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

25

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)

29

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?

30

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.

31

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