Measuring access to finance new data, new insights

Thorsten Beck

Background material

T. Beck and A. de la Torre (2007): The Basic Analytics of Access to Financial Services, Financial Markets, Institutions and Instruments, forthcoming T. Beck, A. Demirguc-Kunt and M. Martinez Peria (2007): Reaching out: Access to and Use of Banking Services across Countries, Journal of Financial Economics, forthcoming T. Beck, A. Demirguc-Kunt and M. Martinez Peria (2006): Banking Services for Everyone? Barriers to Bank Access and Use around the World, World Bank mimeo.

Motivation

Link between financial sector depth and growth and other desirable outcomes has been researched extensively Yet, little is known about financial sector breadth or outreach Lack of data explains this void in the literature

Why care about financial sector outreach?

Access can affect the impact of financial development on growth and poverty.

Financial market imperfections are particularly binding on the poor, who lack collateral, credit histories and connections. Without broad access, they would be hindered from investing in high-return projects. Access helps the process of creative destruction by allowing new firms that are able to use resources more efficiently to enter the market.

Access to finance can be seen as similar to access to basic needs such as safe water, health services, and education.

Why care about data on access to financial services?

Assess analytically the relationship between outreach/access and economic development and poverty alleviation Data for the conceptual framework discussed earlier Benchmark countries and monitor over time

Access to and use of financial services What would we like to measure?

Share of households and firms with access to savings, payment and credit services Share of households and firms that use savings, payment and credit services Very costly exercises (time and resources) Use proxy indicators that are easier to collect Indicators that help explain the gap between bankable and banked population

Outline

Aggregate indicators Bank-level indicators From Data to Concepts

Outline

Aggregate indicators Bank-level indicators From Data to Concepts

Financial sector development across countries - from depth to breadth

Well established indicators of financial depth:

Private Credit to GDP Liquid Liabilities to GDP Bank deposits to GDP

But how many borrowers are behind Private Credit to GDP, how many depositors behind Bank Deposits to GDP? How easy is it to access financial services? We turned to regulators and publicly available data for more information Data for up to 99 countries, 2003/2004

Measuring access aggregate approach

Access to (possibility to use) financial services

Geographic branch penetration: branches per 1,000 km2 Demographic branch penetration: branches per 100,000 people Geographic ATM penetration: ATMs per 1,000 km2 Demographic ATM penetration: ATMs per 100,000 people
Loan accounts per capita: loan accounts per 1,000 people Loan-income ratio: average loan size/GDP per capita Deposit accounts per capita: deposit accounts per 1,000 people Deposit-income ratio: average deposit size/GDP per capita

Actual use of financial services

Limitations

Focus on deposit and loan services provided by banks only.

Ignore payment and insurance services. Ignore important financial services providers such as microfinance institutions and credit cooperatives.

No information on new delivery channels. No data on price dimension of outreach or on quality of services provided. Branch and ATM measures assume a uniform distribution of bank outlets within a countrys area and across its population. Number of loans and deposits may not reflect number of population using services.

E.g., one individual may receive more than one loan or have more than one deposit account

Advantages

Good proxies of the ideal indicator percentage of the population that has access and uses financial services.

Focus on banking services is justified for developing countries since banks are still the main providers of financial services. Easy to interpret. Easy to collect and update.

Household share = 0.493(0.309) + 0.186(0.4)*** Log(Deposits per capita) + 0.055(0.018)*** Log (Branches per km2) N = 19 R2=74% Small firm share = -0.122(0.226) + 0.093(0.033)*** Log(Loans per capita) + 0.016(0.020) Log (Branches per km2) N = 26 R2=30%

Spain Austria Belgium Chile Trinidad and Tobago Colombia Mexico Dominican Rep. Peru Bolivia Madagascar Tanzania Uganda Ethiopia

20

40

60

80

100

Number of branches per 100,000 people

LAC Countries
Sample size: 98 countries

Colombia

Singapore Malta Belgium Trinidad and Tobago Dominican Rep. Mexico Colombia Chile Peru Bolivia Guyana Namibia Botswana

200

400

600

Branches per 1,000 sq km

LAC Countries
Sample size: 98 countries

Colombia

Austria Belgium Denmark Trinidad and Tobago Chile Dominican Rep. Colombia Peru Mexico Kenya Uganda Bolivia Madagascar

1,000

2,000

3,000

Number of Deposits per 1000 People

LAC Countries
Sample size: 54 countries

Colombia

Madagascar Zimbabwe Lebanon Bolivia Peru Mexico Chile Colombia Trinidad and Tobago El Salvador Dominican Rep. Russia Iran

10

Average Deposit Size/GDP per Capita

LAC Countries
Sample size: 54 countries

Colombia

What Explains Outreach?

