Included in the targets of 7 of the 17 Sustainable Development Goals that were finalized in 2015, financial inclusion is seen as both a key solution to some of the most pressing development problems that our world faces today, and a core development goal in its own right. As elaborated in our last post, in theory universal financial inclusion could “unlock the social and economic potential of the unbanked”. By signing the Maya Declaration in 2011, and launching the National Financial Inclusion Strategy in 2015, Pakistan joined the growing ranks of developing countries that have affirmed their confidence in the power of financial inclusion. This move begs the question: does the empirical evidence on financial inclusion support this belief? To answer this we have looked at the results from various randomized control trials which evaluated the impact of different financial instruments – primarily credit, savings, insurance and digital payments – at the individual, household and small enterprise level.

WHAT THE EVIDENCE SAYS

Credit: Experiments on microcredit from across a number of countries including India, Bosnia and Herzegovina, and Mongolia show that credit allows small businesses to grow as owners can invest in assets, and new businesses to rise as people’s ability to undertake productive activities increases. These same studies could not find a solid link between credit to individuals and long term social welfare. In contrast, a study in Mongolia on group loans showed evidence of credit and increased food consumption perhaps due to greater social pressure, and recent experimental evidence revealed that borrowers who were given some flexibility in their repayment schedule benefitted from relatively higher profits in the long run. These two studies suggest that the way credit is structured has a huge effect on the type and level of impact that people experience in the future.

According to this year’s second issue of Microwatch, 3.5 million of Pakistan’s 111 million adult population were actively using microcredit in the first half of 2015, primarily in the form of group loans. This represents a small proportion of total borrowers in the country which were estimated at half the adult population in 2014. Unsurprisingly the majority of borrowers tend to take loans from informal sources (95% of all borrowers in 2013) particularly family and friends despite the availability of alternative financing.

Savings: The impact evidence of savings has been more consistent than that of credit. Generally, savings allow for consumption smoothing, and building of working capital. As with credit, results vary with product structure. In the Philippines a “commitment savings product” in which money was locked until users reached their self-specified savings goal showed an average account balance increase of over 80% in a year relative to the treatment group. It also positively impacted female empowerment by allowing women greater decision making power. In Kenya a commitment savings product dedicated to fertilizer use saw similarly positive results. Farmers who put their harvest profits directly into the product were more likely to spend on fertilizer than the control group. These two studies show the importance of accounting for consumer behavior and needs when designing an impactful savings product.

In 2014 approximately one-third of all adult Pakistanis said that they saved in the last year but only 3 million reported saving at a financial institution. While the overall number of active microsavers increased in the first half of 2015 to 13 million, these numbers reflected significant gender disparity as 75% of active microsavers were men, and 80% of the total value of microsavings was also held by men.

Insurance: Trials from India, Ghana, and Kenya show that insurance allows farmers to manage shocks and mitigate risk. While it is not surprising that insurance allows people to weather natural disasters with greater ease, surprisingly the positive impact of insurance is not just limited to ex-post effects; there are also important ex-ante impacts. Those with insurance bought more inputs, shifted to riskier crops and hired more labor leading to higher productivity as compared to the control group. In addition, there were positive welfare impacts for the family unit of insurance users as their children could eat more and spend more time in school.

Insurance adoption remains low in Pakistan. In 2013 less than 1% of adults had insurance, and 90% of these had life insurance. The most recent micro insurance statistics from the first half of 2015 show that there some growth in the adoption of this instrument over the last two years. In the first half of 2015 there were over 4 million policy holders in the country and the split between health and life insurance was fairly even. Notably, all life insurance policy holders had credit life insurance, a policy that is designed to pay of a microcredit borrower’s debt if he dies.

Digital Payments: There is limited information on the impact of digital payments. Studies on mobile money in Kenya and Rwanda show that this channel facilitates a decrease in transaction costs and ability to share risk across social networks, particularly friends and family. These same studies show that there is a link between mobile money use and smoothed consumption patterns over time. More research needs to be done in this area before any definitive claims can be made.

The availability and use of digital payments are increasing in Pakistan with the advent of mobile money. As of March 2015 there were 1.5 million active mobile money accounts in the country. Despite issues of uptake and sustained usage, the expectation is that this number will rise in coming months, with new regulations allowing for remote account opening, and relaxed KYC requirements.

WHAT THIS MEANS FOR PAKISTAN

The empirical evidence clearly shows that financial inclusion is very impactful at the microeconomic level, and points to a few things that financial inclusion players should keep in mind to ensure maximized impact. As we saw, each financial inclusion instrument has its own type of effect. Credit increases productive capability, savings allow for consumption smoothing, insurance helps mitigate risk, and digital payments increase risk sharing possibilities. Additionally, as the studies on credit and savings revealed, the design of an instrument is critical in determining how impactful it will be for an individual. Finally it is also important consider who is best suited to taking charge of the financial instrument being used in a household – the man or the woman – as this can too can change the type of impact the household will experience.

This is all positive news for unbanked Pakistanis who are the ultimate beneficiaries of financial inclusion policies. Pakistan’s microfinance industry alone has a 24 million people potential customer base which remains untapped. In our next article we will explore the link between financial inclusion and the macroeconomic health of a nation: stay tuned!