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Opinions of Thursday, 26 January 2017

Columnist: Adomako, Appiah Kusi

Harnessing financial inclusion for economic growth

Appiah Kusi Adomako, CUTS International Ghana,

The word “financial inclusion” has gained currency within the policy and development circles over the past decade. It means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way (World Bank).

Financial inclusion has been identified as a facilitator for 7 of the 17 Sustainable Development Goals. Put differently, the achievement of the goals is contingent upon effective financial inclusion. The G20 has affirmed their pledge to financial inclusion by stimulating the Financial Inclusion Action Plan for 2015 onwards and endorsing the G20 High-Level Principles for Digital Financial Inclusion. The Group sees financial inclusion as an essential tool to reduce extreme poverty and boost shared prosperity, and it is committed to a global work plan to achieve Universal Financial Access (UFA). The UN through its intervention has prioritized financial inclusion as a necessary vitamin for every billion of people who have been left out from the tide of the banking wave.

Globally, an estimated 2 billion adults don't have a basic account. Ghana has made relative progress in the area of financial inclusion. About 40.5% of Ghanaians have access to bank accounts which is still 2% lower than countries in the lower middle-income group. By extension, about 60% of the Ghanaians are excluded from the formal financial system. In the area of mobile money penetration, 13% of the population have mobile money account which is 2% higher than Sub-Saharan average.

Value Creation and Poverty Reduction

In an economy where 60% of the population doesn’t have bank account and more than 80% of transactions are in form of cash, the country loses out on the multiplier effects of broad money. The UK for example has 97% money held in the form of deposits with banks, rather than currency in the hands of the public. By having more money in the hands of the people than in bank and other instruments, the country misses out on the multiplier effect of money and its attendant blessings to the economy. Banks act as conduit for the exchange of money. Someone comes to deposit his money and the bank lends it to another and charges interest. Whether it is a consumer or business loan, it stimulates consumption; increases revenue for local producers which in turn increases production and increases employment thereof. This value creation and the multiplier effect would not have been if the money in the first placed had not entered the banking system.

World Bank data suggests a little of under a billion people lives below $1.90 a day. An absence of access to basic financial services makes it troublesome for these individuals to take control of their financial lives. Around the world, 67 % of grown-ups living in the wealthiest 60 percent of family units claim some sort of formal ledger, contrasted with 54 percent of grown-ups living in the poorest 40 percent of families. The very first SDG—ending extreme poverty—aptly mentions the importance of access to financial services. When people are included in the financial system, they are better able to climb out of poverty by investing in business or education. A farmer in Ghana who keeps his money on his mobile money wallet earns interest from the operator. In India, a state-led bank expansion in India’s rural unbanked locations significantly reduced those in rural poverty by 14 to 17 percentage points. By providing the poor and the vulnerable with access to some form of financial services, they are able to make an investment and oversee unforeseen costs.

Digital Finance

Erstwhile, providing access to formal finance was considered as infrastructure heavy and expensive task. However, the scenario has changed with the advent of mobile money. Mobile money allows people to collect money from relatives and friends in far and near during times of needs and wants, reducing the likelihood that they will fall into poverty to begin with. In Ghana, for example, mobile money continues to become the real-time lifeline to many people. I recently engaged a carpenter to make a bookshelf for me after seeing one he had made for a friend. The transactions were concluded over the phone and never had to visit his workshop. When it came to payment of money, I used mobile money to remit the carpenter. In Kenya, ability to undertake mobile payments has reduced poverty by two percentage point.

Farmers with access to financial services are more advantaged and are able to produce far in excess than those without the same, thereby reducing hunger and promoting food security. The UN and Food and Agricultural Organization (FAO) admits a correlation between about 795 million people globally undernourished and lack of access to financial system

Going Forward

In spite of the progress that the country has made, there remains much to be done to be able to harness the blessings of financial inclusion. The abundance of banks in the country does not correlate with increased financial inclusion. Ghana seems to have more banks per capita in West Africa and yet there are millions of unbanked people. Policy intervention is required and the gradual transition of a mostly informal sector to a more formal sector can increase the demand side of financial inclusion.
Government must support through tax incentives local technology start-ups working to promote electronic and mobile financial products to allow them to bring their services to the underserved market. This cannot work efficiently without a proper national identification system. It is therefore the need in this regard for CSOs to generate awareness about benefits of formal finance, identifying bottlenecks and work with regulators to reduce them, and building a coalition of stakeholder to move towards financially included society.

Appiah Kusi Adomako is the Country Coordinator for CUTS International Ghana. CUTS Ghana is a research and advocacy policy think tank which works in the areas of consumer protection and education, economic regulation, trade and development, regional integration, competition policy and law, etc. CUTS can be contacted through | Office: +233-30-224-5652 | Email: apa@cuts.org, Website: http://www.cuts-international.org/ARC/accra