MICROFINANCE PUBLICATION WRAP-UP: “Financial Inclusion and Development: Recent Impact Evidence;” by Robert Cull, Tilman Ehrbeck, Nina Holle; published by CGAP (Consultative Group to Assist the Poor)

“Financial Inclusion and Development: Recent Impact Evidence;” by Robert Cull, Tilman Ehrbeck and Nina Holle; published by CGAP (Consultative Group to Assist the Poor) as Focus Note Number 92; April 2014; 12 pages; available at http://www.cgap.org/sites/default/files/FocusNote-Financial-Inclusion-and-Development-April-2014.pdf

The authors of this document argue that “financial inclusion is an important development priority”[1] that helps poor people around the world improve their lives. The Focus Note reviews evidence of the positive impact of financial inclusion and gives a summary of evaluations of various interventions at the local, micro- and macroeconomic levels.

The authors begin by establishing that “a vast majority of poor households live and work in the informal economy”[1] and the participants of the global informal economy “vary between 50 percent and 60 percent” [1] of the world’s population. In addition, “half of all working-age adults are excluded from formal financial services”[1] resulting in reliance on informal financial mechanisms to smooth their consumption patterns by saving and borrowing from multiple, informal financial service providers.

The study refers to 25 research projects that used randomized evaluations to understand how financial inclusion impacts poor households. In general, the projects conclude that “small businesses do benefit from access to [micro]credit while the linkage to broader welfare is less clear”[1]. The findings also show that, at the microeconomic level, the impact of savings is normally positive because savings tend to help smooth consumption patterns, and they also help poor households to accumulate working capital. Some of the studies that were reviewed conclude that insurance may help poor households “mitigate risk and manage shocks,”[1] therefore decreasing vulnerability. Nonetheless, liquidity constraints and lack of trust limit the prevalence of microinsurance. Evaluations of mobile money services indicate that these services may decrease the cost of transactions and probably improve poor households’ ability to manage risk. One study found that there is “an increased willingness to send remittances as a result of access to mobile money” [1]. However, the authors state that robust evidence is not yet available regarding the impact of mobile money services on the welfare of poor people.

Despite the limited impact on households, the findings of the studies reviewed in this paper indicate that financial access invigorates local economic activity. One research project concluded that the availability of credit from formal financial institutions boosted overall income levels in Mexico. The same paper found that when formal credit is available, poor households tend to rely less on their savings to smooth fluctuations in their income.

The authors of the Focus Note refer to “the well-established literature”[1] suggesting that the degree of financial intermediation at the macroeconomic level is generally correlated with growth and a higher rate of employment. This is enabled through lower transaction costs and more equal distribution of capital and risk. Improved access to formal deposit services may also create a higher degree of financial stability.

The Focus Note also established that in addition to direct economic benefits, financial inclusion has other advantages such as increased efficiency in the execution of social policies, the improvement of business models and increased innovation in business activity.

By Alíz Crowley, Research Associate

About CGAP (Consultative Group to Assist the Poor)

CGAP (Consultative Group to Assist the Poor) is a US-based nonprofit policy and research center dedicated to increasing financial access for poor people worldwide. It is supported by approximately 40 development agencies and private foundations in its efforts to provide market intelligence; promote standards; and offer advisory services to governments, microfinance providers, donors and investors. CGAP reported operating expenses of USD 9 million as of 2013. CGAP is co-located with the offices of the World Bank Group in Washington, DC.

Sources and Additional Resources

CGAP (Consultative Group to Assist the Poor), Focus Note, Financial Inclusion and Development: Recent Impact Evidence 

MicroCapital, March 21, 2014, CGAP Branchless Banking Challenge Fund for West Africa Accepting Entries through March 31, 2014

MicroCapital, October 15, 2013, “A Microcredit Crisis Averted: The Case of Bangladesh,” by Greg Chen and Stuart Rutherford, Published by CGAP (Consultative Group to Assist the Poor)

MicroCapital, July 8, 2013, 2013 CGAP (Consultative Group to Assist the Poor) Microfinance Photo Contest Accepting Entries Through October 2

MicroCapital Universe Profile: Consultative Group to Assist the Poor (CGAP)

Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find out more at https://www.microcapital.org/products-page/

 

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