Financial Inclusion

I recently attended a conference held at RBS on financial inclusion. The conference was addressing the challenges and opportunities of including more people in the UK in gaining access to and participating in financial services. It was being dressed up as providing a service for the people but it’s unsurprising that it would also open up a new customer base for banks.

Yet financial inclusion is of importance and is a major topic within international development. Ever since Muhammad Yunus coined the phrase the “unbanked” back in the 1970’s while developing his concept of microfinance and launching the first microfinance bank Grameen in Bangladesh, it has been a focus of development organisations.

Yunus’ theory was that access to credit and financial services was as much of a human right as access to healthcare and education and he used microfinance as a means of providing financial services to low-income individuals through taking banking to rural areas.

It’s difficult to argue with such a statement when the whole western world functions on credit. That all our lives would be severely affected if we were unable to take out that mortgage, do monthly repayments via direct debit, or even keep our cash in a bank account where it could earn some interest (an alien concept right now I agree).

Being able to smooth out consumption is a fundamental trait within economic theory. We save in order to purchase at a later date, and we take loans and credit to purchase now with the notion that our earnings will be higher in the future to pay it off. So we are subsidising future consumption in order to consume now.

People within the developing world do not get the luxury of smoothing consumption. This is not only consumption of goods lets be clear. A high proportion of young peoples consumption will be an investment in their own human capital through education, with the notion that such an investment will reap a payoff in higher earnings that can then settle up the loan that they had to take out. The majority of low-income individuals within the developing world are also self-employed, being agricultural traders or manufacturers. Being able to access finance services in order to invest in tools to enhance their earning powers is a key driver in reducing poverty.

And it’s not only the developing world. 88 million Americans don’t have a bank, and it stands at 2 billion people globally. However technology may be stepping in. I mentioned in an earlier blog post that m-pesa, a mobile payment system is widely used within Kenya, had 43% of Kenyas GDP flowing through it in 2013, yet with the advent of big data, bitcoin, micro-financial services we could be seeing another push towards reaching the financial excluded.

The conference had a few talks and some panel discussions comprising start-ups and some more “established” representatives. KYC (know your customer) and AML (anti-money laundering) were focal topics which is understandable in the advent of pseudo-anonymity within certain financial products being able to foster new criminal activities, and there are some interesting developments within the field.

Freddy Kelly, CEO of Credit Kudos , talked about how they were using big data to determine the credit worthiness or the credit risk of customers. So it’s not solely based on whether you’ve made your credit card repayments (if you even own one) but “consumer transaction data to build highly accurate and transparent credit score-cards and affordability metrics”.

An interesting development and if there’s one thing we know it’s that developing countries are arguably the ones who will adopt such inclusive technologies first, just ask Lewis Temple, CEO of BRAC UK. Here we had the CEO of a development organisation based out of Bangladesh giving a talk at the RBS headquarters in London on how to promote financial inclusion in the UK from their practices in a Bangladesh. Yunus would have been proud.