Key Terms Explained

Financial Access

Existing Wikipedia Entry - http://en.wikipedia.org/wiki/Access_to_finance

Introduction/Definition

Financial access (financial inclusion) refers to the possibility that individuals or enterprises can access financial services, including credit, deposit, payment, insurance, and other risk management services. It implies an absence of obstacles to the use of these services, whether the obstacles are price or nonprice barriers (e.g discrimination) to finance.¹ For finance to support not only economic growth but also poverty reduction, it needs to be provided to a wide range of economic participants. The challenge is not only making these financial services available to all, but also ensuring the quality of services provided, thereby increasing equality of opportunity and tapping the full potential in an economy.²

The Role of Financial Access

Accumulated evidences have shown that financial access promotes growth for enterprises through the provision of credit in the most promising firms, encourages more start ups, and enables incumbent firms to grow by exploiting growth and investment opportunities. It brings benefit to the economy in general by accelerating economic growth, intensifying competition, as well as boosting the demand for labor. This helps those at the lower end of the income distribution in reducing income inequality and poverty.³

Therefore, if access to finance and the range of services available are limited, household and enterprises would not be able to enjoy the benefit of finance. Poor individuals and small enterprises need to rely on their personal wealth or internal resources to invest in their education and businesses, thereby limiting their full potential and leading to the cycle of persistent inequality and slower growth.⁴

Measurement

The measurement of financial access is essential to strengthen the link between theory and empirical evidence. It is the key to understanding the access to finance around the world, as well as identifying the main challenges or policy barriers to greater access. Currently, the main proxy variables to measure the access to finance for financial institutions are the number of bank accounts per 1,000 adults, number of bank branches per 100,000 adults (commercial banks), the percentage of firms with line of credit (all firms), and the percentage of firms with line of credit (small firms).⁵

In financial markets, the measure of access relies on various measures of concentration in
the market, the idea being that a high degree of concentration reflects difficulties for access
for newer or smaller issuers. The variables include the percentage of market capitalization outside of top 10 largest companies, the percentage of value traded outside of top 10 traded companies, government bond yields (3 month and 10 years), ratio of domestic to total debt securities, ratio of private to total debt securities (domestic), and ratio of new corporate bond issues to GDP.⁶

Barriers and Policies to Increase Access

In many countries, however, access to financial services is limited to only 20–50 percent of the population, excluding many nonpoor individuals and SMEs.⁷ There are multiple reasons for limited financial access especially among the poor. Firstly, the lack of education and knowledge needed to understand the various services that are available to them. Secondly, the small number of transactions they are likely to undertake may make loan officers think it is not profitable enough to help them. Additionally, banks may be located far from the poor as financial institutions are likely to be located in rich neighborhoods. The poor also face a hard time getting loans as they typically do not have collateral and cannot borrow against their future income because they tend not to have income streams that creditors can track. Lastly, dealing with small transactions is also costly for the financial institutions.⁸

Over the past few decades, however, microfinance institutions have managed to provide financial services to some of the worlds poorest and have achieved good repayment rates.

There are many things we could do to build inclusive financial systems. This include, but not limited to, taking advantage of the technological advances in developing financial infrastructure to lower transaction costs, encouraging openness and competition to prompt current institutions to increase their service coverage, and having good prudential regulations in order to provide the private sector with the right incentives. ⁹