Financial inclusion: good for people, good for growth

Financial inclusion makes extraordinary differences to individual lives, whether in developing countries where a bank account can be the line between a poverty trap and a thriving business or in a developed economy where a debt cycle can become a wealth plan.

Even at this micro level, such programs are incredibly worthwhile but a growing body of work shows financial inclusion also has far reaching macro-economic impacts – positive but also with certain risk characteristics.

"Economies are made up of individuals and hence the aggregate impact of financial inclusion is important to consider."
Andrew Cornell, Managing Editor

Indeed, emerging research is looking at the impact of greater inclusion on the efficacy of monetary policy, the unintended impeding consequences of some new global regulation on inclusion and the broader multiplier effects of inclusion on growth.

As a judge for the Australian Securities and Investment Commission’s MoneySmart week awards in my former life, I had the chance to see the impact of a vast array of different programs. One of those was the Saver Plus Program run by ANZ in conjunction with the Brotherhood of St Laurence, Berry Street, the Benevolent Society and the Smith Family over the last decade.

research report undertaken by RMIT University on the first 10 years of this program has just been released and it reveals not just startling success with participants achieving savings goals but much deeper benefits.

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“We can see the evidence of Saver Plus building self-efficacy and transforming minds and attitudes,” the report finds. “Saver Plus presented opportunities that did not previously seem available. Similar evidence was found in every subsequent phase of Saver Plus: reduced stress in the household, increased self-efficacy, development of a range of financial capabilities which enabled participants to save, development of long-term savings habits, increased spending on education and increased financial resilience.”

One Saver Plus participant, a refugee from Vietnam with three children, was a remarkable but not atypical example. She had education and skills but not the English language ability, networks or cultural understanding to use them when she first arrived in Australia.

As a consequence, she was financially stressed. Her target was to muster the savings to buy a home – which she has now done and, in classic Australian fashion, is looking to buy some investment properties.

The individual import of such experiences is of course beyond the financial.

Yet economies are made up of individuals and hence the aggregate impact of financial inclusion is important to consider.

A new report from the Institute of International Finance notes “there are clear benefits of financial inclusion at the individual and macro level—even though the macro effects are difficult to quantify”.

The authors emphasise the point “the benefits of financial inclusion go beyond growth”.

But they also argue the benefits of financial inclusion are not in a sense philanthropic but two way: “financial inclusion is traditionally seen as a developing country issue but there are broader lessons to learn for the financial industry as it seeks to tap new business opportunities and lower transaction costs”.

For example, new technologies designed to bring secure payments or deposit accounts to countries lacking traditional financial services infrastructure can be just as effective in developed countries or indeed can form the basis of innovation which can improve the efficiency and capability of financial services provision more broadly.

The IIF work also acknowledges the risks - which are also on the agenda of global regulators.

“Financial illiteracy and an excessive push by banks to increase their customer base among the low-income population could result in credit bubbles and bad loans,” the report says. “A pro-active government role is therefore imperative to ensure that appropriate regulatory and supervisory mechanisms are in place and sound practices are followed.”

That is, the risks are not an excuse to shun greater inclusion, they are an imperative to improve financial literacy more broadly and ensure regulation is fit for purpose – and that is just as true in developed economies like Australia or New Zealand or Singapore or Hong Kong.

The other realm in which financial inclusion is relevant is the currently fraught one of monetary policy. In theory, greater financial inclusion makes monetary policy more affective because greater proportions of the population feel the impact of interest rates. That is, more people become borrowers and lenders.

This is an important albeit initially relatively low impact consequence of inclusion. Risk considerations however are more immediate given the points touched upon by the IIF and others around credit bubbles, greater involvement of unregulated sectors and potential exploitation.

These are then financial stability issues.

The Bank for International Settlements will be looking at these issues in upcoming work.

Clearly the example of Saver Plus and other matched saving and financial literacy programs demonstrate the enormous benefit of inclusion generally.

As the RMIT report by Roslyn Russell, Mark Stewart and Felicity Cull notes “while Saver Plus has been successful in achieving its key objectives regarding saving and improved financial management behaviour, it also has induced a range of secondary benefits that are also important to building financial resilience and wellbeing”.

“For example, it was not a specific aim to encourage participants to take out insurance cover. However, through learning about the benefits of protecting assets in the education workshops, there have been a number of participants who have done this. Similarly, increased connection with the community has been an unexpected but positive benefit for participants.”

The IIF work in turn highlights the collateral benefits of inclusion work in developing economies.

“In particular, the speed and drivers of financial inclusion in developing countries demonstrate an approach to banking that is way more innovative than what is happening in developed markets, where financial inclusion was achieved through traditional banking channels,” the paper by Felix Huefner and Arpitha Bykere found.

“Many developing countries are ahead of advanced markets in non-bank financial inclusion initiatives and thus can offer case studies for financial institutions to use technology and innovative models to tap business opportunities in developed countries as well as other developing countries.

“These initiatives will also help banks looking to cut expenditure to increase efficiency, lower transaction costs and reduce the number of bank branches.”

The IIF paper pitches inclusion as a business opportunity, not just an example of good – and financially rewarding – corporate citizenship. It notes other papers such as the Center for Financial Inclusion’s Roadmap to Financial Inclusion with its five broad initiatives: 1) Addressing customer needs (chaired by CGAP – Consultative Group to Assist the Poor); 2) Technology-enabled business models (chaired by Visa); 3) Financial capability (chaired by Citi): 4) Client protection (chaired by Smart Campaign); and 5) Credit reporting (chaired by International Finance Corporation).

The financial services sector often struggles with balancing issues such as public profile and profitability but financial inclusion is one of those happy realms where doing the right thing also contributes to financial growth and stability more broadly – good for banks – and improved profitability and customer satisfaction for institutions involved.

For the financial sector to be involved in the vast diversity of inclusion opportunities, it is clearly a case of enlightened self-interest.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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