BVCMUN 2018 ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT GLOBAL ACCESS TO FINANCIAL SERVICES FROM FAITH COMES STRENGTH

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1 BVCMUN 2018 FROM FAITH COMES STRENGTH ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT GLOBAL ACCESS TO FINANCIAL SERVICES 3rd-5th August, 2018

2 INDEX Topic Page Number Introduction 2 Micro-Macro relevance of financial inclusion 3 Measuring global access to financial services 5 Measuring access to deposit countries 8 Measuring access to credit 10 Measuring outreach 11 Policies to broaden access 12 Financial Literacy and Financial Inclusion 14 Gaps in research 16 Questions to consider 18 Links to further research 19 ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 1

3 ORGANISATION FOR ECONOMIC CO- OPERATION AND DEVELOPMENT AGENDA: GLOBAL ACCESS TO FINANCIAL SERVICES Introduction Financial inclusion providing access to financial services for all has gained prominence in the past few years as a policy objective for national policymakers, multilateral institutions, and others in the development field. Financial inclusion is a worthy policy objective, alongside the promotion of stability and efficiency in shaping the development of the financial system. It directly contributes to social cohesion and shared economic development. Financial inclusion involves delivery of a wide range of financial services such as savings, credit, insurance, payments, and remittances. The United Nations designated 2005 the International Year of Microcredit, adopting the goal of building inclusive financial systems. To assist policymakers in designing effective policies and tracking global progress in financial inclusion, the World Bank collected the first set of indicators of financial access in countries around the world in 2005 and updated these indicators for selected countries in ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 2

4 Micro-Macro relevance of financial inclusion In addition to financial stability and efficiency, access to financial services for large segments of the population is increasingly recognized as crucial for development. Access to finance, broadly defined as the share of households and firms that are able to use financial services if they choose to do so, can have substantial effects on welfare and can contribute to the reduction of poverty. In particular, financial access allows individuals and firms to move away from short term decision making toward an inter-temporal allocation of resources. This encourages savings and removes the straitjacket of self finance, thus improving incentives for productive investments and for the enlargement and deepening of markets for goods and services. Though its importance is widely recognized, financial access remains extremely low in a large number of countries. Among these countries are Emerging Powers like Brazil, India and South Africa. According to World Bank calculations in 2007, the percent of adults with access to an account with a financial intermediary was only 43 per cent in Brazil, 48 percent in India and 46 per cent in South Africa. These figures compare with over 90 per cent in the developed world. Improved access to financial services is particularly relevant for Emerging Powers. The fundamental reason is that, from an economic perspective, size (both in terms of GDP and population) ultimately matters as a source of economic power to the extent that it translates into large and growing domestic markets that are participating in the global demand for and supply of products and services. Insufficient access of the population (households and firms) to financial services can result in a severe constraint on the development of a dynamic middle- ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 3

5 class with increasing consumption capabilities and of a buoyant entrepreneurial sector, including small and middle-size enterprises. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 4

6 Measuring global access to financial services While data on financial sector depth aggregate credit, stock market liquidity, etc. are readily available, data on access to and use of financial services, especially on the household level are wanting, partly because of the cost of such data collection, partly because of methodological hurdles. In the absence of micro-data, researchers have sought to create synthetic headline indicators, combining more readily available data on the number of deposit or loan accounts with the results of a few existing household surveys. These headline indicators reveal a large variation in the use of financial services: almost all households use finance in many Continental European countries, but on average fewer than one in three households do in most of the developing world. Financial exclusion thus affects not only the poor, but also large proportion of the non-poor population in many developing countries. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 5

7 In poor countries few lower income people use bank deposit accounts, reflected in the higher average account balances in microenterprises is fairly new, Overview even in developed countries. Unregulated lenders and regulated nonbank financial institutions remain a major credit provider in many countries. There are nearly four times more loans per adult in developed countries than in developing countries. As with deposit services, banks cater to richer clients, reflected in higher ratios of average loan size to average income. Regulated nonbank financial institutions cater to poorer clients than banks and provide smaller loans. In some countries nonbank financial institutions evolve into dominant regulated credit providers. Lending to individuals and small entrepreneurs requires processing many small loans to people who generally lack a credit history or official income records. By generating information that helps lenders assess risk and allocate credit more efficiently, comprehensive credit registries contribute to the development of credit markets. As more people enter the financial system and credit products become more complex, rules and regulations to protect consumers and overcome information and power imbalances need to be put in place. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 6

