Expanding financial inclusion to the 2.5 billion unbanked individuals around the world is essential, but why does it matter, and is it possible in the next six years?

In recent years, the inclusion movement has achieved critical support and rapid progress. Last year universal financial access by 2020 was endorsed by World Bank President Jim Kim. Technology-enabled business models are catalyzing outreach, building on infrastructure like the mobile phones now accessible to six of the world’s seven billion people.

In the following video, global financial inclusion leaders explore the questions of whether financial inclusion is possible by 2020, and why we should work towards that goal.

The video features the following individuals:

• Ajay Banga, CEO, MasterCard Worldwide
• Cherie Blair, Founder, The Cherie Blair Foundation for Women
• Sendhil Mullainathan, Professor of Economics, Harvard University
• Mark Hookey, Founder, Demyst.Data
• Nick Hughes, Director of Strategy, M-KOPA
• Edward Effah, Managing Director, Fidelity Bank
• Bob Annibale, Global Head, Citi Microfinance & Community Development, Citi
• Jean-Claude Masangu Mulongo, Former Governor, Banque Centrale du Congo
• Elly Ohene-Adu, Head of Banking Department, Bank of Ghana
• Duvvuri Subbarao, Former Governor of Reserve Bank of India
• Martyn Parker, Chairman, Global Partnerships, Swiss Re
• Susie Lonie, Mobile Money Consulting Director, Consult Hyperion/SJLCS

To watch the video on our CFI YouTube page, click here.

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Why does the Microcredit Summit Campaign wholeheartedly support the goal of “Finance for All by 2020?” Because we see it as an important step in reaching the larger goal of ending extreme poverty by 2030.

From October 9 to 11 we held the Microcredit Summit in Manila on the theme “Partnerships against Poverty.” Delegates of the Summit drafted and approved the Partnerships against Poverty Summit Declaration, listing the principles that we will follow to insure that microfinance works as a worthy partner in the movement to end extreme poverty. The opening commitment of the declaration states:

First, we commit to putting the extreme poor first. Their voices must be heard in our movement, and they must be full participants in the process of improving their lives and our services. They are not only our clients, but also our biggest resource.

To better reach and serve the poorest and most vulnerable populations, we will ensure that we include women, children, the elderly, the disabled, refugees, the LGBT communities and members of cultural and religious minorities.   

Achieving “Finance for All” means that we must develop financial products and services that meet the needs of the poorest and most vulnerable populations. The organizations partnering with the Microcredit Summit Campaign have committed themselves to work with governments, mobile network operators, payment providers, and others to help design and test these products.

When we develop products that meet the needs and the aspirations of those in extreme poverty at price points they can afford, then we will have improved the efficiency of the overall financial system and begun to put in place the mechanisms for achieving Finance for All.

Sendhil Mullainathan, professor of economics at Harvard University, clearly explained the need for putting the needs of the extreme poor first when he spoke at the FI2020 Global Forum. Scarcity brings increased focus, but it leads to tunneling, over borrowing, and limited bandwidth. The financial products we provide for those living with extreme scarcity can either help them escape the scarcity trap or ensnare them deeper in it.

We pledge to work with the FI2020 movement to help design, test, and scale up products and services that both reach those living in poverty and facilitate their journey out of poverty.

Image credit: The Center for Financial Inclusion

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The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

Since Sendhil Mullainathan is speaking at our Financial Inclusion 2020 Global Forum in two weeks, we ordered a few copies of his new book with Eldar Shafir to pass around the office. As a result, the hypotheses of Scarcity are informing our thinking both on our own habits and on financial inclusion.

The title of the session in which Mullainathan, a Professor of Economics at Harvard University, is speaking is “Why Financial Inclusion Means More Than We Ever Knew.” A mouthful, yes, and a bit mysterious. To unravel the mystery, one has to start with Mullainathan’s hypothesis that scarcity of some kind of resource—money, time, even social relationships—brings about an intense focus on the scarce resource, a focus that has negative effects on the way we think and act in areas of our lives outside that of the scarce resource. If this is true, financial inclusion is a game-changer that both prevents scarcity and alleviates its effects.

