Financial Inclusion Must for Inclusive Growth

By Hom Nath Gaire

Finance has come a long way since the time when it wasn't recognized as a factor for growth and development. It is now attributed as the life blood of an economic system and most economies strive to make their financial systems more efficient. It also keeps policymakers on their jobs as any problem in this sector could freeze the entire economy and even lead to a contagion.

The financial services include the entire range - savings, loans, insurance, credit, payments etc. The financial system has to provide its function of transferring resources from surplus to deficit units but both deficit and surplus units are those with low incomes, poor background etc. By providing these services, the aim is to help them come out of poverty. So far, the focus has only been on delivering credit such as microcredit and has been quite successful in some countries. However, similar success has to be seen in other aspect of finance as well.

In this context, financial inclusion is the most for efficient financial system and to exert positive impact in the economic growth as well as development. Financial inclusion could expedite economic activities and promote entrepreneurship with the maximum use of information, communication and technology-enabled services supported by an extensive Financial Literacy mission.

What is Financial Inclusion? 

Authorities and policymakers worldwide including advanced economies like United State have set up specific task force/committees to understand what financial inclusion is and how it can be achieved.  

Former UN Secretary-General Kofi Annan said: "The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.”

Similarly, according to the UK Financial Inclusion Taskforce, there are three main concerns in financial inclusion; access to banking, access to affordable credit and access to free face-to-face financial advice. Therefore, the term 'Financial Inclusion' is defined as an extension of banking and financial services at an affordable cost to unbanked people of the community.

India also set up a committee under the chairmanship of Dr. C.Rangarajan, the then Governor of Reserve Bank of India (RBI) to suggest measures to increase financial inclusion in 2007. The Rangarajan committee defines financial inclusion as: "Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost."

Therefore, financial inclusion means easy and affordable of access of financial services by the economically poor and unbanked people of society at appropriate, low-cost, fair and safe financial products and services.

Constraints of Financial Inclusion

Financial Inclusion is especially needed for rural and underprivileged masses that may be the future growth engine of the economy. From the recent initiatives undertaken by the world governments to foster financial inclusion, one cannot undermine the need to include the economically underprivileged in the mainstream banking sector. However, many people across the globe are now excluded from mainstream banking. These range from people with low income to people with low information and accessibility to people with no social security or insurance cover. The main reasons behind the financial exclusion are:

Lack of information: Lack of information about the role and function of banks, banking services and products, interest rates, etc. stop people from including themselves in mainstream banking.

Insufficient documentation: Many unbanked people (even in municipalities and urban areas) are unable to show their self identification documents during the opening of a bank account or during taking a loan.

Lack of awareness: Many people are unaware of the banking terms and conditions laid down by banks and regulators from time to time.

High transaction costs: Various commercial banks across the globe levy transaction charges on credit or debit transactions, on over usage of banking services, on cheque book issuance etc.

Lack of access: Accessibility is a problem from all those people who live in geopolitically isolated regions. Moreover, as most of the commercial banks are located in the cities and surrounding area, people in rural areas mainly in least developed countries like ours have a geographical barrier in accessing banks.

Illiteracy: Because of illiteracy, a substantial number of people are unable to take recourse to banking services.

Stringent regulations: Stringent regulations such as Know your Customer (KYC) and Anti-Money Laundering and Counter Terrorist Finance (AML-CTF) norms are also considered as hindrances for financial inclusion.

Financial Inclusion in Nepal  

Nepal one of the LDCs with economically challenged huge rural population that is Financial Inclusion is indispensible for the sustainable growth of the economy.  However, even in such scenarios, many businesses have been successful in showing consistent as well as continued development. One of the most important sectors of this kind is the financial services sector. With just 2 commercial banks in the early days, the country has actually managed to expand this sector, which at present includes 31 commercial banks. Similarly in the past 30 years, different development banks, co-operatives, finance companies, insurance companies have grown by more than 10 fold.

In the mean time, branches of commercial banks, development banks and finance companies totaling at 2483 in mid of march of 2013. Of the total branches, commercial banks have occupied 1472 followed by development banks 713 and finance companies 298. Similarly, from the side of regional distribution, the majority branches of BFIs are situated in the Central Development Region totaling 1168, followed by Western Development Region 606 and Eastern Development Region 401. The minimum branches of BFIs are in the Far-Western Development Region totaling 111 followed by Mid-Western Development Region 197.

