Understanding Financial Inclusion: Promoting Economic Security in Emerging Economies

More than 2 billion people around the world are “unbanked” – living and working outside of the formal financial system.

Two billion is a big, abstract number. But consider that one of two adults – rural farmers in India, owners of tiny cash businesses in Africa, migrant workers in the United States – keep their money under the mattress or in physical surrogates, like the crops in the ground or the fruit they sell each day.

Without a bank account or the means to obtain credit or insurance, they are at the mercy of thieves and natural misfortunes. They don’t live paycheck to paycheck – they live hour to hour, crisis to crisis. These unbanked workers and entrepreneurs constitute 70 percent of the adult population in many emerging economies, and 100 percent, in some rural areas, where no one has access to banks, financial services or the insurance to protect their families. At the bottom of the economic pyramid, people struggle for generations without leaving poverty – and their local economies remain mired as well.

Over the past 40 years, different approaches have brought some of the unbanked into the mainstream. Nobel-prize winner Muhammad Yunus pioneered the practice of microloans – tiny loans to individual clients – in Bangladesh in the mid-1970s, giving individuals the means to grow their enterprises and create a more secure economic future. (Read David Bornstein’s definitive account of Yunus’ work, The Price of a Dream.) The ensuing microcredit revolution has spread from Asia to Latin America and other parts of the world. Because the unbanked also need a place to save, the microfinance movement was born, with nongovernmental organizations (NGOs) and commercial banks signing up millions of people to the savings system.

But progress has been slow and uneven: The 200 million who have been helped by specialized lending and savings institutions constitute less than 10 percent of the billions who remain unbanked.

Woman selling fruit

A Big Umbrella

In recent years, a new approach has emerged – financial inclusion, or FI.

FI reaches out with a full array of help rather than a single-idea solution, in the form of a small loan or a passbook account. FI programs offer many varieties of savings and credit options, including checking accounts, pensions, credit cards and mortgages. They also offer insurance (on crops, health, property) and payment methods (ATM and debit cards, remittances, e-payments). The services are designed to be affordable, convenient and transparent. And the channels go beyond banks to the cloud, tied to networks of cell phones and smart cards instead of brick-and-mortar buildings.

Major FI efforts are under way in India, Africa and other parts of the developing world. Some of the world’s biggest economies are also being targeted for help, including the United States, where millions of low-income people depend on check-cashing stores, pawn shops and payday loans instead of reliable (and secure) financial structures.

“Financial inclusion seeks to connect banks, microfinance institutions, insurers, government pension programs and other financial institutions to one another – as well as to nonfinancial entities such as mobile network operators and retail outlets – in order to expand access to services more effectively than any specialized provider could achieve alone,” according to MetLife Foundation, the insurance giant’s philanthropic arm. In 2013, the foundation committed $200 million to FI initiatives.

MetLife Foundation is one of the many government, policymaking and philanthropic organizations working on FI initiatives, a roster that includes the Bill & Melinda Gates Foundation and the United Nations, whose Special Advocate for Inclusive Finance for Development coordinates an international FI advisory committee. Giant financial institutions like Citigroup and Visa are also involved. And many smaller companies, both nonprofit and profit-seeking, are also in the mix.