Financial inclusion: Progress and challenges
The need of financial inclusion in Nepal is indisputable. Beyond the potential of being able to uplift the financially underserved poor from poverty, an inclusive financial system will contribute towards greater social and economic stability
Advances in technology, new products and services and innovative business models have been driving rapid transformation across Asia’s financial inclusion ecosystem. The relationship between financial inclusion and equitable growth has also been acknowledged,and major global platforms, including the United Nation’s Sustainable Development Goals, have incorporated the objective of broader access to financial services.
Likewise, policy leaders and financial authorities all around have been making every effort to build the enabling conditions for inclusion. Their endeavours are complemented by the experimentation of service provider—banks, non-banks, fintechs and payments companies. The aim is to provide previously excluded populations access to financial services to improve their livelihoods.
Yet, in spite of innovation and change, more than one billion people within the Asia-Pacific region lack access to formal financial services. A lack of access and usage continue to limit the growth of thousands of micro, small and medium-sized enterprises (MSMEs), obstruct women’s access to economic opportunity, and appear detrimental to vulnerable communities.
The fundamental objective of financial inclusion is inclusive growth. Financial inclusion is one of the important mechanisms for all participants in the economy to attain their true productive potential. In this context, the poor are poor since they are caught up in low productivity activities, not being able to gain access to many essential inputs, including basic services like water, electricity, and affordable transport as well as financial services.
It should be understood that a number of benefits are accrued to the economy through financial inclusion. First of all, it is an important instrument to lower income inequality in the economy. Low income individuals are often those unable to access financial services, and once access is provided, these individuals have bigger potential to improve their income levels. Second, more financial resources become available for efficient intermediation and allocation. Third, more financial stability may arise if financial activity goes from unregulated to regulated institutions.
Fourth, access to finance encourages start-up enterprises that often contribute to employment generation.
Financial inclusion also contributes to the growth of the real economy by generating higher productivity in agriculture and MSMEs, especially those owned and managed by women, and by mobilising household savings among smallholders and low-income households. Financial inclusion and access is driven by both formal and informal financial services.
In Nepal’s case, a FinScope Survey conducted by the United Nations Capital Development Fund in 2014 reveals that 61 percent of the adult population have access to formal financial services (40 percent formally banked and 21 percent using ‘other formal’ products). Of the remaining total, 21 percent of adults make use of only informal financial services, and 18 percent of the adult population do not use any financial services (formal or informal).
Both Nepal Rastra Bank (NRB) and the Government of Nepal have been according due emphasis to financial inclusion. For instance, in the Financial Sector Development Strategy (FSDS) covering the period 2016/17-2020/21, financial access and inclusion serves as a pillar of the banking system. Likewise, in the Third Strategic Plan (2017-2021) of NRB, financial stability and financial sector development is one of the strategic pillars, under which enhancing financial inclusion and financial access remain as one of the overriding objectives.
Similarly, the budget for FY 2018/19 aims to launch an ambitious campaign of opening bank accounts for every Nepali citizen within a year. The collection of government revenue and payment of expenditure is also being undertaken through the electronic system from 2018/19 onwards. The overall objective is to expand financial inclusion.
Hence, it can be seen that though some progress is being made on the financial inclusion front, especially at the policy level, there are daunting challenges relating to low financial literacy, insufficient infrastructural facilities coupled with inadequate technology-based facilities by financial institutions. It should also be noted that Nepal can employ financial inclusion as a platform not just for growing the financial sector but more as an engine for driving an inclusive economic growth.
Microfinance institutions could play a dominant role in facilitating inclusion as they are distinctively placed in reaching out to the rural poor. Many of them function in a limited geographical area and possess a greater understanding of the specific issues of the rural poor.
The advancement in information and communications technologies in this digital age also offers new opportunities for Nepal to enhance financial inclusion. However, this calls for financial awareness and literacy to a larger degree. Consumers have to be fully informed of the costs and risks of financial products that are offered.
To conclude, the need of financial inclusion in Nepal is indisputable. Beyond the potential of being able to uplift the financially under-served poor from the endless cycle of poverty, an inclusive financial system will contribute towards greater social and economic stability.
Pant is with Nepal Rastra Bank