Nepal | July 16, 2020

Digital services: For financial inclusion

Bhubanesh Pant
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In Nepal’s case, it is possible for digital financial inclusion to become a game changer for unserved and under-served low-income households as well as micro- and small enterprises

Digital service

The focus on financial inclusion has deepened in recent years following the G20’s adoption of financial inclusion as one of its primary policy goals.

Financial inclusion denotes the opportunity for low-income groups to obtain affordable access to basic financial services. An inclusive financial system contributes towards alleviating poverty and promoting a country’s broader economic development.

In recent days, advocates of financial inclusion have accorded due priority on providing access to financial services through digital channels for the poor as digital financial services (DFS) provide an accessible and affordable entry point into financial systems for many unbanked and under-banked people.

DFS connotes an array of financial services (including credit, savings, loans, insurance and payments services) accessible via digital remote channels such as e-money, mobile money, card payments and electronic funds transfers.

The aim of increasing the accessibility of DFS for the poor is not to introduce the poor to the concept of financial management but rather to provide them with a more reliable, affordable and accessible financial practice.

There is now growing empirical evidence divulging that using DFS to have access to a greater range of financial services improves financial inclusion which subsequently contributes towards improving standards of living for the poor.

Digital technologies offer great potential to overcome critical development challenges and could contribute towards the World Bank Group’s aim of achieving universal access to financial services by 2020.

While in 2015 the UN underscored financial inclusion as a mechanism to steer progress toward the 17 Sustainable Development Goals, a few months ago, the G20 drafted eight High-Level Principles for Digital Financial Inclusion, providing a basis for how countries can employ digital technology to create a more inclusive economy.

When governments digitize payments, it results in an improved delivery of government social payments with substantial cost savings.

Likewise, the increased transparency in government transfers when undertaken via digital channels leads to less “leakage” and better traceability of payments.

Again, research illustrates that using digital methods for remittances increases remitters’ feeling of control over the funds being remitted which have a positive impact on the amount of funds being remitted.

Moreover, the utilization of DFS generates a greater and more reliable pool of information on customers. DFS open up new avenues into the financial system for the disadvantaged, and also contribute to the objective of women’s economic empowerment.

In short, it can transform the financial lives of those who employ this technology

Still, a number of challenges exist with regard to expansion of DFS. These include a) making up-front investments in payments infrastructure, b) educating new account owners on the basic interactions involved in a digital payments system—using and remembering personal identification numbers, understanding how to deposit and withdraw money and c) undertaking steps to guarantee a reliable and consistent digital payments experience.

Furthermore, there are also infrastructure challenges that act as obstacles to the broadening of electronic financial services in rural areas including the lack of electricity with which to power mobile phones, limitations in mobile network coverage, and poor roads and transport networks.

Yet, consumer education is the crux in influencing a largely unbanked population of the advantages of digital payments and winning their widespread acceptance.

At the same time, it needs to be stressed that it is the private sector that has to design digital payment solutions that are customized to the demands of individuals and easy to understand.

The Government, on its part, must address the regulatory concerns, and work with the private sector to build infrastructure that can reach rural areas.

As part of its vision to graduate from its Least Developed Country status, Nepal had earlier announced a commitment to modernize its economy through digital payments as the policymakers acknowledged the value of accelerating the use of safe, sound digital payments platforms for enhancing financial inclusion.

Nepal Rastra Bank, through its Monetary Policy for 2015/16, put due emphasis on the expansion of branchless banking and mobile banking services in the geographical region with low financial access.

Analogously, the government has announced in its Budget for 2016/17 to channelize government to people (G2P) payments including pensions and other social security allowances through digital channels after making necessary arrangements.

Financial regulators around the world have acknowledged the instrumental role DFS can play for financial inclusion and seek to unlock this potential by creating enabling environments.

DFS lower transaction costs, increase transparency, and accelerate access to formal financial services that help people break the cycle of poverty and drive inclusive economic growth.

In Nepal’s case, it is possible for digital financial inclusion to become a game changer for unserved and under-served low-income households as well as micro- and small enterprises in the country.

Pant is with Nepal Rastra Bank

A version of this article appears in print on November 29, 2016 of The Himalayan Times.

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