Economic inequality is an issue that has global Impact. Those living paycheck to paycheck are typically excluded from formal sector opportunities. They live and work in the informal economy—not by choice, but by necessity. They are both producers and consumers, and they need financial access to build assets, create and sustain livelihoods, manage risks, and smooth consumption. The financial diaries literature has shown how actively poor families manage their financial lives. They save and borrow constantly in informal ways and at any given time; the average poor household has a number of financial relationships going on. For the poor, money management is a fundamental and well-understood part of everyday life, and it is a key factor in determining the level of success that poor households have in improving their own lives. But more than 75 percent of the world’s poor are also excluded from formal financial services. Without access to formal financial services, poor families must rely on age-old informal mechanisms: family and friends, rotating savings schemes, the pawn-broker, the moneylender, money under the mattress. These informal mechanisms are insufficient, can be unreliable, and are often very expensive. Thus, financial exclusion imposes large opportunity costs on those who most need opportunity (CGAP).
Policymakers have shown that equal access to banking and financial services is related to job creation and economic growth and economic stability . As demonstrated by the Consultative Group to Assist the Poor (CGAP), a growing number of policymakers are accepting the view that “financial inclusion is key to a stable economic system as a whole” (1). However, people from the lower income demographic have faced continued and unresolved social, economic, and regulatory challenges in their efforts to achieve financial inclusion and equality.
According to statistics collected by the World Bank’s Global Financial Inclusion Database, “an estimated 2.5 billion people around the world do not have access to basic banking services” (CGAP 13). In a study conducted by CGAP, it was determined that political and regulatory issues often prevent lower income persons from participating in traditional financial activities. Among African youth, for example, the opening of savings accounts is inhibited by various local laws that restrict such activity. As noted by CGAP, efforts to overcome these legal hurdles have included the development of “innovative delivery channels, such as online platforms or mobile services” (11). CGAP researchers has also found that people in developing nations are limited in their banking opportunities because of the lack of information, education and support that they receive from banking personnel. This suggests a need for “policy reforms to ensure that providers match product offers with consumers’ expressed needs and that product information is more clearly communicated” (CGAP 18).
Access to financial institutions is an issue in developed nations as well as developing ones. According to estimates of the Federal Deposit Insurance Corporation, about 9 million U.S. households do not have a bank account and “another 21 million households rely on financial services beyond traditional banks” (Aspan par. 11). In the United States, access to financial services is limited in part by regulations that were established during the global financial crisis that occurred in 2008. The crisis was mainly caused by the use of predatory lending practices by American financial institutions. Bankers have become reluctant to provide services to low-income consumers because of these regulations and also because of concerns about protecting their reputations. Furthermore, American bankers have resisted the idea of selling services to people with low incomes because such activity is viewed as “unprofitable at best” (Aspan par. 2).
Financial access improves local economic activity. For example, rural bank branch expansion in India was associated with a significant reduction in rural poverty during 1977–1990. In Mexico, research showed that the rapid opening of Banco Azteca branches in more than a thousand Grupo Elektra retail stores had a significant impact on the economy of the region, leading to a 7 percent increase in overall income levels. In Kenya, research looked at the branch expansion of Equity Bank, which has rapidly grown to account for more than half of all deposit accounts in the country. The study found that Equity’s branch presence had a positive and significant impact on local household use of bank accounts and bank credit. Finally at the macroeconomic level, there is well-established literature that shows that, under normal circumstances, the degree of financial intermediation is not only positively correlated with growth but is generally believed to causally impact growth. The main mechanisms for doing so are generally lower transaction costs for the economy and better distribution of capital and risk across the economy.
There is clearly an ongoing problem regarding the lack of financial inclusion among people with low incomes. This problem has persisted despite the indications that financial inclusion contributes to the overall health of a nation’s economy. People from lower income brackets are challenged by social, economic, and regulatory factors in their effort to achieve financial access and equality. A disruptive, innovative and responsive solution needs to be found that can help navigate this situation and National governments need to work on the development of policies that more sensibly address these issues.
Aspan, Maria. “Banks Seek Profits, and a Better Reputation, from Low-Income Customers.” American Banker, 20 July 2012. Web. 24 April 2014.
CGAP (Consultative Group to Assist the Poor). Advancing Financial Inclusion to Improve the Lives of the Poor: Annual Report, 2013. Washington DC: CGAP, 2013. Web. 24 April 2014.
Gomez, Alida M. “Microcredit Lending to Female Entrepreneurs: a Middle East case study.” Journal of International Women’s Studies 14, no. 2 (March 2013): 30-38. Print.