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Research Roundup on Access to Finance (March 2013)


Measurement, Promotion and Impact of Access to Financial Services

Access to finance has become an important topic in policymakers’ agenda. In its most recent communiqué, the G20 agreed "to assist countries, policymakers and stakeholders in focusing global efforts on measuring and sustainably tracking progress on access to financial services globally." Over the last year, research conducted in DECRG has contributed both to the measurement of access to finance and to our understanding of its causes and implications. This roundup presents a brief discussion of recent working papers that focus on measuring access, drivers of access, and implications of access or lack of access to finance.









Three-quarters of the world’s poor are "unbanked" 

A comprehensive view of the global financial inclusion landscape is now available through the Global Financial Inclusion Database, the first effort of its kind to measure people’s use of financial products across economies and over time. Over 40 indicators measure how adults in 148 economies save, borrow, make payments, and manage risk. The data reveal sharp disparities in the use of financial services across regions, economies, and individual characteristics: 89 percent of adults in high-income economies have a formal account, compared to 41 percent of adults in developing economies and 23 percent of adults living below $2 per day. Fifty percent of adults worldwide have an account at a formal financial institution, although account penetration varies across regions, income groups, and individual characteristics. About 22 percent of adults report having saved at a formal financial institution in the past 12 months, and 9 percent report having taken out a new loan from a bank, credit union, or microfinance institution in the past year. Although half of adults around the world remain unbanked, 35 percent of them report barriers that might be addressed by public policy. These barriers include high cost, physical distance, and lack of proper documentation.

Demirgüç-Kunt, Asli, and Leora Klapper. 2012. "Measuring Financial Inclusion: The Global Findex Database." World Bank Policy Research Working Paper 6025, April.


Access to finance continues to be low for adults and an obstacle for enterprises in Africa

This overview of the African financial sector landscape uses the new Global Financial Inclusion Indicators Database (Global Findex) to characterize adults in Africa that use formal and informal financial services and to identify the barriers to formal account ownership. Next, it uses World Bank Enterprise Survey data to examine how the use of financial services by small and medium enterprises in Africa compares with small and medium enterprises in other developing regions in terms of account ownership and availability of lines of credit. The analysis shows that less than one-quarter of adults in Africa have an account with a formal financial institution and that many adults in Africa use informal methods to save and borrow. Similarly, the majority of small and medium enterprises in Africa are unbanked and access to finance is a major obstacle. Compared with other developing economies, high-growth small and medium enterprises in Africa are less likely to use formal financing, which suggests formal financial systems are not serving the needs of enterprises with growth opportunities.

Demirgüç-Kunt, Asli, and Leora Klapper. 2012. "Financial Inclusion in Africa: An Overview." World Bank Policy Research Working Paper 6088, May.

World Bank Let’s Talk Development Blog, "The Global Findex: The first database tracking how adults use financial services around the world," April 19, 2012. 

Understanding the barriers to ownership and use of formal financial accounts

The use of formal bank accounts can benefit many, but little is known about the factors underpinning financial inclusion across individuals and countries. Using data for 123 countries and more than 124,000 individuals, this research investigates individual and country characteristics associated with the use of formal accounts and what policies are effective among those most likely to be excluded: poor and rural residents. Greater ownership and use of formal accounts is associated with a better enabling environment for accessing financial services, such as lower account costs and greater proximity to financial intermediaries. Policies to promote inclusion, such as requiring banks to offer basic or low-fee accounts and exempting some depositors from onerous documentation requirements, are especially effective among those most likely to be excluded. Furthermore, those who are financially excluded report lower barriers in countries with lower costs of accounts and greater penetration of financial service providers. Overall, policies to reduce barriers to financial inclusion may expand the pool of eligible account users and encourage existing account holders to use their accounts to save and with greater frequency.

Allen, Franklin, Asli Demirguc-Kunt, Leora Klapper, and Maria Soledad Martinez Peria. 2012. "The Foundations of Financial Inclusion: Understanding Ownership and Use of Formal Accounts." World Bank Policy Research Working Paper 6290, December.

Blog (Jan. 9, 2013)


Banking competition does not reduce access to finance

Interest in the impact of bank competition on financial markets and firms intensified during the recent global financial crisis. The downfall of some institutions as a result of the crisis and the emergency measures taken by some governments to deal with this episode—such as mergers, bailouts, recapitalizations, and extension of guarantees—have led to concerns about the future of bank competition and its potential implication for access to bank finance. How competition affects access to finance is a long-standing, largely unresolved question. To explore the impact of bank competition on firms’ access to finance this research combines multi-year, firm-level surveys with country-level panel data for 53 countries. The analysis finds that low competition, as measured by high values of the Lerner index, diminishes firms’ access to finance, while commonly used bank concentration measures are not robust predictors of firms’ access to finance. In addition, the impact of competition on access to finance depends on the banking environment. Some features of the environment, such as greater financial development and better credit information, can mitigate the damaging impact of low competition. But other characteristics, such as high government bank ownership, can worsen the negative effect.

