WPS3589
                         Access to Financial Services:

 A Review of the Issues and Public Policy Objectives

                                                      by


                                              Stijn Claessens

                                      Senior Adviser, World Bank

                                 Professor, University of Amsterdam



                                                  Abstract
This paper reviews the evidence on the importance of finance for economic well-being, provides
data on the degree of usage of basic financial services by households and firms across a sample of
countries, assesses the desirability of more universal access, and overviews the macro-economic,
legal and regulatory obstacles to access using general evidence and case studies. Although access
to finance can be very beneficial, the data show that universal usage is far from prevalent in many
countries, especially developing countries. At the same time, universal access has generally not
been a public policy objective and is surely not easily achievable in most countries. Countries
can, however, undertake many actions to facilitate access to financial services, including through
strengthening their institutional infrastructures, liberalizing and opening up their markets and
facilitating greater competition, and encouraging innovative use of know-how and technology.
Government attempts and interventions to directly broaden the provision of access to finance,
however, are fraught with risks and costs, among others, the risk of missing the targeted groups.
The paper concludes with possible global actions aimed at improving data on access and usage
and areas of further analysis to help identify the constraints to broadening access.


World Bank Policy Research Working Paper 3589, May 2005

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the
exchange of ideas about development issues. An objective of the series is to get the findings out quickly,
even if the presentations are less than fully polished. The papers carry the names of the authors and should
be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely
those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors,
or the countries they represent. Policy Research Working Papers are available online at
http://econ.worldbank.org.



Paper presented at the Fifth Services Experts Meeting on Universal Access, Paris, February 3-4, 2005,
organized by the OECD and the World Bank. The paper draws on material of Stephen Peachey and Alan
Roe, and presentations by Priya Basu, Thorsten Beck, Patrick Honohan, Anjali Kumar, Tova Solo and
others at the World Bank working on access to financial services. I would like to thank Asli Demirguc-
Kunt, Aaditya Mattoo and meeting participants for very useful comments and Ying Lin for his research
assistance. Contact: Stijn Claessens, Senior Adviser, Operations and Policy Department, Financial Sector
Vice-Presidency, World Bank, 1818 H Street, N.W., Washington, D.C. 20433, phone 1- 202-473-3484,
secretary 1- 202-473-3722, fax 1-202-522-2031, Email sclaessens@worldbank.org.

Introduction


Finance has been shown to matter for countries' economic development. There is much

evidence today for a strong and causal relationship between the depth of the financial

system (as measured, for example, by the supply of private credit, stock market

capitalization or other financial measures relative to GDP) on one hand and investment,

growth, poverty, total factor productivity, etc. on the other hand.      Indeed, by many

empirical cross-country tests, initial financial development is one of the few robust

determinants of the subsequent growth of countries. Finance matters for the well being

of people beyond overall economic growth: finance can help individuals smooth income,

insure against risks, and broaden investment opportunities. Finance can be particularly

important for the poor and indeed recent evidence has shown that a more developed

financial system can help reduce poverty and income inequality.


Much of this evidence has however, focused attention on the importance of overall

financial development. Yet, and especially in many developing countries, the financial

system at large does not cater to the needs of all customers. Banking systems and capital

markets are often skewed towards those already better off, catering mainly to large

enterprises and wealthier individuals.     Often, many segments of the enterprise and

household sector suffer from lack of access to finance, hindering their growth and

welfare. This raises the question whether more general availability of financial services

should be a public sector goal and, if so, what the best means of achieving this are.


This paper reviews the evidence on the importance of financial development for

economic well-being, provides data on the degree of usage of and access to financial

services across a sample of countries, provides an assessment of desirability of more

universal access to financial services, overviews the macro-economic, legal and

regulatory obstacles to access to financial services, and reviews the risks and costs

associated with attempts to broader the provision of access to finance. The paper is

structured around the following topics: Why the attention on access recently? What does

access to finance mean? What evidence is there on access and who has or does not have



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access? What do we know on what constraints access and what can be done by

governments to improve access? And what are possible international actions?


Access to finance: relevance


Access to financial services has received more attention lately and has become a more

important part of the overall development agenda. This is likely for a number of reasons.

For one, evidence that "finance"as in financial developmentmatters for growth has

been accumulating over the last decade. Second, based on changes in economies and

economic production, finance may have moved up in the ranking of barriers to growth.

Third, there is an increasing perception that access to finance has been skewed for

households and enterprises. We review briefly the evidence on these three aspects.


There is much more evidence today that finance causes growth. The empirical evidence

is very robust and available at the level of country, sector and individual firm and

households and using various statistical techniques. Financial deepening has been shown

to "cause" growth (Rajan and Zingales, 1998; Demirguc-Kunt and Maksimovic, 1998;

Beck, Levine and Loayza, 2000; for an extensive review of this evidence, see Levine

2005.) The channels why finance matters are multiple. Finance helps growth through

raising and pooling funds, thereby allowing more and more risky investments to be

undertaken, by allocating resources to their most productive use, by monitoring the usage

of funds, and by providing instruments for risk mitigation. Interesting, it is less the form

in which these services comewhether from banks or capital marketsbut more the fact

that they are being provided in an efficient manner, i.e., being supported by a proper

institutional and competitive environment, which matters for growth (Demirguc-Kunt and

Levine, 2000; see also World Bank 2001). As such, it is difficult to assert that particular

types of financial systems are more or less conducive to growth, and possibly neither

which type of system is more or less conducive to facilitate access to financial services.


Finance also helps with improving income distribution and poverty reduction through

several channels. Foremost, finance helps through economic growth, thus raising overall



                                             3

income levels. Finance can more specifically help by distributing opportunities fairer.

There is evidence that finance matters especially for poor households and smaller firms.

Cross-country studies on the link between finance and poverty include Beck, Demirgüç-

Kunt and Levine 2004a.        Controlling for reverse causality, they find that financial

development causes less income inequality. Clarke, Xu, Zou, 2002 also find that

inequality decreases as finance develops, and, since the more concentrated income the

higher poverty, finance thus helps reduce poverty.


Honohan (2004a and 2004b) specifically shows that financial depth explains poverty

(number of people with income less than $1 or $2 a day). But, he also finds that across

countries the degree of microfinance penetration, often thought to be specifically useful

for the poor, has no special effects on poverty (see, however, Morduch and Hayley,

2002). Specific ways in which financial sector development has been found to help

reduce poverty is by alleviating credit constraints that reduce child labor and increase

education, including the opportunity cost of foregone child labor services, and by

insuring against shocks (see Morduch, 2003 for the important of micro-insurance for

poverty). More generally, with one or two exceptions, it is arguably that direct access of

poor people to financial services can strongly affect the attainability of each of the
Millennium Development Goals (MDGs)1, including those that chiefly require upgrading

of public services in health and education, etc, as these also require poor households to be

able to afford these services, which in turn is facilitated by their access to finance


Second, as economic production is changing and countries are liberalizing their real

economies, it has become clearer that the degree of financial development importantly

influences the ability of countries, firms and individuals to make use of (new) growth

opportunities. The fact that finance matters for firms' growth opportunities is especially

so for SMEs. Beck, Demirgüç-Kunt and Levine, 2004b show that, while large SME

sectors are characteristic of successful economies, SMEs do not "cause" growth, nor do

SMEs alleviate poverty or decrease income inequality. Rather they show that the overall

business environmentease of firm entry and exit, sound property rights, and proper


1See IMF/World Bank 2004 on the MDG and progress in achieving them.


