EARD Special Studies

Low-Income Households Access to Financial Services

International Experience, Measures for Improvement, and the Future
Nimal A. Fernando

EARD Special Studies

Low-Income Households Access to Financial Services

International Experience, Measures for Improvement, and the Future

Nimal A. Fernando

October 2007

Nimal A. Fernando is Practice Leader (Microfinance) in the East Asia Department of the Asian Development Bank

2007 Asian Development Bank All rights reserved. Published 2007. Printed in the Philippines. Publication Stock No. 080907 Cataloging-In-Publication Data ADB study on the access to financial services for low-income households. 1. Access to finance 2. Low-income households

The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent. The Asian Development Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequences of their use. Use of the term country does not imply any judgment by the author or the Asian Development Bank as to the legal or other status of any territorial entity. This publication is available on the Asian Develoment Banks microfinance web site: http://www.adb.org/microfinance

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CONTENTS

Page Abbreviations Foreword Abstract I. II. III. IV. V. VI. VII. VIII. Introduction Low-Income Households Demand for Financial Services Dimensions of the Access Problem Factors Underlying Low Access Overview of Cross-Country Experience Measures to Improve Access to Finance The Future of Access to Finance Conclusions iv v vi 1 3 4 11 15 26 30 32 34

References and Websites

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ABBREVIATIONS
ADB ASA BRI IRDA MFI NGO PRC RFAS ROA ROE SHG SMEs WOCCU Asian Development Bank Association for Social Advancement Bank Rakyat Indonesia Insurance Regulatory and Development Authority (India) microfinance institution nongovernment organization Peoples Republic of China Rural Finance Access Survey return on assets return on equity self-help group small and medium-size enterprises World Council of Credit Unions

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FOREWORD

ccess to financial services plays an important role in inclusive development. Broader access makes it possible for low-income households to not only make use of economic opportunities but also improve their health, education, and other social indicators thus significantly improving their socioeconomic well-being. However, in most developing countries, a majority of the population, low-income people in particular, do not have access to financial services from formal and semiformal sources. Even those who have gained access owing to recent developments in financial services for the low-income people are often underserved. In the Asia and Pacific region alone, more than 300 million households suffer from lack of access to financial services from the formal and semiformal sectors. As a result, many of these households are compelled to rely on informal sources of finance. If inclusive development is to become a reality, this problem must be addressed head-on and as early as possible.

This paper discusses different dimensions of the problem of access to finance of low-income people and provides cross-country experience in improving access to highlight the diversity of approaches that different countries follow. In addition, the paper proposes a number of measures to trigger a more powerful process toward improved access. The Asian Development Bank hopes that the paper will help not only policy makers but also practitioners to gain a better understanding of the gravity of the problem of access to finance of lowincome households, and formulate and implement policies and other measures to make a significant dent in the problem, thus enabling millions of unserved and underserved low-income households to actively participate in, and benefit from, the development process.

H. Satish Rao Director General East Asia Department Asian Development Bank

ABSTRACT

ormal financial sectors in most developing economies serve only a minority, often no more than 2030% of the population. Most households do not have access to even basic financial services. A majority of those who do not have access are concentrated in low-income categories. Even those low-income households who have access to finance are underserved both in terms of quantity and quality of products and services. Access to finance is not a magic bullet capable of lifting poor people out of poverty. However, there is consensus that better access can play a potentially key role in inclusive growth and development. Hence, the problem of lack of access to finance for a majority of the people deserves a great deal of attention and must be addressed head-on. This paper discusses

different dimensions of the access problem and provides global experience in improving access for low-income households. The paper highlights the diversity of approaches adopted and the institutional modalities used by different countries. It concludes that the global experience provides useful insights for policy makers and practitioners who are committed to address the issue. While many stakeholders have to participate in the efforts to improve access to finance in quantitative and qualitative terms, the cross-country experience and the gravity of the access problem suggest that governments have a major role to play. Government role, however, must be focused on promoting the important role that private sector financial institutions could play in this task.

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The biggest challenge for developing economies

is to get the banks to the unbanked, rather than to get the unbanked to the banks.
Brian Richardson Managing Director Wizzit (cellphone-based banking facility) South Africa

Poorly functioning banks that simply funnel credit

to connected parties and elites slow growth and exert a disproportionately negative influence on the poor and small businesses by depriving them of the capital they need to succeed. Unfortunately, billions of people live in countries with poorly functioning banks. Thus, banking policies matter because banks influence the ability of people, rich and poor, to improve their living standards.
James R. Barth, Gerard Caprio, Jr., and Ross Levine. 2006. Rethinking Bank Regulation: Till Angels Govern. New York: Cambridge University Press. 2.

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I.

INTRODUCTION1
Although access to finance is a seemingly simple concept, measuring access to finance is not easy partly because it is different from actual usage of financial services. A person may be said to have access to financial services if he or she is able to use formal or semiformal financial services in an appropriate form at reasonable prices when such services are required. Thus, some of those who do not use financial services at a given time may actually have access, whereas other nonusers do not. At the same time, some people may have only partial access in terms of scope of services or institutional types. Similarly, certain occupational groups or ethnic groups may have access while others may not (figure 1). However, because data on access to finance and its various dimensions are difficult to collect and extremely limited, it is common to use data on usage as a proxy. Although the usage data may not tell the full story, they can illustrate many aspects of the multidimensional access problem.

n developed economies, formal financial sectors serve a majority. For example, 99% of the population of Denmark, 96% of the population of Germany, 91% of the population of the Unites States of America, and 96% of the population of France has a bank account (Peachy and Roe. 2004, 31). The opposite is true, unfortunately, for developing countries. According to the World Savings Banks Institute (2004), only 20% of the population in most developing economies has access to formal financial services. In a typical developing economy in the Asia and Pacific region, the formal financial system at best serves no more than 2030% of the population, and excludes 7080%, the vast majority of whom are low-income households in rural areas. With rapid urbanization, rural-to-urban migration, and increasing urban poverty, the share of low-income people without access to finance in urban areas is also increasing in many countries.

Figure 1: Dimensions of Access to Finance

Full Access Partial Access Scope dimension A person has access only to some products and services provided by the formal and semiformal sources. For example, some people may have access to deposit facilities but no access to credit facilities or insurance products. Some people may have access to services that semiformal institutions provide but no access to those provided by mainstream banking institutions. Or some people may have access only to services of state-owned financial institutions. A person may have access only to a pre-specified small amount of credit which does not fully meet the demand. A person may have access but not at competitive prices. A person may have access only to poor quality products and services. Only men may have access while women may not. Youth and elderly persons may not have access while others may. Only certain occupational or ethnic groups and literate persons may have access A person who requires use of formal or semiformal financial services is able to use the services when he/she wants to do so.

Institutional dimension

Quantity dimension Price dimension Quality dimension Gender dimension Age dimension Other dimensions

The author gratefully acknowledges the comments and suggestions of Nimal Sanderatne, Geetha Nagarajan and Ying Qian on an earlier version of this paper. Secretarial assistance was provided by Emmalou Guillarte and Presentacion Lorena. The paper was edited by Ma. Priscilla Del Rosario. The author is responsible for any errors of omission or interpretations in the paper.

Introduction

Given that inclusive development is a widely on the efficient allocation of financial and physical accepted development objective, the lack of access resources, economic growth, income and non-income to finance for a majority of the population of these inequalities, and the distribution of benefits in an countries must be considered a fundamental flaw in economy. Households from Indian villages without the formal financial systems because it reinforces the access to credit markets tend to reduce their childrens vicious circle of both income and non-income poverty. schooling when they receive transitory shocks Access to finance, though more than households not a magic bullet by any with greater access to Access to finance, though not a magic bullet by measure, could play a financial services (Jacoby any measure, could play a potentially significant potentially significant and Skoufias1997). The role in efforts to reduce poverty. Like the rich, role in efforts to reduce adverse effects of lack poor households can benefit from credit, poverty. Like the rich, of access to financial savings, payment and insurance services, and poor households can services could also money transfer facilities. b e n e f i t f ro m c re d i t , s p i l l ov e r t o f u t u r e savings, payment and generations. In general, insurance services, and lack of access to financial money transfer facilities. Rutherford (2000) in his services imposes significant direct and indirect costs excellent book, The Poor and Their Money, even on low-income households and the economy. argues that the poor need access to financial services The twin purposes of this paper are to briefly much more than the rich simply because the poor discuss international experience on efforts to expand have little money. Such services help the poor manage the access to finance for low-income households and their risks, smoothen consumption, take advantage draw some lessons from that experience. Section 2 of of profitable economic opportunities, build income- this paper describes the demand for financial services earning and other assets, and improve their standards by the poor and low-income households. Section of living (ADB 2005; Helms 2006; United Nations 3 focuses on different dimensions of the access 2006). Thus, access to formal financial services can problem. Section 4 discusses factors underlying low profoundly impact on access. Section 5 looks at the quality of life of lowcross-country experience As Rajan and Zingales (2004, 28) noted, the income households. As on expanding financial limited access to finance severely reduces the Rajan and Zingales (2004, services for low-income choices citizens have in determining the way 28) noted, the limited households and explain they work and live. access to finance severely countries that have re d u c e s t h e c h o i c e s significantly progressed citizens have in determining the way they work and on this front and the strategies they have adopted. live. Without broader access to finance, only the rich The section also discusses why some other countries and connected people are able to take advantage of have failed to make significant progress. Section 6 economic opportunities. Also, when a majority of discusses measures to improve access while section the population is excluded from access to financial 7 looks into the future of access to finance. Section 8 services, it can significantly and adversely impact presents conclusions.

II. LOW-INCOME HOUSEHOLDS DEMAND FOR FINANCIAL SERVICES

A significant part of the demand for deposit ince the early 1980s, the conventional formal financial sectors have experienced a dramatic services and credit is generally directed at the informal growth. But the growth has been highly uneven and markets. Lacking access to the kind of products occurred mainly at the middle and upper ends of the and convenient services they require from formal financial markets. This lop-sided growth, however, sources, many households keep their cash at home, has not been a result of lack of demand for financial with informal savings clubs or in the form of various nonfinancial assets such services at the low end as livestock as most rural of the markets. In the In the Asia and Pacific region alone, about 1.9 households do in the Asia and Pacific region billion are poor, near-poor, and vulnerable alone, about 1.9 billion Lao Peoples Democratic in about 380 million households, mostly are poor, near-poor, and Republic (Lao PDR). concentrated in rural areas. The demand for vulnerable in about 380 Similarly, households financial services from these low-income m i l l i o n h o u s e h o l d s, also rely on self-savings households is substantial, and their demand mostly concentrated in or informal sources to covers a wide range of products and services. rural areas. The demand finance investments and for financial services from smooth consumption. these low-income households is substantial, and their For insurance, they rely on informal arrangements demand covers a wide range of products and services. which rest on reciprocity in many cases. For money First, these households demand access to safe, transfers also, they use informal mechanisms. In convenient, and appropriate deposit facilities. Second, general, the effective prices that the poor and lowthey demand access to credit at minimum transaction income households pay in informal markets for these costs and at reasonable prices for a wide range of services tend to be high. Many people who save cash in purposes. Third, they demand access to payment and informal markets suffer significant losses. Those who money transfer services. In many countries, rural-to- borrow from informal commercial credit markets often urban migration has resulted in significant remittance have to pay very high interest rates and are unable to flows from urban to rural areas. This is true for large get medium- to long-term loans. In addition, informal countries such as the Peoples Republic of China (PRC) markets are inefficient in financial intermediation. and India as well as for relatively small countries While many admit the drawbacks of informal such as Cambodia and Viet Nam. Fourth, emerging sources of financial services, their extensive nature evidence suggests that demand for microinsurance and persistent role in meeting the demand for financial products and services is significant. A recent study services among low-income households confirm (United Nations Development Programme [UNDP] beyond any doubt the importance of financial services 2007, 1), for example, estimated that the potential in the lives of these households. Also, the widespread market for microinsurance in India could exceed $1.4 existence of informal markets confirms the fact that billion in value terms. Fifth, the demand for financial there are important supply-side constraints in the literacy services among low-income households is formal financial system on the access to financial also vast. services for those at the low end of the market.

