A new IEG evaluation looks at the World Bank's experience in supporting financial inclusion over a seven-year period.

When thinking about development, we don't often consider why it matters for poor people to have a "bank account." Yet for many poor, the ability to save or borrow is what enables them to deal with the enormous financial challenges they so often face. Many rely on unpredictable jobs or, in the case of farmers, receive a large chunk of their earnings only once or twice a year.  And for those who rely on remittances, domestic or foreign, having an affordable way to safely receive the money is critical. Insuring against catastrophic risk is a fourth area where the poor may benefit from financial services.  Probably the best known argument for providing the poor with financial services has been the expectation that credit can lift people out of poverty by providing the funds they need to build their own businesses and seize growth opportunities. 

"Financial inclusion" can take many forms - savings, credit, payment or insurance services, or some combination of these. True inclusion means providing the poor - whether rural or urban, male or female, young or old - with financial services they actually use - services of good quality that are stable, available, affordable, and convenient and that protect consumers.

The World Bank Group's Commitment to Universal Financial Access

The World Bank Group has set an ambitious vision for achieving universal financial access by 2020. To this end, the World Bank Group rolled out a sizable financial inclusion program. Between FY07 and FY13, the Bank Group supported 884 inclusive finance projects with a total commitment value of $9 billion. That represents a 20 percent increase from previous years.

Despite the tremendous progress of the last few years, 2 billion adults worldwide do not have a bank account, according to the World Bank Group's latest Findex data. It is estimated that that close to 200 million micro to medium-size enterprises in developing economies lack access to affordable financial services and credit. 

Reality Check:  Does Financial Inclusion Really Make a Difference?

The Independent Evaluation Group (IEG) recently completed a major evaluation that examined the relevance and effectiveness of seven years (FY07-13) of World Bank Group support to financial inclusion and its impact on the poor. 

What did the evaluation find? How does financial inclusion really work? What can we learn from this experience? What has worked, what hasn't, and why? To answer these questions, let's start with two common scenarios. 

Take Grace, a resident of Arusha, Northern Tanzania. Grace owns a pottery business with her husband. She was one of the micro entrepreneurs the IEG team met as part of the field work for this evaluation. Working in a small shop, barely the size of a garage, Grace and her husband launched their business fabricating pottery and, over the years, were able to save about $120. In 2009, they approached the National Microfinance Bank (NMB) and took out a loan of $390. Growing the business gradually, they were able to repay the loan, and even take on two additional loans. Today, Grace employs seven staff; instead of 20 pots per week, her business now produces 40. 

In contrast, Joseph owns a food-processing business only two miles away from Grace. Joseph has not been as successful. Despite receiving three loans, he is still struggling. His business has shrunk and now employs only three workers, down from four a year ago. The equipment that Joseph bought with his last loan stands idle in his workshop, as the loan was not enough to pay for the needed spare parts. Essentially, Joseph is now saving up to pay for a machine that is not earning him money - a very expensive way of saving, as he has to pay interest on the loan. Further, experience shows that some people take out loans for consumption, with no new income flow to help them repay.

But financial inclusion is not only about credit. It also includes payments, savings, and insurance. To stick with the example of Tanzania, thousands of citizens save transaction costs by using their mobile phones to send money home - service offered by most mobile phone operators these days. This is also reflected in the Bank Group's portfolio globally: whereas most interventions relate to credit, there has been a gradual shift toward more non-credit-related interventions. This is particularly true in advisory and analytic work, where 56 percent of projects address payments, savings, or insurance. 

Overall, these non-representative observations reflect what IEG found across the globe: Financial access or inclusion does not necessarily lead to poverty reduction.  The findings regarding savings, payments, and insurance are more positive, but the evidence is so limited that we don't yet know for sure.

Making Financial Inclusion Work for the Poor

IEG's review of the entire portfolio of World Bank Group's projects geared toward fostering financial inclusion provides some pointers on what'€™s working and where change needs to happen. 

IEG found that the World Bank Group has made a strong contribution to promoting financial inclusion, reaching a significant share of the microfinance industry. World Bank Group support is strategically well aligned with countries' needs, focusing on countries with low inclusion rates. 

IEG also found that the Bank Group's strategic resource allocation has generally not pushed credit to markets that are already saturated, avoiding situations where the poorest people were getting too far into debt. Overall, the World Bank Group, often through global partnerships, has raised the profile of financial inclusion, shaped standard-setting, and influenced national strategies.

But these positive findings need to be seen in context, especially given the modest results that recent large-scale studies have revealed about the effects of financial inclusion or access on the poor. In addition, the remaining financially excluded people will increasingly live in rural and remote areas, where the provision of financial services is significantly more expensive. To reach these groups, IEG recommends that WBG work systematically at identifying and scaling up innovative delivery models that dramatically lower the costs of services. 

