What is financial inclusion and why is it important for Jordan?

To answer these questions, we need to understand the basics for economic development, growth, and financial service activities, as they are the main drivers for reducing poverty and inequality, includ
To answer these questions, we need to understand the basics for economic development, growth, and financial service activities, as they are the main drivers for reducing poverty and inequality, including gender inequality. (Unsplash)
AMMAN — Financial inclusion is a concept that has been popping up in the vocabulary of economic development, but what is financial inclusion, why is it considered an integral part of the economic development process, and why is financial inclusion essential for the economic development of third world countries?اضافة اعلان

To answer these questions, we need to understand the basics for economic development, growth, and financial service activities, as they are the main drivers for reducing poverty and inequality, including gender inequality.

Countries with comprehensive financial systems have quick and cheap access to financial services, and safe financial transactions. Greater access to financial services enable poor households to better plan their future, and invest in land or shelter.

For example, if farmers get access to affordable financial services, the thinking is that they would acquire fertilizers, better seeds, machinery, and other equipment, which would help them yield better crops and produce. This would enable them to invest more in their crops would translate into more income.

Hence, poor households and small firms would start to accumulate financial assets, and this would pull them out of vulnerability and poverty. Therefore, financial services would ultimately contribute to reducing poverty and child labor activities and would empower vulnerable women and refugees.

The International Monetary Fund (IMF) defines financial services as “the process of acquiring the financial good,” i.e., the transaction needed to obtain the financial good.

Since the global financial crisis of 2007–2008, many economic and financial policy makers have sought to include and to encourage the disadvantaged, vulnerable, and less fortunate segments of societies to use financial services at affordable prices.

They thought that if central banks put the right set of financial frameworks and policies in place, the poor and vulnerable be positively impacted.

In poor developing countries, many adults do not have bank accounts, because the little income they earn would be spent on living necessities and expenses, it would be impractical for them to deposit the income in a bank account as they would need the cash at hand to survive.

Means to financial inclusion

Nowadays, the rapid development of communication technology has helped migrants send remittances to their countries of origin, or to the place their families are residing, as in the case of diasporas and refugees. These remittances are usually payments of law value, as they assist the survival of individuals and family members in their original homeland during times of peace and conflict.

Remittances can encourage economic growth if conditions permit within a country, as they can finance local consumption and strengthen the local economy. Migrants often invest their money in their country of origin or become active in the private sector there.

Financial consumer protection and financial capabilities
The World Bank defines financial capability as “the internal capacity to act in one's best financial interest, given socioeconomic environmental conditions.” It includes the knowledge, attitudes, skills, and behaviors of consumers to manage their resources and understand, select, and make use of financial services that suit their needs.

To encourage participation in financial markets, consumers need to be informed about financial products, and to have confidence in agents and providers of financial services. Therefore, adequate financial infrastructure must be developed to promote access and use of these services.

Financial technology (fintech)
Emerging financial technology companies — fintechs are continuously originating change in the finance industry. Innovations such as artificial intelligence, machine learning, blockchain technology, biometric identification, cloud computing, and the use of big data are revolutionizing the collection and processing of financial information

Fintechs offer technology-enabled solutions that can better address customer needs and preferences by suggesting enhanced accessibility, convenience, and tailored products. Fintech is thought to disrupt legacy financial systems often cumbersome, intimidating, or expensive for the end-user.

Simultaneously, digitization also challenges the conventional roles of central banks. Virtual currencies running on blockchain technology are still considered to be volatile, risky, and energy intensive. Still, central banks are investing in these technologies as they understand that in the long-term these currencies and their underlying technologies may be valuable contributors to the financial system.

Laws, regulations, and instructions
Laws, regulations, and instructions are important sections that provide the necessary infrastructure for financial inclusion. They act as means for providing the foundation of the financial sector development and financial inclusion. They usually aim to cover a comprehensive range of policy topics that relate to financial institutions and their consumers.

Spreading financial and banking literacy
Financial awareness and financial literacy are crucial to financial inclusion. Thus, financial and banking literacy would assist people to have better skills to manage personal properties and savings, to make the right financial decisions, and would raise awareness on the institutions and services available for microfinancing and financing of small and medium-sized enterprises.

Stock markets
A developed stock market is a driver for economic growth. The indicator used for stock market development is the stock market trading volume as a fraction to the Gross Domestic Product (GDP). More trading means that capital is more actively pursuing the most efficient use.

The Case of Jordan
The Central Bank of Jordan (CBJ) has incorporated financial inclusion policies and actions to empower the financially excluded and vulnerable people. This was first established in 2015 with CBJ's initiation of the national, multi-stakeholder policy process for enhancing the financial inclusion of Jordanians.

In December 2017, the CBJ launched Jordan’s three-year National Financial Inclusion Strategy (NFIS) (2018–2020). It focused mainly on vulnerable adults in Jordan, who have low incomes. This strategy also included financial inclusion policies for micro, small, and medium-sized enterprises, in addition to policies that included youth, women, non-nationals, and refugees.

Moreover, the NFIS established and strengthened strong links between financial inclusion and the Sustainable Development Goals (SDGs) for 2030 announced by the UN General Assembly.

In March 2021, the Central Bank of Jordan’s Financial Inclusion Report 2018–2020 showed that in 2017, 67 percent of people in Jordan who are above the age of 15, did not have access to the formal financial system in terms of account ownership.

It indicated that 38 percent of adults were excluded from any formal financial services and 24.8 percent of adults were completely excluded from any formal and informal financial services. And it pointed to the fact that the majority of micro, small, and medium-sized enterprises in Jordan had financial constraints.

According to the report, the CBJ had two objectives for financial inclusion. The first was to increase financial inclusion from 33.1 percent in 2017 to 41.5 percent, and the second was to reduce the gender gap from 53 percent to 35 percent by 2020.

The report showed that the NFIS succeeded in enhancing financial inclusion in Jordan, as it reached 50 percent, and it reduced the gender gap to reach 29 percent at the end of 2020.

Additionally, the CBJ invested in building an inclusive digital payments infrastructure, and created an environment for vulnerable households and businesses to gain access to digital accounts, investments, and other financial tools.

The CBJ also established the first private credit bureau in Jordan. Furthermore, the CBJ worked to promote financial literacy that established trust in the local financial system and provided affordable financial services and products.

Financial inclusion as a tool to curb informal finance
There are some problematic aspects in accessing credit in an informal economy, but financial inclusion can curb the problems from happening.

For example, household access to credit can be affected by the informal economy, as irregular workers may be unable to provide banks and other financial institutions with proper documentation needed to support their ability to service debt, such as pay slips.

Accordingly, underground informal finance will hamper economic growth and decrease wellbeing. Hence, financial inclusion seeks to bring people, who are currently using the informal financial system to the formal financial system, which is usually more regulated, transparent, and protected.

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