Finance For All? Policies and Pitfalls in Expanding Access

1. Finance For All? Finance For All?Policies and Pitfallsin Expanding Access Asli Demirguc-Kunt February, 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… Percent 100 High 75th percentile Median 25th percentile 80 Low 60 40 20 0 Sub-SaharanAfrica EastAsia Europe& CentralAsia Latin America& theCaribbean MiddleEast &NorthAfrica SouthAsia

6. …and increases with income Households using financial services (percent) 100 80 60 40 20 0 0 10 20 30 40 50 GDP per capita (thousands of 2000 USD)

7. Firms’ use of external finance varies by size… Firms using external funding (percent) 40 30 20 10 0 Smallfirms Mediumfirms Largefirms

8. ...and region and income East Asia & Pacific Europe & Central Asia High income Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 0 20 40 60 80 External finance as a percent of total funding for new investments

9. ...and access is seen as a problem 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)

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 No need Voluntary self-exclusion Population Cultural / religious reasons/ /indirect access Insufficient income / high risk Non- users of financial services Discrimination Involuntary exclusion Contractual / informational framework Price / product features Access 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 Number per 100,000 population Number of bank branches 60 Number of ATMs 40 20 0 1 2 3 4 5 Income quintile

14. Eligibility…documentation Number of documents required to open a checking account Greater than 4 1 document, documents, 9% 11% 3 to 4 1 to 2 documents, documents, 24% 27% 2 to 3 documents, 29%

15. …and process Number of days to process SME loan application 50 Bangladesh 40 Philippines Pakistan Uruguay Ghana 30 Mozambique Average10.69 days Median 8.33 days Thailand 20 Egypt, Arab Rep. Madagascar Dominican Republic Lebanon Ethiopia Albania Bulgaria Bosnia and Herzegovina Chile Czech Republic Sierra Leone Trinidad and Tobago Sri Lanka Nepal Indonesia Cameroon India France Mexico Bolivia Lithuania Colombia Zambia 10 Hungary Armenia Jordan Australia Belarus Slovak Republic Georgia Kenya South Africa Malta Zimbabwe Croatia Moldova Turkey Switzerland Slovenia Korea, Rep. Belgium Brazil Peru Greece Denmark Spain Israel 0

16. Affordability…minimum balances Minimum balance required to open a checking account(percent of GDP/capita) Greater than 50% required10% No minimum balance required32% 15 - 50% required10% 5 - 15% required12% 1 - 5% required17% 0 - 1% required19%

17. …and fees Costs of transferring funds abroad(percent of $250, a typical remittance) Greater than 25$11% Less than 5$11%, 5 to 12$27% 12 to 25$51%

18. Barriers and financial exclusion Share of population unable to afford checking account fees Malawi Uganda Sierra Leone Kenya Swaziland Nepal Cameroon Chile Madagascar Ghana South Africa 0 20 40 60 80 100 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 Proportion of firms that grow at rates requiring external finance 0.6 KOR JPN 0.5 THA SGP NOR MYS DEU DEU CAN MEX FIN AUT USA AUS ESP 0.4 NZL JOR CHE IND FRA ZWE NLD BEL GBR ITA 0.3 SWE PAK TUR 0.2 ZAF 0.0 0.5 1.0 1.5 Private credit / GDP

21. Financing constraints hurt firm growth Impact of self-reported obstacles on growth of firm sales Corruption obstacle Legal obstacle Financing obstacle -0.1 -0.08 -0.06 -0.04 -0.02 0 Change in rate of firm growth

22. …particularly for small firms Small firms Banks lack money to lend Large firms Needs special connections with banks High interest rates Bank paperwork/bureaucracy Collateral requirements Financing obstacle 0 -0.1 -0.02 -0.04 -0.06 -0.08 -0.12

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 Growth in poverty headcount 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -2 -1 0 1 2 private credit

25. …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)  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