Proposal on Headline Indicators of Financial Access

MAKING FINANCIAL MARKETS WORK FOR THE POOR Proposal on Headline Indicators of Financial Access Submitted by FinMark Trust 1 To World Bank/DFID/CGAP/FinMark Trust Financial Access Indicators Task Force I. Summary of Proposed Indicators This paper proposes to the Financial Access Indicators Task Force five headline indicators of financial access, and number of sub-indicators. The indicators were developed on the basis of the FinScope household surveys for South Africa. FinScope is a specialized demand side surveys that documents financial behaviour, usage and needs from a consumer perspective and across the entire population. The indicators are simple calculations, based on usage, and profiles of users and non-users in the financial market. The five indicators of access measure the access of the adult population to the financial system in its broad sense, i.e. both formal and informal. These indicators are: 1. Percent of the adult population that say they have one or more financial product provided by a formal financial institutions. These people are said to be financially captured by the formal financial sector. This is not exclusive formal financial product usage. People using formal and informal products will be in this segment. Formal financial institutions are defined as organizations that are legally registered to provide financial services and who need to report to a legal authority. They include the range of formal financial products offered by the range of legally registered financial services providers. 2. Within those that are financially captured, the percent of the population that have a bank product (formal bank). Again this is not exclusive as this also captures those that may have other financial products including non-bank products and informal services. Bank products are any products offered by first tier commercial banks. 1 This paper was prepared by Anne-Marie Chidzero, FinMark Trust, and Research Surveys under contract with DFID and is based on an analysis of FinScope South data. The views expressed in this paper are those of FinMark Trust and Research Surveys. The paper does not purport to represent the opinions or policies of DFID. FinScope is a specialized survey profiling demand for financial services across the entire adult population developed by FinMark Trust. FINMARK TRUST PO Box 61674 Marshalltown 2107 Republic of South Africa 7th Floor 17 Harrison Street Johannesburg Tel +27 11 838 9434 Fax +27 11 645 6896 E-mail info@finmark.org.za Trustees: NL Sowazi (Chair), EG Matenge-Sebesho, M Mogase, M Napier (CEO), DJ Porteous, RSK Tucker

3. Within those that are financial captured, the percent of the population that do not have a bank account, but have a non-bank product (formal-other) from organizations such as microfinance institutions, SACCOs, funeral parlours, insurance companies, retailers etc. 4. Percent of the adult population that is exclusively using informal financial services. This represents a segment called the Financial Frontier. Informal services are provided by entities that may be recognized but not reporting to any legal authority such as savings clubs, ROSCAs, un-registered microfinance providers, village banks etc. 5. Percent of the adult population that say they do not have any financial product from either formal or informal providers. This represents a segment called the Financially Excluded. The five indicators are placed within the three segments, Financially Captured, Financial Frontier, and Financially Excluded and form the Access Strand. The Access Strand can be graphically presented, to provide a visual snapshot of financial access in a country along an access continuum, as is illustrated in this paper. The Access Strand continuum can be used to encapsulate the headline indicator of access thus removing the need to have one indicator of financial access. Two sub-levels of the Access Strand are proposed to complement the headline indicators. One illustrates the usage of non-bank (formal other) and informal sector products within the Financially Captured segment and the second, provides a poverty profile of the top level Access Strand segments. The formal other and informal sector usage indicators include: 1. Percent of the adult population that are financially captured that have an informal financial product. 2. Percent of the adult population that are financially captured that have a non-bank financial product. These sub indicators will illustrate to what extent formal-other (non-bank) and informal service provision is significant. The poverty indicators are: 1. Percent of those that are formally banked that earn less then the poverty line monthly income amount. 2. Percent of those with exclusively non-bank (formal other) financial services that earn less then the poverty line monthly income amount. 3. Percent of the exclusively informal users that earn less then the poverty line monthly income amount. 4. Percent of the financial excluded that earns less then the poverty line monthly income amount. 2

