Role of MFIs in Financial Inclusion

Abstract

Less than half the population in India has access to any formal financial instrument. Therefore, financial inclusion assumes greater importance with each passing day. Previous work and initiatives in promoting financial inclusion have mostly focused on the process, that is, how to make banking costs lower. However, such efforts have seldom yielded much. The institutions relied upon have their own problems. On the other hand, microfinance institutions (MFIs), given their widespread reach, can play a crucial role. However, MFIs are often in direct competition with formal banking. Therefore, what is the incentive for MFIs in the current scheme of things to make it easier for its client’s to access formal banking? In this article, we address these following issues: identifying the role of MFIs in financial inclusion; the institutional bottlenecks that may prevent financial inclusion; and possible solutions. We argue that instead of focusing on financial inclusion as a process, it is better to focus on instruments and institutions that will promote financial inclusion. In particular, we show that a movement towards a cashless economy will attain financial inclusion where the MFIs can be incentivised to develop and maintain the critical network of individuals who will transact cashless.