The government could also consider policies such as granting exemptions from cumbersome documentation requirements, and shifting to the conventional use of electronic payments into bank accounts for government payments

Financial inclusion is emerging as a priority for poli­cymakers and regulators in financial sector develop­ment, with an increasing number of countries intro­ducing comprehensive measures to improve access to and usage of tailored financial services. Issues relating to financial inclusion have also been a subject of growing interest and one of the core socioeconomic challenges on the agendas of international institutions. The World Bank’s declared objective of attaining universal financial access by 2020 is a classic example of financial inclusion being recognized as fundamental for economic growth and poverty alleviation.

Financial inclusion denotes a process that ensures the ease of access, availability and usage of the formal financial system for all members of an economy. The economy as a whole benefits through financial inclusion. First, it is a vital tool to lower income inequality in the economy. Second, more financial resources become available for efficient intermediation and allocation. Third, greater financial stability may be expected if financial activity moves from unregulated to regulated institutions. Fourth, access to finance encourages more start-up enterprises, which often contribute to risk taking, employment and processes of creative destruction. Fifth, by empowering individuals and families to cultivate economic opportunities, financial inclusion can be a compelling agent for strong and inclusive growth.

For central banks, financial inclusion is important due to a number of factors. One, the impact of financial inclusion, and financial development more generally, is witnessed on long-term economic growth and poverty reduction, and thus on the macroeconomic environment. Access to appropriate financial instruments may permit the poor to invest in physical assets and education, lowering income inequality and contributing to economic growth. Second, financial inclusion has repercussions on monetary and financial stability. Increased financial inclusion alters the behavior of firms and consumers, subsequently influencing the efficacy of monetary policy. For example, greater inclusion would make interest rates more effective as a policy tool and it may support central banks’ efforts in maintaining price stability. Financial stability too may be impacted, since the composition of savers and borrowers is altered.

The SAARC countries have a long history of promoting financial inclusion. Historically, however, their interventions have been on the supply side, such as nationalizing private banks, stipulating branch regulations, fixing interest rate ceilings on credit to low-income households, and providing credit at subsidized rates to priority sectors, among others.

With respect to Nepal, though there has been a sharp increase in the number of banking services in the rural areas, it is not proportional to the large population residing in these areas. A survey conducted by the United Nations Capital Development Fund, in late 2014 divulges that 61 percent of Nepalese adults are formally banked while 21 percent use informal channels and 18 percent remain financially excluded. Factors that have hampered the promotion of financial inclusion include the paucity of infrastructural development (including roads and communications) in the remote areas, dearth of economic opportunities in the rural areas, and poor knowledge and awareness about the financial system.

As laid down in its annual monetary policy, Nepal Rastra Bank has been according due priority in enhancing financial inclusion via its credit policy and financial access strategy. A deprived sector lending requirement for banks and

financial institutions, special refinance facility to cottage and small industries and enterprises run by women and specified community, refinance facility with concessional interest rate to productive sector, and interest free loan to banks to open branches in rural areas, among others, are some of the policy provisions that have been arranged for enhancing financial inclusion. Analogously, policy measures for promoting, e-banking, mobile banking and branchless banking have also been formulated and implemented.

Despite some measures undertaken to promote financial inclusion, some challenges remain such as a) aggressively marketing the use of new technology since technological innovation fosters financial inclusion and lowers the costs of serving low-income clients, b) improving coordination with all stakeholders in the financial system, c) bringing informal sector under the regulatory framework and d) developing physical infrastructures including roads and transport facilities towards enhancing physical accessibility to financial services. The government could   also consider policies such as granting exemptions from cumbersome documentation requirements, and shifting to the conventional use of electronic payments into bank accounts for government payments which would help expand access to finance.

The country becomes more successful in broadening access to reach the so many unbanked and underserved people and is able to ensure greater financial inclusion and equitable economic opportunities for all only when financial inclusion becomes part of the government’s national strategy for economic growth.

Dr. Pant is Director at Nepal Rastra Bank