> Posted by Ignacio Mas and Kim Wilson, Independent Consultant and Fellow, Center for Emerging Market Enterprises and the Feinstein International Center, Tufts University

The statistics are appalling: something like two-thirds of people in developing countries do not have access to a bank account, and more than half of those who do don’t find it sufficiently convenient or relevant to use it much.

By referring to this state of affairs as financial exclusion, we elevate the problem to one of gross inequity and neglect of basic needs. But let’s be honest: it is hardly the kind of aggravation that motivates affected people to demand inclusion. No boycotts are brimming, no sit-ins loom in the distance. There are few street-level activists, not counting those who have created a money-lending business out of it. People seem content with just staying away from banks. And the feeling is mutual: many banks, spurred on by donor money, now talk the inclusion talk, but pull the aid away and their new-found focus on the poor may well start to blur. Such little passion for inclusion in the formal system means no movement will explode onto the scene and no market will flourish any time soon.

First of all: do the excluded really feel excluded? Many people certainly feel excluded from banks. They’re aware that banks don’t concern themselves much with the needs of the ordinary person, and they’ve often been made to feel unwelcome in banking halls. Poor people everywhere rationalize that with a simple dictum: banks are not for people like us.

But even if they feel excluded from banks, do they feel excluded from finance? Hardly, and to see that, just ask them about any life circumstance in which they needed money. You’re much more likely to get a story of resourcefulness than of helplessness. By force of need, they’ve developed the skill of scanning their assets, prospective income sources, and social relationships in order to pick which they are going to liquefy in some way in a situation of need. They’ll ask for help from a friend, borrow from the store, pawn a jewel, ask for an advance from an employer, delay buying some business inventory, suspend contributions to some personal or collective savings plan…

These are generally referred to as informal solutions, and what we mean by that is that they are bespoke solutions which need to be negotiated each time a need arises, even though they usually fall into a frequent prior pattern of use, and societies have developed standard protocols for soliciting and carrying out these transactions. Informal options may be effective in accommodating idiosyncratic financial needs, but their effectiveness may be more limited if everyone around you faces the same income fluctuations and shocks as you do.

Formal solutions, in contrast, are meant to be more automatically available because—in theory, at least—they fit into stable, enforceable, longer-term contractual relationships, and banks carry more diversified portfolios of risk. But which is better—formal or informal—is not just a matter of product or contractual design: bank products will remain meaningless as long as banks and ordinary people don’t care for each other.

In any case, poor people’s sense of financial precariousness comes much more from poor income prospects than from unreliability of informal financial options or the unavailability of formal financial options. At least they’ve got some options; what they lack is the income to develop those options more fully over time.

So the financial inclusion/exclusion label is off the mark on three counts. First, it speaks to a sense of helplessness and isolation which is not accurate; only the most destitute face an utter lack of financial options. Second, most people think of finance primarily through the lens of their income flows; it is hard to engage people on financial options without straying into income generation (a point not missed by advocates of microcredit). And third, it implicitly assumes that formal options are superior to informal options; at least that’s what most indicators of financial inclusion seek to measure.

Is it right for us to cling to a label that is so far from how people perceive their situation? Should so much time and money be devoted to corralling the poor into a system that they don’t care to be a part of, under the banner of financial inclusion? Might we focus less on the formal system as the endgame and more on the benefits that those locked into the informal sector seek?

To this end, we believe that technology can play an important role. Electronic payment systems that help people support each other even when they are apart; mobile apps that offer people and microbusinesses an intuitive window into their financial needs and resources; peer funding platforms that let entrepreneurs syndicate their business loans; merchant point-of-sale solutions that help them turn their working capital faster; and so on.

The big question is who will make all this happen. Banks may choose to play a role in all this, or maybe not. But they cannot be our only bet.

Ignacio Mas is an independent consultant. You can learn more about his work here.

kimwilsonKim Wilson is a lecturer at The Fletcher School and a Fellow with the Center for Emerging Market Enterprises and the Feinstein International Center at Tufts University.

Image credit: The World Bank

Have you read?

Green High Heels vs. Pink Flip Flops: The Extreme Inclusion Debate

The Whole Enchilada: Imagining A Richer Financial Ecosystem

Layering Financial Inclusion, Informal on Formal