Dr. Terence Smith, Deputy Governor, Bank of Guyana
Financial inclusion is linked to Guyana’s economic and social development, and plays a
critical role in reducing poverty and is positively correlated with growth and employment. The benefits of financial inclusion and inclusive growth are clearly established.
According to the International Monetary Fund (IMF), access to financial services opens doors for families, allowing them to smooth out consumption and invest in their futures through education and health. Access to credit enables businesses to expand, creating jobs and reducing inequality.
Financial inclusion is the bridge between economic opportunity and outcome. In fact, the IMF data has shown that more inclusion boosts growth.
What is Financial Inclusion and Why is it Important?
According to The World Bank an estimated two billion working age adults – more that half the world’s total adult population – do not have an account at a formal financial institution. Financial inclusion efforts seek to ensure that all households and businesses, regardless of income level, have access to and can effectively use the appropriate financial services they need to improve their lives.
Financial inclusion today is about financial markets that serve more people with products at lower cost. Financial inclusion efforts aim not only to serve the unbanked, but the underbanked. These are people who have poor or unreliable access to formal financial services – for example indigeneous populations living in Guyana’s rural communities. In fact, levels of financial literacy are often low in rural communities.
Financial literacy is interlinked with financial stability, financial integrity, market conduct, and the financial capability of consumers. The truth is that policy makers increasingly recognize that financial exclusion is a risk to political, social, and financial stability, impeding economic advancement, and that financial inclusion presents an opportunity to improve lives.
The Central Banks’ Role in Financial Inclusion
Central banks, like the Bank of Guyana, play a crucial role in creating the enabling environment for financial access. It is their role to get the right balance between ensuring access to financial instruments and protecting banks from instability and risks.
The research suggests that whether broad-based access to formal financial services promotes financial stability depends on how that access is managed within the regulatory and supervisory framework, especially in terms of financial integrity and consumer protection.
Various studies have focused on the impact of financial development on growth, income inequality, and poverty reduction. The evidence strongly indicates that, when effectively regulated and supervised, financial development spurs economic growth, reduces income inequality, and helps lift households out of poverty.
What is the Role of Government?
Beyond the central banks, Governments have a responsibility to provide the laws and regulations that encourage both financial sector development and inclusion. Regulations are particularly important; for example, things like documentation requirements for opening an account and matters related to consumer protection.
According to Consultative Group to Assist the Poor (CGAP), Governments support financial inclusion in at least three key areas:
· Governments set the rules that regulate the environment for financial inclusion, balancing the drive to bring financial services to poor households with measures to protect consumers as well as the stability and integrity on the financial system.
· Governments can promote infrastructure, either financially or by incentivizing private sector investments, to support the expansion of financial services. Such infrastructure might include mobile payment systems, point-of-sale networks, or credit registries, for example.
· Governments can support financial inclusion by driving transaction volume via electronic deposits of government-to-person payments (e.g., social payments, wages, or pension payments) into financially inclusive accounts.
The Impact of Financial Inclusion Strategies
The World Bank determined that a comprehensive approach to financial inclusion addresses at least three aspects: access to financial services and products; usage of financial products and services; and quality of financial services and products, defined by consumer ability to benefit from new financial services and products.
CGAP determined that appropriate financial services can help improve individual and household welfare and spur small enterprise activity. Different types of financial products can benefit poor people in different ways:
· Credit: Microcredit helps encourage investments into assets that enable business owners to start or expand small enterprises. In many countries, it’s been demonstrated that access to credit can lead to larger and more profitable businesses. For example, with access to credit, farmers can invest in larger quantities or more diverse livestock; the owner of a market stall can purchase more wares to sell; and artisan can acquire more raw materials.
· Savings: Building saving helps households manage cash flow spikes and smooth consumption, as well as build working capital.
· Insurance: Vulnerability to risk and the lack of instruments to cope with external shocks make it difficult for people to escape poverty. Micro insurance can be an important instrument in mitigating risk. Weather-based index insurance helps farmers by giving them the confidence to try riskier crop, buy fertilizer or hire labour.
· Payments and mobile money: Having an efficient way of making payments reduces households’ transaction costs. Rather than travel long distances, people have the ease of doing business on their mobile phones.
Financial Inclusion Commitments
World Bank and other researchers indicate that an increasing number of countries are committing to improving access to and usage of financial services. While more than 60 countries have introduced reforms to stimulate an expansion of financial inclusion there is an increasing emphasis on a comprehensive approach with a sequenced package of reforms. Finally, it was determined that financial regulators from more than 20 countries have made financial inclusion commitments under the “Maya Declaration,” to 1) create an enabling environment that increases access and lowers costs of financial services, including new technology; 2) implement a proportionate regulatory framework that balances financial inclusion, integrity, and stability; 3) integrate consumer protection and empowerment as a pillar of financial inclusion, and 4) use data to inform policies and track results.
Next week we will discuss the importance of financial inclusion strategies. Thanks for all your comments and support. As usual, please send your comments or questions to [email protected]
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