The two leading financial trends of our time are the integration of digital technology and the advance of financial inclusion. The latter involves both provision of access to those who have no account (the “unbanked”) and increased usage of financial services by those with a tenuous link to the formal system (the “underbanked”). A combination of swift technological change and government promotion is speeding the rise of inclusion.
Six years ago, the World Bank estimated that roughly 2.5 billion adults (15 or older) had no bank deposit, no formal credit, and no means of payment other than cash or barter. Stunningly, in its Global Findex Database 2017 published last month, the Bank now estimates that the number of unbanked adults has plummeted to 1.7 billion. Over the past six years, more than 1.2 billion adults have gained at least basic financial access through a financial institution or their mobile phone.
In addition to a range of technological progress, India’s government-led financial inclusion program has been the second key factor in the recent advance of inclusion. By our estimate, the gains in India account for more than one-half of the 515 million persons who acquired access globally between 2014 and 2017!
In the remainder of this post, we briefly describe the benefits of financial inclusion, and highlight key trends regarding access since 2011 as well as prospects for achieving the World Bank’s goal of universal financial access. We conclude with a short discussion of Africa, where the largest gains still lie ahead. Reflecting long-term demographic prospects, we emphasize that the advance of financial inclusion in Africa will matter for the global economy, not just for Africa. Read More
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.... Read More
In 1945, a group of 43 nations led by the United States, then the world’s dominant economic power, created the International Bank for Reconstruction and Development (now part of the World Bank Group) and the International Monetary Fund – the “Bretton Woods institutions” – to promote reconstruction after World War II. However, the global economy has evolved much faster than the operations of either the Bretton Woods institutions or some of their regional siblings like the Asian Development Bank (ADB), the African Development Bank (AfDB), the Inter-American Development Bank (IDB), and the European Bank for Reconstruction and Development (EBRD).
What happens when official international financial institutions (IFIs) fail to respond to a changing environment? The same thing that happens to firms that stop innovating. New, more competitive institutions (firms) arise that compel them to change or – like dinosaurs – become extinct. We may be witnessing this process of creative destruction right now. Last month, a group of 57 founding nations led by China signed the articles of agreement to establish the Asian Infrastructure Investment Bank (AIIB) with an initial subscribed capital of $100 billion… Read More