Contesting Financial Inclusion - Wiley Online Library

Debate Contesting Financial Inclusion

Philip Mader ABSTRACT This contribution critically assesses financial inclusion as an intervention in the development space. It examines the turn from microfinance to financial inclusion, with the introduction of new actors and practices; new ideas and ideologies; new theories of change; and new expectations toward clients. It then considers three key issues and contests the arguments made by proponents of financial inclusion about them: first, the argument that financial inclusion facilitates broader development outcomes; second, the claim that poor people gain poverty alleviation through financial inclusion; and third, the suggestion that financial inclusion is good business. In all three areas, the author highlights shortcomings in the evidence base and argues that high expectations of financial inclusion serving as a core pro-poor, private-sector led development intervention lack justification. Rather, financial inclusion should be recognized as a contested and contestable enterprise.

INTRODUCTION

Many members of the development community have endorsed financial inclusion with an evangelical fervour reminiscent of the microfinance hype in the 1990s and 2000s. Access to financial services features in at least 5 of the 17 Sustainable Development Goals (SDGs) set by the United Nations for 2030.1 The enthusiasm of donors and philanthrocapitalists coincides with an unprecedented eagerness among transnational corporations, especially in the financial services and information technology (IT) sectors, to deal with poor people. But in the collective rush to draw the poor2 into formal financial The author thanks Servaas Storm and four anonymous referees for their helpful feedback, as well as Jodie Thorpe and Jim Sumberg for inputs on an earlier version. All errors are the author’s own. 1. Goals 1 (poverty), 2 (hunger), 5 (gender), 8 (growth) and 9 (infrastructure). 2. The shorthand ‘the poor’ is used in this article to refer to the main target group of financial inclusion efforts in the global South (low-income people), at the risk of making this Development and Change 49(2): 461–483. DOI: 10.1111/dech.12368 C 2017 International Institute of Social Studies.

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markets, three critical issues are commonly overlooked. Does financial inclusion really promote development? Do poor people benefit in meaningful ways from using financial services? And does financial inclusion make good business sense? The financial inclusion ‘movement’, represented by (among others) think tanks like Accion International, social business gurus like Muhammad Yunus, funders like the World Bank, and corporate-backed promoters like the MasterCard Foundation, generally takes positive answers to these questions for granted — at least in public pronouncements. As a counterpoint, this article presents a structured, critical policy discourse analysis3 which sets recent high-level textual artefacts against other evidentiary materials and contravening logics. It challenges the emergent development orthodoxy of financial inclusion serving as a core pro-poor private-sector led development intervention, and shows financial inclusion to be a contested and contestable enterprise. In the context of the Forum 2018 Debate, this contribution thereby offers a necessary challenge to a set of policies which, despite being part and parcel of financialization and the expansion of rentier capitalism, have often escaped critical scrutiny, even from many progressive scholars and activists. The programme of financial inclusion presents a proposal to address the immense social, political and economic injustices suffered over several decades of unmitigated debt accumulation (Graeber, 2011) — a paradoxical proposal, given that it addresses the social costs of financialization (see Epstein, this issue) by facilitating even more extensive debt relationships and a further commodification of livelihoods in the global South. As microfinance gradually gives way to this ‘broader push to extend financial markets [which] introduces new products, new providers, and new target markets’ (Cull et al., 2013: 1), a re-evaluation of the developmental, social and business logics of financial inclusion — microfinance’s heir apparent — is urgently needed. This reassessment is all the more important given the imbrication of financial inclusion with the promotion of novel digital financial technologies deployed in the incipient ‘crusade’ against cash (Mader, 2016), the crystallization of the ‘fintech–philanthropy–development (FPD) complex’ as a powerful force reshaping transnational governance (Gabor and Brooks, 2016: 424), and the reconfiguration of social policy agendas to generate more financial assets for investors by collateralizing, securitizing and capturing government-to-citizen payments (Lavinas, this issue). After an explanation, in the first section, of the turn from microfinance to financial inclusion, three issues will individually be discussed in the subsequent three sections: the lack of evidence that expanding financial access group appear artificially homogeneous or clearly-defined. A discussion of this intractable problematic can be found in Mader (2015: 78–81). 3. This contribution draws upon a structured review of assumptions and evidence using a greater range of sources: see Mader (2016).

Debate: Contesting Financial Inclusion

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for poor people promotes broader socio-economic development; the lack of evidence that expanding financial access actually brings poor people immediate benefits; and the dubious business rationale for full financial inclusion. With due caution, the argument here is not that financial inclusion is harmful or destined to fail; rather, that currently there is insufficient evidence for financial inclusion being development-promoting, poverty-alleviating, and indeed profitable enough, to justify all the attention and resources directed toward it.

THE TURN FROM MICROFINANCE TO FINANCIAL INCLUSION

As a background to any discussion of financial inclusion in developing countries, its relationship with microfinance needs to be considered. Modern microfinance emerged in the 1970s and was integrated by the World Bank into Structural Adjustment Programmes. It developed into a global finance– development hybrid specialized in making high-interest loans, which today amount to around US$ 100 billion. But in the last decade, and particularly since 2010, microfinance institutions (MFIs) have come under fire for their high interest rates (around 35 per cent on average, according to The Economist, 2014), their fixation on credit over other financial services (Mader, 2015: 33–34), the lack of demonstrable poverty impact (Duvendack et al., 2011; Stewart et al., 2012), their questionable record on women’s empowerment (Fraser, 2009; Karim, 2011), and for driving over-indebtedness (Gue´ rin et al., 2015). Since then, ‘financial inclusion’ has emerged as a new label. Some critics initially dismissed this as ‘an almost entirely fake agenda’ (Bateman, 2012), and there is some truth to this suggestion of a mere re-branding, because much of today’s financial inclusion activity is still microfinance: small, short-term, high-interest loans extended to low-income people. But treating financial inclusion as only a terminological bait-and-switch, and nothing more, would also overlook some profound yet gradual, ongoing changes. Beyond offering a new developmental flavour-of-the-month, financial inclusion has breathed new life into the previously-flagging ‘poverty finance’ (Rankin, 2013) agenda in development in at least four important ways: new practices; new guiding ideas/ideology; new theories of change; and a new invitation to live by finance. New practices: financial inclusion invites a new set of powerful players and practices into organized financial dealings with the poor; while still ‘including’ MFIs, financial inclusion also welcomes older community-based programmes and cooperative institutions back into the fold. At the same time, other actors like payday lenders, large banks, technology firms, mobile network operators and credit card companies are also now ‘included’. Whereas microfinance was a distinct and free-standing industry, financial inclusion blurs the lines between different types of service providers and

