Making Financial Inclusion a Reality for the Unbanked

Making Financial Inclusion a Reality for the Unbanked

photo: Department of Foreign Affairs and Trade

Financial inclusion and the fight against poverty 

Ravallion (2015) illustrates how mainstream thinking on poverty has changed over the last 200 years: from considering poverty as inevitable or even necessary for economic advancement, to viewing it as a social ill that can be avoided through public action. In fact, as he points out, the right anti-poverty policies are expected to contribute to growth by removing material constraints on the freedom of individuals to pursue their own economic interests.

Critical to removing these constraints is financial inclusion, that is, the delivery of financial services at affordable costs to the low-income and poor segments of society. The UN General Assembly has adopted a resolution stressing the importance of financial inclusion as a key tool for implementing many of today’s vital developmental objectives (UNSGSA 2015), and an international task force was formed involving the Committee on Payments and Market Infrastructures – the global setter of payment system standards – and the World Bank to examine factors affecting financial inclusion in the context of payment systems and services, and to suggest measures to address these issues (CPMI-WB 2015).

Developing financial instruments – such as micro-finance institutions [1] – specifically designed for the low-income and the poor has become part of the standard anti-poverty policy approach. This has especially been so since research that originated in the 1990s showed that the growth-finance relationship is not linear and that financial development might not be as effective in supporting faster output growth at low stages of economic development. Relevant to this extent was the observed presence of threshold effects in the growth-finance dynamics, whereby individual agents need to reach a minimum level of wealth before they can access financial resources and services. Low-income countries may thus take long before financial development can make a significant impact on output growth, especially among the poor.[2] Another potentially relevant factor is the predominant role that banking typically plays in low-income economies where financial infrastructures are weak and the public prefers to use basic bank contracts (that is, deposit and loan contracts) to alternative and more sophisticated financial instruments.[3] The limited impact of finance on growth may thus reflect the limited ability of banks to service the low-income and the poor.

Why do banks fail to reach the poor?

For various reasons: banks may lack reliable information on very low-income borrowers’ cash flows; also, these borrowers may not possess the required collateral or it may be too costly for banks to seize the collateral available. Moreover, when returns are deemed to be too low vis-à-vis perceived risks, as is typically the case when it comes to lending to the poor, banks are uninterested to lend. Also, banks may face too large transaction costs relative to the expected income stream from the services provided. Because of this, microfinance institutions (MFIs) have developed to take over the vacuum left by the banks. MFIs, too, however, often find themselves constrained by the very low income of those they seek to service. It appears that few MFIs reach the customers at the bottom of the poverty scale (CGAP 2006): poor people may prefer not to borrow because they think debt is more likely to hurt rather than help them; also, since most microcredit is uncollateralized, MFIs have found that loan default quickly turns into an uncontrollable epidemic unless they keep it at very low levels; another factor is that many of the poorest need nonfinancial support (e.g., food, grants, or guaranteed employment) before they can make good use of loans or deposit services. Recent research has found no discernible effects of microfinance on education, health, or women’s empowerment (Banerjee et al 2015).

Non-credit money for the poor

Costly lending does not provide a sustainable way to financially include the poor and to allow them to grow out of their condition. In the early 2000s, when we were both at the IMF, we studied how to redesign a domestic monetary system around the concept of non-credit money; that is, a system where – unlike conventional banking – money creation is separated from lending and money is provided to beneficiaries on a non-lending basis (Bossone and Sarr 2002, 2005). This was to be achieved through specialized entities, called Deposit Creating Institutions (DCIs), which – like conventional banks – operate on a fractional reserve regime and use reserves to settle net deposit outflows. Unlike conventional banks, DCIs do not lend but distribute new money to depositors the same way banks create money via lending: money is distributed under no restitution obligation, it takes the form of deposits issued on the accounts of depositors, based on their relative contributions to stable reserves, and is additional to the deposits outstanding at the time of distribution – just like loans. The DCIs provide deposit safekeeping and payment services for a fee: fee income is their raison d’être (although they may offer other services such as cash management for enterprises)..

Without entering into much detail on the system’s configuration and stability, for which we refer the interested readers to our cited work, two fundamental benefits should be emphasized. One is that beneficiaries do not have to borrow money to get money: they don’t have to run into debt to be able to access the money they need to support their spending decisions. And spending, in either small investments or consumption, is what their communities need to grow and to allow producing companies to capture liquidity through sales rather than through borrowing. The other fundamental benefit is that the DCIs may never get insolvent and create systemic risk; yes, they may become illiquid and even exit the market, but in such case liquidity migrates to other DCIs and the system lives on.

The SOFADEL project

While establishing a non-credit money system requires introducing major changes in current financial systems, and on a large scale, we wanted to try something concrete. We launched a community-level initiative based on the principle of making money more easily available to the poor and community investment possible. We thus experimented with a variant of the model that, while still involving microlending, it makes it cost- and collateral-free and yet self-sustainable. We came up with what is ready to go live in Senegal.

In Senegal, only 10 percent of the population is banked, and most transactions are conducted in cash. We thus opted for DCIs issuing a complementary currency in both paper and electronic formats, partially backed by national currency reserves when microloans in complementary currency are made. The complementary currency is bought with national currency or created through lending and represents a claim on the merchandises and services supplied by business and individual members of the DCI, which we called SOFADEL (Fiduciary Company for Local Development Financing, At the initial stage of the project, we chose to have only one SOFADEL for each of the selected metropolitan areas so that each SOFADEL can have a large enough reserves base.

