This paper documents the main findings from a selection of research papers that analyse financial inclusion and its rise in significance as an indicator of financial development and discusses its potential benefits to the economy. Financial inclusion is defined by a population’s access to and usage frequency of financial services and its associated quality and cost.

This paper addresses four topics to provide an overview of financial inclusion:

What is financial inclusion?

The main indicator of financial inclusion is the World Bank’s Global Findex. The data reveals an increase in financial inclusion from 2011 to 2017 as the percentage of bank account holding adults has increased from 51% to 69%. These improvements can be attributed to fintech innovation, however a disparity in average global account holding is evident as a result of differences in structural conditions across countries. These conditions include income levels, population size, density and demographic factors which can create “gaps” in financial inclusion that can be addressed by policymakers. However, factors such as voluntary and involuntary exclusion and costs may leave policies ineffective.

Why does financial inclusion matter?

Financial inclusion is a dimension of financial development and can be measured by financial depth which is the size of financial activity relative to economic output. It can bring long term benefits such as growth, greater income equality and reductions in poverty rates. Financial inclusion affects economic outcomes through channels such as credit, which can bring benefits to individuals and firms but unrestricted, will bring instability. While policy making can utilise financial inclusion for problems such as poverty traps, financial frictions prevent this in ways such as credit limiting.

Financial inclusion of households

The benefits of financial inclusion in households are increased economic activity, reduced poverty rates, and increases in income equality, reduced theft rates, increased household well-being, economic empowerment, and access to education and insurance funding. While there are increases in global registered bank accounts, the rate of the 69% banked adults is adjusted to 55% to account for inactive accounts. Policies are effective in overcoming barriers to financial inclusion and are formulated to decrease account opening fees, establish banks in rural areas, increase accessibility and decrease disclosure requirements. Many governments have recognised the importance of financial literacy and capability and have implemented programs to promote a more educated population.

Financial inclusion of small and medium enterprises

Micro, small, medium enterprises (MSMEs) are more prone to financing constraints and financial inclusion is limited by transaction costs and information asymmetry. Providing proper financial access to MSMEs, known as financial deepening, can indirectly benefit the economy by contributing to growth, reducing poverty and decreasing unemployment rates. Policies are formulated to encourage financial capability, reduce constraints and entry barriers, reform current business environments and frameworks and target market frictions. International organisations have had an important role in facilitating policies, collecting data and publication of financial deepening success. Moderate levels of competition between banks can ease financing constraints on MSMEs if institutional framework and regulations allow.

1. Increasing the levels of financial inclusion can bring greater benefits to the economy on a national and global scope. Connecting the unbanked to financial services can combat global issues such as poverty and provide individuals and enterprises with opportunities for entrepreneurship and productivity.
2. A proportion of increases in financial inclusion rates are a result of fintech innovation, notably mobile money accounts. Over one-fifth of the adult population in Sub-Saharan Africa is registered for a mobile money account. However, despite the rise of mobile accounts, it has not been a substitute for traditional bank accounts. Most countries with varying levels of bank account holding rates have little presence of mobile accounts.
3. Financial inclusion levels are optimal when the policies achieve the goal in broadening the scope efficiently and sustainably. This is represented through a Financial Possibilities Frontier (FPF).
4. Innovation can reduce the costs in providing financial services and will result in increase of bank account holders. Countries such as Uganda, Zimbabwe and Kenya have account holding levels higher than predicted by national income levels.
5. Some gaps in financial inclusion do not need to be eliminated. Aspects such as voluntary exclusion, in which individuals choose not to use financial services, and involuntary exclusion, the lending interest rate limit imposed by banks, cannot be addressed by policies to close the gap.
6. Policies should be aimed to eliminate market frictions that attribute to involuntary exclusion. These frictions include information asymmetry, weak contract enforcement and property rights and lack of competition across banks.
7. The Dabla-Norris, Ji, Townsend, and Unsal (DNJTU) framework is utilised to discover how financial activity and financial inclusion affects economic outcomes. It can be used to simulate market frictions, the impact of policies and compare strategies to observe the potential economic outcomes.