## FINANCIAL INCLUSION—CAN IT MEET MULTIPLE MACROECONOMIC GOALS? (_sdn1517)

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---

### Executive summary — key takeaways
- Financial inclusion defined as the access to and use of formal financial services by households and firms.
- Over 60 governments have set financial inclusion as a formal target.
- Financial inclusion is a prominent objective in the post-2015 Development Agenda and several United Nations Sustainable Development Goals.
- Macroeconomic effects depend on the nature of inclusion; inclusion is multidimensional and effects vary by type of service (accounts, credit, insurance, infrastructure).
- Three policy-relevant findings:
  - Financial inclusion increases economic growth up to a point; marginal benefits wane as inclusion and depth increase and may be low or negative for some advanced economies.
  - Expanding access to credit without proper supervision raises financial stability risks; stronger supervision can mitigate or reverse these risks.
  - Expanding access to non-credit services (ATMs, branches, transaction accounts) does not adversely affect financial stability and can be promoted widely.
- Summary sentence: Financial inclusion can meet multiple macroeconomic goals, but macroeconomic gains wane as both financial inclusion and depth increase, and there are trade-offs with financial stability.

### Context, scope, and data
- Context and motivation:
  - Large gaps in access to finance prompted policymakers in more than 60 countries to set formal targets for financial inclusion.
  - In developing economies:
    - "more than half of the poorest 40 percent are without accounts"
    - "35 percent of small firms face difficulties accessing formal financial services"
  - Financial inclusion emphasized in international fora (United Nations SDGs, G20 commitments on women's economic participation).
  - Benefits: helping firms invest, smoothing household consumption, building capital, protecting against shocks, risk management.
  - Risks: uncontrolled expansion in access can lead to instability (examples: U.S. sub-prime crisis of 2007; India’s 2010 microfinance crisis).
- Data and scope:
  - Uses cross-country data on access and use of financial services from multiple sources (see Annex I).
  - Datasets allow analysis across many aspects of inclusion but are not strictly comparable and have shortcomings.

### Definition, measurement, and stylized facts
- Definition and multidimensionality:
  - Financial inclusion = access to and use of formal financial services (accounts to receive income or transfers, savings accounts, credit sources, insurance products).
  - Pair-wise correlations among different indicators mostly below 0.3, indicating distinct dimensions.
- Measurement approach in the paper:
  - Providers’ side: Financial Institutions Access (FIA) — number of branches of commercial banks and ATMs per 100,000 adults.
  - Users’ side: share of firms and investment financed by bank credit; share of population with account at a formal financial institution by gender and income groups; share of firms citing finance as a major obstacle; share of adults using accounts to receive transfers and wages; share of bank borrowers in the population; use of insurance products.
- Five stylized facts (selected highlights):
  - Fact one (global increase 2011 to 2014):
    - 2014: more than 61 percent of adults had an account with a financial institution or a mobile money service.
    - 2011: about 50 percent of adults had such an account.
    - Asia: share of adults with accounts increased by 14 percentage points (sharpest increase).
  - Fact two (cross-country variation and usage patterns):
    - 2014 regional account ownership examples: East Asia and Pacific (EAP): 69 percent; South Asia: 46 percent; Middle East: 14 percent; High-income OECD countries: 94 percent.
    - 2014 Global Findex: 37 percent of adults with an account do not make any deposits in a typical month; similar share for withdrawals.
    - Only about 18 percent of adults worldwide used an account to receive wages and pay utility bills; 44 percent in high-income OECD countries.
    - Only about 5 percent of adults used an account to receive wages in South Asia, the Middle East and sub-Saharan Africa.
  - Fact three (firms and finance):
    - More than one-third of small firms in developing economies cite access to finance as a major constraint.
    - 16 percent of small firms in advanced economies cite access to finance as a major constraint.
    - 25 percent of large firms in developing economies report problems accessing credit.
  - Fact four (gender gap):
    - Globally: 58 percent of women have an account, compared to 64 percent of men.
    - No gender gap in advanced OECD economies (94 percent of all adults have an account).
    - South Asia: only 37 percent of women have accounts.
    - Women entrepreneurs: estimated 70 percent of women-owned SMEs in developing economies are unserved or under-served by financial institutions.
  - Fact five (supervisory capacity gaps):
    - Basel Core Principles (CP) assessment used to score supervisory quality across 16 CPs relevant to financial inclusion.
    - Countries with low Financial Institutions Access (FIA) show larger gaps in supervisory quality than countries with higher access.

### Empirical findings — financial inclusion and growth
- Main empirical messages:
  - Most types of financial inclusion, including a greater share of women users, increase economic growth.
  - Marginal benefits for growth taper off with greater financial inclusion and depth.
  - Sectors dependent on external finance and those with low asset-tangibility grow more rapidly in countries with greater financial inclusion.
  - Inclusion can be growth-enhancing up to a point; beyond that point returns fall and benefits may be low or negative in some advanced economies.
- Findings on interaction with financial depth (FIN):
  - Initial levels of FI indicators have positive impact on 10-year growth in simple regressions, but impacts are statistically significant only after including overall financial depth (FIN) and other controls.
  - FI indicators with positive growth impacts include:
    - Firm-level: percentage of firms with bank credit; percentage of investments financed by banks; inverse of percentage of firms citing access to finance as a major constraint.
    - Household-level: percentage of adults with an account in a formal financial institution or with a credit card; percentage of adults who have borrowed from a formal financial institution; percentage who used an account to receive government transfers or wages.
  - Positive impacts hold for FI indicators related to the bottom income quartile and to women users.
- Quantified example:
  - For a country with private credit-to-GDP ratio at the 25th percentile, increasing availability of ATMs from the 25th to the 75th percentile is associated with an increase in average economic growth of 3 percentage points.
  - When private credit-to-GDP is at the 75th percentile, the same ATM increase yields about 2 percentage points of additional growth.

