#CHInsights – How Does Credit Accessibility Impact Financial Inclusivity?

Greater financial inclusivity would open more opportunities for people to build savings, make investments and have access to credit. In this episode of #CHInsights, we take a deeper look at how credit accessibility affects the state of financial inclusivity in a county. 


In a world still ravaged by income inequality, poverty, and socio-economic issues, country leaders and organisations have identified financial inclusion as the key to overcoming these challenges. But what is financial inclusion? 

According to the World Bank, a society that has high financial inclusion is one where individuals and businesses have access to useful and affordable financial products and services that meet their needs – all delivered responsibly and sustainably.

For the world’s poorest to have a chance at leading high quality of life, they must first experience economic and social progress. These developments stem from an inclusive financial system that fulfils the needs of people from all income levels, according to the World Bank. 

“Financial inclusion is a building block for both poverty reduction and opportunities for economic growth, with access to digital financial services critical for joining the new digital economy,” the World Bank states. 

The World Bank also states that financial inclusion is what facilitates day-to-day living, and helps families and businesses plan for everything from long-term goals to unexpected emergencies. 

Those living in a financially inclusive country are more likely to have access to financial services and products like savings, credit and insurance, invest in education or health, manage risk, and weather financial shocks, all of which can improve the overall quality of their lives.

The-World-Bank-Financial-Inclusivity

Communities can go from unserved to served when they have a transaction account and use a broad range of financial services. (Image source: The World Bank)

Malaysia has one of the highest financial inclusion rates in the world as 92% of its population have access to a deposit account, according to a report by the World Bank. This also means they can save, withdraw money, access automated teller machines (ATMs), and carry out payments through electronic means nationwide.

Despite this achievement, Malaysia still – like many other countries –  face challenges when it comes to tackling the issue of financial inclusion: in this case, reaching out to the remaining unserved population, a large part of which comprises foreign workers and their families, some of whom are undocumented workers, according to the World Bank report. 

Another report by Bank Negara Malaysia which measures financial inclusion in the country revealed that 8% of Malaysians do not have access to the services of a bank or a similar financial organisation. In simpler terms, we call these individuals, unbanked. 

Bank-Negara-financial-inclusivityFrom the 8% in the population that are unbanked, 55% are women, 46% are aged 15-24 years old, and 86% have no income and low income. (Image source: Bank Negara)

From 2011 to 2015, Malaysia saw some improvement in accessibility and satisfaction of financial services, but still only produced a moderate take-up of financial products.

Bank-Negara-financial-inclusion

According to the figure above, 91% of the country’s adult population have deposit accounts, 25% have financing accounts and 16% have life insurance or takaful policies.

Related: Ultimate Guide To Credit Scores

 Why is credit important to the economy?

When people and businesses can borrow money, transactions will take place and this helps a country’s economy grow.

Credit allows households and individuals to purchase things they need, including expensive items like houses and cars. Transaction accounts, a gateway to other financial services, allows people to store money, and send and receive payments.

credit-accessibility-impact-financial-inclusivity-2Some Malaysians don’t even have access to financial tools and services. 

But due to lack of customer data or limited history to assess creditworthiness, many people around the world, particularly those from the most vulnerable among us, are not able to benefit from credit; and without a credit score, they are unable to get access to financial tools or products that could help them advance economically. This is what could lead them to turn to informal and risky channels (such as loan sharks) despite the high-interest rates. 

According to the Global Findex by the World Bank, an estimated 1.7 billion adults worldwide (or 31% of adults) still don’t have a basic transaction account, although 1.2 billion people have opened a financial account since 2011.  The index surveys more than 150,000 people in some 140 countries. From 1.7 billion unbanked adults, about half of consist of women in poor households in rural areas or out of the workforce, according to the World Bank.

Findings from the World Bank reveal that lack of money could be the key barrier to account-opening. This insinuates that financial services aren’t designed or affordable enough for low-income users. Other barriers cited include distance from a financial service provider, lack of necessary documentation papers and lack of trust in financial service providers.

Related: 4 Ways A Bad Credit Score Can Impact Your Life (And How You Can Fix That)

How do we drive credit accessibility to create a more financially inclusive society?

