Where is Financial Inclusion Going?

Developing countries and emerging markets around the world are taking up the call to use access to financial services as a tool to implement the UN Sustainable Development Goals (SDGs) set for 2030. Nepal is no exception. The government of Nepal plans to use financial inclusion (FI) as a way to ensure higher, sustainable and equitable growth, helping the country to graduate from least-developed country (LDC) status by 2022, and to achieve the SDGs and become a middle-income country by 2030.

The Central Bank of Nepal (Nepal Rastra Bank- NRB) is currently implementing a five-year strategic action plan (2012–2016) which includes financial inclusion as a priority. Building on this priority will help to drive the rest of the financial inclusion development in Nepal.

As priorities for financial inclusion are being rolled out and new ones are being adopted, it is important to take stock of the key global trends that will impact upon them and understand what they mean for Nepal going forward:

FI Is Now Main Stream
The 2014 Global Findex Survey shows that from 2011 to 2014, 721 million new accounts were opened. Over 90% were opened at financial institutions, the vast majority of which were banks. Further, the increasing role of mobile phone technology and more broadly fintech, particularly in the payments and credit space, is creating new markets for financial services previously left to microfinance institutions (MFIs) or informal financial service providers. Financial service provision to new consumer segments is no longer on the periphery, it is now mainstream. But what does it mean?

In Nepal, whilst fintech has yet to shape the financial industry the same way it has in other emerging markets, banks play a critical role. Nearly half of adults in Nepal (40%) access at least one financial service from a bank. However, unlike with MFIs that struggle with scale and capability, banks struggle with providing valuable financial services, according to the end user. Findex found that only 18% of adults use their bank account more than three times a month. That means that most account-holding Nepalese citizens are merely using their accounts to deposit and withdraw money once a month (i.e. as a mailbox), or, not using them at all.

This is a major challenge for banks – as well as mobile money and fintech providers – that rely on usage fees to generate revenue in these markets.

Access and Ownership are No Longer Sufficient
The headline indicators in FI commonly measure the percentage of adults that have access to, or own, at least one financial service from a formal financial institution. However, this does not accurately reflect how adults live their financial lives and new measurement frameworks are offering new insights into how adults engage with the formal financial sector.

For one, FI requires adults to have access to a portfolio of financial services that meet their needs. However, this is rarely the reality in developing countries. For example, according to Nepal’s FinScope consumer survey, 60% of adults have access to a financial service from a formal financial provider. However, just over half of those adults (38%) access more than one financial service from formal providers and, only 5%, access a full portfolio, i.e. savings, credit, insurance and payments.

Second, whilst access and ownership are often necessary conditions for FI, it does not guarantee use. As noted above, very few accounts at financial institutions are used regularly in Nepal. This should be a concern for policymakers and providers, as without usage business models are not viable for providers, and public policy objectives are unattainable as adults need to use services to get value from them.

Finally, informal financial services are often the largest category of financial service provision but are rarely considered when measuring FI. For example, in Nepal 57% of adults report using informal financial services. Furthermore. of the 60% of adults using formal financial services from a bank or other type of formal provider, 37% use informal financial services in any case. This means that less than a quarter of adults (23%) are meeting their needs through formal financial services only. This phenomenon is not unique to Nepal and highlights the importance for policymakers and providers to understand these models and why, even when adults can access formal financial services, they still use informal alternatives.

Going forward it will be important to monitor and track these new indicators as a way to get deeper insight into the market for FI.

Business Convergence Becoming the Norm
Globally, financial service provision is seeing a convergence between different types of traditional financial services and non-financial services providers. The most common partnership to date has been between mobile network operators (MNOs) and banks. MNOs typically have a ubiquitous low-cost agent network, but no legal mandate for financial services beyond payments; and, while banks have the legal mandate, they often lack the low-cost distribution networks required to serve these emerging consumers.

Partnerships are also emerging between banks and traditional community-based financial service providers (e.g. cooperatives) who have similar distribution footprints to MNOs, but lack the capability and systems to scale up financial service provision.

For example, in Nepal, Savings and Credit Cooperative Societies (SACCOs) and MFIs play a key role in formal financial service provision whilst savings groups, hundis (informal payment brokers) and money-lenders do so in the informal space. The commonality amongst these types of providers is that they are local in nature, i.e. the service and decision-making for the service takes place at the community level. Whilst these types of providers are often difficult to scale, they offer a ready partner for other providers that do not have a local presence in the community.

This has been particularly evident in Nepal, with banks linking to MFIs to meet the government mandate of delivering 5% credit to deprived segments of the population. New business models, such as travel agents evolving into remittance providers, in turn evolving into banks are also opening up new avenues for valuable financial services.

The challenge for Nepal, and most policymakers in the developing world, is how to enable these partnerships to deliver value to consumers, while delivering on their mandate for consumer protection, financial integrity and financial stability. In Nepal, updating regulatory frameworks to ensure that the best possible supportive foundation for financial inclusion is in place is a priority.

What Comes Next?
Going forward, Nepal will find itself faced with similar challenges that other developing countries are facing – how do we make financial services truly valuable for new consumer segments and viable for providers?

Whilst the trends above will lead us closer to the solution, it is not expected to be straightforward. Governments will need to make deliberate decisions to allow for innovation, but not undermine the potential of either side of this equation.

The challenge is set and Nepal is ready to step-up to the plate.

If you would like to learn more about where financial inclusions is going from our Making Access Possible work with UNCDF please see the global insight series at:

Cenfri is an independent think and do tank based in Cape Town, South Africa. This article has been jointly authored by Barry Cooper, Catherine Denoon-Stevens and David Saunders.
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