How to achieve financial inclusion in the capital markets for Developing Economies

A few weeks ago, I attended the Afro-Asia Fintech Festival, an event that was dual-organized by the Central Bank of Kenya and the Monetary Authority of Singapore under the theme: Focus on Sustainable Finance, Transforming Lives. Well, the event was mostly attended by banks and fintech companies show-casing their areas of complementarities and sometimes competitiveness in the quest for more and better financial services accessibility and inclusiveness.
As it is, we, from East Africa have a lot to be boastful about and show to rest of the World regarding advances we made on the use of digital platforms in enhancing and deepening of financial services for the unbanked segments of our population – i.e. the use of mobile phones for payments, money transfers via mobile phone, and such sort of things. And yes, with all fairness we have some significant achievement in this space. But then, are these achievements a reflection of the “true” financial inclusion? If not, what could be the ideal measure of financial inclusion? According to the Alliance for Financial Inclusion (AFI), the first dimension to measure financial inclusion is access to the financial services and products that formal institutions offer. That to achieve meaningful access, we have to consider other aspects of the financial markets’ ecosystem – i.e. savings, access to credits, investing, insurance, retirement funds, trading electronic funds, etc. In this article therefore, I will dwell on how “true” financial inclusion in the context of savings and investments via capital markets products and services using digital platforms and other accessibility tools.
It is a arguably a fact that as an economy, we are making real observable strides along the lines of improved savings and investments, and yes the economy is growing steadily relative to some other parts of the World, however, inclusive growth continues to be a challenge. We are, not only lagging many emerging economies, but also, we have a comparatively lesser degree of “true” financial inclusion as compared to some economies in frontier and emerging markets.
By the way, financial inclusion here means ease of access, convenience and low-cost availability of financial products and services to all sections of the population — meaning, faster and more inclusive growth prompts inclusion of diverse economic activities and geographical regions in the financial system.
Now, to broaden a bit the whole idea of inclusive – it has to touch key aspects such as savings, investments, access to credit and wealth creation. The role of capital markets is vital for such inclusive growth as well as wealth creation and distribution by making capital available to entrepreneurs mobilized it from savers and investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ enterprise needs and risk appetite. Innovation, investment advisory, financial education and proper segmentation of financial users constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.
With long-term growth trajectory, considerable financial deepening, increasing foreign cash-inflows and increase in credit, deposits and bank assets as a percentage of GDP, rapid financial inclusion appears a reality if it can be coordinated by diverse financial institutions and with the application of technology. Inadequate use of technology, poor financial literacy and financial education coupled with inadequate framework for financial consumer protection are cause of lower penetration. Alongside these, in the aspect of capital markets, challenges of excessive concentration of trading at member level, company level and geographically is also a major challenge. The market needs a fair amount of development work on the aspects of new products such as micro-savings bonds, municipal bonds, infrastructure bonds targeting retail individual investors is also fundamental.
Financial deepening also implies a larger focus on the debt and equity markets than physical assets and as a society we should not lag behind on this front. For instance, we, in the capital markets need to cast off the conventional notion that financial education and financial literacy is a just part of our social responsibility and realize that it is actually a key element that could foster profitable businesses. We need to see into it that we can enhance household savings or we could encourage our society to save and invest more in listed instruments and collective investment scheme, which currently seems to be a challenge given that less than 1 per cent of the population participates in investing on stock markets instruments. The fact that our savings levels are at 30 per cent and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system (especially the capital markets) and channelizing them into productive investments. Through financial inclusion, capital markets can motivate investments on long term productive assets.
True, financial inclusion need financial literacy, financial education, financial consumers protections and the matching technology to enhance accessibility besides adequate competition to cause more substantial markets. On this, the agency model can be replicated for increasing financial literacy and thereby increasing direct participation of masses in the financial system.
Capital markets institutions and intermediaries could adopt innovative practices and work with banks and non-banking bodies (agents) with a wide network such as post offices, etc., to provide distribution outlets for capital markets products. Financial service providers in the capital markets can foster financial literacy on the lines of initiative such as brokers creating association with public entities such as the Post Office to provide price information and investment-based inputs to savers who could potentially be converted to investors. Such networks can fairly be used for distribution of financial products and services.


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