January 23, 2022
  • January 23, 2022

Financial apartheid

By on November 20, 2021 0

Every year, millions of people around the world are lifted out of poverty with the tools that enable them to build more stable economic lives. At the same time, similar numbers continue to remain trapped in a cycle of poverty from which they are unable to escape.

Likewise, millions of people are pushed back into poverty because they are unable to cope with unexpected economic pressures. Financial exclusion is an important driver of this cycle. Banking is an essential element in achieving greater prosperity and helping to build a better system where financial services empower disadvantaged groups. Greater access to financial services can help lift people out of poverty.

However, large traditional banks often exclude low-income populations by requiring credit score thresholds or minimum balance requirements or by using historically discriminatory practices that keep this low-income customer away from formal finance. Modern lifestyles are based on debt. If you have a stable and reliable income, if you have a bank account with access to a range of modern financial products, you can effectively manage your debts. This is what the entire financial system is for.

But debt becomes the trap of a lifetime if you don’t have easy access to these financial products. Contrary to popular belief, the poor need and use the same variety of financial services and for the same reasons as richer clients: educate their children, improve their housing, deal with unforeseen emergencies, protect themselves against hazards, seize business opportunities and build assets. Ironically, the people who don’t have access to these financial tools are also the ones who need them most.

The poorest people who remain excluded from the financial system are forced to resort to expensive and substandard financial products, which increases the risk that they will turn to expensive sources of credit such as usurious loans. Financially excluded people have little or no tools to save, send payments, borrow and insure. This makes it difficult for them to prepare for the most basic events in life, let alone unforeseen challenges.

The main problem is not that the poor have nothing to spare, but rather that they are not profitable clients, so that banks and other service providers do not try to reach them. Financial exclusion can be very oppressive and suffocating for talented people in low income communities. They don’t have access to affordable capital to start a business.

Financial exclusion often leads to broader social exclusion. People who are financially excluded may not be able to access affordable, adequate and timely credit; they may have trouble budgeting and managing their money or planning for the unexpected and may not know how to get the most from their money.

Low population density, high transaction costs, the need for small and frequent transactions, unfavorable social and cultural norms, and regulatory restrictions on savings deposits are major obstacles to the sustainable provision of formal financial services on the market. underserved markets.

Financial exclusion has several serious consequences for low-income communities, such as dependency, inability to access benefits due to living exclusively on money, inability to save money or to access credit and therefore buy a house or start a business, and finally, the inability to improve their situation through financial tools. Thus, financial exclusion imposes significant opportunity costs on those who suffer the most. When combined with high transaction costs, information asymmetries, a lack of collateral or credit history, these communities are stuck in a bad balance with no way out.

Financial inclusion addresses and offers solutions to constraints that exclude people from the financial sector. Access to formal financial services is improving, but many people in developing countries still do not have a savings account, and many who do not use one. While some people don’t apply for accounts, most are excluded due to barriers like distance, cost, and the paperwork involved. Barriers such as lack of financial literacy, policy gaps, irregular income, remoteness and high cost of banking services keep large sections of the population out of the formal financial market.

Many households may be forced to go into debt or sell assets to stay afloat. Those who have access to accumulated savings can maintain consistent consumption levels and avoid more drastic measures, such as the disaster selling of assets or agricultural products when faced with income shocks associated with losses. unforeseen events such as natural disasters or health emergencies. The socio-cultural and economic factors that lead to financial exclusion are complex, so solutions must be holistic.

The main demand-side barriers to the provision of financial services are lack of awareness, limited financial literacy, and limited access. The designs of most products or services offered by banks, or the way they are administered, are unsuitable for the poor and further reduce demand for them. The most intimidating aspect is the hard to understand paperwork that uses technical language.

At the same time, a lack of financial literacy can cause people to make bad choices and become vulnerable to excessive financial risks. On the supply side, the main obstacle is the transaction cost. This includes minimum balance requirements or other thresholds and recurring charges that cannot be met by a large number of people.

Pricing becomes a barrier to use when its terms do not take into account the income levels of potential users. Either the prices are just too high, or the prices are set and charged too rigidly to be affordable. A large number of bank accounts remain underutilized, making their management inefficient for banks. From a credit point of view, the lack of collateral
makes loans to small borrowers costly and risky for banks. Small note sizes add to the transaction cost per instrument.

In addition, weaknesses in the legal system make it difficult to extend and enforce contracts. Under government decrees, banks are compelled to achieve gigantic goals of opening accounts to bring the unbanked population into the fold of the financial system. We always promise that they would become a source of income.

However, many of them remain dormant (accounts without any transactions) and inevitably become an economic deadweight. Banks cannot afford to lose money serving them. Services are sustainable as long as hunches can cover the cost of delivering them. There has to be a business case for every financial service to remain viable. Banks must impose penalties and ultimately close these accounts; get them out of the financial system.

Thus, the counter-revolution sets in. Ultimately, clients are right back where they started their financial journey. These ill-conceived policies and programs demoralize everyone in the ecosystem ~ customers, bankers, economic watchers, media, academics and NGOs working for the financial empowerment of ordinary citizens.

Plus, it dispels the enthusiasm of those who propel all the effort. Finally, it reinforces the dominant myth that banks are anti-poor. We all need to understand the limits of the financial inclusion revolution, and we need to do
Of course, this does not turn into a brutal gold rush that would end up hurting consumers and financial institutions. Banks need to be aware of the social dimension of financial indictments, but finding and processing accounts involves time and costs that reduce revenue.

Financial services should be provided on the simple principle of a doctor: diagnose the disease and prescribe the appropriate drug. Each individual needs a different prescription. Research on the financial needs, habits and behaviors of poor households has shed light on how they manage their complex financial lives.

This can help design financial instrument products and solutions that can be tailored to their needs. Women in rural areas have little or no access to information on how to engage in the evolving formal financial space, especially when it is online and digital.

Other challenges on the demand side include insufficient investment in building customer capacity, lack of confidence in institutions and new digital channels, and limited availability of smartphones outside of the upper middle class. Several factors amplify the challenge of connecting with unserved customers: their remote locations, lower education levels, and lack of experience with formal institutions Using knowledge from behavioral economics, banks can structure products that help customers better manage their finances while simultaneously increasing customer engagement and loyalty.

Behavioral science and behavioral insights should be at the heart of the product design process, from defining terms and conditions to establishing distribution channels and designing a user experience. Although they recognize that many low-income households are good fund managers who wish to avoid debt, traditional providers still identify other providers, such as microloans, as
more able to serve them even in terms of support for social credit, the efforts of the banks have proved insufficient.

Financial inclusion cannot be left exclusively to finance specialists. We cannot have a one-sector solution. Financial inclusion can only be successful through the convenient marriage of the five paradigms: finance, technology, consumer protection, literacy and numeracy. There is a need for convergence between all the players in the ecosystem. Each player offers unique strengths. By harnessing these mutually beneficial assets ~ financial actors, telecommunications providers, NGOs and government institutions ~ financial inclusion can be accelerated.


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