Financial Inclusion

Definition

Financial Inclusion indicates a situation where individuals have continuous and proximate access to the financial services. Moreover, Financial inclusion refers to a state in which all working age adults have effective access to the financial services at affordable cost from the formal financial service providers. Financial service refers to the wide range of financial products and services like mobilization, credit allocation, risk management, payment services and other financial services provided by the financial institutions.

  • Financial Inclusion is positively correlated to the poverty; hence it is an effective tool to reduce the poverty.
  • Provides wide range of financial service especially to the remote areas and deprived sector, economically backward people without considering any ethnic groups, cast, color, gender etc.

Why Financial Inclusion?

Breaking vicious circle of poverty. Empowerment to rural population
Expanding economic activities. Commercialization of economic activities
Opportunity to save and invest Distribution of financial benefits by govt
To discourage informal financial sector To provide proper monetization in rural areas

Facts

  • Globally 2 billion adults don’t have basic bank account
  • Globally, 59% of adults without bank account cite lack of money as the key reason, this implies financial services are not yet affordable or designed to fit low income users.
  • In south Asia, only 33 percent adults have bank account
  • In Nepal (NRB Survey, 2015) it was found that
  • 61% of  Population are formally banked
  • 21% of  Population are banked from informal channel
  • 18% of  Population are Financially Excluded
  • Number of branches of BFIs (Nepal) 6418 (Mid-June 2018)
  • Active Saving Account (11 Million- 60%) : Male 48% and female 26%
  • Out of 753 local bodies, commercial banks have shown their presence in 556 as of 8 July 2018.
  • As of mid-May 2018, the number of deposit accounts stood at 22.5 million and loan accounts 1.29 million. The number of ATMs reached 2,624. Likewise, the number of mobile banking users reached 4 million and the internet banking users 784 thousand. The number of issued debit card stood at 5.24 million and credit cards 97 thousand.

Steps taken by GON and NRB for Financial Inclusion

  • National Microfinance Policy 2008 has promoted rapid sector growth and increase the outreach of Microfinance Institution in remote areas.
  • Expansion of the banks and their branches
  • Mandatory lending to priority/deprived sectors
  • Major provision through Monetary Policy 2018-19
  • A provision for the commercial banks to extend at least 10 percent of their total credit to agriculture sector and at least 15 percent to energy and tourism sector, making a total of at least 25 percent in the priority sector. Such provision for the development banks and finance companies to extend at least 15 percent and 10 percent respectively of their total credit. Commercial banks will be encouraged to extend credit in the priority sectors in all seven provinces.
  • BFIs should disburse minimum 5.0 percent of their total credit to the deprived sector.
  • A provision of the deprived sector credit by including the loan under the mortgage of educational certificates, loans extended to the deprived and marginalized sections of the society and students of target group for higher as well as technical and professional education, and loans provided to Dalit communities for operating businesses under group guarantee. GoN has provisioned 5 percent interest subsidy on such loans.
  • BFIs to open branches without pre-approval of this bank in areas outside the metropolitan and sub-metropolitan cities.
  • Establishment of provincial office of all commercial banks in each province. This will avail banking services in simplified and effective way in all the provinces and contribute to the expansion of financial access and inclusion.
  • Students at high school and university level are encouraged to open bank accounts in coordination with BFIs. This will be complemented by financial literacy campaigning.
  • Nepal Rastra Bank has introduced e-mapping portal incorporating various indicators of financial inclusion and this portal has  made accessible to the public.
  • In the context of supporting the implementation of federalism through financial access and inclusion, a provision has been made for financial institutions to adjust their area of operations in line with provincial structure. This is expected to expand financial access and inclusion.

Problem or Barrier to Financial Inclusion in context of Nepal

  • Nepalese borrow exclusively from the informal sector
  • Access to financial service is a hindrance to the economic development of Nepal and major contributor of poverty.
  • BFIs focuses are concentrated on urban and semi-urban market centers and yet to reach remote areas.

In context of Nepal there are basically Three type of barrier to the financial inclusion.

