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Expanding Access to Finance: Building Financial Infrastructure for Emerging Markets

This report explores the importance of building financial infrastructure in emerging markets to expand access to finance. It covers topics such as credit bureaus, payment systems, collateral registries, and legal and regulatory frameworks.

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Expanding Access to Finance: Building Financial Infrastructure for Emerging Markets

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  1. Financial InfrastructurePeer Stein, Manager, Advisory Services Access to Finance International Finance CorporationVienna, September 11, 2008

  2. In emerging markets, roughly two-thirds of the population remain unbanked and underserved

  3. Domestic Credit to the Private Sector 250 2005 2000 200 150 As % of GDP 100 50 0 United East Asia Euro Zone Sub- Middle South Europe Latin States and Saharan East and Asia and America Pacific Africa North Central and Africa Asia Caribbean Source: World Development Indicators (World Bank) Aggregate bank lending to the private sector still low

  4. Internet Users & Growth in Internet Users (by Regions) 400 500% 350 400% 300 250 300% Number of Internet Users (Millions) 200 % Growth in Internet Users (2000-05) 200% 150 100 100% 50 0 0% Africa Asia Europe Middle East North America Latin America Oceania/ Australia Global Card Purchase Transactions (Billions) Growth in Mobile Cellular Users (1993-2006) America Western Europe Eastern Europe 2005 2006 2007 2008 2005-2008 1200 Other Asia Pacific Latin America 50 25% 23% 1000 40 20% 800 17% 16% 30 15% Billions Millions 12% 11% CAGR (2005-08) 600 20 10% 400 10 5% 200 0 0% 0 North America Europe Asia/ Pacific Latin America ME/Africa 2000 2001 2002 2003 2004 2005 2006 Access points lag behind, though alternative channels may be an opportunity Banking Penetration in 99 countries 80.0 70 70.0 60.0 50.0 35 33 40.0 30.0 13 20.0 12 11 9 9 8 7 6 6 5 5 3 10.0 1 0.0 High High East Asia Europe Latin Middle South Asia Sub- income: income: & Pacific & Central America & East & Saharan Asia non OECD OECD Caribbean North Africa Africa Avg. no. of branches per 100,000 people Avg. no. of ATMs per 100,000 people Sources: 1) Reaching Out: Access to and use of banking services across countries, Beck, Thorsten, A.Demirgüç-Kunt and M. Martinez Peria, Journal of Financial Economics, 85, pp. 234-66. 2) BuddeComm based on internetworldstats.com, 2006 3) Lehman Brothers report on Specialtfy Finance, June 25, 2007 4) PaulBudde Communications Pty Ltd, 2007

  5. Not only availability is an issue, but also affordability Access to finance High income Cost of finance East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 0 10 20 30 40 50 60 70 Share of firms reporting cost of/access to finance (percent) Source: Demirguc-Kunt, Finance for All? Policies and Pitfalls in Expanding Access, World Bank Research Report, November 2007

  6. Financial services in developing countries can be prohibitively expensive Annual Fees for a Checking Account (% of GDPPC) Source: Beck, Thorsten, Asli Demirguc-Kunt, Maria Soledad Martinez Peria, Banking Services for Everyone? Barriers to Bank Access and Use Around the World, World Bank, February 2007.

  7. Expanding access to finance requires solid financial infrastructure • Creating and improving financial infrastructure • Credit bureaus, payment systems and collateral registries • Legal and regulatory framework • Working with financial institutions • Retail/SME banks, microfinance, housing, leasing • Comprehensive, long-term institution building programs • Working with securities markets • Corporate and government bond markets Market Infrastructure MFI Bank A Bank B

  8. $154,195 $155,000 2006 Emerging Market GDP = $11,527 BN $89,350 $9,178 $4,169 US $ Billions $3,977 $4,000 $1,173 $64,845 $3,000 $2,030 $5,009 $2,000 $222 $204 $2,804 $1,342 $345 $462 $1,000 $240 $141 $688 $- Credit Collateral Remittances Domestic Securities Corporate Bureaus Registries Payments Markets Governance Total Current Financing Volume Total Potential Financing Volume Total financing volumes supported by Financial Infrastructure in emerging markets

