Use the links in this page to see all the cross-references and discussions about financial inclusion and financial intermediation across all the sections

Additional background

About financial inclusion

‼︎ There was very little money deposited on bank accounts in Sudan before the crisis. Usually, beyond the bills and coins in circulation, a significant part of the liquidities in an economy are constituted by the money that is stored on current bank accounts. But in Sudan, there are comparatively very little reserves beyond the bills and coins in circulation [73].

‼︎ Both individuals and businesses in Sudan don’t have access to the financial services that they need. Sudan has one of the lowest levels of financial inclusion and access of small and medium enterprises to finance in Sub-Saharan Africa [169]. Less than 5 % of all businesses and less than 3 % of small businesses have access to a loan or line of credit from a bank [81]. This is significantly less than the level for Sudan’s peers and the average in Sub-Sharan Africa [64].

!! Each segment of the population in demand for financial services is typically catered to by a different type of formal and informal financial institution. The high-income segment (5% of the population) primarily uses banks, and use a wide range of financial products. The top range of the middle-income segment also uses banks, but with a narrower range of products, mainly storage and payment services. The middle-income segment mostly relies on insurance companies and FOREX bureaus. The top of the poor and low-income segment typically uses traders and hawala for credit, guarantees, and remittances. Farmers have the option to use specialised agricultural banks, although their entry points used to be mid-level income, but their customer base has progressively extended to include poorer farmers. In general, the poor and low-income segments have limited options and rely mostly on NGOs and MFIs, except for some saving groups in rural contexts. For the poor and low-income segments, demand and access to financial products are mostly limited to credit options for those integrated in economic activity and cash grants for those outside of the cash economy [132].

?? In the medium term, the poor are likely to bear the brunt of the negative effects of the dysfunctionalities of the financial system. This is mainly due to two reasons: indirectly as they are the last link in the financial chain, and directly as they are excluded from accessing financial services. The repercussions of price premiums will eventually impact the poor, while providers higher up in the chain prioritise their larger and more profitable clients. Additionally, with the middle class and higher income segments increasingly relying on informal finance, prices will rise and capacity will be limited. As a result, these mechanisms are likely to become crowded out and unaffordable for the poor.

<aside> 💡 The ‘three functions’ of money Differentiating between the three functions of money can be very helpful in organising a typology of financial products and services. For the purpose of use by humanitarian, the concept can be summarized as follows: with money, you can typically decide to (1) use it (through transactions & payments), (2) save it - to use it later - (through storage, insurance & saving solutions), or (3) grow it (through borrowing & investment to grow it later, through or credit lines to grow it now). Each of what we call financial service or products, whether formal or informal, is performing t least one or sometimes several of these functions. So the demand for financial services and products can be classified according to these broad categories.

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About financial intermediation

Financial intermediation is a crucial aspect of the financial sector that plays a significant role in the economy. It refers to the process of channeling funds from savers to borrowers, thereby facilitating the transformation of savings into loans. In simple terms, it involves the intermediation of financial institutions, such as banks, in connecting those with surplus funds (savers) to those in need of funds (borrowers).

One key component of financial intermediation is the money multiplier mechanism, which is reflected in the Broad money to reserve money analysis. This analysis demonstrates how the money supply in the economy is created through the multiplier effect of reserve money. It depends on two variables: the currency deposit ratio and the reserve deposit ratio. By understanding and managing these ratios, policymakers can influence the money supply and the overall functioning of the financial system.

Financial intermediation is vital for several reasons. Firstly, it enables the efficient allocation of financial resources by matching the needs of borrowers with the surplus funds of savers. This facilitates economic growth and development by providing funding for productive investments, such as business expansion and infrastructure projects.

Additionally, financial intermediation contributes to the stability and resilience of the financial system. Through risk assessment and diversification, financial institutions help mitigate potential losses and reduce the impact of economic shocks. They also play a crucial role in managing liquidity and providing liquidity support to ensure the smooth functioning of financial markets.

Moreover, financial intermediation promotes financial inclusion by extending access to formal financial services. By connecting individuals and businesses to the banking system, it enables them to save, invest, and access credit for various purposes. This inclusion contributes to poverty reduction, economic empowerment, and overall social and economic progress.

In the case of Sudan, financial intermediation has faced challenges, with lending capacity and intermediation remaining below the Sub-Saharan Africa average. However, the government and the Central Bank of Sudan have recognized the importance of improving financial intermediation and have implemented measures to enhance access to finance, simplify procedures, and expand microfinance. These efforts, along with banking sector reforms and the development of agent banking, aim to improve financial intermediation and boost access to commercial bank lending by the private sector.

In summary, financial intermediation is a critical function within the financial system that facilitates the flow of funds between savers and borrowers. It supports economic growth, stability, and financial inclusion, making it an essential aspect of a well-functioning economy.

About CBOS’ financial inclusion strategy and the development of microfinance