Financial Inclusion Literature Review: Definition, Measurement, and Challenges

Financial Inclusion Literature Review: Definition, Measurement, and Challenges

DOI: 10.4018/979-8-3693-0522-5.ch003
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The financial sector is considered a crucial factor in facilitating economic growth directly through widening access to finance and indirectly contributing to financial inclusion. The concept of financial inclusion is being constantly developed in academic discourse and EU policy though there is no global definition of financial inclusion. Existing literature on financial inclusion uses varying definitions. Many studies define the concept in terms of financial exclusion, which relates to the broader context of social inclusion while others define financial inclusion. The chapter aims to provide a review of the academic literature on the definition and measurement of financial inclusion in order to describe the main challenges to financial inclusion. The study highlights how financial inclusion and the development of the financial sector can generate various opportunities in terms of economic growth and poverty reduction. This highlights the existence of the strong link between well-functioning financial systems and inclusive growth.
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Financial Inclusion Definition

Financial inclusion is an innovative concept, which is been subject to debate on the elements of its definition (Zhang & Valle-Sison, 2014). It is constantly developed in academic discourse and EU policy though there isn’t global definition of financial exclusion. The need for financial inclusion is emerging as an international policy issue at the macro level (Joshi, 2011). European Commission (2008, p. 9) defines financial exclusion as “a process whereby people encounter difficulties accessing and/or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong”.

In the most common and very generic term, financial exclusion can be defined as the impossibility or reluctance of some individuals or businesses to access basic financial services such as current and deposit accounts, loans, insurance services and of payment (Achugamonu et al., 2020). The opposite of financial exclusion i.e. financial inclusion is defined “as the process of ensuring affordable, prompt and adequate access to a wide range of financial products and services, as well as proliferation to their use in all parts of society with a special focus on vulnerable groups, through the implementation of existing and innovative approaches, such as financial literacy programmes” (Gortsos, 2016).

In literature, financial exclusion (or, alternatively, financial inclusion) are documented by national and international literature since the 1990s.

Early literature on financial exclusion concentrated on that financial exclusion is primarily concerned with the lack of a current account (Leyshon & Thrift, 1995; Kempson & Whyley,1999). The literature shows several degrees of financial exclusion, depending on the level of complexity of the services used and/or the use of unofficial suppliers.

Kempson et al. (2000, p. 9) identify “a number of other dimensions of financial exclusion:

Key Terms in this Chapter

Poverty: Poverty is a state in which a person or a group of people don't have enough money or the basic things they need to live. It is generally defined as income or expenditure insufficiency, but the economic condition of a household also depends on its real and financial asset holdings.

Digital Financial Inclusion: Digital financial inclusion represents the deployment of the cost-saving digital instruments to reach financially excluded and underserved populations with a range of formal financial services suited to their needs.

Financial Development: Financial development occurs when intermediaries, markets and financial instruments ease the effects of information, enforcement, and transactions costs. It creates enabling conditions for growth through either a supply-leading (financial development spurs growth) or a demand-following (growth generates demand for financial products) channel.

Financial Access: Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services. Access to financial services is mentioned in several of the proposed goals and targets of the Open Working Group.

Income Inequality: Income inequality regards how unevenly income is distributed throughout a population. If the distribution is not equal, the income inequality growth. Income inequality is often associated to the wealth inequality, which is the uneven distribution of wealth.

Determinants of Financial Inclusion: Determinants represent the factors that can influence the measurement of financial inclusion. The literature identifies various factors such as: formal account ownership, demand for formal savings, demand for formal borrowings, education, number of bank branch, availability of digital financial products and services, etc.

Economic Growth: Economic growth is defined as an increase in the amount of goods and services produced of the population over a period of time. It can be supported by financial inclusion as a policy measure is important because it not only helps the underprivileged with access to and use of financial services but also paves the way for economic growth and helps in increasing efficiency and maintaining stability in an economy.

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