The objective of this policy guide is to provide policymakers and programme designers with an up-to-date view of what needs to be done to include the poorest people in financial services. The guide highlights four promising ways forward for policies and interventions that aim to include the poorest faster than would otherwise be the case – by linking informal and formal financial services, linking social protection with financial services, making maximum use of the digital revolution and promoting weather-based insurance.
Key findings:
- Linking formal and informal financial systems is a way of potentially strengthening the informal provision of savings and credit through local-level collective action. While this is often pursued by formal providers in order to extend their credit outreach – with variable results – in today’s world the really important resilience-building is accomplished by linking savings groups with the banking system, because membership in savings clubs is so widespread.
- Linking social protection with financial services offers service providers a reason to expand their branch and agent network to reach people who would otherwise not be attractive because they have so little money. The social transfer provides a regular flow of money into an account, and, if a mainstream account is established under these favourable circumstances, offers the recipient the possibility of accessing other bank services, such as savings. It is not desirable or necessary to impose savings conditionalities on social transfer recipients. They need to be free to manage the savings–consumption trade-off and in many cases will save as well as increase consumption.
- Harvesting the digital revolution for the poorest is a must. There are already rapidly growing systems operating in Kenya and Tanzania (among other countries), which allow poor customers to receive electronic money transfers, open bank accounts and access financial services. With access to mobile phones expanding exponentially, and agent banking spreading dramatically, this combined with social transfers and formal–informal links offers the greatest scope for financial inclusion in future. Mobile money makes transfers easier – remittances and social transfers – both of which can play pivotal roles in poverty reduction. And mobile accounts are increasingly a channel to a range of financial services. They make financial transactions more convenient and safer, even if costs are sometimes higher. In the longer term, interoperability between mobile money networks is likely to be a key determinant of expansion in use and in transaction volumes. Currently, account holders cannot make or receive transfers from other mobile money networks. Particularly in more competitive markets, interoperability would increase the convenience and range of services, increase volumes and thereby also reduce average user costs.
- Scaling up weather index-based insurance pilot projects offers real possibilities for sustainable contributions to the resilience of poor and near-poor farm households, especially those vulnerable to falling into or back into extreme poverty. Weather index-based insurance is one way of managing the major risks affecting smallholder farmers of drought, floods and temperature excesses. In terms of willingness to pay, insurance is more attractive to wealthier farm households, so it may be that weather insurance will help prevent impoverishment more than it will address chronic poverty. Weather-indexed insurance can also be bought by government and other ‘aggregators’ (e.g. companies providing farm households with services) in order to pre-finance disaster relief or to protect their businesses, which are vital for the poor farm-households they service.
