How well do financial systems in different countries serve households and enterprises? Who has access to which financial services – such as savings, loans, payments, insurance? Just how limited is access?
Just a short while ago, we didn’t know the answer to these questions. But modern development theories very much emphasize that broad financial access is the key to development. Lack of access to finance is often the critical element underlying persistent income inequality as well as slower growth. Without inclusive financial systems, poor individuals and small enterprises need to rely on their personal wealth or internal resources to invest in their education, become entrepreneurs, and make their businesses grow. So it was disappointing that although data on the financial sector have been readily available, data on access simply were not.
Those of us who spend our days trying to find ways of influencing policy decisions know that one of the most effective ways of focusing policy attention on an issue is by measurement. If you can measure something and “benchmark” it with useful comparisons, you are one step closer to identifying what needs to be done. And if you can provide these measurements at regular intervals, you are more likely to capture the attention of policymakers, promote policy change, and track and evaluate the impact of such policies. A team at the World Bank began thinking about this issue in the beginning of this decade, so when the UN announced 2005 as the Year of Microcredit, we were more than ready to rise to the challenge.
But what exactly is access? How do we measure it? Access to financial services implies an absence of barriers – whether these are price or other types of barriers. Access is not the same as use because not everybody who has access makes use of services. As Figure 1 makes clear, whether someone doesn’t use services because she has no need or because she is somehow barred from use is important in designing policies to expand access. For example, while rejection due to high risk or poor project quality for access to credit makes good business sense (and needs to be reinforced as the latest financial crisis amply illustrated), rejection due to discrimination, lack of institutional development or unreasonable prices or fees should be causes for concern and require different responses from policymakers. So we need to measure both use as well as barriers to the use of financial services to understand issues behind access.
When we started this work, consistent, cross-country data for households were very scarce and too costly to collect, so we had to come up with alternative ways of estimating the share of the population using financial services. With my colleagues Thorsten and Sole, we surveyed regulators around the world and collected aggregates such as the number of loan or deposit accounts in a country, average account size, and bank branch penetration to construct figures that approximated the share of the adult population making use of financial accounts. These figures showed us that while the use of finance increases with income, approaching 100 percent for some of the richest countries, in most developing countries less than half the population has an account with a financial institution and in many countries in Sub-Saharan Africa, less than one in five households does (Figure 2).
But why do large proportions of the populations in many developing countries not use financial services? This is why the identification of barriers is important. When surveying financial institutions around the world to answer this question, three constraints stand out:
- One major constraint is geography, or physical access. While technology – phone and internet use – has the potential to alleviate this constraint, physical distance still matters.
- Another barrier is the lack of proper documentation. Financial institutions usually require one or more documents for identification purposes, but many in low-income countries who live in rural areas and work in the informal sector lack such papers.
- High prices and fees also represent barriers: many institutions have minimum account requirements and fees that make even opening a simple account out of reach for many potential users.
While these barriers vary quite a bit across countries, lower barriers tend to be associated with more open and competitive banking systems, which are characterized by private ownership of banks and foreign entry. We also see that strong legal, information, and physical infrastructures (such as telecommunication and road networks); regulatory and supervisory approaches that rely on market discipline; and transparency and media freedom are all associated with lower barriers to access.
Of course these indicators are just that – indicators. While they are linked to policy, they are not policy variables. But as I argued above, collecting these data are a prerequisite to building more inclusive financial systems. By now our aggregate indicators have been picked up by the IMF, which announced their inclusion in the International Financial Statistics database at the October Annual Meetings in Istanbul. CGAP has been collecting and using these indicators to produce its annual Financial Access publication, and there are also plans to collect data on barriers more regularly. In individual countries, there is progress with the analysis of household surveys designed to assess financial access, but these days even a global survey of households seems almost within reach. We still have a lot to do, and a lot to learn, but I am encouraged that we have already come a long way.
World Bank Policy Research Report, Finance for All? Policies and Pitfalls in Expanding Access, World Bank, Washington D.C., 2008.
Beck, Thorsten, Asli Demirguc-Kunt and Maria Soledad Martinez Peria, “Reaching Out: Access to and Use of Banking Services across Countries,” Journal of Financial Economics, 85; 2007.
Beck, Thorsten, Asli Demirguc-Kunt and Maria Soledad Martinez Peria, “Banking Services for Everyone? Barriers to Bank Access and Use Around the World,” World Bank Economic Review, Vol. 22, No. 3, October 2008.