This blog is part of a series organised in conjunction with the 19th global development conference.
What is the link between financial inclusion and sustainable development – and how can research and digital technologies contribute to improving people’s lives through microfinance and other financial services. This column – an entry in GDN’s 2019 international youth blog competition – surveys the ways in which financial inclusion can contribute to progress on the Sustainable Development Goals.
With the call to action towards ‘Zero Exclusion, Zero Carbon, Zero Poverty’ when discussing the Sustainable Development Goals (SDGs), the role of financial inclusion (particularly micro-finance) grows in prominence. Access to financial tools for all can truly be a game-changer in all aspects of global development.
One recent study shows how financial inclusion can enhance readiness for achievement of the SDGs by 2030. Through providing the poor with services that they need to make investments and manage unexpected expenses, financial inclusion can help to address SDG 1: No Poverty.
Financial inclusion can also empower agricultural workers. Farmers with access to financial services often produce more abundant harvests. This translates to progress on SDG 2: Zero Hunger. For example, when farmers from Malawi had their earnings directly deposited into a new bank account, they spent approximately 13% more money on equipment and increased the value of crop output by 21%, on average.
Financial inclusion improves health by providing people with the ability to manage medical expenses, which addresses SDG 3: Good Health and Wellbeing. Savings products can also empower families to plan for and manage education expenses, which speaks to SDG 4: Quality Education.
In addition, women in developing countries are more likely than men to be self-employed and are in greater need of access to formal financial services. The right financial products and services (such as credit bureaus for access to credit, mobile speed-point payment systems, etc.) can be used to promote SDG 5: Gender Equality.
Considering the case of South Africa where the Gini inequality index is 0.63 and the unemployment rate stands at 29%, most middle and low-income earners have more than four dependants. These income earners carry the burden of having to sign up for medical aid and funeral cover, not only for themselves, but also for their dependants. These insurance plans are typically unsuitable: since mainstream insurance brokers care more about how much commission they earn per insurance plan sold, they over-insure clients instead of offering coverage that is contextually suitable for their specific needs.
Furthermore, due to the monthly debit orders deducted to pay off the monthly insurance premiums, low and middle income earners have little to no disposable income left to cover basic needs. Therefore, they rush to the banks for small (micro) loans. Because banks deem them as high-risk lenders, workers are charged high interest rates.
For example, a microlender can require up to R1500 in return for a one-month loan worth R1000. So each month, low-income earner A piles on more credit in order to cover both the insurance premium commitments and the high cost loan borrowed from the microlender. Not only does this cycle strain the household, but it also amplifies the level of consumption and welfare inequalities in South Africa.
Where is the room for savings and investment in such an environment? Where is the room for entrepreneurial culture and activity? People are so overburdened by the loan repayments to which they must attend monthly that all they can think about is where to get more credit. This inequity in microfinance provision is a deterrent for economic growth and development.
Furthermore, the research urges the proliferation of digitization in financial services. This is backed by a separate study that encourages new research exploring important issues related to microfinance services. This is aimed at opening up discussion and debate among researchers, microfinance institution leaders, and public policy-makers.
According to the authors, information and communications technology (ICT) is an important driver in strengthening the microfinance industry. In light of the Fourth Industrial Revolution, the role of ICT and digital financial services can advance progress on the SDGs. For example, technology can support women-owned businesses by reducing the risks of theft and lowering administrative costs.
Another example is how development aid agencies are starting to use digital financial services to deliver money to disaster survivors. Consequently, future research in the direction of the role and impact of ICT in the microfinance industry – giving special attention to the industry’s stakeholders and to the value chain of micro-financial services provided to the poor and vulnerable – could be a significant complement to development.
The impact of digitization in finance is already maturing. For example, more than 30 countries have PAYGO models, which provide off-grid energy service in exchange for continuing payments.
Angaza Design (in Kenya and Tanzania) and Divi Power (in Ghana, Kenya, Namibia, Peru and Somaliland) are two companies that have developed portable solar lights that off-grid consumers can pay off over a three to twelve month period through a combination of point-of-sale financing, mobile payments, and PAYGO pricing. This kind of innovative finance aligns with promoting access to infrastructure: Clean Water and Sanitation (SDG 6) and Affordable and Clean Energy (SDG 7).
Without doubt, research on financial inclusion can provide people with the means to improve their lives. It promotes Decent Work and Economic Growth (SDG 8) via easy access to credit and other financial services that facilitate investment. The International Finance Corporation estimates that there are between 360 and 440 million formal and informal micro, medium, and small enterprises worldwide, which could be supported financially to promote innovation and sustainable industrialization (SDG 9: Industry, Innovation and Infrastructure).
In a country like South Africa, addressing inequality through financial inclusion addresses political unrest and crime (SDG 10 – Reduced Inequality – and SDG 16 – Peace, Justice and Strong Institutions). Microfinance providers, both non-profit microfinance institutions and for-profit banks, provide financial services that are critical for promoting economic development in developing countries.
But microcredit has not turned out to be the engine of innovation that it should be. Access to suitable financial products and services for the recipients’ unique needs, such as deposit and savings accounts, payment services, loans, and insurance, can translate into progress in consumption, welfare, and general economic activity.
For the SDGs to be achieved, it will take systems and structures that allow individuals to play their part in addressing sustainability issues at all levels – from the woman smallholder growing crops organically, to the mini-bus taxi driver wanting to power his vehicle using renewable energy, to the young artist in rural South Africa in need of seed funding to launch his small business. There is a clear link between financial inclusion and sustainable development.
Specifically on the African continent where challenges are more nuanced and vary by region, leveraging innovative solutions for microfinance to curate relevant and suitable financial instruments and products can translate into significant and sustainable progress.
Moreover, digitizing payments could bring millions of adults into the financial system for the first time and strengthen the digital financial infrastructure in emerging economies. Assuredly, targeted research to facilitate the accessibility of financing to people even at the lowest income levels is critical towards the achievement of the SDGs.