Financial inclusion means everyone can access the products and services they need to manage their money effectively at a reasonable cost, while having the necessary awareness and understanding to use them appropriately. Being financially included improves the quality of people's lives, but it also contributes to the economic wellbeing of communities and societies.
Importance of financial inclusion
The issue of financial inequality is one that's been with us for a long time. While there has been considerable progress made over the past 20 years on reducing global poverty, billions of people still don't have a bank account, or they're uninsured and without assets or savings. What the pandemic has exposed, is that those without access to formal financial services are the ones that have suffered disproportionately.
As we know, poverty is far from the only issue affecting the world’s poor. Almost a third of adults globally (about 1.7 billion people) remain unbanked – that is, they don't have a bank account – and of these half are from the poorest 40 per cent of the world population. Many more can't access financial services, such as loans, that are taken for granted in the developed world. This form of exclusion creates a vicious circle, trapping people in a cycle of debt.
Research from the International Monetary Fund shows a strong association between extending traditional financial services to low-income households and small businesses operating in the informal economy, and reducing income inequality. Its data also shows the largest reduction in income inequality comes when women are given increased access to finance.
But while reducing income inequality is important, it's far from the only benefit of more people having access to formal financial systems. The United Nations has linked financial inclusion to progress in relation to 13 of its 17 Sustainable Development Goals. As well as reducing inequalities, eliminating hunger and improving wellbeing, financial inclusion can help improve access to clean water and sanitation, affordable energy and quality education.
Financial inclusion also represents a significant economic opportunity. As well as bringing up to 1.7 billion people into the financial system, it has the potential to generate 95 million jobs and boost global GDP by a massive US$3.7 trillion by 2025.
Support from governments brings positive change
While the pandemic has exacerbated social inequalities and plunged tens of millions of people back into extreme poverty, the past year has also been a time of positive change. Unprecedented technological adoption in banking has led to digital payments emerging as a strong force for financial inclusion. Governments have seen how collaborating with banks and payments companies can help to distribute financial aid quickly and effectively. These developments and shifts in perspective are bringing about an inflection point where we have both the societal desire and the technological capability to build back better, not just from an environmental perspective but from a social perspective as well.
Governments can underpin change in a number of ways, such as through supporting financial education and legislating to ensure more transparent information is available to consumers. They can also subsidise rural broadband and enable internet access: this improves gender equality and democratic stability while driving economic growth. Financial inclusion goes hand in hand with these outcomes as a key benefit.
Clearly defined national financial inclusion strategies that are tailored to a country’s geography and population are a way of bringing about the transformational change that's required. In Brazil, for example, the loosening of regulation and introduction of banking agents has had a very positive effect on financial inclusion, while in Indonesia, pioneering microfinance initiatives have been hugely successful.
How innovation boosts inclusion
But it's not just governments that have a role to play in financial inclusion: the private sector also needs to get involved. Governments tend to be viewed as the gatekeepers that enable change, but the private sector's role is to provide innovation, technology and capital to help support government strategies. Corporates also possess a wealth of data and expertise gained from their operations in developed countries, which they can apply to emerging markets.
Innovation can also improve access to a firm’s products and services both in their home markets and elsewhere. Peer-to-peer payments, crowdfunding, virtual currencies, AI-assisted credit modelling, robo-advisers, auto-underwriting and blockchain bonds are just some examples of financial innovation that are both increasing inclusion and driving growth.
By reorienting strategies to help drive inclusive growth, significant long-term benefits can be achieved by businesses: just look at payment companies, which have shown investing in inclusive growth improves diversification, lowers the cost of capital and allows access to unsaturated markets.
Financial inequality has been cast into the spotlight as a result of the pandemic. But the situation also offers an opportunity to pivot towards investing in a fairer and more inclusive global economy. The rewards for doing so go beyond those directly affected, from increasing political stability to helping address climate change, and from driving global GDP growth to contributing to strong returns from a well-balanced portfolio. Ultimately, financial inclusion can pay dividends all round.
Martin Todd and Henry Biddle, portfolio managers, Federated Hermes
