The importance of financial inclusion in the developing world

Financial inclusion poses policy challenges on a scale and with an urgency that is unique for developing countries, which house nearly 90% of the world’s unbanked population.

Developing country policymakers have recognised that complex and multi-dimensional factors contribute to financial exclusion and therefore require a comprehensive variety of providers, products and technologies that work within and are a reflection of the socio-economic, political, cultural and geographic conditions in their countries.

Nevertheless, a number of common trends and barriers can be identified.

Emerging trends include the recognition of the changing role of policymakers and the importance of leadership to successful financial inclusion strategies and response; that microfinance can be used as an entry point for issues of access; that new technology is a very important – but not the only – consideration for developing country policymakers; that savings are the cornerstone of responses; that banks have an important role to play; and that financial inclusion policy can and should not only focus on the supply-side.

Commonly identified barriers include issues of market response; need for greater stakeholder coordination; lack of reliable data as well as national identity documents and systems; and the need for greater consumer understanding, trust and protection.

Depending on the level of development of financial inclusion policy, there appears to be three broad groups of countries – some early leaders, others for whom financial inclusion is a priority but much more policy development is needed, and others for whom chronic structural challenges in the financial sector mean financial inclusion may not be among the top priorities at this time.

While there is no standard global solution for rapid replication in most places, it can be concluded that there is enormous potential to promote tailor-made solutions based on available good practices.

Adopting country-specific, comprehensive policies at the country level that respond to both demand – and supply-side barriers will be most effective in fostering financial inclusion. There is openness and demand for technology-based solutions and public-private partnerships to foster access, though these must be gradually introduced within the broad range of evidence-based effective policy solutions for financial inclusion.

Policymakers expressed a preference and need for two-way knowledge exchange opportunities with their peers to encourage learning from the experience of others.

A better and broader understanding of financial instability risk within financial innovation is a key prerequisite for scaling-up particularly in the area of technology-enabled financial services. Mobile financial services are mostly limited to payments and are not connected with financial intermediation.

However advances from a handful of countries have shown paths to safely extending beyond payments to banking services such as deposits through innovative leadership and partnerships with banks or microfinance institutions. Systematic global and regional efforts are needed to refine and spread insight on these areas widely. Mechanisms that help leverage existing insight need to be strengthened.

The movement towards evidence-based policy through improved data permits a potential next step for some countries.

Adopting realistic self-set targets when designing financial inclusion policies against which they can monitor their progress and make necessary policy adaptations. Quantitative objectives of this kind to be agreed upon by a larger number of countries could become a major incentive to build global commitment to effectively overcome financial exclusion.

Access to sustainable and secure financial services contributes directly to increasing income and reducing vulnerability for the poor. Bringing more people, and therefore more money, into the formal financial system can lead to overall economic growth and development and increased stability in developing country economies.

Policymakers in developing countries have an important role to play in creating the conditions for improved access, and thereby unlocking the economic potential of their populations. The potential for economic growth and poverty alleviation through the development of a more inclusive financial services sector has been recognised by leaders in developing and developed countries and is emerging as a priority issue on political agendas.