AEIR 2022


21
Feb
2022

COVID-19 is Changing Financial Inclusion: Can Policymakers Keep Up?

, *

The COVID-19 pandemic has increased the importance of ensuring that the poorest and most vulnerable people have access to formal financial services, given their role in supporting inclusive economic recovery and resilience.

With demand for digital services skyrocketing during the pandemic, the Asia-Pacific region has experienced an unprecedented acceleration of digital transformation. For example, in 2020, the mobile wallet GCash in the Philippines saw 254% year-on-year growth in transactions while Bank Indonesia reported 38.62% growth in electronic money transfers, according to The Asian Banker.

While the rapid expansion of digital services is bringing new opportunities to make financial systems more inclusive, it has also put the region’s policy makers and regulators under pressure to ensure that the digital economy actually contributes to greater economic and financial inclusion.

To this end, policy makers need to focus on two key aspects: leveraging digital financial inclusion strategies to support immediate recovery and resilience building; and exploring emerging opportunities and challenges to ensure that the benefits of financial inclusion reach the most vulnerable and disadvantaged in society.

The pandemic has brought greater attention to the digital divide between those who have the resources and capability to embrace the digital transformation, and those who do not. Hence, bridging the digital divide is critical for leveraging the digital economy, including its potential to support an inclusive recovery.

Microfinance institutions play an important role in bridging this gap, providing crucial services to low-income and marginalized communities. While new technology-based models coming into the market are appealing, fintech has yet to prove itself as a viable replacement for traditional microfinance.

Policy makers can support this through interventions aimed at enhancing the ability of microfinance institutions to adopt digital technology to improve both operations and services to their clients. 

The pandemic has also highlighted how the use of digital technology to support resilience among the poor has been less successful in countries which lack key enablers such as robust digital identity schemes, widespread account access, and interoperable payment systems.

While useful frameworks exist to assist policy makers develop successful digital financial inclusion ecosystems, the importance of promoting innovation for new approaches to enhance the viability of digital solutions to the poor cannot be overlooked.

For example, in response to the crisis many governments have accelerated the digitalization of social payments to provide immediate relief to individuals and businesses. However, such solutions have also heightened risks, especially when households are generally more reliant on cash, have limited digital skills, or are faced with greater connectivity issues.

As technological advances continue to accelerate during the pandemic, policy makers need to consider how these developments are shaping a post-pandemic world. This may include reassessing how financial inclusion is understood and promoted.

Greater investment in digital literacy and connectivity is key to closing access gaps to financial services.

Recent research has demonstrated that the impact of financial inclusion varies significantly across income groups subject to its dimensions (i.e. access, usage, etc.). This highlights the importance of considering such aspects as economic development, income distribution, demographics, market structure, and infrastructure quality in tailoring effective financial inclusion strategies.

Despite 1.7 billion people in Asia and the Pacific gaining access to digital services between 2002 and 2018, the digital connectivity gap remains a major challenge, especially in developing countries. The annual financing gap for digital infrastructure in Asia is also growing rapidly and expected to reach as much as $512 billion by 2040.

Greater investment in digital literacy and connectivity is key to closing access gaps to financial services. New innovative financing mechanisms, such as asset tokenization, blockchain-based project bonds, and crowdfunding could also help mobilize finance to this end.

Finally, while countries will need specific local strategies to leverage the benefits of the digital economy and digital financial services, strong regional cooperation can help ensuring that the Asia-Pacific region develops and prospers. Amid increasingly integrated and interconnected financial systems, such cooperation is becoming even more critical.

Even though the COVID-19 pandemic has been grim, it has also provided opportunities for a strong and inclusive post-COVID-19 era. It is now up to us to seize these opportunities.

This article is based on the findings of the ADB report ‘Asia–Pacific Financial Inclusion Forum 2021: Emerging Priorities in the COVID-19 Era.

Original article was published at the Asian Development Blog and duplicated here with permission from the authors.
*Shawn Hunter is an Industry Fellow (APEC) at the Griffith Asia Institute.

**Peter Rosenkranz is a Financial Sector Specialist at the East Asia Department of the Asian Development Bank.

The views expressed in this blog post are the views of the author and do not necessarily reflect the views or policies of ARIC, the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ARIC does not guarantee the accuracy of the information and data included in this blog post and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with official ADB terms.