Low Income Household Improvement

8/6/2019 Low Income Household Improvement

http://slidepdf.com/reader/full/low-income-household-improvement 1/46

EARD Special Studies

Low-Income Households’

Access to Financial Services

International Experience, Measures forImprovement, and the Future

Nimal A. Fernando



Nimal A. Fernando

Low-Income Households’ Access to Financial Services

International Experience, Measures forImprovement, and the Future

EARD Special Studies

October 2007



ii

© 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 nancial services or low-income households.

1. Access to nance 2. Low-income households

The views expressed in this paper are those o the author and do not necessarily refect the views and policies

o the Asian Development Bank, or its Board o Governors or the governments they represent.

The Asian Development Bank does not guarantee the accuracy o the data included in this publication and

accepts no responsibility or any consequences o their use.

Use o the term “country” does not imply any judgment by the author or the Asian Development Bank as to

the legal or other status o any territorial entity.

This publication is available on the Asian Develoment Bank’s micronance web site:

http://www.adb.org/micronance

Nimal A. Fernando is Practice Leader (Micronance) in the East Asia Department

o the Asian Development Bank



iii

CONTENTS

Page

Abbreviations

Foreword v

Abstract

I. Introduction 1

II. Low-Income Households’ Demand or Financial Services 3

III. Dimensions o the Access Problem 4

IV. Factors Underlying Low Access 11

V. Overview o Cross-Country Experience 15

VI. Measures to Improve Access to Finance 26

VII. The Future o Access to Finance 30

VIII. Conclusions

Reerences and Websites 34



iv

ABBREVIATIONS

ADB – Asian Development Bank

ASA – Association or Social Advancement

BRI – Bank Rakyat Indonesia

IRDA Insurance Regulatory and Development Authority (India)

MFI – micronance institution

NGO – nongovernment organization

PRC – People’s Republic o China

RFAS – Rural Finance Access Survey

ROA – return on assets

ROE – return on equity

SHG – sel-help group

SMEs – small and medium-size enterprises

WOCCU – World Council o Credit Unions



v

FOREWORD

A

ccess to nancial services plays an important role

in inclusive development. Broader access makes

it possible or low-income households to not only

make use o economic opportunities but also improve

their health, education, and other social indicators

thus signiicantly improving their socioeconomic

well-being. However, in most developing countries,

a majority o the population, low-income people in

particular, do not have access to nancial services

rom ormal and semiormal sources. Even those who

have gained access owing to recent developments in

nancial services or the low-income people are oten

underserved. In the Asia and Pacic region alone, more

than 300 million households suer rom lack o access

to nancial services rom the ormal and semiormal

sectors. As a result, many o these households are

compelled to rely on inormal sources o nance. I

inclusive development is to become a reality, this

problem must be addressed head-on and as early as

possible.

This paper discusses dierent dimensions o the

problem o access to nance o low-income people

and provides cross-country experience in improving

access to highlight the diversity o approaches that

dierent countries ollow. In addition, the paper

proposes a number o measures to trigger a more

powerul 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 o the

gravity o the problem o access to nance o low-

income households, and ormulate and implement

policies and other measures to make a signicant dent

in the problem, thus enabling millions o unserved

and underserved low-income households to actively

participate in, and benet rom, the development

process.

H. Satish Rao

Director General

East Asia Department

Asian Development Bank



vi

ABSTRACT

Formal inancial sectors in most developing

economies serve only a minority, oten no more

than 20–30% o the population. Most households

do not have access to even basic nancial services.

A majority o those who do not have access are

concentrated in low-income categories. Even

those low-income households who have access to

nance are underserved both in terms o quantity

and quality o products and services. Access to

nance is not a magic bullet capable o liting poor

people out o poverty. However, there is consensus

that better access can play a potentially key role

in inclusive growth and development. Hence, the

problem o lack o access to nance or a majority

o the people deserves a great deal o attention and

must be addressed head-on. This paper discusses

dierent dimensions o the access problem and

provides global experience in improving access or

low-income households. The paper highlights the

diversity o approaches adopted and the institutional

modalities used by dierent countries. It concludes

that the global experience provides useul insights or

policy makers and practitioners who are committed

to address the issue. While many stakeholders have

to participate in the eorts to improve access to

nance in quantitative and qualitative terms, the

cross-country experience and the gravity o the access

problem suggest that governments have a major role

to play. Government role, however, must be ocused

on promoting the important role that private sector

nancial institutions could play in this task.



vii

“The biggest challenge or developing economies

is to get the banks to the unbanked, rather thanto get the unbanked to the banks.”

Brian Richardson

Managing Director

Wizzit (cellphone-based banking acility)

South Arica

“Poorly unctioning banks that simply unnel credit

to connected parties and elites slow growth and

exert a disproportionately negative infuence on the

poor and small businesses by depriving them o thecapital they need to succeed. Unortunately, billions

o people live in countries with poorly unctioning

banks. Thus, banking policies matter because banks

infuence the ability o 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.



viii



I. INTRODUCTION1

I

n developed economies, ormal nancial sectors

serve a majority. For example, 99% o the population

o Denmark, 96% o the population o Germany, 91%

o the population o the Unites States o America, and

96% o the population o France has a bank account

(Peachy and Roe. 2004, 31). The opposite is true,

unortunately, or developing countries. According

to the World Savings Banks Institute (2004), only 20%

o the population in most developing economies

has access to ormal nancial services. In a typical

developing economy in the Asia and Pacic region, the

ormal nancial system at best serves no more than

20–30% o the population, and excludes 70–80%, the

vast majority o whom are low-income households in

rural areas. With rapid urbanization, rural-to-urban

migration, and increasing urban poverty, the share o

low-income people without access to nance in urban

areas is also increasing in many countries.

Although access to nance is a seemingly simple

concept, measuring access to nance is not easy partly

because it is dierent rom actual usage o nancial

services. A person may be said to have access to

nancial services i he or she is able to use ormal or

semiormal nancial services in an appropriate orm

at reasonable prices when such services are required.

Thus, some o those who do not use nancial 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 o scope o services

or institutional types. Similarly, certain occupational

groups or ethnic groups may have access while others

may not (gure 1). However, because data on access

to nance and its various dimensions are dicult to

collect and extremely limited, it is common to use data

on usage as a proxy. Although the usage data may not

tell the ull story, they can illustrate many aspects o

the multidimensional access problem.

Introduction

1 The author grateully acknowledges the comments and suggestions o Nimal Sanderatne, Geetha Nagarajan and Ying Qian on an earlierversion o 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 or any errors o omission or interpretations in the paper.

• Apersonwhorequiresuseofformalorsemiformalfinancialservicesisabletousetheserviceswhenhe/shewantstodoso.

• Apersonhasaccessonlytosomeproductsandservicesprovidedbytheformalandsemiformalsources.Forexample,somepeoplemayhaveaccesstodepositfacilitiesbutnoaccesstocreditfacilitiesorinsuranceproducts.

• Somepeoplemayhaveaccesstoservicesthatsemiformalinstitutionsprovidebutnoaccesstothoseprovidedbymainstreambankinginstitutions.Orsomepeoplemayhaveaccessonlytoservicesofstate-ownedfinancialinstitutions.

• Apersonmayhaveaccessonlytoapre-specifiedsmallamountofcreditwhichdoesnotfullymeetthedemand.

• Apersonmayhaveaccessbutnotatcompetitiveprices.

• Apersonmayhaveaccessonlytopoorqualityproductsandservices.

• Onlymenmayhaveaccesswhilewomenmaynot.

• Youthandelderlypersonsmaynothaveaccesswhileothersmay.

• Onlycertainoccupationalorethnicgroupsandliteratepersonsmayhaveaccess

Full Access

Partial Access

Scope dimension

Institutional dimension

Quantity dimension

Price dimension

Quality dimension

Gender dimension

Age dimension

Other dimensions

Figure 1: Dimensions of Access to Finance



Given that inclusive development is a widely

accepted development objective, the lack o access

to nance or a majority o the population o these

countries must be considered a undamental faw in

the ormal nancial systems because it reinorces the

vicious circle o both income and non-income poverty.

Access to nance, though

not a magic bullet by any

measure, could play a

potentially signiicant

role in eorts to reduce

poverty. Like the rich,

poor households can

ben e it r o m c r edit ,

savings, payment and

insurance services, and

money transer acilities. Rutherord (2000) in his

excellent book, The Poor and Their Money, even

argues that the poor need access to nancial services

much more than the rich simply because the poor

have little money. Such services help the poor manage

their risks, smoothen consumption, take advantage

o protable economic opportunities, build income-

earning and other assets, and improve their standards

o living (ADB 2005; Helms 2006; United Nations

2006). Thus, access to ormal nancial services can

prooundly impact on

the quality o lie o low-

income households. AsRajan and Zingales (2004,

28) noted, “the limited

access to nance severely

r edu c es the c ho ic es

citizens have in determining the way they work and

live.” Without broader access to nance, only the rich

and connected people are able to take advantage o

economic opportunities. Also, when a majority o

the population is excluded rom access to nancial

services, it can signicantly and adversely impact

on the ecient allocation o nancial and physical

resources, economic growth, income and non-income

inequalities, and the distribution o benets in an

economy. Households rom Indian villages without

access to credit markets tend to reduce their children’s

schooling when they receive transitory shocks

more than households

with greater access to

nancial services ( Jacoby

and Skouias1997). The

adverse eects o lack

o access to inancial

s e r v i c e s c o u l d a l s o

s p i l l o v e r t o u t u r e

generations. In general,

lack o access to nancial

services imposes signicant direct and indirect costs

on low-income households and the economy.

The twin purposes o this paper are to briefy

discuss international experience on eorts to expand

the access to nance or low-income households and

draw some lessons rom that experience. Section 2 o

this paper describes the demand or nancial services

by the poor and low-income households. Section

3 ocuses on dierent dimensions o the access

problem. Section 4 discusses actors underlying low

access. Section 5 looks at

cross-country experience

on expanding inancialservices or low-income

households and explain

c o u n tr ies tha t ha ve

signicantly progressed

on this ront and the strategies they have adopted.

The section also discusses why some other countries

have ailed to make signicant progress. Section 6

discusses measures to improve access while section

7 looks into the uture o access to nance. Section 8

presents conclusions.

Access to nance, though not a magic bullet by

any measure, could play a potentially signicant

role in eorts to reduce poverty. Like the rich,

poor households can beneit rom credit,

savings, payment and insurance services, and

money transer acilities.

As Rajan and Zingales (2004, 28) noted, “the

limited access to nance severely reduces the

choices citizens have in determining the way

they work and live.”



Low-Income Households’ Demand or Financial Services

II. LOW-INCOME HOUSEHOLDS’ DEMAND

FOR FINANCIAL SERVICES

Since the early 1980s, the conventional ormalinancial sectors have experienced a dramatic

growth. But the growth has been highly uneven and

occurred mainly at the middle and upper ends o the

nancial markets. This lop-sided growth, however,

has not been a result o lack o demand or nancial

services at the low end

o the markets. In the

Asia and Paciic region

alone, about 1.9 billion

are poor, near-poor, and

vulnerable in about 380

mil l io n ho u seho l ds,

mostly concentrated in

rural areas. The demand

or nancial services rom

these low-income households is substantial, and their

demand covers a wide range o products and services.

First, these households demand access to sae,

convenient, and appropriate deposit acilities. Second,

they demand access to credit at minimum transaction

costs and at reasonable prices or a wide range o

purposes. Third, they demand access to payment and

money transer services. In many countries, rural-to-

urban migration has resulted in signicant remittance

fows rom urban to rural areas. This is true or large

countries such as the People’s Republic o China (PRC)

and India as well as or relatively small countries

such as Cambodia and Viet Nam. Fourth, emerging

evidence suggests that demand or microinsurance

products and services is signicant. A recent study

(United Nations Development Programme [UNDP]

2007, 1), or example, estimated that the potential

market or microinsurance in India could exceed $1.4

billion in value terms. Fith, the demand or nancial

literacy services among low-income households is

also vast.

A signiicant part o the demand or depositservices and credit is generally directed at the inormal

markets. Lacking access to the kind o products

and convenient services they require rom ormal

sources, many households keep their cash at home,

with inormal savings clubs or in the orm o various

nonnancial assets such

as livestock as most rural

households do in the

Lao People’s Democratic

Republic (Lao PDR).

Similarly, households

also rely on sel-savings

or inormal sources to

nance investments and

smooth consumption.

For insurance, they rely on inormal arrangements

which rest on reciprocity in many cases. For money

transers also, they use inormal mechanisms. In

general, the eective prices that the poor and low-

income households pay in inormal markets or these

services tend to be high. Many people who save cash in

inormal markets suer signicant losses. Those who

borrow rom inormal commercial credit markets oten

have to pay very high interest rates and are unable to

get medium- to long-term loans. In addition, inormal

markets are inecient in nancial intermediation.

While many admit the drawbacks o inormal

sources o nancial services, their extensive nature

and persistent role in meeting the demand or nancial

services among low-income households conirm

beyond any doubt the importance o nancial services

in the lives o these households. Also, the widespread

existence o inormal markets conrms the act that

there are important supply-side constraints in the

ormal nancial system on the access to nancial

services or those at the low end o the market.

In the Asia and Pacic region alone, about 1.9

billion are poor, near-poor, and vulnerable

in about 380 million households, mostly

concentrated in rural areas. The demand orinancial services rom these low-income

households is substantial, and their demand

covers a wide range o products and services.



III. DIMENSIONS OF THE ACCESS PROBLEM

The problem o access to nance or low-incomehouseholds has dierent dimensions (gure 2).

It is necessary to look at these to better understand

the gravity o the problem. The most conspicuous

dimension is that a majority o the low-income

population in developing countries do not have

access at all even to very basic nancial services. The

second dimension is that a large majority o the limited

number o those who have access are underserved in

terms o quality and quantity o products and services.

In many developing countries in the region, in

aggregate terms, more low-income people have accessto deposit services than nondeposit nancial services.