Sections II and III of this paper covers the conceptual framework behind the proposed indicators and further describes the Access Strand measurement and headline indicators. Section IV summarises the questions used to produce the headline indicators of the Access Strand. Section V illustrates two levels of sub-indicators of the Access Strand. Further levels are elaborated in Annex II. The definitions used and survey methodology are found in Annex I and III respectively. Further analysis is clearly required to test the conceptual framework, refine the approach, develop and standardise definitions, and refine survey methodology. It is hoped, however, that this paper will provide the platform for debate and next steps on agreeing on headline indicators of access. II. Conceptual Framework For finance to be effective in supporting economic growth and poverty alleviation, financial markets need to be accessible by, and affordable to all those that want, chose to, and can use financial services. The value to be derived from a measure of financial access is information on the extent to which the financial system is expanding and meeting the needs of the entire population, both rich and poor, for financial services. With expanding access, economic development is facilitated. The measures will be a tool to identify what segments of the population are excluded from financial services, i.e. level of financial exclusion. Typically it is people with low incomes that tend to be excluded. Thus the measures of financial access should determine whether financial market development is pro-poor. In proposing headline indicators of financial access we hope to: Draw attention to the extent that financial markets are meeting the needs of the population, are inclusive, and are reaching low income and poor households. Track over time who is being served and who could potentially be served. Guide appropriate policy response to ensure financial market development addresses financial access. Highlight the opportunities to provide more and better financial services. Provide the benchmarks and reference points upon which one can measure the impact of private/public efforts to expand financial access and support financial market development. Allow for cross country comparability. These indicators can be used by countries to compare their performance with others; by policy makers in efforts to support regional economic and financial integration; and by financial services providers with regional business strategies. Measuring access of individuals to financial services is complex. One needs to consider the dimensions of access and the interplay of these dimensions in breaking down the barriers to making markets work, and increasing the levels of financial inclusion. Broadly defined these dimensions include: 3

Physical accessibility. This is the distance and time to a point of service. Consumers need to get to a financial services provider within a reasonable time and along a reasonable distance. Without this, access is constrained. Affordability. A service can be physically accessible but not affordable in terms of the transactions costs associated with getting to the point of sale, as well as the cost of the service itself. Having access to a product/service is thus determined by its affordability. However, often affordability is less of constraint, when there is lack of choice. Usable/acceptable. A service needs be designed and offered in such a way that it can be used and meets the needs of the consumers. So even if the other dimensions of access are not a constraint, there may be barriers to access caused by product and service design features such as minimum balance, requirements to open an account, office opening and closing hours, payment/withdrawal conditions, product terms etc. One can propose a measure of access around these dimensions as is suggested by a study commissioned by FinMark Trust and carried out by Genesis 2. The authors propose measuring access around five access dimensions. These are affordability (which includes cost of getting to a point of service and captures the physical access dimension), and four aspects of the usable/acceptable access dimension defined as regulatory barriers, eligibility, product design, and service. An index is produced showing, on a scale of 1-10, the extent to which each of the five dimensions act as a constraint to financial access. A composite index of access is then produced that rates financial access of a country. With a score of 10, none of the access dimensions are barriers and thus the assumption is the adult population should be able to access financial services. The methodology is complex and relies on a number of assumptions about affordability and a typical monthly usage profile of a transaction bank. The calculations are also based on access to a transaction bank account only as this is seen as the entry point into the formal system. The approach over-looks access of the population to financial services provided by non-banks such as microfinance institutions, informal providers, insurance companies etc. Furthermore it requires using a number of different sources of information to construct the index. Although providing valuable insights about financial access constraints, the methodology is far too complex, and somewhat limiting for the purposes of proposing headline indicators of access. A simpler analytical framework to use in proposing headline indicators of access is that proposed by Porteous 3 on Making Markets Work for the Poor- MMW4P. He identifies three necessary conditions for a market to work and support economic growth and poverty alleviation: Usage of the population is increasing That people have choice and alternatives And that the services are acceptable 2 Genesis Analytics (2004) Measuring Access to Financial Services in Swaziland, Genesis Analytics (Pty) Ltd, Johannesburg, Final, 6 October 2004. 3 David Porteous, Making Financial Markets Work for the Poor, FinMark Trust, October 2004, Chapter 2. 4

Measuring increase usage will give us an indication of changes in levels of financial inclusion, while measuring levels of choice will assist in understanding to what extent financial services are meeting needs, and leading to effective usage. In proposing headline measures of access we need to look for simplicity so that these indicators can be easily produced, but they must also provide some insights on the growth trajectory of the financial system and on levels of financial exclusion. The indicators proposed her are therefore based on the conditions for a market to work. The methodology builds on the concept of an access frontier approach to understanding how markets work over time, and in particular, how they work to include access by poor people as is elaborated by Porteous (2005) 4. As illustrated below, the concept builds on Porteous view that a market for a particular product can be divided into those who currently use it, those who could have it but don t want it, those who are within reach of the market now and in the foreseeable future, and those outside of the reach of the market because of their low income. III. Proposed Indicators Top Level Indicators of Access - The Access Strand A. The Five Headline Indicators of Access The Access Strand The headline indicators of access proposed defines the access of the adult population to the financial system in its broad sense, i.e. both formal and informal. The adult population is placed into three segments of usage, similar to Porteous 5 Access Frontier segments, to produce five headline indicators of access. The three segments are defined as the Financially Captured, Financial Frontier, Financially Excluded, and together they form the Access Strand. The Access Strand can be graphically presented, as is illustrated below, to provide a visual snapshot of financial access in a country. It is however the top level Access Strand that is being proposed to represent the headline indicators of access. : Financially Captured Segment: This captures the adult population that is using formal financial services, and may also use informal services, and is thus financially captured by the formal financial system This segment produces an indicator on the percent of the adult population that is using formal financial services. The Financially Captured segment consists of the range of services offered by organizations legally registered to provide financial services and who need to report to a legal authority. It is recognized that agreeing on a universal definition of a formal institution may be tricky and further guidelines on these need to be researched and developed. Adults who currently use at least one or more of these products are included in this segment. This is not exclusive usage, as they can also currently use informal products. 4 David Porteous, The Access Frontier as a Tool in Making Markets Work for the Poor, draft April 2005. 5 Ibid. 5