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practices. For instance, mainstream companies may now downscale into the ‘micro’ segment, while large MFIs scale up to acquire formal banking licences; a plethora of ‘fintech–microfinance partnerships’ is emerging. With financial inclusion, the role of the state also changes: in microfinance, governments were primarily expected to deregulate and make space for MFIs to grow, but in financial inclusion they are expected to actively promote. The Alliance for Financial Inclusion (AFI), for instance, has assembled policy makers and regulators from 96 countries under the G20’s aegis (Gabor and Brooks, 2016) to create an ‘enabling’ environment for new technologies, to bring about a ‘proportional’ framework of regulation, to ‘integrat[e] consumer protection and financial literacy’, and for ‘collecting and utilizing data’ (AFI, 2015a). The Indian government has emerged as the paragon of a new activist breed of financial inclusion state, with its policy-driven ‘largest financial inclusion scheme in the world’, Pradhan Mantri Jan Dhan Yojana (PMJDY)4 for universal bank accounts, running since 2014, its promotion of ‘RuPay’ cashless payment cards, and its shocking ‘demonetization’ of high-denomination rupee notes in late 2016, aimed at driving the uptake of digital financial services (see Chandrasekhar and Ghosh, this issue). These new practices have fairly little in common with microfinance. New ideas/ideology: financial inclusion blends financial logics with contemporary social justice vernacular, aligning finance with the discourses of social inclusion that have framed the post-2015 ‘Sustainable Development’ agenda. Statements like ‘[o]ne key component of inclusive development is financial inclusion’ — taken from a headline African Development Bank publication (Triki and Faye, 2013: 25) — showcase the blending of finance into donor agendas of economic inclusion and inclusive development. The World Bank and other multilaterals see financial inclusion as integral for ‘inclusive growth’ (Demirgu¨ c-Kunt et al., 2017) — a (poorly-defined) term that is championed by the World Economic Forum (WEF, 2017). At an ideological level, financial inclusion bonds finance with broader aspirations for justice and equality, while stymying critical engagement with financial expansion — after all, who would argue for financial exclusion? — and removing from the picture questions about how markets generate inequality. An inability to partake in markets is one risk poor people commonly face, but being incorporated into markets on highly adverse terms is another (Hickey and du Toit, 2013). Participation in markets can exacerbate existing inequalities and produce new forms of exclusion (Meagher, 2015), and inclusive financial markets by no means automatically offer poor people a ‘fair’ deal: they generally offer lower-quality services at higher prices, at least in the absence of targeted regulation and viable non-market alternatives. New theories of change: financial inclusion brings changed expectations of how poor people should benefit from engaging with finance. The 4. Variously translated as ‘Prime Minister’s Money Scheme’ or ‘Prime Minister’s People’s Wealth Programme’.


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‘original’ (microcredit) theory of change proposed poverty alleviation resulting from microloans and enabling entrepreneurial activities to generate higher incomes. By contrast, financial inclusion theory is agnostic towards entrepreneurship, and instead focuses on two acts of financial intermediation which I call intertemporal intermediation, and interspatial-interclass intermediation. With intertemporal intermediation, the idea is that a key economic problem for low-income people (who often have irregular incomes) is the disconnect between times when they have money and times when they need money. The crucial role of financial services, the theory suggests, is to ‘allow people to reallocate expenditure across time [meaning that] if you don’t have the ability to pay for things now, out of current income, you can pay for them out of past income or future income, or some combination of both’ (Rutherford, 2000: 2). Microeconomically, then, financial services are proposed to alleviate poverty by virtue of shifting money across time. Interspatial-interclass intermediation refers to a macro-level theory that finance drives economic growth by lowering transaction costs and distributing capital and risk. Finance moves money from places and people with excess capital to places and people requiring capital, and the better-connected these places and people are, the more growth results from economic interactions. Thus, macroeconomically, financial inclusion is about connecting greater numbers of capital-providers and capital-users, driving economic growth, the benefits of which will reach poor people. Both theories of change, notably, remove the distinction that once was observed in microfinance between ‘good’ clients (who use finance for something productive) and less worthy clients (who will, for instance, consume), such that now the focus is on offering services to all: different people have different financial needs — all have some — and society benefits from all these needs being met, via the right products at the right prices. New invitation to live by finance: lastly, the turn from microfinance to financial inclusion signifies a change in how clients are supposed to engage with financial services. More is expected from them than when they were ‘only’ presumed to be microentrepreneurs. Since financial inclusion involves bundling and shifting income streams and expenditures (intermediating) across time, people must show even more responsible and calculative behaviours than before: planning for and reacting to opportunities, needs, crises, setbacks, and so on, by making the right financial choices. Whereas microentrepreneurs ‘only’ had to invest in simple businesses and make a profit, financially included households need to assess multidimensional risks and opportunities, plan well ahead and ‘live by finance’ by taking the right decisions.5 Consequently, a plethora of financial education and ‘financial literacy’ initiatives now target poor people. They are often intended as substitutes for consumer protection, by helping clients ‘self-protect’ against 5. The conceptualization of financialization as ‘an invitation to live by finance’ comes from Martin (2002: 3) and was adopted by Roy (2010: 32) to analyse microfinance.

