Omar Khan: On Financial Inclusion

April 12th, 2010

This month we interview Omar Khan, Senior Research and Policy Analyst at the Runnymede Trust (London), about financial inclusion, what it means, how it impacts everyday life and helps build a just society.

RS: Let’s start here, how would you define “Financial Inclusion”?

OK: Financial inclusion starts with access to essential banking products, this includes the ability to open a bank account or to qualify for credit. Financial inclusion is also related to financial capability, or the knowledge, attitudes and decisions people have towards financial institutions, products and services.

In our view, however, financial inclusion has widespread consequences for people, beyond how they experience financial institutions or products. We may need to look deeper to understand and respond to the problems that many financially inclusive products are hoping to solve. For instance, in our most recent publication, Why Do Assets Matter? Runnymede found that that black and minority ethnic people are twice as likely as white people to have no savings, with 60 per cent of Black and Asian people in the UK having no savings at all. To create genuine financial inclusion, we also need to look at the “why” behind statistics like these, and address larger social justice issues such as access to education and skills training or the ability to secure decently paid employment.

RS: Can you expand on that idea, how is financial inclusion related to social justice?

OK: Financial inclusion policy will only be effective if understood from the perspective of social justice. For instance, people need a basic level of income to live a decent life. However there is also clear evidence that disadvantages in education, employment and housing -which we see in so many BME and immigrant populations- has a direct impact on an individual’s ability to access financial services.

Social justice work also creates an environment that fosters social cohesion. Runnymede’s recent report, Why Do Assets Matter? includes both behavioral and citizenship arguments for financial inclusion. This refers to how financial inclusion –whether that means owning an ATM card or having a savings account -can create confidence and contribute to one’s sense of belonging and participation, and ultimately help create greater community cohesion.

RS: The impact of the global economic crisis has affected everyone. What comment do you have for the critics or cynics who suggest that it is not just newcomers or immigrant communities that are financially excluded?

OK: I can’t disagree but that doesn’t mean that immigrant and BME communities aren’t still in need. I don’t think it’s an either/or question.

RS: What does your research tell us about the informal economy and the lending that often springs up in newcomer communities?

OK: Since many newcomers find employment in cash-based sectors like the food and service industry, entering the informal economy is often not a choice.

Being “unbanked” also pushes newcomers into the informal economy and can become a vicious cycle. Being “unbanked” makes it more difficult to gain regular and stable employment, and to receive benefits. The identity requirements for opening a bank account can pose a problem for BME people, since is often a trust issue and a reluctance to supply the requisite identity documents (passports, driving licenses, utility bills).

And then there’s the reality that even when banks adopts more inclusive policies at the top, it doesn’t necessarily trickle down to the front lines. As a result, newcomers and certain ethnic groups continue to be denied access to financial services and often have a lack of trust in financial institutions.

Difficulty in accessing affordable credit means newcomer and BME groups can easily fall into informal lending options, almost by default. The cost of credit can be higher for poor people because the risks of lending to them are considered greater. Many of the reasons that BME and other disadvantaged groups are financially excluded stem from the way risk evaluations are done – and this is a systemic issue that we could look at as an area for change. For instance, postcode risk scoring is increasingly used across a range of financial products. To the extent that BME groups are often clustered in particular postcodes, this type of evaluation indirectly discriminates against them. Is this fair? Certainly not. Reasonable? I don’t know. Maybe it’s time for financial institutions to address the ethics of risk management and come up with better, more inclusive solutions. We need to make it harder for predatory lenders to do business.

RS: Who can help make financial inclusion a reality for newcomers and immigrant populations?

In addition to financial institutions, credit unions and community institutions have a significant role in improving financial inclusion. Financial regulators also implement policy that provided additional support to community credit unions. Another idea would be to require large financial institutions to disclose who they are lending to by group and by postal code.

Community activists also need to play a larger role – our research has shown that financial exclusion impacts mental health and family life, and so these organizations also need to be a part of the discussion.

RS: At CoM, we are interested in social and economic innovation that creates better outcomes for migrants and for cities. So on that note, what would be the most innovative or surprising success story you have seen recently?

OK: For many migrants, mainstream financial institutions such as big banks may be intimidating for new migrants. They may, however, be more willing to access local institutions that provide more face-to-face advice and support. In this context, I’ve been very impressed with the East London based, Fair Finance a social business initiative that is providing low cost loans in a sustainable and completely transparent way to financially excluded groups. Faisal Rahman, their Managing Director, has taken his experiences at the Grameen and World Bank and found a way to make those principles work here in London.

For more Good Ideas that support Financial Inclusion, please see:

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