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Financial Inclusion in Asia:
Meghana Ayyagari
(GWU)
GDN Workshop on Financial Inclusion
17th November, 2014
1
Agenda
What the raw data says
 Benchmarking across countries
 Challenges
 Policy Implications

2
0
20
40
60
80
100
Aggregate Financial Development
High Income
MENA
Developing Asia
Europe
LAC
Sub-Saharan Africa
Private credit by deposit money banks and other FI to GDP(%)
Bank Deposits to GDP(%)
Liquid Liabilities to GDP(%)
Source: Beck, Demirguc-Kunt, Levine, Cihak, and Feyen (2014)
Median country in Developing Asia fares better than median developing
country in Europe, LAC and Sub-Saharan Africa
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Aggregate Financial Development
0
20
40
60
80
100
Private credit by deposit money banks and other FI to GDP(%)
Developing Asia RoW
High Inc
Developing Asia RoW
Developing Asia RoW
Upper-middle Inc
Lower-middle Inc
Developing Asia RoW
Low Inc
The GNI/capita thresholds for income classification are: Low: <$1025, Lower-middle: $1,026-$4,035;
Upper-middle: $4,036-$12,475; High Inc: >$12,475
Within each income group, the median country in Developing Asia performs
better than the median country in the rest of the world (RoW).
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Household Access to Finance
% of adults with an account at a formal financial institution
100
90
80
70
60
50
Global
Median
37%
93.3
40
30
52.8
20
27.7
10
26.7
24.4
17.5
0
High Income
Europe
LAC
Developing Asia
MENA
SSA
Source: 2011 Global FINDEX Database
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
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Household Access to Finance
But this varies greatly across countries within Asia
% of adults with an account at a formal financial institution
100
90
80
70
60
50
40
30
20
10
0
6
Source: 2011 Global FINDEX Database
Household Access to Finance
The Supply Side Picture
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Enterprise Access to Finance
Percentage of Enterprises that Percentage of Enterprises that
have a checking/savings
have a line of credit/loan from
account
a financial institution
Developing Countries in
Middle East & North Africa
54.39%
13.88%
Developing Asia
84.24%
32.96%
Central Asia
88.23%
29.67%
East Asia
91.80%
35.63%
South Asia
79.72%
31.19%
Southeast Asia
77.19%
35.54%
The Pacific
94.56%
39.36%
Africa
83.94%
19.03%
Latin America & Caribbean
88.83%
53.65%
Europe
92.13%
40.91%
While a large percentage of firms use a checking/saving account,
firms’ access to external finance is limited
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Enterprise Access to Finance
% of working capital financed by banks
Small firms are particularly constrained in Developing Asia
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Gap in Financial Inclusion for households
For the whole of Developing Asia, median gap is -8.15 suggesting that the median
country in Developing Asia lags behind benchmark countries in account penetration
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Barriers reported by households
TOP 3 BARRIERS
Lack of money
Geographic Access
Cost
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Barriers reported by enterprises
Developi
ng Asia Europe
LAC
MNA
Africa
No need
55.36
64.77
65.38
48.32
37.16
Unfavorable interest rates
Complex application
procedures
14.75
19.84
12.30
11.74
19.25
10.81
7.13
5.81
9.64
17.41
Collateral requirements
8.21
4.94
4.62
7.55
11.56
3.36
1.13
1.06
3.77
2.26
3.22
0.40
2.42
3.04
6.05
4.29
1.80
8.41
15.93
6.32
Size of loan and maturity are
insufficient
Did not think it would be
approved
Other
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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.
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FINANCIAL INCLUSION IN ASIA:
IMPLICATIONS FROM POLICIES
AND INNOVATIONS ACROSS THE
WORLD
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Households and Microenterprises

Mircocredit


Microsavings


Research shows limited impact of providing access to microcredit on
poor households’ welfare and microenterprises’ growth
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)
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Households and Microenterprises

Islamic Finance


Branching Policies


Social banking experiments have shown some success in countries like
India but not clear whether the gains are sustainable
Financial Literacy


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.
Limited effect on financial behavior, including savings behavior
Biometric Identification

Important innovation showing promise. Few impact evaluation studies
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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.
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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))
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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))
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Small and Medium Enterprises

Market Structure and Lending Techniques



Partial Credit Guarantees



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).
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
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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
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EXTRA
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Barriers reported by enterprises
Armenia
Bangladesh
China
Georgia
India
Indonesia
Korea, Rep.
Pakistan
Philippines
Sri Lanka
Thailand
Median
Average
Eligibility
Days to
Days to
process
process
business loan SME loan
applications applications
9.94
7.62
34.55
43.26
50
40
5.03
5.62
19.98
10.75
16.59
9.68
2.73
2.73
31.98
33.63
44.13
33.29
15.57
10.04
22.46
23.74
19.98
10.75
23.00
20.03
Source: Beck, Demirgüç-Kunt, and Martinez Peria (2007a)
Evidence of complex application
procedures – takes over 30 days in some
countries to process a loan
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Barriers reported by enterprises
Stringent collateral requirements
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Benchmarking Methodology




We estimate the following regression FDi,t = bXi,t+ei,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, 2013.
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Gap in Aggregate Financial Development
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 (%).
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Gap in Financial Inclusion for
enterprises
Note: Data is presented by country since number of data points per region is fewer
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