IFI governance


Implications of financial deepening for inequality and its impact on gender, poverty, and marginalization

14 October 2022 | Minutes

Organisers: SEATINI, Nawi, Arab Watch Coalition, Akina Mama wa Afrika, Bretton Woods Project


  • Luiz Vieira, Coordinator, Bretton Woods Project


  • Erik Feyen, lead financial-sector economist in the World Bank’s Finance, Competitiveness, and Innovation global practice. 
  • Signe Louise Predmore, PhD Candidate and researcher, University of Massachusetts Amhurst 
  • Jane S Nalunga, Executive Director, Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI) Uganda 
  • Lena Lavinas, Professor of Welfare Economics, Federal University of Rio de Janeiro, Brazil, and Senior Researcher at the Brazilian National Research Council (CNPQ) 


Luiz Vieira (introduction):

Financialisation is a heterogenous process whereby financial markets increase in size and salience in the economy. Financial deepening is extremely relevant in many countries at the moment, given the current crises, and a critical factor in inequality and how vulnerable populations will cope with the economic shocks to come. 

It is worth noting that 85 percent of countries might be facing austerity this year, but there are alternatives to austerity, which will reduce or eliminate the negative social impact. 

The organisers of this panel thought it was a good time to discuss the issue of financial deepening, to ask is it a good response to the challenges facing the world, which have compounded long standing issues including inequality from before the pandemic? To what extent is financial deepening an appropriate response to these crises? And what are the gendered effects of this deepening? 

Erik Feyen:

He gave the World Bank Group’s vision of financial inclusion and deepening. The financial sector is clearly a cornerstone of economic development, and inclusion is not in itself a goal but allows better services and resilience, and facilitates the provision of loans for investment in business… insurance, and helping coping with accidents. 

Financialisation is an equaliser, finance can provide tangible services to the poor and disadvantaged sectors. There are three messages from the academic literature: that financial development is pro-economic growth, this is a causal relationship that has played out over three decades; that it is pro poor; and that it has the potential for being pro-women.  

But it is not a panacea, the financial sector doesn’t always work correctly. The high unemployment and dissipation of savings in financial crises, for example, can have a huge and gendered impact on the vulnerable. 

Rent seeking can stop wealth trickling down, and people have fallen victim to the risks of the financial sector. 

WBG helps to strengthen the financial sector and makes it contribute sustainably to resilient and inclusive growth. 

Signe Louise Predmore:

There are gendered impacts of financial deepening. Financialisation/financial deepening has been around and a trend since the 1970s to describe profits generated through financial profits and not productive industry and trade; financialisation is correlated with increased profit extraction. Sovereign lending is now less prefered to alternative lines of credit, and the WB agenda promotes financial inclusion. 

Financial deepening creates disproportionate gender impacts, among other reasons because IMF policies and conditionalities proritise repayment of loans over social protection. Women tend to hold more public sector jobs, and rely disproportionately on social security. Further, household debt is the preferred and accessible answer to households facing crises. 

Just closing gender gaps would not solve problems financialisation creates for women. 

Under the broad umbrella of financial inclusion, we need to separate types of services… credit vs savings for example. Savings accounts may be good for women, but these are more difficult for banks, and come with higher capital requirements and increased regulatory oversight. Credit is easier and more profitable. 

Financial inclusion as a way of addressing poverty poses serious issues for gender… a 2018 IMF report… reports more money spent on food and education, but this capitalises on gender rather than addressing it as an issue, as it relies on women spending more on their families and prioritising their families’ needs. So inequality is not being addressed or reduced through financialisation, but is exploited by it. 

Jane S Nalunga:

Uganda has seen the gendered impacts of financial deepening. This has involved the extension of services to different categories of people, especially the unbanked, those at the bottom of the development pyramid, increasing their access to financial services, especially banking services. Most of these are unbanked, without access to even mobile money. 

Financial institutions, regulation and policies are necessary to protect consumers and stakeholders in business, and we must look at this aspect. Finance can also provide credit, and women can get money from their daughters and sons, and their remittances when they are living and working abroad. 

When women get money, there are changes at the household level, in access to food, etc. There are benefits of financial deepening, but they do not come automatically to those who need it most, it very much depends on the way the financial sector is organised. The banking sector in Uganda is fully liberalised, mostly owned by foreign companies, and banks are mainly in the urban areas. They have a lot of impunity; many times they don’t go by the central bank rate. The government was looking for resources, and had to borrow during the COVID pandemic, but the financial system did not mobilise resources, it did not provide credit for the government or the people who need it. 

