Syndicate content

Financial Inclusion in Fragile and Conflict-Affected States

Asli Demirgüç-Kunt's picture

Those who live in fragile and conflict-affected states face limitations that most of us simply cannot comprehend. Not only do the larger cycles of conflict and insecurity often lie beyond the control of individual adults, but the weak institutions that characterize these economies also severely restrict the opportunities for adults to manage their risks and improve their own lives. Amartya Sen has written that the central aspect of well-being is 'functioning,' defined as the freedom of choice and control over one's life. For adults living in fragile and conflict-affected states, the inability to smooth consumption and make investments through formal savings and credit systems is one of many restrictions on their 'functioning'.

Just 15 percent of adults in these economies have an account at a formal financial institution, compared to 24 percent, on average, in low-income countries and 43 percent in the rest of the developing world. This is the cruel paradox of financial inclusion in fragile and conflict-affected states: it is in precisely these countries that having a safe place to save or a reliable method to receive remittances is most important, yet access to and usage of basic financial services remains incredibly low.

{C}

Microenterprises in Mexico: Motives for starting operations, expectations, size and financing

Pablo Peña's picture

Standard microeconomic theory establishes profit maximization as the ultimate goal of all enterprises. The entrepreneur’s motive for starting a business is not considered as a variable that could affect that goal. However, enterprises are not all the same. Across different countries, many entrepreneurs report non-pecuniary benefits as the primary reason for starting their business—and Mexico is not an exception. Those benefits include “flexibility” and “independence.” For other entrepreneurs, starting a business was a second option, only pursued after being laid off. These motives are especially common for microenterprises, which represent the large majority of businesses in Mexico.

In this study we shed light on how the motives for starting a business help explain differences in expectations and performance of firms. Different expectations mean different appetites for financing. A significant number of microenterprises’ owners in Mexico claim they do not need external financing. Moreover, most microentrepreneurs do not perceive the lack of financing as an obstacle for their businesses. Many of these businesses have little desire to grow or innovate, if any.

The Unbanked Four-Fifths: Informality and Barriers to Financial Services in Nigeria

Michael King's picture

Estimates from the Finscope surveys suggest that in Africa, the proportion of the population without access to formal financial services ranges from 44 percent in South Africa to 92 percent in Mozambique (see Honohan and King 2012). Nigeria, the most populous country in Africa, lies at the higher end of this scale with 79 percent, approximately four-fifths of the adult population, estimated to be ‘unbanked’.

Despite economic theory and an increasing body of empirical research suggesting that access to savings, payment, and credit services facilitates consumption smoothing, helps insure against risk, and allows investment in education and other forms of capital, little is known about the relative importance of different barriers to financial services. Disentangling the roles played by demand constraints, such as income insufficiency, poor education, informality and financial illiteracy, and supply constraints, such as distance and high cost, is a crucial first step for attempts to design effective policies to broaden the reach of formal financial services.

Financial Innovation: The Bright and the Dark Sides

Thorsten Beck's picture

The Global Financial Crisis of 2007 to 2009 has spurred renewed widespread debates on the “bright” and “dark” sides of financial innovation.   The traditional innovation-growth view posits that financial innovations help reduce agency costs, facilitate risk sharing, complete the market, and ultimately improve allocative efficiency and economic growth.  The innovation-fragility view, by contrast, has identified financial innovations as the root cause of the recent Global Financial Crisis, by leading to an unprecedented credit expansion fueling a boom-bust cycle in housing prices, by engineering securities perceived to be safe but exposed to neglected risks, and by helping banks and investment banks design structured products to exploit investors’ misunderstandings of financial markets and exploit regulatory arbitrage possibilities. Paul Volcker, former chairman of the Federal Reserve, claims that he can find very little evidence that the financial innovations in recent years have done anything to boost the economy.

Incentive Audits: A New Approach to Financial Regulation

Martin Cihak's picture

Economists often disagree on policy advice. If you ask 10 of them, you may get 10 different answers, or more. But from time to time, economists actually do agree. One such area of agreement relates to the role of incentives in the financial sector. A large and growing literature points to misaligned incentives playing a key role in the run-up to the global financial crisis. In a recent paper, co-authored with Barry Johnston, we propose to address the incentive breakdowns head-on by performing “incentive audits”.