### Empirical findings — financial inclusion and stability
- Main findings:
  - Expanding access to bank credit without proper supervision increases financial stability risks:
    - Financial buffers decline with broader access to credit, other things being equal.
    - In countries with weaker supervision, erosion of buffers is larger.
    - Countries with strong supervision could see financial stability gains from higher inclusion.
  - In contrast, increasing access to ATMs, branches, and transaction accounts does not adversely impact financial stability.
  - Closing gender gaps in account usage and promoting diversity in the depositor base can improve growth without impairing financial stability.
- Mechanisms and evidence:
  - Inclusion can enhance stability:
    - Direct channel: increased use of bank deposits can solidify banks’ funding base in stress.
      - Evidence: a 10 percent increase in access to deposits can reduce the likelihood of a large (20 percent or more) average withdrawal rate of deposits in periods of stress by 4 percentage points (Han and Melecky, 2013).
    - Indirect channel: inclusion provides clients with better risk management tools, increasing resilience.
  - Credit access, bank stability, and supervision quality:
    - Relationship between bank stability (z-score) and financial inclusion depends on measure of inclusion and quality of supervision (BCP compliance).
    - Using share of borrowers as credit inclusion measure, relationship is bell-shaped at sample average level of bank supervision: initial positive association with bank stability, then buffers decline as inclusion expands.
    - In countries with weaker supervision (lower BCP observance), broadening credit access more strongly reduces bank buffers.
    - At sufficiently high supervisory quality, credit inclusion is positively associated with higher bank buffers.

### Empirical findings — financial inclusion and volatility
- Key results:
  - Larger changes in credit access are associated with higher growth volatility, other factors being equal.
  - Adequate regulation and supervision negate this impact.
  - Replication using Core Principles subset yields similar results.
  - Conclusion: financial inclusion, if done responsibly with adequate regulation and supervision, can contribute to more stable economies; inclusion without adequate regulation and supervision leads to more instability in growth rates.

### Empirical findings — financial inclusion and inequality
- Highlights:
  - Access to finance can help the poorest improve their economic situation, particularly in developing countries.
  - New research (Plotnikov and others, forthcoming) finds:
    - Increasing households’ access to borrowing lowers inequality as measured by the “ratio of 40” during 2007–12, after controlling for human capital measures.
    - This effect does not hold when considering only loans from formal financial institutions, highlighting the role of informal finance.
    - The reducing-inequality effect continues to hold for the share of women receiving loans.
    - The effect is stronger and larger for a subsample that excludes high-income countries.
    - The positive effect on income equality is less pronounced for other measures such as the Gini coefficient.
  - The gender gap in account holdings is positively related to income inequality: countries with larger gender gaps in account holdings tend to have higher income inequality (Gini coefficient).

### Empirical methods and specific regression results (Annex III highlights)
- Financial inclusion and financial stability regressions — setup:
  - Method: Panel regression with country fixed effects.
  - Timeframe: 2004–11.
  - Dependent variable: Bank Z-score (from Global Financial Development database).
  - Key explanatory variables: FAS variables for financial inclusion, lagged by one year, interacted with BCP (composite and subset of principles relevant to inclusion).
  - Controls: lagged Financial Institutions Depth index (FID), real GDP per capita, excess of credit growth above nominal GDP, population, FDI-to-GDP, trade-to-GDP, inflation, government balance, banking crisis dummy, Lerner index.
- Reported estimates (Bank z-score; explanatory variable: Number of borrowers per 1,000 adults):
  - composite BCP | subset BCP
  - Constant: 16.54*** (5.74) | 17.18*** (5.76)
  - X: -0.086** (0.039) | -0.087* (0.048)
  - X2: -3.20 x 10-5*** (9.34 x 10-6) | -2.92 x 10-5*** (9.20 x 10-6)
  - X*BCP: 0.032*** (0.013) | 0.032** (0.015)
  - Observations: 200 | 200
  - R-squared: 0.27 | 0.26
  - Number of Countries: 3939
  - Significance: *** p<0.01, ** p<0.05, * p<0.1
  - Note: standard errors in parentheses.
- Financial inclusion and economic volatility regressions — setup:
  - Method: Non-linear least squares estimation; timeframe: 2004–2011.
  - Dependent variable: Growth volatility (3-year rolling standard deviation of real GDP growth).
  - Explanatory variables: FAS variables (contemporaneous and lagged 3-year differences), interacted with BCP (composite and subset).
  - Controls: lagged by 3 years—FID, real GDP per capita, excess of credit growth above nominal GDP; contemporaneous: FDI-to-GDP, trade-to-GDP, inflation, government balance, volatility of terms of trade changes, volatility of regional cross inflows, offshore/onshore financial center, volatility of foreign growth, Polity index, crisis dummy.
- Reported estimates (Growth volatility; explanatory variable: Lagged 3-year change in number of borrowers per 1,000 adults):
  - composite BCP | subset BCP
  - Constant: 0.712** (0.34) | 0.823** (0.38)
  - X: 0.039*** (0.009) | 0.047*** (0.011)
  - X*BCP: -0.012*** (0.003) | -0.014*** (0.003)
  - Observations: 9999 | 9999
  - R-squared: 0.863 | 0.862
  - Significance: *** p<0.01, ** p<0.05, * p<0.1
  - Note: higher changes in borrowers per 1,000 adults increase growth volatility; better BCP reduces that volatility-increasing effect.