8 Bringing financial services to rural clients is the biggest challenge in the quest for broad-based financial inclusion. Often the main barrier to financial inclusion in rural areas is the great distances that rural residents must travel to reach a bank branch. Poor infrastructure and telecommunications, and heavy branch regulation, also restrict the geographical expansion of bank branch networks. In many developing countries there are fewer bank branches per rural resident than per urban resident. Nonbank financial institutions help fill this gap, with half the countries reporting more nonbank branches per rural resident than bank branches. Better geographic outreach can remove distance as a barrier to financial access for both lenders and borrowers, perhaps allowing banks to be more responsive and less intimidating to their customers. Simplifying the branch approval process can facilitate geographical expansion of branches. But the cost of building physical infrastructure or the combination of low income and low population density may make some areas unprofitable as branch locations. Allowing banks to operate through agents, including partnerships with postal networks and retailers, reduces the fixed costs associated with geographical expansion and holds great promise for improving access to financial services, especially in poor and remote areas. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 7

9 Measuring access to deposit services There are more deposit accounts than adults in the world, concentrated in the rich countries. Underlying the wide variation in rates of account ownership are large differences in poor households access to formal savings. Adding all the predicted and reported values puts the global number of bank and nonbank accounts at approximately 6.2 billion, or more than one for each adult on the planet.6 While there are more than enough accounts to go around, they are not distributed equally. In developed countries there are an estimated 3.2 accounts per adult, but in developing countries, less than 0.9 accounts per adult. Assuming three accounts per banked adult on average puts the number of unbanked adults at about 160 million (19 percent of adults) in developed countries and 2.7 billion (72 percent of adults) in developing countries. As a rule, bank accounts are for the well off, with exceptions Financial access is not a problem for the rich, even in poorer countries. Countries with the highest numbers of households below the international poverty line often have the lowest deposit account penetration Their banking sectors target mainly the richest inhabitants, leaving the more numerous poor with few options. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 8

10 Worldwide, an access gap excludes the world s poorest from the formal financial sector, leaving the majority of accounts owned by the rich. Many nonbank financial institutions cater to poorer clients. Under the right circumstances nonbank deposit-taking institutions, including cooperatives, specialized state financial institutions, and microfinance institutions, could reach many poor clients. The large number of clients served by these institutions in some countries also highlights the need for proper supervision and regulation. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 9

11 Measuring access to credit The penetration of loans, measured by the number of bank loans per 1,000 adults, varies widely across countries and is closely correlated with economic development. Developed economies have the largest number of loans per 1,000 adults. In Estonia and Greece there is one loan for every adult. Eastern Europe and Central Asia experienced record credit growth in the past decade and now average 367 loans per 1,000 adults. Sub-Saharan Africa has the lowest loan penetration. At the extreme, in Burundi and Ethiopia, there is 1 bank loan per 1,000 adults. Banks serve mostly high-income borrowers in developing countries. Low bank loan penetration suggests that banks do not serve low-income customers, a large part of the population in poor countries. Loans granted to individuals in poorer countries are large relative to per capita income. The large average loan size relative to income implies that the few borrowers who do have loans in poorer countries are richer. As markets develop and more people get access to credit, the size of the average loan relative to the country s per capita income gets smaller. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 10

12 Measuring outreach The availability of financial access points, such as financial institutions branches, ATMs, and point-of-sale terminals, varies greatly around the world. There are more bank branches per person in urban areas than in rural ones. To reach rural clients, banks need to build more branches as populations are dispersed over large areas and cannot be served from one location. This implies that, to serve rural populations adequately, there should be more branches per person in rural areas than in urban ones. For the least banked countries, branches are in urban areas almost exclusively, and as bank branching develops, banks branch into rural areas at a greater rate. This likely reflects the fact that as urban markets become more competitive and rural areas develop and display greater profit potential, banks seek greater outreach to rural clients. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 11

