Financial Inclusion: A Strong Critique

Abstract

This article presents some criticisms of financial inclusion. It notes that (i) financial inclusion is an invitation to live by finance and leads to the financialisation of poverty; (ii) some of the benefits of financial inclusion disappears after a few years; (iii) financial inclusion ignores how poverty affects financial decision making, (iv) it promotes digital money which is difficult to understand, (v) financial inclusion promotes the use of transaction accounts; (vi) digital money is difficult to understand; and that (vii) some financial inclusion efforts bear a resemblance to a campaign against having cash-in-hand. This study will help policymakers in their assessment of the economic, social, political and cultural factors that hinder financial inclusion as well as the consequence of financial inclusion for society. For academics, this study will provide a critical perspective to ongoing financial inclusion debates in the large positivist literature on financial inclusion.

Has financial inclusion made the financial sector riskier?

“…Individuals and poor households can make good financial decisions that are welfare-improving such as taking credit that can be repaid comfortably and the effective use of available credit which reduces loan defaults (Musau et al, 2018a;Ozili, 2018b), thereby decreasing nonperforming loans and financial risk in the balance sheet of financial institutions. On the other hand, some poor individuals and households can make financial decisions that are welfare-destructing rather than welfare-improving such as the misuse of available credit which leads to over-indebtedness and loan defaults (Ozili, 2020c), thereby increasing nonperforming loans and financial risk. In the second channel, financial inclusion can transmit financial risk to the formal financial sector when there is low demand for basic financial services.…”

“…Financial inclusion can give rise to nonperforming loans when there are misaligned incentives on the part of the beneficiaries of formal credit (Ozili, 2019;De Koker and Jentzsch, 2013;Ozili, 2018b), because poor households can obtain formal credit and use it for a different purpose than the purpose stated in their loan application forms. The beneficiaries of such loans can take up these loans and use them to engage in non-economic activities or welfare-destructing activities which will not only worsen their economic welfare but will also make it difficult to repay the loans they owe to lending institutions (Ozili, 2020c). When such loans are not repaid, they become nonperforming loans which must be written off especially when poor individuals, households and small businesses do not have collateral.…”