Financial Inclusion and Its Importance

First things first. What is financial inclusion? It’s a very simple and straightforward question you might have asked. Financial inclusion is the process of including more and more people in the financial sector. In another way, you can say that financial inclusion involves spreading financial services to underserved populations. Many people around the world lack access to any type of financial facilities available in their countries. The Economist Group’s economic research and analysis arm, The Economic Intelligence Unit, publishes an index to measure the global condition of financial inclusion. This index, simply known as the Global Financial Inclusion Index, ranks countries based on their financial inclusion efforts. According to the 2023 index, European countries are mostly among the top performers in financially including their citizens. Additionally, some Asian countries, with Singapore at the top position, also perform well. However, the index identifies countries like Yemen, Somalia, Eritrea, Afghanistan, and South Sudan as the worst performers.

Better Personal Livelihood

Financial inclusion is essential for the growth of a country. Increased financial inclusion means that more people can enjoy the benefits and access the various financial products available, ranging from banking to insurance. This access provides individuals with security and opportunities for financial growth, ultimately leading to an elevated standard of living. Moreover, financial inclusion boosts people’s financial confidence. Individuals who are financially included are better able to manage risks and cope with unexpected emergency situations.

Liquidity And Inflation Management

A very important reason for which we need to encourage financial inclusion more and more is the adjustment of liquidity in an economy. Hold on. Did you ask me to define the word liquidity? Okay, in super simple words, it is the measurement of readily availability of cash and some assets which are easily converted into cash.
Let’s assume a portion of financially excluded people. After being financially aware and educated, they start to deposit their money into their newly opened bank accounts to get the benefit of interest and security. Additionally, they start to buy some insurance policies to combat the unknown future or emergency. Maybe they are keeping their valuables in the bank locker. Some may start to invest into some stocks, securities and funds. Others are borrowing a good chuck of money to grow their business or farming or build a house. In a very simple way, they are giving their money to others for any reasons. The readily available huge amount of money that they used to own before is not readily available now. Now they’ll spend less. We spend more when we have a lot of money is in our pocket, not when it is deposited in a bank or invested somewhere. Isn’t it? So, this is how the liquidity is reduced. And as the liquidity is reduced in an economy, it controls the inflation. Because low liquidity forces people to control their excessive spending. When people spend less, the demand reduces which lowers the prices of commodity and this leads to the reduction of inflation.

Economic Growth

The more people keep their money in financial institutions (in any form), the more these institutions can utilize it to lend or invest in other businesses or markets. This process helps other entities to grow, as those in need can secure funding when required. In a growing and healthy economy, wealth is transferred from surplus units to deficit units, benefiting everyone involved. This cycle contributes to the economy’s continuous growth and stability.

Easy Access to Government Facilities

Connecting more people to the financial network is beneficial for the government as well. When the government needs to transfer money in the form of aids, allowances, subsidies, or pensions, the bank accounts of the target population are utilized. Without a bank account, individuals may miss out on these government benefits.

Robust Regulatory Control
This aspect is crucially important. Central banks serve as the primary regulators of a nation’s banking system, while the insurance sector operates under its apex organization, and stock markets are overseen by corresponding regulatory bodies. These regulatory entities are responsible for monitoring and controlling a country’s economy. Their decisions, actions, and policy changes can have significant impacts on the entire system, with the central bank playing a particularly prominent role. Monetary policies are tailored to suit the prevailing economic conditions, and during crises, a country’s central bank acts decisively to prevent economic failure. By overseeing banks and safeguarding them from collapse, central banks play a vital role in maintaining financial stability. The apex regulatory bodies continually work to protect us indirectly through their innovative policies and actions. As more people become integrated into the financial system, the regulators’ influence grows stronger. Encouraging financial inclusion can amplify the reach of their policies and initiatives to benefit a larger segment of the population.

Here we have discussed the importance of financial inclusion, a critical subject that governments worldwide must prioritize. In countries ranked low in financial inclusion indices, it is imperative for their governments to invest time, resources, and effort into improving this situation. Increasing awareness, promoting financial education, developing infrastructure, providing attractive incentives, and designing effective schemes and policies are essential steps these governments need to take. By implementing appropriate strategies, these countries can significantly expand financial inclusion, leading to overall economic growth and development.