Access to finance

Last updated

Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services. [1] Those who involuntarily have no or only limited access to financial services are referred to as the unbanked or underbanked, respectively. [1] [2]

Contents

Accumulated evidence has shown that financial access promotes growth for enterprises through the provision of credit to both new and existing businesses. It benefits the economy in general by accelerating economic growth, intensifying competition, as well as boosting demand for labor. The incomes of those in the lower end of the income ladder will typically rise hence reducing income inequality and poverty. [3]

The lack of financial access limits the range of services and credits for household and enterprises. Poor individuals and small enterprises need to rely on their personal wealth or internal resources to invest in their education and businesses, which limits their full potential and leading to the cycle of persistent inequality and diminished growth. [4]

Access to finance varies greatly between countries and ranges from about 5 percent of the adult population in Papua New Guinea and Tanzania to 100 percent in the Netherlands [1] (for a comprehensive list of estimated measures of access to finance across countries, see Demirgüç-Kunt, Beck, & Honohan, 2008, pp. 190–191 [1] ).

Defining and measuring access to financial services

Access to finance (the possibility that individuals or enterprises can access financial services) should be distinguished from the actual use of financial services, because non-use of finance can be voluntary or involuntary. [1] Voluntary non-users of financial services have access to but do not use financial services either because they have no need for those services or because they decided not to make use of such services due to cultural, religious, or other reasons. [1]

Measuring financial access is essential for strengthening the link between theory and empirical evidence. Currently, the main proxy variables that measure financial access include: the number of bank accounts per 1,000 adults, number of bank branches per 100,000 adults, the percentage of firms with line of credit (large and small firms). [5]

In the case of financial markets, measuring financial access requires ascertaining market concentration, for a high degree of concentration reflects greater difficulties for entry of newer and smaller firms. Other factors include the percentage of market capitalization and traded value outside of top 10 largest companies, government bond yields (3 month and 10 years), ratio of private to total debt securities (domestic), ratio of domestic to total debt securities, and the ratio of new corporate bond issues to GDP. [5]

Involuntary non-users want to use financial services, but do not have access due to a variety of reasons: First, they may be unbankable because their low income prevents them from being served commercially (i.e. profitably) by financial institutions; second, they may be discriminated against based on social, religious, or ethnic grounds; third, they may be unbankable because contractual and informational networks (such as high collateral requirements or a lack of information from credit registries) prevent financial institutions from commercially serving these non-users; finally, the price or features of financial services may not be appropriate for the population groups of the non-users. [1]

Because the factors that determine whether or not an individual or enterprise has access to finance may change over time, it makes sense to group the banked and unbanked into market segments that reflect their current and possible future status as users or non-users of financial services. One such approach to market segmentation is the "access frontier," which can be used for analyzing the development of markets over time. [6] The access frontier defines the maximum proportion of the population that has access to a product or service at a given point in time, and the frontier may shift over time, e.g. as the result of technological and competitive changes in the market. [6] The access frontier approach distinguishes between users and non-users of a product or service, and segments non-users into four groups: [6]

The following table gives an overview of the grouping of consumers into users and non-users, the segmentation of non-users, as well as three zones that enable government policies to better match interventions to the requirements of market development. [6]

User groupMarket segmentMarket policy zone
UsersCurrent users (current market)n/a
Non-usersVoluntary non-usersn/a
Non-users, lying within the present access frontierMarket enablement zone
Non-users, lying within the future access frontierMarket development zone
The supra-market group, lying beyond the future access frontierMarket redistribution zone

Estimating and measuring access to finance is relatively difficult because relevant data are not readily available. [1] A lack of consistent cross-country data on the use of financial services has led to the use of the number of deposit and loan accounts as a simple measure of financial access, [1] although this is an imperfect measure of financial access.

