Financial Inclusion: Bolster the Speed

Dr BK Mukhopadhyay

A noted management economist and an international commentator on business and economic affairs.

He may be reached at m.bibhas@gmail.com

As a global hot topic it is emerging, the causes of financial exclusion are being located while at the same time efforts are on to design strategies to ensure financial inclusion of the poor and disadvantaged, which, in turn, has smoothened the road to reach at the MDG [Millennium Development Goal of Eradication of Poverty by 2020].

For the last few years financial inclusion has dominated public discourse The exclusion of a large part of population from formal banking services leads them to the unregulated, informal sector- close to 90 per cent of small businesses have no links with formal financial institutions and around 60 per cent of the rural and urban population does not even have a functional bank account!

Incidentally, it may be mentioned that world leaders now, while fully appreciating the gaps, say they want to pursue financial inclusion. The G-20 launched a Financial Inclusion Expert Group. Heat is on, led by policy makers, in the developing world from India to Brazil to Mexico. The U S A was also seeking to make greater contribution to global leadership in this arena. In the US the federal government introduced the Community Reinvestment Act, 1997, partly in response to concerns about bank branch closure in low-income neighbourhoods, under which regulation federal.

To be specific: financial inclusion is a state in which all people who can use them have access to a full suite of quality financial services, provide at affordable prices, in a convenient manner and with dignity for the clients. Financial services that are delivered by a range of formal providers [all institutions that provide formal financial services recognized by the Government – commercial banks, savings banks, rural banks, state banks, non-bank financial institutions and other financial institutions like microfinance NGOs, credit unions] have to reach everyone [inclusive of the poor, disabled, rural and other excluded populations], who, in turn, can use them.

Here fully included is a term describing individuals who have access to the full suite of basic services, which, in turn, refers to savings, credit, insurance and payment service. Here, naturally, financial literacy comes into play – the very ability to understand how to use financial products and services as well as how to manage personal, household or micro-enterprise finances over time. And thus improvements in literary levels can be achieved through financial education. This financial education is important in the context of financial inclusion since as previously excluded populations gain access to formal financial services they need to be able to use these services in a productive and responsible manner that will not cause them any harm.

On the other hand, excluded group refers to individuals who have access to none of the products in the full suite of basic services [savings, credit, insurance and payment services] from a formal financial service provider. Broadly defined, financial exclusion signifies the lack of access by certain segments of the society to appropriate, low-cost fair and safe financial products and services from mainstream providers. Financial exclusion is thus a key policy concern because the options for operating a household budget, or a micro/small enterprise, without mainstream financial services can often be expensive. This process becomes self-reinforcing and can often be an important factor in social exclusion, especially for communities with limited access to financial products, especially in rural areas.

Though financial inclusion basically means providing financial services to the vast sections of the population not yet covered by the formal financial system in, yet in the broader sense it means providing access to a bank account backed by deposits insurance, access to affordable credit and the payments system. It is a fact that this aspect of promoting broader access to financial services, despite the emphasis placed on this score, received less attention till recently. The reality mirror reflects that the access dimension, in particular, had been overlooked over the decades.

Recent evidence suggest that finance is not only pro-growth but also pro-poor and economies with better developed financial systems experienced faster reductions in income inequality and poverty. For ensuring fast and consistent economic and social development a well functioning financial system is an essential pre-requisite and so also the depth, capability and efficiency of the financial system. Appropriate financial sector policies call for encouraging on the one hand competition and provide the right incentives to the individuals and on the other extending necessary support to foster growth, poverty reduction and better distributive justice making full use of the capacities. Improving financial access in a way that most benefits the poor calls for the adoption of strategy for inclusion that travels well beyond credit for poor households and as such it is vital to broaden the focus of attention to improving access for all who remain excluded.

Financial exclusion is rightly equated with the inability, difficulty or reluctance to have access to mainstream financial services and the same has the inherent tendency to lead to social exclusion and hence the financial services brings in its fold money and debt services, financial capability, banking, affordable credit and insurance. In an increasingly cashless future economy the consequences of not holding a bank account are ever more exclusionary. Financial inclusion has the power to significantly contribute to a route out of poverty.

Bank regulatory agencies have to rate banks on their ability to serve low-income communities.

It is being rightly observed that by 2020 full inclusion is a big possibility keeping in view the ongoing efforts. Reaching the hitherto unreached spatially is, no doubt, a stupendous work but of course not an impossible one. The challenge is not only to bring them into the formal fold but to ensure a smooth payment system to excluded rural locations, combating the infrastructural bottlenecks. Clear and meaningful objectives, when set before in all these related areas, can inspire all to take a comprehensive path towards full financial inclusion. Of course bringing this forth calls for adequate attention to human and institutional issues – quality of access, affordability of products, sustainability of the providers and of course outreach to the most excluded populations.

It is better not forgotten that financial inclusion aims at benefiting the world’s poor, the vast majority of whom do not use formal financial services of the sort provided by banks, insurers, or microfinance institutions (MFIs) as a result of which they are unable to avail themselves of the fundamental tools of economic self-determination, including savings, credit, insurance, payments, money transfer, and financial education.

McKinsey & Company is very right in pointing out that developing innovative and sustainable products is essential to the further expansion of financial inclusion. Accordingly, organizations should begin with three principles: one, keep products relatively simple, emphasizing ease of understanding and use. Two, design products that balance cost and profit- ability with customers’ capacity to pay. Three, emphasize product bundling—not only to maximize cost-effectiveness but also to shift the focus from pushing a single product to identifying and serving customers’ comprehensive needs.