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Financial Inclusion, Poverty Reduction and the Millennium Development Goals

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Bien que les approches conventionnelles concernant la réduction de la pauvreté, telles que formulées par les objectifs du millénaire pour développement (OMD), soient utiles et nécessaires, elles ne sont pas suffisantes pour relever le défi. L'intégration financière est une approche alternative offrant des solutions progressives et complémentaires, tout en favorisant un processus de développement intégré qui s'adresse directement aux OMD. Cet article en décrit les grandes lignes, en commençant par expliquer les principes de bases de l'intégration financière, ainsi que ses connexions avec la réduction de pauvreté et les OMD, et ceci en se basant sur des recherches de terrain ainsi que sur la littérature secondaire sur le sujet. Suit un exposé de plusieurs expériences internationales, afin de prendre en compte les aspects pratiques de l'approche, avant une troisième partie qui synthétise plusieurs modèles d'intégration financière. Etant donné la crise financière globale actuelle, la nécessité d'intégration financière est plus impérative que jamais. Cet article se termine en proposant plusieurs moyens possibles pour renforcer les liens entre l'intégration financière, la réduction de pauvreté, et les OMD par rapport à des processus de planification, de définition de politiques de développement, ainsi que de programmation.European Journal of Development Research (2009) 21, 213–230. doi:10.1057/ejdr.2008.17
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Original Article
Financial Inclusion, Poverty Reduction and the Millennium Development Goals
Michael Chibba
a,b
a
International Centre for Development Effectiveness and Poverty Reduction, Canada.
b
Canadian International Development Consultants, Inc., Canada.
Abstract Although the chosen and conventional approaches to tackling poverty and other
millennium development goals (MDGs) are useful and necessary, they are not sufficient to address
the challenge. Financial inclusion (FI) offers incremental and complementary solutions to tackle
poverty, to promote inclusive development and to address the MDGs. This treatise is advanced in
the following ways: (i) based on the FI-poverty reduction (PR)-MDG nexus, and supported by field
research and related literature, the key pillars of FI are outlined; (ii) several international cases are
discussed to extract lessons learned; and (iii) explanatory FI models are presented. Given the current
global financial crisis, the need to scale-up FI efforts is now more imperative than at any other time
in recent history. This paper also offers potentially useful approaches to planning, policy-making
and programming in order to strengthen the FI-PR-MDG nexus.
Bien que les approches conventionnelles concernant la re
´duction de la pauvrete
´, telles que formule
´es
par les objectifs du mille
´naire pour de
´veloppement (OMD), soient utiles et ne
´cessaires, elles ne
sont pas suffisantes pour relever le de
´fi. L’inte
´gration financie
`re est une approche alternative offrant
des solutions progressives et comple
´mentaires, tout en favorisant un processus de de
´veloppement
inte
´gre
´qui s’adresse directement aux OMD. Cet article en de
´crit les grandes lignes, en commenc¸ant
par expliquer les principes de bases de l’inte
´gration financie
`re, ainsi que ses connexions avec la
re
´duction de pauvrete
´et les OMD, et ceci en se basant sur des recherches de terrain ainsi que sur
la litte
´rature secondaire sur le sujet. Suit un expose
´de plusieurs expe
´riences internationales, afin
de prendre en compte les aspects pratiques de l’approche, avant une troisie
`me partie qui
synthe
´tise plusieurs mode
`les d’inte
´gration financie
`re. Etant donne
´la crise financie
`re globale actuelle,
la ne
´cessite
´d’inte
´gration financie
`re est plus impe
´rative que jamais. Cet article se termine en pro-
posant plusieurs moyens possibles pour renforcer les liens entre l’inte
´gration financie
`re, la re
´duction
de pauvrete
´, et les OMD par rapport a
`des processus de planification, de de
´finition de politiques de
de
´veloppement, ainsi que de programmation.
European Journal of Development Research (2009) 21, 213–230. doi:10.1057/ejdr.2008.17
Keywords: financial inclusion; poverty reduction; MDGs; inclusive development; models; institutions
Introduction
The size of the financially excluded population in the world is enormous: according to
the United Nations, approximately three billion people around the globe lack access to
formal financial services – such as a bank account, credit, insurance, a safe place to
keep savings and a secure and efficient means to receive social benefit payments –
through a registered financial institution (UN, 2007a; Chibba, 2008a, c). Although this
problem is universal, the financially excludedpersonismoreoftenthannottheaverage
citizen in a developing country. Financial inclusion (FI), within the broader context of
inclusive development, is viewed as an important means to tackle poverty and in-
equality, and to address the millennium development goals (MDGs). However, in the
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nascent literature on the subject, there is scant treatment of the main approaches –
hereafter referred to as key pillars – to FI. There is also no comprehensive outline of
the options available to policymakers, development planners, practitioners and others
interested in the subject, with respect to the main explanatory models that complement
the key pillars and that can assist in planning, policy-making and programming.
The FI treatise that is presented here gives special attention to these lacunae.
This paper is organized as follows: first, the financial inclusion-poverty reduction –
millennium development goal (FI-PR-MDG) nexus is sketched; second, the key
pillars are outlined; third, relevant lessons learned from around the world are
discussed; fourth, explanatory FI models are presented; and fifth, concluding remarks
are offered.
The Financial Inclusion, Poverty Reduction and MDG Nexus
We must remember that the purpose of microcredit is to eliminate poverty in the shortest possible
period of time – Mohammed Yunus. (Counts, 2008, Foreword)
Tackling poverty by addressing the needs of the unbanked – thus, focusing on FI in
developing countries – originated approximately 30 years ago through the social banking
model of Mohammed Yunus, the 2006 Nobel Laureate who founded the Grameen Bank.
FI as a PR strategy was championed almost solely, for years, by non-governmental
organizations (NGOs) such as the original Grameen Bank. Anecdotes abound – though in
recent years robust empirical evidence, although limited in scope, from micro-economic
studies has also increasingly started to surface – extolling the critical role of microfinance
in helping low-income earners in developing countries to improve their lives. The following
is a typical example of such anecdotal evidence: a few years ago, Sarah Doe of Liberia
received micro-credit from an NGO to assist her to start a micro-enterprise. Her business
did reasonably well, and, with an additional loan in a subsequent year, she was able to
expand it. This (also) enabled her to send four of her children to school, open a savings
account and build a better home for her family (DFID, 2006).
