April 21, 2024

Financial inclusion: A pathway to eradicating global poverty

3 min read

As we enter the final quarter of 2023 and closer to the Fourth Industrial Revolution (4IR), marked by unprecedented technological advancement and global interconnectivity, we must acknowledge a stark reality: extreme poverty persists. While we commemorate the International Day of the Eradication of Poverty, it’s crucial to not only recognise this enduring challenge, but also to explore innovative solutions. Financial inclusion stands out as a pivotal instrument.

A recent study conducted by Mahalika, Matsebula and Yu delves into the relationship between financial inclusion and poverty in South Africa. Their findings underscore a significant link between financial inclusion and poverty reduction, shedding new light on the tools available to combat poverty effectively.

Financial inclusion includes a range of proposed solutions for poverty eradication. The World Bank defines it as the provision of access to useful and affordable financial products and services that cater to the needs of individuals and businesses – delivered responsibly and sustainably. These needs encompass transactions, payments, savings, credit and insurance, ultimately affording individuals and businesses access to formal financial services.

The study reveals a decrease in the poverty headcount rate from 32% to 20% and a reduction in financial exclusion from 40% to 27% between 2011 and 2016. However, it’s notable that financial exclusion remains concentrated among the impoverished.

In South Africa, those excluded are primarily unemployed African females without tertiary education residing in rural areas (specifically, Eastern Cape, Free State, North West and Limpopo) and discontented with their lifestyle. The study also indicates similar characteristics between financial exclusion and poverty, cementing a clear positive correlation between accessing financial services and escaping the poverty trap.

It is evident that financial inclusion is not solely the domain of the banking sector but a fundamental tool in the poverty eradication toolbox. The key is that financial inclusion empowers individuals. Access to financial services equips individuals and businesses to better manage risk, stabilise consumption and invest in their future. Even minimal financial assets provide a safety net against economic shocks and potential income loss. The World Economic Forum’s research reinforces this by showing that economies prioritising financial inclusion experience significant economic growth and reduced inequality.

To put these insights into practice, we need concrete actions. Here are a few solutions, on how financial inclusion can be leveraged to systematically eradicate poverty:

  • Leverage digital transformation and technological innovations: In the era of 4IR, we can expand access to financial services, especially in rural areas, through digital platforms. Mobile banking technology and digital wallets offer entry points for individuals and businesses previously excluded from the financial system.
  • Prioritise financial literacy programmes: In conjunction with access to finance, comprehensive financial literacy programmes are essential. These programmes can educate society on managing finances, making better investment and credit decisions, and understanding the significance of savings.
  • Encourage collaborative efforts: Addressing the persistent challenges of poverty requires collaboration between the public and private sectors. Effective government regulations, combined with the innovative spirit of the private sector, can reach marginalised populations more efficiently.
  • Develop and support microfinance institutions: Microfinance institutions have played a pivotal role in promoting financial access in various parts of the world, particularly for micro, small and medium enterprises (MSMEs). We can adopt similar models to provide small loans and essential financial services, transforming the financial prospects of MSMEs in South Africa and other developing regions.

The evidence is clear: The battle against poverty cannot be won through isolated efforts. This challenge demands a concerted, multifaceted approach, and financial inclusion stands at the core of our available solutions.

As we commemorate the 31st anniversary of the International Day of Eradicating Poverty, our call is not only to acknowledge the scale and depth of this challenge but also to commit to transitioning from traditional methods to evidence-backed strategies.

The relationship between financial inclusion and poverty is supported by research, offering us the opportunity to harness modern solutions of the digital age and create a world where poverty is consigned to the past, ensuring Dignity for All in Practice.

Dr Velenkosini Matsebula

Senior Lecturer in Development Finance

Stellenbosch Business School

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