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Chapter 2 reviews the literature to understand the relation (theoretical as well as empirical) between financial development and economic growth, and discusses the concepts of financial development and financial access. This chapter also provides a broad conceptual base on which the methodology of the study is specified to analyse the basic issues. Theoretical arguments and empirical studies show that financial development plays a critical role in enhancing economic growth. The concept of financial development goes beyond passive financial intermediation and is viewed in terms of diversity of financial institutions and instruments, physical outreach of the financial system, and coverage of real sector activities. The concept of financial access or financial inclusion is taken broadly as availability of financial services to all without any barriers—price and non-price.

This chapter describes the process of financial development and access, and the various dimensions of each of the two concepts, and how it leads to economic growth and development. It elaborates on the macroeconomic growth approach and underlying rationale for adopting this approach. Keeping the productive investment requirements of growth in mind, financial development is specified along the dimensions of diversification, size, reach, efficiency and soundness. Financial access is specified as the use of formal financial resources in relation to actual productive investment undertaken by the economic agents/sectors/segments. Further, the use of formal financial system is examined in terms of availability and adequacy of formal financial resources. Adequacy is measured as gap between the need and availability, which the study terms as financial resource gap.

Families lack financial knowledge and skills to make optimal financial decision in an increasingly complex financial landscape. Simultaneously, they lack access to appropriate and beneficial financial services that create conditions for financial stability, well-being, and confidence in the future. People need both financial knowledge and financial inclusion to build financially secure and hopeful lives. The concept of financial capability bridges the disciplines of economics, psychology, and sociology, taking into account how individual action and behavior, human psychology, and social structure influence household financial management and decision making. This chapter explores the idea of financial capability and calls for greater attention to research and professional training in building financial capability, especially in low-income and financially vulnerable households.

Financial inclusion has become an important policy objective in recent years in a number of developing and developed countries. It is increasingly viewed as a tool of poverty alleviation, enables the poor to be risk averse and allows investment in health and education. However, including a large number of different groups of the population within the financial system if not accompanied by the appropriate regulatory measures could pose a risk to the country’s financial stability. Financial stability too has assumed increased importance in recent years especially since the financial crisis. A dilemma among policymakers is how to achieve a balance between the two and how to promote financial inclusion without destabilizing the financial system. In this study we explore the state of financial inclusion and financial stability in the context of BRICS.

Chapter Two details the evolution of public policy responses to financial exclusion in the UK. Focusing particularly upon formal banking, savings, credit and financial literacy, it highlights the key initiatives initiated by the British state in conjunction with the financial services industry and third sector organisations. In so doing, the chapter highlights the key achievements and limitations of these endeavours in facilitating financial inclusion. The chapter then moves on to consider the varied impacts of these programmes upon migrant communities, highlighting the particular importance of nationality and immigration status in shaping access to financial inclusion programmes. The chapter concludes by considering the changing political and economic contexts within which current financial inclusion interventions are being shaped in the UK.

Exclusion from financial services in the form of bank accounts has fallen and appears less significant than informal borrowing and problem debt, which have increased dramatically and are strongly associated with poverty. The most common arrears problems are with housing, local taxes and utility bills, not consumer credit. About a fifth of households are not poor but exhibit similar signs of financial stress. Family remains more important than ‘payday lenders’ as a source of informal lendng,underlining the importance of social capital

Finance can be beneficial for growth, but it can also contribute to financial crises, which are often very damaging for growth. An extensive review of the literature suggests that financial development has a positive impact on economic growth at adequate levels of financial depth but that the effect vanishes, or even becomes negative, when finance becomes excessive. Excessive finance can incubate economic booms and asset price bubbles that end in financial crises, followed by low rates of economic growth for sustained periods. Too little finance is not desirable-but too much is not desirable either. Alternative finance plays an important role in emerging economies, such as China and India. Strong institutions and legal systems may not be prerequisites for growth; alternative systems based on trust, reputation, and other mechanisms can play a crucial role.

This chapter describes the state of financial development in fragile states. Our analysis primarily relies on indicators from the World Bank Global Financial Development Database, which have been used extensively in the literature to capture the degree to which financial services and activities are present in an economy (depth) and the extent to which they are disseminated and made available to the population (inclusion). We find that financial depth in fragile states is underdeveloped and financial inclusion is low, but with significant heterogeneity among fragile states. We conduct empirical exercises which suggest that fragility is negatively related to financial development, both in terms of depth and especially in terms of inclusion, and exercises that also point to certain aspects of fragility most associated with financial underperformance. Finally, we use a benchmarking exercise to estimate how much financial underdevelopment in fragile states is costing them, in terms of economic growth.

This chapter traces the evolution of monetary policy and financial sector reform in India. In terms of broad brush, the chapter presents an analytical account of the following phases: early years of economic planning, bank nationalization and credit planning, adoption of monetary targeting, operationalization of liquidity adjustment facility (LAF) through repo / reverse repo, and the recent introduction of inflation targeting. In describing the story of commercial banking development in India, the chapter slices the post-Independence Indian experience in three wide-ranging segments, and highlights the early years of banking consolidation, social banking and bank nationalization experience, and the initiation of financial sector reform process. In presenting an eclectic critique to neo-liberal financial sector reform, the chapter also raises questions on institutional and infrastructural weaknesses in the strategy of financial inclusion in recent period.

