Financial Inclusion in Emerging Markets
Traditionally, emerging markets and financial inclusivity have been mutually exclusive concepts, with developing economies having poor financial infrastructure and thus neglecting the financially underserved. However, in recent times, financial inclusion has driven sustainable growth in emerging markets, with financial regulators making it a point of focus, and over 50 emerging markets countries having developed a national financial inclusion strategy (1). Greater digitalisation and internet penetration has fuelled this shift - a good example is Kenya, which has doubled its formal financial inclusivity rate after a 7.4% increase in internet penetration between 2021 and 202
What is financial inclusion and why is it important?
Financial inclusion is the process of providing suitable financial services to ‘unbanked’ individuals and businesses in an affordable, sustainable and ethical way. It’s a pretty important issue, with studies showing that increasing financial inclusion can drive economic development, increasing GDP by upto 14% in emerging markets. Financial inclusion can also lead to greater gender equality, with a significant proportion of the unbanked being women.
Clearly, financial inclusion is a pretty big deal, but how exactly has it fostered growth in emerging markets?
In emerging markets, small and medium sized enterprises (SMEs) play a huge role in GDP growth, providing 90% of overall business and over 50% of employment worldwide. However, nearly half of SMEs in developing countries face financing challenges, with a $5.2 trillion financing gap globally. With greater inclusion and access to finance, the true potential of SMEs in boosting employment rates, propping up key industries and driving productivity can be unlocked. Fintech is helping unlock this potential, with innovations such as embedded payments lowering customer acquisition costs and the rapid processing/analysis of credit data allowing greater efficiency in the financing process.
Secondly, agriculture is a big driver of growth in emerging markets; through easier access to funds and insurance, people working in agriculture can better manage their finances, achieving higher yields and thus improving food security. This enables people to focus on education and the development of new skills, both of which improve their human capital, productivity and ultimately power higher macroeconomic growth.
One of the leading markets in which financial inclusion has driven sustainable growth is India; the sub-continent has seen a meteoric rise in financial inclusivity, galvanised by public-private partnerships, as well as government initiativesFor instance, the PM Jan Dhan Yojana (PMJDY) scheme allowed Indians to open a bank account using the Adhar biometric ID system. As of May 2021, the scheme has served 424 million Indian citizens (234 million of which were female). With access to a bank, the processes of finding formal employment, accessing loans and making important purchases have been greatly simplified.
What is the future of financial inclusion in emerging markets?
As emerging market industries and economies continue to grow and develop, financial inclusion is likely to improve; there are hundreds of Fintech startups in Latin America alone, all of which are striving to provide financial services to previously underserved segments of the population. With investors keen to deploy capital into these business models (over $4.25 billion of capital were deployed into embedded fintech in 2021), the movement isn’t going away anytime soon.
Sources
- https://www.lazardassetmanagement.com/uk/en_uk/references/fundamental-focus/financial-inclusion#:~:text=It%20has%20been%20shown%20that,lack%20access%20to%20financial%20services
- https://datareportal.com/reports/digital-2022-kenya#:~:text=Kenya's%20internet%20penetration%20rate%20stood,percent)%20between%202021%20and%202022.
- https://www2.deloitte.com/za/en/kenya/pages/financial-services/articles/beyond-financial-inclusion.html
- https://www.fintechfutures.com/2022/04/why-embedded-finance-is-the-next-big-thing/
.jpeg)
