The topic of access to finance and financial inclusion has been of growing interest throughout the world, particularly in emerging and developing economies. Policymakers are increasingly concerned that the benefits produced by financial intermediation and markets are not being spread widely enough throughout the population and across economic sectors, with potential negative impacts on growth, income distribution and poverty levels, among others. Furthermore, they may also be concerned with the potential negative consequences for macro stability when financial system assets are concentrated in relatively few individuals, firms, or sectors.
Financial inclusion is the use of financial services by individuals and firms. Financial inclusion allows individuals and firms to take advantage of business opportunities, invest in education, save for retirement, and insure against risks (Demirgüç-Kunt, Beck, and Honohan 2008).
It is important to distinguish between the use of and access to financial services. Actual use is easier to observe empirically. Some individuals and firms may have access to but choose not to use some financial products. Some may have indirect access, such as using somebody else’s bank account, or are already using a close substitute. Others may not use financial services because they do not need them or because of cultural or religious reasons. The nonusers include individuals who prefer to deal in cash and firms without promising investment projects. From a policy makers’ viewpoint, nonusers do not constitute an issue since their non-use is driven by lack of demand. However, financial literacy can still improve awareness and generate demand; and non-use for example due to religious reasons can be overcome by allowing entry of financial institutions that offer Sharia-compliant financial products.
Some customers may be involuntarily excluded from the use of financial services. Several groups belong in this category. One notable group consists of individuals and firms that are unbankable from the perspective of commercial financial institutions and markets, because they do not have enough income or present too high a lending risk. These customers have effectively no demand since their lack of use is not due to any market failure., Other groups in this category may not have access due to discrimination, lack of information, shortcomings in contract enforcement, information environment, shortcomings in product features that may make a product inappropriate for some customer groups, or price barriers due to market imperfections. If high prices exclude large parts of the population, this may be a symptom of underdeveloped physical or institutional infrastructures, regulatory barriers or lack of competition. Financial exclusion deserves policy action when it is driven by barriers that restrict access for individuals for whom the marginal benefit of using a given financial service would otherwise be greater than the marginal cost of providing that service.
Moral hazard and adverse selection
Financial markets differ from markets for other products and services. For example, one often hears about an access problem in credit markets but not about an access problem, say, for cars. One of the basic rules of economics is that prices adjust so that at market equilibrium, supply equals demand. Hence, if demand for cars exceeds the supply, the price of cars will rise until demand and supply are equated at the new equilibrium price. If this price is too high for some, they will not be able to own a car. But all those who are willing and able to pay the price will be able to own a car. So if prices do their job, there should be no access problem.
In a famous paper, Stiglitz and Weiss (1981) provide a compelling explanation of why financial markets –particularly credit and insurance - are different. They show that information problems can lead to credit rationing and exclusion from financial markets even in equilibrium. Credit and insurance markets are characterized by serious principal agent problems, which include adverse selection (the fact that borrowers with less intention of repaying a loan are more willing to seek out external finance) and moral hazard (once the loan is received borrowers may use funds in ways that are inconsistent with the lenders interest). Therefore, when considering involuntarily excluded users, it is very important to distinguish between those facing price barriers and financial exclusion due to high idiosyncratic risk or poor project quality, and those facing such barriers due to market imperfections such as asymmetric information.
The reason why rationing can arise even in a competitive credit market, is because interest rates and bank charges affect not only demand but also the risk profile of bank’s customers: higher interest rates tend to attract riskier borrowers (adverse selection) and change repayment incentives (moral hazard). As a result, the expected rate of return of a loan will increase less rapidly than the interest rate and, beyond a point, may actually decrease. Because banks do not have perfect information about the creditworthiness of prospective borrowers, the supply of loans will be backward bending at rates above the bank’s optimal rate. This means that financial exclusion will persist even in market equilibrium. Since it is not profitable to supply more loans when the bank faces excess demand for credit, the bank will deny loans to borrowers who are observationally indistinguishable from those who receive loans. The rejected applicants would not receive a loan even if they offered to pay a higher rate. Hence they are denied access (they may be bankable but are involuntarily excluded).
Determining whether individuals or firms have access to credit but chose not to use it or were simply excluded is complex, and the effects of adverse selection and moral hazard are difficult to separate. Hence, attempts to broaden access beyond the equilibrium level come with challenges, as they require the bank to lower screening standards, and may translate into higher risks for banks and borrowers. The global financial crisis has highlighted that extending access at the expense of reduced screening and monitoring standards can have severely negative implications both for consumers and for financial stability. Therefore, in the case of credit, it is generally preferable to promote financial inclusion through interventions that increase supply by removing market imperfections. Examples are new lending technologies that reduce transaction costs, or improved borrower identification that can mitigate (even if not fully eradicate) problems of asymmetric information.
