The world economy, which has yet to fully recover from the devastation caused by the pandemic, is once again being confronted with fresh challenges arising from the conflict in Ukraine, disruption of global supply chains, unprecedented global debt, expected global recession, and a lot more.
The impact of the pandemic and the subsequent crisis has been asymmetric with far greater risks for developing countries and vulnerable demographic groups. The gaps have widened post pandemic, especially for the poor in developing and least developed countries, as well as for micro, small and medium-sized enterprises.
In fact, a new kind of duality has been created wherein the rich have recovered more robustly than the poor. As a result, poverty has exacerbated, debt vulnerability has increased, and inequalities have grown across the globe. In such a situation, the need to promote financial inclusion among the poor and marginalized holds special significance.
Financial inclusion could best be described as a state where all adults above the age of 15 have effective access to and usage of savings, payments, credit, insurance, and investment services/products provided by financial institutions. Effective access includes relevant products that cater to customer needs, convenience and affordability for customers, responsible market conduct by providers, and effective financial consumer protection groups.
Financial inclusion is an important tool to strengthen the livelihoods of consumers belonging to the excluded and underserved groups and in turn drive their economic empowerment. Access to finance, by way of credit, savings, and insurance, for example, could enable women to raise the necessary capital to start their own business. Provision of quality insurance products can help farmers protect their savings and smooth their consumption even during difficult times. Besides, improved financial access can help families to meet their consumption needs, insure against unfavourable events, and invest in health and education. Similarly, for MSMEs to thrive, timely and affordable credit is essential for making investments, expanding business, and building scale. Hence, at every level, financial inclusion plays an important role in reducing socioeconomic inequalities and promoting human development. As a result, economies with high levels of financial inclusion tend to have stronger growth, more stability, and less inequality.
Recognising that financial inclusion has emerged as a cornerstone of social and economic empowerment, the G20 grouping has, since its inaugural edition in Washington DC in 2008, emerged as a critical enabler to foster inclusive development and is a driving force of economic and financial stability. This has resulted in the rolling out of major financial inclusion guidelines, policies, and initiatives to promote financial inclusion across the globe.
The relentless push given to equitable growth by countries and institutions has resulted in significant progress being made in achieving financial inclusion. For instance, studies suggest that the proportion of adults (15 and older) having an account with a financial institution has gone up from 51 per cent in 2011 to 74 per cent in 2021. Similarly, the latest Global Findex database 2021 shows 76 per cent of the global population having a bank account in 2021 as against 51 per cent in 2011. The digitization drive, which was accelerated in the aftermath of Covid-19, has further hastened financial inclusion efforts.
Despite this, more than a third of the global population continue to be financially excluded due to challenges arising from inadequate access to finance, high capital costs, lack of consumer awareness, trust deficit, limited digital and physical infrastructure, among others. As a result, some of the most vulnerable segments of the economy, such as women, farmers, rural poor, and small businesses, continue to be unserved and underpenetrated, resulting in increasing credit gaps and limited use of financial services such as pensions, savings, insurance. To remedy the situation, a dedicated approach and effective cooperation among multiple stakeholders, including the G-20, is required for banking the unbanked in the society.
One of the most promising ways to financially empower the poor would be by encouraging the use of technology and digitization. Multi-stakeholder cooperation could be sought to deepen financial inclusion and improve service delivery. For instance, India could share its experience with its G20 counterparts of how to use public private partnerships to create digital solutions like UPI to promote financial inclusion. In fact, the United Payments Interface (UPI), by creating a digital platform for promoting cashless transactions, has emerged as an excellent example of technology boosting financial inclusion and for accelerating financial literacy among the masses.
Similarly, the success of Kenya in achieving financial inclusion through use of new financial technology and innovations, especially in mobile money and mobile banking, is also worth emulating. Kenya’s mobile payment services, M-PESA, is a well-known service which is operated through a private telecommunications provider and has nationwide coverage independent of traditional banks. Today, more than 75 percent of Kenya’s population has access to financial services which has grown significantly from 26.7 per cent in 2006 to 83.7 per cent in 2021—the highest in Sub-Saharan Africa. Such success stories could be deliberated and replicated by other countries as well. In fact, technology has created new opportunities, post Covid-19, for digital financial services to accelerate and enhance financial inclusion and the G-20 forum should be used for further strengthening the digital ecosystem and addressing the risks associated with it.
At the same time, the policies and schemes launched by the Indian Government such as Pradhan Mantri Jan Dhan Yojana, which has facilitated universal access to banking facilities, promoted financial literacy, facilitated access to credit, insurance, and pension services along with channelling all benefits through direct benefit transfer, can be shared with G-20 nations. As a result of the scheme, the share of unbanked adults has dropped from 47 per cent in 2014 to 22 per cent in 2021. Besides, the Pradhan Mantri Mudra Yojana has benefitted more than 400 small and micro enterprises since its launch in 2015. Similarly, with social security schemes such as Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Atal Pension Yojana, India has made tremendous progress towards financial inclusion.
The G-20 forum could also discuss expanding the coverage of Fintech, which in recent times has demonstrated a huge potential for driving financial inclusion among the underserved population in remote areas. By using technologies such as artificial intelligence for risk assessment, and being agile and consumer-centric, fintech companies can provide credit to people in the ‘high- risk’ category in remote areas or low-income, unbanked individuals and encourage them to save, grow their money, and take advantage of government programmes and assistance. This gives small-ticket borrowers and local businesses access to microfinancing services for important purchases and capital investment, which is unlike the case with traditional banking systems.
The G-20 forum has also held advance discussion on the creation of Central Bank digital currency with 18 countries having agreed to the proposal. Of these seven countries, including India have launched pilots in the wholesale and retail segments within a closed user group. Such an initiative, if pursued further, would not only lead to financial inclusion by creating bank deposits for the unbanked but would also help in achieving sustainable development goals (SDG).
On assuming the presidency of G-20, India has continued to accord financial inclusion a primacy of place in its agenda of priorities to facilitate equitable growth among countries. Accordingly, the Business20 (B20) India, an engagement group under G20, has established a Task Force on ‘Fostering Financial Inclusion and Empowering Societies’. The Task Force would draft a policy paper outlining a framework for linking financial inclusion with economic empowerment, for both users and businesses keeping ‘strengthening of livelihoods’ at the center.
To conclude, financial inclusion has emerged as an important tool to strengthen the livelihoods of underprivileged consumers and, in turn, drive their economic empowerment. Hence, the B-20 forum, created during India’s Presidency of G-20, which would deliberate and suggest a toolkit of measures to bridge the rich-poor divide, especially in developing countries, is a salutary step forward.
This article was contributed by Mr Sanjiv Bajaj, Immediate Past President, CII and Chairman and Managing Director, Bajaj Finserv Ltd. The article was first published in the May 2023 edition of CII ARTHA.