Strategic Approach Towards Banking the Unbanked Persons in Sri Lanka

Abstract

Financial inclusion has drawn heightened attention from policy making authorities worldwide as a key feature of financial development. Financial inclusion is also considered an important policy tool that can help to achieve the Sustainable Development Goals. This should also be a vital element in formulating the policy architecture for the financial sector in Sri Lanka. Hence, identifying key attributes for a national framework for financial inclusion is of paramount importance. These elements should also be more attentive towards the resilience of the financial system.

Access to safe, convenient and affordable financial services by the poor and vulnerable groups is generally considered as financial inclusion. However, that definition as it is would not be compatible to the country specific circumstances of Sri Lanka. Inclusive finance enables fast-tracking growth, minimizing income disparities and reducing poverty. It also has the potential to promote economic stability which is an essential constituent of financial stability. In fact, financial stability and financial inclusion are mutually reinforcing objectives.

Mere expansion of financial institutions, however, does not always lead to financial system stability, as “too much finance” can lead to adverse effects, if it is driven by unregulated entities. When the financial sector of a country is under-developed, vulnerable segments of the population resort to informal sector institutions thereby aggravating the risks that threaten financial system stability. Hence, achieving the elusive balance between financial inclusion and financial sector stability becomes of paramount importance.

Financial inclusion needs to be addressed at several levels. These include financial literacy and awareness raising among the under-banked population about the well-regulated business models that cater to the sub-prime segment of the market. Expanding market penetration by including the population who have never transacted with insurers and the capital market would also be an effective approach. Reasons for voluntary financial exclusion such as lack of money, religious beliefs, distance to a financial entity and cost of financial services also need to be addressed in devising a national financial inclusion framework.