A World Bank Finance Research Web Feature Article, published February 22, 2006
Financial development influences the dynamism of the economy at large and promotes long-term growth. Recent research has also shown that financial depth is not only associated with higher growth rates but also has an additional pro-poor effect, reducing income inequality. (See earlier feature story | working paper)
Numerous case studies illustrate the poverty-reducing potential of direct access to financial services. Thus, financial exclusion is likely to act as a “brake” on development as it retards economic growth and increases poverty and inequality. However, evidence that could guide public policy initiatives remains thin and tentative mostly due to inadequate data sources.
Although financial sector data is generally complete and readily available, serious gaps exist in financial access data. Recognizing the need for improved data in this important area, the World Bank is seeking to develop better indicators of access to financial services, particularly for small firms and poor households.
This effort has already attracted significant attention in the development community1 and has been given a central role in the United Nations’ International Year of MicroCredit (2005).
"Drawing on this new database, the Bank’s Development Research Group is in the process of producing working papers and publications in this area, and the findings will be synthesized in a Policy Research Report on Access to Finance, due in 2007," said Asli Demirguc-Kunt, Senior Research Manager, Development Research Group - Finance Team.
Why do we need to measure financial access?
Greater availability of data can help us answer a variety of key policy-relevant questions.
How well does the financial system in different countries directly serve the poor and the enterprises which employ the poor?
Just how limited is financial access? Who are the excluded or underserved?
Which types of financial services (e.g., credit, deposit, insurance, payments, etc.) should be accessible for the greatest impact on reducing poverty and lifting growth rates in deprived districts and regions?
What are the chief obstacles to access (including direct and indirect costs, regulations, product design etc.)?
What policy interventions and institutional arrangements can improve access for underserved groups?
Are existing policy interventions geared at improving access actually working?
Data on access would also be valuable for market participants. In the private sector, knowing who has access to which financial services is a first step in designing ways of profitably delivering financial services for different income groups.
Potential formal financial service providers are often discouraged by the lack of market intelligence. Greater availability of the appropriate data can help identify underserved segments and result in greater outreach.
Differentiating between “access” and “usage”
Measuring access to financial services is not as easy as measuring usage. Access is wider than usage: people or small firms may not wish to use financial services despite having knowledge and access at market prices.
Still, even those who claim not to want services may do so because such services are not affordable – incorporating transaction costs or additional barriers – or suitable to their needs.
Also among those that are involuntarily excluded, some may represent such poor credit risk that they cannot be prudently served.
Understanding usage thus requires information on both demand and supply factors. The World Bank is trying to collect indicators that measure higher possibility of access and opportunity to use financial services, as well as actual use. Information is also being gathered on barriers to access in order to identify boundaries of exclusion.
Ongoing Efforts to Measure Access to Financial Services and its Impact
Our knowledge in most countries of the degree to which effective and low-cost financial services reach small enterprises, low and middle-income households and other less privileged segments of the society is very limited.
The World Bank has been following different approaches, conducting and analyzing user (enterprise and household) as well as provider (financial institutions and their regulators) surveys to create benchmarks with which governments and policymakers can track access and evaluate efforts to expand access.
Complementary efforts to measure access and its impact:
The World Bank’s World Business Environment Surveys (WBES), as well as Investment Climate Assessments (ICA) which survey firms in a large number of countries have sought to explore questions of financial sector access by surveyed companies and remain one of the few sources of this data for small and medium enterprises.
Investigating this survey data for a large number of countries, using cross-country firm level regressions, has shown that finance tends to be the most binding constraint to firm growth in the overall business environment2, and that the smallest firms are the most constrained by access to finance issues3.
The Bank’s Finance Research Team will continue to explore issues of financial access and its impact on firm performance as more survey data become available.
Regulator Surveys: Results show large differences in access and usage with developing countries far behind. For example, in some countries like Ethiopia, Uganda, and Madagascar there is less than one bank branch per 100,000 people, whereas some developed countries (Portugal, Spain) have 50 or more.
More recently, the Bank’s Finance Research Team has been collecting information on banking sector outreach from bank regulators. Through these surveys, data was collected on branch and ATM penetration, on the number of deposit and loan accounts, and their average size with respect to income for 99 countries4.
Similarly, in Madagascar there are only 14 deposit accounts and just 4 loan accounts per 1,000 people, corresponding figures in developed countries are in the thousands for deposit accounts and hundreds for loan accounts.
Again, average deposit size is 8 times GDP per capita in Zimbabwe, and average loan size is 28 times GDP per capita in Bolivia, whereas these figures are equal to or less than GDP per capita in more developed countries, indicating these services are much more affordable for poorer individuals and smaller firms.
While these outreach indicators and traditional measures of financial depth are positively correlated and are related to the overall quality of the institutional and legal environment, researchers find that even after controlling for financial sector depth, firms in countries with greater outreach report facing lower financing obstacles, suggesting that outreach matters independently of depth.
Access refers to the availability of supply of different types of financial services at reasonable costs, i.e., the absence of barriers. The existence of these barriers is not easy to establish but surveys are being conducted of the top five banks in over 100 countries to assess the relative importance of such barriers5.
