What is Financial Inclusion?
Financial inclusion means that all people and businesses have access to —and are empowered to use— affordable, responsible financial services that meet their needs. These services include payments, savings, credit, and insurance.
Financial inclusion can be transformative for people and micro and small enterprises (MSEs). Historically, people with low incomes, women, and other socioeconomically marginalized groups have been underserved by financial institutions. Without access to formal services and products and the freedom and skills to use them, they have often relied on informal, unregulated financial tools. Research has shown that, by harnessing economic opportunities and building resilience, financial services can help people and businesses prosper, as well as anticipate, absorb, or recover from shocks, such as unexpected health expenses or climate change-related weather events.
The concept of financial inclusion grew out of the microcredit movement of the 1970s and became widely used in the early 2000s. Today, it is an important part of the global development agenda, with a wide range of actors recognizing it as an enabler of many of the United Nations Sustainable Development Goals (SDGs). It is a mainstream goal of many international standard-setting bodies and national governments and is increasingly seen as a tool for achieving policy goals beyond the financial sector.
Global development funders are also committed to financial inclusion. According to CGAP’s Funder Survey, international funders committed a record US$74 billion for financial inclusion in 2022. In addition, funders are increasingly interested in supporting climate objectives and women’s financial inclusion through their financial inclusion programming.
Why Financial Inclusion Matters
Today, about 1.4 billion people have no financial account at a bank, mobile money provider, or other formal institution. Even when they have accounts, many people find them of little value and are left unused. The result is that roughly one in three of the world’s adult population lacks the financial services they could use to significantly improve their lives. For example, they have no savings for a child’s education, they cannot access loans to buy seeds and fertilizers, and they have no insurance to protect them from medical or natural disasters.
In addition to improving access to and usage of financial services, it is important to maximize the potential of financial inclusion to contribute to broader development outcomes by exploring new and emerging aspects of financial inclusion, including its breadth, depth, and utility. That is, the number of people and small businesses that have access to and use a financial account; the extent to which they have access to and use responsible financial products and services; and their practical benefits and positive outcomes, such as increased food security and climate resilience.
CGAP's Approach to Financial Inclusion
CGAP is a global partnership of more than 30 leading development organizations that works to advance the lives of people living in poverty, especially women, through financial inclusion.
We work at the frontier of inclusive finance to test solutions, spark innovation, generate evidence, and share insights. Our knowledge enables public and private stakeholders to scale solutions that make financial ecosystems meet the needs of poor, vulnerable, and underserved people and of MSEs, including through advancing women’s economic empowerment. As a global public good, CGAP’s independent research and analysis is available to all.
Today, we aim to build responsible and inclusive financial ecosystems that enable a green, resilient, and equitable world for all by elevating the focus of financial inclusion to broader development outcomes. To learn more, see our current five-year strategy, Harnessing Inclusive Finance: A Path Toward Thriving and Sustainable Futures.
Advancing the Sustainable Development Goals (SDGs) Through Financial Inclusion
Financial services are foundational to achieving a wide array of development goals, as evidenced by an expanding body of research. The United Nations Sustainable Development Goals (SDGs) represent the shared aspirations of countries and development actors and go well beyond poverty alleviation. They incorporate the need to promote prosperity and people’s well-being and reduce inequality while protecting the environment. While the SDGs do not identify financial inclusion as an independent objective, they acknowledge that it is central to achieving many of them. New evidence demonstrates that digital financial services offer hope to help the world get back on track to achieve the SDGs by 2030. In fact, financial inclusion can play a critical role in 13 of the SDGs, and there are four indicators to track progress.
Financial inclusion plays a critical role in many of the SDGs, including:
Financial inclusion is not a development goal in and of itself. Instead, it serves as a critical enabler of other global development goals. At CGAP, we are working to strengthen responsible and inclusive financial ecosystems by elevating the focus of financial inclusion to broader development outcomes, contributing to the following outcome areas through our work program:
Foundational Outcomes
- Generating evidence of what works, where, and for whom
- Promoting enabling responsible financial ecosystems
- Enhancing the effectiveness of impact investing in inclusive finance and the inclusiveness of carbon markets
Intermediary outcomes
- Increasing breadth and depth of financial inclusion
High-level outcomes
- Mobilizing financial services for climate adaptation, mitigation and a just transition
- Mobilizing financial services for building resilience to shocks and managing risks
- Mobilizing financial services for women and MSEs to capture economic opportunities
What Do We Know About the Impact of Financial Inclusion?