Those that use informal products will fall in the Financially Captured segment if they also have a formal product like a bank account, or a loan from a legally registered microfinance provider, or savings with a SACCO. The Financially Captured segment can be further broken down to those that have a bank account from a bank registered under a countries first tier bank law (formal bank), and those that do not have a bank account but have other forms of financial service (formal-other). The formal-other are products offered by non-commercial bank institutions such as retailers (credit, funeral policies), microfinance institutions (credit, savings, insurance, transaction), SACCOs (savings and credit), insurance companies etc. This yields two further indicators of access to the formal system, percent of the adult population that is banked by a commercial bank (formal-banked), and a percent that is not using bank services, but other non-bank services (formalother). Financial Frontier Segment: This represents the percent of the adult population that are using informal services exclusively and are said to be at the Financial Frontier. The Financial Frontier implies that people are actively using financial services and have the potential to be financially captured by the formal financial system. This yields another headline indicator, the percent of the adult population operating exclusive in the informal financial system. Informal products are offered by providers that operate without legal status or are not regulated by a regulatory body, but that are recognized. In South Africa these would be burial societies or savings club. A loan from an employer or family/friend would also be considered an informal product (this could be debated). In other countries these could be un-licensed microfinance providers, ROSCAs, un-licensed village banks, un-licensed money lenders etc. Adults who currently use one or more of these informal products are included in this segment. This is exclusive usage - the adults in this segment cannot currently use any formal products. Financially Excluded Segment. This represents the percent of the adult population that are not using any services at all and can be said to be in the Development Frontier. The Developmental Frontier represents a population that is perhaps harder to reach, maybe poorer, or simply chooses or is unable to use financial services for a variety of economic or other reasons. These yields the last, but not least, headline indicators on the adult population that is un-served/banked. These three segments produce the Access Strand and five headline indicators of access. The Access Strand assumes that all adults fall somewhere along a market access continuum, and segments the entire market in percentage form. Thus the entire sample will be 100%, and each sub-segment on the Access Strand will be a percentage of the adult population. The segments are differentiated by current product usage indices ranging from people who are financially captured, to those people who use informal products only and are at the financial frontier, and finally to those people who use no products and are financially excluded. 6

Graph 1 illustrates the Access Strand on the basis of FinScope South Africa data. Graph 1 Access Strand illustrated The continuum of access. Access Strand Financially Captured Financial Frontier Financially Excluded Development Frontier South Africa 57 6 8 29 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Formal - Bank Formal - Other Informal Unbanked Source: Finscope 2004 data 0 Applying segmentation on the basis of the legal status of financial institutions avoids the complication of agreeing on definitions of product types. FinMark Trust plots the landscape of access across transaction banking, savings, credit, and insurance. The complication of using this methodology is agreeing on what financial products in a given country fit into each of the four product category types. A transaction account may have savings functionality so where should it be categorized? Developing standard criteria for categorizing products into the four product group types will not be easy. Using formal vs. informal simply requires identifying and defining the legal status of the financial service provider. Annex 2 proposes some definitions recognizing that further work is required in this. 7

B. Constructing the Access Strand The following provides clarification on how the Access Strand is constructed. Segment 1 - Financially Captured The Financially Captured segment includes people operating within the broader financial services market and therefore needs to be divided into two sub-segments for more accurate cross country comparisons, the formal bank, and formal other. The formal bank sub-segment comprises any adult who currently uses one or more traditional banking product supplied by a bank financial institution. This is not exclusive usage; these adults can also currently use formal-other products or informal products. Formal other sub-segment includes any adult who currently uses one or more other formal product not supplied by a bank financial institution, e.g.: funeral policy, store account, loan from a microfinance provider, savings with a SACCO, etc. These are mutually exclusive and are recorded separately to compare those people who are currently active within the traditional commercial banking sector versus those who are not. The sub-segments allow one to understand the extent to which having a bank account is a precondition to access to other financial services including credit and insurance. The methodology used to place people into the three segments and the list of product types are detailed in table 1 and 2 below. The segmentation is based on South African data only and shows how different products have been divided into formal and informal segments. The definition of products included in each segment may vary from country to country. Each country will need to look at all the products on offer and use the guidelines, detailed in this document, to develop their own definitions and constructions based on their unique product offerings. Thus, allowances are made for regional differences whilst still enabling cross-country comparisons. 8

