Financial inclusion as tool for combating poverty
Friday, 18 December 2009
Dr. Atiur Rahman
FINANCIAL inclusion is a key element of social inclusion (the antithesis of social exclusion), roughly meaning the opportunity for people to contribute to, and to benefit from the processes of social and economic advancement. Poverty related deprivations in health, education and asset ownership are major causes of financial and social exclusion, blocking or severely curtailing access to employment, income and borrowing options. Discrimination by race, religion, caste, cult or gender; social disruptions from prolonged conflicts and wars; physical and mental debilities are among other main causes creating financial and social exclusion. The broad range of causative factors means that financial and social exclusion are likely to be encountered in varying degrees almost in all countries, developing and developed. Consequently, social and financial inclusion figure prominently in policy agenda even of mature developed countries. Poverty related deprivations and exclusions are starker and more entrenched in low income developing countries like Bangladesh, with correspondingly higher urgency of progress towards fuller inclusion.
Connected to financial and social inclusion is the notion of inclusive growth, a growth process based on fuller participation of all population segments, and benefiting them all.
Inclusive growth stresses more on equality of advancement opportunities than on equality of income by redistribution; and is tolerant of 'good inequalities' that are incentives for competitive progress, like income differences arising as rewards for innovation, skills, aptitudes and education. With the unleashed creative energies of the hitherto excluded population segments contributing to growth pursuits, inclusive growth is expected to be stronger and more well-rounded; in terms of income as well as other metrics of well-being such as human development, food security, environmental sustainability.
In day to day life we need some basic transaction services from reliable service providers, like accepting our deposits, lending us money for current expense or investment to be repaid from future income flows, conducting money transfers and settlement of payments. Financial inclusion means access to such basic financial services.
Obviously, the more affluent in the urban areas have easy access to these and other more complex financial services from banks and financial institutions including insurance companies and capital market intermediaries. Banks and other formal financial institutions have few branches or service outlets in rural areas, and small sized transactions with the poor are seen by these institutions as un-remunerative and unattractive., Illiteracy still prevails in rural areas, particularly among the elderly, which is a significant barrier to their accessing financial services from formal institutions. In the urban areas, rural migrants working as day labourers face yet another barrier to accessing institutional financial services in their lack of a definitive present address.
Formation of mutually owned co-operative societies had been an early officially supported attempt at financial inclusion of the rural and urban population of smaller means in similar occupations. Once formed, these co-operatives focused on advancing interests of existing members, in many cases falling prey to elite capture by the more influential members, with little inclination in risking dilution of control by expanding membership. In any case, the co-operatives movement was not designed to target the poorest population segments owning little or nothing in assets.
Financial inclusion of the poorest by way of their access to small-sized loans for income generating self-employment activities (micro-credit) from microfinance institutions (MFIs) has been extensively used in Bangladesh as a tool for combating poverty-related deprivations; pioneered by Dr Yunus in late nineteen seventies and by now replicated worldwide. As elsewhere, ill informed, gullible people particularly in rural areas in Bangladesh have at times fallen prey to financial scams of pyramid /Ponzi schemes promising quick, very high profits, only to lose the investments with inevitable collapse of the schemes. To prevent any such deception in MFI activities and to ensure that these are run with integrity and soundness, the Government of Bangladesh (GOB) has constituted a Microcredit Regulatory Authority (MRA) chaired by Governor, Bangladesh Bank (BB) to license and supervise the MFIs. The MRA being chaired by Governor of BB, the apex financial sector regulator has given a huge boost to the credibility of the MFIs licensed and supervised by the MRA.
Typically, MFI membership commences with opening of deposit accounts with minuscule sum and short spells of group-based sessions imparting to new members basic minimal financial literacy, eventually followed by loan disbursement for income generating self employment initiatives. Deposit, borrowing and repayment experiences of micro-credit borrowers with MRS thus help prepare themselves for eventually accessing larger loans and other financial services from more formal institutions like banks.