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poor choices or offers (McKee et al., 2011: 3). However, such education initiatives are costly, and their effectiveness is in doubt (World Bank, 2014: 80–85); therefore attention has increasingly turned to cheaper behavioural instruments like commitment devices and ‘nudges’. This behavioural turn also follows a number of microcredit impact studies which found scant evidence of poverty reduction, but discovered that credit reshaped borrowers’ spending patterns; for instance, microcredit in India did not raise borrowers’ incomes, but it induced them to reduce spending on various ‘temptation goods’ (Banerjee, Dulfo et al., 2015: 22). Commitment-based savings devices have been found to help ‘present-biased’ poor people overcome ‘time-inconsistent preferences’ and save more money (Dupas and Robinson, 2013). Savers in the Philippines were more likely to quit using tobacco when threatened with confiscation of their savings (Gine´ et al., 2010). Researchers, practitioners and development funders have seized on these and similar findings, and sought to integrate financial services with mechanisms for building clients’ financial ‘capability’, defined as ‘the combination of knowledge, skills, attitudes, and behaviors a person needs to make sound financial decisions that support well-being’ (Arnolds and Rhyne, 2016: 7). Financial inclusion is not an alternative to microfinance, but its continuation and expansion. Development actors further pursue the original premise of microfinance — that financial services generate broader development outcomes and poverty alleviation. But the reframing of ‘poverty finance’ (Rankin, 2013) as financial inclusion (while allowing microfinance to continue, at least for now) has a number of implications: it opens the space to larger financial businesses and other powerful capital actors; ideologically positions finance as a central element of social inclusion; reinforces theories of finance as a crucial economic factor; and deploys finance as a driver of ‘good’ behaviours to overcome poverty. The next three sections will critically evaluate and contest this ascendant financial inclusion agenda, by highlighting three particular challenges posed by the current state of evidence and practice.

FINANCIAL INCLUSION AND DEVELOPMENT OUTCOMES

When advocates of financial inclusion suggest that both individuals and societies as a whole benefit, the implicit theory of change (as sketched above) differs from the older, narrower one underlying microfinance, which emphasized the economic and gender-empowerment benefits of microenterprise funding. This new theory is hardly more modest, as exemplified by the 2011 ‘Maya Declaration’, promulgated by the G20’s AFI. It proclaims that central bankers around the world now ‘[r]ecognize the critical importance of financial inclusion to empowering and transforming the lives of all our people, especially the poor, its role in improving national and global financial


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stability and integrity and its essential contribution to strong and inclusive growth’ (AFI, 2015b, emphasis added). Other AFI statements even more sweepingly hold that ‘financial inclusion is an important part of the solution to current global economic problems’ (Hannig, 2013: 44). The Global Partnership for Financial Inclusion (GPFI), another G20 initiative, also claims that a financial system which ‘excludes the vast majority of citizens . . . cannot contribute to national economic activity, promote job creation, increase income and boost shared prosperity’ (GPFI, 2014: 3). What is the basis for these great expectations of empowering and transforming the lives of poor people, creating jobs, increasing incomes, boosting ‘shared prosperity’, and helping solve global economic problems, with financial inclusion? The G20’s Financial Inclusion Experts Group proposes that ‘[f]inancial sector development drives economic growth by mobilizing savings and investing in the growth of the productive sector. The institutional infrastructure of the financial system also contributes to reducing information, contracting and transaction costs, which in turn accelerates economic growth’ (ATISG, 2010: 44). While many publications (including ATISG, 2010) discuss hardly any evidence at all for such claims, some (for example, World Bank, 2014) claim there to be a substantial evidence base. But a closer look reveals this to be flimsy. The World Bank’s Global Financial Development Report 2014, for instance, bases much of its reasoning on correlations between certain measures of financial inclusion (such as account ownership) and positive macroeconomic and social outcomes (such as economic growth or lower income inequality). To illustrate this, the report highlights the differences between Sweden and Haiti in terms of income inequality and equality of access to bank accounts (ibid.: 41). While being able to discuss many such cross-country comparisons and correlations, however, the report must take a bold logical leap when imputing causation into them.6 The World Bank’s main argument is built on three relatively old publications and the axiomatic, abstract models they present: Banerjee and Newman (1993), Galor and Zeira (1993), and Aghion and Bolton (1997). It claims they show ‘lack of access to finance can be critical for generating persistent income inequality or poverty traps, as well as lower growth’ (World Bank, 2014: 14). In fact, none of the three papers support such strong and broad claims. Banerjee and Newman (1993) and Galor and Zeira (1993) both modelled the effect of financial access on poverty, focusing only on individuals’ ability to fund investments in their own education. Unequal access to credit, they argued, led to differences in human capital (or skills), which led to greater inequality and lower growth throughout the economy. However, the 6. Cull et al. (2014: 6) acknowledge that ‘[a]t the macroeconomic level, the evidence has to rely on cross-country comparisons’. Some texts add nuance, for example: ‘the crosssectional nature of the data allows us to interpret these results only as significant correlations, not causal relationships’ (Allen et al., 2012: 24), but such data are widely claimed to be compelling evidence.

