AMMAN — Financial inclusion
is a concept that has been popping up in the vocabulary of economic development,
but what is financial inclusion, why is it considered an integral part of the
economic development process, and why is financial inclusion essential for the economic
development of third world countries?
اضافة اعلان
To answer these questions,
we need to understand the basics for economic development, growth, and
financial service activities, as they are the main drivers for reducing poverty
and inequality, including gender inequality.
Countries with
comprehensive financial systems have quick and cheap access to financial
services, and safe financial transactions. Greater access to financial services
enable poor households to better plan their future, and invest in land or
shelter.
For example, if farmers
get access to affordable financial services, the thinking is that they would
acquire fertilizers, better seeds, machinery, and other equipment, which would help
them yield better crops and produce. This would enable them to invest more in
their crops would translate into more income.
Hence, poor households
and small firms would start to accumulate financial assets, and this would pull
them out of vulnerability and poverty. Therefore, financial services would
ultimately contribute to reducing poverty and child labor activities and would
empower vulnerable women and refugees.
The International
Monetary Fund (IMF) defines financial services as “the process of acquiring
the financial good,” i.e., the transaction needed to obtain the financial
good.
Since the global
financial crisis of 2007–2008, many economic and financial policy makers have sought
to include and to encourage the disadvantaged, vulnerable, and less fortunate segments
of societies to use financial services at affordable prices.
They thought that if
central banks put the right set of financial frameworks and policies in place, the
poor and vulnerable be positively impacted.
In poor developing
countries, many adults do not have bank accounts, because the little income
they earn would be spent on living necessities and expenses, it would be impractical
for them to deposit the income in a bank account as they would need the cash at
hand to survive.
Means to financial
inclusion
Remittances
Nowadays, the rapid development
of communication technology has helped migrants send remittances to their
countries of origin, or to the place their families are residing, as in the
case of diasporas and refugees. These remittances are usually payments of law
value, as they assist the survival of individuals and family members in their
original homeland during times of peace and conflict.
Remittances can encourage
economic growth if conditions permit within a country, as they can finance
local consumption and strengthen the local economy. Migrants often invest their
money in their country of origin or become active in the private sector there.
Financial consumer
protection and financial capabilities
The World Bank defines financial
capability as “the internal capacity to act in one's best financial interest,
given socioeconomic environmental conditions.” It includes the knowledge,
attitudes, skills, and behaviors of consumers to manage their resources and
understand, select, and make use of financial services that suit their needs.
To encourage
participation in financial markets, consumers need to be informed about
financial products, and to have confidence in agents and providers of financial
services. Therefore, adequate financial infrastructure must be developed to
promote access and use of these services.
Financial technology
(fintech)
Emerging financial
technology companies — fintechs are continuously originating change in the
finance industry. Innovations such as artificial intelligence, machine
learning, blockchain technology, biometric identification, cloud computing, and
the use of big data are revolutionizing the collection and processing of
financial information
Fintechs offer
technology-enabled solutions that can better address customer needs and
preferences by suggesting enhanced accessibility, convenience, and tailored
products. Fintech is thought to disrupt legacy financial systems often
cumbersome, intimidating, or expensive for the end-user.
Simultaneously,
digitization also challenges the conventional roles of central banks. Virtual
currencies running on blockchain technology are still considered to be
volatile, risky, and energy intensive. Still, central banks are investing in
these technologies as they understand that in the long-term these currencies
and their underlying technologies may be valuable contributors to the financial
system.
Laws, regulations,
and instructions
Laws, regulations, and
instructions are important sections that provide the necessary infrastructure
for financial inclusion. They act as means for providing the foundation of the
financial sector development and financial inclusion. They usually aim to cover
a comprehensive range of policy topics that relate to financial institutions
and their consumers.
Spreading financial
and banking literacy
Financial awareness and
financial literacy are crucial to financial inclusion. Thus, financial and
banking literacy would assist people to have better skills to manage personal
properties and savings, to make the right financial decisions, and would raise
awareness on the institutions and services available for microfinancing and
financing of small and medium-sized enterprises.
Stock markets
A developed stock market
is a driver for economic growth. The indicator used for stock market
development is the stock market trading volume as a fraction to the Gross
Domestic Product (GDP). More trading means that capital is more actively pursuing
the most efficient use.
The Case of Jordan
The Central Bank of
Jordan (CBJ) has incorporated financial inclusion policies and actions to
empower the financially excluded and vulnerable people. This was first established
in 2015 with CBJ's initiation of the national, multi-stakeholder policy process
for enhancing the financial inclusion of Jordanians.
In December 2017, the CBJ
launched Jordan’s three-year
National Financial Inclusion Strategy (NFIS) (2018–2020).
It focused mainly on vulnerable adults in Jordan, who have low incomes. This
strategy also included financial inclusion policies for micro, small, and
medium-sized enterprises, in addition to policies that included youth, women,
non-nationals, and refugees.
Moreover, the NFIS
established and strengthened strong links between financial inclusion and the
Sustainable Development Goals (SDGs) for 2030 announced by the UN General
Assembly.
In March 2021, the Central
Bank of Jordan’s Financial Inclusion Report 2018–2020 showed that
in 2017, 67 percent of people in Jordan who are above the age of 15, did not
have access to the formal financial system in terms of account ownership.
It indicated that 38
percent of adults were excluded from any formal financial services and 24.8
percent of adults were completely excluded from any formal and informal
financial services. And it pointed to the fact that the majority of micro,
small, and medium-sized enterprises in Jordan had financial constraints.
According to the report,
the CBJ had two objectives for financial inclusion. The first was to increase
financial inclusion from 33.1 percent in 2017 to 41.5 percent, and the second
was to reduce the gender gap from 53 percent to 35 percent by 2020.
The report showed that
the NFIS succeeded in enhancing financial inclusion in Jordan, as it reached 50
percent, and it reduced the gender gap to reach 29 percent at the end of 2020.
Additionally, the CBJ
invested in building an inclusive digital payments infrastructure, and created
an environment for vulnerable households and businesses to gain access to
digital accounts, investments, and other financial tools.
The CBJ also established the
first private credit bureau in Jordan. Furthermore, the CBJ worked to promote
financial literacy that established trust in the local financial system and provided
affordable financial services and products.
Financial inclusion as a tool
to curb informal finance
There are some problematic
aspects in accessing credit in an informal economy, but financial inclusion can
curb the problems from happening.
For example, household
access to credit can be affected by the informal economy, as irregular workers
may be unable to provide banks and other financial institutions with proper
documentation needed to support their ability to service debt, such as pay
slips.
Accordingly, underground
informal finance will hamper economic growth and decrease wellbeing. Hence,
financial inclusion seeks to bring people, who are currently using the informal
financial system to the formal financial system, which is usually more regulated,
transparent, and protected.
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