### Country examples and policy-relevant cases
- India:
  - Priority-sector lending (PSL) requires banks to set aside 40 percent of their assets to priority sectors.
  - PSL led to high nonperforming loans and concentrated credit risk in many public sector banks.
  - Pradhan Mantri Jan Dhan Yojana: "close to 170 million accounts opened by early July 2015"; state-owned banks accounted for 97 percent of enrollment; concerns about actual usage of accounts.
  - Reserve Bank of India (2014) recommendations and financial literacy efforts by National Center for Financial Education discussed.
- Peru:
  - 2014: launch of the “financial inclusion opportunities map.”
  - Builds on 2012 electronic e-money legislation and a new unified mobile payments platform; platform expected to become operational in 2015.
  - Leverages mobile telephone penetration of more than 75 percent.
- United States:
  - FSAP recommends financial inclusion feature more prominently on the U.S. policy agenda.
  - Global Findex: United States ranked 27th out of 147 countries in percentage of adults with a bank account in a formal financial institution.
  - 2013 FDIC survey: 20 percent of U.S. households are “underbanked” and 8 percent are “unbanked.”
  - Strengthened consumer protection and financial literacy initiatives noted.
- Nigeria:
  - Financial Inclusion Strategy (2012) aims to reduce exclusion from 46 percent of the adult population (in 2010) to 20 percent by 2020.
  - Strategy addresses five barriers: (1) income; (2) physical access; (3) financial literacy; (4) affordability; (5) eligibility.
  - Key elements: tiered Know-Your-Customer approach, active financial literacy program, strengthened consumer protection, enhanced mobile payment system, improved access to credit for SMEs.

### Regulation, supervision, and gender considerations
- Regulation and supervision:
  - High-quality regulation and supervision can distinguish “bad” inclusion from “good” inclusion.
  - Supervisory challenges: assessing credit risk without collateral; supervising large numbers of small loans and diverse lenders; cooperation among agencies; managing systemic risk when banks provide credit to microlenders; licensing criteria for technological innovations.
  - Supervisory intensity should be proportionate to risks so as not to raise cost of capital to nonviability.
  - Basel Committee on Banking Supervision (BCBS) developing guidance to assess application of the 2012 Basel Core Principles (BCP) to entities and activities relevant to financial inclusion; BCBS surveyed supervisory practices across 59 jurisdictions.
- Gender and governance:
  - Women underrepresented in financial governance: across regions, less than 20 percent of bank Boards are women; only 15 of some 800 banks across 72 countries had women CEOs in 2013.
  - In supervisory/regulatory agencies: share of women in bank boards averaged 20 percent in 2015 and has declined since 2011; low-income countries had a higher share than advanced or emerging economies in 2015.
  - Empirical associations:
    - No association between higher share of women and supervisory quality after controlling for governance and financial development/inclusion.
    - Positive association between share of women in supervisory boards in 2011 and banking system average z-score 2011–13, controlling for several factors.

### Policy messages and recommendations
- Overarching guidance:
  - Financial inclusion can meet multiple macroeconomic goals but requires calibrated policies because macroeconomic gains wane with greater inclusion and depth and trade-offs with financial stability exist when expanding credit without adequate supervision.
- Policy implications (high-level):
  - Promote access to and use of non-credit financial services (ATMs, branches, transaction accounts) broadly, as they do not adversely affect financial stability and support growth until marginal effects fade.
  - Expand credit access cautiously with strengthened banking supervision to avoid erosion of financial buffers and rising non-performing loans.
  - Close gender gaps in account usage and promote depositor-base diversity to bolster growth without undermining stability.
  - Tailor inclusion strategies to country-specific supervisory capacity and financial system depth.
  - Target inclusion efforts to address market failures; avoid general increases in bank credit or rapid credit growth goals that could undermine macrofinancial stability.
  - Promote market-based mechanisms (new lending technologies, improved borrower identification) and proportionate supervision to make inclusion viable.
  - Promote non-credit services extensively (ATMs, branches, accounts, payments through accounts) and use financial literacy programs and technology (mobile payment platforms).
  - Improve quality of banking supervision in countries aiming to increase access; BCBS reviewing core principles relevant to financial inclusion to recommend proportionate supervision.
  - Set up consumer protection bureaus to prevent predatory practices.

*Source: _sdn1517 - EXECUTIVE SUMMARY (IMF).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Key takeaways
- Financial inclusion defined as the access to and use of formal financial services by households and firms.
- Over 60 governments have set financial inclusion as a formal target.
- Financial inclusion is a prominent objective in the post-2015 Development Agenda and several United Nations Sustainable Development Goals.
- Macroeconomic effects depend on the nature of inclusion; inclusion is multidimensional and effects vary by type of service (accounts, credit, insurance, infrastructure).
- Three policy-relevant findings:
  - Financial inclusion increases economic growth up to a point; marginal benefits wane as inclusion and depth increase and may be low or negative for some advanced economies.
  - Expanding access to credit without proper supervision raises financial stability risks; stronger supervision can mitigate or reverse these risks.
  - Expanding access to non-credit services (ATMs, branches, transaction accounts) does not adversely affect financial stability and can be promoted widely.

