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Moving toward financial inclusion in East Asia and the Pacific

Leora Klapper's picture

Surging account ownership among the poor. The highest rate of account ownership among women in developing countries. Widespread formal saving.

Those are some of the key financial inclusion trends in East Asia and the Pacific, as outlined in a new policy note drawing on the 2014 Global Findex database.

Since 2011, about 700 million adults worldwide have signed up for an account at a formal financial institution (like a bank) or a mobile money account. That means 62 percent of adults now have an account, up from 51 percent three years ago.

East Asia and the Pacific made an outsized contribution to this global progress. About 240 million adults in the region left the ranks of the unbanked; 69 percent now have an account, an increase from 55 percent in 2011 (figure 1). Poor people led the regional advance, as account ownership among adults living in the poorest 40 percent of households surged by 22 percentage points — to 61 percent. Much of the growth was concentrated in China — which saw account penetration deepen on the bottom of the income ladder by 26 percentage points — but China was hardly alone. In both Indonesia and Vietnam, account ownership doubled among adults living in the poorest 40 percent of households.

The challenge: How do we measure the mobilisation of private finance?

Jeff Chelsky's picture

Massive amounts of private finance will be needed to achieve the Sustainable Development Goals (SDGs). At the same time, there is understandable pressure on official sector entities to demonstrate that their use of scarce public resources is having impact. While this makes it important for them to show how they are catalysing private investment, as discussed in a recent article, measuring this contribution is fraught with challenges.[1]

The first challenge is definitional. Words like “mobilise,” “catalyse,” “leverage” and “additional” are often used interchangeably, with varying degrees of precision and consistency. A number of these concepts appear in the World Bank Group (WBG) “corporate scorecards”[2] — an integrated performance and results-reporting framework — which has presented us with a platform to distinguish the terms.

The recent credit surge, seen in historical context

Franziska Ohnsorge's picture

Since the global financial crisis, credit to the private nonfinancial sector in emerging markets and developing economies (EMDEs) has surged. Within this overall surge, however, there has been considerable divergence between commodity-exporting and -importing economies. In commodity-importing EMDEs, credit-to-GDP ratios are high by historical standards but are now stable or declining. In commodity-exporting EMDEs, in contrast, credit growth has been near a pace associated with past credit booms, but private sector credit levels are still moderate, and, with a few exceptions, still well below thresholds identified as warning signs.

Informed trading in business groups, ownership concentration, and market liquidity

Alvaro Enrique Pedraza Morales's picture

Institutional investors have become the majority owners of most large corporations and are expected to play a key role for financial development by providing funding for firms, enhancing market liquidity through more active trading, and by promoting better corporate governance in the companies in which they invest.

For developing countries, while most of the literature has focused on the impact of foreign institutional investors on capital markets, little is known about the relation between domestic institutional investors and trading activity, transactions costs, and governance practices. Understanding the role of domestic investors is particularly important since in many of these countries, business groups, which are typically collections of publicly traded companies with significant amount of common ownership, dominate private sector activity. In such context, money management institutions which belong to these business groups are prone to conflicts of interest between their fiduciary responsibilities and the objectives of their own management. For example, business groups’ relations can be used by controlling managers as a mechanism to enhance the entrenchment of corporate control. Alternatively, an institutional investor which belongs to a business group might have access to private information in affiliated firms. Ownership concentration and business group ties potentially exacerbates information asymmetries, discouraging investment.

The Kenyan financial transformation (2000-2015)

Michael King's picture

Giant leaps in financial inclusion driven by private sector innovation and supportive regulation have made Kenya a case study in financial sector development. A new book brings together a group of academics to investigate the myriad of dimensions of and issues that lie beneath Kenya’s much-touted financial inclusion success story. The book is available at this link: Kenya’s Financial Transformation in the 21st Century.

Kenya: A World Leader in Financial Inclusion?

