ASIA
26 March 2014
Financial inclusion in Asia -- the challenge
Lack of access to formal financial institutions like banks, is one important factor keeping too many people in poverty in Asia, and stopping them from creating businesses.
Well-functioning financial systems are an essential part of the infrastructure of a market economy. They offer savings, credit, payment, and risk management products that enable the economy's basic functions of consumption, saving and investment to spin around.
But most regrettably, too many people in developing countries, as well as poor people in advanced countries, don't have access to the formal financial system. That's why we need "inclusive" financial systems, which offer broad access to financial services to everyone, without barriers to their use.
Inclusive financial systems are particularly beneficial to poor people and other disadvantaged groups. Without inclusive financial systems, poor people must "scrape by" to survive in life or become entrepreneurs. "Scraping by" can mean building up your own savings, borrowing from family and friends, running up a tab at the local shop, to name just a few strategies etc.
In short, lack of access to the formal financial system can contribute to persistent poverty and income inequality, and slower growth of the whole economy.
This is all well known, and has been well known for a long, long time. But what has been lacking is rigorous measurement of the problem. Little had been known about the extent of financial inclusion and the degree to which such groups as the poor, women, and youth are excluded from formal financial systems. Fortunately, the Global Financial Inclusion (Global Findex) database, a World Bank initiative, now provides such indicators.
What are the main results and insights? Not surprisingly, there are sharp disparities in the access to formal financial services.
Worldwide, 50% of adults have an account at a formal financial institution like a bank, credit union, cooperative, post office, or microfinance institution. But there is a big split between high-income economies, where 89% of adults have an account, and developing countries where the figure is a mere 41%.
Globally, more than 2.5 billion adults do not have an account. Without an account in a formal financial institution, it is all the more difficult for these people to save, obtain credit, receive wages or government payments, and send/receive remittances to family and friends.
In the developing world, there is also great disparity in financial access between different regions -- ranging from 55% in East Asia and 39% in Latin America, to 33% in South Asia, 24% in Sub Saharan Africa, and 18% in the Middle East and North Africa.
And within each region, especially in Asia, there is enormous disparity too.
-- In the advanced countries of the Asia Pacific, there is almost universal access to formal financial services, with the following shares of the population having an account at a formal financial institution -- Australia 99%, Canada 96%, Hong Kong 89%, Japan 96%, Korea 93%, Singapore 98%, and the US down the list at 88%.
-- In middle income Asian countries, access to formal financial services is much lower -- China 64%, India 35%, Indonesia 20%, Malaysia 66%, the Philippines 27%, and Thailand 73%.
-- And in low income Asia countries, access to formal financial services is even lower again, with for example Bangladesh at 40%, Cambodia 4%, Laos 27%, and Nepal 25%.
As is evident from this scatter of numbers, national income explains much of the variation in account penetration across all economies -- but far less for poorer ones. Countries like Cambodia, Indonesia and the Philippines are in particular well behind the curve. This suggests that there are things that government and business can do to improve the situation.
It is also of great interest to look at the gender dimension, since gender discrimination and lack of opportunity are important factors holding back development in many countries. Not surprisingly, the gender gap is particularly large in South Asia, where 41% of males have a formal financial account, but only 25% of women do.
In East Asia, 58% of men have an account, with women only a little behind at 52%. Interestingly in South East Asian countries, the share of women having a financial account is very close to that of men -- Indonesia 20/19 (men/women), Malaysia 66/63, Singapore 98/98, Thailand 73/73, and Vietnam 21/19. And in the Philippines 34% of women have formal financial accounts, while only 20% of men do! Clearly cultural factors play a role. Overall, the gender gap in advanced countries is very close to East Asia, with 92% of men and 87% of women having accounts in the advanced world.
What are the reasons for a person not having an account in a formal financial institution in Asia?
The results are fairly similar between East Asia and South Asia, with the most important factors in order of importance being: a family member already has an account; formal financial institutions are too far away; they are too expensive; a lack of necessary documentation; a lack of trust; and religious reasons.
Clearly, there are things that can be done to address some of these factors. Indeed, a good number of organizations in Asia are working hard on financial inclusion issues, organizations like the Asian Development Bank Institute, APEC Business Advisory Council, Alliance for Financial Inclusion, Consultative Group to Assist the Poor (CGAP), and the World Bank.
Looking ahead, it will be more important than ever for these efforts to bear fruit, since consumer-driven domestic demand, the services sector, and small and medium enterprises are now taking a more leading role in Asian economic development. The previous scenario of foreign direct investment and bank financing for large enterprises will take more of a back seat.