*Financial inclusion can meet multiple macroeconomic goals, but macroeconomic gains wane as both financial inclusion and depth increase, and there are trade-offs with financial stability.*

---

### INTRODUCTION

### Context and motivation
- Large gaps in access to finance prompted policymakers in more than 60 countries to set formal targets for financial inclusion.
- In developing economies:
  - "more than half of the poorest 40 percent are without accounts"
  - "35 percent of small firms face difficulties accessing formal financial services"
- Financial inclusion is emphasized in international fora (United Nations SDGs, G20 commitments on women's economic participation).
- Benefits attributed to inclusion: helping firms invest, smoothing household consumption, building capital, protecting against shocks, and risk management.
- Risks: uncontrolled expansion in access can lead to instability (examples: U.S. sub-prime crisis of 2007; India’s 2010 microfinance crisis).

### Data and scope
- Paper uses recently available cross-country data on access and use of financial services from multiple sources (see Annex I).
- Variety of datasets allows analysis across many aspects of inclusion but they are not strictly comparable and have shortcomings.

---

### PREVIOUS EVIDENCE ON MACROECONOMIC EFFECTS

### Summary of prior findings
- Household access to finance has a strong positive relationship with growth (Sahay and others, 2015a).
- Relationship between financial depth and growth is bell-shaped: returns to growth fall with higher depth beyond a certain point.
- Financial Institution Access (FIA), an index of ATMs and bank branches per 100,000 adults, had a monotonic relationship with growth.
- Dabla-Norris and others (2015): lowering monitoring costs and relaxing collateral requirements to increase firms’ access to credit would increase growth.
- Buera, Kaboski, and Shin (2012): microfinance has positive impacts on consumption and output.
- Some studies indicate higher access to credit could raise non-performing loans (Dabla-Norris and others, 2015).
- Han and Melecky (2013): broader access and use of deposits can mitigate deposit withdrawals during stress.
- Mehrotra and Yetman (2015): aggregate consumption volatility is lower in countries with high financial inclusion (130 countries), especially measures of account ownership and saving at a formal financial institution.

### Heterogeneous micro evidence
- Effects vary by type of financial service:
  - Basic payments and savings: microeconomic evidence supportive, especially for poor households.
  - Small and young firms: access to finance associated with innovation, job creation, and growth.
  - Microcredit: mixed results from field experiments (Karlan and Zinman (2011); Roodman 2011; World Bank 2014).
- Financial access by women has broad societal benefits; women face greater barriers than men and financial empowerment of women can improve family welfare (Sanyal, 2014).

---

### CONCEPT, EXAMPLES, AND STYLIZED FACTS

### Definition and multidimensionality
- Financial inclusion defined as access to and use of formal financial services (accounts to receive income or transfers, savings accounts, credit sources, insurance products).
- Range of definitions noted (World Bank, 2014): from "access and use of services provided responsibly and sustainably" to "delivery of financial services at affordable costs to disadvantaged and low-income segments of society."
- Pair-wise correlations among different indicators are mostly below 0.3, indicating distinct dimensions:
  - Example correlations: percentage of adults with accounts vs. percentage of firms citing access as a constraint (negative); ATMs per 1,000 square kilometers vs. percentage of adults borrowing from a formal financial institution (positive).

### Measurement approach in the paper
- Granular approach covering provider and user sides:
  - Providers’ side: Financial Institutions Access (FIA) — number of branches of commercial banks and ATMs per 100,000 adults.
  - Users’ side: share of firms and investment financed by bank credit; share of population with account at a formal financial institution by gender and by income groups; share of firms citing finance as a major obstacle; share of adults using accounts to receive transfers and wages; share of bank borrowers in the population; use of insurance products.

### Country examples (Box 1) — promoting safe inclusion
- India:
  - Priority-sector lending (PSL) requires banks to set aside 40 percent of their assets to priority sectors.
  - PSL led to high nonperforming loans and concentrated credit risk in many public sector banks.
  - Reserve Bank of India (2014) recommendations include wholesale consumer and investment banks, relationship-based lending, purchasing protection against rainfall and commodity-price risks, mandatory reporting to credit bureaus, and disclosure of concentration levels.
  - Pradhan Mantri Jan Dhan Yojana: goal of opening a bank account for every household; "close to 170 million accounts opened by early July 2015"; state-owned banks accounted for 97 percent of enrollment; concerns remain about actual usage of accounts.
  - Financial literacy push by the National Center for Financial Education.
- The Netherlands:
  - National strategy for financial education started in 2006 (Money Wise Action Plan); 2014–18 revised Action Plan focuses on managing money, financial planning, and making well-informed decisions.
- Nigeria:
  - Financial Inclusion Strategy (2012) aims to reduce exclusion from 46 percent of the adult population (in 2010) to 20 percent by 2020.
  - Strategy addresses five barriers: (1) income; (2) physical access; (3) financial literacy; (4) affordability; (5) eligibility.
  - Key elements: tiered Know-Your-Customer approach, active financial literacy program, strengthened consumer protection, enhanced mobile payment system, improved access to credit for SMEs.

---

### FINANCIAL INCLUSION AND GROWTH

### Main findings
- Most types of financial inclusion, including a greater share of women users, increase economic growth.
- Marginal benefits for growth taper off with greater financial inclusion and depth.
- Sectors dependent on external finance and those with low asset-tangibility grow more rapidly in countries with greater financial inclusion.
- Overall conclusion: inclusion can be growth-enhancing up to a point; beyond that point returns fall and benefits may be low or negative in some advanced economies.

---

### FINANCIAL INCLUSION AND STABILITY

### Main findings
- Expanding access to bank credit without proper supervision increases financial stability risks:
  - Financial buffers decline with broader access to credit, other things being equal.
  - In countries with weaker supervision, erosion of buffers is larger.
  - Countries with strong supervision could see financial stability gains from higher inclusion.
- There are large supervisory gaps across countries, signaling potential risks from unchecked broadening of access to credit.
- In contrast to credit access, increasing access to ATMs, branches, and transaction accounts does not adversely impact financial stability.
- Closing gender gaps in account usage and promoting diversity in the depositor base can improve growth without impairing financial stability.

