Asli Demirguc-Kunt Director of Research World Bank Group Financial Inclusion.

SEVENTY-SEVENTH INTERNATIONAL ATLANTIC ECONOMIC CONFERENCE

MADRID 2-5 APRIL 2014

Asli Demirguc-KuntDirector of ResearchWorld Bank Group

Financial Inclusion

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• Increased policy interest– Over 50 countries: formal targets and strategies for financial inclusion– WBG President: has called for achieving universal financial access by 2020

• Critical role in reducing poverty, boosting shared prosperity

• Enables poor people to save and borrow, allowing them to build assets, invest in education and entrepreneurial ventures, thus improving their livelihoods

• New empirical evidence on financial inclusion and its effects

Why financial inclusion ?Intro Measurement and Impact Public Policy Focus Areas Main Messages

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Global views: Financial Development Barometer

Source: Financial Development Barometer (poll of financial sector officials and experts from 21 developed and 54 developing economies).

Very important35%

Somewhat important25%

Not sure16%

Not very important24%

What is the role of new technologies in expanding access to finance?

Financial education; 32%

Better legal framework and credit information,

27%

Promote new lending technologies; 17%

More competition; 8%

More microfinance; 8%

More state banking; 8%

What is the most effective policy to improve access to finance among low-income borrowers?

Intro Measurement and Impact Public Policy Focus Areas Main Messages

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• Financial inclusion = share of individuals and firms that use financial services

• … does not mean finance for all at all costs

• Some have no demand or need for financial services

• But for many, the use of financial services is constrained by market and government failures

• That is why it is important to measure not only actual use of financial services, but also the barriers to access

Defining financial inclusionIntro Measurement and Impact Public Policy Focus Areas Main Messages

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Defining financial inclusionIntro Measurement and Impact Public Policy Focus Areas Main Messages

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• Globally, about 50 % of adults have a bank account • The other 50 % (2.5 billion) remain “unbanked”

Measuring financial inclusionIntro Measurement and Impact Public Policy Focus Areas Main Messages

Adults with accounts at a formal financial institution

Source: Global Financial Inclusion (Global Findex) Database, worldbank.org/globalfindex

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Where do the unbanked live?Intro Measurement and Impact Public Policy Focus Areas Main Messages

Source: Global Financial Inclusion (Global Findex) Database, worldbank.org/globalfindex

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• Not all “unbanked” need financial services, but barriers play a key role

Measuring financial inclusionIntro Measurement and Impact Public Policy Focus Areas Main Messages

Religious reasons

Lack of trust

Lack of documentation

Too far away

Too expensive

Family member already has account

Not enough money

0 5 10 15 20 25 30 35

5

13

18

20

23

25

30

Note: Respondents could choose more than one reason. The data for “not enough money” refer to the percentage of adults who reported only this reason. Source: Demirguc-Kunt and Klapper 2012.

Non-account-holders reporting barrier as a reason for not having an account (%)

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Correlates of financial inclusion

Source: Based on Allen, Demirguc-Kunt, and others (2012)


-20%

-15%

-10%

-5%

0%

5%

10%

-16%

-13%

-9%

-6%

3%

-3%

-12%

-2%

2%

7%

-7%-8%

eff

ec

t o

n p

rob

ab

ility

of

ow

nin

g a

n a

cc

ou

nt

(%)

Po

ore

st 20

%

Se

con

d 2

0%

Mid

dle

20

%

Fo

urth

20

%

Ru

ral

0-8

yrs of e

du

catio

n

Lo

g o

f ho

use

ho

ld size

Em

plo

yed

Un

em

plo

yed

Ou

t of w

orkfo

rce

Ma

rried

Ag

e

11


12


Source: Calculations based on Demirgüç-Kunt and Klapper 2012; World Development Indicators database, World Bank.Note: Higher values of Gini mean more inequality. Data on Gini are for 2009 or the latest available year. Account penetration is share of adults who had an account at a formal financial institution in 2011.

Financial inequality and economic inequality

0 5 10 1520

30

40

50

60

70In

com

e in

equa

lity

(G

ini c

oeff

icie

nt)

account penetration in the richest 20% as a multiple of that in the poorest 20%

Sweden

Haiti

Philippines

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• Empirical evidence on impact varies by the type of financial services

• Basic payments, savings: strong evidence on benefits, especially for the poor

• Insurance products: also some evidence of a positive impact

• Access to credit: mixed picture – firms: a positive effect on growth, especially start ups, small and medium

enterprises– microenterprises and individuals: evidence on benefits for smoothing

consumption, but not always for entrepreneurial ventures

Evidence on impacts of financial inclusionIntro Measurement and Impact Public Policy Focus Areas Main Messages

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• Policy should focus on addressing market and government failures

• Not on promoting financial inclusion for inclusion’s sake, and certainly not on making everybody borrow

• Direct government interventions in credit markets tend to be politicized and less successful, particularly in weak institutional environments

• Role for government in creating legal and regulatory framework – Examples: protecting creditor rights, regulating business conduct,

overseeing recourse mechanisms to protect consumers

Financial inclusion policy – overall findings from researchIntro Measurement and Impact Public Policy Focus Areas Main Messages

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Competition policy: important part of consumer protection• Healthy competition among providers increases consumers’ market power• New evidence: lack of bank competition diminishes firms’ access to finance


Source: Love and Martinez Peria 2012

effect at maximum government ownership

effect at minimum credit information

effect at minimum financial development

average effect (all countries)

-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0

-3.1

-2.8

-1.3

-0.6

Effect of bank mark-up (Lerner index) on probability of a firm having access to finance

Financial inclusion policy – overall findings from research

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• Role in supporting information environment (standards for disclosure, transparency, promoting credit bureaus, collateral registries)


Source: Love, Martínez Pería, and Singh 2013.

