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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 Mobilize and pool savings Savings services Produce information ex ante about possible investments and allocate capital Payment services 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 Financial markets Collect savings and intermediate in the form of debt, collect proprietary information about debtors and monitor them directly 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 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 nondemand deposits) Non-bank financial institutions (finance through non-deposit sources): leasing companies etc. Financial intermediary development Source: International Financial Statistics (IFS) Liquid Liabilities (currency plus demand and interestbearing liabilities of FI)/GDP Bank deposits/GDP IFS lines (24+25)/99b Bank Credit/GDP IFS lines 55l/99b IFS lines (22d)/99b Private Credit/GDP IFS lines (22d+42d)/99b Financial intermediary development: A note on deflating FDt FDt 1 0.5 * CPI e , t 1 CPI e , t GDPt CPI a , t Private Credit in Brazil 1990 (inflation = 3,000%) 37.5% 23.0% FD t GDP t FDt CPI e,t GDPt GDPt 1 0.5 * ( ) CPI a,t CPI a,t 1 Financial intermediary development across countries 0.8 0.7 0.6 0.5 Low Lower Middle Upper Middle High 0.4 0.3 0.2 0.1 0 Liquid Liabilities/GDP Bank deposits/GDP Bank Credit/GDP Private Credit/GDP 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 semiformal 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 Interest rate margins = net interest revenue/interest bearing assets Average for all banks or weighted by size? Alternatively, as ratio to total assets Interest rate spread = lending rate – deposit rate (Source: IFS, country-specific) Overview Introduction Financial intermediaries Financial markets Contractual savings and insurance Access to financial services Compiling data – an on-going effort 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 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 Socio-economic: deficient access for some population segments Problems: population density, underdeveloped rural areas (e.g., physical infrastructure), security 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 Voluntary self-exclusion Physical access Affordability 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 Indirectly inferable from infrastructure What collateral is accepted by banks? What information requirements do banks have? What are criteria in lending process? 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 Branch Penetration Branches per 1,000 sq km Number of branches per 100,000 people India Indonesia Russia China 0.00 5.00 10.00 15.00 20.00 25.00 Number of Deposits per 1,000 Population 99th Percentile Austria 3,119. Greece 75th Percentile 2,417.64 Mauritius 1,585.99 Thailand 1,423.12 Trinidad and Tobago 1,073.48 Guyana 50th Percentile 25th Percentile 571.03 Venezuela 486.74 Bosnia 429.40 Philippines 302.05 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 al U awi ga nd G Ba h a ng an Zi lad a m esh ba bw Bo G sn eo e ia -H B rgia er oli D ze vi om g a in C ov ic o l in a n om a Re b i pu a A blic lb Bu ani lg a U ari ru a g Le uay Li ban th on ua n M ia Sl alt ov a en S p ia ai n Ita S w ly ed en M Minimum Amount (% GDP per capita) Barriers to Banking Minimum Amount to Open Checking Accounts (% of GDP per capita) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 ala Ug wi an d Ba Gh a ng ana la d Bo Ge esh sn or ia -H Bo gia er liv ze i a Do g m in Co ovin ica lo a n mb Re ia pu Al blic b Bu ania lg Ur aria ug Le ua ba y Li no th n ua n M ia Sl alt ov a en i Sp a ai n Ita Sw ly ed en M Annual Fees (% GDP per capita) Barriers to Banking Annual Fees on Checking Accounts (% of GDP per capita) 30.00 25.00 20.00 15.00 10.00 5.00 0.00 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