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FINANCIAL INCLUSION
ABA
April 22nd, 2017
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POVERTY REDUCTION, INCOME EQUALITY,
INCLUSIVE GROWTH & WELFARE
 Inclusive Growth & Inclusive welfare
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 Poverty reduction and promoting income equality in the society is an

integral part of the macroeconomic ultimate policy goals.

 Macroeconomists always think of policies that can reduce both

extreme poverty, & income inequality in the society.

 Rapid and sustained poverty reduction requires inclusive growth

which allows people to contribute to, and benefit from economic
growth.

 Inclusiveness refers to equality of opportunity in terms of access to

markets, resources and unbiased regulatory environment for
businesses and individuals.
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 In a frequently cited cross-country study, Kraay (2004)

shows that growth in average incomes explains 70%
of the variation in poverty reduction (as measured by
the headcount ratio) in the short run, and as much as
97% in the long run.

 Growth associated with progressive distributional

changes will have a greater impact in reducing
poverty than growth which leaves distribution
unchanged.
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 Inclusive growth policies are an important

component of most government strategies for
sustainable growth & development.

 For instance, a country that has grown rapidly

over a decade, but has not seen substantial
reduction in poverty rates may need to focus
specifically on the inclusiveness of its growth
strategy, i.e. on the equality of opportunity for
individuals and firms.
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FINANCIAL INCLUSION (FI)
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 Financial inclusion is the proportion of individuals and firms that use financial services
(WBG 2014).

 It includes access to and use of a package of services including but not limited to account,
payments, saving, credit, insurance, pension, and securities.

 Inclusive financial systems are those with a high share of individuals and firms that
use financial services.

 Financial inclusion is different from access to finance, and microfinance in PARTICULAR.

 Financial inclusion does not mean finance for all at all costs. (risk)
 Responsible Inclusion..inclusion not for the sake of inclusion (credit

overextensiton)
 FI to the cost of Financial Stability or vice versa.

 FI to the cost of Financial Integrity or vice versa.

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 Without inclusive financial systems, individuals are limited

in their ability to absorb income shocks, smooth
consumption, and they must rely on their own limited
savings to invest in education or entrepreneurial activities.

 Also newly founded enterprises must likewise depend on

their constrained earnings to take advantage of promising
growth opportunities.

 This can contribute to persistent income inequality and slow

economic growth.
 Banerjee and Newman’s model (1993)
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 Use of and Access to Financial Services
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 Why is Financial Inclusion Important for Development?

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 Allocation of Funds is the role of financial system.

 Productive uses of funds in firms with good growth

opportunities..

 Exclusion of such firms due to Asymmetric information or

due to:

 High transaction costs, access point, biased regulations,

distance, geography, documentation requirement,
collateral requirement, i.e.
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 The use of a range of quality and affordable financial

services allows individuals and MSMEs to safely and
efficiently save, make payments, borrow, and manage risk.

 Considerable evidence indicates that the poor benefit

enormously from basic payments, savings, and insurance
services.

 For firms, particularly the small and young ones that are
subject to greater constraints, access to finance is
associated with innovation, Job creation, and growth.
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 Theory and evidence suggest that microenterprises can obtain high returns
to capital.

 Microenterprises often need relatively small loans that are provided by

microfinance institutions.

 SMEs, on the other hand, require larger amounts of credit that they may
access through banks or other forms of finance, such as factoring and
leasing.

 The policy interventions targeted at microenterprises and SMEs may thus

also be different.