Table 1 Method used to place people into the three segments 9

Table 2 List of products Segmentation Rationale Key Q2a Bank Accounts 1 An ATM card 2 Debit card 3 Savings Book 4 Post Office Savings 5 Savings/Transaction Account 6 Current/cheque account 7 Credit Card Visa/Master/American Exp/Diners Club 8 Fixed Deposit Bank Account 9 Garage Card/Petrol Card 10 Money Market Account Housing 11 Mortgage bond or housing loan 12 House bought borrowing money from Government 13 House bought by borrowing money from an employer Loans 14 Personal Loan from bank 15 Loan from friend/family 16 Loan from employer 17 Loan from microlender 18 Loan from informal money lender eg: loan shark 19 Loan from stokvel 20 Vehicle finance 21 An overdraft Retail Cards 22 Store cards buy on account, pay later eg: Edgars 23 Store loyalty card that gives you cash back eg: Clicks 24 Other clubs or loyalty cards eg: Voyager, Kaizer Chiefs Q19 Insurance 1 Funeral policy with big institution 2 Life assurance policy 3 Retirement annuity 4 Provident fund 5 Pension fund 6 Endowment/investment policy 7 Homeowners insurance 8 Medical aid 9 Hospital plan 10 Medical insurance 11 Insurance to maintain credit repayments 12 Life cover to pay off debts when die 13 Disability insurance 14 Education policy 15 Household content insurance 16 Car insurance 17 Cell phone insurance 18 Travel insurance 19 Dreaded disease insurance 20 Legal insurance 21 Funeral cover from current employer 22 Disability cover from current employer 23 Life cover through current employer 24 Life cover through trade union 25 Life cover through church group 26 Funeral cover through church group 27 Funeral cover for family through current employer 28 Lump sum in case of death through current employer 29 Personal injury/accident Applying the data to South Africa shows that 63% of South African adults are Financially Captured, 8% are operating within the Financial Frontier and 29% are Financially Excluded. Fifty seven percent of adults fall under the Formal-bank subsegment as they currently use at least one bank product. The two most common bank products used are ATM Cards (26%) and Transaction Accounts (23%). For the 6% of the adult population using non-bank products, these are mainly store accounts (64%), followed by funeral policies (31%). Those using formal other products (i.e. no bank products), 36% are also currently using informal products (27% Burial Society and 9% loan from friends/family). Segment 2 - Financial Frontier/Informal usage The majority of the adults currently using informal products (representing the Financial Frontier), currently belong to a burial society (74%) and/or a stokvel saving scheme (21%). This is exclusive in that these adults do not currently use any formal bank or formal-other products. 10

Segment 3 - Financially Excluded/Development Frontier The South Africa data shows that 29% of adults are un-served. They do not have a bank account nor do they currently have any neither other-formal product nor informal product. Main reasons cited for being financially excluded are do not have money to save (67%) and do not have a job" (61%). Only 3% cited the bank is too far from where I live as a reason for being financially excluded. III. Sub-level of the Access Strand The overall purpose of the Access Strand is to segment the population in such a way that both government and private sector organizations are able to develop action plans moving forward to improve the population s exposure to financial services, resulting in improved economic growth and reduced poverty. The Access Strand for South Africa in its simplistic format provides a current status quo in terms of the population s exposure to the financial services, but does not provide the texture about the segments of the population in each strand. Neither does it do sufficient justice to the significance of both informal and non-bank provision of financial services. The solution is to propose a more detailed look at the Access Strand across other key indicators. A number of sub-levels of the Access Strand can be produced as illustrated here. A. Informal and Non-Bank Access Sub-Indicators The Access Strands produces a measure of financial inclusion that identifies the percent of the adult population participating in both the formal and informal financial system. The financial frontier for expansion and MMW is seen as the proportion of the population that is not financially captured, and operating exclusively in the informal sector. It must be noted that this measure by no means suggests a progression of people from informal to formal. Neither does it suggest that one should seek to formalize the informal system. In fact a percent of the population will be operating in both the formal and informal sectors. The South Africa data shows that 38% of adults in the formal-bank segment only use bank products while 62% currently use bank product and other products as follows: 38% formal-other products consisting of funeral policy, funeral scheme, store accounts 24% informal products consisting of burial society products. To better inform policy on strategies to expand formal provision one needs to have a better understanding of the magnitude of the informal provisions of financial services as well as that from non-banks (formal other). In many countries, these non-banks play a critical role in the provision of financial services to low income households as is 11

evidenced from the size of the microfinance sector in countries such as Kenya and Uganda. It is suggested that the top level of the Access Strand be complimented by a second level of sub-indicators showing the percent of the adult population using informal services and the percent using non-banks services within the Financially Captured Segment. These indicators are illustrated in Graph 2 using the Access Strand. Graph 2 Breaking down the financially captured segment to better illustrate informal sector usage (note data is illustrative only and will be update once data has been calculated for SA) Access Strand Informal and Non-Bank Product Usage within Financially Captured Segment Formal - Bank Formal - Other Informal Un-served South Africa 57 6 8 29 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Financially Captured Inf orma Formal Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 B. Income Sub-Levels A sub-level measure of the Access Strand should provide insights to profiles of the population in the three Access Strand segments. The analysis of FinScope South Africa data investigated what the key drivers for usage are with respect to: Eligibility both perceptual and actual criteria. Physical access in terms of distance and time Usability must satisfy a need and/or add value in some way. Affordability from customer and product perspective; business rule related. 12

