Economic growth is a priority in traditional macroeconomics. A widely held view asserts that economic development and social inclusion go hand in hand with higher rates of economic growth, and are both essential end-goals for any state. This brief commentary reviews and concisely explains how the presence of microfinance institutions can promote economic development through financial inclusion. This commentary starts off by identifying the concept of social inclusion and continues by linking it to that of financial inclusion. Special emphasis is given to the Egyptian context at the end of this commentary, despite the deficiency of data and research in this particular field.
<h3>Socially-inclusive economic growth </h3>
Public discussions on the effects of economic growth have always been at the forefront of policy dialogues and recommendations. Theoretically speaking, the &nbsp;achievement of higher rates of economic growth should automatically indicate higher levels of national income, or Gross Domestic Product (Mankiw, 2017). People enjoying higher levels of income per capita should optimally enjoy higher standards of living. However, this simple and direct link deserves further scrutiny. This line of theoretical reasoning assumes that achieving higher levels of national income or GDP stimulates spending on economic and social aspects (such as education, health and public infrastructure) that are conducive to achieving high levels of economic development. While economic growth and development are both essential means to a healthy economy, the link between them is not always straightforward. For example, in cases of countries where high rates of economic inequality exist, economic growth does not necessarily lead to economic development (Todaro &amp; Smith, 2011). High institutional corruption levels are usually among the root causes of income inequality, as benefits from economic growth are channeled to only those groups that enjoy immense economic power and status. Consequently, groups at the lower end of the income spectrum have little or no access to the payoffs of economic growth. Therefore, efficient and equitable social and economic institutions have to be in place to ensure that the payoffs trickle down to those who are unprivileged. Attaining high rates of economic growth should,therefore, go hand in hand with attaining social inclusion of all social classes.
<h3>Social inclusion and financial inclusion</h3>
Social inclusion is a multidimensional concept. It is aligned with the main themes of the Sustainable Development Goals intending to promote sustained and inclusive societies that are conducive to inclusive and equitable economic growth. It is also closely linked to the notion of financial inclusion. &nbsp;According to a definition proposed by the United Nations&rsquo; Department of Economic and Social Affairs, &ldquo;social inclusion is defined as the process of improving the terms of participation in society for people who are disadvantaged on the basis of age, sex, disability, race, ethnicity, and economic and migration status&rdquo; (2016). Thus, social inclusion is more than just equitable access to economic resources; instead, it is the process through which an individual is enabled to enjoy his/her basic rights by participating socially, culturally and politically with his/her surroundings.
Accordingly, promoting social inclusion can be seen as going hand in hand with the notion of financial inclusion. In Peru, for example, half of the beneficiaries of the Juntos cash transfer program had no information on how to utilize a bank account, or what interest rates and bank statements are (Singh &amp; Yadav, 2012). Such forms of financial illiteracy are an unfortunate, prevalent phenomenon in developing countries. Based on the notion that banking and financial services are public goods, financial inclusion is defined as the delivery of financial services to all groups of underprivileged and disadvantaged individuals. Examples of financial services can include: access to payments and remittance facilities, savings, loans and insurance services. In the Indian context, as an example, financial inclusion, represented through offering financial services to low-income groups, has acted as an influential instrument for poverty reduction and increasing incomes (Singh &amp; Yadav, 2012). Therefore, it is essential that financial services are made widely accessible to the entire population without any forms of discrimination.
Based on this reality and in an attempt to promote financial inclusion of the poor, the notion of microcredit was introduced by the Grameen Bank in the mid-1970s. The initiative was conceived in Bangladesh by Muhammad Yunus, believing that lack of credit access to the &nbsp;underprivileged communities was a major impediment to economic development. The idea of microcredit rests on the assumption that it is possible to lend loans to the poor without collateral. Thus, more people have access to loans and can start their own small-scale operations with the help of these funds. It is necessary to mention that lower income groups do not enjoy access to commercial banks due to various reasons, such as: pervasive financial illiteracy, inability to provide financial guarantees, and high transaction costs by the bank. Grameen Bank has also utilized the concepts of group borrowing and peer pressure in order to ensure high repayment rates and to minimize the risks of default. This, in addition to other incentives offered by Grameen, has helped in providing more access to credit, especially for poor women; &nbsp;thus, resulting in less poverty (Todaro &amp; Smith, 2011). Currently, microfinance is being referred to as a tool for poverty reduction, whereby the poor are allowed to generate sustained for-profit process that enables them to break out of the poverty cycle. The idea has been imitated in other neighboring countries, like Indonesia, Philippines, Kenya and Bolivia, in an attempt to approach the problems of poverty and financial exclusion.
<h3>Microfinance in Egypt: What we know so far </h3>
Shifting focus to the Egyptian landscape, it can be argued that there is widespread financial illiteracy. Statistics in 2018 indicate that 32% of the Egyptian working age population own an account at a formal financial institution. That figure is 18% higher than the figure reported in 2014. A decomposition of this figure by characteristics shows that:
<ul>
<li>27% of people owning financial accounts are women.</li>
<li>28% of people owning accounts are not part of the labour force.</li>
<li>29.3% are living in rural areas.</li>
<li>20.3% of the above figure belong to the poorest 40% of the population.</li>
</ul>
The previous findings suggest the significance of microfinance activities for those who are earning the lowest incomes and for those who still do not enjoy a constant inflow of income. Moreover, women represent the majority of microfinance beneficiaries. As per 2017 figures, they constitute around 66% of the total borrowers in Egypt and amount to 1.3 million in number. &nbsp;This percentage is indicative of the role that microfinance institutions play in women empowerment--a relationship that has been examined thoroughly in previous literature (Oxford Business Group, 2018).
