12 Benefits of Financial Inclusion

Studies show that improving financial inclusion ^[a]boosts financial prospects, alleviates poverty, and improves the overall economy.

Thankfully, we’ve been making great strides toward a financially inclusive society.

The past decade has seen a 50% increase worldwide in the number of adults with financial accounts. That coincides with a nearly 50% reduction in global extreme poverty over the same time period. 

Clearly, financial inclusion is an effective anti-poverty tool, but with record high levels of homelessness and increasing wealth inequality, we still have a long way to go.

With that in mind, let’s take a closer look at the benefits of financial inclusion.

Quick Summary

• Financial inclusion is a powerful tool for alleviating poverty and providing financial security.

• Included in the numerous benefits to financial inclusion are increased wealth building, job creation, and improved access to basic needs, such as clean water and sanitation.  

• Financial inclusion initiatives are most beneficial to marginalized communities since they’ve been intentionally excluded from the financial system.

1. Less Systemic Poverty

This list is in no particular order, but the clearest, most important benefit of financial inclusion is the reduction of poverty.

Increasing financial inclusion has been particularly effective against severe, systemic poverty, which is often found in communities long ignored or overlooked by financial institutions.

It’s common sense — if you give people access to financial tools that can build and protect their wealth, they will use them, and if they use them, they will indeed build and protect wealth.

This is backed up by loads of empirical evidence. Numerous studies demonstrate the correlation between higher financial inclusion and lower poverty rates.

One such notable study was conducted by experts at the Federal University of São Carlos and Universidade Paulista in Brazil. They looked at Latin America as a whole and “found significant and negative effects of financial inclusion on poverty and inequality.”

This backs up similar findings by Japanese scholars who studied the economy of Burkina Faso, economists who looked at decades of data from Egypt, and a recent study that looked at data from 156 countries and found that “financial inclusion has a significant negative association with poverty in developing countries….”

There have been so many studies demonstrating that inclusion in the financial system boosts income levels and alleviates poverty that I think we can accept it as a universal truth.

2. Financial Security

When we talk about financial inclusion, we’re talking about access to basic financial services, such as bank accounts, health insurance, retirement plans, and more.

What do all these things have in common? They provide a level of financial security that those in more privileged communities have long taken for granted.

According to the World Bank Group, financial security translates to “financial resiliency.” People who have access to formal financial services are far more resilient than their peers who rely on personal loans or other informal arrangements to cover emergency costs.

Banks provide wealth storage, which allows people to develop emergency funds and save for the future.

Insurance products can prevent health or other issues from becoming catastrophic financial events.

Retirement plans can boost savings and ensure a financially secure transition out of the workforce.

Now imagine if you didn’t have access to any of these tools. How would you save? What would happen if you were struck by a bus? How would you provide a nest egg for your golden years?

The COVID-19 pandemic was a stark reminder of the importance of financial security and how financial inclusion can contribute to that security.

One organization that has been on the forefront of increasing financial inclusion is CARE International. Through its Village Savings and Loan (VSLA) programs, it has provided basic financial services to 13.7 million people who otherwise might not have financial access. 

CARE conducted a study to see how well VSLA members fared during COVID-19 and the results were a dramatic affirmation of financial inclusion.

VSLA members were more than 75% more likely to have savings to draw on and between 50% and 60% less likely to suffer food insecurity than their underbanked neighbors.

Promoting financial inclusion is a great step toward increasing financial security.

3. Generational Wealth

Generational wealth refers to any valuable assets passed down from one generation to the next.

Inheritance is the best-known form of generational wealth, but receiving help from your parents to pay for college or getting passed down the family car are other prime examples.

To build generational wealth, you obviously first need to build the underlying wealth. Inclusion in the financial system means greater economic opportunities, according to IMF Deputy Managing Director Mitsuhiro Furusawa.

Once you’ve obtained that wealth, you need the means to save it and, ideally, grow it through investments or interest-bearing accounts.

These are also functions of an inclusive financial sector, as is purchasing assets, such as a house you could pass down, but that, too, requires financial inclusion via mortgages and homeowner’s insurance.

Maintaining wealth also means access to insurance to mitigate the possibility of a single financial shock destroying your savings and livelihood.  

Finally, you need the tools to pass that wealth down.

That means setting up a will, trust, or other estate planning tools. This is often done through a bank, which means, once again, that you’ll need affordable access to a financial services provider.

4. Decreased Government Spending on Assistance Programs

It stands to reason that anything that alleviates poverty will also decrease the amount of money governments spend on economic aid.

