27 May 2022

Financial inclusion in tackling poverty

How Effective is Financial inclusion in tackling poverty and income inequality? 

Despite the commendable efforts of some countries in Africa to improve financial inclusion, they remain top of the ladder in poverty and inequality. Ironic, right? Poverty and income inequality are two social challenges existing in Africa today and both have the potential to make a hash of any continent’s development. Half of the countries in Sub-Saharan Africa have poverty rates higher than 35% (World Bank, 2020). Some questions to consider: what potential does financial inclusion have in diminishing these issues? Does the access and usage of financial services by every individual contribute any significance in reducing poverty and income inequality? Let’s find out. 

Globally, around 1.7 billion people are still unbanked. This is an unpleasant figure because these people are lacking an opportunity to break out of the poverty cage and income inequality is prevalent. If excluded individuals can access saving, credit, investment services and gain appropriate financial knowledge, they stand a better chance to increase their income and attain a level of financial freedom. 

Although African countries have made outstanding economic progress, the quality and inclusiveness of this growth remain an increasing concern for all. There’s a striking existing gap between the rich and poor, banked and the unbanked, rural and urban dwellers. The unbanked and rural dwellers are likely to be poorer because they lack access to financial services. Data shows that the highest rate of poverty can be traced among young women and youths residing in rural areas. According to the UN statistics, the poverty rate in rural areas is 17.2 per cent—more than three times higher than in urban areas (5.3 per cent).

The increasing poverty level and income inequality have led many African countries and institutions to devise strategies to tackle these challenges. The African Development Bank in its Human Development Strategy proposes possible ways to tackle income inequality through more inclusive opportunities. Also, Ghana is striving to achieve an inclusive financial inclusion landscape through its framework. 

Among other possible ways, financial inclusion may tackle or eliminate both poverty and inequality-related issues these ways: 

  1. Financial inclusion helps people take control of their financial lives. Access to credit can help business owners expand their businesses and make more profit. They can swiftly receive payments from their customers and transact with them with better efficiency. Individuals can also earn interest on their savings and easily carry out transactions without stress. Families can also easily save up for their children’s education. 
  2. Financial inclusion can help families absorb financial shocks. By accessing disaster risk management tools including insurance, they can bounce back from any mishap such as floods, etc. 
  3. Increasing financial inclusion can drive economic development, and possibly increase GDP by up to 14%. As an indicator, a rising GDP improves the well-being of a society and its standard of living. 

The integration of finance with technology is accelerating financial inclusion. With the rise in the use of mobile technologies, people who have been excluded from the financial system may be able to access financial services (digital financial services) regardless of where they reside. People in remote areas/ rural communities will be able to access these services without physical restrictions.  

Research has shown that financial inclusion significantly impacts poverty rates in high and upper-middle-income economies compared with middle-low and low-income economies. This suggests that financial inclusion majorly helps to lower poverty and income inequality when the economy empowers people to use financial products/services for the development and improvement of their lives.  

As a key takeaway, financial inclusion tackles poverty and income equality when it empowers the poor.