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The Case for Financial Inclusion

Apr 30, 2010

The world’s attention has over the last two to three years been focused on addressing the global financial and economic crisis, whose epicentre was the United States of America. But more importantly, for the countries in the periphery, the effects came with a decline in economic activity that had taken a decade to build. Global dialogue has focused on reforming the global financial system regulatory architecture. Key bodies such as the G-20 have been at the heart of this debate. However, is there a danger that financial inclusion could be overlooked in the midst of this debate? We argue that the financial inclusion in developing countries must be advanced to support growth and poverty eradication. We show that financial inclusion will increase capacity for future growth in the developing countries.
Financial Inclusion and Developing Countries Most developing countries did not bear the direct impact of the crisis emanating from the centre, particularly with regard to their financial sector. The effects on these countries were indirect, mainly resulting from falling commodity prices, decline in exports, remittances, foreign investments and declining fiscal space that had taken years to build. Developing countries, on the other hand, constitute the vast majority of the world’s financially excluded populace. It is therefore imperative that, as focus is given to financial stability, emphasis should also be laid on financial inclusion. ###MORE### Why Financial Inclusion The positive correlation between financial inclusion and development works through several channels: first, access to finance is access to markets that allow access to credit. Second, access to financial services encourages the savings/investment cycle, allowing for capital accumulation and asset building and enabling the poor to escape poverty. Savings mobilization is critical to funding the investments needed to alleviate poverty, create wealth and employment in developing countries. Safe havens for saving by the poor reduce their vulnerability to periodic economic and social shocks. Strong institutions supervised by Central Banks will shield savers and citizens from instability caused by unscrupulous investment channels such as pyramid schemes. Financial Inclusion Policies Developing countries have pioneered various cutting-edge financial inclusion policies, such as in the case of Agent Banking in Brazil and mobile money financial services in Kenya and the Philippines. These policies allow technological platforms to be used for cost-effective reach to the downstream savers. However, this knowledge has not been disseminated widely enough to allowing for a scaling up these innovations in other countries. It is therefore apt that mechanisms that can disseminate this knowledge be established. Of note are the Alliance for Financial Inclusion (AFI) and the G-20 Financial Inclusion Experts Group. AFI brings together policy makers from developing countries to share cutting-edge financial inclusion policies. This has brought policy makers from Brazil and Colombia together to share their experiences on agent banking with Kenyan policy makers. Philippines’ policy makers have also under the umbrella of AFI and shared their experiences on mobile financial services with counterparts from Afghanistan. AFI is driven by policy makers who are members of its Steering Committee, which is currently chaired by the Governor of the Central Bank of Kenya. On its part the G-20 Financial Inclusion Experts Group seeks to promote sustainable access to financial services through supporting the safe and sound spread of new modes of financial service delivery capable of reaching the poor. These are important initiatives that developing countries should fully lend their voice to and ensure that financial inclusion is mainstreamed in financial sector policy development. Next Steps There is a clear case for financial inclusion, and there is even a stronger case to scale up financial inclusion. For this reason we would recommend the following principles:- · Diagnosis - An understanding of the current financial inclusion status and the constraints on the demand and supply sides in a country should be obtained. In most developing countries, there is a combination of segmented markets and dual formal and informal markets · Policy Solutions - Policy interventions should be formulated to address the constraints identified in the diagnostic phase. These should be customised to unique country experiences. For example, in cases of segmented markets, one may need to understand what each segment demands rather than provide solutions across segments with limited success. · Co-ordination - In implementing financial inclusion policies, public and private sector players should be coordinated to ensure the efficient and effective utilization of resources. At the national level, the objective is to build strong institutions to regulate the financial sector with minimum regulatory arbitrage. As the world emerges from the global financial crisis, it is time to scale up financial inclusion initiatives. This is imperative as there can be no sustainable development when the majority remain financially excluded. Professor Njuguna Ndung’u is the Governor of the Central Bank of Kenya

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