Banking on the unbanked in a digital era

Banking on the unbanked in a digital era

Wayne Campbell

Friday, August 28, 2020

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The Global Findex database provides more than 200 indicators on topics such as account ownership, payments, saving, credit, and financial resilience. It shows that 515 million adults worldwide opened an account at a financial institution or through a mobile money provider between 2014 and 2017. This means that 69 per cent of adults now have an account, up from 62 per cent in 2014 and 51 per cent in 2011.

It is evident that even as account ownership continues to grow, inequalities persist. There is a gendered component to account ownership, and perhaps this has to do with the institution of patriarchy which is more pervasive in some societies in which women continue to be voiceless and have very little rights outside the domestic sphere.

Data show that 72 per cent of men have an account compared to 65 per cent of women. That gender gap of seven percentage points was also present in 2014 and 2011. In developing economies the gender gap remains unchanged at nine percentage points.

The Global Findex reports that the gap between richer and poorer narrowed. Among adults in the richest 60 per cent of households within economies, 74 per cent have an account. Among the poorest 40 per cent only 61 per cent do, leaving a global gap of 13 percentage points. The difference is similar in developing economies, and neither gap has changed meaningfully since 2014.

Data also indicate that account ownership is also lower among young adults, the less educated, and those who are out of the labour force. The Global Findex declares that about 1.7 billion adults remain unbanked without an account at a financial institution or through a mobile money provider. Because account ownership is nearly universal in high-income economies, virtually all these unbanked adults live in the developing world. Indeed, nearly half live in just seven developing economies: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan.

Fifty-six per cent of all unbanked adults are women. Women are over-represented among the unbanked in economies where only a small share of adults are unbanked, such as China and India, as well as in those where half or more are, such as Bangladesh and Colombia. Unbanked adults are more likely to have low educational attainment. In the developing world about half of all adults have a primary education or less.

“Unbanked” is an informal term for adults who do not use banks or banking institutions in any capacity. Unbanked individuals generally pay for commodities in cash. They typically do not have insurance, pensions, or any other type of professional money-related services. The unbanked are usually to be found in the informal economy of the society. They are oftentimes the most vulnerable in the society and readily become prey for the unscrupulous. The unbanked may take advantage of alternative financial services, such as check-cashing and payday lending, if such services are available to them.

State assistance

Whereas the coronavirus pandemic continues to impact the Jamaican economy, tens of thousands of individuals have been furloughed or laid off since the first COVID-19 case was confirmed on the island on March 10.

According to the Minister of Finance Dr Nigel Clarke, since applications opened on April 9, the Government has received approximately 500,000 submissions for assistance under its $10-billion COVID-19 Allocation of Resources for Employees (CARE) Programme — a cash transfer intervention aimed at cushioning the economic impact of the virus on businesses and individuals. Approximately 60,000 applications were received for the Supporting Employees with Transfer of Cash (SET Cash) component of the CARE Programme. This component provides grants to people who earned taxable income of J$1.5 million or less and have been furloughed or lost their jobs completely. Data from the SET Cash applications suggest that more than 75 per cent of the applicants are under age 40. These individuals are usually more likely to have significant financial commitments and obligations given their stage of life.

Jamaica continues to have a challenge regarding the number of people who are unbanked. This issue was at the fore in the Clarke's declaration that some 77,000 applicants placed bank information that could not be validated. The unbanked were being served by local alternative service. In Jamaica the popular 'partna' is one such alternative financial service.

In the United States of America it is estimated that about 10 million American households are unbanked. Nationwide, about 7.7 per cent of households are unbanked, but the rate of unbanked can vary greatly from one state to the next. Mississippi has the highest rate of unbanked, at 16.4 per cent. Rates of the unbanked in some US cities and counties exceed 20 per cent. These places include Detroit; Newark, New Jersey; Cameron County, Texas; Laredo, Texas; Hialeah, Florida; Miami; and Starr County, Texas. Unbanked rates exceed 40 per cent in Cleveland; Savannah, Georgia; Nashville; and Atlanta.

