The Central Bank this week kicked off the formulation of a National Financial Inclusion Strategy (NFIS) to reach Sri Lanka’s underbanked and underinsured people to encourage them to have stronger access to the financial system and greater economy.
This is massively important because even though about 83% of Sri Lankan adults have bank accounts, their usage of banking services is severely limited. The number of individuals who reported no deposit and no withdrawal in the past year was 31% and only 17% of women have been successful in borrowing from the formal sector, whereas over 80% of borrowers in the informal microfinance sector are women. This shows that there is a strong gender bias towards financial inclusion as well.
Less than 15% of SMEs and only 1% of micro enterprises used any form of insurance and insurance penetration among the public is also abysmally low in Sri Lanka. This is not helped by lack of focus on women. Insurance payouts received by women dropped by 34% during 2006-2009.
First and most broadly, financial inclusion must be seen as closely intertwined with the process of financial sector development. If inclusion means access to banking, then those services need to be closer to where the people are—offering deposit-taking, payments processing, microfinancing, mortgages, insurance. In other words, all of the products and services that fuel investment create jobs and stimulate growth.
Governments have a responsibility to provide the laws and regulations that encourage both financial sector development and inclusion. Regulations are particularly important; for example, basic things like documentation requirements for opening an account. Potential customers may be excluded if they are required to provide a fixed address or proof of employment in the formal sector. Technological innovations like mobile banking will require specific regulations.
The private sector needs to evolve diverse products and find better ways to engage with their customers and address their concerns. Improving financial access need not necessarily lead to instability. Inclusion does not mean lending to everyone at any cost. This requires training—particularly in record-keeping, budgeting and planning for small businesses. Clearly, it also requires work for the jobless and underemployed so that they can have an income to save and invest but it also means banks have to provide more individual solutions rather than the same loan with different names at strict interest rates, as it mostly done in Sri Lanka.
This is where regulations—and supervision—are so important. Durable and efficient financial inclusion requires a balance of innovation with safeguards for financial soundness. It means helping consumers, especially the most vulnerable, to benefit from access without diving deeper into debt. So well-designed financial regulations—including strong prudential oversight—can ensure that loans are channeled to the most productive uses. Many countries have achieved this balance, and financial inclusion has increased.
Financial inclusion empowers individuals, families and small businesses, particularly in impoverished communities. A well-functioning financial system that can empower them and strengthen economies should be the core of sustainable growth. In fact most of the Government’s more progressive policies from increasing entrepreneurship, rolling out 100 microfinance schemes and establishing a development bank all tie into financial inclusion perfectly.