1 Banking Services for Everyone? Barriers to Bank Access and Use Around the World Thorsten Beck Asli Demirgüç-Kunt Maria Soledad Martinez Peria The World

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Banking Services for Everyone? Barriers to Bank Access and Use

Around the World

Thorsten Beck

Asli Demirgüç-Kunt

Maria Soledad Martinez Peria

The World Bank

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Motivation• Theory suggests that financial market frictions that prevent broad

access can lead to persistent income inequality or poverty traps.

• To date the empirical literature has established the importance of banking sector depth for GDP growth, productivity growth, poverty, firm growth and entry rates.

• But much less is known about the determinants and implications of access to financial services by individuals and firms.– Existing papers on access to financial services focus on country case

studies at the household or firm level. See Claessens (2006), Claessens and Demirguc-Kunt(2006).

• Few papers study this issue by focusing directly on banking services providers. – See Beck, Demirguc-Kunt and Martinez Peria (2007).

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• Develop new indicators of barriers to bank access and use of banking services around the world.

• Show their association with economic and financial development and, most importantly, with existing measures of outreach and financial exclusion.

• Offer back-of-the-envelope calculations of financial exclusion.

• Explore potential determinants of barriers.– Banks’ characteristics (ownership, size, business

orientation)– Countries’ contractual, regulatory, and competitive

frameworks as well as physical infrastructure and degree of transparency.

Paper’s Objectives

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Caveats

• Difficult to compare barriers across countries due to differences in financial practices (e.g., certain type of accounts might be more common in some countries than others).

• Fees and charges on financial services might reflect differences in the scope and quality of services.

• We focus only on the largest banks and ignore non-bank providers.

• Despite these limitations, we see this paper as a first effort to create consistent indicators of barriers that can lead to financial exclusion.

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• 209 banks across 62 countries

• Sample comprises countries across all levels of financial and economic development.

• Balanced regional coverage. All regions represented.

• Banks are among the largest 5 in each country.– For 60 out of 62 countries the share of deposits exceeded 30% and

for 32 this share exceeds 50%

– The share of loans exceeds 30% in 57 countries and 50% in 28 countries.

Data - The Survey

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Data – The Indicators

Deposits Services

Loans Services

Payment Services

Physical Access

Affordability

Eligibility

Locations to open a deposit account

Ratio of minimum balance needed to open an account to GDP pc.Fees associated with maintaining an account.

Number of documents required to open an account.

Physical Access

Affordability

Eligibility

Locations to submit a loan application

Ratio of minimum balance required for consumer or SME loans to GDP pc.Fees associated with these loans.

Number of days to process a loan application.

AffordabilityCost of transferring a small amount of funds internationally.Fees associated with using ATM cards.

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Data – Minimum Balance to Open Checking Account (% of GDPPC)

Average=12.27Median=0.98

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Data – Annual Fees for a Checking Account (% of GDPPC)

Average=2.49

Median=0.3

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Data – Number of Documents Needed to Open a Checking Account

Average=2.57

Median=2.63

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Data – Minimum Amount Required for SME Loans (% of GDPPC)

Average=408.35

Median=58

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Data – Fees on SME Loans (% of GDPPC)


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Data – Days to Process a SME Loan Application


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Data – Cost to Transfer Funds Internationally (% of US$250)

Median=6.37

Average=6.33

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Barriers, Economic, and Financial Development

GDP per capita

Private Credit / GDP

Number of Places to Open Deposit Account (Out of 3) -0.105 -0.015Minimum Balance to Open Checking Account (% of GDPPC) -0.288** -0.318**Checking Account Annual Fee (% of GDPPC) -0.26* -0.302**Number of Documents Needed to Open Checking Account (Out of 5) -0.422*** -0.349**

Number of Places to Submit Loan Application (out of 5) 0.468*** 0.539***Minimum Amount SME Loan (% of GDPPC) -0.284** -0.336**Fee SME Loan (% of GDPPC)s -0.113 -0.156Days to Process SME Loan Applications -0.356*** -0.331**Cost to Transfer Funds Internationally (% of 250) -0.164 -0.088Fee for Using ATM Card -0.214 -0.16

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Barriers and Outreach

Number of branches per 100,000 People

Number of Loans Per 1000 People

Number of Deposits per 1000 People

Penetration (% of adults with access to a financial institution)

