The Global Findex Database 2014: Measuring Financial Inclusion Around The World

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1 The Global Findex Database 2014: Measuring Financial Inclusion Around The World Peter van Oudheusden Consultant, The World Bank Sept

2 The Foundations of Financial Inclusion: Understanding Ownership and Use of Formal Accounts Franklin Allen Asli Demirguc-Kunt Leora Klapper Maria Soledad Martinez Peria Sept

3 Account Ownership GLOBAL FINDEX / GALLUP WORLD POLL Application What explains account ownership? 100% GDP per Capita vs Account Ownership 80% 60% 40% 20% 0% 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 GDP per Capita Is variation simply a function of country-level income? Overall it explains around 72 percent of the variation in account ownership Below the median (<$3,500) it explains only around 23 percent

4 What explains account ownership? Dependent variable is account ownership at the individual level Costs of opening a bank account ** ATM penetration 0.002*** (0.175) (0.001) Costs of maintaining a bank account *** Interoperability POSs (0.137) (0.102) Costs of debit cards ** Correspondent banking permitted (0.172) (0.129) Offer basic or low fee account Promoting Access in Rural Areas (0.215) (0.146) Exception from KYC requirements Legal rights index 0.085*** (0.165) (0.018) Branch penetration 0.007*** G2P transfers: open accounts (0.002) (0.147) Controlling for age, income, marital status, employment status, gender, rural residency and GDP per Capita Enabling environment is associated with higher chances of account ownership

5 What explains account ownership? Is the relationship different for excluded segments? Here: rural population Dependent variable is account ownership at the individual level Costs of opening a bank account * Interoperability POSs (0.066) (0.037) Costs of maintaining a bank account Correspondent banking permitted (0.063) (0.053) Costs of debit cards Promoting Access in Rural Areas (0.065) (0.057) Offer basic or low fee account 0.187** Total disclosure requirements for deposits 0.018** (0.078) (0.009) Exception from KYC requirements 0.124* Consumer Protection: Monitoring Index 0.038*** (0.068) (0.014) Branch penetration 0.003*** Consumer Protection: Enforcement Index 0.034*** (0.001) (0.011) Controlling for age, income, marital status, employment status, gender and country-fixed effects Inclusion promoting policies are positively related with higher chances of account ownership among those that are more likely to be excluded.

6 What explains account ownership? Challenge of causality Explore time dimension in future work

7 The Impact of the Financial Crisis on Trust in Banks Work in Progress Asli Demirguc-Kunt Leora Klapper Peter van Oudheusden Luigi Zingales Sept

8 Motivation These are not things that can be fixed by a few rule-tweaks, or by bolstering the capital that banks are required to hold. They require a real change of heart and expectation. If this cannot be achieved by the current leadership, a new generation will have to be sent for. For until there is a real cultural change, the bank bashing will not end - Financial Times, November 5, 2012 Research showing that trust matters for economic decision making Guiso, Sapienza and Zingales (2004, 2008) Sapienza and Zingales (2009)

9 Aim Document relationship between trust and use of financial services Across a wide array of countries Over time Document development of trust over time Exploit information on trust in different type of institutions

10 Definitions of trust Do you have confidence in each of the following, or not? How about Financial institutions or banks? (Banks) Judicial system and courts? (Judiciary) National government? (Government) Honesty of elections? (Elections) The Military? (Military) [Constructed] Institutions? (Average of Judiciary, Government, Elections, and Military)

11 % of adults % of adults GLOBAL FINDEX / GALLUP WORLD POLL Application Relationship Between Trust and Financial Services 60% 50% 40% 30% Account ownership (all adults) 49% 55% 52% 53% 53% 51% 60% 50% 40% 30% Saved at a financial institution (adults that saved) 33% 40% 37% 37% 38% 36% 20% Banks Judiciary Government 20% Banks Judiciary Government No Trust Trust No Trust Trust Summary statistics suggest a positive relationship between trust in banks and financial services Little evidence of a relationship between other trust measures and financial services