Despite substantial expansion of bank branches and the roles thus far of co-operatives and MFIs, financial inclusion in Bangladesh has much further to go in adequately covering all population segments and all sectors of economic activities. About one-fifth to one-fourth of the population of Bangladesh still live in extreme poverty; many of them not capable of undertaking micro-credit supported self-employment initiatives. With few financial service outlets reaching out to this weak population segment, drawing from the official sources whatever small social safety net payments they are entitled to require them to incur substantial cost in time and travel expenses. Further, financial exclusion is not limited only within people in the lowest rungs in the income ladder. MFI borrowers successfully breaking out of extreme poverty and outgrowing eligibility for micro-credit often find themselves in a 'missing middle', still to be considered eligible for larger loans from banks or other formal institutions. Significant market gaps and failures persist in financing of important, growth oriented activities like agriculture and SMEs. Such exclusions and gaps are holding down economic growth and poverty reduction. Financial inclusion is therefore a high policy priority in Bangladesh, for faster, more inclusive growth.
Definition and measurement issues in financial inclusion: As yet without a widely adopted uniform definition; financial inclusion is reckoned in Bangladesh as access to financial services from entities supervised by official authorities, or from official institutions, including:
a) Banks and financial institutions supervised by Bangladesh Bank (BB),
b) Micro-finance Institutions (MFIs) supervised by the Micro-credit Regulatory Authority (MRA),
c) Credit co-operatives supervised by the Registrar of Co-operative Societies, d) Insurance companies supervised by Insurance Regulatory Authority,
e) Capital market institutions like investment banks, merchant banks, stock exchanges supervised by the Securities and Exchange Commission (SEC),
f) Post offices under the Post Office Department of the government offering savings, money transfer and insurance services; bureaus of National Savings Directorate of the Government issuing government savings instruments.
Because access to primary financial services of deposit taking, lending and money transfers count as financial inclusion, we need not be concerned with the clientele of secondary and tertiary institutions like insurance companies and capital market institutions in measuring the extent of inclusion, clients of these institutions already standing counted in as recipients of the primary services of deposit taking and lending.
Deposit services for safekeeping of savings is the stepping stone in accessing credit and other financial services on a continuing basis from banks, financial institutions including MFIs and cooperatives; the coverage of deposit services (number of deposit accounts membership in deposit schemes in MFIs, cooperatives, post offices as percentage of total population) is therefore a comprehensive primary measure of financial inclusion.
The coverage of credit services across income/occupational/gender groups and across economic activity sectors is another yardstick of financial inclusion, important from the viewpoint of growth and combating poverty. This measure is more qualitative, expressed in terms of gaps, exclusions and barriers in access to financial services.
Approaches in widening financial inclusion- progress thus far: Early post-liberation financial inclusion initiatives in Bangladesh comprised:
i) Expansion of rural branches of banks (all of which were nationalised in 1971 after liberation of Bangladesh), and
ii) Promotion of mutually-owned co-operative credit societies offering deposit and credit services to members.
The better off rural elite benefited from these initiatives, but success in financial inclusion of the broad masses of illiterate, enumerate rural poor remained limited. As mentioned earlier, the cooperatives tended to fall prey to 'elite capture' by powerful groups uninterested in diluting control by expanding membership; and the co-operative movement did not actually target the poorest population segments owning little or nothing in assets. Rural branches of banks focused mainly on crop loans to farmers, there lending models were not geared towards reaching out to the poorer landless illiterate unable to handle the paperwork involved in bank borrowing. The regulated low interest rates on bank lending prevalent up to the late nineteen eighties, not covering the high costs of managing small loans to borrowers in dispersed rural locations, was also a deterrent during that period.
The Grameen Bank and the MFIs brought about a major breakthrough in reaching out to the rural poor. Their lending models specifically included imparting of necessary minimal literacy and numeracy to aspiring member borrowers; they have also been unrestricted in realising interest and service charges at rates high enough to recover costs.
