Financial inclusion

Banking the Unbanked: The Indian Revolution

Financial inclusion—providing universal access to financial services and encouraging their use—is an important means for promoting economic development. As of 2014, the World Bank estimated that there were still 2 billion adults without a bank account, and many others with only a tenuous connection to the financial system (see Global Findex). Better access will boost the efficiency of the payments system, promote household savings and access to credit, and improve people’s ability to manage risk. And, as it does all of these things, financial inclusion has the potential to reduce inequality and increase economic growth. In other words, reducing the multitudes of those that are unbanked will improve the fate of the poorest of the poor. (For more detail, see our earlier post.)

India’s unprecedented effort to “bank the unbanked” through the Pradhan Mantri Jan Dhan Yojana (PMJDY), or “Prime Minister’s People’s Wealth Scheme,” is by far the largest such undertaking. Launched merely three years ago, on August 28, 2014, the mission to provide no-frills, no-minimum-balance (hereafter, JDY) bank accounts to every adult (including the one-fifth of the population living below the poverty line and the large rural population with limited access to physical bank branches) has been remarkably successful. As of this writing, more than 300 million people have opened JDY accounts. And, while initial readings suggested limited use, over time, JDY account holders look to be learning about the benefits, so that use is rising toward levels observed for bank accounts of comparable individuals. Put differently, by lowering bank transactions costs, hundreds of millions of people who lacked access to financial services are revealing a latent demand....

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Monetary policy and financial inclusion

Central bankers usually steer clear of discussions about inequality. They view monetary policy as a tool for stabilizing the economy. For many central banks, like the ECB or the Bank of England, this means price stability. For others, like the Federal Reserve, it means a combination of high employment and low inflation. Regardless of the goals, issues involving the distribution of income are generally left to the fiscal authorities.

For the most part, this division of labor is sensible. However, their mandates require central banks to make policy tradeoffs that are influenced by the prevailing income distribution. Specifically, the way in which monetary policy is conducted should depend on the access individuals have to the financial system, including both savings and credit. And we believe that it does.

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Banking the Masses

Just three years ago, the World Bank estimated that 2½ billion adults (15 years and above) had no access to modern finance: no bank deposit, no formal credit, and no means of payment other than cash or barter. Stunningly, the Bank now estimates that even as the global population has increased, the number of “unbanked” has dropped by 20 percent. Between 2011 and 2014, 700 million adults have gained at least basic financial access via banks or mobile phone payments systems...

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