Reasons For Financial Inclusion And Exclusion

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Financial exclusion can be broadly defined as the inability to access basic financial services due to problems associated with access, conditions, prices, marketing or self-exclusion in response to discouraging experiences or perceptions of individuals / entities. In the Report of the Committee on Financial Inclusion in India (Chairman: C. Rangarajan, 2008) defined Financial inclusion/exclusion as – The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at affordable cost.

The sections that are generally excluded are:

Marginal farmers, landless labourers, Unorganized sector, urban slum dwellers Migrants, ethnic minorities, women, Eastern & Central regions of India mostly.

Some of the reasons for exclusion are:

Lack of awareness, low income, social exclusion, illiteracy.

Sparse population in remote & hilly areas with poor infrastructure & lack of physical


Easy availability of informal credit.

Documenting procedures requiring proof of identity and address, high charges and

penalties, generic products that are currently in the market do not satisfy the needs of the sections that are excluded financially. There is no single over-riding factor that could explain financial exclusion. It includes a variety of factors stated above and probably many more.


Supply side barriers pose bigger impediments in the process of financial inclusion. Some of the significant causes of comparatively low expansion of institutional credit in the rural areas can be risk perception, high transaction costs, lack of infrastructure, and difficult terrains and low density of population.

Another noticeable factor being the perception among bankers that large number of rural population is un-bankable as their capacity to save is limited, small loan requirements, miniscule margin in handling small transactions. Also, non-availability of Know Your Customer (KYC) requirements (documentary proof of identity and address) can be a very important barrier in having a bank account especially for migrants and slum dwellers). Further, unsuitability of products and services being offered to the rural people are not tailor- made. For example, most of their credit needs are in form of small lump sums and banks are reluctant to give small amounts of loan at frequent intervals. Consequently, they resort to borrowing money from moneylenders at exorbitant rates. Poor market linkage or say penetration of service providers also constitutes the major factors of financial exclusion. And also one more unreasoned perception among the bankers is that the rural areas have poor repayment record.

Global literature explains financial exclusion also in the context of a larger issue of social exclusion of weaker sections of the society. While Leyshon and Thrift (1995) explain financial exclusion as such processes those aid to prevent certain social groups and individuals from gaining access to the formal financial system, Carbo et al. (2005) and Conroy (2005) opine that it is a state of inability of some poor and disadvantaged societal groups to access the financial system. Mohan (2006) reasons that financial exclusion implies the lack of access by some segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers. Ensuing the reasoning made above, it can be an indication that financial exclusion occurs mostly to people who are the disadvantaged sections of the society.

One more issue of interest is whether low level of financial inclusion is associated with high income inequality (Kempson et al., 2004).

Empirical literature on determinants

of financial exclusion mostly comprises analysis based on primary surveys within a country or a region.2 In a recent paper, Beck et al. (2007) have studied financial sector outreach and its determinants by using cross country data.

The literature on financial inclusion has identified financial exclusion as reflection of a broader problem of “social exclusion”. In the industrialised and high income countries having a well-developed banking system, studies have shown that the exclusion from the financial system occurs to persons who belong to low-income groups, the ethnic minorities, immigrants, the aged and so on (Barr, 2004; Kempson and Whyley, 1998; Connoly and Hajaj, 2001). There is also a geographical factor; people living in rural areas and in locations that are remote from urban financial centres are more likely to be financially excluded (Leyshon and Thrift, 1995; Kempson and Whyley 2001). Further, countries with low levels of income inequality tend to have relatively high level of financial inclusion (Buckland et al, 2005; Kempson and Whyley, 1998). In other words, the levels of financial inclusion inevitably rise in response to both prosperity and declining inequalities.

Another factor that can be associated with financial inclusion is employment (Goodwin et al., 2000). The unemployed or those with irregular and insecure employment are less likely to participate in the financial system. Studies have found that payment of wages through automated cash transfer (ACT) has been one of the main influences on financial inclusion in the UK. Recent evidence also suggests that the continued payment of social security benefits and the State pension in cash is significantly related to financial exclusion (Kempson and Whyley, 1999).

Informal sector or the informal economy accounts for a large and significant share of employment in several less developed countries (ILO, 2002). In these countries and elsewhere in the industrialised countries, formal sector employment could imply participation in the formal financial system through receiving wages and salaries routed through the formal banking system. Formal employment also implies inclusion in employment related social security system, benefits of which are availed through the formal banking system. Thus the proportion of formal sector employment would be an important indicator of the level of financial inclusion. Since we have not found reliable income inequality is negatively associated with financial inclusion, more precisely, higher the income inequality, higher is the likelihood of financial exclusion.

Leyshon, A. and N. Thrift, (1995), Geographies of Financial Exclusion: Financial

Abandonment in Britain and the United States, Transactions of the Institute of British Geographers, New Series, Vol. 20, No. 3, pp. 312-41.

Carbo, S., E. P. M. Gardener, P. Molyneux, (2005), Financial Exclusion, Palgrave


Conroy J, (2005), APEC and Financial Exclusion: Missed Opportunities for Collective

Action?, Asia-Pacific Development Journal , 12(1), June 2005.

Mohan, Rakesh, (2006), Economic Growth, Financial Deepening and Financial Inclusion,

Address at the Annual Bankers’ Conference 2006, Hyderabad on November 3,


Rangarajan Committee, (2008), Report of the Committee on Financial Inclusion, Government

of India.

Kempson, E., A. Atkinson and O. Pilley, (2004), Policy Level Response to Financial

Exclusion in Developed Economies: Lessons for Developing Countries, Report of Personal Finance Research Centre, University of Bristol.

Barr. M, (2004), Banking the Poor, Yale Journal on Regulation 21, pp. 122-239

Kempson, E. and C. Whyley, (1998), Access to Current Accounts, British Bankers’

Association, London

Connolly, C. and K. Hajaj, (2001), Financial Services and Social Exclusion, Financial

Services Consumer Policy Centre, University of New South Wales

Goodwin, D., L. Adelman, S. Middleton and K. Ashworth, (2000), Debt, Money

Management and Access to Financial Services: Evidence from the 1999 PSE Survey

of Britain, 1999 PSE Survey Working Paper 8, Centre for Research in Social Policy,

Loughborough University

Kempson, E. and C. Whyley, (1999), Kept Out or Opted Out?, Policy Press, Bristol.

ILO, (2002), Women and Men in the Informal Economy: A Statistical Picture, International

Labour Office, Geneva.

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