Their programs were designed with some extent of gender bias favouring women, in the expectation that their strengthened income standing in the traditionally male dominated families will lead to better upbringing and education of their children.
Besides extending micro-credit, many MFIs in Bangladesh have collaborated with insurance companies in extending another financial service, viz., microinsurance to the poor, offering modest sized covers such as credit life insurance ('debt dies with debtor'), health and accident insurance (for sicknesses; and injuries requiring hospitalisation etc.)., property insurance (usually for livestock bought with MFI loans), at affordably low rates of premium.
Typically the IVIFIs act as partner agents of the' insurance companies, collecting the microinsurance premiums on their behalf, most often by deduction at source from the micro-credit loans sanctioned. Regularly published data on microinsurance in Bangladesh are as yet unavailable; a February 2007 survey posted in CGAP's microfinance gateway (www.microfinancegateway.org) reported 10 insurance companies in partnership with 61 MFIs, were offering different microinsurance products in 81 schemes; with cumulative premium collections of over Taka 11.2 billion from about 4.5 million clients.
Some recent empirical studies using differing methodologies and covering differing time spans, have disputed the poverty reduction impact of micro-credit claimed by its protagonists (Dr. Yunus asserts that annually about five per cent of micro-credit clients of Grameen Bank are lifting themselves out from extreme poverty). Episodes of borrower distress in complying with rigorous micro-credit regimes, sometimes compounded by multiple MFIs lending to the same borrower, occasionally do appear in newspapers.
Self-employment initiatives are far from being risk free for the borrowers or the lenders, wrongly chosen initiatives and weaknesses in loan sanction and management disciplines can and do lead lenders and borrowers occasionally in difficulties; requiring prompt but appropriately flexible corrective response.
Such difficulties do not negate the reality that financial inclusion by way of micro-credit indeed unlocks opportunities for the despondent, apathetic poor to lift themselves out of poverty; unleashing in them the optimism and creative energy necessary to retry and get over any setback in the initial attempt.
Another criticism that micro-credit does not help the poorest of the poor is invalid because micro-credit is intended only for those who can use it in income generating activities.
Those unable to do so because of old age or other infirmity must be supported by outright transfers in the form of social safety net payments (the traditional safety net of extended family has dwindled, even in the higher income classes), not by credit to be repaid later.
Social innovations promoting financial inclusion, like micro-credit and the special programmes designed to bridge market failures and gaps in agricultural and SME financing, help spawn diverse cycles of further innovations by entrepreneurs in the real sector, fostering inclusive growth in the true sense.
For instance, SME financing has helped innovative entrepreneurs in small light engineering workshops in Bangladesh to develop and expand into a huge network producing plant/machinery spares (sometimes the plant/machine in entirety) of all descriptions for the manufacturing, transportation, construction and agricultural sectors, at fractions of import costs. In early nineteen eighties, the emerging apparels export sector had scant access to foreign exchange for their import inputs, the innovation of back-to-back usance letters of credits (LCs) for input imports against export LCs from buyer got around the problem, triggering decades of sustained growth.
While the number of deposit accounts in banks and the number of members in MFIs and cooperatives are growing steadily, the rate of increase has slowed in the recent years. About 25 per cent of the adult population is still to be covered by deposit and other financial services from regulated institutions, quite probably the hardest to reach. In access to credit, a 'missing middle' has emerged in the recent years between the poorest served by MFIs, and the relatively better off served by banks.
Small businesses outgrowing eligibility for micro-credit from MFIs often find themselves considered still too small by banks for their lending, sharecroppers not so poor as to be eligible for micro-credit from MFIs are considered ineligible for crop loans by banks, with little or no collateral for banks to fall back upon in events of default. In terms of sectors of economic activity, important areas like agriculture, off-farm rural output activities and environment friendly renewable energy remain under-served by banks and other institutional lenders.
