Financial exclusion and the cost of incomplete participation

Economic and social implications of the access to financial services both in developed and in developing countries have increasingly promoted the debate around the issue of considering “financial inclusion” as a public good, according to potential positive externalities associated to greater financial participation. If the role of financial inclusion as a public good, and the enhanced efficiency of public policy following a greater participation in the financial markets are established in an abstract way, a numerical estimate of the potential costs of incomplete participation in the financial system is still not explicitly addressed in the literature. The study designs a simplified approach for the calculation of the cost of financial exclusion through the identification of a general functional form representing the cost of incomplete participation encountered by financial actors or by the public policy aimed at alleviating financial exclusion. An empirical estimation of the convexity of the marginal cost of inclusion is carried out using MIX Market data on 2,232 Microfinance Institutions (MFIs).The cost of incomplete participation is then estimated parametrically according to alternative subgroups of financial institutions with different levels of depth of outreach corresponding to distinct orientation toward individuals excluded from the mainstream financial sector. Calculations show the role of financial exclusion in generating inefficiencies that raise the cost of accessing to financial transactions for all the participating individuals, or, in a policy perspective, the cost to tackle incomplete participation.