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Published On: Wed, Nov 30th, 2016

The Importance of Financial Inclusion in the Developing World

Financial inclusion and financial literacy are two of the most important areas of improvement in the developing world. The United States Department of the Treasury has identified a set of core competencies that all adults must have to be able to make informed financial decisions. This includes:

  • Earning
  • Spending
  • Saving
  • Borrowing
  • Protecting against risk

Recent research by the South African arm of the short-term lender Wonga found that of 18,000 respondents in the country, 77 percent did not look at the interest rates or fees on credit applications, while 57 percent did not know what a credit report was. This perfectly illustrates the problem the developing world faces.

photo/ screenshot YouTube

photo/ screenshot YouTube

No matter how much the economy and the access to education and jobs in developing countries improves, the distribution of wealth will not change until knowledge of these key pillars of financial literacy is widespread.

The role of financial inclusion

Financial literacy not only empowers people to make the right financial choices for a sustainable future, but it also boosts the usage of the financial services available. Many people are simply unaware of the financial services that exist.

Financial technology, or fintech, is one of the biggest areas of growth in the western world. Mark Carney, the current Governor of the Bank of England, has said that: “With time, fintech could mean a more open, more transparent, and more democratic global financial system”. The trouble is that at the moment, fintech is thriving in those markets where financial literacy is already high, and is not doing enough to help those who need it the most.  

As surprising as it may seem in 2016, an estimated 2 billion people do not have access to formal financial services, while 50 percent of women around the world are excluded from the financial world altogether. There are a number of resources out there aimed at improving financial inclusion in the developing world. A money academy has been launched, again in the South African market, to help people understand how money works and how to make the right choices, but resources like this are few and far between. And there’s still an incredibly long way to go.  

The lack of financial identity

While improving financial literacy and levels of financial inclusion is a huge part of the fight, there is still one stumbling block that could be more difficult to overcome. Many poor people in the developing world have no financial identity. Many do not have bank accounts, and many of the bank accounts that do exist are not used. Many do not even have formal identification documents, which makes using any form of financial service an impossibility.

This is a particularly big problem for women. Nearly a fifth of all women without a bank account lack any sort of identification document. This is another problem that could be solved by developments in financial technology. Biometrics could play a vital role in establishing a financial identity when no other information, such as phone bills or utility payments, is available.

While innovation in the fintech sector is gradually raising levels of financial inclusion in the developing world, there is still much more to do to empower people to take their first steps to a better financial future.  

Author: Jimmy Simond

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