Dr. Atiur Rahman is Governor, Bangladesh Bank. The write-up, in the form of a paper, was presented by him at the recently-held Joseph Mubiro Memorial Lecture, organised by the central bank of Uganda. This is the first of a two part article. To be continued
FINANCIAL inclusion is a key element of social inclusion (the antithesis of social exclusion), roughly meaning the opportunity for people to contribute to, and to benefit from the processes of social and economic advancement. Poverty related deprivations in health, education and asset ownership are major causes of financial and social exclusion, blocking or severely curtailing access to employment, income and borrowing options. Discrimination by race, religion, caste, cult or gender; social disruptions from prolonged conflicts and wars; physical and mental debilities are among other main causes creating financial and social exclusion. The broad range of causative factors means that financial and social exclusion are likely to be encountered in varying degrees almost in all countries, developing and developed. Consequently, social and financial inclusion figure prominently in policy agenda even of mature developed countries. Poverty related deprivations and exclusions are starker and more entrenched in low income developing countries like Bangladesh, with correspondingly higher urgency of progress towards fuller inclusion.
Connected to financial and social inclusion is the notion of inclusive growth, a growth process based on fuller participation of all population segments, and benefiting them all.
Inclusive growth stresses more on equality of advancement opportunities than on equality of income by redistribution; and is tolerant of 'good inequalities' that are incentives for competitive progress, like income differences arising as rewards for innovation, skills, aptitudes and education. With the unleashed creative energies of the hitherto excluded population segments contributing to growth pursuits, inclusive growth is expected to be stronger and more well-rounded; in terms of income as well as other metrics of well-being such as human development, food security, environmental sustainability.
In day to day life we need some basic transaction services from reliable service providers, like accepting our deposits, lending us money for current expense or investment to be repaid from future income flows, conducting money transfers and settlement of payments. Financial inclusion means access to such basic financial services.
Obviously, the more affluent in the urban areas have easy access to these and other more complex financial services from banks and financial institutions including insurance companies and capital market intermediaries. Banks and other formal financial institutions have few branches or service outlets in rural areas, and small sized transactions with the poor are seen by these institutions as un-remunerative and unattractive., Illiteracy still prevails in rural areas, particularly among the elderly, which is a significant barrier to their accessing financial services from formal institutions. In the urban areas, rural migrants working as day labourers face yet another barrier to accessing institutional financial services in their lack of a definitive present address.
Formation of mutually owned co-operative societies had been an early officially supported attempt at financial inclusion of the rural and urban population of smaller means in similar occupations. Once formed, these co-operatives focused on advancing interests of existing members, in many cases falling prey to elite capture by the more influential members, with little inclination in risking dilution of control by expanding membership. In any case, the co-operatives movement was not designed to target the poorest population segments owning little or nothing in assets.
Financial inclusion of the poorest by way of their access to small-sized loans for income generating self-employment activities (micro-credit) from microfinance institutions (MFIs) has been extensively used in Bangladesh as a tool for combating poverty-related deprivations; pioneered by Dr Yunus in late nineteen seventies and by now replicated worldwide. As elsewhere, ill informed, gullible people particularly in rural areas in Bangladesh have at times fallen prey to financial scams of pyramid /Ponzi schemes promising quick, very high profits, only to lose the investments with inevitable collapse of the schemes. To prevent any such deception in MFI activities and to ensure that these are run with integrity and soundness, the Government of Bangladesh (GOB) has constituted a Microcredit Regulatory Authority (MRA) chaired by Governor, Bangladesh Bank (BB) to license and supervise the MFIs. The MRA being chaired by Governor of BB, the apex financial sector regulator has given a huge boost to the credibility of the MFIs licensed and supervised by the MRA.
Typically, MFI membership commences with opening of deposit accounts with minuscule sum and short spells of group-based sessions imparting to new members basic minimal financial literacy, eventually followed by loan disbursement for income generating self employment initiatives. Deposit, borrowing and repayment experiences of micro-credit borrowers with MRS thus help prepare themselves for eventually accessing larger loans and other financial services from more formal institutions like banks.
