PROVO, Utah — In Guatemala, where half the population lives in rural communities without extensive infrastructure, it can be hard to accumulate savings, get credit, or acquire insurance. But is this a big enough fish to fry, and if so, should frying it be among the goals of foreign aid?
Whether lower-income citizens can access formal financial services is more than just an indicator of development; it is an important contributor to economic and structural growth. When families and businesses can participate in transactions, build savings, and purchase insurance, they can make plans to meet their long-term goals and set aside funds to deal with unexpected emergencies. They can begin to invest in education or health. The extent to which this is possible — the accessibility of the finance sector — is known as “financial inclusion.”
The number of Guatemalan adults with a bank or other financial account nearly doubled (from 22 percent to 41 percent) between 2011 and 2014. Yet two-thirds of the population still do not have access to formal financial services. The problem is less pronounced throughout the rest of Latin America and the Caribbean, where the proportion is only about half, but the region lags well behind developed countries in which fewer than 5 percent of people make do without such services. Two billion people worldwide lack even a basic financial account.
A working paper recently published by the Center for Global Development suggests that despite progress in isolated areas, financial inclusion in Latin America has improved very little since 2011, especially in comparison to other regions at similar stages of development. It’s a problem that can largely be traced to institutional weakness. When laws are unevenly or arbitrarily enforced, few citizens are likely to trust their money to institutions like banks and insurance companies. Because so few invest, there is little meaningful competition between institutions. The lack of robust competition perpetuates the institutional weaknesses — and the process collapses in on itself in an ever-repeating cycle.
Of course, there is no quick solution to the weak rule of law that plagues much of Latin America, and financial inclusion may seem like a less pressing issue in the fight against poverty than alleviating hunger or improving access to healthcare. But digital technology is every day creating new tools that could help families prepare for a more secure future, and it’s a question that should remain on the radar of those interested in promoting global growth.
Experts are starting to suspect that digital inclusion may be the first step toward financial inclusion. In 2011, 2.5 billion people lacked a bank account, 60 percent of whom could not obtain one because they were unable to legally prove their identity. But four in ten of those same people had access to cell phones — phones that, in the near future, could help institutions to provide a global e-identity. By 2030, the UN intends to provide a legal identity for all the world’s citizens, and some countries already offer varieties of e-residency programs. Tech companies are working toward the development of apps that would allow users to access all their important financial information at the touch of a button.
Issuing and registering a digital identity is by no means easy or uncontroversial. Today, it’s little more than a concept still percolating in the beginning stages of development. However, in in the future, it could be the key to increasing financial inclusion — and one of the important steps toward eliminating global poverty.
– Madeleine Read