Financial inclusion has emerged as a global hot topic over. For the last few years, financial inclusion has dominated public discourse.
The exclusion of a large part of a nation's population from formal banking services often leads them to the unregulated and informal sector. In most developing countries, nearly 90 per cent of small businesses have no links with formal financial institutions and around 60 per cent of the rural and urban population do not even have functional bank accounts.
Specifically, financial inclusion is a state in which all people who can use them have access to a full suite of quality financial services provided at affordable prices in a convenient manner and with dignity for the clients. Financial services that are delivered by a range of formal providers (all institutions that provide formal financial services that are recognised by the government - commercial banks, savings banks, rural banks, state banks, non-bank financial institutions and other financial institutions like microfinance non-governmental organisations, credit unions) have to reach everyone (inclusive of the poor, disabled, rural and other excluded populations), who, in turn, can use them.
The 'financially-included' are individuals who have access to the full suite of basic services, which refers to savings, credit, insurance and payment service. Naturally, 'financial literacy' comes into play here. It is the very ability to understand how to use financial products and services as well as how to manage personal, household or micro-enterprise finances over time. Thus improvements in literary levels can be achieved through financial education. This is important under the context of financial inclusion since as previously excluded populations gain access to formal financial services they need to be able to use these services in a productive and responsible manner.
On the other hand, 'financially-excluded' group consists of individuals who have access to none of the products in the full suite of basic services (savings, credit, insurance and payment services) from a formal financial service provider. Broadly defined, financial exclusion signifies the lack of access by certain segments of society to access low-cost, fair and safe financial products and services from mainstream providers.
Financial exclusion is thus a key policy concern, because the options for operating a household budget, or a micro/small enterprise, without mainstream financial services can often be expensive. This process becomes self-reinforcing and can often be an important factor in social exclusion, especially for communities with limited access to financial products, especially in rural areas.
In the broader sense, financial inclusion means providing access to a bank account, access to affordable credit and the payments system. This aspect of promoting broader access to financial services received less attention till recently.
Recent evidence suggests that finance is not only pro-growth, but also pro-poor. It has been found that economies with developed financial systems experience faster reductions in income inequality and poverty. For ensuring fast and consistent economic and social development, a well-functioning financial system is a pre-requisite.
Appropriate financial sector policies call, on the one hand, for encouraging competition and provide the right incentives to the individuals. On the other, the policies urge extending necessary support to foster growth, poverty reduction and better distributive justice by making full use of the capacities. Improving financial access, that will most benefit the poor, calls for strategy that will extend well beyond simply credit for poor households. As such, it is vital to broaden the focus of attention to improving access for all who remain excluded.
Financial exclusion is equated with the inability, difficulty or reluctance to have access to mainstream financial services. The same has the inherent tendency to lead to social exclusion. In an increasingly cashless future economy, the consequences of not holding a bank account are ever more exclusionary. Financial inclusion significantly contributes to a route out of poverty. Bank regulatory agencies should rate banks on their ability to serve low-income communities.
It should not be forgotten that the financially excluded are unable to avail themselves of the fundamental tools of economic self-determination, including savings, credit, insurance, payments, money transfer, and financial education.
McKinsey & Company is very right in pointing out that developing innovative and sustainable products is essential to the further expansion of financial inclusion. Accordingly, organisations should begin with three principles. These are: one, keep products relatively simple, while emphasising ease of understanding and use; two, design products that balance cost and profitability with customers' capacity to pay; and three, emphasise on product bundling-not only to maximise cost-effectiveness but also to shift the focus from pushing a single product to identifying and serving customers' comprehensive needs.
Dr B K Mukhopadhyay is a Management Economist.
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