When we say finance means the difference between life and death, nothing accentuates it better than the reality we witnessed during the pandemic. Inequality was exacerbated during this global catastrophe, and the divide between the haves and have-nots became more glaringly apparent. There was a global economic collapse, where ordinary people were removed from jobs, while the top 1 percent, consisting of billionaires and millionaires, multiplied their wealth at an unprecedented rate.
During the two years ravaged by Covid, in countries with scant medical infrastructure or only accessible to the rich, people had to go into debt to pay their medical bills. Many people had to go into an online donation campaign on social media. Most couldn’t fulfill their targets.
Finance can also mean the difference between life and death regarding education. College education, relevant degrees, and vocational training can be stepping stones out of poverty. A stable and white-collar job can secure financial stability and health. Financial means can also be a difference between building your generational wealth like property and stocks, which will increase in price and become an asset over time. It can also mean moving from a polluted industrial area with numerous health hazards to a safe, healthy area without pollution.
Financial Access: World Bank
Financial access has become an ever-so-crucial talking point in recent times. Policymakers have realized that uniformity of financial access in developing countries is as central to progress as economic output and industrial productivity. Progressive economists and lawmakers are concerned with the accumulation of wealth and authority in the hands of a few, restraining economic growth, and profoundly impacting the financial infrastructure.
Moreover, financial exclusion prevents the working class from building assets, investing in business and education, saving for medical emergencies, etc. Financial exclusion can happen due to a need for more awareness and financial literacy or the complete absence of infrastructure.
Reasons for Financial Exclusion
To stop people from being financially excluded, there needs to be more access to income, stable assets, banking infrastructure, and investment opportunities. Financial exclusion prevents someone from fully-fledged economic participation without any restraint. Here are some reasons why it may happen:
1. Lack of IT Access
The Internet is a service still afforded today by developed nations. Developing nations like India and other Latin American countries have made immense strides in internet connectivity. China has managed to digitize its entire country. But most African nations and Asian countries have been deprived of internet facilities. The absence of this infrastructure means there are no means to have an online banking system. There are numerous benefits to online banking:
- Remoting banking can help to expand a financial institution’s banking facility that its physical branches cannot reach.
- You can keep track of your transactions and balances without going to the bank.
- You can pay your bills, and if options are afforded, you can pay them automatically.
- Online banking makes it possible for bank holders to transfer funds quickly.
- You have access to your account all the time.
A digital infrastructure ensures smooth transactions of funds without money getting lost. A better digital framework protects customer privacy and data. They also protect from cyberattacks, thefts, and hacking. None of these could be afforded without a reliable digital infrastructure.
2. Lack of Awareness
Lack of awareness can also be a significant issue toward financial exclusion. To avail of banking services, we must assume account holders should know and be educated to use the banking system. That is difficult because some people aren’t only unaware and illiterate.
Many countries are undergoing wars, famine, and other life-altering calamities. Educational institutions are taken over or destroyed. Awareness is hindered. The Syrian war has left a significant part of the country’s education facilities destroyed or damaged. Thus, financial education becomes impossible.
3. Social Exclusion
In countries that restrict the rights of women and girls, they suffer financial exclusion. But this phenomenon is not restricted to women. In many countries, especially theocracies, rights, and civil liberties are restricted for black races, minority ethnicities, and certain religions. They are prohibited from holding bank accounts, thrown out of universities, and face legal, social, and economic discrimination.
For example, the segregation in America between whites and blacks discriminated against black people regarding employment and property ownership. The procedure of redlining prohibited black people from buying property in the white majority lucrative areas with access to schools and supermarkets. In Afghanistan, women are forcefully removed from offices and schools, thus preventing them from economic participation.
Unemployment directly results in financial exclusion. Economic strife and other financial calamities are responsible for widespread unemployment and result in financial exclusion. In 2008, the Wall Street crash caused widespread economic strife. Record-breaking numbers of people were laid off, while many more were rendered homeless. Unemployment causes instability, panic, and fear psychosis.
This causes banking collapse, and financial exclusion happens when people lose their savings and portfolio.
MLF and Financial Inclusion
DLA Piper is one of the law firms that are working for financial protection and inclusion. In 2015, DLA Piper drafts a legal framework to support financial inclusion and expands access to banking and investment. Model Legal Framework and Commentary for Financial Consumer Protection was jointly started by Accion and New Perimeter, and furnished by the Microfinance CEO Working Group, to encourage financial inclusion for vulnerable populations, especially in developing countries.
