Role of financial inclusion in poverty reduction

Suit the C-Suites
Belvin L. Armenion

Posted on May 16, 2016

According to the Bangko Sentral ng Pilipinas (BSP), there is “financial inclusion” when everyone is able to use financial products and services (e.g., credit, savings, payments and insurance) effectively to their benefit. Such products and services must be appropriately designed, of good quality and relevant to benefit the person accessing them.

At a global level, significant progress has been made toward financial inclusion. According to The Global Findex Database 2014 of the World Bank, unbanked people worldwide decreased by 20% from 2.5 billion in 2011 to 2 billion in 2014. The percentage of banked adults (i.e., adults having an account with a bank, another type of financial institution, or a mobile money provider) worldwide increased to 62% (up from 51% in 2011). The data also showed that 94% of adults in the developed world are banked, while in the developing world only 54% are banked.

In the Philippines, we recognize the diligent work of the BSP to realize financial inclusion. It is, in fact, the first central bank in the world to establish an office dedicated to financial inclusion. The BSP recognizes financial inclusion as a worthy policy objective to be pursued, alongside the promotion of stability and efficiency in the financial system.

The BSP defines the financial inclusion agenda around a three-pronged framework: (1) access to financial products and services; (2) financial education and literacy; and (3) financial consumer protection.

The BSP reports on Financial Inclusion Initiatives and Financial Inclusion in the Philippines summarizes the country’s accomplishments and significant milestones in financial inclusion. These reports show that 4 out of 10 Filipinos saved money in 2015 (up from 2 out of 10 in 2009). Among Filipino adults, 24.5% never saved and only 31.3% (up from 26.6%) have an account at a formal financial institution. The lack of enough money was cited as the main reason for not having a bank account.

While there has been significant progress, there is still much to be done.

As an emerging country with a sizeable number of people living in poverty, access to financial services remains an important challenge. Based on a March 18, 2016 report from the Philippine Statistics Authority, the country’s 2015 poverty incidence (the proportion of people below the poverty line versus the total population) is at 26.3% while the subsistence incidence (the proportion of Filipinos in extreme or subsistence poverty) is at 12.1%. This means that there are around 26 million Filipinos who are still living below the poverty line.

There is an urgent need for the collective and individual efforts of government institutions, non-government organizations (NGOs), business entities, and the general public to accelerate inclusive finance as a means to alleviate poverty. Filipinos at the bottom group need far more than access to financial services. They need both effective access and use of these services.

With the BSP leading strategic efforts, the Philippines is on track toward achieving effective access, which is best implemented top-down. In fact, the country is now considered a thought leader in the area of financial inclusion. This can be attributed to the BSP initiatives and programs especially in its work in developing relevant policies and regulations. These include the national strategy for financial inclusion and general policy work that facilitates banking for the poor (e.g., micro-banking offices, a regional approach to unbanked areas), as well as public awareness campaigns on economic and financial issues.

Deliberate programs to encourage the effective use of financial services are needed, in conjunction with developing effective access. This can only happen if users have the necessary financial knowledge and capabilities. In other words, financial education is a must and this is best addressed through capacity-building of people on the ground, particularly among the unbanked.

Based on the Financial Education in Asia 2015 report of the Asian Development Bank (ADB), the Philippines is still in the process of finalizing its national strategy for financial education, while India, Indonesia, and Japan have already implemented their programs.

Our financial inclusion strategy should give greater weight to financial education.

It may come as a surprise that despite daily encounters with money, Filipinos do not usually talk about finance and its proper management.

According to the ADB report, only Japan includes financial education in its school curriculum. Including financial literacy programs in schools, starting from the elementary levels, would certainly help expedite financial inclusion. This means, however, that our school teachers will also have to undergo relevant and rigorous training so that they can teach financial literacy more effectively. Programs in local barangays that champion financial literacy to local communities can also make a big difference.

On the other hand, there are already NGOs, cooperatives, and microfinance institutions that provide capacity-building services to socially- and economically-challenged families. They should be commended for instilling financial discipline to their members through weekly meetings. Members are given access to microcredit with weekly repayments. This discipline helps them save and maintain micro-savings accounts. Through such practical training programs, members gain the necessary financial education that eventually help them transition into micro-entrepreneurs and be qualified for bigger amounts of uncollateralized loans to finance their micro-businesses. Several of these businesses have actually matured into small and medium-sized entities.

The BSP 2014 Report on the State of Financial Inclusion in the Philippines identifies Laguna as the top province in terms of financial inclusion index (a single number ranging from 0 to 1 which takes into account two basic dimensions of financial inclusion: access and usage), probably because it has the highest concentration of microfinance institutions dedicated to inclusive finance.

Mobile technology and mobile financial services offer considerable opportunities to expand financial inclusion. Mobile banking has the potential to expand access to financial services to remote areas at lower costs. Mobile technology may help those who have no credit history gain access to credit. It can also provide easy access to data that can be used to continually refine financial products and services according to the changing needs and preferences of customers.

Caution is, however, called for. The success of microfinance institutions hinges on financial discipline, which is best molded through manual intervention and personal contact. It is critical to carefully balance the advantages of online technology with the financial discipline of human relationships, which are vital to the success of traditional microfinance institutions. Technology solutions may be worth pursuing only after financial education has been embraced and understood.

With appropriate government incentives for NGOs, cooperatives, and microfinance institutions, there could be an exponential growth in the country’s financial inclusion efforts. Further growth can be achieved if traditional bank and non-bank financial institutions (including remittance agents, money changers/foreign exchange dealers, pawnshops), and other businesses take the opportunity to reach out to the 26 million Filipinos living below the poverty line. They can develop strategic alliances with NGOs, cooperatives, and microfinance institutions that have a proven pro-poor business model to reach a broader scale of poor people more efficiently and effectively, and potentially reduce costs for end customers.

Financial inclusion is everyone’s responsibility. Studies have shown that people with higher financial education have better chances to succeed in life and are better equipped to break the cycle of poverty. Given this, it may be worthwhile for profit-oriented entities -- in order to maintain the balance between commercial returns and the financial inclusion agenda -- to monitor social return or impact metrics, in addition to the usual financial performance indicators.

Impact is a measure of social change on the lives of customers as a result of using the services and products offered to them. Impact assessment results can be used to ensure that actions are aligned with the established purpose of the organizations they serve. It is best implemented as an additional performance metric that is regularly monitored by senior management, the board of directors, and other stakeholders.

Having demonstrable impact metrics can help drive the right behavior toward inclusive finance while garnering more support from both the public and private sectors. In the context of poverty reduction, inclusive finance is an essential component of the inclusive growth that has been very much in the news these days.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Belvin L. Armenion is a Director of SGV & Co.