Addressing the Limits of Informal Financing
In 2014 2 billion people in the world didn’t have an account at a financial institution. While this number represents a 20% decrease in the unbanked population since 2011, globally a significant number of individuals still remain outside the formal financial sector. These people remain unbanked either because they lack access to financial services – due to a physical, monetary or mental barrier – or because they have chosen to stay in the informal sector.
In Pakistan 87% of adult individuals do not have a formal account however this does not mean that they are financially inactive. In the last 12 months alone the average Pakistani would have conducted one or more of the following financial activities:
- Borrowing money from a friend or family member (38% of all borrowers);
- Saving money in cash at home (51% of all savers) or at a ROSCA (27% of all savers);
- Personally delivering a remittance (93% of all remittance senders).
When these unbanked individuals were asked why they don’t have a formal account, approximately 20% said that they don’t need or want one, whilst a little more than 80% reported facing a barrier which prevented them from opening one. The major barriers which people self-reported were: lacking a regular income, lacking knowledge about available services or account opening procedures, and/or not having a financial service point close to their residence.
By remaining unbanked people are unable to use financial services to their full potential. In emergency circumstances – which range from a sudden change in income, to ill health, to natural disasters – there is a huge risk that people won’t be able to raise sufficient capital or any capital at all, given that their major source of funds is limited to friends and family. Furthermore any support that their informal social networks can provide may be time bound and tied to social obligations, and come with the associated issues of lack of privacy and inconvenience. Even outside of emergency events, the unbanked may find themselves in need of long-term credit or savings products which they can’t access informally, to help them maximize their livelihoods.
These scenarios indicate a high level of risk exposure for those in the informal sector. By bringing people into the formal sector the expectation is that this risk exposure will be minimized, and emergency borrowing or lending for consumption smoothing purposes will be eliminated. Additionally, access to sustainable long-term financing should help increase their productive capacity, and give them the means to invest in their own businesses in the long run. This movement into a more secure financial sector is the essence of what we call financial inclusion.
Globally there are many formal definitions of the term “financial inclusion”. While there is no “right” one, looking at a range of definitions from financial inclusion experts and policy makers reveals certain points of commonality.
“Full financial inclusion is a state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations.” — Center for Financial Inclusion
“Financial inclusion means that households and businesses have access and can effectively use appropriate financial services. Such services must be provided responsibly and sustainably, in a well-regulated environment” — Consultative Group to Assist the Poor
“Individuals and firms can access and use a range of quality payments, savings, credit and insurance services which meet their needs with dignity and fairness” — State Bank of Pakistan
Across these three definitions the ideas of access, use and quality are emphasized. Both experts and policy makers recognize the importance of capturing all aspects of access, and then also addressing the issues of usage and value which are core problems for those who remain voluntarily excluded. As the financial inclusion agenda advances in developing countries like Pakistan the definition of financial inclusion may be refined further to account for new developments and realities.
While helping those who remain unbanked, particularly those who have not actively chosen this state, via financial inclusion is an ambitious goal it is also an important one. There is an urgent need to level the playing field on the financial front if we want to empower the many poor working age adults in Pakistan to better their lives. We have a long way to go before we realize the transformative power of financial inclusion but by promoting this agenda and byeffectively collaborating across the ecosystem of financial inclusion actors we hope to eventually get there.