How to Tackle Financial Exclusion Effectively - Essay Example

A REPORT ON WHAT IS FINANCIAL INCLUSION AND HOW CAN IT BE TACKLED EFFECTIVELY In the simplest of terms, financial exclusion is when the people of any community or financial status are excluded from the general financial system of the country and generally with very severe consequences for the people who are excluded and the society in general. The first question anyone would ask is why would anybody be excluded And how could anybody exclude them The answer to these questions is not difficult. While nobody goes out of the way to exclude, the rules of the game are such that they are excluded. For example , if you are a single mother on welfare , the chances are very good that you do not have a checking account or a credit card and you pay exorbitant rate for cashing a cheque or paying a heavy interest for borrowing money from a loan shark. Now while no bank advertises that it will not extend it's banking facilities to mothers on welfare , there are various barriers which would present that. The income level of that person may be so low that banking guidelines would not permit giving them credit facilities . They may not have any established credit because they pay everything in cash, or they may even have bad credit , because they just may not have given too much thought to payment on time and they just pay when they have the money. Or simply they may not just know , how the financial and credit system works. So a certain group of people are excluded from the financial system , so how is this bad and most importantly , how does this effect you and me After all we are not a socialist or a communist country where everybody should have access to everything and we besides we already know that system has failed. This is not about trying to establish a socialist welfare society. There are real damaging consequences to a modern free market economy from lack of financial inclusion of a certain group of people. First of all a whole group of people have been excluded from the mainstream economy , that cannot be good for the economy. The people themselves will enter a vicious cycle of paying high interest rates for credit and since these people are already in varying degrees of poverty it just pushes them further into it. Finally poverty breeds instability , violence and crime. The inner cities, slums and ghettos all of this in common that they consist of financially excluded people and are breeding ground of poverty and crime. But should Financial Institutions take the burden of providing credit facilities to people who do not meet their credit guidelines Don't they have a responsibility to make sound investment decisions on behalf of their shareholders Certainly they do. In fact the current sub prime crisis may not have happened if a few banks had behaved in a prudent manner in lending. You cannot and should not lend to the unlendable. But understand this , these people already borrow money , they pay a very heavy interest for it. So the banks must design products to capture this market rather than asking this group of people to meet their existing guidelines which may be difficult , if not impossible. If Bangladesh can have a successful micro loan program with Grameen bank , why could U.K. which has a much smaller problem with financial exclusion not come up with solutions. Indeed An interesting feature which emerges from the international practice is that the more developed a society is, the greater is the thrust on empowerment of the common person and low-income groups. In U.K The first review of the problems of financial exclusion in 1999 stimulated both debate and development. The government set out its strategy, Promoting financial inclusion, in 2004, identifying three priority areas - access to banking, access to affordable credit, and access to free face-to-face money advice for people who are financially excluded. UB or Universal banking was setup partly because of this effort , this opened up access to bank accounts at post offices. And this was a very good idea , because bank may look like alien territory to you if you are one of the excluded group , but everybody has to go to the post office. Now how does one go about increasing credit. The first thing is spread information about the channels of existing credit. The provision of good, face-to-face advice on money and debt was one of the three key priority areas that the government identified in 2004. Through the Financial Inclusion Fund the government is supporting two initiatives: one to develop face-to-face debt advice ; the other to develop outreach services . Education would see that a lot of people may just not have known that all they had to do to get banking facilities and borrow money was to go to the local bank. Insurance is another area where financial exclusion is rampant For some years, UK insurance companies have had arrangements with local social housing providers to provide low-cost home contents insurance to tenants. These are run as a partnership, with the housing provider effectively acting as a broker selling policies to their tenants and collecting repayments. It is important to know what are the groups which are subject to financial exclusion , because if you know the people you are targeting it is more likely you can make it more effective. Groups such as prisoners, refugees and asylum seekers, young people and the over-50sCare leavers ,disabled people, including those with mental ill-health Homeless people ,Older people ,People experiencing poverty People with learning difficulties ,Some ethnic minorities ,Some religious groups Younger people are especially vulnerable to financial