Missing (as usual) from discussions of the Millennium Development Goals after the recent release of its 2012 report is any talk of the impressive role the private sector has played in promoting more cost-effective and sustainable development in recent years.
Thus far, financial inclusion mostly encompasses microcredit (small loans to the poor to start businesses), which began a little over a decade ago, and mobile money, primarily a tool for transferring money via mobile phone among individuals. While these measures are a good start, they are far from comprehensive.
The poor often receive their small incomes at irregular intervals, so that rather than receiving “a dollar per day,” they may actually receive $60 at harvest time and no income for the next two months.
Savings accounts help poor individuals and households deal with such fluctuations. Many already participate in informal savings groups within their communities. Others pay moneylenders to hold their money for them. Some microfinance institutes have begun offering savings accounts, but the accounts are often available only to loan clients.
Mobile banking is another option to begin filling this gap, though current mobile money business models would need to be reconfigured, as most service providers obtain their revenue from fees on transfers. Government regulations would need to allow for mobile savings mechanisms.
Insurance is another area for increasing the financial inclusion of the poor. In the event of a major health or environmental catastrophe, and without insurance or long-term savings, the poor often plunge deeper into poverty. Insurance products for the poor, often called microinsurance, are still a new phenomenon. Most providers for this type of insurance do not yet have ways of addressing adverse selection and moral hazard and are still working out a way to provide adequate protection at a reasonable price.
Mobile phones, through mobile money services, can provide a means for accessing insurance products, removing some of the cost required for accessing hard-to-reach areas. But mobile phones are merely a tool, and more thinking is needed to develop appropriate product offerings.
Linking public-sector employee pay to electronic payments or banking services in developing countries would pull a substantial portion of the populations into the formal banking sector. Such moves would make great strides in financial areas and improve “transparency, security, corruption and [provide] potential cost savings for both governments and intermediaries (banks),” key elements for improving economic freedom.
Lastly, a large proportion of the world’s poor are self-employed, either in agriculture or as small shopkeepers or business owners. These individuals operate largely in a cash economy, which is highly insecure. A farmer may travel miles to the market to sell his produce and travel home carrying all the cash earned that day, making him an easy target for robbery. Mechanisms such as mobile money transfers, promoted for business purposes rather than just personal transfers, would help.
Financial inclusion can go beyond the current microcredit and mobile money transfers available to the poor. The poor will be better able to pull themselves out of poverty if they have secure mechanisms for saving money, insurance products to protect against risk, and safe ways to conduct their day-to-day business and government transactions.
Michelle Kaffenberger is a Research Manager at InterMedia, a global research and evaluation consultancy.
