“Champions for financial inclusion are extremely important, it is easier to push the agenda forward with them.” – Prof Thorsten Beck

AFI had the honour of hosting Professor Thorsten Beck in its Kuala Lumpur headquarters to reflect about the 10-year journey of bringing smart policies to life, and evolution of the financial inclusion data framework.

In a nutshell: financial inclusion policy efforts have evolved in parallel with its data framework, and vice-versa.

Looking back on 10 years of development in financial inclusion

Back in 2008, when AFI and the concept of financial inclusion were being crafted, there was no baseline data to measure the size of the challenge ahead. However, it was clear that expanding the finance frontier was one of the key priorities in the developing economies, as demonstrated by the growth of microfinance in those years. At the time, the data framework was equipped with only some of the financial development indicators such as private credit to GDP or bank deposits to GDP — enabling only a broad overview of the financial markets outreach.

In those early days, the financial inclusion data framework lacked accurate data on distribution of deposits and credits, as well as measures of financial outreach. Crude proxy indicators including ratio of bank branches or ATMs to population, and number of depositor loan accounts provided a glimpse of the financial inclusion landscape despite the lack of a direct link between financial products and its holders.

As the conceptual framework evolved, the financial inclusion data framework was developed through more granular supply-side and demand-side data. While the demand-side approach developed through national and international initiatives such as Finscope and FinAccess, the Global Findex enabled a clearer picture of the distribution of account ownership and usage.

As a result, data has helped to identify the main market barriers of financial inclusion. From a financial market perspective, the costs and risks associated with providing financial services to the poor are identified as the main barriers to financial inclusion. From the customers’ perspective, the main barriers are lack of documentation, lack of steady and sufficient income, and cultural reasons.

Hence, increasing awareness of market barriers has contributed to enhancing financial innovation and competition in the financial markets — key drivers in the policy implementation of financial inclusion.

Opportunities from technology and data also opened room for digital innovation as a vital factor in advancing financial inclusion, while lowering costs and market rigidities in the financial sector.  

Financial inclusion and Poverty Alleviation

“[…] Financial inclusion may not be the solution in itself, but it is part of a broader development agenda, which also includes the development of financial intermediaries and markets to support economic growth.”  

Prof Beck highlighted a critical issue around financial inclusion and poverty alleviation. Financial inclusion plays a key development role in facilitating and lowering transactional costs, and enhancing risk management especially through boosting payment systems, enabling savings and credit.

In the financial inclusion space, payments are the “best bang for one’s buck,” noted Prof Beck. Low-cost payments have spill-over effects among low-income individuals and families including small firms. These effects include lowered risks and transactional costs, and enabled consumption smoothing and more resilience effects through a broader access to resources.

Microsavings have a positive development effect in building assets specifically for SMEs and human capital building, whilst access to credit still has a mixed effect. According to Prof Beck, access to credit is the component that carries some element of risk, representing a trade-off between inclusion and stability.

What have we learned in the 10-year journey through financial inclusion?

This 10-year journey has positioned financial inclusion at the forefront of the development agenda and is now a key enabler of the majority of the seventeen Sustainable Development Goals (SDGs), which represent the key outcomes for sustainable development and poverty alleviation.

In the context of emerging financial inclusion strategies and target settings, we should remember Goodhart’s Law[1] “(…) When a measure becomes a target, it ceases to be a good measure.”

Benchmarking models for monitoring financial inclusion progress could be used to identify gaps in a country’s performance in comparison to its historic trend. However, in order to track its development with appropriate indicators, the target definition has to consider the underlying conditions of the country.

Benchmarking does not mean ranking, and ranking in the context of financial inclusion does not bring added value, since it only enables an arbitrary competition between different countries or economies warding-off a positive collaborative approach.

“[…] Ranking is like the icing on a cake, I like the cake but not the icing.” – Prof Thorsten Beck

What’s to come in the next 10 years?

There are new frontiers to cross in measuring financial inclusion. Big data and new technologies in data collection, and analysis impose new risks and opportunities for regulators and policymakers alike — in order to keep up with the pace in innovation and develop a sound impact assessment framework that incorporate the effects of regulatory reform on a market and household level.

Gender and women’s financial inclusion, as individuals and entrepreneurs, should be kept as a primary development concern. According to Prof Beck, policy analysis should go beyond financial inclusion and explore more in-depth socio-cultural and behavioural implications for women’s economic empowerment.

Where does AFI stand once full financial inclusion is reached?

In a discussion that followed the lecture, AFI Executive Director, Dr Alfred Hannig emphasized that regardless of the speed that it takes to reach total financial inclusion, the big challenge is to maintain high level of financial inclusion.”

“AFI is not worried about the speed of financial inclusion. AFI is much more worried about the quality of financial inclusion. [We need] to take time to include and maintain high inclusion,” Dr Hannig explained.  

On behalf of the AFI team we highly appreciate the insights from Prof Beck and look forward to maintaining the conversation with him during our 10-year celebration.