Unintended Consequences of Financial Inclusion

Fanta, Ashenafi Beyene; Makina, Daniel

doi:10.1016/b978-0-12-814164-9.00011-6

Cited by 12 publications

(11 citation statements)

References 44 publications

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“…It hinders mobile payments and credit loans which are not only closely related to financial inclusion but are also relevant to institutional and process innovations within financial innovation. The strength of institutional and process innovation lies in their ability to expand both penetration and coverage of financial services, but the downside of these types of innovation are that they not marketdriven, but governance driven; and can easily be manipulated by government in developing countries [49].…”

Section: Financial Inclusion In Developing Countriesmentioning

confidence: 99%

Financial Inclusion in Developing Countries: Applying Financial Technology as a Panacea

Isukul

Tantua

2021

SAJSSE

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Traditional banking methods of addressing the problem of financial inclusion in developing countries is not working efficiently. As it is becoming obvious, opening operational and functional banking business offices in many developing countries is not a financially viable option. Banking offices need enormous amounts of resources, equipment and personnel to run efficiently. In most developing countries were low income is the norm rather than the exception, it is not possible to sustain a policy objective that employs the use of banking business offices to address the problem of financial inclusion. Such initiative could start out well, however the possibility of sustainability is called into question. Thus, whatever meaningful gains have been garnered from such policy will be reversed or lost overtime. This research employs the use of quantitative methods and it sets out to test whether the usage of financial technology has had any meaningful impact in improving financial inclusion in the developing countries selected in the study. The findings of the research reveal that financial technology offers the instrument, tools and mechanism for drive financial inclusion in ways traditional methods of banking cannot. Financial technology offers, cost effective and cheaper means of driving financial development. This research suggests that financial technology should be used as a means of driving financial development in developing countries as it offers a more sustainable and cost-effective solution to the problem of financial inclusion. Developing countries, should embrace, adopt and adapt financial technologies to address their financial development issues.

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Section: Financial Inclusion In Developing Countriesmentioning

confidence: 99%

Financial Inclusion in Developing Countries: Applying Financial Technology as a Panacea

Isukul

Tantua

2021

SAJSSE

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“…Over-indebtedness is an unintended consequence of financial inclusion. Over-indebtedness is often triggered by cross-borrowing and lack of credit literacy (Fanta & Makina, 2019). Having unpaid debt reduces the chance of getting more credit from the same formal lender.…”

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confidence: 99%

Financial Inclusion-Exclusion Paradox: How Banked Adults become Unbanked Again

Ozili

2021

Financial Internet Quarterly

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This paper analyses how financially included adults might become unbanked again. Agents of financial inclusion incorporate economic and social constraints in the delivery of formal financial services. These constraints limit the ability of poor banked adults to use basic financial services to the fullest. The constraints affect agents of financial inclusion positively and affect customers negatively up to a point where the marginal benefit of being financially included is negative for poor customers. When the marginal benefit of using formal financial services becomes negative, the affected banked adults may discontinue using their formal accounts or exit the formal financial sector when they can no longer bear the negative effect of social and economic constraints that hinder their ability to enjoy basic financial services to the fullest.

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“…Although there are different models suggested by researchers, for example the generalised additive model (GAM), (Ntasalaze and Ikhilde, 2017) or generalised linear models (Gilligan et al 2018), linear probability models (LPM) are a good choice to characterize average multivariate relationships (Gomila 2021;Békés and Kézdi 2021;Aldrich and Nelson 1984), especially given their advantage that the parameters are easy to interpret (Caudill 1988). Additionally, LPMs are used in the related literature analyzing the impact of debt on employment (Mian and Sufi, 2014;Bernstein and Struyven 2017;Bernstein 2017;, financial inclusion (Fanta and Makina 2019;Fitzpatrick 2015), and health (Mahoney 2015;Hyytinen andPutkuri 2018, Gross andNotowidigdo 2017) as well.…”

Section: Methodsmentioning

confidence: 99%

“…It has been proven that financial inclusion may increase the debt stock (Fitzpatrick 2015;Nam and Loibl 2021) and may increase over-indebtedness (Gloukoviezoff 2011), and as an extreme situation can lead to overdue debts. In the meantime, there has been some mentioning (Anderloni and Carluccio 2006;Gloukoviezoff 2007;Fanta and Makina 2019) or a more indirect (Krumer-Nevo et al 2017) recognition of a two-way impact between financial inclusion and debt, but limited research focused at the reverse impact between financial inclusion and debt.…”