Low-Income Households Demand for Financial Services

III. DIMENSIONS OF THE ACCESS PROBLEM

he problem of access to finance for low-income households has different dimensions (figure 2). It is necessary to look at these to better understand the gravity of the problem. The most conspicuous dimension is that a majority of the low-income population in developing countries do not have access at all even to very basic financial services. The second dimension is that a large majority of the limited number of those who have access are underserved in terms of quality and quantity of products and services. In many developing countries in the region, in aggregate terms, more low-income people have access to deposit services than nondeposit financial services. A third dimension is that access to a significant proportion of low-income households is dependent on unsustainable, subsidy-dependent, and poorly performing institutions.

Reliable and up-to-date data on different dimensions of access to finance in developing countries are scanty. However, available country-level evidence of access to formal financial services is revealing: In India, about 73% of 89 million farmer-households have no access to formal sources of credit (Thorat 2007). The World Bank-National Council of Applied Economic Research, Rural Finance Access Survey (RFAS) 2003 in India2 (World Bank 2004), indicated that 79% of the households do not have access to formal loans and 59% do not have access to a savings account in the formal sector. The access problem was more severe for the poorer households: 87% of the poorest households surveyed did not have access to a loan and 71% did not have access to a savings account from the formal financial system. The problem was not insignificant even among small farmers68% without access to

Figure 2: Dimensions of the Access Problem

Low-income households and their micro- and small enterprises

Majority with no access to finance at all

A small minority with access to finance

Very large proportion is underserved

Very small proportion with full access

Significant number depend on services of unsustainable institutions Clients have to pay high transactions costs

Many have access to deposit services of stateowned financial institutions and cooperatives

A significant proportion have access only to credit from microcredit institutions Poor credit quality

Proportion with access to banking services is very limited

Access to insurance services is extremely limited

Withdrawing funds is not always easy Transactions costs are high

Client transactions costs are high Processing time long High minimum loan requirements Banks are geared to serve high-income groups

Product incompatability is high Transparency low

This survey covered 6,000 households and microenterprises in two states, Andhra Pradesh and Uttar Pradesh.

a loan and 45% without access to a savings account. remained financially excluded, with no service from Over 82% of the households surveyed in RFAS 2003 the formal or informal financial sector. The same also did not have any insurance. Another study by survey found that only 26% of households have a Diamond Management and Technology Consultants bank account. However, banks focus on urban areas (2006) concluded that less than 20% of rural Indians and the wealthiest. In rural Nepal, only 16% of the have access to formal financial services, and about 185 households have a bank account, for example. Again million potentially bankable people in rural India this is heavily concentrated in the upper income do not have a bank account. However, the problem groups. Only 49% of the households have a deposit of access to finance is not confined to rural areas. account with any financial institution. An estimated According to the Banking Ombudsman of Karnataka 69% of foreign remittances come through informal State (Business Line 2006), 63% of the people in the channelsusually family and friendseven among country do not have the benefit of banking facilities. households with a bank account. Despite government The financially excluded sections largely comprise efforts, formal financial institutions do not serve the marginal farmers, landless laborers, self-employed and needs of most of the Nepalese population, particularly unorganized sector enterprises, urban slum dwellers, the low-income people (Ferrari et. al. 2007). A large number of rural people in the PRC also do ethnic minorities, migrants, and women. Most of the excluded people are concentrated in the North East, not have access to banking services. The Organisation for Economic Co-operation and Development (2004) Eastern, and Central regions (Thorat 2007). Access to finance is no better in Pakistan. Only reports the results of a recent national survey showing about 30% of adults have bank accounts and the that only 16% of farmers in the PRC have access to total number of borrowers from banking institutions formal or informal credit. The Peoples Bank of China constitutes only 3% of the population. There are only (the central bank) estimates (www.undp.org.cn) 171 deposit accounts and 30 loan accounts per 1,000 that 36% (82 million) of Chinese rural households people. Agriculture and small and medium enterprise currently have access to financial services, primarily credit reaches only 1.6 million and 0.3 million through Rural Credit Cooperatives (RCCs). However, borrowers, respectively (Akhtar 2007, 36). Formal according to the members of the agriculture and and semiformal financial institutions reach no more rural development task force at the China Council than 10% of the potential market at the low end. The for International Cooperation on Environment and number of active borrowers served by microfinance Development (CCICED), although RCCs cover a vast institutions at the end of 2005 was estimated at 6% of area of the countryside with an extensive network, their the potential market of 10 million people (Burki and provision of loans to small-farm households is limited. Chen 2006, 7). Rural people suffer the most from the Only 25% of smallholders nationwide have obtained a RCC loan (CCICED lack of access to finance. Agriculture and Rural According to Akhtar (2007, According to the Governor of the State Bank Development Task Force 36) who is the Governor of of Pakistan, 67% of the rural population is Members 2005. 356). The the State Bank of Pakistan underserved by the formal banking system small and medium-sized (central bank), 67% of because only 6% of bank branch networks reach enterprises (SMEs) in the rural population into rural areas. the PRC also receive less is underserved by the than 10% of bank credit formal banking system because only 6% of bank branch networks reach into though their share in gross domestic product is about 50%, and 40% of SMEs have no debt mainly because rural areas. Nepal is another country with acute problems they have no easy access to formal sources (OECD in access to finance. A recent survey (2006) on access 2005). A recent national survey showed that more than to financial services estimated that only 52.3% of Nepalese households are served by a formal or 90% of the rural population in the Lao PDR do not have semiformal financial institution while about 27.6% access to formal financial services. The main service are served by informal sources. An estimated 19.6% provider, the state-owned Agricultural Promotion
Dimensions of the Access Problem

Bank, serves about 5% of rural households while The underserved category suffers from a number of another 5% are served by semiformal institutions. problems. With little access to reliable formal sector facilities, A significant proportion of those with access most people in rural areas of the Lao PDR continue to depend on the services provided by financially hold cash at home or save in nonfinancial assets. In unsustainable, heavily subsidy-dependent, and poorly early 2004, rural households held an estimated $216 performing institutions. Whether these institutions million equivalent in cash savings, and cash in hand can maintain, let alone increase, their outreach and accounted for about 40% of this amount. The estimated the quality of the services they provide in the future total noncash savings of rural householdssavings in remains uncertain. Perhaps one of the best examples the form of livestock, gold, jewelry, housing materials, for this is provided by the state-owned agricultural etc.were much higher, exceeding the cash savings development bank in Bangladesh.3 This bank claims by a factor of 2.75 (Coleman and Wynne-Williams to reach over 3 million borrowers. However, the bank 2006, 4650). relies excessively on resources provided by the central Surprisingly, even in such countries as Indonesia bank to continue its operations and is saddled with where financial services too many operational for the poor have problems. The Surprisingly, even in such countries as Indonesia expanded because of nonperforming assets where financial services for the poor have successful institutions, of the bank amounted expanded because of successful institutions, the the access problems to 50% of total assets at access problems remain significant. remain significant. A the end of June 2006. household survey that the Similarly, the Bangladesh Bank Rakyat Indonesia Rural Development (BRI) and a group of Board (BRDB) claims A significant proportion of those with access researchers from Harvard to reach over 4 million depend on the services provided by financially University carried out in clients. However, the unsustainable, heavily subsidy-dependent, and October 2000 concluded financial and operational poorly performing institutions. that 68% of the sample performance of BRDB is households did not extremely unsatisfactory: have credit from any formal or informal financial its operations lack transparency; are characterized by institutions, and that 62% of the sample households poor loan recovery rates; and involve large government did not have savings accounts in any formal or subsidies, being a state agency. In addition, rent seeking informal financial institutions. The same survey also is widespread among its field-level employees. showed that the proportions were high even for the Viet Nam also has a large-scale state-owned group of households with viable enterprises: 58% had institutionVietnam Bank for Social Policies (VBSP) no loans from financial institutions and 52% had no that provides access to credit for low-income savings in a financial institution (BRI 2001, 3637). households at highly subsidized interest rates. VBSP While the proportion of the self-excluded among these reported 4.195 million active borrowers with a total of is not clear, the data tend to show that the number of $1.149 billion in gross loans outstanding at the end of households without access to financial services could 2006. However, its return on assets (ROA) and return be large. on equity (ROE) have continued to be significantly The other dimension of the access problem is negative in the last 3 years for which data are available that a large majority of the low-income households (table 1). At the end of 2006, ROA and ROE were 4.04% with access are simply underserved both in terms and 13.69%. The continued operations of VBSP as a of quality and quantity of products and services. large-scale credit agency is thus dependent on whether

The bank started commercial operations in 1973. In 2007, it had 948 branches, 818 of which are in rural areas. According to its profit and loss account (unadjusted for subsidies, etc.), its losses amounted to about $26 million equivalent for the financial year ended 30 June 2006. Its gross loans outstanding amounted to about $1.1 billion.

While more low-income households have access to deposit services than to other financial services, the 00 00 00 quality of deposit services provided by most formal Number of active borrowers 3,740,179 4,125,264 4,695,986 and semiformal institutions remains questionable. Loans below $300 (%) 80.00 70.00 50.00 Clients below poverty line (%) 86.00 86.00 83.00 First, the transaction costs associated with the ROA (4.21) (4.56) (4.04) deposit services of most formal institutions remain ROE (12.89) (15.29) (13.69) too high for the users from low-income households. ROA =return on assets, ROE = return on equity. Most rural people have to spend time and money to Position at end of each year. Source: www.mixmarket.org. make depositswalking, cycling, or riding to bank offices. In some countries, depositors have to incur it is able to obtain government subsidies without other expenses. For example, in Cambodia, savers who make deposits in banking institutions expect to interruption. The rural credit cooperatives (RCCs) in the pay a commission to the teller for the safe deposit of their money (Clark 2006, PRC provide deposit 111). Second, restrictions and lending services to on withdrawal of funds a large number of lowWhile more low-income households have reduce their value as i n c o m e h o u s e h o l d s. access to deposit services than to other financial a source of liquidity. But RCCs have serious services, the quality of deposit services provided Third, most developing nonperforming loan by most formal and semiformal institutions countries have a long way (NPL) problems remains questionable. to go in ensuring safety of according to different poor peoples deposits estimates their average NPL ratio ranged from 26% to 50% (Dolven and Kuhn in financial institutions including cooperatives that 2004). They are also beset with serious governance and they rely on. The proportion of low-income people with viability problems. The Government has initiated a nationwide reform program to address their financial access to credit from mainstream banking institutions and operational problems. The same is true for most continues to be insignificant in most developing primary agricultural credit societies in India which countries. Also, transaction costs that poor and claim to have over 90 million members. A recent press low-income households have to bear when they use report (Financial Express 2006) stated that majority the facilities provided by these institutions remain of these societies are in shambles for want of sound high. Generally, to obtain a loan from a bank, a lowfinancial practices. Sri Lankas cooperative rural banks income person has to visit the institution several times provide basic lending and deposit services to over 1.5 and go through cumbersome procedures. Banks in million low-income households. But they also suffer Bangladesh, Pakistan, and Philippines take more than from severe governance and operational problems one month to process an SME loan application (Beck (ADB 2003). India Post has a network of over 155,000 et. al. 2007, 14). In many countries, low-income clients post offices, 89% of which are located in rural areas. have to pay bribes to have access to formal financial India Post is Indias largest savings institution with services, particularly to credit from state-owned banks. more than $60 billion in outstanding deposits and According to some studies, in India, bribe payments over 116 million savings accounts, mostly from low- are estimated to be around 10% of the loan amount income households. However, India Post continues (Diamond Management and Technology Consultants to make substantial losses and relies on government 2006, 9). The RFAS 2003 estimated the bribe payments subsidies. Postal savings banks in many other Asian to be in the range of 1020% of the loan amount. On developing economies such as Bangladesh, Pakistan,4 average, 27% of sample households who borrowed from a regional rural bank report having to pay a and Indonesia have similar problems. Table 1: Vietnam Bank for Social Policiesa
a