A third dimension is that access to a signiicant

proportion o low-income households is dependent

on unsustainable, subsidy-dependent, and poorly

perorming institutions.

Reliable and up-to-date data on dierentdimensions o access to nance in developing countries

are scanty. However, available country-level evidence

o access to ormal nancial services is revealing: In

India, about 73% o 89 million armer-households have

no access to ormal sources o credit (Thorat 2007). The

World Bank-National Council o Applied Economic

Research, Rural Finance Access Survey (RFAS) 2003 in

India2 (World Bank 2004), indicated that 79% o the

households do not have access to ormal loans and

59% do not have access to a savings account in the

ormal sector. The access problem was more severe orthe poorer households: 87% o the poorest households

surveyed did not have access to a loan and 71% did

not have access to a savings account rom the ormal

nancial system. The problem was not insignicant

even among small armers—68% without access to

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

Figure 2: Dimensions of the Access Problem

Low-income households andtheir micro- and small enterprises

Majority with no access to nance at all A small minority with access to nance

Very large proportion is underserved Very small proportion with ull access

Many have access todeposit services o state-

owned fnancial institutions

and cooperatives

A signicant proportionhave access only to

credit rom microcredit

institutions

Signicant numberdepend on services

o unsustainable

institutions

Proportion with accessto banking services is

very limited

Access to insuranceservices is extremely

limited

• Clients have to pay high transactions costs

• Withdrawing unds isnot always easy

• Transactions costs arehigh

• Poor credit quality • Client transactionscosts are high

• Processing time long • High minimum loan

requirements• Banks are geared to

serve high-incomegroups

• Productincompatability ishigh

• Transparency low



Dimensions o the Access Problem

a loan and 45% without access to a savings account.

Over 82% o the households surveyed in RFAS 2003

also did not have any insurance. Another study by

Diamond Management and Technology Consultants

(2006) concluded that less than 20% o rural Indians

have access to ormal nancial services, and about 185

million “potentially bankable” people in rural India

do not have a bank account. However, the problem

o access to nance is not conned to rural areas.

According to the Banking Ombudsman o Karnataka

State (Business Line 2006), 63% o the people in the

country do not have the benet o banking acilities.

The nancially excluded sections largely comprise

marginal armers, landless laborers, sel-employed and

unorganized sector enterprises, urban slum dwellers,

ethnic minorities, migrants, and women. Most o the

excluded people are concentrated in the North East,

Eastern, and Central regions (Thorat 2007). Access to nance is no better in Pakistan. Only

about 30% o adults have bank accounts and the

total number o borrowers rom banking institutions

constitutes only 3% o the population. There are only

171 deposit accounts and 30 loan accounts per 1,000

people. Agriculture and small and medium enterprise

credit reaches only 1.6 million and 0.3 million

borrowers, respectively (Akhtar 2007, 36). Formal

and semiormal nancial institutions reach no more

than 10% o the potential market at the low end. The

number o active borrowers served by micronanceinstitutions at the end o 2005 was estimated at 6% o

the potential market o 10 million people (Burki and

Chen 2006, 7). Rural people suer the most rom the

lack o access to nance.

According to Akhtar (2007,

36) who is the Governor o

the State Bank o Pakistan

(central bank), 67% o

the rural population

is underserved by the

ormal banking systembecause only 6% o bank branch networks reach into

rural areas.

Nepal is another country with acute problems

in access to nance. A recent survey (2006) on access

to inancial services estimated that only 52.3% o

Nepalese households are served by a ormal or

semiormal nancial institution while about 27.6%

are served by inormal sources. An estimated 19.6%

remained nancially excluded, with no service rom

the ormal or inormal inancial sector. The same

survey ound that only 26% o households have a

bank account. However, banks ocus on urban areas

and the wealthiest. In rural Nepal, only 16% o the

households have a bank account, or example. Again

this is heavily concentrated in the upper income

groups. Only 49% o the households have a deposit

account with any nancial institution. An estimated

69% o oreign remittances come through inormal

channels—usually amily and riends—even among

households with a bank account. Despite government

eorts, ormal nancial institutions do not serve the

needs o most o the Nepalese population, particularly

the low-income people (Ferrari et. al. 2007).

A large number o rural people in the PRC also do

not have access to banking services. The Organisation

or Economic Co-operation and Development (2004)reports the results o a recent national survey showing

that only 16% o armers in the PRC have access to

ormal or inormal credit. The People’s Bank o China

(the central bank) estimates (www.undp.org.cn)

that 36% (82 million) o Chinese rural households

currently have access to nancial services, primarily

through Rural Credit Cooperatives (RCCs). However,

according to the members o the agriculture and

rural development task orce at the China Council

or International Cooperation on Environment and

Development (CCICED), although RCCs cover a vastarea o the countryside with an extensive network, their

provision o loans to small-arm households is limited.

Only 25% o smallholders nationwide have obtained

a RCC loan (CCICED

Agriculture and Rural

Development Task Force

Members 2005. 356). The

small and medium-sized

enterprises (SMEs) in

the PRC also receive less

than 10% o bank creditthough their share in gross domestic product is about

50%, and 40% o SMEs have no debt mainly because

they have no easy access to ormal sources (OECD

2005).

A recent national survey showed that more than

90% o the rural population in the Lao PDR do not have

access to ormal nancial services. The main service

provider, the state-owned Agricultural Promotion

According to the Governor o the State Bank

o Pakistan, 67% o the rural population is

underserved by the ormal banking system

because only 6% o bank branch networks reach

into rural areas.



Bank, serves about 5% o rural households while

another 5% are served by semiormal institutions.

With little access to reliable ormal sector acilities,

most people in rural areas o the Lao PDR continue to

hold cash at home or save in nonnancial assets. In

early 2004, rural households held an estimated $216

million equivalent in cash savings, and cash in hand

accounted or about 40% o this amount. The estimated

total noncash savings o rural households—savings in

the orm o livestock, gold, jewelry, housing materials,

etc.—were much higher, exceeding the cash savings

by a actor o 2.75 (Coleman and Wynne-Williams

2006, 46–50).

Surprisingly, even in such countries as Indonesia

where nancial services

o r t h e p o o r h a v e

expanded because o

successul institutions,the access problems

remain signiicant. A

household survey that the

Bank Rakyat Indonesia

(BRI) and a group o

researchers rom Harvard

University carried out in

October 2000 concluded

that 68% o the sample

h o u s e h o l d s d i d n o t

have credit rom any ormal or inormal inancialinstitutions, and that 62% o the sample households

did not have savings accounts in any ormal or

inormal nancial institutions. The same survey also

showed that the proportions were high even or the

group o households with viable enterprises: 58% had

no loans rom nancial institutions and 52% had no

savings in a nancial institution (BRI 2001, 36–37).

While the proportion o the sel-excluded among these

is not clear, the data tend to show that the number o

households without access to nancial services could

be large.The other dimension o the access problem is

that a large majority o the low-income households

with access are simply underserved both in terms

o quality and quantity o products and services.

The underserved category suers rom a number o

problems.

A signiicant proportion o those with access

depend on the services provided by inancially

unsustainable, heavily subsidy-dependent, and poorly

perorming institutions. Whether these institutions

can maintain, let alone increase, their outreach and

the quality o the services they provide in the uture

remains uncertain. Perhaps one o the best examples

or this is provided by the state-owned agricultural

development bank in Bangladesh.3 This bank claims

to reach over 3 million borrowers. However, the bank

relies excessively on resources provided by the central

bank to continue its operations and is saddled with

too many operational

p r o b l e m s . T h e

nonperorming assets

o the bank amountedto 50% o total assets at

the end o June 2006.

Similarly, the Bangladesh

R u r a l D e v e l o p m e n t

Board (BRDB) claims

to reach over 4 million

clients. However, the

nancial and operational

perormance o BRDB is

extremely unsatisactory:

its operations lack transparency; are characterized by poor loan recovery rates; and involve large government

subsidies, being a state agency. In addition, rent seeking

is widespread among its eld-level employees.

Viet Nam also has a large-scale state-owned

institution—Vietnam Bank or Social Policies (VBSP)—

that provides access to credit or low-income

households at highly subsidized interest rates. VBSP

reported 4.195 million active borrowers with a total o

$1.149 billion in gross loans outstanding at the end o

2006. However, its return on assets (ROA) and return

on equity (ROE) have continued to be signicantly negative in the last 3 years or which data are available

(table 1). At the end o 2006, ROA and ROE were –4.04%

and –13.69%. The continued operations o VBSP as a

large-scale credit agency is thus dependent on whether

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

Surprisingly, even in such countries as Indonesia

where inancial services or the poor have

expanded because o successul institutions, the

access problems remain signicant.

A signicant proportion o those with access

depend on the services provided by nancially

unsustainable, heavily subsidy-dependent, and

poorly perorming institutions.




it is able to obtain government subsidies without

interruption.

The rural credit cooperatives (RCCs) in the

PRC provide deposit

and lending services to

a large number o low-

in c o me ho u seho l ds.

But RCCs have seriousn o n per o r min g l o a n

( N P L ) p r o b l e m s —

according to dierent

estimates their average

NPL ratio ranged rom 26% to 50% (Dolven and Kuhn

2004). They are also beset with serious governance and

viability problems. The Government has initiated a

nationwide reorm program to address their nancial

and operational problems. The same is true or most

primary agricultural credit societies in India which

claim to have over 90 million members. A recent pressreport (Financial Express 2006) stated that majority

o these societies are in shambles or want o sound

nancial practices. Sri Lanka’s cooperative rural banks

provide basic lending and deposit services to over 1.5

million low-income households. But they also suer

rom severe governance and operational problems

(ADB 2003). India Post has a network o over 155,000

post oces, 89% o which are located in rural areas.

India Post is India’s largest savings institution with

more than $60 billion in outstanding deposits and

over 116 million savings accounts, mostly rom low-income households. However, India Post continues

to make substantial losses and relies on government

subsidies. Postal savings banks in many other Asian

developing economies such as Bangladesh, Pakistan,4

and Indonesia have similar problems.

4 Pakistan’s post ofce network consists o 12,343 post ofces. These ofces manage 4 million savings accounts (Akhtar 2007, 37).

While more low-income households have access

to deposit services than to other nancial services, the

quality o deposit services provided by most ormal

and semiormal institutions remains questionable.

First, the transaction costs associated with the

deposit services o most ormal institutions remain

too high or the users rom low-income households.

Most rural people have to spend time and money to

make deposits—walking, cycling, or riding to bank

oces. In some countries, depositors have to incur

other expenses. For example, in Cambodia, “savers

who make deposits in banking institutions expect to

pay a commission to the teller or the sae deposit o

their money” (Clark 2006,

111). Second, restrictions

on withdrawal o unds

reduce their value as

a source o liquidity.Third, most developing

countries have a long way

to go in ensuring saety o

poor people’s deposits

in nancial institutions including cooperatives that

they rely on.

The proportion o low-income people with

access to credit rom mainstream banking institutions

continues to be insigniicant in most developing

countries. Also, transaction costs that poor and

low-income households have to bear when they usethe acilities provided by these institutions remain

high. Generally, to obtain a loan rom a bank, a low-

income person has to visit the institution several times

and go through cumbersome procedures. Banks in

Bangladesh, Pakistan, and Philippines take more than

one month to process an SME loan application (Beck

et. al. 2007, 14). In many countries, low-income clients

have to pay bribes to have access to ormal nancial

services, particularly to credit rom state-owned banks.

According to some studies, in India, bribe payments

are estimated to be around 10% o the loan amount(Diamond Management and Technology Consultants

2006, 9). The RFAS 2003 estimated the bribe payments

to be in the range o 10–20% o the loan amount. On

average, 27% o sample households who borrowed

rom a regional rural bank report having to pay a

00 00 00

Numberofactiveborrowers 3,740,179 4,125,264 4,695,986

Loansbelow$300(%) 80.00 70.00 50.00

Clientsbelowpovertyline(%) 86.00 86.00 83.00

ROA (4.21) (4.56) (4.04)

ROE (12.89) (15.29) (13.69)

Table 1: Vietnam Bank for Social Policiesa

ROA=returnonassets,ROE=returnonequity.aPositionatendofeachyear.

Source:www.mixmarket.org.

While more low-income households have

access to deposit services than to other nancial

services, the quality o deposit services providedby most ormal and semiormal institutions

remains questionable.



bribe to get the loan; a little under 27% o households

who borrowed rom a commercial bank paid a bribe,

and 10% o households who borrowed rom a credit

cooperative paid a bribe (World Bank 2004, 15). In

Azerbaijan, “corruption in the banking sector has been

observed to be signicant. Bankers charge ees as a

bribe that can sometimes account or 20–30% o the

loans” (Lamberte and Fitchett 2006, 110). Although

data are not available, one should not assume that this

problem does not exist or low-income households in

other developing countries.

Low-income people with access to credit are too

heavily dependent on the services that specialized

microinance institutions (MFIs) provide. While

MFIs have signiicantly

improved access to credit

or low-income people,

women in particular, withew exceptions, much

o the credit provided

by MFIs is or short-

term income-generating

activities. Little is provided or housing improvements,

education, health, consumption smoothing, and

emergencies. Credit quality remains generally low.

Beyond credit, other basic inancial services such

as deposit and domestic money transer services

remain peripheral in the case o most MFIs, although

there are exceptions such as the unit desas o the BRI,Grameen Bank, and ACLEDA Bank, which have made

signiicant progress in broadening their inancial

services (Rutherord 2006; Clark 2006).

In most countries, majority o the population do

not have access to ormal insurance services, although

microinsurance services in a number o countries

have begun to expand in recent years. About 86% o

Indonesians were not covered by any health insurance

scheme in 2001. In India, about 90% o the population

is not served by the insurance industry. The exclusion

rates in other countries are also alarmingly high: 97%in Bangladesh, 97% in Pakistan, and 95% in Nepal.

5 Insurance penetration ratio is an indicator used to measure the level o risk awareness in the population and signifcance o insurance inan economy.

A recent global study estimated the number o lives

covered by ormal insurance policies in 100 poorest

countries at no more than 78 million (Roth et. al. 2007).