Headline figures from survey data place Kenya at the top of the financial inclusion index both regionally and globally. Data from the last Global Findex survey shows that 75% of Kenyan adults have a formal account that allows them to save, send or receive money. In 2014 Kenya outperformed both the global average and many middle-income countries such as Chile, Brazil, India, Mexico and Russia.

Can wage subsidies boost employment in the wake of an economic crisis?

Miriam Bruhn's picture

Unemployment often rises during an economic crisis and policymakers take a range of actions to try to mitigate this increase. For example, 22 countries around the world used some form of wage subsidy program to promote employment retention during the recent crisis. Many studies have looked at the effect of wage subsidies on employment in non-crisis times, with mixed findings. But, there is not much evidence on whether wage subsidies can raise employment in the wake of a crisis.

Conceptually, wage subsidies during a crisis may make sense since layoffs could slow down the recovery as re-hiring and training workers may be costly for firms. This is particularly true for workers with job-specific skills. For these workers, it may be beneficial for firms to not let them go in the first place. However, as firms face lower demand for their products, they may not have the financial means to keep paying these workers, particularly in the presence of credit constraints, which are often exacerbated during a crisis. This is where wage subsidies come in. But, ultimately, we just don’t know whether these subsidies really cause firms to retain workers they otherwise would not have retained.

Access to finance and job growth

Maria Soledad Martinez Peria's picture

The recent global financial crisis has highlighted the impact of credit markets on the real economy, in particular on employment. While an extensive literature exists on how finance can affect corporate investment and overall economic growth, comparatively little is known about the effect of finance on labor market outcomes. 

In a recent paper, entitled “Access to Finance and Job Growth: Firm-Level Evidence across Developing Countries” Meghana Ayyagari, Pedro Juarros, Sandeep Singh and I use comprehensive firm-level data across a large set of developing countries to analyze the impact of access to finance on job growth and the heterogeneity in this relationship across firm size.[1] In particular, we study the differential impact of access to finance on MSMEs’ ability to create jobs relative to that of larger firms.

How equitable is access to finance in Turkey? Evidence from the latest Global FINDEX

Joao Pedro Azevedo's picture

Access to finance is an important tool against poverty since it allows for the smoothing of consumption. The equality of access amongst different groups in the society is also crucial in terms of correctly allocating the positive benefits of improved financial services.

In a recent paper published in the World Bank Policy Research Working Paper Series we proposed and computed an Equity Adjusted Coverage rate (EACR) for a range of financial inclusion indicators in Turkey. This work complements the conventional coverage or use of financial services by adjusting for the equity of its coverage, on the basis of a set of `circumstances. The characteristics or circumstances that are accounted for, in Turkey’s case, are gender, age, education, income quintile, and urban/rural.

Are neurotic, extraverted youths in more need of financial education?

Pablo Peña's picture

Every day more and more people in the world have access to financial services. In the minds of many, that poses an important risk. People need financial education, particularly in the form of information, to prevent them from making dangerous financial mistakes. They need to be aware of fees they pay, the interest rate charged by their credit cards, and important clauses in the contracts they sign.

The funny thing is, not even people we consider financially savvy know those things. I put these kinds of questions to 30 Mexican economists, all PhDs working in the financial sector or in academia. 38% did not know the APR of their credit cards. 66% did not know approximately how much they paid last year in fees to retirement fund managers. 72% claimed they do not usually read the fine print in bank contracts.

Psychometrics as a tool to improve screening and access to credit

Miriam Bruhn's picture

Small and medium enterprises (SMEs) often face financial constraints because they lack audited statements and other information about their operations, and as a result, financial institutions have difficulties assessing the risk of lending to them. Studies have shown that information sharing, credit bureaus, and credit scoring can increasing credit to SMEs, but not all countries have well-developed credit bureaus that gather the level of information needed to build a reliable credit-scoring model. For example, the average credit bureau in Latin America and the Caribbean complies with only half of best practices and covers only 40.5 percent of the adult population (Doing Business Report 2016).

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