  9. 2006 Emerging Market Population = 5.4 billion 3.50 2.97 3.00 2.50 2.00 1.87 Billions 1.50 0.99 1.00 0.77 0.06 0.53 0.53 0.65 1.10 0.50 0.25 0.28 0.28 0.71 0.17 0.34 0.24 0.24 0.08 0.00 Credit Collateral Remittances Domestic Securities Corporate Bureaus Registries Payments Markets Governance Number of people currently affected Potential # of people affected Total people positively affected by Financial Infrastructure

  10. Financial Infrastructure helps reduce transaction costs $30 $25 $20 90% $15 Cost per $100 lent or sent 75% $10 80% $5 90% $0 Retail/small business loans that can make use of credit bureaus Loans securitized with moveable collateral Remittances Domestic Payments Most efficient system Total potential reduction in costs Least efficient system Notes: “Total potential reduction in costs” is indicative of the broad range of potential cost reduction. Actual cost savings realized is contingent ultimately on the efficiency of the system. Credit Bureaus: Lending costs on micro, retail and small business loans. Upper limit is for MFI loans, and is based on average of “Operating costs as a % of loan portfolio” information obtained from 2006 MIX Market data for 798 MFIs in 96 countries. Collateral Registries: Lending costs on secured credit and leases. Remittances: Cost of sending remittances to remitter’s home country. Domestic payments: Cost of sending payments in country. Financial Infrastructure has long-term systemic potential to reduce cost per dollar lent or sent

  11. The World Bank Group is developing a Financial Infrastructure Index (FII) The Financial Infrastructure Index: • Provides a basis for cross-country comparison of FI elements for which consistent cross country data is available • Builds on an FI index being developed by the OECD • Measures strength of FI using indicators for four broad areas: • Contract Enforcement – as a proxy for enforcement of creditor rights in case of non-payment • Access to Credit - measures availability and scope of credit information and the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders • Investor Protection - measures extent of disclosure, director liability and the extent to which shareholders can challenge transactions, including minority shareholder rights. Proxy for corporate governance • Bankruptcy Procedures – reflects time, cost and outcomes of bankruptcy proceedings • As more data become available, the index will be expanded to include other aspects of financial infrastructure such as payment systems, the status of auditing and accounting and securities market infrastructure.

  12. Preliminary results showing FII regional averages Source: World Bank and IFC. The methodology for the computation of the index follows OECD framework as developed by Alain de Serres, Shuji Kobayakawa, Torsten Slok and Laura Varita (2007) “Regulation of Financial Systems and Economic Growth”, OECD working paper ECO/WKP(2006)34

  13. Private credit to GDP and Financial Infrastructure Financial Infrastructure and Depth 140% 124% 120% 100% 80% Domestic credit to GDP 56% 60% 45% 37% 40% 17% 20% 0% 1 2 3 4 5 FI quintiles Note: correlation controlling for income per capita and off shore financial zones. Source: World Bank and IFC

  14. Interest rate spread and Financial Infrastructure Financial Infrastructure and Efficiency 14.0 12.2 12.0 10.0 8.2 7.1 8.0 6.8 Interest rate spread 6.0 3.6 4.0 2.0 0.0 1 2 3 4 5 FI index Note: correlation controlling for income per capita and real interest rate. Source: World Bank and IFC

  15. Non-performing loans and Financial Infrastructure Financial Infrastructure and Stability 14.0 12.5 12.0 10.0 10.0 7.8 Non-performing loans (%) 8.0 6.0 4.6 4.0 2.4 2.0 0.0 1 2 3 4 5 FI index Note: correlation controlling for income per capita, inflation and GDP growth.. Source: World Bank and IFC

  16. What should policy makers do? • Pursue sound financial sector and macroeconomic policies • Establish an appropriate legal and regulatory framework • Develop institutional capacity for enforcement and oversight • Address competition policy issues, maintaining a balance with cooperation • Identify clear roles for public and private sectors • Extend financial infrastructure to target populations such as low-income, SME or rural consumers • Develop multi-sector strategies or solutions to address the problem of access • Prioritize development objectives of FI • Promote financial education and financial literacy

