The level of financial inclusion varies widely around the world. Globally, about 50 percent of adults have a bank account, while the rest remain unbanked, meaning they do not have an account with a formal financial institution. Not all the 2.5 billion unbanked need financial services, but barriers such as cost, travel distance, and documentation requirements are critical. For example, 20 percent of the unbanked report distance as a key reason they do not have an account. The poor, women, youth, and rural residents tend to face greater barriers to access. Among firms, the younger and smaller ones are confronted by more binding constraints. For instance, in developing economies, 35 percent of small firms report that access to finance is a major obstacle to their operations, compared with 25 percent of large firms in developing economies and 8 percent of large firms in developed economies.
Financial inclusion is important for development and poverty reduction. Considerable evidence indicates that the poor benefit enormously from basic payments, savings, and insurance services. For firms, particularly the small and young ones that are subject to greater constraints, access to finance is associated with innovation, job creation, and growth. But dozens of microcredit experiments paint a mixed picture about the development benefits of microfinance projects targeted at particular groups in the population. Financial inclusion does not mean finance for all at all costs. Some individuals and firms have no material demand or business need for financial services. Efforts to subsidize these services are counterproductive and, in the case of credit, can lead to overindebtedness and financial instability. However, in many cases, the use of financial services is constrained by regulatory impediments or malfunctioning markets that prevent people from accessing beneficial financial services.
The focus of public policy should be on addressing market failures. In many cases, the use of financial services is constrained by market failures that cause the costs of these services to become prohibitively high or that cause the services to become unavailable due to regulatory barriers, legal hurdles, or an assortment of market and cultural phenomena. Evidence points to a function for government in dealing with these failures by creating the associated legal and regulatory framework (for example, protecting creditor rights, regulating business conduct, and overseeing recourse mechanisms to protect consumers), supporting the information environment (for instance, setting standards for disclosure and transparency and promoting credit information—sharing systems and collateral registries), and educating and protecting consumers. An important part of consumer protection is represented by competition policy because healthy competition among providers rewards better performers and increases the power that consumers can exert in the marketplace. Policies to expand account penetration—such as requiring banks to offer basic or low-fee accounts, granting exemptions from onerous documentation requirements, allowing correspondent banking, and using electronic payments into bank accounts for government payments—are especially effective among those people who are often excluded: the poor, women, youth, and rural residents. Other direct government interventions—such as directed credit, debt relief, and lending through state-owned banks—tend to be politicized and less successful, particularly in weak institutional environments.
New technologies hold promise for expanding financial inclusion. Innovations in technology—such as mobile payments, mobile banking, and borrower identification using biometric data (fingerprinting, iris scans, and so on)—make it easier and less expensive for people to use financial services, while increasing financial security. The impact of new technologies can be amplified by the private sector’s adoption of business models that complement technology platforms (as is the case with banking correspondents). To harness the promise of new technologies, regulators need to allow competing financial service providers and consumers to take advantage of technological innovations.
Product designs that address market failures, meet consumer needs, and overcome behavioral problems can foster the widespread use of financial services. Innovative financial products, such as index-based insurance, can mitigate weather-related risks in agricultural production and help promote investment and productivity in agricultural firms. Improvements in lending to micro and small firms can be achieved by leveraging existing relationships. For example, novel mechanisms have broadened financial inclusion by delivering credit through retail chains or large suppliers, relying on payment histories in making loan decisions, and lowering costs by using existing distribution networks.
It is possible to enhance financial capability—financial knowledge, skills, attitudes, and behaviors— through well-designed, targeted interventions. Financial education has a measurable impact if it reaches people during teachable moments, for instance, when they are starting a job or purchasing a major financial product. Financial education is especially beneficial for individuals with limited financial skills. Leveraging social networks (for example, involving both parents and children) tends to enhance the impact of financial education. Delivery mode matters, too; thus, engaging delivery channels—such as entertainment education—shows promise. In microenterprises, business training programs have been found to lead to improvements in knowledge, but have a relatively small impact on business practices and performance and depend on context and gender, with mixed results. The content of training also matters: simple rule-of-thumb training is more effective than standard training in business and accounting.