Over the last decade, there has been an explosion of research into how financial services may benefit the circumstances of low-income populations. These studies, while providing meaningful information, focus mainly on microcredit or a specific financial product. Acknowledging the need for a more complex but unambiguous impact-centric approach, CGAP launched the Impact and Evidence in Financial Inclusion: Taking Stock blog series. These resources look at recent initiatives to integrate findings on the effects of financial inclusion, discuss our standpoint on emerging discourse like financial health, discuss CGAP's current efforts, and more.
Understanding the Relationship between Financial Health and Financial Inclusion
Financial inclusion and financial health are strongly connected but are not synonymous. While financial inclusion describes the state where all individuals and enterprises have access to and are empowered to use affordable, responsible financial services that meet their needs, financial health is focused on how people manage their financial lives. It refers to a state where individuals can meet financial needs and obligations, cope with negative financial shocks, pursue financial aspirations, and feel satisfied and confident about their financial lives. Financial health does not only rely on financial services but can also be influenced by many factors. It offers an intermediate outcome on the path towards longer development outcomes, such as women’s economic empowerment and poverty reduction, and it puts the customer in a position to increase control over their financial situation and better manage financial shocks. Its measurement can yield early warnings on issues such as the inadequacy of social protection, inability to save, consumer protection issues, and over-indebtedness, and it can confirm the results of policy decisions.
COVID-19 (Coronavirus) Insights for Inclusive Finance
According to World Bank projections, the twin global crises of a pandemic and economic lockdowns are wreaking havoc on the lives of the poor, pushing around 100 million people back into extreme poverty by the end of 2021, primarily in Africa and South Asia. While the recent decade's advancements in the delivery of financial services have provided governments and individuals new instruments for delivering relief to those in need, the crisis is putting other aspects of financial inclusion at risk.
At the same time, the urgent need for governments to provide social assistance payments to citizens throughout the pandemic led to the rapid opening of 477 million new social protection digital accounts in just two years. For these reasons, CGAP has emphasized the following areas in its COVID-19 work: the MFI sector, distribution, and government-to-person payments, analyzing the impact on customers, and providing guidance for donors and investors. Learn more here.
Financial Inclusion Policy and Regulation
New technologies are rapidly changing the face of finance, breaking up financial services into smaller components digitally delivered by new players. Giant retail companies, electronic money issuers, major tech and social media networks, and fintechs are making forays into the financial sector, combining vast volumes of data gleaned from online sales, chat conversations, and social media posts to offer new financial services.
As the financial services industry becomes increasingly modular, automated, disaggregated and transnational, CGAP believes that policy makers need a new approach. Successful financial inclusion requires a policy and regulatory framework that fosters responsible, inclusive financial systems and one that has the flexibility to adapt to rapid changes. Consumers must view the system as fair and stable, protecting their interests. Businesses must know there is a clear set of rules balancing innovation and stability while fostering appropriate competition and cooperation .
Check out our resources on financial inclusion policy and regulation.
Regulatory Sandboxes: A Tool for Fostering Financial Innovation
A regulatory sandbox is a framework established by a regulatory body that allows innovators to perform live experiments in a controlled setting under the observation of a regulator. Regulatory sandboxes can help regulators to make faster and better informed decisions on how to appropriately regulate (and supervise) new services and providers reaching the marketplace.
Not all jurisdictions need a sandbox. Their suitability depends upon the regulatory objectives, the flexibility of the existing regulatory regime, the resources and capacity of the regulator, and the types of innovations emerging in the market. Under certain circumstances, they have potential to speed the regulatory adaptation towards an enabling framework in support of inclusive, innovative finance.
Learn more about regulatory sandboxes: 
● Learn about the concept of a regulatory sandbox and how it has evolved in different parts of the world: A regulatory sandbox is a relatively new idea that has been employed in various countries across the globe. In this blog series, CGAP examines the concept critically and looks at how it has been implemented.
● Explore how firms have innovated in regulatory sandboxes: With this map, users can explore over 100 organizations, their technology, and how they're advancing financial inclusion.
● Start building a regulatory sandbox: CGAP's guide walks regulators through the decision-making process step by step. It includes ideas on how to design and operate a successful sandbox, as well as alternatives.
Financial Inclusion for Job
CGAP is investigating how the digital economy and digital financial services might generate income for the following groups of workers, who together make up the vast majority of workers in emerging markets:
Temilade Adelaja via Communication for Development Ltd.
