Can cash transfer programs help bring about financial inclusion?
Jeremy Shapiro is a Senior Program Officer at the The Bill and Melinda Gates Foundation Financial Services for the Poor Team, which works to help people in the world’s poorest regions improve their lives and build sustainable futures by connecting them with digitally-based financial tools and services.
Over 130 low- and middle-income countries currently operate cash transfer programs. These programs have proven to be an effective poverty reduction approach, but this is tautological: a person receiving USD 1 a day is - by definition - no longer among the sub-dollar-a-day population. But do cash payments have impacts above and beyond this obvious effect? And can they solve seemingly unrelated problems like high account dormancy among low-income households? Emerging evidence suggests that payments can.
Population with formal bank account (%)
Graph shows percentage of individuals with a formal financial account separately for low-income adults (bottom 40% of income distribution) and adults reporting receipt of government transfer. Source: Global Findex
Global surveys and rigorous studies indicate that government payments spur account creation and stimulate account usage. This in turn enhances the direct impacts of a cash transfer and further improves the lives of low-income households. Thus, broad-based government cash transfers could meet the joint goals of poverty reduction and financial inclusion.
To begin with, evidence shows that receiving a government transfer is associated with having a financial account. The World Bank Global Findex shows that slightly over 50% of adults worldwide report having a financial account, whereas the number exceeds 70% for those receiving a government transfer. This does not prove that government payments cause account creation, but it is consistent with and suggestive of the possibility.
Account access, however, is only half of the financial inclusion equation. The other half is account usage. To achieve full financial inclusion, account holders must be able to use their accounts to help them manage their financial lives - to save and borrow to manage shocks and seize investment opportunities. But this is not always the case. In India, for example, up to a third of account-holding customers do not use their accounts.
Can government transfers crack the dormancy issue? The Findex data suggests so. Across all countries, low-income transfer recipients are more likely to save and borrow through formal sources than their low-income peers who don’t receive transfers, and are more likely to borrow formally than all adults.
Population with formal financial services (%)
Graph shows percentage of individuals with savings and loans from formal financial service providers separately for low-income adults (bottom 40% of income distribution) and adults reporting receipt of government transfer. Source: Global Findex
Moreover, a growing number of randomized control trials indicate this is a causal relationship. In Kenya, a study evaluating a cash transfer aimed at the very poor found that recipients were 7 percentage points more likely to have savings and 10 percentage points more likely to access loans than a control group. In India, a randomized evaluation of digitized government payments found that the transition to digital payments increased borrowing by approximately 15%.
Though large-scale transfer programs may be a costly prospect for donors and governments, such programs offer huge social and economic benefits. Evidence suggests that households invest a significant proportion of the transfers they receive, leading to income increases of 20% to 30% of the amount transferred. To the extent that increased transfers enable increased borrowing, low-income entrepreneurs may be able to further increase incomes, and studies show such entrepreneurs can earn up to 60% on capital.
And it turns out that feared negative impacts of cash transfers are a non-issue: a comprehensive review finds that recipients do not use transfers on harmful goods such as alcohol and tobacco and studies indicate that even sizable transfers in developing countries do not reduce labor supply.
Cash transfers can also help prevent a slide back into poverty, as additional savings help households to weather shocks. Importantly, the financial inclusion multiplier effect can amplify the impacts of cash transfers by stimulating credit and savings. Thus, the joint goals of poverty reduction and financial inclusion may be accomplished in a mutually reinforcing way through direct transfer programs.