                                              4

contract enforcementinfluences economic growth. Finance, however, accelerates

growth by removing constraints on small firms, more so than on large firms. Finance

allows firms to operate on a larger scale and encourages more efficient asset allocation.

Financialand institutionaldevelopment thus help leveling the playing field among

firms and countries, especially important in a global economy with rapidly changing

growth opportunities.


Third, while financial development in general is beneficial for growth and poverty, this

does not mean that finance is available on an equal basis. Finance can be allocated

skewed or even perversely.       While hard to "proof" for a large sample of countries,

increasingly there is evidence that finance often benefits the few, especially in developing

countries. In normal times, this has meant that not all have been given a fair chance at

getting their projects financed. Loans are being allocated on the basis of connections and

non-market criteria. In the context of crises, this has meant that the costs of financial

crises have been allocated unevenly, with the brunt borne by the poor. Halac and

Schmukler (2003) show that financial transfers during crises are large and expected to

increase income inequality and to be very regressive. For more discussion of the uneven

distribution of finance and the impact of financial reform on inequality, see Claessens and

Perotti (2005) and references therein.


These three aspects already suggest that there may be a case for making financial services

more generally available. We need to analyze though what access to finance means, what

the data show, what the impediments to access are, how access can be improved, and

whether there is a residual role of the government in encouraging greater and more equal

access.




                                             5

What does access to financial services mean and what do the data tell us on usage of

and access to finance?


To analyze the issues of access, we first need a definition what access to finance means.

There are various dimensions to access to financial services (see Bodie and Merton,

1995, for a general review of the functions of finance).                       First, is the question of

availability: are financial services available and in what quantity? Second is the question

of cost: at what price are financial services available, including all costs, also the

opportunity costs of say of having to wait in line for a teller or having to travel a long

distance to a bank branch? Third, what are the range, type and quality of financial

services being offered? Following Morduch (1999), we can name these dimensions

differently as reliability, i.e., is finance available when needed/desired; convenience, i.e.,

what is the ease of access; continuity, i.e., can finance be accessed repeatedly; and

flexibility, i.e., is the product tailored to the needs. There are other variants of dimensions
of finance used in other studies.2 The point is that there are various dimensions to access,

making it more difficult to establish the degree of (lack) of access.


This discussion already shows that there will not be an easy definition of access. One also

needs a clear objective of what is the desirable degree of access. Universal access is not

necessarily the goal, different perhaps from basic health services, primary education,

clean water, etc. There are number of reasons. For one, we do not (yet) know at the

micro-level sufficiently well what the benefits and impacts of access to finance are and

whether there is a public goods argument to be made in favor of extending access more

broadly. The gains of access to basic health care services such as immunization are better

known today than the gains from access to financial services. Second, as for other good

and services, the demand for financial services may not exist. Many households even in

developed countries choose not have a bank account as they do not engage in enough

financial transactions, e.g., write no checks, collect wages in cash or cash their checks,

2For example, Kempson et al. 2000 distinguish between five types of exclusion to financial services:
(i) access exclusion: e.g. through risk screening; (ii) condition exclusion: product design inappropriate for
the needs of some people; (iii) price exclusion: financial products too costly; (iv) marketing exclusion: with
some people effectively excluded by targeting marketing and sales; (v) self-exclusion: some persons not
applying in the belief that they would be refused.


                                                        6

yet they may not burdened by no "access." Firms without use of external credit may

choose to remain so as their rates of return on capital are too low to justify formal finance

or because they are not willing to provide the necessary information on their business to

banks, and by implications to others, including tax authorities. Equally important, and

even in the best financial systems financial services providers may not wish to provide

access to all costumers as it is not profitable or sustainable to so. This does not reflect

any market failures, but rather that finance, like other services, has its own demand and

supply. This may mean that a country requires a certain overall level of development

before more universal access is a viable proposition.               Furthermore, there is plenty

anecdotal evidence that some households may have difficulty managing access to credit

(e.g., credit cards), suggesting that some restraint, say until financial literacy is more

adequate, may well be overall welfare enhancing.


In order to answer whether there is a case for more universal provision of financial

services, we need thus to know more on the benefits of access, the reasons why

households and firms may (or may not) demand financial services and why financial

services provides may (or may not) provide financial services, and, of course, the costs to

society of providing greater access. Here, we face a number of questions, starting with

the basic one that we have limited data across countries on the degree of usage of and

access to financial services. While there is much data on financial sector development,

there is very limited data on usage and access, both for households and for firms.      3 There

is consequently also limited analysis on the dimensions in which access may be deficient.

There can be deficient access geographically to branches and outlets. Or access can

socio-economically be deficient, i.e., access is available only for some population

segments. Or it can be deficient in an opportunity sense: the deserving do not have

access. Data are insufficient in all respects, so far, making judgments on the relative

benefits and costs of access difficult.


For some countries, there are data on households' use of basic financial services, such as

having a bank account, often obtained using commercial banks and central bank data, or


3See Honohan 2004c and DFID 2005 on data availability and deficiencies


                                               7

on the basis of surveys. More recently, data have been collected on the spread of micro-

finance following CGAP efforts and Microcredit Summit. These cover the number of

people with access to a savings account. For some countries, there are data from

household surveys, such as the Living Standard Measurement Survey (LSMS)-type. Of

these LSMS-surveys, some 27 have covered some dimensions of households' use of

financial services (see Honohan, 2004c).       Still, and with the exceptions of some

developed countries such as Sweden, much of the data collected in these general

households surveys is very basic and limited in terms of the various dimensions of use

and access (quantity, costs, quality). Access by households to credit, although typically

only one-quarter in terms of number of access to savings and arguably less important in

terms of growth and development, has been equally difficult to document at the level of

households. Many countries, for example, do not even have data on the aggregate level

of consumer credit, in part, as not just banks are providing that, but also non-bank

financial institutions.


Data on firms' use and access to financial services are equally limited. While there is

much information on listed firms' financial structure and their access to (some forms of)

external financing, there is much less information on the unlisted firms and especially

limited information on small firm finance access. Mostly data come from surveys, such

as those conducted by the World Bank (World Bank Economic SurveyWBES,

Investment Climate AssessmentsICAs), or by national agencies such as the US Federal

Reserve Boards, UK Bank of England, EU, etc. Some data come from central bank

statistics and advocacy groups (e.g., US Small Business Administration, chambers of

commerce, and equivalents). Again, the data are basic and limited in terms of various

dimensions of access (quantity, costs, quality). Access to credit dominates the data

collection efforts, with access to savings services less of an issue, although payment

services are important as well for firms. Mostly data are collected on use of and access to

banking services, and much less data are available on other financial services, such as

insurance, leasing, factoring and the like.




                                            8

Although weak and often not comparable, available data show that access of households

to banking services varies greatly. In developing countries, many households do not have

a bank account. Table 1 provides data on the degree to which households use a basic

financial service provided by a formal financial institution, e.g., have a checking or
savings bank account, across a number of countries.4 It shows that usage in most of the

OECD countries is nearly universal, with many percentages above 95% and with an

average of 90%; in developing countries, though, usage is much less and the average is

only 26%. The highest usage of financial services from formal financial institutions is

59% percent in Jamaica. Some other high numbers may not be representative of the

whole country as they apply to the population of the capital city only (Mexico) or some

specific cities or regions (China, Colombia, India) or urban areas (Brazil). For most of

the other developing countries, use of a basic bank account does not exceed 30 percent,

and in the lowest-income countries, use is less than 10% of households.


