Syndicate content

Financial Sector

Moving from financial access to health

Tilman Ehrbeck's picture

Over the past decade, the push for financial inclusion has united governments, companies, technology entrepreneurs, and nonprofit organizations in dozens of countries on every continent — and with remarkable success. In 2011, only 51 percent of the world’s adults had a formal bank account. By 2017, as the World Bank recently reported in its new Global Findex data, we’ve reached 69 percent — that is 1.2 billion more people who are now connected to the modern economy.

As more people in emerging markets gain access to the formal financial system — fueled by the increased penetration of the mobile phone and associated digital financial services — the pace of financial inclusion is accelerating. At this rate, we're on track to reach universal financial access by 2020, a goal set by the World Bank, which is an important success milestone.  Access to basic financial services, such as a bank account, credit, and insurance, is a crucial step in improving people's social and economic outlook. 

To Cap or not to cap? What does Kenya’s experience tell us about the impact of interest rate caps on the financial sector?

Bilal Zia's picture

Interest rate caps can have far-reaching consequences on the composition and maturity of commercial bank loans and deposits. From both a policy and research standpoint, it is important to understand the mechanisms behind such impacts and the channels through which they affect various players in the financial sector.

While cross-country evidence suggests that interest rate caps can reduce credit availability and increase costs for low-income borrowers1, rigorous micro-evidence on the channels of impact within an economy is missing.

In a new working paper that uses bank-level panel data from Kenya, Mehnaz Safavian and I carefully examine the impact of the recently imposed interest rate caps on the country’s formal financial sector.2

In September 2016, the Kenyan Parliament passed a bill that effectively imposed a cap on interest rates charged on loans and a corresponding floor on the interest rates offered for deposit accounts by commercial banks. This new legislation was in response to the public view that lending rates in Kenya were too high, and that banks were engaging in predatory lending behavior. The interest rate caps were therefore intended to alleviate the repayment burden on borrowers and improve financial inclusion as more individuals and firms would be able to borrow at the lower repayment rates.

Financial repression and bank lending: Evidence from a natural experiment in an emerging market

Tomás Williams's picture

Since the early 2000s, local-currency debt (mostly traded in domestic markets) became a growing and important source of funding for several governments in emerging market economies. Despite their impressive growth, many domestic sovereign debt markets maintain a captive domestic audience that facilitates direct credit to government. This represents a form of financial repression 1, which can lead to a crowding out of private credit.

The degree of this form of financial repression depends crucially on government access to foreign credit. If there is a low presence of foreign investors in domestic sovereign debt markets, governments have to rely heavily on domestic financial institutions potentially worsening the crowding out of private credit. In turn, an increased presence of foreign investors might reduce financial repression, and free resources for the private sector. As a result local firms may be able to finance more investment projects and boost economic activity. Although intuitive, there is little evidence on this topic because of identification challenges.2 In a recent study (Williams, 2018), I use a quasi-natural experiment in Colombia and provide evidence on how the entrance of foreign investors into domestic sovereign debt markets reduces financial repression and increases domestic credit growth, boosting economic activity.

Can psychometrics help bridge the gap?

Claudia Ruiz's picture
Traditional credit scores are fairly accurate in predicting future loan performance, which is why lenders have tended to concentrate on clients with already a solid credit history, as screening them is less costly. However, interest in alternative ways to identify potential good borrowers that lack credit history is growing, particularly in countries where a non-trivial fraction of the population remains unbanked.

The “accounting view” of money: money as equity (Part III)

Biagio Bossone's picture

In part I of this blog, we discussed the implications of our proposed “Accounting View” of money as it applies to legal tender. In part II, we further elaborated on the implications of the new approach, with specific reference to commercial bank money. We conclude our treatment of commercial bank money in this part, starting from where we left, that is, the double (accounting) nature of commercial bank (sight) deposits as debt or equity.

Bank deposits: debt, equity, or both…?

This double nature is stochastic in as much as, at issuance, every deposit unit can be debt (if, with a certain probability, the issuing bank receives requests for cash conversion or interbank settlement) and equity (with complementary probability). Faced with such a stochastic double nature, a commercial bank finds it convenient to provision the deposit unit issued with an amount of reserves that equals only the expected value of the associated debt event, rather than the full value of the deposit unit issued.

