SPECIAL REPORT: On Financial Stability, Inclusion, Exclusion and “Big Mistakes”

During a session on financial stability at European Microfinance Week yesterday, Piotr Korynski of the Microfinance Centre said regarding financial services that “it is not always a good idea to include everybody.” After showing data from a range of countries showing a positive correlation between the share of adults with formal financial accounts and gross domestic product, Mr Korynski asked, “Is financial inclusion driving income, or is income driving financial inclusion?” Rather than working so hard to push the adoption of financial services, he suggested, “Maybe it will naturally happen.”

Later in the session, Mr Korynski stated, “Poverty is not necessarily a problem of finance…. Trying to solve poverty through finance would be a big mistake. We have to have a different way of thinking about financial inclusion.”

Timothy Lyman of CGAP (Consultative Group to Assist the Poor) discussed the interactions among financial inclusion, financial stability, financial integrity (anti-crime) and consumer protection (I-SIP). Referring to previous work by the International Monetary Fund, he said the “idea that financial inclusion supports the other three long-term and vice versa is supported by a growing body of research.” On the other hand, “the message is decidedly not that financial inclusion equals stability. The reality is highly nuanced.”

Mr Lyman argued that understanding the interactions among the elements of I-SIP can help guide policymakers to make better decisions. This, even as “the introduction of digitization is radically changing…the market, and this is changing the relationship among the four [elements of I-SIP].”

Dr Adalbert Winkler Adalbert Winkler of the Frankfurt School of Finance & Management (pictured) shared his research, which also revealed mixed signals regarding whether financial inclusion supports financial stability. For example, “Financial inclusion contributes to stability because of diversification effects on the asset side…but it could also have a negative impact because it involves a deterioration of lending standards.”

On one hand, Dr Winkler said, “Financial inclusion has benefits that outweigh the risks,” and “if you want to move forward, this is the way you have to go.” On the other, he stated that “inclusion and stability are now being portrayed as if you boost financial inclusion, it will boost financial stability…but the claims are most likely not to hold.”

Dr Winkler also echoed a comment from Klaus Tischhauser the Co-founder and CEO of responsAbility Investments, who said earlier in the day that it is naive to think there will not be more credit crises in the future.

Olivier Jerusalmy of the European Financial Inclusion Network argued passionately that access to “toxic” credits decreases financial inclusion. He spoke about defining inclusion as access to appropriate financial products coupled with the ability to use them without difficulty. Because “unfair practices increase the poverty of users,” he argued that “people with credit should not be considered financially included if they have payments they cannot afford or suffer from disadvantageous loan terms.”

This story is part of a sponsored series on European Microfinance Week, which is held each November by the European Microfinance Platform (e-MFP), a 125-member network located in Luxembourg. MicroCapital is reporting live from the event.

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