World Bank and Consumer Protection
According to the world economic community, financial inclusion is the bedrock of economic stability and development. According to the World Bank, consumer protection is the key to the door to financial inclusion. Without consumer protection, the market will stifle, and industrial production will stagnate.
This initiative of promoting economic equality by working with 25 underdeveloped countries, has the following gameplan:
- Adopting stringent economic regulations.
- Expanding the network of mission-based lending.
- Improving economic stability and self-reliance.
- Focusing on the vulnerable sections of society, such as black women, children, minimum-wage workers, unorganized workers, etc.
- In the Kenyan study, Financial diaries about M Pesa use reveal that M Pesa promotes inclusivity.
Moral Hazard and Wrong Selection
The significant reason for financial exclusion is how the financial markets function. The fundamental problem with the financial market is that it doesn’t operate on the basic principle of supply and demand, like other commodities in the market. For instance, if you want to buy a house, the price will be based not only on labor and operational costs but also on current demand.
A rise in demand will naturally jack up the prices of property. This manner of price increase is called inflation. Even though inflation affects mostly all existing physical commodities or services, the financial market operates differently. The prices rise if access to financial markets is easy and the credit line is extensive and low. If the interest rates are low, inflation stifles, and the prices of commodities come to equilibrium and stop rising.
In their academic paper, Weiss and Stiglitz present a compelling explanation regarding why information mismanagement and credit line rationing exclusion can lead to unequal access to credit. The credit market relies heavily on trust and disclosure of information. Sometimes, the borrower takes out loans without any intention of repaying them.
Sometimes the loans are used for adverse reasons, which clashes with the intention of the lender giving out the loan. This tightens the credit line, and working-class people lose access to credit altogether. Credit rationing also occurs in competitive credit markets as well. The bank cannot increase interest rates if the loan demand increases because it will drive away people with good credit scores and histories.
On the other hand, high-interest loans attract risky borrowers with bad credit scores and banking history. So, banks keep interest rates low, which significantly decreases their profit increase over a long period. This creates a disparity and leaves most of the credit out of the hands of everyday people.
Measuring Access to Credit and Financial Inclusion
Previously, the density parameters, such as banking branches or ATMs per capita, were measured as the source of financial inclusion. This provider-side parameter helped determine how much a country’s banking sector has penetrated a nation. The information was collected from 2004 to 2011 but provided no factual data on the financial service penetration of the country.
First, these statistics don’t consider how many people are opening their bank accounts. Second, it doesn’t consider societal conditions like the exclusion of women from public life. Women are excluded from education, mainly literacy, and consequently deprived of financial literacy.
The information gap was considered by Bill and Melinda Gates, who cooperated with the World Bank to judge the financial inclusion of 148 nations. The collaboration analyzes over 150,000 adults across these nations and sees how they use their nations’ banking facilities. The parameters include savings, borrowings, portfolio, risk management, bank accounts, and 40 others. The data is compiled into the Financial Inclusion Index, also called Findex. The index is conducted through research with honesty the new frontier that opens for wider access.
In its current state, the global financial index puts stress on its diagnostics and analysis. The index is available in 142 languages across 148 countries so local lawmakers can access the information they have to improve their policies and infrastructure. The index is also essential for allocating resources where needed most.
1. What are the solutions for financial inclusion?
DLA Piper has collaborated with Accion and Micro Finance CEO group to create a financial inclusion framework. The framework mainly focuses on consumer protection for economic goals.
2. How is financial inclusion measured?
Global financial inclusion is measured by a global financial index called Findex. The index focuses on savings, borrowings, portfolios, bank accounts, and 40 other parameters. The index is compiled by Bill and Melinda Gates, partnered with World Bank.
3. What are the reasons for the financial exclusion?
There are numerous reasons why financial exclusion happens. Lack of infrastructure, especially in digitization, is one of the main reasons. Other reasons include lack of education and social exclusions such as unemployment or discrimination based on gender, gender identity, race, religion, ethnicity, or other identity groups.
Access to finance at the correct time, and during moments of urgency, can be the difference between life and death for most. Needless to say, we definitely have to traverse a long way before we achieve total financial equity.
However, the data shows that the world is rapidly catching up. The amount of people living in extreme poverty has declined drastically since the beginning of the 21st century. World hunger has decreased, and people have more access to the internet than ever before.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.