Micro and small entrepreneurs and their employees: There are nearly 500 million formal and informal micro and small enterprises (MSEs) around the world, and they are important drivers of jobs and livelihoods for low-income groups. Credit and other financial services help these businesses to grow, but for many it is out of reach. CGAP is researching how digital financial services can help close the multi-trillion-dollar MSE finance gap to improve the lives of low-income entrepreneurs and their employees.
Ana Caroline de Lima for 2017 CGAP Photo Contest
Women in rural and agricultural livelihoods: Rural women are highly engaged in agriculture and play critical roles across food systems. Yet they are disproportionately poor and financially underserved, and few financial services are designed to meet their specific needs and aspirations. In response, CGAP is exploring opportunities for innovative financial services that can help women in rural and agricultural livelihoods increase their incomes and resilience in ways that make business sense.
Temilade Adelaja via Communication for Development Ltd.
Platform workers: Digital platforms are growing globally and transforming the nature of work. Platform workers sell both goods and services in online marketplaces, including on “gig” platforms and e-commerce sites, and through social media channels. The number of people incorporating platform work into their livelihood strategies is small but rising quickly in emerging markets. Often, they have unmet needs for financial services that could help them grow their platform work and earn higher incomes.
Financial Inclusion and Smallholder families
There are around 500 million smallholder families globally, and many are financially excluded. CGAP’s research on smallholder farmers reveals that they are a heterogeneous group with diverse financial needs and goals that extend beyond agriculture. Their unmet demands make them potential clients for financial services providers who are able to segment the market appropriately and design useful financial services. Our research challenges prevalent notions about what smallholders are searching for in financial services. Learn more about the financial needs of smallholder families by downloading our publication or viewing this infographic.
National Surveys of Smallholder Households in Six Countries
CGAP conducted nationally representative surveys of smallholder households, along with financial diary research, in six countries between 2013 and 2017. These countries were: Bangladesh, Côte d'Ivoire, Mozambique, Nigeria, Tanzania, and Uganda. The research covers the agricultural and financial lives of smallholders, including their agricultural and non-agricultural revenue sources, financial practices and tools, mobile phone use, and other factors that are useful in segmenting markets, identifying needs, and designing appropriate financial services.
Designing Digital Financial Services for Smallholder Families
There are an estimated 500 million smallholder families around the world, representing 2 billion people. Many remain financially excluded even though smallholders have a stronger, more diverse demand for financial services than most providers realize—especially for savings and insurance, according to CGAP’s research. CGAP has collaborated with many financial service companies to turn demand-side knowledge regarding smallholders into market impact. We explore how digital innovations can help better serve this market, including women in rural and agricultural livelihoods, by customizing savings, credit, payments, and insurance solutions. Check out these resources to read more about our findings.
Financial Inclusion and Consumer Data Protection
People in Low and Middle Income Countries are increasingly creating digital footprints because of the rapid development of digital technology. With these data footprints, financial services firms are expanding their customer base and developing new solutions that better address the requirements of the poor. Consumer data can provide an essential source of information about unbanked and under-banked consumers that financial service providers can use to reach them with financial services. Although poor people’s data can help financial services providers to reach them with more useful financial services, it can also be misused, compromised, or otherwise abused in ways that harm consumers. Research shows that consumer data misuse and fraud are on the rise globally. Research also shows that low-income consumers highly value their data protection and privacy and are even willing to pay more for financial services that come with stronger protections. It is important for policy makers, regulators, and providers to address these risks to minimize consumer harm and build trust in digital financial services.
The “consent model” is the cornerstone of data privacy and protection around the world. This model, in which consumers are typically presented with dense, legalistic terms and conditions and forced to agree to them before using a service, is flawed. This is especially true with regards to low-income users, especially women, with limited digital or financial literacy and numeracy. Moreover, as the ways in which data is collected, used, and shared become ever-more complex, it is increasingly unrealistic to expect consumers to understand and manage their data. For these reasons, CGAP believes the consumer consent model is broken and places unrealistic burdens on consumers. As emerging and developing economies transition toward digital economies, they urgently need to adopt realistic policies that shift more responsibility on providers. In doing so, they have a unique opportunity to construct modern data protection and privacy regimes that are fit for the future.
Policy Solutions
Relying on consent is no longer sufficient to protect consumers' data. New protocols can be developed to make it easier for customers to access and move their data between service providers.