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role of educational credit is far narrower than financial inclusion itself, and in terms of policy implications, the papers could just as well serve to argue the case for more egalitarianism in education policies (not broader access to finance). The third key paper, Aghion and Bolton (1997), meanwhile, does not even argue for expanding access to finance; rather, it proposes that policy makers should institute permanent wealth redistribution schemes because, so the authors claim, this would help equalize access to finance — the reverse causation of that asserted by World Bank (2014). Thus, in a sober evaluation, these three theoretical papers, plus the cross-country correlations, which form the basis of the World Bank’s cornerstone report on financial inclusion, offer only a weak evidence base, at best. Yet such misinterpretations and selective readings of economics papers pervade the financial inclusion literature far more broadly. Another important empirical publication (cited more than 8,000 times in total, according to Google) is King and Levine’s (1993) ‘Finance and Growth: Schumpeter Might be Right’ — a seminal paper in finance policy which specifically investigated neither developing countries nor the inclusiveness of financial systems, it is nonetheless regularly fielded as evidence for financial inclusion being a key to developing countries’ growth. King and Levine modelled and tested a relationship between the growth of national private financial sectors and macroeconomic variables, primarily GDP, finding that as the financial sector grew, so did the economy. But it remains unclear what, if anything, these findings say about financial inclusion of the poor (or anyone), because not the size of financial sectors, but whom they reach, is the issue; a massive financial sector may still cater to only part of the population. Furthermore, King and Levine’s paper offers no evidence that economic growth (whether driven by financial growth or not) actually benefits poor people. Another article that is often cited as proof for financial development benefiting the poor in fact argues finance impacts only ‘indirectly on income inequality, through its effect on economic growth’ (Jalilian and Kirkpatrick, 2005: 649). This paper, too, used overall private credit relative to GDP to measure financial development, and therefore again can say little about inclusive financial access. Furthermore, it concluded that only in the longer term (after first actually exacerbating inequality) would financial growth create greater equality. Similarly, Beck et al. (2007: 27), with their widely-cited finding that ‘[f]inancial development disproportionately boosts incomes of the poorest quintile and reduces income inequality’, only engage with overall private credit, not credit for the poor. In short, while advocates invoke these articles as evidence for financial inclusion benefiting poor people through macroeconomic improvements, the articles themselves fail to distinguish between financial sector growth (or bloating) and financial inclusion, and they say very little (if anything) about access to financial services for poor or presently-excluded people. Worse still, the imputed logic may be false, in that larger financial sectors offer more credit for larger, industrial enterprises, not for the poor, and this might


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explain macroeconomic growth and improvements in inequality. If that were the case, the direction of more financial resources towards ‘inclusive finance’ — whose customers are likely to use credit for consumption, or invest in low-growth microenterprises — would even hinder growth and exacerbate inequalities (Bateman and Chang, 2012). The ‘macro’ argument for financial inclusion rests on the suggestion that expanding access to finance drives growth and other pro-poor macroeconomic changes; but the evidence, as we have seen, is inconclusive or of questionable relevance. The interspatial-interclass intermediation theory of change for financial inclusion thus appears very weak. The underlying axiomatic and abstract models are based on an assumption about more finance being better for growth; this appears even more archaic since the onset of the Great Financial Crisis, and since even the International Monetary Fund has begun to revise this assumption (Arcand et al., 2015). The many correlations between financial and developmental outcomes, which texts like World Bank (2014) present, are compelling, but their causality is probably spurious, with an unrecognized variable, such as quality of government, generosity of welfare states, etc. actually driving both. Or the causality may even be the reverse of what is expected. The correlations are akin to the relationship between automobile ownership and incomes: one would find statistical correlations across countries and people, but to call for ‘automotive inclusion’ as the key to higher incomes would be outlandish. More logical is that lower economic inequality, higher incomes and better access to jobs drive usage of financial services (and cars for that matter), because people who reliably can satisfy their more urgent needs — such as food, housing or healthcare — are able to afford financial services, too. Prioritizing financial inclusion in development policy then puts the cart before the horse. As Sarma and Pais (2011: 626) recognize: ‘building of financially inclusive societies would require attempts to reduce income inequality, enhance literacy levels and improve physical and communication infrastructure’; and since, by all accounts, this is what financial inclusion advocates aim for, they should focus on socio-economic development before financial development.

FINANCIAL INCLUSION AND POVERTY ALLEVIATION

With the ‘macro’ theory in doubt, what about more direct, ‘micro’ impacts on the poor? Financial inclusion proponents generally argue that it brings poor people significant, tangible, direct benefits, and their argument rests on the intertemporal intermediation theory of change: that financial services are crucial because they allow poor people to move money over time and mitigate shocks, in order to enhance their economic opportunities, gain access to goods and services, and manage and allocate their resources better. Some proponents even suggest that ‘poor households are in continual need of financial tools to improve their productivity and secure the best possible

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consumption and investment choices, all the while managing potential or existing risks’ (Ledgerwood and Gibson, 2013: 27, emphasis added). Despite having remained a less-fervent promoter of microfinance than the World Bank and many other multilaterals, the UN (2006: 4) has proclaimed: ‘we know that access to a well-functioning financial system can economically and socially empower individuals, in particular poor people, allowing them to better integrate into the economy of their countries, actively contribute to their development and protect themselves against economic shocks’. Much literature in the finance and development space echoes such claims about financial services playing a critical role in directly (not indirectly, through economic growth) improving the lives of poor and low-income populations (see ATISG, 2010: 1; Thingalaya et al., 2010: 21–22; UNCTAD, 2014: 5). With its tone of urgency and promises of impact, the promoter discourse about financial inclusion echoes the hubristic claims once made for microcredit, for instance by Muhammad Yunus, who used to regularly tell audiences that microfinance would send poverty to ‘poverty museums’ within two generations (Yunus, 1997). Indeed, most early financial inclusion texts drew heavily on the claims made for microcredit (e.g. Helms, 2006: 29ff; UN, 2006). Even today, the financial inclusion literature generally treats an absence of formal financial services, prima facie, as an evident deficiency. For instance: ‘An estimated 2.7 billion adults worldwide do not have credit, insurance, or savings with a bank or other formal institution . . . . Yet, the more we learn about the financial lives of poor people, the clearer it is that low-income families need a wide array of financial services’ (Ehrbeck et al., 2012: 1). With even greater pathos, the G20 argues: For poor people, money management is an absolutely central part of daily life, perhaps more than for any other economic group. . . . More than two billion adults do not have access to formal or semi–formal financial services. They are the financially excluded in a world where access to financial services can mean the difference between surviving or thriving. (ATISG, 2010: v, 4)

