Financial Inclusion and Financial Technology
Financial exclusion prevents the poor and disadvantaged from accessing formal financial systems . The unbanked and underbanked use alternate channels to meet their financial needs but face exorbitant pricing. The inability of banks to respond to the needs
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Financial Inclusion and Financial Technology
1 Introduction Financial exclusion is a problem prevalent in both emerging and developed economies. Financial exclusion prevents the poor and disadvantaged from accessing formal financial systems (Conroy 2005). As per the 2014 World Bank database, 6% of unbanked adults or 53 million people are from the Organization for Economic Co-operation and Development (OECD) countries (The World Bank Group 2015). The unbanked and underbanked use alternate channels, such as money transfer services, check cashing services and loan facilities, to meet their financial needs but face exorbitant pricing. Money transfer services include remittances and prepaid cards. According to the World Bank Group (2016), the global average fee paid on remittances is a high 8%. This is way beyond the 3% goal set as the Sustainable Development Goal (SDG) by the United Nations to reduce inequality within and among countries. Loan facilities include pawn shops, rent-to-own services, pay-check advances and payday lenders. These are usually at very high rates. A study finds that consumers who rent goods and pay weekly rent end up paying several times the actual cost (Financial Inclusion Center 2016).
© The Author(s) 2020 S. Agarwal et al., Household Finance, https://doi.org/10.1007/978-981-15-5526-8_9
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1.1 Microfinance Traditional banks had been reluctant to cater to the neglected segment because of their unknown risk profile, low income, limited wealth and geographic dispersion which made them too expensive to serve and the returns too low to bother. In the 1990s, microfinance initiatives such as the Grameen Bank drew attention to lending through well-organized groups, replacing economic collateral with the discipline of peer pressure to ensure repayment and financial sustainability of these initiatives. Unfortunately, by 2008, there were concerns of over-indebtedness and skepticism about the development potential of microfinance (Duvendack et al. 2011). The microcredits were directed toward very small one-person businesses of low productivity and low odds of survival (Bateman 2015). 1.2 Financial Inclusion and Financial Stability The 2008 World Bank Annual Report, titled “Finance for All” (The World Bank 2008), reframed the focus from microcredit to a broader term “financial inclusion” which encompasses a wider range of financial products including saving, payment and lending to households and small businesses (Soederberg 2013). However, the global financial crisis in the same year cast doubt on the wisdom of encouraging market-based financial inclusion in the face of risky subprime loans (French et al. 2009). To shed light on the murky issue, the World Bank published its 2014 Global Financial Development Report rejecting any correlation between financial inclusion and financial instability across a large set of high- and low-income countries (Cihak et al. 2013). The report supports market- based financial inclusion and pushes for private sector innovation of new pr
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