Assessing the Impact of the Euro Crisis on Long-Term Credit Provision in Europe

Erik Feyen's picture

In the run up to the global financial crisis, European banks significantly increased their lending activities both domestically and outside home markets driven by a pro-cyclical spiral of cheap abundant funding, increasing profitability, and economic growth. In the process, European banks became excessively leveraged and reliant on sources of wholesale short-term funding making them more susceptible to shocks which could force them to adjust their operations abruptly and shrink their balance sheets (Le Lesle (2012)).

When the crisis erupted, a process of bank deleveraging was put into motion and European bank lending standards deteriorated significantly during various episodes of financial stress (Feyen, Kibuuka, and Ötker-Robe (2012), Giannetti, and Laeven, (2012)). First lending standards in Europe deteriorated considerably as the US subprime mortgage crisis unfolded in 2007 and reached a peak in 2009 in the wake of the default of Lehman Brothers in September 2008. Credit supply weakened significantly in 2011Q4 again when the European crisis deepened.

Gross inflows, financial booms and crises

Favorable growth prospects and higher asset returns in emerging market economies have been led to a sharp increase in flows of foreign finance in recent years. Massive inflows to the domestic economy may fuel activity in financial markets and — if not properly managed — booms in credit and asset prices may arise (Reinhart and Reinhart, 2009; Mendoza and Terrones, 2008, 2012). In turn, the expansion of credit and overvalued asset prices have been good predictors not only of the current financial crises but also of past ones (Schularick and Taylor, 2012; Gourinchas and Obstfeld, 2012).

Revolving Credit and Term Loans as Credit Alternatives to Firms in Mexico: When and for what purpose?

Sirenia Vazquez's picture

Credit to firms can be classified in two categories: revolving credit lines and term loans. Revolving credit lines offer borrowers the option to draw funds up to a limit, repay and redraw them as they see fit. In term loans, borrowers usually make a single draw of funds and commit to pay a fixed amount periodically. Both types of credit have pros and cons. However, it is not clear what determines whether a firm obtains a revolving credit or a term loan. In particular, two interesting questions arise. First, what is the relationship between the type of credit to firms and the economic cycle? Second, are there any differences between those types of loans in terms of pricing? In a recently released paper, I explore these questions for Mexican firms, using credit level information from Mexico’s National Banking and Securities Commission (CNBV) for the period of 2001-2012.

New, Individual-Level Data on Financial Inclusion Shows What Drives Ownership and Use of Financial Inclusion

Asli Demirgüç-Kunt's picture

Who uses formal financial services? What policies are associated with greater use of accounts among the poor and rural residents? And why do certain segments of the population remain unbanked? Is it by choice or is it due to barriers such as high costs or large distances to the nearest bank branch? In a new paper we co-authored with Franklin Allen and Sole Martinez Peria, we explore these questions using an exciting new micro-dataset from the Global Financial Inclusion (Global Findex) database. This dataset, based on interviews with over 150,000 adults in 148 countries, lets us identify account ownership, the use of an account to save, and whether an account is used frequently, defined as three of more withdrawals per month. (For a detailed description of the data, see our earlier paper, Demirguc-Kunt and Klapper, 2012). Figure 1 shows summary statistics of our financial inclusion measures.

Bank Regulation and Supervision: Insights from a New World Bank Dataset

Martin Cihak's picture

Bank regulation and supervision has become subject of vigorous debates during the global financial crisis. Many observers pointed out weaknesses in regulation and supervision in the run-up to the crisis (see, for example, Caprio, Demirguc-Kunt and Kane, 2010, Dan 2010, Levine 2010, and Barth, Caprio, and Levine 2012). The crisis prompted policymakers to consider changes in regulation and supervision. But much of the policy discussions focused on a small number of major (and mostly high-income) economies. And despite the high degree of interest in the global regulatory framework, there has been a surprising lack of consistent and up-to-date information on the national regulatory and supervisory approaches pursued in individual countries around the world during the crisis. This lack of information led to important gaps in understanding what works in regulation and supervision and what does not.

Pages