Formal and informal financial services

Financial services may be provided by a variety of financial intermediaries that are part of the financial system. A distinction is made between formal and informal providers of financial services, which is based primarily on whether there is a legal infrastructure that provides recourse to lenders and protection to depositors. [7] The following table gives an overview of this distinction by showing the segments of financial systems by degree of formality. [8]

TierDefinitionInstitutionsPrincipal clients
Formal banksLicensed by central bankCommercial & development banksLarge businesses
Government
Specialized non-bank financial institutions (NBFIs)Rural banks
Post Bank
Savings & loan companies
Deposit-taking microfinance banks		Large rural enterprises
Salaried workers
Small & medium enterprises
Semi-formalLegally registered, but not licensed as financial institution by central bankCredit unions
Microfinance NGOs		Microenterprises
Entrepreneurial poor
InformalNot legally registered at national level (though may belong to a registered association)Savings (susu) collectors
Savings & credit associations, susu groups
Moneylenders		Self-employed
Poor

A more detailed approach to distinguishing formal and informal financial services adds semi-formal services as a third segment to the above. While formal financial services are provided by financial institutions chartered by the government and subject to banking regulations and supervision, semi-formal financial services are not regulated by banking authorities but are usually licensed and supervised by other government agencies. [7] Informal financial services are provided outside the structure of government regulation and supervision. [7]

Barriers and Policies to Increase Access

However, in many countries financial access is still limited to only 20–50 percent of the population, excluding many poor individuals and SMEs. [4] Many reasons could explain the limited financial access especially among the poor. First, the poor lack the education and knowledge needed to understand financial services that are available to them. Second, loan officers might find it unprofitable to serve the small credit needs and transaction volume of the lower-income population. Additionally, banks may not be geographically accessible for the poor since financial institutions are likely to be located in richer neighborhoods. The poor are also burdened by lack of collateral and inability to borrow against their future income because their income streams tend to be hard to track and predict. [4]

In light of the lack of financial access for the poor, over the past few decades developments in micro finance institutions have managed to provide financial services to some of the world's poorest, and achieved good repayments.

There are still work to be done to build inclusive financial systems. This includes taking advantage of the technological advances in developing financial infrastructure to lower transaction costs, encouraging transparency, openness and competition to incentivize current institutions to expand service coverage, and enforcing prudential regulations in order to provide the private sector with the right incentives. [4]

See also

Notes

  1. 1 2 3 4 5 6 7 8 9 Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). Finance for All?: Policies and Pitfalls in Expanding Access. Washington, D.C.: The World Bank. Retrieved March 21, 2008, from http://siteresources.worldbank.org/INTFINFORALL/Resources/4099583-1194373512632/FFA_book.pdf
  2. ↑ Richardson, B. (2008, July 15). Enhancing Customer Segmentation Processes and Optimising Adoption Techniques to Support Efforts to "Bank the Unbanked." Presentation given during the Mobile Banking & Financial Services Africa conference in Johannesburg, South Africa.
  3. ↑ Beck, Demirgüç-Kunt and Levine, 2007 and Beck, Levine, and Levkov, 2010
  4. 1 2 3 4 Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). Finance for All?: Policies and Pitfalls in Expanding Access. Washington, D.C.: The World Bank.
  5. 1 2 The World Bank GFDR Report
  6. 1 2 3 4 Porteous, D. (2005, May 26). The Access Frontier as an Approach and Tool in Making Markets Work for the Poor. Somerville, MA: Bankable Frontier Associates. Retrieved May 28, 2008, from http://www.bankablefrontier.com/assets/access-frontier-as-tool.pdf Archived 2008-08-21 at the Wayback Machine
  7. 1 2 3 Ledgerwood, J. (1998). Microfinance Handbook: An Institutional and Financial Perspective. Washington, D.C.: The World Bank.
  8. ↑ Steel (2006), cited in Aryeetey, E. (2008, March). From Informal Finance to Formal Finance in Sub-Saharan Africa: Lessons from Linkage Efforts. Washington, D.C.: International Monetary Fund. Retrieved March 8, 2009, from https://www.imf.org/external/np/seminars/eng/2008/afrfin/pdf/Aryeetey.pdf

Further reading

Related Research Articles

<span class="mw-page-title-main">World Bank Group</span> Group making loans to developing countries

The World Bank Group (WBG) is a family of five international organizations that make leveraged loans to developing countries. It is the largest and best-known development bank in the world and an observer at the United Nations Development Group. The bank is headquartered in Washington, D.C., in the United States. It provided around $98.83 billion in loans and assistance to "developing" and transition countries in the 2021 fiscal year. The bank's stated mission is to achieve the twin goals of ending extreme poverty and building shared prosperity. Total lending as of 2015 for the last 10 years through Development Policy Financing was approximately $117 billion. Its five organizations are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID). The first two are sometimes collectively referred to as the World Bank.

