How to achieve financial inclusion via capital markets

In recent times, financial inclusion have caught our diverse understanding, and we may fairly question: is registering for mobile accounts (wallets) or the practice of money transfer via mobile phone a significant achievement for “true” financial inclusion? If not, what could be the ideal measure of financial inclusion? According to the Alliance for Financial Inclusion (AFI), the first dimension to measure financial inclusion is access to the financial services and products that formal institutions offer.

To achieve meaningful access, we have to consider other aspects of the financial market’s ecosystem – i.e. deposits, borrowing, investing, insurance, retirement funds, trading electronic funds, etc.

I will dwell on how “true” financial inclusion can be achieved via capital markets products and services using this idea of electronic funds.

Although the economy has made significant strides in recent years along with higher savings and investment rates, inclusive growth continues to be a challenge. We are, not only lagging many emerging economies, but also, we have a comparatively lesser degree of “true” financial inclusion as compared to some countries in frontier markets.

By financial inclusion here we mean ease of access, convenience and low-cost availability of financial products and services to all sections of the population.

Meaning, faster and more inclusive growth prompts inclusion of diverse economic activities and geographical regions in the financial system.

The role of capital markets is vital for inclusive growth in wealth distribution and making capital available to investors.

Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ enterprise needs and risk appetite.

Innovation, investment advisory, financial education and proper segmentation of financial users constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.

With a long-term growth trajectory, considerable financial deepening, increasing foreign cash-flows and increase in credit, deposits and bank assets as a percentage of GDP, rapid financial inclusion appears a reality if it can be coordinated by various financial institutions and with the application of technology.

Lack of institutional co-ordination, competition, technology and financial literacy are cause of lower market penetration. Alongside these, the capital markets also have challenges of excessive concentration of trading at member level, company level and also geographically.

The market also needs fair amount of development work on the bond market (especially micro-savings bonds, municipal bonds), interest rate futures, SME segment in the stock market and in the cash market.

Financial deepening also implies a larger focus on the debt and equity markets than physical assets and as a country we lag behind on this front.

We, in the capital markets need to cast off the conventional notion that financial inclusion is a part of social responsibility and should realize that it can foster profitable business. We need to see into it that we facilitate domestic and international investments, not only into money transfers, for the people without a bank account.

We can enhance savings by households or can encourage our society to be that among highest savers in the region, which currently is a challenge given that less than 1 per cent of the population participates in capital markets.

Given a savings rate of about 30 per cent and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system (especially the capital markets) and channelising them into highly productive investments. Through financial inclusion, capital markets can generate productive investments.

True financial inclusion would need financial literacy and matching technology to enhance accessibility besides adequate competition to cause more substantial marketing.

The agency model can be replicated for increasing financial literacy and thereby increasing direct participation of masses in the financial system.