MIPP researcher explains the benefits of the implementation of a formal banking system to vulnerable populations.

Patricio Valenzuela, from Millennium Institute for Research in Market Imperfections and Public Policy (MIPP), performed research studies of Financial Inclusion in Kenya, Africa, finding that the benefits of a formal banking system can even reach the fields of Health and Education.

 “In Africa, not only there are high levels of poverty, but a large percentage of the population also lacks access to basic financial services”, says Patricio Valenzuela, Ph.D. in Economics and researcher at MIPP, regarding the impact of access to banking products on people.

“Improving Access to Banking: Evidence from Kenya” is the title of his work, co-authored by Franklin Allen, Elena Carletti, Robert Cull, Jun "QJ" Qian, and Lemma Senbet, in which the researchers evaluate the impact of Equity Bank - and access to its products - on the Kenyan population.

“We need to understand finance as a basic service for individuals. Savings or insurance are financial instruments that influence people’s future opportunities. In this study, we quantify the impact of Equity Bank on the population of Kenya, whose strategy had quite an important influence on the access of basic financial services with beneficiary effects for the community”, Valenzuela points out .

The researcher explains: “Health and education are basic needs for our society, but quite often we ignore the fact that to make them widely accessible we also need to concern ourselves with, and make use of, our financial services”, he says and continues: “anyone without a savings account will most likely not be saving, or will lose his money or interest, which means that he might not have access to loans and credit for future business opportunities, or will not be able to send hischildren to college or university, or might not have access to health coverage in cases of illness and disability, among others. A simple savings account can clearly improve the quality of life as it functions as an insurance”, Valenzuela confirms .       

The implementation of a formal banking system in Kenya was not without its barriers, as every “branch” needed to adapt to the needs of local tribes and communities, including customization to multiple dialects and the country’s mobile phone infrastructure.

In Chile, the enrolment in the formal banking system of the majority of the population was facilitated by the Neighbourhood Tellers provided by Banco Estado. Through this service, households of low income could now make deposits or pay bills at any store in the vicinity of their homes. 

This scenario, according to the researcher, generates benefits for people despite of its high costs. “The implementation of a formal banking system (bancarization) has a cost that is, at times, quite high, but in our research we demonstrate that in the case of Equity Bank this cost still allows for the institution to maintain its profitability and ensure the individuals. This situation can be extrapolated to the situation of Banco Estado, which has to charge a lot to make its system profitable, but has ensured that the model is time enduring and improves the quality of life for people”, he concludes. 



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