Financial inclusion - defined as access to, and use of, affordable and appropriate financial services by all segments of society - is a major enabler of sustainable economic development.
These services – encompassing transactions, payments, savings, credit and insurance – empower individuals and businesses to manage risk, invest in opportunities and participate more fully in the market.
Many market systems operate with entrenched financial exclusion, with large segments of the population lacking access to basic savings, credit, insurance and payment services. MSD programmes can play a vital role in addressing financial exclusion by adopting a facilitative approach that strengthens the overall financial system and makes it more inclusive and responsive to the needs of all market actors.
Promoting access to finance across market systems
Some common approaches for promoting access to finance include:
1. Strengthening financial service providers (FSPs)
MSD programmes may have an intervention focused on capacity-building for FSPs, providing them with training and technical assistance to improve their operational efficiency, product development capabilities, credit risk management practices and outreach strategies. This can include product development and innovation, whereby an MSD programme facilitates the design and development of innovative financial products that are tailored to the needs of specific market segments. This may involve, for example, digital credit products leveraging alternative data for credit scoring, savings accounts with tiered interest rates to incentivise savings, or microinsurance products to protect against specific risks (e.g. related to crop failure, health emergencies).
Other options include:
- Buying down financial institutions’ high risk and costs of servicing small accounts or remote rural areas through loan guarantees and cost-sharing in the pilot phase.
- Visually mapping financial service access points to help policymakers and financial institutions identify under-served areas. Good information is often a precursor to systems change.
Improving access to finance through product innovation and the value chain finance approach is a case study involving Equity Bank of Rwanda and IMSAR, an MSD programme that developed innovative agricultural lending products.
2. Addressing demand-side constraints
This often involves providing financial literacy training to individuals and businesses to improve their understanding of financial concepts, budgeting, saving, debt management and responsible borrowing. Programmes have also combined financial services with business development support to provide entrepreneurs with the knowledge and skills they need to manage their businesses effectively. This may include working with the public and private sectors to increase financial education and literacy. Relevant entities may include ministries of education that wish to integrate financial education into school curricula, central banks, and financial institutions themselves.
Gender inclusive financial literacy provides a checklist of considerations when planning to implement gender inclusive financial literacy activities as part of an economic development programme
3. Leveraging technology
This can be achieved by promoting mobile money and digital payment systems to expand access to financial services, reduce transaction costs and increase transparency. It can also involve facilitating partnerships between traditional FSPs and FinTech companies to leverage technology and reach new market segments.
Identifying and strengthening the right digital finance partner i sheds light on a provider’s (or product’s) ability to engender trust, and help grow the digital finance ecosystem writ large, based on how it handles certain key issues such as transparency, data security and product development.
MSD and the blended finance agenda
Blended finance refers to the strategic use of development finance and philanthropic funds to mobilise additional commercial investment towards sustainable development in emerging markets.
For MSD programmes, blended finance mechanisms offer a powerful way to unlock capital flows and address systemic constraints hindering market growth and inclusion. By strategically de-risking investments and improving the risk-return profile for commercial investors, blended finance can crowd in much-needed capital to support innovative business models and scale impactful interventions.
Blended finance aligns with the facilitative approach of MSD and can help address several common challenges:
- Bridging the "pioneer gap": early-stage or innovative business models in developing markets often struggle to attract purely commercial investment due to perceived high risk and limited track record. Blended finance can de-risk these investments, making them more attractive to commercial investors.
- Promoting financial sustainability: by crowding-in commercial capital, blended finance helps to reduce reliance on donor funding and create more financially sustainable market solutions.
- Scaling impact: blended finance unlocks the potential for scaling successful interventions by attracting larger pools of commercial investment.
Bridging the gap showed that successful sector transformation relies on multiple enabling factors – such as markets, finance, investment and policies – coming together to unlock growth. As more development finance institutions (DFI) and MSD strategies start to converge on transformational change, there is – in theory at least – scope for each side to support and complement the work of the other.