Finance: Research, Policy and Anecdotes

I am on my way back from Washington DC where I presented a paper at the IMF’s Fourth Statistics Forum on Financial Inclusion: Measuring progress and progress on measuring.  My first reaction to the invitation was a flash-back – to a conference at the World Bank in October 2004 on Data on Access of Poor and Low Income People to Financial Services: What we know and what we need to know.  That conference was part of the Year of Microcredit and a first high-level discussion on what data on financial inclusion were available and what would have to be done. The conclusion of that conference was that we had little if any data and we needed a lot of data. 

Over the past 12 years, we have come a long way.  Shortly after the above mentioned conference, Asli Demirguc-Kunt, Sole Martinez and I started out with several data collection efforts.  The better known of the two – branch and account penetration indicators – was later mainstreamed by the IMF in the form of the Financial Access Survey.   While these indicators are relatively easy to collect by national supervisors and can be updated frequently, they are clearly crude proxy indicators. In the case of branch and ATM penetration, there is too strong a focus on (i) traditional delivery channels, ignoring innovative channels, including agency or correspondent banking and digital finance, and (ii) on regulated entities.  In the case of deposit and loan account per capita measures, these indicators do not take into account that individuals might have several accounts across different banks.  A second, somewhat less known data collection exercise focuses on barriers to access, using a bank-level survey that targeted the largest 5 banks across a sample of 80 countries and present indicators for three types of banking services - deposit, loan and payments - across three dimensions – physical access, affordability and eligibility. Barriers such as availability of locations to open accounts and make loan applications, minimum account and loan balances, account fees, fees associated with payments, number of documents required to open a bank account, and processing times for loans vary significantly both across banks and countries. However, data collection efforts on access barriers based on bank-level surveys face several severe constraints.  First, unless channeled through regulatory entities, there is the risk of low response rates. Second, the comparability of such data might be limited given different account types and fee structures across banks and countries.  Nevertheless, such bank-level surveys have remained popular, as shown by the EBRD's Banking Environment and Performance Survey, although face-to-face interviews might be to only way to get good response rates.

Given the nature of financial inclusion focusing on individuals having access to and use financial services, more accurate measures of financial inclusion have to focus on users of financial services, in the form of surveys. Early surveys focused on financial access by individuals are the Finscope and Finaccess surveys across several African countries. The World Bank, with support from the Bill and Melinda Gates Foundation, has undertaken over the past years a broad cross-country exercise – the Global Findex Survey - by including financial questions in an existing Gallup global poll to generate baseline data on financial inclusion levels across 150 countries, using samples of 1,000 persons per country. The survey is to be undertaken every three years to measure and track specific data on people’s use and access to formal and informal financial services; the first wave was conducted in 2011, the second wave in 2014, with a third wave planned for 2017.  Experience with data from the first wave and the ongoing discussion on financial inclusion has led to adjustments and expansion in the questions for the second wave.

So looking back at the conference in 2004, we have made lots of progress.  However, we have also learned important lessons. One important lesson is that of Goodhart’s law: “When a measure becomes a target, it ceases to be a good measure”. Translated into the financial inclusion agenda: when policy makers focus too much on achieving specific inclusion goals, there is a risk that they care less about the quality of the financial services and the sustainability of their provision. In this context it is also important to understand that a positive impact of financial inclusion on individual and aggregate welfare does not come through the pure ownership of accounts but their active use. Finally, and again related to the previous point, it is important to look beyond absolute levels of the indicators on financial inclusion and benchmark them appropriately to properly assess progress in inclusion and gauge the effect of policy reforms.

Overview