Financial Inclusion for Development: How to get Banking to the Poorest?

Guillermo Perry

The panelists in the third Plenary Session of GDN’s 12th Annual Conference addressed how the financial sector can support the achievement of the Millennium Development Goals (MDGs), by means of improving financial depth and access, while paying close attention to the formulation of relevant policies and the role played by its main actors.

The first panelist, Fabrizio Coricelli, Associate Researcher of the Paris School of Economics, said that poverty in developing and transitional economies can be alleviated by widening people’s access to financial services. He suggested that there are two dimensions to the problem: demand and supply and he proposed that the greatest potential for widening access lies in better supply. One promising approach is connecting social cash transfers programs to financial services, which would lower administrative costs for the banks, thereby increasing the attractiveness of carrying out business with lower income groups.

Coricelli stressed that social transfers and financial instruments should complement each other, in order to improve the saving behaviours of low-income groups.

A second speaker, Iftekhar Hasan, Director of the International Center for Financial Research, stressed the importance of small and community banks in improving economic development. He described how they bring financial services to Small and Medium Enterprises (SMEs) and loans to different population groups.

However, he said that care should be taken to ensure that financial regulations should not worsen income inequality and distribution. Finally, he focused attention on the important role played by foreign banks in developing economies. He urged that lessons are learned from these experiences and that we are mindful of the risks associated with their presence.

Closing the plenary session, Guillermo Perry former Minister of Finance of Colombia, and Associate Researcher of Fedesarrollo and KSG, highlighted the importance of access to financial services in order to foster economic growth. Financial development contributes to growth by reducing inequality and increasing accessto financial services, reaching from large to small firms, and from rich to poor households. Perry argued that according to theoretical work, when financial inclusion is achieved, this hasan important impact on growth and inequality reduction can be attained.

Additionally, Perry showcased that the usual indicators used to measure financial access, such as the size of thefinancial sector or the size of capital inflows, might be misleading; a large financial sector couldvery well be giving loans to a few individuals, leaving a large population with no access at all.

Finally, he stated that it is no surprise that opening to financial international markets does nothelp reduce inequality nor boost growth, as sometimes the only ones that have access to financialservices are large firms. Financial integration could indirectly increase access if it helped developa broad domestic financial system. However, this is not always the case as financial integrationdepends on the quality of the existing financial institutions and on how strong the domesticfinancial sector is when economies open up. This leads to the conclusion that carrying out apremature financial integration may lead to a smaller financial sector or even a crisis, which ofcourse would hamper long term growth. Thereby, financial integration should be progressive.+

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One Response to Financial Inclusion for Development: How to get Banking to the Poorest?

  1. The paper is a true reflection of the facts as it relates to the economies of developing and transitional countries. However, in as much as these are facts, there are now more mitigating factors that will compound the situations in these economies, and these emanated from the recent global financial/economic crises.
    Most developing and transitional countries, lack the requisite capacity to undertake the fundamental restructuring that will effectively impact on their national economies. Pauper city of capacity are multidimensional in such places.
    For instance there are clear evidences of insufficient cash to back up even well intentioned policy decisions,furthermore, the issue of political will and human resource inadequacies, and finally coruption are sure constraints.
    The most problematic, is the globalization of the crises. With most of Europe requiring loan to forestall economic collapse, to where do such developing countries look for capacity enhancement and support?.It will be a very slow process, but the best approach will be indigenising the transitional agenda, so that it will not face disruption from externally induced financial instability.

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