Do financial services really make the difference between surviving and thriving? Only in rare instances do proponents not present finance as an evidently pressing, universal need. As one exception, the UN (2006: 3) concedes that ‘[i]nclusive finance does not require that everyone who is eligible use each of the services, but they should be able to choose to use them if desired’. That microcredit, in any ‘miraculous’ or transformative way, brings poverty relief has been so seriously dispelled by accumulated research findings — both from systematic reviews of prior studies (e.g. Duvendack et al., 2011) and results from new randomized studies (e.g. Banerjee, Karlan and Zinman, 2015) — that microfinance promoters’ declamations now, at least for the most part, avoid making claims that microfinance measurably reduces poverty. For instance, the answers of the Consultative Group to Assist the Poor (CGAP) to frequently asked questions (FAQs) serve up


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carefully-formulated claims that microfinance and financial inclusion ‘help improve individual and household welfare and spur small enterprise activity’, while studiously avoiding the (refutable) claim that poverty is actually reduced.7 Even sympathetic observers increasingly concede that ‘the best estimate of the impact of microcredit on poverty is zero’ (Roodman, 2012). To offer a snapshot of the wider evidence base for this: a recent slew of six high-profile randomized control trial (RCT) studies8 delivered few conclusive impact results, and the lead authors conceded a ‘lack of evidence of transformative effects on the average borrower’ (Banerjee, Karlan and Zinman, 2015: 3). Particularly regarding the intensely-studied question of whether access to microcredit raises incomes, studies find that while households do invest more in business ventures and productive assets, this does not raise their incomes on average. At a granular level, the studies present a complex tangle of findings, non-findings and uncertainties: results from one country usually do not replicate in others; reverse impacts are sometimes found; impacts vary widely between different client groups (many significant impacts are found only for very small subpopulations, such as the top 5 per cent or highly regular service users), which distorts the averages. However, the argument made for financial inclusion beyond microfinance is a different one: it is about expanding freedom of choice and enabling better money management for poor people. This would be hard to refute with any evidence. The claim that poor people are active, savvy, skilful financial managers who seek better tools is most potently made in the book Portfolios of the Poor (Collins et al., 2009), which draws on evidence gathered from so-called ‘financial diaries’.9 The authors evaluate these data through an analytical lens focused exclusively on poor people’s monetary activities (where the authors argue the interesting ‘action’ is; ibid.: 11), disregarding any non-monetary exchanges (which are very common among poor people) or changes to physical assets (even though, as the authors acknowledge, these constitute the bulk of poor people’s wealth). Unsurprisingly, the authors find poor people to actively manage money in many different ways; they interpret any instance of not immediately spending all available income — not living entirely ‘hand-to-mouth’ — as an act of financial intermediation, simply because money has been moved over time. Collins et al. even go so far as to argue that poor people’s problem of having low incomes is trumped by their lack of access to reliable, convenient, flexible and appropriately structured financial tools with which to manage low incomes. ‘Not having enough money is bad enough’, they conclude; 7. See: www.cgap.org/about/faq/what-impact-financial-inclusion-efforts (accessed 14 June 2017). 8. Published in a special issue of the American Economic Journal: Applied Economics 7(1), January 2015. 9. The method, more accurately, consisted of regular interviews with household heads to reconstruct their incomes and expenditures, ex-post, rather than keeping actual diaries.

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‘[n]ot being able to manage whatever money you have is worse. This is the hidden bind of poverty’ (ibid.: 184). There can be no doubt that poor people lead complex financial lives, as Collins et al. persuasively show; but that, amid the ‘triple whammy’ (ibid.: 39–45) of (1) low incomes, (2) irregularity/unreliability, and (3) lack of financial tools, the latter two should really be the worst problems, appears strange. In making this argument, Portfolios of the Poor — hailed as the ‘new bible’ for poverty eradication10 — replaces one myopic view of poverty (merely a lack of money) with another (a lack of financial tools), leading to the (potentially disastrous) consequence that financial inclusion advocates and practitioners are free to turn their attention away from enhancing poor people’s paltry resources, and concentrate on the much more trivial task of selling them services with which to marshal and manage such meagre resources. As the lead authors of the RCT collection suggest: ‘If microcredit’s promise was increasing freedom of choice it would be closer to delivering on it’ (Banerjee, Karlan and Zinman, 2015: 3).11 Thanks not least to this analytical sleight of hand — making ‘lack of money’ as a problem disappear from view, putting ‘lack of financial intermediation and choice’ centre stage — many policy publications are able to argue that the key impact of financial inclusion must not be poverty reduction, but improving client ‘welfare’ (see Allen et al., 2012: 35; ATISG, 2010: v, 1, 4; Ledgerwood, 2013: xvii and Ch. 5; Sarma and Pais, 2011: 613; UNCTAD, 2014: 4–5). Welfare, as an economic concept, is a vague and obscure (bordering on tautological) notion: simply gaining additional options in any given situation is already an improvement. Any household that gains the option of using financial tools to smooth its consumption or reallocate its expenditures gains welfare; notably, welfare would even increase if the usual indicators of poverty, such as income or asset levels, remained unchanged. Certainly, allowing poor households to smooth consumption or manage shocks, or generally give them more choices, can be indicative of helping them cope with poverty, but not of helping them escape poverty. Consequently, the benefits to the poor from financial inclusion, which still are often presented as ground-breaking in grandiose public statements, are becoming increasingly blurred. In the words of the UN (2006: iii): ‘A small loan, a savings account or an insurance policy can make a great difference to a low-income family. They enable people to invest in better nutrition, housing, health and education for their children. They ease the strain of coping with difficult times caused by crop failures, illness or death. They help people plan for the future’. Yet the concern for enabling people to invest in vital goods or helping them

10. Jonathan C. Lewis on the back cover of the 2009 edition. 11. This is undeniably true; but it says nothing about the consequences of the choices people make, which, in unfortunate cases, include over-indebtedness, financial losses and a curtailment of future choices (Guérin et al., 2015).


