Financial inclusion: Drivers and real effects

Thorsten Beck, Maria Soledad Martinez Peria, Maurice Obstfeld, Andrea Presbitero 12 April 2018



Financial inclusion – typically defined as broad access to and use of financial services – has gained prominence in academic and policy fora. As inequality and social disparities have widened, promoting financial inclusion is viewed as a gateway to close income and social gaps.

Over the last decade, the G20 has committed to advancing financial inclusion globally and created the Global Partnership for Financial Inclusion in 2010 at the Seoul Summit with this objective. More recently, and reflecting the fact that two billion adults still remain unbanked worldwide (Global Findex 2014), the 2017 Financial Inclusion Action Plan reaffirmed the G20 leaders’ commitment to expand financial inclusion as a key element of the 2030 Agenda for Sustainable Development.

Recognition that the services offered by financial intermediaries matter for economic development goes back at least to Schumpeter (1911), and a large body of economic research has shown that financial development is a critical driver of economic growth, mostly by fostering productivity growth, innovation and resource allocation. Evidence based on macro data also indicates that financial development disproportionately boosts the incomes of the poorest quintile and reduces income inequality (Beck et al. 2007).

But evidence more directly related to financial inclusion, focusing not on the depth of finance, but on initiatives that expand access to financial services is more mixed and at least two important questions remain open. First, does expanding the outreach of financial services have sizeable real effects and, if yes, through which channels? Second, what kind of financial services can have a stronger payoff in terms of inclusion without threatening financial stability?

This column tries to provide answer to these questions by summarising new research presented at a recent IMF-DFID conference on “Financial inclusion: Drivers and real effects”, while putting this new evidence in the broader context of the existing research on financial inclusion.

The real effects of access to finance

Early studies focusing on the experience of Grameen Bank with microlending characterise microfinance as a development tool that can reduce poverty, especially for women (Pitt and Khandker 1998). Yet, since then, there has been a lively discussion in the profession on the validity of the early positive results (Pitt 2014, Roodman and Morduch 2014). Subsequent evidence based on randomised control trials (RCTs) conveys a less enthusiastic picture of the role of microfinance. For instance, introducing the 2015 American Economic Journal: Applied Economics special issue on microcredit expansions, Banerjee et al. (2015) conclude that the most consistent pattern across studies is of modestly positive, but not transformative, effects of microcredit, including on female empowerment. One reason explaining a modest average effect is the presence of significant heterogeneities across borrowers. In this respect, the recent analysis by Banerjee et al. (2018) presented by Cynthia Kinnan shows that microfinance can have persistent effects on business activity and consumption, but these effects are limited to individuals who already had a business prior to the intervention. By contrast, there is almost no impact for novice entrepreneurs, suggesting that microfinance could have differential effects at the intensive and extensive margin, helping existing entrepreneurs through more credit, but also attracting low-productivity businesses.

More positive findings come from studies that analyse quasi-natural experiments or policy shocks. Two influential papers on India and Mexico find significant effects of branch expansion programs on poverty reduction and business and job creation (Bruhn and Love 2014, Burgess and Pande 2005). In this spirit, three new papers presented at the conference exploit natural experiments in different settings – India, Rwanda, and the US – to look at how banking expansion programs can translate into greater access to credit and an increase in real economic activity.

An analysis of the largest financial inclusion program in India (JDY) by Agarwal et al. (2018a), which led to 255 million new bank account openings, shows that regions more exposed to the program experienced an increase in lending. Thus, banks catered to the new demand for formal credit by previously unbanked households, which substituted informal lending with less expensive bank credit. This, together with an increase in household savings, made it easier for households to smooth consumption. A similar picture emerges from the analysis of the Umurenge program in Rwanda by Agarwal et al. (2018b) aimed at expanding financial inclusion through the creation of an extensive network of community-focused credit cooperatives. The program raised the likelihood of access to bank loans for the previously unbanked individuals, some of whom then switched to borrowing from commercial banks. In particular, commercial banks seem to engage in ‘cream-skimming’,  by extending credit to low-risk borrowers from credit cooperatives at attractive terms.

