Financial Inclusion, Financial Sector Development and Economic Growth——Where do MENA countries stand?
I. Introduction
Financial Inclusion refers to the accessibility and availability of financial services to the different socioeconomic classes of a society, including banking and saving accounts, transfer and payment services, insurance services, and financing and credit services (World Bank, 2011). If such financial services were unavailable or underprovided, some people might be forced to recourse to informal channels, which are generally untrusted, unregulated, and risky.
Some narrow the definition further stating that financial inclusion is when the poor and disadvantaged have access to financial services. This paper will use the broad definition of financial inclusion considering everyone’s access to financial services. However, as is usually the case, the poor and the disadvantaged would mainly be excluded from financial services and hence be the most in need of financial inclusion policies.
The widespread use of informal-savings methods implies a missed opportunity for the banking sector to provide safe and affordable financial products to the unbanked. For example, adults who do not use banks or other conventional financial institutions often turn to alternative methods to manage their finances, such as rotating-savings clubs and credit associations. Therefore, financial inclusion is an integral part of the development of economies, and it is vital for sustainable economic growth. When people have access to credit, new opportunities surge.
In the macro level, the advantage is far more obvious. Financial inclusion focuses on relocating savings of the unbanked into the financial system at an affordable cost. Money under mattresses will move into financial institutions and it will be better managed in favor of economic activities such as credit allocations and investment (Hamdi, 2011). Banking activities will become dynamic, access to loans will be easier and economic activities will prosper.
In recent years, policymakers across the world have shown an increased interest in financial inclusion. The interest arises from the substantial importance of financial inclusion in facilitating access to financial services, creating jobs, and improving the standards of living and economic growth. It will also broaden Access to financial services as marginalized groups and those who are in remote areas will get access to basic financial services. This will result in empowering Individuals by offering them tools that help managing their finances. Therefore, financial inclusion helps promote equity through reducing disparities in financial access and opportunities.
The 2013 World Bank financial inclusion database reveals that 2.5 billion of the global adult population has no means of accessing regulated financial services. The account holders in developing countries represent 41% of the adult population while it’s 89% in the high income countries and 51% in the world (WB 2013). The updated Report (2022) shows a considerable improvement during the past decade as the number of adults without access to an account has steadily declined from 2.5 billion in 2011 to 1.4 billion in 2021. As of 2021, 76% of the world’s adult population had an account meaning that millions of formerly excluded and underserved poor customers are moving from exclusively cash-based transactions to formal financial services using a mobile phone or other digital technology to access these services(World Bank, 2022).
Although the numbers improved considerably, they are still high and the gap between rich and poor countries persisted due to the lack of adequate financial infrastructure. Such an absence of financial services means that people in remote areas will be excluded from the advantages of the financial sector, and they will be relying on parallel money lenders at high rates of interest.
In this article we will provide an overview of financial inclusion and its benefits, and we will reveal the state of the debate of the degree of financial inclusion in the MENA region.
II. Why financial inclusion is important?
Financial inclusion is important due to its role in employment creation, raising income, and reducing poverty. On the one hand, financial inclusion can help individuals and households by giving them a safe place to save, creating a pension, and allowing them to take out loans and insurance payments to cover health and education. On the other hand, Families can also absorb shocks better, especially with health insurance available in case of illness in the family. A study by the National health services (NHS) in the UK reported that a higher financial inclusion tackles health inequalities in a society. Families might also be more resilient to income shocks due to savings. Life insurance is crucial in case of death in the family while unemployment insurance in case of loss of employment. Finally, financial inclusion benefits firms by promoting investment and innovation and allowing them to utilize market opportunities more efficiently and reduce risk.
1.Advantages of financial inclusion
Three key factors are generally used to measure financial inclusion, and they are:
• Banking penetration: the most common indicator of financial inclusion, which is measured by looking at the number of deposit and loans accounts.
• The availability of banking services: measured by the number of bank branches in per 100,000 adults, the number of automated teller machines (ATMs) per 100,000 adults, and the number of points of sale (POS) devices per 100,000 adults. The adult population is defined as anyone above 15 years of age.
• The usage of the banking system:gauged by looking at private sector credit as a percentage of GDP. Mobile phone penetration is also explored in this paper to foresee if mobile banking could be a successful way to improve financial inclusion.