Another finding from recent studies is that many accounts opened for the poor in mass rollout campaigns are not actively used. Therefore, instead of focusing on headline numbers and statistics, the relevant goal for the World Bank Group and other development actors in this space should be to provide services to everyone who has a productive or beneficial use for them.  

Finally, approaches to local conditions need to ensure that programs deliberately target and reach the poor. This calls for a more systematic and comprehensive approach to identifying and tackling constraints to financial inclusion, such as barriers to usage and high transactions costs.  

If development actors embrace this approach, financial inclusion is far more likely to result in significant poverty reduction.

Read the Report: Financial Inclusion - A Foothold on the Ladder toward Prosperity

Comments

Submitted by Fouzia Rahman on Tue, 10/27/2015 - 22:52

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Evidences of financial inclusion of poor, rural/urban slum residents, agricultural workers, domestic labor and women daily wages workers have been documented in micro credit, social insurance, conditional cash transfers for women's health and disaster management industry. Moreover mobile phone industry initiated money transfers is proven to be a convenient innovation benefiting women and elderly particularly who are financially dependent on their employed family members working/living in cities or foreign countries.

Submitted by Stefan Apfalter on Sun, 11/01/2015 - 22:37

In reply to by Fouzia Rahman

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Thank you, Fouzia, for your comment. First, it is important to note that our evaluation covered only financial inclusion, and not all kinds of support to the poor. In fact, one “take-away” is that the poor may have many needs other than financial services, and public resources for the poor will need to be sensibly balanced among competing priorities. With the growth of the microfinance industry, the evidence base on how financial inclusion affects the poor has also grown. To reflect the current status of the literature, IEG commissioned an independent literature review covering more than 140 articles and publications, with a focus on the most recent research. The evidence indicates that the expectations of microcredit pulling millions out of poverty have not been fulfilled. The overall picture is one of mixed but modestly positive (not transformative) effects of microcredit on the poor. Credit – and along with it other financial services such as payments, savings, and insurance – can, however, help the poor manage their day-to-day struggle, and the small and as yet inconclusive amount of evidence available on savings and payments shows promise for these services. Having access to a range of financial services provide choices and options that did not exist before, in particular with regard to education, health, and buffering income shocks. In fact, benefits from non-credit financial services appear to have a higher potential than micro credit alone, which may make them more suitable entry points for the poor into formal financial services. IEG’s review also covered all 3ie listed impact evaluations and systematic reviews on financial inclusion. It indicated that microcredit is – overall – fairly well studied and savings more modestly studied; payments, insurance, financial literacy, and consumer protection represent major gaps in rigorous understanding. However, even with regard to credit, the long-term impact has rarely been studied, with most studies focused on the short term – that is, we don’t yet know what happens to the poor over time. Nor do rigorous studies shed much light on macroeconomic or fiscal impact of interventions, the role (or potential role) of government, intergenerational effects, or enablers of microenterprise (and household) success. On mobile payment systems, studies are concentrated on a few countries. This is in line with the general trend revealed by the 2014 FINDEX report -- that mobile money has really only taken off in East Africa as a primary vehicle for financial inclusion, an experience yet to be replicated elsewhere.

Submitted by M.I.Zuberi on Wed, 11/16/2016 - 23:46

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Bangladesh, along with the rest of the world, has expressed its commitment to meet the UN’s Sustainable Development Goals (SDGs) –especially SDG2 relating to ending hunger and achieving food security by 2030.Fulfilling the goal faces a strange contradiction: half of the world’s households most affected by hunger are farmers and these hunger-stricken farmers operate some 500 million smallholder farms that are critical to feeding the expanding population. Equally, the small farmers in Bangladesh remain under-invest in their farms for two primary reasons: first, many lack the working capital needed to purchase better inputs/technology ; and second, many farmers don’t have the risk appetite to try new crops/seed varieties, technology or cultivate higher-value crops because of their extreme poverty and insecurity.
Our long term plan is to develop a system of “transformational” engagements in the production system of the small farmers through community-based approach utilizing the trained manpower. The proposed approach will be based on the following principles as recommended by the Independent Evaluation Group (IEG) of the World Bank .
Following this vital realisation, Department of Environmental Sciences, Gono University, Bangladesh in collaboration with B-SAFE Foundation and Hunger Free World (HFW), have developed a joint programme for offering human resource development and action research/ implementation support for farmer communities (CBOs), NGO workers, other relevant institution personnel and students for attending Certificate Courses in a number of areas. The courses will be of three months duration --combining both classroom and intern--and providing education and training offered by the university departments and NGO experts. Other aim is to help raise the awareness about sustainable development keeping environment, agriculture and health in the front. Three principal areas of concern that would be in the training programme are: organic agriculture, good agricultural practices, climate-smart agriculture and participatory marketing.
We need funding support for the NGO-participants enabling them to receive training and technical support for the local ecosystem-based implementation of their knowledge and experience. How can I get effective support for the participating NGO/CBO personnel ?

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