Government spending on assistance programs varies widely from country to country, but the US government spent $522 billion (about 8% of the overall budget) on economic security programs in 2023. Theoretically, any reduction in that amount would save taxpayers money.

This is one reason why setting up a national financial inclusion strategy (NFIS) is considered a good investment.

An NFIS is designed to coordinate financial inclusion efforts among a wide variety of private and government stakeholders. They’ve been quite successful, and according to the World Bank, more than 50 countries worldwide have set up a NFIS. 

Increasing financial inclusion could also be more effective than government assistance programs in that it is, in some ways, more equitable.

For example, one in six immigrants in the US forgo available government assistance due to green card concerns.

Increasing overall financial inclusion would benefit everyone regardless of immigration status.

5. Reduced Economic Inequality

According to the UN, income inequality has gotten worse in most of the world, with more than 70% of the world’s population living in a country where income inequality is growing.

Economic inequality is bad for a number of reasons, and economists are searching for solutions.  

A lot of evidence points to financial inclusion as a good remedy.

A study published by the European Journal of Finance studied income inequality in 140 countries. They found that “financial inclusion reduces inequality at all quantiles of the inequality distribution.”

Other studies reached the same conclusion, including one published in the Singapore Economic Review, in which the authors discovered that financial inclusion was “the key to tackling income inequality.”

6. More Entrepreneurship

A lot of good ideas die on the vine for the simple reason that turning a good idea into a business requires capital.

In some communities, informal loans from friends and family members can provide seed money, but in particularly impoverished communities, access to affordable capital usually only comes through the formal financial sector.

Microloans were designed to address this issue, and for a while they were regarded as a miracle cure for poverty.

The idea was that providing small loans to promote entrepreneurship in unbanked, impoverished communities would empower and enrich communities.

The overall impact of microloans has fallen short of those lofty expectations, however, and there’s little “evidence that the loans have been lifting families out of poverty on average.” 

Many microloan organizations have taken this to heart and developed a promising solution, pivoting from mere microloans to microfinance.

One such organization is Lendwithcare, a branch of the aforementioned CARE, that now includes “other basic financial services such as savings, money transfer and insurance,” in addition to business training and financial literacy classes.

Focusing more on financial inclusion as a whole rather than just loans has, indeed, made a more profound impact.

The International Labour Organization started a project in Indonesia that bundled financial services such as savings and loan organizations with microlending.

They found that this approach yielded much better results, both on a socioeconomic level and on businesses’ bottom lines.

New businesses that not only have capital but also have other financial resources are far more likely to succeed.

7. Community Well-Being

The United Nations has long made financial inclusion a part of any of its anti-poverty programs.

In fact, the UN draws a direct line between a community’s level of financial inclusion and its ability to provide for the basic needs of its members.

The UN’s special advocate for financial inclusion lists “nutritious food, clean water, housing, education, and healthcare” as goals that are more obtainable for communities that are included in the financial system.  

Sanitation services are a good example.

Building and maintaining sanitation infrastructure to many impoverished communities is a high-cost proposition for service providers.

However, if a community gains access to mobile banking and can make digital payments rather than paying cash, costs can go down significantly.

Sanitation providers can then afford to invest in more communities, and some of the savings get passed on to consumers. Everybody wins.

The Consultative Group to Assist the Poor cites a sanitation project in Madagascar as a prime example of how digital financial services can expand basic needs.

A sanitation company was able to cut its costs by 20% when it converted to digital payments, making sanitation systems an affordable reality for many more people.  

For those of us who are privileged enough to not have to worry about clean water or sanitation, this might not seem like such a big deal, but according to the most recent data, there are two billion people without clean water and more than 3.6 million without adequate sanitation services.

8. International Transaction Efficiency

Faster and cheaper international financial transactions might not seem like such a huge benefit, but for those dependent on these digital payments, called remittances, transaction efficiency is extremely important.

This is no small group we’re talking about, either. The UN estimates that there are more than 800 million people worldwide who receive remittances.  

Many of those involved in remittances lack adequate financial access and are forced to use expensive services to send and receive money.

According to the Migration Data Portal, currency conversions and fees typically total around 6.2% of the money sent. That’s a significant chunk taken out of money that is often heading to severely impoverished communities.

Every penny counts, and over a worker’s lifetime, these fees can add up to thousands of dearly needed dollars.

Thinking about these fees on a macro scale shows just how expensive fees can be.

The World Bank estimated that $647 billion worth of remittances were sent in 2022. Using the typical costs of 6.2%, we can estimate that more than $40 billion was paid out in fees. That’s $40 billion that didn’t get into the pockets of those who need it most.  

