February 27, 2019 Valentin

Financial Inclusion & Blockchain

What is financial inclusion?

None of the 17 sustainable development goals (SDGs) defined by the UN state financial inclusion explicitly, but by looking at the definition of financial inclusion one may quickly realise that it is actually embedded in at least 8 of the SDGs. Financial inclusion is defined as access to useful and affordable financial products and services that meet the needs of individuals and businesses – transactions, payments, savings, credit and insurance – and are delivered in a responsible and sustainable way. Having access to financial services facilitates the ability to participate in economic activities. This, in turn, supports the process of eliminating extreme poverty, the first and most important sustainable development goal. Strongly interlinked is SDG 2, ending hunger, to which financial inclusion would contribute by promoting food security. Further arguments on why financial inclusion is crucial for achieving some of the SDGs have been supported by various studies and imply that, in addition to the two already mentioned, SDGs 3, 5, 8, 9, 10, and 17 will either directly or indirectly benefit from a higher rate of financial inclusion.

Current state

In 2011 only 51% of the adult population has had an account. This number has experienced a significant rise since and reached 69% in 2018 as reported by the World Bank. One of the contributing factors for the increase was the ability to conduct financial transactions using a mobile phone. Implementing same policies in a number of economies does not lead to an evenly spread success rate. Some were ready to adopt alternative and innovative ways of account ownership, others, however, still have a long way to go, leaving 1.7 billion adults unbanked today.

Potential of blockchain solutions

One of the obstacles towards available, accessible and affordable financial services are the high and non-transparent fees of opening and later maintaining an account. These costs are, of course, a compensation for financial institutions, their contributed work and for being reliable sources of information. Reliable sources in the financial sector are, traditionally, centralized entities (banks, governmental agencies), causing inefficiencies by having to process information centrally. Blockchains, being automated and decentralized ledgers with the ability to record various kinds of transactions, monetary or non-monetary (e.g. rights, behaviour), eliminate the need for centralized entities, helping lower the costs of account ownership. Because of its structure, blockchain technology has the ability to support solving trust and inefficiency issues caused by third parties.

Concluding from described characteristic, blockchain technology can help solve following issues associated with financial inclusion:

  1. “Trusted” third party elimination
    Storing transactions in a secure, automated and decentralized manner could help eliminate traditional intermediaries that request a person to undergo costly and inefficient processes in order to execute a transaction.
  2. Cost reduction
    Following the first point, a peer to peer network can be established which in turn eliminates costs and fees of third party services, leading to lower entry barriers and simultaneously facilitating the account opening process, and making accounts cheaper to maintain.
  3. Time efficient processes
    First point described above would largely be supported by smart contracts, which are sets of pre-defined rules triggering actions only after the necessary conditions have been met. This implies that the entire network can instantly be updated, potentially leading to shorter settlement time.
  4. Remittances
    By lowering fees and shortening settlement times (points 2 and 3), in addition to incentivized account ownership, access to remittances would also improve. Transaction fees for sending money across international borders on average amount to 7,45%. Agenda 2030 suggests this should be reduced to less than 3%.
  5. Eliminating the need for identity documents
    Blockchain-based identities that do not require identity documents are being developed, allowing underbanked population to access financial services and capital flows, and to take part in not only local, but global economies too.
  6. Transparent credit history
    Paper-heavy process are prone to information loss and thus to error occurrences as well. Having a tamper-proof system for storing value allows automated transactions to securely take place and so lead to verifiable credit histories. Issuing debt could, therefore, become a much more efficient and reliable process, granting more financial stability.


Before being able to let the technology help eliminate the inefficiencies associated with financial inclusion, ecosystems around these inefficiencies will have to be investigated and the results will have to be tested. This process might reveal some not yet known challenges of blockchain technology, some of the obstacles have, on the other hand, already been described.

Legal constraints pose challenges for implementing blockchain across various sectors. The financial sector will not be an exception, for the traditional way of transacting value through centralised institutions will not be easy to replicate in a decentralized manner. This is why we are starting to see an increasing number of banks forming their own opinions around cryptocurrencies and establishing private blockchains.

Utilizing blockchain technology will largely depend on the awareness around its potential and what services it can offer. What is more, improved financial literacy precedes the ability to make right financial decisions. Alignment of the two, knowledge around financial services and knowledge around blockchain technology, might require special attention, as it could be one of the crucial determinants of a successful blockchain implementation and a long-term solution.

On the other hand, challenges implicit to blockchain will have to be tackled too. One of them being that the unbanked population, as one could assume, is not used to transacting digital money. Preferring cash in their day-to-day activities could represent an obstacle in adopting blockchain technology. This might be avoided if the trend of using mobile phones for sending money continues to increase in developing countries.

A complex issue like financial inclusion through blockchain technology will likely depend on the support from both, public and private institutions in the beginning. This can, however, be seen as a point in transition from centralized to decentralized solutions and technology adoption, as a stepping stone to forming self-organized, bottom-up systems.


Published by Tatjana

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