Despite substantial expansion of bank branches and the roles thus far of co-operatives and MFIs, financial inclusion in Bangladesh has much further to go in adequately covering all population segments and all sectors of economic activities. About one-fifth to one-fourth of the population of Bangladesh still live in extreme poverty; many of them not capable of undertaking micro-credit supported self-employment initiatives. With few financial service outlets reaching out to this weak population segment, drawing from the official sources whatever small social safety net payments they are entitled to require them to incur substantial cost in time and travel expenses. Further, financial exclusion is not limited only within people in the lowest rungs in the income ladder. MFI borrowers successfully breaking out of extreme poverty and outgrowing eligibility for micro-credit often find themselves in a 'missing middle', still to be considered eligible for larger loans from banks or other formal institutions. Significant market gaps and failures persist in financing of important, growth oriented activities like agriculture and SMEs. Such exclusions and gaps are holding down economic growth and poverty reduction. Financial inclusion is therefore a high policy priority in Bangladesh, for faster, more inclusive growth.
Definition and measurement issues in financial inclusion: As yet without a widely adopted uniform definition; financial inclusion is reckoned in Bangladesh as access to financial services from entities supervised by official authorities, or from official institutions, including:
a) Banks and financial institutions supervised by Bangladesh Bank (BB),
b) Micro-finance Institutions (MFIs) supervised by the Micro-credit Regulatory Authority (MRA),
c) Credit co-operatives supervised by the Registrar of Co-operative Societies, d) Insurance companies supervised by Insurance Regulatory Authority,
e) Capital market institutions like investment banks, merchant banks, stock exchanges supervised by the Securities and Exchange Commission (SEC),
f) Post offices under the Post Office Department of the government offering savings, money transfer and insurance services; bureaus of National Savings Directorate of the Government issuing government savings instruments.
Because access to primary financial services of deposit taking, lending and money transfers count as financial inclusion, we need not be concerned with the clientele of secondary and tertiary institutions like insurance companies and capital market institutions in measuring the extent of inclusion, clients of these institutions already standing counted in as recipients of the primary services of deposit taking and lending.
Deposit services for safekeeping of savings is the stepping stone in accessing credit and other financial services on a continuing basis from banks, financial institutions including MFIs and cooperatives; the coverage of deposit services (number of deposit accounts membership in deposit schemes in MFIs, cooperatives, post offices as percentage of total population) is therefore a comprehensive primary measure of financial inclusion.
The coverage of credit services across income/occupational/gender groups and across economic activity sectors is another yardstick of financial inclusion, important from the viewpoint of growth and combating poverty. This measure is more qualitative, expressed in terms of gaps, exclusions and barriers in access to financial services.
Approaches in widening financial inclusion- progress thus far: Early post-liberation financial inclusion initiatives in Bangladesh comprised:
i) Expansion of rural branches of banks (all of which were nationalised in 1971 after liberation of Bangladesh), and
ii) Promotion of mutually-owned co-operative credit societies offering deposit and credit services to members.
The better off rural elite benefited from these initiatives, but success in financial inclusion of the broad masses of illiterate, enumerate rural poor remained limited. As mentioned earlier, the cooperatives tended to fall prey to 'elite capture' by powerful groups uninterested in diluting control by expanding membership; and the co-operative movement did not actually target the poorest population segments owning little or nothing in assets. Rural branches of banks focused mainly on crop loans to farmers, there lending models were not geared towards reaching out to the poorer landless illiterate unable to handle the paperwork involved in bank borrowing. The regulated low interest rates on bank lending prevalent up to the late nineteen eighties, not covering the high costs of managing small loans to borrowers in dispersed rural locations, was also a deterrent during that period.
The Grameen Bank and the MFIs brought about a major breakthrough in reaching out to the rural poor. Their lending models specifically included imparting of necessary minimal literacy and numeracy to aspiring member borrowers; they have also been unrestricted in realising interest and service charges at rates high enough to recover costs.
Their programs were designed with some extent of gender bias favouring women, in the expectation that their strengthened income standing in the traditionally male dominated families will lead to better upbringing and education of their children.
