Advancing Financial Inclusion for the Forcibly Displaced: A Collective Imperative

On March 14, e-MFP was pleased to open applications for the European Microfinance Award (EMA) 2024, which is on ‘Advancing Financial Inclusion for Refugees and Forcibly Displaced People’. This is the 15th edition of the Award, which was launched in 2005 by the Luxembourg Ministry of Foreign and European Affairs — Directorate for Development Cooperation and Humanitarian Affairs, and which is jointly organised by the Ministry, e-MFP, and the Inclusive Finance Network Luxembourg (InFiNe.lu), in cooperation with the European Investment Bank.

Kicking off e-MFP’s annual series of guest blogs on this topic, Ed Fraser, a consultant supporting the EMA team, describes the scale and complexity of the displacement challenge, the barriers faced by the forcibly displaced, and introduces the role(s) that the financial inclusion sector can play, and argues for a collective approach, an ‘imperative’, that leverages what various stakeholder groups can offer in serving these groups.

Each year, growing numbers of people are forced to leave their homes. Most are internally displaced within their country, but many others cross international borders in search of asylum. In the process, they face inordinate risks and inevitable challenges in meeting even the most basic of human needs. To make matters worse, they are often excluded from accessing social, economic and other systems that might otherwise enable survival, recovery and durable solutions. This includes financial systems, as forcibly displaced people consistently lack access to useful and affordable financial products and services that meet their needs, delivered in a responsible and sustainable way. Redressing this systemic exclusion is not just a matter of priority for all key stakeholders, but a collective imperative.

Scale and Complexity of Forced Displacement
Forced displacement is a growing global phenomenon, with the latest UNHCR Global Trends report, published in June 2023, indicating that 108.4 million people worldwide were estimated to be forcibly displaced because of persecution, conflict, violence, human rights violations and events seriously disturbing public order. This figure is predicted to increase due to a proliferation of various root causes of displacement. In addition, displacement is typically now more protracted and complex in nature, for example often involving multiple movements both internal and external to the country of origin.

While the prevailing narrative surrounding refugees is people making dangerous crossings to Europe or the US, the majority of displaced people remain in their countries of origin as Internally Displaced People (IDPs), or cross to neighbouring countries as refugees. As a result, most of the global refugee and IDP population remains in low- and middle-income countries typically, though not exclusively, in displacement camps or urban and peri-urban areas.

Forced displacement of this nature and extent acts to impede the achievement of Sustainable Development Goals (SDGs) and other well-established commitments in respect of human rights, protection, assistance and development, not least those established via the Global Compact on Refugees and respective Global Refugee Forums.

The Role of Financial Inclusion
Financial inclusion of refugees and other FDPs is a vital part of a necessarily holistic and collaborative response to the challenges posed by forced displacement at respective individual, community, national and global levels. Effective and sustained financial inclusion supports survival and coping in the immediate wake of displacement, as well as building self-reliance and resilience in support of longer-term recovery, empowerment and transformation. Whether enabling maximisation of skills and competencies through restoration of decent livelihoods, encouraging net contribution to local economies or facilitating voluntary, informed return or resettlement, financial inclusion constitutes an essential pillar of a dignified life for people affected by displacement.

In this vein, it is right to advocate for equality in inclusion of Forcibly Displaced People (FDPs) in local financial systems, such that they benefit equally from sustainable access to those same financial products and services offered to local or so-called host communities. Alternatively, the unique spectrum of needs, preferences and vulnerabilities experienced by FDPs often require at least adaptation, if not creation anew, of financial products and services. Similarly, refugees and other FDPs face unique, typically higher and undeniably systemic barriers to achieving safe and sustainable financial inclusion. As such, beyond adaptation or creation, impactful solutions must seek to redress such barriers through use, support and change of local financial systems such that they more consistently accommodate FDPs and cater to their unique needs, preferences, and vulnerabilities.