Pakistans post office network consists of 12,343 post offices. These offices manage 4 million savings accounts (Akhtar 2007, 37). Dimensions of the Access Problem

bribe to get the loan; a little under 27% of households A recent global study estimated the number of lives who borrowed from a commercial bank paid a bribe, covered by formal insurance policies in 100 poorest and 10% of households who borrowed from a credit countries at no more than 78 million (Roth et. al. 2007). cooperative paid a bribe (World Bank 2004, 15). In The comparatively low insurance penetration ratios5 Azerbaijan, corruption in the banking sector has been in developing countries shown in table 2 reflect the observed to be significant. Bankers charge fees as a access problem. bribe that can sometimes account for 2030% of the A majority of the population in most developing loans (Lamberte and Fitchett 2006, 110). Although countries in the Pacific sub-region also do not have data are not available, one should not assume that this access to formal or semi-formal financial services. problem does not exist for low-income households in A recent financial sector assessment covering the other developing countries. Solomon Islands, Vanuatu, Samoa, Tuvalu and Kiribati Low-income people with access to credit are too noted that only about 20% of the population of these heavily dependent on the services that specialized five countries have access to financial services. Most microfinance institutions (MFIs) provide. While of the banking is conducted in the capital cities. MFIs have significantly In the Solomon Islands, improved access to credit about 90% of all banking Low-income people with access to credit are for low-income people, sector savings accounts too heavily dependent on the services that women in particular, with and loan are based in the specialized microfinance institutions (MFIs) few exceptions, much branches of the capital provide. of the credit provided city. The percentage of by MFIs is for shortthe rural population that term income-generating can access the branches activities. Little is provided for housing improvements, in the provinces is small because of logistic constraints education, health, consumption smoothing, and (Flaming and Mathison 2007). emergencies. Credit quality remains generally low. Table 2: Insurance Penetration Ratioa: Beyond credit, other basic financial services such Selected Countries, 2005 as deposit and domestic money transfer services remain peripheral in the case of most MFIs, although Developing Countries Insurance Penetration (%) there are exceptions such as the unit desas of the BRI, Bangladesh 0.61 Grameen Bank, and ACLEDA Bank, which have made Peoples Republic of China 2.70 significant progress in broadening their financial India 3.14 Indonesia 1.52 services (Rutherford 2006; Clark 2006). Pakistan 0.67 In most countries, majority of the population do Philippines 1.48 not have access to formal insurance services, although Sri Lanka 1.46 microinsurance services in a number of countries Developed Countries have begun to expand in recent years. About 86% of Japan 10.54 United Kingdom 12.45 Indonesians were not covered by any health insurance United States of America 9.15 scheme in 2001. In India, about 90% of the population Republic of Korea 10.25 is not served by the insurance industry. The exclusion a Insurance penetration is gross insurance premium as a % of gross domestic product. rates in other countries are also alarmingly high: 97% Source: Swiss Re. 2006. in Bangladesh, 97% in Pakistan, and 95% in Nepal.

Insurance penetration ratio is an indicator used to measure the level of risk awareness in the population and significance of insurance in an economy.

Thus, developing Asia clearly suffers from a commercial informal markets. Although it is not the massive financial access problem quantitatively and only cause, lack of access to financial services lies at qualitatively. The problem the root of the persistent is more acute in large poverty and inequality countries such as the problems in most Developing Asia clearly suffers from a massive PRC, India, and Pakistan. developing societies. financial access problem quantitatively and As a result, vast numbers Given the severity of qualitatively. The problem is more acute in large of poor and low-income the problem, widespread countries such as the PRC, India, and Pakistan. people in the region are and far-reaching unable to take advantage economic and social of economic opportunities and gainfully employ implications of lack of access to financial services themselves and their family members, and create (figure 3) and the potentially critical role that finance employment opportunities for others; unable to build can play in inclusive development, closing the huge assets that increase their income-earning capacity and gap between the demand for financial services from quality of life; unable to ensure that their children get low-income households and its supply from the basic primary and secondary education; and unable formal and semiformal sources in both quantitative to manage the risks of vulnerabilities resulting from and qualitative terms may be considered one of various types of external shocks that adversely affect the biggest development challenges facing most their already low living standards. Many small farmers developing countries in Asia and other regions. The and small nonfarm enterprise operators who are just international experience provides that some countries above the poverty line also suffer from lack of access have remarkably progressed in improving access to to financial services. Faced with credit constraints finance for low-income households while some others many small farmers use fewer cash inputs leading have not been able to achieve relatively successful to lower incomes. They are also compelled to rely on results. An examination of these different experiences self-finance6 and informal markets. Many of these suggests insights and lessons for the policy makers people are forced by the circumstances to pay a and practitioners who are serious about addressing poverty premium when they access the services of this important development issue.

McKinnon (1973, 30) defines self-finance as the investment within a particular enterprise (or economic unit) of savings accumulated in that enterprise. Self-finance takes place in all types of households and enterprises, from rich to poor people, and from microenterprises to the very large-scale multinational firms. The main disadvantage of self-finance is that a households or enterprises resources may not match those required to harness an investment opportunity within a reasonable time frame. Thus, a household or an enterprise may not be able to take advantage of a high-productivity investment opportunity. The scale of an economic activity or an enterprise will have to be limited by the amount of self-finance. The shortcomings of self-finance will be more pronounced when investments are characterized by indivisibilities. A poor household may require funds to buy cattle, a sewing machine, or a bag of fertilizer. The amount of funds required may be large relative to the income of a household living at subsistence level. Hence, the household may not be able to finance the investment in one lump sum but may be able to do so in installments. A poor household that is not able to self-finance discrete increases in investments will be compelled to use traditional technology and continue with low-productivity activities. Thus, McKinnon (1973, 13) noted that poverty and the inability to borrow can be formidable barriers to the adoption of even the simplest and most productive innovations. The important point, however, is the virtual impossibility of a poor farmers financing from his current savings the whole of the balanced investment needed to adopt the new technology. Access to external financial resources is likely to be necessary over the one or two years when the changes take place. Without this access, the constraint of self-finance sharply biases investment strategy toward marginal variations within the traditional technology. Self-finance limits specialization, adoption of better technology, growth in productivity, and thus economic growth and development (ADB 2000, 4445). Conversely, access to finance promotes these. Dimensions of the Access Problem

Figure 3: Lack of Access to Financial Services: Results and Costs

Lack of access to formal deposit facilities Savings kept at home in cash Savings in nonfinancial assets (livestock, etc.) Incentives to save reduced Savings reduced Lower returns on savings Value of savings erode because of inflation Partial or complete loss of savings due to theft/floods/quality deterioration of assets/death of animal owing to sickness Decrease in risk management capacity and increase in vulnerability

Lack of access to formal credit facilities Limit investments to the amount of selfsavings and/or amount that can be borrowed from informal sources Forego profitable investment opportunities Less able to finance childrens education Less able to afford medical expenses Less able to finance consumption smoothing Increased vulnerability to external shocks Compelled to rely on commercial informal credit markets Foregone income due to sub-optimal investments. Scale of existing economic activity remains micro. Foregone income because of inability to take advantage of a potentially high-return investment opportunity Low-household income Underemployment of household labor Children unable to get better education Household member malnutrition Higher costs incurred on informal sector borrowings Low net return on investments with informal borrowings Increased socioeconomic inequalities Increased severity of poverty

Lack of access to domestic money transfer services Carry cash to the destination Use friends/relatives to physically transfer cash Use other informal cash carriers Lack of access to formal payment services Inability to make payments in time Lack of access to formal insurance services Operate with higher risks Less able to finance major health expenses Vulnerability to external shocks increased Obligations to extended family increased Increase in health problems Increased severity of poverty Increase in household debt Increase in vulnerability Freedom of choice reduced drastically Low income/savings Low social development Persistent poverty Greater economic/social inequality Increase in government welfare costs Social exclusion Incur greater transaction costs Loss of cash because of theft, etc. Increased debt burden High transaction costs

Total exclusion from formal financial system Forced to rely on self-savings and/or informal sources for the needed services Increased pressure for welfare programs

0

IV. FACTORS UNDERLYING LOW ACCESS

significant proportion of people excluded from of finance, central banks, and national planning and the formal financial system have access to and use implementing agencies share these views. Even lowfinancial services of the informal sector. This indicates income people hold similar views, with their deep that the limited access to formal or semiformal sources suspicion of the intentions and the role of the private of finance cannot be solely explained in terms of sector. Most of the supply-side factors that contribute to market failure. The persistence of the informal markets low access to finance find their roots in these conventional, not only suggests the deep-rooted, and widely The persistence of the informal markets not importance of financial held views. This dominant only suggests the importance of financial services from the demand thinking has contributed services from the demand side, but also reveals side, but also reveals to a business failure fundamental supply-side constraints in the fundamental supply-side in serving this market, formal financial system. constraints in the formal although much of the financial system. These constraints vary across countries and are influenced by a host of factors such as the stage of financial sector development, perceptions of dominant financial institutions regarding the business case for providing financial services for the excluded, financial policy and regulatory system, and the institutional composition of the financial system. A root cause of supply-side constraints is the conventional view of the potential market consisting of poor and low-income people. Two interrelated ideas dominate the conventional view. First is that given lowincome levels and lagging social development, there is little profit potential in the low end of the financial markets; hence, the conclusion that market-based solutions cannot lead to improved financial services for low-income people and that the private sector has no significant role in this market segment. Second is that because this market consists of low-income people, it must be served through government programs and programs of charitable institutions including socialmission-oriented nongovernment organizations. Most formal-sector-established financial institutions, international development agencies, and government policy makers including those working in ministries
7

limited access to formal financial services for low-income households is generally described as market failure. Perhaps, the most obvious supply-side factor is the absence of formal financial institutions in close proximity. Thus, many low-income people in remote rural areas where such facilities are not available within a reasonable distance tend to rely more on informal markets than those in other areas. However, availability of retail outlets in close proximity does not often help if these institutions are not seriously committed to serve the low-end market taking it as a business proposition, and their core business does not include products and services that low-income people demand at reasonable prices. The geographic (spatial) access does not necessarily mean economic access in such cases. India seems to provide an example of this. Over 95 commercial banks operating in India have some 47,000 branches located in semiurban and rural areas while 196 regional rural banks also have over 14,372 branches in rural areas. In addition, there are 105,000 primary agricultural credit societies. Despite this extensive retail network, access to finance continues to be dismally low in rural India, particularly for low-income households, as noted earlier.7 Similarly,

However, it is important to note that some studies have highlighted major banking infrastructure deficiencies in rural India. For example, according to Diamond Management and Technology Consultants (2006), only 7% of villages have a bank branch and 67% do not even have a post office. Availability of brick and mortar facilities may be important, although its significance for access to finance is likely to decrease significantly with new information and communication technology that would connect remote rural areas to semiurban or urban-based facilities. Factors Underlying Low Access



in all developing countries, urban areas have much requirements of those in the low-end markets has better banking infrastructure but the majority of low- aggravated the access problem. Often even lowincome households do not have access to the services income people living in close proximity to formal provided by these institutions. financial institutions do not have access to products Another major reason for the limited supply is that and services for this reason. The incompatibility may established medium- and large-scale conventional stem from a number of factors. The products may have financial institutions have not yet become major players features that are not in line with the socioeconomic in the low end of the financial markets. First, these characteristics of clients. A loan product requiring institutions have not been established and organized weekly repayments may not be suitable for a to serve the low-end markets. They do not have access household whose cash flow does not enable such to low-cost information on the potential clients at repayments. An insurance product whose terms and the low-end markets. Their organizational structures, conditions are not readily transparent and simple may cost structures, and products are geared to serve not be suitable for people with limited literacy skills. up-market clients. Given If having an account with the higher costs generally the bank is required to use The incompatibility of services and products associated with serving its payment services, some offered by the suppliers with the product and low-income clients, these people may not be able to service requirements of those in the low-end financial institutions find actually use those services. markets has aggravated the access problem. that the impetus to move The effective price of a further up market is more product including client powerful than that for transaction costs may be moving down-market. Hence, established, large-scale too high. Most migrant workers have been using conventional financial institutions seldom attempt informal money transfer services to remit money to serve low-income households because the relative because they are relatively cheaper and more contribution that such a move can make to profit is convenient than most formal mechanisms. Most banks smaller.8 The long-held, deep-rooted presumption require high minimum balances for savings accounts, that profit is small at the do not accept savings in bottom of the pyramid small amounts, and have In most developing countries procedures market and meeting their restrictions on frequency associated with transactions are too complex, demand for financial of withdrawals. These cumbersome, and intimidating for most low(and other) services is the factors have kept millions income clients, particularly those with low primary responsibility of small savers from using literacy levels and for poor women. of the governments and their deposit facilities charitable organizations (Rutherford 2000), driving seems to have reinforced this incentive asymmetry. them to save under the mattress despite the risks such Managers of conventional medium- and large-scale practices entail. In Nepal, the high required minimum institutions who would like to introduce innovative balance and the cumbersome documentation technology and processes to serve poor clients for requirements to open a savings account limit many profit will often find it difficult to get their proposals low-income peoples access to deposit services of through the resource allocation processes and systems banks. within their institutions. In most developing countries procedures The incompatibility of services and products associated with transactions are too complex, offered by the suppliers with the product and service cumbersome, and intimidating for most low-income

