Why A Large Fraction Of The Adults In The World Are Financially Excluded

Housing forms a large fraction of the assets of most Indian households. Even in many developing countries, housing forms about 50 per cent of the assets of most households. This is true, even in the United States. This is why mortgage loans and tax deduction on mortgage loans allow most people to buy houses. Without such tools, home ownership would be more difficult than it is now.

In developing countries where more people are unbanked and not part of the financial system, this makes the process longer and more difficult. For examples, a house may be built in many stages over a long period if mortgage loans are difficult to get. The later stages of the construction would be undertaken only when the household is able to spend more. But it is not just households that suffer. The real estate industry is also not very structured or developed in such countries. When financial inclusion is low, real estate developers are likely to be less professional, less organised, and more likely to use substandard housing material. Moreover, when people are part of the banking and financial system, they are more likely to get jobs, and be eventually capable of getting a mortgage loan. Having access to the financial system also makes sure that households do not fall into poverty overnight.

In 2014, McKinsey pointed out that about half of the the world's population is unbanked. Things have changed since then. Recently, the World Bank had pointed out over a year ago that there has been a massive decline in the number of unbanked people across the world. Hundreds of millions of people have opened bank accounts in the recent past. But, still this does not change the facts too much. In developing countries, more than half of the poorest 40 per cent of the households do not have a bank account. The situation is worse among women. The worst gender gap is seen in South Asia. In some countries, religion is a reason why many people do not have bank accounts. This means that by merely changing the preferences of beliefs of people, it is possible to raise the proportion of people who are banked.

The usage of bank accounts is not very high either. For example, according to The World Bank, 43 per cent of the people who have bank accounts in India did not make a deposit or withdraw money from in the financial year 2014-15. Even when people use their bank accounts, they make a significant fraction of the payments in cash. Utility bills, for example are paid in cash in many developing countries. This is true of school fee and other such bills, too. It will take some time for such payments to shift from transactions in cash to transactions done through debit or credit cards or net banking.

One of the reasons of low financial inclusion is that most of the bank account owners in Asia, Africa and the Middle East have extremely low incomes.  This still does not mean that such households do not borrow or save. They do borrow and save, but usually not through formal financial services. This leads to less than optimal outcomes because, for example, interest rates are high when you borrow from the local moneylender. The local moneylender is also not likely to lend to you if he does not personally know or trust your family and other informal networks you are part of.

Mobile technology was not so widespread in the past, and though it is increasingly becoming near universal, this is still a recent phenomenon. In many poor countries, large numbers of people have mobile money accounts instead of bank accounts. Their numbers will rise in the near future.