Research from the Mastercard-SMU Financial and Social Inclusion programme suggests that societal and cultural factors, in addition to technology, are vital components of financial inclusion.

Back to Research@SMU Issue 44

By David Turner

SMU Office of Research & Tech Transfer – Credit cards, smartphones and online banking have increased the accessibility to financial services, making it easier for people to make payments, invest or get a loan to kick-start their business. Yet, while we have come to take such services for granted, many people remain locked out of the benefits that those financial services could bring, e.g. to improve an individual’s quality of life, prolong sustainability of business etc.

According to new research from the Mastercard-Singapore Management University (SMU) Financial and Social Inclusion programme, social barriers, rather than technological ones, account for this financial exclusion.

“Financial technology still leaves out swathes of people, and this means missed opportunities for development,” says programme director and Mastercard Chair of Social and Financial Inclusion Professor Howard Thomas, of the SMU Lee Kong Chian School of Business (LKCSB).

Established in 2015 as a research catalyst, the Mastercard-SMU programme aims to find means of linking financial and social inclusion in a way that boosts economic growth. Finding such links is of growing global interest amongst the international financial community. In 2016 the International Monetary Fund’s Managing Director called for financial inclusion to be integrated not only into inclusive growth strategies but also into macroeconomic and financial policies.

Context and culture

Financial inclusion is a global issue, but is especially important in regions with mixed levels of development, says Professor Thomas. In Southeast Asian countries such as Vietnam and the Philippines, for instance, shiny new business centres and under-developed neighbourhoods are often separated by non-physical barriers, such as widespread lack of trust in financial institutions.

And in some cases, community structures may not be innovative or agile enough to allow new technologies to spread, he adds. “Savvy entrepreneurs are not necessarily from established authorities. Sometimes it’s a matter of identifying individual leaders, networks or pathways through which to promote new technologies.”

In addition to social context, culture is important as well, says Professor Thomas. Each country has its own culture and values, and so presents different problems that require unique solutions. “In Vietnam, for example, you see an entrepreneurial spirit and willingness to take risks, but also a reluctance to take on debt, which could point to an absence of trust,” he says.

Understanding this reluctance to borrow could help identify ways to inject financial services into under-developed pockets of the economy, Professor Thomas notes.

Surveying beyond the mainstream

An innovative survey carried out under the Mastercard-SMU programme zooms in on just such under-developed pockets in Ho Chi Minh City, Vietnam. Led by Assistant Professor Aurobindo Ghosh of the SMU LKCSB, the soon-to-be-published study explored whether financial literacy and economic awareness alleviate financial exclusion among the city’s under-served groups.

To the uninitiated, Professor Ghosh’s expertise in econometrics with applications in finance and economics may seem unrelated to financial and social inclusion. But such issues, he says, strike at the heart of economics. “Without access to banks or savings services, people have a hard time entering mainstream economic life.”

Ironically, because their lives are lived outside of the mainstream, identifying people who cannot access credit or banking services poses a challenge. In addition, there could be any number of reasons for their struggles, including education, income, physical access, and social and cultural factors.

“A range of factors could be barriers but not necessarily so, for example there is lower education, lower income, locality and physical access, or it could be more social reasons,” Professor Ghosh points out. Add to that the fact that many people are not completely frank about their financial lives, and the research problem becomes extremely complex.

Piecing together the puzzle

Econometrics, with its ability to help researchers understand connections between various types of data, is particularly well suited for studying complex problems such as this, says Professor Ghosh.

Professor Ghosh and his colleagues surveyed some 400 people, gathering data on interconnected measures of financial inclusion, including frequency of bank use, access to borrowing for business, and having a regular savings plan and insurance. Several months later, they repeated the survey to determine if anything had changed.

Since people tend not to give completely truthful answers about their financial lives, obtaining good data required careful survey design. “We started with small questions about daily necessities and responsibilities, and then moved on to what people’s biggest financial challenges were, and why they were not using financial services,” explains Professor Ghosh.

The surveys’ fortuitous timing yielded surprising insights into how global events shaped life in neighbourhoods throughout the world. The first survey occurred when Vietnam was projected to benefit from the Trans-Pacific Partnership (TPP), the ambitious multi-country trade deal that stalled after the 2016 US presidential election. By the time of the second survey, both presidential candidates, Hillary Clinton and Donald Trump, had strongly criticised the TPP. Survey respondents showed awareness of this, and their behaviour changed accordingly.

Using econometric models, the researchers also looked for overall patterns in the data that could provide insights into financial awareness and inclusion.

“We found that even within Ho Chi Minh City, certain neighbourhoods were more financially excluded, even after accounting for other important variables such as wealth,” says Professor Ghosh. These findings, he adds, could point to practical areas for policy-makers to focus on.

Building up trust in financial systems

Another interesting finding from the survey was that debt levels among respondents were low: outside of home mortgages, 70 percent of survey respondents had no debt. “There is an aversion to debt, despite plenty of entrepreneurial spirit and a well-educated population,” says Professor Ghosh.

There are many possible reasons for this widespread debt aversion, he says. “This could be due to the upheaval and cultural legacy of the Vietnam War, or it could more simply be due to poor access to credit. We can also speculate that the older generation, being more aware of the past, may be more mistrusting and uneasy about stability, and so want cash liquidity or gold.”

The survey also found that financial depression and financial exclusion are not necessarily linked – a finding that has important implications for economic development. “People may be surviving financially, but because they have poor access to financial services, they are missing out on opportunities to grow their business,” says Professor Ghosh. “This means society is missing out on economic growth opportunities.”

Professor Ghosh next plans to dig deeper into the root causes behind the survey’s findings, and to explore ways of incrementally building trust in areas where it is lacking.

Professor Thomas notes that such small steps by the Mastercard-SMU programme include assessing the reasons underlying the success of financial technology (fintech) applications. In partnership with a fintech company, the programme is also working to build credit histories among credit-excluded communities, targeting low-to-middle income women who have no collateral or credit record.

“This was a profit-driven start-up that has transformed into a social enterprise which gives small loans for durables like mobile phones or refrigerators, thus helping them build a credit history on their way to a better quality of life,” says Professor Ghosh.

Initiatives such as these, Professors Ghosh and Thomas hope, will help underbanked populations in Asia reap the benefits of financial services.

Back to Research@SMU Issue 44

Image credit: Zapp2Photo

Read more about our research