---

### FINANCIAL INCLUSION AND INEQUALITY

### Main findings
- The paper examines links between inclusion and inequality (see dedicated section and Figure 8).
- Evidence indicates financially empowered women and broader account ownership can have redistributive and welfare-improving effects; however, detailed quantitative results are provided in the main analysis sections.

---

### POLICY MESSAGES

### Overarching guidance
- Financial inclusion can meet multiple macroeconomic goals but requires calibrated policies because:
  - Macroeconomic gains wane with greater inclusion and depth.
  - Trade-offs with financial stability arise particularly when expanding credit without adequate supervision.

### Policy implications (high-level)
- Promote access to and use of non-credit financial services (ATMs, branches, transaction accounts) broadly, as they do not adversely affect financial stability and support growth until their marginal effects fade.
- Expand credit access cautiously with strengthened banking supervision to avoid erosion of financial buffers and rising non-performing loans.
- Close gender gaps in account usage and promote depositor-base diversity to bolster growth without undermining stability.
- Tailor inclusion strategies to country-specific supervisory capacity and financial system depth.

---

*Source: _sdn1517 - EXECUTIVE SUMMARY (IMF).*

### introduction of a movable collateral register. (IMF, 2015b).

### FINANCIAL INCLUSION—CAN IT MEET MULTIPLE MACROECONOMIC GOALS?

### Country examples: Peru and the United States
- Peru: e-money
  - 2014: launch of the “financial inclusion opportunities map,” an interactive tool.
  - Builds on 2012 electronic e-money legislation and a new unified mobile payments platform linking providers and customers.
  - Leverages mobile telephone penetration of more than 75 percent.
  - Platform expected to become operational in 2015 (IMF, 2015c).
- The United States: consumer protection and financial literacy
  - FSAP (IMF, 2015d) recommends financial inclusion feature more prominently on the U.S. policy agenda.
  - Global Findex: United States ranked 27th out of 147 countries in percentage of adults with a bank account in a formal financial institution.
  - 2013 FDIC survey: 20 percent of U.S. households are “underbanked” and 8 percent are “unbanked.”
  - Strengthened consumer protection (including the Consumer Financial Protection Bureau) and Financial Literacy and Education Commission activities are positive steps for financial stability and inclusion.

### Five stylized facts on financial inclusion (summarized)
- Fact one: global increase in inclusion (2011 to 2014)
  - 2014: more than 61 percent of adults had an account with a financial institution or a mobile money service.
  - 2011: about 50 percent of adults had such an account.
  - Asia: share of adults with accounts increased by 14 percentage points (sharpest increase).
  - Borrowing from financial institutions also increased across regions (except South Asia); mortgage demand primary driver except in sub-Saharan Africa.
- Fact two: wide cross-country variation in account holdings and usage
  - 2014 regional account ownership examples:
    - East Asia and Pacific (EAP): 69 percent of adults had an account.
    - South Asia: 46 percent.
    - Middle East: 14 percent.
    - High-income OECD countries: 94 percent.
  - Account usage limited: 2014 Global Findex shows 37 percent of adults with an account do not make any deposits in a typical month; similar share for withdrawals.
  - Only about 18 percent of adults worldwide used an account to receive wages and pay utility bills; 44 percent in high-income OECD countries.
  - Only about 5 percent of adults used an account to receive wages in South Asia, the Middle East and sub-Saharan Africa.
- Fact three: small firms cite access to finance as a major constraint
  - More than one-third of small firms in developing economies cite access to finance as a major constraint.
  - 16 percent of small firms in advanced economies cite access to finance as a major constraint.
  - 25 percent of large firms in developing economies report problems accessing credit.
- Fact four: persistent gender gap in some regions
  - Globally: 58 percent of women have an account, compared to 64 percent of men.
  - No gender gap in advanced OECD economies (94 percent of all adults have an account).
  - South Asia: only 37 percent of women have accounts.
  - Women entrepreneurs: estimated 70 percent of women-owned SMEs in developing economies are unserved or under-served by financial institutions.
  - Women often face more restrictive collateral requirements, shorter loan maturities, and higher interest rates; demand-side barriers include illiteracy and lack of control over household financial resources (DFiD-GIZ, 2013).
- Fact five: supervisory capacity gaps largest where inclusion lags
  - Basel Core Principles (CP) assessment used to score supervisory quality across 16 CPs relevant to financial inclusion.
  - “Gap” defined as distance from perfect score (zero = perfect).
  - Countries with low financial institutions access (FIA) show larger gaps in supervisory quality than countries with higher access.