<span class="mw-page-title-main">Microfinance</span> Provision of microloans to poor entrepreneurs and small businesses

Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient. ID Ghana is an example of a microfinance institution.

A community development financial institution (US) or community development finance institution (UK) - abbreviated in both cases to CDFI - is a financial institution that provides credit and financial services to underserved markets and populations, primarily in the USA but also in the UK. A CDFI may be a community development bank, a community development credit union (CDCU), a community development loan fund (CDLF), a community development venture capital fund (CDVC), a microenterprise development loan fund, or a community development corporation.

Financial sector development in developing countries and emerging markets is part of the private sector development strategy to stimulate economic growth and reduce poverty. The Financial sector is the set of institutions, instruments, and markets. It also includes the legal and regulatory framework that permit transactions to be made through the extension of credit. Fundamentally, financial sector development concerns overcoming “costs” incurred in the financial system. This process of reducing costs of acquiring information, enforcing contracts, and executing transactions results in the emergence of financial contracts, intermediaries, and markets. Different types and combinations of information, transaction, and enforcement costs in conjunction with different regulatory, legal and tax systems have motivated distinct forms of contracts, intermediaries and markets across countries in different times.

Agrarian reform can refer either, narrowly, to government-initiated or government-backed redistribution of agricultural land or, broadly, to an overall redirection of the agrarian system of the country, which often includes land reform measures. Agrarian reform can include credit measures, training, extension, land consolidations, etc. The World Bank evaluates agrarian reform using five dimensions: (1) stocks and market liberalization, (2) land reform, (3) agro-processing and input supply channels, (4) urban finance, (5) market institutions.

<span class="mw-page-title-main">Small Industries Development Bank of India</span> Regulatory Body

Small Industries Development Bank of India (SIDBI) is the apex regulatory body for overall licensing and regulation of micro, small and medium enterprise finance companies in India. It is under the jurisdiction of Ministry of Finance, Government of India headquartered at Lucknow and having its offices all over the country.The SIDBI was established on April 2, 1990, by Government of India, as a wholly owned subsidiary of IDBI Bank. It was delinked from IDBI w.e.f. March 27, 2000. Its purpose is to provide refinance facilities to banks and financial institutions and engage in term lending and working capital finance to industries, and serves as the principal financial institution in the Micro, Small and Medium Enterprises (MSME) sector. SIDBI also coordinates the functions of institutions engaged in similar activities. It was established in 1989, through an Act of Parliament.

Buyers and sellers in a market are said to be constrained by market discipline in setting prices because they have strong incentives to generate revenues and avoid bankruptcy. This means, in order to meet economic necessity, buyers must avoid prices that will drive them into bankruptcy and sellers must find prices that will generate revenue.

A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that is not legally a bank; it does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFC facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations. Alan Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment which act as backup facilities should the primary form of intermediation fail."

The underbanked is a characteristic describing people or organizations who do not have sufficient access to mainstream financial services and products typically offered by retail banks and thus often deprived of banking services such as credit cards or loans. The underbanked can be characterized by a strong reliance on non-traditional forms of finance and micro-finance often associated with disadvantaged and the poor, such as cheque cashers, loan sharks and pawnbrokers.

Financial inclusion is the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services which include banking, loan, equity, and insurance products.It is a path to enhance inclusiveness in economic growth by enabling the unbanked population to access the means for savings, investment, and insurance towards improving household income and reducing income inequality

<span class="mw-page-title-main">Financial Supervisory Service (South Korea)</span>

The Financial Supervisory Service (FSS) is South Korea's integrated financial regulator that examines and supervises financial institutions under the broad oversight of the Financial Services Commission (FSC), the government regulatory authority staffed by civil servants.