Although logically, physical accessibility is a constraint to access, the South African data does not support this claim. Eligibility (no money to save) and usability (satisfy customers needs) seem to be the two key drivers of access as shown in the table below. Table 3 Reasons for not have a bank account FinScope SA 2004 South Africa Total Respondents 1262 WTD.INC.RESP. 14871656 100% Uptake/usage I don't know how to open an account 1% They can't speak my language 0 Eligibility I do not have a job 61% Don't have money to save/ no regular income 66% Don't qualify 9% Physical Access The bank is too far from where I live 3 Usability Don't need a bank account/prefer cash 10% It's expensive to have/don t trust 5% Affordability Charges/fees too high 4% The responses are a summary of the spontaneous mentions from anyone who is currently un-served, including those people who were previously banked (Q3a Finscope 2004 - reasons for being un-banked). Eligibility in the form of income is clearly the most significant reason people are claiming to be un-served (66%). This, together with unemployment levels in South Africa, seems to be the main access indicator influencing the level of accessibility to financial services. The other four access indicators received relatively low mentions. Clearly the importance of income as a differentiator needs to be tested on the data for Botswana and Namibia, and other countries as this information becomes available. As income/money appear to be key drivers of the segmentation across the Access Strand, a more detailed view of income, source of income and life stage (indicator of income) is required. The following questions from Finscope 2004 pertain to income and have been analysed in more detail to generate three additional sub-levels of the Access Strands: Q22. Different people get money in different ways. Please tell me in which ways you get money? (Access Stand Money Source Indicator) Q56a. Which of the following best describes your employment status? (Access Strand Life Stage Indicator) 13

Q60. Please give me the letter that best describes the AVERAGE TOTAL MONTHLY PERSONAL INCOME before tax and after deductions. (Access Strand Poverty Line Indicator) Three income indicators have been imposed over the Access Strand including: Poverty Line Indicator Money Source Indicator Life Stage Indicator Each level provides a more detailed view within each of the three Access Strand segments, thus highlighting key areas for government and private sector organizations to focus on to generate actionable ways forward to improve the population s exposure to financial services. We cover the Poverty Line Index here as an illustration recognizing that collecting data on income is difficult. The Money Source and Life Stage Indicators are presented in Annex II to further illustrate the concept and look out how this approach can be refined. As income/money is the main indicator for being financially excluded, the proposal is to look at the Access Strand segments using the Poverty Line Indicator. The Poverty Line is a globally recognized policy driven tool and allows for ease of cross-country comparisons. The Poverty Line Indicator based on the South African Finscope 2004 data and has been set at a personal monthly income of R1500 (Q60). Those adults earning more than R1500 per month as well as those who refuse to disclose their income, have been grouped as Above the Poverty Line. (Generally people who refuse are of higher income and are scared to disclose their income). Those adults earning R1500 or less per month as well as those with no income have been grouped as Below the Poverty Line. The Poverty Line Indicator has been applied across each of the four Access Strand indicators and shown in Graph 4. 14

Graph 3 Access Strand Poverty Indicators Access Strand Poverty Line Indicator Formal - Bank Formal - Other Informal Un-served South Africa 57 6 8 29 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Formal Bank Above Poverty Line, 50 Below Poverty Line, 50 Formal Other 18 Below Poverty Line, 82 Informal 4 Below Poverty Line, 96 Unbanked 3 Below Poverty Line, 97 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Poverty Line set at personal monthly income of R1500 0 Interestingly, amongst the formally banked adults, 50% are below the poverty line. Of these adults, only 14% claim to earn no income. A further 14% claim to use someone else s/a joint bank account. Not surprisingly, 96% and 97% of adults within the informal and financially excluded segments respectively are below the poverty line. Of these adults, 24% and 46% within the informal and un-served segments claim to earn no income. Whilst the Poverty Line Indicator helps identify one of the access indicators viz: eligibility as an Access Strand driver, it does not measure all the reasons for financial exclusion. As income/money is used as rationale for segmentation in Level 1, a more detailed analysis of source of money (Level 2) is required to further understand reasons for adults being financially excluded. 15

