Demand-side Factors for Financial Inclusion: A Cross-country Empirical Analysis

Published date01 April 2019
Date01 April 2019
Subject MatterArticles
Demand-side Factors
for Financial Inclusion:
A Cross-country
Empirical Analysis
Rigzin Yangdol1
Mandira Sarma1
The importance of an inclusive financial system in the overall growth and eco-
nomic development of a nation is well recognized. While most studies on finan-
cial inclusion use supply-side data, this article presents a demand-side analysis of
factors associated with financial inclusion. Making use of a large cross-country
data on financial inclusion status and individual characteristics of adult individu-
als, we econometrically establish that individual characteristics and economic
circumstances play very significant role in determining financial inclusion of adult
individuals, after taking into account other factors of the country. The article
uses three indicators of financial inclusion and several explanatory variables such
as country-specific factor (gross domestic product [GDP] per capita), individual
characteristics and individual economic circumstances of adult individuals from
different countries. We find that in general, being woman, less educated, job-
less and poor are negatively associated with financial inclusion of individuals.
Enhanced level of education and income, in general, enhances likelihood of finan-
cial inclusion. These findings should be taken into account while formulating poli-
cies towards promotion of financial inclusion.
Financial inclusion, logistic regression model, demand side factors
1 Centre for International Trade and Development, School of International Studies, Jawaharlal Nehru
University, New Delhi, India.
Corresponding author:
Rigzin Yangdol, Room 116, Centre for International Trade and Development, School of International
Studies (II), Jawaharlal Nehru University, New Delhi 110067, India.
International Studies
56(2–3) 163–185, 2019
2019 Jawaharlal Nehru University
Reprints and permissions:
DOI: 10.1177/0020881719849246
164 International Studies 56(2–3)
The importance of an inclusive financial system is well recognized by policy-
makers, academics and civil society at large. Financial inclusion has become an
important policy agenda in many countries. An inclusive financial system has all
sections of the society actively participating in the formal financial system irre-
spective of income levels. A small loan that helps to generate a job for a poor
person has the potential to contribute towards alleviating poverty; basic savings
accounts can provide a secure avenue for safekeeping of individuals’ savings;
appropriately designed insurance services can help individuals insure against
accidents, crop failure, etc. In general, proper usage of these services enables
opportunities of income generation, secure avenues for savings and management
of economic risks. Further, extending financial services to all sections of the
society, especially the very poor section, enhances economic welfare and con-
tributes towards more equitable society which is necessary for a prosperous and
healthy economy.
Efforts at building inclusive financial systems have come from different stake-
holders—governments, financial sector regulators, banking industry and non-
governmental organizations. Many countries have legislative measures to promote
financial inclusion. For example, in the USA, the Community Reinvestment Act
(1997) requires banks to offer credit throughout their area of operation and pro-
hibits them from targeting only the rich neighbourhoods. Similarly, in France, the
Law on Exclusion (1998) emphasizes an individual’s right to have a bank account.
The Government of the UK, in 2005, constituted a ‘Financial Inclusion Task
Force’ in order to promote and monitor the progress of building an inclusive
financial system. Notable initiatives at enhancing financial inclusion have also
come from the banking sector in many countries. For example, in 1996, the
German Bankers’ Association introduced a voluntary code to provide for a bank
account that facilitates basic banking transactions, known as ‘everyman’ banking
account. Similarly, a low-cost bank account called ‘Mzansi’ was launched for
financially excluded people in 2004 by the South African Banking Association in
South Africa. In India, the Reserve Bank of India (RBI) has initiated several
measures to achieve greater financial inclusion such as facilitating ‘no-frills’
accounts and ‘General Credit Cards’ for low deposit and credit. In many develop-
ing countries, mainstream commercial banks have not been able to penetrate
widely in rural and remote areas and among low-income and poor people, appar-
ently due to high operating cost associated with it. Alternate financial institutions
such as microfinance institutions and ‘self-help groups’ that provide small-sized
loans to poor sections of the society have also come to play an important role as
an alternative to commercial banks. An additional factor in recent years is tech-
nology. The role of technology has increased, and this has led to innovations in
low-cost financial products and methods of financial service delivery like smart
cards, internet banking, mobile banking, business correspondents and agents,
postal-system delivery, etc. Some examples are M-Pesa (a service for electronic
money transfer) provided by Safaricom in Kenya since 2007, large-scale intro-
duction of ‘business correspondents’ in Brazil, ‘no-frills’/‘Basic Savings Bank

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