Financial Inclusion plays vital role in reduction of poverty, inequality and stimulation of job creation

May 29, 2013

JOHANNESBURG May 29, 2013 – Conditions in global financial market have eased considerably since mid-2012, reflecting further monetary stimulus provided by high-income country (and many developing countries) central banks, improved fiscal sustainability in developed countries and the establishment of mutual support mechanisms in the European Union. Global economic recovery, however, remains fragile, susceptible to downside risks, and more uneven across country groupings: with stronger recovery anticipated for the US and Japan than for the EU, and return to robust growth (although still below the pre-crisis levels) in the large emerging markets.

Against the backdrop of subdued external demand subject to significant downside risks and a domestic investment climate weakened in particular by labor strife, medium-term growth prospects for South Africa have been revised down, from a projected 3.2 percent for 2013 in the July 2012 Economic Update to 2.5 percent currently,” said Sandeep Mahajan, World Bank Lead Economist.

The slowdown has put into sharper focus the key structural challenges facing South Africa in its quest to achieve higher and more inclusive growth. Among them is the expansion of access to financial services for both individuals and small enterprises, which, according to the “South Africa Economic Update, focusing on Financial Inclusion,” report released by the World Bank today, could help reduce poverty and inequality and stimulate job creation in South Africa.

There are 12 million unbanked people in South Africa and the phenomenon of financial exclusion extends to millions more who are under-banked. This is despite the fact that along the modes-of-access indicators of financial inclusion, South Africa is more in line with high income countries than developing countries.

“The transformative power of financial inclusion in South Africa should not be underestimated. Improved access to finance by poor households and micro enterprises can unlock income earning opportunities and self-reliance for many”. said Asad Alam Country Director for South Africa. .

This report analyzes South Africa’s financial inclusion landscape, with a particular focus on formal payments, savings and credit. Its main messages are:

  • Financial inclusion is important for growth and reducing inequality and poverty – in South Africa and across the developing world.
  • On an aggregate basis, access to financial services in South Africa seems strong. However, the aggregate picture masks significant inequalities in access. In part, financial inclusion reflects the duality of the South African economy.
  • Supply-side issues play a major role – particularly inadequate competition in the banking sector, near absence of microfinance institutions, and inordinate emphasis on payroll lending.
  • Aspects of the regulatory environment may play a role, although they do not only serve financial inclusion purpose.
  • The presence of highly developed financial infrastructure as well as mobile technology offer exciting opportunities for expanding financial inclusion.

“Global experience shows that less endowed segments of the population are best serviced by specialized institutions with a cost structure and business model adapted to their needs,” said Michael Fuchs, World Bank Advisor on Finance and Private Sector Development, Africa Region. “As such, there could be high payoff from introducing a tiered licensing system that opens the market to institutions that can service unbanked and underbanked individuals and small and microenterprises.”

Furthermore, the report argues that the entrance of new banks has demonstrated how greater competition can enhance product choice and reduce customer choice. It cites case studies from countries with comparable economies to show potential approaches that South Africa might consider for enhancing financial inclusion.

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