Financial exclusion has a major impact on the lives of the poor

March 5, 2014

Relationship between financial inclusion and economic growth and development is globally accepted. Unfortunately, when it comes to financial exclusion in the world, there is a mountain to climb. The concept of financial exclusion means people have no access to formal banking accounts, insurance, financial literacy, credit and loan facilities among others. Despite thousands of research conducted to improve the understanding of financial exclusion and its interaction with social and economic disadvantage in the world few countries have bothered to tackle the problem head on. There is substantial and growing proportion of the global population who remain excluded from financial services and there are large unmet needs for access to affordable and appropriate products. The poverty-financial exclusion cycle is a vicious one and needs to be broken. The characteristics of those excluded highlight factors such as age, income, country of birth and location. In the absence of proper financial products and lack of access to bank accounts means poor people end up paying extra charges, resulting in an unnecessary extra financial burden on them.  Financial education studies have been found to help provide a big boost to people with scarce funds, enabling them to better utilize their money.

Access to formal banking infrastructure in developed world save people from exorbitant and unreasonable interest rates. Financial inclusiveness and formal bank accounts for more people makes the subsidy transfer easier and smoother and also more effective and efficient. In countries where there is higher percentage of access to more precise data from the banking institutions it has assisted in the processes of poverty targeted policies making. In Africa, commercial banks that behave like small gods and have been found to be more bureaucratic than governments, they need to start viewing financial inclusion as an opportunity and not an obligation that must be fulfilled. The success of the micro-lending and micro-credit businesses based on mobile money in Kenya, as evident from the decently affordable loan repayment rates, has provided sufficient proof regarding the credit worthiness of those neglected by established commercial and retail banking institutions that have failed to read societal trends that is likely to put them out of mainstream business and into annals of history. Mobile money revolution in East African countries of Uganda, Kenya, Tanzania and Rwanda has reinforced the scope for profitability for the banks.

Time has come for the banks to move beyond just lending and see the financially excluded as their next big wave of customers but that will not happen as majority of population see banks as a bunch of arrogant and ignorant corporate institutions. The dismal rate of banking penetration and financial inclusion in Africa is attributed to inefficiency, half-baked employees and corporate attitudes towards the middle and low incomes earners and that has been a major cause of concern for financial intermediaries in Africa for decades according to studies. Based on average return on equity, East African banks constantly rank as the most profitable in the developing countries but they are amongst the least efficient and most snobbish. The role of the government and banking institutions in providing an impetus for financial inclusiveness is not an alternative but a constitutional right and studies have shown that what is missing is the will. Banks need to become more efficient and competitive, which would help bring down the interest rates on loans. The drive for financial inclusiveness and banking reforms have lifted millions of East Africans out of poverty and must be supported by all.

Contador Harrison