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What is Financial Inclusion? Definitive Guide

We’ll walk you through the meaning of Financial Inclusion and why expanding financial access can increase growth, increase incomes of the poor, and reduce income inequality around the Globe.

Traditional systems around the world are far from inclusive. Many poor people lack the financial services that can serve these functions, such as bank accounts and digital payments. They rely on cash, which can be unsafe and difficult to manage. Without access to financial services that enable formal savings and borrowing, these “unbanked” people are also less likely to be able to come up with emergency funds to meet unexpected expenditure needs.

Well-functioning financial systems serve a vital purpose by offering savings, payment, credit, and risk management services and thereby contributing to economic development.

What is Financial Inclusion

Financial inclusion simply means that individuals have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit, and insurance – delivered in a responsible and sustainable way.

The term “financial inclusion” has been gaining importance since the early 2000s, especially following a speech given on 29 December 2003 by the former General Secretary of the United Nations, Kofi Annan, who said:

 “The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit, or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector”.

Kofi Annan

Since then, media have been highlighting the number of people excluded from financial services, and financial inclusion has gradually become one of the primary objectives of international institutions such as the World Bank or the various agencies of the United Nations.

Financial inclusion is increasingly replacing microfinance in the alphabet of financial services to the poor and the unbanked. In fact, this change in language broadens the scope of the sector since it goes beyond MFIs and includes new service providers, such as fintech, and new technologies, such as mobile banking. It might, however, obscure the original objectives of poverty alleviation and empowerment of the disadvantaged populations.

Why Does Financial Inclusion Matter?

Across the world, we hear reports of the rich getting richer and the poor being left behind, this has been a global issue for many many years, and people are still left without access to services that would benefit them and their families.

There is a growing body of research that documents the potential benefits of financial inclusion, especially from the use of digital financial services, including mobile money services, payment cards, and other financial technology applications.

Recent research shows financial inclusion yields a wide range of benefits. Mobile money services, which allow users to store and transfer funds through a mobile phone, can improve people’s income earning potential and reduce poverty.

Decentralized finance applications can also help people manage financial risks and smooth consumption. When times are tough, mobile money services can make it easier for families to receive money from friends and relatives living far away.

Blockchain payment systems can lower the cost of remittances and save time and travel costs. Decentralized services also help people accumulate savings and increase spending on necessities.

For governments, switching from cash to digital payments can reduce corruption and improve efficiency.

Financial, What is Financial Inclusion? Definitive Guide
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Global Benefits of Financial Inclusion

Financial services can help drive development by facilitating people’s investments in their health, education, and businesses, and making it easier for people to manage emergencies. There is great variation in financial inclusion in the Africa and Central Asia region. Some countries have seen significant growth in account ownership, despite starting from a low base.

These experiences underline the potential role of digital payments in driving financial inclusion. But nearly 30 percent of unbanked adults report trust in banks as a barrier, which is nearly double the developing country average.

And in some countries, gender gaps in account ownership remain significant. Given the heterogeneity of experiences, there are ample opportunities for countries in the region to learn from each other and contribute to the rich research and operational agenda going forward.

But what Benefit comes with financial inclusion:

  • Economic Growth: It is generally accepted that a well-developed and healthy financial system is a prerequisite for sustained economic growth in any Nation, A sound financial system can also contribute to exchange rate stability by way of its stabilizing effects on external trade and financial flows and is, of course, necessary for the effective transmission of monetary policy. As the size and importance of financial systems have grown in the years, so have the sources of potential threats to their stability.
  • Global Empowerment: A well equipped financial system can empower people with the skills and knowledge to make the right financial decisions, which in turn leads to all kinds of individual benefits.
  • Individual Asset Management: Services like Banking, investment, and many more can be accessible to any individual or business, irrespective of Net worth and size, respectively.
  • Affordable participation: In an economy for all, Financial inclusion is a ‘dead’ word, Even though a different form of technological transformation is actively working to widen the Gap of the included, we are patiently opened to new and affordable developments for the enrichments of our daily life.

Efficiency of Traditional Finance Institutions

More than thirty years ago, microfinance swept through Asia and Africa with the promise of empowerment for poor people through access to affordable financial services. These economic tools would allow them to invest in small businesses, save for their future, and work their way out of poverty. Microfinance has provided basic financial services to millions across these regions, first through credit and now increasingly through a full suite of financial services including savings, insurance, and pension funds

Today many banks across the continent have moved from manual banking systems to front office digital services. They have spent the last decade investing in banking infrastructure including online banking and electronic transactions systems. Such use of digital infrastructures has not only allowed domestic banks to efficiently reach higher number of clients and compete with large foreign competitors, but also improved banks’ margins by reducing operations cost.

In Africa, there is evidence that, foreign and private owned banks are more efficient than their public counterparts and that banks could save between 20% to 30% of their total cost if they were operating efficiently.

While there is no clear evidence on the factors driving banking efficiency, we speculate that the excess operating cost of banks in sub-Saharan Africa (in West Africa in particular) could partly be the result of external factors unrelated to banking structures. In regions where business regulations and procedures are inefficient, banks incur substantial day-to-day operational expenses.

Efficiency of Decentralized Finance Institutions

Financial access is supported by innovation, competition, scale, and efficiency in technology and payment infrastructure, but these goals may conflict and may be difficult to achieve simultaneously.

Remarkable progress has been made in expanding financial inclusion in Africa and the world. Decentralized account ownership has grown significantly in many countries, and the use of cryptocurrency payments has picked up. There may be opportunities to enhance DeFi services and encourage more account owners to use financial services.

However, the behavior of account owners in Africa differs from that in other economies, because of issues related to culture, history, and trust.

Many unbanked adults have mobile phones, making it easy to adopt decentralized finance products,

In some African countries, such as Ghana and Nigeria, the application of digital technologies in financial services has increased. While In other countries, such applications remain limited. There may be room for growth in the use of digital financial services, such as electronic payments and services associated with e-commerce.

Blockchain technology alone is not sufficient to increase financial inclusion, however. A well-developed payment system, good physical infrastructure, appropriate regulations, and strong consumer protection safeguards must be in place. And financial services need to be tailored to the needs of disadvantaged groups, such as women, low-income families, and first-timer users of financial services, who may lack literacy and numeracy skills.

Mobile money accounts are widely used in Africa. Mobile phone carriers can provide financial services. Blockchain technologies may lower the cost of financial services and make them more affordable. Globally, about 1.1 billion—or about two-thirds of all unbanked adults—have a mobile phone, Providing unbanked mobile phone users with Internet access and digital financial services could be key to expanding financial inclusion.


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