A strong consensus has emerged that increased levels of financial inclusion – through the extension of credit and provision of bank accounts, savings schemes and insurance products – have the potential to reduce global poverty and nurture economic development. This is especially true at a time when technology is providing new, scalable delivery mechanisms that bypass many of the problems associated with physical financial infrastructure.

But the picture is a highly complex one. The ability to improve financial inclusion depends on the interaction of a large number of stakeholders, including the private sector, government, policymakers and non-governmental organisations. Moreover, there are numerous barriers that prevent further progress on financial inclusion, including: a lack of education; out-of-date regulation and policies; and cultural mistrust of formal financial providers.

It is clear, however, that there is a strong groundswell behind efforts to improve financial inclusion. In this report, we examine current trends and assess some of the main challenges and opportunities. Key findings include the following:

The cycle of exclusion is powerful and self-reinforcing. Poverty results in financial exclusion, and financial exclusion reinforces poverty still further. The transaction costs of being excluded are often high, because individuals must pay extra fees as non-account holders. And, without access to deposit products, customers must store savings in unsecure places, increasing the risk of loss or theft. More generally, financial exclusion can prevent access to healthcare, education and employment, all of which reinforces the poverty cycle.

Financial inclusion is about much more than small loans. Microcredit has helped to prove that the unbanked and underbanked can be worthy and reliable consumers of appropriate financial services. Now other needs like insurance, transactional accounts, payment services, financial education and savings are starting to be met by non-profits, governments and even commercial banks around the world. Meanwhile, savings – and a safe place to put them – are seen by many as the most critical means toward poverty alleviation and the expansion of financial inclusion. In some countries, up to 40 per cent of monthly household income is saved, but it has been estimated that up to 20 per cent of informal savings in rural Africa are lost through fire and flood.

Financial exclusion is a global issue the numbers are starkest in the developing world – the World Bank estimates that, in some countries, fewer than 10 per cent of people have access to financial services of any kind. But even in developed countries the harsh realities of exclusion are just as real. In europe, the financially excluded range from an estimated one per cent of the population to as high as 40 per cent in Poland and 48 per cent in Latvia. In the UK, about 890,000 people are estimated to be unbanked, and in the US the figure is about 28 million.
Technology will bear fruit, but will also bring challenges. Mobile telephony, smart cards and electronic transfers have already made huge inroads in banking. The need for new approaches to the provision of finance is leading innovation and helping to expand the reach of financial services and reduce costs for customers and providers. Mobile phone technology may present a lifeline to the unbanked, but it can also be a headache for regulators, who often have difficulty keeping pace with innovation.

The commercialisation of financial inclusion is not without controversy. A growing number of financial institutions see the opportunity to attract new customers – albeit small-scale ones – through new products and services in developing countries. Critics fear this could lead to further exploitation of the unbanked, already a vulnerable group. Others welcome the investment, seeing any opportunity for greater financial inclusion as a good one. In the coming years, institutions will need to strike a delicate balance between profit-making and social responsibility.

The global economic downturn has had an impact. As the global financial crisis began to develop, there were hopes that financial inclusion initiatives might be sheltered from the shock to the broader financial sector. But it is now clear that credit and funding risks now loom large for the microfinance sector too. One result may be a greater emphasis on savings rather than credit. But the main effect of the crisis may be that policymakers are spurred to increase their efforts to promote financial inclusion.

Policymakers need to tread lightly. Policy measures to increase financial inclusion can have a powerful effect, but must be considered carefully in order to prevent counterproductive outcomes. Policymakers’ most important roles will be to: create and empower the institutions and legal systems that support financial services and protect consumers; collect information; and promote competition.