Notwithstanding its critical role in alleviating poverty, improving access to credit,
promoting savings, supporting gender equality and enhancing livelihoods, microfinance
alone cannot facilitate FI. In fact, despite the inroads it has made over the past three
decades, over two billion people, of the three billion poor and financially excluded around
the globe, live in developing countries (figures from Consultative Group to Assist the
Poor, 2006). For example, in Africa, only about 4 per cent of the population has a bank
account (UNCDF, 2006), whereas in Latin America, 65 per cent of the population
comprises the unbanked (World Bank, 2007). Therefore, Africa surely deserves special
attention.
The UN Secretary General and heads of several multilateral organizations declared in
2007 that Africa is in danger of not meeting the MDGs by 2015 (UN, 2007b). What
should be done? ‘Traditional’ policy solutions to address poverty – such as those outlined
in ‘How to Tackle Poverty’ (Coyle, 2007), which focus on a mix of aid, advice, sound
institutions, sensible macro-economic policies and evidence-based policies – are important,
but they are not sufficient. Importantly, in addition to the traditional approaches, new,
incremental and complementary approaches are required to accelerate the momentum
towards achieving the MDGs, and FI offers such an opportunity.
Chibba
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Over the past few years, action on FI has been most prominent in the area of advocacy,
led by the major donor nations and multilateral and bilateral organizations. In an effort
to stress the importance and urgency of achieving rapid and significant progress in FI,
and to find collective solutions, numerous conferences and stakeholder meetings have
been convened throughout the world. Examples include the United Nations Conference
on Financial Inclusion in Africa that was held in Dakar in June 2006; the World
Bank’s Access to Finance conference held in Washington DC in March 2007; the
Making Finance Work for the Poor event of April 2007 that was jointly hosted in
London, England by United Kingdom’s Department for International Development
(DFID), the UK Microfinance Club and the World Bank; DFID’s Financial
Inclusion Conference of June 2007; and the global conference titled ‘Next Generation
Access to Finance: Gaining Scale and Reducing Costs with Technology and
Credit Scoring’ that was held in Washington DC in late September 2007 under the
auspices of the International Finance Corporation, the Consultative Group to Assist
the Poor and Visa International. In addition to advocacy, international organizations
have also scaled-up their FI efforts by taking concrete action through organizational
changes and policy research, and through finance and technical assistance to developing
countries.
There are indeed innumerable reasons to recognize and support the emerging and
critical role of the FI-PR-MDG nexus in furthering economic and social progress in
developing countries. Theoretical, empirical and anecdotal evidence suggests that FI has
the potential to reduce poverty, and that it promotes pro-poor growth and addresses the
MDGs (for example, see IFPRI, 2007; Chibba, 2008a, b, c; Setboonsarng and Parpiev,
2008; World Bank, 2008). In addition, the poor and low-income earners in developing
countries can lead better lives through FI for reasons that include enhanced money
management, access to finance at reasonable cost, a safe place to keep savings and the
advantages of having more options than those available in the informal sector. Similarly,
entrepreneurs, small businesses and micro-enterprises can also potentially benefit from FI.
Beyond these reasons, the international community, by endorsing the MDGs, has also
endorsed the viewpoint that social and economic development cannot truly take place if a
large part of society is marginalized and essentially overlooked. FI is therefore perceived to
be an integral part of inclusive development and globalization, and also as one of several
approaches to PR.
A related point is that given the current global financial crisis, and the on-going food
and energy crises, FI is now even more important for developing countries, for several
reasons. First, the pursuit of neo-liberalism ultimately resulted in the collapse of the free
market system of governance and economic management as was practiced in the United
States. Notably, this system was alien to developing countries, whose banking systems
remain essentially unaffected. Second, the emerging market economies (China and
India, for example) are better placed to weather a global economic slowdown because
they have, inter alia, mixed economies, prudential financial policies, inclusive growth
agendas, strong domestic demand and substantial foreign exchange reserves (see Chibba,
2008d). Third, the rest of the developing countries (the poor performers who are the
majority) are less prepared and more vulnerable. And this is precisely why an inclusive
development strategy and agenda, and FI in particular, will serve them well at this time
of crisis.
For all of the above reasons, FI is important in itself as a means to address poverty and
related issues of equity and access. In addition, given the real possibility that as a result of
Financial inclusion, poverty reduction and the MDGs
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the current global crises, progress towards the MDGs may now be compromised in many
developing countries, the need to scale-up FI is now more important as a complementary
and incremental approach than at any other time in recent history.
The Key Pillars
A thorough survey of literature will show to any keen observer that there is scant com-
prehensive treatment of key pillars in the nascent literature on the subject. In Chibba
(2008c), and based on field research and related analysis, it is suggested that tackling FI
and strengthening the FI-PR-MDG nexus requires a focus on four key pillars: private
(financial and non-financial) sector development, financial literacy, microfinance and
public sector support. The first pillar, private sector development, has sizable financial
and non-financial parts that are sectors in their own right. Hence, they are discussed
separately.
Financial sector development is well recognized as being a prerequisite to growth and
PR (DFID, 2004; Hossein and Kirkpatrick, 2005). The generally accepted wisdom on
financial development states that the focus of initiatives should be on the institutional,
regulatory, economic and related dimensions in the medium-to-long term. However,
conventional wisdom has been wrong in focusing solely on broad-based and compre-
hensive development of the financial sector without sufficient attention to FI issues.
Furthermore, development progress is assumed to be innately slow under this ‘conven-
tional’ approach, partly because of its premise that progress is only achievable in the
medium-to-long term and partly because of the assumption that financial sector liberal-
ization takes time (now a highly questionable doctrine in itself if conceived through the
neo-liberal ideology). As case studies and/or lessons learned show (see Chibba, 2008a, b, c
and Tables 1 and 2), FI initiatives can and should proceed simultaneously, although at a
much faster pace than conventional financial sector development initiatives. To be sure,
major international organizations are increasingly (though arguably slowly) recognizing
this fact, and they are taking required action. The recent shift in emphasis that highlights
FI as a key aspect of financial sector development is an example of this, and it is evidenced
in policy and research papers (for example, DFID, 2006; Claessens and Feijen, 2007;
World Bank, 2008), in the recent flurry of conferences and events on FI (noted above)
and in the recently declared policy on inclusive development as a priority by the major
multilateral organizations and by several developing countries – notably the emerging
market economies, including India, Brazil and South Africa. These developments also
signal a new phase in FI globally that promises to encompass a broad scope of supportive
action. At the World Bank Group (WBG), for instance, numerous new initiatives such
as the following have been taken: (a) merging of the finance and private sector research
team; (b) release of a policy research report – the first comprehensive report on FI– titled
‘Finance for All?’ (World Bank, 2008); and (c) the creation of a new organizational unit
that focuses specifically on collection and analysis of data on access to financial services by
both firms and households.