The comparatively low insurance penetration ratios5

in developing countries shown in table 2 refect the

access problem.

A majority o the population in most developing

countries in the Pacic sub-region also do not have

access to ormal or semi-ormal nancial services.

A recent inancial sector assessment covering the

Solomon Islands, Vanuatu, Samoa, Tuvalu and Kiribati

noted that only about 20% o the population o these

ve countries have access to nancial services. Most

o the banking is conducted in the capital cities.

In the Solomon Islands,

about 90% o all banking

sector savings accounts

and loan are based in thebranches o the capital

city. The percentage o

the rural population that

can access the branches

in the provinces is small because o logistic constraints

(Flaming and Mathison 2007).

aInsurancepenetrationisgrossinsurance premiumas a% ofgrossdomestic

product.Source:SwissRe.2006.

Table 2: Insurance Penetration Ratioa:Selected Countries, 2005

Developing Countries Insurance Penetration(%)

Bangladesh 0.61

People’sRepublicofChina 2.70

India 3.14

Indonesia 1.52

Pakistan 0.67

Philippines 1.48

SriLanka 1.46

Developed Countries

Japan 10.54

UnitedKingdom 12.45

UnitedStatesofAmerica 9.15

RepublicofKorea 10.25

Low-income people with access to credit are

too heavily dependent on the services that

specialized microinance institutions (MFIs)

provide.




Thus, developing Asia clearly suers rom a

massive nancial access problem quantitatively and

qualitatively. The problem

is more acute in large

countries such as the

PRC, India, and Pakistan.

As a result, vast numbers

o poor and low-income

people in the region are

unable to take advantage

o economic opportunities and gainully employ

themselves and their amily members, and create

employment opportunities or others; unable to build

assets that increase their income-earning capacity and

quality o lie; unable to ensure that their children get

basic primary and secondary education; and unable

to manage the risks o vulnerabilities resulting rom

various types o external shocks that adversely aecttheir already low living standards. Many small armers

and small nonarm enterprise operators who are just

above the poverty line also suer rom lack o access

to nancial services. Faced with credit constraints

many small armers use ewer cash inputs leading

to lower incomes. They are also compelled to rely on

sel-nance6 and inormal markets. Many o these

people are orced by the circumstances to pay a

“poverty premium” when they access the services o

commercial inormal markets. Although it is not the

only cause, lack o access to nancial services lies at

the root o the persistent

poverty and inequality

p r o b l e m s i n m o s t

developing societies.

Given the severity o

the problem, widespread

a n d a r - r e a c h i n g

economic and social

implications o lack o access to nancial services

(gure 3) and the potentially critical role that nance

can play in inclusive development, closing the huge

gap between the demand or nancial services rom

low-income households and its supply rom the

ormal and semiormal sources in both quantitative

and qualitative terms may be considered one o

the biggest development challenges acing mostdeveloping countries in Asia and other regions. The

international experience provides that some countries

have remarkably progressed in improving access to

nance or low-income households while some others

have not been able to achieve relatively successul

results. An examination o these dierent experiences

suggests insights and lessons or the policy makers

and practitioners who are serious about addressing

this important development issue.

Developing Asia clearly suers rom a massive

inancial access problem quantitatively and

qualitatively. The problem is more acute in large

countries such as the PRC, India, and Pakistan.

6 McKinnon (1973, 30) defnes sel-fnance “as the investment within a particular enterprise (or economic unit) o savings accumulated inthat enterprise.” Sel-fnance takes place in all types o households and enterprises, rom rich to poor people, and rom microenterprisesto the very large-scale multinational frms. The main disadvantage o sel-fnance is that a household’s or enterprise’s resources may notmatch those required to harness an investment opportunity within a reasonable time rame. Thus, a household or an enterprise may not

be able to take advantage o a high-productivity investment opportunity. The scale o an economic activity or an enterprise will have to belimited by the amount o sel-fnance. The shortcomings o sel-fnance will be more pronounced when investments are characterized by indivisibilities. A poor household may require unds to buy cattle, a sewing machine, or a bag o ertilizer. The amount o unds required may be large relative to the income o a household living at subsistence level. Hence, the household may not be able to fnance the investment inone lump sum but may be able to do so in installments. A poor household that is not able to sel-fnance 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 ormidable barriers to the adoption o even the simplest and most productive innovations. The importantpoint, however, is the virtual impossibility o a poor armer’s fnancing rom his current savings the whole o the balanced investmentneeded to adopt the new technology. Access to external fnancial resources is likely to be necessary over the one or two years when thechanges take place. Without this access, the constraint o sel-fnance sharply biases investment strategy toward marginal variations withinthe traditional technology.” Sel-fnance limits specialization, adoption o better technology, growth in productivity, and thus economicgrowth and development (ADB 2000, 44–45). Conversely, access to fnance promotes these.



0

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

• Lowerreturnsonsavings

• Valueofsavingserodebecauseofinflation

• Partial or complete loss of savings due to theft/floods/quality

deteriorationofassets/deathofanimalowingtosickness

• Decrease in risk management capacity and increase invulnerability

• Foregoneincomeduetosub-optimalinvestments.Scaleofexisting

economicactivityremainsmicro.

• Foregone income because of inability to take advantage of a

potentiallyhigh-returninvestmentopportunity

• Low-householdincome

• Underemploymentofhouseholdlabor

• Childrenunabletogetbettereducation

• Householdmembermalnutrition

• Highercostsincurredoninformalsectorborrowings

• Lownetreturnoninvestmentswithinformalborrowings

• Increasedsocioeconomicinequalities

• Increasedseverityofpoverty

• Lossofcashbecauseoftheft,etc.

• Increaseddebtburden

• Hightransactioncosts

• Incurgreatertransactioncosts

• Increaseinhealthproblems

• Increasedseverityofpoverty

• Increaseinhouseholddebt

• Increaseinvulnerability

• Freedomofchoicereduceddrastically

• Lowincome/savings

• Lowsocialdevelopment

• Persistentpoverty

• Greatereconomic/socialinequality

• Increaseingovernmentwelfarecosts• Socialexclusion

Lack of access to formal deposit facilities

• Savingskeptathomeincash

• Savingsinnonfinancialassets(livestock,etc.)

• Incentivestosavereduced

• Savingsreduced

Lack of access to formal credit facilities

• Limit investments to the amount of self-

savingsand/oramountthatcanbeborrowed

frominformalsources

• Foregoprofitableinvestmentopportunities

• Lessabletofinancechildren’seducation

• Lessabletoaffordmedicalexpenses

• Lessabletofinanceconsumptionsmoothing

• Increasedvulnerabilitytoexternalshocks

• Compelled to rely on commercial informal

creditmarkets

Lack of access to domestic money transfer

services

• Carrycashtothedestination

• Use friends/relatives to physically transfer

cash

• Useotherinformalcashcarriers

Lack of access to formal payment services

• Inabilitytomakepaymentsintime

Lack of access to formal insurance services

• Operatewithhigherrisks

• Lessabletofinancemajorhealthexpenses

• Vulnerabilitytoexternalshocksincreased

• Obligationstoextendedfamilyincreased

Total exclusion from formal financial system

• Forcedtorelyonself-savingsand/orinformal

sourcesfortheneededservices

• Increasedpressureforwelfareprograms



Factors Underlying Low Access

IV. FACTORS UNDERLYING LOW ACCESS

A signicant proportion o people excluded romthe ormal nancial system have access to and use

nancial services o the inormal sector. This indicates

that the limited access to ormal or semiormal sources

o inance cannot be solely explained in terms o

market ailure. The persistence o the inormal markets

not only suggests the

importance o inancial

services rom the demand

side, but also reveals

undamental supply-side

constraints in the ormalinancial system. These

constraints vary across countries and are infuenced

by a host o actors such as the stage o nancial sector

development, perceptions o dominant inancial

institutions regarding the business case or providing

nancial services or the excluded, nancial policy and

regulatory system, and the institutional composition

o the nancial system.

A root cause o supply-side constraints is the

conventional view o the potential market consisting

o poor and low-income people. Two interrelated ideasdominate the conventional view. First is that given low-

income levels and lagging social development, there

is little prot potential in the low end o the nancial

markets; hence, the conclusion that market-based

solutions cannot lead to improved nancial services or

low-income people and that the private sector has no

signicant role in this market segment. Second is that

because this market consists o low-income people,

it must be served through government programs and

programs o charitable institutions including social-

mission-oriented nongovernment organizations.Most ormal-sector-established nancial institutions,

international development agencies, and government

policy makers including those working in ministries

o nance, central banks, and national planning andimplementing agencies share these views. Even low-

income people hold similar views, with their deep

suspicion o the intentions and the role o the private

sector. Most o the supply-side actors that contribute to

low access to nance nd their roots in these conventional,

deep-rooted, and widely

held views. This dominant

thinking has contributed

to a “business ailure”

in serving this market,

although much o thelimited access to ormal

inancial services or low-income households is

generally described as “market ailure.”

Perhaps, the most obvious supply-side actor is

the absence o ormal nancial institutions in close

proximity. Thus, many low-income people in remote

rural areas where such acilities are not available

within a reasonable distance tend to rely more on

inormal markets than those in other areas. However,

availability o retail outlets in close proximity does

not oten help i 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 o

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 nance

continues to be dismally low in rural India, particularly

or low-income households, as noted earlier.7 Similarly,

7 However, it is important to note that some studies have highlighted major banking inrastructure defciencies in rural India. For example,according to Diamond Management and Technology Consultants (2006), only 7% o villages have a bank branch and 67% do not even havea post ofce. Availability o brick and mortar acilities may be important, although its signifcance or access to fnance is likely to decreasesignifcantly with new inormation and communication technology that would connect remote rural areas to semiurban or urban-basedacilities.

The persistence o the inormal markets not

only suggests the importance o inancial

services rom the demand side, but also reveals

undamental supply-side constraints in the

ormal nancial system.



in all developing countries, urban areas have much

better banking inrastructure but the majority o low-

income households do not have access to the services

provided by these institutions.

Another major reason or the limited supply is that

established medium- and large-scale conventional

nancial institutions have not yet become major players

in the low end o the nancial markets. First, these

institutions have not been established and organized

to serve the low-end markets. They do not have access

to low-cost inormation on the potential clients at

the low-end markets. Their organizational structures,

cost structures, and products are geared to serve

up-market clients. Given

the higher costs generally

associated with serving

low-income clients, these

nancial institutions ndthat the impetus to move

urther up market is more

powerul than that or

moving down-market. Hence, established, large-scale

conventional nancial institutions seldom attempt

to serve low-income households because the relative

contribution that such a move can make to prot is

smaller.8 The long-held, deep-rooted presumption

that prot is small at the

bottom o the pyramid

market and meeting theirdemand or inancial

(and other) services is the

primary responsibility

o the governments and

charitable organizations

seems to have reinorced this incentive asymmetry.

Managers o conventional medium- and large-scale

institutions who would like to introduce innovative

technology and processes to serve poor clients or

prot will oten nd it dicult to get their proposals

through the resource allocation processes and systems within their institutions.

The incompatibility o services and products

oered by the suppliers with the product and service

requirements o those in the low-end markets has

aggravated the access problem. Oten even low-

income people living in close proximity to ormal

nancial institutions do not have access to products

and services or this reason. The incompatibility may

stem rom a number o actors. The products may have

eatures that are not in line with the socioeconomic

characteristics o clients. A loan product requiring

weekly repayments may not be suitable or a

household whose cash fow does not enable such

repayments. An insurance product whose terms and

conditions are not readily transparent and simple may

not be suitable or people with limited literacy skills.

I having an account with

the bank is required to use

its payment services, some

people may not be able to

actually use those services.The eective price o a

product including client

transaction costs may be

too high. Most migrant workers have been using

inormal money transer services to remit money

because they are relatively cheaper and more

convenient than most ormal mechanisms. Most banks

require high minimum balances or savings accounts,

do not accept savings in

small amounts, and have

restrictions on requency o withdrawals. These

actors have kept millions

o small savers rom using

their deposit acilities

(Rutherord 2000), driving

them to save under the mattress despite the risks such

practices entail. In Nepal, the high required minimum

balance and the cumbersome documentation

requirements to open a savings account limit many

low-income people’s access to deposit services o

banks.In most developing countries procedures

associated with transactions are too complex,

cumbersome, and intimidating or most low-income

8 As Christensen et. al. (2004, 36) noted, “an opportunity that is attractive to a frm that has $50 million in sales and seeks 10 percent top-linegrowth would be unattractive to a frm that has $5 billion in sales and seeks 10 percent top-line growth. A $2.5 million opportunity meets50 percent o the frst frm’s growth needs but only 0.5 percent o the second frm’s growth needs. Which company do you think will placea higher priority on going ater a $2.5 million market?”

The incompatibility o services and products

oered by the suppliers with the product and

service requirements o those in the low-end

markets has aggravated the access problem.

In most developing countries procedures

associated with transactions are too complex,

cumbersome, and intimidating or most low-

income clients, particularly those with low

literacy levels and or poor women.



Factors Underlying Low Access

clients, particularly those with low literacy levels and

or poor women. Most institutions do not have simple,

low-end-market-riendly systems and procedures. In

Bangladesh, more than three documents are required

to open a savings account in a bank and minimum

loan requirements o banks are too high in relation to

the typical requirements o low-income households.

Banks also take more than a month to process a

small enterprise loan application. In some states

o India, a commercial bank takes, on average, 33

weeks to approve a loan (World Bank 2004, 15). More

importantly, banks require marketable collateral or

loans which most low-

income households are

unable to provide. In some

countries, the collateral

requirements are so high

that even middle-classclients are unable to meet

them. In Azerbaijan, or

example, banks usually

require 125–200% collateral as guarantees or loans

and accept only real estate properties in Baku city

as collateral (Lamberte and Fitchett 2006, 110). Most

nancial institutions, including MFIs, do not provide

emergency loans and loans or lie-cycle events or

which eective demand at

the base o the economic

pyramid is substantial. Although poor and low-

income clients demand

simple, no-nonsense, easy

to understand inancial

products and services,

most conventional nancial institutions do not oer

such products and services.

