The latest edition of the World Bank’s global Findex report is making the rounds these days. (For BR Research’s take on where Pakistan stands, read “Findex finds Pakistan lagging,” published April 24). As expected, the emphasis on “financial inclusion” – which is about access to and effective usage of financial services for the unbanked – has been renewed in the multilateral donor’s report.
The financial inclusion mantra, which has gained prominence among developing economies in recent years, is presumably based on good intent. But the empirical evidence is still missing to conclusively establish that poor/low-income households’ access to formal finance leads to improvements in development outcomes (e.g. household consumption, schooling, healthcare, entrepreneurship, etc.).
A causal relationship may well exist; but evidence will probably need years, perhaps decades, of local-level time-series studies, to come to light. Yet, somehow, the notion that higher account ownership leads to poverty reduction remains anecdotally robust. From Latin America all the way to South Asia, one finds the development sector cheerleading digital financial services for the poor, suggesting that success story in one region will pretty much replicate in a distant, disparate region.
At the apex, the World Bank itself is walking a fine line, something also reflected in this latest Findex report. The report’s authors concede that “evidence is somewhat mixed” for “potential development benefits from financial inclusion”. But as a whole, the said report, despite its commendable nuance, seems to suggest financial inclusion as a development solution.
The report itself details how most of the world’s unbanked individuals are already disadvantaged individuals: the unbanked are more likely to be poor; have low education attainment; have an overrepresentation of women; and are more likely to be out of labour force.
Does that not suggest, in short, that many among the unbanked may not have the money – and, by extension, income and savings – to deposit into bank accounts in the first place? (The report reveals that 44 percent of unbanked Pakistanis in the Findex survey cited “insufficient funds” as the reason behind not having bank accounts).
If the problem is indeed that of insufficient funds, how can the act of opening a bank account begin the process of turning that situation around? Folks need sufficient incomes, lack of which is manifested in poverty and thus reflected in their financial exclusion.
Recall, back in late nineties and early 2000s, donors had actively championed micro-credit programmes for poverty reduction. A decade later, donor enthusiasm has waned as development research shows “mixed results” in different regions when it comes to microfinance creating new entrepreneurial activity and boosting incomes of existing businesses for folks in the lower income quintiles.
In recent years, the focus has shifted to “payments”, of the digital kind, to make marginalized folks part of the formal financial system. Digital payments can indeed resolve a number of issues with fiat money. Compared to cash, digital transfers are safe, instant, cost-effective and transparent for individuals, governments and private sector. In mobile phones, an effective, widespread conduit is also available. (As per the report, out of 1.7 billion unbanked adults globally, 1.1 billion had mobile phones as of 2017).
But it all circles back to the point that giving the poor/low-income folks transaction/saving accounts is not the same as boosting their incomes; it doesn’t make a qualitative difference in their lives at all.
A danger with the current financial inclusion approach is that it may set off a race among developing countries to open more and more bank/mobile-money accounts, many of which will meet the inevitable fate of being unused. Instead, policy focus needs attack conditions that create poverty and restrict social mobility.