> Posted by Jenny C. Aker, Assistant Professor of Economics, Tufts University

Today’s post continues the debate from the Extreme Inclusion conference at the Fletcher School at Tufts University. The proposition, as you will recall: “Financial inclusion means formal inclusion.” Yesterday, we heard from the Pro side of the argument (represented by green high heels), and today we hear from the Con side (pink flip flops). The Con team is represented here by Jenny C. Aker on behalf of herself and teammates Ignacio Mas and Daryl Collins.

What we have heard from the opposing team is that financial inclusion – real financial inclusion – means “formal” financial inclusion. We heard that in order to get out of the poverty trap, poor individuals want – and need – financial services that build financial security, manage risks against shocks, and invest in new business opportunities. In other words, things that the informal sector can’t fully provide.

But is formal always better? Formal services are often laden with fees (how many of you know the APR on your credit card?), unfamiliar, or simply unsafe. The 1999 banking crisis in Uganda depleted smallholder savings. It was a formal system. The collapse of the Russian banking system defrauded depositors. This, too, was a formal system. And as the financial sector has become wider and deeper in many countries, the effects of such volatility — boom one day, bust the next — are felt by more people, including the poor.

Even without these formal sector collapses, the poor must often choose between high-priced formal financial services or none at all. We often criticize the moneylenders for being usurers. But what about Banco Compartamos, which has interest rates well above 70 percent and still doesn’t offer savings services? Is that fair? Or the compulsory two savings account system of the Grameen Bank, each with separate rules? Is that useful?

Financial inclusion, broadly defined, is the ability of an individual, household, or group to access appropriate financial services or products. Informal services – from friends and family members, ROSCAs, tontines, susu collectors, and yes, even moneylenders – provide those services. Services that may not be regulated, but are useful, fair, dignified, and familiar. They have helped millions of people borrow, save, insure, and invest, all on their own terms. These systems have survived and thrived for centuries in the face of inflation, financial collapse, coups d’etat, earthquakes, and floods. Why would we not encourage people to manage their existing networks better, rather than encourage them to no longer use that network?

It is with these arguments that we ask you all to reject the proposition that financial inclusion means formal financial inclusion. Like our enthusiasm for microfinance as the “next big thing”— for which, by the way, we have little rigorous evidence of its impact on the world’s poor — a focus on formal financial inclusion will encourage the poor to use formal financial products that are not useful, fair, or familiar, potentially at the expense of their existing social networks. Do we have something to gain? Possibly, but the jury is still out. Do the poor have something to lose? Absolutely. We should not be willing to take that risk.

Jenny C. Aker is an Assistant Professor of Economics at The Fletcher School and the Department of Economics at Tufts University. She is also a Non-Resident Fellow at the Center for Global Development and a member of the Advisory Board for Frontline SMS.

After working for Catholic Relief Services as Deputy Regional Director in West and Central Africa between 1998 and 2003, Jenny returned to complete her PhD in agricultural economics at the University of California-Berkeley. Jenny works on economic development in Africa, with a primary focus on the impact of information and information technology on development outcomes, particularly in the areas of agriculture, agricultural marketing, and education; the relationship between shocks and agricultural food market performance; the determinants of agricultural technology adoption; and impact evaluations of NGO and World Bank projects.

Image credits: The Fletcher School

Have you read?

Scaling Up Formal Savings: Lessons from the SEEP Annual Conference

In Defense of Formal Financial Services: Moving Beyond the Parking Lot and Onto the Highway

Promoting Formal Financial Savings: Know Your Goal, Know Your Competition