NationalVolume 14 Issue # 10

Financial Inclusion: A new tool to combat poverty

According to the latest annual report of the World Bank, the share of people living in extreme poverty around the globe has declined, but it is falling at a slower pace in Sub-Saharan Africa due to certain acute challenges. The percentage of people living in extreme poverty fell to a new low of 10 percent in 2016 – the latest year for which the data was available – down from 11 percent in 2014, reflecting some progress. The number of people living on less than a dollar 1.90 per day, the threshold of extreme poverty, fell during this period by 68 million to 736 million globally. Importantly, more than a billion people have lifted themselves out of extreme poverty over the last 35 years and the present poverty rate is lower than it has ever been in recorded history.

 Commenting on the development, World Bank Group President Jim Young Kim said: “This is one of the greatest human achievements of our time” but the report shows that the rate of decline was slowing, especially in least developed countries. “If we are going to end poverty by 2030, we need much more investment, particularly in building human capital, to help promote the inclusive growth it will take to reach the remaining poor,” Kim said. Another major concern was that a higher share of the world’s poor was concentrated in Sub-Saharan Africa, a region that already has a high poverty rate of 41 percent and the battle against poverty will be won or lost in this region.

According to experts, financial inclusion is the new tool to fight poverty and income inequality. Financial inclusion means including the maximum number of people in the banking system and the new payments, savings and insurance services and instruments that have developed as a result of digital technology.  Around 2.5 billion people worldwide, especially the poor, women, youth, and rural residents, are financially excluded, and 200-250 million medium and small enterprises are underserved because neither pure cash systems nor the traditional banking model can effectively meet their needs. Despite proven demand for financial services at all levels of income, the market has failed to meet those demands, forcing billions of individuals and millions of micro, small, and medium size enterprises to rely on riskier and more expensive methods to save, borrow, and secure their assets. Surely, not all the 2.5 billion unbanked people need financial services, but barriers such as cost, travel distance, and documentation requirements have to be removed. For example, 20 percent of the unbanked people report distance as a key reason they do not have an account. The poor, women, youth, and rural residents tend to face greater barriers to access. Among firms, the younger and smaller ones are confronted by more binding constraints.

A recent Brookings Financial and Digital Inclusion Project (FDIP) Report evaluates access to, and use of, affordable financial services across 21 geographically and economically diverse countries. Developed by the EIU in collaboration with the Multilateral Investment Fund, the Global Microscope report assesses the regulatory ecosystem for financial inclusion by evaluating 12 indicators across a range of developing economies in East and South Asia, Eastern Europe and Central Asia, Latin America and the Caribbean, the Middle East and North Africa, and Sub-Saharan Africa.  Afghanistan, Bangladesh, Brazil, Chile, Colombia, Ethiopia, India, Indonesia, Kenya, Malawi, Mexico, Nigeria, Pakistan, Peru, the Philippines, Rwanda, South Africa, Tanzania, Turkey, Uganda, and Zambia are among the countries  which have been ranked based on 33 indicators spanning four dimensions: country commitment, mobile capacity, regulatory environment, and adoption.

The FDIP Report seeks to answer a set of fundamental questions about today’s global financial inclusion efforts. The questions relate to the role of digital technologies in advancing financial inclusion and legal, policy, and regulatory approaches to promote financial inclusion. The report says that new technologies hold great promise for expanding financial inclusion. Innovations in technology—such as mobile payments, mobile banking, and borrower identification using biometric data (fingerprinting, iris scans, and so on)—make it easier and less expensive for people to use financial services, while increasing financial security.

Two-thirds of the 55 countries studied have improved their enabling environment for financial inclusion in all areas in the past year. Peru, Colombia, and the Philippines remain at the forefront of the international country rankings.  The average score for the 55 countries has increased (from 46 points to 48 points, where 100 is best). Moreover, conditions globally have improved for ten of the 12 indicators covered in the index. These gains indicate that some very basic elements of policy essential to promoting financial inclusion are now widespread.

The countries with the greatest increases in their overall scores have a more comprehensive strategy in place and programmes and laws that tackle multiple barriers to inclusion. India recorded one of the biggest increases of any country in its score (10 points), which reflects a substantial drive to make banking more accessible to the entire population. This improved accessibility was accomplished through the introduction of guidelines for creating specialised Payment Banks and Small Finance Banks specifically aimed at the poor. Two other top gainers – Haiti and Egypt – implemented measures to establish an even broader set of financial inclusion mechanisms that include government support and regulation and supervision of credit.

The World Bank group recently released a report setting out guiding principles to help countries increase financial inclusion.  The seven guiding principles are: (i) commitment from public and private sector organisations; (ii) a robust legal and regulatory framework underpinning financial inclusion; (iii) safe, efficient and widely reachable financial and ICT infrastructures; (iv) transaction accounts and payment product offerings that effectively meet a broad range of transaction needs; (v) availability of a broad network of access points and interoperable access channels; (vi) effective awareness and financial literacy efforts; and (vii) the leveraging of large-volume and recurrent payment streams, including remittances, to advance financial inclusion objectives.

The World Bank Group plays a key role in the global effort to end extreme poverty and boost shared prosperity. The World Bank Group’s “Universal Financial Access 2020” goal is for all adults globally to have access to a transaction account or electronic instrument to store money, send and receive payments as the basic building block to manage their financial lives. Pakistan’s financial inclusion ranking has gone up two notches from the earlier ranking as revealed by the Economist Intelligence Unit’s (EIU) Global Microscope Report. The EIU Report attributes the improvement in Pakistan’s ranking to the top level commitment, consistency, and major financial inclusion initiatives implemented by the State Bank of Pakistan.