Most supply-side constraints have been reinorced

by, i they are not rooted in, what may be described as

“government ailure.” The global experience provides

ample support to this hypothesis. In general, accessis much lower in countries where governments have

not adopted market-riendly policies toward access

to inance. Where governments have signiicantly

restricted the potential role o the private sector

including NGOs, and restricted the operational

autonomy o nancial services providers (including

that o state-owned inancial institutions with a

social mission to serve the poor) through interest rate

ceilings and other measures, the growth in supply o

services has been sluggish. Also, in countries where

governments have imposed regulatory barriers on,

or not provided adequate legal space to acilitate,

integration o nancial services or the poor into the

mainstream o nance, the growth in supply has been

lackluster. Restrictive government policies on oreign

investments in nancial services or the poor have also

retarded the supply.

Demand-side actors

also explain the limited

access to nance or low-

income people. First, many

poor and low-incomepeople cannot aord to

bear the high eective

costs involved in using

ormal nancial services. In Nepal, an estimated 34%

o the population cannot aord the ees and charges

associated with a bank savings account (Beck et. al.

2007). While a signicant proportion o the excluded

people use services provided by a range o inormal

sources o nance, some

people are even excluded

rom inormal commercialmarkets.9 Many experts

i n m i c r o e n t e r p r i s e

development tend to

assume that millions and

millions o high-return

economic activities in which poor people can invest

their loan proceeds exist. This is ar rom reality. A

closer look at dierent segments o the market or

nancial services or the poor suggests that many

poor households do not have viable economic

opportunities that can generate high enough real rateso return to repay loans at interest rates that enable

nancial institutions to cover their costs, make an

adequate prot, and save some money or a rainy day.

In a typical developing economy in the region, the

9 Inormal fnancial markets consist o two subtypes: noncommercial and commercial. Friends and relatives who provide fnancial serviceson reciprocal arrangements without a proft motive are noncommercial while those who provide loans or proft are commercial.

More importantly, banks require marketable

collateral or loans which most low-income

households are unable to provide. In some

countries, the collateral requirements are so

high that even middle-class clients are unable

to meet them.

Many experts in microenterprise development

tend to assume that millions and millions o high-return economic activities in which poor

people can invest their loan proceeds exist. This

is ar rom reality.



best available investments or many poor households

involve those with moderate real returns (Fernando

2006, 8). Thus, many people who belong to this

category tend to sel-exclude

rom ormal nancial markets

and rely on sel-savings or

reciprocal arrangements to

meet their demand or credit.

Most small and marginal

armers, particularly those in

what is generally described

as less-avored areas all into

this category. As Rajan and Zingales (2004, 113) noted,

“nance cannot create opportunities. It only makes it

easier to exploit them.”

High transaction costs o using ormal nancial

services severely limit the access o low-income people

to ormal nancial services because the incidence o transaction costs is too high on small value transactions.

Transaction costs are the costs o establishing and

conducting nancial relationships: hence, they are

admission tickets to nancial markets (Von Pischke

1991, 11). High transaction costs arise rom a variety

o actors such as lack o retail outlets in close

proximity, complex and cumbersome requirements

and procedures o the ormal institutions, and corrupt

practices adopted by

sta o some ormal

institutions, as noted

earlier.

L o w i n a n c i a l

l i t e r a c y o p o o r

a n d l o w - i n c o m e

people signiicantly

contributes to nancial

exclusion in general and sel-exclusion in particular.

Many low-income households do not access insurance

services and deposit acilities, among many other

nancial services, because o this actor. The impact

o this is reinorced by the complex procedures and

requirements o ormal nancial institutions. In mosto the Pacic developing countries, nancial illiteracy

is considered a major actor limiting access to nance

because most o the population have conducted

transactions without using nancial institutions or

generations (Flaming and Mathison 2007, 4).

Overview o Cross-Country Experience

High transaction costs o using ormal nancial

services severely limit the access o low-income

people to ormal nancial services because the

incidence o transaction costs is too high on

small value transactions.




10 India began nationalization o banks in 1969. The regional rural banks were established in 1976 to service the rural poor, small and marginalarmers, 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.

11 According to the World Bank (2006, 15) “the two decades o IRDP experience in the 1980s and 1990s aected the credibility o microborrowersin the view o bankers and ultimately hindered the access o low-income clients to banking services.”

12 In October 2002, ADBP was incorporated as Zarai Taraqiati Bank Ltd. as an initial step o a government-initiated restructuring programsupported by ADB. However, implementation o the program has been patchy, and much o its deep-rooted problems remain.

V. OVERVIEW OF CROSS-COUNTRY EXPERIENCE

Historically governments in many Asian andother countries have intervened on the supply

side to address access to nancial services in various

ways. These measures include nationalizing private

banks; establishing and promoting specialized banks

including national savings banks and postal banks,

branching regulations or directives, directives on

portolio composition, interest rate ceilings on credit

to low-income households, and provision o credit

at subsidized interest rates to what was considered

priority sectors o the economy or priority segments

o the society. For example, India, Sri Lanka, andPakistan nationalized private-owned banks to expand

banking services to the excluded and established new

state-owned banks to serve low-income segments.10

India’s social banking program and priority sector

lending program meant to increas e banking services

to the poor and low-income households and rural

people. While an evaluation o the eectiveness o

these measures is beyond the scope o this paper, it is

correct to say that some o these did produce positive

results (Burgess and Pande 2005) while some did, in

eect, urther curtail the supply contrary to the policy makers’ expectations.11

In most cases, newly established state-owned

inancial institutions

a i l e d t o m a k e a

sustainable dent in the

problem despite the large

amount o unds used or

the purpose. Pakistan’s

Agricultural Development

Bank (ADBP)12 is one o

many examples. These institutions have also createdtheir own constituency o supporters making their

reorms a politically more daunting task and ensuring their persistence despite continuing nancial bleeding,

ineciency, dismally low outreach, and poor quality

o services. More importantly, these institutions have

ailed to serve their stated target groups. Similarly,

nationalized nancial institutions have ailed to live up

to the stated objectives o policy makers and inficted

signicant costs on the society. The operations o

both categories o institutions have promoted rent-

seeking behavior among their sta and clients and

damaged development o a disciplined credit culture.

There is general agreement that in most countriesthe conventional supply-side measures contributed

to the weakening o nancial institutions and their

implementation involved huge nancial costs (Meyer

and Nagarajan 2000). Whether they produced benets

proportional to the costs remain controversial. Many

people who are keen to improve access to nance

agree that the old approach o direct interventions

to provide the services by government-owned or

controlled institutions and to orce the private sector

institutions to provide the services is no longer relevant

and eective, even i it has worked to some extent inthe past. A new, more market-riendly and market-

supportive demand-driven approach has gained

increasing support at

global, regional, and

national levels.

The countries that

adopted a more market-

riendly approach to

access to inance have

achieved sustainable

results. These countries have essentially taken anumber o bold initiatives to implement such an

The countries that adopted a more market-

riendly approach to access to inance have

achieved sustainable results. These countries

have essentially taken a number o bold

initiatives to implement such an approach.



(Position as of December 00)

Khan Bank BRI

NumberofActiveBorrowers 234,715 3,455,894

NumberofSavingsAccounts 717,824 30,907,566

GrossLoanPortfolio($million) 201.90 3,035.70TotalSavings($million) 250.00 4,869.70

TotalAssets($million) 295.90 5,498.30

ReturnonAssets(%) 4.45 6.88

ReturnonEquity(%) 51.32 129.86

Portfolioatrisk–over30days(%) – 5.07

Operatingexpenseratio(%) – 8.26

Costperborrower($) 123.80 65.30

Table 3: Khan Bank (Mongolia) and Bank RakyatIndonesia (BRI) Selected Performance Indicators

Source:www.mixmarket.org

approach. Some o these countries have eectively

reormed existing state-owned nancial institutions

with a mandate to serve low-income clients and

given those institutions the reedom to adopt market-

oriented, demand-driven policies and practices. These

policies and reorms have produced robust and viable

nancial institutions serving the poor and low-income

households. Indonesia and Mongolia belong to this

category. In the case o Mongolia, the state-owned

Agricultural Bank o Mongolia was insolvent in 1995,

illiquid in 1999, and plagued by unrecoverable loans

that government oicials promoted prior to the

reorms. The cost o operating this bank was borne by

the Government. The bank’s operational and nancial

problems were so acute that most analysts presumed

reorming this bank was impossible. With external

assistance, the Government successully reormed this

bank during 2000–2002 and sold it to a oreign-ownedprivate sector company

in 2003 (Dyer et. al. 2004).

Contrary to many people’s

skepticism that it will

not continue, let alone

expand, rural inancial

services under the private

ownership, Khan Bank

(new name o the ormer

bank) has signiicantly

improved access to a wide range o nancial servicesor previously unserved and underserved clients in

urban and rural areas. It has also achieved remarkable

results in mobilizing deposits by providing quality,

reliable, and sae deposit services to a wide range o

clients. At the end o August 2007, outstanding deposits

amounted to $390.5 million in 1,528,879 accounts.

The previously nonviable, poor-quality, credit-only

nancial institution has become a viable nancial

intermediary that adds value to the nancial system

and increases people’s choices. Khan Bank’s return on

equity was 51.3% at the end o 2006 (table 3). The bank serves about 80% o the households in the country.

In Indonesia, during 1983–1986, the Government

successully reormed the unit desa system o the Bank

Rakyat Indonesia (BRI) which was about to collapse

because o political intervention, poor management,

and high deault rates, among other things. The reorms

led to the emergence o one o the most successul

state-owned rural nancial institutions in the world. A

major element o the reorm program was the reedom

given to BRI management to set cost-recovery and

market-oriented interest rates on loans and deposits.

The Government also ensured elimination o political

interventions in the operation o the unit desa system

and access to high-quality technical assistance to

carry out the necessary reorms in operations. The

reorms transormed the unit desa system into a viable

operation and a robust entity by 1987. It has continued

to generate proits with increasing outreach ever

since on a continuing basis. In 2002, the Government

allowed private sector ownership o this bank through

an initial public oering. Currently, private sector

shareholders account or about 48% o its share

capital. At the end o 2006, BRI units had 4,112 outlets

with over 3.45 million borrowers and 30.9 million

savings accounts. The value o their outstanding loansamounted to $3.04 billion

while deposits amounted

to $4.87 billion, indicating

a deposit-to-loan ratio o

160%. BRI continues to

expand its services to

the poor and low-income

h o u s e h o l d s , a m o n g

others, on a proitable

basis. The average annual

prots o BRI unit desas amounted to $199 millionin 2001–2006 while in 2006 the units reported $329

million in prots. At the end o 2006, the ROA and ROE

were 6.9% and 130%, respectively (table 3).

Contrary to many people’s skepticism that

it will not continue, let alone expand, rural

nancial services under the private ownership,

Khan Bank (new name o the ormer bank) has

signicantly improved access to a wide range o

nancial services or previously unserved and

underserved clients in urban and rural areas.




Indonesia’s market-oriented and liberal approach

to nancial services is urther refected in its policy

toward the operations o the state-owned pawning

company, Perum Pegadaian. Again the Government

has given operational and management autonomy

to this institution to adopt market-oriented pricing

policies. The company provides services throughout

the country to a wide range o clients through its branch

network o 840 branches and 13 regional oces. In

2003, it provided over $1.0 billion in 21 million loans

and was the major supplier o microcredit in terms o

the number o clients served (ADB 2005, 9).

Another country which has achieved a remarkably

improved access to nance

is Cambodia. The war-

torn Cambodia did not

have existing inancial

institutions to reorm in thelate 1980s. But Cambodia

allowed new microcredit

institutions to emerge

and nurtured their growth

through liberal policies.

The Government allowed

oreign investments to the

microinance sector and

micronance institutions

(MFIs) to adopt cost-

recovery interest rates without restrictions. These

two policy measures laid

the oundation or a solid

microinance sector to

emerge and grow. Two o the many such institutions

have become major players in the sector in recent

years.

ACLEDA Bank is one o these two. This institution

which had an NGO origin

is one o the ew fagship

micronance commercialbanks in the region and

serves over 150,000 poor

and low-income clients.

ACLEDA provides a wide

range o quality and reliable services protably to an

increasing number o people in the country. According

to Clark (2006, 219–222), ACLEDA’s mission has evolved

over time to deepen and broaden the services to the

low-income households. This is refected partly in the

increased number o tiny loans in its microbusiness

loan portolio. ACLEDA has also expanded its money

transer services signicantly allowing low-income

urban workers to remit unds to their amilies in rural

areas at relatively low cost and no risk. The domestic

money transers increased rom $7.0 million in 886

transactions in 2001 to $286.7 million in 98,171

transactions in 2005. It has achieved remarkable

results in expanding its deposit services (gure 4) in

recent years. An increasing number o low-income

households are using these services.

AMRET, the other major MFI in Cambodia, has

grown rapidly to serve poor clients in rural areas o

many provinces, although it has not yet become a ull-

pledged banking institution like ACLEDA Bank. At the

end o 2006, AMRET had 141,957 active borrowers with

an average loan balance

o about $124. Unlike

most MFIs, AMRET’sloan portolio indicates

a high concentration—

over 65%—in agriculture.

Despite this, AMRET has

managed to maintain its portolio quality and

protability. At the end o 2006, the portolio at-risk

(over 30 days) was only 0.06% and the ROA and ROE

were 6.97% and 25.21%, respectively.

Unlike most MFIs, AMRET’s loan portolio

indicates a high concentration—over 65%—in

agriculture. Despite this, AMRET has managed to

maintain its portolio quality and protability.

Figure 4: ACLEDA Bank Deposit Mobilization

3,836

19,070

35,054

57,091

92,413

141,368

1.955.68

13.16

31.64

61.90

-

20,0000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006

No. o Accounts

-

20

40

60

80

100

120

140

Volume ($ million)

Volume

123.15

Source:www.acledabank.com.kh

No. o Accounts



The Philippines has been making progress in

access to nance, though overall market penetration

remains low at around 20–25% o the potential market.