12 Relationship Between Trust and Financial Services 2014 of adult population has an account of adult population that saves saves at financial institution of adult population that borrows borrows from financial institution Trust in banks 0.063*** 0.070*** 0.061*** 0.070*** 0.037*** 0.042*** (0.004) (0.005) (0.006) (0.007) (0.006) (0.007) Trust in institutions 0.023*** *** *** ** (0.006) (0.007) (0.010) (0.010) (0.009) (0.010) Female * * ** (0.004) (0.004) (0.004) (0.006) (0.006) (0.006) (0.006) (0.006) (0.006) HH income Q *** *** *** *** *** *** *** *** *** (0.007) (0.007) (0.007) (0.011) (0.011) (0.011) (0.010) (0.010) (0.010) HH income Q *** *** *** *** *** *** *** *** *** (0.007) (0.007) (0.007) (0.010) (0.010) (0.010) (0.010) (0.010) (0.010) HH income Q *** *** *** *** *** *** *** *** *** (0.006) (0.006) (0.006) (0.009) (0.009) (0.009) (0.009) (0.009) (0.009) HH income Q *** *** *** *** *** *** *** *** *** (0.006) (0.006) (0.006) (0.009) (0.009) (0.009) (0.009) (0.009) (0.009) Constant 0.268*** 0.301*** 0.273*** 0.103*** 0.143*** 0.110*** (0.023) (0.023) (0.023) (0.033) (0.033) (0.033) (0.028) (0.028) (0.028) Country year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes # of Observations 68,193 68,193 68,193 32,228 32,228 32,228 28,715 28,715 28,715 # of Countries R-squared Also controlling for age, rural residency, education, marital status, and employment status

13 Relationship Between Trust and Financial Services 2011 of adult population has an account of adult population that saves saves at financial institution of adult population that borrows borrows from financial institution Trust in banks 0.040*** 0.046*** 0.035*** 0.033*** 0.039*** 0.041*** (0.003) (0.004) (0.007) (0.007) (0.007) (0.007) Trust in institutions *** 0.025** (0.005) (0.005) (0.010) (0.010) (0.010) (0.010) Female ** ** ** (0.003) (0.003) (0.003) (0.006) (0.006) (0.006) (0.006) (0.006) (0.006) HH income Q *** *** *** *** *** *** *** *** *** (0.006) (0.006) (0.006) (0.011) (0.011) (0.011) (0.011) (0.011) (0.011) HH income Q *** *** *** *** *** *** *** *** *** (0.005) (0.005) (0.005) (0.010) (0.010) (0.010) (0.010) (0.010) (0.010) HH income Q *** *** *** *** *** *** *** *** *** (0.005) (0.005) (0.005) (0.009) (0.009) (0.009) (0.010) (0.010) (0.010) HH income Q *** *** *** *** *** *** *** *** *** (0.005) (0.005) (0.005) (0.008) (0.008) (0.008) (0.009) (0.009) (0.009) Constant 0.690*** 0.719*** 0.697*** * 0.128** 0.106* (0.031) (0.031) (0.031) (0.047) (0.048) (0.048) (0.055) (0.055) (0.055) Country year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes # of Observations 87,285 87,285 87,285 33,888 33,888 33,888 29,577 29,577 29,577 # of Countries R-squared Similar relationship in 2011 though slightly less strong

14 Relationship Between Trust and Financial Services Immediate withdrawal of Wage Payments Immediate withdrawal of Government Transfers 50% 40% 30% 20% 29% 23% 26% 26% 50% 40% 30% 20% 44% 37% 41% 41% 10% 0% Banks Government 10% 0% Banks Government No Trust Trust No Trust Trust Unexplored relationship Based on the question whether after wage/government payments are transferred into their account, people withdraw all the money immediately or over time

15 Country Trends in Trust 80% Canada 80% 73% United States 60% 40% 60% 40% 46% 20% 20% 0% 0% Trust in institutions Trust in banks Trust in institutions Trust in banks Canada and the United States have similar trust patterns in Trust in banks and institutions relatively stable in Canada Trust in banks drops relatively to trust in institutions in 2009 for the US US is identified as a crisis country and Canada not

16 Country Trends in Trust Definition of Crisis Country Laeven and Valencia (2013) Banking Crisis is an event that meets two conditions 1. Significant signs of financial distress in the banking system (as indicated by significant bank runs, losses in the banking system, bank liquidations) 2. Significant banking policy interventions measures in response to significant losses in the banking system * Deposit freeze, bank holidays * Extensive liquidity support * Significant bank nationalizations * Significant guarantees in place * Bank restructuring gross costs * Significant asses purchases

17 Country Trends in Trust 80% 70% 60% 50% 40% 30% 20% 10% 0% Trust in institutions: Crisis Countries Trust in institutions: Non-Crisis Countries Crisis countries and non-crisis countries have similar levels and time trends when looking at trust in institutions.

