All accounted for: how four nations tackled financial exclusion

By on 04/09/2019
M-Pesa now reaches some 25m Kenyans, with transactions equalling the country’s GDP. Pic by Fiona Graham/WorldRemit

Access to banking and financial services can help tackle poverty, boost economic growth and ease service delivery. Pablo Jiménez Arandia examines four countries’ very different approaches to tackling financial exclusion

“Financial exclusion is the inability to access financial or banking services – either because one lives too far from them; or because one does not fit the user profile of banking entities due to, for example, having low income or being poor.”

For citizens, economist Beatriz Fernández Olit tells Global Government Forum, the lack of a bank account or financial services limits their ability to save, transfer money, protect themselves using services such as insurance, and find employment. But financial exclusion also has huge implications for global economic development and public policymaking.

In September 2015, the General Assembly of the United Nations acknowledged the link between financial exclusion and poverty levels. In the 17 points comprising the Sustainable Development Goals for 2030, the international organisation included the right of any person to access basic financial services – designating it as one of the necessary targets (number 1.4) for achieving the plan’s primary goal of eradicating poverty across the planet.

The big question is how to do this; many initiatives have been tried around the world. And some have had remarkable success: here, we profile four very different – but effective – approaches to tackling financial exclusion.

Kenya: the M-Pesa phenomenon

In 2007, telephone operator Vodafone launched a mobile money transfer service in Kenya called M-Pesa. The system almost immediately became a success, and today has around 25 million Kenyan users.

Although multiple associated services (such as deposits, bill payments and money withdrawal) have been incorporated over time, the service’s operation has remained broadly consistent since its inception. Through an SMS message, the receiver of a payment obtains a PIN code that allows the corresponding amount to be withdrawn from one of the thousands of banking agents – who range from street vendors to associated businesses – distributed throughout Kenyan territory.

A study published in Science estimated that 194,000 households (2% of the country’s total) have escaped poverty thanks to M-Pesa. The success of this model has led other companies to offer similar services, increasing the total value of mobile transactions in Kenya to a level similar to the country’s GDP – up from 20% of GDP in 2010.

The main criticism levelled at M-Pesa is rooted in its success: the system has achieved such market dominance that Safaricom, the provider of the service, charges high commissions on transfers – despite the poverty of many of its users.

Pakistan: social assistance via electronic payments

Pakistan is one of the poorest countries in Asia. It also has one of the lowest rates of access to financial services among southern Asian countries, especially for women. To address the problem, in 2008 the government launched the Benazir Income Support Programme (BISP) social assistance plan: a public subsidy programme aimed at the female population.

Although aid was initially provided in cash through local officials, massive fraud pushed the authorities to introduce several digital means of verification for their users in 2010. These included a debit card with personal information, and a system of codes sent via SMS. These safety measures have strengthened the security of the system, and now 94% of payments from BISP to its beneficiaries are made using these methods.

One of the unexpected effects of the programme has been to give a voice to female beneficiaries in both the private and public realms. Many women have managed to exercise their right to vote after obtaining ID documents from the government, explains researcher Atika Kemal of the University of Essex. Among the pending challenges is providing consistent access to banking services, such as transfers or loans. Kemal also points out that the poor literacy of many of the BISP users is a barrier to using the necessary technology in this system.

The ID verification system attached to Pakistan’s BISP programme has allowed more women to vote. Pic by Juvaria

Brazil: the correspondent banking model

In some regions of Latin America, it is common to see small stores displaying the name of a bank on the front door. This identifies ‘correspondent banking agents’: non-financial establishments associated with a banking entity, where users can access services such as paying bills or cashing cheques. This model was born in the 1970s in Brazil, and has continued into the 21st century thanks to a change in regulation from the monetary authorities.

Today, the number of agents is 16 times higher than that of the traditional branches of Brazilian banks, offering finance businesses a cheap and effective way to reach the most isolated and poorest areas of the territory. Countries such as Colombia, Peru, Mexico and Ecuador also have similar networks, though they are not as far-reaching as Brazil’s.

However, recent studies show that the ability of this model to financially include the poorest segment of the population is, for now, limited. Currently, only 4% of new bank accounts and 6% of loans granted in the country are processed in these establishments, with most users visiting correspondent banking agents to pay bills.

Banking outlets in small retailers have increased access to financial services across much of Latin America – as in this Colombian shop. Pic by Hseidek

India: biometric identification for inclusion

In recent years, India has undertaken several initiatives related to financial inclusion. One example is the Jan Dhan Yojana (PMJDY) programme, through which millions of citizens have obtained a bank account in public entities. In many cases, these accounts have been used for depositing social assistance.

This massive bancarisation (330 million new accounts in four years) would not have been possible without Aadhaar: a government database that includes the biometric identification of 90% of the country’s population. According to data from the World Bank, only 40% of Indian adults had a bank account in 2011. Seven years later, this figure had already doubled to 80%.

India’s Aadhar system, one of the world’s biggest ID programmes, involves taking biometric data from citizens. Pic by Kannanshanmugam

Even so, the challenges for Indian authorities remain enormous. For example, only 54% of account owners actively use their accounts and less than half made a deposit or withdrawal in the last year, according to the FII Programme. The road to full financial inclusion in India remains long, but the country has made huge strides in putting the necessary infrastructure in place.

About Pablo Jimenez Arandia

Pablo Jiménez Arandia is a Spanish freelance journalist based in Barcelona. He currently collaborates with several media outlets, writing on topics including international affairs, economics, migration and travel.

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