Financial inclusion: why does it matter?
This is part two of four short reviews from a consolidated article by Oussama Baher, investigating the lack of financial and social inclusion for Palestinian refugees in Lebanon and advocating that the rewards for financial inclusion of refugees outweigh the disadvantages any government may fear.
The ease of access to financial services in its various forms, or what is formally known as Financial Inclusion, has become a major research subject in the fields of Economics and Finance. There is a broad consensus that improving Financial Inclusion can lead to reduction in income inequality and stimulate economic growth. Better access to financial services has been shown to benefit low-income and disadvantaged populations by increasing their ability to smooth consumption and absorb financial shocks, and by improving their long-run financial security and overall quality of life. Given the suffering they have faced, Palestinian refugees fall exactly within this category in most of the host countries they are in, especially Lebanon (refer to the previous chapter).
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Generally speaking, financial inclusion can be defined in terms of access, usage and quality of formal bank accounts allowing users to execute the basic financial transactions to fulfil their daily needs. More specifically, financial inclusion can be achieved via access to banking and non-banking accounts, investment accounts, credit, insurance, electronic payment and transfer services in both formal and informal sectors. Modern practices go even beyond access, usage and quality to include social, infrastructural, and technological dimensions, as well as others.
These more detailed definitions can benefit developing nations even more, where lack of development in the financial sectors mean people still rely on informal markets to meet their daily needs. One of the most challenging aspects in governance is how to reach out to the most vulnerable in society such as refugees and improve their quality of living. While improving infrastructure and basic living standards can be seen as a valid method, financial inclusion is proven to have a more direct impact on the working people including the most vulnerable of them. Vulnerable groups include poor families whose dependence on unpredictable jobs makes them more likely to feel the impacts of economic volatility and political instability.
According to the World Bank, allowing the vulnerable to access financial services such as savings, credit, insurance, and remittances can each help smooth the volatile incomes of poor people, providing a margin of safety when income drops or expenses rise, or providing vital funds for children’s education or health care. One of the most convincing arguments in favour of credit is when it's used to help poor people out of poverty by providing them with the finances they need to seize certain opportunities.
Adapted from Loukoianova et. al. (2018). Financial Inclusion in Asia-Pacific. International Monetary Fund
To be realistic, while access and usage of financial services may be limited due to lack of formal education, poor communities may still benefit from using funding for self-development through education or training. This capacity development and enhancing of human capital, when done efficiently, could only have benefits for an economy, boosting economic circulation from within. All these arguments form the basis of a thrust towards improved financial inclusion of the most vulnerable in our societies.