13 Policies to broaden access Since expanding access remains an important challenge even in developed economies, it is not enough to say that the market will provide. Market failures relating to information gaps, the need for coordination on collective action and concentration of power mean that governments across the world have an important role to play in building inclusive financial systems. However, not all government action is equally effective and some policies such as overly relaxed credit policies can even be counterproductive. Hence it is important for governments to have realistic goals. Deep institutional reform ensuring, above all, security of property rights against expropriation by the state is an underlying, albeit often long-term, prerequisite for well functioning financial systems. Can we prioritize institutional reforms to broaden access in the short to medium term? Recent evidence suggests that In low income countries, establishing credit registries to improve the information infrastructure matters more than improving creditor rights. In relatively underdeveloped institutional settings, reforms that enable an individual lender to recover on debt contracts (for example, those related to collateral) are more important in boosting bank lending than reforms related to resolving conflicts between multiple claimants, such as bankruptcy codes. Introducing specific legislation to underpin modern financial technology, from leasing and factoring, to electronic-finance and mobile-finance will also produce results in the short- to medium-term. Encouraging openness and competition including private ownership and foreign entry - is also an essential part of broadening access, as it encourages incumbent institutions to seek out profitable ways of providing services to the previously excluded segments of the population. It also increases the speed with which access-improving new technologies are adopted. Providing the private sector with the right incentives is important, as competition can also result in reckless or improper expansion if not accompanied by proper regulatory and supervisory framework. As the increasingly complex international regulations such as Basel II are imposed on banks to help minimize the risk of costly bank failures, it is important to ensure that these arrangements do not inadvertently penalize small borrowers by failing to make full allowance for the potential for a portfolio of SME loans to achieve risk-pooling. Research suggests that while banks making small loans have to set aside larger provisions against the higher expected loan losses from small loans and therefore they need to charge higher rates of interest to cover these provisions they should need relatively less capital to cover the upper tail of the distribution, i.e. to support the risk that losses will exceed their expected value (to cover what are sometimes known as unexpected loan losses). The scope for direct government interventions in improving access is more limited than often believed. While there is a large body of evidence that suggests interventions through ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 12

14 government-owned subsidiaries to provide credit have generally not been successful, the experience has been more mixed for non-lending services. Further, a handful of government financial institutions have moved away from credit, and evolved into providers of more complex financial services, entering into public-private partnerships to help overcome coordination failures, first-mover disincentives, and obstacles to risk sharing and distribution. Ultimately, these successful initiatives could have been undertaken by private capital, but the state has had a useful role in jumpstarting these services. Direct intervention through taxes and subsidies can be effective in certain circumstances, but experience suggests that they are more likely to have large unintended consequences, more so in finance than in other sectors. For example, with direct and directed lending programs discredited in recent years, partial credit guarantees have been the direct intervention mechanism of choice for SME credit activists. However, these are often poorly structured, embody hidden subsidies, and benefit mainly those who do not need the subsidy. In the absence of thorough economic evaluations of most schemes, their net effect in cost-benefit terms thus remains unclear. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 13

15 Financial Literacy and Financial Inclusion In particular, there has been significant appreciation of the role of financial education in improving levels of financial inclusion around the world, as highlighted by three sets of principles, endorsed by G20 leaders: The G20 Principles on Innovative Financial Inclusion; the G20 High-Level Principles on Financial Consumer Protection and the OECD/INFE High-level Principles on National Strategies for Financial Education. Each set of principles identifies the need for a combined policy response through an integrated framework of financial inclusion, financial education and consumer protection. This same triad is also apparent in the Maya declaration (2011), endorsed by regulatory bodies in developing and emerging countries, which includes the commitment to recognise consumer protection and empowerment as key pillars of financial inclusion efforts to ensure that all people are included in their country s financial sector. In 2010, the G20, recognising the importance of financial inclusion policy across G20 member countries and others, endorsed a Financial Inclusion Action Plan and established the Global Partnership for Financial Inclusion (GPFI) as an implementing mechanism. As such, the GPFI draws together key implementing partners, including the OECD since The OECD will be particularly involved in the 4th GPFI subgroup created in 2013 which focuses on financial literacy and financial consumer protection. This further indicates the importance of the triad mentioned above. In addition, the G20 Leaders have called upon the expertise of the OECD/INFE in their June 2012 communiqué, requesting that the OECD/INFE and the World Bank in cooperation with the GPFI deliver further tools to promote financial education and identify barriers to financial inclusion for women and youth: We recognize the need for women and youth to gain access to financial services and financial education, ask the GPFI, the OECD/INFE, and the World Bank to identify barriers they may face and call for a progress report to be delivered by the next Summit. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 14

