Europe and Central Asia Economic Update

Financial Inclusion

April 5, 2019
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Inclusive financial sector development can play an important role in contributing to growth and reducing poverty by promoting people’s investment in their health, education, and businesses.

Economic Developments & Outlook

The Europe and Central Asia region is facing a more challenging economic context than previously envisaged, due to a slowing of global growth and increased uncertainty around future prospects. Growth in the emerging market and developing economies of the region slowed to 3.1% in 2018 and is projected to decline to 2.1% in 2019.

Overall regional growth has been hindered by weakness in Turkey. However, growth has been strong in other parts of the region – Central Europe, the Western Balkans, Russia, and Central Asia. Regional growth is expected to pick-up modestly in 2020-21, with a gradual recovery in Turkey offsetting slowing activity in Central Europe.

However, renewal of financial pressures in Turkey, combined with spillovers to the rest of the region, could disrupt growth. The possibility of sharp declines in energy prices could pose a risk to energy exporters such as Azerbaijan, Kazakhstan and Russia.

Increased policy uncertainty could undermine confidence in the region and impact growth. Policy disagreements between the European Union and some Central European countries could deter international investors and reduce fiscal transfers. A slowdown or reversal in ongoing structural reforms are a risk in several countries, especially Armenia, Azerbaijan, Belarus, Ukraine and Turkey.

Over the long-term, the region faces a range of challenges including aging populations, declining productivity, weakening investment, and climate change.

Financial Inclusion

Inclusive financial sector development can play an important role in contributing to growth and reducing poverty by promoting people’s investment in their health, education, and businesses. Greater financial inclusion can also help allocate the savings of an aging population and increase access to finance. 

Financial services can enhance people’s ability to manage financial emergencies such as job loss or crop failures, the effects of which can push vulnerable households into destitution. Greater access to and use of digital financial services, such as mobile money services, payment cards, and other financial technology applications, can lead to significant development outcomes.

There is great variation in financial inclusion in the Europe and Central Asia region. In the euro area, most adults already own a bank account, but developing countries in the region lag behind. About 116 million adults in the region had no bank account as recently as 2017, the majority living in Russia, Turkey, Uzbekistan, Ukraine, and Romania.

Overall, there has been a significant increase in ownership of bank accounts in the developing countries of the region, from 45% in 2011 to 65% in 2017. Indeed, some countries are among global top performers in terms of increasing account ownership, albeit from a very low base.

Being unbanked is associated with a lack of labor force participation. About 60% of unbanked adults in the developing countries of the region are out of the labor force. Meanwhile, about half of adults without a bank account are from the poorest 40% of the population.

Women represent 58% of all unbanked adults in the region, reflecting the income and gender gaps in financial inclusion. In Turkey, for example, the gender gap is close to 30 percentage points – three times the average gap in developing countries. And in Romania, the gap between richest 60 percent of the population and poorest 40 percent is 33 percentage points, which is more than double the average income gap in developing countries.  

Almost 30% of unbanked adults in developing countries across the region report a lack of trust in banks as an obstacle to opening accounts, which is nearly double that of developing country average. Formal savings is very low in the region and informal borrowing is prevalent. In case of an emergency most people in developing countries in the region rely on family and friends rather than their savings or borrowing from a financial institution.   

Technology offers a lot of promise in promoting inclusion. In Europe and Central Asia, the share of adults using digital payments – such as receiving payments or transfers directly into an account, making payments over a mobile phone or using the internet – has jumped by 14% since 2014. Countries with the greatest increases in account ownership also saw significant increases in digitalization.

There are several opportunities to increase account ownership. For example, over 80% of unbanked people have a mobile phone, and moving public-sector pension payments into accounts could help reduce the number of unbanked in the region by up to 20 million. Given the wide range of country experiences, there are ample opportunities for countries in the region to learn from each other, which lays out a rich research and operational agenda going forward.

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