Access to Financial Services in Emerging Powers: Facts, Obstacles and Recommendations

Abstract

In addition to financial stability and efficiency, access to financial services for large segments of the population is increasingly recognize as crucial for development. Access to finance, broadly defined as the share of households and firms that are able to use financial services if they choose to do so, can have substantial effects on welfare and can contribute to the reduction of poverty. In particular, financial access allows individuals and firms to move away from short-term decision making toward an inter-temporal allocation of resources. This encourages savings and removes the straitjacket of self finance, thus improving incentives for productive investments and for the enlargement and deepening of markets for goods and services.Though its importance is widely recognize (with a substantial amount of supporting literature), financial access remains extremely low in a large number of countries. Among these countries are Emerging Powers like Brazil, India and South Africa. According to World Bank calculations in 2007, the percent of adults with access to an account with a financial intermediary was only 43 per cent in Brazil, 48 percent in India and 46 per cent in South Africa. These figures compare with over 90 per cent in the developed world.While important for all categories of countries, improved access to financial services is particularly relevant for Emerging Powers. The fundamental reason is that, from an economic perspective, size (both in terms of GDP and population) ultimately matters as a source of economic power to the extent that it translates into large and growing domestic markets that are participating in the global demand for and supply of products and services. Insufficient access of the population (households and firms) to financial services can result in a severe constraint on the development of a dynamic middle-class with increasing consumption capabilities and of a buoyant entrepreneurial sector, including small and middle-size enterprises. Thus, in this paper, we take the view that improved access to financial services in Emerging Powers is necessary for the long-term sustainability of their economic power.This paper builds on existing research to address two fundamental questions: First, why do big emerging economic powers like Brazil, India, Mexico and South Africa display low ratios of access to financial services for large segments of their populations? And second, do the obstacles to financial access in Emerging Powers differ from those faced by other emerging/developing countries? It is important to note that this study will focus only on financial services accessed through the formal financial system. Consistent with previous research, this paper considers the creation of adequate incentives for the increased provision of and demand for services in the formal financial sector as an important policy challenge.To conduct the analysis, the rest of the paper is organised as follows: Section II defines the concept of Emerging Powers that will be used in this study and identifies the countries in that group. Then it presents a number of stylised facts that characterise access to financial services by this group of countries, emphasizing differences between developed countries and emerging/developing countries. Section III identifies obstacles to access to financial services and provides graphic evidence and partial correlations between financial access and some of the most important impediments to access. Section IV presents an econometric investigation aimed at answering two questions: (a) is financial access in Emerging Powers limited by the obstacles defined in Section III?; and (b) is the relative importance of alternative constrains to financial access in Emerging Powers different from other emerging/developing countries? Answers to questions (a) and (b) then shape Section V, which derives policy implications and conclusions.