Multiple Factors Make Informal Financial Sector Popular
By Paneetha Ameresekere
While promoting financial inclusion has been a main focus for policymakers in Sri Lanka, a significant informal financial sector continues to exist in the country; the World Bank (WB) in a report dated 7 April but released the following day, 8 April, said.
Sri Lankan respondents, in a survey jointly conducted by the Central Bank of Sri Lanka (CBSL) and the International Finance Corporation (IFC), the WB adjunct to lend to the private sector, in 2018, cited various sources of borrowing, including from both formal and informal sources, as well as various motives for borrowing.
The popularity of informal financial services in Sri Lanka was due to a multiplicity of factors, like such services being closer to rural communities due to personal relationships/family ties and ease of physical access, the WB said. ‘Our insights also point to the strong prevalence of financial dualism, i.e., the presence of both a formal and informal financial sector in the country, where gender plays a significant role,’ the report said.
Such ‘financial dualism’ is common in most developing countries, where a large informal financial sector which serves the lower end of the market co-exists alongside the formal financial system. ‘We found that being formally employed was positively related to being financially included. All coefficients were positive and highly significant. Having formal employment relates most favourably to one’s ability to obtain formal credit as well as use digital cards. The latter is easily explainable since financial institutions in the local market still prefer predictable income flows evidenced by receipt of a regular salary over other forms of income. Overall, we note that being educated and having formal employment play a significant role in being included in formal finance,’ the report said.
Meanwhile, women have a 44% probability and men a 38% probability of saving using an informal source. In the case of formal savings, the comparable probabilities were 90% for women and 93% for men.”Women tend to access informal sources of savings and borrowing more than men,’ it added.
Turning to credit, women have 78% probability compared to 66% for men of borrowing from an informal source, while the probability gap was higher for formal credit at 43% for women against 59% for men, the WB said.
‘We observe that those in the oldest age group are less likely to save overall. Given the country’s challenging demographic transition towards a more ageing population with more women, as well as women’s greater longevity compared to men – low access to old age savings could become a problem specific to Sri Lankan women,’ the report warned.
Though Sri Lanka is ahead of its regional peers in terms of basic financial inclusion measured via access to a formal account and having formal savings, it lags behind its upper middle income peers in East Asia. Similarly, for credit and usage of digital finance, there is much room for the country to improve and thereby match its East Asian peers. Digital financial services can be a powerful tool for inclusive finance. However, we see the strong influence of generational effects, resulting in low usage of such services in Sri Lanka,’ the WB said.
Nevertheless, leveraging the high level of literacy in the country, there is potential to explore avenues to increase usage, either through better digital financial literacy, simpler products, or through better targeting, the report said.
‘Our insights also point to the strong prevalence of financial dualism in the country, where gender plays a significant role’ it said. Being a male, being more educated and (possibly therefore) being formally employed, increase a person’s access to, and usage of, formal finance rather than women bearing the same attributes, the WB said.
This is on the premise that financial inclusion, i.e., to formal financial services, is an enabler for inclusive growth, it said. Thus, the gender gap is evident in financial inclusion, it added. But in a country where 52% of the population comprise women, combined with the demographic transition towards an increasing elderly population with higher longevity for women, the findings imply that urgent and targeted action is necessary for the financial inclusion of women and making them part of the economy, the WB said.
But financial inclusion vis-à-vis formal finance is an important enabler of inclusive growth as it helps people to invest in the future, manage financial shocks, and smooth household consumption, all of which can contribute to reductions in poverty and inequality. It is a means through which people at both low and high levels of income can be integrated into the formal financial system, thereby contributing to the formal economy.
This also has to be looked at in the context that though Sri Lanka is an upper-middle income country, the number of Sri Lankans still live just above the extreme poverty line is estimated at 1.9 million or 8.7% of the population, who survive on US$3.20 (Rs 623) per day, the WB said.
Digital finance could be a powerful lever for women’s transition into formal financial inclusion as it addresses important issues of time, safety, and security, the WB said.
Quoting as an example of the wonders of digital finance as told by a young mother living in the suburbs of Colombo who sells string hoppers for a living, she said, ‘I never knew I could manage my money from home. Thanks to what I learned today, I will have more time to make idiyappam.’
This woman was one of 20 participants at a financial literacy awareness pilot conducted by the IFC, it said. However, closing the gender gap in financial inclusion will require attention to address the digital gender gap and digital literacy, the WB said. Eighty-six per cent of men in Sri Lanka own a mobile phone compared with 79% of women. Further, 62% of women said they were aware they could make financial transactions through mobile phones, but only 32% claimed they were comfortable doing it.‘This highlights the potential impact digital literacy and digital financial awareness can have on increased usage of digital financial services,’ the WB said.
When it comes to payment cards, the situation is similar. While ownership of credit and debit cards is slowly increasing, Sri Lanka essentially remains a cash economy, with only 38% of the population at ease using debit cards. From a gender perspective, men were more comfortable using debit cards (41% men and only 35% women). CBSL’s recent announcement of 2020 as the ‘Year for Digital Transactions’ and the trilingual awareness campaign, ‘Cash Wade’ — supported by focused training programmes countrywide — are initiatives that are part of this national strategy, the WB said.
‘Working together, we believe digital finance can consequently transform women’s lives and empower more women like the young mother from the pilot training, thus contributing to greater inclusion of all Sri Lankans,’ the WB added.
It further said that education presents a significant determinant for not using informal sources, though therein lies a paradox – Sri Lanka has achieved gender parity in education, yet Sri Lankan women still rely more on informal finance compared to their male counterparts. While this may be attributed to a possibly low level of financial literacy among women compared to men, or non-quantifiable factors such as culture and tradition.
This paradox merits further analysis and research, in a context where sustaining inclusive growth would rely to an extent on female labour participation supported by more inclusive finance for women improve formal financial inclusion in Sri Lanka, and identifying its determinants, so that more Sri Lankans can benefit from the safety and security of formal finance and better financial capability, with the ultimate goal of sustaining inclusive growth for the country’s individuals and businesses, the report said. (Concluded)