Financial inclusion refers to the provision of financial services as a mean to expand opportunities for people living in poverty. Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society.
Financial inclusion enables poor people to save and to borrow—allowing them to build their assets, to invest in education and entrepreneurial ventures, and to improve their livelihoods. Inclusive finance is especially likely to benefit disadvantaged groups such as women, youth, and rural communities.
Financial inclusion started with microcredit loans to low-income people who would otherwise not be able to access credit from formal financial institutions. The microfinance sector is estimated at $60-100 billion worldwide. The microfinance industry has experienced rapid growth, with leading microfinance institutions growing by 20 percent per annum in the last 5 years. Yet the sector still reaches less than 20 percent of its potential market among the world’s low income segments. After nearly 40 years, the microfinance sector has evolved and now includes a wide range of products and payments systems targeted and designed for low-income consumers. For financial institutions, integrating a strategy for financial inclusion mitigates institutional risks, financial loss and accelerates sustainable returns essential to create jobs, increase incomes, build savings, and reduce vulnerability. With 2.5 billion adults today still excluded from access to formal financial services, leading institutions such as the World Bank Group, have committed to reach at least 1 billion of excluded populations by 2020.
Financial inclusion offers a broad range of financial products beyond credit – savings and transaction accounts, insurance, longer-term savings plans and other financial services. Financial products and services, if delivered transparently and appropriately, deepen trust and confidence and enable more effective decision-making for underserved consumers.
Global initiatives have emerged to raise awareness and establish standards for responsible and customer-centric practices in the provision of financial services. Such initiatives try to promote responsible financial practices across three levels – for regulators, for financial services providers, and individual consumers. This encompasses client protection, social performance management, financial education, appropriate products design, transparent pricing, ethical behavior, data privacy and security. Global initiatives include:
- Basel Committee on Banking Supervision: published a series of recommendations on the supervision of microfinance institutions that mobilize savings
- Global Appeal for Responsible Microfinance: a worldwide effort developed by Convergences 2015 to build commitment to financial inclusion and to responsible finance.
- The 2011 Global Financial Inclusion (Global Findex) Database: initiated by the World Bank’s Development Research Group and funded by the Bill & Melinda Gates Foundation, the database measures how adults in 148 countries save, borrow, make payments and manage risk and provides useful data for policymakers to promote financial inclusion initiatives.
- MFTransparency: has enabled the industry to demonstrate its commitment to transparency in pricing, with the publication of pricing data on over 400 MFIs in 17 countries.
- Principles for Investors in Inclusive Finance: were signed by more than 50 investors to express their commitment to integrate responsible finance considerations into their own due diligence, partner selection, monitoring, and performance reporting processes.
- Smart Campaign: developed a set of Client Protection Principles and launched a Certification program, through which MFIs can demonstrate their adherence to the Principles.
- Social Performance Task Force (SPTF): developed standardized social performance indicators for microfinance institutions, which includes client protection and responsible finance.