For several decades, the exciting promise of microfinance has been to provide the world’s poorest with access to financial services. But along the way, microfinance has too often become conflated with micro-credit. This is not surprising, given that most of the first microfinance institutions (MFIs) were non-profit organizations that took grants from donors and recycled them as loans. Now, however, many MFIs have reincorporated as banks with the ability to accept savings, and the full promise of microfinance is beginning to be realized. Indeed, the expansion of efficient and effective saving mechanisms and other financial services such as insurance is one of today’s most exciting developments in the effort to tackle poverty.
Savings accounts and insurance can help poor people survive unexpected financial shocks brought on by events such as family illness, crop failure, or market downturn. Savings can also improve an individual’s social mobility, ability to invest, and future earning potential. According to the International Monetary Fund’s most recent Financial Access Survey (FAS), “access to commercial bank services has deepened across virtually all regions of the world, with Africa continuing to lead growth in financial access.” In addition, more and more poor people are buying life insurance and internet connectivity and online services continue to boost financial inclusion.
Still, approximately 2.5 billion people -- more than half of the world’s adult population – don’t have bank accounts. And most of this unbanked population lives in developing countries. A 2011 Gallup and World Bank poll found that in high-income countries, both rich and poor individuals usually have savings accounts. This is not the case in low-income countries, where travel distance, cost, and documentation requirements hinder individuals from opening accounts. For women, gender discrimination and financial dependence on male guardians can further limit access to formal finance.
Last month, I hosted Mary Ellen Iskenderian, president and CEO of Women’s World Banking, and Steve Hollingworth, president and CEO of Freedom from Hunger, to discuss these issues as part of the Council on Foreign Relations’ ExxonMobil Women and Development Series. Our discussion touched on many topics related to financial inclusion, one of which was the important difference between microcredit and microfinance. In some situations, a loan might not be the financial tool an individual needs to climb out of poverty. The World Bank’s recently-published Global Financial Development Report 2014 similarly argues that providing credit indiscriminately can lead to financial and economic instability.
In addition, financial services can be rendered ineffective without accompanying financial literacy training. As Iskenderian mentioned during our meeting, development organizations are now pioneering innovative financial literacy training programs, including educational text and voice messages that can be accessed using a cell phone. The Global Financial Development Report 2014 found that classroom-based financial education has less impact than when individuals learn through “teachable moments,” such as applying for a loan or starting a job. Popular entertainment can also be a useful tool in communicating lessons on banking and financial planning.
The latest FAS report finds that financial inclusion seems closely tied to overall economic growth. In Africa, for example, there was a nearly four-fold increase in commercial bank depositors per 1,000 adults from 2004 to 2012. The region simultaneously experienced a 40 percent growth in GDP per capita. Similarly, in the Asia and Pacific region, depositors per 1,000 adults nearly doubled over the same period, with GDP per capita increasing more than 70 percent. Still, although developing countries are projected to dominate global saving and investment in years to come, that trend might not extend to the poorest populations. The Middle East and North Africa region, in particular, “has the lowest use of formal financial institutions for saving by low-income households.”
The accessibility of financial services remains highly dependent on public and private sector regulation. To encourage low-income banking, governments should enact effective policies that require banks to offer low-fee accounts, allow electronic payments, and grant exemptions for documentation requirements. Less successful policies include debt relief, directed credit, and lending through state-owned banks. Financial institutions, meanwhile, should adopt new technologies such as mobile banking to make financial access easier and more secure. The African Development Bank Group and other financial organizations have already begun pioneering these types of programs.
Overall, innovative programs and products that address market failures, meet consumer needs, and overcome behavioral problems can foster the widespread use of financial services. For example, financial products such as index-based insurance can mitigate weather-related risks in agricultural production and help promote investment and productivity in agricultural firms. Still, as Hollingworth lamented, widely accessible crop insurance for farmers, which would improve their financial security immensely, seems to be a long way off.