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Financial Inclusion: opportunity or outcome?

An efficient financial system is an enabling structure critical to sustainable solutions for a more inclusive, equal and peaceful society. This is because financial inclusion is not just an end goal in itself but means to many ends. Recently, the Finance Minister of Pakistan and the Governor of State Bank of Pakistan chaired a meeting to discuss the first formal Financial Inclusion Strategy for Pakistan. Financial access is primarily defined by an adult having a transaction account. This account acts as a gateway to other financial services like credit and insurance that enable employment, entrepreneurial activities, investment in education and health, manage risk and better deal with financial shocks.

Research has also established financial inclusion central for sustainable and inclusive socio-economic growth. It has emerged as an important tool that facilitates families with improved quality of day-to-day living, tackles poverty and inequality promoting overall social inclusion. However, the current debate in Pakistan limits financial inclusion to being an end goal rather than an instrument to achieve other sustainable development goals. This paper explores the relationship specific to financial inclusion and employment only.

State Bank of Pakistan has shown commitment to improve financial inclusion by formulating a strategy and supporting development of digital and mobile infrastructure to improve access and use. Financial sector in Pakistan is experiencing rapid growth and working jointly with telecoms towards the ambitious goal of financial inclusion for 50% of adult population till 2020.

Along with other gains, financial inclusion is influential to transform the structural nature of employment in both the formal and informal sectors of Pakistan. At present the unemployment rate for Pakistan is very high at 5.9%. Research has shown that well-integrated financial sector with access to financial products, services and relevant literacy can play an enabling role in job creation. Evidence-based findings globally have shown that increasing access to financial services especially for youth and women strengthens their ability to use these services to support their transition to employment and better livelihoods. For example, a survey of Afghani households between 2003-2007 found that microfinance created more than 500,000 jobs. Similarly, in Uganda 62% of women who received entrepreneurship training and start-up loans went on to start a business within 3 months.

When people have access to formal financial services, they tend to earn more, save more and attain assets that provide them with a safety net against external shocks. However, to reap exponential benefits financial inclusion needs to pay special attention to marginalized segments of the society. As historically, main reasons marginalized groups are socially excluded are unemployment, gender, geographic location or religious reasons.

Thus, inclusive growth through affordable and accessible financial services that targets the underserved and most marginalized groups and markets is a critical factor to create employment. But how is employment and financial inclusion linked? The answer depends on the type of jobs we are referring to.

Firstly, formal sector jobs with fixed salary employment contracts are linked to finance through macro-economic system. Research has established that effective financial markets help mobilize domestic savings and remittances to be allocated as capital to firms considering their investment-return prospects. A well-functioning financial sector in terms of not only access to financial services and products but also business development advice, managing financial risk, active financial networks and effective supervision work to stabilise capital markets. Efficient financial system plays an intermediation role that aims to promote investment and consumption leading to economic prosperity which in turn creates more high-paid jobs.

 

Secondly, financial inclusion makes credit more accessible and affordable especially for micro, small and medium sized enterprises (MSMEs). Use of digital platforms provide more accurate and reliable credit history that can be used as evidence for external financing. Financial inclusion provides access to wider range of services such as micro-insurance and is not limited to transactions only. These help small businesses to better deal with risk and uncertainty. This can facilitate new entrepreneurial opportunities and business expansion for existing MSME’s that are currently the largest employer in Pakistan as 80% of non-agricultural labour force is employed in SME’s. A strong financial sector also provides a sustainable local funding base that links businesses across sectors, supports technology and innovation transfers that transform economic landscape to create decent and productive employment opportunities. This is particularly useful for young people and women in rural areas where lack of financial access is reflected in lack of relevant technology, skills and innovation.

Lastly, in Pakistan, roughly 70% of the economy operates in the informal sector. Other than agriculture, it includes daily wage earners, household help and small enterprises. Most of these, especially daily wage earners, are most vulnerable to financial uncertainty with long spells of no income. Families with irregular income streams need to consciously manage their finances through financial tools like savings, credit and insurance. Access to financial services will allow these vulnerable groups to manage risks better by building assets, smoothing income and consumption to fend off against highly irregular and seasonal incomes.

According to recent Findex data, 1.7 billion people worldwide are still unbanked and most of them are women, poor households in rural areas and people out of workforce. In Pakistan, currently only 21% of the adults have a registered bank account. The gender gap for year 2017 is reported to be 28%. The rural urban divide is even worse, only 19% of adults in rural areas have accounts. Also, the average difference between young adults and older adults is 10%. The financial access gaps identified by gender, income and age can help formulate a more appropriate Financial Inclusion Strategy.

Generally, financial inclusion is considered a public good but on its own it is not sufficient. It is not a magical tool to completely fix the employment dilemma, however, improving the availability of financial services can help enhance competitiveness and integrate economic diversity that drives employment.

Pakistan needs to develop a well-integrated and well-regulated financial sector that will help shift the employment from informal sector to formal sector. The focus, however, needs a paradigm shift from treating financial inclusion as an end objective to rather use it as a tool to achieve other socio-economic objectives.

Though, in order to reap benefits in employment through financial inclusion, policymakers should focus on financial and digital infrastructure, institutional quality, financial literacy and skills development. As discussed above, access to credit enables businesses to expand, providing employment opportunities and reducing inequality. Therefore, financial inclusion acts as a bridge. However, it is not always clear who is responsible for promoting and ensuring financial inclusion in Pakistan. The best bet is a dynamic partnership that engages all the stakeholders. As relying on government reforms, Central Bank policies, private sector innovation especially Fintech companies, telecommunication sector and development sector will help exploit the comprehensive benefits of financial inclusion to achieve Sustainable Development Goals under UN Agenda 2030.

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