### Financial inclusion and growth: empirical findings
- Causation challenges
  - Reverse causation and confounding (e.g., civil conflict, rule of law, inequality) complicate inference.
  - Econometric approaches control for other factors and for reverse causation, within data limits (comparable international data for only 10 years or less).
- Inclusion and growth interaction with financial depth (FIN)
  - Initial levels of FI indicators have positive impact on 10-year growth in simple regressions, but impacts are statistically significant only after including overall financial depth (FIN) and other controls.
  - Financial inclusion yields growth benefits distinct from overall financial development.
  - FI indicators with positive growth impacts include:
    - Firm-level: percentage of firms with bank credit; percentage of investments financed by banks; inverse of percentage of firms citing access to finance as a major constraint.
    - Household-level: percentage of adults with an account in a formal financial institution or with a credit card; percentage of adults who have borrowed from a formal financial institution; percentage who used an account to receive government transfers or wages.
  - Positive impacts hold for FI indicators related to the bottom income quartile and to women users.
- Diminishing marginal benefits at high financial development
  - Interaction effects: as FIN and FI grow large, marginal growth effects decline and may become small or negative.
  - At low levels of FIN and FI, marginal effects on growth are large.
- Channels: externally dependent sectors and asset tangibility
  - Rajan-Zingales (RZ) approach: sectors more dependent on external finance (EXT) grow faster where FIN is higher.
  - Replacing FIN with FI indicators shows ATMs availability, percentage of adults with an account, and use of accounts to receive government transfers are positively and significantly associated with higher growth of externally dependent sectors.
  - Interaction of FIN, FI, and EXT indicates FI has an additional role beyond FIN in supporting growth of externally dependent sectors.
  - Sectors with lower tangibility of assets (harder to pledge as collateral) grow faster where financial infrastructure, account access/usage, and firms’ access to credit improve.

- Key quantified example from Figure 5
  - For a country with private credit-to-GDP ratio at the 25th percentile, increasing availability of ATMs from the 25th to the 75th percentile is associated with an increase in average economic growth of 3 percentage points.
  - When private credit-to-GDP is at the 75th percentile, the same ATM increase yields about 2 percentage points of additional growth.

### Financial inclusion and stability: empirical findings
- Conceptual framing
  - Paper examines not only expected outcomes of “stable” and “inclusive” but also the covariance term between them.
  - Covariance negative when trade-offs exist (e.g., higher systemic risk in pursuit of inclusion); positive when synergies exist (e.g., greater stability increases trust and deposit demand).
- Inclusion can enhance stability (direct and indirect channels)
  - Direct: increased use of bank deposits can solidify banks’ funding base in stress.
    - Evidence: a 10 percent increase in access to deposits can reduce the likelihood of a large (20 percent or more) average withdrawal rate of deposits in periods of stress by 4 percentage points (Han and Melecky, 2013).
  - Indirect: inclusion provides clients with better risk management tools, increasing resilience of borrowers and banks.
- Credit access, bank stability, and supervision quality
  - Relationship between bank stability (z-score) and financial inclusion depends on measure of inclusion and quality of supervision (BCP compliance).
  - Using share of borrowers as credit inclusion measure, relationship is bell-shaped at sample average level of bank supervision: initial positive association with bank stability, then buffers decline as inclusion expands.
  - In countries with weaker supervision (lower BCP observance), broadening credit access more strongly reduces bank buffers.
  - At sufficiently high supervisory quality, credit inclusion is positively associated with higher bank buffers.
  - Results robust when using subset of 16 BCP indicators relevant to financial inclusion.
  - Implication: strong supervision is necessary to accompany credit-led financial inclusion to avoid negative effects on bank stability.
- Credit access and macroeconomic volatility
  - Larger changes in credit access associated with higher growth volatility, other factors equal.
  - Adequate regulation and supervision negate this impact.
  - Replication using Core Principles subset yields similar results.
  - Conclusion: financial inclusion, if done responsibly with adequate regulation and supervision, can contribute to more stable economies; inclusion without adequate regulation and supervision leads to more instability in growth rates.

*Source: IMF staff note—financial inclusion analysis and empirical results as presented in the supplied content.*

### 32.      In contrast to credit, increases in the access to and use of other financial services have

### _sdn1517 - 32.      In contrast to credit, increases in the access to and use of other financial services have

### Financial inclusion and financial stability
- Increases in access to and use of non-credit financial services (for example, transaction or savings accounts) have generally weak overall links to financial stability; analyses of these linkages generally yield inconclusive results.
- The type of financial inclusion matters for stability:
  - Access to transaction accounts and similar services: financial stability effects appear minimal.
  - Credit access: extending credit by lowering screening and monitoring standards can have severely negative implications for consumers and financial stability.
- Preferable approach for credit inclusion: enhance supply by removing market imperfections rather than weakening standards. Examples:
  - New lending technologies that reduce transaction costs.
  - Improved borrower identification to mitigate asymmetric information problems.

### Regulation, supervision, and proportionality
- High-quality regulation and supervision can distinguish “bad” inclusion from “good” inclusion.
- Supervisory challenges related to financial inclusion include:
  - Assessing credit risk when there is no collateral.
  - Supervising, regulating, and collecting information on a large number of small loans and diverse lenders.
  - Cooperating among multiple supervisory and regulatory agencies.
  - Managing systemic risk when banks provide credit to microlenders.
  - Understanding risks from technological innovations in products, services, and delivery channels (such as mobile banking) in licensing criteria.
- Supervisory intensity should be proportionate to risks so as not to raise the cost of capital to the point of nonviability of lenders.
- The Basel Committee on Banking Supervision (BCBS) is developing guidance to assess application of the 2012 Basel Core Principles (BCP) for Effective Banking Supervision to entities and activities relevant to financial inclusion.
- BCBS surveyed supervisory practices for financial institutions engaged in financial inclusion across 59 jurisdictions; results will inform guidance on the BCP.

