Champions of Financial Inclusion

Wednesday, July 21, 2010

Remittance: a step towards financial inclusion

Financial Inclusion is the buzzword doing the rounds in the social sector these days. Financial inclusion is an umbrella term used to represent access to various financial services by the poor (bottom of the pyramid!). One of these services is the transfer of money i.e. remittance; a field which is seeing a lot of developments lately.

Remittance in common parlance refers to the transfer of money by a person abroad to his family/friends in his/her home country. Various reports by World Bank, United Nations University show that remittances form the second largest source of international finance to many developing countries of the world, often surpassing the official development flows. International Fund for Agricultural Development (IFAD) 2006 estimates put the total flow of remittances to developing countries at $301 billion (including informal channels) while the World Bank estimates are $250 billion (excluding informal channels), which mirrors the huge market potential.

And we are not just talking about the rich or middle-class but the poor too. We have known through personal experience or news stories about the sheer no. of unskilled labour who have migrated to areas for e.g. Gulf (from Kerala) in search of livelihoods. And it is this section of migrants that the development sector needs to concentrate on by ‘introducing’ formal channels to them which can be better leveraged to promote economic development.

Remittances make a real difference to people, a difference that’s measured not in money but in its ultimate utilization for better food, medicines, education and healthcare. But what’s the connection between remittance flows and financial inclusion?

In countries like Ghana, remittances can account for up to half the household income. In Bangladesh, they can represent most of the household income. It is estimated that about 10% of the world’s households receive remittances (DFID). And while this money is used to support basic necessities like roti, kapada, makaan, it can have a multiplier effect. It is known that most often the excess money is further invested for genetrating profits for the family. The cumulative effect on the economy could be increased employments, increased money flow for investments, thereby stimulating growth. And it is this aspect that if encouraged, can help communities to come out of poverty.

Money is sent through formal channels like banking institutions or money transfer agencies or more frequently, as in case of poor migrants, through informal channels like friends, acquaintances or illegal Hawala channels. There a number of impediments faced in the informal fund transfer – higher charges, delivery issues, possibility of theft etc., which may not just mean reduced money to the beneficiary but may even further tax the family. On the other hand, the formal channels ensure easy transference of the entire amount in return for set charges. And as money transfers through formal channels often require the use of a bank account, remittances promote access to formal financial services for the sender as well as recipient.

However the problem lies in the fact that the penetration of the formal channels is much limited, due to the same demand and supply problems which are plaguing the banking sector - problems of availability and accessibility, identification, information gap, illiteracy, higher operational costs.

This situation if utilized efficiently can prove to be a win-win situation for all stakeholders. As Dilip Ratha(World Bank) points out, encouraging remittances through the banking channels (formal channel) can increase the development impact of remittances by encouraging more savings and furthering investment opportunities. Banks and other financial institutions can introduce their other products to its remittance customers thereby reducing their costs per customer. MFIs can make use of the history of the remittance receipts to map out the credit history of the potential customers.

Access to remittance services in rural and remote areas can be improved by encouraging the participation of the microfinance institutions, credit unions, and saving banks (including postal saving schemes) in the remittance market thereby effectively increasing the probability of usage of formal channels by the poor.

The opportunities are limitless; and if combined with initiatives by the financial institutions and policy and regulatory support by Governments have the potential to make a difference!

Finance for Transgenders: Potential for Microfinance

Recently, there was a TV interview of Laxmi Narayan Tripathi, who runs an NGO called ‘Astitva’ to fight for the rights and respect of the transgender community. The interview was quite insightful; she spoke about her experiences while growing up and how differently she was treated because of her sexual choice. However, with the support of her family and friends and her own determination, she is now on her feet and is a reknowned international GLBT activist.

Being in the sector of financial inclusion, I got thinking about the financial angle in this whole process. Though trangenders have found mention in the Indian scriptures since time immemorial; they have been denied respect, dignity and right to livelihood. Due to which, the community is forced to be involved in begging, sex work and entertainment/intimidation to earn their livelihoods. A little search on net showed that apart from some initiatives by Tamil Nadu TAI Vizhudugal Federation, there have not been many efforts made to bring transgenders under the ambit of financial inclusion.

When we talk about financial inclusion, we look at rural population, informal groups, women and now disabled but we tend to neglect other communities who though don’t have much political support or influence, but who at the same time require the services just like any one else to rise above poverty. Full financial inclusion entails everyone but it is not complete if certain sections are excluded.

This situation according to me makes a poor statement about the overall Indian mentality but can spell a huge opportunity for micro-financial sector where new products and services could be designed to meet the specific requirements of the different sections of the population so that they can emerge out of poverty and live with dignity.