Commercial banks have also taken action to address FI. Traditionally shy in dealing
with low-income earners, they are today playing a critical role in FI as new services
are increasingly being offered to low-wage earners, and the poor generally, throughout the
world. For example, in Guatemala, two leading commercial banks have introduced
new business lines to serve the unbanked (Gwinner et al, 2006). And in India, FI is
Chibba
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Table 1: Financial inclusion: Cases, pillars and the FI-PR-MDG nexus
Case Approach (policy/product/
service)
FI lesson Led by FI Pillar The nexus (FI-PR-MDG)
India: State
Bank of India
The public sector provides the
overall framework, approach
and banking codes/standards
for FI; policy/product
guidance from the central
bank; ‘no frills’ bank accounts;
other FI products and services
(eg, FL, smart cards);
simplification of banking
policies and services
Led by the public sector,
a full scope of FI products
and services to address all the
pillars is a feasible option
with the cooperation of all
stakeholders
Public sector PSS
PSD
FL
Mf
Inclusive dev’t is a policy and
priority in India based on
the premise that it has linkages
with PR/MDGs.
Mexico: Cemex Business-led approach by
Cemex (a private sector
non-financial firm) is assisting
with FI through a savings and
credit scheme linked to
supplier credit for the poor
and unbanked.
Supplier credit can facilitate
FI and serve the poor, the
unbanked and the under
banked; and it offers a
workable business strategy
to expand markets/FI
Private –
Non-financial
firm
PSD This business-led approach is
de facto part of FI and the
perceived nexus w/MDGs
and PR
Guatemala: G&T
Continental;
Banrural
Commercial banks offer
microfinance services to the
unbanked in indigenous
languages through new ‘corner
store’ type bank offices as well
as through ATMs in various
languages with ‘picture’
options.
Commercial banks’
microfinance market for FI
purposes is penetrable,
profitable and huge. Banks
are successfully leading such
business approaches to FI
through innovative and
strategic approaches.
Private –
Formal
financial
institution
PSD
Mf
Same as above. Plus, empirical
evidence on the role of Mf
in achieving the MDGs
China: Dev’t Org
of Rural Sichuan
Financial literacy (FL) in
support of effective and
efficient microfinance
NGOs can be effective partners
for financial literacy and
microfinance
NGO FL
Mf
The broad-based benefits of
FL are linked to MDGs/PR
(Mavrinac and Chin 2004;
and others).
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South Africa:
Absa, Nedbank,
FNB, Standard
Bank, Postbank
With initial, ongoing and
overarching leadership and
guidance from the public
sector, the formal financial
sector developed a Financial
Sector Charter (FSC) for FI
that has led to new and/or
enhanced financial products
and services to serve the
poor and the financially
excluded.
‘No frills’ Mzansi bank
accounts and other formal
financial services for
low-income earners can result
from a ‘voluntary’ FSC,
given a favourable political
and institutional climate and
continued governmental
leadership and oversight for
FI. This model can be
emulated or can be adapted
by African nations.
Public and
Private sectors;
oversight;
consensus-
based FSC
PSD
PSS
Mf
FL
The government of South
Africa acknowledges that this
approach is exemplary, in part,
of the perceived FI-MDG-PR
nexus.
Philippines:
Globe Telecom
One of the largest mobile
telephone providers is offering
mobile banking services –
including, bill payment,
‘mobile wallets,’ non-bank
accounts and cash transfers
– to the banked and unbanked
Telecommunication service
firms are providing cost-
effective and efficient financial
services to the unbanked,
including those in remote
areas.
Private –
Non-financial
firm
PSD
Mf
Linkages are implicit through
the development of the
PSD and Mf pillars.
Brazil: Bradesco
& Correiros do
Brasil
Remote and under serviced
areas can receive improved
access to financial services
through private bank
(Bradisco) – post office
(Correioros do Brasil)
collaboration
Partnership between private
banks and the post office is
one effective way to leverage
existing infrastructure for FI
Private –
Formal
financial
institution
PSD
PSS
Mf
Intervention driven in part
by the assumption of a
FI-MDG-PR nexus
Mexico – US
central banks
and Bansefi
Bank accounts for the
unbanked; funds transfer
service for remittances from
the US to Mexico’s unbanked.
This strategic public sector
initiative on remittance
transfers, led by central banks,
can address financial inclusion
Public sector PSS
Mf
The FI-MDG-PR nexus is
implicit through the support
for the PSS and Mf pillars
Table 1: Continued
Case Approach (policy/product/
service)
FI lesson Led by FI Pillar The nexus (FI-PR-MDG)
Chibba
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(The third cooperating agency
is Bansefi, a Mexican
government bank)
needs specific to Mexico –
US circumstances
Kenya: Equity
Bank
Microfinance and other
financial services to SMMBs
by a commercial bank
Specialization in microfinance
and services to SMMBs can
be profitable and also
promotes FI
Formal
financial
institution
PSD
Mf
Part of the overall FI strategy
India and South
Africa: FINO,
WIZZIT/IFC
Equity participation by IFC,
part of the World Bank
Group, to support FI work
Equity participation can
strengthen formal financial and
non-financial firms and serve
as a catalyst for FI work
IFC as
catalyst
PSD
Mf
Emanates from IFC’s strategy
to address the FI-MDG-PR
nexus
Trinidad and
Tobago (T&T):
Central Bank
A comprehensive FL program
to support FI and other related
economic and social
development goals
The public sector can feasibly
lead FL initiatives with
the central bank as the
coordinating agency and
with the support of other
key stakeholders
Public
sector
FL
PSS
An integral part of T&T
strategy tied to growth,
welfare and the MDGs
Developing
country
Technology – eg, mobile
phones, prepaid cards and
electronic kiosks – offers a
viable medium for FI. Numerous
countries – in addition to
cases provided above – such as
Ghana, Nigeria, Maldives,
Columbia and Mongolia are
using technology-based FI
Technology (especially
information technology and
telecommunications) offers
complementary channels
for FI
Private –
Various
financial and
non-financial
firms
PSD
Mf
The next signs the development
of the PSD and Mf pillars.
