Rapid advances in
financial inclusion globally have brought over three-quarters of the world
adult population into the formal financial system.
Globally,
financial account ownership increased by 50 percent in the 10 years spanning
2011 to 2021, to reach 76 percent of the global adult population[i].
Moreover, the gender gap in account ownership narrowed for the first time in
the last decade[ii].
Most governments now have a financial inclusion strategy and deliver government
payments through the formal financial system. India is a remarkable global
example in its accelerated journey towards building a financially inclusive
society. The PMJDY scheme combined with India’s digital stack has paved the way
for an inclusive infrastructure that is bringing previously underserved
low-income populations into the economic and financial mainstream. Till January
2022, the scheme generated over a record 443 million accounts for India’s
households out of which over 55 percent of accounts belong to women.[SG1]
Financial inclusion
alone may not be enough to drive economic growth and well-being
While
financial inclusion has aided several policy measures during this time, there
is an emerging body of evidence that suggests mixed results at best in terms of
the impact of financial inclusion on the lives of low-income populations. For
example, a recent review by CGAP showcased that while access to bank accounts
improved savings among farmers in Malawi, the same exercise in other countries
did not find similar results[iii].
Being
financially included does not translate into being financially secure or
resilient. For instance, the recent Global Findex Database 2021 shows that
about 45 percent of adults in developing economies could not access emergency
money within 30 days with an unexpected expense. Furthermore, about two-thirds
of adults were very worried about at least one source of financial stress, in
particular about covering health expenses in the event of a major illness or
accident.
Recent
evidence from developed countries also suggests that higher levels of financial
literacy, financial inclusion, and income do not always translate to financial
wellbeing. A 2021 study by Financial Health Network in the U.S. finds that only
one out of three Americans is financially healthy despite the U.S. being a
high-income country with near universal levels of financial inclusion and high
financial literacy.
In
India, despite high rates of financial inclusion, consumer financial resilience
is lower than the world’s average. As per the Global Findex 2021 survey, while
more than 80 percent of adults reported having access to one of several sources
of emergency money within 30 days, two-thirds of these adults said it would be
very difficult to come up with those funds.
Low
rates of saving and borrowing from formal financial institutions[iv]
in India, also reflect poor usage of accounts despite ownership. Limited
financial literacy[v]
and lack of a compelling reason to use formal financial services are key
reasons for the low use of accounts. Furthermore, the COVID-19 pandemic also
brought greater attention to the digital divide between those who have the
resources and capability to embrace the digital transformation, and those who
do not.
There is a need to
move beyond access and usage of financial services to improving people’s
capacity to manage their financial lives
Research
by Asian Development Bank (ADB) shows that the impact of financial inclusion
varies significantly across income groups subject to its dimensions of access
and usage. This highlights the importance of such aspects as economic
development, income distribution, demographics, market structure, and
infrastructure quality in shaping the impact of financial inclusion strategies[vi].
In
India, the NSFI’s 2019-2024 strategic objective is ‘to make financial services
available, accessible, and affordable to all the citizens in a safe and
transparent manner to support inclusive and resilient multi-stakeholder led
growth’. However, in reality, practitioners tend to focus solely on access
and use of financial products and services and neglect the ultimate goal of
financial inclusion. This narrow focus on designing new products and services
to aid inclusion has left behind the primary agenda of improving people’s
financial health.
Financial Health includes the ability to:
· Manage their day-to-day expenses- Financial Security;
· Cope with unexpected economic shocks like the covid-19 pandemic – Financial Resilience;
· Feel in control of their finances – Financial Control and;
· Achieve their financial goals – Financial Freedom
Financial
services firms, particularly those that serve low-income customers, have been
focused on volumes: the number of accounts they mobilized or transactions they
processed, losing sight of the bigger question: Is this innovation or service
transforming the financial lives of individuals, households and communities?
Globally,
particularly in developed countries, we are witnessing a tectonic shift from
financial inclusion toward financial wellbeing as a core purpose of financial
institutions. This shift is due to the inherent insufficiencies of financial
inclusion and financial literacy actions to build financially secure and
resilient societies as also revealed through the COVID-19 pandemic.
[1] Global Findex Database
2021
[3] Looking Beyond the Average
Impact of Financial Inclusion | Blog | CGAP
[4] The Global Findex Database
2021
[5] As of 2020, a survey
conducted by National Centre for Financial Education shows that only 27% of
Indians are financially literate
[6] Park, C.-Y. and R. Mercado, Jr. 2021.
Understanding Financial Inclusion: What Matters and How It Matters. ADBI
Working Paper 1287. Tokyo: Asian Development Bank Institute. Available:
https://www.adb.org/publications/understanding-financial-inclusion-what-mattersand-how-it-matters