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Why Is Financial Inclusion Important? How to Achieve It

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Financial institutions still struggle to provide people with basic financial services. This is due to several reasons such as low income, religion- or status-based discrimination, and lack of collateral. International organizations such as the World Bank recognize the vitality of financial inclusivity, and many regulators aim to create a more equitable economy. Although there are many challenges to achieving greater financial inclusion, technologies such as fintech and crypto open new economic possibilities for the unbanked population. 

More governments, businesses, and citizens must review how technology could improve their access to financial resources in the 21st century. Learn why financial inclusion is so important globally.

What is financial inclusion?

Financial inclusion means making fundamental financial products and services––including credit cards, loans, and insurance––accessible to as many people as possible. 

Although financial inclusivity is often associated with developing nations, many wealthier  countries still face pressing issues. For instance, the Federal Deposit Insurance Commission (FDIC) cites that almost 6 million U.S. households didn’t have a bank account in 2021. Financial inclusion is a problem wherever consumers struggle to save, transact, or borrow money because they lack adequate access to rudimentary financial services.

Financial inclusion: The latest statistics 

Global financial inclusion has experienced significant progress over the years, although there’s still room for improvement. According to statistics from the World Bank, 76% of adults had access to bank accounts, credit union, or mobile money services in 2021, up from 51% in 2011. In fact, 71% of people in developing regions could access a financial service. Although these statistics are encouraging, the World Bank stated that 1.4 billion people didn’t have a bank account in 2021. 

As per Global Finance, five countries account for the highest unbanked population.

  1. Morocco 
  2. Vietnam
  3. Egypt 
  4. Philippines 
  5. Mexico 

Besides this, there’s still a gender gap in developing nations w.r.t. financial services. Although more women are gaining access to these services, the disparity exists. In 2021, 74% of men had a financial account as opposed to only 68% of women. The World Bank also found that people in rural areas and women had the most difficulty saving or receiving money for emergencies. 

Surveys from the Organisation for Economic Co-operation and Development (OECD) suggest many people in developing regions have inadequate access to financial education. According to the OECD, only 17% of people claimed they have “high” knowledge of financial topics, while 26% described their financial literacy skills as “low.” 

Why is financial inclusion important?

Improving financial inclusion has broad implications for the global economy. From raising the living standards for millions of families to encouraging entrepreneurial activity, financial inclusion could significantly drive economic growth. 

  1. Reduces poverty: Studies show that having a safe and reliable way to store money can raise families out of poverty. For instance, MIT researchers found that mobile money technologies such as Kenya’s M-Pesa helped bring 2% of Kenyans above the poverty line.   
  2. Boosts economic growth: Many financial analysts believe there are billions in untapped potential due to a lack of financial inclusivity. Recent data suggests greater access to financial services could drive 14% of the GDP in many developing nations, such as India. In frontier countries, improved financial inclusivity could raise the GDP by as much as 30%. 
  3. Improves financial education: Experts indicate there’s a link between financial literacy and participation in financial services. Generally, the more access to financial education courses people have, the more likely they’ll feel confident transacting and storing money. A full-fledged financial inclusion policy improves financial awareness within society. 
  4. Nurtures entrepreneurship: Financial inclusion makes it easier for businesses and entrepreneurs to provide loans, manage cash flows, and securely store their funds. These features promote start-ups to open and expand their operations, contributing to the local economy. 
  5. Spurs savings: A savings account is one of the hallmarks of financial inclusion. Once families have a secure place to store their money, they can set some aside for a “rainy day fund.” A recent study from the National Bureau of Economic Research found that mobile banking users in East Africa found it easier to pay for emergency healthcare costs. 

What stops financial inclusion?

Policymakers know the benefits of financial inclusion, but many obstacles keep nations from achieving this goal. Addressing these hurdles is crucial for reducing economic inequality. 

