Remittances to Sub-Saharan Africa (SSA) have increased steadily in recent decades and are estimated to have reached about $32 billion in 2013. Though studies have shown that remittances can affect aggregate financial development in SSA — as measured by the share of deposits or M2 to GDP (Gupta et al. 2009), to my knowledge there is no evidence for this region on the impact of remittances on household financial inclusion defined as the use of financial services. This question is important because there is growing evidence that financial inclusion can have significant beneficial effects for households and individuals. In particular, the literature has found that providing individuals access to savings instruments increases savings, female empowerment, productive investment, and consumption. Furthermore, the topic of financial inclusion has gained importance among international bodies. In May 2013, the UN High-Level Panel presented the recommendations for post-2015 UN Development Goals, which included universal access to financial services as a critical enabler for job creation and equitable growth. In September 2013, the G20 reaffirmed its commitment to financial inclusion as part of its development agenda.
Cross-border banking has been an important part of Africa’s financial systems since colonial times. While it has long been dominated by European banks, its face has changed significantly over the past two decades. African banks have not only significantly increased their geographic footprint across the region (see Figure 1) but have also become economically significant beyond their home countries in a number of countries across Africa. As their banks have expanded across borders, South Africa, Nigeria, Morocco, and Kenya have emerged as the dominant regional financial centers (see Figure 2). Yet despite this increase in cross-border banking activity within Africa there has been a lack of comprehensive research and analysis on this topic. In a new policy report we try to fill this gap by documenting the growth of cross-border banking in Africa and assessing the risks and benefits of cross-border linkages as well current supervisory arrangements for cross-border supervisory coordination.
Figure 1: Cross-Border Expansion of African Financial Groups over Time,
In the wake of the global financial crisis, policy-makers’ attention has focused on lending to small and medium-sized enterprises (SMEs) as these were among the most affected firms when the credit cycle turned. SME finance has also attracted the attention of the G20 as it is seen as an important constraint on firm growth in developing, emerging and industrialized countries. Indeed, a joint report by IFC and McKinsey has pointed to a global SME financing gap of over 2 trillion USD (Stein, Goland and Schiff, 2010). Various initiatives, such as the SME Finance Challenge and the SME Finance Forum, have consequently been established to try to alleviate small firms’ funding constraints.
In a recent paper with Luc Laeven and Ed Kane, we have now updated our database of deposit insurance arrangements around the world through 2013. Our starting point was the World Bank’s survey on regulation and supervision conducted in 2010. This survey asked national officials for information on capital requirements, ownership and governance, activity restrictions, bank supervision, as well as on the specifics of their deposit insurance arrangements. We combined this data with the deposit insurance surveys conducted by the International Association of Deposit Insurers in 2008, 2010, and 2011, and in the case of European countries with detailed information on deposit insurance arrangements obtained from the European Commission (2011). Finally we checked discrepancies and data gaps against national sources, including deposit insurance laws and regulations, and IMF staff reports. Following Demirguc-Kunt, Kane, and Laeven (2008), we assume any country that lacks an explicit deposit insurance scheme has implicit deposit insurance given the widespread governmental pressures to provide relief in the event of a widespread banking insolvency.
The recession of 1936–37 was one of the most severe recessions in economic activity in the history of the United States. This sharp but short-lived recession occurred while the U.S. economy was recovering from the Great Depression of 1929–1932. After expanding for 50 months, from March of 1933 to May 1937, real GDP fell by 11 percent from May 1937 to June 1938. Industrial production fell by a staggering 32 percent.
The recession was preceded by increases in reserve requirements for Federal Reserve member banks. In 1936–37, the Federal Reserve became worried about the large level of excess reserves in the banking system, and considered them an inflationary threat. The Federal Reserve doubled reserve requirements as an insurance policy against this threat. The first increase came on August 16, 1936. The Federal Reserve increased reserve requirements again on March 1, 1937 and a third and final time on May 1, 1937. After the third increase, reserve requirements had doubled from the levels they had been from June 21, 1917 to August 1936. Due to the timing of the two events, the recession and the reserve requirement increases, scholars have debated whether the Federal Reserve’s reserve requirement increases of 1936–37 reduced bank lending and engendered the economic recession of 1937–1938. In a new paper, Patrick Van Horn (Southwestern) and I test whether the Federal Reserve’s increases in reserve requirements reduced bank lending.
What makes firms decide whether to buy their inputs from another firm or to vertically integrate and become their own supplier? Contracting problems between buyers and suppliers motivate a vast literature on the boundaries of the firm (e.g., Coase 1937, Williamson 1975, Grossman and Hart 1986). In particular, firms may choose to enter into procurement contracts with suppliers or source goods internally depending on the degree to which future contingencies can be specified between the two parties (i.e., what economists refer to as “contract incompleteness”). For example, if there is no contractual way to mitigate the uncertainty about the value of an intermediate good, a buyer firm may prefer to vertically integrate and avoid having to renegotiate with the good’s supplier in the future. In this context, trade credit, or delayed payment, may play a key role in allowing suppliers to guarantee the quality of their goods, enabling market-based procurement relationships. In a new paper, Emily Breza (Columbia) and I test this claim empirically.
