Financial Services and Financial Access Indicators Thorsten Beck

Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services Compiling data – an on-going effort

Functions of financial markets Ease the exchange of goods and services Payment services Mobilize and pool savings Savings services Produce information ex ante about possible investments and allocate capital Credit services Monitor investments and exert corporate governance after providing finance Facilitate the trading, diversification and management of risk

Financial institutions and markets Financial intermediaries Collect savings and intermediate in the form of debt, collect proprietary information about debtors and monitor them directly Financial markets Attract savings in the form of debt or equity instruments to provide resources for firms; information collection and dissemination through price mechanism Contractual savings and insurance Mobilize savings through contingent contracts, offer risk management services, provide investment resources in different forms (institutional investors)

Financial intermediaries or markets? Financial system structure varies widely across countries Financial structure (importance of banks and markets) has no impact on economic development The provision of financial services (by whoever) is important for economic development

How to measure provision of financial services While emphasis on financial service provision as opposed to specific institutional structure, available data are organized by institutions not by services Careful in interpretation (example US: most credit is not through banks, but other financial intermediaries) Mix of cross-country comparisons and country-specific data, anecdotal and qualitative evidence Here, we focus on quantitative measures

Structure of the Financial System Number Total assets Depository institutions Commercial banks Mortgage finance companies Building Societies Non-depository institutions Insurance companies Pension funds Securities firms Finance companies

Financial institutions and markets – some initial thoughts Stocks vs. flows Are all assets equal? Depth vs. breadth Limitations of quantitative indicators

How to compare across countries Income group Regional group Other countries in the region Countries of the same size (region or elsewhere) Countries with similar export structure

Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services Compiling data – an on-going effort

Financial intermediary development Deposit money banks (offer demand deposits) Other bank-like institutions (postal banks etc., finance through non-demand deposits) Non-bank financial institutions (finance through non-deposit sources): leasing companies etc.

Financial intermediary development Credit (IFS 22) Deposits Private sector (22d) Demand deposits (24) Public sector (22a,b) Savings/time deposits (25) Inter-bank (22f)

Financial intermediary development Source: International Financial Statistics (IFS) Liquid Liabilities (currency plus demand and interest-bearing liabilities of FI)/GDP IFS lines 55l/99b Bank deposits/GDP IFS lines (24+25)/99b Bank Credit/GDP IFS lines (22d)/99b Private Credit/GDP IFS lines (22d+42d)/99b

Financial intermediary development: A note on deflating Private Credit in Brazil 1990 (inflation = 3,000%) 37.5% 23.0%

Financial intermediary development across countries

How to interpret financial intermediary development Countries with higher levels of financial intermediary development enjoy higher GDP per capita growth rates. Rapid growth in financial intermediary development is a good banking crisis predictor. Financial intermediary development has to be based on fundamentals Legal system efficiency Transparency Monetary stability Focus on effectiveness, not size

Financial intermediary development – a caveat Cross-country comparisons limited to institutions that report to regulators and thus indirectly to IFS. In most countries, this does not cover semi-formal financial institutions (coops), informal finance and micro-finance Recent data collection on micro-finance penetration

Financial intermediary development - Efficiency Source: Bankscope Overhead costs/total assets Average for all banks or weighted by size? Interest rate margins = net interest revenue/interest bearing assets Alternatively, as ratio to total assets Interest rate spread = lending rate – deposit rate (Source: IFS, country-specific)

Financial intermediary development - market structure Number of institutions Concentration ratio, Herfindahl index etc Ownership structure (government and foreign ownership) More on this later

Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services Compiling data – an on-going effort

Financial market development Equity market Debt market Other markets Data availability: best for equity, less for debt, few for other markets Sources: Emerging Market Database, BIS

Financial market development Primary markets Number of issues Issue volume/GDP Problems: Debt issues: refinance? Might vary a lot over the years

Financial market development Secondary market: Market size Market capitalization/GDP Number of listed firms (debt or equity)/GDP Problem: how much is widely held and traded Problem: comparison over time and across countries made difficult due to price element Market activity Value traded/GDP Turnover = value traded/market capitalization

Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services

Contractual savings and insurance Source: SIGMA Insurance penetration (premium volume/GDP) Insurance Density (premium volume per capita in USD) Problem: price*quantity Outstanding assets/GDP Range of products Contractual savings: Source: country-specific Total assets of funded pension programs Total expense for PAYG pension systems

Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services Compiling data – an on-going effort

Access to financial services – How to define access Geographic: deficient access to branches and outlets Problems: population density, underdeveloped rural areas (e.g., physical infrastructure), security Socio-economic: deficient access for some population segments Problems: high minimum deposits and administrative burden, lack of formality, low educational levels, discrimination Opportunity: reliance on past record and real estate collateral (instead of on expected future performance) Problems: credit services limited to entrepreneurs with credit history, connections, or immovable collateral

Access to financial services – Access vs. usage Usage much easier to measure, but access most likely wider Understanding usage requires information on both demand and supply Distinguishing between: Access to financial services Physical access Affordability Voluntary self-exclusion Cultural barriers and financial illiteracy Inadequacy of product Involuntary self-exclusion Involuntary exclusion

Access to financial services – defining the problem properly Payment/savings services Constrained optimum too low, due to state variables (contractual framework, infrastructure, security, market size etc.) Equilibrium below constrained optimum, due to regulatory inefficiency, market structure Credit services Constrained prudent optimum too low, due to (i) macroeconomic volatility, (ii) deficiencies in contractual and informational framework and (iii) lack of possibilities to diversify risk Equilibrium below constrained prudent optimum, due to regulatory inefficiency, market structure Imprudent excess access, beyond constrained optimum

How to measure access: Geographic/physical access Indicators: Branch/outlet/ATM penetration (legal definition) Compare penetration in urban/rural areas Availability and use of phone and e-finance Alternative providers Use of indicators: Comparison across geographic units within countries Relative to GDP, population, area Pitfalls: Relate to other country characteristics Are more branches better? (Overbranching?) Policies and regulations on branching

How to measure access: Socio-economic Indicators Number of clients Deposit and loan size distribution, SME lending Fees and minimum balances for deposits Cost and time of payment services Informal finance Firm-level and household surveys Use of indicators: Cross-country comparisons on firms’ financing patterns and obstacles Characteristics that can explains firms’ and households’ access to financial services Identify main impediments to access/participation to finance (economic, legal, social, infrastructure etc.) Pitfalls: “70% of population do not have access” – define access problem Control for household and firm characteristics when assessing access and participation

How to measure access – Opportunity Closely linked to socio-economic segmentation Mostly anecdotal evidence What collateral is accepted by banks? What information requirements do banks have? What are criteria in lending process? Indirectly inferable from infrastructure Contractual environment Credit information systems Possible areas to be explored with expert surveys Time and cost to apply for loan Infer size of eligible borrower segment from collateral, information, minimum loan etc. requirements (provider surveys) and firm/household surveys

Access to Financial Services – Cross-Country Data Few data are available Recent data compilation effort by World Bank (Beck, Demirguc-Kunt and Martinez Peria, 2005) on branch/ATM penetration and use of loan and deposit accounts On-going effort to compile data on barriers to banking (cost, requirements etc.) Going forward: standardized household surveys to measure access to and use of financial services Already existing: firm-level surveys Going forward: expert surveys on costs of specific products

Branch penetration across countries

Number of Deposits per 1,000 Population 99th Percentile Austria 3,119.95 Greece 2,417.64 Mauritius 1,585.99 75th Percentile Thailand 1,423.12 Trinidad and Tobago 1,073.48 Guyana 571.03 50th Percentile Venezuela 486.74 Bosnia 429.40 Philippines 302.05 25th Percentile Honduras 287.27 Papua New Guinea 119.77 Armenia 111.38 1st Percentile Madagascar 14.46

Share of households with bank accounts – predicted vs. actual

Barriers to Banking

Barriers to Banking

Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services Compiling data – an on-going effort

Compiling data - an on-going effort Good data on banks Good aggregate data on equity markets and contractual savings Fewer data on cost and efficiency of financial markets Very few data on service provision and access

Compiling data – the tasks of IFI and countries IFIs’ task: Compile cross-country databases Develop and regularly update indicators of financial services and access Countries’ task: Collect and process data Develop “within-country databases”

World Bank Questionnaire on Access to Financial Services Collect data on credit, deposit and payment services across countries for Cross-country comparisons To study the impact of access on poverty and growth 19 Questions Data will be made public and accessible