This chapter deals with financial inclusion of India’s poor. The Unique Identification Authority of India (UIDAI) claims that the Aadhaar programme can play a critical role in enabling access to formal financial mechanisms, by helping the poor to easily authenticate their identity. This, in turn, can significantly improve the effectiveness of existing financial strategies, and the challenges that the poor now face in accessing financial services. The solution that Aadhaar offers for financial inclusion of the poor includes creation of a micropayment platform, addressing the last-mile problem, streamlining the delivery of government benefits, and providing access to finance to those who have so far been excluded. This chapter analyses the validity of these claims.

This chapter highlights financial sector development and financial inclusion. The reforms in the financial sector led to increase competitive base, efficiency, and range of financial services. However the outcome led to urban-centric financial services depriving financial access to rural and urban poor. The advent of technology, particularly mobile telephony and the boldness of the regulator to open up provision of financial services to non-traditional players, mobile network operators, revolutionized access to financial services. Increasingly, innovation in financial services and partnership are opening up new frontiers to tap in to the demand for wider range of financial services to the hitherto unbanked masses. The chapter concludes with a look at the future of financial sector development where trends predict an optimistic outlook. However, demand for more innovative products will call for more risk management. Digital financial services will continue to influence financial inclusion initiatives.

The major feature of Colombia’s national development banks is that they constitute a system of multiple, specialized institutions, created at different times to promote sectors that were considered strategic for the country’s development. This chapter analyses the characteristics of the system of national development banks in Colombia currently composed of four specialized institutions: FDN (for infrastructure), FINDETER (local development), BANCOLDEX (industry and foreign trade), and FINAGRO (agriculture). The chapter explores the history, current structure, and main features of the system. It also looks at how the system is managing three major market failures: infrastructure financing (the major case of market failure in long-term financing), financial inclusion, and the promotion of entrepreneurial growth.

This chapter argues that increased mobilization of domestic financial resources is critical if Zambia is to achieve its development objective of becoming a prosperous middle income country by 2013. This is a significant challenge requiring that impediments to the development of the financial sector, particularly the existence of severe information costs in the financial sector, are addressed. In this regard, Chapter 7 demonstrates how the nature of Zambia’s financial sector can be explained through the existence of information costs. These information costs can be addressed by enhancing the legal and institutional framework; encouraging more effective competition that promotes financial intermediation and consumer welfare, and improving financial inclusion. Policies that support the secondary market for both public and private debt are also critical for improved domestic and external resource mobilization.

Inspired by a strong sense of social mission, credit unions in London, as elsewhere in Great Britain, have a long commitment to serving people on low-incomes. Recognised by the UK Government as key players in providing financial services to those marginalised by mainstream financial providers, credit unions have received significant political support and public financial investment to expand their services in low-income communities. This has been particularly important in times of austerity and hardship and of change to the welfare benefits systems. This chapter focuses on the historic development of credit unions in London, and explores how they have endeavoured to resolve the tension inherent in remaining true to their social and co-operative values and at the same time in ensuring their economic stability and independence. It discusses the background of credit unions in the capital, the challenges they have faced over the years and how they are endeavouring to reform as professional financial co-operatives serving a wide and diverse membership. East London Credit Union (ELCU) was founded by local volunteers inspired and motivated by their Christian faith to make a difference in the local community. The chapter reflects on ELCU’s mission and social commitment to assist people through hard times and the way in which has endeavoured to tackle austerity through business success.

Most people in rural Africa do not have bank accounts. In this paper, we combine experimental and survey evidence from Western Kenya to document some of the supply and demand factors behind such low levels of financial inclusion. Our experiment had two parts. First, we waived the fixed cost of opening a basic savings account at a local bank for a random subset of individuals who were initially unbanked. While 63% of people opened an account, only 18% actively used it. Survey evidence suggests people did not begin saving in their bank accounts because: (1) they do not trust the bank, (2) service is unreliable, and (3) withdrawal fees are prohibitively expensive. Secondly, we provided information on local credit options and lowered the eligibility requirements for an initial small loan. After 6 months, only 3% of people initiated the loan application process. Survey evidence suggests that people do not borrow so as not to risk losing their collateral. These results suggest that while expanding access to banking services may benefit a minority, broader inclusion may require changes in service quality. There are also challenges on the demand side.

Reviewing the post-Sachar initiatives of the Ministry of Finance and Reserve Bank of India (RBI) in extending credit to minorities, data in this chapter indicates that the credit access for Muslims is in fact still declining in comparison to other groups. The RBI has made slow progress on financial inclusion in minority-concentrated districts and has accumulated an enormous backlog that only vigorous policy implementation will reduce.

Developed countries—and many developing nations as well—face the triple threat of growing longevity, falling birthrates, and fiscal shortfalls. Drawing on the 2014 Global Findex database, which provides individual-level data on the use of financial products in more than 140 countries, we show that only about one-quarter of adults globally save for old age, with higher rates in higher income economies as well as East Asia and the Pacific. On average, men are slightly more likely than women to do this, but the gender gap is deeper in developing countries. Worldwide, saving for old age is most common for older and better educated adults, those adults with financial accounts, and people in countries having an English or German legal origin. Measures to increase trust in the financial system—such as deposit insurance—also lead to higher rates of old age saving. Finally, we find no evidence of substitution between pension system provisions and contribution rates with saving for old age.