18 Country Trends in Trust 80% 70% 60% 50% 40% 30% 20% 10% 0% Trust in banks: Crisis Countries Trust in banks: Non-Crisis Countries Trust in institutions: Crisis Countries Trust in institutions: Non-Crisis Countries Crisis countries and non-crisis countries have similar levels and time trends when looking at trust in institutions. Crisis countries saw a sharp decline in trust in banks in 2009 while trust in banks is relatively stable over time for non-crisis countries

19 Country Trends in Trust Trust in banks Trust in judiciary Trust in government Trust in elections Trust in military ** 0.018* * * (0.017) (0.011) (0.018) (0.015) (0.011) (0.011) ** 0.019* (0.017) (0.011) (0.017) (0.014) (0.010) (0.011) * 0.021** * 0.031*** 0.020* (0.017) (0.011) (0.016) (0.015) (0.010) (0.010) *** ** (0.017) (0.010) (0.016) (0.014) (0.010) (0.010) *** * *** (0.018) (0.011) (0.017) (0.015) (0.011) (0.011) *** (0.018) (0.013) (0.019) (0.016) (0.012) (0.013) Trust in institutions Constant 0.539*** 0.426*** 0.440*** 0.432*** 0.633*** 0.481*** (0.015) (0.008) (0.013) (0.010) (0.008) (0.008) Base Years Country Fixed Effects Yes Yes Yes Yes Yes Yes # of Observations # of Countries Adj. R-squared Only trust in banks shows a decline in 2009 that persist over time Holds for a larger, unbalanced sample of countries as well

20 Country Trends in Trust Trust in banks *** *** *** *** *** (0.016) (0.016) (0.016) (0.016) (0.015) *** *** *** *** *** (0.015) (0.015) (0.016) (0.016) (0.014) *** * ** *** *** (0.015) (0.015) (0.016) (0.016) (0.014) *** *** *** *** *** (0.015) (0.015) (0.016) (0.016) (0.014) *** *** *** *** *** (0.016) (0.016) (0.016) (0.017) (0.015) *** *** *** *** *** (0.016) (0.015) (0.016) (0.017) (0.015) Trust in Judiciary Government Elections Military Institutions 0.661*** 0.383*** 0.358*** 0.510*** 0.680*** (0.065) (0.049) (0.055) (0.070) (0.071) Constant 0.258*** 0.371*** 0.385*** 0.216*** 0.212*** (0.029) (0.023) (0.025) (0.046) (0.035) Base Years Country Fixed Effects Yes Yes Yes Yes Yes # of Observations # of Countries Adj. R-squared Patterns become more pronounced after controlling for trends of trust in other institutions.

21 Country Trends in Trust Trust in Banks (1) (2) Trust in institutions 0.680*** 0.633*** (0.071) (0.069) *** * crisis country *** (0.015) (0.013) (0.030) *** * crisis country *** (0.014) (0.013) (0.029) *** * crisis country *** (0.014) (0.013) (0.029) *** * crisis country *** (0.014) (0.012) (0.029) *** * crisis country *** (0.015) (0.015) (0.030) *** * crisis country *** (0.015) (0.013) (0.029) Constant 0.212*** 0.234*** (0.035) (0.034) Base Years Country Fixed Effects Yes Yes # of Observations # of Countries Adj. R-squared Decline in trust primarily holds for crisis countries Around a 15 percentage point persistent decline after the financial crisis

22 Country Trends in Trust 80% 60% 40% 20% 0% Cyprus 35% 30% 25% 20% 15% 10% 5% 0% 30% 22% saved at a financial institution 27% 10% borrowed from a financial institution 12% 21% borrowed from family and friends Trust in institutions Trust in banks Unfortunately no evidence of how relationship between trust and banks and use of financial services change over a crisis Anecdotal evidence: Cypriot financial crisis

23 Future Work Are trust patterns concentrated for certain population segments? Relationship between trust and financial services by population segments.