-to-human transmission. It would be another 25 days until the World Health Organization officially named the new virus, along with the disease it causes, and a full 54 days before it declared COVID-19 to be a pandemic. So it’s little wonder that our trends assessment mentioned neither the public health nor the economic and financial impact of the virus.

Since then, the virus has wreaked havoc on the global economy, leading to at least a 5% contraction in global gross domestic product and a six-year reversal in human development. It has also threatened the livelihoods of an estimated 1.6 billion workers in the informal economy

Yet despite this destruction to lives and livelihoods, the emergence of COVID-19 on the global stage does not mean we must entirely dismiss the trends we’d predicted at the year’s onset. Instead, we must view them through a new prism. In doing so, it becomes clear that the pandemic presents a major risk of reversing the financial inclusion gains the world has steadily accumulated over the last decade. Yet it also presents us with opportunities – if policy momentum can be sustained in spite of the adverse circumstances.


Youth’s uncertain future

In January, the first trend we highlighted was an increasing focus by policymakers in developing countries on the financial and economic inclusion of their youth populations. While youth may be more resilient to the direct health impacts of the virus, they will not be spared from its economic impact. 

More than half of all young people working in developing countries are in the informal sector, and therefore at higher risk of loss of employment and income. In March, some 86% of young entrepreneurs in the Asia-Pacific region reported that COVID-19 had already negatively impacted their businesses. And young entrepreneurs around the world also face challenges in accessing government support schemes, if they do not already have existing relationships with financial institutions. 

Furthermore, the closure of schools and universities may exacerbate education inequalities by disadvantaging those without access to e-learning. And studies have shown that youth leaving school or graduating during a recession face lifelong disadvantages and loss of earnings


Inclusive green opportunities

Another trend we highlighted was that 2020 would be a critical year for cementing the nexus of climate action and financial sector policymaking. Though public health responses to COVID-19 have provided evidence of the speed with which harmful emissions can drop when behaviors shift and economic activities grind to a halt, these benefits are not likely to be long-lasting

Instead there is a real risk that dealing with the pandemic could set back progress on climate action, both by eliminating the fiscal space countries need to invest in the transition to a green economy, and because attempts to keep the virus in check are exhausting policy bandwidth – the postponement of COP-26 to 2021 being one prominent example. 

Yet despite these risks, as attention shifts towards economic recovery from COVID-19, policymakers will have an unprecedented opportunity to link the greening of the economy to job creation and inclusive growth. Research has highlighted that, to date, only 4% of G20 countries’ fiscal stimulus can be classified as “green” – i.e.: with the potential to reduce long-term greenhouse gas emissions. As called for by International Monetary Fund managing director Kristalina Georgieva, now is the time for policymakers to design inclusive green stimulus packages ready for post-crisis deployment.


Targeted policies for forcibly displaced persons

As we mentioned in our trends assessment in January, the almost 80 million forcibly displaced persons (FDPs) around the world require targeted policies and interventions as part of a holistic financial inclusion strategy. The COVID-19 crisis has undoubtedly made their lives even more precarious. As the recent catastrophe in Lesbos, Greece has shown starkly, many FDPs are confined to camps, the conditions in which make social distancing and regular hand washing impossible, leaving them highly vulnerable to infection from the virus. 

To make matters worse, there are signs that host communities’ attitudes and hospitality to FDPs may harden in response to the pandemic. Indeed, in some cases, FDPs in transit have been turned away from their intended destinations, with COVID-19 movement restrictions cited as a justification. In a context in which “an outbreak anywhere is an outbreak everywhere,” it’s essential to include FDPs in economic and financial – as well as public health – responses to the pandemic. As David Miliband, president and CEO of the International Rescue Committee put it, “this is a disease of the connected world and we must address it as a connected world.”


Inclusive digital onboarding

Turning to technological trends, the shift towards digital identification and verification that we highlighted in January has been further catalyzed by the closure of physical premises. Countries such as India, Peru and Thailand, which have invested in national digital identity programs and other digital infrastructure such as interoperable payment systems, have been able to utilize this infrastructure to deliver targeted large-scale fiscal support packages – including to informal sector workers and vulnerable populations. 

The president of the Financial Action Task Force, Xianming Liu, gave further impetus in this direction by calling for countries to explore digital identity to manage money laundering and terrorist financing risks posed by the crisis. He also urged them to make use of financial technology, regulatory technology and supervisory technology “to the fullest extent possible.” 

This trend towards digital onboarding, if sustained beyond the pandemic, could be particularly important for the financial inclusion of women who, research shows, are disproportionately impacted by traditional Know Your Customer norms


Regulation and virtual assets

We also projected that 2020 would be a year of increased regulation and growing use cases for virtual assets. This still seems likely to be the case, judging from examples such as the Reserve Bank of Zimbabwe’s announcement in March of a regulatory sandbox for cryptocurrency companies. 

The Financial Action Task Force has warned that countries need to remain vigilant with regard to the “increased misuse of … virtual assets to move and conceal illicit funds” in light of the pandemic. Meanwhile, the impact of the crisis in nudging consumers and businesses to digital payment channels, coupled with unprecedented monetary policy responses by central banks globally, could also serve to increase the attractiveness of virtual assets as investments. The pandemic also presents an opportunity for various “stablecoin” projects to demonstrate their potential role in financial inclusion, by helping to disburse emergency funds to the most vulnerable populations quickly and efficiently. 

Meanwhile, with the exception of China, many countries had pressed the pause button on using central bank digital currencies in the emergency phase of their crisis response. But the pandemic highlights the importance of reliable, secure and interoperable digital payments systems as an essential service. So coupled with the declining popularity of cash, we are now already seeing such projects picking up speed again as we enter the recovery phase. 

Indeed, the accelerated adoption of digital payments and the demonstrated necessity of holistic digital ecosystems for national and human security may yet be one of the crisis’s most enduring legacies. 


Robin Newnham is Head of Policy Analysis at the Alliance for Financial Inclusion.

Photo credit: Branimir Balogović.




Coronavirus, Finance
COVID-19, digital finance, digital payments, financial inclusion, refugees, regulations, youth