Abbreviations: FI=financial inclusion; MDG=millennium development goal; NA=not applicable; NGOs=non-governmental organizations; PR=poverty reduction;
Pillar 1: private sector development (PSD); Pillar 2: financial literacy (FL); Pillar 3: microfinance (Mf); Pillar 4: public sector support (PSS); TA=technical assistance.
Adapted from Chibba (2008c).
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Table 2: Financial inclusion models
Model Financial sector consensus Public sector leadership Private sector Civil society/NGO Catalytic
Approach
and process
Given a favorable
governmental, institutional
and political climate, the
financial sector takes
strategic action to address
financial exclusion (FE)
through a consensus-driven
process
Public sector prepares
the strategy/action plan
and then calls on stake
holders to participate
and/or forms direct
partnerships
Private sector (financial
and non-financial firms):
individually, jointly or
through partnerships,
designs and implements
market-based
approaches. (In
addition, advocacy and
lobbying is collectively
pursued for an improved
business/investment
climate)
NGOs, voluntary
organizations, charities,
non-profit orgs. incl.
research and policy
institutes, act
individually, jointly or
through partnerships,
to tackle FE
FI is supported
through various
catalytic channels –
eg, advocacy,
research, facilitation,
funding, advisory
services and
partnerships.
Lead players Formal financial
institutions and
government
Government – esp.
central bank, public
sector bank(s); with
support from the private
sector
Financial and non-
financial firms
All types of civil society/
non-profit
organizations/
charities, research/policy
institutes
Multilateral/bilateral
organizations (World
Bank, UN agencies,
ADB, IDB, DFID
and so on)
Main
mechanisms/
instruments
1. Legislation;
2. Financial Sector Summit
and Financial Sector
Charter (FSC);
3. Data collection/analysis
on unbanked;
4. Financial sector develops
new products, services
and delivery mechanisms
Various options:
1. Planning and banking
codes and standards
with the central
bank’s guidance
(India);
2. Central bank plans
and co-ordinates
financial literacy
(Trinidad & Tobago);
3. Partnership of central
banks & pubic bank
(Mexico – US)
Market-based, such as :
1. Credit from non-
financial firms (eg,
Cemex of Mexico);
2. Partnership/
technology/
innovation-driven
options – eg,
e-banking. Examples:
Prodem FFP, M-Pesa,
Wizzit, Globe
Telecom, ICICI Bank;
3. Non-financial firms
form banking units
(eg, Banco Wal-Mart)
Grassroots-level
microfinance and;
financial literacy,
research/analysis by
non-profit/policy/
research institutes;
funding from
philanthropic bodies and
businesses (eg, Citibank
to NGOs and other
intermediaries)
Advocacy; research
and evidence-based
lessons learned;
facilitation; funding;
equity participation;
and technical
assistance
Chibba
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Implementation Led by financial
institutions
Overall program led by
the central bank with
support from other
gov’t entities; private
sector firms otherwise
take the lead
Private sector financial
and non-financial firms
Led by civil society/
non-profit sector
organizations/other
intermediaries/policy-
research institutes
Multilateral/bilateral
organizations;
executing agency
(government, NGO,
or funding recipient)
Products/
services
Basic accounts; e-banking;
M&E; financial literacy;
money transfer; other
financial services
Microfinance; basic
bank accounts, financial
literacy; and other
pro-poor financial
services (eg, e-banking,
money transfers)
Microfinance; basic
accounts; e-banking;
partnerships; (limited)
financial literacy; other
financial services
(eg, payment facilitation,
money transfers)
Research, evaluation,
surveys; microfinance;
advocacy; and financial
literacy
Advocacy;
publications; project
financing; equity
participation; risk
sharing; TA
Country South Africa India; Trinidad &
Tobago; Mexico
Numerous countries in
all regions (eg, Bolivia,
Kenya, Philippines,
India, Brazil)
Numerous countries
in all regions (eg,
Bangladesh, South
Africa, China)
Numerous countries
in all regions
Financial
inclusion
pillars
addressed
All four One, more or all of
the pillars
All four. However,
mainly PSD and
microfinance, with
financial literacy and
public sector support
pillars to a limited
extent only
Primarily, microfinance
and financial literacy
All four; but in a
catalytic and
supporting role
Abbreviations: As in Table 1, plus: M&E=monitoring and evaluation; FE=financial exclusion; ADB=Asian Development Bank; IDB=Inter-American Development
Bank; DFID=Department for International Development, United Kingdom.
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the ‘buzzword’ today, as the banking industry has adopted a policy, and it is offering new
products and services to address financial exclusion (www.iibf.org.in/financeq/iib_
financeinclusion.asp).
In addition, the non-financial private sector has also recently surfaced as being essential
to FI. The pivotal role of technology (especially, e-banking and telecommunications
generally) and market-based approaches to serve the poor and unbanked through business
alliances involving financial and non-financial firms is resulting in new products and
expanded services (see Table 1). Mobile phones, information technology and biometric
technology have also featured prominently in recent years in broadening access to finance.
In addition, large manufacturers, retailers and wholesalers are also playing an incremental
and complementary role in providing specialized financial services. For example, in
Mexico, consumer credit from Banco Wal-Mart and supplier credit from Cementos
Mexicanos (Cemex) are addressing the needs of the poor. Another example is financial
services offered by non-financial firms that are acting as local agents for formal financial
institutions in remote areas, or in areas where there are no bank branches, to better serve
the poor and the unbanked.
Financial literacy is the second pillar that supports FI. The National Foundation for
Educational Resources (NFER) in the United Kingdom defines financial literacy as ‘the
ability to make informed judgments and to take effective decisions regarding the use and
management of money’ (NFER, 1992). The crucial role of financial literacy became evi-
dent in field research and related analysis (Chibba, 2007, 2008c), especially in facilitating
the informed use of microfinance, in promoting participation in the formal financial
sector, and in addressing the issue of mores that guide the conduct of many citizens with
respect to borrowing, spending, saving and finance generally. Thus, it is perhaps not
surprising that financial literacy is viewed as ‘the next training frontier,’ particularly by
both donor nations and multilateral organizations (see, for example, IDB, 2006).
