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 US$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.
Expanding access to financial services remains an important policy challenge in many countries, with much for governments to do. However, policymakers need to have realistic goals. For example, in many instances, lax credit policies have hampered national welfare.
According to the report (which presents case study analyses of policies and interventions and draws analyses from extensive data), government policies in the financial sector should focus on:
Prioritizing institutional reforms
Besides the far-reaching (and often long term) reform of institutions -- such as securing property rights against state expropriation -- prioritizing certain reforms would help deliver improved access to finance in the short to medium term, the report says.
These reforms include improving information infrastructures, such as establishing credit registries, legislation for leasing and factoring, and strengthening procedures that allow individual lenders to recover on debt contracts, such as those related to collateral.
Promoting cost-effective technologies
Low-cost internet and mobile phone-based financial services should be allowed to proliferate without legal impediments, the report says. Timely updates of legislation would ensure that contracts are clearly enforceable.
Early examples of success with "m-finance" -- which uses mobile phones to overcome high unit costs posed by lack of more traditional infrastructure--include the Philippines (an initial sign-up of 4 million customers), South Africa, DR Congo, Zambia and Kenya.
Promoting competition and stability
Governments should encourage openness and competition -- including private ownership of banks and foreign bank entry -- and provide the right regulatory incentives for efficient and sustainable delivery of services.
Policies to improve financial access may differ from those for financial development. For example, policies that aim to promote stability (i.e. regulation and supervision) and prevent abusive lending to the poor may adversely impact financial access.
Reaching the poorest
Delivering financial services to the poorest without subsidies remains difficult. As credit is not the only -- or in many cases, the main -- financial service needed by the poorest, the report suggests that subsidies may be better spent on overcoming barriers to savings and payment services, which are necessary to participate in a modern market economy.
(China Development Gateway November 14, 2007)