Other financial services, such as deposits and payments, do not suffer from moral hazard and adverse selection that affect credit and insurance markets, but they still present policy challenges for financial inclusion. Non-price barriers are often very important. For example, potential customers may be discriminated against by the design features of a product, or they may face barriers to access due to red tape. Some individuals will have no access to financial services because there are no financial institutions in their area, as is the case in many remote rural areas. Yet others may be excluded because of poorly designed regulations, for example documentation requirements of opening an account, such as having a formal address or formal sector employment. For those individuals, the supply curve is vertical at the origin, and the supply and demand for services do not intersect, again leading to financial exclusion.
When it comes to access to simple deposit or payments services, policymakers also care if high prices and fixed costs make it impossible for large segments of the population to use these basic services. This is not an access issue in the strict sense, but it still represents a policy challenge because the high price often reflects lack of competition or underdeveloped physical or institutional infrastructures, where government can play an important role.
Measuring the use of and access to financial access
Until recently, measurement of financial inclusion around the world has focused on density indicators, such as the number of bank branches or ATMs per capita. Much of this “provider-side” information on financial inclusion is now collected as part of the Financial Access Survey (fas.imf.org), which has annual data for 187 jurisdictions from 2004 to 2011. While these indicators made it possible to obtain basic provider-side information on the use financial services, relatively little has been known until recently about the global reach of the financial sector—the extent of financial inclusion and the degree to which groups such as the poor and women are excluded from formal financial systems.
This gap in data has now been addressed with the release of the Global Financial Inclusion (“Global Findex”) database, built by the World Bank, in cooperation with the Bill and Melinda Gates Foundation and Gallup, Inc. These “user-side” indicators, compiled using the Gallup World Poll Survey, measure how adults in 148 economies around the world manage their day-to-day finances and plan for the future. The indicators are constructed with survey data from interviews with more than 150,000 nationally representative and randomly selected adults over the 2011 calendar year. The database is publicly available online and includes over 40 indicators related to account ownership, payments, saving, borrowing, and risk management. The complete country- and micro-level database is available through the Global Findex website, www.worldbank.org/globalfindex.
In its current form, the value of the Global Findex data lies in benchmarking, diagnostics, and cross-sectional analysis. However, with the complete updates in 2014 and 2017, the Global Findex will allow users to compare indicators within countries over time. This will allow for a better understanding the impact of financial inclusion policies over time. The database can serve as an important tool for benchmarking and to motivate policy makers to embrace the financial inclusion agenda. The questionnaire, translated into 142 languages to ensure national representation in 148 economies, can be used by local policy makers to collect additional data. Adding its questions to country-owned efforts to collect data on financial inclusion can help build local statistical capacity and increase the comparability of financial inclusion indicators across economies and over time.
The World Bank’s Enterprise Surveys (www.enterprisesurveys.org) is currently the leading dataset to measure financial inclusion by firms of all sizes across countries. The World Bank also compiles so-called Informal Surveys, similar in format to the Enterprise Surveys but focused on firms in the informal sector.
As for access to financial markets, the Global Financial Development Database, available at www.worldbank.org/financialdevelopment, contains cross-country indicators capturing firms’ access to securities markets. One of the proxy variables for access to stock and bond markets is market concentration. The idea behind this measurement is that a higher degree of concentration reflects greater difficulties for access for newer or smaller issuers. The variables in this category include the percentage of market capitalization outside of top 10 largest companies, the percentage of value traded outside of top 10 traded companies, government bond yields (3 month and 10 years), ratio of domestic to total debt securities, ratio of private to total debt securities (domestic), and ratio of new corporate bond issues to GDP.
Chapter 1 of the 2013 Global Financial Development Report provides an introductory discussion into the measurement of financial access, as part of a broader discussion on financial development and key characteristics of financial systems. The forthcoming 2014 Global Financial Development Report will focus on financial inclusion, and chapter 1 will provide a more in-depth look at the relevant data sources and a discussion of what is known about financial access around the world.
Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. 2007. “Finance, Inequality and the Poor.” Journal of Economic Growth 12 (1): 27–49.
Beck, Thorsten, Ross Levine, and Alexey Levkov. 2010. “Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States.” Journal of Finance 65 (5): 1637–67.
Čihák, Martin, Asli Demirgüç-Kunt, Erik Feyen, and Ross Levine. 2012. “Benchmarking Financial Development Around the World.” Policy Research Working Paper, World Bank, Washington, DC.
Demirgüç-Kunt, Asli, Thorsten Beck, and Patrick Honohan. 2008. Finance for All? Policies and Pitfalls in Expanding Access. Washington, DC: World Bank.
Demirgüç-Kunt, Aslı and Leora Klapper. 2012. “Measuring Financial Inclusion: The Global Findex,” Policy Research Working Paper 6025, World Bank, Washington, DC.
World Bank. 2012. Global Financial Development Report 2013: Rethinking the Role of the State in Finance. World Bank, Washington, DC (https://www.worldbank.org/en/publication/gfdr).
World Bank. 2013. Global Financial Development Report 2014: Rethinking the Role of the State in Finance. World Bank, Washington, DC (forthcoming).