The third pillar is microfinance, which, as noted earlier, has a long and successful
record in promoting FI.However, microfinance engages both those already in the formal
sector as clients, and those outside it. Despite this dual role, microfinance is a proven and
powerful means to facilitate FI. Until recently, the preponderance of evidence was anec-
dotal, and this is gradually changing. For example, recent empirical research provides
strong evidence in support of the positive role of microfinance in tackling poverty and in
addressing the MDGs (see, for example, Karlan and Zinman, 2007; Cotler and Woodruff,
2008; Setboonsarng and Parpiev, 2008). As noted in Chibba (2008a), the drawbacks
to such evidence are mainly twofold: first, that it is country-specific or site-specific (hence,
it is not generally applicable); and second, that it normally takes a long time for it to be
universally accepted (as with the case of Yunus’s micro-credit). Nonetheless, innovative
solutions from the private sector are being used to complement traditional microfinance
based on the social banking model. In Mexico, for example, Compartamos, which was
originally established under the social banking model, has developed into a profit-based
enterprise, and the social bottom-line (required for social banking) is no longer relevant.
Yet it claims to extend micro-credit and other microfinance services. Changes in the
world of microfinance are also unfolding in previously uncharted waters: the current
agenda to scale-up microfinance includes the use of global capital markets (see, for
example, Standard and Poor’s 2007), and this may lead to yet another development in
its rapidly growing role. Most importantly, this pillar is well entrenched to address
financial exclusion, and it is also an integral part, as with the other pillars, of the FI-PR-
MDG nexus.
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Finally, public sector support is the fourth pillar, and it has a central role to play in
ensuring that appropriate regulations and legislation, supported by policies, procedures,
programs and accountability mechanisms, are in place to facilitate FI. Moreover, it also
involves political economy (including political will, multipartite negotiations, charters,
incentives and monitoring mechanisms), as was the case in South Africa after the collapse
of the apartheid system that eventually resulted in the development of the Financial Sector
Charter (FSC) by formal financial sector institutions. This politico-economic dimension,
though it is country-specific, can manifest itself in various forms. In India, for example,
the government had the political will, and took concrete action, to pursue FI policies,
and to ensure that there is appropriate and supportive legislation, supervision and
implementation. Thus, a financial sector charter was not required.
International Lessons and Related Analysis
The Southern Africa region is fertile ground for the FI-PR-MDG nexus, and it offers
useful cases and lessons.
Lessons and opportunities in the Southern Africa region
At the national or governmental level, the first significant steps towards FI in a developing
country were taken in South Africa after the collapse of the apartheid regime, and within
the framework of inclusive development. In fact, by 1995, South Africa had already
adopted goals similar to the MDGs (South Africa, 2005). Therefore, South Africa is a
legitimate global leader in inclusive development matters, despite the controversy and
heated debate that prevails – especially within South Africa itself – about the successes,
failures or limitations and drawbacks of the FI initiative and the Black Economic Empow-
erment (BEE) program. For example, an au contraire view – including the weaknesses of
BEE – is advanced by Andreasson (2006), and also by Ponte et al (2007), who argue that
power held by the new black elite, along with narrowly implemented BEE policies, make
broad-based socio-economic transformation unlikely. In its special survey of South Africa,
the Economist (2006) also highlighted the limitations of BEE. To such criticism, the South
African government has responded with a pragmatic and ‘real world’ response:
There has been understandable criticism that empowerment in its narrowest form – the
encouragement of business to put a more representative share of ownership and control in black
hands – has in some instances simply served to enrich a small elite. This was perhaps inevitable as
businesses scrambled to find what they considered to be bankable and ‘connected’ partners as a
new era dawned. (www.southafrica.info/business/trends/empowerment/bee-sutcliffe-190506.htm)
In a recent paper, Hamann et al (2008, pp. 21–37) have provided a balanced assessment
in their review of the subject. While acknowledging that the state plays a proactive
and forceful role in empowerment and FI, they conclude that BEE’s impact on the poor
is inconclusive, and that further research, especially empirical research, is needed.
Meanwhile, according to MDG Monitor (a UN initiative), South Africa is on track to
meet the PR target – as well as possibly all MDGs – by 2015 (www.mdgmonitor.org/
country_progress.cfm?c=ZAF&cd=710). Barring a few exceptions – three countries as of
March 2008 are also on track to meet the PR target – this is not the case with the rest
of Africa. On the whole, notwithstanding the questions and doubts that are raised
within Africa, and especially by observers of South African affairs as noted above, the
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South African case still stands out as being exemplary in several respects in Africa. Indeed,
despite the ongoing debate on its drawbacks and merits, it is nonetheless worthy of being
selectively emulated or adapted to specific conditions in other countries.
For example, take the case of Botswana. Because of reasons such as population size,
location, infrastructure, Human Development Index (HDI) rank and high income in-
equality, it serves as a good case study in FI. Four decades ago, the percentage of
financially excluded in Botswana was about the same as the current average for Africa,
approximately 96 per cent. Today, slightly over 50 per cent of Botswana’s population is
financially included (Chamberlain and Walker, 2005). However, this growth in FI was
possible not because of microfinance, nor through a strategic and concerted effort to
realize substantial improvements in FI. Rather, it was through prudent management of
natural resources, consistently good fiscal policy (the government and the private sector
are major players in the economy), and because of a very long period – over a quarter of a
century – of high economic growth driven by mineral resource development and generally
responsible public sector policies and programs. But, ultimately, there is a limit to such
expansion and the benefits derived from it. Economic growth in Botswana has slowed
considerably in recent years, mineral revenues are flat, and diversification of the economy
remains an elusive goal. Furthermore, the level of absolute poverty in Botswana, although
significantly reduced over the past few decades, is still very high at around 30 per cent of
the population. Meanwhile, inequality is also severe (see IMF 2008 pp. 25). Botswana
and other developing countries cannot afford to wait several decades for further and
significant progress to occur, and need a focused and strategic effort. Field research
conducted in 2006 by this author, supported by related research and analysis, suggests that
there are seven key problems hindering further progress in FI as a strategy to address
poverty and inequality in Botswana (Chibba, 2006a, b, 2007): (i) a large informal sector
that accounts for an estimated one-third of the national economy; (ii) mores, including
the ‘no matata’ (worry-free) attitude, play a pivotal role in the savings, spending
and borrowing patterns of citizens and small, medium and micro-businesses (SMMBs);
(iii) poor access to formal credit, as only about 50 per cent of the population has access to
formal financial services; (iv) absence of, or very low presence of, formal financial in-
stitutions in both rural areas and small urban centers; (v) market concentration – dominance
of the retail financial sector by two banks and the widespread presence of monopolies
or oligopolies in almost every sector of the economy; (vi) a weak enabling environment
for private businesses; and (vii) poor governance in areas such as monetary policy,
land ownership, public sector agency governance, government procurement and the
legal and regulatory framework (for FI). As argued elsewhere (Chibba, 2008c), some
of these problems can be addressed by FI through the use of an appropriate approach
and model.
