- What is financial inclusion?
- How is financial inclusion measured?
- What are the objectives of financial inclusion?
- What are the biggest obstacles in achieving the objectives of financial inclusion?
- What are the effects of a greater financial inclusion?
- What are the risks of financial inclusion?
1. What is financial inclusion?
Based on the latest definitions, financial inclusion is defined in terms of three dimensions: access, use and quality. Access means having the option to use financial services and products offered by institutions in the formal financial system, or the ease with which individuals can access available financial products and services at formal institutions. Use refers to effective usage of financial products. This has to do with the regularity and frequency of use, as well as the objective with which the financial system is used. Finally, quality is determined by the characteristics of access and use (quality and efficiency). It includes a variety of topics such as the adaptability of products to the necessities of clients, variety of financial services, product regulation and supervision, and, consumer protection regulation, among others.
2. How is financial inclusion measured?
There are various indicators and sets of indicators developed and measured by different entities that seek to assess the level of financial inclusion in an economy. In general, the existing indicators seek to measure access and use of the financial system. The most utilized and recognized indicators are the following:
- The Global Financial Inclusion Index (Global FINDEX) from the World Bank
- The Financial Access Survey (FAS) and the Composite Index of Financial Inclusion from the IMF
- The analysis of the regulatory environment for financial inclusion (and its indicators) from the Global Microscope
- The Enterprise Survey from the World Bank
Generally, the indicators refer to natural persons and not legal entities. A case in point is the World Bank Global Findex. There are other indicators for legal entities, but they are found in other databases (Enterprise Survey, World Bank). This definition and characterization of financial inclusion suffers from important weaknesses.
The differences between indicators of access and use are not clearly defined, and there is an overlap between the two categories. In some cases, to have a checking account at a financial institution is considered “access,” while in other cases it is considered “use” of the financial system.
Finally, it is assumed that access precedes use, and that it depends on supply factors, while use depends on demand factors. In order to use the financial system, one must have access to it, but not using the financial system does not necessarily mean not having access to it.
3. What are the objectives of financial inclusion?
ECLAC’s vision of financial inclusion emphasizes the productive aspect of financial inclusion both at an individual and enterprise level. With this understanding, financial inclusion is seen as a policy for productive insertion.
On the one hand, it encompasses all the efforts and initiatives oriented towards providing access to formal financial services to those that lack them. On the other hand, it improves and perfects the use of the financial system for agents, in particular for productive units such as SMEs, which are already part of the formal financial circuit.
The project uses this approach in the case of SMEs. The position of SMEs between micro-enterprises and large companies presents a difficulty for their financial inclusion. Micro-enterprises and large companies benefit from specialized financial institutions oriented towards these productive sectors (microfinance and commercial banks). SMEs, on the other hand, lack financial services and products that consider their particularities, which holds back their growth and improvement. (Neira Burneo, 2016, p7).
4. What are the biggest obstacles in achieving the objectives of financial inclusion?
The most commonly identified hurdles for financial inclusion in Latin America and the Caribbean are:
- An absence of a financial culture and lack of a strong demand for financial products and services that is guided by a formal financial education.
- A low supply of financial products and services, and low coverage (especially in rural areas), a result of a lack of knowledge of the real needs of the population currently excluded from the Formal Financial System.
- A lack of bank penetration and little usage of financial services due to costs, distances, and documentation requirements.
- Lack of infrastructure, institutions, and a coordinated framework for development of a financial system.
- Various cultural factors like the exclusion of women from economic decision making, lack of confidence in formal banking institutions, etc.
5. What are the effects of a greater financial inclusion?
Studies show that there is a correlation between greater financial inclusion and:
- An increased level of development and quality of life, as well as an increase in fundamental rights
- Greater economic growth
- Greater economic and financial stability
- Greater economic equality in the population, an increase in shared prosperity, and inclusive economic growth
- A reduction in poverty and income inequality
- An increase in employment and the creation of jobs in the productive sector
- A diversification of activities in small economies: Generation of capabilities to take maximum advantage of resources, and the rise in income levels, together with a decrease in market imperfections, contributing to economic stimulation at a local and national level.
6. What are the risks of financial inclusion?
A country’s financial system is complex and if its development is not adequately planned, guided, supervised, or measured there could be negative consequences for the economy and development. As a result, it’s important for governments and other entities to be involved, participate, and coordinate the development and implementation of financial inclusion measures. Poorly implemented financial inclusion could produce financial and economic instability.