As Christensen et. al. (2004, 36) noted, an opportunity that is attractive to a firm that has $50 million in sales and seeks 10 percent top-line growth would be unattractive to a firm that has $5 billion in sales and seeks 10 percent top-line growth. A $2.5 million opportunity meets 50 percent of the first firms growth needs but only 0.5 percent of the second firms growth needs. Which company do you think will place a higher priority on going after a $2.5 million market?



clients, particularly those with low literacy levels and including NGOs, and restricted the operational for poor women. Most institutions do not have simple, autonomy of financial services providers (including low-end-market-friendly systems and procedures. In that of state-owned financial institutions with a Bangladesh, more than three documents are required social mission to serve the poor) through interest rate to open a savings account in a bank and minimum ceilings and other measures, the growth in supply of loan requirements of banks are too high in relation to services has been sluggish. Also, in countries where the typical requirements of low-income households. governments have imposed regulatory barriers on, Banks also take more than a month to process a or not provided adequate legal space to facilitate, small enterprise loan application. In some states integration of financial services for the poor into the of India, a commercial bank takes, on average, 33 mainstream of finance, the growth in supply has been weeks to approve a loan (World Bank 2004, 15). More lackluster. Restrictive government policies on foreign importantly, banks require marketable collateral for investments in financial services for the poor have also loans which most lowretarded the supply. income households are Demand-side factors More importantly, banks require marketable unable to provide. In some also explain the limited collateral for loans which most low-income countries, the collateral access to finance for lowhouseholds are unable to provide. In some requirements are so high income people. First, many countries, the collateral requirements are so that even middle-class poor and low-income high that even middle-class clients are unable clients are unable to meet people cannot afford to to meet them. them. In Azerbaijan, for bear the high effective example, banks usually costs involved in using require 125200% collateral as guarantees for loans formal financial services. In Nepal, an estimated 34% and accept only real estate properties in Baku city of the population cannot afford the fees and charges as collateral (Lamberte and Fitchett 2006, 110). Most associated with a bank savings account (Beck et. al. financial institutions, including MFIs, do not provide 2007). While a significant proportion of the excluded emergency loans and loans for life-cycle events for people use services provided by a range of informal which effective demand at sources of finance, some the base of the economic people are even excluded Many experts in microenterprise development pyramid is substantial. from informal commercial tend to assume that millions and millions of Although poor and lowmarkets.9 Many experts high-return economic activities in which poor income clients demand in microenterprise people can invest their loan proceeds exist. This simple, no-nonsense, easy development tend to is far from reality. to understand financial assume that millions and products and services, millions of high-return most conventional financial institutions do not offer economic activities in which poor people can invest such products and services. their loan proceeds exist. This is far from reality. A Most supply-side constraints have been reinforced closer look at different segments of the market for by, if they are not rooted in, what may be described as financial services for the poor suggests that many government failure. The global experience provides poor households do not have viable economic ample support to this hypothesis. In general, access opportunities that can generate high enough real rates is much lower in countries where governments have of return to repay loans at interest rates that enable not adopted market-friendly policies toward access financial institutions to cover their costs, make an to finance. Where governments have significantly adequate profit, and save some money for a rainy day. restricted the potential role of the private sector In a typical developing economy in the region, the

Informal financial markets consist of two subtypes: noncommercial and commercial. Friends and relatives who provide financial services on reciprocal arrangements without a profit motive are noncommercial while those who provide loans for profit are commercial. Factors Underlying Low Access



best available investments for many poor households of factors such as lack of retail outlets in close involve those with moderate real returns (Fernando proximity, complex and cumbersome requirements 2006, 8). Thus, many people who belong to this and procedures of the formal institutions, and corrupt category tend to self-exclude practices adopted by from formal financial markets staff of some formal High transaction costs of using formal financial and rely on self-savings or institutions, as noted services severely limit the access of low-income reciprocal arrangements to earlier. people to formal financial services because the meet their demand for credit. Low financial incidence of transaction costs is too high on Most small and marginal literacy of poor small value transactions. farmers, particularly those in and low-income what is generally described people significantly as less-favored areas fall into contributes to financial this category. As Rajan and Zingales (2004, 113) noted, exclusion in general and self-exclusion in particular. finance cannot create opportunities. It only makes it Many low-income households do not access insurance easier to exploit them. services and deposit facilities, among many other High transaction costs of using formal financial financial services, because of this factor. The impact services severely limit the access of low-income people of this is reinforced by the complex procedures and to formal financial services because the incidence of requirements of formal financial institutions. In most transaction costs is too high on small value transactions. of the Pacific developing countries, financial illiteracy Transaction costs are the costs of establishing and is considered a major factor limiting access to finance conducting financial relationships: hence, they are because most of the population have conducted admission tickets to financial markets (Von Pischke transactions without using financial institutions for 1991, 11). High transaction costs arise from a variety generations (Flaming and Mathison 2007, 4).



Overview of Cross-Country Experience

V. OVERVIEW OF CROSS-COUNTRY EXPERIENCE

istorically governments in many Asian and reforms a politically more daunting task and ensuring other countries have intervened on the supply their persistence despite continuing financial bleeding, side to address access to financial services in various inefficiency, dismally low outreach, and poor quality ways. These measures include nationalizing private of services. More importantly, these institutions have banks; establishing and promoting specialized banks failed to serve their stated target groups. Similarly, including national savings banks and postal banks, nationalized financial institutions have failed to live up branching regulations or directives, directives on to the stated objectives of policy makers and inflicted portfolio composition, interest rate ceilings on credit significant costs on the society. The operations of to low-income households, and provision of credit both categories of institutions have promoted rentat subsidized interest rates to what was considered seeking behavior among their staff and clients and priority sectors of the economy or priority segments damaged development of a disciplined credit culture. of the society. For example, India, Sri Lanka, and There is general agreement that in most countries Pakistan nationalized private-owned banks to expand the conventional supply-side measures contributed banking services to the excluded and established new to the weakening of financial institutions and their state-owned banks to serve low-income segments.10 implementation involved huge financial costs (Meyer Indias social banking program and priority sector and Nagarajan 2000). Whether they produced benefits lending program meant to increas e banking services proportional to the costs remain controversial. Many to the poor and low-income households and rural people who are keen to improve access to finance people. While an evaluation of the effectiveness of agree that the old approach of direct interventions these measures is beyond the scope of this paper, it is to provide the services by government-owned or correct to say that some of these did produce positive controlled institutions and to force the private sector results (Burgess and Pande 2005) while some did, in institutions to provide the services is no longer relevant effect, further curtail the supply contrary to the policy and effective, even if it has worked to some extent in makers expectations.11 the past. A new, more market-friendly and marketIn most cases, newly established state-owned supportive demand-driven approach has gained financial institutions increasing support at failed to make a global, regional, and The countries that adopted a more marketsustainable dent in the national levels. friendly approach to access to finance have problem despite the large The countries that achieved sustainable results. These countries amount of funds used for adopted a more markethave essentially taken a number of bold the purpose. Pakistans friendly approach to initiatives to implement such an approach. Agricultural Development access to finance have Bank (ADBP)12 is one of achieved sustainable many examples. These institutions have also created results. These countries have essentially taken a their own constituency of supporters making their number of bold initiatives to implement such an

10

11

12

India began nationalization of banks in 1969. The regional rural banks were established in 1976 to service the rural poor, small and marginal farmers, rural artisans, landless workers, and small entrepreneurs. The Integrated Rural Development Program (IRDP) provided highly subsidized credit to rural households in the 1980s and 1990s. According to the World Bank (2006, 15) the two decades of IRDP experience in the 1980s and 1990s affected the credibility of microborrowers in the view of bankers and ultimately hindered the access of low-income clients to banking services. In October 2002, ADBP was incorporated as Zarai Taraqiati Bank Ltd. as an initial step of a government-initiated restructuring program supported by ADB. However, implementation of the program has been patchy, and much of its deep-rooted problems remain. Overview of Cross-Country Experience



approach. Some of these countries have effectively state-owned rural financial institutions in the world. A reformed existing state-owned financial institutions major element of the reform program was the freedom with a mandate to serve low-income clients and given to BRI management to set cost-recovery and given those institutions the freedom to adopt market- market-oriented interest rates on loans and deposits. oriented, demand-driven policies and practices. These The Government also ensured elimination of political policies and reforms have produced robust and viable interventions in the operation of the unit desa system financial institutions serving the poor and low-income and access to high-quality technical assistance to households. Indonesia and Mongolia belong to this carry out the necessary reforms in operations. The category. In the case of Mongolia, the state-owned reforms transformed the unit desa system into a viable Agricultural Bank of Mongolia was insolvent in 1995, operation and a robust entity by 1987. It has continued illiquid in 1999, and plagued by unrecoverable loans to generate profits with increasing outreach ever that government officials promoted prior to the since on a continuing basis. In 2002, the Government reforms. The cost of operating this bank was borne by allowed private sector ownership of this bank through the Government. The banks operational and financial an initial public offering. Currently, private sector problems were so acute that most analysts presumed shareholders account for about 48% of its share reforming this bank was impossible. With external capital. At the end of 2006, BRI units had 4,112 outlets assistance, the Government successfully reformed this with over 3.45 million borrowers and 30.9 million bank during 20002002 and sold it to a foreign-owned savings accounts. The value of their outstanding loans private sector company amounted to $3.04 billion in 2003 (Dyer et. al. 2004). while deposits amounted Contrary to many peoples skepticism that Contrary to many peoples to $4.87 billion, indicating it will not continue, let alone expand, rural skepticism that it will a deposit-to-loan ratio of financial services under the private ownership, not continue, let alone 160%. BRI continues to Khan Bank (new name of the former bank) has expand, rural financial expand its services to significantly improved access to a wide range of services under the private the poor and low-income financial services for previously unserved and ownership, Khan Bank households, among underserved clients in urban and rural areas. (new name of the former others, on a profitable bank) has significantly basis. The average annual improved access to a wide range of financial services profits of BRI unit desas amounted to $199 million for previously unserved and underserved clients in in 20012006 while in 2006 the units reported $329 urban and rural areas. It has also achieved remarkable million in profits. At the end of 2006, the ROA and ROE results in mobilizing deposits by providing quality, were 6.9% and 130%, respectively (table 3). reliable, and safe deposit services to a wide range of clients. At the end of August 2007, outstanding deposits Table 3: Khan Bank (Mongolia) and Bank Rakyat amounted to $390.5 million in 1,528,879 accounts. Indonesia (BRI) Selected Performance Indicators The previously nonviable, poor-quality, credit-only (Position as of  December 00) financial institution has become a viable financial Khan Bank BRI intermediary that adds value to the financial system Number of Active Borrowers 234,715 3,455,894 and increases peoples choices. Khan Banks return on Number of Savings Accounts 717,824 30,907,566 equity was 51.3% at the end of 2006 (table 3). The bank 201.90 3,035.70 Gross Loan Portfolio ($million) Total Savings ($million) 250.00 4,869.70 serves about 80% of the households in the country. 295.90 5,498.30 Total Assets ($million) In Indonesia, during 19831986, the Government Return on Assets (%) 4.45 6.88 successfully reformed the unit desa system of the Bank 51.32 129.86 Return on Equity (%) Portfolio at risk over 30 days (%) 5.07 Rakyat Indonesia (BRI) which was about to collapse 8.26 Operating expense ratio (%) because of political intervention, poor management, Cost per borrower ($) 123.80 65.30 and high default rates, among other things. The reforms Source: www.mixmarket.org led to the emergence of one of the most successful