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plan for the future, noble as it may be, is hardly the same as ensuring their investments are likely to succeed and generate better futures for them. The obfuscation of the poverty alleviation issue goes even further with some advocates now suggesting that access to financial services should, in its own right, be recognized as empowering and granting a sense of inclusion. Helms, for example, suggests that financial instruments bring intrinsic enjoyment and empowerment, in that ‘within our lifetime poor and low-income people throughout the developing world can enjoy permanent access to the financial services they need. These financial services . . . enable poor people to climb the first rung on the ladder out of poverty on their own terms’ (Helms, 2006: 139, emphasis added).12 Helms also likens financial inclusion to the participation in world society that the Internet facilitates (ibid.: 145). Other authors very explicitly and directly associate finance with empowerment: ‘Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction. Truly speaking, providing access to finance is a form of empowerment of vulnerable groups’ (Thingalaya et al., 2010: 11); still others proclaim finance to be crucial for inclusion writlarge, with statements like ‘financial inclusion may well be about money and finance, but with the ultimate objective of directly abolishing the state of social exclusion in the economy’ (Teki and Mishra, 2012: 76). All this may be true — but evidence of poverty reduction it is not. In terms of ‘micro’ impacts, then, although financial inclusion might well bring many intangible benefits, these are evidently, for the most part, assumed rather than demonstrated. Digging below the rhetorical surface of financial inclusion discourse, the promised ‘poverty alleviation’ effects reveal themselves as an ability to intertemporally intermediate money, an expansion of financial choices, and an intangible sense of inclusion; by no means meaningless things, but fairly superficial impacts which are far from transformative. Viewed from a poverty alleviation perspective, moreover, once more the relative positions of cart and horse come into question: if poor people actually enjoyed higher incomes, their irregularity would surely be far less of a problem, and the financial tools with which to manage their incomes would become affordable. Although it is reasonable to treat ‘financial exclusion as a manifestation of social exclusion’ (Sarma and Pais, 2011: 626), to (conversely) locate it at the heart of these exclusions is unjustifiable without further evidence.

FINANCIAL INCLUSION AND GOOD BUSINESS SENSE

Leaving aside such questions of economic and social policy, the case for financial inclusion may also be made as simply a viable business proposition, 12. No explanation is given for why those routes out of poverty that can be pursued via financial services usage would be the routes that poor people would choose ‘on their own terms’.

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worthwhile pursuing in its own right as long as it does no harm. For financial inclusion to make good business sense, financial actors must succeed at profitably offering decent-quality services at affordable prices and at encouraging clients to use them. Major financial corporations (as well as non-profits connected to major finance companies, such as Citi Foundation and MasterCard Foundation) have already signalled their strong interest in financial inclusion as a business opportunity, and many publications assume the business case, or ‘business potential’ (Teki and Mishra, 2012: 128), to be evident. For instance: over the next decade, the depth of poverty will diminish as millions of families will leave extreme poverty behind. With slightly more discretionary income such families can begin to afford financial services, opening the possibility for the private sector to serve them. We estimated that full inclusion could bring a potential $6 to 8.5 billion revenue pool into the financial sector. (Accion, 2009: 3)

Similarly, a report commissioned for Visa estimates that micro and small merchants in developing countries alone will pay around US$ 35 billion annually in fees, if their transactions, amounting to more than US$ 6.5 trillion, are digitized and brought into the formal financial system (Carlberg et al., 2016). However, that businesses will be able to profitably and decently serve all poor people is not self-evident — as, not least, numerous calls for government support suggest. Why is the financial inclusion of poor people expected to be a viable and interesting business opportunity for private, for-profit financial sector actors? Here, too, the experience of microfinance often serves as a starting point. For instance, the G20 Financial Inclusion Experts Group highlights that MFIs have proven that: ‘clients often pay market rates for financial services and are reliable clients. These market rates can cover the higher transaction costs of small loans and often include significant risk premiums. The majority of microfinance providers that have significant numbers of clients are profitable (i.e. financially sustainable), and are funded by social and commercial investors not donor grants’ (ATISG, 2010: 6). Helms (2006: 5) also underscores how microfinance ‘has demonstrated that poor people are viable customers, created a number of strong institutions focusing on poor people’s finance, and begun to attract the interest of private investors’ (see also MasterCard Foundation, 2014: 5; UN, 2006: 9). But, given that financial exclusion persists, the question arises: why is the business potential of financial inclusion not fulfilled? Why do profit-oriented actors not successfully ‘do’ inclusive finance with all poor people? One explanation commonly put forward by financial inclusion advocates (in contradiction of Portfolios of the Poor) is that many poor and low-income people do not demand or know how to ‘properly’ use formal financial services; they do not fully recognize what formal financial sectors offer them, and how they must behave to benefit. For example, Deb and Kubzansky (2013: ii, 2) argue there is a massive ‘financial capability gap’ which


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businesses should help to close, because ‘[w]ithout the skills and knowledge to make informed financial choices, it can be difficult if not impossible for low-income earners using financial products for the first time to understand the full implications — including both the short-term and long-term risks — of their choices and actions’. The G20 experts similarly claim: ‘[l]ow levels of financial capability form a significant barrier . . . . With enhanced financial capability, poor people will be able to understand basic financial concepts, appreciate how newly available services can meet the needs currently filled via informal financial arrangements, and have the skills to apply their knowledge’ (ATISG, 2010: 18). One related problem for proponents of the business case is that the space they seek to occupy is not always empty: smaller, informal or government providers of financial services exist. Some authors are careful to not wholly dismiss these as always irrelevant or harmful — particularly where they serve clients who are too marginal to be of much interest for private-sector operators (Ledgerwood and Gibson, 2013: 30) — but still take a position that, the more formal and more private (that is: for-profit) a provider is, the better. As Accion (2009: 1) very bluntly states: ‘Financial services are delivered by a range of providers, most of them private’. The MasterCard Foundation (2014: 4) notes, more subtly, that village-based savings groups can satisfy basic needs but, ‘[w]hile these solutions work at a subsistence level, their exclusion from the formal system makes them more susceptible to risk’. Cull et al. (2014: 2) also opine: ‘At times, these informal mechanisms represent important and viable value propositions. Often, however, they are insufficient and unreliable, and they can be very expensive’. Even though the G20 calls for ‘diversity’ in financial inclusion, it too mostly implies private providers when it emphasizes that policy approaches should ‘promote competition and provide market-based incentives for delivery of sustainable financial access’ (GPFI, 2014: 13). The broad emphasis on competition as a supposed driver of financial inclusion shows the conviction that private, profit-seeking entities (which respond to competition) should take the lead: ‘As in any market, if improvement in access does not develop in a competitive manner, benefits may be restricted. Clients with limited information and/or choices may not be able to exert competitive pressure on providers to improve services’ (Ledgerwood, 2013: 4). The UN, once again, represents an outlier, conceding that ‘multiple providers of financial services . . . could include any number of combinations of sound private, non-profit and public providers’ (UN, 2006: 17). Two further explanations are routinely offered for why financial inclusion business opportunities as yet remain unrealized. The first is that information asymmetries cause the market to fail: financial institutions do not trust or know their (potential) clients well enough; the clients do not understand the institutions well enough. While the latter is often deemed remediable through education or capacity building, the former is discussed as a problem of adverse selection and moral hazard (Thingalaya et al., 2010: 26;