  1. Demand Side Barrier
  1. 23.6 % of population lives below poverty line hence low involvement of people in economic activities and savings are insufficient. Hence demand of financial services are low.
  2. Lack of proper security to pledge for credit facility, lack of investment skill and investment environment.
  3. Financial service requires some literacy to use its product and service, but Nepal suffers with illiteracy, hence people feel uncomfortable with formalities to avail financial services.
  4. Monetization is very poor among the rural population in Nepal, hence demand for financial service is low among those population.
  5. Lack of people’s confidence towards financial system.  
  1. Supply Side Barrier
  1. BFIs do not prefer to expand their branches in rural areas showing lack of monetization and lack of businessas the prime reason.
  2. Dispersed population and geographical location discourage BFIs to expand their branches  (Cost of Fund higher than the return/profit)
  3. Nominal interest on deposit, high interest on credit and costly service charges distract people from taking financial services.
  4. Weak institutional capacity and lack of adoption of sophisticated technology by the Micro-finance do not allow them for expanding and extending their services to the remote areas.
  1. Policy Level Barrier
  1. Policies are not designed/formulated from the supplier side; hence they are not motivated to reach to the remote.
  2. Government or Central bank do not provide subsidy or similar grants to design products and services to the rural population. 
  3. Supervision and monitoring policies are not dedicated enough towards extending financial services among poor and remote segments of the society.

Possible ways to overcome the barriers of Financial Inclusion in Nepal.

  1. Provide proper motivation to the financial service provider to reach to the rural population.
  2. Providing financial literacy: Financial literacy and financial inclusion goes hand in hand, hence effective financial literacy program helps to overcome the barrier of financial inclusion.
  3. Reduce burden of poverty: To generate need of financial services people must be engaged in the economic activities, hence it is necessary to enhance their capability to generate income.
  4. Providing add-ins to the credit facility: Only providing credit is not sufficient to the vulnerable groups; various other facilities like trainings, marketing skills, financial consultant services are necessary for the sustainable financial inclusion.
  5. One size fits all solution won’t work in our country due to diversified socio-economic condition of the country. Hence, multiangled efforts are required.
  6. Strengthening the resilience of the banking system is required to win confidence of the general people to the financial system.
  7. Conducting better market research to identify potential financial service clients is necessary.
  8. Digital innovation: Use of digital financial technology like ATM, Mobile Banking, SMS Banking, Branchless Banking etc. are essential for financial services at lower cost and nearest proximity. Better adoption of the IT and network infrastructure will enhance financial inclusion program.
  9. Partnership between Bank & Microfinance and Microfinance and Saving and Credit Cooperative will support Financial Inclusion in Nepal.
  10. Financial service should be accompanied by the micro-insurance along with robust regulatory and supervisory framework.

Financial Inclusion in Nepal to be focused on :

  • Financial inclusion in Nepal should focus towards conducting Financial Survey,
  • creation of systematic client profile,
  • reaching the unreached or unbanked one,
  • linking client with non-financial service providers,
  • mainstreaming the operation of financial cooperatives, capacity development of Financial Service Providers,
  • innovation of new product and service development and diversification,
  • Promoting the use of technology,
  • developing and targeting the product and services to the low-income groups by treating it as both business opportunity growth and CSR in order to promote Financial Inclusion.

Indicators of Financial Inclusion

Number of Branches and Deposit account   Number of Loan account Number of Branchless banking centers
Number of Branchless banking customer.   Number of non-operated Branchless banking centers Number of mobile banking customers   Number of Internet Banking  Customers Number of ATMs   umber of Debit-Credit-and Prepaid Cards

Conclusion

Financial inclusion has been identified as an enabler for 7 of the 17 Sustainable Development Goals. Likewise, G20 has also committed to advance financial inclusion worldwide. As, financial inclusion is a key enabler to reduce extreme poverty and boost shared prosperity, Nepal has also recognized the role of financial inclusion in overall economic development. As one of the major pillars of Financial Sector Development Strategy financial inclusion can be powerful agent for strong and inclusive growth. Nepal has various hinderances to achieve financial inclusion goal, hence development in the sector of Information Technology(IT) strongly supports the growth and inclusiveness of the banking sector and facilitate the inclusive economic growth. The technological intervention helps to overcome barriers such as distance of branch, location of customer, availability of information and literacy of the customer thereby making it feasible for BFIs to penetrate the large un-served market at low cost. Also, Financial inclusion policy should be made suitable as per federal structure and dedication and commitment from all the stakeholders as well as political stability is required in order to make financial inclusion effective and successful in Nepal.