Financial inclusion at a crossroads: now is the time to think again

The Covid-19 pandemic has plunged many economies across the ‘global south’ into economic and social calamity. One of the responses coming from international institutions, such as the Consultative Group to Assist the Poor and the World Bank, is a call to redouble the effort to advance financial inclusion. If only ‘full’ financial inclusion can be achieved quickly, the argument goes, a major boost to economic and social development is there for the taking.

Such a belief in the power of financial inclusion to help the global poor is not only misguided, but also a dangerous distraction.

We should first reflect on the fact that financial inclusion was significantly advanced across the global south throughout the 1990s. This was thanks to the microfinance model famously associated with Muhammad Yunus, the US-trained Bangladeshi economist and recipient of the 2006 Nobel Peace Prize. Mr Yunus claimed that microfinance would ‘put poverty in a museum’ within a generation.

However, by the late 2000s, microfinance had become defined by rising individual over-indebtedness, increasingly regular ‘boom to bust’ cycles (such as in India’s Andhra Pradesh state in 2010), the general ‘dumbing down’ of many local economies, and serious human rights violations. Mr Yunus and the microfinance advocacy community he helped create were wrong: microfinance did not work.

A new hope?

Nevertheless, full financial inclusion is now more than ever a real possibility thanks to the arrival of investor-driven fintech platforms. And because Kenya’s iconic M-Pesa fintech platform, launched in 2007, has meaningfully reduced poverty, many in the international development community are now convinced that the world has found the next anti-poverty panacea. Inevitably, claims that investor-driven fintechs will resolve the deep economic problems created by Covid-19 are now rapidly multiplying.

There is no doubt that easier, quicker and cheaper access to a range of financial services that fintech provides has improved the lives of many in the global south. But all too many financial innovations that start well can go wrong into the longer term. Sadly, this already seems to be the case regarding fintech.

It is suspicious, to say the least, that so much of the evidence celebrating the fintech-driven financial inclusion narrative is actually seriously flawed, if not deliberately misleading. As in the case of the bricks-and-mortar microfinance model, it seems that an evidence base is yet again being ‘created’ to support a preferred policy. It would surely be a disaster for the global south were its governments to be fooled a second time in this way.

Moreover, concrete problems are already emerging with the investor-driven fintech platforms that dominate in the global south. Instant access to microcredit thanks to M-Pesa has plunged many of Kenya’s poor into mass over-indebtedness, especially its youth, thanks to gambling facilitated by the M-Pesa platform.

The more valuable growth-oriented formal small and medium-sized enterprise sector across Africa has been progressively starved of financial support because it is much more profitable for fintechs to support typically unsustainable informal microenterprises that can nevertheless survive long enough to repay a short-term loan.

Above all, the spectacular profits that investor-driven fintechs can ‘mine’ from the trillions of daily transactions of the global poor are largely spirited away from their communities to be enjoyed by wealthy elites and corporations in other countries. This essentially recreates the old ‘extractivist’ model that helped the European colonial powers grow very wealthy by impoverishing their then colonies. Returning a tiny part of this extracted wealth in the form of foreign aid only touches upon the problems it creates.

Putting people first

A much better way forward for the global south is to actively support the creation of fintechs that are community owned, democratically managed and endowed with a firm mandate to promote sustainable economic and social development.

One such ‘people-centred’ fintech operates in Maricá, Brazil. In just a few years, this fintech has demonstrated that it is possible to develop, provide and regulate fintech services so that they generate real benefit for the community in the form of poverty reduction, better government services, a more sustainable enterprise sector and a reduction in inequality.

For example, it provides lower-cost payments services to the beneficiaries of the city’s well-regarded basic income programme. It supplies low- and no-cost loans to struggling microenterprises capable of growing and diversifying. Above all, it reinvests any profits back into the community, thus contributing to a local growth dynamic that is increasingly seen as the key to sustainable local economic development.

Unlike the investor-driven fintech model, the ‘Maricá Model’ thus shows how advancing financial inclusion need not disadvantage the community, but can serve as a major opportunity for individual and collective advancement.

Milford Bateman is visiting professor of economics at the department of tourism and economics at the Juraj Dobrila University of Pula, Croatia, and adjunct professor at St Mary’s University in Halifax, Canada.