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UNCTAD 2014: 7; World Bank, 2014: 17–18). As the World Bank (2014: 17), for instance, argues, in credit markets ‘higher interest rates tend to attract riskier borrowers (adverse selection) and change repayment incentives (moral hazard)’. If true, the high prices poor people pay for financial services do not mean that financial inclusion necessarily must be expensive or unprofitable. Rather, they indicate that information gaps have driven a wedge between supply and demand, which is to be removed with new technologies, new policies and market infrastructures (such as credit bureaus). A second common explanation given for the business opportunity remaining unfulfilled is government failure: high documentation requirements create obstacles (Allen et al., 2012: 13); regulation stifles innovation (ATISG, 2010: 1); price regulation and anti-competitive policies keep entrants out of markets (World Bank, 2014: 47); and states compete unfairly by attempting to offer financial services themselves (Ehrbeck et al., 2012: 5; Helms, 2006: 141).13 To remedy such governmental sins against business efforts to financially include the poor, according to the UN (2006: 6), ‘a change in attitudes of government and other stakeholders may be required, along with a greater appreciation of what inclusive financial sectors can deliver for development’. Staschen and Nelson (2013: 73) even speak of the need to ‘educate lawmakers’ in order ‘to overcome any potential resistance and create a joint understanding of what is needed to achieve an enabling environment for financial services for the poor’. Several objections can be raised against these ‘market failure’ and ‘government failure’ explanations of financial exclusion. First, Collins et al.’s (2009) portrayal of poor people as savvy finance users suggests that clients are unlikely to be unaware of the benefits of financial products, or incapable of using them properly. Instead of poor and low-income people remaining financially excluded because they mistrust formal institutions, it appears more likely that many lack the savings or cash flows to make it worthwhile and profitable for businesses to serve them — except through short-term, high-interest loans, of the kind that MFIs provide. Second, high prices actually reflect transaction costs, rather than just trust or information problems. The largely non-existent business of microsavings services offers a case in point: because collecting and administering tiny deposits is very expensive for MFIs, most MFIs prefer to raise capital from banks, investors or donors (Mader, 2015: 33–34); if they do offer savings services, MFIs usually provide these in conjunction with loans, often as ‘forced savings’ (where borrowers must ‘deposit’ part of the loan as security, and pay interest on the full loan amount).14 Third, the widespread fixation of financial inclusion advocates on governments as a hindrance is a distraction from all the policy support private finance already receives. Many different factors favour financial inclusion: a globally 13. As an outlier once again, the UN (2006: 18) points out that, historically, public financial services programmes have sometimes been useful. 14. Sinclair (2012: 35–36, 92) details how MFIs pad their profit margins with this technique.


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liberalized international financial environment, structural adjustment which expanded private credit provision, international capital markets flush with funds, numerous governments which have declared financial inclusion a policy priority, and the fact that regulation and competition from state lenders has long been in retreat in many places. However, there is another possible explanation for many financial inclusion authors’ fixation on government: what they seek, in reality, is for governments to deliver the business for private financial companies. States are increasingly called upon to go beyond deregulating markets, and demonstrate their ‘broad-based government commitment to financial inclusion to help alleviate poverty’ (ATISG, 2010: vii). They should provide ‘a supportive environment [that] keeps the market in mind’ (Accion, 2009: 2). Commonly-made demands on public bodies include delivering payment infrastructure and credit bureaus (Ehrbeck et al., 2012), encouraging technology development and uptake (ATISG, 2010: 1), promoting clients’ financial capability (Staschen and Nelson, 2013: 76–78), removing regulation (UNCTAD, 2014: 17), and ensuring macroeconomic stability (Helms, 2006: 141). The World Bank, furthermore, calls on governments to channel their welfare payments to citizens through financial service providers, because the payments can become ‘a vehicle for extending financial inclusion’ (World Bank, 2014: 98). ‘[T]he spectrum of social transfers, wages, and pension payments’, Ehrbeck et al. (2012: 8) argue, should be used to drive transaction volumes, bring more low-income individuals into the financial sector, and lower the costs per transaction (see also Allen et al., 2012: 34; UNCTAD, 2014: 17). The question is not whether there is a business case for financial inclusion — it has been vociferously argued — but whether it is credible. From the present evidence, it remains unclear. Where private business has engaged in financial inclusion, it generally has cherry-picked, offering selected services (mainly high-interest loans) to selected clienteles (often the urban, employed, less-poor), and even these ‘business models’ frequently have taken initial or continual philanthropic and public-sector support.15 Despite many grand pronouncements about ‘fintech’, branchless banking, mobile banking, or agent banking acting as the imminent drivers of financial inclusion,16 the business case remains more speculative than certain. Underwriting the current ‘tech’ optimism, that new technologies can dramatically lower transaction costs and generate new data riches that resolve information problems, is Kenya’s famous mobile payments service M-PESA. But M-PESA’s broad take-up has proven difficult to replicate elsewhere (see MasterCard Foundation, 2014: 5), and payments services may be more 15. Even in the microfinance business, only 23 per cent of institutions manage without subsidies (D’Espallier et al., 2013). 16. See ATISG (2010: v); Helms (2006: 141, 222); Ledgerwood (2013: 2); UNCTAD (2014: 10).

