Empowerment Through Financial Inclusion, Address to the International Forum for Financial Inclusion

IMF News, June 26, 2014

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Authors: Christine Lagarde Managing Director
Published: June 26, 2014

Importance of Financial Inclusion

Definition: financial inclusion = the “unbanked”; bringing the more than 2.5 billion people—mostly poor, mostly women—who currently lack access to basic financial services into formal financial networks.
Core rationale:
- Access to credit links economic opportunity and economic outcome; financial inclusion empowers individuals and families to cultivate economic opportunities and supports strong and inclusive growth.
- Poverty reduction achievements: extreme poverty, measured as life on less than US$2.50 per day, has been halved.
- Mexico-specific progress: extreme poverty falling by 60 percent and the middle class doubling in size over the past ten years.
- Global inequality: the 85 richest “people” control as much wealth as the poorest half of the global population—about 3.5 billion people.
- Current exclusion: more than a third of the global population is still financially excluded.
Benefits for households and firms:
- Households: access to payments, savings and insurance helps smooth consumption, increase investment in education and health, and insure against shocks that can deepen poverty.
- Firms: access to finance encourages investment in productive technologies, expansion, hiring, and maturation to larger scale.
Gender dimension:
- Women face barriers: limited property rights, fewer assets, lower wages and labor force participation leading to insufficient collateral.
- Mexico: less than 50 percent of women are part of the labor force, compared to 85 percent for men; lower education and managerial experience reduce access and favorable terms.
- Financial inclusion can help close gender and inequality gaps.

Promoting Financial Inclusion — Roles and Instruments

Framing: promoting financial inclusion is a collective responsibility—roles for private sector, government, and civil society.
Private sector initiatives (harnessing technology and tailored business models):
- Technological innovation lowers costs of serving low-income clients and makes services viable and affordable.
- Mobile banking example: Kenya’s M-PESA (operated through a private telecommunications provider) has nationwide coverage; today, more than 75 percent of the Kenyan population has access to financial services—the highest in Sub-Saharan Africa.
- Similar M-PESA-style services operate in Paraguay and in Mexico (the latter through the formal banking sector).
- Government-to-person (G2P) payments can draw unbanked beneficiaries into formal networks; Mexico’s Oportunidades cited as an example.
- Banking correspondents in Brazil, India, and Mexico (card- and mobile-based technologies) extended reach to previously unbanked customers and locations.
- Chile: supermarket chains build credit histories by extending small store credit and expanding based on repayment record, translating into broader access to credit.
- Consumer protection and financial education protect against over-indebtedness and support effective use.
Government role (creating an enabling environment):
- Three policy areas:
- Encourage healthy competition to foster product development, financial innovation, and consumer choice.
- Create an enabling regulatory environment—prudent yet uncomplicated regulations, exemptions from onerous documentation, and requirements for banks to offer basic accounts.
- Strengthen financial infrastructure—improve access to borrower information via credit information systems and legal registries for movable collateral to increase lending to small and medium enterprises.
- Mexico examples: national strategy for financial inclusion with a strong focus on women; financial reforms to create a universal credit bureau for all financial institutions and an information bureau that publishes lending rates and complaints about unfair practices.

Financial Inclusion and Financial Stability

Tension and balance:
- Financial inclusion and credit expansion create opportunities but, if poorly managed, can undermine financial stability by extending credit to unproductive projects or unfit clients and increasing borrower debt distress.
- Responsible financial inclusion requires balancing opportunity and innovation with safeguards against excesses on both supply and demand sides.
Practical safeguards and supporting measures:
- Effective consumer protection and market conduct regulations are key to ensuring responsible access to credit.
- Transparency through disclosure requirements increases information and consumer understanding.
- Financial literacy builds consumer capacity; supports responsible choices and reduces gender gaps driven by lower education.
- Support for entrepreneurs: capacity building in accounting, record keeping and project planning helps access credit productively.
- Examples:
- Mexico’s Educacion Financiera, Tu Ganancia program develops basic financial skills such as budgeting and discovering low-cost sources of credit.
- Banco Compartamos in Mexico serves low-income clients and offers financial education programs and products tailored to women.

Conclusion and Institutional Support

Restatement:
- Financial inclusion is an economic and moral imperative to reach the excluded and empower individuals—especially women and the poor—while supporting well-functioning financial systems that enrich whole countries.
Outlook:
- Mexico’s national strategy is expected to provide a framework to implement policies and initiatives to raise financial inclusion to regional levels.
- The IMF recognizes financial inclusion as a key pillar of financial development and inclusive growth and will continue to work with the World Bank and regional institutions to develop and share best practices bilaterally and in multilateral initiatives such as the G-20.
Notable quotations preserved:
- “Culture consists of connections, not separations.”
- “Too much light is like too much darkness, you cannot see.” (Octavio Paz)
- “Un progreso incluyente debe conjugar, en un país como México, las exigencias del cambio y las de la tradición…. Nuestra modernidad no puede ser ciega, puramente imitativa...Debe ser una modernidad inclusiva.” (Carlos Fuentes)

Empowerment Through Financial Inclusion, Address to the International Forum for Financial Inclusion by Christine Lagarde, Managing Director, International Monetary Fund — June 26, 2014