Financial Inclusion is one of the United Nations Sustainable Development Goals for 2030. This topic is in the agenda of almost all governments of the world, top global organizations, thousands of NGOs and Associations. And yet, its definition is not that easy. What is financial inclusion? The answer to this question is crucial to evaluate if the ongoing initiatives are adequate – or not.
So, what exactly is financial inclusion? The most basic definition is the ability to access useful and affordable financial products and services. Think things like transactions, payments, savings, credit and insurance. It's not just about having a bank account; it's about being able to use a range of financial tools to improve your life. Why is this important? Because it can really help boost economic growth, reduce poverty, and generally make things better for people.
The concept of financial inclusion applies to both individuals and businesses. If you provide the same access opportunities to everyone, you reduce inequality in society and among different countries. A financial inclusive ecosystem enables people to store, spend and save money, get loans to improve their living situation or start an entrepreneurial activity, protect themselves against risks thanks to insurance products.
In other terms, financial inclusion allows reducing poverty, create good jobs, and ensure a sustainable economic development.
But is the mere access to a current account enough to be “financial included”? We at Inclusive Money do not think so.
Our definition of Financial Inclusion
Like many others, we believe that financial inclusion means that people have access to appropriate, affordable, and timely financial and banking services. Regardless of their identity or characteristics.
As you see, an inclusive financial ecosystem is built on four pillars:
appropriateness: it provides appropriate services that are aligned with your needs;
affordability: it provides affordable services, whose cost is proportional to what they offer you;
timeliness: it provides timely services, that are accessible when and where you need them;
non-discrimination: the same quality of service is provided to everyone, regardless of their gender, tone of skin, sexual orientation, religion and so on.
With these four pillars in mind, we can now better understand why financial inclusion is still a dream in many countries. Even the most prosperous nations have a long way to go to become really inclusive to all of their citizens.
Current state of financial inclusion globally
Okay, so where are we at right now with financial inclusion around the world? Well, there's still a long way to go. Millions of adults worldwide still don't have access to formal financial services. The situation varies a lot depending on where you are. Some regions are doing pretty well, while others are lagging behind. It's a complex issue with lots of different factors at play, but the goal is to keep pushing forward and make sure everyone has a fair chance.
Unbanked vs. underbanked
We can better understand how to improve financial inclusion by looking at how people can be excluded by the banking system.
The first level is the total absence of access to financial services. Those in this state are known as unbanked people, or unbanked. According to the United Nations, 1.7 billion people in the world live in this condition. Most of them are in poor or developing countries.
Some other people do have access to banking services, but these do not fit their needs or their profile. They are known as under-banked, or underserved. As the name suggests, these people are not receiving the level of service they need. And most of them, especially in Western countries, have no clue of it: they simply assume that they are already receiving the only available banking service.
But what hinders financial inclusion?
The main barriers to financial inclusion are related to:
access to banking and insurance services;
lack of data or documentation;
no financial literacy;
no digital skills;
high costs.
Most financial inclusion projects try to tackle several of these barriers. But the thing is, it is almost impossible to target all these barriers with a single approach.
You may be unbanked for different reasons. Because you have no access to banking services, for example: there are no bank branches close to you, and you do not have an internet connection or a connected device like a computer or a smartphone.
Or maybe you live in an area with no branches and well-connected to the internet. But, guess what, you are very bad at using technology and cannot properly use a mobile banking app.
Strategies for achieving financial inclusion
Okay, now that we know what the obstacles to a more inclusive finance are, let's look at how we actually make financial inclusion a reality. It needs a proper plan, a strategy. It's about getting everyone involved, from the government to the banks to even your local community groups. It's a team effort, really.
Expanding access to financial services
First things first, people need to be able to actually access financial services. Think about it: if there's no bank branch nearby, or if the only ATMs charge a fortune, it's going to be tough. We need to get creative. Things like mobile banking and online lending are a good start, but we also need to think about expanding those traditional branch networks, especially in rural areas. And, as we have previously explained, it's not just about having access; it's about having access to the right kind of services. Products tailored to the needs of people who are currently underserved.
Improving financial literacy and education
Right, so imagine you've got access to all these fancy financial services, but you have absolutely no clue how they work. That's where financial literacy comes in. It's no good giving people access to credit if they don't understand interest rates or how to manage debt. We need to get financial education into schools, run training courses for adults, and just generally raise awareness about financial education. It's about giving people the tools they need to make informed decisions about their money.
Implementing inclusive financial policies and regulations
And finally, the boring but important bit: policies and regulations. The government needs to create an environment where financial inclusion can thrive. That means things like tiered Know-Your-Customer (KYC) requirements, which make it easier for people to open bank accounts, even if they don't have all the usual documents. It also means encouraging the development of digital financial services and strengthening consumer protection regulations. Basically, making sure that the rules of the game are fair for everyone. It's about creating a level playing field, so everyone has a chance to get involved in the financial system.
Promoting financial inclusion through social welfare policy and services
Social welfare policies can be a game-changer in boosting financial inclusion. It's about making sure everyone, especially those who are vulnerable, can get access to and use financial services. Think banking, credit, and insurance – the things many of us take for granted. Social welfare can really step in to bridge the gap.
Designing inclusive social welfare programmes
Social welfare programmes can be designed to actively promote financial inclusion. This means building financial support directly into the programmes. For example, instead of just handing out benefits, programmes could encourage recipients to open bank accounts and use formal financial services. This could involve partnerships with local banks or credit unions to offer accounts with low fees and easy access. It's about making the system work for everyone, not just those who are already financially secure.