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susceptible to technological breakthroughs than financial services generally. Indeed, the potential of formal for-profit business models to be successful in savings and insurance, which would be crucial for households coping with shocks, is particularly uncertain, as Collins et al. (2009: 93), for instance, concede: ‘commercially viable comprehensive health insurance to poor households . . . would almost surely entail premium payments that would be beyond the reach of even the best-off households’. In light of current calls for heavy public investment, financial capability building, and delegitimizing or removing other finance providers, it therefore appears that the presumed business case for financial inclusion is really built on the expectation of interventions with public money to facilitate private profits. Such demands upon states represent little less than a call on governments to subordinate their social policies to the goal of financial sector expansion (as documented for Brazil by Lavinas, this issue). If the business case does depend on governments or donors, governments and donors might as well do the job themselves.

CONCLUSION

This contribution has examined the turn from microfinance to financial inclusion as an opening-up of financial dealings with poor people, to include new actors and practices, new ideas and ideologies, new theories of change, and a renewed invitation to live by finance. It subsequently critically scrutinized the arguments made for financial inclusion: driving broader development outcomes, bringing direct benefits to poor people, and making good business sense. It has demonstrated that protagonists widely assume financial inclusion to generate economic growth and development; but the causal connection is unclear, and if there is one, it may be that growth and development actually drive financial inclusion. It has also shown that the assumption of poor people benefiting directly from financial inclusion is weak; the impact literature cannot show transformative or even clearly positive effects (unless improved money management, a diffuse sense of inclusion, and expanded financial choices are the desired effects). Lastly, it has argued that the business case for financial inclusion — the promise that for-profit actors will deliver comprehensive services at decent quality and affordable prices — is far weaker than normally presumed; worryingly, although perhaps unsurprisingly, calls on governments have increased to make their social policies serve the goal of financial inclusion, with the state acting as handmaiden for financial businesses. With this, the contribution confronts the prevailing orthodoxy that financial inclusion is a core pro-poor private-sector led development intervention — it is neither clearly pro-poor, nor private-sector led, nor development — and instead proposes it to be a contested and contestable enterprise of granting financial capital more power over markets and policy agendas. This is


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not in itself an argument against offering financial services to poor people, especially to particular groups such as owners of high-potential enterprises, but it is a rebuttal against the totalizing agenda that has painted financial services as essential drivers of pro-poor ‘inclusion’. And by implication it is an argument for policy makers to check their fiscal and political patronage for financial inclusion, press for more solid (instead of speculative) evidence for the developmental and poverty impacts, and give greater consideration to alternative interventions for inclusive development. Finally, it is also a reminder to learn lessons from the multiple disappointments with microfinance, which did not serve to alleviate (let alone eliminate) poverty, but instead spearheaded a financialization of poverty to the advantage of rentier capitalists and ‘social’ investors (Mader, 2015). Going forward, four things should be noted. First, the evidence base for (or against) financial inclusion needs to be strengthened, particularly regarding the effects that financial expansion has on poor people and developing societies. The current evidence–policy mismatch around financial inclusion is strikingly similar to the one that has plagued microfinance. While expectations are high for financial inclusion to serve as a core pro-poor intervention in the SDG era, they do not appear justified. Adherence to flimsy theories about finance driving development and poverty alleviation bears the risk of putting the proverbial cart before the horse, and at best addressing very specific symptoms, rather than deeper causes, of poverty and underdevelopment. Second, greater attention should be paid to the limitations and potential downsides of financial inclusion: these might include insufficiently recognized regressive effects, for instance if loans represent a significant financial drain on borrower households’ finances (Mader, 2015), or if electronic payments systems bring redistribution from poorer households to wealthier households (Schuh et al., 2010). Third, the business-driven approach to financial inclusion should be critically re-examined, particularly vis-a` -vis more social alternatives, such as cooperatives, postal savings banks, or government lending programmes — which exist, and at least in Europe historically have provided the greatest impetus for popular access to financial services. In particular, governments should not see their role as helping the private sector make money out of financial services to the poor, while diverting public resources from important uses like job creation or social care. If there is a business case for financial inclusion, let businesses pursue it; if not, let governments and communities pursue alternatives. Fourth, unless a much firmer evidence base in favour of financial inclusion as a poverty-alleviation and development promotion strategy emerges, policy makers, governments and philanthropists would be well advised to prioritize more redistributive interventions. While financial inclusion and investments in more urgent areas of social provision like healthcare or education are by no means mutually exclusive, in practice opportunity costs do imply funds should be spent where clearer evidence of beneficial impacts is ascertained.

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Financial inclusion, like microfinance, follows the fundamental premise that development and poverty alleviation should be pursued through an expansion of financial markets — a financialization of development and poverty in the guise of inclusive development. But it is more than just a relabelled version of microfinance. Financial inclusion is a thoroughly fortified finance–development hybrid that looks poised to grant financial market actors and rentier capital even greater powers to extract rents and reshape politics, and subordinate social development to capital market development. It also continues the recent descent down a slippery slope of the promises of development being watered down from broad-based transformative change, to merely mitigating symptoms of poverty, to increasingly just extending services (for sale) to the poor as a goal in itself. This shifting of the goalposts deserves to be contested and challenged in a far more clear-sighted debate about the means and ends of development which must be, and always have been, broader than just building markets.

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Philip Mader ([email protected]) is a Research Fellow at the Institute of Development Studies (IDS) in Brighton, UK. He has published The Political Economy of Microfinance (Palgrave, 2015) and is one of three editors of the Routledge International Handbook of Financialization (under preparation, expected 2019).