  1. Geography: The closer people are to financial institutions such as banks, the more likely they’ll open an account. Conversely, those who live in rural areas have the lowest likelihood of accessing financial resources. Some regions may also have fewer companies and job opportunities for locals to achieve economic independence. 
  2. Poor identity systems: Many financial institutions require formal documents and IDs from people who want to set up an account. In some cases, governments may not issue the requisite paperwork for accessing financial services.   
  3. Financial literacy: Even in developed nations, many people still doubt their financial literacy. For instance, Ipsos’s poll data suggests slightly more than 50% of adults in the U.S. have an adequate understanding of fundamental finances. The fewer people know about their options, the less likely they’ll take advantage of financial resources. Also, the Financial Industry Regulatory Authority (FINRA) points out that people who lack financial literacy skills are more prone to fraud and scams
  4. Financial requirements: Generally, banks and other financial institutions have minimum deposit requirements. However, families in developing regions may not have the minimum requirements on hand. Even if people have enough money to open a bank account, they may feel uncomfortable depositing it all at once.

Solutions to financial inclusion

As digital finance advances, governments and companies have more tools to address financial inequality in their home countries. International organizations hope these novel solutions strengthen financial inclusion rates. 

  1. Microloans: Created by Grameen Bank in the ’70s, microlending involves sending small loans to small businesses. Unlike traditional loans, “microloans” have lower creditworthiness requirements, making them more accessible to developing communities. These microfinance strategies give more unbanked or underbanked entrepreneurs access to capital, significantly driving economic development.  
  2. Mobile money: Initially, mobile money referred to buying and sending “airtime” as an alternative form of transferring money via mobile phones. However, as more mobile providers noticed this trend, they began developing mobile money services linked to a person’s cell phone. Mobile money providers such as M-Pesa allow people to send and receive money in an account associated with their phone number. The concept has become increasingly common in many African nations, processing more than $700 billion in monthly payments in 2021.  
  3. National ID systems: Some countries issue national IDs to give people in rural areas the paperwork they need for financial services. For example, India uses a combination of biometric scanning and demographic questions in its Aadhaar Identification System. Once someone has a 12-digit Aadhaar number, they can apply for digital financial services like the country’s Unified Payments Interface (UPI). 
  4. Fintech financial inclusion: As more people can access smartphones and the internet, it’s becoming easier to download consumer-focused financial technology apps. Platforms such as PayPal, PhonePe, and AliPay make it simpler for people to transfer and save money on a digital device. Fintech apps also open new economic opportunities for investments, loans, and insurance policies.  

Can crypto help with financial inclusion?

Cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) may impact the future of financial inclusion. As long as people can access the internet, they can download a self-custodial crypto wallet and store or send their tokens to other blockchain addresses. The quality of service isn’t dependent on where somebody lives. This is a large paradigm shift versus traditional fintech.  Crypto holders can also access many alternative financial services (e.g., crypto lending and trading) in DeFi (decentralized finance) apps. Unlike fintech apps or bank websites, crypto doesn’t have a centralized authority, enabling people to send digital payments across the blockchain in a peer-to-peer fashion. 

Although cryptocurrencies aren’t yet widely adopted, some developing nations are adopting this new technology. In 2021, El Salvador became the first nation to legalize Bitcoin as legal tender. Estimates suggest about one-third of Kenyans now have a Bitcoin wallet, and the Bitcoin Lightning Network recently introduced remittance services for people in Nigeria, Kenya, and Ghana. Plus, projects such as Worldcoin are also increasing crypto adoption by airdropping DAI stablecoins to millions of digital wallets. 

Wrapping up

Nations still try to achieve global financial inclusion. More governments, NGOs, and international institutions list financial inclusivity as a top priority. Also, technologies such as fintech apps, mobile payments, and cryptocurrencies offer millions of people alternative banking services. Financial inclusivity could become a reality as more companies and developers create innovative products and services. 

At Worldcoin, we believe cryptocurrency will play a significant role in promoting diversity and inclusion in the financial services sector. That’s why we’re putting a share of our crypto in everyone’s hands for free. Subscribe to our YouTube channel to learn more.

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