Point: SME should grow, Size of SME in the economy, SME and Employment, Not too
much SME, SME and Growth in average GDP per worker… Missing Middle
 Income, Consumption, & Saving over the life cycle
Implications: population growth, FI, Fiscal…
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 Consumption Smoothing in the PIH Model
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 Benefits & positive externalities associated with FI
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1. Promoting high sustained growth & (Potential 13. Increasing National Saving
Growth) 14. Creating Employment Opportunities
2. Poverty Reduction 15. Mitigating the risk of income shock of
3. Reducing Income Inequality individuals and MSME
4. Reducing Political Tensions due to poverty, 16. Improving Coordination Failure in the economy
unemployment, redistribution, deficit, i.e. 17. Investing in education, health, i.e.
5. Cost of Printing Money 18. Women empowerment
6. Reducing Cash Holdings Security concerns 19. Reducing Corruption (Transparency)
7. Long Term Fiscal Sustainability (Gov. Transfer & 20. Promoting Innovation
Redistribution) 21. Developing the Financial Sector as a growth
8. Promoting Financial Stability (Deposit sector in itself.
Diversification) 22. Higher Competitiveness
9. Promoting Financial Integrity (Crime, 23. Reduced Transaction Cost
Terrorism, Tax Evasion, Black Market, i.e) 24. Broader Economic Participation
10. Safe and Secure payments 25. Intergenerational equity (saving than
11. Improving Access to Finance by Creating borrowing)
Payments and Income history and records 26. Reducing Self control problem and design of
(Role of Credit Information) commitment device
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But More Importantly…

Population growth

Demographic change

Economic Growth

Poverty trap

Fiscal Sustainability….

No LRFS plan (population growth, demographic

changes, infrastructure burden, climate change,

national saving, deficit financing i.e.)
 Shocking Facts….. Afghanistan
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FINANCIAL INCLUSION IN AFGHANISTAN
 Account ownership

40%
34% 34%
31%
30% 29%

24% 24%

20% 17%
13%
10% 10% 11%
10% 9% 9.2%
7% 7%
5.8%
2.7%
0.3% 0.3% 0.7%
0%
Afghanistan Bangladesh Nepal Pakistan West Bank and Burundi Congo, Dem.
Gaza Rep.

% adults with an account % adults with an account at a financial institution % adults with a mobile money account
 Usage of basic financial services
ELECTRONIC

21%
PAYMENTS

20% 15%
12% 11% 10%
6% 6%
0%
Afghanistan Bangladesh Nepal Pakistan West Bank and Burundi Congo, Dem.
Gaza Rep.
% adults using an electronic payment instrument

65%
60%
45%
SAVINGS

40% 32% 35%

26% 24% 23%
20% 11% 16%14% 15%
4% 8% 7% 5% 3% 5% 7% 4% 8% 5%
0%
Afghanistan Bangladesh Pakistan Nepal West Bank and Burundi Congo, Dem. Rep.
Gaza

Saved Saved at a financial institution Saved using an informal savings club

59% 60% 57%

60% 48% 50% 46% 41%
BORROWING

35% 34% 35% 39%

40%
22% 25% 26%
18%
20% 10% 12%
4% 8% 5% 2% 5% 4% 8% 2% 6% 2% 6%
0%
Afghanistan Bangladesh Pakistan Nepal West Bank and Burundi Congo, Dem.
Gaza Rep.

Borrowed Borrowed from a financial institution Borrowed from a money lender Borrowed from family or friends
 Gender gap
40%
36.7%
35.4%
31.3%
30%
26.5% 27.3%

21.0% 21.2% 20.7%

20%
15.8%
14.3%

10%
6.7%7.5%
3.8% 4.8%

0%
Afghanistan Bangladesh Nepal Pakistan West Bank Burundi Congo, Dem.
and Gaza Rep.

