UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 15 / August 2005

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By Angela Arévalo, Adviser, World Savings Banks Institute[1]

Within the framework of its strategy to contribute to the debate on access to finance and to raise awareness of the role of savings banks, the World Savings Banks Institute (WSBI)[2] is working on its own data collection efforts with a broad perspective:

1. The field of WSBI's research work is the market for accessible finance - as opposed to the microfinance sector alone. This "market" includes savings banks, postal savings banks, other institutions with a double bottom line, concerned commercial banks and microfinance institutions.
2. The scope of WSBI's work entails analysis of the supply side of accessible finance. Despite greater attention to demand-side data collection efforts (such as household surveys), one cannot deny that the use of financial services lies at the intersection of demand with supply. Demand-side surveys are neither more nor less a valid way of measuring access than supply-side estimates; actually, they are both needed.

The Importance of Data

That access to finance matters for economic growth, poverty reduction and social inclusion is widely recognized and supported by academic research. A coherent body of research evidence[3] shows that financial development is positively associated with economic growth and better income distribution, with both being considered drivers of poverty reduction. Building inclusive, well-developed financial systems is therefore critical to reducing poverty.

Despite the importance of access to finance, there is very little information about who has access, who effectively uses financial services and how financial institutions are providing those services. Moreover, there is still no coherent and widely-accepted framework for identifying whether access in a country is severely repressed or moving towards full inclusion. The lack of information on the status of access and use of financial services worldwide is considered as one of the major obstacles to building inclusive financial sectors.

In this framework, WSBI is supporting initiatives to collect and analyse information on the status of access to financial services. WSBI members believe that a better view on the reasons for financial exclusion and the cost-benefit case for banks trying to improve access to financial services, will lead their operations and strategies towards more effective results in expanding and ameliorating this access.

WSBI's Contribution

WSBI has already made one major contribution to discussions concerning the measurement of access to finance, with its "Access to Finance" paper presented on the occasion of a joint WSBI/World Bank conference on the topic in Brussels at the end of October 2004.[4] A second study is currently under development, however its main findings can already be announced and are outlined below.

The first study presented some estimates on the level of access: it found that approximately 10% of the population in industrialised countries is excluded from the financial system and around 80% of those living in developing countries lack financial access.

Concerning the measurement of financial access, the authors identified different levels of access to banking services from different regions around the world in the first study.[5] By identifying the balance between cash in circulation and deposits mobilised, as well as the proportion of deposits recycled to lending for the private sector, they found that the level of access could be represented by three stages that allow the grading of countries according to where they lie in the spectrum: from very repressed access - where there might be less than one account for every ten adults, an intermediate phase where between one in five and one in three of the population have an account and approaching full access where at least half the population has an account.

From this exercise four significant regional conclusions emerged:

• Sub-Saharan Africa is a long way behind other regions in terms of expanding access (although much, but by no means all, of this is a reflection of the extremes of poverty seen in this region);
• Asia is pretty well advanced in this respect. This is particularly true of the rapidly industrialising countries in that region but also of the generality of developing Asia;
• The more advanced transition economies of Central Europe have progressed extremely well in rebuilding real access after the huge declines of the early 1990s. However, most CIS countries lag far behind in this process;
• Central and South America have made surprisingly little progress in spite of relatively robust economic bases. This is particularly true of the larger countries in that region.

The Involvement of Savings Banks in the Market for Accessible Finance

The second study, which is currently being finalised, looks in greater depth at data from WSBI member banks in order to improve understanding of the quantitative and qualitative dimensions that impact access. It asks: How many accounts are there per head of population or household? Are there branches within a day's journey? Is it actually possible for customers to provide the required documentation to open an account? Will charges absorb the entire balance of a savings account within a year? Above all, the study seeks to give insight into the size of the market of accessible finance and to illustrate savings banks' role on that market.

It is important to mention that seeing that the study presents a supplier perspective; some of the results may look different to the results of consumer surveys carried out in developing countries. Neither perspective is wrong. Only the understanding of both demand and supply side will lead to more comprehensive solutions to expanding access.

The initial findings of the work so far have shown groundbreaking results. On the question on how big the market for accessible finance is, it was found that, further to CGAP's first estimates which revealed the existence of 750 million accessible accounts,[6] there are more than 1.4 billion accessible accounts. Furthermore, savings banks - including postal savings banks - manage over three quarters (at least 1.1 billion) of those accessible accounts. The remaining 300 million accounts are provided by specialist microfinance providers, rural and development banks, credit unions and co-operatives.

These results indicate both that the market for accessible finance is much larger than anyone had previously realized and that savings banks are very important players in this market:

• In advanced industrial countries, approximately 90% of adults will at least have some sort of bank account and in a number of them, savings banks will account for half or more of this market. Where they do not, it is because commercial banks share the same retail focus;
• For developing countries the comparable figure is probably around 30-40% of adults who have some sort of bank or microfinance relationship - this figure is double that of estimates made a year ago.

Moreover, the results have shown that an economy is very unlikely to be approaching full access unless it has a strong savings bank movement (see next table). In this respect microfinance and savings banking should be seen as complements, not substitutes. Savings banks' strengths are in processing small-scale lending, as well as providing accessible savings and payment services. Microcredit specialists are good at small scale lending. Both strengths can be combined for a strong local financial system.

Snapshots of access - microfinance institutions (MFIs), savings banks and commercial banks

It is misleading to think of all savings banks as savings-only institutions. The research has shown that across the developing world non-postal savings banks recycle half their deposits as credits. The table below shows the average proportion of savings mobilized in different regions.

Shares of savings mobilised as credit by region (for non-postal savings banks)

Furthermore on the lending side, when considering credit portfolios as a whole, the average size of loans from WSBI members in South America and Central Europe is similar to specialist microfinance schemes, meaning that they target a truly mass market.

As regards costs, savings banks appear to have much higher staff productivity than microfinance institutions. This can be seen in the number of accounts per employee. Savings banks handle roughly 900 accounts per employee, microfinance institutions perhaps only 150. Some of the 900 accounts could be inactive but not the 85% or so needed to bring the two numbers into line.[7]

Last but not least, a common feature of savings banks across the world is the maintenance of large branch networks, often in areas that commercial banks no longer serve. Furthermore, there are some indications that savings bank staff is just as productive outside major urban centres as inside, suggesting savings banking is more scaleable than commercial banking in rural areas.

Finally, these results provide both encouraging and challenging news for the savings banks movement, showing that:

• Access to formal financial institutions across the developing world is twice what it was thought to be, with savings banks accounting for three quarters of this;
• But despite this, access is still seen as a problem and savings banks seem to be the invisible players in the arena.

The possible reason for this could be that savings bank accounts are accessible but put obstacles in the way of customers using them for all but the most basic services. In other words, access is available but people are not using the actual infrastructure.

This conclusion is very challenging not only for savings banks but for the market for accessible finance as a whole. How can we revive the actual infrastructure and adapt it to the real needs and expectations of the majority of the population? For market players this is not only a social concern, in addition it represents a huge business opportunity.