Making Data Work for the Poor: With billions of people going online and expanding digital financial services, CGAP has suggested three methods in which countries can better protect their citizens, particularly the poor. The new approaches would shift the burden of responsibility off the shoulders of consumers and onto the data collectors and users . Learn more about it here.
India's New Approach to Personal Data-Sharing: As the number of Indians conducting financial transactions online rises, concerns have been raised about safeguarding the privacy of millions of customers while letting their data move freely across the financial system. Read more about India's unique solution to personal data sharing.
Business Value
Behavioral testing of Kenyan consumers found that half were prepared to pay extra for data protection on minor loans, despite their financial hardships during COVID-19. This confirms pre-pandemic studies in India and Kenya, showing that low-income consumers value and are prepared to pay for data privacy. Studies like these show that data privacy is not just beneficial for consumers; it is also beneficial for providers and can give them an edge in competitive markets.
Cyber Protection
There has been an increase in data fraud and cyber-attacks in developing markets. During the COVID-19 pandemic, more people started using digital financial services, highlighting the importance of good cybersecurity. However, cyber-crime is evolving rapidly, affecting an increasing number of customers in high-income and lower-income countries. Cybersecurity is a challenge for many providers in emerging markets, and some of the attacks on providers can have negative effects on their customers. One potential solution is for financial sector stakeholders to aggregate their resources and create regional cybersecurity resource centers.
Customer-Centric Financial Inclusion
According to CGAP's research, businesses that take a customer-centric strategy provide valuable financial goods and services to low-income customers, increasing utilization and generating more revenue. This empowers customers and offers them ownership over their financial well-being.
Financial service providers can use the CGAP Customer-Centric Guide to develop and implement financial services that suit the requirements and desires of their low-income customers through hands-on toolkits and experiments.
You can also check out these case studies to see how customer-centricity works in practice:
● CARD Pioneer, a microinsurance firm, had a 100 percent increase in sales after implementing a customer-centric strategy.
● Digicel Mobile Money in Haiti grew transaction volume by ten times in just two years by using customer insights to provide additional services.
● Pioneer Microinsurance in the Philippines discovered that increasing profits might be achieved by focusing on a great customer experience.
● AMK in Cambodia implemented customer-centricity strategies to reshape its management and organizational structure.
Agent Networks
Agent networks provide a vital link between low-income consumers and digital financial services providers, allowing for cash-in and cash-out (CICO) transactions. Given that rural areas are home to the bulk of the world's financially excluded and underserved population, expanding rural CICO agent networks is crucial to achieving greater financial inclusivity.
CGAP’s global research shows that establishing effective agent networks in rural areas populated by financially excluded people can be accomplished by following six general principles:
● Enable rural CICO agents to generate more revenue streams
● Make CICO agents more accessible to rural customers
● Expand the range of people who can serve as CICO agents
● Identify and manage risks posed by rural agents without stopping innovation
● Develop a data-driven strategy to close the gender gap in CICO access and use
● Expand public and private partnerships that share CICO agents
Read CGAP's publication, "Agent Networks at the Last Mile," to learn how financial services providers, policy makers, and regulators can put these principles into practice.
Frequently Asked Questions
CGAP’s vision is a world where poor people can capture opportunity and build resilience to advance their lives. In these deeply troubling times, the values we share of dignity and respect for every person, where racism has no place and diversity is celebrated, are ever more important to affirm. We stand with everyone around the world working for justice, human dignity and equality.
For over 25 years, CGAP has been at the forefront of financial inclusion research. Our past insights helped drive the microfinance movement and catalyze support around mobile money. Today, we are focused on supporting financial solutions that help poor people, especially women, to improve their livelihoods and become more resilient in the face of climate change, pandemics, and other challenges. Often in collaboration with teams across the World Bank Group, we partner with governments, funders, financial services providers, and other market actors to test, learn, and share knowledge that helps build inclusive, responsible financial systems. By establishing proofs of concept and extracting actionable insights that help our partners take solutions to scale, we influence through evidence. Visit www.cgap.org and see our Annual Report to learn more.
Financial inclusion means that all people and businesses have access to — and are empowered to use — affordable, responsible financial services that meet their needs. Microfinance refers to financial services designed for low-income, socioeconomically marginalized groups that have historically been excluded from formal financial systems. Microfinance providers help the poor access these financial services and products.
