Financial Inclusion in Asia: Meghana Ayyagari (GWU) GDN Workshop on Financial Inclusion 17 th November,

Agenda  What the raw data says  Benchmarking across countries  Challenges  Policy Implications 2

Aggregate Financial Development 3 Median country in Developing Asia fares better than median developing country in Europe, LAC and Sub-Saharan Africa

Aggregate Financial Development 4 Within each income group, the median country in Developing Asia performs better than the median country in the rest of the world (RoW).

Household Access to Finance 5 Over 70% of adults in Developing Asia report not having an account at a formal financial institution- a bank, credit union, cooperative, post office, or microfinance institution

Household Access to Finance 6 But this varies greatly across countries within Asia

Household Access to Finance The Supply Side Picture 7

Enterprise Access to Finance 8 Developing Countries in Percentage of Enterprises that have a checking/savings account Percentage of Enterprises that have a line of credit/loan from a financial institution Middle East & North Africa54.39%13.88% Developing Asia84.24%32.96% Central Asia88.23%29.67% East Asia91.80%35.63% South Asia79.72%31.19% Southeast Asia77.19%35.54% The Pacific94.56%39.36% Africa83.94%19.03% Latin America & Caribbean88.83%53.65% Europe92.13%40.91% While a large percentage of firms use a checking/saving account, firms’ access to external finance is limited

Enterprise Access to Finance % of working capital financed by banks 9 Small firms are particularly constrained in Developing Asia

Gap in Financial Inclusion for households 10 For the whole of Developing Asia, median gap is suggesting that the median country in Developing Asia lags behind benchmark countries in account penetration

Barriers reported by households 11 TOP 3 BARRIERS Lack of money Geographic Access Cost

Barriers reported by enterprises 12 Developi ng AsiaEuropeLACMNAAfrica No need Unfavorable interest rates Complex application procedures Collateral requirements Size of loan and maturity are insufficient Did not think it would be approved Other

Financial Inclusion in Asia Summary  Mixed picture of achievements and challenges.  In terms of aggregate financial development (banking sector depth and stock market turnover ratio), the median country in Developing Asia performs better than the median developing country in other regions of the world.  However, in terms of financial access very few households access formal financial services and far few enterprises have access to external credit.  There is also wide variation within Developing Asia with East Asia scoring high on most indicators and Central Asia performing the worst. 13

FINANCIAL INCLUSION IN ASIA: IMPLICATIONS FROM POLICIES AND INNOVATIONS ACROSS THE WORLD 14

Households and Microenterprises  Mircocredit Research shows limited impact of providing access to microcredit on poor households’ welfare and microenterprises’ growth  Microsavings Some evidence that access to formal savings might therefore result in a better protection of resources from other household members especially if the alternative is saving within the household rather than other informal means of saving outside the household (Beck, Pumak and Uras, 2014).  Microinsurance Limited take-up. Lack of trust and liquidity constraints are significant nonprice frictions that constrain demand for microinsurance (Cole et al. 2013) 15

Households and Microenterprises  Islamic Finance Beck, Demirguc-Kunt and Merrouche (2013) show that there not as many significant differences between conventional and Islamic banks in countries with both types of institutions.  Branching Policies Social banking experiments have shown some success in countries like India but not clear whether the gains are sustainable  Financial Literacy Limited effect on financial behavior, including savings behavior  Biometric Identification Important innovation showing promise. Few impact evaluation studies 16

Households and Microenterprises  Other Innovations Non-bank models – mobile banking, e-finance, and phone finance  Limited adoption of technology in Developing Asia Public-private partnerships, as in the case of digitalization of government payments in Pakistan. 17

Small and Medium Enterprises  Institutional Framework Introduction of credit registries or bureaus  positive impact on lending to SMEs (Brown, Jappelli and Pagano (2009) with smaller and more opaque enterprises benefiting more (Love and Mylenko, 2003). Positive effect of introducing movable collateral registries on firms' access to finance, an effect stronger among smaller firms (Love, Martínez Pería, and Singh (2012)) 18

Small and Medium Enterprises  Institutional Framework Haselmann, Pistor and Vig (2009) show that changes in collateral laws were more important than changes in bankruptcy laws for the expansion of credit in twelve transition economies in the 1990s Caveat: Countervailing evidence on the effect of strengthening creditor rights by negatively affecting the demand side (Acharya and Subramian (2009), Acharya, Amihud and Litov (2011),Vig (2013)) 19

Small and Medium Enterprises  Market Structure and Lending Techniques Large and foreign banks, relative to other institutions, can have a comparative advantage at financing SMEs through arms-length lending technologies, such as asset-based lending, factoring, leasing, fixed-asset lending, credit scoring, and centralized organizational structures. See Berger and Udell (2006) and de la Torre, Martinez Peria, and Schmukler (2010).  Partial Credit Guarantees Some positive evidence See Lelarge, Sraer, and Thesmar (2010)  Equity Finance While private equity seems promising still a nascent technology in developing countries due to various barriers 20

Conclusion  On average, countries stand where they are predicted to be by socio-economic factors  But large variation within the region  Financial innovation critical for further deepening and broadening External finance critical for SMEs Access to payment/savings services priority for households Need competition (beyond banking) and adequate regulatory framework 21

EXTRA 22

Barriers reported by enterprises 23 Eligibility Days to process business loan applications Days to process SME loan applications Armenia Bangladesh China5040 Georgia India Indonesia Korea, Rep.2.73 Pakistan Philippines Sri Lanka Thailand Median Average Source: Beck, Demirgüç-Kunt, and Martinez Peria (2007a) Evidence of complex application procedures – takes over 30 days in some countries to process a loan

Barriers reported by enterprises Stringent collateral requirements 24

Benchmarking Methodology  We estimate the following regression FD i,t = bX i,t +e i,t where FD is the log of an indicator of financial development, X is an array of structural country-specific factors, and the subscripts i and t relate to countries and years, respectively.  The predicted value of this regression provides a time-varying benchmark for different financial sector indicators  This Benchmark serves as a “structural depth line” and we can now compare the actual and predicted values to estimate a financial inclusion gap.  Source: Beck and De la Torre, 2007; De la Torre, Feyen, and Ize, 2013; Beck and Feyen,

Gap in Aggregate Financial Development 26 For the whole of Developing Asia, the median gap is 1.62 suggesting that for the median country in Developing Asia, the predicted value of Private Credit to GDP (%) is 1.62 percentage points below actual value of Private Credit to GDP (%).

Gap in Financial Inclusion for enterprises 27 Note: Data is presented by country since number of data points per region is fewer