Financial Inclusion in Asia:

Meghana Ayyagari

(GWU)

GDN Workshop on Financial Inclusion

17th November, 2014

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Agenda What the raw data says Benchmarking across countries Challenges Policy Implications

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Aggregate Financial Development

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60

80

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0

High Income MENA Developing Asia Europe LAC Sub-Saharan Africa

Source: Beck, Demirguc-Kunt, Levine, Cihak, and Feyen (2014)

Private credit by deposit money banks and other FI to GDP(%)

Bank Deposits to GDP(%)

Liquid Liabilities to GDP(%)

Median country in Developing Asia fares better than median developing country in Europe, LAC and Sub-Saharan Africa

Aggregate Financial Development

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Within each income group, the median country in Developing Asia performs better than the median country in the rest of the world (RoW).

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60

80

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High Inc Upper-middle Inc Lower-middle Inc Low Inc

Developing Asia RoW Developing Asia RoW Developing Asia RoW Developing Asia RoW

The GNI/capita thresholds for income classification are: Low: <$1025, Lower-middle: $1,026-$4,035;Upper-middle: $4,036-$12,475; High Inc: >$12,475

Private credit by deposit money banks and other FI to GDP(%)

Household Access to Finance

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Over 70% of adults in Developing Asia report not having an account at a formal financial institution- a bank, credit union, cooperative, post office, or microfinance institution

Household Access to Finance

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But this varies greatly across countries within Asia

Household Access to FinanceThe Supply Side Picture

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Enterprise Access to Finance

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Developing Countries in

Percentage of Enterprises that have a checking/savings

account

Percentage of Enterprises that have a line of credit/loan from

a financial institution

Middle East & North Africa 54.39% 13.88%

Developing Asia 84.24% 32.96%

Central Asia 88.23% 29.67%

East Asia 91.80% 35.63%

South Asia 79.72% 31.19%

Southeast Asia 77.19% 35.54%

The Pacific 94.56% 39.36%

Africa 83.94% 19.03%

Latin America & Caribbean 88.83% 53.65%

Europe 92.13% 40.91%

While a large percentage of firms use a checking/saving account, firms’ access to external finance is limited

Enterprise Access to Finance% of working capital financed by banks

9Small firms are particularly constrained in Developing Asia

Gap in Financial Inclusion for households

10For the whole of Developing Asia, median gap is -8.15 suggesting that the median country in Developing Asia lags behind benchmark countries in account penetration

Barriers reported by households

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TOP 3 BARRIERS

Lack of money

Geographic Access

Cost

Barriers reported by enterprises

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 Developing Asia Europe LAC MNA Africa

No need 55.36 64.77 65.38 48.32 37.16

Unfavorable interest rates 14.75 19.84 12.30 11.74 19.25Complex application procedures 10.81 7.13 5.81 9.64 17.41

Collateral requirements 8.21 4.94 4.62 7.55 11.56

Size of loan and maturity are insufficient 3.36 1.13 1.06 3.77 2.26Did not think it would be approved 3.22 0.40 2.42 3.04 6.05

Other 4.29 1.80 8.41 15.93 6.32

Financial Inclusion in AsiaSummary Mixed picture of achievements and challenges. In terms of aggregate financial development (banking sector

depth and stock market turnover ratio), the median country in Developing Asia performs better than the median developing country in other regions of the world.

However, in terms of financial access very few households access formal financial services and far few enterprises have access to external credit.

There is also wide variation within Developing Asia with East Asia scoring high on most indicators and Central Asia performing the worst.

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FINANCIAL INCLUSION IN ASIA:

IMPLICATIONS FROM POLICIES AND INNOVATIONS ACROSS THE WORLD

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Households and Microenterprises Mircocredit

Research shows limited impact of providing access to microcredit on poor households’ welfare and microenterprises’ growth

Microsavings Some evidence that access to formal savings might therefore result in a

better protection of resources from other household members especially if the alternative is saving within the household rather than other informal means of saving outside the household (Beck, Pumak and Uras, 2014).

