## A Big Step Forward for Bolstering Financial Inclusion

_IMF Blog, January 28, 2015_

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## Bibliographic details
- Authors: David Marston, Era Dabla-Norris, D Filiz Unsal
- Published: January 28, 2015

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### Summary and objectives
- Authors: David Marston, Era Dabla-Norris, D. Filiz Unsal
- Publication date: January 28, 2015
- Purpose: Present a new framework to identify barriers to financial inclusion, estimate how removing those barriers affects country output and inequality, and evaluate policy levers to promote inclusion.

### Why financial inclusion matters
- Large gaps in global access to finance:
  - "Slightly more than half of the firms (58 percent) in developing countries and only one-fifth of those in low-income countries have access to bank credit."
- Binding barriers for firms, especially small and medium-sized enterprises:
  - High costs, travel distance, onerous paperwork.
  - Limited credit, high collateral requirements, high interest rates.
- Economic consequences documented:
  - Individuals rely on limited savings to become entrepreneurs.
  - Fledgling enterprises depend on self-financing for investment needs, limiting firm size, innovation, and productivity.

### Framework application and country case findings
- Countries analyzed:
  - Low-income: Kenya, Mozambique, Uganda.
  - Emerging markets: Egypt, Malaysia, Philippines.
- Key cross-country findings:
  - Disentangling constraints is crucial; policy impact depends on country-specific characteristics.
    - Example: Uganda’s output is most responsive to relaxing collateral requirements (identified as the most binding constraint).
    - Example: Malaysia’s major obstacle is high participation costs for access to financial services.
  - Financial inclusion increases output, but effects on inequality vary:
    - Reducing the cost of accessing financial services can reduce income inequality as previously excluded enterprises obtain credit and workers receive higher wages.
    - Relaxing collateral requirements may initially increase inequality because wealthy firms use less collateral to leverage more, increasing production and profit; over time, as banks lower collateral requirements, relatively poorer agents gain and inequality can decline.
  - Distributional consequences can be sharp:
    - Lowering participation costs tends to benefit the poor, while wealthy firms may lose somewhat due to higher interest rates and wages.
    - Policies targeting financial depth (e.g., relaxed collateral) benefit productive firms but can impose losses on less productive firms and firms with low credit demand.

### Policy implications and recommended measures
- No one-size-fits-all solution; prioritize country-specific diagnosis of binding constraints.
- Foundational actions for governments:
  - Develop appropriate legal, regulatory, and institutional frameworks and a supporting information environment.
  - Introduce and enforce laws that protect property or creditor rights.
  - Set standards for disclosure and transparency.
  - Promote credit information-sharing systems and collateral registries.
  - Educate and protect consumers.
- Operational and targeted measures governments could consider:
  - Grant exemptions from onerous documentation requirements.
  - Allow correspondent banking arrangements.
  - Shift to using electronic payments into bank accounts for government payments.
- Expected outcomes of implementing these measures:
  - Expanded firms’ access to finance, increased financial inclusion, reduced inequality, and boosted growth.

### Ongoing and future work
- Framework being applied to additional countries; "over 20 country studies completed or in progress," including:
  - Colombia, Costa Rica, El Salvador, Guatemala, Honduras, India, Nicaragua, Nigeria, Paraguay, Panama, Peru, Uruguay, the Economic Community of Central African States, the Democratic Republic of Congo, Nigeria, and Zambia.
- Invitation to follow future research and case studies on financial inclusion.

*Source: A Big Step Forward for Bolstering Financial Inclusion (January 28, 2015).*

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## References

- [https://www.imf.org/wp-content/uploads/2015/01/spr-blog-on-financial-inclusion-chart.jpg](https://www.imf.org/wp-content/uploads/2015/01/spr-blog-on-financial-inclusion-chart.jpg)

_Source: https://www.imf.org/en/blogs/articles/2015/01/28/a-big-step-forward-for-bolstering-financial-inclusion_