Financial Inclusion in Asia:

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Financial Inclusion in Asia

• Meghana Ayyagari
• (GWU)
• GDN Workshop on Financial Inclusion
• 17th November, 2014

2
Agenda

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

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Aggregate Financial Development
Median country in Developing Asia fares better
than median developing country in Europe, LAC and
Sub-Saharan Africa
4
Aggregate Financial Development
Within each income group, the median country in
Developing Asia performs better than the median
country in the rest of the world (RoW).
5
Household Access to Finance
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
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Household Access to Finance
But this varies greatly across countries within
Asia
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Household Access to FinanceThe Supply Side
Picture
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Enterprise Access to Finance
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
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Enterprise Access to Finance of working capital
financed by banks
Small firms are particularly constrained in
Developing Asia
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Gap in Financial Inclusion for households
For 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
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Barriers reported by households
TOP 3 BARRIERS Lack of money Geographic
Access Cost
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Barriers reported by enterprises
  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 19.25
Complex 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 2.26
Did 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
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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 barriers

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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
  Eligibility Eligibility
Days to process business loan applications Days to process SME loan applications
Armenia 9.94 7.62
Bangladesh 34.55 43.26
China 50 40
Georgia 5.03 5.62
India 19.98 10.75
Indonesia 16.59 9.68
Korea, Rep. 2.73 2.73
Pakistan 31.98 33.63
Philippines 44.13 33.29
Sri Lanka 15.57 10.04
Thailand 22.46 23.74
Median 19.98 10.75
Average 23.00 20.03
Evidence of complex application procedures
takes over 30 days in some countries to process a
loan
Source Beck, Demirgüç-Kunt, and Martinez Peria
(2007a)
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Barriers reported by enterprisesStringent
collateral requirements
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Benchmarking Methodology

• We estimate the following regression FDi,t
  bXi,tei,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
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 ().
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Gap in Financial Inclusion for enterprises
Note Data is presented by country since number
of data points per region is fewer