Inclusive finance and rural youth

This working paper deepens the analysis on inclusive finance and rural youth through cutting-age research and new insights and approaches that have emerged over the years in the field. The overall narrative clear ly documents the ways in which rural youth engage with the economy, policy and institutions and identifies the rapid changes occurring across the globe as well as the opportunities and challenges that young people living in rural areas encounter in their different livelihoods. Within this context, financial inclusion has gained attention as a key contributing factor to unlock the potential of rural youth in driving sustainable and inclusive rural transformation. This paper investigates how recent developments in this sector entail new opportunities for rural youth, and highlights persisting barriers that prevent rural youth from accessing financial and non-financial services, making the case for a market system approach to financial inclusion with specific attention given to digital finance. The youth employment challenge is a global development priority. In many developing countries, high youth unemployment rates, significant proportions of working poor in vulnerable employment and economic disengagement together pose the risk of creating disaffection, driving migration, inciting social unrest and slowing progress toward development goals. The paper documents the increasing body of evidence about the positive link between financial inclusion and individual welfare, business creation and women’s empowerment but also highlights the body of research that questions such a positive narrative, pointing out the lack of a sound and functional financial inclusion ecosystem. Financial inclusion is a concept that seeks to ensure that all individuals and businesses have access to and can effectively use a range of appropriate and high-quality formal financial services to improve their lives. The study presents evidence about the disproportionately large share of unbanked youth worldwide and identifies specific constraints that prevent an efficient match between the demand and the supply of financial services, limiting access, usage and quality of available services and the transition from school to work. A review of the existing narrative shows that, in recent years, funders and international actors have focused their strategies on advancing financial inclusion on the supply side of the financial ecosystem, by providing technical assistance and funding to financial service providers. However, such approaches failed to address underlying constraints that go beyond the micro level of service providers. The paper intends to describe how the financial ecosystem can be conducive to enabling rural youth to flourish. It examines the application of the market system approach to address those barriers to financial inclusion for rural youth, and defines roles and investment opportunities for practitioners and development actors. According to this approach, interventions to advance financial inclusion must go beyond the micro level and need to play a catalytic role to incentivize all market players to perform their functions more effectively. Finally, it highlights the potential of digital finance as a powerful accelerator of financial inclusion in general and for rural youth in particular to increase access and derisk youth vis-à-vis their financial ecosystem. The paper is structured as follows: the first section after the introduction focuses on the latest narrative on advances and persisting barriers in the financial inclusion of rural youth; the next section describes the holistic approach to inclusive finance for rural youth by leveraging digital innovations; the final section outlines recommendations for development actors to build youth resilience to successfully navigate school-to-work transitions and to broaden youth employment opportunities in rural areas