Finance For All?Finance For All?Policies and Pitfallsin Expanding Access
Asli Demirguc-Kunt
January 2008
A World Bank Policy Research Report
Development Research Group (DECRG)
2
Why are we interested in access?
• Financial exclusion is likely to act as a brake on development– Theoretical models have shown that financial
market frictions can be the critical mechanism for generating poverty traps and slower growth
– An extensive empirical literature exists on the links between financial development and growth
• But, limited evidence linking access to financial services to outcomes, due to lack of data
3
Questions addressed in this PRR
• Just how limited is access around the world?
• What are the chief obstacles and barriers to broader access?
• How important is access to finance as a constraint to growth or poverty reduction?
• What is the role of government in building inclusive financial systems?
4
Fraction of households with an account
5
…varies by region…
0
20
40
60
80
100
Sub-SaharanAfrica
EastAsia
Europe& Central
Asia
Latin America
& theCaribbean
MiddleEast &NorthAfrica
SouthAsia
PercentHigh
75th percentile
25th percentile
Low
Median
6
…and increases with income
0
20
40
60
80
100Households using financial services (percent)
0 10 20 30 40 50
GDP per capita (thousands of 2000 USD)
7
Firms’ use of external finance varies by size…
0
10
20
30
40
Largefirms
Mediumfirms
Smallfirms
Firms using external funding (percent)
8
...and region and income
0 20 40 60 80
External finance as a percent of total funding for new investments
Sub-Saharan Africa
South Asia
Middle East & North Africa
Latin America & Caribbean
High income
Europe & Central Asia
East Asia & Pacific
9
...and access is seen as a problem
Share of firms reporting cost of/access to finance (percent)
0 10 20 30 40 50 60 70
High income
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
Access to financeCost of finance
10
Defining “access” is not easy
Access versus use
• Usage is much easier to measure
• However, access is likely to be wider – some may have access, yet may not wish to use services
• Understanding usage requires information on both demand and supply
• Thus need to collect indicators that measure both:–Actual use of various services (savings, payment, credit)–Barriers to access, to identify boundaries and causes of
exclusion
11
Access versus use
Users of financial services
Non- users of financial services
PopulationVoluntary self-
exclusion
Involuntary exclusion
No need
Cultural / religious reasons/ /indirect access
Insufficient income / high risk
Contractual / informational framework
Discrimination
Price / product featuresAccess to financial services
No access to finance
12
Barriers to access
• Through bank surveys identify barriers to– Opening and maintaining an account– Applying/processing, getting a loan– Paying bills, making money transfers
• Along different dimensions– Physical barriers: branches, ATMs, – Eligibility: documentation, paperwork, procedures – Affordability: interest rates, fees, minimum balances
13
Physical access
Branch and ATM penetration, by income quintile
0
20
40
60
1 2 3 4 5
Income quintile
Number per 100,000 population
Number of bank branchesNumber of ATMs
14
Eligibility…documentation
Number of documents required to open a checking account
1 document, 9%
1 to 2 documents,
27%
2 to 3 documents,
29%
3 to 4 documents,
24%
Greater than 4 documents,
11%
15
…and process
Denm
ark
Isra
elSp
ain
Gre
ece
Kore
a, R
ep.
Switz
erla
ndSl
ovak
Rep
ublic
Belg
ium
Braz
ilPe
ruSl
oven
iaZi
mba
bwe
Sout
h Af
rica
Mol
dova
Turk
eyCr
oatia
Geo
rgia
Keny
aM
alta
Bela
rus
Aust
ralia
Trin
idad
and
Tob
ago
Arm
enia
Hung
ary
Jord
anCo
lom
bia
Zam
bia
Median8.33 days
Lith
uani
aBo
snia
and
Her
zego
vina
Cam
eroo
nSi
erra
Leo
neIn
done
siaBo
livia
Mex
icoFr
ance
Sri L
anka
Average10.69 days
Indi
aCz
ech
Repu
blic
Nepa
lDom
inica
n Re
publ
icBu
lgar
iaCh
ileEg
ypt,
Arab
Rep
.Al
bani
aEt
hiop
iaM
adag
asca
rLe
bano
nTh
aila
ndM
ozam
biqu
eG
hanaUr
ugua
yPh
ilippi
nes
Pakis
tan
Bang
lade
sh
0
10
20
30
40
50Number of days to process SME loan application
16
Affordability…minimum balances
Minimum balance required to open a checking account(percent of GDP/capita)
No minimum balance required32%
0 - 1% required19%
1 - 5% required17%
5 - 15% required12%
15 - 50% required10%
Greater than 50% required10%
17
…and fees
Costs of transferring funds abroad(percent of $250, a typical remittance)
Less than 5$11%,
5 to 12$27%
12 to 25$51%
Greater than 25$11%
18
Barriers and financial exclusion
Share of population unable to afford checking account fees
0 20 40 60 80 100
South AfricaGhana
MadagascarChile
CameroonNepal
SwazilandKenya
Sierra LeoneUgandaMalawi
Percent
19
Barriers are lower in countries with:
• Higher income
• Better contractual/information systems
• Greater openness and competition in banking
• Greater transparency standards, media freedom
