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Financial Development: New Book Shows that Low-Income People Are “Bankable”

  • More than 800 million people living on less than $5 a day actively use financial services.
  • Income isn’t the only deciding factor for financial access.
  • Inclusive financial policies can benefit the poor and the financial industry alike.

WASHINGTON, Mar 25, 2013 – More than 800 million “unbankable” low-income people already are actively using banking and other financial services, suggesting that expanding financial access can not only benefit the poor but create millions of new customers for the financial industry, according to a new book.

The book, Banking the World: Empirical Foundations of Financial Inclusion, shows that the population living on less than $5 a day, adjusted by purchasing price parity, makes up more than two-thirds of those using formal financial services in Africa, Asia and the Middle East. That contradicts the theory that income and urbanization drive the demand for services by banks and other financial institutions.

Even in cross-country comparisons, income isn’t the only deciding factor for financial access.For example, the percentage of people using formal banking is higher in India and Thailand than in countries with similar gross domestic product or urbanization. That means financial access can be expanded with the right kind of regulation and policy, along with industry participation, even when a country’s socioeconomic and demographic context remains the same.

“These estimates provide support for the belief that poor people are bankable,” says World Bank Director of Research AsliDemirguc-Kunt, who edited this book with Robert Cull, a lead economist of the Bank’s research department, and Jonathan Murdoch, professor of public policy and economics at the New York University’s Wagner Graduate School of Public Service. “Governments and the financial industry can help create millions of new customers if they design the right policy and products to serve the world’s low-income population.”

The book came just as researchers are discovering new trends about the “unbanked” population. The World Bank’s Global Financial Inclusion Database, for example, shows that 2.5 billion people don’t use bank accounts – not only because of poverty, but also the cost, travel distance, and amount of paper work involved in opening one.

Other research, using “financial diaries,”shows that financial dealings among low-income households are complex simply because they are poor, operating on tight margins with few cost-effective options to cope with financial emergencies, such as a wedding or hospital bill. As a result, they often rely on an informal network of relatives, friends and savings clubs, as well as money lenders who charge high fees. That makes it harder for them to build up reserves, let alone use credit, insurance and other financial tools.

Not surprisingly, financial development in developing countries can serve the pent-up demand for better financial products, improve the lives of the poorest population and reduce income inequality. One study in the book (Chapter 7), for example, links easier financial access to reducing hunger. People tend to be less undernourished in countries where farmers use financial services -- often to buy more fertilizer and tractors that boost cereal yields and agricultural productivity, thus driving down food prices.

In another study (Chapter 6), two researchers examine the impact of Banco Azteca’s expansion in Mexico. In 2002, the bank opened branches in more than 1,000 Grupo Elktra retail stores, creating overnight the country’s largest network of bank branches. Data show that informal businesses owned by men rose 7.6 percent in municipalities with the stores, compared with those without them. In addition, both men and women increased their income by 7%.

Still, even with innovations such as microcredit and mobile banking, the cost of serving the poorest customers is high. Strategies such as group lending, weekly meetings and social pressure can be costly for both providers and clients. One randomized control study (Chapter 13) in the book, however, points out an innovative way to manage the risk. It finds that farmers in Malawi who were fingerprinted as part of their loan application had a repayment rate that was 40% higher than others in the highest risk group of borrowers. Finger printing, however, had no effect on how lower-risk borrowers behaved.

“Banking the world in a more inclusive way carries risks, but this collection of essays provides guidance to policy makers and the financial industry about how it can be done, and if the risks are managed well, the benefits to the world’s poor will be substantial,” says Cull.

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