Lee-Roy Chetty
Lee-Roy Chetty

The changing landscape of financial inclusion

Today, there is broad recognition that access to capital is only one of the inputs required for economic development and poverty alleviation.

Furthermore, the marginalised — like anyone — require and use a variety of financial services for a variety of purposes. And some of these services work better than others, for reasons we are just beginning to understand.

Many events have influenced the landscape for financial services for the poor, but three significant influences require further analysis.

The first has been a shift from a narrow focus on the institution and its performance to a much broader focus on clients — understanding their behaviour, financial service needs, and how various providers can better meet these needs.

The second important shift has been from a narrow supply-led view to a broader focus on the financial ecosystem.

The result has been a much more holistic view of the sector and a more coordinated effort by government and industry to focus on increasing financial inclusion and, ultimately, making markets work better for the poor.

The third shift has been the opportunity to expand outreach through new business models based on branchless banking using technology and agent networks

Financial needs and vulnerabilities change as people move through the life-cycle — from dependence on family to independence and from school to work, marriage, family responsibilities, and retirement.

For example, sons migrate in search of more income; young mothers manage childbirth expenses, health care, and nutrition; parents struggle to educate their children. Widows are threatened with loss of land and other assets to their husbands’ relatives. Elderly clients face acute vulnerabilities, including loss of productivity due to deteriorating health, physical immobility, and the loss of family support as children become independent and develop their own financial commitments.

These changes result in the need for different financial services at different life-cycle stages.

To be relevant, financial service providers must modify products, services, and delivery channels to accommodate differences in life-cycle and age. Providers can respond to differing needs by developing age-specific products, such as youth savings accounts or pension funds.

Family structure can also affect how financial services are used.

In many communities, the concept of family extends well beyond spouses, siblings, children, and grandparents. Cousins, distant relatives, and even neighbours are an integral part of a family.

For example, to use a South African example to illustrate this point, polygamy further increases the size and complexity of the family structure. A large family may live together in one compound, often combining financial resources in order to meet daily needs or respond to emergencies.

Similarly, income is often shared among the larger family. While saving may be difficult for an individual, sharing income facilitates risk management in the absence of formal services.

In many contexts, community elders control assets and decide how they will be distributed throughout a given community. Thus an individual’s ability to access services may depend on his or her social position relative to that of more senior members in the community.

The financial pressures of managing inconsistent income to cover daily expenses, unexpected emergencies, and life-cycle events weigh heavily on the poor. Although millions of people — from the poorest of the poor to the economically active poor to small business operators to salaried workers — face similar pressures, their responses and need for financial services vary depending on their livelihoods and where they live, which, in turn, affect their income level.

Geography matters as well.

For example, people living in rural areas likely earn income from agricultural activities that generate very different cash flows than traditional “microenterprises”.

Financial services for smallholder farmers need to suit their cash flows and consider the production and marketing risks specific to a given crop. However, in general, it is more expensive for providers to operate in rural areas, limiting clients’ choices and challenging providers to reach scale, particularly where population density is low, access to markets or supplies is limited, and infrastructure is undeveloped.

Rural areas often have higher risk due to the lack of a diversified economic base and the risk of crop failure or drought; in some rural areas, a history of poorly designed rural credit programmes can affect people’s perceptions of financial services.

While having a bank account may seem more useful for an employee who receives regular wages than for, say, a labourer who is paid in cash, farmers, wage earners, and labourers would all benefit from having access to a safe place to save for lump-sum expenditures or respond to an emergency or new opportunity.

Building and maintaining a level of trust in all circumstances can improve financial inclusion, and it is particularly important when different ethnic or religious groups are involved.

Religion and ethnicity can also affect the ability of women to access services. For example, in some cultures women are home-bound for religious reasons and unable to meet with providers outside the home or to form groups with other women.

Altogether, the need for and ability to use and benefit from financial services depend to a great extent on age and life-cycle income levels, cultural context, and gender, the more understanding client characteristics and influences on their behaviour are understood, the better equipped micro-financers will be to increase financial inclusion in a meaningful way.

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