Given the above context, Botswana is in a suitable position to emulate or adapt some of
the key generic features of the ‘financial sector consensus model’ used in South Africa. The
FI target (hypothetical case) of 75–80 per cent of the overall population, or roughly
400 000 low-income adults, is achievable by 2015 because three (and possibly four) of the
five building blocks (discussed below under explanatory models) are largely already in
place – (1) stable and good governmental leadership, as well as the conditions for and
some of the essential legislation to support FI are present; (2) Botswana has an established
trackrecord in employing a consensus-driven tripartite approach; (3) the knowledge
and information base already exists, especially with respect to collection and analysis of
data on the unbanked (through FinMark Trust-funded surveys and related Botswana
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government statistics); and (4) the government is well placed to continue to provide
an enabling and supporting environment and support direct interventions. If a similar
time-line to that experienced by South Africa is used, then the 75–80 per cent target
for financial inclusion is both realistic and achievable by 2015 (and despite the current
global financial crisis).
Other international cases
What lessons can one draw from other developing countries? As summarized in Table 1, a
global scan of FI initiatives and lessons learned shows that there are numerous com-
plementary approaches and initiatives that can support the key pillars and strengthen the
FI-PR-MDG nexus, including the following:
KSupplier credit, as in the case of Cemex, a major Mexican private sector firm, which is
offering supplier credit for the purchase of raw materials to upgrade or build homes
through solidarity group loans.
K‘No frills’ bank accounts, as offered in India and South Africa;
KSpecialization in microfinance and financial services to entrepreneurs, SMMBs
and the ‘unbanked’ – one such example is Equity Bank in Kenya, which turned
around from a loss-taking financial institution to a profitable bank by focusing
on microfinance and related financial services; and, through such a strategic change in
business, it has expanded its client base by over 500 per cent in 4 years.
KInterventions of NGOs active in financial literacy. The Development Organization of
Rural Sichuan in China is one such example.
KApproaches that employ technology, information technology, telecommunications
and business strategies to penetrate new markets and support FI initiatives in several
developing countries throughout the world – through the use of cell phones, prepaid
cards and electronic kiosks, for instance. Indeed, the poor and those in under-serviced
and remote areas are increasingly being served through such approaches (see examples
for the Philippines and Guatemala, and the example for developing countries overall).
KPlanning, programming and oversight led by the central bank, as in the cases outlined
for India, Trinidad and Tobago, and Mexico.
Moreover, as also shown in Table 1, the FI-PR-MDG nexus is present in all of the cases,
whether based on assumptions, objectives, strategies and/or mechanisms that facilitate
implementation and oversight.
In sum, field research, development practices and new business opportunities linked to
the key pillars that support FI are cutting new paths to PR, and offer numerous lessons for
FI work and ways to strengthen the FI-PR-MDG nexus.
Explanatory Financial Inclusion Models
‘A model is a simplified representation of some aspect of the real world.’
(Stokey and Zeckhauser, 1978, pp. 8, 22)
While the discussion thus far goes a long way in appropriately addressing and framing FI,
a further link is missing – discussion of explanatory models that complement the
key pillars and help in planning, facilitating or otherwise pursuing FI interventions. In
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addition, countries yet to take concrete action on FI and that are likely not to meet the
MDGs – especially the PR and gender equality targets – can benefit from explanatory
models that inform and further show the additional range of options available in planning
and implementing their FI strategies and programs. Thus, the explanatory models,
so-called because of their explanatory and heuristic powers, are process-driven, and they
complement the key pillars. Such models are absent in the nascent literature on FI, and
they are therefore of considerable interest to policy-makers, bureaucrats, social scientists,
businessmen and others interested in or involved in international development.
The questions that are pertinent to such FI models are, what is the approach and
process to financial inclusion? Who are the key actors (or players)? What are the main
mechanisms/instruments involved? Who leads implementation? What are the key products
and services offered? Which countries serve as good case studies for the models? What FI
pillars are addressed by each model?
The 14 cases in Table 1 show a broad scope of approaches to the FI-PR-MDG nexus,
but the lessons learned suggest that the four key pillars of FI can be strengthened through
the use of five models of FI: financial sector consensus; public sector leadership; private
sector development; civil society/non-profit sector; and the catalytic model. Table 2
contains a summary of each of these models with respect to the following aspects:
approach, lead players, main mechanisms/instruments, implementation, products/services,
country and FI pillars addressed.
