Policy-makers facing urgent demands to reform national financial systems have a key opportunity to help their poorest citizens gain access to useful financial services.
But to seize that opportunity, they need much better information on the extent of access to services in their countries, such as who has access and what policies can be adopted to achieve this goal.
"Many countries have a stated policy of broadening access to finance for their poorest citizens," says Nataliya Mylenko, lead author of CGAP's new report, Financial Access 2009. "But in the absence of data, it's very difficult for decision makers to formulate effective policies."
To address this lack of data, CGAP surveyed financial regulators in 139 countries to produce the first of a new series of annual assessments on the status of financial access worldwide. Financial Access 2009 finds that formal banking often targets only the wealthiest people, depriving the poor of important tools that can help them invest more in their businesses, spend more on household items, and have the funds to cope with crises.
"For the first time ever, policy-makers have the opportunity to examine their access to finance efforts within the context of global indicators," says Elizabeth Littlefield, CGAP CEO. "Many may be surprised to learn that only about 30% of people in developing countries have deposit accounts with regulated financial institutions, compared to 80% in developed countries. For 70% of the population in developing countries who are excluded from the regulated financial system, basic financial transactions like payments or savings are simply not available."
Financial Access 2009 confirms that in most developing countries banks do not serve low-income populations, instead they focus on richer clients. Non-bank financial institutions, such as cooperatives, specialised state financial institutions (like postal and state saving banks), and microfinance institutions, are more likely to work with poor and rural clients.
But the information available for nonbank financial institutions is limited, making it difficult to assess the true scale of their operations.
The research finds that norms for identification (know-your-customer) requirements should be proportionate to the size of transactions and accounts. Poor people in developing countries often find it difficult to provide acceptable identification-many do not have government identification, supporting documents, or even an address-to satisfy stringent know-your-customer requirements.
Some countries do not have reliable identification issuance systems. And costs of collecting know-your-customer data, and reporting them and other transaction data, are large in relation to the small size of accounts that would be held by poor people.
In addition, government transfers to deposit accounts have the potential to make banks, government, and clients better off. Of the 139 countries surveyed, 40 reported encouraging or mandating conducting government transfers through the banking system, including 14 high-income countries and 10 countries in Latin America. Few countries in other regions are promoting such transfers.
The survey finds that regulation should make it easier for banks to establish branches, reporting that 90 of 139 countries (nearly 65%) require formal approval for each new branch. Obtaining approval is a mere formality in some countries. But in others approval involves undergoing a long application process, submitting a feasibility study, and obtaining additional clearances from several government entities.
In some cases multiple clearances and delays result in months of waiting, not to mention high costs, that can deter banks from setting up branches. When the cost of complying with the branch approval process is too high, banks might reconsider building branches that are only marginally profitable-such as branches in many poor or rural areas.
In addition, transparency – ensuring that pricing, terms, and conditions are fully disclosed in ways clients can understand – is an important part of consumer protection.
Comprehensive credit information bureaus and adequate consumer protection are important for access to credit. In high-income countries and Latin America, where retail credit is more developed, more than 90% of countries have consumer protection and disclosure requirements, compared to only half in South Asia and Africa.
Disclosure requirements on loan interest rates exist in 109 countries. In all, 47% of countries have disclosure requirements rather than usury ceilings, while 30% of countries use both. Financial Access 2009 stresses the importance of regulators and governments gathering more information about the characteristics and behavior of their financial systems, to help them design policies that correctly target barriers to poor people accessing financial services and that anticipate changes in behavior and financial systems in the future.