68240 KCP Perspectives April 2012 Putting Knowledge to Work Volume 1 • Issue 3 Message from the Editor Access to Finance: Pioneering Research on the Importance of Financial Inclusion for Poverty Reduction F inancial inclusion is the industry’s buzzword these days.1 Currently, more and more global leaders embrace access to financial services as an important policy objective, as well as a tool for poverty reduction and growth.2 At their 2010 summits in Toronto and Seoul, the leaders of the G-20 countries elevated financial inclusion to a top priority of their economic development agenda. Martin Ravallion, Director Development Research Group The wide recognition did not come overnight. Ten years ago, people didn’t talk much about World Bank financial inclusion. Rather, the popular terminology at the time was “Microfinance Strategies.� Largely thanks to the success of microfinance, the empowerment dimension of finance gradu- ally entered the policy conversation. That led to the evolution of the thinking: build an inclusive In this issue we look back at two dif- financial system that works for the poor. To assist policymakers in designing effective policies ferent areas of research, where the and tracking global progress in financial inclusion, three KCP projects in 2005 collected the first KCP was strategically tapped to help set of indicators of financial access in countries around the world, and updated these indicators us address emerging gaps in knowl- for selected countries in 2008. edge relevant to development policy. The first relates to financial inclusion and the second concerns international The start of the financial inclusion saga Building a more inclusive financial system requires that researchers first get a good knowledge migration. Both these research initia- on how well financial systems across countries are directly serving the poor. “Even to answer the tives could not have been launched basic question ‘how many people use financial services?’ we were confronted with a dearth of and concluded so quickly without the data and lack of consensus on what ought to be measured,� recalls Asli Demirgüç-Kunt, direc- flexibility that the KCP offers the Bank tor of development policy and chief economist for the Finance and Private Sector Development to move rapidly into new and innovative Network at the World Bank. research areas. The KCP-funded work on financial in- STEP 1 Measuring access The project Micro-indicators of Financial Development, led by Asli with the support of the KCP clusion opened up innovative and influ- from 2002 to 2006, generated a database on financial outreach indicators, which has since ential new research on the importance allowed policymakers and researchers to benchmark countries along various outreach dimen- of access to financial services for the sions, such as number of bank branches, ATMs, deposit and loan accounts per capita. Drawing poor. Before this groundbreaking re- on this new database, a Policy Research Report on Access to Finance, ‘Finance for All? Policies search, the development community and Pitfalls in Expanding Access,’ was published in 2007. This effort also attracted significant was mostly focused on ways to ex- pand microfinance. This KCP-funded research culminated with the Policy Re- 1 Financial inclusion is the process of ensuring access to appropriate financial products and services needed search Report (PRR) Finance for All?, by vulnerable groups, such as politically excluded and low-income groups, at an affordable cost in a fair and which established a vital intellectual transparent manner by mainstream institutional players. 2 A 2012 World Bank Survey on Bank Regulation and Supervision finds that over 70 (continued on page 3) percent of bank regulators report having a mandate to promote financial inclusion. KNOWLEDGE CHANGE for The World BAnk Development Economics KNOWLEDGE CHANGE for attention in the development community. open accounts and apply for loans, and financial services. That led to the first pub- It played a central role in the International the costs associated with different pay- lic database7 of demand-side indicators, Year of Microcredit (2005), as a key ele- ment services. As a result, this project which consistently measure individuals’ ment of the overall development agenda. developed indicators of the requirements use of financial products across countries The findings were cited in the UN Secretary and the costs associated with using bank- and over time. Financed by a 10-year grant General’s speeches, and the Economist3 ing services around the world. Using these from the Bill and Melinda Gates Founda- magazine’s survey article and new indica- data, the determinants of barriers to bank- tion, DECFP8—in partnership with Gallup tors section. The report and several papers, ing services and the impact of such barri- Inc.—has started to collect demand-side such as Reaching out: Access to and use ers on economic outcomes were identified data, the Global Financial Inclusion (Global of banking services across countries,4 also in the study, Banking Services for Every- Findex) Database. These new indicators, facilitated greater data-collection efforts one? Barriers to Bank Access and Use expected to be released at the 2012 Spring on access and inclusion by CGAP5 and around the World. This study and the da- Meetings, will be central in the financial in- the IMF. Moreover, the article prompted tabase helped researchers and policy mak- clusion agenda of the G-20 discussions in Princess Máxima6 to assist ers compare countries Mexico. with funding for the IMF, so based on ease of the that they now can imple- use of financial services Financial inclusion is no longer ment their survey on an and understand the fac- painful to contemplate ongoing basis, collecting tors contributing to such These three steps taken with the help of the the indicators that the KCP barriers. Furthermore, KCP helped achieve the initial objectives of study helped create. the research paved the producing finance indicators. These indica- way for other efforts by tors have helped policy makers identify the These first attempts at de- the World Bank to gather factors that help improve access to finance veloping consistent and information on access to in a national context. In India, the World comparable cross-country finance. Bank has recently championed an initiative indicators of banking sys- to understand and improve financial access, tem outreach data made it possible for STEP 3 Evaluating the impact of countries to measure and evaluate the access on welfare 3 Economist, “The Hidden Wealth of the Poor,� success of their financial sector programs After measuring financial access and iden- November 3, 2005 and Economist, Emerging- in boosting outreach. The project also had tifying barriers, the third step in improving Market Indicators, “Bank Density,� December 1, 2005. significant spillover effects on two other access is evaluating its impact on welfare. 