Expanding financial inclusion is not only an issue for developing countries, but it could have positive real effects also in advanced economies. Looking at the US interstate branching deregulation between 1994 and 2010, a paper by Celerier and Matray (2018) shows that this exogenous increase in bank branch supply improved economic conditions for low-income households, through asset accumulation and better financial security.

Payments and savings instruments

But financial inclusion is not exclusively about credit. Access and use of other financial services such as payments and savings can also be as, if not, more important. Efficient, accessible and safe retail payment systems and services are critical for greater financial inclusion. Digital payments can reduce the costs and increase the efficiency of government-sponsored social programs, by limiting the scope for corruption and improving targeting as, for example, evidence from India has shown (Muralidharan and Sukhtankar 2016). As for all financial services, the take-up and the use of new services is often constrained by information and administrative costs, and a key policy question is understanding how to facilitate the use of financial services. In this regard, recent research on India by Dalton et al. (2018) has shown that removing registration and information barriers significantly increased the adoption of a new electronic payment technology by local businesses.

Access to savings instruments helps households smooth consumption, empowers women, and finances investments in human and business capital. A growing body of RCTs suggests that savings have a more transformative impact than microcredit, through large positive impacts not only on income and wealth, but also on social spending (Karlan et al. 2014). A new paper presented at the conference by Jack (2018) points to a novel channel through which access to formal savings could improve well-being, as parents who were offered access to a convenient savings technology were able to save more and, as a consequence, were more likely to enroll their children in high school.

The dark side of financial inclusion

So far, we have focused on the ‘bright side’ of financial inclusion. Unfortunately, there can be a dark side too. Partly in response to the Global Crisis – and also inspired by Raghu Rajan’s 2005 Jackson Hole paper – a growing body of research questions whether finance is always good for growth, suggesting that ‘too much’ or ‘too fast’ finance can plant the seeds of future financial crises (Arcand et al. 2015, Gourinchas and Obstfeld 2012, Mian and Sufi 2014, Schularick and Taylor 2012). This vulnerability is not an exclusive feature of financial markets in advanced economies. During the microcredit crisis in India in 2010 the state government of Andhra Pradesh, worried about widespread over-borrowing and alleged abuses by microfinance collection agents, issued an emergency ordinance, bringing microfinance activities in the state to a complete halt. This large contraction in microcredit supply translated into large negative effects on the labor market and on consumption (Breza and Kinnan 2018).  More recently, the assessment of the JDY program in India presented by Agarwal et al. (2018a) also shows evidence of an increase in loan defaults in areas more exposed to the program, pointing to the trade-off between inclusion and stability.

Further research

Despite important insights from existing and new studies presented at the recent IMF-DFID conference, some questions remain on financial inclusion where further research is needed.

(1) As financial inclusion increases and clients transition from microfinance to banking services, what are the financial and real consequences? 

(2) Technology has played an important role in expanding financial inclusion, in particular through mobile devices. As this trend continues and new technologies emerge, what are the expected gains from and pitfalls of Fintech?

(3) While the literature suggests gains from financial inclusion, there is yet no clear roadmap for policymakers. What are the priorities for policymakers to further promote financial inclusion and maximise its real effects?

While responding to these questions will require further research, it is clear from the existing and newest literature on financial inclusion that in searching for answers it will be important not to rely on a single methodological approach. Rigorous impact evaluations based on RCTs and careful studies based on administrative and observational data could complement each other and, together with a sound theoretical framework, better inform policy makers and practitioners on which are the priorities to further promote financial inclusion and maximise its real effects.

Authors’ note: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.


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Topics:  Development Financial regulation and banking International finance

Tags:  global crisis, financial inclusion, Finance, microfinance, growth

Professor of Banking and Finance, Cass Business School; Research Fellow, CEPR

Chief, Macro-Financial Division, IMF Research Department

Economic Counsellor and Director of Research, IMF

Economist, IMF; Assistant Professor (on leave), Università Politecnica delle Marche


CEPR Policy Research