The recent improvements in access to inance in

the Philippines have stemmed rom rapid growth o

outreach o major MFIs such as CARD NGO, TSPI,

and TSKI, increasing involvement o rural banks in

micronance services and the entry o two major

cellphone companies into the industry. The three

microcredit NGOs together increased their active

number o borrowers by more than tenold, rom

44,413 to 475,045 between the end o 2000 and end

o 2006. According to the Bangko Sentral ng Pilipinas

(Central Bank o the Philippines), a total o 550

branches o 223 thrit, rural, and cooperative rural

banks are involved in micronance. The two cellphone

companies—Smart and

Globe Telecoms—oerinnovative cellphone-

based acilities to transer

money, pay bills, and make

payments or purchases

rom stores, among other

things. A ew MFIs are using the acilities to disburse

loans and collect loan repayments. This integration o

cellphone technology is likely to signicantly urther

expand the access to nancial services to those in

low-income groups and remote areas.

Bangladesh has also tremendously progressedin improving access to nance or the poor and low-

income households during the last three decades.

However, Bangladesh’s approach has been dierent.

First, the Government provided necessary space or

NGOs to play the lead role in pushing the rontier o

nance or the poor. The Government also acilitated

the establishment o the Grameen Bank. This

approach, partly because o the large amount o grant

unds rom external sources and later on concessional

loans rom a range o multilateral and bilateral unding

agencies, led to a strong microinance sector and

signicant outreach o microcredit services. However,

the Government also continues to use the state-owned

Krishi Bank (agriculture bank) and BRDB extensively

to provide access to credit and deposit services or

low-income households, without considering reorms

o these two institutions, although the case or their

reorm was strong.

At the end o 2005,

MFIs in Bangladesh was serving over 13.6

million borrowers. The

G r a m e e n B a n k a n d

two giant NGOs, BRAC

(Building Resources

Across Communities) and ASA (Association or

Social Advancement), accounted or about 80% o

this outreach. The Grameen Bank initially ocused

on providing credit acilities and paid little attention

to voluntary deposit mobilization. This policy was

changed in 2000 with increased emphasis on depositmobilization. The new savings programs o the

Grameen Bank have allowed millions o its members

Table 4: Association for Social Advancement (ASA) and Building Resources Across Communities(BRAC) - Bangladesh Selected Growth and Performance Indicatorsa

ASA BRAC

00 00 00 00

NumberofActiveBorrowers 1,976,403 5,163,279 2,918,341 4,550,855NumberofSavingsAccounts 2,136,165 6,455,979 n/a 45,234GrossLoanPortfolio($million) 144.70 255.40b 164.00 350.20

TotalSavings($million) 18.10 46.30b n/a 0.52TotalAssets($million) 169.20 298.10b 224.00 393.50ReturnonAssets(%) 14.40 14.53b n/a 6.90ReturnonEquity(%) 36.15 28.16b n/a 23.27Portfolioatrisk–over30days(%) 0.31 1.09 5.97 3.76Operatingexpenseratio(%) 7.84 8.21b 14.79c 12.91Costperborrower($) 5.60 5.40b n/a 9.20

aPositionattheendofeachyear,unlessotherwisestated.bAsofendof2005.cAsofendof2003.


Cellphone companies oer innovative cellphone-

based acilities to transer money, pay bills, and

make payments or purchases rom stores,

among other things.




and nonmembers easy access to reliable deposit

services. At the end o September 2007, the Grameen

Bank had $697 million in outstanding deposits,

consisting o $401 million o members’ deposits and

$296 million in nonmembers’ deposits. The deposit-

to-loan ratio was 139% (www.grameen-ino.org).

As shown in table 4, BRAC and ASA had 4.6 million

and 5.2 million active borrowers, respectively, at the

end o 2006. Both are nancially viable microcredit

institutions with very innovative programs to reach

even the poorest households. ASA’s return on equity at

the end o 2005 was 28.2%. In early 2006, both BRAC and

ASA reduced their interest

rates on microcredit rom

15% (fat) per annum to

12.5% (lat) per annum,

beneiting millions o

their clients. And bothorganizations operate

very eiciently: in the

case o ASA, the cost per borrower was only $5.40 in

2005.

The growth in micronance services in Bangladesh

has not been conned to the large-scale institutions,

however. A number o medium-scale MFIs also

expanded their outreach signicantly in recent years.

BURO (ormerly BURO Tangail) and Thengamara

Mohila Sabuj Sangha (TMSS) are two good examples.

The number o active borrowers o BURO increasedrom 54,189 at the end o 2000 to 263,503 at the end o

2006 while the number o savings accounts increased

rom 73,263 to 331,329 in the same period. BURO’s ROA

Share Microfinance Spandana SKS Microfinance

00 00 00 00 00 00

NumberofActiveBorrowers 814,156 826,517 110,011 972,212 24,799 513,108GrossLoanPortfolio($million) 18.90 91.70 10.20 89.80 2.70 61.40

TotalAssets($million) 23.30 101.30 11.40 101.50 4.10 74.80ReturnonAssets(%) 3.17 1.22 12.39 0.74 (0.69) n/aReturnonEquity(%) 22.88 15.31 110.71 22.00 (11.59) n/aOperatingExpenseRatio(%) 19.35 10.97 5.37 6.29 18.74 10.38b

Table 5: Growth and Performance Indicators of Selected MicrofinanceInstitutions in Indiaa

aAsofendofMarcheachyear.Noneoftheseinstitutionshavealegalchartertomobilizedeposits.bAsof31March2006.

Source:www.mixmarket.org

and ROE were 6.14% and 17.35% at the end o 2006

while the portolio at-risk (over 30 days) was 2.15%.

TMSS increased its number o active borrowers rom

144,425 at the end o June 2001 to 436,121 at the end o

June 2006. TMSS also began to oer deposit services in

2005 and had 493,010 savings accounts by the end o

June 2006.13 These organizations ocus their services

predominantly on low-income women.

India’s MFIs have also signicantly contributed to

the regional growth in the micronance industry seen

in recent years. The outreach o micronance services

has been increasing in India not only because o

the phenomenal growth

o the bank sel-help-

groups (SHGs) linkage

program but also because

o the substantial growth

reported by nonbank inancial institutions

providing micronance

services. According to the National Bank or Agriculture

and Rural Development (NABARD), by March 2006,

2.23 million SHGs were reaching about 33 million

members. Sinha (2007, 1), however, estimates that

the SHG bank linkage program and the MFIs together

reached only about 17 million amilies by mid-2006.

Data on some major MFIs, shown in table 5, illustrate

the dramatic growth taking place in the industry in

recent years. Spandana, or example, increased itsactive borrowers rom 111,011 at the end o March

2004 to 972,212 at the end o March 2007 while SKS

Micronance increased its number o active borrowers

13 www.mixmarket.org

In early 2006, both BRAC and ASA reduced their

interest rates on microcredit rom 15% (fat) per

annum to 12.5% (fat) per annum, beneting

millions o their clients. And both organizations

operate very eciently.



0

rom 24,799 to 513,108 in the same period. NGO MFIs

have also been continuing their growth, although they

ace constraints on access to loanable unds to ensure

smooth and rapid growth rates.

The industry growth

pattern in India has been

highly uneven, with high

concentration in south

India: an estimated two

thirds o the borrowers

reached are in three

southern states—Andhra

Pradesh, Tamil Nadu, and

Karnataka. However, the expansion o micronance

into states outside the southern region has begun

partly because o the increasing level o competition

in the southern region. The other notable eature o

the growth in the Indian industry, according to Sinha(2007a, 2) is the dramatic improvements in eciency

resulting in eective interest rates paid by microcredit

clients in India declining to among the lowest in the

world. Analysis o a sample consisting o 79 MFIs

indicated that 30 had operating expense ratios less

than 12%.

Another major aspect o the growth in micronance

is its lopsidedness in terms o scope o services.

Because NGOs and nonbank nance companies do

not have a legal charter to provide deposit services,

the growth occurred in credit services, not in depositservices. However, it is not correct to conclude that

deposit services or low-income households have not

expanded in India. While reliable disaggregated data are

not available, many state-owned banks have expanded

their deposit acilities to the low-income households.

Some o these banks continued to implement very

innovative programs or the purpose.

In India, the Government has been paying more

attention to improve the overall policy environment

or micronance in recent years. In January 2006, the

Reserve Bank o India (the central bank) permittedbanks to use post oces and specialized MFIs including

NGOs, cooperatives, and or-proit companies as

retail agents. The banks may now use these agents to

perorm tasks such as collecting small-value deposits.14

In addition, the central bank has also reinorced

its emphasis on promoting nancial inclusion. As

a result o this renewed and increased emphasis,

both private sector and state-owned banks have

initiated new programs

to increase access to

inance or unserved

a n d u n d e r s e r v e d

clients. The country’s

largest private sector

commercial bank, ICICI

Bank, is in the oreront

o these institutions with

a multipronged approach to promote access to

inancial services through its own branches and

delivery mechanisms, and through partnerships with

other institutions.

In November 2005, the Reserve Bank o Indiaadvised Indian banks to make available a basic “no-

rills” banking account with low or nil minimum

balances as well as charges to expand the outreach

o such accounts to low-income people. A number

o banks responded. Between March 2006 and

2007, 6 million new “no-rills” bank accounts have

been opened largely by state-owned banks (Thorat

2007). Indian Bank (a state-owned bank) introduced

a inancial inclusion project on a pilot basis in

Mangalam village in Pondichery in December 2005.

As a result o this project, Mangalam has becomethe rst village in India where all the households in

the village have access to banking acilities. Indian

Bank has taken the lead to involve other banks to

also expand banking acilities to excluded villagers.

Canara Bank (another state-owned bank with more

than 2,500 branches) has opened about 350,000

new savings accounts to encourage thrit among the

poor. The Syndicate Bank, which has an impressive

history or being innovative in serving low-income

households, has signed up a million new customers

over 2 months recently by introducing a “no-rills”account called “SyndSamanya” to enable low-income

persons to have access to basic banking services. The

bank allows people to open a SyndSamanya account

even with a zero balance and deposit amounts as small

The other notable eature o the growth in the

Indian industry, is the dramatic improvementsin eciency resulting in eective interest rates

paid by microcredit clients in India declining to

among the lowest in the world.

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




Three visionaries—a businessman, an engineer,and a physician—together invested Rs8,000 asinitial capital in 1925 to establish the CanaraIndustrial and Banking Syndicate Ltd. in Udupi,a small town in the Karnataka state o India. Atthe time, it was the only Indian bank with a headoce in a rural area. Their objective was primarily to provide nancial assistance to the local weavers

who were crippled by a crisis in the handloomindustry through mobilizing small savings romthe community.

I the savers did not withdraw rom the

scheme or 7 years, they were paid a higher rateo interest than otherwise was the case. Withinthis period, the saver could borrow rom the bank against the security o his or her deposit.

The bank grew rapidly and, in 1957, it openedits 100th branch in Karnataka state. The name o the bank was changed to Syndicate Bank Limitedin 1963. The bank’s head oce was transerred toManipal in 1964, a small town also in Karnataka.The bank’s market share in the banking businessgrew rom 1% in 1960 to 4% in 1975. In 1968, 32%o its branches were in rural areas. Its loans toagriculture and small enterprises constituted 30%

o its total loans. About 90% o its deposits weresmall accounts below Rs1,500.

The bank was able to harness a businessopportunity without competition rom otherbanks until 1960. The pigmy deposits accountedor 14–15% o total deposits in 1946. The sharerose to 21% in 1960. Since then the share declinedbecause o aster growth o other types o deposits

and competition rom other banks. In 1975,the share was 7–8% o Syndicate Bank’s totaldeposits.

To achieve its primary objective, in 1928, thebank introduced the pigmy deposit scheme whichcontinues to be its brand equity even today. Thescheme was aimed at mobilizing small depositsrom low-income households and involved door-to-door collection o small savings, as low as 2annas, at stated intervals by agents appointed by the bank. Agents were paid a commission o 3%per year, based on the amount collected. Until

1962, the bank permitted its sta to work also asagents during their spare time (The Central Bank prohibited this practice in 1962).

The scheme continues to date althoughits specic eatures have changed over time. Thebank’s authorized agents collects clients’ savingsat regular intervals—daily, weekly, or monthly—rom their doorsteps; a client can save as low asRs1 daily or 63 months under the scheme. Thebank has over 1.2 million depositors under thescheme whose savings are collected by some3,200 pigmy agents. The daily collection underthe scheme is over $580,000 equivalent. In 2006,

the total amount o pigmy deposits exceeded$320 million. A variant o the pigmy depositscheme—Pigmy Plus 2007—introduced in 2007also provides doorstep services to depositors inlow-income households to save their money. Thebank now has over 1,800 branches spread all overIndia and plans to add another 2,000 door-to-door collection agents.

Source:www.syndicatebank.in;Bhatt.1988.

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

as ve 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 irst introduced in 1928 when it was a

private bank (see box 1). A number o private banks

have also introduced no-rill accounts or low-income

households. For example, ING Vysya (the only Indian

bank owned by a oreign bank), introduced in June

2007 a no-rills, zero-balance account aimed at the

mass retail savings market.

The Insurance Regulatory and Development

Authority (IRDA) o India has also been actively

encouraging insurance services or low-income

households. In 2002, IRDA established rural and social

sector targets or insurance companies. All insurers

entering the business ater the start o 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 eectivity date o the IRDA Act had to

ensure that the quantum o insurance business was

no less than they recorded or the previous accounting

year, ending in March 2002 (UNDP 2007, 22–23).

In November 2005, IRDA strengthened its

microinsurance ocus. In October 2004, India’s central

bank permitted regional rural banks to undertake



insurance business as a “corporate agent” without risk

participation. While the extent to which each policy

and regulatory measure has contributed to improving

access o low-income households to mainstream

insurance services is not clear, data indicate that theaccess has begun to improve. In 2002–2003 alone,

private insurance companies sold 600,000 new policies

in rural areas while over 1.0 million was sold under

social sectors. Public insurance companies sold 13.2

million new policies in rural areas and 36.8 million

new policies under the social sectors.