Besides extending micro-credit, many MFIs in Bangladesh have collaborated with insurance companies in extending another financial service, viz., microinsurance to the poor, offering modest sized covers such as credit life insurance ('debt dies with debtor'), health and accident insurance (for sicknesses; and injuries requiring hospitalisation etc.)., property insurance (usually for livestock bought with MFI loans), at affordably low rates of premium.
Typically the IVIFIs act as partner agents of the' insurance companies, collecting the microinsurance premiums on their behalf, most often by deduction at source from the micro-credit loans sanctioned. Regularly published data on microinsurance in Bangladesh are as yet unavailable; a February 2007 survey posted in CGAP's microfinance gateway (www.microfinancegateway.org) reported 10 insurance companies in partnership with 61 MFIs, were offering different microinsurance products in 81 schemes; with cumulative premium collections of over Taka 11.2 billion from about 4.5 million clients.
Some recent empirical studies using differing methodologies and covering differing time spans, have disputed the poverty reduction impact of micro-credit claimed by its protagonists (Dr. Yunus asserts that annually about five per cent of micro-credit clients of Grameen Bank are lifting themselves out from extreme poverty). Episodes of borrower distress in complying with rigorous micro-credit regimes, sometimes compounded by multiple MFIs lending to the same borrower, occasionally do appear in newspapers.
Self-employment initiatives are far from being risk free for the borrowers or the lenders, wrongly chosen initiatives and weaknesses in loan sanction and management disciplines can and do lead lenders and borrowers occasionally in difficulties; requiring prompt but appropriately flexible corrective response.
Such difficulties do not negate the reality that financial inclusion by way of micro-credit indeed unlocks opportunities for the despondent, apathetic poor to lift themselves out of poverty; unleashing in them the optimism and creative energy necessary to retry and get over any setback in the initial attempt.
Another criticism that micro-credit does not help the poorest of the poor is invalid because micro-credit is intended only for those who can use it in income generating activities.
Those unable to do so because of old age or other infirmity must be supported by outright transfers in the form of social safety net payments (the traditional safety net of extended family has dwindled, even in the higher income classes), not by credit to be repaid later.
Social innovations promoting financial inclusion, like micro-credit and the special programmes designed to bridge market failures and gaps in agricultural and SME financing, help spawn diverse cycles of further innovations by entrepreneurs in the real sector, fostering inclusive growth in the true sense.
For instance, SME financing has helped innovative entrepreneurs in small light engineering workshops in Bangladesh to develop and expand into a huge network producing plant/machinery spares (sometimes the plant/machine in entirety) of all descriptions for the manufacturing, transportation, construction and agricultural sectors, at fractions of import costs. In early nineteen eighties, the emerging apparels export sector had scant access to foreign exchange for their import inputs, the innovation of back-to-back usance letters of credits (LCs) for input imports against export LCs from buyer got around the problem, triggering decades of sustained growth.
While the number of deposit accounts in banks and the number of members in MFIs and cooperatives are growing steadily, the rate of increase has slowed in the recent years. About 25 per cent of the adult population is still to be covered by deposit and other financial services from regulated institutions, quite probably the hardest to reach. In access to credit, a 'missing middle' has emerged in the recent years between the poorest served by MFIs, and the relatively better off served by banks.
Small businesses outgrowing eligibility for micro-credit from MFIs often find themselves considered still too small by banks for their lending, sharecroppers not so poor as to be eligible for micro-credit from MFIs are considered ineligible for crop loans by banks, with little or no collateral for banks to fall back upon in events of default. In terms of sectors of economic activity, important areas like agriculture, off-farm rural output activities and environment friendly renewable energy remain under-served by banks and other institutional lenders.
Dr. Atiur Rahman is Governor, Bangladesh Bank. The write-up, in the form of a paper, was presented by him at the recently-held Joseph Mubiro Memorial Lecture, organised by the central bank of Uganda. This is the first of a two part article. To be continued