Key Factors & Challenges
FDPs have complex financial and non-financial needs which vary according to a range of factors, not least the phase of displacement and specifics of the context in which they reside. However, they experience a range of individual or demand-side barriers to fulfilling their needs, such as:

• lacking linguistic skills, financial literacy or awareness of available services which, for example, limits their ability to demonstrate that they are a secure and potentially profitable clients for Financial Service Providers (FSPs) and others;
• an absence of legal status, identification or business registration for legal compliance (e.g. with Know Your Customer (KYC) requirements);
• a lack of financial track record or viable collateral assets for credit or loans;
• movement restrictions or absence of digital means or connectivity in order to access otherwise available solutions; or
• insufficient purchasing power to afford associated costs.

As pressing as these challenges are, however, it is imperative to also consider supply-side and broader systemic barriers if responses are to support more formal, durable solutions. From a supply-side perspective, there are many challenges, but they include a lack of knowledge, familiarity or in-depth understanding on the part of FSPs of FDPs as a potential client base; lacking willingness or ability of FSPs to develop affordable products adapted to the unique needs, preferences and risks of FDPs; adaptation or creation being based on simplistic assumptions and (mis)perceptions which limit effectiveness of otherwise well-intentioned initiatives; or stringent consumer identification rules that inherently exclude FDPs.

From a systemic perspective, FDPs are often disadvantaged, intentionally or otherwise, by impractical, untested, unsustainable and exclusionary policy, regulation, risk assessment and strategy. In particular, KYC legislation frequently acts to exclude FDPs who either lack proof of ID to fulfil stringent KYC requirements. This is without even mentioning the stigmatisation and outright hostility FDPs often confront from host communities, FSPs and political actors alike, or the insufficiency of support services and infrastructure to allow truly equitable inclusion.

Solutions: Who’s Responsible for Doing What?
There is a role to be played by all key stakeholders in advancing financial inclusion of FDPs, not least the Private Sector, including traditional FSPs or emerging FinTech companies, but also the Public Sector, notably national governments, civil society actors, including Non-Government Organisations from global to local levels, and others, like related networks or communities of practice. This recognises that the enhancement of financial inclusion for FDPs constitutes a collective imperative.

It is vital to also consider FDPs and the communities that host them as participating stakeholders, as opposed to passive actors or recipients. In doing so, it is important to recognise that not all FDPs, even those with comparable experiences of displacement, are the same in terms of needs, preferences and vulnerabilities. For example, forcibly displaced women face intersecting barriers related to their displacement status and gender that drive financial exclusion, including restricted access to livelihoods, legal status, safety risks, and discriminatory social norms. As such, pursuing effective, sustainable solutions for FDPs requires nuanced analysis and, in turn, the participatory design and implementation of bespoke approaches.

With this in mind, it is crucial that any solutions aiming to enhance financial inclusion for FDPs:

1. Favour formality, but recognise the necessity or preference for informality by FDPs, thus adapting to evolving needs and vulnerabilities of different displacement phases and contexts;
2. Respect principles of participation by soliciting and responding to FDPs’ views and preferences, being sure to mainstream protection principles and manage protection risks;
3. Appreciate that effective solutions are not limited to the realm of innovative FinTech, but may include more basic, context-appropriate solutions from actors across the system;
4. Clearly define and measure intended impact, considering broader measures of financial health and wellbeing, not solely access to functional financial market systems; and
5. Determine the most feasible, relevant and appropriate means to understand, avoid harming and, ultimately, support or change local financial systems via more facilitative approaches.

I am honoured to be supporting this year’s Award process and look forward to seeing the range of institutions and initiatives that show what financial inclusion organisations can - and currently - do to help displaced groups build resilience, restore livelihoods, and live with dignity in host communities.

In order to reply to any questions that applicant organisations may have when applying to the Award, there are three Application Guidance sessions: an English session held March 25th (see recording here); a French session held also on March 25th (see recording here); and a Spanish session on April 3rd (register here)