Individuals obtain financial services through other means, though, including through non-

financial institutions, as the comparison for some Latin American countries shows (Table

2). The Microcredit data also show that there is often use of other forms of financial

services, outside the banking system. As such, these numbers underestimate the degree

of access to financial services, but they do show the large differences between developed

and developing countries in terms of usage of financial services from formal financial

institutions.


The next question then is who are then the unbanked households, and how do they differ,

if at all, between developed and developing countries? To the extent we know, the



4The data for Table 1 come from a variety of sources. The main sources are households' surveys, the
LSMS (Living Standard Measurement Surveys). Here individual households responses on questions of
usage of financial services are averaged for each country. Second main sources are the surveys conducted
by FINMARK and genesis in a number of Southern African countries. Again, these are household surveys,
but more specifically aimed at usage of financial services. The source for the EU -countries is Pesaresi and
Pilley, 2003. For the US, the source is the Survey of Consumer Finance, 2004. For Brazil, Colombia, India
and Mexico the recent estimates are from Kumar et al. 2004, Basu et al. 2004, and Solo et al. 2004. The
earlier India numbers are from the regular Indian household survey. The Kenya, Tanzania and Uganda
estimates are from Peachey and Roe, 2004. Questions on financial services usage do vary across the
households survey, numbers are thus not necessarily comparable and some of the numbers are only rough
estimates.


                                                     9

profiles are as expected, although we have to realize that it is choice of households, so we

observe only revealed usage and not potential access (given costs, quality, ease, etc.,

many do not bother to seek access from formal financial institutions). Socioeconomic

characteristics such as income, wealth and education play the largest roles in explaining

access. Financial exclusion is thus often part of a broader exclusion in terms of education,

jobs, formal training, etc. Households that use credit have a different profile from those

with banking account and savings use, and the profile is more affected by income and

wealth characteristics, as it tends to be the richer that borrow.


The comparison between the US and Latin America countries indeed shows some

similarities between otherwise very different countries in terms of why people do not

(want to) bank (Table 3). Conveniences, trust and savings are important considerations

for households to seek financial services from banks. Unbanked households in the US

and Mexico also display very similar characteristics, two countries otherwise at different

levels of development, with the exception of home ownership (Table 4). The costs of

being unbanked do vary considerably, however, as the alternative means are much fewer

and more costly in Mexico. The costs in the USA for being unbanked are estimated to be

only 2.5% of median income in the lowest income segment, whereas in Mexico they are

estimated at 5% (Solo et al. 2004).


Although also weak and often neither comparable, some data on firm access to financing

have more recently become available. Specifically, Table 5 reports the percentages of

firms that say access to financing presents major or severe obstacles to the operation and

growth of their business. The data come from the World Bank Investment Climate

Assessments (ICA) that have been conducted in the last few years. About a quarter of the

firms on average complain about the lack of external financing, with large variations

though, from less than seven percent for Latvia and Lithuania, to more than 50 percent

for several countries and a high of 60 percent for Brazil.


Somewhat similar to the households' analysis is the answer to the question what are the

unbanked firms? To the extent we know, profiles are as expected, with size of the firm



                                               10

(and related, age) especially important.         Table 5 already suggests this since the

percentage of large firms with complaints is less than that for the smallest firms, on

average some eight-percentage points, but sometimes as much as 10 to 20 percentage

points. Across a large sample of countries and controlling for other factors, it has also

been found that size strongest affects access to credit (Beck, Demirgüç-Kunt, and

Maksimovic, 2005). (This analysis used the World Bank Economic Survey data; the

ICA-data are currently being analyzed to further determine what drives (lack of) firm

access across countries.) For a specific country, Brazil, size was found to be more

important than performance and other variables, suggesting quantitative limitations to

credit access (Francisco and Kumar, 2004). The impact of size on credit was found to be

greater for longer-term loans in case of Brazil (as well as for many other countries). As

an aside, public financial institutions in Brazil are actually found more likely to lend to

large firms, thus negating the idea that public banks necessary fill market gaps.


Size may, however, reflect not only profitability, financial and legal collateral but also

political collateral. This is particularly so in developing countries where lending is often

done on the basis of relationship and connections, often political. Indeed, in countries

with well-developed financial systems size can be overcome. Many banks in developed

countries lend to many small, single proprietary firms, sometimes without requiring

collateral, financial statements, or other requirements. Thanks due to the spread of

technological advances such as automated credit scoring, banks in developing countries

are also becoming active in these forms of financing.         And in the most developed

financial markets, universal access to basic financial services, including some forms of

credit, is essentially assured for households, as the data above showed.


Access can thus be based on opportunities and needs. Since in many countries it does not

seem so, the question to ask is what constrains access in general and in some countries in

particular? In other words, before asking whether there is a need for intervention, one

needs to address the question what the barriers to access are, and whether there is a

market failure and, if so, which.




                                               11

Financial institutions' specific and institutional environment barriers to access


Explanations of the lack of access fall into two dimensions: financial institutions' specific

constraints, and barriers arising from the overall institutional environment. In the

terminology of Beck and de la Torre (2005), this means one can classify options to

expand access in two groups: individual financial institutions' solutions, or what they call

moving towards the country's access possibilities frontier; and government actions, or

what they call expanding the country's access possibilities frontier. We will first discus

these two aspects and evidence on them and then consider the associated policy actions.


Individual financial institutions' constraints. Consumershouseholds and firmsoften

state that they restrain their demand because not the right types of financial services are

being provided. Households often mention problems of high minimum deposits, and

high administrative burden and fees. Getting a loan can be especially cumbersome and

too costly for many a borrower given the small amounts desired, the high fixed costs of

applying, and the often-high rejection rates. Financial institutions may furthermore

demand collateral, which poor borrowers typically lack.         Formal financial services

provision may also entail other, non-pecuniary barriers, such as requiring (greater)

literacy. Instead, households and firms will not seek financial services from formal

financial institutions and rely on informal forms of finance. This applies to deposit,

lending and payment services. Individuals needed funds for investment may rely on

family and friends.     People wanting to transmit payments to the relatives, whether

domestic or international, may rely on informal networks, although at higher costs. This

is most obvious in the transmission of international remittances, where unit costs can be

very high when more informal mechanisms are used. A $100 wire from New York to

Mexico costs for the banked - $9 plus unknown exchange rate spread, whereas it costs for

the unbanked - $19 plus unknown exchange rate spread (Solo, Caskey, and Durán, 2004).

Yet, these informal mechanisms are often preferred due other, non-pecuniary barriers.


Thus, lack of demand is a very important reason why usage is not universal: many

households and firms may not use financial services, although they do have access to



                                             12

some financial services. And banks may consider some households and firms as less

attractive as customers, and are therefore not be willing to extend financial services.

When demand is there, though, and the environment is sufficiently competitive, banks

can be expected to try to provide financial services. Still, one common reaction of

financial services providers why they do not serve poor households and small firms is

that these are too high-risk, too high-cost propositions.       In other words, financial

institutions find it not profitable enough to offer appropriate financial services to some

segments.


