This is the fifth blog in a series about Business Ready (B-READY), a World Bank flagship report that assesses the global business environment. The first blog, Data for reforms: Leveraging the B-READY 2024 report for enhanced business environments, offered guidance on how to effectively navigate and leverage B-READY data to enhance business environments; the second blog, Data-driven transparency: The need for easy access to laws and regulations for businesses, explains the importance of transparency for businesses to thrive; the third blog, Minimum wage policies through the lens of data-driven insights, dives into the role of minimum wage in labor markets; the fourth blog, The right place at the right time: Why business location matters for firm success, deals with the link between physical location and how that can boost its performance.
The fight against financial crime took a major leap forward in 1989 with the creation of the Financial Action Task Force (FATF). Since then, countries have adopted anti-money laundering/countering financing of terrorism (AML/CFT) measures, with Customer Due Diligence (CDD) at their core. CDD helps financial institutions verify customer identities, assess risks, and monitor transactions—enhancing transparency and protecting financial systems.
But these safeguards come at a cost. Strict CDD requirements can create financial barriers, particularly for small and medium-sized enterprises (SMEs). Compliance costs deter banks from lending to smaller firms, while complex documentation requirements often leave SMEs locked out of financial services—especially in developing economies.
Digital innovations like electronic Know Your Customer (eKYC) offer a potential solution, streamlining identity verification while maintaining regulatory oversight. To be effective, however, regulatory frameworks must evolve to support digital verification methods.
This blog, drawing on data from the Business Ready (B-READY) project, explores how economies can balance financial integrity with inclusion—and how eKYC can help bridge the gap. B-READY assesses these challenges within its Financial Services topic, particularly in the Commercial Lending category, which evaluates regulatory frameworks and explores ways to enhance access to finance through stronger yet more efficient CDD measures.
Data insights from B-READY
Data on Financial Services from the World Bank’s B-READY report and additional Enterprise Surveys data reveal notable trends in financial access across income groups. According to the data covering the 50 economies in B-READY 2024, small and medium enterprises (SMEs) constitute the majority of firms – over 90% – across income groups. However, their access to checking or savings accounts increases with income level, from 81% in low-income economies to 95% in high-income economies. Moreover, SMEs consistently lag large firms, with the gap widening as income levels decline (Figure 1).
A similar pattern emerges in financing constraints (Figure 1). In low-income economies, 40% of SMEs report major or severe obstacles to finance—twice the rate of large firms.
The data also reveal how CDD regulations incorporate AML/CFT risk factors – that are based on FATF recommendations – across economies. Regulatory coverage varies widely, with some risk factors being more commonly addressed than others, resulting in differences in the number of factors covered in each economy (Figure 2). As additional risk factors are integrated into CDD policies, the complexity and burden of compliance increase for both financial institutions and their clients.
This situation is particularly concerning for developing and emerging economies, where SMEs represent a significant share of the formal private sector (Abraham and Schmukler 2017) yet have limited access to capital markets.
Electronic Know Your Customer (eKYC) offers a way to ease compliance burdens while maintaining regulatory effectiveness. KYC is a regulated process used to verify a customer's identity and assess risk, traditionally requiring physical document submission and in-person verification. However, eKYC leverages digitalization, authentication technologies, and APIs to automate these procedures, enabling financial institutions to conduct identity verification remotely and more efficiently. For eKYC to be viable, regulatory frameworks must permit financial institutions to perform CDD without requiring physical document exchanges.
Among the 45 economies with available data, 29 have commercial lenders that rely on it for conducting CDD. Adoption rates increase with income levels—only 2 out of 5 low-income economies use eKYC, compared to 11 out of 12 high-income economies (Figure 3). Five economies had no definitive response to the e-KYC question.
eKYC could lower barriers of AML/CFT compliance
Figure 4 shows the link between SMEs reporting access to finance as a major or very severe constraint, and the relative size of the private credit market in various economies. As credit markets expand, it becomes easier for SMEs to get financing. The dashed line in the figure shows that bigger credit markets are generally linked to fewer financing obstacles for SMEs (indicated by a negative correlation).
Notably, in economies without eKYC, SMEs face greater challenges in accessing finance, shown by their placement above the regression line. Most of these economies have also adopted all 12 AML/CFT risk factors, suggesting that stricter regulations might be contributing to financial access barriers. In contrast, economies with eKYC perform better, appearing mostly below the regression line.
Why is this important?
Compliance measures such as CDD are essential for maintaining the integrity of financial systems and preventing illicit activities. Nevertheless, they also pose significant challenges for SMEs, particularly in developing and emerging economies. The high compliance costs and complex regulatory requirements can hinder financial access for smaller firms. However, digital innovations like eKYC offer promising solutions to streamline these processes, reducing the burden on both financial institutions and SMEs. By adopting such technologies and ensuring supportive regulatory frameworks, economies can strike a balance between financial integrity and inclusion, ultimately fostering a more inclusive financial environment for SMEs.
Here, the B-READY data has become a valuable tool for countries to identify areas that warrant improvement in their regulatory frameworks and to foster economic growth through private sector development.
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