The Innovative Wit by ENC Exploration
By Yasmine Nina Benhalima
CEO – Founder of ENC Exploration
Writer of Innovate Wit by ENC
Financial inclusion, which is defined as means that individuals and businesses have access to useful and affordable financial products and services, has been a popular topic since the Covid19 outbreak. It aims to include everyone in the society by providing access to basic financial resources and is a major step towards inclusive growth and economic development of the underprivileged populations. It is also expected that it helps address poverty and shared prosperity by improving and smoothing household incomes.
While 1.7 billion individuals are unbanked, the FinTech market has continued to help expand access to financial services during the COVID19 pandemic – with strong growth in all types of digital financial services. To what extent the development of FinTech can help develop, reach financial inclusion and stimulate GDP growth?
The Financial Stability Board recognises FinTechs as “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services.” The FinTech sector encompasses payments, lending, trading, investing and insurance with significant and growing market value. For instance, in 2018, worldwide payments totalled about $200 trillion, while electronic transactions amounted to $40 tn. It is expected that global payment volume will rise 30 per cent by 2030 to around $260 tn.
Financial Inclusion Development 2014-2017.
The below chart (Kherva, P. 2021) shows the development of digital infrastructure across five continents from 2008 to 2018. For instance, the value of mobile money transactions has reached a sizable amount, ranging from around 20 percent of GDP in Bangladesh and Senegal, to over 140 percent of GDP in Zimbabwe.
To determine and assess the extent of financial inclusion in a country, policymakers use traditional and digital financial inclusion indexes. As the below graph shows, the traditional financial inclusion index remained broadly unchanged between 2014 and 2017 for most countries. There were eight countries that experienced a decline in the levels of traditional financial inclusion (e.g Nigeria and South Africa).
On the other hand, from 2014 to 2017, the digital financial inclusion index between 2014 and 2017 with the most improvement in African countries: Benin, Ghana and Senegal being the highest gainers. On the other hand, the index level did not see a significant increase for some of the countries in Latin America and the Caribbean.
Comparing digital and traditional financial inclusion shows that high digital inclusion index and low-to-medium traditional inclusion index mostly consist of African countries (Senegal, Uganda etc) where Fintech could be filling the gap in the availability of services provided by financial institutions.
In advanced countries, FinTech is more developed where banking regulation is less stringent and FinTech is more developed in course with higher ease of doing business. COVID19 has accelerated the rise in digital payments and has led us to shift to the digital sphere. For instance, digital payments transactions reached USD 3859 billion with China leading the largest market, in the GCC region, the digital payments segment is projected to reach USD 4 934 billion globally (USD 17 billion in KSA).
Impact over GDP
Empirical researches conducted by the World Bank showed that increasing digital financial inclusion in payment is found to boost annual economic growth by up to 2.2 percentage points. Efforts to address inequality in access to technology is key to prevent the digital divide within and across countries.
In order for countries to have the highest potential to spur financial inclusion through fintech, governments must implement policies promoting financial inclusion (e.g. in rural and low-income populations) and to ensure a competitive landscape. These policies should also ensure that financial literacy is spread and address social barriers including high formality. In addition, efforts to address inequality in access to technology is key to prevent the digital divide within and across nations.