These bank surveys include questions on the costs (fees, minimum requirements, paperwork and documentation etc.) of opening and maintaining different types of accounts, interest rates for these accounts, loan application procedures and documentation, interest rates and fees on different types of loans, costs associated with different payment services and factors influencing credit and collateral decisions.
The Bank’s Finance Research Team is still very much at the start of this exercise, but some of the early results are fascinating. For example, minimum amounts required to open a checking account in some African countries like Malawi and Uganda can be as high has over 30 to 50 percent of GDP per capita.
Similarly, annual fees on these accounts are over 20 percent of GDP per capita. Compared to more developed countries, these figures suggest deposit accounts are very costly to open and maintain.
Preliminary data suggest minimum consumer and SME loans, days to process loan applications, and costs to transfer funds both domestically and internationally also vary significantly across countries.
Using this data it will be possible to construct summary indicators of access barriers and conduct further analysis investigating which type of institutions are associated with which type of barriers and the impact of barriers on different banking and economic outcomes.
Financial sectors in many developing countries serve only a small minority of households, often less than ten percent of the population. Although financial access questions have been included in household surveys in the past, this component has been quite small and the data not easily comparable across countries6.
Recently, several extensive household surveys dedicated to financial access have been carried out in a few counties, such as Brazil, India, Mexico and South Africa. There are plans to scale up these efforts to collect better comparable data on financial access through household surveys.
In cooperation with other international agencies (UNDP, DFID, Finmark Trust) extensive work has already been underway in the World Bank over the last year to define suitable access indicators and techniques for gathering the necessary data and develop a harmonized core questionnaire on finance that can be part of all future household surveys.
Household access surveys will serve as a platform for the development of indicators and benchmarks on access within a country over time and across countries, as well as in-depth research. Dissemination (through a global online database) and analysis of this information will inform and help development of policy lessons for creating more inclusive financial sectors7.
Asli Demirguc-Kunt holds the joint appointment of Finance Research Manager, in the World Bank's Development Economics Research Group, and Adviser, Operations and Policy Department in the Bank's Financial Sector Vice Presidency. Her recent research has focused on banking crises, financial regulation, stock markets, corporate finance and the impact of financial structure on economic growth.
Patrick Honohan is a Senior Financial Sector Policy Advisor in the World Bank’s Financial Sector Vice Presidency and the Development Research Group. His current research focus is in the field of monetary and financial sector policy, including banking crises, financial liberalization and the taxation of financial intermediation.
Thorsten Beck is a Senior Financial Economist in the Finance Team of the Development Research Group of the World Bank. His recent research has focused on the effects of bank concentration and competitiveness, access to financial services, and the impediments to growth that SMEs face.
Stijn Claessens is Senior Adviser to the World Bank's Financial Sector Vice-Presidency, and Professor of International Finance at the University of Amsterdam. His policy and research interests are firm finance and access to financial services; corporate governance; internationalization of financial services; and risk management.
Robert Cull is a senior economist in the World Bank's Development Research Group. His research focuses on the evolution of public and private institutions to resolve financial market failures. His most current research is on the effects of privatization and foreign entry on developing countries' banking sectors.
Maria Soledad Martinez Peria is a Senior Economist in the Finance Team of the Development Research Group of the World Bank. Her published research has focused on currency and banking crises, depositor market discipline, and foreign bank participation in developing countries. Currently, she is researching financial sector outreach and the impact of remittances on financial development.
Anjali Kumar is an Adviser in the Financial Sector Operations and Policy department on issues pertaining to financial access. Her recent work includes particularly the analysis and measurement of financial services for the poor.
1 Economist, “The Hidden Wealth of the Poor,” November 5, 2005 (subscribe to read) and Economist, Emerging-Market Indicators, “Bank Density,” December 3, 2005 (subscribe to read).
2 Ayyagari, M., A. Demirguc-Kunt and V. Maksimovic (2006) “How Important are Financing Constraints? The role of finance in the business environment” World Bank Policy Research Working Paper # 3820.
3 Beck, T. A. Demirguc-Kunt and V. Maksimovic (2005), “Financial and Legal Constraints to Growth: Does Firm Size Matter?’ Journal of Finance, Vol 60, No 1, pp137-177.
4 Beck, T., A. Demirguc-Kunt and S. Martinez Peria (2005), “Reaching out: Access to and Use of Banking Services Across Countries” World Bank mimeo.
5 Beck, T. , A. Demirguc-Kunt and M. S. Martinez Peria (forthcoming) “Banking Services for Everyone? Barriers to Bank Access Around the World”, World Bank mimeo.
6 See Gasparini, L, F. Guitierrez, G. Porto, A. Tamola and L. Tornarolli (2005) “Finance and Credit Variables in Household Surveys of Developing Countries,” World Bank mimeo.
7 Claessens, S. and A. Demirguc-Kunt (2006) “Measuring Access to Financial Services through Household Level Surveys,” World Bank Work Program Concept Note.