Increased financial inclusion can significantly lower these costs. Adopting digital financial services, such as mobile banking and payment apps, can make remittances far cheaper and far faster, which is why the World Bank is making digital infrastructure a priority.

The UN report cited above also suggests that other technological factors, such as the growing use of cryptocurrencies, could further increase transaction efficiency in emerging markets.  

Considering how much money is at stake, it’s no wonder that governments and international organizations are trying to promote financial inclusion to further lower transaction costs.

9. Less Reliance on Exploitative Financial Service Providers

Expensive, inefficient transactions aren’t just a problem for those sending and receiving remittances. Lack of financial inclusion also affects standard domestic payments between employers and employees.

In communities without access to the traditional financial services industry, a lot of bad actors step into the void.

Payday loan providers, check-cashing businesses, and others charge exorbitant fees for simple financial transactions that are often provided free of charge to someone with a traditional bank account.

Although the number of unbanked people continues to shrink in the US, there are still millions of banked and underbanked households.

According to a recent FDIC report, 5.9 million US households were unbanked as of 2021, and nearly 19 million were “underbanked,” meaning they had some access to banking services, but still had to conduct some “nonbank” financial transactions.  

These nonbank financial transactions are those conducted by check-cashing businesses, often at exorbitant costs.

The Financial Health Network estimates that “financially underserved” individuals spent $189 billion on fees and interest costs associated with financial products in 2018.

That’s a massive number, but looking at these costs on an individual level is even more alarming.

A landmark study about the racial wealth gap in the US, conducted by renowned consulting firm Mckinsey & Company, found that Black individuals who didn’t have basic banking services paid up to $40,000 over the course of their lifetimes in check cashing and related fees.

That’s $40,000 that could have been used to start a business, provide for a rainy day, or be passed on as generational wealth.

Increasing financial inclusion means offering affordable financial services. Check-cashing companies and predatory lenders do the opposite.  

10. Jobs

The World Economic Forum looked closely at the Global South, a region facing a jobs crisis, and found that small- and medium-sized businesses account for more than 70% of jobs.

It also estimated that the world will need to create 600 million jobs to account for population growth before 2030. Most of those jobs, particularly in areas such as the Global South, will have to come from micro-, small, and medium-sized enterprises (MSMEs).

So, what do we need to do to promote small businesses?

The SME Finance Forum estimates that more than 131 million MSMEs in developing countries have “unmet financing needs,” and that financial access is “a critical barrier to growth for MSMEs.”

Bringing MSMEs into the formal financial sector would help to eliminate the financing gap and allow small businesses to grow and provide more jobs. 

11. Financial Literacy

As a study conducted by Cambridge University Press stated, increasing financial literacy is a critical part of increasing financial inclusion. Giving people access to financial tools isn’t helpful if they don’t know how to use them.  

But the inverse is also true — increased financial inclusion leads to increased financial literacy.  

Financial literacy programs are great, but what’s the point of learning about financial tools you are unable to access?

Financial education, then, is also a result of financial inclusion. If you are offered access to the tools you need, you are far more likely to learn how to use them.

12. Support for Marginalized Communities

For decades, the financial sector has overlooked certain segments of the population, often intentionally.

Some banks, like Wells Fargo (allegedly), continue discriminatory practices to this day. Others have already been forced into reform, but the damage is done.

This damage is most acutely felt in Black and Hispanic households.

The FDIC did a national survey of unbanked and underbanked households and found that “differences in unbanked rates between Black and White households and between Hispanic and White households in 2021 were present at every income level….”

As an example, the study cited the fact that for households earning between $30,000 and $50,000, more than 8% of Hispanic and Black houses were unbanked compared with just 1.7% of White households.

Since they’ve been left so far behind, these communities have the most to gain from financial inclusion.

Community development financial institutions and other initiatives can make a big difference simply by extending standard financial services to these marginalized communities.

And the benefits would extend beyond those communities as well.

The McKinsey Institute for Black Economic Mobility estimates that “if Black Americans had the same access to financial products of White Americans, financial institutions could realize up to approximately $2 billion in incremental, additional revenue,” and that “addressing the racial wealth gap could lead to an additional 5 percent of GDP growth in the United States.”

Those startling estimates show you just how excluded some communities have been and just how powerful financial inclusion can be.

Conclusion

The benefits of financial inclusion are undeniable, and there’s probably even more than I managed to fit into this list.

The bottom line is that increasing financial inclusion can make a huge difference on an individual, community, and even global level.  

If I missed something on this list, please let me know. And if you have any personal experience with the benefits of financial inclusion, I’d like to hear it. Please leave me a message or comment below.