Financial inclusion, which refers to the provision of affordable and useful financial services and products to households and firms via a sustainable approach, is a major driver of growth that has the potential for achieving sustainable development.
Why is this true? Well, to begin with, when businesses – particularly small and medium-sized enterprises (SMEs) which constitute the largest share of the entire enterprises and also account for the lion’s share of all jobs – are able to access affordable financial services that allows them to make or receive payments, insure against risk and secure credit from financial institutions to finance expansion projects, fund research and innovation requirements, this provision bolsters productivity in enterprises; which collectively stimulates growth in the SMEs sector and related sectors, such as the agriculture sector, promoting inclusive growth and shared prosperity as more jobs are created.
Conversely, when individuals are able to access financial services which allow them to make or receive payments, save, borrow and also insure against uncertainty at a moderate cost, this provision enhances their ability to pay for healthcare, education, food, clean water and sanitation – and all these contributions are essential for attaining sustainable development.
Simply put, the remarkable impact gained from harnessing access to finance for households and firms indicates that financial inclusion is an invaluable resource or power that can be wielded to accelerate inclusive growth and foster shared prosperity; which are both significant remedies to the poverty, inequality and hunger that must be eradicated to achieve sustainable development.
Now that the potential of strengthening access to finance for households and businesses has been realised, how can this resource be used effectively and efficiently? Firstly, to enhance the impact of financial inclusion to achieve sustainable development, it is imperative for policymakers and relevant stakeholders in the financial sector to adopt adequate measures in a problem-solving process to expand access to financial services and products – eschewing a one-size-fits all approach, but rather designing a variety of financial services and products to meets the unique needs of all demographics. For example, while both universal banks and microfinance institutions provide financial access to individuals and enterprises, these two financial institutions serve different demographics.
In the same vein, the customer base of traditional banking differs considerably from financial technology (fintech), which integrates technology and innovation to offer financial services to a comparatively larger population – fintech has the capacity to deliver affordable and relevant financial services to the unbanked and underserved population, a demographic that the traditional banking system is struggling to serve. While both traditional banking and fintech can be used as complements, no country in the world is thriving through the adoption of fintech than China; a move that was instrumental in the country eradicating extreme poverty in its last impoverished counties in 2020.
In 2019, prior to China accomplishing this tremendous feat, the EY Global FinTech Adoption Index – a survey of 27,000 digitally-inclined consumers in 27 markets – indicated that while Asia was ahead of the other regions in the use of fintech by individuals and SMEs, China’s fintech adoption rate of 87 percent was the highest in the world for a single country: suggesting that 87 percent of the Chinese respondents use at least one fintech service, and with a whopping 99.5 percent of them revealing that they know of online apps which facilitate financial transactions.
The widespread usage of fintech by people and businesses in China, which is partly accelerated by effective financial literacy programmes, has been essential in eradicating abject poverty, strengthening access to education, healthcare, food, clean water and energy in the country. So, the big question is: how did China achieve this incredible feat, and are there any lessons for the rest of the world?
To answer this question aptly, it is important to cast our minds back at least to 2015, when MyBank – China’s first online bank – was established. It is worth noting that China, just like any other country in the world, also had a financing gap in the country’s SMEs sector; a challenge that the traditional banking system was struggling to address. By identifying the potential of fintech to provide financial services and packages to people and enterprises in urban, rural and remote parts of China, the country strengthened access to digital financial services with the introduction of MyBank.
Designed to provide affordable financial services and packages to farmers and SMEs, the online bank – which is a subsidiary of Alibaba Group’s Ant Financial Services – relies on a data-driven approach that employs over 3,000 variables to examine an applicant’s creditworthiness within three minutes: from 2015, when MyBank was first introduced, till date, more than 20 million SMEs in China have secured credit from this fintech. However, this would have been near-impossible to achieve without MyBank’s algorithm weighing risk by using repayment data from Alibaba’s financial services such as Alipay – which has about 1 billion users in China alone; highlighting why it is vital for different financial institutions to complement each other for boosting financial inclusion in an attempt to attain sustainable development.
While China has been able to complement efforts of traditional banks with the extraordinary performance of fintech companies – which is improving access to finance for households, filling SMEs’ financing gaps, scaling up productivity and yielding inclusive growth and shared prosperity, all having contributed substantially in ending extreme poverty, reducing inequality, strengthening access to education and healthcare in the country – this encouraging progress is not a fluke.
To repeat similar success in other parts of the world, policymakers should first prioritise ICT infrastructure investment, as this will aid in building a strong foundation to support the progress. Again, while fintech should not be developed at the expense of traditional banks, financial services and products from the two should be propagated through rigorous financial literacy programmes to enlighten both households and firms. If these directives are undertaken effectively, financial inclusion will be enhanced to achieve sustainable development.
Alexander is an economic consultant, chartered economist and a chartered financial analyst with a Master’s degree in finance and a Bachelor’s degree in economics and finance – together with stellar experience derived from the International Monetary Fund (IMF)