The degree of financial illiteracy is also evident through the fact that only 8.8% of those aged above 15 have borrowed from a financial institution or have used a credit card in 2018. That figure is only 1% higher than the figure reported for the year 2014 &nbsp;(World Bank Group, 2018). The growth of the microfinance sector in Egypt in recent years can be attributed to increasing institutional support. The introduction of the first microfinance law in 2014 helped in introducing new commercial microfinance institutions to the market. Before that, the microfinance sector had been dominated by NGOs. According to Amr Abouesh, chairman and CEO of Tanmeyah Micro Enterprise Services, the devaluation of the Egyptian pound against the dollar in November 2016 had an impact on increasing demand for microfinance products, particularly amongst SMEs (Oxford Business Group, 2018). &nbsp;As of 2017, the Financial and Regulatory Authority (FRA) had licensed the operations of three commercial microfinance institutions and 750 NGOs. In August 2017, the Central Bank of Egypt announced a microfinance initiative that intends to finance an amount of 30 billion Egyptian pounds to beneficiaries, who will further deliver subsidized funding to various microfinance companies. &nbsp;This is in accordance to the CBE&rsquo;s funding initiative that specifies a portion of 20% of banks&rsquo; portfolios to be offered to SMEs. Seeing the size of the informal sector, the CBE claims that this initiative will reap its benefits in terms of higher economic growth, financial inclusion and employment levels. (Oxford Business Group, 2018).
Developing the microfinance sector is sure to have favorable impacts on overall economic development indicators. Microfinance in Egypt is already playing a role in promoting higher employment levels and job creation (Abouesh, 2017). The availability of microfinance activities has created financial solutions for poor families aiming to maintain sustainable levels of income. Accordingly, higher financial inclusion of poor segments of the society is also encouraged through high savings mobilization that is necessary for investment and consumption (EFGHermes, 2017).
The research &nbsp;on the potential effects of microfinance &nbsp;in Egypt is still limited. This is primarily due to the limited availability of micro &nbsp;data at the household level or to the institutions offering microfinance. However, despite the limited amount of information on their effects, it is known that microfinance institutions have been present in Egypt since the 1980s and in large numbers, even before they were formally acknowledged. More empirical research is needed on the specific effects and consequences of microfinance lending in Egypt in order to be able to better develop this growing sector. &nbsp;For example, research linking microfinance lending directly with important economic indicators, such as poverty , household consumption and investment, can help indicate whether the availability of microfinance is reaping its benefits. The growing institutional support for microfinance activities is currently playing a huge role in its development; however, such initiatives need to be sustained and strengthened.
<hr>
References
<ul>
<li>
Abouesh, A. (2017, December 11). &nbsp;Microfinance: The unsung engine of job creation and economic growth in Egypt [Blog]. Retrieved from <a href="https://blog.efghermes.com/2017/12/11/microfinance-the-unsung-engine-of-job-creation-and-economic-growth-in-egypt/">https://blog.efghermes.com/2017/12/11/microfinance-the-unsung-engine-of-job-creation-and-economic-growth-in-egypt/</a>
</li>
<li style="font-size: 10pt;">
Mankiw, N. G. (2017). Principles of Economics. United States of America: Cengage Learning.
</li>
<li style="font-size: 10pt;">
Department of Economic and Social Affairs. (2016). Leaving no one behind: the imperative of inclusive development. United Nations. Retrieved from <a href="https://www.un.org/esa/socdev/rwss/2016/full-report.pdf">https://www.un.org/esa/socdev/rwss/2016/full-report.pdf</a>
</li>
<li style="font-size: 10pt;">
Microfinance in Egypt improves access to funding for smaller firms. (n.d.). Oxford Business Group. Retrieved from <a href="https://oxfordbusinessgroup.com/analysis/lending-hand-expanding-microfinance-segment-improves-access-funding-smaller-players">https://oxfordbusinessgroup.com/analysis/lending-hand-expanding-microfinance-segment-improves-access-funding-smaller-players</a>
</li>
<li style="font-size: 10pt;">
Singh, J. &amp; Yadav, P. (2012). Micro Finance as a Tool for Financial Inclusion and Reduction of Poverty. Journal of Business Management &amp; Social Sciences Research, 1, 1-11. &nbsp;<a href="http://www.borjournals.com/a/index.php/jbmssr/article/viewFile/105/1134">http://www.borjournals.com/a/index.php/jbmssr/article/viewFile/105/1134</a>
</li>
<li style="font-size: 10pt;">
Todaro, M. P. &amp; Smith, S. C. (2011). Economic development. United States of America: Pearson Education Limited.
</li>
<li style="font-size: 10pt;">
World Bank Group. (2018). Egypt In The Little Data Book on Financial Inclusion (p. 57). Washington, DC: World Bank Publications. Retrieved from <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/29654/LDB-FinInclusion2018.pdf?sequence=1&amp;isAllowed=y">https://openknowledge.worldbank.org/bitstream/handle/10986/29654/LDB-FinInclusion2018.pdf?sequence=1&amp;isAllowed=y</a>&nbsp;
</li>
</ul>

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