The financial sector consensus model resulted from path-breaking initiatives in South
Africa, notably development and adoption of the FSC by formal financial sector in-
stitutions, given a favorable governmental, institutional and political climate in the post-
apartheid era. But equally importantly, the government has pro-actively supported FI,
and continues to play a role that encompasses the provision of an enabling environment,
regulatory and oversight functions, as well as direct public sector intervention in the
provision of goods and services that are essential to the overall inclusive development
vision and agenda towards a just and equitable post-apartheid society. Based on the
Nedlac Act, which was followed by multipartite (government, business, labor and com-
munity) decision-making, and subsequently by the financial sector’s so-called ‘voluntary’
actions towards adopting the charter, market information was collected on the financially
excluded before program implementation. The main characteristics or building blocks of
this model are (1) governmental leadership for inclusive development through a frame-
work for the development of South Africa that includes appropriate policies, mechanisms
and legislation to support FI (given the initial favorable conditions for FI and the removal
of regulatory barriers through the Financial Advisory and Intermediary Services Act and
the Dedicated Banks Bill); (2) consensus-driven approach, where the formal financial
sector institutions cooperated to strategically address financial exclusion and work to-
wards an equitable society as set out in the FSC that was collectively drafted and endorsed
by it ; (3) the knowledge and information base, especially with respect to collection and
analysis of data on the unbanked (FinMark Trust-funded surveys); (4) the financial sector
develops and introduces new financial products, services and delivery mechanisms (for
example, ‘no-frills’ Mzansi bank accounts and additional financial services for the poor
and financially excluded, such as microfinance, e-banking and money transfer services);
and (5) the government continues to provide an enabling environment and a modicum of
public sector intervention (especially public sector infrastructure and services in support of
the program).The time-line for this process leading up to the introduction of the Mzansi
bank accounts – beyond the favorable governmental and political climate initially – was
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about 3 years (2002–2005). Over 1.5 million Mzansi accounts were opened in the first year
alone (www.southafrica.info/business/economy/development/mzansi.htm). All four of the
FI pillars are being addressed through this model (see Tables 1 and 2). To reiterate a point
made earlier, despite the ongoing debate on the merits and drawbacks of this model, the
MDG Monitor has concluded that South Africa is on track to achieve the extreme poverty
and hunger goal, and possibly all of the other MDGs as well (www.mdgmonitor.org/
country_progress.cfm?c=ZAF&cd=710). Given the current global financial crisis, and
the food and energy crises, continued prudent leadership of the nation, sensible economic
stimulus packages over the next few years and continued support for inclusive develop-
ment will bear significantly on this prognosis. One important lesson learned is that the
pragmatic and effective role of the government in actively pursuing and supporting an
inclusive development agenda is indeed essential to any FI program. Another lesson, with
respect to countries such as Botswana that are in danger of not meeting any of the MDGs,
is that this model offers one possible incremental option to scale-up their MDG efforts.
The public sector leadership model assumes that the public sector must be at the core,
or serve as the anchor, of FI efforts. Thus, the public sector prepares the strategy and
action plan; ensures the development of banking codes, standards, and related rules
and regulations; invites all stakeholders to participate and assist; and guides the overall
implementation (typically led by the central bank). Products and services offered include
financial literacy, no-frills bank accounts and microfinance (the private sector and NGOs
are critical players in this as well). In addition, the necessary enabling environment is
provided by the government- and public sector-led interventions are also introduced
(especially by public sector banks). India is a good example of this model. In comparison
to South Africa, India skipped consensus-building and the collection and analysis of
data, and leapfrogged straight through from strategic planning to implementation: in
effect, India began with a public sector-driven plan and strategy, a modicum of public–
private sector collaboration (that saw adoption of banking codes and standards
for FI) and the Reserve Bank of India’s guidance on FI (www.iibf.org.in/financeq/iib_
financeinclusion.asp). The government has also been a leader in FI through public sector
banks. The result has included the introduction of no-frills savings bank accounts
by numerous banks (public and private), and access to credit and basic transaction services
through technology-based tools (for example, smart cards and mobile banking). The
responsibility for generating market information and related analysis rests largely with
financial service providers, though NGOs and research institutes are also assisting in
addressing this need. This model also applies to the provision of very limited or specific FI
services, such as financial literacy (as in the case of Trinidad and Tobago) and bank
accounts to facilitate remittance transfers from one country to another (the US – Mexico
case). Thus, one, more or all of the FI pillars are addressed through this public sector
leadership model.
The private sector model focuses on and engages financial and non-financial entities.
Acting individually, jointly or through partnership, the private sector formulates and
implements FI initiatives that are based on business strategies, essentially market-based
approaches, but increasingly hybrid approaches as well, involving public–private sector
partnerships – as in Brazil’s case (see Table 1) – and NGO–private sector partnerships.
As the lead player under this model, the private sector’s motive behind FI initiatives is
profit, as opposed to social or civic duties or responsibilities. However, as with most
large private businesses, there is a small but significant social service element, as
(for example) in the case of Citibank’s financial contributions made to intermediaries
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(especially, microfinance institutions and non-profit organizations) to support financial
literacy and microfinance programs. Furthermore, this model includes advocacy and
lobbying by the private sector for an improved investment and business climate (for
example, improved rules and regulations, privatization and less red tape). Thus, all of the
FI pillars are addressed by this model. Several examples are provided in Tables 1 and 2.
The civil society/NGO model has a grassroots-level approach led by voluntary organi-
zations, educational institutions, non-profit entities (including policy and research in-
stitutes, universities and philanthropic organizations) and other NGOs. The strength of
this model lies in education and training (financial literacy), certain financial services
(microfinance, in particular) and advocacy. Thus, financial literacy and microfinance are
the main pillars addressed. However, through advocacy, research and representation,
private sector development and public sector support pillars are also addressed to a limited
extent. An example of this model, as shown in Table 2,is the work of the Development
Organisation of Rural Sichuan in China.
The Catalytic Model focuses on supporting FI goals and objectives through channels
such as advocacy, research, facilitation, funding, partnerships and advisory services. The
multilateral and bilateral organizations are the dominant players that fit this model.
Is it appropriate to view these international organizations as being part of the catalytic
model? Indeed it is. For example, take the WBG. At the 2007 Annual Meeting of its
Board of Governors, Robert Zoellick, the WBG President, gave a speech titled ‘Catalyzing
the Future: An Inclusive and Sustainable Globalization,’ and remarked that the role of the
WBG is
yto assist countries to help themselves by catalyzing the capital and policies through a mix of
ideas and experience, development of private market opportunities, and support for good
governance yspurred by our financial resources. It is the purpose of the Bank Group to advance
ideas about international projects and agreements on trade, finance, health, poverty yso that
they can benefit all, especially the poor. We should be expanding the frontiers of thinking about
policy and markets, pioneering new possibilities y. (World Bank Group, 2007; emphasis added)
Specifically, the products and services involved under this model are broad in scope,
and include research and publications, advocacy and facilitation services (for example,
conferences, fora and seminars), funding (for projects and programs), technical assistance
and advisory services, and risk-sharing and equity-financing. All of the FI pillars are
addressed through a catalytic and supporting role.
Indeed, the five models are interdependent, and multiple models are at play at the
country level to render depth and scope to FI efforts. In South Africa, despite the con-
ceptualization, launch and early implementation through the formal financial sector
consensus model, the momentum is being generated especially through private sector
development, although with vital and ongoing governmental pressure and oversight.
