Financial Inclusion – Harder than it Looks

Peterson K Ozili has written about financial inclusion and why it is harder than it looks ¹. He starts by describing three countries that have achieved remarkable levels of financial inclusion and then lays out why this is hard to achieve. Many of the barriers are within the control of governments to remove by investment and subsidies. Others, the cultural, social and income barriers are a much more significant challenge.

In July’s Cash and Payment News™ we wrote about India’s Pradhan Mantri Jan Dhan Yojana (PMJDY) programme, which has brought basic bank accounts offering savings and deposit accounts, remittance services and financial products such as credit, insurance and pensions to people. Between August 2015 and 2020 the numbers enrolled rose from 179 million people, with account holdings averaging Rs 1,279 and with 157.4 million Rupay debit cards to over 400 million people holding Rs 3,239 and 297.5 million Rupay cards. The PMJDY scheme works in conjunction with India’s national identity programme.

Rwanda has set up community saving and credit co-operatives (Umurenge SACCO’s) that in three years have created 1.6 million accounts, about the same number as the formal banking sector. 90% of the population live within 5km of a SACCO branch.

Finally, Kenya’s M-Pesa scheme, based on mobile phone accounts, started in 2007 and by 2012 had 19.5 million mobile money users, 83% of the adult population. One of the success drivers was the system that paid agents monthly based on criteria such as the number and value of transactions per month, number of customers etc. The result was an agent network throughout rural and urban Kenya.

Ozili goes on to identify six barriers to financial inclusion.

1. Lack of access to modern information and communication technology infrastructure.

2. Lack of financial products and services that meet the need of all customers. For example, if the account has minimum saving thresholds, somebody who can only save a small sum of money may not be able to earn interest. If loans require collateral, those with little collateral may be unable to borrow whatever the purpose.

An unseen side of this is the cost structure of accounts. Account maintenance fees and bank charges often don’t reflect the ability of account holders to pay. As a result, what may be a nominal fee to those with a regular income can represent a significant barrier to the low earner, irregular earner.

3. Social exclusion. This comes from a lack of identity, a steady job and credit history. The un-or under-employed, dependent adults, migrants and asylum seekers are examples of those who end up being socially excluded.

4. Over indebtedness and the inability to manage debt. Debt creates a trap which is hard to escape from and which, once you have it, creates an unattractive financial profile for formal institutions.

5. Lack of financial capability. Those who barely make ends meet lack the resilience to face shocks. They don’t save meaningful amounts and seldom plan ahead, manage money or have to make financial decisions and choices. They don’t have experience of financial management.

6. Supply side barriers. If financial institutions and ATMs are not local, the incentive to join the banked is reduced. Equally, if point-of-sale equipment isn’t used or available, then the benefits of debit cards is reduced.

The result is that financial inclusion programmes, or government requirements for benefits or wages to be paid into bank accounts, can lead to accounts that are either not used or little used. This appears as a paradox to the authorities and financial institutions.

Ozili looks at solutions, although it feels like some of these are easier to write than to do. For example, eliminate informal norms and cultural barriers, use job creation schemes to increase employment, eliminate high interest rates and introduce ‘regulation that lower that cost of financial services for low-end customers etc.’ 

What this paper does do is summarise very well the barriers and the challenge they represent. This is particularly timely as central banks work on the design of digital currencies and as financial inclusion is constantly used to justify the rise of electronic money. The challenges identified by Ozili apply to all payment tools with cash, ironically, perhaps the least affected. 

1 - 'Financial inclusion-exclusion paradox: how banked adults become unbanked again' - Peterson K. Ozili. MPRA Paper 108494.