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Access to Finance: The Unfinished Agenda

A Finance Research Feature, March 2007

Without access to external finance, firms cannot realize their full growth potential. This can slow down economic growth for a country as a whole. In fact, financing constraints are among the worst obstacles impeding firms’ operations and growth, especially in countries with weak financial markets and institutions.

There have been many recent advances in understanding how to measure access to financial services; what determines the level of access; and the impact of access to finance. But a substantial and exciting agenda remains to be explored in this key area of development, concluded experts at a recent conference on access to financial services in Washington, DC.

Francois Bourguignon, World Bank Chief Economist and Senior Vice-President, Development Economics, told participants at the event that more work needs to be done on links between financial sector development and the interaction of economic growth and income inequality.

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Organized by the World Bank’s Development Research Group (DECRG) and the World Bank Economic Review in March 2007, the event brought together leading academics, practitioners, and policy makers. (

Tackling financial market imperfections head-on

Many theoretical models link inequality with growth through financial market imperfections that can be overcome through redistribution or other public policy tools.

Very few models try to tackle financial market imperfections head-on,” said Asli Demirguc-Kunt, Senior Research Manager of DECRG’s Finance and Private Sector Development Group. “This is particularly surprising because there is clear evidence that finance and income inequality are negatively related across countries, as well as across states within the US.

Obstacles such as minimum deposits or loan sizes, account fees and the need for documentation can prevent most people in many developing countries from accessing banking services. This is reflected in estimates of the proportion of households with a financial account, ranging from over 90 percent in Western Europe to less than 20 percent in Sub-Saharan Africa.

Lack of data has seriously impeded rigorous analysis,“ said Thorsten Beck, Senior Economist at the World Bank, and co-organizer of the conference. “It is only recently that we have started compiling data on use of and access to finance.”

These data can be used to study options for policy makers to improve access to finance and more accurately measure the impact of access to and use of financial services.

New insights on microfinance

Several conference papers offered new insights into low-income households’ and micro-entrepreneurs’ needs for financial services and challenges faced by the microfinance movement. 

Experimental evidence from Mexico confirms that micro-entrepreneurs are able to pay the high rates charged by formal and informal financial intermediaries, given very high returns to capital.

On the other hand, data from Indonesia indicate a greater need for consumer credit than for productive credit. And microfinance customers do not seem to react to microfinance offerings in ways suggested by theory. 

While rainfall insurance has been highlighted as an important micro-insurance instrument, researchers find surprisingly little take-up in a pilot project in India.

An exclusive focus on informal and semi-formal microfinance, however, might be mistaken. Even in countries with banking systems dominated by government-owned banks such as China, informal finance is an imperfect substitute for access to formal banking services.

Evidence from Bosnia and Herzegovina suggests that while people can decide to become entrepreneurs regardless of financing from banks, the likelihood of staying in business is significantly increased by an existing relationship with a bank. 

Finally, the greatest benefit to the poor from financial development may not be due to direct access to finance, as emphasized by microfinance, but due to indirect benefits of greater financial development trickling through labor and product markets.

Expanding access to finance – the role of governments

What determines the use of formal banking services? Findings include the long-term effects of institutions (as seen in the way that immigrants from different countries to the US vary in their participation in the financial market); the degree to which competition is fostered (evidence seen from Italy); and the use of public-private partnerships by governments.

Several examples from Latin America show the potential for such interventions, which help overcome coordination and first-mover failures. But the jury is still out as to whether the right governance structures are in place and whether the government will really pull out once it is no longer needed. And even if such schemes are successful, they do not take away from the need for long-term institution building.

Greater technology, greater access

Experts identified other areas deserving more attention and analysis in the future.

Michael Klein, World Bank Vice President for Finance and Private Sector Development pointed out that the increasing use of technologies such as mobile telephony in banking may prove to be key in expanding access to the under-served. This will require more analytical work and research on the interaction between technology and regulation. 

On a more general level, globalization and technological advances will redefine the debate on access to finance over the coming year and require continuing data collection and analytical research, emphasized L. Alan Winters, Director of the World Bank’s Development Research Group.

Many of the papers presented at the conference will be published in a special issue of the World Bank Economic Review and the findings of this conference will also form part of the forthcoming Policy Research Report on Access to Finance: Measurement, Impact and Policy.


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