September 2010, Asli Demirgüç-Kunt (DECFP)
How did the recent global crisis affect access to financial services? A report by the World Bank Group and CGAP just provided the answer: Data show that even as countries were suffering due to financial crisis, access to formal financial services grew in 2009. Indeed, the number of bank accounts grew world-wide, even as the volume of loan and deposit accounts dropped. Physical outreach of the financial systems, consisting of branch networks, automated teller machines (ATMs), and point-of- sale (POS) terminals, all expanded.
That’s good news. Lack of access to finance is often the critical element underlying persistent income inequality as well as slower growth. But the recent global financial crisis which has led us to question many of our beliefs and re-opened old debates also exposed an important tension between access and stability. Were we wrong to emphasize access in the light of what happened?
No. But at the same time, it is important to stress that this access needs to be sustainable access, and expanding it should not be pursued at the expense of stability. For example, we know there are many underlying causes of the recent global crisis. But one way U.S. policymakers contributed to the crisis is by encouraging Fannie Mae and Freddie Mac to increase availability of mortgages to borrowers with questionable ability to repay. Subsequent relaxing of the standards, the increase in home prices due to a larger pool of “qualified” borrowers, and their eventual default in large numbers during the downturn, all added to the severity of the crisis. Hence, an important lesson of the recent crisis is that irresponsible expansion of access can be very costly.
We also need to remember that for poor households, credit is not the only – or in many cases, the principal- financial service they need. It is true that provision of financial services to the poor often requires subsidies. But subsidizing access to credit is tricky business and may backfire in unexpected ways, and subsidies may be better spent on savings and payment systems which are necessary for participation in a modern market economy. Access to formal payment and savings services can approach universality as economies develop. However, not everyone will – or should- qualify for credit.
All this should not take away from the important goal of broadening financial access, just that we need to be careful in how we do this. In the Policy Research Report “Finance for All?” we devoted a whole chapter discussing policies and pitfalls in expanding access. Governments certainly have an important role to play in building inclusive financial systems, but not all government action is equally effective and some policies, as we have seen, can be counterproductive. Government policies should focus on building financial institutions, encouraging competition, and establishing sound prudential regulation to provide the private sector with appropriate incentive structures and broaden access. Governments can facilitate the development of an enabling financial infrastructure and encourage adoption of new technologies. Despite the lessons of the recent crisis, these days there is a renewed interest in direct interventions – be it through subsidies or credit guarantees (or even ownership of financial institutions). But we need to be mindful that these are difficult to design and administer well, often have unintended consequences, and require careful evaluation before being judged successful and widely emulated.