Posted by Ignacio Mas, Independent Consultant

That was a fun debate at Fletcher.

This or that? Formal or informal? Pro or con? Of course the answer always lies somewhere in the middle, it’s about and rather than or, to use the trite expression. It would certainly be ironic to seek to be inclusive by excluding options.

But in the case of financial inclusion, where a number of formal and informal services vie for relevance, what does this happy medium look like? I don’t see it as a bountiful fruit platter that people can pick from (now formal, now informal) as much as a richly layered cake.

The cake analogy is to represent the idea of platforms, of capabilities arranged horizontally and interworking with each other. Each layer brings a flavor, a texture, a color to the cake, but it is only when slices cut through the entire stack that the full cakeness comes through.

Let’s count the layers of financial inclusion. You need an identity layer, so that information can be traced back to individuals and histories can be constructed. You need an efficient money transfer layer, so that money can move efficiently and without delay between the various players when they are near or far. You need a cash distribution layer, with a multitude of localities where you can exchange various forms of money (cash to electronic, large bills into small change), on demand. You need enforcement mechanisms, so that IOUs can be trusted. You need a reliable accounting layer to keep track of all these contracts and IOUs. You need creative packaging of money transfers and IOUs into higher-level financial contracts (savings, credit, insurance, and combinations of all these) that connect more directly with people’s problems and needs. You need social connections and knowledge, so that people can variously give, lend, guarantee, and vouch for each other. You need people who can become evangelists, connectors, educators, marketers, to get others involved. You need, you need, you need…

I don’t mean to make it sound more complicated than it really is, or to bias the discussion towards formal just because I used some big words in there. Go through the list again: each of these functions can be done formally or informally, and in fact savings groups do all of the above in their own way. But we shouldn’t strive to create two layered cakes, the nutritious-but-wobbly and the glitzy-but-indigestible. The formal and informal layers need to mix in seamlessly.

M-PESA is a good example of that. It builds on a formal national ID layer, a semi-formal cash in/out layer, and an informal “send money home” customer use case layer. This interworking of the hugely formal (the biggest telco in the land, acting under the watchful eye of the all-powerful Central Bank) with the all-pervasive, timeless informal (the gifting and sharing economy) is what Susan Johnson called The Rift, and she appropriately revealed it to be the source of the magic that has lit up Kenya with electronic money. M-PESA is as much a triumph of the formal as it is of the informal.

At the Fletcher debate, I may have surprised some who know my personal journey by stating that M-PESA is not financial inclusion. It most certainly is not, but neither is any single layer in the cake. I said it not for the reason that most people tend to argue: that, since the M-PESA product offering is spartan, then it cannot be true financial inclusion. I most vehemently reject that the “true” financial inclusion layer, the litmus test of whether something is or isn’t financial inclusion, concerns the product layer. Consider this analogy: do we count access to clean water by the number of people who can find 500cc bottles of water at the local shop? No, with access we expect pipes and taps and stuff like that. That’s what creates convenience, reliability, affordability. It’s about the delivery mechanism as much as it is about the water itself. Again, the magic is happening lower down the layer stack.

So no, by itself M-PESA does not amount to financial inclusion, but in a sense it is also much more than financial inclusion. By making larger and remote payments more efficient, it has enabled a whole bunch of impacts that goes well beyond whether people decide to borrow or save. That’s the advantage of operating at the lower layers: it is less glamorous because the customer benefits are far less concrete and measurable, but it creates a much broader array of potential channels to impact. Vested as we are in the topic, we cannot make the mistake of judging M-PESA only through the lens of financial inclusion.

So why is that, despite all this M-PESA talk and forced to pick at the debate, I sided with the informals? Because I don’t think we as a development community should see our role mainly or exclusively as being to serve up billions of poor people captively to a small set of larger formal institutions who heretofore have shown little interest in helping the mass market. Let’s continue to build layers of the cake, as many and as diverse as possible, formal if they’ll play ball, informal if they don’t.

Image credit: Livelob.com

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

Have you read?

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

Extreme Inclusion Debate Part II: Financial Inclusion is Informal Financial Inclusion

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