Financial inclusion is crucial for several reasons, and its importance spans economic, social, and individual dimensions. The access to financial services will increase loans and savings, thus, increasing consumption in the economy (Collins et al, 2009). By integrating more people into the financial system, a wider base for economic activity will be created. Access to banking and financial services allows individuals and businesses to save, invest, and manage resources more efficiently, which can spur economic growth and innovation. This means that a more inclusive financial system can contribute to economic stability by spreading financial risks more widely across the population. The more people have access to savings and credit, the less vulnerable to shocks an economy becomes.
Through access to financial services, households can enjoy obtaining credit at an affordable rate, deposit money at a safe place and even place their saving in different investment schemes. They can also invest in projects such as education or healthcare, which can substantially improve their quality of life. These financial services will improve the household’s well-being and will help reduce poverty in society. This access can help people manage financial risks, invest in education or small businesses, and generally improve their economic stability and opportunities.
Another advantage of financial inclusion consists in empowering marginalized groups, including women, the elderly, and those in rural areas. It gives them control over their financial lives, helps them build assets, and provides a buffer against economic shocks. Therefore, financial inclusion could foster gender equality, accelerate economic growth, improve social well-being, and lead to more robust and inclusive societies. This can lead to a more equitable society where individuals have a fair chance to improve their economic standing.
2. Financial inclusion, financial development, and economic growth
Financial inclusion and financial development are two concepts that are closely interconnected. The more the inclusion into the financial system is, the more the sector is developed. Furthermore, the more the financial sector is developed, the more growth the economy will achieve.
Financial Inclusion, overall, fosters investment, consumption, and economic activity. Financial inclusion increases the volume of transactions in an economy. However, greater financial inclusion might allow for a riskier client profile at financial institutions. Such as people at the lower income bracket, or high risk, uncollateralized facilities extended to less creditworthy individuals and corporations, which can prompt some degree of credit risk and, in some cases, pose a potential threat to financial stability.
The inclusion of people with low average income in the financial system is a complex issue. People with low average income tend to default on loans more than people with high average income. In essence, defaults increase the percentage of non-performing loans (NPLS) and deteriorate the quality of assets within the financial system. In addition, when the financial system is integrated and highly competitive, profit margins tend to be low, causing banks to provide credit for customers with low credit scores. In retrospect, the financial crisis of 2008 that was caused by subprime mortgages provides an example of how greater financial inclusion, especially the inclusion of people with low credit scores, can hurt financial stability.
Greater financial inclusion can also create an additional regulatory burden; the central bank would need to designate more resources to monitor the financial system. Greater financial inclusion leads to a more diverse profile of financial institutions (pension funds, insurance companies, mutual funds, non-banks, etc.) which elicit sophisticated and advanced techniques for supervision. The central bank would need to develop these techniques, such as an early warning system, econometric modelling, micro and macro stress testing, among others, to identify and assess potential threats to financial stability.
Alternatively, people within the low-income bracket can provide stable deposits to the financial system. On average, they conduct fewer transactions in terms of value and volume than people at the higher income bracket. Transaction costs, future uncertainty, and other deterrent factors curtail their level of consumption and spending. Therefore, their aggregate deposit can be considered a relative mitigant to the risk of an abrupt withdrawal of deposits in the financial system.
In summary, while financial inclusion focuses on ensuring that everyone has access to financial services, financial development is about enhancing the overall quality and efficiency of the financial system. Both are integral to a robust financial ecosystem, and progress in one often supports progress in the other.
III. Financial inclusion in MENA countries
In the Middle East and North Africa region, the level of financial inclusion differs from one country to another one and even from one sub-region to another one. For example, the GCC countries, including Saudi Arabia, Bahrain, Qatar, Oman, Kuwait, and the United Arabe Emirates, are highly positioned compared to Arab-African countries, such as Egypt, Morocco, Libya, Algeria, and Tunisia.
