A stable financial status is equally crucial for people living in rural areas as it is for people living in urban areas. It helps both groups to advance in life towards their long-term or short-term goals while accounting for any unexpected crises like natural disasters, medical emergencies, or death. In fact, financial stability is the backbone for improving quality of life, and it is a key factor in attaining 7 of the 17 Sustainable Development Goals.
Therefore, the goal of achieving complete financial inclusion has been on the agenda for most countries. But, attaining this goal is not an easy feat to achieve. Certain common challenges faced on the path toward financial inclusion have been identified. In order to address these problems, first, we need to understand the factors that affect financial inclusion.
In this article, we will discuss the factors that impact financial inclusion, challenges to the increasing financial inclusion rate, and consider some of the solutions that can help us alleviate the situation.
A Holistic Thesis on Financial Inclusion Strategies
The improvement of financial inclusion status has been a global concern for decades now. Organizations like World Bank, Alliance for Financial Inclusion, and many others have tried to unite all the countries to make improvements in their financial structure to be more inclusive. Their efforts have resulted in many countries adopting national financial inclusion strategies. However, the economic environment of every country is not quite like the other, and although considerable strides have been made toward financial inclusion, overall, we are still falling short.
State of Financial Inclusion Around the Globe
As financial inclusion has been identified as a key factor in improving 8 of the 17 UN Sustainable Development Goals, countries have geared up to address the situation. More than 50 countries have set goals for themselves to attain financial inclusion and have implemented national financial inclusion strategies (NFIS). Financial standard-setting bodies (SSBs) established at the global level at the Bank of International Settlements (BIS) in Basel now include financial inclusion in their work. It was a crucial step going forward.
The private sector also plays an important role in achieving financial inclusion goals. Start-ups with innovative business models have been extremely beneficial in reaching people in remote areas and providing financial access to grossly underserved communities. For example, the winner of the Forbes India awards FINO – Start-Up of the Year has set up India’s largest banking correspondence network. Their efforts have been pivotal in reaching millions of people across 26 states.
Importance of Financial Inclusion
As we try to delve into the challenges in the path towards financial inclusion, one might question why, at all, the world is striving towards complete financial inclusion? The Sustainable Development Goals (SDGs) drafted by the United Nations (UN) that will help alleviate the living standards across the globe identifies 17 goals, and financial inclusion is crucial to achieving 7 out of those 17 goals.
This is because access to financial services is the first step in acquiring and growing your own funds. Improved financial standing opens up new avenues for everyone. The most prominent role of financial inclusion is revealed in the following section.
- It helps reduce poverty rates by helping poor people with affordable and efficient financial tools.
- By helping the weaker section of society, financial inclusion is the major force for driving economic growth.
- It enables and empowers the community providing them with the strength and confidence to live independently. Financial inclusion also provides people with the right financial tools and skills.
- Financial inclusion leads to greater investment opportunities and, subsequently, greater employment opportunities.
- Improves quality of life and standard of goods and services.
Indicators of Financial Inclusion
Setting goals to improve financial inclusion is pointless without appropriate yardsticks with which to measure the progress. The state of financial inclusion is determined based on information collected from various sources such as the Gallup World Poll, GSMA Mobile Money Deployment Tracker, Mobile Money Regulatory Index, IMF Financial Access Survey, Organization for Economic Cooperation and Development (OECD), International Survey of Adult Financial Literacy, World Bank Enterprise Surveys, World Bank Global Findex Database, World Bank Global Payments Systems Survey, and World Bank ID4D Findex Database. These sources are supplemented with data from individual countries, which are most helpful as they are context-based.
Global Partnership for Financial Inclusion (GPFI) collects the information from the above sources and compiles the data to track the progress of financial inclusion strategies. Generally, the progress is judged on three dimensions to assess the financial inclusion rates. They are as follows:
- Access to financial services
- Usage of financial services
- Quality of the products and the service delivery
The above indicators provide a holistic base to judge the quality of financial inclusion efforts. But GPFI encourages countries to develop their own indicator to have a more in-depth understanding of the efficiency of strategies and financial inclusion policies.
Challenges to Financial Inclusion
As the central banks, financial regulatory institutions, and government agencies of developing countries implement new strategies to improve the financial inclusion of their countries, they are facing major challenges that threaten their efforts. These challenges need to be understood in depth in order to provide effective solutions. Although these challenges take on different forms depending on the specific economic and social environment of each country, they can be aggregated into five major challenges.
Lagging Financial Education Among the Populace
In countries where general education rates are low, it is not expected that financial literacy will be high. Financial literacy is crucial for people to identify their financial needs and utilize the most appropriate financial service and product that can solve their problems.
Financial literacy includes awareness of financial products and services, correct usage of each of these services, and technical know-how before making sound financial decisions. This opens up many avenues for them as they can better access the services available to them and make proper use of associated channels such as ATMs or mobile banking.
