PSD Blog - The World Bank Group

The Infinite Potential of Mobile Banking

Brookings has released a report on the state of access to finance in developing countries, taking a specific look at the lessons learned from the mobile banking sector in Kenya. The report paints a troubling picture of the state of financial access in many developing countries, but then gives some reasons for optimism.

First, the bad news:

Access to financial services, and indeed overall financial development, is crucial to economic growth and poverty reduction. Yet in Sub-Saharan Africa, only 1 in 5 households have access to financial services. In 2007, over 70 percent of Kenyan households did not have bank accounts or relied on informal sources of finance. In 2006, there were only 35 bank branches in Benin, a country with a population of 7 million. This lack of formal financial services limits market exchanges, increases risk and limits opportunities to save. Without formal financial services, households rely on informal services that are associated with high transaction costs.

Responsible Finance: The Case of the Philippines

Yesterday I attended a presentation at CGAP on responsible finance, which featured three excellent guest speakers, including Fe de la Cruz, Director of Corporate Affairs, Central Bank of the Philippines (the other guests included a former member of the Brazilian Central Bank, and Daryl Collins, co-author of Portfolios of the Poor). The presenters discussed their interpretations of responsible finance, and outlined how specific government programs are spurring its development.

In essence, responsible finance is driven by three primary actors:

1. Governments, who provide consumer protection and regulation
2. Providers of finance
3. The clients themselves, who need to posses a certain degree of financial literacy

Fe de la Cruz outlined how the Philippine government is actively supporting the responsible finance agenda.

One third of Filipinos live in poverty, and only 30 percent of the total population have formal bank accounts. The government is attempting to address these issues by pushing financial education at an early age. Children in grades 1-6 (ages 6-11) are now given instruction in financial literacy. Because many of the country's poorer children drop out of school once they reach puberty, the government has decided to focus its financial education efforts on the very young. The result is that over 12 million students are given some sort of lesson in financial responsibility.

Got Behavioral Economics?

Despite economists’ frequent assumption that humans are rational economic agents, let’s admit it, we have limitations; we may be weak, altruistic, easily manipulated or scatter-brained among many other things. Thus, results based on, say field experiments relying on one-off interviews may tend to miss a lot of that important human behavior.

Kiva-mongering

David Roodman, a fellow at the Center for Global Development, set off a storm with a post on the popular microfinance organization Kiva. Many lenders on the sight probably had the impression this was a peer-to-peer lending sight, but David reveals this is not quite so. Kiva connects lenders to microfinance institutions, not individual microentrepreneurs. His post even prompted a piece in the New York Times yesterday that compares Kiva to partially discredited child sponsorship organizations. But make sure to check out CGAP's even-handed take on the whole issue.

On the heels of that controversy, Kiva finds itself dealing with another. Premal Shah, Kiva's president, apeared yesterday on Press: Here and discussed the concerns of some Kiva users over the site's expansion to include U.S.-based borrowers. Premal points out (in the very beginning of Episode 33 Part 2) that Kiva gives you choice: "The whole idea of Kiva is that it gives you, the person who wants to make a difference, choice. So if you want to lend to a goat-herder in Ghana, go for it. If you want to lend to a bakery in Oakland, California, that's your perogative."

Small businesses and the case for safe savings

Writing in this blog last July, Anushka Thewarapperuma penned a favorable review of a new book by Daryl Collins and Jonathan Morduch on how people living on less than $2/day manage their financial lives. The authors discovered that the world's poor are quite good at managing their finances:

The poorest people on earth engage in the sort of sophisticated money management that would make Chuck Schwab proud.

Thewarapperuma ended her post by noting that Collins "will be coming out soon with a pilot study using the same methodology of financial diaries, this time for small businesses."

Flash-forward to today, and Collins is back with her new study, commissioned by FinMark Trust, which gathers cash flow and qualitative information for small businesses in South Africa. The report, which surveyes 26 businesses in Langa and Nyanga townships across a range of industries, makes some initial conclusions about the financial services and training needs of these small enterprises, including:

Microfinance under the microscope

Last year I speculated about the potential impact of the financial crisis on the environment for microfinance. A report from the Economist Intelligence Unit (2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean) provided data on the microfinance premium—the difference between what mainstream banks and MFIs charge for a loan—in many countries in Latin America. How much would MFIs reliant on external funding get squeezed, and would they get squeezed worse than the banks?

The recently published 2009 Microscope (now expanded to 55 countries around the world with the assistance of IFC) gives a mixed answer. Of the 13 countries in Latin America for which there are data in both the 2009 and 2008 Microscope, seven saw their microfinance premiums rise while six saw their microfinance premiums fall (see image below the jump for the most recent premiums).

Improving Credit in Armenia

The 2006 and 2007 Doing Business reports both found that Armenia has been reforming in the area of credit. Armenian lenders can now rely on a credit registry when deciding on loan applications. But have these reforms really had an impact?

The recently-released enterprise surveys country note on Running a Business in Armenia shows that these reforms have indeed resulted in improved access to credit, which in turn is making it easier for Armenian firms to operate efficiently.

Both prepaid sales and sales on credit nearly doubled in recent years, from 15 to 16 percent in 2005 to 30 percent in 2009. Furthermore, the figure below shows that the value of collateral (expressed as a percentage of the loan amount) necessary to secure a loan has decreased substantially across all sectors of the economy.

 

Bringing Finance to Pakistan's Poor

Yesterday I attended the World Bank's book launch of Bringing Finance to Pakistan's Poor: Access to Finance for Small Enterprises and the Underserved. The authors, Tatiana Nenova and Ceclie Thioro Niang, interviewed 10,000 households from across Pakistan's geographic and socio-economic landscape, including both men and women.

In general, Pakistanis are underserved by both formal and informal channels of finance. Only 14 percent of the total population has formal access, while just over 59 percent have access to either formal or informal finance. As the chart above illustrates, this is quite low compared to Bangladesh (32% formal access), India (48%) and Sri Lanka (59%). Small and medium enterprises, which account for 30% of GDP and 78% of jobs, only account for 16% of the country's overall credit.

Informal Sector Comparison: Manufacturing vs Services

I have been comparing the differences between manufacturing and services firms in the informal or unregistered sector. There is a rich literature on how and why these firms differ, but it is based on firms in the formal or registered sector. It’s a moot point whether differences between manufacturing and service firms in the formal sector also hold for the informal sector. For example, differences in scale economies between service and manufacturing firms are known to be important for the formal sector, but this is not immediately obvious when comparing these firms in the informal sector.

“Unwilling” Entrepreneurs

The common perception of the informal sector is that unregistered businesses are not as efficient as registered or formal businesses. One proposed reason for this is that, by not being registered, informal businesses face severe hardships in accessing finance, markets, public services and government programs. Hence, the usual policy response to informality is simple: try and encourage informal businesses to register.

However, another problem in regards to informal firms may be the underlying motivation for starting the business in the first place. There are many informal businesses that are started not because the owner sees a good business opportunity, but because he or she cannot find a satisfactory job (“unwilling” entrepreneurs). A survey of informal firms conducted by Enterprise Surveys shows that 46 percent of informal firms in Ivory Coast, 39 percent in Madagascar and 31 percent in Mauritius were started because the (largest) owner could not find alternative employment opportunities.