Financial Inclusion plays a pivotal role in fostering Economic Empowerment, creating a symbiotic relationship. Innovative financial products, such as cash-flow-based lending rather than traditional collateral-based lending, can greatly expand access to capital for underserved segments like Micro, Small, and Medium Enterprises (MSMEs), women, and farmers. Financial offerings that prioritize privacy and control for women can contribute to asset accumulation and household decision-making, ultimately leading to economic empowerment. Similarly, tailor-made insurance services, providing fast payouts and high flexibility, can boost farmers’ income and productivity. On the flip side, economic empowerment can also fuel financial inclusion. For instance, when women have equal ownership of assets, they can offer collateral, making it easier to access capital.
Remarkable progress has been made in the realm of Financial Inclusion. Over the past decade (2011-2021), the percentage of adults holding accounts with financial institutions has surged from 51% to 74%. As part of the G20 2023 agenda under the Indian presidency, the Business 20 (B20) engagement group has established a Task Force devoted to ‘Financial Inclusion for Economic Empowerment.’ This task force aims to propose strategies for further bolstering global financial inclusion efforts and their contribution to economic empowerment.
Understanding Financial Inclusion
The definition of financial inclusion has evolved over time, encompassing various facets related to access, utilization, and the quality of financial services, with a particular focus on underserved segments of society. Consequently, there exists no universally accepted definition of financial inclusion. Definitions vary based on factors like the target market segment (households, businesses, etc.), the scope of financial products and services (credit, insurance, payments, savings, etc.), and key attributes (accessibility, affordability, sustainability, responsiveness, timeliness, convenience, etc.).
The Necessity of a Comprehensive Assessment Framework
Policy actions proposed by experts acknowledge the diverse approaches that countries can take to improve financial inclusion. To facilitate monitoring, the B20 Task Force puts forth a ‘Financial Inclusion Assessment Framework’ based on three key pillars: (i) Ecosystem and Enablers, (ii) Product, and (iii) Legal and Regulatory. This framework allows countries to evaluate their performance in accordance with the proposed criteria. The policy paper released by the task force highlights the pivotal roles played by mobile money in Kenya and the digital public infrastructure in India and Brazil as driving forces behind financial inclusion.
Concerning monitoring indicators, the framework takes into account existing data systems, such as the Global Partnership for Financial Inclusion 2023 indicators, Alliance for Financial Inclusion Indicators, United Nations Environment Programme Finance Initiative indicators, and World Bank Findex. The framework aims to enhance these data systems further by incorporating critical dimensions like the role of Digital Public Infrastructure, Gender and Diversity, Capacity Building through incubation and financial literacy, Self Help Group (SHG) and co-operative promotion, etc., in advancing financial inclusion.
The Financial Inclusion Assessment Framework acknowledges that countries are at varying stages in their financial inclusion journeys. Thus, guiding principles for assessment and strategy should (a) be rooted in both core good practices and enhanced good practices (recommended but not not mandatory), (b) allow flexibility for countries to attain similar outcomes through different approaches, and (c) be tailored to each country’s financial infrastructure maturity and sector penetration.
Challenges and Opportunities in Financial Inclusion
The world has made significant strides towards financial inclusion, with the proportion of adults holding financial institution accounts increasing from 51% in 2011 to 74% in 2021. Nearly 86% of adults now own mobile phones, and over 50% possess debit or credit cards. Among those with financial institution accounts, more than 65% have made deposits and withdrawals.
However, effective access to formal financial services remains limited. For instance, while 51% of women (15+) have borrowed money, only 28% did so from formal financial institutions or via mobile money accounts. This underscores challenges on both the supply and demand sides. Demand-side hurdles include limited business knowledge, financial and digital literacy, the informal nature of enterprises, inadequate access to formal financial services, low consumer awareness, absence of digital identity for enterprises, and trust issues, particularly among new-to-bank or new-to-credit customers in digital financial service delivery. On the supply side, challenges encompass insufficient collaboration in data sharing, the absence of data-driven products, irrelevant value-added services, and limited digital and physical infrastructure.
FinTech companies, primarily tech-driven entities offering financial services, have displayed immense potential over the past decade in driving digital financial inclusion. They have emerged as pivotal players in this era due to their ability to digitize conventional value chains, provide last-mile connectivity, and deliver financial and value-added services cost-effectively. FinTechs have a distinct advantage as they are agile and customer-centric, thanks to innovative business models that offer flexibility in serving underserved customer segments.
This blog is based on the policy paper published by the B20 Task Force on Financial Inclusion for Economic Empowerment.
Know more about the policy recommendations, here.