1. Comparison between GCC and Non-GCC MENA countries
It is worth mentioning that the financial infrastructure in the GCC is more sophisticated than the other non-GCC countries such as Egypt, Morocco, Algeria, Tunisia, etc. Access to finance, proxied by the number of Bank branches and number of ATM machines per 100,000 people, is greater in GCC countries than the other bloc of countries. For every 100,000 people there are 6.8 Bank branches in Egypt, whereas in Kuwait there are 13 Bank branches. There are 81 ATM machines per 100,000 people in Kuwait, 29 in Egypt and Morocco and 32 in Tunisia. On average, the cost of issuing and maintaining bank accounts is lower in GCC countries than the other countries.
The percentage of adults with accounts in a formal financial institution is 205% in Bahrain, 35.7% in Tunisia, and 26% in Egypt (Table 1). In rural areas, the indicators are considerably lower. Rural areas‟ inhabitants find it more difficult to access financial services, ATM machines, and bank branches, which lead to greater financial exclusion. The financial infrastructure and the costs of financial services are also the major factors explaining the high inclusive in Bahrain compared to Tunisia and Egypt.
Table 1 Some indicators on financial inclusion in MENA in 2021
Source: World Bank Financial Access 2022.
*Data of 2017.
As we can see from Table above, there exists a huge discrepancy between GCC and Non-GCC countries when it comes to owners of credit and debit cards as well as owners of financial accounts. The discrepancy is mainly due to many socioeconomic factors as well as financial factors which ultimately yield financial inclusion or financial exclusion.
The socioeconomic factors (GDP per capita, literacy rate, and unemployment level) directly affect the financial factors (access to finance, cost of finance, percentage of adults with bank accounts).
As an example, by comparing GCC countries to the other MENA countries, one can conclude that the first bloc of countries outperforms the latter in the socioeconomic factors. In fact, GDP per capita and literacy rates are considerably higher in GCC countries, while unemployment is lower. As shown in Table 5.2, the literacy rate in Bahrain for example was 97.8% in 2022, while it is 72.4% in Egypt and 77.3% in Morocco. Literacy, financial literacy, encourages people to keep their money in banks and financial institutions as they are more aware of the benefits associated with it. Turning now to the Human Capital Index, which measures the human capital that a child born today can expect to attain by age 18, given risks to poor health and poor education that prevail in the country where she lives, the results also show a gap between GCC countries and the remaining MENA countries. In fact, while Human capital index is 0.67 in the UAE, it is only 0.49 in Egypt and 0.5 in Morocco.
Table 2 Socioeconomic Indicators
Source: World Bank 2022.
The factors analyzed above show that in an economy with higher financial inclusion, we would generally expect more income since lower strata of society will realize small business opportunities which will raise the welfare effect in the economy.
2. MENA versus the World
By comparing overall MENA countries with the World, the World Bank data (2022) shows that the Middle East and North Africa (MENA) is the region with the lowest proportion of adults with afinancial account in the world.
The updated figures of the Findex Report of the World Bank (2022) reveal the following statements:
• Only 48 percent of adults in the region, excluding high-income economies, have an account, 23 percentage points lower than the developing economy average. Being unemployed makes it even less likely for an adult to have an account (Figure 1).
• Only 39 percent of adults who are not active in the labor force in MENA have an account, the lowest percentage of all world regions.
• Adults who are not active in the labor force in MENA are approximately 16 percentage points less likely to have an account.
• The Global Findex 2021 revealed that 70 percent of people without an account are not active in the labor force.
• Digital payments are not yet widely adopted in the region compared to other developing economies.
• Only 40 percent of adults reported having made or received a digital payment in the last year, compared to the developing economy average of 57 percent.
Source: Global Findex Database 2022.
*Excluding High income countries.
Figure 1 Account Ownership in Middle East and North Africa in 2021*
Note: Regional data excludes high-income economies.
Source: Global Findex Database.
Figure 2 Percent of adults age 15+.
IV. Policy Recommendations
The G20 developed nine principles for Innovative Financial Inclusion which was endorsed by the June 2010 G20 leadership Summit in Toronto. These principles outline the need for governments and regulators to support financial inclusion and for it to be a goal along with financial stability and prudential regulation. One of the principles states that promoting financial inclusion should be tackled by a public-private sector partnership and that banks and microfinance institutions can take the leading role in promoting financial inclusion but this needs to be enforced by financial regulation.
