Journal Issue: World Bank Economic Review, Volume 22, Issue 3

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Experimental Evidence on Returns to Capital and Access to Finance in Mexico
(World Bank, 2008-12-01) McKenzie, David ; Woodruff, Christopher
A strong theoretical argument for focusing on access to finance is that financial market imperfections can result in large inefficiencies, as firms with productive investment opportunities underinvest. Lack of access to finance is a frequent complaint of microenterprises, which account for a large share of employment in developing countries. However, assessing the extent to which a lack of capital affects their business profits is complicated by the fact that business investment is likely to be correlated with a host of unmeasured characteristics of the owner and firm, such as entrepreneurial ability and demand shocks. In a randomized experiment that gave cash and in-kind grants to small retail firms, providing an exogenous shock to capital, the shock generated large increases in profits, with the effects concentrated among firms that were more financially constrained. The estimated return to capital was at least 20–33 percent a month—three to five times higher than market interest rates.
Patterns of Rainfall Insurance Participation in Rural India
(World Bank, 2008-12-01) Giné, Xavier ; Townsend, Robert ; Vickery, James
Take-up of an innovative rainfall insurance policy offered to smallholder farmers in rural India decreases with basis risk between insurance payouts and income fluctuations, increases with household wealth, and decreases with binding credit constraints. These results are consistent with the predictions of a simple neoclassical model with borrowing constraints. Other patterns are less consistent with the benchmark model. For example, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance take-up decisions, and risk-averse households are less, not more, likely to purchase insurance. These results may reflect household uncertainty about the product, given their limited experience with it.
Access to Finance
(World Bank, 2008-12-01) Beck, Thorsten ; Demirgüç-Kunt, Asli
Recent data compilations show that many poor and nonpoor people in many developing countries face a high degree of financial exclusion and high barriers in access to finance. Theory and empirical evidence point to the critical role that improved access to finance has in promoting growth and reducing income inequality. An extensive literature shows the channels through which finance promotes enterprise growth and improves aggregate resource allocation. There is less evidence at the household level, however, and on the effectiveness of policies to overcome financial exclusion. The article summarizes recent efforts to measure and analyze the impact of access to finance and discusses the unfinished research agenda.
Banking Services for Everyone? Barriers to Bank Access and Use around the World
(World Bank, 2008-12-01) Beck, Thorsten ; Demirgüç-Kunt, Asli ; Martinez Peria, Maria Soledad
Information from 209 banks in 62 countries is used to develop new indicators of barriers to banking services around the world, show their correlation with measures of outreach, and explore their association with bank and country characteristics suggested by theory as potential determinants. Barriers such as minimum account and loan balances, account fees, and required documents are associated with lower levels of banking outreach. While country characteristics linked with financial depth, such as the effectiveness of creditor rights, contract enforcement mechanisms, and credit information systems, are weakly correlated with barriers, strong associations are found between barriers and measures of restrictions on bank activities and entry, bank disclosure practices and media freedom, and development of physical infrastructure. In particular, barriers are higher in countries where there are more stringent restrictions on bank activities and entry, less disclosure and media freedom, and poorly developed physical infrastructure. Also, barriers for bank customers are higher where banking systems are predominantly government-owned and are lower where there is more foreign bank participation. Larger banks seem to impose lower barriers on customers, perhaps because they are better positioned to exploit economies of scale and scope.
How Important Are Financing Constraints? The Role of Finance in the Business Environment
(World Bank, 2008-12-01) Ayyagari, Meghana ; Demirgüç-Kunt, Asli ; Maksimovic, Vojislav
What role does the business environment play in promoting or restraining firm growth? Recent literature points to a number of factors as obstacles to growth. Inefficient functioning of financial markets, inadequate security and enforcement of property rights, poor provision of infrastructure, inefficient regulation and taxation, and broader governance features such as corruption and macroeconomic stability are all discussed without any comparative evidence on their ordering. Using firm-level survey data on the relative importance of different features of the business environment, the article finds that although firms report many obstacles to growth, not all the obstacles are equally constraining. Some affect firm growth only indirectly through their influence on other obstacles, or not at all. Analyses using directed acyclic graph methodology and regressions find that only obstacles related to finance, crime, and policy instability directly affect firm growth. The finance result is shown to be the most robust. The results have important implications for the priority of reforms. Maintaining policy stability, keeping crime under control, and undertaking financial sector reforms to relax financing constraints are likely to be the most effective routes to promote firm growth.
What Can We Learn about Financial Access from U.S. Immigrants? The Role of Country of Origin Institutions and Immigrant Beliefs
(World Bank, 2008-12-01) Osili, Una Okonkwo ; Paulson, Anna
Immigrants from countries with more effective institutions are more likely than other immigrants to have a relationship with a bank and to use formal financial markets more extensively. The evidence that a country's institutional environment shapes beliefs—and by extension the use of financial services—provides support for policies that focus on institutional reforms in promoting financial access. After holding wealth, education, and other factors constant, the impact of institutional quality in the country of origin affects the financial market participation of all immigrant groups except those who have lived in the United States for more than 28 years. These findings are robust to alternative measures of institutional effectiveness, to controlling for additional country of origin characteristics, and to various methods for addressing potential biases caused by immigrant self-selection.
The Unbanked
(World Bank, 2008-12-01) Johnston, Don Jr. ; Morduch, Jonathan
To analyze the prospects for expanding financial access to the poor, bank professionals assessed 1,438 households in six provinces in Indonesia to judge their creditworthiness. About 40 percent of poor households were judged creditworthy according to the criteria of Indonesia's largest microfinance bank, but fewer than 10 percent had recently borrowed from a microbank or formal lender. Possessing collateral appeared as a minor determinant of creditworthiness, in keeping with microfinance innovations. Although these households were judged able to service loans reliably, most desired small loans. Calculations show that the bank, given its current fee structure and banking practices, would lose money when lending at the scales desired. So, while innovations have helped to extend financial access, it remains difficult to lend in small amounts and cover costs.