In Latin America, many MFIs including banks,

nonbank nance institutions, and NGOs continue to

achieve impressive results in expanding the access

to inance o low-income households. In Bolivia,

MFIs had about 391,000active borrowers while in

Peru they had about 1.1

million active borrowers

at the end o 2005. In

b o t h c o u n t r i e s , t h e

governments provided an

enabling environment or

commercial micronance

to thrive. This environment made rapid growth

possible. BancoSol in Bolivia has shown its dynamism

and robustness as a micronance bank. At the end o

2006, it had 103,786 active borrowers with a gross loan

portolio o about $163 million (table 7). About 75% o

the loans were below $300, indicating its continued

ocus on the low end o the market. BancoSol has

also signicantly expanded its deposit services: the

number o savings accounts increased by 35,359

between the end o 2005 and end o 2006 to 111,946.

The recent growth o Mibanco in Peru is even more

impressive: it had 221,802 active borrowers at the end

o 2006 (table 7), 67,261 more borrowers than it had

at the end o 2005. The growth in deposit services wasmore remarkable with the number o savings accounts

increasing rom 57,142 at the end o 2005 to 160,636

at the end o 2006. NGO Popayan in Colombia also

recorded dramatic growth in outreach on a protable

basis. The number o active borrowers increased rom

48,333 at the end o 2002 to 137,855 at the end o 2006.

Popayan also managed to improve its eciency during

this period, as indicated by the lower operating cost

ratio in 2006. WWB Cali also in Colombia increased

its outreach (number o borrowers) dramatically

rom 38,000 to 149,000between the end o 2001

and 2006. It did this

proitably and without

sacri icing portol io

quality, with a ROE o

19.2% and a portolio at

risk (over 30 days) o 1.6%

at end o 2006.

Some MFIs in Latin America grew despite the act

that they charge very high interest rates. Compartamos

in Mexico is a case in point. The number o active

borrowers o Compartamos increased rom 144,991

at the end o 2002 to 616,528 at the end o 2006, and

its outstanding loan portolio increased rom about

$41.8 million to $271.1 million during the same period.

The ROA and ROE o Compartamos were 23.18% and

57.35%, respectively, at the end o 2006. Compartamos,

Year Year Year Year Year

Rural Sector: Life Insurer

Percentofpolicieswrittenintheyear 7 9 12 14 16

Rural Sector: Nonlife Insurer

Percentofgrosspremiumcollectedintheyear 2 3 5 5 5

Social Sectora: Life and Nonlife

Numberofpersonscovered,both,lifeandnonlife 5,000 7,500 10,000 15,000 20,000inayear

Table 6: IRDA Guidelines for Insurance Companies, 2002

aSocialsectorincludesunorganized,self-employedindividuals,vulnerablepopulation,anddisabledpersons,amongothers.

Source:UNDP.2007.

In Latin America, many MFIs including banks,

nonbank inance institutions, and NGOs

continue to achieve impressive results in

expanding the access to nance o low-income

households.




15 The interest yield o Compartamos was about 86% or 2005 while it has been even higher or earlier years. In April 2007, Banco Compartamoscompleted an initial public oering (IPO) o 30% o its stock. For details on the IPO and related issues, see (Rosenberg 2007; Rhyne andGuimon 2007).

Table 7: Growth and Performance Indicators of Selected MicrofinanceInstitutions in Latin Americaa

aPositionattheendoftheyears.bCommercialbank.cNGO.


BancoSol (Bolivia)b Mibanco (Peru)b FMM Popayan (Colombia)c

00 00 00 00 00 00

NumberofActiveBorrowers 50,904 103,786 99,121 221,802 48,333 137,855NumberofActiveSavingsAccounts 48,341 111,946 37,908 160,636 – –GrossLoanPortfolio($million) 80.90 163.00 95.90 320.40 12.20 80.70TotalSavings($million) 62.40 145.40 43.30 203.00 – –TotalAssets($million) 104.30 222.30 109.00 388.40 14.20 85.50ReturnonAssets(%) 0.25 2.33 6.18 5.13 15.27 7.69ReturnonEquity(%) 1.72 22.81 26.40 34.44 24.60 18.24OperatingExpenseRatio(%) 12.16 11.68 24.56 16.87 11.12 12.44Portfolioat-risk–over30days(%) 6.61 2.91 3.09 2.90 0.88 0.78

which became a commercial bank in June 2006,

expects to reach 1.0 million clients by 2008.15

Another country which has recently expanded

a c c e s s t o i n a n c e

signiicantly through

a r evo l u tio n a r y a n d

nontraditional approach

is Brazil. Two state-owned

banks (Banco do Brasil

and Caixa Economica

Federal) and two private

sector banks (Banco

Bradesco and Lemon Bank) in Brazil provide basic

inancial services through retail agents, including

small supermarkets, petrol stations, pharmacies, post

oces, and lottery kiosks. These agents are called

“banking correspondents.” In 2000, 1,600 o Brazil’s

5,800 municipalities lacked access to ormal banking

services. By 2003, all municipalities had access to these

services through banking correspondents. By the end

o 2005, some 58,000 banking correspondents were

operating in the country (Lyman et. al. 2006). This

method has enabled banks to reach even remote rural

areas where bank branches would probably be too

costly to set up (Ivatury 2006). In the country’s poorest

region, the Northeast, many municipalities are served

only by banking correspondents.

Some Latin American countries such as Bolivia

and Peru closed their poorly perorming state-owned

agricultural development banks. The Government o

Guatemala (in Central

America), in contrast,

took a dierent approach

by reorming its state-

o w n e d a g r i c u l t u r a l

bank, (Banco Nacional

de Desarollo Agricola

or BANDESA) in 1997.

This bank suered rom

problems typical to most state-owned agricultural

banks and was not serving the rural population

eiciently and eectively. The reorm program

changed this situation.

Through transormation o BANDESA, a new bank,

Banco de Desarollo Rural (BANRURAL), was created.

The new bank began commercial operations in January

1998. The bank began to provide a wide range o

nancial services mainly to rural people and uses new

technology to reach people with low literacy. It also

provides liquidity acilities to a large number o small-

scale NGOs and credit unions. It operates protably

as a public–private rural nancial institution, without

being a burden on the state budget. It expanded the

number o branches rom 71 in 1998 to 323 in 2005.

Some Latin American countries such as Bolivia

and Peru closed their poorly perorming state-

owned agricultural development banks. The

Government o Guatemala (in Central America),

in contrast, took a dierent approach by reorming

its state-owned agricultural bank, in 1997.



The number o active savings accounts increased rom

183,621 in 1998 to 667,778 in 2001. The number o

active borrowers increased rom about 30,000 in 1997

to 196,000 at the end o 2005, with a gross loan portolio

o $674 million. About 11% o the loan portolio was in

agriculture and women accounted or hal o its clients.

The expansion in credit

operations was achieved

w i t h o u t s a c r i i c i n g

quality. At the end o

2005, the portolio at-risk

(over 30 days) was only

0.9%. The proitability

o BANRURAL improved dramatically and the bank

became subsidy-independent. The ROE was 18.83%

in 2001 and increased to 38.7% by the end o 2005

(Wenner et. al. 2007).

A number o Eastern European and Central Asiancountries have also achieved progress in improving

access to nance or low-income households mainly

through greeneld micronance and small enterprise

banks. The Procredit Bank in Georgia, established in

1998, increased its active borrowers rom 8,173 to

61,558 between end o 2000 and 2006. The outreach

in deposit services has been more impressive as in

many other Central Asian countries. The number o

savings accounts increased rom 12,648 to 326,835

in the same period. The Procredit Bank in Kosovo

increased its savings accounts rom 116,530 to 240,761 while the Procredit Bank in Serbia increased its savings

accounts rom 54,895 to 333,697 in the same period.

The experience in these countries tends to conrm

that the largest group o people without access to

nance is those who want a sae place to save.

The Arican region also provides success stories in

access to nance. Kenya’s K-Rep Bank and Equity Bank

are only two examples

rom that region. K-Rep

Bank, which has an NGO

origin, is now a major

commercial micronance

bank in the country. At the

end o 2006, K-Rep Bank

had an outstanding loan portolio o $54.1 million;

114,301 active borrowers; and deposits amounting to

$23.8 million in 14,951 savings accounts. The Equity

Bank had 239,541 active borrowers and over one

million savings accounts at the end o 2006. As shownin table 8, a number o other countries such as Ethiopia

and Tanzania also made signicant progress.

In South Arica, banking institutions, together

with mobile phone companies, have begun to expand

the access to nancial services. WIZZIT, a start-up

mobile banking service provider, organized as a

division o the South Arican Bank o Athens, targets

low-income customers with an interest-bearing bank

account that customers access with their mobile

phone. Customers can use their mobile phones to

make person-to-person payments and transer money. WIZZIT also gives customers a branded debit card with

ACSIb Equity Bank Centenary Bank c PRIDEd Capitec Bank e

(Ethiopia) (Kenya) (Uganda) (Tanzania) (South Africa)

00 00 00 00 00 00 00 00 00 00

NumberofActiveBorrowers 255,000 536,804 41,024 239,541 34,490 66,113 48,216 89,783 250,000 368,854NumberofActiveSavingsAccounts 69,910 224,571 155,883 1,014,474 313,480 559,161 – – n/a 583,000

GrossLoanPortfolio($million) 19.90 78.20 15.10 106.40 25.10 84.00 8.00 16.40 41.20 124.90TotalSavings($million) 24.90 9.10 27.90 167.60 53.60 123.60 – – 48.20 124.30

TotalAssets($million) 27.90 95.90 33.50 287.50 66.70 155.20 8.50 18.80 139.00 303.80ReturnonAssets(%) 3.20 7.91 3.35 4.85 2.30 3.56 4.26 1.34 n/a 9.07ReturnonEquity(%) 29.74 25.55 26.58 40.36 18.79 26.17 16.22 6.00 n/a 18.65OperatingExpenseRatio(%) 9.24 4.93 23.67 42.38 51.14 33.07 42.73 37.97 n/a 79.53

Portfolioat-risk–over30days(%) 2.09 1.55 8.29 12.19 1.03 6.42 0.18 0.44 n/a 11.58

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

aPositionattheendofeachyear,unlessotherwisestated.bAmharaCreditandSavingsInstitutions.cCentenaryRuralDevelopmentBankLtd.dNGOePositionasof28Februaryeachyear.


The Arican region also provides success stories

in access to nance. Kenya’s K-Rep Bank and

Equity Bank are only two examples rom that

region.



Measures to Improve Access to Finance

16 In South Arica, an estimated 16 million people, or 48% o the adult population, are unbanked or underbanked and lack access to ormalfnancial services. However, there are 20 million phone subscribers, nearly 80% o whom are prepaid customers. Many o these subscribersare in the low-income segment. This paragraph on South Arica is based on Ivatury (2006).

17 According to the Banking Association o South Arica, over 3 million Mzansi accounts have been opened in the 3 years ollowing the launcho the fnancial sector charter in 2004 which, among other things, aimed at promoting fnancial inclusion. The Postbank, a separate divisiono the Post Ofce, has been the biggest single issuer o new Mzansi accounts. Recent research has indicated that a majority o the Mzansiaccount holders were previously unbanked. However, access to fnance continues to be a major problem in the country. According to somepractitioners, most o the Mzansi accounts remain inactive. In 2006, over 15 million adults did not have access to banking services.

which they can make purchases at retail outlets and

deposit or withdraw money at ATMs (Ivatury 2006,

9). Standard Bank has entered into a joint venture

with MTN, a leading mobile operator in the country,

to oer a service called MTN Banking. Standard Bank

considers this joint venture as a separately branded

channel targeting low-income customers who use

mobile phones but may not have access to, or comort

in, using a bank branch.16 In October 2004, with

government encouragement, the our largest South

Arican banks and the postal bank began oering

a low-cost transaction

a c c o u n t ( k n o w n a s

“ M z a n s i ” a c c o u n t )

intended or low-income

customers.17

T h e e x p e r i e n c e

i n d i c a t e s t h a tcooperatives also play an

increasingly important

role in improving access

to nance in a number o

countries. For example,

credit unions in Ecuador, El Salvador, Guatemala,

Honduras, Jamaica, Mexico, and Nicaragua distribute

remittances through the IRnet program o the World

Council o Credit Unions (WOCCU). From August 2001

to March 2005, credit unions carried out a total o 1.45

million transactions or $635 million in remittances. InEcuador, 10 credit unions assisted by WOCCU under a

special development program had 282,000 member-

clients, a total o $120.6 million in outstanding deposits

and $126.4 million in outstanding loans at the end o

September 2005. They provided diverse products

and services to their member-clients. Most o their

clients consist o people rom low-income households,

including women(www.woccu.org.). According to the

Association o Asian Conederation o Credit Unions,

its network o credit unions in Asia serve over 5.0

million clients, including some 3.8 million poorest.

While some countries have remarkably expanded

access to nancial services or the unserved population

and underserved clients,

the gl o ba l s i tu a tio n

suggests that some o

the largest developing

countries such as the

PRC, India, Pakistan,

and Mexico continue toreport the biggest gaps

in meeting the demand

or inancial services

at the low end o the

markets. Bangladesh and

Indonesia are the exceptions among the large countries.

Restrictive government policies, excessive government

interventions to provide the services through

government-owned and controlled institutions, and

reluctance to open micronance markets or oreign

investments and to integrate micronance into themainstream o banking and nance tend to explain

why these countries have lagged behind.

While some countries have remarkably expanded

access to inancial services or the unserved

population and underserved clients, the global

situation suggests that some o the largest

developing countries such as the PRC, India,

Pakistan, and Mexico continue to report the

biggest gaps in meeting the demand or nancial

services at the low end o the markets.



