Essay

A Comprehensive Guide to Financial Inclusion

By  Martin Čihák and Aslı Demirgüç-Kunt

The World Bank Group’s Global Financial Development Report 2014, released November 11, 2013, is the most comprehensive study yet on financial inclusion. It highlights new evidence on policies that improve—and those that undermine—access to finance.

The study is the second in a new series of reports on global financial development. It follows up on last year’s inaugural issue, which concentrated on rethinking the state’s role in finance. Similarly to the first report, the current publication seeks to avoid simplistic views and instead develops a nuanced approach to financial sector policy, based on a synthesis of recent and new evidence.

The report comes at a time when financial inclusion has garnered worldwide attention. More than 50 countries have recently committed to explicit targets for increased financial inclusion. And last month, World Bank Group President Jim Yong Kim called for achieving universal financial access for all working-age adults by 2020.

Despite the heightened interest in financial inclusion, views on policies that work best are split. This is illustrated the results from the second round of the Financial Development Barometer, a global survey undertaken by the Global Financial Development Report team in preparation for the report. The survey tracks views on financial sector development among financial sector practitioners (such as central bankers, finance ministry officials, market participants, and representatives of nongovernmental organizations) around the world. Among other things, respondents’ views differ widely on what is the most effective policy to improve access to finance among low-income borrowers (figure 1), where about a third of the respondents emphasized financial education, while others picked the legal framework, credit information, promotion of new technologies, and other policies.

The diversity of views underscores the gaps in knowledge about the effects of key policies on financial inclusion. This is also where Global Financial Development Report 2014 comes in. While recognizing the complexity of the questions and the limits of existing knowledge, it draws on a mass of new data and research to contribute to the policy discussion.

Figure 1: What is the most effective policy to improve access to finance among low-income borrowers?   


Source: Global Financial Development Report 2014 (Financial Development Barometer survey of financial sector officials and experts from 75 countries).

What are the report’s main findings?

The report highlights new evidence that people, especially the poor, benefit greatly from using basic payments, savings and insurance services. Financial inclusion can thus be a powerful accelerator of economic progress, and can help achieve the World Bank Group’s goals of eliminating extreme poverty and building shared prosperity.

The report stresses that achieving those benefits requires addressing market and government failures. For policymakers, it is important to provide an enabling environment of strong laws and regulations, good information, and healthy competition among financial service providers. In this way,

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they can encourage the private sector embrace new technologies, such as mobile banking and biometric borrower identification; and also create new and innovative products, such as commitment savings accounts or index insurance.

The report also cautions that the objective should not be financial inclusion for inclusion’s sake. For example, creating millions of bank accounts that end up lying dormant has little impact. And without healthy competition and effective regulation, attempts to promote credit for all just lead to financial and economic instability, as we have seen time and again, including in the recent global crisis.

Pursuing financial inclusion responsibly requires educating consumers about finance. The report’s systematic review of 188 articles, reports, and studies on the subject concludes that classroom-based financial education for general population has little impact. It works better during key moments in one’s life, for example when starting a job or applying for a loan. People also learn better when messages are delivered though their social networks and through engaging channels, such as soap operas.

The report and the related website also highlight the important data compilation work done at the Word Bank Group. The report is accompanied by several useful cross-country datasets, including an updated and extended version of the Global Financial Development Database, covering over 100 financial system characteristics for more than 200 economies. Reflecting the report’s focus on financial inclusion, the dataset has expanded coverage of financial access indicators for financial institutions (featuring both provider-side and user-side data) and for financial markets. It also includes data on financial sector depth, efficiency, and stability.

Figure 2. Where In the World Do the 2.5 Billion Unbanked Live?

Source: Calculations based on the Global Financial Inclusion (Global Findex) Database and World Development Indicators. Note: The cartogram is for illustration purposes only. Country sizes are adjusted to reflect the estimated number of unbanked people, ages 15+. The image was created with the help of the MapWindow 4 and ScapeToad software.

One possible use of the data is illustrated here in figure 2, illustrating where the unbanked live. It is a cartogram in which country sizes are adjusted to reflect the estimated number of unbanked adults. After adjusting for the number of the unbanked, for example, Mexico seems larger than the United States, Australia and Canada almost disappear from the map, and India appears larger than South America.

The work on financial inclusion is far from done, of course, but reports such as this help in charting the road towards greater financial inclusion. The report is a component of a broader initiative to enhance the stability and inclusiveness of the global financial system. It should prove useful to a range of stakeholders, including governments, international financial institutions, nongovernmental organizations, think tanks, academics, private sector participants, donors, and the wider development community.


Category: Report

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