The Importance of Financial Access for the Poor

We need continued product and business model innovation so that we can reach more people with a broader range of products at lower costs. What is needed instead is a variety of financial service providers that create an ecosystem that serves the poor profitably.
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At their summit in Los Cabos, G20 leaders reaffirmed their commitment to financial inclusion as an important global development priority. The Mexican hosts showcased their own efforts and other countries explained their plans and commitments to advance financial access. Under the Mexican G20 presidency, the notion that all working-age adults should have access and be able to use formal financial services to help improve their lives has gained further ground.

I should declare at this point that the entity I work with has supported the G20 and the Mexicans in developing their financial inclusion agenda, so I'm obviously partial. But I believe I'm partial for good reason.

Imagine life without access to formal financial services: without a deposit account, a college savings plan, or home mortgage, most of us would be unable to realize simple dreams and aspirations for our families, and simple planning would become a complex affair. We rely on financial services to plan for important life events, and without them day-to-day money management becomes a very complex -- and stressful -- exercise. Health setbacks or accidents without insurance can set you back considerably. Buying a house probably isn't in the cards. We take access to financial services for granted. But that's not the case for the majority of the population.

According to new data from the World Bank, in 2011 an estimated 2.5 billion working-age adults globally -- more than half of total -- had no access to the types of formal financial services delivered by regulated financial institutions wealthier people rely on. Instead they depend on informal mechanisms for saving and protecting themselves against risk. They buy livestock as a form of savings, they pawn jewelry and they turn to the moneylender for credit. These mechanisms are risky and often expensive.

As the commitment from the G20 shows, policy makers and regulators worldwide have recognized this. An increasing body of evidence shows that appropriate financial services can help improve household welfare and spur small enterprise activity. There is also macroeconomic evidence to show that economies with deeper financial intermediation tend to grow faster and reduce income inequality. This explains why G20 leaders have made financial inclusion a global development priority.

Under their leadership, a powerful responsible financial market development vision is emerging -- a vision that essentially aims at banking the other half of the global working-age adult population.

1. Learning from the microcredit revolution

The microcredit revolution showed that poor families in the informal economy are valuable clients, and that it is possible to serve them in large numbers sustainably. Today, the $70 billion microcredit industry that grew from these innovations with its estimated 200 million clients remains a great success of sustainable non-government and private sector growth catalyzed by highly-targeted public subsidies.

But over the past few decades we have also learned that poor households need access to the full range of financial services to generate income, build assets, smooth consumption, and manage risks -- financial services that a more limited microcredit model cannot provide.
The global financial inclusion agenda recognizes these broader needs. As Mahmoud Mohieldin and I have previously noted, It also recognizes the importance of financial literacy, building consumer financial capabilities, and for consumer protection regimes that take the conditions and constraints of poor families in the informal economy into account.

2. Capturing the benefits of business model innovations

The microcredit revolution found an ingenious way to provide credit to the poor without collateral: using the joint-liability loan that replaced physical collateral with social collateral to allow the poor to pledge for one another. But the business model challenge for other financial services is different. For small denomination savings and remittances the key challenge is the need for ultra-low transaction costs; for insurance, risks must be pooled and managed at an actuarially-relevant scale. There is no such thing 'as small is beautiful' in insurance.

We need continued product and business model innovation so that we can reach more people with a broader range of products at lower costs. Such innovation is already happening, for example, leveraging mobile-phone based business models. But ultimately no single type of provider will be able to overcome the very different product-specific business model challenges. What is needed instead is a variety of financial service providers that create an ecosystem that serves the poor profitably.

3. Creating the enabling environment

Responsible market development needs a regulatory environment that balances the needs of advancing access to finance and stability of the financial system. Globally, policy makers are recognizing that financial exclusion is a risk to political stability that impedes economic advancement. The global financial Standard Setting Bodies are changing their guidance to respond to this need to facilitate financial inclusion, and the G20 Leaders commended the progress made by the Financial Action Task Force in particular.

Under the Maya Declaration organized by the Alliance for Financial Inclusion, 25 countries to-date have made specific policy commitments to accelerate financial access for the poor. And in Los Cabos the G20 Leaders endorsed the Basic Set of Financial Inclusion Indicators to help countries spur and measure progress toward financial inclusion.

An estimated 2.5 billion working-age adults are excluded from formal financial services. Between the better understanding of demand, the innovations in supply, and the recognition of the need for a protective and supportive enabling environment, I believe we have the knowledge and the means to change this, and to achieve full financial inclusion in our lifetime.

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