Region Wise Distribution of Branches of BFIs (as of mid March 2013)

Region	Com. Banks	Dev. Banks	Fin. Companies	Total	Population in, 000	Population /Branch in '000
Eastern	270	95	36	401	5811.6	14.49
Central	731	266	171	1168	9657	8.27
Western	261	267	78	606	4926.8	8.13
Med-Western	124	62	11	197	3546.7	18.00
Far-Western	86	23	2	111	2552.5	23.00
Nepal	1472	713	298	2483	26494.6	10.67

Source: Nepal Rastra Bank and Central Bureau of Statistics  

Increase in number of branches of BFIs is considered as one of the indicators of financial inclusion. Banking Industry, normally, occupies a bigger chunk in the financial system. However, a larger chunk of banking services is still concentrated in urban areas. More especially, the banking services still seems to be concentrated in capital city. The districts with highest number of bank branches are Kathmandu, Lalitpur and Rupandehi with 335, 77 and 67 branches respectively. This level of reach and penetration also means that the financial inclusion is yet to strengthen to follow economic progress in the country.

This sector has always been driven by a keen need of growth as well as is being pushed by various regulations. Over a period of time, this sector has deeply gone to the roots of urban, semi-urban as well as to the rural Nepal. This penetration level, in particular, has benefitted millions of people living in the country who fall below the poverty line in both the rural as well as semi-urban areas of the country.

The latest figures indicate that the financial services are used only by a section of the population (around 40%) in Nepal. There is demand for these services but it has not been provided. The excluded regions are rural, poor regions and also those living in harsh climatic conditions where it is difficult to provide these financial services. The excluded population then has to rely on informal sector for availing finance that is usually at exorbitant rates.

This leads to a vicious cycle. First, high cost of finance implies that first poor person has to earn much more than someone who has access to lower cost finance. Second, the major portion of the earnings is paid to the moneylender and the person can never come out of the poverty.

Factors Forcing People to be Informal 

High cost: It has also been seen that poor living in urban areas don't utilize the financial services as they find financial services are costly and thus are unaffordable. Hence, even if financial services are available, the high costs deter the poor from accessing them.

Non-price barriers: Access to formal financial services also requires documents of proof regarding a persons' identity, income etc. The poor people do not have these documents and thus are excluded from these services. They may also subscribe to the services initially but may not use them as actively as others because of various non-price barriers.  

Behavioral aspects: Research in behavioral economics has shown that many people are not comfortable using formal financial services. The reasons are difficulty in understanding language, various documents and conditions that come with financial services etc.

Externalities of Financial Inclusion

There are a number of positive externalities of financial inclusion.

·        One of the important effects is people able to reap the advantages of network externality of financial inclusion as the value of the entire national financial system increases.

·        Another reason as financial inclusion is a quasi-public good the consequent fuller participation by all in the financial system makes monetary policy more effective and thus enhances the prospects of noninflationary growth.

·        One important point that is essential for financial inclusion in rural and agriculture based LDCs like ours is to ensure the growth of banking system to meet the needs of a modern economy, expansion in geographic terms and improve access to banking services.

Way Foreword

In order to strengthen the financial inclusion in the country, NRB as the monetary authority of country, has been adopting some promotional measures so far such as providing additional incentives to BFIs to go to the remote as well as underprivileged areas. Similarly, it has been encouraging the microfinance institutions to be more inclusive while directing the commercial banks to lent a given portion of their loan portfolio to the deprived sectors.

However, the indicators of financial inclusion are yet to improve. In this context, the following measures should be adopted under the existing infrastructure framework to speed up the financial inclusion in Nepal.  

Postal Network: The government should consider tying up with BFIs to deliver financial solutions to the un-banked, using its extensive postal network. The synergistic outreach of the existing postal system supplemented by banking functions is the answer to the challenges posed by rural markets. As Nepal has a largest postal network in the remotest areas, the excluded masses can gradually connect with the full-fledged banking services.

Mobile Banking: The transaction costs can be radically reduced even in remote locations through mobile banking. The costs, which ease of access for the consumers and the profitability of provider will ultimately opt the level of wireless services.

Use of Technology: Rural banking can be expanded in an easy and user friendly way through universal technology with innovative applications. The role of various ICT tools and associated technologies in providing financial solutions to the unbanked is also substantial. Rural ATMs, plastic cards like smart cards, biometric cards including mobile payment (branchless banking) technologies do have the ability to engage the unbanked sections.

Financial Literacy: Steps have be taken by the Government for the expansion of banking services and linking of opportunities among various segments of financial sector like capital markets, insurance, etc. To achieve this aim the government should come up with an extensive campaign of financial literacy.