The IMF Paper, Financial inclusion: Can it meet multiple macroeconomic goals? (published September 2015), starts from the point that not much is known about the macroeconomic implications of financial inclusion, but there is evidence that a household’s access to finance has a strong positive relationship with growth. This includes the view that access to basic payments and savings for poor households shows benefits, and more so than access to microcredit. There is also mounting evidence that financially empowered women are more likely to improve the family’s welfare, and excluding women limits growth and may also lower financial stability.
The paper looks at a range of previous studies which highlight that economic sectors which rely on ‘external’ financing (ie finance not generated from within the enterprise, but invested or loaned by others) grow better where there is higher financial inclusion. This is particularly true in sectors where pledging collateral is more difficult. (Sadly, it is not easy to detect from the paper which sectors those are.)
Beyond supporting growth, financial inclusion can also enhance financial stability at the macro level: there is evidence that an increase in access to deposits can reduce the likelihood of a large average withdrawal rate in times of stress. This chimes with some McKinsey research we recently highlighted on how banks growing their deposit base leads investors to value them more highly: “aggregating relatively small savings from a large number of customers smooths out the peaks and troughs, or at least shapes them into highly predictable phasing such as a peak at the end of the month when incomes are paid in.” So a bank can become a safer bet.
CARE has believed for some time that bringing the savings of the poor into the formal sector should be a big plus for the formal economy: our research has shown that members of our Village Savings and Loan Associations save on average $58 per annum. Given that more than 10 million people are members of savings groups in sub-Saharan Africa, that is a lot of cash that can be utilised by the formal sector. And when we go to the global level, the 2 billion currently unbanked obviously constitute an enormous potential pool of resources.
CARE plans to continue to ramp up our efforts to close the gender gap in access to formal finance by supporting women to form VSLAs and to then support those VSLAs to open accounts with formal financial institutions and deposit their savings there. So it’s good to see a financial heavyweight not always noted as a friend of the poor, come out in favour of the importance and value of financial inclusion and in particular on the role of women.
This blog was co-authored by Christian Pennotti, who is the Senior Technical Adviser on the LINK UP financial inclusion programme.