Wizzit is a provider of basic banking services for the unbanked and underbanked in South Africa. Its services are based on the use of mobile phones for accessing bank accounts and conducting transactions, in addition to a Maestro debit card that is issued to all customers upon registration. Wizzit is a branchless banking business, meaning that its services are designed so that customers can generally conduct transactions without the need to visit bank branches.

<span class="mw-page-title-main">M-Pesa</span> Mobile banking service

M-PESA is a mobile phone-based money transfer service, payments and micro-financing service, launched in 2007 by Vodafone and Safaricom, the largest mobile network operator in Kenya. It has since expanded to Tanzania, Mozambique, DRC, Lesotho, Ghana, Egypt, Afghanistan, and South Africa. The rollouts in India, Romania, and Albania were terminated amid low market uptake. M-PESA allows users to deposit, withdraw, transfer money, pay for goods and services, access credit and savings, all with a mobile device.

The unbanked are adults who do not have their own bank accounts. Along with the underbanked, they may rely on alternative financial services for their financial needs, where these are available.

<span class="mw-page-title-main">Social protection</span>

Social protection, as defined by the United Nations Research Institute for Social Development, is concerned with preventing, managing, and overcoming situations that adversely affect people's well-being. Social protection consists of policies and programs designed to reduce poverty and vulnerability by promoting efficient labour markets, diminishing people's exposure to risks, and enhancing their capacity to manage economic and social risks, such as unemployment, exclusion, sickness, disability, and old age. It is one of the targets of the United Nations Sustainable Development Goal 10 aimed at promoting greater equality.

<span class="mw-page-title-main">Alliance for Financial Inclusion</span> Malaysia-headquartered policy network

The Alliance for Financial Inclusion (AFI) is a policy leadership alliance owned and led by member central banks and financial regulatory in developing countries with the objective of advancing financial inclusion.

Sri Lanka has been involved with the World Bank since its initial entrance into the International Bank for Reconstruction and Development (IBRD) on August 29, 1950. Currently, Sri Lanka's quota in the IBERT is approximately 515.4 million dollars, thus allotting 5,846 votes or 0.25% of the total votes in the institution. Sri Lanka later became a member of the other institutions in the world bank such as the International Finance Corporation (IFC) on July 20, 1956, with a current quota of 7.491 million dollars, allotting 8,311 votes or 0.32% of the total votes; the International Development Association (IDA) on June 27, 1961, with a current share of 98,100 votes or 0.36% within the institution; the International Center for Settlement of Investment Disputes (ICSID) on November 11, 1967; and the Multilateral Investment Guarantee Agency (MIGA) on May 27, 1988, with a current quota of 4.78 million SDR. Sri Lanka is currently in the India-led constituency for these organizations, representing the country as part of the South Asian block.

<span class="mw-page-title-main">Asli Demirguc-Kunt</span> Turkish economist

Asli Demirgüç-Kunt is a Turkish economist. She is a non-resident Fellow at the Center for Global Development and a former chief economist of the Europe and Central Asia Region of The World Bank. During her 33-year career at The World Bank, she also served as the Director of Research, Director of Development Policy, and the Chief Economist of the Finance and Private Sector Development Network, conducting research and advising on financial and private sector development issues. She has authored more than 100 research papers, as well as books, is widely published in academic journals, and is among the most-cited researchers in the world. Demirguc-Kunt has been named one of the top 10 women in economics as of June 2015 and one of the top 10 percent of Female Economists for her contributions to the field of economics.

<span class="mw-page-title-main">Leora Klapper</span> American economist

Leora F. Klapper is an American economist who currently works as a lead economist at the World Bank in the Finance and Private Sector research team as part of the Development Research group. Klapper has held government jobs in Washington, DC and Jerusalem, Israel in the Bank of Israel, as well as having held private sector jobs for Peter L. Bernstein and the Salomon Brothers firm in New York. She is also the founder of The Global Findex Database and Entrepreneurship Database.

Luc Laeven is a Dutch economist, director-general of the research department of the European Central Bank 2015–present. Previously he held senior posts at the International Monetary Fund and the World Bank. He was also a Professor Finance at Tilburg University from 2009 to 2019. He has been a research fellow at the Centre for Economic Policy Research in London since 2009.

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.