Ending Income Poverty through Financial Inclusion

The concept “financial inclusion” in popular business and development groups means an all-encompassing term with regard to innovation in financial providers for the poor. Financial inclusion is part of an important economic development programme to solve the lack of use of formal financial services with regard to billions of people around the world.

The success of financial inclusion is measured in terms of the density of places for financial services (like the number of ATMs), product penetration (opened number of bank accounts) and geographic access (proximity of monetary services to people).

These objectives show that financial inclusion has centered on enhancing a poor person’s income. Put differently, financial addition seeks to solve income poverty.

This is not enough. This is because solving individuals’ short-term income needs can sometimes result in unintended consequences of asset destruction. Such consequences derive from the fact that, while people are encouraged to enter the formal financial system, they do not give enough consideration to encourage them to build assets.

Fortunately, this isn’t the case for all financial addition projects. A few noteworthy efforts set out to build assets. Most focus on helping people enhance their cash flow. This approach makes it possible to solve both income and asset poverty.

Financial inclusion in its thinnest sense

Approximately 2 billion people around the world lack access to formal financial services. Such services could be a bank account, credit, insurance, a secure place to keep savings along with a secure and efficient way to make and receive payments through a registered financial institution.

These steps underscore a preoccupation on the part of researchers and practitioners with how people access and use formal financial services. Seen out of this perspective, achieving financial addition happens when members of a local economy have bank accounts with digital means to move money and make payments facilitated by retailer networks or mobile phones. Monetary inclusion thus becomes a modernisation project – a technical problem that needs technical solutions.

Access to credit as a measure of financial addition is more complicated. This is because individuals can be worse off once they are financially included via loans, perhaps best illustrated by the events in Andhra Pradesh. Caught in a cycle of debt, drought, and crop failing, thousands of farmers committed suicide over 10 years. This comes down to adverse inclusion.

This was the case for a large number of miners in the Marikana area in South Africa. One of the biggest lenders to the miners was Africa Bank. By the end of 2014, the bank had gone under due to a worsening credit book. The bank had overextended itself by issuing more financial loans to its customers than they could repay.

The core problem was that these were unsecured loans not really given to enhance cash flow while building assets. The downwards debt spiral can be severe. Multiple loans and compounding interest on outstanding loans added up to negative cash flow. Some borrowers started with a loan for furniture, but ultimately many people needed loans to buy food and other necessities.

The problem then is to rethink financial inclusion. Is it possible to think beyond income and cash flow management to include perspectives on creating assets? For individuals, it means calculating this as net worth, or the difference between assets and liabilities.

Drawing on Foucault

The work of Michel Foucault is relevant to this discussion.

The French philosopher drew attention to social control through the interplay of power and knowledge within societal institutions. He sought to interrogate how society draws its boundaries. His concept of subjectification opens up for exploration the individual’s own self-management within sociable structures.

From his perspective we should turn to the core economic and financial positions that folks stake out for themselves, how they identify the problems that pertain to which position, the strategic measures they take to overcome the issues and the forms of control these people enact to govern their monetary practices in line with their understanding of social and moral norms.

What this means is that when thinking about how individuals engage financial services we should exceed the simple binary relationships that find people as consumers of services provided by the financial industry. An example of this is financial training. Educating people to be trustworthy consumers of financial services differs from engaging them to safeguard and make their family wealth. Following Foucault’utes logic, instilling financial functions such as ‘owner’ or ‘investor’ could spur people to turn down the next offer of credit.

Such an approach would encourage a perspective of the person as an ‘owner’ rather than simply like a ‘consumer’.

Wealth management for the poor

Four noteworthy monetary inclusion projects support a good thing perspective by engaging with individuals as owners rather than just customers.

In the US the Assets for Independence Act of 1998 supports a network associated with nearly 650 community-based asset-building programmes with regard to low-income people. The programme activly works to solve asset poverty alongside income poverty while encouraging the use of formal banking services. It supports citizens to invest in education, homes, and smaller businesses.

Kshetriya Gramin Financial Services in Indian positions itself as a prosperity management service for the rural poor.

Fundación Paraguaya, with its Lower income Stoplight, puts clients in the driver’utes seat of their financial future. Fundación Paraguaya works directly along with low-income people in a way that ensures these people decide what about their life they want to change.

Finally, Muhammad Yunus received the actual Nobel Peace Prize in 2006 for making finance accessible to countless borrowers. Less reported is the fact that he also created 7.Five million shareholders in a brand new bank. Borrowers own 95% of the bank, and the Bangladeshi government 5%.

These are only a few examples of exciting surgery in financial inclusion which are venturing beyond the boundary of income poverty. While I am not really against financial inclusion efforts already under way, I am arguing for an expansion of the effort in order to reconnect to the fundamental social mission of poverty reduction by adding asset building alongside income enhancement.

Why financial inclusion needs a new frontier – asset creating is republished with permission in the Conversation