Indonesias market-oriented and liberal approach low-income households. This is reflected partly in the to financial services is further reflected in its policy increased number of tiny loans in its microbusiness toward the operations of the state-owned pawning loan portfolio. ACLEDA has also expanded its money company, Perum Pegadaian. Again the Government transfer services significantly allowing low-income has given operational and management autonomy urban workers to remit funds to their families in rural to this institution to adopt market-oriented pricing areas at relatively low cost and no risk. The domestic policies. The company provides services throughout money transfers increased from $7.0 million in 886 the country to a wide range of clients through its branch transactions in 2001 to $286.7 million in 98,171 network of 840 branches and 13 regional offices. In transactions in 2005. It has achieved remarkable 2003, it provided over $1.0 billion in 21 million loans results in expanding its deposit services (figure 4) in and was the major supplier of microcredit in terms of recent years. An increasing number of low-income households are using these services. the number of clients served (ADB 2005, 9). AMRET, the other major MFI in Cambodia, has Another country which has achieved a remarkably improved access to finance is Cambodia. The warFigure 4: ACLEDA Bank Deposit Mobilization torn Cambodia did not No. of Accounts Volume ($ million) have existing financial 160,000 140 institutions to reform in the 141,368 140,000 late 1980s. But Cambodia 120 123.15 allowed new microcredit 120,000 100 institutions to emerge 100,000 92,413 and nurtured their growth 80 through liberal policies. 80,000 61.90 60 The Government allowed 57,091 60,000 foreign investments to the 40 35,054 40,000 microfinance sector and 31.64 19,070 20 microfinance institutions 20,000 0 13.16 3,836 (MFIs) to adopt cost5.68 1.95 recovery interest rates 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 without restrictions. These Volume No. of Accounts two policy measures laid Source: www.acledabank.com.kh the foundation for a solid microfinance sector to emerge and grow. Two of the many such institutions grown rapidly to serve poor clients in rural areas of have become major players in the sector in recent many provinces, although it has not yet become a fullpledged banking institution like ACLEDA Bank. At the years. ACLEDA Bank is one of these two. This institution end of 2006, AMRET had 141,957 active borrowers with an average loan balance which had an NGO origin of about $124. Unlike is one of the few flagship Unlike most MFIs, AMRETs loan portfolio most MFIs, AMRET s microfinance commercial indicates a high concentrationover 65%in loan portfolio indicates banks in the region and agriculture. Despite this, AMRET has managed to a high concentration serves over 150,000 poor maintain its portfolio quality and profitability. over 65%in agriculture. and low-income clients. Despite this, AMRET has ACLEDA provides a wide range of quality and reliable services profitably to an managed to maintain its portfolio quality and increasing number of people in the country. According profitability. At the end of 2006, the portfolio at-risk to Clark (2006, 219222), ACLEDAs mission has evolved (over 30 days) was only 0.06% and the ROA and ROE over time to deepen and broaden the services to the were 6.97% and 25.21%, respectively.
Overview of Cross-Country Experience



The Philippines has been making progress in However, Bangladeshs approach has been different. access to finance, though overall market penetration First, the Government provided necessary space for remains low at around 2025% of the potential market. NGOs to play the lead role in pushing the frontier of The recent improvements in access to finance in finance for the poor. The Government also facilitated the Philippines have stemmed from rapid growth of the establishment of the Grameen Bank. This outreach of major MFIs such as CARD NGO, TSPI, approach, partly because of the large amount of grant and TSKI, increasing involvement of rural banks in funds from external sources and later on concessional microfinance services and the entry of two major loans from a range of multilateral and bilateral funding cellphone companies into the industry. The three agencies, led to a strong microfinance sector and microcredit NGOs together increased their active significant outreach of microcredit services. However, number of borrowers by more than tenfold, from the Government also continues to use the state-owned 44,413 to 475,045 between the end of 2000 and end Krishi Bank (agriculture bank) and BRDB extensively of 2006. According to the Bangko Sentral ng Pilipinas to provide access to credit and deposit services for (Central Bank of the Philippines), a total of 550 low-income households, without considering reforms branches of 223 thrift, rural, and cooperative rural of these two institutions, although the case for their banks are involved in microfinance. The two cellphone reform was strong. companiesSmart and At the end of 2005, Globe Telecomsoffer M F Is i n Ba n g l a d e s h Cellphone companies offer innovative cellphoneinnovative cellphonewas serving over 13.6 based facilities to transfer money, pay bills, and based facilities to transfer million borrowers. The make payments for purchases from stores, money, pay bills, and make Grameen Bank and among other things. payments for purchases two giant NGOs, BRAC from stores, among other ( Bu i l d i n g Re s o u rc e s things. A few MFIs are using the facilities to disburse Across Communities) and ASA (Association for loans and collect loan repayments. This integration of Social Advancement), accounted for about 80% of cellphone technology is likely to significantly further this outreach. The Grameen Bank initially focused expand the access to financial services to those in on providing credit facilities and paid little attention low-income groups and remote areas. to voluntary deposit mobilization. This policy was Bangladesh has also tremendously progressed changed in 2000 with increased emphasis on deposit in improving access to finance for the poor and low- mobilization. The new savings programs of the income households during the last three decades. Grameen Bank have allowed millions of its members Table 4: Association for Social Advancement (ASA) and Building Resources Across Communities (BRAC) - Bangladesh Selected Growth and Performance Indicatorsa
ASA 00
Number of Active Borrowers Number of Savings Accounts Gross Loan Portfolio ($million) Total Savings ($million) Total Assets ($million) Return on Assets (%) Return on Equity (%) Portfolio at risk over 30 days (%) Operating expense ratio (%) Cost per borrower ($)
Position at the end of each year, unless otherwise stated. As of end of 2005. c As of end of 2003. Source: www.mixmarket.org.
a b

BRAC 00
5,163,279 6,455,979 255.40b 46.30b 298.10b 14.53b 28.16b 1.09 8.21b 5.40b

00
2,918,341 n/a 164.00 n/a 224.00 n/a n/a 5.97 14.79c n/a

00
4,550,855 45,234 350.20 0.52 393.50 6.90 23.27 3.76 12.91 9.20

1,976,403 2,136,165 144.70 18.10 169.20 14.40 36.15 0.31 7.84 5.60



and nonmembers easy access to reliable deposit and ROE were 6.14% and 17.35% at the end of 2006 services. At the end of September 2007, the Grameen while the portfolio at-risk (over 30 days) was 2.15%. Bank had $697 million in outstanding deposits, TMSS increased its number of active borrowers from consisting of $401 million of members deposits and 144,425 at the end of June 2001 to 436,121 at the end of $296 million in nonmembers deposits. The deposit- June 2006. TMSS also began to offer deposit services in to-loan ratio was 139% (www.grameen-info.org). 2005 and had 493,010 savings accounts by the end of As shown in table 4, BRAC and ASA had 4.6 million June 2006.13 These organizations focus their services and 5.2 million active borrowers, respectively, at the predominantly on low-income women. end of 2006. Both are financially viable microcredit Indias MFIs have also significantly contributed to institutions with very innovative programs to reach the regional growth in the microfinance industry seen even the poorest households. ASAs return on equity at in recent years. The outreach of microfinance services the end of 2005 was 28.2%. In early 2006, both BRAC and has been increasing in India not only because of ASA reduced their interest the phenomenal growth rates on microcredit from of the bank self-helpIn early 2006, both BRAC and ASA reduced their 15% (flat) per annum to groups (SHGs) linkage interest rates on microcredit from 15% (flat) per 12.5% (flat) per annum, program but also because annum to 12.5% (flat) per annum, benefiting benefiting millions of of the substantial growth millions of their clients. And both organizations their clients. And both reported by nonbank operate very efficiently. organizations operate financial institutions very efficiently: in the providing microfinance case of ASA, the cost per borrower was only $5.40 in services. According to the National Bank for Agriculture 2005. and Rural Development (NABARD), by March 2006, The growth in microfinance services in Bangladesh 2.23 million SHGs were reaching about 33 million has not been confined to the large-scale institutions, members. Sinha (2007, 1), however, estimates that however. A number of medium-scale MFIs also the SHG bank linkage program and the MFIs together expanded their outreach significantly in recent years. reached only about 17 million families by mid-2006. BURO (formerly BURO Tangail) and Thengamara Data on some major MFIs, shown in table 5, illustrate Mohila Sabuj Sangha (TMSS) are two good examples. the dramatic growth taking place in the industry in The number of active borrowers of BURO increased recent years. Spandana, for example, increased its from 54,189 at the end of 2000 to 263,503 at the end of active borrowers from 111,011 at the end of March 2006 while the number of savings accounts increased 2004 to 972,212 at the end of March 2007 while SKS from 73,263 to 331,329 in the same period. BUROs ROA Microfinance increased its number of active borrowers Table 5: Growth and Performance Indicators of Selected Microfinance Institutions in Indiaa
Share Microfinance 00
Number of Active Borrowers Gross Loan Portfolio ($million) Total Assets ($million) Return on Assets (%) Return on Equity (%) Operating Expense Ratio (%)
a b

Spandana 00
110,011 10.20 11.40 12.39 110.71 5.37

SKS Microfinance 00 00

24,799 2.70 4.10 (0.69) (11.59) 18.74

00
826,517 91.70 101.30 1.22 15.31 10.97

00
513,108 61.40 74.80 n/a n/a 10.38b

814,156 18.90 23.30 3.17 22.88 19.35

972,212 89.80 101.50 0.74 22.00 6.29

As of end of March each year. None of these institutions have a legal charter to mobilize deposits. As of 31 March 2006. S ource: www.mixmarket.org

13

www.mixmarket.org Overview of Cross-Country Experience



from 24,799 to 513,108 in the same period. NGO MFIs In addition, the central bank has also reinforced have also been continuing their growth, although they its emphasis on promoting financial inclusion. As face constraints on access to loanable funds to ensure a result of this renewed and increased emphasis, smooth and rapid growth rates. both private sector and state-owned banks have The industry growth initiated new programs pattern in India has been to increase access to The other notable feature of the growth in the highly uneven, with high finance for unserved Indian industry, is the dramatic improvements concentration in south and underserved in efficiency resulting in effective interest rates India: an estimated two clients. The countrys paid by microcredit clients in India declining to thirds of the borrowers largest private sector among the lowest in the world. reached are in three commercial bank, ICICI southern statesAndhra Bank, is in the forefront Pradesh, Tamil Nadu, and of these institutions with Karnataka. However, the expansion of microfinance a multipronged approach to promote access to into states outside the southern region has begun financial services through its own branches and partly because of the increasing level of competition delivery mechanisms, and through partnerships with in the southern region. The other notable feature of other institutions. the growth in the Indian industry, according to Sinha In November 2005, the Reserve Bank of India (2007a, 2) is the dramatic improvements in efficiency advised Indian banks to make available a basic noresulting in effective interest rates paid by microcredit frills banking account with low or nil minimum clients in India declining to among the lowest in the balances as well as charges to expand the outreach world. Analysis of a sample consisting of 79 MFIs of such accounts to low-income people. A number indicated that 30 had operating expense ratios less of banks responded. Between March 2006 and than 12%. 2007, 6 million new no-frills bank accounts have Another major aspect of the growth in microfinance been opened largely by state-owned banks (Thorat is its lopsidedness in terms of scope of services. 2007). Indian Bank (a state-owned bank) introduced Because NGOs and nonbank finance companies do a financial inclusion project on a pilot basis in not have a legal charter to provide deposit services, Mangalam village in Pondichery in December 2005. the growth occurred in credit services, not in deposit As a result of this project, Mangalam has become services. However, it is not correct to conclude that the first village in India where all the households in deposit services for low-income households have not the village have access to banking facilities. Indian expanded in India. While reliable disaggregated data are Bank has taken the lead to involve other banks to not available, many state-owned banks have expanded also expand banking facilities to excluded villagers. their deposit facilities to the low-income households. Canara Bank (another state-owned bank with more Some of these banks continued to implement very than 2,500 branches) has opened about 350,000 innovative programs for the purpose. new savings accounts to encourage thrift among the In India, the Government has been paying more poor. The Syndicate Bank, which has an impressive attention to improve the overall policy environment history for being innovative in serving low-income for microfinance in recent years. In January 2006, the households, has signed up a million new customers Reserve Bank of India (the central bank) permitted over 2 months recently by introducing a no-frills banks to use post offices and specialized MFIs including account called SyndSamanya to enable low-income NGOs, cooperatives, and for-profit companies as persons to have access to basic banking services. The retail agents. The banks may now use these agents to bank allows people to open a SyndSamanya account perform tasks such as collecting small-value deposits.14 even with a zero balance and deposit amounts as small

14

However, some analysts are skeptical about the potential positive impact of this business correspondent model because the Reserve Bank has not allowed passing on the cost of local level bank representative to the clients. As a result, Sinha (2007b) argues, that the model has been more or less still-born.

