Financial Exclusion and Poor
Lecture 6


Introduction
•There is a growing recognition across the EU that having access to a bank account and the
financial services that banks and other financial institutions provide, including credit
facilities, is, in many countries, a necessary condition for social inclusion. (European Commission
Employment, Social Affairs and Equal Opportunities Social Situation Observatory – Living Conditions
and Income Distribution 2010, p.3)
•People who have difficulty in obtaining a bank account or access to credit, therefore, tend to be
those who are out of work or who have particularly low levels of income, which are independent
causes of social exclusion.

Financial exclusion
•Financial exclusion is a broad term for the barriers faced by the poor
•It is defined as “those processes that serve to prevent certain social groups and individuals from
gaining access to the financial system” (Leyshon and Thrift, 1995)
•However, financial inclusion is one of the powerful weapons in poverty irradiation
•
3 Major Causes of Vicious Circle of Poverty (With Diagram)

Forms of financial exclusion
(1)Access exclusion: the restriction of access through the processes of risk management
• eg. Repaying capacity, permanent income
•(2) Condition exclusion: where the conditions attached to financial products make them
inappropriate for the needs of some people
• eg. Asking guarantors, bonds/surety
•(3) Price exclusion: where some people can only gain access to financial products at prices they
cannot afford
• eg. high interests and instalments
•(4) Marketing exclusion: whereby some people are effectively excluded by targeting marketing and
sales
• eg. loans and credit card promotions
•(5) Self-exclusion: people may decide that there is little point applying for a formal financial
product because they believe they would be refused
• eg. fear for debt, religious and cultural norms Anana Shuka

Financial inclusion/exclusion in the global context
•the Asian system offered universal participation in which the government performed a major role by
directing credit at low but stable rates of return.
•European countries tended to offer a “range of functionally distinct institutions” that was
tailored to meet diverse needs; some were scaled to cater to nation-wide demands while others were
simply to meet local needs.
•The US used to have a system in which banks were local and segmented with near universal
participation, and
•Countries in Latin America used have universal banking in urban areas and informal financial
arrangements in rural areas.
•However, all these diverse models of banking which were unique to their environments are now being
replaced by a homogeneous system as a result of financial globalization that caters to the upscale
segment.

•As financial institutions focus on attracting desirable upscale customers by offering them low or
zero fees for service, the poor customers are left with costly and limited services.
•Furthermore, the cross-subsidies between elite customers and other customers which allowed banks
to offer small but similar financial services are being eliminated. Because banks now compete
globally for elite customers, they no longer offer subsidies to lower-balance or riskier clientele.
•The end result of all these transitions is a larger number of households becoming unbanked (“those
who are unable to establish or maintain bank accounts” (Dymski, 2005, p. 125) and an ever clearer
division between the financially included and the financially excluded.

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Financial exclusion and india


•
FINANCIAL INCLUSION IN INDIA AN OVER VIEW By Dr. S. Vijay Kumar Head & Associate Professor (Retd.),
Department of Economics, Kakatiya Government (UG&PG) - ppt download

Financial exclusion in Europe
•Carbo et al. (2007) indicate,
•the widespread liberalization of the financial industry has drastically increased
“intensification of bank competition”
•Liberalization policy has deregulated the banking and financial market, which create benefits to
rich class
•That challenged the standard of justice in financial practices
•Carbo et al. (2007) observed that financial exclusion is “invariable experienced by the poorer
members of society” even though they are in developed countries.
•The percentage of the adult population, in Europe, who do not have bank accounting, for example is
stunning: 22.4 percent in Italy, 17.9 percent in Greece, 16.8 percent in Ireland, 16.7 percent in
Portugal, 13.5 percent in Austria and 10.5 percent in the UK. Between 14% and 18% in the Czech
Republic, Ireland, Latvia, Lithuania, Poland and Slovakia

Consequences of financial exclusion
•The lack of access or not having a bank account makes it difficult for the poor
•to receive income and to make payment,
•to receive credit that they really need to help them navigate the financial crises
•It also reduces saving habits, financial literacy and management skills
•As a result, the poor resort to alternatives to the traditional financial institutions such as
•money-lenders
•payday loans
•pawnshops that charge very high rates.
•inability to obtain insurance coverage.

Different approaches to combat the problem of financial exclusion
•These approaches have travelled under such different names as
•social investment programs
•micro-finance programs
•community finance, and
•community development
•the government of the UK stimulates local enterprises and reduce dependency on state support
through: promoting community development and finance programs (CDFI) to provide credit to poor
communities, and grant-funding community

Assignment 01
•With reference to the Grameen Bank Micro Finance system, evaluate the importance of the role of
micro finance as social entrepreneurship in poverty irradiation (Marks 20)
•Pay attention to following thing
•1. Read on Grammen Bank system (the bank of poor)
•2.Aims and objectives of GB and the way how it operates
•3. Discuss how it has changed saving, investment and consumer behaviours of poor
•4. How GB has organized poor for income generating and entrepreneur activities
•Length- maximum 10 pages
•Submission date 12th April
•Individual task

Assignment 2
•Group activity
1.Interview 5 to 10 poor people in your area and analyze the characteristics of their poverty
2.Introduce a suitable social entrepreneurship model/s to irradiate their poverty
•(marks 30)
•Results should be presented in the class using power point presentation. Everybody has to
contribute to the project and present the outcomes
•Presentation will be on 27th April