Financial Inclusion: Implications for Public Policy

A growing body of evidence suggests that financial development and improved access to finance (also referred to as financial inclusion) is likely not only to accelerate economic growth but also to reduce income inequality and poverty in a country. Despite the essential role played by financial services in the progress of efficiency and equality in a society, 2.7 billion people (70% of the adult population) in emerging markets still have no access to basic financial services, and a great many of the them come from countries with predominantly Muslim populations (Demirgüç-Kunt, Beck, and Honohan, 2007). In conventional finance, financial access is especially an issue for the poorer members of society, including potential entrepreneurs. They are commonly referred to as “nonbanked” or “unbankable,” and in the case of potential entrepreneurs, they invariably lack adequate collateral to access conventional debt financing. While access to finance may be important for economic growth, the private sector may not be willing to provide financing to some areas or some segments of the economy because of the high cost associated with credit assessment and credit monitoring and because of the lack of acceptable collateral.