Educating people on financial mechanisms also depends on the behavioral trends of the populace. Insights into the traditional thought process of people regarding financial processes are imperative in designing impactful, low-cost curriculums that can improve the statistics of new accounts and savings.
Authentic Identity Documents
Any financial institution requires valid IDs of individuals to allow them to access financial services. Even the simplest task of opening an account is not an option for individuals without authenticated IDs. This blocks the road to transactions, shifting large payments like social benefits and wages.
This is a problem in countries where getting an official ID is a long, drawn-out process. The process to obtain these IDs takes so long that it delays acquiring financial services. Also, many countries face a problem of unauthentic or easily duplicable IDs that makes financial inclusion efforts to be stagnant.
Financial Consumer Protection and Regulation
The improvement of the financial sector in many developing countries is limited by the prevailing corruptive practices. This breeds an inherent fear of financial institutions. With the implementation of newer, unknown digital facilities, consumers are more distrustful than ever, and rightfully so.
There should be strict regulations in place to oversee the fair and just treatment of clients. Policies for the safe and secure use of customer details promote confidence and increase financial institutions’ reliability standards. These policies also ensure transparent operations and make sure that the customers are well-informed about the products they are going to use.
Gender Bias in Financial Inclusion
There is a considerable gender bias in the financial environment of many developing countries, especially among rural communities. The women are kept from participating in financial decisions either because it is difficult for them to obtain IDs or because they require the supervision of a male guardian. These and more restrictions on women prevent them from taking charge of their own money and making financial decisions for themselves.
Over fifty-eight percent of Indian women report difficulty accessing credit savings or jobs because of gender. The statistics are staggeringly grim. Because of a lack of participation from women, even financial institutions do not focus on the needs of women, which results in a lack of adequately useful services that can help women grow their money and improve their financial status.
The rural population as a whole has been ignored in the development of financial services and products. Generally, there are fewer financial institutions available for the rural population as compared to the urban section of society. As a result of limited access to financial services, people belonging to the rural community are ignorant about the proper usage of financial services. Such ignorance keeps them from using the available services.
Active Use of Financial Services
In many countries, financial services are available and have encouraged many people to open an account with a formal financial institution. But opening an account is not enough. It is a real problem in many countries that citizens who have opened an account with the bank only use it to receive payments such as wages, social payments like pensions, etc., and promptly withdraw the entire amount in cash. This is not useful for either the banks or the customers, as the accounts are not fully utilized. People often shy away from all the other financial services that having an account will allow them to use.
Solutions to Overcome the Challenges
Once the challenges are identified, positive steps can be taken to overcome these problems and continue to improve the state of financial inclusion in the world. An in-depth understanding of these problems has helped the World Bank to furnish certain solutions to cope with them. The solutions provided by them are generalized and need to be modified depending on the context of individual countries. As a guide, these provide a general structure that can be followed to develop national strategies and effective policies to improve the state of financial inclusion in individual countries.
Incorporate Financial Institutions with Diverse Functions
The type of financial institutions depends on the needs of the demographic they intend to serve. No country is homogeneous in its population, and it is made up of people belonging to various social and economic groups. Different financial institutions like commercial banks, postal banks, microfinance institutes, credit cooperatives, etc., have different approaches to their clients, and the operations of each of these institutions are based on varying business models. They target distinct customer segments and geographical locations.
The regulatory and legal bodies should have policies that allow for the entry of different types of institutions into the market. The policies should also ensure the safety of the clients so that they get fair and just treatment during the transactions. The rules and regulations in place should also ensure that all transactions between the financial institute and the client are transparent.
Enact Regulations to Ease the Entry of Technology-Driven Non-Traditional Institutions
Where the traditional institutions are failing to meet the needs of the people, the non-traditional, technology-driven, innovative institutes with improved business models are swooping in. Mobile service providers who have incorporated payment options into their services have been doing wonders in many developing countries like India and Kenya.
But there are still more markets that are primed to welcome and inculcate mobile payments into their daily lives, who are still without the option. By tapping into the potential of the unbanked in DRC and other such demographics, with the help of new-tech financial services, the goal of financial inclusion will be much easier to reach.
The addition of innovative new technology to the existing customer networks, infrastructure, and big data will allow financial institutions to reduce transaction costs and provide financial services that even the low-income customer base can avail.
But like with any new approach, the risk factor is high and a close monitoring of market trends is necessary to safeguard the interests of the clients. Thus, regulations should be designed to allow for technology to intervene but should also make efforts to reduce the risks associated with these practices.
Develop Traditional Banking Systems to Include More Cost-Effective Channels Like Agent-Based Banking
Traditional brick-and-mortar banking systems are proving to be less successful in including different sections of society. It is a more rigid and costly venture. So, the question is, are commercial banks ready to serve the base of the pyramid? In order to tackle this problem is to allow alternate low-cost delivery channels to operate in lieu of physical banks. These channels include local retail shops that can serve as agents of financial service providers and “lite” branches. These methods reduce the overall cost, thus making it accessible to the poor as well as expanding the customer base and increasing the reach of physical banks.
