Several years ago, a senior person at a large foundation (let’s call him Fred) asked us if we thought financial inclusion—creating and supporting financial products and services designed for low-income communities—really made a difference to the poor. We took his question very seriously, and answered that we honestly weren’t sure whether it was as high up on the charts as investments in health or education. He was less ambivalent. He was adamant that finance actually underpinned every challenge low-income people faced—whether housing, sanitation, health, or education. He felt having the right financial tools and strategies was critical to the success or failure of all poverty-alleviation interventions.
We’ve returned to that conversation often, especially now that the field of financial inclusion seems to be at a crossroads. Donors, financial providers, researchers, and consultants are trying to decide which way to turn next. The field started with microcredit, then developed a range of financial tools, including insurance and savings products. But at what point can the financial inclusion field declare victory? Thanks largely to the spread of mobile money, the number of adults without a formal account decreased from 2.5 billion to 2 billion between 2011 and 2014, and the latest Findex survey for 2017 (which will be released later this year) will likely show further progress. But if people aren’t using these accounts, then we can surmise they aren’t having any impact at all. And even if they do use them, how do we know that they are making a real difference to the lives of low-income people?
While access to financial services has grown impressively across a range of countries, evidence that it’s improving the lives of the poor has been less clear. Leora Klapper and colleagues at the World Bank made a connection between financial inclusion and the UN Sustainable Development Goals (SDGs) in a 2016 UNSGSA paper. While the SDGs do not explicitly target financial inclusion, the authors mapped the evidence base of financial inclusion impact to 10 of the 17 SDGs.
Among the research they surveyed, work by Tavneet Suri of MIT and Billy Jack of Georgetown University was the most rigorous. Suri and Jack conducted five rounds of a household panel survey in Kenya during a time when the use of the mobile money system M-Pesa—a low-fee service that allows users to easily deposit, withdraw, or transfer money via their mobile phones—was on the rise. Suri and Jack ran the first rounds of their panel survey between late 2008 and early 2010 to measure the impact M-Pesa had on risk sharing (giving or taking money or goods when there is a shortfall), between family members who were dispersed by internal migration or driven by opportunities and employment across long distances. They found that users of M-Pesa are not only more likely to receive more remittances, and from a wider network of sources, but also better withstand unexpected expenses or decreases in income.
In Suri and Jack’s more recent 2016 paper, they used all five years of their panel data study between 2008 and 2014 to study the effects of M-Pesa on long-term household consumption. Their analysis reveals that, over that time period, M-Pesa brought an estimated 2 percent of Kenyan households out of extreme poverty (those living on less than $1.25 per person per day).
On the one hand, it’s impressive that a simple mobile money product can contribute to alleviating poverty at all. On the other hand, compared with other types of interventions for the poor, such as bed nets and vaccinations, one can’t help thinking: Seriously, that’s the best we’ve got?
But perhaps we’re doing financial inclusion a disservice by thinking about one-to-one impact—the idea that a financial tool alleviates poverty. There are good reasons for changing our focus. First, impacts from financial services can happen very slowly and usually result from sustained use of a financial service over time—impatient observers likely won’t see much impact. A second reason is conceptual: Digital finance has myriad, interwoven effects on people’s lives. A financial decision like taking a loan has consequences on livelihoods (Will the loan for buying fertilizer work, or will the crop fail?), stress (Does the loan carry a sense of pride or create anxiety?), time management (Is the borrower now obligated to attend meetings?), and risks (Will the borrower be able to pay it back?). In this way, Fred’s point about finance underpinning so many aspects of the lives of consumers is perhaps our first clue that evaluating the impact of financial inclusion, product by product, is exactly the wrong way to proceed.
The diagrams below demonstrate this graphically. More than three quarters of Kenyan adults subscribe to M-Pesa, and usage levels are consistently high. Based on these yardsticks, it is an undoubtedly successful product. However, M-Pesa’s ultimate impact on the lives of users (and the proportion of people it impacts) becomes decidedly anemic as we move from measuring access to measuring usage to measuring impact on poverty alleviation.