Financial inclusion is key to development
Financial inclusion development has a socio-economic and environmental impact
April 27th was declared the Arab Day of Financial Inclusion by the Council of Arab Central Banks in 2016. This day is important for the financial industry and the governments of all the Arab countries, as it confirms their commitment with the financial inclusion.
The financial inclusion ensures the access to proper financial services to the population, "proper" in this context means that the services are affordable for the users and fulfill their needs. To understand more in deep this concept, it is necessary to identify why it is important for the Arab countries and for all the societies around the globe, and the main reason is that the financial inclusion development has a socio-economic and environmental impact:
Social impact: It can improve social variables like equality, employment and GDP per capita. Also, as the financial inclusion is related with the reduction of cash usage, it can potentially decrease the criminality and the inconvenience of cash for the society.
Economic impact: The financial inclusion can benefit the economy by reducing the informality and the tax evasion. Also, the migration from cash to digital money reduces the cost for the government of producing notes and coins, as well as it reduces the private sector costs for managing and transporting cash.
Environmental impact: Increasing the usage of emoney instead of cash has an important impact on the environment, since the emission of notes and coins require consumption of natural resources, manufacturing processes and transportation.
Also, the lack of financial inclusion prevents the people from:
Prior to looking at the financial inclusion scenario in the Arab world, it is important to clarify some concepts. First, the unbanked population are the people that doesn't have access to financial services. Most of the times, the banked population is defined as the people with at least one financial service, although, this definition is not very accurate, as the people with only one bank account, normally use it to receive their salaries, subsidies or cross border remittances, and they withdraw all the money they get at once, without using the financial services. This happens a lot in the Arab countries, the people with this behavior is considered underbanked. For statistical purposes, the real banked population can be considered as the people with a bank account and another financial service.
- Save money in a formal and secure way, to achieve goals in the medium and long term.
- Access to credits to increase the income generation of their businesses.
- Get insurances to mitigate the daily risks.
- Transfer money efficiently, securely and at low cost.
To be consistent with the actual use of the financial services on the population, the financial inclusion rates in the Arab world are as follows:
> Banked population: 8 per cent of the adults
> Underbanked population: 23 per cent of the adults
> Unbanked population: 69 per cent of the adults
This means that the financial inclusion opportunity in the Arab world is 92 per cent.
The countries with more unbanked population are the ones with the smallest GDP per capita, such as Somalia (61 per cent without a bank account) and Yemen (94 per cent without a bank account). In the other hand, the Arab countries with the highest GDP per capita have significant underbanked rates, such as Qatar (34 per cent underbanked) and UAE (46 per cent underbanked), this is mainly due to the large expat population working in these countries with low and middle income salaries.
The financial inclusion in the Arab countries for female population is still developing, there are some Arab countries where the percentage of adult women with an account at a financial institution is less than 10 per cent, as per the World Bank data for 2014. Although, for some countries, there are substantial improvements in this indicator from 2011 to 2014, in example, Saudi Arabia passed from 15 per cent to 61 per cent, increasing 46 per cent in three years. Other countries, such us Bahrain, Algeria and UAE improved more than 17 per cent in this indicator.
Some important factor for the financial inclusion in the Arab world are the cross-border remittances. The total amount of remittances outgoing from Arab countries is more than $82 billion per year, and the amount of inward remittances overcomes $49 billion per year. The sending profile countries, such us UAE, Saudi Arabia, Qatar and Kuwait can leverage from the remittance outflows to boost financial inclusion, as the population sending remittances need efficient channels to transfer money home, such as mobile wallets, these channels can be provided by the financial sector and other emoney issuers. On the other hand, the receiving profile countries, such as Egypt, Morocco and Tunisia can leverage from the remittances inward by opening bank accounts for the beneficiaries, and by offering other financial services that can be aligned with the remittances.
Mobile Wallets are one of the most important topics when comes to financial inclusion. This tool came to serve the financially excluded population. In countries with lack of proper financial infrastructure, the mobile wallets are a cost-effective method to reach the massive population. Mobile payments play a key role in resolving issues related to informal economy and access to financial services by end users and small size businesses. There are many individuals who do not have access to bank accounts but do own a mobile phone, which allows them to perform monetary operations, in fact, according to GSMA document "The Mobile Economy Middle East and North Africa 2016" the SIM penetration in Mena region for 2015 was 110 per cent, most of the adults have at least one phone number. For these reasons, mobile financial services can flourish in emerging markets, where they are targeted primarily to the unbanked and underbanked population. On the regulatory side for mobile wallets, there are progress in the Arab world in terms of regulation for mobile financial services, countries like Jordan, Morocco, Tunisia and most recently UAE have implemented laws to regulate mobile wallet offers.
The road for the financial inclusion is long and there are still many steps to enable financial services for everyone. The solutions to increase financial inclusion need to be implemented properly, customized for each market segment, include microfinance services, low cost transfers, international remittances and other digital services to leverage the economic and social development. Also, the financial inclusion initiatives shall always be accompanied by proper security measures for KYC, AML and CFT controls.
The challenge is big and there are some barriers to achieve the goal. But with the support of the governments, the financial institutions and the industries, the gap can be closed soon.
Sources: World Bank, Nimmök Consulting
The writer is CEO and founder of Nimmök Consulting. Views expressed are his own and do not reflect the newspaper's policy.