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Harnessing financial inclusion for economic growth

BY: Appiah Kusi Adomako
Mobile money transfer on phone
Mobile money transfer on phone

The phrase “financial inclusion” has gained currency within the policy and development circles over the past decade. It means individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way (World Bank).

Financial inclusion has been identified as a facilitator for seven of the 17 Sustainable Development Goals (SDG’S). Put differently, the achievement of the goals is contingent upon effective financial inclusion.

The G20 has affirmed their pledge to financial inclusion by stimulating the Financial Inclusion Action Plan for 2015 onwards and endorsing the G20 High-Level Principles for Digital Financial Inclusion.

The group sees financial inclusion as an essential tool to reduce extreme poverty and boost shared prosperity, and it is committed to a global work plan to achieve Universal Financial Access (UFA).

The United Nations (UN) through its intervention has prioritised financial inclusion as a necessary vitamin for the people who have been left out from the tide of the banking wave.

Globally, an estimated two billion adults don't have basic accounts. Ghana has made relative progress in the area of financial inclusion.

About 40.5 per cent of Ghanaians have access to bank accounts which is still two per cent lower than countries in the lower middle-income group.

By extension, about 60 per cent of Ghanaians are excluded from the formal financial system.

In the area of mobile money penetration, 13 per cent of the population has mobile money account, which is two per cent higher than sub-Saharan average.

Value creation and poverty reduction

In an economy where 60 per cent of the population doesn’t have bank accounts and more than 80 per cent of transactions are in form of cash, the country loses out on the multiplier effects of broad money.

The UK for example has 97 per cent money held in the form of deposits with banks, rather than currency in the hands of the public.

By having more money in the hands of the people than in banks and other instruments, the country misses out on the multiplier effect of money and its attendant blessings to the economy. Banks act as conduit for the exchange of money.

Someone comes to deposit his money and the bank lends it to another and charges interest.

Whether it is a consumer or business loan, it stimulates consumption; increases revenue for local producers which in turn increases production and increases employment thereof.

This value creation and the multiplier effect would not have been if the money in the first placed had not entered the banking system.

World Bank data suggest that a little under a billion people live below $1.90 a day. An absence of access to basic financial services makes it troublesome for these individuals to take control of their financial lives.

Around the world, 67 per cent of grown-ups living in the wealthiest 60 per cent of family units claim some sort of formal ledger, contrasted with 54 per cent of grown-ups living in the poorest 40 per cent of families. The very first SDG—ending extreme poverty—aptly mentions the importance of access to financial services.

When people are included in the financial system, they are better able to climb out of poverty by investing in business or education. A farmer in Ghana who keeps his money on his mobile money wallet earns interest from the operator.

In India, a state-led bank expansion in India’s rural unbanked locations significantly reduced those in rural poverty by 14 to 17 percentage points. By providing the poor and the vulnerable with access to some form of financial services, they are able to make an investment and oversee unforeseen costs.

Digital finance

Erstwhile, providing access to formal finance was considered as infrastructure heavy and expensive task. However, the scenario has changed with the advent of mobile money.

Mobile money allows people to collect money from relatives and friends in far and near during times of needs and wants, reducing the likelihood that they will fall into poverty to begin with.

In Ghana, for example, mobile money continues to become the real-time lifeline to many people. I recently engaged a carpenter to make a bookshelf for me after seeing one he had made for a friend.

The transactions were concluded over the phone and never had to visit his workshop. When it came to payment of money, I used mobile money to remit the carpenter. In Kenya, ability to undertake mobile payments has reduced poverty by two percentage points.

Farmers with access to financial services are more advantaged and are able to produce far in excess than those without the same, thereby reducing hunger and promoting food security.

The UN and Food and Agricultural Organisation (FAO) admits a correlation between about 795 million people globally undernourished and lack of access to financial system.

Going forward

In spite of the progress that the country has made, there remains much to be done to be able to harness the blessings of financial inclusion.

The abundance of banks in the country does not correlate with increased financial inclusion. Ghana seems to have more banks per capita in West Africa and yet there are millions of unbanked people.

Policy intervention is required and the gradual transition of a mostly informal sector to a more formal sector can increase the demand side of financial inclusion.

The government must support through tax incentives, local technology start-ups working to promote electronic and mobile financial products to allow them to bring their services to the underserved market.

This cannot work efficiently without a proper national identification system. It is, therefore, the need in this regard for CSOs to generate awareness of benefits of formal finance, identifying bottlenecks and work with regulators to reduce them, and building a coalition of stakeholder to move towards financially included society.