Rural areas used mainly mobile money, which is taxed – transaction taxes are levied on it. This is one point where the gendered impact comes in, as women use mobile money because they are unbanked. Women are saving very little money, and this money is taxed. Microfinance has mushroomed in Africa, but regulation has not kept up. Collateral is houses, or other property and they risk losing them; the system needs to be regulated. 

As a way forward, we must look at the role of the state in regulating the financial sector. The financial model in Uganda and Africa is extractive… resources, profits are taken out of the country. States have liberalised their current accounts, so there is a lot of outflow. The more the financial deepening, the more resources flow out. We need to re-think the entire developmental model. It is the wrong model, it is extractive, and the financial sector promotes financial sector’s interests and profit maximisation. The real economy will suffer from this, and the people at the bottom of the ladder will suffer the most. 

Lena Lavinas:

Mounting debt means growing vulnerability. Household debt is a serious issue, and apart from an IMF discussion note from 2020, no one is talking about indebtedness. 

Inequality is a serious problem, and Brazil is a very unequal country. The Gini coefficient is very high. 25 percent are below the poverty line in the 2010s, it is now 38-40 percent and people are starving. Now the top 10 percent of people hold 80% of the wealth. 

A focus on income is wrong, as financial wealth grows faster than income. And household debt, not just in Brazil, but everywhere in the world, and especially in the developing world, is increasing rapidly. 

There are divergent patterns of debt. In the developed world, 60 percent of consumer debt is mortgages; in the developing world, this is only a third. People are getting indebted just to finance their livelihoods, and the debt structure is as a consequence different. 

In the developing world, services are mostly decommodified, but debt is increasing because they cannot afford living on their salaries… and this is a result of financial inclusion. Consumer debt is 22-3 percent of GDP. 

60 percent of credit now goes to non-financial companies and households in Brazil. Since 2016, households are taking out more loans than commercial companies. Most credit given to consumers is consumer credit, not for real estate. People are financing their livelihoods. From 2012 to the present; 90 percent of consumer credit concessions are non-real estate. 

Banks are lending money to the poor to stay afloat. 

Since the pandemic, the debt to income ratio in Brazil has now risen to 60 percent for poor households. Most people in Brazil have bank accounts, and over 50 percent of all borrowers in Brazil’s central bank credit information system have incomes 1.5 times below the minimum wage. 27.9 percent of their household income is used to service debt; 13 percent are falling into poverty because of debt, and 79 percent of households are now indebted. 

Default rates are now 29 percent. 

Financial inclusion leads to indebtedness and default, and creates a permanent cycle of debt expansion. It has reshaped social policy, which is now oriented toward providing collateral for debt expansion, so we are seeing permanent cycles of debt expansion. 


Questions & Answers:

Luiz: Indebtedness and credit are being used to meet livelihood needs… how does the Bank react to that? Does the bank recognise the tension between attracting FDI and negative effects on the race to the bottom. Is the bank aware of this? 

Erik: The Bank shares many of the same concerns. The financial sector is a tool, the enabling environment needs to be well aligned for the tool to operate, and when it isn’t, we tend to see a trend toward rent seeking, etc. 

Indebtedness is a core concern we discuss on a daily basis, the Bank wants in-country banks to go to rural areas and offer constructive credit. 

Where there are lower levels of financial inclusion, the bank sees increasing Foreign Investment can help inequality, but when it overshoots it can have negative effects especially on the vulnerable. But financial markets can crowd in investment, and it can be beneficial. Financial sectors can help mobilise that investment, but often it doesn’t work correctly. When it works, it can bring in capital rather than facilitating resources moving out, but this is not without danger, and requires a strong regulatory framework to mitigate risks. 

Luiz: Financialisation is heterogenous, and varies from country to country. What is the bank’s role, and what role can/should the bank play? 

Jane: Countries can design their financial policies, bearing in mind the context. Finance is a tool, but countries should have the policy space to be able to use it effectively, but conditionalities of the Bank, the liberalisation of the capital account and financial sector, those restrict a country’s policy space. In Uganda, the government doesn’t have a bank any more. This will take resources out of a country. 

The Bank and the international financial sector don’t allow for the mobilisation and concentration of domestic resources for development, and thus doesn’t give sufficient policy space for countries to develop effective financial sectors. 

Signe: Social policy space is important, as is context. So how do the IMF and Bank policies shape that? 

The legacy of colonialism in the shaping of the financial profile of national debt should be recognised. Some countries suffer from a history of resource extraction linked to colonialism, and it can be very difficult for these countries to recalibrate their debt profiles. 

Also the role of interest rates in debt profiles is critical; in South Africa, informal channels see 40% interest rates. 