### Gender, governance, and stability (Box 2 summary)
- Women are underrepresented in financial governance:
  - Across regions, less than 20 percent of the Board of Directors in banks are women.
  - Only 15 of some 800 banks across 72 countries had women CEOs in 2013.
  - Women account for 50 percent of business and social sciences graduates and 30 percent of economics graduates in the United States and United Kingdom, where most banks are located.
- In bank supervisory and regulatory agencies:
  - Share of women in boards of directors is low and not related to country income level.
  - In 2015, low-income countries had a higher share of women than advanced or emerging economies.
  - Averaging 20 percent in 2015 overall, this share has declined since 2011.
- Empirical associations:
  - No association was found between a higher share of women and supervisory quality (measured by three different proxies), after controlling for governance indicators and financial development/inclusion.
  - Positive association exists between the share of women in supervisory boards in 2011 and the banking system’s average z-score 2011–13, controlling for supervisory quality, governance indicators, level of financial access, GDP per capita, GDP growth and level of nonperforming loans. (Z-scores measure capital and profit buffers scaled by volatility of earnings.)
  - Higher share of women on bank boards brings diversity of views and does not seem to hurt bank-specific z-scores (stability).

### Financial inclusion and inequality
- Access to finance can help the poorest improve their economic situation, particularly in developing countries.
- New research (Plotnikov and others, forthcoming) finds:
  - Increasing households’ access to borrowing lowers inequality as measured by the “ratio of 40” (ratio of income share of the bottom 40 percent to that of the middle 40 percent) during 2007–12, after controlling for human capital measures.
  - This effect does not hold when considering only loans from formal financial institutions, highlighting the role of informal finance (family, friends, employers, other sources).
  - The reducing-inequality effect continues to hold for the share of women receiving loans.
  - The effect is stronger and larger for a subsample that excludes high-income countries.
  - The positive effect on income equality is less pronounced for other measures such as the Gini coefficient.
- The gender gap in account holdings is positively related to income inequality:
  - Countries with larger gender gaps in account holdings tend to have higher income inequality (Gini coefficient).
  - The Gini is also positively correlated with inequality in relative account holdings in the richest segment of the population.

### Key empirical findings on growth, depth, and stability
- Benefits to growth from financial inclusion are substantial but diminish with increases in financial depth.
- Positive impacts on growth from:
  - Enabling firms to access credit markets.
  - Financing a greater share of investment with bank credit.
  - Increasing the number of households with bank accounts and credit cards.
  - Using accounts to receive government transfers and wages.
- Returns to growth from increasing financial inclusion wane as both financial inclusion and depth increase.
- Sectors dependent on external finance and with less tangible assets grow more rapidly in countries with more financial inclusion.
- Bank stability risks increase when access to credit is expanded without adequate regulation and supervision:
  - Financial buffers (capital and profits in banks) can be eroded.
  - Countries with weaker supervision could see capital buffers erode more substantially with greater credit access; countries with stronger supervision could see gains in financial stability.
  - Policies requiring banks to expand credit to the underserved without adequate oversight can be detrimental to bank stability.
  - Buffers may deteriorate due to rapidly increasing nonperforming loans and under-provisioning of loan losses.
- Policy examples and safeguards:
  - India: better use of relationship-based lending, greater disclosure, active trading of credit facilities to create liquidity for priority sector lending.
  - Including a limit on the “stressed” debt-service-to-income ratio for prospective borrowers can guard against over-stretching on loan repayments if interest rates and exchange rates rise; such limits have been put in place recently in Australia, Hong Kong, and the United Kingdom (in these cases for all housing loans).

### Policy messages and recommendations
- Target inclusion efforts to address market failures; involuntary exclusion in credit or account access calls for policy action.
- Avoid general increases in bank credit or rapid credit growth goals that could undermine macrofinancial stability; consider direct and targeted transfers to people in need rather than through bank credit when appropriate.
- Promote market-based mechanisms that make financial inclusion viable for banks and other institutions instead of schemes that direct lending to certain sectors.
- Promote non-credit services extensively (ATMs, branches, accounts, payments of salaries/pensions/benefits through accounts) since they have positive growth impact without strong negative effects on banking sector stability.
- Promote closing the gender gap in account usage, increase account uptake among low-income households, and encourage greater diversity in bank deposits to improve growth without impairing stability.
- Use financial literacy programs and technology (for example, mobile payment platforms) to enhance efficient financial inclusion.
- Improve the quality of banking supervision in countries aiming to increase access; supervisory gaps are largest in countries with the lowest access but also exist in high-access countries.
- BCBS is reviewing core principles relevant to financial inclusion to recommend proportionate supervision that does not impose onerous regulatory costs.
- Set up consumer protection bureaus to prevent predatory practices in financial services provision.

### Data and empirical approach notes
- Financial Access Survey (FAS) overview:
  - Annual survey managed by the IMF’s Statistics Department, fully funded by donors.
  - Collects comparable time series data on outreach and use of basic financial services provided by resident financial corporations to resident customers within a country.
  - Outreach approximated by branch networks, number of ATMs, and (beginning 2014) number of agent outlets for mobile money providers.
  - Usage dimension includes deposits, loans, and insurance; users identified separately as households and small and medium enterprises (SMEs).
  - FAS contains data and metadata for 189 jurisdictions from 2004 onward in 164 underlying series and 47 indicators.
  - The 2015 round was expected to be released in September 2015.
  - FAS database available at http://fas.imf.org (as stated).
- FAS covers:
  - Other depository corporations grouped into: (1) commercial banks; (2) credit unions and financial cooperatives; (3) deposit taking microfinance institutions; and (4) other deposit takers (savings and loan associations, building societies, rural banks and agricultural banks, post office giro institutions, post office savings banks, savings banks, and money market funds).
  - Other financial corporations grouped into: (1) insurance corporations (disaggregated into life and non-life); and (2) other financial intermediaries (finance companies, financial leasing companies, investment funds, securitization vehicles, investment banks, underwriters and dealers specialized in securities market activities, and non-deposit-taking microfinance institutions).
- Definitions:
  - Household definition follows the Monetary and Financial Statistics Manual.
  - SMEs defined per World Bank Group classification: enterprises with fewer than 300 employees, $15 million in assets, and $15 million in annual sales, and loan sizes of less than 1 million ($2 million for some advanced economies).
- Empirical approach challenges and methods:
  - Lack of long time series for financial inclusion data limits standard GMM growth regressions.
  - FIA index (Sahay and others 2015a) based on FAS has limited usable time observations.
  - Alternative approaches used:
    - Cross-country OLS relating FI at one point in time or period average to subsequent growth, interpreting Global Findex as a ranking when only two time points are available.
    - GMM with interactions using a time-invariant FI variable (period average or single observation) interacted with financial depth/development variables.
    - Microeconomic difference-in-differences (Rajan and Zingales approach) to test whether externally dependent sectors grow faster with greater financial inclusion, using specifications that interact external dependence with FI and FIN variables.