There may be variety of reasons for the lack of provision of appropriate products and

services. Banks may have problems providing financial services to all households and

firms given population density, e.g., it may be too costly to provide the physical

infrastructure in rural areas. Or in some areas there may be a lack of security in cash

transfers and branches cannot be operated commercially profitable. High transactions

costs for small volumes are often mentioned as constraining financial services providers

from broadening access. Small borrowers borrow frequently, for example, and repay in

small installments. They consequently do not want financial products with high per unit

costs, yet for the bank costs are often similar regardless of transaction size. Households

and firms in developing countries may seek financing or insurance for specific purposes

(major life events such as marriage, health or specific crop insurance), for which

contracts are difficult to design. Firms may be underserved for the same reasons. Small

firms seek different products than large enterprises, e.g., payments services for small

amounts, and banks may therefore not consider these firms sufficiently attractive as

clients. Small markets may make it more difficult to develop or roll out new products

specifically useful for that market.


For financial services providers, the fixed costs in financial intermediation thus make

providing services for small clients, by small institutions, and in small markets hard. At

the same time, economies of scale lead to decreasing unit costs as transaction volume

increases, making some specialization attractive. While better cost management can

lower unit cost and thereby lead to higher outreach for low-income clientele, there are



                                            13

limits to cost management at the level of an individual institution, as evidence on

economies of scale for banks in mature financial markets shows (see Berger and

Humphrey, 1997 for a survey). Evidence on micro-finance institutions also shows this

(Honohan, 2004b). The proliferation of micro-finance institutions in many countries has

not necessarily benefited final clients as much as possible as few institutions have

reached the scale necessary for efficient financial services provision. Similar constraints

arise at the country-level where many financial systems are very small (less than a few

billion dollars, which is less than a very small bank in most developed countries),

hindering effective financial services provision (Hanson, Honohan and Majnoni, 2003).

It suggests that the scale for effective financial services provision may not exist in all

countries.


Banks can innovate though and move closer to the "access frontier". Sometimes prodded

by government and public opinion, they can make their products more suited to low-

income households. In South Africa, the country's major banks launched in November

2004 a low-cost bank account aimed at extending banking to the black majority. The

country's four big retail banks along with the post office's Postbank launched the

"Mzansi" account. The account, set up under a financial sector charter agreed on by the

industry in 2003, requires a minimum deposit of 20 rand (some 4 US dollars) and is

aimed at providing some 13 million low-income South Africans without prior access to

bank accounts access to financial services.        Whether this will be profitable and

sustainable is to be seen, but the initial take-up has been promising (see further Napier,

2005 for an analysis of access to financial services in South Africa).        For further

examples of innovate approaches see De la Torre and Schmukler (2005), which study

different cases studies on enhancing access, also to investigate what may be replicable.


Institutional environment constraints. For many of the mismatches between potential

demand and supply, it is not clear if there is a market failure and if so what the exact

source of the market failure is. Why would financial institutions not offer these products

if feasible? Or why would financial institutions that operate at the right scale and with

the right technology not enter into certain markets? The fact that they do not must mean



                                             14

that it is not profitable to do so given current technology and the institutional

environment (legal, regulations and other requirements) they face in a particular market.

Question is whether these mismatches between demand and supply need to and can be

remedied.    While there is much (relevant) analysis on what affects financial sector

development and the role of the institutional environment there in (e.g., World Bank,

2001), evidence on what is affecting households' and firms' access to financial services

across countries is very limited to date. What exists though gives some insights on what

the most binding constraints are.


Across countries, it appears that access to micro-finance for poor or the near-poor is less

in countries with higher GDP per capita, in countries with better "institutional" quality

and a larger market size (Honohan, 2004a and 2004b). This suggests that there is some

element of the overall general development, including a greater usage of advanced

technology, allowing more developed countries to offer financial services profitably to

lower segments. Of course, the lower segment in these more developed countries

represents a higher income level, so it does not mean that the same technology can also

reach the lower segments in developing countries. The same analysis shows that the

quality of the main banking system discourages the spread of micro-finance institutions.

Specifically, countries with higher spreads and higher profitability in their main banking

system have fewer micro-finance institutions. This suggests that more competition in

banking system can foster greater access to financial services from micro-finance

institutions.


It also appears that access to savings can be a function of the distribution networks,

including that of postal, saving banks and other more specialized financial institutions. In

Brazil, for example, the size and scope of the some branch networks, as well as the split

between public/private banks and domestic/foreign banks plays a role in the degree of

access (Kumar et al. 2004; and World Bank 2005). In other markets, more specialized

financial institutions such as savings banks and other proximity banks that have, besides

profitability, an objective of providing financial services, have had some impacts on

broadening access (Peachy and Roe, 2004). These findings suggest that what is driving



                                            15

households access is not purely a function of the scope for profitable banking, but that the

overall institutional environment and level of development do play a role.


The access of small firms across countries has been analyzed more to date, and evidence

here suggests even stronger than for households that the institutional environment matters

(Berger and Udell, 2004 for a review of the conceptual issues). This is particularly so on

the credit side, as can be expected. The absence of credit information, difficulty in

collateral that can be registered and recovered if necessary, difficulties in general contract

design and enforcement can make lending especially difficult.                 Credit services may

consequently be limited to entrepreneurs with credit history, (political) connections, or

immovable collateral, such as real estate collateral. Even when a business is viable, there

will often be a lack of formal reliance on past records and little regard to expected future

performance.     In many countries, there is often the additional problem of uncertain

repayment capacity arising from volatile income and expenditures. Especially new and

smaller firms often have high exposures to these systemic risks (e.g., macro-economic

volatility, financial crises, default by governments, arbitrary taxation and other risks).


There is empirical evidence on the importance of these barriers. The quality of legal

systems, property rights, and the presence of mechanisms for reliable information have

been found to be especially important for small firms (Beck, Demirgüç-Kunt, and

Maksimovic, 2005). Small firms and firms in countries with poor institutions use less

external finance, especially less bank finance.              Better protection of property rights

increases external financing of small firms significantly more than that of large firms,

mainly due to more bank and equity finance. It also appears that substitutes to bank

finance are imperfect, e.g., small firms do not use disproportionately more leasing or
trade finance compared to larger firms.5


Analysis at the individual country level has been more limited to date, but it does provide

some insights as well in what may be driving access. It is clear that banking system



5See further some of the papers presented at a recent World Bank SME-conference,
http://www.worldbank.org/research/projects/sme_conference.htm.


                                                   16

regulations can hinder access.      There can be minimum or maximum interest rates

policies, which make it hard for financial services providers to offer saving or lending

instruments profitable.    Other regulations can include usury laws, restrictions and

requirements on lending, and high compliance costs. High transactions costs and barriers

for dealing with formal financial institutions for households can be due to administrative

regulations and procedures. The procedures for a household opening a bank account can

be complex, requiring among others proof of identity, address, or income.             Many

countries, for example, have costumer identification requirements, so called "Know Your

Customer" rules, which limit their ability to offer simple banking products. The recent

focus on anti-money laundering and counter-terrorisms financing (AML/CFT) has led to

laws that can adversely affect the provision of financial services, as it has threaten to do

in South Africa (see Mapier, 2005). In some countries there are other, costly or distortive

rules (e.g., in some African countries where permission from the male household head is

necessary for the female member of the household to open a bank account). More

generally, government interference can distort risk-return signals, making it hard for

formal financial institutions to offer attractive products.