IV. Questions for defining the Access Strand The following suggest the question construction in order to generate the top level Access Strand only. Annex II elaborates further on standardization of the survey approach to construct the Access Strand, headline indicators and sub indicators. In order to ensure cross-country comparability the structure and inclusion of the products/services offered in each country needs to be standardized. The use of products needs to be divided into formal and informal services. Guidelines will need to be developed for this categorization. The final product list needs to be included in the question that will generate the segmentation indicators and develop the overall Access Strand. An example of this question is as follows. This question is the measure from which the hypothesis is derived and is therefore the key question in determining the definitions for the three segments viz: Financially Captured, Developmental Frontier and Financially Excluded. Question 1. We are going to talk about your personal experience with various products. Please tell me which of the following products you currently use? By currently use, we mean currently have some experience with? (Interviewer will hand the respondent a card with the list and allow multiple mentions.) Bank Accounts/ 1. An ATM card/ -1 2. Debit card/ -2 3. A savings book/ -3 4. A Post Office Savings Account/ -4 5. Savings/Transaction account/ -5 6. Current or Cheque account/ -6 7. Credit Card Visa/Master/American Express/Diners Club/ -7 8. Fixed Deposit bank account/ -8 9. Garage Card/Petrol Card/ -9 10. Money market account/ -10 11. Mzansi account -11 12. Mortgage Bond or housing Loan -12 13. Vehicle Finance -13 14. An overdraft -14 Housing/ 15. Loan from government to build a house -15 16. Loan from employer/ to buy a house -16 17. Loan from friends/family to buy a house -17 18. A subsidy from government s RDP housing scheme to buy your -18 house Loans/ 19. Personal Loan from bank -19 20. Loan from friend or family/ -20 Currently use 16

21. Loan from an employer/ -21 22. Loan from a micro-lender e.g. African Bank, Credit Indemnity, -22 Capitec/ 23. Loan from an informal money lender, e.g. a mashonisa/cash loan -23 shop/ 24. Loan from a stokvel/ -24 Retail Cards/ 25. Store card where you buy on account and pay later e.g. Edgars, -25 Woolworths/ 26. Store loyalty card that gives you cash back e.g. Clicks/ -26 27. Other club or loyalty cards such as Voyager, Ster Kinekor, Kaizer -27 Chiefs/ Funeral/death/burial options 28. Funeral policy with a big institution/ -28 29. Funeral cover/insurance through your church group/ -29 30. Funeral cover/insurance for your family through your current -30 employer/ 31. Funeral cover/insurance from your current employer/ -31 32. Lump sum in the case of your death through your current employer/ -32 33. Belong to a burial society -33 34. Funeral cover through an undertaker/funeral parlour -34 35. Funeral cover not through a formal institution -35 Short-term Insurance 36. Car insurance/ -36 37. Household content insurance/ -37 38. Cell phone insurance/ -38 39. Travel insurance/ -39 40. Home owners insurance (e.g. insurance on building)/ -40 41. Insurance that pays your credit repayments if you are unable to pay/ -41 Long term/life insurance 42. Life assurance policy/ -42 43. Endowment/investment policy/savings policy/ -43 44. Life cover to pay off any money that owe when you die/ -44 45. Disability insurance/ -45 46. Education policy/ -46 47. Disability cover from your current employer/ -47 48. Dreaded disease/critical illness insurance/ -48 49. Life cover through your current employer/ -49 50. Legal insurance/ -50 51. Life cover through your trade union/ -51 52. Life cover through your church group/ -52 53. Personal injury/accident/ -53 Retirement/Pension 54. Retirement annuity/ -54 55. Provident fund/ V -55 56. Pension fund/ -56 Savings clubs 57. Stokvel -57 58. Other savings clubs (i.e. church club) -58 59 None Of The Above -59 17

Adult population: Individuals aged 16+. Annex I Access Strand Definitions Financially Captured: formal products that are supplied by institutions governed by a legal precedent of any type e.g.: Cheque Account or Funeral Policy. A formal organisation which must be bound by legally recognized rules. Adults must currently use at least one or more of these products. This is not exclusive usage, they can also currently use an informal product(s). Financial Frontier: informal products. Informal products are those products that operate without legal governance that would be recognized e.g.: Burial society or smaller savings club. Adults must currently use one or more of these informal products and cannot currently use any formal products. Financially Excluded: neither use formal nor informal products. Must not currently use any formal-bank, formal-other and informal product. Formal: Refers to financial institutions that are licensed by a financial market regulatory authority, such as Ministry of Finance, Central Bank, Non-Bank Regulator, or other. Formal Bank/Bank Product: Refers to usage of a commercial bank product registered as a first tier bank. Formal Other/Non-Bank Product: Refers to usage of non commercial banks products offered by non-commercial bank institutions include insurance, retailers, moneylenders, microfinance institutions, SACCOs etc. Informal: Refers to providers who are not licensed to provide financial services or who operate out side of any regulatory authority. Formal bank segment: Usage of traditional banking product supplied by a commercial bank institution. Not exclusive usage, also includes current usage of formal-other product(s) or an informal product(s). Formal non-bank segment: Usage of other formal products not supplied by a commercial bank but others including insurance companies, retailers, microfinance institutions, SACCOs etc. Not exclusive usage, also includes current usage of informal product(s). Informal segment: Usage of products that operate without legal governance that would still be recognized e.g.: Burial society or smaller savings club. The Poverty Line Indicator: Country specific monthly income amount derived from the country poverty line measure. Poverty line is set at R1,500/month in South Africa. 18