• Greater market discipline
20
Impact: finance promotes firm growth
Private credit / GDP
AUSAUT
BEL
CAN
CHE
DEU
ESP
FIN
FRA
GBR
IND
ITA
JOR
JPN
KOR
MEX
MYS
NLD
NOR
NZL
PAK
SGP
SWE
THA
TUR
USA
ZAF
ZWE
0.2
0.3
0.4
0.5
0.6Proportion of firms that grow at rates requiring external finance
0.0 0.5 1.0 1.5
DEU
21
Financing constraints hurt firm growth
Impact of self-reported obstacles on growth of firm sales
-0.1 -0.08 -0.06 -0.04 -0.02 0
Financing obstacle
Legal obstacle
Corruption obstacle
Change in rate of firm growth
22
…particularly for small firms
-0.12-0.1-0.08-0.06-0.04-0.020
Financing obstacle
Collateral requirements
Bank paperwork/bureaucracy
High interest rates
Needs special connections with banks
Banks lack money to lend Large firmsSmall firms
23
Access to finance- channels
Impact through different channels
• Number of firm start-ups, firm dynamism and innovation
• Greater equilibrium size of incumbent firms
• More efficient organizational forms such as incorporation
24
Finance is also pro-poor
Financial depth and poverty alleviation
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
-2 -1 0 1 2 private credit
Growth in poverty headcount
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To promote pro-poor growth it is important to improve access for all excluded (not only the poor)
…with significant indirect effects
• Welfare impact of direct access of the poor – mixed results
• Aggregate studies – that take into account spill-over effects - suggest stronger impact
• General equilibrium models and natural experiments also suggest indirect effects of financial development may be quite significant for the poor – i.e. having jobs and higher wages
To promote pro-poor growth it is important to improve access for all excluded (not only the poor)
26
Role for government?
• Yes: markets will not provide for all
….but
• Need realistic goals – not everybody should use credit
• Not all government policies are equally effective in broadening access
• Policies for financial development vs. access
27
Building institutions
• Institutions matter – protection of property rights, contract enforcement.. How to prioritize?
• Information infrastructures (credit registries..) over enforcementof creditor rights
• Ease of recovery on individual debt contracts (collateral) over resolution of conflicts between different claimants (bankruptcy laws)
• Specific policies • legislation for leasing, factoring, etc.• credit registries, issuing national identification numbers, reduce costs of
registering and repossessing collateral• encourage innovation (e-finance, m-finance); legal clarity• financial education
28
Policies to promote competition and stability
• Competition – including foreign entry - is likely to improve access over time
• Also improves the speed with which new access –improving technologies are adopted
• Good prudential regulations are key
– example: regulations such as Basel II should not punish SME loans, protection against abusive lending (note interest ceilings often back-fire; increased transparency and formalization is a preferred approach)
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Direct government action?
• Scope is more limited than often believed– Experience with government banks,
directed lending has not been positive.
– Savings and payment services, the record is more mixed
– Public-private partnerships may help “kick-start” certain financial services
– Partial credit guarantees for SMEs?
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Finance for the poor versus excluded
– Should access for the poor subsidized?• Despite best efforts, much of microfinance – especially for the poor-
relies on grants and subsidies• Credit subsidies can undermine the incentives to introduce access-
expanding innovations• For poor households credit is not the only –or the principal- service
they need – savings and payments services may be more important
– Political economy concerns• Financial access is lacking not only for the poor, but for large
segments of non-poor• Focusing on the “excluded” may help promote reforms to expand
access for all.
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What is new? Main messages
• Access to finance is limited around the world; barriers lead to exclusion for the non-poor as well as the poor.
• Finance is not only pro-growth, but also pro-poor.
• But pro-poor policy should not focus exclusively on the poorest: there are large spill-over effects of finance
• Government policy agenda is lengthy (but few quick fixes) including:
• building institutions, prioritizing reforms, • underpinning infrastructures to exploit technological advances,• promoting competition, and • ensuring that regulation provides the correct incentives.
• The very poor are likely to need subsidies to access financial services. But better for savings and payments than for credit