Aadhaar Alone Will Do Little to Improve Women’s Financial Inclusion in India

Governments and banks must first tackle issues such as corruption, low informal sector wages and female illiteracy.

If we want women to have the same economic opportunities as men, we need to improve financial inclusion. That means giving women equal access to the formal banking system and offering them services to manage their money that are more affordable than more casual arrangements.

India, with its well-known comparative advantage in IT services, has been attempting to boost financial inclusion by linking its digital unique identification (UID) scheme, Aadhaar, with access to bank accounts. But will it actually succeed in increasing women’s participation in the formal financial sector? The answer is not obvious.

To judge the potential for UID systems to improve financial inclusion, we first have to ask what prevents women (mostly in South Asian economies) from holding bank accounts.

A tentative answer comes from the Global Findex Database maintained by the World Bank. The data clearly shows lower participation in formal banking among women relative to men, particularly in the South Asian region. This gap is as large as 18 percentage points for the region and compares unfavorably with the seven percentage-point gender gap in account ownership worldwide.

The data also seems to show that institutional reforms can, indeed, change savings behaviour. The Global Findex reveals a large jump from 35% of the population holding bank accounts to 53% between 2011 and 2014. During the same period, there was also an eight percentage-point rise in internet penetration. So, one obstacle to opening bank accounts is a lack of internet access. It would follow that improving access to online services can boost access to banking for those who are currently excluded from formal financial systems.

Not all government efforts to increase participation in the economy will necessarily have the same effect, however. The Aadhaar programme aims to increase access to bank accounts by supplying everyone with an official proof of identification. But while lack of documentation or proof of authenticity often acts as a barrier to bank account ownership, it is not the primary reason adults, particularly women, in countries such as India shy away from formal finance.

The 2014 Report on Financial Inclusion by the World Bank indicates that the single biggest reason for lacking a bank account – reported by 16% of adults without accounts in 2014 – is simply lack of finances. When it comes to the size of women’s savings, particularly of those engaged in the informal sector – such as domestic workers – they are often not large enough to provide women with an incentive to change their savings behaviour in favour of formal banking.

Most women also consider the fact that other family members own bank accounts as a sufficient excuse not to engage with formal banking. This was evident in the responses I and my colleagues heard while undertaking an unpublished survey of domestic workers in South Delhi that we conducted in 2016.

An interesting observation was that the women were willing to accept below-minimum wage terms simply because their husbands had better job opportunities. They also considered personal bank accounts as entirely optional. If another member of their family (typically their husband) had a bank account, they believed that would suffice for them as well.

Women in informal sectors are also often already participating in informal banking undertaken by their employers: Frequent income shocks lead to regular borrowing from employers for which repayment is made over many future salary payments. Where are the surplus finances that these women from the informal sector are supposed to put in the bank?

In this context, it is unclear how IT-enabled ID systems that improve documentation procedures for banking will yield higher financial inclusion for those with very little to put aside into a bank account.

The innovation of zero-balance accounts, as part of the Pradhan Mantri Jan Dhan Yojana (translated as the Prime Minister’s Public Wealth Scheme) launched in August 2014, seems to be a step in the right direction. This facility allows customers to open bank accounts without depositing any money immediately into the account.

But the outreach of this facility is limited, as the Reserve Bank of India has not made it mandatory for banks to provide such services. There is also a problem with implementation. During a field visit to Muzaffarpur, North Bihar, I saw rural women with Aadhaar cards face problems in both opening and operating bank accounts, highlighting many failings in the promise of zero-balance accounts. The delegate who was opening these bank accounts on behalf of the banks was demanding side payments for himself, which the women could not pay.

The central problem is the mechanism by which bank accounts are opened, even if they claim to be zero balance. Despite being armed with Aadhaar cards and an internet connection, most rural women cannot open a bank account on their own.

Human contact becomes important due to the illiteracy that is prevalent among women in states like Bihar. But relying on others can make these women victims of bribery, which more often than not makes UIDs no more powerful than just pieces of plastic.

Only once the government addresses basic problems such as corruption, low informal-sector wages and female illiteracy will UIDs aid the process of financial inclusion for women in countries like India.

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