Access to and use of banking services :

Increases with GDP per capita Increases with better institutions

Increases with better physical infrastructure Some evidence of negative correlation with government-ownership of banks; no correlation with foreign ownership Not the same correlation with legal origin/religion/endowments as financial depth

Lower cost of contract enforcement Better systems of credit information sharing but no correlation with creditor rights

Outline

Aggregate indicators Bank-level indicators From Data to Concepts

Barriers to Bank Access and Use around the World

Survey sent to 5 largest banks in over 80 countries Intensive follow-up via phone and email to understand and clean responses Final sample of 193 banks across 58 countries

Cover at least 30% of banking market or Largest bank is included

Barriers to Bank Access and Use around the World

Savings services

Physical access: Locations to open an account (headquarters, branch, branch-like office) Affordability Minimum balances to open checking/savings account Fees to maintain checking/savings account Eligibility: Documents required to open account Credit services Physical access: Locations to apply for a loan (headquarters, branch, branch-like office, phone, Internet) Affordability Minimum loan amount (business, SME, consumer, mortgage loan) Fees on loans Eligibility: Days to process loan Payment services Fee to wire $250 internationally Fee to use ATM card

Affordability across countries checking account minimum balances

150
Cameroon

100
Sierra Leone

Nigeria

Ethiopia

Trinidad and Tobago

50
Dominican Rep. Bolivia Colombia

Uganda

0
LAC Countries
Sample size: 56 countries

Colombia

Mexico

Chile

Peru

Sierra Leone

Affordability across countries checking account fees

Malawi

25

20

Uganda

15

Kenya

10

Cameroon

Colombia

0
LAC Countries
Sample size: 55 countries

Mexico

Colombia

Trinidad and Tobago

Dominican Rep.

Chile

Bolivia

Peru

Affordability across countries how many are excluded?

Using data on checking account fees, GDP per capita and income distribution Assumption: households do not spend more than 2% of annual income on financial transaction services Share of population excluded by checking account fees:

Conservative estimates!

Cameron Kenya Malawi Sierra Leon Uganda Colombia

54% 81% 94% 89% 93% 6%

Sierra Leone

Chile

Trinidad and Tobago

Eligibility across countries documents required to open a checking account

Bangladesh Uganda

4
Dominican Rep. Colombia Mexico

Bolivia

0
LAC Countries
Sample size: 54 countries

Colombia

Peru

Trinidad and Tobago

South Africa

Dominican Rep.

Physical access across countries locations to submit loan applications

Spain Denmark Greece Chile Mexico

Colombia

Peru

0
LAC Countries
Sample size: 52 countries

Colombia

Bolivia

Affordability across countries minimum consumer loan amount

Philippines

400

300
Malawi Albania Uganda

200

Kenya

Bolivia

100
Colombia Peru

Trinidad and Tobago

Dominican Rep.

0
LAC Countries
Sample size: 51 countries

Colombia

Mexico

Chile

Cost of payment services across countries Use of ATM card

.6
Nigeria Pakistan

Mexico

.4

South Africa

Bolivia

Peru

Colombia

.2

Trinidad and Tobago

0
LAC Countries
Sample size: 47 countries

Colombia

Chile

Outreach across countries comparing aggregate with banking barriers

Loans per capita Deposits per capita Minimum Balance to Open Checking Account Annual Checking Fees Number of Documents to Open Checking Account Locations to Submit a Loan Application Minimum SME Loan Amount Cost to Transfer Funds Internationally -0.342 -0.202 -0.181 0.67*** -0.224 -0.091 -0.467*** -0.317* -0.411** 0.466*** -0.28 -0.278 Access to finance as constraint 0.371** 0.368** 0.4** -0.378** 0.263 -0.002 Cost of finance as constraint 0.381** 0.513*** 0.272 -0.378** 0.212 0.127

What explains barriers?

Larger banks impose lower barriers

Better physical infrastructure implies lower barriers Better contractual and informational frameworks are associated with lower barriers Higher degree of competition and transparency is associated with lower barriers Mixed results on government and foreign ownership

Scale economies

Foreign banks charge higher fees, but fees are lower in foreign-dominated banking systems and it is easier to apply for loans and open deposit accounts Customers face lower fees in government-owned systems, but also greater restrictions in applications for loans and longer processing times

Outline

Aggregate indicators Bank-level indicators From Data to Concepts

The access map: combining data with concepts

Using mix of aggregate, bank and demand data, determine bankable and banked population for different financial products

Using different data, determine binding constraint

Unbankable population: no sufficient income or economic activity Unbanked due to voluntary self-exclusion Unbanked due to involuntary exclusion Demand-side Supply side: competition/regulation Supply side: state variables

Which reform gives the biggest return?

Access map - examples

Checking account

Collateral as binding constraint

Use household survey to determine banked population Use bank survey to determine cost of checking account and thus bankable population Use household surveys to determine voluntary/involuntary exclusion Use household/bank data to determine binding constraint documentation requirements, physical access, product characteristics
Compare asset holdings of households/firms with collateral requirements of banks If legal system reform allows a new asset to be used as collateral, what is share of firms/households that could gain access to credit

Conclusions

An array of new data bases that will eventually allow a good picture of the breadth of financial systems As we collect data over time, we will be in a better position to research link between access/outreach and economic development and poverty reduction Combination of different databases will allow us to draw the access map Proper interpretation of data needed to get from measurement to policy advice

Want to know more?

http://econ.worldbank.org/programs/finance Data, papers, newsletter, events etc.