Financial inclusion

By Mansoor Ahamd
February 22, 2024

LAHORE: Financial inclusion has been broadly recognized as critical in reducing poverty and achieving inclusive economic growth. Financial inclusion is not an end in itself, but a means to an end as it has substantial benefits for individuals.

A representational image of a person counting coins. — Unsplash

People at the lower strata of society in Pakistan still lack access to financial services. Mobile phone operators have increased the access of the poor to financial services but the gap is still very high.

Studies show that when people participate in the financial system, they are better able to start and expand businesses, invest in education, manage risk, and absorb financial shocks. People at the lower income levels end up paying often twice the fees to get access to basic financial services as the affluent. And that’s just to get access to their own money in the time and the way that they want to have access to it, or to be able to move their money to members of their family here or abroad.

In some cases, when financial services are offered to the poor, they refuse because people have a distrust of the financial system and just don’t feel comfortable interacting with it in a formal way. But at the same time, mainstream financial institutions have not reached out to help, and some affirmatively avoid banking some cohorts in the economy.

The World Bank book points out that those choosing to use an informal savings method rather than their formal account may do so because the costs of actively using their account are prohibitive—as a result of such barriers as balance and withdrawal fees and physical distance. It is also possible that wage accounts set up by employers cannot easily be used to save.

It also stated that most people need to borrow money from time to time. They may want to buy or renovate a house, to invest in an education, or to pay for a wedding. When they lack the money to do so, they turn to someone who will lend it to them—a bank, a cousin, an informal lender. And in some parts of the world, many people may rely on credit cards for short-term credit.

Now, with the advent of fintech and of community development financial institutions and microfinance institutions, steps are being taken toward bridging that gap and bringing more people into the financial system. Still, fintech is in its infancy in Pakistan and the microfinance banks mostly cater to people with assets.

The aim of financial access is to ensure that this access helps those individuals achieve financial health and wellness, greater resilience, and have savings for a rainy day so that they can deal with unexpected healthcare expenses, natural disasters, and other events that they can’t necessarily plan for but want to be able to self-insure against.

For those who don’t have access to financial services, it’s almost impossible to save enough to pay the bills, much less build the kind of wealth that can be passed on to the next generation. According to a study by a global consultancy, nearly a billion and a half people living in emerging economies don’t have access to formal savings and credit. They pay for everything in cash, have no secure way to save and invest their money, and rely on informal lenders and personal networks for credit. Pakistan lags behind all regional economies in digital transactions.

There’s a huge opportunity for mobile providers to improve financial inclusion for the billions of unbanked people, as well as to create immense value by tapping into a huge and largely untouched market.