0

as five rupees. The account is promoted through a door-to-door campaign. In the meantime, it continued to implement its innovative pigmy deposit scheme, which was first introduced in 1928 when it was a private bank (see box 1). A number of private banks have also introduced no-frill accounts for low-income households. For example, ING Vysya (the only Indian bank owned by a foreign bank), introduced in June 2007 a no-frills, zero-balance account aimed at the mass retail savings market. The Insurance Regulatory and Development Authority (IRDA) of India has also been actively encouraging insurance services for low-income

households. In 2002, IRDA established rural and social sector targets for insurance companies. All insurers entering the business after the start of the IRDA Act 1999 are required to comply with the obligations toward the rural and social sectors in a phased manner, as shown in table 6. Those insurance companies existing on the effectivity date of the IRDA Act had to ensure that the quantum of insurance business was no less than they recorded for the previous accounting year, ending in March 2002 (UNDP 2007, 2223). In November 2005, IRDA strengthened its microinsurance focus. In October 2004, Indias central bank permitted regional rural banks to undertake

Box 1: Pigmy Deposit Scheme of The Syndicate Bank (India)

Three visionariesa businessman, an engineer, and a physiciantogether invested Rs8,000 as initial capital in 1925 to establish the Canara Industrial and Banking Syndicate Ltd. in Udupi, a small town in the Karnataka state of India. At the time, it was the only Indian bank with a head office in a rural area. Their objective was primarily to provide financial assistance to the local weavers who were crippled by a crisis in the handloom industry through mobilizing small savings from the community. If the savers did not withdraw from the scheme for 7 years, they were paid a higher rate of interest than otherwise was the case. Within this period, the saver could borrow from the bank against the security of his or her deposit. The bank grew rapidly and, in 1957, it opened its 100th branch in Karnataka state. The name of the bank was changed to Syndicate Bank Limited in 1963. The banks head office was transferred to Manipal in 1964, a small town also in Karnataka. The banks market share in the banking business grew from 1% in 1960 to 4% in 1975. In 1968, 32% of its branches were in rural areas. Its loans to agriculture and small enterprises constituted 30% of its total loans. About 90% of its deposits were small accounts below Rs1,500. The bank was able to harness a business opportunity without competition from other banks until 1960. The pigmy deposits accounted for 1415% of total deposits in 1946. The share rose to 21% in 1960. Since then the share declined because of faster growth of other types of deposits
Source: www.syndicatebank.in; Bhatt. 1988.

and competition from other banks. In 1975, the share was 78% of Syndicate Banks total deposits. To achieve its primary objective, in 1928, the bank introduced the pigmy deposit scheme which continues to be its brand equity even today. The scheme was aimed at mobilizing small deposits from low-income households and involved doorto-door collection of small savings, as low as 2 annas, at stated intervals by agents appointed by the bank. Agents were paid a commission of 3% per year, based on the amount collected. Until 1962, the bank permitted its staff to work also as agents during their spare time (The Central Bank prohibited this practice in 1962). The scheme continues to date although its specific features have changed over time. The banks authorized agents collects clients savings at regular intervalsdaily, weekly, or monthly from their doorsteps; a client can save as low as Rs1 daily for 63 months under the scheme. The bank has over 1.2 million depositors under the scheme whose savings are collected by some 3,200 pigmy agents. The daily collection under the scheme is over $580,000 equivalent. In 2006, the total amount of pigmy deposits exceeded $320 million. A variant of the pigmy deposit schemePigmy Plus 2007introduced in 2007 also provides doorstep services to depositors in low-income households to save their money. The bank now has over 1,800 branches spread all over India and plans to add another 2,000 door-todoor collection agents.

Overview of Cross-Country Experience



Table 6: IRDA Guidelines for Insurance Companies, 2002

Year 
Percent of policies written in the year Percent of gross premium collected in the year Number of persons covered, both, life and nonlife in a year
a

Year 
9 3

Year 
12 5
a

Year 
14 5 15,000

Year 
16 5 20,000

Rural Sector: Life Insurer

7 2 5,000

Rural Sector: Nonlife Insurer Social Sector : Life and Nonlife

7,500 10,000

Social sector includes unorganized, self-employed individuals, vulnerable population, and disabled persons, among others. Source: UNDP. 2007.

insurance business as a corporate agent without risk between the end of 2005 and end of 2006 to 111,946. participation. While the extent to which each policy The recent growth of Mibanco in Peru is even more and regulatory measure has contributed to improving impressive: it had 221,802 active borrowers at the end access of low-income households to mainstream of 2006 (table 7), 67,261 more borrowers than it had insurance services is not clear, data indicate that the at the end of 2005. The growth in deposit services was access has begun to improve. In 20022003 alone, more remarkable with the number of savings accounts private insurance companies sold 600,000 new policies increasing from 57,142 at the end of 2005 to 160,636 in rural areas while over 1.0 million was sold under at the end of 2006. NGO Popayan in Colombia also social sectors. Public insurance companies sold 13.2 recorded dramatic growth in outreach on a profitable million new policies in rural areas and 36.8 million basis. The number of active borrowers increased from new policies under the social sectors. 48,333 at the end of 2002 to 137,855 at the end of 2006. In Latin America, many MFIs including banks, Popayan also managed to improve its efficiency during nonbank finance institutions, and NGOs continue to this period, as indicated by the lower operating cost achieve impressive results in expanding the access ratio in 2006. WWB Cali also in Colombia increased to finance of low-income households. In Bolivia, its outreach (number of borrowers) dramatically MFIs had about 391,000 from 38,000 to 149,000 active borrowers while in between the end of 2001 In Latin America, many MFIs including banks, Peru they had about 1.1 and 2006. It did this nonbank finance institutions, and NGOs million active borrowers profitably and without continue to achieve impressive results in at the end of 2005. In sacr ificing por tfolio expanding the access to finance of low-income both countries, the quality, with a ROE of households. governments provided an 19.2% and a portfolio at enabling environment for risk (over 30 days) of 1.6% commercial microfinance at end of 2006. to thrive. This environment made rapid growth Some MFIs in Latin America grew despite the fact possible. BancoSol in Bolivia has shown its dynamism that they charge very high interest rates. Compartamos and robustness as a microfinance bank. At the end of in Mexico is a case in point. The number of active 2006, it had 103,786 active borrowers with a gross loan borrowers of Compartamos increased from 144,991 portfolio of about $163 million (table 7). About 75% of at the end of 2002 to 616,528 at the end of 2006, and the loans were below $300, indicating its continued its outstanding loan portfolio increased from about focus on the low end of the market. BancoSol has $41.8 million to $271.1 million during the same period. also significantly expanded its deposit services: the The ROA and ROE of Compartamos were 23.18% and number of savings accounts increased by 35,359 57.35%, respectively, at the end of 2006. Compartamos,



Table 7: Growth and Performance Indicators of Selected Microfinance Institutions in Latin Americaa
BancoSol (Bolivia)b 00
Number of Active Borrowers Number of Active Savings Accounts Gross Loan Portfolio ($million) Total Savings ($million) Total Assets ($million) Return on Assets (%) Return on Equity (%) Operating Expense Ratio (%) Portfolio at-risk over 30 days (%)
Position at the end of the years. Commercial bank. c NGO. Source: www.mixmarket.org.
a b

Mibanco (Peru)b 00

99,121 37,908 95.90 43.30 109.00 6.18 26.40 24.56 3.09

FMM Popayan (Colombia)c 00

48,333 12.20 14.20 15.27 24.60 11.12 0.88

00
103,786 111,946 163.00 145.40 222.30 2.33 22.81 11.68 2.91

00
221,802 160,636 320.40 203.00 388.40 5.13 34.44 16.87 2.90

00
137,855 80.70 85.50 7.69 18.24 12.44 0.78

50,904 48,341 80.90 62.40 104.30 0.25 1.72 12.16 6.61

which became a commercial bank in June 2006, Some Latin American countries such as Bolivia expects to reach 1.0 million clients by 2008.15 and Peru closed their poorly performing state-owned Another country which has recently expanded agricultural development banks. The Government of Guatemala (in Central access to finance America), in contrast, significantly through Some Latin American countries such as Bolivia took a different approach a re v o l u t i o n a r y a n d and Peru closed their poorly performing stateby reforming its statenontraditional approach owned agricultural development banks. The owned agr icultural is Brazil. Two state-owned Government of Guatemala (in Central America), bank, (Banco Nacional banks (Banco do Brasil in contrast, took a different approach by reforming de Desarollo Agricola and Caixa Economica its state-owned agricultural bank, in 1997. or BANDESA) in 1997. Federal) and two private This bank suffered from sector banks (Banco Bradesco and Lemon Bank) in Brazil provide basic problems typical to most state-owned agricultural financial services through retail agents, including banks and was not serving the rural population small supermarkets, petrol stations, pharmacies, post efficiently and effectively. The reform program offices, and lottery kiosks. These agents are called changed this situation. Through transformation of BANDESA, a new bank, banking correspondents. In 2000, 1,600 of Brazils 5,800 municipalities lacked access to formal banking Banco de Desarollo Rural (BANRURAL), was created. services. By 2003, all municipalities had access to these The new bank began commercial operations in January services through banking correspondents. By the end 1998. The bank began to provide a wide range of of 2005, some 58,000 banking correspondents were financial services mainly to rural people and uses new operating in the country (Lyman et. al. 2006). This technology to reach people with low literacy. It also method has enabled banks to reach even remote rural provides liquidity facilities to a large number of smallareas where bank branches would probably be too scale NGOs and credit unions. It operates profitably costly to set up (Ivatury 2006). In the countrys poorest as a publicprivate rural financial institution, without region, the Northeast, many municipalities are served being a burden on the state budget. It expanded the number of branches from 71 in 1998 to 323 in 2005. only by banking correspondents.

