Ideas & Updates

A means to an end: The post-2015 future of financial inclusion

© ©The Bill and Melinda Gates Foundation

Financial inclusion is a means to an end – or many ends – rather than an end in itself.

Financial inclusion is a means to an end – or many ends – rather than an end in itself. As an enabler, greater financial inclusion contributes to development goals of poverty reduction, economic growth and jobs, greater food security and agricultural production, women’s economic empowerment, and health protection, inter alia.

Financial inclusion is defined as access for all to a wide range of financial services—savings, credit, insurance, and payments—provided responsibly and sustainably by a range of providers in a well-regulated environment. Financial inclusion figures prominently in the post-2015 discussions. This should come as no surprise, as access to finance can help people and enterprises manage their lives and businesses in ways that contribute to greater food security or profitability, better health outcomes or timely investment in new technology, and so on.

SDG Goal 8

Sustainable economic growth is the focus of Goal 8 of the proposed Sustainable Development Goals.

As the Millennium Development Goals (MDGs, 2000-2015) come to a close this year, discussions regarding their successor Sustainable Development Goals (SDGs, 2015-2030) are ramping up. Currently there are 17 goals (compared to 8 goals in the MDGs) and 169 targets (compared to 21 targets in the MDGs).

There is no doubt that the SDGs are even more ambitious than the MDGs, and, in their breadth, recognize the inter-connection between human development, the environment, and relations between nations and governments and those they govern. While many acknowledge that the sheer numbers of goals and targets may be unwieldy (for example, see The Economist), there is reluctance on the part of some member states, particularly developing countries, to open up the goal—and even the targets—to reconsideration, as they were based on months and months of political negotiations.

With a September deadline looming, the focus is on ensuring the targets are specific and measurable and consistent with existing accords. To keep this all manageable, pressure is being focused on limiting the number of indicators, with some talking about 100 targets as the magic number. How can progress towards 169 targets be measured by 100 indicators? Proponents suggest that this can be achieved by identifying indicators that are relevant to multiple targets.

Which indicator to track?

One of the compelling aspects of inclusive finance is that by simply ensuring that people and businesses have access to appropriate financial products and services, they can use these financial tools to manage consumption, savings and investment, and thereby contribute to achieving a range of broader development goals. Although there are a number of indicators to measure various dimensions of financial inclusion [International Monetary Fund’s 2012 Financial Access Survey (FAS) and the World Bank’s Global Findex and Enterprise Surveys], probably the single best indicator of full financial inclusion is access to a formal account. While technology is opening up access to finance in the form of mobile money and card-based products, if these lower-cost delivery channels are not connected to a formal account, the ability of people and enterprises to save and accumulate for future investments is limited. New partnership models are opening up all over the world which facilitate such links. Tracking ownership and access to mobile phones is critical, and extent of acceptance networks for card-based services is essential, and both should be tracked as intermediate indicators along the financial inclusion continuum. At the end of the day, however, it is access to—and ultimately usage of—formal accounts that will ensure full financial inclusion. That is best captured in the indicator “access to formal account,” which can be disaggregated along dimensions such as gender, age, and geography. So this single indicator could be used to measure financial inclusion targets as they appear in multiple goals. This is a start in the direction of whittling down the number of indicators to 100.

Financing for Development

Alongside the SDG negotiations, the Financing for Development (FfD) discussions are focused on the investment required to achieve these goals. The draft Addis Ababa Accord outlines proposals for domestic public finance; private finance; international public finance; trade; debt; systemic issues; technology, innovation and capacity building; and data, monitoring and follow up. These discussions will culminate in political commitments regarding financing the global development agenda at the conclusion of the 13-16 July meetings to take place in Addis Ababa.

Adasa John receives a phone call in her field in Rudewa Mbuyuni location near Morogoro, Tanzania on May 27, 2014.

Digital financial services have the potential to address women’s preferences in new and different ways than traditionally provided financial services.

Financial inclusion has a special, differentiated contribution to make in the FfD discussions. Development of pro-poor financial markets is an essential element of equitable growth strategies and can play an important—and often overlooked—role in domestic resource mobilization. By moving savings out from under the mattresses and into the formal financial sector, these resources become available for further investment in the local economy.

Lack of access to appropriate financial services is not limited to individuals and households, however. While formal SMEs contribute a third of GDP in emerging economies, nearly half of them—some 200-245 million SMEs—lack the financing they need to grow, and the overall credit gap in these countries is estimated at $2.1-2.6 trillion. Inclusive financial markets can contribute to greater economic growth and job creation by ensuring that these enterprises get access to the financing they need.

Finally, there are steps that governments, donors, and private sector can take that result in greater efficiency and significant cost savings as well as enhanced transparency and reduced leakage in ways that can free domestic resources to be utilized for priority investments.

Shifting payments—whether salaries, pensions, social benefits, procurement, etc.—from cash to electronic is one such step. For example, in Mexico, the government is saving $1.3 billion annually—or 3.3% of its total expenditures on wages, pensions, and social transfers—by making payments electronically.

Mobile Banking 2015 Gates

Mobile banking emerged as one of the main messages in the 2015 Gates Annual Letter.

When done well, such shifts can also contribute to greater financial inclusion, especially if these electronic payments to individuals are made into basic accounts. But even short of the full benefits of account ownership, mobile money and other digital financial services can bring intermediate benefits including storing value, making payments for insurance premiums and utility bills, sending and receiving money to and from relatives and others. This is exactly what the UNCDF-housed Better than Cash Alliance is promoting in order to deliver results both for people and for governments—and to move us closer to realizing shared global goals and ensuring the resources to achieving them.

As someone who has followed these discussions—and tried to influence them where possible—it is really quite amazing to see financial inclusion featured so prominently. While the exact contours of the final SDGs may change—it is likely that financial inclusion will remain as part of the DNA of the post-2015 agenda. We should be glad. And we’ve got work to do! We must avoid promoting financial inclusion as the next panacea, but instead help ensure that it truly is a means—and an effective, efficient and impactful means—to the ends of sustainable development.

Elements of this blog article are reflected in the author’s comments during a Guardian chat