SOFADEL will issue the complementary currency via a network of distributors that will operate its electronic platform. Such decentralized system will allow SOFADEL to manage only one central office. Distributors will want to purchase SOFADEL currency with a 5% bonus and resale it for a profit to individual members who get a 2.5% bonus from them. Members can spend it at participating businesses at a 1/1 exchange rate with the national currency, thereby obtaining a 2.5% discount. Businesses can either convert the currency received in national currency at SOFADEL for a 5% conversion fee, or spend it with other members. The conversion fee is an incentive for members to keep the currency circulating within the system (and the community) maximizing SOFADEL’s reserves in national currency. SOFADEL currency can also be converted from electronic to paper format for a 2.5% fee and to national currency for a 5% fee, which will help SOFADEL keep national currency reserves. Since members can purchase and transfer SOFADEL’s electronic currency among them, distributors will also operate the platform as a fee-based money-transfer system for intra-community payments. This, too, will help maximize national currency reserve holdings and allow SOFADEL to provide microloans in complementary currency.

SOFADEL (which does not have a banking license) will lend its currency on behalf of its members: its microloans represent credit sales from its members, not from itself; and a member who does not reimburse her loans loses her privileges, while her default amounts to not repaying the participating businesses of the community. When one member defaults, as long as the currency borrowed is still circulating within the community, SOFADEL is not affected. Thus, the business credit risk will be mutualized at SOFADEL as fiduciary representative of its members.

Members may borrow SOFADEL currency free of costs for up to 4 years. Borrowings will be based on each member’s relative contribution to SOFADEL’s reserves of national currency and the volume of microloans available taking liquidity risk into account. Contributions will be calculated through the electronic account platform operated by distributors, which keeps track of the net purchases of the SOFADEL currency by each member.

SOFADEL reserves will be held in banks and will be invested in financial and non-financial assets through a mutual investment and guarantee fund to support member small enterprises larger financing needs (equity, loans, leases) at market costs. This is what makes SOFADEL sustainable. Members will be represented at the board of SOFADEL, and participate in its governance through an association. Grouped in a consultative council, member businesses will provide their views to SOFADEL on how its national currency reserves should be invested to better support their activities and local development. The board of SOFADEL can decide on the exchange rate between the complementary currency and the national currency in order to preserve SOFADEL’s national currency reserves fund in case of excessive conversion of its currency into national currency or in the event of shocks hitting the area where SOFADEL operates.

SOFADEL is in the process of recruiting members (currency users and currency accepting businesses, and independent distributors). This process, started in 2014, also requires addressing some cultural and legal challenges, which are not uncommon to other jurisdictions worldwide, such as convincing the authorities that issuing a complementary currency is not tantamount to counterfeiting legal tender or replacing it, or that managing funds on behalf of an association does not amount to soliciting public savings. These types of challenges have led to legal prosecutions of complementary currency initiatives in countries such as Brazil, before being dropped as unfounded.


Financial inclusion is a key step toward fighting poverty. Including the financially excluded requires finding ways to make money available to them. Traditional lending, however – including through conventional microfinance – has proven ineffective to that extent. While market-based systems can be designed where money creation and distribution is separated from lending, too radical and large-scale reforms would be necessary to implement them. Less ambitious and more spatially localized initiatives can be conceived. Our SOFADEL idea is one of them. 


Banerjee A, E Duflo, R Glennerster, and C Kinnan (2015) “The Miracle of Microfinance? Evidence from a Randomized Evaluation,” American Economic Journal, Applied Economics, 7(1): 22-53

Bossone B and A Sarr (2002) “A new financial system for poverty reduction and growth,” IMF Working Paper, WP/02/178

Bossone B and A. Sarr (2005) “Non-credit money to fight poverty,” in Fontana G and R Realfonzo (eds.), “The Monetary theory of Production,” Basingstoke: Palgrave MacMillan

Bossone B, S Mahajan and F Zahir (2002) “Financial infrastructure, group interests, and capital accumulation: theory, evidence, and policy,” IMF Working Paper, WP/03/24

Center for Financial Inclusion (2013) “Microfinance vs. Financial Inclusion: What’s the Difference?” February 27 (Link)

CGAP (2006) “Graduating the poorest into microfinance: linking safety nets and financial services,” FocusNote, Consultative Group to Assist the Poor, No. 34, February

CPMI-WB (2015) “Payment aspects of financial inclusion,” Consultative report, Committee on Payments and Market Infrastructures and World Bank Group, September, Bank for International Settlements and World Bank Group

Ravallion M (2015) “Challenges in maintaining progress against global poverty,” VoxEu, 23 December (Link)

UNSGSA (2015) “General Assembly Passes Resolution on Financial Inclusion for Sustainable Development”, United Nations Secretary General’s Special Advocate for Inclusive Finance for Development, 14 December

[1] For a discussion on microfinance and financial inclusion see CGAP, “Frequently Asked Questions about Financial Inclusion,” here, and Center for Financial Inclusion (2013).

[2] For references to the relevant literature see Bossone and Sarr (2002).

[3] For a detailed and analytical discussion of this factor, see Bossone et al (2002).