Financial inclusion is a hot topic in the financial industry. Over the past few decades, Malaysia has made significant steps in accelerating financial inclusion for its people. According to the inaugural 2022 Global Financial Inclusion Index from Principal Financial Group, Malaysia is ranked the 20th most financially inclusive market out of 42 markets. The nation’s financial system received high scores for enabling business confidence, and the government’s support was ranked in the top 10 for laws and regulations prioritising consumer financial protection. As Bank Negara Malaysia (BNM) announced the winners of the digital banking licence, the nation is now moving towards a more inclusive financial system.

Financial inequality in SEA

A significant population of the world lacks or has inadequate access to financial services. Southeast Asia (SEA) is still experiencing low levels of financial inclusion, with 290 million of the total population that are still unbanked and underbanked. Two years ago, when the pandemic hit, it was especially hard for poor urban households. In 2020 alone, 97 million more people were pushed into poverty as a result of COVID-19. As they have no access to financial products and services, they have suffered disproportionately.

Figure 1: The percentage of unbanked, underbanked, and banked consumers in SEA (Source: Business Insider)

What is financial inclusion?

According to the World Bank Group, financial inclusion is a key enabler in reducing poverty and boosting prosperity. Financial inclusion refers to the provision of suitable, affordable, and quality financial services such as transactions, payments, credit, savings, and insurance to all segments of society, including the unserved and underserved markets. The United Nations (UN) states that the lack of access to a bank account is the key barrier to greater financial inclusion. Having a bank account is the first step as it serves as a gateway to most financial services. A bank account enables an individual to store, send and receive money. Yet, only 69% of adults globally have a bank account.

Figure 2: Adults without a bank account in 2017 (Source: Statista)

With the lack of a bank account, it robs individuals of the available financial services such as access to loans to increase their standard of living.

Common limitations and challenges to a financially inclusive world

1. Lack or no credit history

To get your loan approved or even get a credit card as an individual or a business owner, your credit history matters. The conventional lending models rely heavily on an applicant’s established credit history during credit scoring as it is able to provide lenders with in-depth insights into the applicant’s borrowing and/or spending habits. If you have a good credit history, you would most likely be eligible for the loan. If you have bad credit data or lack thereof, chances are, you will most likely get rejected as you will be classified as having a high risk of default. The latter is most likely the case for the unserved and underserved. After all, no financial institutions will place their confidence in individuals who may not be able to repay the entire amount.

2. Product market fit

Product market fit is a common barrier when it comes to serving the unserved and underserved market. Oftentimes, the financial products and services offered do not accommodate the capabilities of people of these segments. For instance, inflexible tenure, too many documentation requirements, high-interest rates, slow loan disbursement, etc. This is especially true for microenterprises and small businesses as their financial needs are often characterised as high in complexity and low in scalability. 

3. Affordability

Furthermore, in order for financial services to be widely accessible, financial products and services must be affordable, and the costs involved have to be sufficiently low as well, in order to ensure profitability despite limited revenues. As you can probably tell, offering financial services to these market segments tends to have higher costs and lower revenue streams. If banks are unable to generate profit from these services, it would be extremely difficult to scale or incentivise them.

The role of digital lending in increasing financial accessibility

Increasing financial access to borrowers who are unlikely to receive it is the first step to a financially inclusive society. Innovation and technology are the keys to making it happen. The ongoing COVID-19 crisis has accelerated the creation and adoption of new technologies across all sectors, and the financial industry is no exception. In fact, the lending industry is experiencing a paradigm shift towards digitisation and automation. Digital lending is now a rapidly growing global phenomenon and a crucial key to increasing financial inclusion.  

We are all well too aware of how time-consuming and lengthy the traditional lending process is. Digital lending, however, makes it possible for potential borrowers to apply for loan products from any time and anywhere, as long as there is internet access. Financial institutions also greatly benefit from this technology, ranging from boosting productivity to providing speedier services to their customers.

The key to driving greater financial inclusion

1. Alternative data for credit scoring, making loans accessible

Digital lending enables non-traditional ways of doing credit scoring. By making use of alternative data, banks and financial institutions will be able to tap into the unserved and underserved market to rate a borrower’s creditworthiness during the loan approval process. With alternative data, lenders will have access to data such as an individual’s spending patterns and behaviour through digital channels like e-wallets. This is a huge game changer for those with no credit history. Lenders will also be able to expand their customer base, provide more loans, and drive greater revenue! Lending is core to a bank’s profitability after all. 

In addition, coupling alternative data together with artificial intelligence (AI) and machine learning (ML) could also lead to increased financial inclusion. According to Gartner, explainable AI (XAI) has a huge potential to boost financial inclusion in banking, particularly in terms of helping banks to evaluate a wider selection of customers on their ability to repay whilst also solving the “black box problem.”

2. Provide cost-saving digital financial solutions

Digital lending has a significant potential to bridge the funding gap — by providing financial solutions at a lower cost. The average customer acquisition cost (CAC) in the banking sector is already fairly high, costing more than $300 per customer. The figure is also seen rising due to the negative effects of COVID-19 and the saturation of digital channels. Moreover, the complex and rigorous manual processes in traditional lending are not helping either as it leads to high overhead costs. 

Fortunately, the customer acquisition and loan processing costs for digital lending are much lower. Digital lending models are able to digitise the customer journey for a loan product; the customer onboarding and KYC, loan processing, and loan disbursement. This reduces the need for human intervention as everything is automated, thus reducing manual operating costs. As a result, banks are finally able to provide affordable financial products to the unserved and underserved market while expanding their revenue streams and ensuring profitability.

Our journey to a more financially inclusive world

In JurisTech, we believe that financial inclusion is the key to closing the inequality gap, reducing poverty, and promoting economic growth. We do our part by providing future-ready technology that reimagines financial services. Are you ready to build and enrich lives with our proven solutions? 

Drop us an email today at contact@juristech.net!

About JurisTech

JurisTech (Juris Technologies) is a leading Malaysian-based Fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond. 

If you are looking to digitally transform your origination process, check out Juris Origination, a loan and financing origination system that automates the entire loan application and approval process. Juris Origination can be coupled with our artificial intelligence (AI) engine, Juris Mindcraft, to provide alternate credit scoring for greater financial inclusion.