% women with an account % men with an account

 Financial Depth
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 Account Penetration
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 Borrowers
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 Credit Cards
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 Debit Cards
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 Bank Branches
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 ATMs
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 Point of Sale (POS)
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 Some Existing Constraints
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 Poverty  Insecurity
 Financial literacy  Transaction Cost
 Financial culture  Documentation Requirements
 Laws and regulations  Market Failure
 Religious believes  Financial Consumer Protection
 Culture  Tax Evasion
 Trust  High Cost of Doing Business in
 Limited Access Points Afghanistan (Banking,
 Lack of Physical Infrastructure Insurance i.e.)
 Distance  No Public Awareness Programs
 Geography  Few Types of FSPs
 Demographics/ Population  Income inequality
Density  Financial Repression Policy
 Informality (Entry of New Banks)
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PUBLIC POLICY ON FINANCIAL INCLUSION
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 In many cases, the use of financial services is

constrained by market failures that cause the costs of
these services to become prohibitively high or that cause
the services to become unavailable due to regulatory
barriers, and legal hurdles.
 Dealing with these failures by:
1. legal & regulatory framework (creditors right
protection, regulating business conduct, overseeing
recourse mechanisms to protect consumers)
2. supporting the information environment and
3. educating and protecting consumers.
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 Against this broader policy context, WBG examines

three focus areas:
 (1) the potential of new technology to increase
financial inclusion; (Mobile Money, Mobile Banking,
Internet banking, POS, ATMs, Debit/Credit Cards, i.e.)
 (2) the role of business models and product design;
and
 (3) the role of financial literacy, financial capability,
and business training.
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ROADMAP FOR DEVELOPMENT
OF A NFIS IN AFGHANISTAN
 Rationale for Developing NFIS
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 It is expected that NFIS will enhance the prospects of the poor to engage in the
country’s financial system, including access to account, credit, savings accounts,
insurance, leasing, pension, and payment services.

 Through better access to financial system, the poor will have greater opportunities
to improve their lives.

 The argument is that a significant portion of the population are currently excluded
from a range of financial services.

 In meeting these unmet demands, not only do people become better off, but it
also contributes to economic growth and reduces poverty.
 This roadmap outlines the:
steps and related actions
 Key Building Blocks for Development and
Implementation of a NFIS in Afghanistan
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Vision and
Defintion

Action Plan Diagnostics

Monitoring and Objectives: priority areas,

Evaluation (M&E) System target groups, pillar

Coordination
Structure
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 Data and Diagnostics: The content and priorities of the NFIS

are informed by data and diagnostics, covering both demand
and supply side.
 Targets and Objectives: On the basis of available financial
inclusion data, concrete, measurable, and verifiable targets can
be set, against which regulators can monitor progress.
 Leadership and Coordination: Internal coordination efforts are
needed both during the formulation and implementation of the
NFIS. These efforts can be crystallized through the
establishment of a governance structure, with a clear mandate
and dedicated resources.
 (A coordination structure is the main body responsible for
promoting the discussion and coordinating financial inclusion
reforms) WBG.
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 Strategy Formulation: Drafting of the NFIS can be

done on a consultative basis, to secure buy-in across
government and the private sector.
 Strategy Implementation: The actions and reforms
set out in the strategy benefit from clear prioritization
and sequencing, with clarity also on the roles and
responsibilities for each implementing institution.
 Monitoring and Evaluation: M&E is essential to
ensure that the implementation of the strategy is on
track and to adjust policies and other measures in
real time.
 Roadmap for Development of an NFIS in
Afghanistan
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1. Payments, digital transaction accounts, mobile financial

services
2.       AML/CFT & Financial inclusion
3.       Consumer Protection & Financial Literacy
4.       Microfinance
5.       Islamic Finance
6.       Housing Finance
7.       SME Finance
8.       Credit Infrastructure
9.       Insurance
10.   Agrifinance
 List of institutions to be included…
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1. DAB 11. Ministry of Communications and

2. MoF Info. Technology
3. MoI 12. Ministry of Commerce
13. Ministry of justice
4. Ministry of Economy
14. Central Statistics Office
5. Ministry of Labor
15. Economics Dept, Kabul University
6. Ministry of Agriculture
16. MISFA
7. Ministry of Women’s Affairs
17. ABA
8. Ministry of Education 18. Insurance Department and
9. Ministry of Higher Education Association
10. Ministry of Migrants and 19. MNOs
Returnees 20. Civil Society
 Financial Exclusion in Market Equilibrium
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