On a global scale, financial inclusion is the enabler for seven of the 17 Sustainable Development Goals; it is also an objective pursued by many stakeholders across the globe, from political and business leaders to financial institutions and advocacy groups.  

The World Bank Group (WBG) put forward an aggressive target to reach Universal Financial Access (UFA) by 2020, an initiative that envisions giving all individuals  – women and men alike  – as well as businesses, access to the financial services they need, regardless of income. This noble goal started in 2013, with the target of extending financial services access to one billion adults who do not currently have such options.

The World Bank and the International Monetary Fund (IMF) also developed the Financial Sector Assessment Programs (FSAPs) to help strengthen the countries’ overall financial systems and cover a range of financial sector issues. The World Bank came up with an integrated and unified approach to help these countries achieve financial access and responsible financial inclusion. It focuses on nine intertwined areas:

  1. National financial inclusion strategies 
  2. Modernize retail payment systems and government payments
  3. Reform national payments systems (NPS), including remittance markets
  4. Diversify financial services for individuals
  5. Leverage technology for financial inclusion
  6. Strengthen competition and expand access points
  7. Financial consumer protection
  8. Financial capability
  9. Financial inclusion data

For a more thorough understanding of these nine focus areas, you can refer to the World Bank.  

As we previously wrote, one way to promote financial inclusion, as identified by BNM, is through the establishment of digital banks, as serving the underserved and unserved in retail and SME are among the key requirements for organisations interested in establishing digital banks, according to a framework by BNM. 

Related: Digital Banks Are On the Rise In Malaysia – What Does This Mean for You? Experts Weigh In

Alternative scoring could be the solution to financial inclusion

Alternative-credit-scoring

Source: Data from non-traditional sources such as mobile and social applications are now considered when assessing one’s credit risk. 

According to Development Asia, alternative credit scoring uses data on consumer behaviour from digital platforms and applications to assess risk. Alternative credit scoring also uses combined data from multiple sources, like airtime and mobile money usages, bills payment history, and social media usage to assess one’s credit risk. 

Alternative credit disrupts the high cost of credit assessment and verification by using an individual’s preferences and habits, as an alternativee way to evaluate a borrower’s credit risk profile.

Another alternative is AI-based credit scoring systems. Finextra describes AI-based credit scoring systems as having the “capacity to unearth hidden relationships between variables that are not always apparent to traditional credit scoring systems, as well as conducting a more nuanced evaluation of data.”

The advantage of AI is it provides complex, in-depth rules. Unlike traditional credit scoring models that are based on simple rules, often rejecting borrowers who may otherwise be credit-worthy. 

For some time now, alternative credit scoring is seen as a viable option to serve the unbanked. One such method is through the creation of digital scorecards across different verticals (like ride-hailing or e-commerce companies).  

credit-accessibility-impact-financial-inclusivity-2Before you can work towards getting an excellent credit score, you need to be able to have access to financial services and products, first. 

According to CredoLab, digital credit scoring models (those that blend alternative data with traditional data) have proven to provide faster and more efficient credit scoring. According to them, fintech and online lending marketplaces Rubique and Bankbazaar, have seen a jump in customer loan approval ratio, going from 40-45% to 65% after using digital scoring.

In Southeast Asia, Grab Finance partnered with Credit Saison on a joint venture that provides loans and lending services to millions of unbanked and underbanked consumers, micro-entrepreneurs and small businesses across Southeast Asia. 

“Grab Financial Services Asia taps into Grab’s huge cache of customer data gathered from the Grab app, which processes over a billion transactions annually, to provide a sophisticated, alternative resource for measuring credit ratings,” Grab said in a statement.

“By analysing behaviour and transaction data from the app, such as transport movements, geo-location, and GrabPay transaction data, the company can offer alternative data points to assess creditworthiness, filling the gap left by traditional credit scoring methods,” it said. 

What is the future of alternative credit?

Due to the rise in mobile penetration in Southeast Asia, we can expect to see further growth of e-wallets and digital banks, both possible drivers of alternative credit scoring in the region.   

As part of our #CHInsights series, we try to break down complex concepts and ideas into easy-to-understand reads, yet remain insightful.