The Role of Access to Finance in Reducing Vulnerabilities

This article is an excerpt of CFI’s Managing Director Nataša Goronja’s remarks at a side event of the Third Preparatory Committee for the 4th International Conference on Financing for Development, hosted by the NGO Committee on Financing for Development.

Good afternoon, your Excellencies, UN Mission and agency staff members, and NGO and CSO colleagues. 

Thank you for this opportunity to speak to you today. I appreciate the Chair’s kind introduction and the invitation to this important discussion. 

I will speak with you about the relevance that access to formal financial services plays in reducing vulnerabilities through our research on the topic. Our Center for Financial Inclusion was originally conceived after the 2008 financial crisis to work on financial consumer protection issues related to low-income clients’ needs around the globe. Our work has since expanded to be reflective of the modern financial inclusion landscape. Our vision is a world where everyone can use responsible financial services to improve their economic wellbeing. 

Our vision is a world where everyone can use responsible financial services to improve their economic wellbeing. 

Along with other important development efforts, access to finance is one of the keys for reducing vulnerabilities. Today, 1.4 billion people around the globe lack access to formal financial services, of which more than 50% are women. 

Access to payments, savings, credit, and insurance services enables low-income people to absorb shocks in the short term, recover from shocks more quickly in the long term, and be better prepared for future disruptions. Mobile money and digital payments, for example, allow individuals to receive assistance more quickly, and from a wider social support network in response to negative shocks. Access to finance for women is especially important. It helps women accumulate assets in their own name and have more control of household finances, which often leads to more investments in health and education (see, e.g., The Essential Role of Finance in Education, Housing and Health Care, CGAP, January 2022).¹ 

While we see through research that access to finance can be transformative, 1.4 billion people around the globe still lack access to a financial account.

And while we see through research that access to finance can be transformative,² 1.4 billion people around the globe still lack access to a financial account. While this number remains much too high, it is a large improvement from 2011, when 2.5 billion people around the globe lacked access to formal finance (2021 Findex Database, World Bank Group). Much remains to be done. How do we move forward? ³ 

1. Recent Innovations

As Draft Zero points out, it is important to note that much of the expansion in recent access to finance in the last decade has been due to technological advancements. An important role is played by financial service providers—both traditional and the newer entrants, such as microfinance institutions and more recently fintechs—leveraging the available public infrastructure. Market infrastructure innovation has played a key role in expanding access to finance, especially when it comes to digital public infrastructure and artificial intelligence. Providers are now reaching more consumers than ever, often without the opening of brick-and-mortar branches. The development of open banking and open finance is a key step in the right direction, as is the related ongoing interest and development of digital public infrastructure in numerous markets. However, these systems must be designed securely and with adequate safeguards to ensure data privacy as well as due care for those who might be left behind, outside of the digitally transformed world.  

2. Responsible Finance 

At CFI, we care about access as well as responsibility in access to finance. There is a need to design and deliver products in a way that they don’t cause adverse outcomes and that there are adequate recourse mechanisms when something goes wrong.  

This includes addressing vulnerabilities that can arise from algorithmic bias and deceptively designed interfaces. CFI has coined the term “consumer protection by design,” because we believe that the design itself should also take into account client consumer protection needs. 

I also want to speak with you about a specific consumer protection issue that is sometimes encountered by credit clients: personal overindebtedness. In such instances, individuals experience debt stress, whether from a number of sources or a single source of credit. In a world where we now have more data than ever before on clients using financial services, we actually know less about how to understand liquidity management at the household level when consumers manage a complicated debt portfolio that includes a mix of short- and long-term debt. Some countries have not yet developed necessary guardrails, like strong and real-time credit reporting infrastructures, options for personal bankruptcy and credit counseling, and accompanying legal protections such as how to liquidate collateral in the case of bankruptcy experienced by an individual in debt stress. We strongly suggest that these be taken into account as policy recommendations moving forward. 

3. MSMEs

I want to now turn our attention to the micro and small enterprise segment, as our largest research project is in this area. MSMEs, on aggregate, are the largest employer of low-income people. We have been conducting research in 5 countries on digital transformation pathways for MSMEs. What we have found is that despite large differences between markets—for example MSMEs in Sao Paulo use 5 digital technologies on average, compared to only 1.6 in Addis Ababa—those MSMEs that are more digitized show higher financial viability in terms of productivity, financial resilience, and growth. 

In this area, our policy recommendations are to make investments in further digitization of MSMEs, enable more funding for them through specialized financial products suited to their needs, and to continue investments in consumer protection mechanisms for them.⁴ 

4. Green Finance

Lastly, I want to turn to green finance. Our research has found that over 65 percent of MSMEs in Delhi, for example, have experienced a climate-related shock. This is one of the reasons that CFI has focused on green inclusive finance. Our contribution to the field has been the Green Inclusive Finance Framework, which offers a new way of thinking about inclusive finance in the context of climate change (based on four key impact pathways: mitigation, resilience, adaptation, and transition).  Here, we recommend the following policy considerations: 

1. Increased collaboration between climate organizations and financial institutions to design and implement green inclusive financial products and services. 
2. Piloting more solutions to gather evidence on what works, and when implementing solutions ensuring that they do not trigger unsustainable practices or cause harm to people and the environment. 
3. Prioritizing funding and tracking of funding for climate adaptation and resilience, particularly in low-income country contexts. 

Thank you.

[1] One of the ways to think about the impact of access to financial services is in terms of a reduction in vulnerabilities, and therefore—financial health. To discuss financial health, I will borrow from a framework created by our colleagues at another research organization, Innovations for Poverty Action, the IPA. Finance, at the level of individual consumers, is about moving money across time, space, and risk. Moving money across time means saving (because we are moving money from now to later. When we borrow, we move funds from the future to now. Moving money across space means sending money from one person or firm to another. Moving money across risk means being able to be insured. In this framework, and I am simplifying matters a bit,  financial health is the ability to do these things quickly and cost-effectively (Measuring Financial Health Around the Globe, Innovations for Poverty Action, June 2020). 

[2] For example, a study of Kenya’s introduction of mobile money found that the service helped raise households out of extreme poverty and led women to make different occupational choices, such as making business or retail their main occupations. These individuals were able to better manage their financial resources and more efficiently allocate labor, savings, and risk (Suri and Jack, December 2016). A review of randomized control trials (RCTs) in 2015 found that micro credit had modest yet positive economic effects on the aggregate (Bannerjee, Karlan, and Zinman, 2015). To me, this means that we need to complement access to credit with other financial services for better impact. 

[3] We are here to discuss funding for development. Efforts to improve access to finance are currently funded by a set of multi- and bilateral aid agencies, development finance institutions, and private funders around the world to the tune of $74 billion in 2022, per the most recent CGAP Funder survey. We are also seeing a focus on climate in financial inclusion funding, with 14 percent of projects having this focus, and over one third of projects target women’s financial inclusion specifically (2022 CGAP Funder Survey, CGAP, March 2024). While this funding figure is impressive, more must be done.

[4] We found that large barriers to adoption for MSME owners included high cost, lack of infrastructure, and lack of trust. One of the biggest barriers that MSE owners face in using digital financial services is a lack of trust that comes from either personal experience or hearing about others’ bad experiences. Most MSE owners don’t have the time to complain, and they have little faith that complaints would be resolved—if they were even aware of complaint channels in the first place. Yet trust alone is not sufficient if digital technologies are prohibitively expensive or if they are ineffective because internet connectivity is limited, for example. In places like Addis, more foundational investments are needed to enable equitable access to digital technologies.