Eradicating global poverty: Can fintech be the solution?
Alexander Ayertey Odonkor
Editor's note: Alexander Ayertey Odonkor is an economic consultant, chartered economist and a chartered financial analyst with a keen interest in the economic landscape of countries in Asia and Africa.The article reflects the author's views and not necessarily those of CGTN.
The recent 2021 World Bank overview of global poverty shows that after close to a quarter-century of steady decline in extreme poverty, this trend is retrogressing. Shocks from the COVID-19 pandemic are exacerbating the impact of climate change and armed conflict on global poverty. An in-depth analysis of the impact of the pandemic on extreme poverty shows that although the already-poor and vulnerable are suffering the most from job losses and deprivation, COVID-19 is also altering the global profile of poverty by creating millions of new groups of poor people in urban areas.
The new group of poor people in urban areas are better educated and less likely to work in the agriculture sector as compared to those living in extreme poverty before the pandemic. This new group of poor people are more likely to be engaged in the informal sector, an area where access to traditional banking services is limited in most developing and emerging countries. This begs a pressing question: how can this new group of poor people in urban areas together with the rural poor, who account for the largest share of the world's total population living in extreme poverty, be lifted out of poverty? The surest way to address this challenge is to integrate financial technology (fintech) into poverty eradication programs at both the local and national level, by easing access to finance for the unbanked and the underserved population. Fintech will broaden financial inclusion, cut income inequality and alleviate poverty by promoting shared prosperity.
One country that has been phenomenal in integrating fintech in poverty eradication programs has been China. In two of my previous articles, I discussed how China has been successful in lifting the largest number of people from poverty within a few decades. After China's 1978 economic reforms, more than 850 million people have been lifted out of poverty, the largest in human history. How did China accomplish this remarkable feat? The answer to this question can be found in carrying out fact-based economic policies that have transformed the country’s financial sector. Financial reforms have improved fintech adoption which is broadening financial inclusion by making services easily accessible to the underserved and the unbanked population in China.
Through a mobile phone, poor households in rural and urban areas are able to access credit from financial institutions, make or receive payments, insure against risk and even save a percentage of their income. During tough times such as the loss of a breadwinner or economic recession, floods, low crop yield or outbreak of a pandemic, low-income households are able to weather the storm without being pushed into poverty. With fintech's help in China, pro-poor policies have yielded remarkable results: broader financial inclusion in rural areas, slimmer income inequality, promoting shared prosperity and eradicating poverty as poor households are able to invest in education and secure financial assistance from lending institutions for their small and medium-sized enterprises (SMEs).
SMEs play a vital role and constitute an integral component of any economy; creating jobs and contributing significantly to gross domestic product (GDP). According to the World Bank, SMEs account for about 90 percent of all businesses and over 50 percent of all employment worldwide. SMEs around the globe are essential for creating jobs, bolstering inclusive growth and alleviating poverty. But SMEs' limited access to finance is a major challenge that impedes growth, particularly in developing countries. Although formal SMEs account for about 40 percent of national GDP in emerging economies, this percentage could even be higher if informal SMEs are included. This clearly indicates the need to speed up SME growth to create more jobs, to promote shared prosperity and to eradicate poverty. Accelerating SME growth is crucial for job creation as a recent projection from the World Bank suggests that 600 million jobs will be needed to match the growing global workforce by 2032.
So it is important to foster SME growth, specifically in developing countries, where the largest share of the world's poor people live. While 7 out of 10 jobs are created by formal SMEs in emerging economies, there will be more sustainable jobs if informal SMEs can easily secure credit from financial institutions. Even though financial constraint is a major challenge for SMEs, this drawback is more pronounced for informal SMEs.
Lending institutions consider informal SMEs as highly risky enterprises because they usually lack adequate credit information to access finance from financial institutions. To address this challenge, it is imperative for policymakers and stakeholders to build a resilient SME sector. This could be done by drawing lessons from China's financial sector reforms: focusing distinctively on how fintech is improving financial inclusion, bridging the SME finance gap, mitigating income inequality and eradicating extreme poverty in the country. For example, through a credit risk assessment framework which uses real-time transaction data that relies on more than 3,000 variables to assess the credit worthiness of a loan applicant within a few minutes, China's first online bank MyBank and other fintech companies are providing credit to SMEs which are considered to be highly risky by traditional banks.
To emulate this example, governments, development organizations and stakeholders in developing countries are required to build adequate infrastructure that could support fintech adoption. If an enabling environment is created for fintech services, they will augment the efforts of traditional banks and other stakeholders to broaden services for SMEs, the unbanked and the underserved population. It will be essential for lifting the new group of poor people in urban areas and the rural poor from extreme poverty.
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