NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, May 22, 2015

Half of the world’s population lives and works in the informal economy – not by choice, but by necessity. In the language of economists, poor families in developing countries are consumption-smoothing households and capital-consuming, self-employed entrepreneurs at the same time. As a result, they need a broader range of financial services to manage inevitably irregular income and expense spikes, accumulate working capital, build assets, and mitigate risks. Lacking better alternatives, they often resort to informal financial mechanisms, such as moneylenders, pawnbrokers, and rotating savings clubs, which can be very unreliable and expensive.

Against this backdrop, the notion of financial inclusion has risen to the top of the global development agenda, and the new Findex financial inclusion data is giving an important update on progress. Headline news is that 700 million more working-age adults gained access to the formal financial system since 2011, when the last comprehensive Findex survey was conducted. In this round, researchers included some 40+ financial usage related questions into the Gallup World Poll, covering sets of 1,000 randomly selected, nationally representative adults in more than 140 countries, to create the most robust summary data set of its kind in the world.

The new data suggests that the global progress is broader-based, with access increasing across most world regions. By income, poorer families are catching up with more affluent ones. However, when looking at gender a sizable gap between men and women persisted. The new data also suggests important levers for how to potentially ramp up families in the informal economy to formal financial services: some 400 million unbanked adults globally receive wages or government transfer payments in cash that could be directed towards basic transaction accounts; similarly, 440 million unbanked adults in developing countries receive cash for the sale of agricultural produce; and 270 million send or receive domestic remittances in cash.