In addition to hindering the activity of existing financial services providers, regulations

can also hinder the emergence of financial institutions more suited to the needs of lower-

income households or smaller firms. Rigidity in chartering rules, (high) minimum capital

adequacy requirements (in absolute terms), limited degrees in funding structures, too

heavy regulations and supervision, too strict accounting requirements and other rules can

hinder micro-finance institutions and smaller financial institutions from emerging. In

South Africa, regulation and supervision for banks was being extended to micro-finance

institutions, which reduced their capacity to offer financial services profitable to the

lower segments of the populations (Glaessner et al. 2004).      Separate charters may be

useful, with the structures required depending, among others, on whether the institution

borrows, takes deposits, is owned by its members and only caters to those (Van

Greuning, Gallardo, and Randhawa, 1999).




                                               17

With these and other regulatory and supervisory requirements tradeoffs arise, however, as

the requirements are meant to serve other public policy purposes, such as financial

stability and financial integrity. There are also tradeoffs in terms of facilitating the

mainstreaming of micro-finance institutions. Jansson, Rosales and Westley (2004) argue,

for example, that one does not want to create new and distinct institutional forms for

microfinance unless: (a) there are several mature and well-managed nonprofit

organizations ready to transform into such financial intermediaries, and (b) the existing

institutional forms-- such as bank or finance company--are for all practical purposes

unusable (due to high minimum capital requirements, for instance) or carry important

operational restrictions (such as the inability to mobilize deposits).


There is consequently a need to evaluate the value of regulatory approaches from an

overall welfare point of view. Although approaches have to strike the right balance, they

can be adjusted to further enhance access. In many countries, for example, one needs to

develop anti-predatory lending rather than usury laws which in the end hurt the small

borrowers as they do not get access to credit at all, even at high interest rates. Also

adopting "truth in lending" requirements to small scale lending, rather than the extensive

small print type regulations many countries have, can be useful to ease access. Adapting

regulations can furthermore mean facilitating multiple forms of financial services

provision, e.g., not just "banks" that takes deposits.      In many cases, it will involve

considering savings mobilization separately from credit extensions. Many households

are interested in savings and payments services only, not in credit services. It can be that

these types of financial services provision require different forms of regulation and

supervision.    This mean, one might develop specific frameworks for micro-finance

institutions and activities of commercial banks on small scale.


Finally, much of regulation is aimed at protecting savers and borrowers against misuse

and risks, yet they may not be effective in developing countries given lack of supervisory

capacity, independence and effective checks and balances while still ending up hindering

access (see Barth, Caprio and Levine 2005). Consideration also needs to be given to

educate people on the risks of (new) financial services and different types of financial



                                              18

services providers, such they themselves strike the right balance between risk and

benefits. More generally, it will be necessary to increase financial literacy, as is actively

being done in some countries. Best approaches in these areas, though, will vary greatly

from country to country.


Areas where it is obvious that progress can be made in furthering access in many

developing countries are institutional infrastructure improvements.           Better legal,

information, payments systems, distribution and other infrastructures are needed in many

countries.   The agendas of many governments, multilateral financial institutions and

others are already aimed at this, but most of it will take time. Other policy steps can be

useful to further access. The evidence of the main banking system suggests that one

important way to enhance access is through improving competition in banking systems.

This can be done often easier than improving the institutional environment.             Also

increasing competition and opening up can bring in (newer) technology and know-how.


Increased competition can be applied to all segments. One can, for example, allow

smaller and non-bank financial institutions greater access to existing networks. In many

countries, access to the payments system is limited to a club of large banks, or the pricing

structure of access is such as to preclude smaller financial institutions from having

effective access. Information sharing is restricted in many countries to incumbent banks

and formal financial institutions.     This and the limited existence of (private) credit

bureaus in turn are hindering other financial institutions to provide financial services as

evidence has shown (Miller, 2001).         Few countries, for example, allow non-bank

financial institutions and entities, such as department stores, access to bank information,

thereby making it more difficult for these entities to provide financial services to low-

income households. Yet, from these non-financial institutions often lower-income people

get their credit. In Mexico, for example, close to 50% of credit for those with no banking

relationship comes from department stores (Solo, Caskey, and Durán, 2004).


Although some of these changes are technically relatively easy to adopt, the area of

competition policy remains very complex, especially in small markets with little



                                             19

institutional capacity. It requires establishing a credible competition agency, for which

the institutional requirements are quite high.      Furthermore, even in well-developed

countries, questions arise on how to deal with the many network properties in financial

services (access to the payments system, credit bureau, distribution networks, etc).

Answers here are not obvious.       One does not want to undermine the incentives for

accurate information provision, for example, by opening up a credit bureau to any new

party as that can undermine the incentive structure for entities to provide accurate

information.    Nor does one want to have financial institutions disclose all type of

information as that can undermine their willingness to enter relationships with their

clients out of fear that competitors take away the business.


In addition to the general view that competition can help with access, there is specific

evidence that allowing greater entry by foreign banks can further enhance access.

(General evidence on the effects of foreign bank entry is reviewed in Clarke et al. 2003).

A study on borrowers' perceptions across 36 countries found that reported financing

obstacles were lower in countries with high levels of foreign bank penetration (Clarke et

al. 2004). The same study found strong evidence that even small enterprises benefited

and no evidence that they were harmed by the presence of foreign banks. The channels

appear to be both competitive pressures of foreign banks on the domestic banking system,

forcing local banks to go downscale, as well as direct provision of financial services by

foreign banks. A specific Latin America study found that foreign banks with small local

presence do not appear to lend much to small businesses, but that large foreign banks in

many cases surpass large domestic banks (Sanchez et al. 2002).


There are also plenty of case examples on the effects of foreign banks' entry.         In

Mongolia, a country with an income per capita of less than $500 and a very rural based

economy, after many years of operating deficits, loan losses, and a failed attempt at

privatization, the government-owned Agricultural Bank of Mongolia ("Khan" Bank) was

placed in receivership in 1999. In March 2003 HS Securities of Japan bought Khan Bank

from the Government of Mongolia for $6.85 million. Khan Bank now operates a network

with 379 points of service throughout Mongolia, much greater than any of the other 16



                                             20

banks operating in the country (and up from 269 when new management took office).

One out of two Mongolian households today is a client of Khan Bank and it seems to

continue to expand its branch network and services.


The effects of foreign banks entry are both direct and indirect. The direct effects include

the direct provision of financial services mentioned above. The indirect effects include

the effects of foreign banks on the overall banking system through greater financial

stability and improved efficiency of financial intermediation, as reviewed by Clarke et al.

(2003). These two effects can make the local banking environment more conducive to

lending, including to the lower segments, and can put pressures on local banks to engage

more in lending to lower segments as profitability in other segments, say in corporate

sector lending, declines.


The impact of foreign competition in securities markets on access is less obvious.

Globalization has meant that large firms have been accessing international financial

markets.     In some developing countries, domestic stock markets' liquidity has

consequently been negatively affected, possibly hurting access to finance by smaller

firms. At the same time, relaxing the financing constraints of large firms through access

to international markets can help financing constraints of small firms since they indirectly

benefit, such as through trade-credit type of arrangements. On net, it is not clear yet

whether small firms lose or gain from globalization and increased competition in

securities markets.


