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Financial Inclusion: Lies and damn lies
Financial Inclusion refers to the efforts and initiatives aimed at providing individuals and businesses with access to useful and affordable financial products and services. These services include transactions, payments, savings, credit, and insurance, delivered in a responsible and sustainable way. The goal of financial inclusion is to ensure that everyone, especially the underserved and marginalized populations, can fully participate in the financial system, thereby enhancing their economic opportunities and well-being.
History In Web3
Read any Web3 startup white paper, the most common phrase you will find is "financial inclusion". It has almost become the "Amazing Grace" phrase of every Web3 startup. Even, the somewhat more successful players, such as Celo, MakerDAO,Compound,Aave etc, have become glorified tools to support speculators at best. Why is it so hard to really achieve financial inclusion?
Is it an Access Problem?
The biggest assumption made by the proponents of Web3 in solving financial exclusion is that is simply a access problem. This assumption overlooks structural barriers and inequalities. Simply providing access to financial services does not address underlying issues such as income inequality, lack of education, and limited job opportunities. In some cases, financial inclusion initiatives may divert attention and resources away from more fundamental developmental challenges, such as improving healthcare, education, and infrastructure.
Is it an Technology Problem?
Another critical perspective relates to the digital divide. Many financial inclusion efforts rely heavily on digital technologies and mobile banking platforms. While these innovations can enhance convenience and reduce transaction costs, they exclude those without access to smartphones, reliable internet connectivity, or digital literacy skills. This exclusion can deepen existing inequalities, reinforcing social and economic marginalization rather than alleviating it.
Is it even a Problem?
Furthermore, the emphasis on formal financial services may undermine informal and community-based financial systems that have historically provided resilience and support to marginalized groups. Informal savings groups, community credit systems, and traditional forms of insurance often operate outside formal regulatory frameworks but play crucial roles in social cohesion and risk-sharing mechanisms.
From a regulatory standpoint, promoting financial inclusion can also pose challenges. Governments and international organizations may prioritize expanding financial access without adequately addressing regulatory frameworks, consumer protection laws, and institutional capacity. This oversight can expose consumers to risks such as fraud, data privacy breaches, and financial instability, particularly in emerging markets with weak regulatory oversight.
In addition to these operational and regulatory challenges, the impact of financial inclusion on broader economic stability and sustainability remains a subject of debate. Critics argue that rapid credit expansion driven by financial inclusion initiatives can contribute to asset bubbles, overleveraging, and systemic risks, as seen in cases where microfinance institutions collapsed due to unsustainable lending practices.
Moreover, the narrative of financial inclusion often overlooks cultural and contextual factors that shape financial behaviors and preferences. Different societies have diverse attitudes towards savings, borrowing, and risk management, which may not align with Western-centric notions of financial inclusion. Imposing universal financial inclusion goals without accounting for local preferences and social norms can lead to resistance and suboptimal outcomes.