IMF research shows the positive impact on poverty and inequality of improving access to financial services

by 23rd Mar 2016
Women in Jordan participate in a savings and loan group supported by CARE Women in Jordan participate in a savings and loan group supported by CARE

A recent IMF ‘staff paper’ (i.e. this is not the official view of the organisation, but they’re not disagreeing with it either...) provides additional support to CARE’s fight for financial inclusion by showing that four of the dimensions of financial development – access, depth, efficiency and stability – can significantly reduce income inequality and poverty.

There is a fifth dimension, financial liberalisation, but that – maybe unsurprisingly if we think about the causes of the global financial crisis – makes poverty and inequality worse. But even so, it is nice to have an august but rather neo-liberal institution acknowledge the importance of our cause.

I’ve highlighted previous IMF evidence which supported our push for financial inclusion by highlighting the impact of financial inclusion on national growth, and that acknowledgement is deepened by this more recent publication. It points out that “while the positive effect of financial development on economic growth has been well documented… Few have studied the impact of financial development on the distribution of income.” Until now.

The authors of the new study, Financial Development, Inequality and Poverty: Some International Evidence, have looked at a sample of 143 countries over the period of 1961-2011, and as I’ve said, they come to the conclusion that financial development can significantly reduce income inequality and poverty. And helpfully they have also looked at whether the reverse causality may apply – i.e, as poorer people’s incomes grow, financial services develop – and have decided that the causality runs from financial development to reduced inequality, not the other way round.

Why is this of importance to us here at CARE?

Well, as I have said we are committed to financial inclusion, particularly of women, and have been so for nearly 25 years, initially via our Village Savings and Loan Associations which provide effective informal financial services to women. However, in recent years we have increasingly been working to link groups to the formal sector, often to banks. This is for reasons of security (keeping the group’s savings of, say, around $1,000 in a metal box under the treasurer’s bed is not very secure) and because groups require increasingly sophisticated financial products as they develop.

Many banks are rising to this challenge – see for instance the mapping of bank linkage efforts in the recent CARE/Plan/Barclays publication The State of Linkage Report: The first global mapping of savings group linkage – but much more needs to be done to push banks to recognise the business case for linkage, and for governments to build an enabling regulatory environment, and to develop effective financial inclusion strategies in their economic development planning. Therefore, evidence such as that from the IMF is valuable in helping persuade governments to push the banks to do more to improve access.

It is also good to know that an area on which CARE has worked for nearly 25 years not only directly improves the lives of the (mainly) women who are in savings groups which link to banks, but that these improvements in access to finance also much more broadly help to fight inequality and poverty.

Gerry Boyle

I lead CARE International UK’s policy analysis and advocacy around value chains and dignified work. I originally joined CARE as the Senior Policy Adviser on Private Sector Engagement. With the advent of our new Global Programme Strategy which put a particular emphasis on women’s economic empowerment, my focus changed a little, although I still work extensively with issues in the private sector and with CARE’s corporate partners.

Until recently I spent a lot of my time on financial inclusion, now looked after by my colleague Fiona Jarden. I also co-chair the Bond Private Sector Working Group.  Immediately before I joined CARE I worked for Oxfam as Head of Business Relations for about three years, but the vast majority of my career was spent as a management consultant including being a consulting Partner at Deloitte, where for a time I led Deloitte UK’s Consumer Business consulting practice, serving many major multinationals. My original degree was in Law from Oxford University, and in 2008 when I left Deloitte I did an MSc in Philosophy and Public Policy at LSE.

One good thing I've read

Amartya Sen’s Development as Freedom. It provides a framework for many people’s modern understanding of what is development, based on a profoundly human-centred approach rather than anything instrumental. And to check whether one personally is doing enough to fight poverty, I recommend Peter Singer’s The life you can save: Acting now to end world poverty – it’s very clear and easy to read but very challenging! Finally, Ha-Joon Chang’s Bad Samaritans: Rich nations, poor policies, and the threat to the developing world is a very readable guide to economic development which argues strongly against many of the prevailing orthodoxies.

Email: boyle@careinternational.org

Twitter: @gerryboyle10