Boosting financial inclusion in emerging economies

By Vimal Balasubramaniam

The well-worn joke about your granny hiding her savings under the mattress has become out-dated at a time when pretty much everyone in the developed world has access to established financial infrastructures.

The situation in emerging economies, however, is very different. Despite efforts to improve financial inclusivity, large numbers of households are shunning formal savings, mortgage and insurance products and are using informal channels to finance everything from education to retirement.

Our study into household finances in six emerging economies (China, India, Bangladesh, the Philippines, Thailand and South Africa) aimed to get to the bottom of these differences in the management of wealth.

The research has revealed complex dynamics, which providers and policymakers need to get to grips with if they are to help families in emerging economies manage their household finances more effectively.

Our findings highlighted an important distinction between having access to financial vehicles and actually using them. Thanks to advances in technology, access to formal financial products in emerging economies is high, standing at around 80 per cent of households. Less than half that number, however, actually use these accounts to fund life events such as marriage or divorce, or to save for emergencies.

Differences in attitudes and approaches to household finance in the countries we studied were most pronounced in middle income families. Here, wealth is mostly held in physical assets, such as gold, real estate or livestock. Savings or retirement accounts are virtually unheard of and take up of medical or other insurance policies is low.

When households find themselves facing financial difficulty, perhaps because of unexpected illness, loss of income or property damage caused by natural disasters, they typically turn to family, friends or informal lenders for help. This can leave them prone to crippling interest payments, with rates of unsecured debt particularly high in Thailand, India and China. Often, the resulting debt burden can be as crippling for poorer households as the initial emergency.

So what is driving these behaviours? Our research suggests that there is no one easy answer and there is in fact a complex web of cultural, psychological and practical factors influencing the way wealth is managed in emerging economies.

Societal shifts are a pivotal issue. In countries such as India, for example, it has long been a given that the younger generation will contribute to the family ‘pot’ and take care of their elders, resulting in no pressing need for people to consider how they will fund their retirement.

Increasingly, however, these cultural norms are starting to change as the younger generation become more individualist and nuclear family oriented and no longer want — or are able to — support their extended family in the way they would traditionally have done in the past.

This is a time bomb waiting to explode, given the rapid growth in the elderly population in these emerging economies. India and China alone are set to have more than 500 million elderly individuals over the course of the next decade — and do not have sufficient social and welfare systems to support them.

Lack of trust is also an issue. Financial markets in these emerging economies have been plagued in the past by inefficiencies and mis-selling. Growth of the mortgage market, for example, has been hindered by the absence of robust legal and regulatory infrastructures, while on the insurance side, weak legal rights for policyholders and lax enforcement of pay-outs has deterred people from buying policies.

The impact of poor financial literacy and shame and embarrassment associated with reaching out for advice should also not be under-estimated. On the practical front, limited accessibility to bank branches, particularly in rural areas, is also a factor. If there is no formal financial institution nearby, people are more likely to use informal savings clubs or take a ‘cash under the mattress’ approach.

Understanding the unique constraints and circumstances that drive household financial behaviour in emerging markets is the first step towards developing new or adapted financial products which will meet people’s needs more effectively.

Patterns in behaviour are not, however, going to shift overnight — and the first and most important step towards driving change is to create an enabling environment. Existing regulatory frameworks are not necessarily conducive to the financial innovation that is beginning to emerge in these markets. Indeed, there are concerns that the pace of innovation will outstrip regulatory capacity in some countries, leading to inefficiencies or in the worst case scenario, outright fraud.

Policymakers and providers need to explore ways of facilitating the development of new products and services, while at the same time ensuring the infrastructure is robust enough to support them.

In a recent report to the Indian Government, we made a number of recommendations, including the introduction of standards for financial advice and the development of digital end-to-end financial products.

What will get the unbanked banking in emerging economies?

We are particularly pleased they have accepted our suggestion of setting up a regulatory sandbox, where companies can trial new products with a limited number of households. This will allow regulators to assess the impact and effectiveness of a product or service in a low-risk environment, before deciding whether it is suitable for extension to the wider market.

The bigger, established financial institutions — many of whom are well behind the innovation curve — may need encouragement to take a longer term view. Setting up the framework and supply chain for next generation pension products, for example, is likely to be unprofitable for firms in the short term, although the rewards further down the line could be significant thanks to the potential for scale offered by digitisation.

There is also much work to be done in understanding how to reach potential customers, given that as much as 80 per cent of the labour force are in the unorganised, informal sector and outside of traditional communication channels.

Financial innovations are beginning to emerge, often led by new, fast-growing companies who are locally based and have a real understanding of both the needs and the challenges of the market. In Kenya, for example, mobile money products were established well before e-wallet systems became widely available in the US and UK.

Other finance providers are beginning to look at digital systems that can overcome the issues associated with a cash economy. Online payment mechanisms, coupled with the use of QR codes, for example, can be used to complete transactions end-to-end, avoiding the need for both buyers and sellers to travel to a bank to withdraw or deposit cash.

What will persuade more people to bank in emerging economies?

We are also beginning to see interesting uses of behavioural science nudges in the financial sector. There have been successful experiments with savings accounts linked to lotteries, for example, which have proved popular with low income families. The potential to win a prize — in the shape of a significant hike in savings rates — has helped to motivate people to save rather than spend.

We are only at the beginning of our journey towards understanding the management of household finances in emerging economies. It is vital that research continues, so that governments have the knowledge and understanding they need to tackle poverty effectively and develop robust financial structures that can support families in times of need.

It’s important to get this right. A growing number of emerging economies have young households accessing financial markets for the first time. We need to make sure their first, defining experiences are positive, as this will shape future behaviour.

Further reading:

Badarinza, C., Balasubramaniam, V., and Ramadorai, T. (2018) The Household Finance Landscape in Emerging Economies. Available at SSRN:

Anagol, S., Balasubramaniam, V. and Ramadorai, T. (2018) “ Endowment effects in the field : evidence from India’s IPO lotteries”, The Review of Economic Studies, 85, 4, 1971–2004.

Vimal Balasubramaniam is Assistant Professor of Finance and teaches Investments and Risk Management on Executive MBA (London), plus Investment Management on MSc Finance and the Undergraduate programme.

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Originally published at on June 19, 2019.

Warwick Business School, located in central England, is part of the University of Warwick and one of the world’s leading business schools

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