VI. MEASURES TO IMPROVE ACCESS TO FINANCE

The oregoing review o international experience, while admittedly not comprehensive, indicates

the diversity o approaches that dierent countries

use. The approaches and global experience indicate

that three measures are vital to trigger a more powerul

process toward improved

access to nance. First,

it is necessary to clearly

recognize that the ormal

inancial systems that

serve a minority are

simply unacceptablerom the point o view o building an inclusive society.

Such recognition will signicantly infuence the lens

that we use to look at the problem and encourage a

more proactive set o measures than otherwise would

be the case. Along with this, building inclusive nancial

systems that serve the majority should be made a

central goal o every developing country. Eliminating

nancial exclusion as early as possible in a sustainable

manner must be given the central importance that it

deserves in overall policy or inclusive development.

However, it is important to dene the problem broadly to ocus on providing nancial services or all unserved

and underserved people rather than low-income

people. As Rajan (2006, 57) noted, “by dening the

problem more broadly to include the middle class,

we can enlist a powerul

supporter in the common

ight or access. In the

process, the links between

the ormal and inormal

inancial systems will

strengthen, allowing thepoor to migrate upward.”

The second most essential measure is to recognize

the majority o the people currently without access

to inance as potential clients or market-based

nancial services. This will help unleash innovative

responses to penetrate the bottom o the pyramid

market. Based on this, governments must recognize

that the private sector ormal nancial institutions

have a major role to play in serving this market. This

recognition is undamental to the potential solutions

Financial exclusion is an acute problem inPakistan, with a majority o the people with noaccess to ormal and semiormal sector nancialservices. Rural low-income people are aectedmore severely than others by this problem. Giventhe gravity o the problem, the State Bank o

Pakistan (SBP), the central bank, is playing a leadrole in expanding banking services to the country’spoor and rural population.

SBP is now developing a broad-basednancial inclusion strategy. The goal o the strategy

will be to enhance the coverage o the nancialsystem through a range o innovative approachesand institutional modalities to provide holistic

services. Over the next 5 years, the target will beto double the deposit base rom the existing 26.6million accounts to 53 million by 2012, and todouble the number o borrowers with a ocus onlow-income households.

The strategy includes a ar-reaching

microinance development plan to increasemicronance outreach rom 1.2 million clientsto 10 million, expansion o branch networks tounderserved areas, promotion o Islamic banking,and promotion o application o new inormationand communication technology to reach ruralpeople.

Source:Akhtar.2007.

Box 2: The State of Bank of Pakistan’s Role in Financial Inclusion

First, it is necessary to clearly recognize that the

ormal nancial systems that serve a minority

are simply unacceptable rom the point o view

o building an inclusive society.



Measures to Improve Access to Finance

and the seriousness with which they are likely to be

executed.

Third, within government bureaucracy, improving

access to inance should be made an explicit

responsibility o the central bank o each country. This

is particularly important because nancial inclusion

can best be achieved when it is mainstreamed into

the broader inancial system under competitive

conditions. Central banks in most developing

countries used to treat access to nance problems with

benign neglect.18 This has begun to change. A number

o central banks now show more interest in nancial

inclusion. The case o the State Bank o Pakistan (box

2) is an illustration.

Setting goals are necessary but not sucient.

The governments, including central banks, have to

take a number o concrete actions to translate the

goal o nancial inclusioninto a reality (United

N a t i o n s 2 0 0 6 , 1 5 2 ;

Claessens 2005; Kumar

2005) . Go ver n men ts

have to dene their role

and execute it in such a

way that it will provide

space and incentives or

private sector institutions

including social investors to play an increasing role in

providing the services. Essentially, the governmentsneed to ocus on a number o key areas.

First, the governments need to collect hard

data on the extent o the inancial exclusion and

such eorts need to be repeated periodically.19 This

would provide a basis or selecting priority areas,

ormulating a coherent set o activities to address

the problem, ne-tuning those programs in place,

and monitoring the progress over time. Second,

18 There are some exceptions. A case in point is the Reserve Bank o India (RBI). For many years, RBI has shown interest in reducing fnancialexclusion. This continues to date. For example, the Governor o RBI in his Annual Policy Statement or both 2005–2006 and 2006–2007 madereerence to fnancial exclusion and urged the banks to align themselves with its objectives.

19 Most policy makers do not even know the extent o the problem because such statistics are not collected systematically. As the AdvisorsGroup to the United Nations International Year o Microcredit (UNCDF 2005) noted: “the lack o good data has made it hard or governmentsand others to make well-designed policy, hard or potential providers o fnancial services to poor people to accurately judge the need/opportunity, hard or multilaterals and donors to judge i their actions are helping or hindering the fnancial sectors in which they intervene,hard or investors to assess the market opportunities, and hard even to reach empirically sound conclusions about the relationship betweenfnancial access, poverty, and economic growth.”

20 Financial inrastructure includes prudential regulation and supervision o fnancial institutions; accounting policies and fnancial inormationdisclosure required o fnancial institutions; ramework o laws governing fnancial transactions and the legal procedures to enorce them;and dissemination o fnancial and legal inormation.

governments need to create an enabling environment

or the private sector service providers, including

NGOs, and allow them operational autonomy to make

sound business decisions and adopt commercial

practices. Third, governments have to develop

nancial inrastructure.20 Financial inrastructure will

signicantly reduce both risks and transaction costs

o providing a range o nancial services in various

ways. Financial inrastructure, or example, will

reduce inormation barriers and asymmetries, induce

entry o new institutions into the industry, induce

inancial technological innovations, and promote

greater competition. Financial inrastructure will have

a positive impact particularly on access to credit or

people with little or no marketable collateral and poor

people’s demand or nancial assets in the ormal

sector. In many countries, poor physical inrastructure

discourages extensiono more fexible delivery

mechanisms such as use

o ATMs in rural areas.

The governments

also have to initiate

serious reorm programs

to transorm state-owned


with a mandate to serve

low-income groups into viable and dynamic service

providers. In most countries, these institutions havelow outreach, provide poor quality services, are ull

o rent seekers, and consume large amounts o public

unds to sustain their operations. However, they do

oer potential to become demand-driven, sustainable

institutions providing access to an increasing segment

o the underserved and unserved population. This

potential must be ully harnessed through appropriate

reorm programs. Such eorts should encompass

Governments have to deine their role and

execute it in such a way that it will provide space

and incentives or private sector institutions

including social investors to play an increasing

role in providing the services. Essentially, the

governments need to ocus on a number o key

areas.



postal savings institutions and other savings banks,

in addition to agricultural and rural development

banks which do not unction eectively and eciently

or operate sustainably. Reorms in these institutions

may pave a better way or their eventual partial or ull

privatization as shown by the cases o BRI in Indonesia,

Agricultural Bank o

Mongolia, and BANDESA

in Guatemala.

To ease constraints

on expanding supply o

services, central banks

should examine how regulatory systems impede

nancial inclusion. Providing legal and regulatory

space or new institutional modalities to emerge

and thrive needs to be given greater attention than

in the past. Improvements to regulatory systems

need to be done within a orward-looking ramework where technological innovations in inormation

and communication tend to increasingly dismantle

the industry boundaries and make it possible or

nonnancial institutions to become major players

in providing a range o nancial services which are

traditionally considered to be the domain o pure

nancial institutions.

The governments can also take measures

to address demand-side constraints. Two types

o measures appear to

be important. The irsttype in c l u des tho se

necessary to improve the

environment or more

protable investments at

the low end o the nancial

market. Greater attention

is needed to improve rural

inrastructure, markets,

and pro-poor technology.

In most developing countries, people in rural areas

ace high risks and transaction costs because o lack o basic inrastructure. The potential service providers

also ace similarly high risks and transaction costs in

reaching rural people. A strategy aimed at opening

up new economic opportunities in these areas will

reduce clients’ transaction costs and risks associated

not only with investments but also with using nancial

services provided by ormal sources which, in turn,

will increase incentives

to seek nancial services

o o r m a l s o u r c e s .

In addition, the same

strategy will improve

suppliers’ incentives to

expand the services because it will reduce their risks

and transaction costs. The second set o measures

ocuses on programs to increase nancial literacy

among dierent categories o excluded people. 21

Central banks can play a lead role in this task.

The governments also must ensure an adequatelevel o competition in the nancial system. Competition

could infuence the inherently asymmetric incentive

structure o the established conventional incumbents

in regard to moving up market and encouraging their

penetration into low-end markets. This process is

already in motion in some countries and it is likely

to gather urther strength and momentum in the

medium-term primarily because o the increasing

role o oreign banks and other nancial institutions

i n m o s t d e v e l o p i n g

countries. For example,India’s domestic banks

seem to be coming under

increasing pressure to

strengthen their eorts

to move down-market

owing to the increasing

role o oreign banks in

the nancial system.

The private-sector-

established nancial institutions will have to develop

more robust business models to deliver nancial servicesto the low-end markets. They may increasingly require

21 Some developed countries have established dedicated unds to promote fnancial inclusion. For example, the Government o UnitedKingdom established a £120 million Financial Inclusion Fund in 2005. Barclays Bank also launched a Financial Inclusion Fund in 2005 tosupport programs aimed at reducing fnancial exclusion. Both unds support, among other things, fnancial literacy improvement programs.The Royal Bank o Scotland Group has set up a Financial Inclusion Innovation Fund which provides grants to organizations to test out new approaches and activities to promote fnancial inclusion (HM Treasury 2004). Developing countries have begun to ollow this. The FinanceMinster o the Government o India in his budget or 2007–2008 announced the setting up o two unds or fnancial inclusion: the frstcalled Financial Inclusion Fund or developmental and promotional interventions and other called Financial Inclusion Technology Fundto meet cost o technology adoption. Each und will have $125 million.

The governments can also take measures to

address demand-side constraints. Two types o

measures appear to be important.

The private-sector-established inancial

institutions will have to develop more robust

business models to deliver nancial services

to the low-end markets. They may increasingly

require partnerships and alliances with a range

o inancial and noninancial institutions,

including limited service nongovernment

MFIs.



The Future o Access to Finance

partnerships and alliances with a range o nancial and

nonnancial institutions, including limited service

nongovernment MFIs. They need to gure 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 nancial

and other services to the poor and exploring how new

technology such as low-cost ATMs can be eectively

used to expand their services.

Other countries also provide promising examples.

The ANZ Bank’s eorts 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 oered two simple products to suit their

requirements—a 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 ee 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 o March 2005, 25,800 previously unbanked rural

Fijians opened accounts and amassed more than

$500,000 as a result o this eort (Blacklock 2005).



0

VII. THE FUTURE OF ACCESS TO FINANCE

A ccess to nance is poised or signicant growthglobally. The uture growth in nancial services

or low-income households will be driven by

more enabling policy

environment, integration

o technology into this

segment o the nancial

markets, and increasing

c o m p e t i t i o n . T h e

countries in which these

dierent drivers converge

would most likely see anexponential growth in access to nance or those at

the low-end o the markets.

In most countries, the government role is crucial

or the continued growth in access to nance. The

access to nance will grow at higher rates in countries

where governments acilitate rather than undermine

private sector’s role. The countries that allow diverse

institutions to enter the industry and play an active

role will see much higher growth rates than the others.

The countries that continue to have serious doubts

about the need or more commercial approachesa n d in ter ven e in the

markets through interest

rate restrictions and other

tr a dit io n a l mea su r es

such as directed credit in

particular will continue to

see only sluggish growth.

Similarly, the countries that do not adopt more proactive

and orward-looking policies to address regulatory

and other issues arising as a result o increasing

application o new inormation and communicationtechnology are likely to all behind those that address

such issues eectively. Also, countries that continue

restrictions on oreign investments in micronance

and do not make adequate eorts to make their

broader inancial systems more competitive are

likely to experience persistent problems in access to

nance. In countries where technological integration

is rapid and the sector is likely to expand rapidly, thegovernment will have to pay much greater attention

than in the past to strengthen supervisory and

regulatory systems and

inancial inrastructure

that would acilitate risk

management and access

to client inormation.

The other major

dr iver o gr o w th in

access to nance will be

increased competition.Competition will help in many dierent ways. First,

it will drive the prices (including transaction costs)

down and allow those who are currently excluded or

price-related reasons to enter the market and access

the services. This is particularly true in respect o credit

and money transer services. In Bolivia, microcredit

interest rates have declined rom an average o about

30% in 1998 to 24% in 2002 and 21.2% in 2005. The

competitive markets will produce similar results in

other countries. Second, competition will motivate

incumbents to reexamine and improve their businessmodels to provide better

quality services and a

wider range o services to

ensure their institutional

viability. In Bangladesh,

some MFIs reduced the

c o m p u l s o r y s a v i n g s

requirements because o increasing competition. A

number o MFIs, including BRAC and ASA, have also

reduced their nominal interest rates. The competition

will lead to a substantial growth in lending orhousing improvements, education, emergencies,

and consumer durables. Microinsurance services will

also dramatically grow in the next decade because

mainstream insurance companies have begun to

penetrate this market through their own delivery

networks and through partner-agency arrangements

with institutions such as MFIs and post oces having

The uture growth in nancial services or the

low-income households will be driven by more

enabling policy environment, integration o

technology into this segment o the nancial

markets, and increasing competition.

Competition will motivate incumbents to

reexamine and improve their business models to

provide better quality services and a wider range

o services to ensure their institutional viability.



The Future o Access to Finance

wider networks. Third, competition at the upper

end o the markets will reinorce the incentives or

incumbents, particularly the domestic commercial

banks with currently no or minimal micronance

market penetration, to go down–market, thus leading

to an expansion o the supply with consequent

positive eects on the clients. I the current trends

in countries such as the Philippines and South

Arica are an indication,

the uture competition

may also come rom

nonnancial institutions

such as mobile phone

companies owing to the

increasingly blurring

industry boundaries in

the nancial service industry.

The other key driver o uture growth will betechnology. Three broad types o technology will

drive this growth: rst is pro-poor new inormation

and communication technology, primarily low-cost

cellphones; second is advances in ATMs and other

point o sales devices; and third is smart plastic cards.