  17. World Bank Group Support to Financial Infrastructure Development • Explore synergies among individual programs in countries/regions (see next slide) • Strenghten/broaden standard setting efforts (e.g. credit reporting) • Working on common terminology/approaches • Push the Research agenda • Conduct “Financial Sector Assessment Program” (FIAP) within the context of FSAPs and beyond • Prepare joint TA and Loan/Grants programs

  18. World Bank Group Support to Financial Infrastructure Development: Active projects

  19. ANNEX

  20. World Bank Group indicators and databases cover most financial infrastructure Existing: • Doing Business • Credit bureaus • Movable collateral • Property registration (part of immovable collateral) • Investor protection (part of corporate governance) • Contract enforcement • Payments Systems Group “Global Payments Survey” • Remittance price database In Development: • Getting Finance Indicators • Collateral Registry Survey

  21. Credit Information Index measures rules affecting the scope, access, and quality of credit information. Source: Doing Business 2008 Credit Information Index 6 4.8 5 3.4 3.4 4 2.6 3 1.9 1.9 1.3 2 1 0 OECD Eastern Latin Middle East Asia South Sub- Europe & America & East & & Pacific Asia Saharan Central Caribbean North Africa Asia Africa “Getting Credit” Indicator Private Bureau Coverage (% of Adult Population) OECD 59.3 Latin America & Caribbean 32.1 Private Bureau Coverage (% of Adults) Eastern Europe & Central Asia 15.4 East Asia & Pacific 10.8 Middle East & North Africa 8.1 4.5 Sub-Saharan Africa South Asia 1.9 0 10 20 30 40 50 60 70

  22. Legal Rights Index 6.4 7.0 5.6 6.0 4.5 5.0 4.1 4.0 3.9 3.7 4.0 3.0 2.0 1.0 0.0 Sub- Saharan Africa OECD Eastern Europe & Central Asia East Asia & Pacific Latin South Asia Middle East & North Africa America & Caribbean Investor Protection Index 7.0 6.0 5.2 6.0 5.1 5.0 5.0 4.7 4.3 5.0 4.0 3.0 2.0 1.0 0.0 OECD East Asia & Pacific Latin America & Caribbean Eastern Europe & Central Asia South Asia Middle East & North Africa Sub- Saharan Africa Strength of collateral and bankruptcy laws and investor protection rights The Legal Rights Index measures the degree to which collateral and bankruptcy laws facilitate lending, Investor Protection Index measures the strength of minority shareholder protections against misuse of corporate assets by directors for their personal gain. Source: Doing Business 2008

  23. Duration (days) Eastern Europe & Central Asia 443 OECD 443 East Asia & Pacific 550 Sub-Saharan Africa 643 Middle East & North Africa 699 Latin America & Caribbean 700 South Asia 1047 0 200 400 600 800 1000 1200 Source: Doing Business 2008 Number of Days to Enforce a Contract “Enforcing Contracts” indicator 50 60 43.5 43.5 39.4 39.3 37.3 Measures efficiency of contract enforcement by following the evolution of a sale of goods dispute and tracking the time, cost, and number of procedures involved from the moment the plaintiff files the lawsuit until actual payment. 35.9 50 40 31.3 40 30 30 # of Procedures 20 Cost (% of Claim) 20 10 10 0 0 Middle East & North Africa South Asia Sub- Saharan Africa Latin East Asia & Pacific Eastern OECD America & Europe & Caribbean Central Asia Procedures (number) Cost (% of claim)

  24. 8 12 7 6.8 6.6 6.4 6.2 7 10 6 5 4.9 8 5 4 6 3 Number of Procedures 4 Cost (% of Property Value) 2 2 1 0 0 Middle East & North Africa Eastern Europe & Central Asia East Asia & Pacific Sub- Saharan Africa Latin America & Caribbean South Asia OECD Procedures (number) Cost (% of property value) Duration (days) South Asia 134 Sub-Saharan Africa 105 East Asia & Pacific 99 Eastern Europe & Central Asia 92 Latin America & Caribbean 73 Middle East & North Africa 48 OECD 28 0 20 40 60 80 100 120 140 160 Number of days “Registering Property” indicator Examines the steps, time, and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building in the largest business city—already registered and free of title dispute. Source: Doing Business 2008

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