Pre-reform Post-reform0

10

20

30

40

50

60

70

80

50

73

41

54

Registry reformers

Non-reformers (matched by region and income)

% o

f fi

rms

wit

h ac

cess

to f

inan

ce

Financial inclusion policy – overall findings from research

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Promoting financial inclusion: focus areas

Promoting financial inclusion

I. Promise of technology

II. Product design, business

models

III. Financial capability


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• Technological innovations reduce transaction costs, increase financial security• Scope for scaling up, illustrated e.g. by growth in phone subscriptions


Source: World Development Indicators.


1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

25

50

75

100

125

World

High income

Middle income

Low income

Sub

scri

ptio

ns p

er 1

00 p

eopl

e

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Example: fingerprinting in Malawi (% of balances repaid on time)


Source: Calculations based on Giné, Goldberg, and Yang (2012).


Worst 2nd quintile 3rd quintile 4th quintile Best0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

88%

79%

91% 93%89%

26%

74%

92%96% 98%

FingerprintedControl

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• To harness the promise of new technologies…

• …. regulators need to allow competing financial service providers and consumers to take advantage of technological innovations…

• …coupled with strong prudential regulation and supervision to prevent overextension.

I. Promise of technologyIntro Measurement and Impact Public Policy Focus Areas Main Messages

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• Product design that addresses market failures, meets consumers’ needs and overcomes behavioral problems can foster wider use of financial services

• Example 1: commitment accounts

II. Product design, business modelsIntro Measurement and Impact Public Policy Focus Areas Main Messages

Land under cultivation0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

Ordinary account

Commitment account

acre

s

Total value of inputs

Value of crop output

Farm profit0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Ordinary account

Commitment account

Loc

al c

urre

ncy

(Mal

awi K

wac

ha, M

K)

Note: The exchange rate was MK145/USD during the study period.Source: Brune, Giné, and others (2011).

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• Example 2: index insurance

• New evidence: lack of trust, liquidity constraints constrain demand (field experiment in India by Cole and others, 2012)

• What helps: designing products to pay often and fast, an endorsement by a well-regarded institution, simplification and consumer education

II. Product design, business modelsIntro Measurement and Impact Public Policy Focus Areas Main Messages

Source: Giné and Yang, 2009

0

5

10

15

20

25

30

35 33

20

tak

e-u

p o

f lo

ans

(%

of

farm

ers)

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• Example of an innovative business model: Banco Azteca, Mexico• Improved access can be achieved by leveraging existing relationships

II. Product design, business models

Source: Bruhn and Love (forthcoming)


2000-II

2000-III

2000-IV2001-I

2001-II

2001-III

2001-IV2002-I

2002-II

2002-III

2002-IV2003-I

2003-II

2003-III

2003-IV2004-I

2004-II

2004-III

2004-IV12.0

12.5

13.0

13.5

14.0

14.5

15.0

7.6

7.8

8.0

8.2

8.4

8.6

8.8

9.0

Municipalities without Azteca Municipalities with Azteca

% o

f ind

ivid

uals

who

are

info

rmal

bus

ines

s ow

ners

(mun

icip

aliti

es w

itho

ut A

ztec

a)

% o

f ind

ivid

uals

who

are

info

rmal

bus

ines

s ow

ners

(mun

icip

aliti

es w

ith

Azt

eca)

Banco Azteca opening

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• Classroom-based financial education for general population do not work• Financial literacy can be increased by well-designed, targeted interventions• More likely to work in “teachable moments” (e.g., new job, new mortgage)• Especially beneficial for people with limited financial skills• It helps to leverage social networks (e.g., involve both parents and children)• “Rule of thumb” training helps by avoiding information overload• New delivery channels show promise—example: messages in soap operas

III. Financial capabilityIntro Measurement and Impact Public Policy Focus Areas Main Messages

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• Financial literacy messages seem to have a real-world effect…

• … but the effect is short-lived – need to repeat / reinforce

III. Financial capability

Source: Berg and Zia (2013)


Has someone in the household used hire purchase in the past 6 months?

Has someone in the household gambled money in the past 6 months?

0

5

10

15

20

25

30

35

15

26

19

31TreatmentControl

% o

f re

spon

dent

s

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• Financial inclusion: critical role in sustainable development, reducing poverty, boosting shared prosperity

• Financial inclusion varies widely around the world; poor people and young and small firms face the greatest barriers

• Innovative technologies, services, business models, and delivery channels hold much promise for increasing financial inclusion

• The role of policy is to address market and government failures, not to increase inclusion for inclusion’s sake

• Key areas: strengthening regulations, improving information environment, ensuring competition among providers, educating & protecting customers.

Main messagesIntro Measurement and Impact Public Policy Focus Areas Main Messages

Asli Demirguc-Kunt Director of Research World Bank Group Financial Inclusion.

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