Love, Inessa, and María Soledad Martínez Pería. 2012. "How Bank Competition Affects Firms’ Access to Finance." World Bank Policy Research Working Paper 6163, August.

Government connections affect access to credit in Chinese firms

Credit allocation in China has been characterized by government intervention and a bias toward state-owned enterprises. This research uses firm-level data to understand whether and how firms with differential government connections are financially constrained in China and how that affects their investment patterns. Investment by non-state firms is indeed highly sensitive to internal cash flows, while no such sensitivity is found for government-owned enterprises. Even within the subset of non-state firms, government connections are associated with substantially less severe financial constraints (less reliance on internal cash flows to fund investment). Also, large non-state firms with weak government connections are especially financially constrained, due perhaps to the formidable hold of their state rivals on financial resources after the “grabbing-the-big-and-letting-go-the-small” privatization program in China. Firms with government-appointed Chief Executive Officers also have significantly lower investment intensities, due perhaps to their lower-powered incentives. The results provide further evidence of the misallocation of credit by China’s dominant state-owned banks.

Cull, Robert, Wei Li, Bo Sun, and Lixin Colin Xu. 2013. "Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms." World Bank Policy Research Working Paper 6352, February.


Firms in Europe and Central Asia with external credit were more likely to survive the financial crisis

The global financial crisis hit firms in the Eastern Europe and Central Asia region especially hard. Firm managers reported that reduced demand was the biggest problem, although financial constraints were also frequently mentioned. Two datasets are used to investigate how country and firm characteristics during the early phase of the financial crisis affected their likelihood of survival. Data on financial constraints for 360 firms from 23 countries in 2002, 2005, and 2008 showed both a gradual easing of financial constraints from 2002 to 2005, and tightening during the crisis. During the crisis, financial constraints were less severe in countries with well-established foreign banks (entered prior to year 2000), and the increase in the severity of financial constraints was more pronounced for large firms, although their constraints were less severe on average. Data from firms still in operation in 2009 in six countries confirm that firms with external credit were more likely to survive the crisis.

Clarke, George R. G., Robert Cull, and Gregory Kisunko. 2012. "External Finance and Firm Survival in the Aftermath of the Crisis: Evidence from Eastern Europe and Central Asia." World Bank Policy Research Working Paper 6050, April. 

Better access to microfinance needed for rural, nonfarm microenterprises in Bangladesh

The farm sector in Bangladesh is the major source of employment and income, with the rural nonfarm sector providing an additional source of income. As the nonfarm sector—mostly made up of microenterprises—becomes a larger part of the rural economy, access to finance plays an increasingly important role in promoting the efficiency and growth of microenterprise activities. An investigation of access to microfinance suggests that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities. Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans. The analysis suggests that credit constraints may be reducing the enterprises’ profit margin by as much as 13.6 percent per year. Since the returns to microenterprise investment are high, microfinance institutions can play a larger role in supporting microenterprise growth.

Khandker, Shahidur R., Hussain A. Samad, and Ali Rubaba. 2013. "Does Access to Finance Matter in Microenterprise Growth? Evidence from Bangladesh." World Bank Policy Research Working Paper 6333, January. 

Eliminating credit rationing alone will not be enough to improve rural productivity in Ethiopia

Ethiopian data is used to explore credit rationing in semi-formal credit markets and its effects on farmers’ resource allocation and crop productivity. Credit rationings found to be widespread in the sampled rural villages, largely because of risk-related factors. Political and social networks emerge as key determinants of access to credit among smallholder, peasant farmers. Significant regional variation emerges as well. In high-potential, surplus-producing areas where credit is largely used for agricultural production, eliminating credit constraints would increase productivity by roughly 11 percentage points. By contrast, in low-productivity, drought prone areas where loans were rarely used to acquire inputs for crop production, there is no relationship between credit rationing and agricultural productivity. To be effective, efforts to improve agricultural productivity not only need to increase credit supply, but also explore the reasons for credit rationing and the availability of productive opportunities.

Ali,Daniel Ayalew, and Klaus Deininger. 2012. "Causes and Implications of Credit Rationing in Rural Ethiopia: The Importance of Spatial Variation." World Bank Policy Research Working Paper 6096, June.

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Last updated: 2013-03-14

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