*Source: IMF staff chapter text from the provided PDF content unit.*

### ANNEX III. EMPIRICAL APPROACH—FINANCIAL

### ANNEX III. EMPIRICAL APPROACH—FINANCIAL

### Financial inclusion and financial stability regressions — Method and setup
- Method: Panel regression with country fixed effects.
- Timeframe: 2004–11
- Dependent variables:
  - Bank Z-score, drawn from the Global Financial Development database. The Z-score measures the “distance-to-distress” for banks, reflecting the buffers against earnings shocks.
- Explanatory variables:
  - Financial Access Survey (FAS) variables for financial inclusion (Annex I). Variables were lagged by one year.
  - Explanatory variables were interacted with BCP, which approximates the quality of bank supervision by measuring the degree of compliance with Basel Core Principles (BCP).
  - Two measures of BCP tested: a composite of all the principles, and a subset of BCP principles relevant to financial inclusion (Core Principles 1, 3, 4, 5, 8, 9, 10, 11, 14, 15, 16, 17, 18, 24, 25, and 29).
- Controls:
  - Lagged values of the Financial Institutions Depth index (FID) from Sahay and others (2015a), real GDP per capita, excess of credit growth above nominal GDP;
  - Contemporaneous variables of population, FDI-to-GDP ratio, trade-to-GDP ratio, inflation, government balance, a dummy for banking crisis, and the Lerner index.

### Financial inclusion and financial stability regressions — Key results
- General result summary:
  - The coefficient on the variable “number of borrowers per 1,000 adults” was found to be negative and significant for both X and X2.
  - The coefficient of the interaction with both measures of BCP was positive.
  - For other variables of financial inclusion, the relationships were found to be insignificant or inconclusive.
  - Some variables lacked sufficient coverage for meaningful regressions.
- Detailed reported estimates (Dependent variable: Bank z-score)
  - Explanatory variable: Number of borrowers per 1,000 adults
    - composite BCP | subset BCP
    - Constant: 16.54*** (5.74) | 17.18*** (5.76)
    - X: -0.086** (0.039) | -0.087* (0.048)
    - X2: -3.20 x 10-5*** (9.34 x 10-6) | -2.92 x 10-5*** (9.20 x 10-6)
    - X*BCP: 0.032*** (0.013) | 0.032** (0.015)
    - Observations: 200 | 200
    - R-s qua red: 0.27 | 0.26
    - Number  of Countr i es: 3 93 9
    - Standard errors in parentheses
    - Significance: *** p<0.01, ** p<0.05, * p<0.1

### Financial inclusion and economic volatility — Method and setup
- Method: Non-linear least squares estimation.
- Timeframe: 2004 -2011
- Dependent variable:
  - Growth volatility, defined as a 3-year rolling standard deviation of real GDP growth.
- Explanatory variables:
  - Financial Access Survey (FAS) variables for financial inclusion (Annex I). Contemporaneous and lagged 3-year differences of financial inclusion variables were used.
  - Explanatory variables were interacted with BCP (composite and subset as above).
- Controls:
  - Variables lagged by 3 years—the Financial Institutions Depth index (FID), real GDP per capita, excess of credit growth above nominal GDP;
  - Contemporaneous variables of FDI-to-GDP ratio, trade-to-GDP ratio, inflation, government balance, volatility of terms of trade changes, volatility of regional cross inflows, offshore/onshore financial center, volatility of foreign growth, the Polity index, and a crisis dummy.

### Financial inclusion and economic volatility — Key results
- General result summary:
  - The coefficient on the variable “number of borrowers per 1,000 adults” (lagged 3-year change) was positive and significant for X: higher changes in the number of borrowers per 1,000 adults (expansion in the share of borrowers) increased growth volatility.
  - The interaction with BCP shows a negative sign, indicating that better BCP reduces the volatility-increasing effect of expanding borrower share.
  - For other variables of financial inclusion, relationships were insignificant or inconclusive.
  - Some measures suffered from lack of sufficient coverage.
- Detailed reported estimates (Dependent variable: Growth volatility (rolling 3-year standard deviation of growth))
  - Explanatory variable: Lagged 3-year change in number of borrowers per 1,000 adults
    - composite BCP | subset BCP
    - Constant: 0.712** (0.34) | 0.823** (0.38)
    - X: 0.039*** (0.009) | 0.047*** (0.011)
    - X* BCP: -0.012*** (0.003) | -0.014*** (0.003)
    - Observations: 9999 | 9999
    - R-squared: 0.863 | 0.862
    - Standard errors in parentheses
    - Significance: *** p<0.01, ** p<0.05, * p<0.1

*Source: ANNEX III. EMPIRICAL APPROACH—FINANCIAL, _sdn1517*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1517.pdf_