Increase Funds for Supervision and Utilizing Technology to Optimize Available Resources
The smooth operations of the entire financial sector of any country are hinged on proper supervision of market conduct. This is essential to ensure that the financial institutions are adhering to the rules and regulations and following fair practices. In fact, most of the suggestions for overcoming the obstacles to financial inclusion will only work with intensive supervision after the implementation of the laws and regulations.
The issue of supervision and the humongous task of covering every financial institution in the country can be eased with the use of technology. By leveraging the power of technology, one can optimize their limited resources for better output. It can also be used to assess future risks of different business models, automate reporting and conduct supervisory analyses. This approach is known as “Regtech”.
Implement Risk-Sased, Tiered AML/CFT Requirements
When opening an account comes with a lot of paperwork, which naturally deters customers from opening a bank account. But financial institutions cannot simply do without proper documentation, which ensures the safety of the institution and the client. In order to overcome this obstacle, the introduction of a flexible AML/CFT requirement along with a national identification scheme (one using digital identification or biometrics) can reduce the documentation involved, easing the process of opening an account. This process still acts as a gatekeeper for high-risk customers but allows the low-income, low-risk section of the community to access financial products and services.
Promote the Development of Need-Based Financial Products
The governing bodies need to invest in the development of financial products and services that are actually useful for the community to whom they intend to market. For the poorer section, it especially means low-cost services.
A financial institution can offer cost-effective products by applying technical expertise to create innovative financial products. The regulatory framework in place should support the financial institutions in this venture and create products like basic bank accounts and microinsurance, which fulfill the needs of the financially backward section of the community and help them improve their living conditions.
Overall the policies that shift the product-centric mindset to a more customer-centric mindset are required. After applying behavioral insights inside Latin American financial institutions, financial inclusion in Latin America improved considerably. This is because it aimed at understanding how customers interact with financial products and services, and by anticipating their behavior, they created functional financial services and products.
Expanding Financial Infrastructure
The underserved are often kept from accessing financial services due to poor credit reporting systems and a lack of collateral registries. This problem can be overcome by developing a more symmetrical information system and increasing the available collateral registries. Retail payment systems are essential in increasing financial access to the underserved. Hence, it is most prudent for governments to invest in growing their retail payment systems to support financial inclusion.
Ensuring Fair and Just Treatment of Clients by Establishing Rules for Transparency
As financial institutions deal with people’s hard-earned savings, they should be a secure place and someone the customers can trust. It is critical for policymakers to include laws and regulations that protect customers from exploitation and potential abuse. It should be mandated that financial institutions should provide complete information about the products, and every transaction should be completely transparent.
These regulations will help the customer make informed decisions about which products are suitable for them, make comparisons between financial service providers and avoid over-indebtedness. It also supports the clients right to demand fair and respectful treatment by their choice of financial institutions.
Encouraging Improvements Towards Financial Inclusion
The efforts made by different countries are impressive, and it has definitely yielded results despite the obstacles in their path. Today the numbers show that worldwide 76% of adults (aged 15+) and 71% of people in developing countries own an account with a formal financial institution. Another promising development in financial literacy comes from the evidence favoring embedded education in Zambia. The knowledge base associated with microfinance opportunities and the establishment of the Consumer Education for Branchless Banking (CEBB) has proved to be highly successful in improving financial literacy in the country.
Although there are signs of improvement, there is still a long way to go. A large section of the underserved still includes the poor, women, smallholder farmers, and micro, small, and medium-sized enterprises (MSMEs). This statistic will improve once the challenges are faced with appropriate solutions. Fortunately, it is not an unattainable task, and the future looks hopeful as all countries are increasing their efforts.
Q1. What are the Challenges in Achieving Financial Inclusion?
The major hurdles in the path towards financial inclusion are the lack of financial education, growing poverty rate, lack of awareness, and lack of digital and financial infrastructure. These challenges make it difficult for the smooth implementation of policies that work to improve the situation.
Q2. What Can Be Done to Improve Financial Inclusion?
Financial inclusion poses a major threat to the growth of any country, and collaborative attempts at remedying the situation have been made by many countries. Steps to improve financial inclusion include increasing the number of financial institutions in rural and remote areas, promoting digital payments in all sections of society, and providing financial literacy for everyone.
Q3. What are the Pillars on Which Financial Inclusion Stands?
The financial inclusion of a country stands on six basic pillars: financial services access made universal, ensuring availability of basic financial products, opportunities for improving livelihood and skill development, financial literacy and education for all, protecting the interests of customers, and addressing their issues, and effective coordination. These basic traits of any economy need to be improved to enhance financial inclusion and strengthen the country’s stronghold.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.
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