Technology will positively impact on both demand or

and supply o a variety o nancial services. Technology

will reduce operating costs, improve eciency, and

lead to new delivery mechanisms and business

models. For example, technology will allow branchless

banking and establishment o new partnerships

between nancial service providers and a range o

other service providers

that were not easible

beore to provide services

to clients in remote areas

a n d l o w -po pu l a tio n

density areas. Mobile-

phone-based services

a r e r e v o l u t i o n i z i n g

micronance services in a number o countries such

as South Arica, Philippines, and India. However, theextent to which technology will be integrated into the

nancial service industry at the low end will depend

on supportive government policies and the quality o

the inrastructure, particularly in rural areas.

Technology will positively impact on both

demand or and supply o a variety o nancial

services. Technology will reduce operating costs,

improve eciency, and lead to new delivery

mechanisms and business models.



VIII. CONCLUSIONS

Access to nance is a central issue in developmentrom the view points o growth, reduction o income

poverty, social development, and equity. In most

developing countries, only a minority o the population

has access to nance, adversely aecting both growth

and inclusive development. For equitable growth and

inclusive development, this issue must be addressed

head-on particularly because in absolute terms low-

income people account

or the largest number

o people without access

to inancial services.Providing better access to

a wider range o nancial

services or this segment

o the population will

have a ar-reaching impact on the welare o their

amilies and contribute toward creating a more

egalitarian society than otherwise would be the

case.

The global experience on improving access

to inance or larger numbers o the population

suggests that there is no universally applicable model.Countries have achieved impressive results through a

range o approaches. However, the experience suggests

that countries that allow diversity in approaches and

institutional modalities

are most likely to achieve

better results and create

more competitive markets

that would immensely

b e n e i t l o w - i n c o m e

households than others.

The need or diversity in approaches and institutions is justied not only

by the diversity in demand or nancial services and

multidimensional nature o poverty but also by the

need to reduce systemic risks, increase competition,

and improve eciency.

The global experience provides useul insightsor policy makers in improving access to nance. The

governments need to recognize not only that private

sector institutions have a potentially major role to play

but also the central role o the governments themselves.

The governments have to dene their role and execute

it in such a way that it will provide space and incentives

or the private sector to play an increasing role in

providing services.

E s s e n t i a l l y , t h e

governments need to ocus

on a number o key areas.First, governments need

to explicitly recognize

access to nance or all

unserved and underserved

people as an important goal to pursue. Second, the

responsibility or improving access to nance must

be assigned to central banks. Third, systematic

eorts must be initiated and pursued to collect

data on dierent dimensions o the access problem.

Fourth, governments need to create an enabling

environment or the private sector service providersand allow them operational autonomy to make

sound business decisions. Fith, governments must

initiate reorm programs to transorm state-owned


with a mandate to serve

low-income people into

via bl e a n d dyn a mic

service providers. Sixth,

governments should

create legal space and

improve the inancialregulatory system to acilitate integration o nancial

services or the poor into the mainstream o nance.

In Brazil, banking regulators allowed banks to open

basic transaction accounts or poor people with

no proo o address or income. The countries such

The global experience on improving access to

nance or larger numbers o the population

suggests that there is no universally applicable

model. Countries have achieved impressive

results through a range o approaches.

Access to nance is a central issue in development

rom the view points o growth, reduction

o income poverty, social development,

and equity... this issue must be addressed

head-on.



Reerences

as Bolivia and Peru not only provided an enabling

policy environment but also necessary legal space

or regulated MFIs to emerge and thrive. Seventh,

governments have to develop nancial inrastructure

to reduce risks and transaction costs o providing

inancial services by

ormal sector institutions.

Eight, governments have

to adopt more liberal

p o l i c i e s o n o r e i g n

investments in nancial

services or the poor to

benet rom the vast amount o human and nancial

resources seeking investment opportunities in

nancial services or the poor. The important role

played by oreign investments in countries such as

Cambodia and Mongolia should not be overlooked.

Ninth, governments have to make signiicant

investments to improve economic and social

inrastructure in countries where underinvestments

in these constitute a major issue. Improvements in

economic and social inrastructure will reduce risks

and transaction costs

o providing inancial

services to the poor. In

addition, they will reduce

clients’ transaction costs

o accessing the services

and risks that they may

have to ace in their investment activities. In summary,

government eorts must be ocused on promoting,

rather than replacing, private nancial institutions to

provide nancial services or all.

In summary, government eorts must beocused on promoting, rather than replacing,

private nancial institutions to provide nancial

services or all.



REFERENCES AND WEBSITES

Akhtar, Shamshad. 2007. A New Paradigm. Banker 57 (979): 36–37. Asian Development Bank (ADB). 2000. Finance or the Poor: Micronance Development Strategy. Manila:

ADB.

. 2003. Report and Recommendation o the President to the Board o Directors on a Proposed Loan to

Sri Lanka or the Rural Finance Sector Development Program. Manila.

. 2005. The Changing Face o the Micronance Industry: Building Financial Systems or the Poor. Theme

Paper No. 14. Manila: ADB.

Bank Rakyat Indonesia (BRI). 2001. BRI Microbanking Services: Development Impact and Future Growth

Potential. Jakarta: BRI and the Center or Business and Government, John F. Kennedy School o

Government, Harvard University.

Barth, James, R. et. al. 2006. Rethinking Bank Regulation: Till Angels Govern. New York: Cambridge University

Press.

Beck, Thorsten, et. al. 2007. Banking Services or Everyone? Barriers to Bank Access and Use Around the World.

Paper presented at the World Bank Conerence on Access to Finance, 15–17 March 2007, World Bank,

Washington, DC, USA.

Bhatt, V. V. 1988. On Financial Innovations and Credit Market Evolution. World Development 16(2):281–292.

Blacklock, Carolyn. 2005. Big Banks, Small Customers: ANZ Bank’s Micronance Experience in the Fiji Islands.

Finance or the Poor 6(2): 6–8.

Burgess, Robin, and Rohini Pande. 2005. Do Rural Banks Matter? Evidence rom the Indian Social Banking

Experiment. The American Economic Review 95(3):780–795.Burki, H., and G. Chen. 2006. Micronance Perormance in Pakistan 1999–2005: Growth, But a Structural Flaw

Persists. Islamabad: Pakistan Micronance Network.

Business Line. 2006. Promote No-rills Accounts. 26 September.

China Council or International Cooperation on Environment and Development (CCICED), Agriculture and

Rural Development Task Force (ARDTF). 2005. Expanding Finance Options or Rural Development. In

China’s Agricultural and Rural Development in the Early 21st Century, edited by Sonntag, et. al. 2005.

Canberra, Australia: Australian Centre or International Agricultural Research.

Claessens, Stijn. 2005. Access to Financial Services: A Review o the Issues and Public Policy Objectives. World

Bank Research Working Paper 3589. Washington, DC: World Bank.

Clark, Heather. 2006. When There Was No Money: Building ACLEDA Bank in Cambodia’s Evolving Financial

Sector. Berlin: Springer.

Christensen, Clayton M, et.al. 2004. Seeing What’s Next: Using the Theories o Innovation to Predict Industry

Change. Boston, Massachusetts: Harvard Business School Press.

Coleman, Brett, and Jon Wynne-Williams. 2006. Rural Finance in the Lao People’s Democratic Republic:

Demand, Supply, and Sustainability. Manila: ADB.



Reerences

Diamond Management and Technology Consultants (DMTC). 2006. Building a More Inclusive Financial System

in India. Mumbai: DMTC.

Dolven, Ben, and Anthony Kuhn. 2004. China’s Other Big Banking Mess. Far Eastern Economic Review. 29

April.

Dyer, Jay, et. al. 2004. The Agricultural Bank o Mongolia. In World Bank/Consultative Group to Assist the Poor,

Scaling Up Poverty Reduction: Case Studies in Micronance. Washington, DC: CGAP.

Fernando, Nimal A. 2006. Understanding and Dealing with High Interest Rates on Microcredit. Manila: ADB.

Ferrari, Aurora, et. al. 2007. Access to Financial Services in Nepal. Washington, DC: World Bank.

Financial Express. 2006. MOF to tie up $1 billion ADB unds or co-ops. 26 September.

Flaming, Mark W. and Stuart Mathison. 2007. Financial Services Sector Assessment: Kiribati, Tuvalu, Samoa,

Solomon Islands, Vanuatu. New York: United Nations Development Program and United Nations Capital

Development Fund.

Helms, Brigit. 2006. Access or All: Building Inclusive Financial Systems. Washington, DC: World Bank.

HM Treasury. 2004. Promoting Financial Inclusion. London: HM Treasury.

Ivatury, Gautam. 2006. Using Technology to Build Inclusive Financial Systems. Focus Note 32. Washington,

DC: CGAP.

Jacoby, Hanan G., and Emmanuel Skouas, 1997. Risk, Financial Markets, and Human Capital in a Developing

Country. Review o Economic Studies 64(3): 311–335.

Kumar, Anjali. 2005. Access to Financial Services in Brazil. Washington, DC: World Bank.

Lamberte, Mario B., and Delbert Fitchett. Rural Finance in Azerbaijan: Executive Summary. In Beyond

Micronance: Building Inclusive Rural Financial Markets in Central Asia, edited by Mario B. Lamberte,

et. al. Manila: ADB.

Lyman, Timothy R., et. al. 2006. Use o Agents in Branchless Banking or the Poor: Rewards, Risks, and Regulation.

Focus Note 38. Washington, DC: CGAP.

McKinnon, Ronald. 1973. Money and Capital in Economic Development. Washington, DC: The BrookingsInstitution.

Meyer, Richard, and Geetha Nagaranjan. 2000. Rural Financial Markets in Asia: Policies, Paradigms, and

Perormance. Hong Kong: Oxord University Press.

Organisation or Economic Co-operation and Development (OECD). 2004. Rural Finance and Credit

Inrastructure in China. Paris: OECD.

. 2005. Economic Surveys: China. Paris: OECD.

Peachy, Stephen, and Alan Roe. 2004. Access to Finance–What Does it Mean and How Do Savings Banks Foster

Access? Brussels: World Savings Bank Institute.

Rajan, Raghuram, and Luigi Zingales. 2004. Saving Capitalism rom the Capitalists. New Jersey: Princeton

University Press.

Rajan, Raghuram. 2006. Separate and Unequal. Finance and Development 43(1): 56-57.

Rhyne, Elizabeth, and Andres Guimon. 2007. The Banco Compartamos Initial Public Oering. Insight No. 23.

Accion International.

Roth, J., et. al. 2007. The Landscape o Microinsurance in the World’s 100 Poorest Countries. Microinsurance

Center. www.microinsurance.org.



Rosenberg, Richard. 2007. CGAP Refections on the Compartamos Initial Public Oering. Focus Note No. 42.

Washington, DC: CGAP.

Rutherord, Stuart. 2000. The Poor and Their Money. New Delhi: Oxord University Press.

. 2006. The Grameen Pension Savings Scheme. Finance or the Poor 7(3): 1–10.

Sinha, Sanjay. 2007a. Eciency with Growth: The Emerging Face o Indian Micronance. Finance or the Poor

8(3): 1–11.

. 2007b. The Financial Exclusion Bill. The Economic Times. 1 June.

Swiss Reinsurance Company. 2006. Sigma Report 5/2006. Zurich: Swiss Re.

Thorat, Usha. 2007. Financial Inclusion – The Indian Experience. Speech made at the HMT-DFID Financial

Inclusion Conerence 2007, 19 June 2007, Whitehall Place, London, UK. Available: www.rbi.org.in/

scripts/speeches.

United Nations Capital Development Fund. 2005. Statement o the Advisors Group to the United Nations

International Year o Microcredit. Available:

www.yearomicrocredit.org/docs/Advisors_Group_UN_IYOM_8Nov2005.pd

United Nations. 2006. Building Inclusive Financial Sectors or Development. New York: United Nations.

United Nations Development Programme (UNDP). 2007. Building Security or the Poor: Potential and Prospects

or Microinsurance in India. Colombo: UNDP Regional Centre.

Von Pischke, J. D. 1991. Finance at the Frontier. Washington, DC: World Bank.

World Bank. 2004. India Scaling-Up Access to Finance or India’s Rural Poor. Washington, DC: World Bank.

. 2006. Micronance in South Asia: Towards Financial Inclusion or the Poor. Washington, DC: World

Bank.

Wenner, Mark, et. al. 2007. Managing Credit-Risk in Rural Financial Institutions in Latin America. Washington,

DC: Inter-American Development Bank.

World Savings Bank Institute (WSBI). 2004. WSBI Access to Finance Resolution. Brussels: WSBI.

Websites

www.acledabank.com.kh

www.grameen-ino.org

www.mixmarket.org

www.syndicatebank.in

www.undp.org

www.woccu.org



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 developingeconomies, the formal financial sectors serve only a minority, often no more than 20–30% of thepopulation. Most households who do not have access to financial services are concentrated inlow-income categories. Even those low-income households who have access to finance areunderserved both in terms of quantity and quality of products and services. Although it is not apanacea, 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 dealof attention and must be addressed head-on. The global experience suggests that there are manyways to improve access to finance for low-income households. Many countries have madeprogress through diverse approaches and different institutional modalities. The global experienceprovides useful insights for policy makers and practitioners who are committed to address theissue. While many stakeholders have to participate in this effort, cross-country experience over timeindicates 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 privatesector 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 thenearly 1.9 billion who live on less than $2 a day. Despite many success stories, the region remainshome to two thirds of the world’s poor. ADB is a multilateral development finance institutionowned by 67 members, 48 from the region and 19 from other parts of the globe. ADB’s vision is aregion free of poverty. Its mission is to help its developing member countries reduce poverty andimprove their quality of life.

ADB’s main instruments for helping its developing member countries are policy dialogue, loans,equity investments, guarantees, grants, and technical assistance. ADB’s annual lending volume istypically about $6 billion, with technical assistance usually totaling about $180 million a year.

ADB’s headquarters is in Manila. It has 26 offices around the world and more than 2,000employees from over 50 countries.

Asian Development Bank 6 ADB Avenue Mandaluyong City

Documents

Low Income Household Improvement