The Industry and Parliament Trust, in partnership with the University of Essex and Yorkshire Building Society, hosted a discussion on Wednesday 18 November 2020 entitled 'Ensuring Financial Inclusion'. Lee Rowley MP chaired the virtual event. Providing their expert knowledge were Darren Smith and Louise Drake from Yorkshire Building Society and myself. Members attended the discussion from both the House of Commons and the House of Lords, alongside representatives from industry.
Globally, the changing narrative of financial inclusion highlights the need for improving the well-being of the population, reflecting its role as an enabler in achieving Sustainable Development Goals. In the UK, the Financial Conduct Authority estimates that 1.3 million people don't have a bank account which motivates the session (FCA 2018, p46). The findings of over 3 million people accessing high-cost credit, and over 12 million people having less than £50 in savings are alarming. As financial services increasingly transition to digital, it becomes important to ask: how can we ensure that all segments of society move together?
Savings are an essential precautionary device, but many people’s interest in saving will be lowered when interest rates are low, with little prospects of an increase soon. Many microfinance institutions have been successful in generating the habit of savings among the poor through innovative approaches to micro savings. Low rates of savings could have a long-term impact on the economy and future living standards. The pandemic impact of unexpected job losses and the change in the 'live for the day' practice of people puts added pressures on savings. The discussion noted the emergence of 'accidental savers' during this period as they were spending much less on travel and entertainment. There is enthusiasm to capture this movement and ensure people continue saving post-pandemic.
The lack of financial literacy affects the financial decision-making capacity of a large population resulting in poor money management and enormous debts. This trend is more clear among younger people, and the need is higher to teach these core skills at an early stage. As part of a project on 'mainstreaming financial inclusion' in India, Bose et al. (2019) found that participation in information networks is substantial in improving the financial behaviour of female-headed households. The results show a significantly positive effect of information networks on household decisions on investments, bank savings, consumption expenditure, and participation in insurance schemes. Financial education improves people's confidence in dealing with money and visiting a bank. Many individuals have an unhealthy relationship with money and need tools to enhance their financial management and confidence to deal with financial issues.
As the use of cash declines and more banking services move online, the digital divide will create significant concerns for industry and government. A majority of the aged population don't use internet facilities, and many rural areas have poor internet access. Considering the demographic and infrastructural challenges, we may need to consider digital inclusion and financial inclusion hand-in-hand for a longer time. Perceptions also play a significant role in the access and use of financial products. In an earlier enquiry on the micro-foundations of access to finance in South Africa, Annim et al (2012) found a robust relationship between financial perception and behaviour on access to and use of financial accounts and services. The security of online transactions is a significant concern for users, and the right security measures need to be in place to address this fear.
A Joint Effort
Connecting 1.3 million people financially will require more inclusive packages. In a study in Sri Lanka, we observed the need for more inclusive and composite packages of microinsurance products for greater financial inclusion (Bendig and Arun, 2016). The global experience of prominent institutions such as BRAC and the Grameen Bank shows the need for combined packages to enhance financial inclusion. Many foundations and non-governmental organisations can play a role in bringing back those who have a poor credit history or the lack of permanent address. The joint effort by these organisations with the policymakers is crucial for this.
Words by Thankom Arun, Professor of Global Development and Accountability at the University of Essex
Bendig, Mirko & Thankom Arun, (2016). "Uptake of Multiple Microinsurance Schemes: Evidence from Sri Lanka" The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(2), pages 205-224, April. Available via IDEAS: https://ideas.repec.org/a/pal/gpprii/v41y2016i2p205-224.html
Bose, Udichibarna and Arun, Thankom and Arun, Shoba (2019), What You Do Know Is Good for You: Information Networks Among Female-Headed Households in India. Available at SSRN: https://ssrn.com/abstract=3549205
FCA (2018), The financial lives of consumers across the UK: Key findings from the FCA’s Financial Lives Survey 2017. https://www.fca.org.uk/publication/research/financial-lives-consumers-across-uk.pdf
Annim, Samuel Kobina and Arun, Thankom Gopinath and Kostov, Philip (2012) Effect of Perceptions and Behaviour on Access to and Use of Financial Service: Evidence from South Africa. IZA Discussion Paper No. 7042, Available at SSRN: https://ssrn.com/abstract=2189780