The financial system plays a critical role in the global economy, as it serves as the backbone of economic growth and development. However, it is essential to acknowledge that the current financial system is not equitable, leading to long-standing issues of inequality and exclusion. As a result, there is a pressing need for equity to play a more significant role in shaping a fair and inclusive financial system. Equity can bring about fundamental changes that not only address the issues of inequality but also create a financial system that works for everyone, regardless of their socio-economic background.

So, what is equity in finance, and how does it contribute to creating a more inclusive and fair financial system? Equity can be defined as the concept of fairness and justice in the distribution of economic resources and opportunities. In the context of finance, equity refers to the fair distribution of financial resources, benefits, and risks among individuals and institutions. It is a fundamental principle that is often overshadowed by the traditional focus on efficiency and profitability in the financial sector.

One of the primary reasons why equity is crucial in creating a fair and inclusive financial system is that it helps reduce the socio-economic gap between the rich and the poor. In today’s globalized world, where the gap between the haves and the have-nots is widening, equity is a crucial tool for addressing income and wealth disparities. By promoting equitable distribution of resources, the financial system can help bridge the gap and create a more equal society.

Equity also plays a crucial role in fostering financial inclusion. Financial inclusion means providing access to financial services and products to individuals and businesses who have traditionally been excluded from the formal financial system. These include marginalized communities, small and medium-sized enterprises, and low-income individuals. By promoting equitable access to financial services, institutions can enhance financial stability, stimulate economic growth, and reduce poverty. In this way, equity can play a significant role in transforming the financial system into a more inclusive one.

Moreover, equity can contribute to improving financial stability. As seen during the global financial crisis of 2008, an inequitable distribution of resources and opportunities can lead to significant economic imbalances, creating financial instability. When the majority of economic resources are concentrated in the hands of a few, it can lead to financial bubbles, excessive risk-taking, and ultimately, a financial crisis. On the other hand, a more equitable distribution can promote a more stable financial system by reducing the concentration of resources and fostering responsible behavior.

To understand the role of equity in creating a fairer financial system better, let us consider a practical example. In 2017, the Reserve Bank of India (RBI) introduced the “banking on self-help groups” (SHGs) program to promote financial inclusion and equity. Under this program, women from low-income households would come together and form SHGs, which would then receive loans and financial literacy training from local banks. The program aimed to address the exclusion of women from the formal financial system while also promoting equitable development. As a result, the SHGs have seen significant success, providing women with access to credit, creating employment opportunities, and reducing poverty.

Another example of the role of equity in creating a fair financial system is the emergence of impact investing. Impact investing refers to investments made with the intention of generating measurable social and environmental impact, alongside financial returns. It is a form of responsible investing that promotes equity by directing resources towards businesses and projects that benefit society and the planet. Impact investing has become a significant trend in recent years, highlighting the growing recognition of the role of equity in finance.

In conclusion, equity plays a crucial role in creating a more inclusive and fair financial system. It addresses issues of inequality and exclusion, promotes financial stability, and fosters responsible behavior. As seen in the examples mentioned above, promoting equity in finance can lead to significant positive changes, both at the individual and societal levels. Therefore, it is imperative for financial institutions and policymakers to prioritize equity in their decision-making processes to achieve a more just and inclusive financial system, thereby contributing to a more equitable and prosperous world.