The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Growing Income, Growing Inclusion: How Rising Incomes at the Base of the Pyramid Will Shape Financial Inclusion by Sonja Kelly and Elisabeth Rhyne deftly summarizes the relationship between income and formal financial services. It maps those countries that can begin to look forward to big chunks of their populations moving up the economic pyramid. The good news is that incomes are increasing - those earning $1 or $2 a day can anticipate doubling that amount soon.
The bad news is that financial inclusion watchers consider the emerging “vulnerable class” –those with a daily income of $4 to $10 – to be financially included only when formal suppliers reach them. Sure, formal inclusion is one kind of inclusion and certainly helpful for some. But the informal to formal continuum is linear. It misses many lateral possibilities that, taken together, could produce multiple robust and interlocking financial ecosystems, with formal options constituting just one part of those systems.
Conventional wisdom goes like this: I am poor and therefore dwell in a primordial, financial murk. As I crawl out of the murk via more income, formal products nudge me onto the dry banks of financial evolution. I am complete. Such thinking feels so natural, so right, so logically unassailable.
But conventional thinking has not proven out this linear progression. While the Kelly and Rhyne paper points to 1) a strong correlation (.76) between income and account ownership and 2) increased access to formal financial services accompanying increased income for the bottom 40 percent of the population, it also says, “for individuals, participation in one sector may not replace or preclude participation in the other. Customers will pick financial products and providers from across the spectrum of formality to meet their needs.”
This last sentence captures my imagination. It inspires me to entreat our financial philosophers: why focus your genius on dragging customers kicking and screaming into banks, or decamping reluctant bankers to the countryside in search of business they don’t want?
Why not, instead, focus on helping folks receive all the benefits we ascribe to the formal system - transparency, safety, convenience, reliability, fair pricing, and privacy - without the expenses of that system (those hefty reserves, that costly supervision), while at the same time improving upon those benefits?
Might we imagine a system better than either the formal or informal system of today? How would this be possible?
Let us digress a bit, first, and turn to the world of energy. Visionaries in energy have questioned the classic electrical grid model (you are included when you are on the main power grid) and look to a world of a more distributive energy, with technology central to the efficient movement of power in and out of extreme nooks and crannies.
We can translate their world into ours. More distributive sources of energy mean more resilience in the system. One power plant goes down but folks still have their lights on – there are lots of nodes of local energy storage to be tapped. Let’s substitute: More distributive sources of financial services mean more resilience in the system. If one bank goes down, folks still have credit – there are lots of nodes of local money storage to be tapped.
One more try: Self-organizing systems of energy (versus monolithic systems of energy) allow for more efficient energy storage and circulation. A home with excess solar power can move surpluses economically to nearby homes in need. Now for finance: More self-organizing systems of money (versus monolithic systems of money) allow for more efficient money storage and circulation. A cluster of people with excess money can move surpluses economically to nearby clusters in need.
At the heart of this translation is smart technology. Technology is making smart energy possible and technology can make smart finance possible.
Picture a world in which I belong to an ASCA, a local savings club (and note, I have seen ASCAs with share-outs ranging from $50 to $15,000). I have developed a nice credit history with this club. Maybe I would like more credit than the club has at the moment. No worries, I “share” my credit history with another club in the network (just as I share a folder in a drop box or share to a select few on Facebook), and they lend to me.
Or imagine that my club has been saving for two years and has a surplus that it would like to lend at a nice profit. Again, no worries, our club searches for a club with a capital deficit – perhaps one at the beginning of a new cycle.
Technology makes all this possible. Even smarter technology would “sense” our patterns and those of other groups and make recommendations.
This lending from one group to another is already happening without the benefit of technology. I just saw it in Nicaragua and India. Search and transfer costs could have been reduced if smart technology had been involved.
Helpful apps are already on the scene. FSD Kenya, a DFID project, has developed a new smart phone app for group use. It is easy to envision a “share” function to draw in all kinds of formal and informal services.
Technology will soon not only enable more distributive financial services (and therefore systemically more resilient services) but also more transparent, convenient, and reliable financial services – all this without asking customers or bankers to change their behaviors. Plus, local knowledge can be fed into the circuitry, reducing risks of all kinds.
The point is not to rule out formal services but to rule them in along with many other options. Smart tools in the hands of creative people will change the face of the financial landscape for all of us, not just the bottom 40 percent.
Kim Wilson is a lecturer at The Fletcher School and a Fellow with the Center for Emerging Market Enterprises and the Feinstein International Center at Tufts University.