One of the tenets of Financial Inclusion is to help people gain access to capital in an economical and fair manner. There are many steps to achieve this. The first of course is to open a bank account and formally enter the financial system. This has to then be followed by a systematic way to save and invest money either through systematic investment plans like mutual funds or simply even through fixed deposit schemes and savings accounts. But all this is for people who already have a little bit of money.
What about those who don’t have money? In 2012, the World Bank produced a unique first-of-its-kind method to gauge financial inclusion levels across the world. It was called the ‘Findex’ or Financial Inclusion index. This study tried to answer the question as to why almost 2 billion people in the world remain un-banked. Not surprisingly, the biggest reason was that most of those people just had too little money.
What to do when you have too little money?
Although there are countless answers to this all-important question, lets focus on one way that has proved effective especially for the lower income and un-banked classes- Microfinance.
Microcredit to the rescue
Also called Microcredit, microfinance is a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise have no other access to financial services. To understand how microcredit works, allow me to introduce you to Grameen Bank and its founder Muhammad Yunus, a professor at the University of Chittagong in Bangladesh whose humble economics research project evolved into a worldwide phenomenon that got him and his project the Nobel Peace Prize. It started with Yunus deciding to make a small loan of US$27 to a group of 42 families as start-up money so that they could make items for sale, without the getting into high interest predatory lending from rural money-lenders. The unique idea is that since the lending was done to a group of people, they worked together to ensure timely repayment. Each member of the group was encouraged by the others to prevent default- they were splitting the gains but also splitting the risk. Yunus felt that this type of lending could stimulate businesses and reduce poverty in rural Bangladesh. The project grew and started lending to more and more people across the country. Soon, the government took notice and Grameen Bank came into being.
By 2017, the bank had over 2500 branches with 9 million borrowers. But the most important stat is that these borrowers boated a repayment rate of an astounding 99.6%. Unprecedented given that these people were the poorest of the poor. The secret is that microcredit is based on the concept of pooling borrowers into groups and lending to the group instead of individuals. That is where the power of microcredit lies.
Grameen bank and several other microcredit initiatives are centered on the ideal that loans and financial inclusion are better than charity. People who had never heard of bank accounts are being given the chance to access capital, start businesses and build wealth while comfortably paying off their debt.
When we talk of Financial Inclusion, microcredit cannot be left out as it is paving the way for millions of underprivileged, unaware people to become part of a dynamic financial system centered on allocating capital to those who need it most and can benefit from it. It only remains to be seen how this phenomenon grows and brings down the mammoth number of un-banked people in the world today. Time will surely tell.