Facing up to the Political Realities of Financial Inclusion: Time for Donors to Rethink Their Approach?

This paper discusses a pragmatic approach to financial inclusion. It states that when donors approach financial inclusion, they pursue ?best practice? institutional and policy reforms that are intended to develop market-based financial systems. On the other hand, the governments? approach to financial inclusion is more direct through ?activist? interventions, such as offering loans to the poor with preferential interest rates. In this state where the diverging scripts leave donors with difficult choices about how to engage, the paper suggest that donors need to adopt a more pragmatic approach, rooted in the political economy of individual countries. Key points include:

• Undertaking more explicit and systematic political economy analysis will enable donors to better understand the dynamics behind activist policies;
• Understanding the activist policies enables donors to better understand and be more reflexive about the scope for pro-active engagement towards financial inclusion;
• Donors should ?work with the grain? of political economy dynamics, by which they can then expand the space for reform;
• Bringing the centrality of political process into analysis of market development provides scope to find new ways to engage, which are both innovative and sustainable.