Financial Inclusion is a policy among the MENA countries, but it does not look like a priority like monetary and financial stability. According to the World Bank financial inclusion reports (2011 and 2022), the MENA region is rated as the second lowest region that promotes financial inclusion. The lowest are the high-income countries but that is because they are generally financially inclusive so there is no great need to promote financial inclusion. It is recommended that MENA countries, especially non-GCC countries, make financial inclusion one of their economic and financial priorities. There needs to be actual strategies and working groups to tackle this issue. Furthermore, the Central banks could enforce regulation to push the financial sector to promote financial inclusion. One of these regulations could be requiring banks to have a certain number of accounts for low-income customers where they can have deposits and in some cases debit cards.
There is also a need for more microfinance institutions in MENA countries as their number is very low. Another recommendation is to create postal banks like what is done in France to promote more access to financial services especially countries with high population living in rural area such as Egypt (Table 3). This way, it will reduce the geographical barriers to financial services and at the same time be less intimidating for a low-income person than going to a bank branch or headquarters.
Technology and digitization also play a crucial role in promoting financial inclusion, especially with the high penetration rate of internet in MENA countries(Table 3).
Table 3 Mobile Phone Penetration
Source: WDI World Bank data.
*2021 data used.
Mobile banking can transform banking as it is 50% cheaper than conventional banking (McKay and Pickens, 2010). Based on Table 5.3, all MENA countries have a relatively high mobile cellular phone subscription. Even though GCC countries have a relatively low rural population, there is still a high potential for mobile banking to reach unbanked people and promote financial inclusion. Furthermore, a robust regulatory regime can aid in the success of mobile banking.
V. Conclusion
Financial Inclusion or exclusion is an outcome of socioeconomic and financial factors. The present study shows that a high level of GDP per capita encourages people to save more and keep their savings in formal financial institutions. Literacy and financial awareness are important in informing the public about the benefits of opening bank accounts and depositing savings in financial institutions. Ultimately, robust socioeconomic factors lead to greater financial inclusion.
In GCC countries, where the GDP per capita is high, saving rates tend to be high as well, and people deposit their income in bank accounts. The banks play the role of mobilizing the funds from savers to borrowers, which stimulates investment, consumption, and economic activity. In Egypt, Morocco, and Tunisia, however, the GDP per capita is significantly less, which translates to low saving rates and consequently less investment, consumption, and economic activity. Here, previous experiences show that slow economic growth is frequently associated with high unemployment rates, as a sizable portion of the labor force stands idle, and the economy is not operating at its full capacity. Sluggish economic growth and high unemployment levels dampen demand for bank accounts and financial services, exacerbating the issue of financial exclusion. Therefore, the central banks and policymakers in low-income countries should encourage financial inclusion by reducing the barriers to entry for banks to increase competition and to reduce the costs of access to financial services.
【This article is AFCA Working Paper No. 2024-22/185】
Expert Biography
Dr. Helmi Hamdi, Fellow of Asian Financial Cooperation Association Think Tankers Committee, is currently working as Senior Economist at the Central Bank of Bahrain, and he is a senior research fellow at CERGAM EA 4225 Aix-Marseille University. He is also an Adjunct Professor of Economics at the London School of Economics (LSE International Programs).
Dr. Helmi served as Director of Project for the OECD-MENA Centre for Investment, a Consultant for the UNDP and he a Country Risk Expert at EuroMoney Country Risk (London). He eared multiple professional certifications from international organizations such as the IMF, UNCTAD, and Visa, and other certifications from prestigious universities such as The Harvard Business school, The Imperial college Business school, the University of Hong Kong, and the University of California in Berkeley.
Dr. Hamdi, holds a PhD in Applied Economics and a Habilitation to Supervise research (HDR) from Aix-Marseille University, France.
Dr. Helmi's field of expertise are: The Economics of Banking and Finance,the Economics of Payment Systems, Monetary Theory and Policy, Macro econometrics, Energy Policy and Modeling and Emerging Market Economies. He is the author of 2 Books and more than 100 research papers, where most of them have been published in reputed Journal such as: Review of International Economics, Applied Economics, Economics Bulletin, Economic Modelling, Ecological Indicators, African Development Review, International trade Journal, Journal of Applied Business Research, Journal of Quantitative Economics, International Economic Journal, International Journal of Business and Finance Research, etc.
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