exclusion. The Government of the United Kingdom put together Financial inclusion Task force as it did not want to focus on who were excluded but to focus on how to get everybody included. The initiatives mentioned earlier in the paper covered some of that. But getting a whole group of disenfranchised people to enter the mainstream economy requires more than just Government intervention. An entirely new sector of economy had to be created. This was called the third sector. This had to be created by the government of the U.K and sustained by the broader economy , if these two did not happen , this was doomed for failure. First the extent of the problem was to be gauged. A Working group task force was created to find out the extent of Financial exclusion in U.K in monetary terms , in other words how much money was required to fix the problem How much was the demand Working Group has conservatively estimated nationwide demand for affordable credit from financially excluded clients at 1.2 billion p.a. (3,000,000 loans) versus what was projected growth rate of 30m lending p.a. (75,000 loans) There are massive gaps, relative to demand, in both coverage and capacity of 3rd sector lenders Many of the inputs required for accelerated momentum in the third sector area are non-financial. For example Govt can ensure regulation is enabling, and build demand for 3rd sector products; Banks can strengthen governance and boards, or help develop products and services; 3rd sector lenders can commit to sector benchmarks, long-term business plans, identifying training needs, supporting professional development; Local authorities and social landlords can support new provision in specific areas. The financial commitment has not been forgotten however, and the Government of the U.K is committed to investing 40 million pounds in the third sector growth fund. The United Kingdom has taken a more Voluntary participation approach unlike the United States which makes community re-investment mandatory via the CRA , the Community re-investment Act. Though the U.S. Financial markets are examples for the rest of the world. The current sub-prime crisis in many ways is a result of lending to people who should not have had a loan. In many ways it refers to people who perhaps were not ready for a mortgage. However it does not mean that the lenders lent to them out of some altruistic values. It was to profit, which is acceptable. But unsound business practices do not help the cause of financial inclusion. The present sub prime crisis does not take away from the fact that there are many financially excluded people who cannot get an affordable loan. And while it is certain that the current crisis has come about by the way of unsound lending practices, it does not mean that efforts of financial inclusion in this area should result in the same. There is an evident increase in the advertising of products - including mortgages and remortgages, car loans and debt consolidation loans - specifically to people who have a poor credit record, or who are finding their existing debt difficult to manage. It might be predicted that such borrowers would be particularly vulnerable to unscrupulous practice - being in more desperate financial circumstances and having fewer options.1 There is no doubt that the borrowers in this group are more of a credit risk and must pay a higher rate of interest, but it would still be cheaper than rent and it would get them to own a house and start building their equity and credit. However there were valid concerns over the level and transparency of charges and over how fairly potentially vulnerable borrowers are treated have driven moves towards greater regulation across the financial services sector. In October 2004, all mortgage lending came under the regulation of the FSA and significantly all loans will be subject to the same regulation and guidance (abolishing the previous divide whereby only loans of less than 25,000 were subject to the Consumer Credit Act). It is too early to judge what the effect of these reforms will be, although many in the industry argued that even the preparation for compliance with this new regime had already improved practice and pushed out firms with poor practice. In Conclusion , Since 1997 the Government of the U.K has made significant policy changes and implemented various initiatives to financially include large sections of people who were previously outside the periphery of the financial system. They have done it with knowledge , funding and most importantly in partnership with the private sector. Reference: 1. , C.K. Prahlad, Fortune at the bottom the Pyramid 2. International experiences in Financial inclusion, Chapter 1 3. Professor Elaine Kempson Providing financial services and preventing financial exclusion: Experience from the United Kingdom 4. http://www.financial-inclusion.co.uk/ 5. http://www.jrf.org.uk/research-funding/calls/financial-exclusion.asp 6. http://www.financialinclusion-taskforce.org.uk/ 7. Report of the third sector credit Working Group of the Financial Inclusion Taskforce 8. Joseph Rowntree foundation , Developments in mortgage lending 9. J Neill Marshall Financial institutions in disadvantaged areas: a comparative analysis of policies encouraging financial inclusion in Britain and the United States Environment and Planning A 2004, volume 36, pages 241 261 10. Peter Vaas Solving Financial Exclusion Needs Joined up Government , Public Money and Management Feb 2007 Pg 2-4 11. Sharon Collard Toward Financial Inclusion in the UK: Progress and Challenges, Public Money and Management Feb 2007 Pg 13-20 12. Community Reinvestment act review , Mortgage Bankers Association of America Read More