Advancing women’s financial inclusion is at the heart of promoting economic growth and resilience, improving gender equality and furthering sustainable development. When women have access to financial services, they are better able to manage risks and increase economic opportunities that contribute to their households, businesses and societies. Despite this, women worldwide are less likely than men to have bank accounts and access to credit, insurance and savings services including digital products. Closing the gender access gap in account ownership is necessary but CGAP’s approach goes one step further, focusing on improving women’s access, usage and outcomes of financial services as a pathway to women’s economic empowerment.
Since 2016, CGAP has been researching emerging business models in digital financial services with the goal of separating the hype around fintech from solutions that can genuinely benefit the poor and underserved. Our conclusion is that there really is transformative change underway that will redraw the financial services landscape in ways that should expand inclusion. A number of distinct and innovative business models are emerging, often driven by people and companies that come from outside the traditional banking sector and do not identify with legacy banks, their business models, or their approaches to financial services.
Data from last Global Findex shows that women still have a lower likelihood of owning a bank account than men. Not only has the gender gap in account ownership remained stubbornly persistent at nine percentage points in developing economies since 2011, but shocks like the COVID-19 pandemic are threatening to reverse some of the gains made so far. Several challenges prevent women from accessing, using and benefitting from financial services, particularly in rural parts of emerging economies, such as: restricted mobility, lacking documents required for account opening, household or work obligations, financial illiteracy and the stigmas around women’s use of financial services and women’s financial independence. These challenges are often underpinned by social norms which are not well understood or tackled by financial inclusion community.
Both commercial and impact investors have a critical role to play in advancing financial inclusion. Working in tandem with governments and donors, investors have helped the microfinance sector reach over 140 million low-income and excluded customers with loans and other financial products that support their businesses and livelihoods. Beyond microfinance, investors have played an important role in seeding and scaling promising fintech business models that provide a variety of digitized financial services — from payments, to savings, to insurance — to excluded consumers and businesses.
Donors aiming for financial inclusion, as an end in itself or as a means toward economic development or poverty alleviation, can help make the financial ecosystem work better and be more inclusive. Donors have played an important role in much of the progress achieved in inclusive finance and over the past few decades, public funding for financial inclusion has helped to build an industry that now attracts private funding, both international and local.
A variety of donors support financial inclusion efforts. They include national governments, private foundations, bilateral donors, multilateral donors, regional banks, and development finance institutions (DFIs). Donors also support financial service providers and their innovations through direct investment and technical assistance. CGAP’s annual survey tracking international funding trends showed $52 billion in funder commitments to financial inclusion in 2020.
Microfinance institutions have been operating for around 50 years and continue to play an important role in financial inclusion. They exist to serve low-income, socioeconomically marginalized groups that are traditionally excluded by large financial institutions and continue to be excluded by most digital newcomers. Many microfinance institutions have been slow to adopt digital technologies in ways that could help them scale up their impact, causing some to question their relevance in an era of rapid fintech innovation. However, many are now implementing digitization initiatives. Given their mission and extensive experience serving the poor — which sets them apart from many fintechs — microfinance institutions that digitize successfully have potential to significantly advance financial inclusion.
While some business models are more relevant to financial inclusion than others, the overall impact of fintech innovation has been to unbundle value chains in ways that could prove beneficial for low-income customers and providers who serve them. On the consumer end, this means customers gain access to a rapidly growing range of financial service providers, often with innovative models that offer products in a different way, at lower cost, with fewer preconditions and less administrative red tape. On the back end, it means that providers themselves are able to rely on a growing range of third-party fintechs who offer highly specialized, value-adding, and cost-effective solutions to core banking processes. In both cases, highly scalable innovators are redefining how banking works. For an overview, see this short animated video.
According to The World Bank, more than 55 countries have committed to financial inclusion, and over 60 had initiated or were preparing national strategies as of 2018.
Digital financial services (DFS) have become the leading driver of inclusion for the unbanked around the world, particularly in developing countries. What makes this possible is not only innovation in products and technology but regulation. CGAP has identified four building blocks for creating an enabling a safe DFS regulatory framework:
- Nonbank e-money issuance
- Use of agents
- Risk-based customer due diligence
- Consumer protection
Financial services play a variety of roles in helping people to access basic services. For example, off-grid solar companies are leveraging digital payments along with remote lockout technology to help low-income households finance solar energy to light their homes. Utilities are using similar business models, built on digital payments, to expand access to clean water. Financial services can remove barriers to education by increasing transparency in the use of public education funds, improving teacher’s presence and accountability, and expanding access to education finance for low-income families.