The next article will provide an overview of work on the solutions to the financial inclusion challenge in Asia.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
But most regrettably, too many people in developing countries, as well as poor people in advanced countries, don't have access to the formal financial system. That's why we need "inclusive" financial systems, which offer broad access to financial services to everyone, without barriers to their use.
Inclusive financial systems are particularly beneficial to poor people and other disadvantaged groups. Without inclusive financial systems, poor people must "scrape by" to survive in life or become entrepreneurs. "Scraping by" can mean building up your own savings, borrowing from family and friends, running up a tab at the local shop, to name just a few strategies etc.
In short, lack of access to the formal financial system can contribute to persistent poverty and income inequality, and slower growth of the whole economy.
This is all well known, and has been well known for a long, long time. But what has been lacking is rigorous measurement of the problem. Little had been known about the extent of financial inclusion and the degree to which such groups as the poor, women, and youth are excluded from formal financial systems. Fortunately, the Global Financial Inclusion (Global Findex) database, a World Bank initiative, now provides such indicators.
What are the main results and insights? Not surprisingly, there are sharp disparities in the access to formal financial services.
Worldwide, 50% of adults have an account at a formal financial institution like a bank, credit union, cooperative, post office, or microfinance institution. But there is a big split between high-income economies, where 89% of adults have an account, and developing countries where the figure is a mere 41%.
Globally, more than 2.5 billion adults do not have an account. Without an account in a formal financial institution, it is all the more difficult for these people to save, obtain credit, receive wages or government payments, and send/receive remittances to family and friends.
In the developing world, there is also great disparity in financial access between different regions -- ranging from 55% in East Asia and 39% in Latin America, to 33% in South Asia, 24% in Sub Saharan Africa, and 18% in the Middle East and North Africa.
And within each region, especially in Asia, there is enormous disparity too.
-- In the advanced countries of the Asia Pacific, there is almost universal access to formal financial services, with the following shares of the population having an account at a formal financial institution -- Australia 99%, Canada 96%, Hong Kong 89%, Japan 96%, Korea 93%, Singapore 98%, and the US down the list at 88%.
-- In middle income Asian countries, access to formal financial services is much lower -- China 64%, India 35%, Indonesia 20%, Malaysia 66%, the Philippines 27%, and Thailand 73%.
-- And in low income Asia countries, access to formal financial services is even lower again, with for example Bangladesh at 40%, Cambodia 4%, Laos 27%, and Nepal 25%.
As is evident from this scatter of numbers, national income explains much of the variation in account penetration across all economies -- but far less for poorer ones. Countries like Cambodia, Indonesia and the Philippines are in particular well behind the curve. This suggests that there are things that government and business can do to improve the situation.
It is also of great interest to look at the gender dimension, since gender discrimination and lack of opportunity are important factors holding back development in many countries. Not surprisingly, the gender gap is particularly large in South Asia, where 41% of males have a formal financial account, but only 25% of women do.
In East Asia, 58% of men have an account, with women only a little behind at 52%. Interestingly in South East Asian countries, the share of women having a financial account is very close to that of men -- Indonesia 20/19 (men/women), Malaysia 66/63, Singapore 98/98, Thailand 73/73, and Vietnam 21/19. And in the Philippines 34% of women have formal financial accounts, while only 20% of men do! Clearly cultural factors play a role. Overall, the gender gap in advanced countries is very close to East Asia, with 92% of men and 87% of women having accounts in the advanced world.
What are the reasons for a person not having an account in a formal financial institution in Asia?
The results are fairly similar between East Asia and South Asia, with the most important factors in order of importance being: a family member already has an account; formal financial institutions are too far away; they are too expensive; a lack of necessary documentation; a lack of trust; and religious reasons.
Clearly, there are things that can be done to address some of these factors. Indeed, a good number of organizations in Asia are working hard on financial inclusion issues, organizations like the Asian Development Bank Institute, APEC Business Advisory Council, Alliance for Financial Inclusion, Consultative Group to Assist the Poor (CGAP), and the World Bank.
Looking ahead, it will be more important than ever for these efforts to bear fruit, since consumer-driven domestic demand, the services sector, and small and medium enterprises are now taking a more leading role in Asian economic development. The previous scenario of foreign direct investment and bank financing for large enterprises will take more of a back seat.
The next article will provide an overview of work on the solutions to the financial inclusion challenge in Asia.
Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com