Financial inclusion is the key to inclusive growth

Money is the seed of money, and the first guinea is sometimes more difficult to acquire than the second million. — Jean-Jacques Rousseau

Inequality and exclusion are two of the most pressing challenges facing the world today. In recent years, policy planners have realised that development will be uneven and not wholesome if we do not address the problem of exclusion in a big way. Inclusive growth is necessary for ensuring that the benefits of a growing economy extend to all segments of society. Providing opportunities to every individual to use his potential for improving his well-being is essential for developing prosperous and stable societies. Unleashing people’s economic potential starts with connecting them to the vital networks that drive the modern economy.

Access to and integration into these networks enhances their productivity leads to shared prosperity. It is now accepted wisdom that a key ingredient of inclusive growth is financial inclusion. Greater financial inclusiveness is a gateway for more balanced development and a more cohesive society. Financial inclusion is the philosophy of providing affordable, safe, accessible, sustainable and properly regulated financial tools — delivered in a responsible way so that people can build their assets while improving their livelihoods. It enables people to have safe place to save money, acquire affordable and appropriately designed loans and insurance to gain better control over their own lives and that of their families.

Financial services are like clean water, electricity, transport and communication — they are essential to leading a better life. In fact, they provide an enabling infrastructure for other development goals — from clean water to quality education to affordable healthcare to gender equality. As a corollary, ideal financial societies are those that provide ways that enable people to navigate their daily financial lives. Low income people need contextualised and customised services on account of the peculiarities of their financial lives, particularly their irregular/volatile income streams and expenditure patterns. Financial inclusion provides access to the formal financial system for socially and economically excluded people by integrating them better into the economy and the development stream. The Consultative Group to Assist the Poor (CGAP), the development arm of the World Bank, puts it well: “The financial system is, in a sense, the nerve system of an economy. It is the platform used for market transactions to occur, the means by which governments distribute benefits, and the mechanism used by citizens to demonstrate their civic responsibilities by payment of taxes and government services. Ensuring the financial system is inclusive is paramount in the process of creating a more inclusive, equal and peaceful society.” CGAP adds: “While more inclusive financial systems alone will not solve the problem of inequality and build inclusive and peaceful societies, it will certainly be an important contributor, and it is hard to imagine progress without it”.The poor need to set aside money in times of plenty and draw it in lean times. Life is one long risk for them as they are just a tragic event away from a financial catastrophe. Without inclusive financial systems, individuals and enterprises in low income communities lose promising opportunities, have their potential to use their entrepreneurial abilities constricted or have their capital constrained to their own savings and earnings. Managing money is hard, and it’s harder when you live on an earning that makes you plan your life on a day to day basis. Limited access to finance is seen as a major contributor to persistent poverty.

When more people have access to affordable and high-quality financial services, they have more opportunities to thrive. This is especially true for women, who are often underserved by traditional financial institutions. New kinds of financial products and services can be developed that are aimed expressly at women. In all societies, howsoever oppressed or illiterate women may be, they remain the stewards of household savings. Financial inclusion focuses on removing obstacles to the use of these services, whether the obstacles are price or non-price barriers. Financial market imperfections, such as information asymmetries and transaction costs, are likely to be highly imposing on the talented poor and on micro- and small enterprises that lack collateral and documented financial histories, which may lead to self-exclusion.

Though we are living in an era of spectacular innovation in financial inclusion, formal financial institutions find it hard to serve low-income custom-ers because of the high costs associated with acquiring and serving them. The small transaction sizes and lower balances in accounts make them a drain on bank’s resources.

Informal financial services normally offer more flexibility and convenience than formal financial institutions who have to make high investments for establishing delivery channels, particularly when they have to set up brick and mortar distribution outlets. But revolutionary developments in technology, products and channels, and regulatory frameworks have brought formal financial services to the fingertips of millions of remote communities. With billions of people already using mobile phones, and the rapidly falling prices of smartphones, the means to introduce people to formal banking and financial services are now available. Technology can rapidly scale financial services where they are needed most.

Mobile phone penetration is growing far more quickly than access to financial services. Mobile network operators can now immediately connect villages that are half a day away from bank branches and unreachable by road, giving real-time connectivity and access to people. The JAM trinity (Jan Dhan accounts, the AadhaarID system and mobile technology) can allow us to design completely new business models that offer highly efficient, scalable and reliable support.

There are now a variety of devices and non-conventional methods that involve lower processing costs, provision of home-grown customised systems such as the low cost, multi-lingual ATM — all of which enable banks to provide financial services closer to the consumer at relatively low cost. Here are also other innovations that include the use of smart cards combined with a point-of-sale or point-of-transaction device, banking correspondents and mobile money agents. Banks can further deepen their financial inclusion initiatives by creating products that are simple, intuitive and tailored to meet the needs of those at the bottom-of-the-pyramid. However, the importance of physical and human interface should not be trivialised. The last mile customer integration has to be friendly close and intensive to generate trust and confidence in consumers.

Financial analysts have now developed several useful metrics for measuring financial inclusion so that it can be monitored by implementing agencies. These are:

1. Branch Penetration: It is measured as number of bank branches per one lakh population. This refers to the penetration of commercial bank branches and ATMs for the provision of maximum formal financial services to the rural population.

2. Credit Penetration: It takes the average of the three measures: number of loan accounts per one lakh population, number of small borrower loan accounts per one lakh population and number of agriculture advances per one lakh population.

3. Deposit Penetration: It is measured as the number of saving deposit accounts per one lakh population. Insurance Penetration it is measured as the ratio of premium underwritten in a particular year to the GDP.

We must, however, understand that true inclusion is not something any one entity can deliver on its own. It’s a partnership where different players in the financial environment or ecosystem can pool their capabilities and know-how and build on the synergies .This is the most effective way of truly driving greater inclusion and bringing modern financial services to underserved people. A number of government agencies are also actively involved in efforts to deepen financial inclusion. Most of them are reaching previously grossly neglected groups, such as women. Their contribution has been quite significant and noteworthy. India is certainly on the cusp of a vibrant financial revolution and is poised to making full financial inclusion a reality. But it will require bold innovation, hard timelines, practical policy reorientations, and fundamental shifts in business models to make the financial lives of the poor simple and fulfilling.

The writer can be reached at moinqazi123@gmail.com