Role of technological improvements


Besides the removal of barriers and improvements in the institutional environment a

number of recent country experiences have shown that by some specific interventions

access can be enhanced. In India, for example, discussions are underway to use existing

networks (e.g., the postal system) to allow the delivery of new financial services by many

other, public and private providers. The idea is that the technology and information

backbone of existing public or other networks need not be exclusively limited to one



                                            21

entity. There is little reason, for example, why not to allow multiple financial services

providers to offer their products using the same distribution network and in the same

outlets. Many countries have large networks of post offices already connected and one

could envision, for example, an electronic "kiosk" in every post-office where various

financial institutions can offer their services online with the costumers to choose. In the

post offices in South Africa, using electronic-finance services, a platform in being

developed to allow costumers to apply for loans from any bank. Another model is Brazil,

where the post office is present in 1,738 out of more than 5,000 municipalities without a

bank outlet. Here the government auctioned the exclusive right to distribute financial

services through post offices in 2001 and a large private bank was the winner. Although

this may quickly improve the quality of services, it does, however, carry some risks of

local monopolies.


New technology, including the internet, smart cards, and the use of mobile phones can in

general help broaden access (see BIS, 2004, for a general overview of e-finance

developments). On one end of the income spectrum, in Vienna, payments for parking

fees and in Finland payments at vending machines can be made by mobile phone. In

many developed countries, mobile payments can now be made through voice access, text

messaging (SMS) or WAP (as a gateway to the internet).             Another arrangement in

developed countries allows customers to pay using the prepaid value stored on their

mobile phone or to pay ex post, where payments for goods or services are placed as

additional items on the customer's phone bill.        Use of mobile phones for financial

services provision might also facilitate access in lower-income, developing countries as

mobile phones are often more widespread than fixed lines and can have a lower threshold

for users than banks.


In some developing and transition countries, banks have offered pre-paid cards (Bolivia,

Brazil, China, Ghana, India, Lithuania, Malawi, Malaysia, Mexico, Nigeria, the

Philippines, Russia, Turkey and Venezuela). The use of pre-paid cards can facilitate

payment services for low-income households. Often though, this will need regulatory

changes, as when pre-paid cards are considered deposit instruments and fall under some



                                              22

form of banking regulation. Technology can help in other ways. In Uganda, over the past

two years, Hewlett-Packard and others active in the microfinance industry have been

working to increase the scale of microfinance. The team has developed, tested and is

implementing a remote transaction system using handheld devices, which capture

transaction data and use a GSM network to transmit this back to a head office server and,

in turn, management information system. Hand-held tools are being used more generally

by several micro-finance institutions to provide on the spot loan applications and

approvals (see Microsave.org for other examples).


In Mexico, there have been innovative ways of trade finance using reverse factoring. The

program developed by Nafin, a government development bank, allows many small

suppliers to use their receivables from large credit-worthy buyers, including foreign

MNCs,     to   receive   working   capital   financing,  effectively  transferring  their

creditworthiness to allow small firms to access more and cheaper financing. What makes

Nafin special is that it operates an internet-based platform, providing on-line services,

reducing costs, increasing transparency and improving security. In the short-run, there is

a subsidization of overhead costs, but by lowering costs for SME working capital, it

expects to generate more business and become sustainable (see further Klapper, 2004).


Paulson and McAndrews (1998) provide a case study of how Standard Bank of South

Africa tried a new ways of addressing an un-banked population. Already a decade ago, in

1993, Standard Bank set up E-Bank. It was a simple savings product offering card-only

access, but supported by dedicated staff speaking a mix of relevant local languages and

operating out of dedicated outlets to help overcome problems of illiteracy and concerns

about security in a high crime environment. It had high start-up costs, but provided

financial services to a low-income segment. Since then E-bank has been absorbed in the

bank's more general provision of financial services to low-income households.


These are examples of some specific market approaches and government interventions

that can further enhance access. Many other examples like these exist. More generally,

there is much emphasis recently on facilitating the mainstreaming of micro-finance



                                           23

institutions and the scaling up of new initiatives on access. These initiatives can be done

by specific interventions, as the above examples and work underway in India (see Basu et

al. 2004, and Ananth and Mor, 2005) and other places shows, but how to generalize is

still a lesson to be drawn.


Government interventions to broaden access


Universal usage, as will be clear by now, should not necessarily be a public policy goal

and trying to broaden access too forcefully raises some concerns. Access to credit may

be a further problem when it leads to impoverishing indebtedness as poor can over-

borrow, often at unfavorable terms.         More generally, the fact that the poor and

disenfranchised lack access may be more a problem of poverty than a problem of access.

Although data are weak and do not allow one to make a definitive assessments, the share

of those with potential "bankable" demand for financial services but no access in poorer

developing economies may well be similar to the share of exclusion in richer advanced

industrial economies. Since there is evidence that access rises with per capita income and

wealth, although with complex causality links, arguably the focus should primarily be on

poverty-reducing growth and programs to enhance overall inclusion (jobs, education,

social participation), with greater access to financial services to follow as corollary. And,

even where there is a case to try to extend financial services provision to a larger

segment, it can be that the costs of general, public or public-induced provision may

outweigh its benefits.


Broader public interventions can nevertheless be useful in some cases, but will need to be

carefully introduced. Given political economy factors, broadening access may not relax

credit and savings constraints, when there is a selection bias, i.e., those households or

firms with good prospects anyway apply for credit.            Subsidies cannot only distort

markets, but evidence is mounting that subsidies are captured by the relatively well off,

which often already have access. Priority lending requirements are neither the solution,

but rather can also divert resources away from the lowest segments, often towards the

less needed. Furthermore, there may not be any additionality, as clients that have access



                                              24

already move to new providers that are being subsidized.           For example, much of

emphasis on improving the supply of housing finance (by providing tax breaks, requiring

minimum lending shares for commercial banks or establishing specialized financial

institutions that rely on implicit government support) ends up being a subsidy for the

middle-class. In Brazil, for example, the cost of the housing finance program is one of

the many factors behind the general high financial intermediation spreads, hurting

borrowers and depositors through higher lending rates and lower deposit rates,

presumably especially those less well off. Enhancing access can then in the end hurt

those truly needed as the costs are borne by all.


Another example relates to micro-finance institutions. Much emphasis has been given by

donors and others, including multilateral financial institutions, to micro-finance

institutions, including by providing subsidies for setting up institutions (sometimes also

with providing subsidies for the continued costs of operating, but that has become less

accepted in recent years). These forms of subsidies can already work perversely as they

can lead to higher subsequent spreads to recover the fixed costs (Hoff and Stiglitz, 1998).

There is thus a need to keep the direct and indirect subsidies minimal and for any

program costs and risks co-sharing with the private sector is key as a (partial) market test.


There is some evidence that the demand for and supply of financial services may be

stimulated in other, less costly ways. Many employers prefer to deposit their payroll and

wages electronically, and would be willing to stimulate usage of formal bank services by

providing some form of subsidy (for example, facilitating branching within the premises,

encouraging the establishment of a credit union, or facilitating private savings schemes).

Governments can also do this. They can, for example, try to make social security, tax and

other individual-oriented payments in such a way so as to encourage more bank access,

among others, by making them largely electronically.


