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Finance for All? Policies and Pitfalls in Expanding Access

Policy Research Report
Finance for all
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November 13, 2007 – Between 50 and 80 percent of adults in many developing countries have inadequate access to financial services, finds a new World Bank policy research report entitled “Finance for All? Policies and Pitfalls in Expanding Access”. Failure to provide more households and small and medium enterprises with the financial services they need acts as a brake on development.

While noting the microfinance industry’s progress in delivering credit to poor people, the report calls for a broader financial strategy that delivers services to all excluded people and firms. Inclusive financial systems ultimately benefit the poorest people and the smallest firms the most, by creating more jobs, raising incomes, and generating more opportunities for small businesses, the report says.

“Reforms that promote access to financial services should be at the core of the development agenda,” said Asli Demirgüç-Kunt, Senior Research Manager, Finance and Private Sector at the World Bank, and lead author of the report. “Better access to finance not only increases economic growth, but also helps fight poverty, and reduces income gaps between rich and poor people.”

Poor people and small firms, especially those in rural areas or in the informal sector, face many barriers to financial access—distance from services, the inability to produce formal documents when needed, and prohibitive costs. Ethiopia has less than one bank branch per 100,000 people, and in Cameroon it costs $700—more than GDP per capita—to open a checking account. Across Sub-Saharan Africa, only 20 percent of households have accounts with financial institutions.

In small firms in developing countries, only 15 percent of new investments are financed externally, compared with 30 percent among larger firms. Without financial access, small and new firms face obstacles to both entry and prospective growth.

Governments should strengthen institutions and adopt new technologies to bring down transaction costs, the report says. Research suggests that they should also encourage competition—including foreign bank entry—and provide the right regulatory incentives. 

In contrast, direct interventions by governments, such as through credit subsidies or government-owned financial institutions, can be counter-productive, reducing incentives for the private sector to deliver services to the poor. 

conference on access to finance was organized by the World Bank earlier this year (March 15-16 2007)
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