Interestingly, the research found out that half of the unbanked had a bank account previously, but is now choosing to conduct their financial lives without one. There is an umbilical cord-type association poverty levels and being unbanked. The less disposable income one has increases the likelihood that that individual is among the category of the poor. Secondly, there is nothing to put aside in the event of a rainy day since every day is a rainy day.

An Investopedia article stated, “Extremely poor individuals may also have no need for the banking system as they try to survive their day-to-day lives, and may indeed find that they are unable to maintain minimum balances, afford account fees, or arrange for transportation to and from bank branches during banking hours.”

It is widely agreed that some of these same points which are true in the United States of America are applicable to Jamaica and elsewhere. A new United Nations Development Programme (UNDP) report puts Jamaica's per capita income at US$8,350. The same study states that 406,000 Jamaicans live either near or in extreme poverty. Of that number, 14,000 live in extreme poverty. The newly released United Nations Development Programme annual report on Jamaica for 2016 estimates the poverty rate among the country's 2.8 million people at 14.5 per cent, but found that the majority of them, an estimated 268,800 people, live close to the poverty line.

It should be noted that urban poverty differs from rural poverty. We have all seen or heard of rural poverty, oftentimes characterised by dirt floor in some parts. The levels of poverty in urban centres sometimes are not so stark and contrasting to that of rural areas. The Jamaica Survey of Living Conditions establishes that Jamaican poverty is more prevalent in its rural population. This is not surprising given Jamaica's history of slavery and colonialism. The prevalence of poverty is reported as declining from 19.9 per cent of Jamaica's population in 1997 to 9.9 per cent in 2007. The recent Jamaica Survey of Living Conditions 2016 conducted by the Planning Institute of Jamaica (PIOJ), reveals that 45 per cent of Jamaica's population lives in rural areas where the incidence of poverty is about 28.5 per cent.

A culture of financial inclusion

In order for a country to achieve sustainable development it's critical that its citizenry are incorporated into the official financial services. As a result there must be a sustained effort to develop a culture of financial inclusion for all. Older people tend to shy away from the new and emerging technologies. It is clear that the banking sector specifically, and the financial services sector in general, must be reviewed in terms of allowing the unbanked population access to such services.

Mobile phones are a good way of ensuring financial inclusion. Almost every Jamaican has access to a smartphone. Perhaps what is needed are more affordable data plans. In this regard, our mobile network providers must be part of the conversation regarding universal financial inclusion regarding financial inclusion.

Unquestionably, our credit unions must also be present at the conversation table. Unless the necessary legislative framework of the banking industry is carried out in order to ensure that banking fees are affordable some individuals will continue to live in the shadows of being unbanked. The Government also has a responsibility to devise poverty reduction programmes to lift the number of poor in the society.

According to the United Nations Sustainable Development Goal (SDG) #3, more than 700 million people, or 10 per cent of the world population, still live in extreme poverty and are struggling to fulfil the most basic needs like health, education, and access to water and sanitation, to name a few. The SDG #3 further states that the majority of people living on less than US$1.90 a day live in sub-Saharan Africa. Worldwide, the poverty rate in rural areas is 17.2 per cent more than three times higher than in urban areas.

Having a job does not guarantee a decent living. In fact, eight per cent of employed workers and their families worldwide lived in extreme poverty in 2018. Poverty affects children disproportionately; one out of five children lives in extreme poverty. Ensuring social protection programmes for all children and other vulnerable groups is critical to reduce poverty. Poverty has many dimensions, but its causes include unemployment, social exclusion, and high vulnerability of certain populations to disasters, diseases and other phenomena which prevent them from being productive. Growing inequality is detrimental to economic growth and undermines social cohesion, increasing political, and social tensions and, in some circumstances, driving instability and conflicts.

In the words of Francesco Burelli, you cannot transform a society or economic environment that is fully reliant on paper to digital overnight. There will always be a transition period with financial inclusion where payment methods co-exist and have to be interoperable.

Wayne Campbell is an educator and social commentator with an interest in development policies as they affect culture and or gender issues. Send comments to the Jamaica Observer or, @WayneCamo.

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