Throughout the world, there are thousands of small businesses and microentrepreneurs with low incomes, living in vulnerable communities who day after day face an adverse economic environment. Small shop owner, hairdressers, door-to-door retailers, street food vendors, car repair shops, artisans, and many others have to confront restrictions and barriers to their business potential.
A lack of strategic planning, dependence on personal and family savings, informality, unfair competition, high rent, domestic responsibilities (specially for women) are just some of the barriers that these entrepreneurs share. They are more or less pervasive depending on what kind of business is undertaken and the area where they live. Another key characteristic they share is the low level of financial inclusion.
What is financial inclusion?
It’s the continuous access by people or companies to diversified, formal and adequate financial products and services.
In order to gain access even to traditional financial services, small and medium enterprises (SME), as well as entrepreneurs with low income, have to face an array of difficulties: high interest rates and bank fees, long distances to the location where services are offered, inadequacy of these services, lack of understanding from financial institutions, and lack of information about existing products and services.
According to the World Bank, emerging countries have more than 200 million SME, both formal and informal, who are lacking “adequate funding to grow and prosper”. At the same time, approximately 2,500 million people do not use formal financial services throughout the world (60% of people living in developing countries and only 11% in developed countries).
Studies like the Global Microscope reflect the efforts (sometimes incipient, sometimes long-lasting) undertaken by different countries to regulate the institutional environment and favor financial inclusion. The Global Microscope’s ranking includes 55 countries. Colombia and Peru take the first place due mainly to an effective coordination between government agencies and private actors, added to a prudent financial regulation, clear rules for savings schemes, generalized access, and a long history of microcredit initiatives.
How to create greater financial inclusion?
It’s essential to establish regulatory environments that are adequate to the socioeconomic reality of developing countries, where levels of financial inclusion are the lowest. The diversity of products and services is one important element of such environments. Many times, financial inclusion is confused with access to formal lending, but the concept of financial inclusion is much broader, and includes services such as savings, insurance, and different forms of payments and transfers. It’s important that the consumers’ needs are guiding the offer. The case of Clip in Mexico is a good example of an alternative service; it allows entrepreneurs to accept different payment methods besides cash, using a tablet or smartphone.
Getting new suppliers in the market is another key factor. A wide range of suppliers should be included in the economy, not only financial institutions, but social sector organizers, and other private and governmental actors. Municipal saving and credit associations in Peru are a good example of this. They are microfinance institutions that offer loans to SME, as well as savings accounts, insurances and other services. They are part of municipal governments, but their boards are run by diverse actors, including some from civil society.
With new and more diverse suppliers, it’s important to broaden the target audience to include low income earners, workers with informal pay, informal SME, people living in rural areas, and other groups who are commonly discriminated from the financial system (women, ethnic minorities, people with disabilities). There are many organizations who are already offering services exclusively to these groups. An example is the Brazilian NGO Acreditar, which combines microfinance lending with financial education and coaching for entrepreneurs, who are mostly women in businesses related with food, health and agriculture. In 2016, ZIGLA developed the organization’s monitoring and evaluation system, and now continues to provide support in monitoring their indicators.
The ways in which services are supplied also needs to become more diverse: the financial sector needs to take advantage of new fintech developments to complement traditional services. New technologies allow for lower transaction costs, new ways of assessing credit risk, and new mobile payment methods which might be especially adequate for clients in remote locations. An example is Lenddo, which uses non-traditional information (Facebook, LinkedIn, Google, Yahoo or Twitter) to calculate how likely someone is to be excluded from the traditional financial system. In Peru, BIM developed a mobile wallet that enables users to send, receive, withdraw money, and even pay bills from any cellphone even without access to the Internet.
It’s important to encourage adequate financial education for consumers, which is not limited to financial assistance. Users have to understand the products and services that are available, as well as the risks and opportunities that they offer.
Financially educated entrepreneurs eventually become better clients, take less debt, handle it more responsibly, and know which financial products fit their needs. Throughout the world, multiple actors (governments, banks and others) are carrying out initiatives in financial education. The OECD’s International Network on Financial Education (INFE), for instance, provides access to information, resources, research and news related to financial education on a global scale.
Now that the elements that favor financial inclusion are known, the challenge for governments, financial institutions, and companies in the fintech world is to work strategically together, focusing always on the needs of the target audience. If they keep to that road, SME will have more and better tools to reach their full potential.
 The Global Microscope is a publication by The Economist, with support from IMF and other organizations.