4 Journal of Financial Economics Volume 85, Issue KCP projects, which aimed to identify ob- The evaluation required micro data at the 1, July 2007, Pages 234–266. stacles to access, and evaluate the impact household and enterprise levels. Efforts to 5 CGAP (Consultative Group to Assist the Poor), of access on welfare. systematically collect these data around is a global policy and research center dedicated the world were made possible through to advancing financial access for the world’s poor. CGAP promotes standards, funds and develops STEP 2 Identifying and analyzing the KCP project Household Surveys on innovations, and shares knowledge and best barriers to access Access to Finance. By introducing a ran- practices. To assess the barriers to financial access dom component to the provisional work of 6 An economist and investment banker by and the use of banking services across financial products, such as financial literacy training, Princess Máxima of the Netherlands had played active roles in the UN International Year countries, the KCP project, Barriers to training or random variation in the terms or of Microcredit in 2005 and in the subsequent UN Banking, financed a survey to collect bank- availability of credit to micro-entrepreneurs Advisors Group on Inclusive Financial Sectors from 2006 to 2008. level data from a sample of 209 banks in and households, the project illustrated 7 In recognition of the need for better data to 62 countries. how removing barriers and improving ac- support the financial inclusion agenda, the World cess affects growth and household welfare. Bank’s Development Research Group is building The survey included various questions such the Global Financial Inclusion Index (Global Findex) with a 10-year grant from the Bill & Melinda Gates as the minimum balances required to open This project inspired the Bill and Melinda Foundation. and maintain deposit accounts, the asso- Gates Foundation to fund a worldwide 8 DECFP is the Finance & Private Sector ciated fees, the application procedures to poll to measure and benchmark access to Development unit in the Research Group. 2 n KCP Perspectives KNOWLEDGE CHANGE for in partnership with the National Council of migration. This topic was among many (continued from page 1) Applied Economic Research (India). discussed at the 2004 Sea Island G8 sum- mit, where the World Bank was asked to Message from the Editor Altogether, these steps helped create an bring about a better understanding of the inventory of options and barriers that en- impact of international migration on devel- foundation for better and more effective abled the reassessment of the supply and oping countries. policies in this key area. demand side, and to take a closer look at general market practices. Also, these KCP In response to this request from the G8 In the second article we tell the story projects created a much needed founda- summit, the Internal Management Com- of how the KCP was instrumental in tion for the analysis by the global commu- mittee (IMC) of the KCP decided in a spe- jump-starting the research program on nity as it charts an agenda for improving cial meeting to allocate over a million USD international migration. At that time, we access to finance for the poor. In other to jump-start a research program for this frankly didn’t know enough about the words, the KCP has again assisted in cre- purpose.9 impact of the brain drain on poverty, ating a true public good and helped lever- and the mitigating effect of remittances. age additional resources for research and Where on earth is everybody? The research program produced three data collection in this important area. Where do people go? groundbreaking books on this important Who are the movers? topic, as well as the world’s largest da- In recognizing the importance of the data tabase on brain drain. That has become issues and the challenges, the KCP fund- a unique public good for the entire re- International ed the development of a series of compre- search community, especially for re- Migration, hensive databases10 of global migration searchers in migrant-sending countries. patterns. The first goal was to generate an Remittances and overview of global migration patterns since I hope you enjoy this third issue of vol- Development – the end of WWII. The resulting database ume one of KCP Perspectives. We are provides, for the first time, a complete set planning the first issue of volume two to A Rapid Response of bilateral migration stocks for the second reach you before the annual meetings in by the KCP half of the 20th century. The database is October 2012. composed of five 226-by-226 bilateral ma- F or centuries, people have moved across international borders in search of better opportunities. Currently more trices of migration stocks disaggregated by gender and educational attainment for each decade between 1960 and 2000.11 Asian countries (e.g. Singapore or Hong Kong) are among the most important than 215 million people in the world are estimated to live outside their countries of The second database focuses on the 9 KCP Projects on migration include: Global birth. Yet, international migration has not other key dimension of migration patterns, Migration Database Extensions – A Global Public kept up with other measures of global in- namely the educational distribution, better Good, Migration Policies and their Impact on Development, Brain Drain and Brain Gain of tegration, such as international trade and known as “the brain drain� in the academic Ghana’s Best and Brightest, Migration, Remittances financial flows. Thus, there is a need to and policy circles. The database presents and Development in Africa: Household Survey with develop a better understanding of the link- bilateral migrant stocks by both gender Existing Sampling Frame, Migration and its Impact on Households and Individuals in Migrant-Sending ages between migration, poverty reduc- and education for the labor force ages 25 Communities, International Migration, Remittances tion and economic development. There is and above for 1990 and 2000. Compared and Development. also a pressing need for global develop- with previous analyses, the database cov- 10 Bilateral Migration Matrix 2010, Bilateral Migration Database 1960–2000, Database ment institutions, such as the World Bank, ers migration to all developing country with Age of Entry, 1990–2000, Panel Data on to take the lead in generating public data destinations, by introducing new census International Migration, 1975–2000, Medical Brain and knowledge on migration, so that aca- data and utilizing appropriate estimation Drain, 1991–2004, Extended Bilateral Migration Database – Joint OECD – World Bank. demics, policymakers, and development methods. In terms of high-skilled migra- 11 The database is available at http:// experts can identify and enhance mecha- tion, countries such as South Africa, the data.worldbank.org/data-catalog/ nisms to maximize welfare gains from Persian Gulf countries and some Eastern global-bilateral-migration-database. Putting Knowledge to Work n 3 KNOWLEDGE CHANGE for non-OECD destinations. Until now, those 50–60 percent of their total income from on Africa and Latin America. Some of the countries had been missing from the list remittances. Remittances have a dispro- projects were directly relevant to opera- of receiving countries, thereby limiting a portionally positive impact on educational tions and geographically focused, such as true understanding of international human (school attendance and performance) and the Malaysia Economic Monitor, Country capital mobility. healthcare (weight for age, height for age, Economic Memoranda (CEM) for Jamaica, child delivery by a doctor and vaccinations) Ghana and Turkey, new minimum wage “These databases have since facilitated outcomes for children, and especially for implementation in Malaysia, potential tem- work both in and outside of the Bank, serv- girls. Investment in physical assets, en- porary labor mobility agreements between ing as a global public good and spurring trepreneurial activities and consumption Egypt and the European Union, and Re- lively academic debate and research,� said of financial services shaping Tomorrow in South Asia. Ça glar Özden, the task team leader of the ˘ (such as bank ac- project and senior economist at the Bank. counts and loans) Perhaps most important, the data- are also benefited bases and the analysis contributed to Renaissance in the interest in from remittances in focusing the debate on the migration remittances triggered by a striking the migrant house- and development nexus. increase in remittance flows holds. Finally, mi- At the same time, the po- The second KCP project, on remittances, grants earn much tential links between mi- focused on the direct development impact more upon their re- gration and development of migration. The data show individuals turn when compared have been identified with living outside their countries of birth grew to other workers, as more accurate data and to three percent of the world’s population. they have acquired empirical evidence. This The other important statistic is on remit- valuable skills while effort showed that if cor- tances migrants send to their home coun- abroad. rectly measured, migra- tries. Remittance flows in 2010 totaled over tion can contribute to the USD440 billion, almost three times the The results of these KCP growth and prosperity amount of foreign aid for that year world- projects have been widely of both origin and des- wide. In 24 countries the researchers stud- disseminated among re- tination countries, as well as ied, remittances are equal to more than 10 searchers, policy makers directly benefit the migrants percent of the gross domestic product in and others through the themselves. 2009. In nine countries they were equal to publication of a large num- more than 20 percent of GDP. ber of papers in prestigious The database, the papers and academic journals. In addi- the books are also available for For the KCP project titled Household Sur- tion, three edited volumes were published, the public through the program’s website. veys of International Migration and Re- presenting the main results of the studies mittances, the researchers designed and funded by the KCP.12 12 Bilateral Migration and Remittances 2010 database provides updated total of international implemented a series of innovative house- migration stock which exceeds the total of 215 hold surveys to assess the impact of remit- The databases and other outputs have con- million people in 2010. tances on poverty, education, healthcare, tributed to numerous World Bank projects 13 These are titled “International Migration, entrepreneurship, and various labor mar- over the last five years. These projects cov- Remittances, and the Brain Drain�, “International Migration, Economic Development and Policy� ket outcomes. In a wide range of countries ered a wide range of activities, indicating and “International Migration of Women.� List (from Ghana to Brazil, Pacific Islands, Gua- how migration touches upon different as- of publications and outputs are listed in each completion report from the KCP Website. temala, the Philippines and to Pakistan), pects of the development process. These Household Surveys of International Migration and the KCP studies found that remittances included the World Development Reports, Remittances, Global Migration Database Extensions reduce the level, the depth and the sever- which covered a range of topics over the 14 CGAP promotes standards, funds and develops ity of poverty. The greatest impact is on the last several years (such as gender, econom- innovations, and shares knowledge and best practices. It also offers advisory services to severity of poverty, since the households ic geography and labor markets), as well as governments, financial service providers, donors in the lowest 10% income level receive the widely disseminated regional flagships and investors. 4 n KCP Perspectives