16 The OECD addressed this call through the work of its INFE and, in particular, the expert subgroups on Financial Education for Financial Inclusion and Empowering Women through Financial Awareness and Education and ongoing work on financial education for youth and in schools. This global call reflects the need to improve the evidence base and global policy instruments on financial education for financial inclusion. It reinforces the findings of a scan undertaken by the OECD/INFE that suggests that despite a number of organisations with a focus on financial inclusion there has been relatively little data collection or substantive analytical work on the role of financial education in financial inclusion outside of the OECD. Those organisations with an interest in the role of financial education in financial inclusion can be divided into three main types: 1) Organisations that acknowledge the importance of financial education and recommend additional activity but do not undertake policy analysis or development work themselves; 2) Those that fund or implement financial education projects but do not undertake policy analysis or provide policy level guidance; 3) Those that have carried out analytical work, but at a regional level or on very specific issues. The OECD started working on the demand-side of financial inclusion in 2003, devoting a chapter of its 2005 publication to the importance of financial education for bringing the unbanked and underserved into the financial system. In October 2010, upon the recommendation of its Advisory Board, the OECD/INFE responded to the continuing need to address financial inclusion issues through demand-side approaches in both developed and less developed countries by creating a new expert subgroup on the role of financial education in financial inclusion. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 15

17 Gaps in Research The first step in improving access is measuring it. To design effective policies and track progress policymakers need to measure financial access. While a growing number of countries collect data on the availability and use of financial services, there is no consistent set of global financial access indicators to allow comparison across countries and over time. A basic challenge in measuring financial access is differentiating between the access to and use of financial services. Individuals may choose not to open a bank account or to borrow even if these services are available, reducing use relative to access. Such voluntary exclusion is difficult to measure, however, because it is not directly observable. So, researchers rely on indicators of use as an approximation for access. Much more research is needed to measure and track access to financial services, to evaluate its impact on development outcomes, and to design and evaluate policy interventions. Building data sets on access to finance that benchmark countries annually would help focus policymakers attention and allow us to track and evaluate reform efforts to broaden access. Better data on the firm and household level are important in improving our understanding of the impact of access. Indeed, household surveys are often ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 16

18 the only way to get detailed information on who uses which financial services from which types of institutions, including informal ones. In evaluating impact, randomized field experiments are promising. By introducing a random component to assignment of financial products, such as financial literacy training or random variation in the terms or availability of credit to micro-entrepreneurs and households, such research can illustrate how removing barriers and improving access affects growth and household welfare. Finally, careful evaluations of direct interventions would also help improve design of policies to build more inclusive financial systems. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 17

19 Questions to Consider 1) What are the possible ways through which measure of access to finance can be universalized so as to enable a comprehensive collective policy effort to be devised? 2) 3) 4) What policy measures can help in influencing various components of access to financial services, namely deposit services, credit and financial outreach? Has microfinance been able to meet its promise of reducing poverty without requiring continuous subsidies? Should financial services for the poor be subsidized or a strict market based approach is better suited to make the goal of global access to financial services achievable? 5) What role can the emerging powers and the developed nations play for helping the community of nations to achieve their goal of a wider access to financial services? ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 18

20 Links to Further Research &checksum=4a ec6 DF0365C7580A940014C ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT Page 19

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