Financial Inclusion: The good, the bad and the ugly

That’s me and my son in front of the house where I grew up. It’s a house situated at the top of a roadside cliff in lower Antipolo City where landslides are just a normal thing (remember the Cherry Hill tragedy?). The wall of the house in the picture is made up of rough concrete, unfurnished and obviously undone. No window shields. Not even interior finishing. Nothing whatsoever. It’s more really of a pig pen than a house from a civilized world’s point of view.

The same house that put me into deep financial debt at the tender age of 21 and got me credit-blacklisted in the Philippines. How did that happen? It’s a long but relatable story for the 86% of Filipinos that are currently unbanked.

The wall of the house was not originally made-up of concrete. It used to be rusty galvanized iron (GI) sheets. I had to replace it with concrete blocks to protect my family from the gun bullets that may pass through the GI sheets from the nightly riots of gangs in our neighborhood. Good thing I just got my new credit card. So, to buy construction materials, I made a cash advance from my credit card because I don’t have cash and the hardware store doesn’t accept credit card payments. At the time, I can’t even qualify for micro-loans from banks or credit institutions because of my lack of credit history and low income. I advanced only PHP 7,000, my cash advance limit, which is almost equal to my monthly net pay at the time. That PHP7,000 cash advance from my credit card plus the credit card purchases for my father’s medicines ballooned to over PHP40,000 in less than a year’s time and I’ve been in default ever since. I can’t blame the credit officer who put my name in the Credit Management Association of the Philippines’ (CMAP) blacklist. Thanks to you whoever credit and collection officer who put my name in it because up to now I can’t get a credit card, a personal loan and many times in the past, I’ve been rejected from buying-on-credit an air-conditioning unit for my hypertensive father.

At the time, Financial Inclusion was just a word waiting to be transformed into reality.

The World Bank defines Financial Inclusion as “means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way”. It aims to reduce poverty and promote prosperity particularly for the unbanked population in the world.

Financial Inclusion seems to be the most-spoken word of current FinTech world. With value propositions of convenience and accessibility, innovative companies have introduced efficient solutions for remittance services, mobile wallets, cashless payments, and micro-financing using digital means. No credit history? No problem! Because they are using innovative algorithms to credit score potential borrowers. They analyze and utilize non-traditional data such as mobile spending information, spending patterns, locations and even social media information. Most of these companies promise lower transaction cost and aims to empower consumers by maximizing their disposable income and purchasing power.

Is it worth it though? Perhaps not totally. Financial Inclusion has downsides too on both sides of the table. For user-consumers, it poses dependency for efficient spending without guarantees of increasing disposable income and purchasing power. Consumers may end up buying more and saving less, they might buy more what they can pay for which could worsen over time. In addition, consumers may default in repayments due to improper matching of their income and scheduled loan re-payments or purchases. On the other hand, banks and innovative companies too may end up without real tangible returns due to heavy investments in technology over the years, incurring huge losses or minimal profits that may not be enough to fuel growth and further reach. Philippines alone has more than 7,000 islands, a population of 100 million and that according to Jack Ma is “mobile technology is going to make sure that everybody, inclusive, reach the money that they need.”  Funding runs out, government and donor grants might stop at a certain point due to economic downturn and changes in socio-economic priorities.

So how do we solve the equation? In my own humble opinion, it’s a combination of many factors:

Financial Inclusion should not be just a ‘side dish’ but the ‘main course’. Banks and innovative companies should consider financial inclusion penetration as mainstream vertical that they need to focus on and not just something auxiliary. It’s a numbers game. There’s currently a lot of potential if they can serve the 86% unbanked population in the financial ecosystem.

Change of policy by traditional institutions. This refers to policy change from providing premium services not just to the big boys but also to the smaller businesses and entrepreneurs who are in dire need of financing to grow their businesses. Make sure the poor can get engaged and active as well.

Strengthen consumer protection. There’s a bunch of organizations and individuals preaching financial literacy already. Most are targeting increasing awareness of the unbanked to available financial products, suitable short-term and mid-term finance solutions to small business, and lastly, wealth build-up. However, emphasis on consumer protection is a must too! We want to make sure that those consumers are informed and protected against the harmful effects of an efficient financial system. Because the more the financial system gets sophisticated and efficient, the wealthier the nation becomes, the effects of capitalism creeps in, which among other things, less consumer protection.

Underestimation of the potential micro-customers. Banks and other financial institutions tend to underestimate the micro-consumers. They’ve been trying to educate them on things that they already know. They know the value of money, losses and profits. They do know how to make money. Actually, both large and small consumers are facing the same thing anyway – the credit risk. But according to the late Wash Sycip, the poor were honest than the rich, and always paid what they owed despite their status in life.

Promotion of social entrepreneurship. The mantra should be: Make money and help people and then help more people by making more money. Social entrepreneurship aims to make people generate profits too. Those profits should be reinvested to make the social entrepreneurship system self-sustaining and continuously growing in order to reach more people especially those currently living below poverty line.

The World Bank Group’s President Kim, has called for Universal Financial Access (UFA) by 2020 and considers financial inclusion as a key enabler to reducing poverty and boosting prosperity. It’s easier said than done though. Why? It’s because it takes some time before the poor and unbanked finally feel the impact of this financial inclusion initiative. In a capitalist economy, rapid economic growth most of the time results in rapidly growing inequality. The rich become richer while the poor become poorer. Thus, a balanced and sustainable financial inclusion model remains a vague spot to discover.

Visiting the old house where I grew-up and taking a picture of it with my son is actually both a relieving and painful experience. It’s a relief because I feel proud of the actualization of the dream I built around that house:  To get out of poverty. However, it’s also painful to see because it reminds me that there might be current 21 year-olds within the 86% unbanked population facing the dangers of getting into unneeded financial debt that will surely sustain their predicament instead of alleviating poverty, if the financial inclusion initiative will fail in the next years.

2 Comments on “Financial Inclusion: The good, the bad and the ugly”

  1. Financial inclusion always sounds so positive but yes, there is an ugly side. Most financial institutions cite that making financial products available through e-commerce would give more Filipinos access to these things.

    I would even claim that it’s such an elitist concept as of now in the Philippines since all the 90%+++ Philippine internet penetration rate cited in case studies mostly comprises of Free FB mobile access.

    Our laundry lady once told us a story that there was a lending institution that went to the rural areas of Ilijan, Batangas City who offered cash loans with a ridiculous 30% – 50% interest rate per month. Most of the people there have low incomes and the area is far from the city proper. They do not have immediate access to the internet or high-paying jobs which the lending company is taking advantage of.

    I hope that instead of using financial inclusion as a marketing scheme, private companies and the government would actually take steps such as educating people before giving them access to financial products that would get them knee-deep in debt rather than helping them in the long-run.

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