Lena: WB social management strategy is that it wanted to launch microcredit schemes in the developing world, as a response to potential risk and vulnerability, but this risk has since increased, as the financial sector has taken over social reproduction. In Brazil, university has been free, but now student debt is a huge problem in many places. A public social reproduction sphere is necessary to improve human capital in some countries. The Bank now provides minimum, targeted aid for the poorest, but much else important is ignored. 

The Bank favours fiscal transfers now, and 2.5 billion now receive cash transfers around the world. The poor are being exploited, and forced to take out loans to pay for their livelihoods, even in the US. This is impoverishing the world; especially for the poor in the developing world. And debt means securitisation. The Bank in 2000 said it favoured microcredit and cash transfers, but this financial inclusion has increased dependence of billions of families on the financial system. 

Luiz: Do these discussions about these risks of financial inclusion take place in the bank? 

Erik:  He agrees with many of the points that were made, and notes this is at the core of the conversation at the Bank. However, these policies don’t operate in isolation, but in harmony, and the Bank makes mistakes. 

The Bank recognises that premature capital account liberalisation can have damaging consequences, it has moved away from Washington consensus of the 1990s. Now the Bank thinks these policies need to operate together holistically. 

We see high indebtedness at household and country level, and we want to know how this can be resolved in a smooth way? How does this relate to governance? They think about colonialism, those institutional arrangements that were set up in colonial times that persist today. 

The financial sector is a small part of the overall picture, but the question is how can it be made to work harmoniously in the overall development picture. 

Luiz: What is the discussion within the bank on how to manage PPPs and de-risking? How does the bank conceptualise these trade offs? 

Lena: A question for Erik: The financial sector could promote more crowding-in of investment, but that was role of financial sector in the 60s and 70s, but now there is a crowding out effect… We have lower growth rates everywhere (except China, where there are capital controls, etc). De-industrialisation and extractivism is common… and this is not creating good jobs, it is creating bad jobs… so when has the Bank seen the financial sector crowding in investment? 

Erik: Our experience is different. When the financial sector works well, it can mobilise investment when the private sector can’t by itself. 

Luiz: Commodity dependence has increased, and increased financial deepening. It is hard to find a country that has achieved an economic transformation. 

Isabel Ortiz: Arguments for redistribution, from the wealthy to the poor, are strong; this brings benefits for poor families, and more and broader economic benefits for more people. 

The World Bank and the IFC… What can they do for the poor? Microcredit and market based solutions are their answer, but this has not been shown to work, a strengthened public sector and better services are needed. 

Signe: It is good to hear Erik talking about finance as a tool, but the Bank’s promotion of financial inclusion should not be without any qualifiers, there has to be an appreciation of good and bad household debt, and of gender. 

She appreciates Erik’s nuanced understanding, but doesn’t see this reflected in the work and statements of the bank. 

Jane:  Erik has raised an important issue, about premature capital account liberalisation. The bank needs to encourage this holistic thinking at the national level. But at the national level, policy makers and technocrats don’t think in these terms, they need to completely rethink how things are done. 

Leonardo: Liquid asset poverty is another way of looking at poverty. One definition is that people can’t sustain themselves without income for three months. 

Jane: Because of the colonial past, their countries depend on exports of commodities, and global commodity prices vary hugely, and privatisation is a factor… the way the economy is structured affects the poor. 

Lena: It is impossible for the poor to accumulate assets. They are highly indebted; c. 80 percent of annual disposable income is committed to the repayment of debts in Brazil. These loans aren’t for a house or capital investment, it’s for essentials for living. 

This liquid asset focus is neoliberal way of thinking, and doesn’t meet reality. Human capital is important. 75 percent of students go to private universities in Brazil, so they don’t need to take out loans, and the state doesn’t provide loans for students. But we now have institutional investors financing student loans, and people are taking on debt to get training and education. There is a structural shift, and we need to recognise this, and address this. We need to reimagine capitalism. 

We have the opportunity to fix this, and we now have the green transition to manage. We need cooperative, collaborative development; the developing world can’t finance a green transition as it is today. 

Luiz: Thinking about finance and the real economy, with the green revolution in mind, does the World Bank accept the argument that finance is not playing its role in supporting real economy? 

Erik: The literature on financial deepening and poverty alleviation is considered seriously by the Bank. There is a large cross-country literature on this, and the evidence is that the financial sector is a massive force for alleviating poverty. 

Maybe governments are over or under reaching, and this is part of the development puzzle. The bank is striving to get this balance right. The underlying issues are critical, if the financial sector works properly, and this is always an ‘if’, it can drive development.