Cash Transfers and Financial Inclusion: Natural Bedfellows?

Posted by Vishnu Sridharan, Program Associate, New America Foundation

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at Accion.

Since the launch of Mexico’s first conditional cash transfer program in 1997, governments from Nicaragua to Nigeria have adopted similar approaches to mitigate the worst effects of poverty. In fact, the New America Foundation’s Global Savings and Social Protection Database–which currently focuses on Latin America, Africa, and Asia–has identified over 90 cash transfer programs in 45 countries in the developing world, with over half a billion beneficiaries. In the past 3 years alone, as the map below shows, 15 cash transfer programs have been started, expanded or redefined, which gives us some indication of these programs effectiveness and feasibility.

The rapid expansion and development of cash transfer programs spells good news for financial inclusion proponents, our recent research suggests. At root, this is because regular cash transfers between governments and individuals (G2P payments) are, at least on face, a natural springboard to financial inclusion.

Although the trends are far from uniform, three independent movements within cash transfer programs are leading to the expansion of access to formal financial services by low-income households.

1. Shift Away from Cash: It is argued that multi-lateral donors, governments, and individuals benefit when money is transferred electronically to a bank account, onto a card, or into a mobile wallet. Arguments for the benefits of dumping physical currency include increased transparency in payments, greater safety for recipients, and more innovation in the private sector. This is a positive development for financial inclusion because electronic transfers are easier to bank than cash. The shift away from physical currencies to electronic payments has been helpful to financial inclusion efforts from Colombia to Fiji, and will be important moving forward for countries such as India.

2. Promoting Long-Term Resiliency: Cash transfers may catalyze long-term resiliency as opposed to simply enabling short-term consumption. First, in emergency and fragile situations, the observation that it is important not simply to rebuild broken homes but also guard against future emergencies is leading many programs to have longer time horizons, as happened in Ethiopia with its Productive Safety Net Program and in Haiti with the country’s first conditional cash transfer program, Ti Manman Cheri. Second, in countries that have established cash transfer programs, for example in Peru and Chile, there is a growing emphasis on helping beneficiaries ‘graduate’ from poverty, These movements toward helping individuals build assets is a boon for those promoting financial inclusion, as it is hard to imagine one taking place without the other.

3. Policy Advocacy: As a result of the awareness-raising efforts of countless financial institutions, foundations, and individuals, financial inclusion has found a place to stay on the policy agendas of governments and multi-laterals that are implementing cash transfers the world over. Evidence of this abounds on the global scale — see the recent G20’s work on financial inclusion — and on the national scale — see (inter alia) recent pushes for financial inclusion in Colombia, Fiji, Peru and Kenya. These policy efforts gain all the more credence as evidence accrues with respect to the drawbacks of cash and the importance of long-term resiliency.

While these trends are likely to continue, we still must ensure that financial inclusion actually has a positive social impact. On this point, multiple concerns persist, including the low usage of bank accounts among cash transfer beneficiaries and the growing consensus that, for the poorest of the poor, access to financial services by themselves serves little purpose. For these populations, more robust interventions such as BRAC’s Challenging the Frontiers of Poverty Reduction: Targeting the Ultra Poor (CFRP TUP) program, a model that is currently being piloted in 10 countries around the world by CGAP and the Ford Foundation, seem more appropriate.

Given the rapid shift away from cash payments and our increasing understanding of the importance of asset building, a future of full financial inclusion is not all that difficult to imagine. What seems more challenging, however, is making sure that financial inclusion is meaningful for everyone, including the marginalized, socially excluded, and chronic poor.

For more information, sign up for updates from the Financial Inclusion 2020 campaign.

Vishnu Sridharan is a program associate with the Global Assets Project. Before joining New America, Vishnu worked with the Global Network for Public Interest Law in New York and Beijing, as well as with Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ). He was also a Peace Corps Volunteer in El Salvador from 2004-2006, where he focused on government transparency, citizen participation and community-initiated development.

He holds a J.D. from Stanford Law School and a B.A. from Columbia College.


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