The challenges of financial inclusion

Azraf Uddin Ahmad,
The Financial Express,
Published: March 12, 2017

The success of microfinance in Bangladesh and elsewhere led to re-evaluation of the development process by the global development community. This culminated in the UN recognition of 2005 as the International Year of Microfinance. Subsequent interest from the Bill and Melinda Gates Foundation in fostering financial inclusion through improvements in technology led to the creation of the Alliance for Financial Inclusion (AFI) in 2008 which was soon recognised by the G20 as an implementing partner in 2010. This gave the AFI sufficient traction to get 30 signatories for its Maya

Declaration in 2011 which became the first cross-country commitment to developing policy frameworks for financial inclusion, laying the ground for systematic tracking of country-level progresses and tying those with global aid commitments. Given the long journey from structural adjustment policies, Poverty Reduction Strategy Papers (PRSP) and Millennium development Goals (MDGs) to Sustainable Development Goals (SDGs), this new agenda of financial inclusion deserves attention due to increasing likelihood of it turning into an alternative framework capable of guiding allocation of international resources. With the Microfinance Regulatory Authority (MRA) signing the Maya Declaration and the Bangladesh Bank (BB) committing to a few targets along with the MRA, a new discourse on financial inclusion is likely to get momentum. The BB has established a Financial Inclusion Department and a National Financial Inclusion Strategy (NFIS) is currently being formulated. It is important to understand the purpose and scope of the NFIS and here is a modest attempt to highlight the points deemed to be important for formulation of the strategy.

A useful starting-point is to conceptualise financial services. In the context of development, a household may need to make payments, allocate its spending temporally, minimise the risk it faces and ensure long-term income mobility. Where cash is unable to meet these needs, households use financial services. In reality there can be a plethora of services which fulfil these needs. However, the AFI puts an emphasis on formal savings, credit, payment systems and insurance. Such an interpretation can mask the complexities of the issue as it does not consider the role of delivery mechanisms through which individuals access these services. As the AFI emphasises the importance of formal accounts, with Peru, Indonesia, and Burundi including it within their definition of inclusion, it poses questions before Bangladesh’s policy formulation. Given the huge success and adoption of microcredit in Bangladesh, the role of semi-formal finance cannot be underestimated. Although the 2010 Institute of Microfinance (InM) study shows that 54 per cent and 56 per cent households have access to savings and credit respectively, only 28 per cent (of 54 per cent) and 8.0 per cent (of 56 per cent) access these through formal channels.

It is important that Bangladesh formulate a NFIS which fully reflects its own context and includes semi-formal financial services within the fold of financial inclusion. It needs emphasising that regulatory authorities do not view financial inclusion as a binary issue going forward, where people have access to singular services or not. Rather financial inclusion has to be seen as a complex multi-dimensional journey. Policies should ideally make it possible for households to access formal banking services on graduation from semi-formal models to ensure that the whole network of financial services is accessible. To this end greater sharing of credit history information between the banking sector and MFIs might foster greater access and usage as was emphasised in a recent dissemination seminar of a study conducted by the Economic Research Group and organised by the Business Finance for the Poor, Bangladesh.

Regardless of the definition one chooses to use, there are major constraints which have to be overcome in order to further facilitate financial inclusion. One can view the current gaps in financial inclusion from two distinct yet intertwined perspectives. On the supply side, the high cost of maintaining branches and monitoring clients often outweighs the potential revenue from rural, low income, and marginal areas due to the low volume of transactions. In addition to financial costs, households often face large non-financial costs of accessing financial services due to high documentation requirements and distance. These costs may be large compared to potential benefits from interest earned for households. Both from the supply and demand sides, high barriers lead to a lack of incentive to create access to finance. Eliminating these barriers ensures that access can happen at a minimum cost, leading to financial inclusion.

Although a great deal of literature has explored the lack of financial literacy and trust in financial services, product design has received limited attention. The limitations in design of formal services lead households to turn to informal channels to meet their needs for short-term credit or savings. The coexistence of a thriving informal market alongside formal ones suggests that the flexibility of informal markets offers lessons for the formal sector. It is highly likely that households choose to remain “excluded” due to obtaining few benefits from largely homogenous formal financial services which do not reflect their needs. In the light of such voluntary exclusion, questions are raised about the necessity of formal accounts for households and also about the objectives financial inclusion. Therefore, it may be more apt to view a NFIS as an attempt to eradicate barriers in order to have access to rather than to prescribe formal services for all. By accommodating a role for semi-formal services and taking into consideration the unique needs of households, it may be possible to craft a holistic financial inclusion strategy for Bangladesh.
Azraf Uddin Ahmad is a Research
Associate at the Economic
Research Group

Source: (Financial Express)