Jerry Buckland is the author of Hard Choices: Financial Exclusion, Fringe Banks, and Poverty in Urban Canada.
Financial exclusion is the situation faced by people who have no relationship, or an insufficient relationship, with a mainstream financial institution, such as a bank or credit union, to meet all their financial service needs. What causes financial exclusion? There are many different, sometimes conflicting responses to the question.
Some take a more pragmatic approach:
• The Winnipeg Free Press (17/March/2012) did an article on the topic of bank access in Winnipeg’s North End which elicited some interesting and conflicting responses. Some responses argued that banks, as a business, could not be expected to operate branches in the North End. Some argued that poor people need to take more initiative in overcoming poverty. Others argued that with poverty come many barriers that can prevent people from bank access.
• With a research team I recently published a report through the Institute of Urban Studies (at the University of Winnipeg) that examined a selection of Canadian financial institutions’ approaches to financial inclusion. Among financial institution representatives, and between them and other groups, there are basic disagreements about language and theory about bank access. Some bank respondents accepted that poor people face structural barriers to banking like access but some rejected that and argued that being unbanked is mainly a personal choice and that financial literacy was the solution.
From my research I have found little evidence of exceedingly irrational behaviour among low-income people – so financial literacy is a factor just not the only or even main one. Rather, as the book argues, financial exclusion is driven in part by poorer access, poorer services, and mixed staff culture of mainstream banks as compared with fringe banks.
Others consider this question from a more theoretical perspective. (See figure 2.1, p.63 of Hard Choices for a map of the most common theoretical arguments explaining financial exclusion.)
• A particularly fruitful source of analysis regarding financial exclusion has come from behavioural economics. By relaxing the orthodox economics assumption that humans are rational economic calculators, behavioural economics studies human economic behaviour. Regarding its insights on poor people’s financial decision-making you might read this valuable interview with Dr. Eldar Shafir. He finds that poor people are forced into a pre-occupation with the present that prevents them from planning for the future.
• From a theoretical perspective it will be very interesting to see if the insights from behavioural economics lead to a rethink regarding other central assumptions in other parts of orthodox economics. If we accept that people can be nudged, or using another word, manipulated, then what are the implications regarding the actions, such as advertising, by large actors such as businesses and government. There is some interesting work being done by the World Economics Association regarding the scope of orthodox economics.
But beyond understanding what causes financial exclusion, what can be done to promote financial inclusion?
There have recently been a couple of interesting developments that I am aware of in terms of inner-city banking.
• The Assiniboine Credit Union has opened a new branch in Winnipeg’s North End, and in Toronto, the Royal Bank of Canada opened a branch in Regent Park. These are significant examples of FIs opening branches in inner-city neighbourhoods that, in recent years, have mainly seen branches closing. Having an FI branch in a neighbourhood makes banking more accessible and more attractive to residents.
• Also, The Guardian has called for input on the role of credit unions in the financial services sector.
• A community-based organization in Kerala State, India has begun to assist people in leasing land for cultivation, and mobilizing people to pressure banks to provide them financial services.
This idea reminded me of similar work undertaken in a number of Canadian communities. Take, for instance, Winnipeg. Here, community-based action was supported by one financial institution and by the provincial government. The Alternative Financial Services Coalition (AFSC) was a network of community organizations and one financial institution, many based in Winnipeg’s poor North End, that were concerned with the state of financial services there. Individual agencies noted the declining availability of financial services in the neighbourhood, undertook some preliminary research, and formed a network to organize their efforts, birthing the AFSC. This effort culminated in research reports including a feasibility assessment for what became the Community Financial Services Centre, a referral-based agency that helps people with financial management and bank access issues.
Clearly, people and communities can make a difference.