.Above The Poverty Line: Earning more than the country specific poverty line monthly income amount and refuse to disclose personal monthly income. Below The Poverty Line: Earning below the country specific poverty line monthly income amount. The Money Source Indicator: four definitions Income - work: formally, informally, self-employed, piece jobs, investments or selling goods. Government grants/pensions: any grant from the government viz: pension, child or unemployment insurance or maintenance money or workers compensation pay. Money from friends/family: money from friends/family or money from gambling/ lottery. Do not get money: do not get any money. The Life Stage Indicator: four definitions Earn income: income from formal sector e.g.: industry, or informal sector e.g.: hawker. Student: students or learners. Pensioner: pensioners or retired individuals. Unemployed: no income or not engaged in any economic activity 19

Annex II Sub Level Indicators - Building on the Access Strand A number of sub-levels of the Access Strand can be constructed to further understand reasons for the top-level Access Strand segmentation to guide policy and as well as financial service provision. Three more are offered here in addition to the Poverty Index Indicator for illustrative purposes. A. Access Strand Sub-Level Money Source Indicator Common sources of money (detailed in Q22 FinScope 2004) have been grouped together to form four broad sources of money, as follows: Income - work includes adults who are formally, informally or self-employed. It also includes adults who generate an income via piece jobs, investments or selling goods. Government grants/pensions refers to those adults who receive any grant from the government viz: pension, child or unemployment insurance. It also includes adults who receive maintenance money or workers compensation pay. Money from friends/family refers to adults who receive money from friends and family as well as those who get money from gambling/lottery. Do not get money simply refers to adults who claim not to get any money. Although the different sources of money are market specific, the overall analysis ( source of money ) can be used across countries for comparison. Graph 6 illustrates the concept. The source of money indicator shows that whilst 97% of adults in the financially excluded segment are below the poverty line, and 46% are unemployed, some of these adults are sourcing money elsewhere. The above indicator shows that only 23% claim to get no money. 46% in fact get money from friends and/or family and a further 19% from grants/pensions. The opportunity within this segment is the 18% who claim to source money from work. The high percentage of adults within the Informal and Formal Other segments claiming to source money from pensions/grants (48% and 41% respectively) suggest a bias of pensioners within these segments. This is further explored in the Level 3 (Life Stage Indicator) analysis. Get no money is at much lower levels across all four segments than the no income measures from the income question i.e.: Formal Bank 3% and 7% respectively Formal Other 8% and 19% respectively Informal 10% and 24% respectively Un-served 23% and 46% respectively. 20

Graph 4 Access Strand by Money Source Indicator Access Strand Money Source Indicator Formal - Bank Formal - Other Informal Unbanked South Africa 57 6 8 29 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Formal Bank Income, 66 Grant/pension, 23 Friend/family, 22 No money, 3 Formal Other Income, 34 Grant/pension, 41 Friend/family, 32 No money, 8 Informal Income, 32 Grant/pension, 46 Friend/family, 32 No money, 10 Unbanked Income, 19 Grant/pension, 19 Friend/family, 46 No money, 23 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 B. Sub-Level Access Strand Life Stage Indicator The Access Strand can be explored a level further to understand the reason for the population distribution across the Access Strand, based on where a person is his/her economic life. The definitions of the four life stages are summarised from Q56a FinScope 2004 data: Earn income includes any individual who generates income for themselves either through the formal sector e.g.: industry, or the informal sector e.g.: hawker. Student refers only to students and learners. Pensioner refers to pensioners and retired individuals. Unemployed includes anyone who claims to be unemployed and those who do not have a job but are looking for one, plus housewives. Using South Africa data, the Access Strand Life Stage Indicator graph 7 shows that the reason 46% of adults in the financially excluded segment source money from friends and family is because 27% of all the financially excluded adults are students/learners and therefore supported by their families. 21

