Published on All About Finance

What do we know about the link between financial inclusion and inclusive growth?

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Adults around the world and in all income groups use a variety of financial services, ranging from digital payments and savings accounts to loans and insurance. Many low-income adults, however, rely largely on informal financial services — 2 billion adults worldwide, or 38 percent, reported not having an account at a formal institution in 2014, according to Global Findex data. The World Bank has launched the ambitious goal of Universal Financial Access by 2020. This goal is not an end in itself. Rather, financial inclusion is a means to an end.

Which bring us to the question: What do we know about the link between financial inclusion and inclusive growth benefiting all income groups?

In a new paper, we summarize the recent empirical literature on the benefits of financial inclusion and how they can contribute to inclusive growth and economic development. The paper is organized around four major types of financial products offered through formal institutions: payments, savings, credit and insurance.

Financial inclusion means that adults have access to and can use a range of appropriate financial services. At its most basic level, formal financial inclusion starts with having a deposit or transaction account at a bank or other financial institution or through a mobile money service provider. The account can be used to make and receive payments and to store or save money. Financial inclusion also involves access to appropriate credit from formal financial institutions, as well as the use of insurance products that allow people to better manage financial risks such as crop damage.

Empirical evidence shows that financial inclusion allows people to make many everyday financial transactions more efficiently and safely. Use of the formal financial system also expands their investment and financial risk-management options. This is especially relevant for people living in the poorest households. For example, digitizing social transfer payments in Niger significantly reduced travel and wait times for recipients receiving the funds. It also lowered the government’s administrative costs. In Malawi, access to accounts increased savings among farmers. That translated into greater agricultural output and household spending.

Yet not all financial products are equally effective in reaching development goals, such as lower poverty and inequality. Current evidence suggests the biggest impacts come from digital payments as well as savings accounts – provided the latter are inexpensive and serve a specific purpose such as saving for specific goals, like school fees or next year’s seeds. By contrast, research on microcredit’s impact is mixed and shows modest, if any, effects. Meanwhile, some studies show that people with insurance invest in riskier, higher return technologies. For example, in India, index-based rainfall insurance allowed farmers to cultivate riskier cash crops that commanded higher prices.  But little is known about the impact of insurance on welfare measures.

Most of the evidence on the link between financial inclusion and inclusive growth exists at the individual, mirco level. By comparison, the relationship between financial inclusion, inequality and macroeconomic growth is not well understood. Financial inclusion can be positively related to these outcomes, but there is relatively limited research on this topic.

The literature on measuring the impact of financial inclusion has grown rapidly in the past couple of years. But research on the impact of the different dimensions of financial inclusion on economic development is, for the most part, just beginning.

Most of the attention and research on household finance and economic development in the past two decades has looked at the impact of microcredit. However, rigorous evaluations analyzing the development impacts of microcredit have produced growing evidence about its mixed effects among low-income individuals. Consequently, the research focus has shifted in recent years toward account ownership and the savings and payments services accounts can provide.

Similarly, there has been a greater focus on insurance, especially agricultural insurance. Yet few studies have been conducted and more needs to be understood.

Field experiments involving randomized control trials have brought rigorous evaluation to the literature by establishing appropriate counterfactuals. But it is unclear whether the positive findings from these studies are applicable to other countries and groups of people. For example, would a savings product that benefited market women in Kenya be helpful for a male farmer in Brazil? Replicating successful interventions in different settings would address such questions and clarify the circumstances under which financial inclusion improves people’s livelihoods.

Similarly, more research is needed to understand why financial inclusion may have a beneficial impact in some circumstances – but not others. For example, current evidence suggests that product design, including pricing, might have a significant impact on demand and development outcomes for financial inclusion.

Another important part of the research agenda will be linking the micro-level evidence of the benefits of financial inclusion to macro-level goals, such as greater economic growth and lower inequality.

Advances in technology have made it possible to deliver financial services in new ways and will continue to change how those services are delivered. As financial services change, so might their potential link to economic development. 


Asli Demirgüç-Kunt

Former Chief Economist, Europe and Central Asia Region

Dorothe Singer

Economist, Development Research Group

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