The role of gold in enabling financial inclusion

Bringing more people into the financial system is a priority for policymakers across the world.

Introduction

Boosting financial inclusion, or access to formal banking services, has become a major policy objective for governments, NGOs and international organisations across the world. Financial inclusion is often defined as allowing people to access savings products, credit, insurance, and payments systems. Access to formal financial services is important as financial security is key for economic growth and development – when individuals and households are financially secure, they are more likely to invest or start businesses, further supporting economic development.

Gold plays a hugely important role in individual and household finances for many. It can bring the financial security needed to start a business, or help individuals meet unexpected costs such as healthcare expenses. Often seen as a long-term asset it can also help ensure financial freedom in retirement. But there are other benefits too, including financial system stability and expanding access to other banking products. Where consumers trust and understand gold, retail banks have an opportunity to offer gold-backed banking products to appeal to a larger range of consumers. The World Gold Council is starting a new article series to explore these issues and bring awareness to the role that gold plays in households around the world. 

Financial inclusion – the status quo

In the latest World Bank Global Fidex Report, published in 2021, the average bank account penetration rate in emerging markets was 71%, while77% globally have access to a bank account. This is a significant improvement on the 51% that had access to banking services in 2011. Despite these improvements in access to financial services, financial inclusion remains a major priority. This is why the G20 launched a new financial inclusion action plan just last year. At its heart is harnessing  digital technology to improve access to formal financial services. Where bricks and mortar banks sometimes struggled to expand access through a physical branch network, the digitalisation of finance has facilitated access to hard-to-reach consumers. The same is happening in the gold market – over the last decade we have seen the development of new digital gold products that allow individuals to buy, manage, and sell gold online.

Financial inclusion - building steam

Across the world there is a rapid embrace of initiatives assisting the drive for financial inclusion. Part of this is offering a range of innovative financial products. In many markets including China, Singapore, UAE, and Malaysia retail banks are offering gold investment accounts, tapping into a natural, cultural affinity for gold. Turkey is perhaps the ‘gold standard’ with a range of gold-based products now offered by retail banks including investment accounts, buy-back schemes, gold bonds, and gold cheques, amongst others.

Financial inclusion is not just about access. It is also about appeal. The range of products on offer have to interest consumers to attract them into the banking system. “We are at an interesting inflection point where digital gold will also become a part of this process. It would add an additional dimension to financial inclusion not present with the existing set of financial instruments,” said Professor Arvind Sahay, former chairperson of the India Gold Policy Centre (IGPC).

Can gold break down the barriers to financial inclusion?

Where access to bank accounts is low, gold can—and often does—fill the gap. This is particularly the case for under-served and marginalised communities, including women, rural populations and the working poor.

Barriers to financial inclusion include a lack of access brought by infrastructure challenges, and also a lack of trust in the formal banking system. The value proposition is clear: If banks offer gold products, consumers are more likely to come into the banking system, expanding financial inclusion. It could also lead to better outcomes for gold consumers – banks are regulated entities and are often better able to leverage economies of scale, so efficiencies that can be passed on to the end consumer.

This isn’t just about selling gold though. It is also about putting it to work. The potential for gold as collateral has been floated in many countries for some time. Allowing banks to accept gold deposits could potentially bring previously unbanked people into the formal economy, enabling them to accumulate savings and apply for loans and other financial services. This is a model that could be adopted in many markets, including in lower-income ASEAN countries, which is a region with significant gold consumption. 

Gold in the ASEAN region

Gold has a long-established foothold in ASEAN economies. In 2023, the World Gold Council’s Gold Demand Trends research showed that over 170 tonnes of gold was consumed in the ASEAN region.  “Gold is deeply cultural across ASEAN," said Professor Sahay, former chairperson of the IGPC. “People buy it as a store of value, as jewellery, and a form of transmission of wealth from one generation to the next”.

The region isn’t just a major consumer of gold. Indonesia and the Philippines are home to significant gold mining operations, Singapore is a major trading and refining centre, and the jewellery created in Thailand and Indonesia are prized around the world for their craftsmanship, forward-thinking designs, and value for money.

In Vietnam – the largest gold consumer in ASEAN – there are a number of drivers behind gold demand. Our consumer research (published in 2021) showed that 81% of Vietnamese view gold as a safeguard against political and economic uncertainty. It is seen by a similar number of respondents as bringing financial security in the long term, and a majority of those surveyed trusted it more than fiat currencies. “Gold tael bars and gold chi rings are the most preferred tools for saving as they can easily be traded for cash at more than 10,000 shops nationwide or used as collateral for capital loans from banks and other financial institutions,” said Huynh Trung Khanh, deputy chairman, Vietnam Gold Traders Association.

In other markets in the region, including Indonesia and Malaysia, gold pawning is also a huge business, facilitating access to credit for individuals and small businesses. Indonesia’s biggest pawn shop operator, PT Pegadaian, is state-owned. Indonesia is also home to several popular digital gold platforms that facilitate gold transactions in small denominations. It also launched a blockchain-based, precious metals-backed payments and savings platform outside of the banking system to increase financial inclusion in 2021. Developed by Indonesia's state-owned postal service, PT Pos, and foreign token provider, Kinesis, PosGo is the country’s first Sharia-compliant mobile platform. It allows users to trade gold and silver, as well as save, transact and manage their wealth in digital tokens without the need for bank accounts.

In many countries gold has both a financial role, and a cultural significance - and the interplay of the two drives consumer interest. “Gold jewellery products, such as 24K bangles and necklaces, are popular gifts for Vietnamese brides in the wedding season and newborn infants on their first birthdays. Gold bars and chi rings are also in great demand during the Vietnamese new year Tet festival, particularly on the God of Wealth day (tenth day of the new year)”, according to Huynh Trung Khanh, deputy chairman, Vietnam Gold Traders Association. Gold is used to celebrate major family milestones in Thailand too. “Gold is a popular choice for wedding, birthday and newborn celebrations,” says Pawan Nawawattanasub, member of the Board of Directors, Thai Gold Traders Association.  

Conclusion

Gold meets both financial and cultural needs. As a long-term store of value, an asset that is easy to buy and sell, and an asset that can provide protection against risk and uncertainty, giving consumers financial security. It can directly and indirectly help achieve the public policy objective of maximising financial inclusion:

This first blog is intended to set the scene and introduce some of the motivations for buying gold, and its role in individual and household finances. Over the coming months we will be publishing a series of in-depth articles focussing on specific countries, starting with Egypt.