Digital Financial Inclusion in the Times of COVID-19

IMF Blog | By Ulric Eriksson von Allmen, Purva Khera, Sumiko Ogawa, and Ratna Sahay | July 1, 2020

financial inclusion and fintech - Digital Financial Inclusion in the Times of COVID-19The COVID-19 pandemic could be a game changer for digital financial services. Low-income households and small firms can benefit greatly from advances in mobile money, fintech services, and online banking. Financial inclusion as a result of digital financial services can also boost economic growth. While the pandemic is set to increase use of these services, it has also posed challenges for the growth of the industry’s smaller players and highlighted unequal access to digital infrastructure. Several actions will need to be taken to ensure maximum inclusion going forward.

Low-income households and small firms can benefit greatly from advances in mobile money, fintech services and online banking.

The shift towards digital financial services was already helping societies advance financial inclusion before the pandemic started, benefiting many low-income households and small firms with typically little access to traditional financial institutions. Lockdowns and social distancing are accelerating the use of digital financial services, just as the SARS epidemic in 2003 hastened China’s launching of digital payments and e-commerce.

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Many countries (for example, Liberia, Ghana, Kenya, Kuwait, Myanmar, Paraguay and Portugal) are supporting this shift with measures such as lowering fees and increasing limits on mobile money transactions.

Africa and Asia lead the way

In a new study, we introduce an index of digital financial inclusion that measures the progress in 52 emerging market and developing economies. We found that digitalization increased financial inclusion between 2014 and 2017, even where financial inclusion through traditional banking services was declining. This is likely to have progressed more since then.

Africa and Asia lead digital financial inclusion, but with significant variation across countries. In Africa, Ghana, Kenya, and Uganda are front runners. In comparison, the Middle East and Latin America tend to use digital financial services more moderately. In some countries, such as Chile and Panama, this likely reflects a relatively higher level of bank penetration.

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In most countries digital payments services are evolving into digital lending, as companies accumulate users’ data and develop new ways to use it for credit worthiness analysis. Marketplace lending, which uses digital platforms to directly connect lenders to borrowers doubled in value from 2015 to 2017. While so far concentrated in China, the United Kingdom, and the United States, it appears to be growing in other parts of the world, such as in Kenya and India.

Benefits beyond financial inclusion

Financial inclusion benefits economies and societies as a whole. Previous studies have found that extending traditional financial services to low-income households and small firms goes hand-in-hand with increasing economic growth and reducing income inequality. Our analysis finds that digital financial inclusion is also associated with higher GDP growth.

During the COVID-19 lockdowns, digital financial services are enabling governments to provide quick and secure financial support to “hard-to-reach” people and businesses, as demonstrated in Namibia, Peru, Zambia, and Uganda. This will help mitigate the economic fallout and potentially strengthen the recovery.

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