15

The interest yield of Compartamos was about 86% for 2005 while it has been even higher for earlier years. In April 2007, Banco Compartamos completed an initial public offering (IPO) of 30% of its stock. For details on the IPO and related issues, see (Rosenberg 2007; Rhyne and Guimon 2007). Overview of Cross-Country Experience



The number of active savings accounts increased from accounts from 54,895 to 333,697 in the same period. 183,621 in 1998 to 667,778 in 2001. The number of The experience in these countries tends to confirm active borrowers increased from about 30,000 in 1997 that the largest group of people without access to to 196,000 at the end of 2005, with a gross loan portfolio finance is those who want a safe place to save. of $674 million. About 11% of the loan portfolio was in The African region also provides success stories in agriculture and women accounted for half of its clients. access to finance. Kenyas K-Rep Bank and Equity Bank The expansion in credit are only two examples operations was achieved from that region. K-Rep The African region also provides success stories without sacrificing Bank, which has an NGO in access to finance. Kenyas K-Rep Bank and quality. At the end of origin, is now a major Equity Bank are only two examples from that 2005, the portfolio at-risk commercial microfinance region. (over 30 days) was only bank in the country. At the 0.9%. The profitability end of 2006, K-Rep Bank of BANRURAL improved dramatically and the bank had an outstanding loan portfolio of $54.1 million; became subsidy-independent. The ROE was 18.83% 114,301 active borrowers; and deposits amounting to in 2001 and increased to 38.7% by the end of 2005 $23.8 million in 14,951 savings accounts. The Equity (Wenner et. al. 2007). Bank had 239,541 active borrowers and over one A number of Eastern European and Central Asian million savings accounts at the end of 2006. As shown countries have also achieved progress in improving in table 8, a number of other countries such as Ethiopia access to finance for low-income households mainly and Tanzania also made significant progress. through greenfield microfinance and small enterprise In South Africa, banking institutions, together banks. The Procredit Bank in Georgia, established in with mobile phone companies, have begun to expand 1998, increased its active borrowers from 8,173 to the access to financial services. WIZZIT, a start-up 61,558 between end of 2000 and 2006. The outreach mobile banking service provider, organized as a in deposit services has been more impressive as in division of the South African Bank of Athens, targets many other Central Asian countries. The number of low-income customers with an interest-bearing bank savings accounts increased from 12,648 to 326,835 account that customers access with their mobile in the same period. The Procredit Bank in Kosovo phone. Customers can use their mobile phones to increased its savings accounts from 116,530 to 240,761 make person-to-person payments and transfer money. while the Procredit Bank in Serbia increased its savings WIZZIT also gives customers a branded debit card with

Table 8: Growth and Performance Indicators of Selected Microfinance Institutions in Africaa

ACSIb (Ethiopia) 00
Number of Active Borrowers Number of Active Savings Accounts Gross Loan Portfolio ($million) Total Savings ($million) Total Assets ($million) Return on Assets (%) Return on Equity (%) Operating Expense Ratio (%) Portfolio at-risk over 30 days (%)
a

Equity Bank (Kenya) 00

41,024

Centenary Bankc (Uganda) 00

34,490 313,480 25.10 53.60 66.70 2.30 18.79 51.14 1.03

PRIDEd (Tanzania) 00

48,216 8.00 8.50 4.26 16.22 42.73 0.18

Capitec Banke (South Africa) 00

250,000 n/a 41.20 48.20 139.00 n/a n/a n/a n/a

00
536,804 224,571 78.20 9.10 95.90 7.91 25.55 4.93 1.55

00
239,541

00
66,113 559,161 84.00 123.60 155.20 3.56 26.17 33.07 6.42

00
89,783 16.40 18.80 1.34 6.00 37.97 0.44

00
368,854 583,000 124.90 124.30 303.80 9.07 18.65 79.53 11.58

255,000 69,910 19.90 24.90 27.90 3.20 29.74 9.24 2.09

155,883 1,014,474 15.10 106.40 27.90 167.60 33.50 287.50 3.35 4.85 26.58 40.36 23.67 42.38 8.29 12.19

Position at the end of each year, unless otherwise stated. Amhara Credit and Savings Institutions. c Centenary Rural Development Bank Ltd. d NGO e Position as of 28 February each year. Source: www.mixmarket.org.
b



which they can make purchases at retail outlets and clients, a total of $120.6 million in outstanding deposits deposit or withdraw money at ATMs (Ivatury 2006, and $126.4 million in outstanding loans at the end of 9). Standard Bank has entered into a joint venture September 2005. They provided diverse products with MTN, a leading mobile operator in the country, and services to their member-clients. Most of their to offer a service called MTN Banking. Standard Bank clients consist of people from low-income households, considers this joint venture as a separately branded including women(www.woccu.org.). According to the channel targeting low-income customers who use Association of Asian Confederation of Credit Unions, mobile phones but may not have access to, or comfort its network of credit unions in Asia serve over 5.0 in, using a bank branch. 16 In October 2004, with million clients, including some 3.8 million poorest. government encouragement, the four largest South While some countries have remarkably expanded African banks and the postal bank began offering access to financial services for the unserved population a low-cost transaction and underserved clients, account (known as the global situation While some countries have remarkably expanded Mzansi account) suggests that some of access to financial services for the unserved intended for low-income the largest developing population and underserved clients, the global customers.17 countries such as the situation suggests that some of the largest The experience PRC, India, Pakistan, developing countries such as the PRC, India, indicates that and Mexico continue to Pakistan, and Mexico continue to report the cooperatives also play an report the biggest gaps biggest gaps in meeting the demand for financial increasingly important in meeting the demand services at the low end of the markets. role in improving access for financial services to finance in a number of at the low end of the countries. For example, markets. Bangladesh and credit unions in Ecuador, El Salvador, Guatemala, Indonesia are the exceptions among the large countries. Honduras, Jamaica, Mexico, and Nicaragua distribute Restrictive government policies, excessive government remittances through the IRnet program of the World interventions to provide the services through Council of Credit Unions (WOCCU). From August 2001 government-owned and controlled institutions, and to March 2005, credit unions carried out a total of 1.45 reluctance to open microfinance markets for foreign million transactions for $635 million in remittances. In investments and to integrate microfinance into the Ecuador, 10 credit unions assisted by WOCCU under a mainstream of banking and finance tend to explain special development program had 282,000 member- why these countries have lagged behind.

16

17

In South Africa, an estimated 16 million people, or 48% of the adult population, are unbanked or underbanked and lack access to formal financial services. However, there are 20 million phone subscribers, nearly 80% of whom are prepaid customers. Many of these subscribers are in the low-income segment. This paragraph on South Africa is based on Ivatury (2006). According to the Banking Association of South Africa, over 3 million Mzansi accounts have been opened in the 3 years following the launch of the financial sector charter in 2004 which, among other things, aimed at promoting financial inclusion. The Postbank, a separate division of the Post Office, has been the biggest single issuer of new Mzansi accounts. Recent research has indicated that a majority of the Mzansi account holders were previously unbanked. However, access to finance continues to be a major problem in the country. According to some practitioners, most of the Mzansi accounts remain inactive. In 2006, over 15 million adults did not have access to banking services. Measures to Improve Access to Finance



VI. MEASURES TO IMPROVE ACCESS TO FINANCE

he foregoing review of international experience, However, it is important to define the problem broadly while admittedly not comprehensive, indicates to focus on providing financial services for all unserved the diversity of approaches that different countries and underserved people rather than low-income use. The approaches and global experience indicate people. As Rajan (2006, 57) noted, by defining the that three measures are vital to trigger a more powerful problem more broadly to include the middle class, process toward improved we can enlist a powerful access to finance. First, supporter in the common First, it is necessary to clearly recognize that the it is necessary to clearly fight for access. In the formal financial systems that serve a minority recognize that the formal process, the links between are simply unacceptable from the point of view financial systems that the formal and informal of building an inclusive society. ser ve a minority are financial systems will simply unacceptable strengthen, allowing the from the point of view of building an inclusive society. poor to migrate upward. Such recognition will significantly influence the lens The second most essential measure is to recognize that we use to look at the problem and encourage a the majority of the people currently without access more proactive set of measures than otherwise would to finance as potential clients for market-based be the case. Along with this, building inclusive financial financial services. This will help unleash innovative systems that serve the majority should be made a responses to penetrate the bottom of the pyramid central goal of every developing country. Eliminating market. Based on this, governments must recognize financial exclusion as early as possible in a sustainable that the private sector formal financial institutions manner must be given the central importance that it have a major role to play in serving this market. This deserves in overall policy for inclusive development. recognition is fundamental to the potential solutions

Box 2: The State of Bank of Pakistans Role in Financial Inclusion

Financial exclusion is an acute problem in Pakistan, with a majority of the people with no access to formal and semiformal sector financial services. Rural low-income people are affected more severely than others by this problem. Given the gravity of the problem, the State Bank of Pakistan (SBP), the central bank, is playing a lead role in expanding banking services to the countrys poor and rural population. SBP is now developing a broad-based financial inclusion strategy. The goal of the strategy will be to enhance the coverage of the financial system through a range of innovative approaches and institutional modalities to provide holistic
Source: Akhtar. 2007.

services. Over the next 5 years, the target will be to double the deposit base from the existing 26.6 million accounts to 53 million by 2012, and to double the number of borrowers with a focus on low-income households. The strategy includes a far-reaching microfinance development plan to increase microfinance outreach from 1.2 million clients to 10 million, expansion of branch networks to underserved areas, promotion of Islamic banking, and promotion of application of new information and communication technology to reach rural people.



and the seriousness with which they are likely to be governments need to create an enabling environment executed. for the private sector service providers, including Third, within government bureaucracy, improving NGOs, and allow them operational autonomy to make access to finance should be made an explicit sound business decisions and adopt commercial responsibility of the central bank of each country. This practices. Third, governments have to develop is particularly important because financial inclusion financial infrastructure.20 Financial infrastructure will can best be achieved when it is mainstreamed into significantly reduce both risks and transaction costs the broader financial system under competitive of providing a range of financial services in various conditions. Central banks in most developing ways. Financial infrastructure, for example, will countries used to treat access to finance problems with reduce information barriers and asymmetries, induce benign neglect.18 This has begun to change. A number entry of new institutions into the industry, induce of central banks now show more interest in financial financial technological innovations, and promote inclusion. The case of the State Bank of Pakistan (box greater competition. Financial infrastructure will have 2) is an illustration. a positive impact particularly on access to credit for Setting goals are necessary but not sufficient. people with little or no marketable collateral and poor The governments, including central banks, have to peoples demand for financial assets in the formal take a number of concrete actions to translate the sector. In many countries, poor physical infrastructure goal of financial inclusion discourages extension into a reality (United of more flexible delivery Governments have to define their role and Nations 2006, 152; mechanisms such as use execute it in such a way that it will provide space Claessens 2005; Kumar of ATMs in rural areas. and incentives for private sector institutions 2 0 0 5 ) . G ov e r n m e n t s The governments including social investors to play an increasing have to define their role also have to initiate role in providing the services. Essentially, the and execute it in such a serious reform programs governments need to focus on a number of key way that it will provide to transform state-owned areas. space and incentives for financial institutions private sector institutions with a mandate to serve including social investors to play an increasing role in low-income groups into viable and dynamic service providing the services. Essentially, the governments providers. In most countries, these institutions have need to focus on a number of key areas. low outreach, provide poor quality services, are full First, the governments need to collect hard of rent seekers, and consume large amounts of public data on the extent of the financial exclusion and funds to sustain their operations. However, they do such efforts need to be repeated periodically.19 This offer potential to become demand-driven, sustainable would provide a basis for selecting priority areas, institutions providing access to an increasing segment formulating a coherent set of activities to address of the underserved and unserved population. This the problem, fine-tuning those programs in place, potential must be fully harnessed through appropriate and monitoring the progress over time. Second, reform programs. Such efforts should encompass

18

19

20

There are some exceptions. A case in point is the Reserve Bank of India (RBI). For many years, RBI has shown interest in reducing financial exclusion. This continues to date. For example, the Governor of RBI in his Annual Policy Statement for both 20052006 and 20062007 made reference to financial exclusion and urged the banks to align themselves with its objectives. Most policy makers do not even know the extent of the problem because such statistics are not collected systematically. As the Advisors Group to the United Nations International Year of Microcredit (UNCDF 2005) noted: the lack of good data has made it hard for governments and others to make well-designed policy, hard for potential providers of financial services to poor people to accurately judge the need/ opportunity, hard for multilaterals and donors to judge if their actions are helping or hindering the financial sectors in which they intervene, hard for investors to assess the market opportunities, and hard even to reach empirically sound conclusions about the relationship between financial access, poverty, and economic growth. Financial infrastructure includes prudential regulation and supervision of financial institutions; accounting policies and financial information disclosure required of financial institutions; framework of laws governing financial transactions and the legal procedures to enforce them; and dissemination of financial and legal information. Measures to Improve Access to Finance



postal savings institutions and other savings banks, also face similarly high risks and transaction costs in in addition to agricultural and rural development reaching rural people. A strategy aimed at opening banks which do not function effectively and efficiently up new economic opportunities in these areas will or operate sustainably. Reforms in these institutions reduce clients transaction costs and risks associated may pave a better way for their eventual partial or full not only with investments but also with using financial privatization as shown by the cases of BRI in Indonesia, services provided by formal sources which, in turn, Agr icultural Bank of will increase incentives Mongolia, and BANDESA to seek financial services The governments can also take measures to in Guatemala. of formal sources. address demand-side constraints. Two types of To ease constraints In addition, the same measures appear to be important. on expanding supply of strategy will improve services, central banks suppliers incentives to should examine how regulatory systems impede expand the services because it will reduce their risks financial inclusion. Providing legal and regulatory and transaction costs. The second set of measures space for new institutional modalities to emerge focuses on programs to increase financial literacy and thrive needs to be given greater attention than among different categories of excluded people. 21 in the past. Improvements to regulatory systems Central banks can play a lead role in this task. need to be done within a forward-looking framework The governments also must ensure an adequate where technological innovations in information level of competition in the financial system. Competition and communication tend to increasingly dismantle could influence the inherently asymmetric incentive the industry boundaries and make it possible for structure of the established conventional incumbents nonfinancial institutions to become major players in regard to moving up market and encouraging their in providing a range of financial services which are penetration into low-end markets. This process is traditionally considered to be the domain of pure already in motion in some countries and it is likely financial institutions. to gather further strength and momentum in the The governments can also take measures medium-term primarily because of the increasing to address demand-side constraints. Two types role of foreign banks and other financial institutions of measures appear to in most developing be important. The first countries. For example, The private-sector-established financial type includes those Indias domestic banks institutions will have to develop more robust necessary to improve the seem to be coming under business models to deliver financial services environment for more increasing pressure to to the low-end markets. They may increasingly profitable investments at strengthen their efforts require partnerships and alliances with a range the low end of the financial to move down-market of financial and nonfinancial institutions, market. Greater attention owing to the increasing including limited service nongovernment is needed to improve rural role of foreign banks in MFIs. infrastructure, markets, the financial system. and pro-poor technology. The private-sectorIn most developing countries, people in rural areas established financial institutions will have to develop face high risks and transaction costs because of lack more robust business models to deliver financial services of basic infrastructure. The potential service providers to the low-end markets. They may increasingly require
21

