Heavy Cash Use Indicates Financial Exclusion

Cash can be costly, especially when it comes to financial inclusion.

For years, policy makers have advocated for strategies that increase financial inclusion. According to the Consultative Group to Assist the Poor (CGAP), providing financial services to underserved populations has the potential to improve household welfare, stimulate economic growth and reduce income inequality. Still, in spite of global efforts to increase financial inclusion, more than half of working age adults across the world lack access to appropriate financial services.

How a country uses cash has implications for financial inclusion. For those without access to an account at a financial institution, electronic payment instruments such as  prepaid cards and mobile phones offer tools for storing savings.

But the adoption of cash alternatives also depends on the availability of financial services. Without access to savings accounts, payment cards or mobile money, households and businesses are faced with few alternatives to saving and transacting in cash.

In the so-called Next Eleven economies (including Egypt, Mexico and Indonesia), financial inclusion remains an important consideration. And for good reason: Unlike the US, these three countries each have rates of bank account ownership that lag far behind the global average.

The Relationship between Cash and Financial Services

Among the countries currently being studied by CEME, there is a clear relationship between the importance of cash in the economy and financial inclusion. Measures of narrow money (M1), which include demand deposits and currency in circulation outside of banks, are a useful starting point for estimating the importance of cash in a country’s economy. The following chart compares account ownership with currency in circulation outside of banks as a percent of narrow money:

While the US is considered an outlier because of the dollar’s unique position as the world’s reserve currency (which means more dollars in circulation), there is a strong correlation between the importance of cash in the Egyptian, Indonesian and Mexican economies and their respective levels of bank account ownership. Egypt, which has seen currency circulating outside of banks grow to over 70% of narrow money (M1) after the 2011 Revolution, also has the lowest rate of account ownership at just 10%. In contrast, Indonesia has a slightly higher rate of account ownership (20%), and has just over 50% of narrow money in cash outside of banks. Mexico boasts the highest rate of account holders among the three nations and also depends significantly less on cash, although cash usage and financial inclusion continue to pose challenges.

Payments, Savings and Access to Cash Alternatives

Households and businesses that use cash incur significant transportation and time costs as they travel to pay or receive payment. And those who keep their savings in cash expose themselves to the risk of theft, which can be devastating for vulnerable populations struggling to make ends meet. Therefore, providing access to cash alternatives is a crucial component of any strategy for increasing financial inclusion.

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