Graph 5 Access Strand by Life Stage Indicator Access Strand Life Stage Indicator Formal - Bank Formal - Other Informal Unbanked South Africa 57 6 8 29 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Formal Bank Earn income, 61 Student, 6 Pensioner, 14 Unemployed, 19 Formal Other Earn income, 31 Student, 5 Pensioner, 19 Unemployed, 46 Informal Earn income, 26 Student, 3 Pensioner, 24 Unemployed, 50 Unbanked Earn income, 16 Student, 27 Pensioner, 6 Unemployed, 53 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 Furthermore, the high percentage of government grants/pension in the Formal Other and Informal segments (41% and 46% respectively) is due to the number of pensioners in these segments viz.: 19% and 24% respectively. The significantly high number of adults in the Formal Bank segment (61%) is indicative of income (money) being the fundamental access indicator to financial services. C. Access Strand Sub-Level Financial Diversity Another sub-level of the Access Strand could be to focus on further segmentation of the Financial Captured Market, by looking at the percent of the adult population that have no formal product, 1 formal financial product, 2-3 financial products, or more than 3 financial products. This will give an indicator of the level of choice, and condition for markets to work, but also illustrate the percent of the total population that is not operating in the formal market. In this illustration, the financially un-captured would be those that 22

are exclusively using informal services plus those un-served, i.e. the financial and development frontier segments. This is illustrated in Graph 3 (fictional percentages provided). Graph 6 Financial Captured usage of multiple products The continuum of access for the Financially Captured Financially -captured Financially un-captured Example 10 20 33 37 0% 20% 40% 60% 80% 100% 4 or more 2-3 products 1 banking product no formal product 0 23

Annex III - Guidelines for Survey Methodology A. The Research Procedure - Sampling The sampling guidelines detailed below refer to the South African market. The procedure can be used as a guideline for other developing countries to ensure effective crosscountry comparisons of the key access indicators to financial services. In order to ensure cross-country comparisons, the sample for each country needs to be nationally representative. By this, we mean that the sample must be reflective of the adult population living in the country at the time. The sample must be conducted amongst adult members of the population. Therefore, the age limit must be anyone who can access either a formal or an informal financial service legally. In South Africa this is 16, but may differ from country to country. To ensure accurate representivity, the sample should be designed in such a way as to allow everyone in the country an equal chance of being selected to take part in the interview process. This can be achieved in a variety of ways. An example would be to take current geographical definitions of the population, such as magisterial district or Enumerator Areas (EAs), and randomly select certain of these areas/districts to be interviewed in. These areas should be of a similar population density to ensure representivity. If this is not the case, then the areas should be weighted according to the number of people living in that area, and the areas drawn according to that weighting. That is, if an area has five people and another area ten people, the area that has ten people should be given twice as much opportunity to be included in the survey. Geographical area break-downs are usually government assigned. In order to ensure representivity to the currently accepted population levels in each country, the areas that are used in the census, if a census takes place in that country, should be used. Within each selected geographical area selected random rules of respondent selection must be applied. This includes both the identification of the households that need to be interviewed as well as the individual within the household. It is essential to note that this is an individual survey, and not a household survey, as data collected will be analysed on an individual level and not on a household level. To select the household/s within the geographical area we suggest the following: (This is an example on the interviewers instructions for South Africa, number of visiting points per area could be changed, as could the number of substitutes to promote better precision, but this does give an example on how to find a given number of people per area). 24

FIRST STARTING POINT To identify the first visiting or starting point in the metropolitan, urban and rural EAs, do the following: (i) (ii) (iii) (iv) (v) Randomly select a number between 1 and the interviewing/sampling interval (e.g. 7) to identify the first visiting point of the EA/area. From a convenient entry point into the EA/area (e.g. main road) count in a systematic fashion the visiting points until you come to number 7. Then count houses in a zig-zag fashion on both sides of a street only if visiting points on both sides of the street occur within the EA boundary. Move in a spiral towards the centre of the EA/area. Flats: With flats, the number of apartments in a block will have to be determined to get the right selection interval. If the sample does not allow for 8 visiting points, then spread well. Hostels: With hostels, fieldwork supervisors should go to the management of the hostel and get permission to enter the hostel. Also, use their register (if available) to determine the number of beds in the hostel. Systematically select beds by entering the hostel at a convenient entry point (e.g. ground floor) then moving up and down the floors to identify the starting point and remaining visiting points Commercial farms: Count the number of farms that can be seen on the EA map provided. In EA s that have many farms in them (that is more than 10) systematically select 4 farms and 2 dwelling units per farm. In EA s with very few farms (that is less than 10) systematically select 2 farms with 4 dwelling units per farm. In EA s where one farm makes up the entire EA then all 8 dwelling units must be selected on that farm. Follow the sampling interval instructions to select the first farm to visit and then use the same method to select the dwelling units. IDENTIFYING THE REMAINING VISITING POINTS 1. From that household i.e. the first visiting point, skip households according to the sampling intervals that have been provided (which is 8). Count and proceed firstly in one direction into the EA, depending on where the entry point is. For example, you will start by counting households in a NORTHERLY direction if you entered the EA from the SOUTHERN boundary. To select the second household, you will then travel and count in an EASTERLY direction, for the third household, travel and count in a SOUTHERLY direction, and for the last one, travel and count in a WESTERLY direction, moving clockwise for each new interviewing point. 25