Microinsurance Limited take-up. Lack of trust and liquidity constraints are significant

nonprice frictions that constrain demand for microinsurance (Cole et al. 2013)

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Households and Microenterprises Islamic Finance

Beck, Demirguc-Kunt and Merrouche (2013) show that there not as many significant differences between conventional and Islamic banks in countries with both types of institutions.

Branching Policies Social banking experiments have shown some success in countries like

India but not clear whether the gains are sustainable

Financial Literacy Limited effect on financial behavior, including savings behavior

Biometric Identification Important innovation showing promise. Few impact evaluation studies

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Households and Microenterprises Other Innovations

Non-bank models – mobile banking, e-finance, and phone finance

Limited adoption of technology in Developing Asia

Public-private partnerships, as in the case of digitalization of government payments in Pakistan.

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Small and Medium Enterprises Institutional Framework

Introduction of credit registries or bureaus positive impact on lending to SMEs (Brown, Jappelli and Pagano (2009) with smaller and more opaque enterprises benefiting more (Love and Mylenko, 2003).

Positive effect of introducing movable collateral registries on firms' access to finance, an effect stronger among smaller firms (Love, Martínez Pería, and Singh (2012))

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Small and Medium Enterprises Institutional Framework

Haselmann, Pistor and Vig (2009) show that changes in collateral laws were more important than changes in bankruptcy laws for the expansion of credit in twelve transition economies in the 1990s

Caveat: Countervailing evidence on the effect of strengthening creditor rights by negatively affecting the demand side (Acharya and Subramian (2009) , Acharya, Amihud and Litov (2011) ,Vig (2013))

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Small and Medium Enterprises Market Structure and Lending Techniques

Large and foreign banks, relative to other institutions, can have a comparative advantage at financing SMEs through arms-length lending technologies, such as asset-based lending, factoring, leasing, fixed-asset lending, credit scoring, and centralized organizational structures.

See Berger and Udell (2006) and de la Torre, Martinez Peria, and Schmukler (2010).

Partial Credit Guarantees Some positive evidence See Lelarge, Sraer, and Thesmar (2010)

Equity Finance While private equity seems promising still a nascent technology in

developing countries due to various barriers20

Conclusion  On average, countries stand where they are predicted

to be by socio-economic factors But large variation within the region Financial innovation critical for further deepening

and broadening External finance critical for SMEs Access to payment/savings services priority for households Need competition (beyond banking) and adequate

regulatory framework

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EXTRA

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Barriers reported by enterprises

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  Eligibility

Days to process

business loan applications

Days to process

SME loan applications

Armenia 9.94 7.62Bangladesh 34.55 43.26China 50 40Georgia 5.03 5.62India 19.98 10.75Indonesia 16.59 9.68Korea, Rep. 2.73 2.73Pakistan 31.98 33.63Philippines 44.13 33.29Sri Lanka 15.57 10.04Thailand 22.46 23.74

Median 19.98 10.75

Average 23.00 20.03

Source: Beck, Demirgüç-Kunt, and Martinez Peria (2007a)

Evidence of complex application procedures – takes over 30 days in some countries to process a loan

Barriers reported by enterprisesStringent collateral requirements

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Benchmarking Methodology We estimate the following regression FDi,t = bXi,t+ei,t

where FD is the log of an indicator of financial development, X is an array of structural country-specific factors, and the subscripts i and t relate to countries and years, respectively.

The predicted value of this regression provides a time-varying benchmark for different financial sector indicators

This Benchmark serves as a “structural depth line” and we can now compare the actual and predicted values to estimate a financial inclusion gap.

Source: Beck and De la Torre, 2007; De la Torre, Feyen, and Ize, 2013; Beck and Feyen, 2013.

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Gap in Aggregate Financial Development

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For the whole of Developing Asia, the median gap is 1.62 suggesting that for the median country in Developing Asia, the predicted value of Private Credit to GDP (%) is 1.62 percentage points below actual value of Private Credit to GDP (%).

Gap in Financial Inclusion for enterprises

27Note: Data is presented by country since number of data points per region is fewer