Financial Inclusion is Social Inclusion
By Nicolás Vargas Varillas
Every two weeks or every month, for several years now, various pollsters and market analysis firms have shared with us increasingly boring and less revealing statistics when it comes to analyzing informality. They always talk about the infamous 60% of Peruvians living in economic informality, that the Peruvian tax base only manages to get above 20%, among other things. At the same time, and almost synchronously, we often come across the same analysts who repeat to us ad nauseam Hernando de Soto's famous ideas on private property. Now, as tedious as this information may be to discuss, these are still profoundly valid points about where we Peruvians should direct our discussions, not only about how to combat informality, but also about increasing the number of Peruvians who can benefit not only from a social market economy, but also how many Peruvians, especially the most vulnerable, can access the opportunity to be protected and supported by a truly present and efficient state. The discussion could take countless paths, but today I will propose one that, in my opinion, is fundamental: financial inclusion.
To discuss financial inclusion, it is crucial to first discuss the institutions that are part of it. In Peru, there are four banks that share most bank accounts in the country. There's no need to mention them. However, these institutions are only able to offer, by their very nature, a series of financial products that are functional only for a minority of Peruvians. Thus, a significant portion of our population is unable to access loans or financing that are useful for their goals and interests, which cannot be provided by standard commercial banks. Therefore, it is imperative to rethink the way the Peruvian banking system is designed. Beyond the presence of commercial banks, it is imperative to rethink the role played by other banking institutions, primarily savings banks (both municipal and rural) as well as savings cooperatives. These institutions, by their very origin (as their names indicate), have a strong capacity to operate in a specific geographic area. In this way, these financial institutions have a greater understanding of the reality of their potential clients in the area where they operate and can thus design financial products that more accurately fit their needs. Likewise, they also provide clients with greater access to claims, given their proximity to the institution itself. This is particularly crucial in savings cooperatives, where the savers themselves are responsible for managing the institution's shares and, therefore, while it is true that they may not be able to achieve very large financial assets or high returns, they can provide a safe, accessible, and understandable option to millions of Peruvians in need of financial services.
The next question in this analysis is linked to the benefits that promoting the existence of these types of financial institutions can bring in terms of financial inclusion. First, and as can be deduced from what was mentioned in the previous paragraph, these institutions provide greater access to savings and provide financial products that are more useful to the population. It is of no use to a saver with their own SME to become banked if the traditional bank is unable to provide an attractive return on their income, or if, in the case of a saver who makes a living from agriculture, they cannot access a loan that they can comfortably repay during the period when they lack a major source of income given the season. Thus, the existence of savings banks and cooperatives makes it more attractive for savers to approach these formal banking institutions (thus distancing themselves from loan sharks) and thus not only protect themselves from land traffickers or local mafias but also find ways to protect and increase their capital.
At the same time, the financial inclusion I mention here also brings benefits to the state. First, by including a greater number of Peruvians, it is consequently possible to broaden the country's tax base. The expansion of this base is the only way to increase tax collection, thus contributing to the growth of the nation's general budget year after year. At the same time, tax collection also provides the state with a crucial tool for creating public policies with greater impact: information about taxpayers. By paying taxes, citizens not only contribute money to the Peruvian treasury but also provide information about their situation to the state. These details we share include things like type of employment, income, property, family size, among many other data. With this information, the state is then able to better understand its citizens, their needs and emergencies, and, why not, their potential goals and aspirations. Thus, expanding the tax base also provides the state with new information about its citizens, providing it with more and better data that will be crucial when designing and implementing public policies, more efficiently combating social exclusion and poverty, thus closing the virtuous circle that begins with financial inclusion.
In this way, it's possible to talk about how financial availability will lead to greater financial inclusion; greater financial inclusion will lead to greater tax collection and, above all, greater taxpayer information; and more taxpayer information will lead to better public policymaking, thus truly closing the social gaps that persist in our country.
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