Financial inclusion to boost low-income economy

Since the early 2000s, the term "financial inclusion" has gained importance as a result of findings about financial exclusion and its direct correlation with poverty.

Microcredit as a concept and system has been an asymmetric evolution ahead of financial inclusion. Financial inclusion is often closely connected to the aggressive microcredit policies that were introduced without appropriate regulations, oversight or client education policies. It resulted in clients becoming quickly over-indebted to the point of committing suicide in a country like India. Lending institutions also witnessed repayment rates collapse after politicians in one of India's largest states called on borrowers to stop paying their loans back, thus threatening the existence of a big Indian microcredit industry. This crisis has often been compared to the mortgage-lending crisis in the US.

In theory, "financial inclusion" or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable". Studies show still a large portion of working-age adults globally have no access to the types of formal financial services delivered by regulated financial institutions. In the Asian region alone only 30 per cent of the adults have a bank account even though the formal financial sector of the region has grown in the recent years. It is argued that "as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination is the prime objective of financial inclusion of the public."

GOALS OF FINANCIAL INCLUSION: The United Nations defines the goals of financial inclusion as follows:

• access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance;
• sound and safe institutions governed by clear regulation and industry performance standards;
• financial and institutional sustainability, to ensure continuity and certainty of investment, and
• competition to ensure choice and affordability for clients.

"The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance" observed former United Nations Secretary-General Kofi Annan. On December 29, 2003, he said, "the great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives." Also Alliance for Financial Inclusion (AFI) Executive Director Alfred Hannig highlighted: "Financial inclusion is no longer a fringe subject. It is now recognised as an important part of the mainstream thinking on economic development based on country leadership."

The term 'financial inclusion' was used for the first time, of course,  in the Indian context, by Y V Reddy, the then Governor, Reserve Bank of India (RBI)   in his  Annual Policy Statement presented in April 2005.  Later on, this concept gained ground and came to be widely used in India and abroad. While recognising the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, banks were urged to review their existing practices to align them with the objective of financial inclusion. The central bank of India, RBI has initiated several measures to achieve greater financial inclusion. These include: (1) Opening of no-frills accounts, (2) Relaxation on know-your-customer (KYC) norms, (3) Engaging business correspondents (BCs), (4) Use of technology, (5) Adoption of Electronic Bank Transfer (EBT) to reduce the cost and time for fund transfer,  (6) Introduction of General-purpose Credit Card (GCC) facility to help the poor and the disadvantaged with access to easy credit, (7) Simplified branch authorization and (8) Opening of branches in unbanked rural centres.

BANGLADESH EXPERIENCE: Dr Atiur Rahman, former Governor of Bangladesh Bank, focused on 'Financial Inclusion Bolstering Inclusive Economic Growth in Bangladesh' in his policy statement delivered on February 16, 2015. According to him, financial inclusion is "a key element of social inclusion, necessary to foster inclusive growth, combat poverty by opening up blocked opportunities; and inclusive financing of farm/non-farm output initiatives generate new employment on the demand side while matching new domestic output on the supply side." He underscored that conventional monetary and financial policies do not address inclusivity concerns; liquidity flows into profit seeking from speculative pursuits. His initiatives included, inter alia, motivational efforts, creation of necessary enabling environment, and policy support. Bangladesh Bank has since introduced financial policies steering initiatives-financing away from speculative uses towards socially responsible productive pursuits.

Inclusive financing thrusts of Bangladesh Bank are on output initiatives in agriculture, supporting food security and food price stability, SME (small and medium-sized enterprises) finance promoting output, employment and income generation and green finance supporting environmental sustainability to widen advancement opportunities for the poorer segments of people. Policy initiatives of ensuring adequate financing for agriculture include: (1) Mandatory minimum 25 per cent agricultural lending target for all banks; (2) Government interest subsidy on loans for specified higher value exotic crops and spices; (3) Banks with inadequate presence of rural branches can lend through local microfinance institutions (MFIs); (4) Meeting credit needs of tenant farmers supported by lending through a widely reputed MFI; (5) Availability of bank accounts for farmers at nominal deposits; 10 million accounts have opened so far. For the small and medium enterprises (SMEs), which contributes 22.5 per cent to GDP (gross domestic product) and makes up 40 per cent of employment, financing is supported by refinance lines funded partly by development partners (IDA, ADB and JICA) and partly by Bangladesh Bank. The Bangladesh Bank disbursed Tk 3.45 billion from its refinance window. About 21.9 per cent of the SME credits are distributed to women entrepreneurs. For the purpose of providing help to the SMEs, the 'New Entrepreneurs Fund' and the 'Jute Sector Fund' have been launched in 2014.

The Bangladesh Bank mooted a pragmatic recommendation saying that the central banks of the South Asian Association for Regional Cooperation (SAARC) region can initiate policies targeting low-income populations by introducing agriculture and rural programmes under a comprehensive monitoring strategy. Thus loans to sharecroppers and small enterprises, introduced by the Bangladesh Bank, have been contributing not only to achieving wider coverage of financial inclusion in the country, but also helping reduce the high dependence of small and marginal farmers on non-institutional sources.

ENSURING SUSTAINABLE INCLUSIVE BANKING: However, there are some issues which are being taken into consideration for effectively addressing the challenges for ensuring sustainable inclusive banking:

i) The inclusive banking measures are Bangladesh Bank-led and regulatory driven. These are not really spontaneous initiatives on the part of banks and financial institutions, without which sustainability of inclusive banking cannot be established.

ii) The measures so far taken are still not fully able to address the demand side problems of the financially excluded sections of the people. Financial exclusion is not only a supply side problem.

iii) Banking approaches to the financially excluded people are to be changed. Here, banks should go to the public, rather than customers coming to them.

iv) Focus on women by the inclusive banking measures must be maintained.

v) Initiatives in regard to financial literacy and establishment of credit-counseling centres are very necessary, but these are absent in many countries' contexts. Apart from the excluded people, the financial service providers should also undergo extensive and continuous training on financial inclusion. This subject (financial inclusion) should be incorporated as a key segment of the initial training received by frontline branch and other customer contact staff.

vi) Like with mandatory agriculture/rural finance programmes, all banks operating in Bangladesh may be asked to participate in financial inclusion programmes for which the responsibility of different unbanked/underbanked districts/areas should be allocated among the banks on the basis of some rational criteria.

vii) Finally, instead of giving piecemeal directives, the central bank should provide detailed guidelines of inclusive banking to all formal banks and financial institutions

While financial inclusion is an important issue, it may also be interesting to assess whether such inclusion as earmarked in policies are actually reaching the common beneficiaries. Since the 1990s, there have been serious efforts both in the government agencies and in the civil society to monitor the fund flow process and to track the outcome of public expenditure through budget tracking. Organisations like International Budget Partnership (IBP) are undertaking global surveys in more than 100 countries to study the openness (transparency) in budget making process. There are various tools used by different civil society groups to track public expenditure. Such tools may include performance monitoring of public services, social audit and public accountability surveys. In India, the institutionalisation of Right to Information (RTI) has been a supporting tool for activists and citizen groups for budget tracking and advocacy for social inclusion. In Bangladesh, citizen groups like Sushashon O Unnayaner Jonnya Prochar Obhijan (SUPRO), Action Aid and Unnayan Anneshon are also advocating decentralisation of the budget making process and keeping the people's voice in consideration while formulating budget.

There's no denying that inclusive and environmentally responsible financing is of high urgency for the low-income and climate-change threatened economies like Bangladesh.

Dr Muhammad Abdul Mazid is a retired Secretary to the government and a former Chairman, NBR.

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