Section: Financial Services Overdue Debtmentioning

confidence: 99%

“…We look at the situation where the extreme situation of over-indebtedness is a given: the examined households have long-term overdue debt, which may have been the result of irresponsible lending and borrowing (Cherednzchenko and Meindertsma 2019) (one extreme example is the Hungarian FOREX loans as described by Berlinger and Walter 2013;Berlinger and Walter 2015;Bodzási 2019) but can be a result of unexpected shocks faced by the households or individuals (loss of job, health issues, etc.). Fanta and Makina (2019) showed that there is a relationship between poverty and over-indebtedness and that there is a spiralling effect between poverty trap and financial exclusion. Anderloni and Carluccio (2006) highlighted three possible links between overindebtedness and financial exclusion.…”

Section: Financial Services Overdue Debtmentioning

confidence: 99%

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Overdue Debt as a Poverty Trap

Dobránszky-Bartus¹

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In our research, we aim to shed light on the role of overdue debt in reinforcing poverty. This not only helps to better understand the dynamics of poverty trap induced by overdue debt but also enhances the rediscussing of current policy tools. Our research is based on data collected with targeted questionnaires in March and April 2019 by the Soreco Research Kft. Data were recorded with a personal question and answer method, by a so-called multi-stage stratified random sampling procedure. The data collection was anonymised and focused on the financial and liquidity decisions of households in small settlements in one of the most disadvantaged counties of Hungary, Borsod-Abaúj-Zemplén (BAZ) county. The sample is representative on the level of households living in small settlements. After cleaning the raw data, we have information from 504 households and 1794 individuals. 1196 individuals are of legal age, from whom 179 had overdue debt. We develop a theoretical model inspired by Akerlof (1978), Tirole (2006), and Mukherjee, Subramanian, Tantri (2019) to derive a feasibility condition for market-based debt relief programs. Our empirical analysis aims at investigating the role of overdue debt in creating poverty trap. With the help of statistical analysis and linear probability models we examine the impact of overdue debt on employment, on having a bank account, and on mental- and physical- health based on targeted questionnaires and in-depth interviews in the most disadvantaged regions of Hungary. We controlled for socioeconomic factors (e.g., gender, age, education level, ability to pay) and for settlement and county development indicators. In these regions, a significant part of the society has been the victim of financial exclusion well before the Covid 19 crisis, even under prospering economic conditions. Results: § The theoretical model shows that lenders have no interest to offer payment reductions if non-performing borrowers are few, have small debts, and are difficult to reach. In this situation, poor debtors serve better as deterrents, similarly if we put them into a pillory. § Calibrating model parameters to poor households struggling with overdue debts, we show that this might be the case on our sample, too. § As, in normal economic circumstances, private debt relief programs are typically not feasible, a state subsidy would be needed to consolidate the debts of the poor. State intervention can be justified both by positive externalities and moral considerations. § We find that many borrowers hide from debt collection as a consequence of overdue debt that has escalated to an unbearable level due to penalty rates. These borrowers are following the hiding strategy and take their decisions accordingly: to avoid deductions, they do not apply for registered jobs, do not open bank accounts and consequently, they are forced to live under constant stress. § To sum up the impact of overdue debt on social inclusion factors and according to our estimations, overdue debts reduce the likelihood of having a registered job by nearly 14 percentage points. Not having a registered job reduces the probability of owning a bank account by 22 percentage points and, in addition, overdue debts further decrease the probability by 5 percentage points. In addition, overdue debt also has a negative effect on the health of those living in the same household as the debtor, and this negative effect is greater than what a combined high school diploma and diploma could compensate for (0.4 versus 1.08-0.72 = 0.36). § Overdue debt, therefore, leads to a certain type of debt-trap mechanism resulting in significant loss for both the individual and the society. In this light, policy makers should pay more attention to addressing credit cycles and resolving non-performing debt obligations, especially in this fragile part of the society.

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Unintended Consequences of Financial Inclusion

Cited by 12 publications

References 44 publications

Financial Inclusion in Developing Countries: Applying Financial Technology as a Panacea

Financial Inclusion in Developing Countries: Applying Financial Technology as a Panacea

Financial Inclusion-Exclusion Paradox: How Banked Adults become Unbanked Again

Overdue Debt as a Poverty Trap

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