Number of Places to Open Deposit Account (Out of 3) -0.181 -0.375* -0.223 -0.266**Minimum Balance to Open Checking Account (% of GDPPC) -0.286** -0.341 -0.464*** -0.373***Checking Account Annual Fee (% of GDPPC) -0.231 -0.202 -0.318* -0.341**Number of Documents Needed to Open Checking Account (Out of 5) -0.401*** -0.187 -0.42** -0.462***Number of Places to Submit Loan Application (out of 5) 0.445*** 0.633*** 0.427** 0.475***Minimum Amount SME Loan (% of GDPPC) -0.268* -0.329 -0.412** -0.369***Fee SME Loan (% of GDPPC)s -0.128 -0.204 -0.242 -0.13Days to Process SME Loan Applications -0.313** -0.383* -0.37** -0.292**Cost to Transfer Funds Internationally (% of 250) -0.107 -0.091 -0.278 -0.164Fee for Using ATM Card -0.292* -0.225 -0.376* -0.257*

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Barriers and Firm Financing Obstacles

access to finance

cost of finance

Number of Places to Open Deposit Account (Out of 3) -0.051 -0.048Minimum Balance to Open Checking Account (% of GDPPC) 0.332** 0.32**

Checking Account Annual Fee (% of GDPPC) 0.368** 0.513***Number of Documents Needed to Open Checking Account (Out of 5) 0.464*** 0.37**

Number of Places to Submit Loan Application (out of 5) -0.362** -0.369**

Minimum Amount SME Loan (% of GDPPC) 0.153 0.112Fee SME Loan (% of GDPPC)s 0.108 0.225Days to Process SME Loan Applications 0.246 0.226

Cost to Transfer Funds Internationally (% of 250) -0.038 0.062Fee for Using ATM Card 0.203 0.183

Business constraints

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• We conduct back-of-the-envelope calculations of the extent of financial exclusion.

• We combine income and income distribution data with our data on deposit account fees to compute the share of the population that cannot afford financial services.

• In 10 out of 48 countries where we could do calculations based on checking account fees, at least 30% of the population cannot afford checking accounts.

• In 7 countries, at least 50 % of the population was excluded.

Barriers and Financial Exclusion

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What Explains Banking Barriers?- Results

Bank Characteristics

• Theory offers mixed predictions as to the impact of bank size and ownership type on the extent of barriers.

We find:1. Bank size is correlated with lower barriers.

2. Some evidence that foreign banks charge higher deposit fees, but they are not associated with higher barriers in other respects.

3. Government banks are not associated with lower barriers. Bank customers face higher barriers to credit services in systems which are predominantly government owned.

4. Correlation between business orientation and barriers is mixed.

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Informational and Contractual Environment

• Theory suggests that by helping to overcome informational asymmetries and problems of adverse selection and moral hazard better informational and contractual environments can lead to lower banking barriers.

• We find a significant association between the efficiency of contractual and informational frameworks and lower barriers.Surprisingly, this is more so for deposit barriers.

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Market structure

1. Evidence of lower barriers to deposit services in banking system with greater foreign bank presence.

2. In systems that are predominantly government-owned, bank customers face greater restrictions in terms of where to apply for loans and the time it takes to process them.

3. Contestability is associated with lower barriers.

4. There is no consistent relationship between market structure (concentration) and barriers.

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Regulatory and supervisory framework

1. Greater restrictions to banking freedom are linked to higher barriers.

2. More supervisory powers are also associated with higher barriers.

3. More reliance on private monitoring is correlated with lower barriers.

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Transparency• We explore the association between barriers and a measure of

transparency/freedom across countries.

• Banks in countries where a greater share of the media is controlled by the government have higher barriers.

Physical infrastructure

• The quality of physical infrastructure, which is associated with the costs of doing business for banks, can explain cross-country variation in many barriers to banking.

• Barriers are higher in countries with higher electric power transmission and distribution losses as a % of output.

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• First step in identifying and understanding barriers to banking.

• Barriers to banking are negatively associated with lower banking sector outreach and a lower proportion of the adult population with access to financial sector accounts.

• Barriers go hand in hand with greater firm financial constraints.

• Evidence that factors traditionally associated with greater financial depth such as the availability of credit information systems, the protection of creditor rights, and the cost of contract enforcement are significantly associated with barriers.

• More competitive banking systems are associated with lower barriers, but there is no clear correlations with the actual market structure.

Conclusions

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• Government banks are not associated with lower banking barriers.

• A larger foreign bank share is associated with lower barriers in deposit services.

• Regulatory and supervisory policies that are less restrictive and rely more on private markets are also associated with lower barriers.

• Non-financial factors such as better infrastructure and greater transparency are also associated with lower barriers.

Conclusions (cont.)