Financial Exclusion

This text is concerned with the increasingly important and problematic area of financial exclusion, broadly defined as the inability and/or reluctance of particular societal groups to access mainstream financial services. This has emerged as a major policy concern in the US and the UK. The case of these two countries is particularly interesting since these have the most strongly market-orientated financial systems in the world, and as such they provide a good ‘laboratory’ of the likely development path of financial exclusion, together with some possible policy solutions (by government, other interest groups and the financial services sector) in other deregulating financial sectors.

This chapter provides a broad overview of financial exclusion, with particular reference to UK and US experiences. It explores the meaning and various dimensions of financial exclusion. In addition, the chapter outlines various policy responses that have been used to tackle the problem of financial exclusion.

This chapter outlines the various approaches that have been suggested as means to tackling financial exclusion. Eradicating financial exclusion has been a major priority of the UK Government since the mid- 1990’s onwards and is becoming increasingly important throughout Europe and elsewhere. A range of initiatives have been developed. Unlike in the US where policy aimed at dealing with financial exclusion has been mainly through the enactment of various legislation, in the UK the policy response to date has been characterised by Government as ‘facilitator and mediator’, with an emphasis on a partnership approach. In this ‘model’, the banks and the Post Office have a key role to play in helping to overcome financial exclusion. The main features of the various policy approaches taken are discussed in this chapter.

The US banking and financial services industry is one of the most advanced in the world. In many respects, the US is a kind of ‘pacemaker’ in financial services development for other countries. Like the UK, financial exclusion is a major issue in the US; strong Government affirmative action has been one noteworthy response in the US. In all countries experiencing and reacting to financial exclusion, the banks are seen as an indispensable and integral part of the response mechanism. At the same time, one has to be aware of the institutional context of different countries in explaining financial exclusion, its economic consequences and the appropriate policy responses. The present chapter focuses on the US and what is clear is that the rise of deregulation in financial services sectors, intensifying competition and the rise of the ‘value maximisation’ model have exposed a growing need to tackle financial exclusion. US experiences (as probably the most strongly market-orientated banking system in the world) correspond closely to those of the UK, although the approach has been more legislation based. There are also important institutional differences between the US and UK (for example, the respective roles of the post office, credit unions and Government affirmative action).

The European banking and financial services sector has also been subject recently to intense deregulation and globalisation pressures within the process of completing the internal market and the development of European monetary union. Within the EU, financial exclusion has emerged as a major issue. Like UK and US experiences, the apparent dichotomy between the ‘free competition’ model and the ‘public good’ aspects of basic financial services has emerged as a major policy and bank strategic challenge. In all countries experiencing and reacting to financial exclusion, the banks are seen as an indispensable and integral part of the response mechanism. As noted before, one always has to be aware of the institutional context of different countries in explaining financial exclusion, its economic consequences and the appropriate policy responses.

This chapter explores three areas. First, we examine the broad European policy response to expanding financial exclusion on Chapter 6 and also discuss the implications for banks. Second, we discuss the kinds of strategies that banks have and might develop in this evolving scenario. Finally, we focus on how economic theory may be able to help explain why financial exclusion occurs and in doing so as to provide some practical insight into how the banking system (‘bank strategies’) might be developed to combat exclusion.

This chapter examines issues relating to financial exclusion in developing countries. There are many parallels between initiatives being made in the developed and developing world to encourage parts of society to make greater use of financial services. Obviously, many developing countries have substantially underdeveloped financial institutions and systems with a much greater part of the population having no financial services. The chapter focuses on the main features of financial exclusion in developing countries and examines various mechanisms that have been suggested to promote financial inclusion covering the role of informal financial networks and various microfinance initiatives. Reference throughout the chapter is made to the broader finance and development literature that also emphasises the promotion of thefinancial services industry as an important driver of economic growth.

Finally, this brief chapter explores some areas, in our opinion, that deserve further attention regarding the study of financial exclusion. It is clear that financial exclusion is rapidly emerging as a ‘hot topic’ in European banking and financial policy areas. At the same time, there is a real and marked paucity of comparative and other kinds of empirical research on this area. Much more work is needed if financial exclusion is to be tackled in a sustained way and if banks are to play strategically a pro-active and value-enhancing role in this process. A fundamental problem in this area is the need for robust and comparable data related to financial exclusion. These data are needed across time and countries. Good research and appropriate policies will be constrained until these data become more available. This has to be a priority, a ‘necessary condition’ for a viable research agenda. At the same time, benchmark standards need to be developed, agreed and carefully monitored. It is only with these in place and fully understood that a more credible analysis of the impact of greater financial inclusion and associated welfare improvements can be evaluated.