Why Is Financial Inclusion so High on the Development Agenda?

Tuesday, September 29, 2015

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.

 

Source: Huffington Post (link opens in a new window)

Categories
Impact Assessment
Tags
financial inclusion, social impact, unbanked