Redefining financial inclusion

We may be going about financial inclusion all wrong…

At the core of the global drive for financial inclusion is the understanding that all lives have equal value — everyone should get the opportunity to live wholesome lives in peace and good health, with the ability to pursue their dreams and aspirations. To achieve this, people need to have the tools required to pursue these dreams affordably and conveniently, hence the importance of financial access.
Apart from being a global good, inclusive growth is also an essential prerequisite for the financial, economic, political or social stability of the society, hence the formulation of the United Nation’s Sustainable Development Goals (SDGs); however, an emerging body of work is highlighting the limitations in measuring financial inclusion.

For every major development organisation monitoring the rate of financial inclusion in nations (for example, World Bank, EFinA and Intermedia), the metric of measurement is the number of bank/deposit accounts (either with a commercial bank or a mobile money provider). This is understandable because the bank account introduces consumers to a world of other financial services beyond just remittances and payments (financial services such as insurance, credit, etc.) but this measurement metric presents a problem.

Measuring bank accounts is problematic because while it can measure the increase or decrease in uptake of financial services, it tells us nothing about usage; and it is in the usage of tools and services financial institutions provide that consumers can begin to reap the dividends of financial inclusion.

Using Nigeria’s situation as an example, there are about 34 million unique bank customers who own a cumulative of approximately 90 million bank accounts. If just 70 percent of those accounts are inactive, then the number 34 million becomes a bit superficial in the grand scheme of things. True financial inclusion would be 70 percent of 34 million (about 23.8 million people). Thus, when reporting financial inclusion, it is important that we also account for the ratio of access to usage.

Further complicating the matter is the fact that many mobile money customers presently in the country are already-banked individuals. It is not uncommon to see a banked individual with at least two bank accounts and a mobile money account.

It is therefore obvious that we need a new measurement metric, or at least a new framework for measuring financial inclusion, which takes into account the overlap in our collective quest for financial inclusion. If we fail to do these things, we may end up patting ourselves on the back for a job poorly done and uncompleted.

Financial inclusion initiatives in different parts of the world (Ghana and India come to mind) suffer from this phenomenon — at the onset of a particular financial inclusion initiative, there is an initial spike in account openings, followed by a lag in account use and activity. This leaves a high number of inactive accounts. Still following that trend, a high number of inactive bank accounts could also signify other underlying problems within the ecosystem, one of which is the lack of real value proposition to the consumer. Is it possible that consumers just don’t see the benefits of using these services yet? We know that a considerable percentage of the unbanked population is suffering in cycles of extreme poverty. They live from hand to mouth; which means money is used immediately it comes to them, hence no perceived need for long-term savings.

So far in the financial inclusion discourse, the focus has mostly been mathematical in nature — how many bank accounts are opened?; whereas, measuring bank accounts highlights “nominal inclusion,” i.e., it is a vain metric. A high number of bank accounts does not advance the economy nor does it provide the desired outcomes, rather, people using financial services which are affordable and sustainable is what we need to get to us to utopia.

In what other ways can the dividends of financial inclusion be maximised?

Please send in your feedback via email: sustainabledfs@lbs.edu.ng or Twitter: @sustainabledfs using the hashtag #LBSInsight

Dr Olayinka David-West and Ibukun Taiwo are members of the Sustainable and Inclusive Digital Financial Services initiative at Lagos Business School