In 1999, the US Treasury Department, for example, initiated a program to pay all federal

benefit payments, such as social security benefits, by Electronic Transfer Accounts

(ETAs). One impediment was the large number of benefit recipients without bank



                                            25

accounts, whom cashed their checks instead of depositing them in a bank account. Using

subsidies, banks were encouraged to open bank accounts and recipients were encouraged

to switch to electronic payments. The Treasury offered to pay banks $12.60 for each

ETA account they established for benefit recipients, and the Treasury specified a

minimum set of characteristics that these accounts must meet (the accounts could not cost

account owners more than $3 a month and they could not levy a fee for electronic

deposits coming in). The switch would benefit the government as supplier (lower costs),

but in the end could also help the recipient by giving him access to financial services. In

the end, the take-up was less than expected, suggesting again that lack of access to

financial services is part of a broader issue of social exclusion. Similar experiences exist

with encouraging taxes payments and returns to be made electronically, where the usage

is often concentrated among those already having access and otherwise better off.


Besides these methods, there are other options open for governments to stimulate access

for households to banking and other basic financial services. For one, the regulatory

system can be used to direct, although not mandate banks to address the problem. This is

what might be described as the Community Reinvestment Act (RCA) model used in the

US. Second, authorities can mandate all banks to provide minimum banking services

("basic accounts") for otherwise excluded segments of the market. Third, governments

can rely on banks with a social commitment (in the legal form of either public banks,

cooperatives, foundations, the postal network or proximity banks such as local savings

banks) offering very restricted retail services.            Each of these approaches has its
advantages and disadvantages.6


The US Community Reinvestment Act (CRA) enacted by the US Congress in 1977 and

revised in 1995 aims to improve financial access.              It aims to help meet the credit

requirements of the communities in which banks operate, including low to moderate

income neighborhoods. Each bank is rated every three years as to the bank's performance

in making loans to low- and moderate-income people (rather than for its process for

complying with CRA), allowing the general public to apply pressures for non-


6The following sections draw extensively on Peachy and Roe, 2004.


                                                 26

compliance. Ratings focus on the areas of lending, services and investment, with lending

carrying greater weight than the others. Claims for its success are contested but with

neither side establishing a strong position; still a sign of success is that it has existed for a

long time. The CRA model is very specific model though, not followed elsewhere, which

suggest its replicability is limited. The CRA should moreover not be seen in isolation.


The UK, France, Sweden and Ireland, among others, have tried by legal means to

broaden access. In France, for example, anyone seeking to open an account, but rejected

by a bank, can contact the Bank of France who will provide a named bank (often the post

bank) that will then be obligated to open an account for that person. In some other

countries, postal banks (often government owned) have been given the task to provide

basic cash and banking services. There is little review of the experiences with these

schemes, though, as to their effects and efficiency. The experience with "proximity"

banks is reviewed by Peach and Roe (2004) and some support is found for a positive

effect on access of a greater presence of such banks. Also, credit unions and other non-

for-profit financial institutions can make a difference in access.


The experiences with credit extensions, especially for SMEs, are extensive, in both

developed and developing countries, suggesting that there has been a large public need to

provide these forms. The efficacy of these interventions is much more doubtful, however

(a general review of credit lines is World Bank, 2004; Caprio and Demirguc-Kunt 1997

provide some empirical evidence on subsidies and review general experiences). The

means to distribute credit to these groups are generally distortive, often credit does not

reach the intended target group but rather the well-connected, and institutional

development is undermined, as banks do not develop their credit analysis skills. The case

for direct and indirect intervention in access to credit is therefore less clear than for

access to basic savings, payments and transaction services.




                                             27

Conclusions


Over the last decade, finance has been recognized as an important driver of economic

growth. More recently, access to financial services has been recognized as an important

aspect of development and more emphasis is given to extending financial services to low-

income household segments. Although still early in the analysis, there is some evidence

that access is improving. On the household side, there are some data on the use of micro-

finance that suggest there has been an expansion of access for households. Data here have

to be interpreted carefully as increases may represent a better coverage over time, rather

than an expansion. There is also evidence in terms of more main-streaming of access by

commercial banks as competition forces and technology allow them to go to the lower

segments. Examples in developing countries are ICICI bank, SHG Bank Linkage and

South African banks that have made it a priority to reach out to lower segments.


For firms, the evidence on access to credit is more mixed. It appears to be increasing in

some countries, but mostly in consumer finance forms, less so on the SME credit side.

Some have argued that recent trends in banking systems may have adverse consequences.

Consolidation of the banking system in many countries increases the distance between

borrower and lender, making lending more based on hard information and reducing the

role of relationship lending which can be especially useful for new and small firms. Yet,

part of this increased consolidation is the consequence of increased competition, which in

general helps to increase access. Indeed, while there is cross-country evidence that more

concentrated banking systems could increase financing obstacles, this is more so if the

system is not competitive and dominated by public banks.


But more definite interpretation on factors affecting access will have to wait for better

data on access. This will require some national and international actions to develop more

comparable data on access. Data on access will have to come from different sources:

providers of financial services provision (using national statistics and financial

institutions), users of financial services (on the basis of surveys), and from experts (to

identify constraints). Each of these data sources has its tradeoffs, so simultaneous actions



                                             28

will be needed, but without good data, little progress can be made in terms of policy

recommendations.


With better data, benchmarking systems (across and over time) and more analysis on

what is driving access will be possible. Furthermore, analysis of the success of different

models, with possibly more controlled "experiments" and rigorous evaluations of (lack

of) success is needed. This type of analysis will help both private financial institutions

deliver financial services profitably as well as guide national and global policy

interventions. It might also be useful for international and national agencies to develop

"models" on various aspects of access, i.e., advice on regulations of micro-finance

institutions and their activities; and rules for some aspects such as consumer protection

and Know Thy Customer rules; and guidance on the best data to collect, and who and

how to collect data.




                                              29

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      Directions in Development, World Bank.




                                         34

      Table 1: Share of households with access to a bank account or using financial services
                                                                          % of                                      % of
                                                            % of       household        % of          % of      household         % of
                                                         household     that used     household    household      that used     household
                                                         that saved      formal      that used   that borrowed     formal      that used
                                                         money in the  financial      informal   money in the    financial      informal
                                       Date of Number of  past 12    institutions to finance to     past 12    institutions to finance to
          Country           Source     Survey households  months          save         save         months        borrow         borrow

Armenia                   LSMS            1996      4920        17.13          8.86        0.203                                       4.51
Bosnia and Herzegovina    LSMS            2001      5400                                                  21.78          6.22        15.83
Bulgaria                  LSMS            2001      2633                                                   5.43          5.43
China (Hebei andLiaoning) LSMS      1995 - 1997      787        82.47         41.93        13.34          28.08          5.21        24.65
Côte d'Ivoire             LSMS            1988      1600        88.13         24.81                       23.81          3.19        21.06
Ghana                     LSMS         1998/99      5998        11.97                                     39.08          3.27        32.03
Guatemala                 LSMS            2000      7276        18.13         17.77          0.38         31.75         23.47          7.42
Guyana                    LSMS         1992/93      1819        15.67         13.74          3.63          4.67          1.32          2.53
Jamaica                   LSMS            1997      2020        68.12         59.41        17.82          10.54          1.88          5.89
Kyrgyz Republic           LSMS            1998      2979        11.35          1.34        10.14           6.08          0.34           5.3
Morocco                   LSMS         1990-91      3323        15.53                                     22.03          3.55        19.32
Nepal                     LSMS            1996      3373                                                  57.04         12.93        49.96
Nicaragua                 LSMS         1998-99      4209         6.53          4.73          0.19         22.52          7.58          7.75
Pakistan                  LSMS            1991      4800        23.58         12.21        14.52          30.31           1.1        29.42
Panama                    LSMS            1997      4945                                                   1.52          0.83          0.79
Peru                      LSMS            1994      3623        25.23                                     16.64          2.07        14.52
Romania                   LSMS         1994-95     24560        94.28         22.53          1.36         15.88              6       11.41
South Africa              LSMS            1993      9000                                                  44.76          4.94        42.58
Viet Nam                  LSMS         1997-98      6002        89.85           8.7        12.81           49.1         26.12        30.44

