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access to finance

Bank Competition and Access to Finance

Asli Demirgüç-Kunt's picture

In a recent blog post, I talked about whether there are trade-offs between bank competition and financial stability.  But what about access to finance?  What does competition imply for access?

Theory supplies conflicting predictions, as usual.  According to standard economic theory, a banking system characterized by market power delivers a lower supply of funds to firms at higher cost; hence greater competition improves access.  However, several theoretical contributions have shown that when we take into account problems of information asymmetry, this relationship may not hold.  For example, banks with greater market power can have more of an incentive to establish long-term relationships with young firms and extend financing since the banks can share in future profits.  In competitive banking markets, however, borrower-specific information may become more dispersed and loan screening less effective, leading to higher interest rates. Indeed, while it has been shown that concentration may reduce the total amount of loanable funds, it may also increase the incentives to screen borrowers, thereby increasing the efficiency of lending.  However, all these models also assume a developed economy, with a high degree of enforcement of contracts and developed institutional environments in general. This is obviously not the case for most of the countries where the Bank works.

How Do Firms Finance Investment?

Asli Demirgüç-Kunt's picture

A large body of literature has found that in countries with weak institutions firms are able to obtain less external financing, resulting in lower growth.  Indeed, even simple cross-country comparisons of firm financing patterns can be quite revealing.  In a paper co-authored with Thorsten Beck and Vojislav Maksimovic, this is exactly what we do.  Using data from the World Bank’s Enterprise Surveys dataset (WBES) for 48 countries, we investigate what proportion of firm investment is financed externally, and, of this external finance, how much of it comes from different sources, such as bank and equity finance, leasing, supplier credit, development banks, and informal sources such as money lenders.

In our sample of firms, on average just over 40 percent of firm investment is externally financed.  Breaking external financing down into its parts, about 19 percent of all financing comes from commercial banks and 3 percent from development banks.  Another 7 percent is provided by suppliers and 6 percent through equity investment.  Leasing is another 3 percent, and less than 2 percent comes from informal sources.  More recent enterprise survey data for an expanded sample of countries and firms also suggest similar patterns (Figure 1).

Sources
Source: Enterprise Surveys, covering 71 countries

Measuring Access to Finance…One Step at a Time

Asli Demirgüç-Kunt's picture

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. 

Solving the microfinance savings riddle

A few months ago I discussed the release of the World Bank publication on Bringing Finance to Pakistan's Poor. One of the authors' key findings was that most Pakistanis have a strong aversion to debt, and are seeking financial channels to store their savings, rather than for borrowing. According to their survey data, most Pakistanis are more interested in accessing savings accounts than loans.


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