Financial inclusion has attracted enormous interest because of its promise to provide an instrument for economic and social empowerment. Initial thinking was that simply expanding the reach of the financial sector would produce financial tools to support greater economic and social inclusion. But the results thus far have been disappointing.
The origins of financial inclusion are found in the microcredit movement – often associated with the Grameen Bank in Bangladesh. Rhetoric quickly outstripped reality with Professor Yunus, the pioneer of Grameen, at one point suggesting that access to credit should be regarded as a human right. Despite many inspiring examples, microcredit has largely failed to live up to its promise of transforming the economic lives of the poor.
Thinking moved on and the concept of financial inclusion was born encompassing a much wider range of services including payments, savings, insurance and investment. The most prominent global target today is for Universal Financial Access by 2020: ‘adults worldwide – women and men alike – will be able to have access to a transaction account or an electronic instrument…’. In Kenya we have already made huge progress towards this particular target. But many of these accounts are empty or are barely used. Unsurprisingly the impact of this form of “inclusion” has been decidedly modest. Are we heading to the point where financial inclusion is ready to be added to the bonfire of inspiring but flawed development ideas? Before we do this, perhaps it is time to look more carefully at just how finance can be used to drive economic and social empowerment. Finance can only end up being useful if it helps people deal with real world problems and value creation.
‘Send money home’ was the original tagline for Kenya’s extraordinarily successful M-Pesa mobile phone based money transfer service. It encapsulated how the service was originally conceived and implemented – offering a solution to a real world need which many people faced in Kenya. While this was an example of a single tool addressing a clearly defined and common requirement, many real-world problems are more complex. A farmer wants to be able to increase her income by investing in growing green-grams. But to do this she needs to be able to sell what she produces, acquire the know-how to nurture her crop throughout, make sure there is still food on the table throughout the growing season, mitigate the risk that the crop fails and pay her children’s school fees throughout.
So how do we encourage the development of finance which addresses these type of complex real world needs? In trying to answer this we need to balance humility and ambition. Humility because the issues here are complex and the pursuit of silver bullets has rarely ended well. But ambition because this isn’t about tinkering at the edges but recognising that this is about a fundamental change in what finance is all about. With these caveats to the fore, here are some thoughts on how a move to a more impactful type of finance might be accomplished, drawing on recent global developments:
First – recognise that no one will have all the answers. We need diversity of ideas and these need to be tested practically to find what works and doesn’t work. An environment is needed which encourages genuine innovation and eliminates barriers while ensuring that we protect the financial system and consumers. Enhanced competition is essential and we will most likely need new business models. While the basic banking model has proved its worth over centuries, it is notable that much of the recent progress in financial inclusion has come through challenger forms: SACCOs, microfinance institutions and mobile money operators.
Second – build an open infrastructure. There are multiple layers of infrastructure needed to underpin an open financial ecosystem. Establishment of identity is a foundational element and being able to do so readily in an increasingly digitised world will be essential to expanding the scope of formal finance. The payments system similarly underpins all other financial services. In theory digital technologies open up the potential for virtually cost-free value transfers. This has benefits for trade across the entire economy but with the potential for disproportionate impact on poorer households. The economies in which the poor find their livelihoods are characterised by vast numbers of micro-sized or more realistically ‘nano’ sized transactions for which current levels of transaction cost represent a significant barrier. Realising the ambition of creating an open infrastructure requires bold public policy intervention. Given the inherent network economics and the huge hurdle of transitioning from cash to digital it is unlikely that a market solution will simply emerge.
Third – use data to connect up the real economy and the financial sector. Through freeing up information, genuine opportunities can be identified and risks managed and reduced. Current credit information sharing only represents a modest start in realising the potential. By consolidating data – more and more of which is produced as a by-product of digitisation – finance can flow to where it is needed. A wholesaler sees the turnover of the many traders buying her products, the credit information bureau knows whether these traders have defaulted in the past, the mobile phone company picks up data which is correlated with behavioural characteristics, and the industry association working with the bureau of statistics has information on the performance of industry sub-sectors. Specialist finance providers or data analytics firms can combine all this data and build a risk model, enabling the wholesaler to offer pre-financed stock to traders with a repayment schedule tailored to actual real-world trading cycles. Addressing the potential here means tackling the development of the market for information which is being seen as an increasingly valuable ‘commodity’. Who owns the information, how is it traded and how is it regulated?
Fourth – address the shortcomings of markets through interventions which build long-term solutions. Too often the identification of a market failure has led to governments simply substituting for the absent supply of services. Rarely has this been either scalable or sustainable. Interventions need to address the source of the market failure. Take the case of finance for small enterprises. Lack of collateral is often held to be the constraining factor with guarantees or direct lending used to address the perceived problem. But in doing so it is often simply using subsidy to avoid tackling the fundamental problem: financial providers are unable to effectively identify which small businesses are viable and provide them with growth-supporting finance. What is needed is experimentation of new ways to do this – probably increasingly working through partnerships with players in the real economy with far better visibility of the businesses and with the incentives to see them develop. State provided development finance can be used to support this experimentation with a view to influencing the wider financial market. The recent explosion of digital credit in Kenya has demonstrated that once viability is demonstrated, replication follows rapidly.
Fifth – ensure that the rules of the game are directed towards creating long-term, sustainable finance businesses. There will always be opportunities to exploit consumers in the short-term to make quick returns. Sustainable finance is about creating real value for people and businesses, with a long-term gain for everyone. The starting point is that financial service providers must accept a duty of care to avoid harming their customers. Caveat emptor (‘let the buyer beware’) simply isn’t good enough in financial services. This leaves the least financially sophisticated and most vulnerable most exposed. Carefully designed and enforced regulation is essential to underpin a sea change in how financial markets work recognising that financial service providers need to accept greater responsibility for the impact of what they do on the welfare of their customers.
The failure to accomplish the sort of impact envisaged four decades ago might suggest that it is time to move on from financial inclusion. But regardless of whether financial inclusion remains a topic of interest in development circles, resources need to be allocated. In a market based economy the financial system will inevitably play a pivotal role in how this resource allocation happens. If we want to develop an economy which creates opportunity, reaping the latent potential of the many Kenyans who remain at the margins, then we have to pay attention to finance. Accomplishing real financial inclusion will need redoubled efforts by policymakers, regulators and providers focussed on solving real world problems.