Bitcoin is indeed a rather surprising mix of frightfully clever ideas and frightfully simplistic mechanisms, as I argue in a recent paper. You can dismiss bitcoin as a doomed monetary experiment, but you must not pass over the opportunity to let your imagination run with it as it can shake some basic assumptions you have on how financial systems must work. Might there be some lessons in there for how to 'fix' what's broken in our financial system? Take it as an invitation to dream about the following three questions, which are based around the three basic design premises of bitcoin.
First: What if digital money was something that I could hold for myself and pass onto others, without necessarily having to go through a licensed financial institution? You can't do that now: you cannot hold digital money without becoming a customer of Citibank, PayPal or M-PESA. We've been delivered into their hands, and yet they do not necessarily see it their business to serve everyone. It didn't use to be that way: you can hold coins and bank notes by yourself, there is decentralized management of that. What if we held the option to serve ourselves financially with electronic payments, on a peer-to-peer basis, even if only as a countervailing power or last resort?
Back in 2005, the International Year of Microcredit, it had already become clear that microfinance is much more than microcredit and that other financial services are as, if not even more, important for the poor. There has been an increasing focus on microsaving products, with several recent studies gauging the effect of providing the poor with access to formal savings accounts. Looking across the developing world, however, the large majority of the low- and even middle-income households continue to use different forms of informal saving channels. In a recent paper, we explore how these different savings practices are associated with the likelihood that a microentrepreneur reinvests her earnings into her enterprise.
We make use of a novel enterprise survey conducted at the MSE-level in Tanzania. The survey data was collected by the Financial Sector Deepening Trust Tanzania in 2010 from a nationwide representative cross-section of 6,083 micro- and small enterprises. The respondents of the questionnaire are entrepreneurs with an active business as of September 2010. The median initial capital is about 35 USD and average monthly sales are 149 USD. 50 percent of the entrepreneurs are female. More than three quarters of the entrepreneurs in the sample save for business purposes. However there is considerable heterogeneity among saving practices of Tanzanian entrepreneurs. Informal individual saving is the most popular practice among Tanzanian entrepreneurs. 75% of the savers save informal-individually (i.e. under the mattress), whereas around 13% of them save formally. The remainder save their funds via people outside the household such as members of ROSCAs and moneylenders or give them to household members for save-keeping.
Why would savings practices matter for reinvestment decisions? In the absence of easy access to informal or formal credit, entrepreneurial savings might become important if liquidity needs arise. However, the extent to which savings are channelled into the company might depend on the ease of access to these savings, where some informal practices (such as ROSCAS or saving with household members) might not offer as easy access as formal savings accounts or saving below the mattress.
Access to formal financial services has been expanding in recent years. But as people start to use these services for the first time, it has become clear that the challenge is not only providing access to financial services, but also ensuring that people have the behaviors and attitudes to use financial products responsibly and to their advantage. If not, increased access to finance could potentially lead to over-indebtedness and even financial crises.
Two recent nationwide surveys of 1,526 adults in Colombia and of 2,022 adults in Mexico measure financial capability to provide insights on how people manage their finances. The term “financial capability” refers to a broader concept than financial literacy or knowledge alone. It covers a number of different behaviors and attitudes related to participation in financial decisions, planning and monitoring the use of money, and balancing income and expenses to make ends meet.
The financial capability surveys find for example that, in Mexico, many make financial plans, but far fewer adhere to them. Seventy percent of those surveyed say they budget, but just one-third reported consistently adhering to a budget. Similarly, just 18 percent knew how much they spent last week. In Colombia, while 94 percent of adults reported budgeting how income would be spent, less than a quarter of those surveyed actively monitored spending or had precise knowledge of how much is available for daily expenses.
Mobile banking (m-banking) — the use of mobile phones to conduct financial and banking transactions — represents a key area of financial innovation in recent times. Mobile banking allows banks’ customers convenient access to a variety of banking functions, and increases efficiency. Customers can access funds in their bank accounts at all times through mobile phones, and transaction costs are driven down. Even when individuals have access to bank accounts with low fees, m-banking can reduce the opportunity cost of financial transactions.
Mobile banking has also been identified as a potentially significant contributor to financial inclusion by the G-20. While half the adults worldwide do not have access to formal bank accounts, it is estimated that more than 2 billion of those unbanked already own a mobile phone. Unbanked individuals cite difficulties in obtaining a bank account such as living too far away from branches, not possessing necessary documents, or high banking costs. All such barriers to finance can in theory be overcome through a pivot in business model that is supportive of m-banking.
M-banking has flourished both in developed and developing countries in various forms in response to structural characteristics. The model of providing financial services through a mobile phone linked to a bank account is referred to in the literature as the additive model. The use of m-banking in developed economies often follows the additive model. This contrasts with the practice of using m-banking to target the unbanked - the transformative model. Under this model, non-banks issue electronic currency to offer costumers payment services and value storage services.