In India, the public sector model has been dominant, but the private (financial and
non-financial) sector has also assumed the responsibility to generate the momentum, and
the public sector continues to supervise, monitor and advocate through the central bank
and provide banking services through public sector banks. In Mexico, the private sector
model has been dominant thus far, and market-based approaches are the norm and set the
pace. Yet, the public sector has simultaneously played an important role as well. For
example, three public sector entities – the Bank of Mexico, the Federal Reserve Bank and
Bansefi, a Mexican government bank – jointly implement and oversee the Mexico–US
remittance program. The civil society/NGO and catalytic models also play critical,
although ancillary, roles in each of these three countries. This ancillary role is particularly
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significant in private sector development, financial literacy and/or microfinance programs,
as amply illustrated in Table 1. Therefore, there is no ‘one model fits all.’ Each model –
and, in most cases, simultaneously with the other models – can be useful in introducing,
sustaining and scaling-up FI efforts nationally, regionally and/or globally to achieve the
MDGs.
Conclusion
This paper suggests that FI is an inclusive development and PR strategy that manifests
itself as part of the emerging FI-PR-MDG nexus. However, given the current global
crises, the need to scale-up FI is now perhaps more important as a complementary and
incremental approach to work towards meeting the MDGs than at any other time in
recent history. Findings and analysis from field research point to four key pillars that
are required to strengthen FI and the FI-PR-MDG nexus – private sector development
(both financial and non-financial), financial literacy, microfinance and public sector
support. Furthermore, the key pillars can be complemented through fundamental
explanatory models of FI that can also be instrumental in working towards achieving the
MDGs, especially the PR and gender equality targets. There are five such models: (1)
formal financial sector consensus; (2) public sector leadership, (3) private sector devel-
opment, (4) civil society/NGOs, and (5) the catalytic model. While one or two of these
models play the leading role in countries such as India, South Africa and Mexico, financial
inclusion is a dynamic and multidimensional process, and, as such, all of these models are
simultaneously at play, to varying degrees, in most of the developing countries. In effect,
the majority of developing countries have the advantage of learning from lessons learned
by the early leaders, and of emulating or adapting proven approaches to tackling financial
exclusion through the informed use of these five models.
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... Study findings suggest that the inclusion of the unbanked population into the formal financial system open an avenue for earning opportunity, capital accumulation for future investment and consumption, which eventually supports household and the economy in lessening the prospect of poverty inclusion. Study findings align with existing literature see Omar and Inaba (2020), Inoue (2019b), Mohammed et al. (2017), Chibba (2009). ...
... Concerning the relationship between financial inclusion and poverty reduction in low-and lower-middle-income counties, the study established that financial inclusion is critical for poverty reduction, implying the negative statistically significant influences associated with poverty reduction activities. The study's results are consistent with previous research, such as (Ozili, 2020), Omar and Inaba (2020), Inoue (2019a) ( and Chibba (2009). ...
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... Study findings suggest that the inclusion of the unbanked population into the formal financial system open an avenue for earning opportunity capital accumulation for future investment and consumption, which eventually supports household and the economy in lessening the prospect of poverty inclusion. Study findings align with the existing literature works, see, for instance, Omar and Inaba (2020), Inoue (2019b), Mohammed et al. (2017), andChibba (2009). ...
... Regarding the nexus between financial inclusion and poverty reduction in lower and lower-middle-income countries, study established that financial inclusion plays a critical role in poverty reduction, implying the negative statistically significant influences running to poverty reduction activities. Study findings align with existing literature works such as Ozili (2020), Omar and Inaba (2020), Inoue (2019b), Mohammed et al. (2017), and Chibba (2009). Financial inclusion can improve the poor's financial situation and level of life while also reducing income disparity (Beck et al., 2007). ...
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For attaining sustainable economic development in the lower and lower-middle-income nations, the role of poverty reduction has been critically addressed along with the economic determents that manage poverty level which has accelerated the economic progress by ensuring the higher performance of other macrovariables including FDI inflows, financial development, trade openness, and human capital accumulation. The purpose of this study was to evaluate the role of education and financial inclusion in poverty reduction in lower and lower-middle-income countries for the period 1995–2018, with a panel of 68 nations. The study applied several econometrical tools, including a cross-sectional dependency test (CDS), panel unit root test, panel cointegration test, generalized methods of moment (GMM), and system-GMM. The CDS results confirmed the sharing of typical dynamics in research units. The test of stationarity detected variables was integrated after the first difference. A panel cointegration test documented the long-run association between education, financial inclusion, and poverty. The study documented that government investment in education positively assists poverty reduction, implying a negative association between them. Furthermore, the inclusion of the population into the formal financial system expedited the poverty reduction process that has access to formal financial benefits allowing earning opportunities and higher purchasing power, eventually supporting an increased standard of living. Directional causality tests revealed feedback hypothesis holds in explaining the nexus between education, financial inclusion, and poverty, i.e., [ED←→Poverty; FI←→Poverty]. For policy reform and restructuring, it is essential to pay considerable attention to development in education and access to the formal financial system because progress in education and finance has positive spillover effects on the aggregated economy.
... These services include savings, money transfers, insurance or investment, pension, and remittances. Chibba (2009) conceives financial inclusion as an economic intervention strategy aimed at overcoming the market challenges that hinder the poor and the less privileged from having access to financial services. Financial inclusion efforts focused on the poor excluded from the financial system due to the high cost of accessing formal financial services. ...
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Chapter
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Easy access to authorized financial services bears potentiality of reducing income inequalities and poverty. This chapter explores the pivotal role of the banking industry toward financial inclusion by expanding its branches in the growth and development of the economy. Simultaneously, the chapter highlights technology-enabled financial inclusion due to highest mobile penetration levels in India. It explains technology-enabled mobile banking where banks reach doorsteps of customers by taking control of various impediments and constraints posed by the brick-and-mortar model. It also estimates the technical efficiency level of Indian banks by considering different variables contributing to the objective of financial inclusion, as without sound and efficient functioning of banking system, an economy cannot function steadily and efficiently. This chapter further explains how the inefficient banks enhance their efficiency score by reducing their input level with the given output or enhancing their output level with the given input. Finally, the chapter interprets the key results.
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