Some developed countries have established dedicated funds to promote financial inclusion. For example, the Government of United Kingdom established a 120 million Financial Inclusion Fund in 2005. Barclays Bank also launched a Financial Inclusion Fund in 2005 to support programs aimed at reducing financial exclusion. Both funds support, among other things, financial literacy improvement programs. The Royal Bank of Scotland Group has set up a Financial Inclusion Innovation Fund which provides grants to organizations to test out new approaches and activities to promote financial inclusion (HM Treasury 2004). Developing countries have begun to follow this. The Finance Minster of the Government of India in his budget for 20072008 announced the setting up of two funds for financial inclusion: the first called Financial Inclusion Fund for developmental and promotional interventions and other called Financial Inclusion Technology Fund to meet cost of technology adoption. Each fund will have $125 million.



partnerships and alliances with a range of financial and nonfinancial institutions, including limited service nongovernment MFIs. They need to figure out how emerging new technology can be integrated into their service delivery models to penetrate this market and stay competitive. Banks like ICICI in India has already begun this process by establishing new partnerships with regulated MFIs and NGOs providing financial and other services to the poor and exploring how new technology such as low-cost ATMs can be effectively used to expand their services. Other countries also provide promising examples. The ANZ Banks efforts in the Fiji Islands is one such

example. ANZ Bank carried out a systematic program in the Fiji Islands to serve excluded people in rural areas and offered two simple products to suit their requirementsa savings account and an everyday account. The savings account has a zero opening balance, is operated with a passbook, pays interest on every dollar saved, and is charged a fee only when the customer withdraws. The everyday account has also been designed to suit low-income clients including microenterprise operators. From October 2004 to end of March 2005, 25,800 previously unbanked rural Fijians opened accounts and amassed more than $500,000 as a result of this effort (Blacklock 2005).

The Future of Access to Finance



VII. THE FUTURE OF ACCESS TO FINANCE

ccess to finance is poised for significant growth is rapid and the sector is likely to expand rapidly, the globally. The future growth in financial services government will have to pay much greater attention for low-income households will be driven by than in the past to strengthen supervisory and regulatory systems and more enabling policy financial infrastructure environment, integration The future growth in financial services for the that would facilitate risk of technology into this low-income households will be driven by more management and access segment of the financial enabling policy environment, integration of to client information. markets, and increasing technology into this segment of the financial The other major competition. The markets, and increasing competition. d r i v e r o f g r ow t h i n countries in which these different drivers converge access to finance will be would most likely see an increased competition. exponential growth in access to finance for those at Competition will help in many different ways. First, the low-end of the markets. it will drive the prices (including transaction costs) In most countries, the government role is crucial down and allow those who are currently excluded for for the continued growth in access to finance. The price-related reasons to enter the market and access access to finance will grow at higher rates in countries the services. This is particularly true in respect of credit where governments facilitate rather than undermine and money transfer services. In Bolivia, microcredit private sectors role. The countries that allow diverse interest rates have declined from an average of about institutions to enter the industry and play an active 30% in 1998 to 24% in 2002 and 21.2% in 2005. The role will see much higher growth rates than the others. competitive markets will produce similar results in The countries that continue to have serious doubts other countries. Second, competition will motivate about the need for more commercial approaches incumbents to reexamine and improve their business models to provide better a n d i n t e r ve n e i n t h e quality services and a markets through interest Competition will motivate incumbents to wider range of services to rate restrictions and other reexamine and improve their business models to ensure their institutional t r a d i t i o n a l m e a s u re s provide better quality services and a wider range viability. In Bangladesh, such as directed credit in of services to ensure their institutional viability. some MFIs reduced the particular will continue to compulsory savings see only sluggish growth. Similarly, the countries that do not adopt more proactive requirements because of increasing competition. A and forward-looking policies to address regulatory number of MFIs, including BRAC and ASA, have also and other issues arising as a result of increasing reduced their nominal interest rates. The competition application of new information and communication will lead to a substantial growth in lending for technology are likely to fall behind those that address housing improvements, education, emergencies, such issues effectively. Also, countries that continue and consumer durables. Microinsurance services will restrictions on foreign investments in microfinance also dramatically grow in the next decade because and do not make adequate efforts to make their mainstream insurance companies have begun to broader financial systems more competitive are penetrate this market through their own delivery likely to experience persistent problems in access to networks and through partner-agency arrangements finance. In countries where technological integration with institutions such as MFIs and post offices having

0

wider networks. Third, competition at the upper point of sales devices; and third is smart plastic cards. end of the markets will reinforce the incentives for Technology will positively impact on both demand for incumbents, particularly the domestic commercial and supply of a variety of financial services. Technology banks with currently no or minimal microfinance will reduce operating costs, improve efficiency, and market penetration, to go downmarket, thus leading lead to new delivery mechanisms and business to an expansion of the supply with consequent models. For example, technology will allow branchless positive effects on the clients. If the current trends banking and establishment of new partnerships in countries such as the Philippines and South between financial service providers and a range of Africa are an indication, other service providers the future competition that were not feasible Technology will positively impact on both may also come from before to provide services demand for and supply of a variety of financial nonfinancial institutions to clients in remote areas services. Technology will reduce operating costs, such as mobile phone a n d l ow - p o p u l a t i o n improve efficiency, and lead to new delivery companies owing to the density areas. Mobilemechanisms and business models. increasingly blurring phone-based services industry boundaries in are revolutionizing the financial service industry. microfinance services in a number of countries such The other key driver of future growth will be as South Africa, Philippines, and India. However, the technology. Three broad types of technology will extent to which technology will be integrated into the drive this growth: first is pro-poor new information financial service industry at the low end will depend and communication technology, primarily low-cost on supportive government policies and the quality of cellphones; second is advances in ATMs and other the infrastructure, particularly in rural areas.

The Future of Access to Finance



VIII.

CONCLUSIONS

Access to finance is a central issue in development The global experience provides useful insights from the view points of growth, reduction of income for policy makers in improving access to finance. The poverty, social development, and equity. In most governments need to recognize not only that private developing countries, only a minority of the population sector institutions have a potentially major role to play has access to finance, adversely affecting both growth but also the central role of the governments themselves. and inclusive development. For equitable growth and The governments have to define their role and execute inclusive development, this issue must be addressed it in such a way that it will provide space and incentives head-on particularly because in absolute terms low- for the private sector to play an increasing role in income people account providing services. for the largest number E s s e n t i a l l y, t h e Access to finance is a central issue in development of people without access governments need to focus from the view points of growth, reduction to financial services. on a number of key areas. of income poverty, social development, Providing better access to First, governments need and equity... this issue must be addressed a wider range of financial to explicitly recognize head-on. services for this segment access to finance for all of the population will unserved and underserved have a far-reaching impact on the welfare of their people as an important goal to pursue. Second, the families and contribute toward creating a more responsibility for improving access to finance must egalitarian society than otherwise would be the be assigned to central banks. Third, systematic case. efforts must be initiated and pursued to collect The global experience on improving access data on different dimensions of the access problem. to finance for larger numbers of the population Fourth, governments need to create an enabling suggests that there is no universally applicable model. environment for the private sector service providers Countries have achieved impressive results through a and allow them operational autonomy to make range of approaches. However, the experience suggests sound business decisions. Fifth, governments must that countries that allow diversity in approaches and initiate reform programs to transform state-owned institutional modalities financial institutions are most likely to achieve with a mandate to serve The global experience on improving access to better results and create low-income people into finance for larger numbers of the population more competitive markets viable and dynamic suggests that there is no universally applicable that would immensely service providers. Sixth, model. Countries have achieved impressive b e n e f i t l ow - i n c o m e gover nments should results through a range of approaches. households than others. create legal space and The need for diversity improve the financial in approaches and institutions is justified not only regulatory system to facilitate integration of financial by the diversity in demand for financial services and services for the poor into the mainstream of finance. multidimensional nature of poverty but also by the In Brazil, banking regulators allowed banks to open need to reduce systemic risks, increase competition, basic transaction accounts for poor people with and improve efficiency. no proof of address or income. The countries such



as Bolivia and Peru not only provided an enabling Ninth, governments have to make significant policy environment but also necessary legal space investments to improve economic and social for regulated MFIs to emerge and thrive. Seventh, infrastructure in countries where underinvestments governments have to develop financial infrastructure in these constitute a major issue. Improvements in to reduce risks and transaction costs of providing economic and social infrastructure will reduce risks financial ser vices by and transaction costs formal sector institutions. of providing financial In summary, government efforts must be Eight, governments have services to the poor. In focused on promoting, rather than replacing, to adopt more liberal addition, they will reduce private financial institutions to provide financial policies on foreign clients transaction costs services for all. investments in financial of accessing the services services for the poor to and risks that they may benefit from the vast amount of human and financial have to face in their investment activities. In summary, resources seeking investment opportunities in government efforts must be focused on promoting, financial services for the poor. The important role rather than replacing, private financial institutions to played by foreign investments in countries such as provide financial services for all. Cambodia and Mongolia should not be overlooked.

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Low-Income Households Access to Financial Services: International Experience, Measures for Improvement, and the Future In developed countries, formal financial sectors serve a majority. In contrast, in most developing economies, the formal financial sectors serve only a minority, often no more than 2030% of the population. Most households who do not have access to financial services are concentrated in low-income categories. Even those low-income households who have access to finance are underserved both in terms of quantity and quality of products and services. Although it is not a panacea, access to finance can play a potentially key role in inclusive growth and development. Hence, the problem of lack of access to finance for a majority of the people deserves a great deal of attention and must be addressed head-on. The global experience suggests that there are many ways to improve access to finance for low-income households. Many countries have made progress through diverse approaches and different institutional modalities. The global experience provides useful insights for policy makers and practitioners who are committed to address the issue. While many stakeholders have to participate in this effort, cross-country experience over time indicates that the governments have a major and multiple roles to play. The government role, however, must be focused on promoting rather than replacing the important role that private sector financial institutions could play in this task. About the Asian Development Bank ADB aims to improve the welfare of the people in the Asia and Pacific region, particularly the nearly 1.9 billion who live on less than $2 a day. Despite many success stories, the region remains home to two thirds of the worlds poor. ADB is a multilateral development finance institution owned by 67 members, 48 from the region and 19 from other parts of the globe. ADBs vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve their quality of life. ADBs main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. ADBs annual lending volume is typically about $6 billion, with technical assistance usually totaling about $180 million a year. ADBs headquarters is in Manila. It has 26 offices around the world and more than 2,000 employees from over 50 countries.

Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org Publication Stock No. 080907