Providing financial education and literacy training
Loads of people struggle with managing their money simply because they haven't had the chance to learn how. Social welfare programmes can incorporate financial education and literacy training to help people understand budgeting, saving, and borrowing. These courses could be offered in community centres, libraries, or even online. The goal is to give people the skills and knowledge they need to make informed financial decisions and avoid falling into debt. It's about giving people the tools to help themselves.
Leveraging technology to expand financial inclusion
Technology can play a massive role in expanding financial inclusion. Mobile banking, online lending, and other digital financial services can reach people in remote areas or those who can't easily access traditional banking services. Social welfare programmes can promote digital channels by providing access to smartphones or tablets, offering training on how to use digital financial services, and partnering with fintech companies to develop innovative solutions. It's about using technology to break down barriers and make financial services more accessible to everyone.
The role of technology in advancing financial inclusion
Technology is changing the game when it comes to getting more people involved in the financial system. It's not just about fancy gadgets; it's about making finance accessible to everyone, regardless of where they live or what their background is. Think about it: not long ago, banking meant trekking to a branch during opening hours. Now, you can manage your money from your phone at 3 AM. That's the power of tech at work.
Digital financial services and their impact
Digital financial services are having a huge impact. They're making it easier and cheaper for people to access things like payments, savings, and credit. This is especially important for those who've been excluded from the traditional banking system. For example, mobile money platforms have allowed people in remote areas to send and receive payments without needing a bank account. It's not a perfect solution, but it's a big step forward. These services are also helping small businesses grow by giving them access to capital and markets they couldn't reach before. The rise of digital technologies is really changing the landscape.
Mobile banking and online lending solutions
Mobile banking has been a game-changer. It's put banking services directly into people's pockets. No more long queues or complicated paperwork. Online lending is also making a difference, offering quick and easy access to credit for individuals and small businesses. These platforms often use alternative data to assess creditworthiness, which means they can lend to people who might not qualify for a traditional bank loan. Of course, there are risks involved, like high interest rates and the potential for over-indebtedness, but the convenience and accessibility are undeniable.
Overcoming infrastructural barriers with technology
One of the biggest challenges to financial inclusion is the lack of infrastructure, especially in rural areas. Technology is helping to bridge this gap. Mobile networks are expanding, making it possible to offer financial services even in remote locations. Satellite internet and other innovative solutions are also being used to connect underserved communities. It's not just about connectivity, though. Technology is also helping to reduce costs, making it more affordable to provide financial services to low-income populations. Distributed ledger technology could significantly transform financial and banking structures.
Appropriateness and Affordability of financial services
We see financial inclusion as the sum of two different problems. Some people are completely excluded from the financial system. Others are underbanked, meaning they have access to financial services that do not respect all the four pillars of financial inclusion.
Let’s make some more examples of how the four pillars approach can help contextualize financial inclusion issues.
The banking offer may be not appropriate, if you do not have access to some specialised services that fit your needs: this is the case, for example, of some business services that are only offered to big corporations, and not to small and medium businesses.
Or, on the other hand, many people have very basic needs. An online current account and a payment card would be more than enough, but they are only offered more sophisticated – and expensive – bundles of banking and insurances services.
Affordability is a key issue to understand why some people are banked, but under-served.
The cost of banking should be proportional to the quality and complexity of what is offered. A simple, basic online account with a virtual payment card may be free, or very cheap.
Timeliness is quite intuitive: you need to access the service you require in the place and at the moment you require it.
Mind the digital gap
A lot of countries are relying on technology and mobile phones to ensure the financial inclusion of a wide part of their population.
But a connection to the internet is not free, and neither is the device you need to access digital services.
In some regions of the planet, no internet connection is provided. Many people in rural areas have never seen a computer in their life – and their phones are actually just phones.
But if you think a branch network is a viable solution, well, you are wrong. Branches are very expensive, and banks place them where they can be profitable.
In developing countries it is quite rare to find a bank branch outside the biggest cities. There is no way a branch could be profitable in a small village of farmers. People living in rural communities may have to walk long distances, for hours or even days, in order to reach the closest physical touchpoint.
But the situation is not better in developed countries. Banks have been shuttering thousands of branches in small towns for over a decade now. Hundreds of villages have no physical touchpoint.
This is endangering the financial inclusion of the most vulnerable people, like the elderly, low-income people or those with no digital skills.
If you do not know how to use a computer, or cannot afford one, you cannot bank. Unless you take a bus or a train and travel to the closest banking branch. A situation that is worsened by the phenomenon of transport poverty.
A quite touchy subject is non-discrimination. Data from many countries shows that minorities are often poorer than the rest of the population. Some groups may be less likely to get a loan, like racial minorities, or women. Others may face some kind of discrimination when talking to a banker or a consultant, like LGBTQAI+ community members have repeatedly reported.
Policy frameworks for fostering financial inclusion
Regulatory approaches to support inclusion
When it comes to getting more people included in the financial system, the rules of the game really matter. It's not just about having regulations, but about having the right ones. These rules need to encourage innovation and competition while also protecting consumers. Think about things like making it easier for new types of financial services to get started, or creating different levels of requirements for different kinds of accounts. The AFI's support is crucial here, helping authorities to improve conditions for financial inclusion.
Consumer protection in financial services
It's all well and good to get people using financial services, but what happens if they get ripped off? That's where consumer protection comes in. We need to make sure people understand their rights, and that there are ways for them to get help if something goes wrong. This means having clear rules about how financial companies can operate, and making sure there's someone to complain to if they don't play fair. It's about building trust in the system, so people feel safe using it.
International cooperation and best practises
Financial inclusion isn't just a problem for one country to solve. It's a global issue, and that means we need to work together. Sharing ideas, learning from each other's mistakes, and coordinating our efforts can make a big difference. Things like agreeing on common standards, or helping developing countries build their own financial systems, are all part of the puzzle. By working together, we can make sure everyone has a chance to participate in the global economy.