On first reading, Mullainathan and Shafir’s book seems to apply immediately to my own life. In my case, a scarcity of time means that I often adopt a focus on time and resulting tunnel vision for the task at hand. This focus has some positive effects—I produce work much faster than I would if I had more time. And it has some negative effects—I forget special events like my closest friend’s birthday (I’m sorry, Sarah! Does mentioning you in this blog post make up for it?). In essence, the authors contend that the single-minded focus that severe scarcity creates absorbs so much psychic energy, mindspace, bandwith, or whatever you may call it, that rational decision-making suffers.

This tunneling—devoting a great deal of bandwidth to a single resource—produces intense focus on the scarce resource, but also catastrophic failure on the things that get neglected to make “space” for such a focus.

For those living in poverty, according to Mullainathan and Shafir, this can have dramatic effects. The data they present indicate that a scarcity mindset, caused by poverty, makes coping with poverty even harder. For the authors, this explains many of the behaviors we see at the base of the pyramid:

… if you want to understand the poor, imagine yourself with your mind elsewhere. You did not sleep much the night before. You find it hard to think clearly. Self-control feels like a challenge. You are distracted and easily perturbed. And this happens every day. On top of the other material challenges poverty brings, it also brings a mental one… The failures of the poor are part and parcel of the misfortune of being poor in the first place (161).

The authors deftly point out that in the wake of this scarcity mindset it is often the small economic shocks—the unexpected illness, the sudden change in income, the school fees that weren’t figured into the monthly budget—that perpetuate the scarcity mindset.

What Mullainathan and Shafir suggest is that financial services can both help keep people from falling into a scarcity mindset and can keep people from making poor decisions while in a scarcity mindset. They note that people need to have cash when they need it, and there are two ways to cultivate this. First, people who are living in poverty need financial services that help build savings slack. Loans with built-in savings requirements address this, as do commitment savings accounts. Second, people who are living in poverty need products that prevent the firefighting that comes from economic shocks. Building a product for farmers that helps to smooth out income between harvest payments works toward this end. Loans, savings, or insurance for special events—weddings or funerals, for example—allow funds to be available when they are most needed.

This is why financial inclusion is more important than we ever knew—providing financial services helps to both prevent and alleviate mental bandwidth issues. Financial services might have psychological benefits that help people to make good decisions for themselves and their families. If Mullainathan and Shafir’s conclusions are correct, financial inclusion becomes a game-changer with major implications for decision-making at the base of the pyramid.

Underlying the solutions offered in Scarcity is a fresh perspective on economic development. It acknowledges the role of understanding behavior when building products and encouraging financial capability—principles that emerged in our “Roadmap” to Financial Inclusion. It also calls for us to “zoom out” and understand the trends, like demographic and urbanization trends, that are working in the lives of those at the bottom of the pyramid—the premise for our Mapping the Invisible Market work.

The book’s conclusions are refreshingly wide-reaching amidst other financial inclusion literature that I’m reading, which are mostly small, randomized control trials whose conclusions are by definition limited. It could be that the book tries to explain a bit too much, however, applying the same concepts to everyone in the world and to nearly every kind of problem. Though the authors are self-aware of this weakness, and in response they complicate their primary hypothesis, adding a few bells and whistles to explain the behavior of those living in poverty and appropriate solutions to scarcity at the bottom of the pyramid.

Whether Scarcity is read to be too far reaching or appropriately ambitious, we are eagerly anticipating Mullainathan’s remarks at our Financial Inclusion 2020 Global Forum. We can’t wait to learn more about why financial inclusion is more important than we ever knew.

For more information on Financial Inclusion 2020, sign up for project updates.

Image credit: Macmillan

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