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The Ladder

A Blog from New America's Asset Building Program

Financial Inclusion: not an Escalator, maybe a Ladder?

Published:  March 22, 2012

Yesterday, CGAP hosted an event to discuss their recently released paper, “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries.” The paper was a follow up to a 2009 paper, “Banking the Poor via G2P Payments,” which argued that the convergence of electronic payments and financial inclusion had the potential to achieve several benefits, such as reducing government costs and introducing recipients to the wider world of financial services.

At the event, CGAP Executive Director Tillman Ehrbeck and paper co-author Sarah Rotman were refreshingly honest about how the data they had found did and did not support their initial hypotheses. Ehrbeck stated that he initially believed that financial services could be an ‘escalator,’ in that once beneficiaries were introduced into the formal financial sector via a simple bank account, they would move up rather quickly to higher financial services such as savings and credit. After looking at more evidence, however, he now believes that financial services might be more of a ‘ladder,’ in that after placing beneficiaries on the first rung of a bank account, more effort is necessary to help them scale up to other services.

For her part, Sarah Rotman emphasized the importance of not lumping all beneficiaries of social safety net programs as prime clients for financial inclusion. Instead, she emphasized that the poorest of the poor may need the entirety of their social protection payment for consumption, with little need or use for a bank account, while the somewhat better off might benefit from having a safe place to store some portion of their funds in order to smooth consumption over the medium term. She also made clear that, even for the slightly better off, the goal of financial inclusioin was not long-term asset accumulation as much as spreading scarce resources over somewhat longer time horizons.

By far the strongest critique of the social protection and financial inclusion agenda came from Mansoora Rashid, who was also the sole panelist from the social protection sphere. Ms. Rashid made a variety of points, including the following: 

  1. Financial inclusion is not a high priority for those in the social protection sphere, nor is it clear that it should be. Instead, social protection advocates focus on getting small payments to the poorest of the poor, for which targeting, not corruption, is a much more pressing concern.
  2. The most vulnerable are the toughest to get into banks and the least in need of financial inclusion. This is true because a) they lack financial literacy and confidence in formal financial institutions, b) many banks don’t want them as clients, and c) they need the entirety of their cash transfers for consumption.
  3. Financial inclusion shouldn’t hinge on social safety net beneficiaries; which is to say, although financial inclusion may be a worthwhile goal, the primary target of these efforts should not be a nation's poorest.

One of the most important issues to be addressed by future research --one that Rotman says is a priority of CGAP --is to see how this investigation would play out in lower income countries, as the countries examined (Mexico, Colombia, South Africa and Brazil) have quite developed payment infrastructure and governance.

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