The “accounting view” of money: money as equity (Part II)

Biagio Bossone's picture

In part I of this blog, we discussed the implications of our proposed “Accounting View” of money as it applies to legal tender. In this part and the next, we elaborate on the implications of the new approach, with specific reference to commercial bank money.

Bank deposits and central bank reserves

After long being a tenet of post-Keynesian theories of money,1 even mainstream economics has finally recognized that commercial banks are not simple intermediaries of already existing money; they create their own money by issuing liabilities in the form of sight deposits (McLeay, Radia, and Thomas 2014).2

If banks create money, they do not need to raise deposits to lend or sell (Werner 2014). Still, they must avail themselves of the cash and reserves necessary to guarantee cash withdrawals from clients and settle obligations to other banks emanating from client instructions to mobilize deposits to make payments and transfers.

The relevant payment orders are only those between clients of different banks, since the settlement of payments between clients of the same bank (“on us” payments) does not require the use of reserves and takes place simply by debiting and crediting accounts held on the books of the bank.

The Fintech revolution: The end of banks as we know them?

Sergio Schmukler's picture

The retrenchment and intensified regulation of the traditional banking system after the global financial crisis, combined with greater access to information technology and wider use of mobile devices, have allowed a new generation of firms to flourish and deliver a wide array of financial services. What does this mean for the traditional banking system?

In the Global Financial Development Report 2017/18 and a new Research and Policy Brief, we argue that despite the rapid expansion of fintech companies, so far, the level of disruption seems to have been low. This is partly driven by the complementarity between the services provided by many fintech providers and traditional banks. That is, in many instances, the new fintech companies bring alternative sources of external finance to consumers and SMEs, without displacing banks. For example, online lending is an alternative for the type of borrower usually underserved by traditional banks. This is of special relevance not only for households and firms in the developing world (where the banking system is often underdeveloped), but also for underserved borrowers in high-income countries. Moreover, because a bank account is needed to perform many of the fintech services, it is hard now to imagine fintech companies overtaking banks completely and becoming involved in the current accounts niche. There will always be need for a highly regulated service that allows households and firms to keep their money safe and accessible. Banks seem to be the players best suited for that role.

Financial inclusion for Asia's unbanked

Manu Bhardwaj's picture

Asian economies are well positioned for robust growth — with GDPs expected to rise by an average of 6.3% in each of the next two years. Emerging markets in Asia are also the best performers in economic growth in recent years, especially when compared with emerging markets outside of Asia.

But to ensure this growth is equitable and inclusive, Asian business leaders, academics and policymakers need to confront a host of challenges, including significant “unbanked” and “underbanked” populations. More than 1 billion people within the region still have no access to formal financial services — meaning, no formal employment, no bank account, no meaningful ability to engage in commerce online or offline. By some estimates, only 27% percent of adults have a bank account, and only 33% of firms have a loan or line of credit. As was highlighted by the speakers at the recent Mastercard-SMU Forum in Singapore, greater financial inclusion must become an essential component of Asia’s economic development.

A call to Turkey to close the financial gender gap

Asli Demirgüç-Kunt's picture
Also available in: Español | Français 

Financial inclusion is on the rise globally. The third edition of the Global Findex data released last week shows that worldwide 1.2 billion adults have obtained a financial account since 2011, including 515 million since 2014. The proportion of adults who have an account with a financial institution or through a mobile money service rose globally from 62 to 69 percent.

Why do we care? Having a financial account is a crucial stepping stone to escape poverty. It makes it easier to invest in health and education or to start and grow a business. It can help a family withstand a financial setback. And research shows that account ownership can help reduce poverty and economically empower women in the household.

New Global Findex data shows big opportunities for digital payments

Asli Demirgüç-Kunt's picture

We're delighted to release the 2017 Global Findex, the third round of the world's most detailed dataset of how adults save, borrow, make payments, and manage risk.

Drawing on surveys with more than 150,000 adults in more than 140 economies worldwide, the latest Global Findex features new data on fintech transactions made through mobile phones and the internet. It also provides time series updates for benchmark financial inclusion indicators.

The data shows that financial inclusion is on the rise globally, with 1.2 billion adults opening accounts since 2011, including 515 million in the last three years alone. That means 69 percent of adults globally have an account, up from 62 percent in 2014 and 51 percent in 2011. We see that Fintech, or financial technology, plays a progressively greater role in countries like China, where 50% of account owners use a mobile phone to make a transaction from their account. Compared to 2014, twice as many adults in Brazil and Kenya are paying utility bills digitally.

Pages