Brazil (11 urban areas)   SAFS            2002      2000                       42.7        45.45
Colombia (Bogota city)                                                         41.2
India                     AIDIS           1991     57031                                                   26.9          11.8           19
India (UP and AP)         RFAS            2003      6000                       47.5
Mexico (Mexico city)                                                             25
Botswana                  FINSCOPE        2003       530                      46.98        25.66                        11.70        29.06
Lesotho                   FINSCOPE        2003       534                      17.04        11.05                                       5.99
Namibia                   FINSCOPE        2003       810                      28.40          0.86                        5.31        15.19
Swaziland                 FINSCOPE        2003       604                      35.26        19.54                         4.14        16.06
South Africa              FINSCOPE        2004      2988                         46
Kenya                     Estimate                                            10.00
Tanzania                  Estimate                                             5.00
Uganda                    Estimate                                   < 5

United States             SCF             2001      4449                       90.9                        75.1
Denmark                                                                        99.1
Netherlands                                                                    98.9
Sweden                                                                           98
Finland                                                                        96.7
Germany                                                                        96.5
France                                                                         96.3
Luxembourg                                                                     94.1
Belgium                                                                        92.7
Spain                                                                          91.6
UK                                                                             87.7
Portugal                                                                       81.6
Austria                                                                        81.4
Ireland                                                                        79.6
Greece                                                                         78.9
Italy                                                                          70.4




                                                                          35

Table 2: What (Other) Savings and Deposit Facilities are Being Used?



Distribution of Deposits      Brazil        India                 Colombia Mexico
Banks                         95%           90%                   85%         96%
                              (54% private; (30% Rural Regional
                              41% public)   Banks)

Cooperatives                  0%            7%                    14%

Post Office                   n.a.          2%

Family/Friends                4%            n.a.
Others                        1%            1%                    1%          4%


Source: Kumar et al. 2004

Table 3: Why Don't the Unbanked Use Banks?


                                           USA*     Mexico     Colombia Brazil   India
§Demandlimitations:noneed/nosavings         53%        7%       16%       n.a.   75%
No awareness                                                                     18%
§Supplylimitations:Bankbarriers/
 (eg. high costs minimum balances;          45%        70%      78%      42%      n.a.
documentations)
§PerceptionsofService/Safety/Mistrust:      18%        16%       3%      25%
Lack of documentation                       10%        3%
Privacy                                     22%        2%
§Inconvenience­Locationandhours             10%        2%
§OtherReasons                                                    3%      33%


Source: Kumar et al. 2004

Table 4: Who Are the Unbanked? USA and Mexico

Similarities
Lower income groups
Below median income
       USA                              79%
       Mexico                           90%
Less educated
Less than high school
       USA                              56%
       Mexico                           51%
Marginalized in socio-economic terms
       Mexico (informal sector)         60%
       USA (Latino and Afro American)   90%

Differences
Percentage of Unbanked
       Mexico (Mexico City)             75%
       USA                              9.1%
Home Ownership of Unbanked
       Mexico (own home in Mexico City) 63%
       USA                              7.8%

Source: Solo et al. 2004




                                       37

      Table 5: Complaints by Firms About Lack of Access to External Financing
                                                                  Indicator - Access to financing
                                                                  Small (1- Medium (50- Large
                                                                    49         249        (250+
                                                         Country  employ                  employ
Country                                             Year Average    ees)    employees)     ees)
Albania                                             2002   14.29    16.04        14.81          0
Algeria                                             2002   53.07    55.84        45.36         44
Armenia                                             2002   21.82    22.95        19.05      18.18
Azerbaijan                                          2002   13.04    12.61            24      4.17
Bangladesh                                          2002   41.59    42.47        45.81      36.36
Belarus                                             2002   25.83    30.67          12.5     18.92
Bosnia and Herzegovina                              2002     22.5   23.16        19.44         25
Brazil                                              2003   60.46    61.94        60.63      51.85
Bulgaria                                            2002   38.52    45.24        18.42      29.73
Cambodia                                            2003     9.39     9.33         5.26      12.2
China                                               2002     22.8   16.87        20.86      30.18
Croatia                                             2002   24.86    26.89        24.24      19.23
Czech Republic                                      2002     25.1   28.83        25.58       6.98
Ecuador                                             2003     44.9   48.96        36.04         50
El Salvador                                         2003   30.97    36.54        19.64      19.51
Eritrea                                             2002   52.31        55       52.63      33.33
Estonia                                             2002     12.1   11.82        16.67       9.09
Ethiopia                                            2002   42.82    43.48            48     27.91
Georgia                                             2002   10.47    10.08        15.38       5.88
Guatemala                                           2003   34.07    36.36        33.33         22
Honduras                                            2003   50.79    56.19        51.43      20.69
Hungary                                             2002   21.63    26.06        16.67       9.52
India                                               2002     18.3 ..        ..           ..
Indonesia                                           2003   17.53    15.98        16.59      19.47
Kazakhstan                                          2002   11.69      9.88       11.43      20.59
Kenya                                               2003   44.07    60.47        30.59      39.29
Kyrgyz Republic                                     2002   15.98    15.09        20.45       5.88
Latvia                                              2002     6.06     5.22         4.17        12
Lithuania                                           2002     6.67     5.69       12.12       4.55
Macedonia, FYR                                      2002   13.33    13.21           8.7     22.22
Moldova                                             2002   25.15    27.12        15.15         30
Nicaragua                                           2003   54.42    57.18        47.17       12.5
Pakistan                                            2002   37.55    38.56        34.57       27.5
Peru                                                2002   50.22    50.65          62.5     66.67
Philippines                                         2003   13.52    15.04        14.39       8.86
Poland                                              2002     32.7   36.45        22.64       32.2
Romania                                             2002   29.72    32.89          25.4     24.32
Russian Federation                                  2002   20.26    20.95        17.98      20.69
Serbia and Montenegro                               2001   33.58    30.77        33.33      42.86
Slovak Republic                                     2002   29.56    32.67        27.27      20.83
Slovenia                                            2002     8.15     9.93            4         0
Tajikistan                                          2002   22.54    24.51        15.56         25
Tanzania                                            2003   48.33    54.76        38.24      27.27
Turkey                                              2002   17.33    16.07        25.71       9.84
Uganda                                              2003   45.04    47.32        39.02      33.33
Ukraine                                             2002   26.42    31.06        16.25      18.18
Uzbekistan                                          2002   26.53    26.04        21.43      35.29
Zambia                                              2002   53.66    65.15        51.58      37.14
Description: Percentage of firms that say access to
financing presents major or severe obstacles to the
operation and growth of their business.
Source: World Bank Investment Climate Assessments: data from rru\worldbank.org, downloaded
on 2-14-2005.



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