WB calls for broader access to finance in developing countries

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WASHINGTON, Nov 14 (Xinhua): The World Bank called yesterday for broader access to finance in developing countries, saying failure to provide more households and small and medium enterprises with the financial services they need acts as a brake on development.
Between 50 per cent and 80 per cent of adults in many developing countries have inadequate access to financial services, according to a new World Bank policy research report entitled "Finance for All, Policies and Pitfalls in Expanding Access."
While noting the microfinance industry's progress in delivering credit to poor people, the report called for a broader financial strategy that delivers services to all excluded people and firms.
Inclusive financial systems ultimately benefit the poorest people and the smallest firms the most, by creating more jobs, raising incomes, and generating more opportunities for small businesses, the report said.
"Reforms that promote access to financial services should be at the core of the development agenda," said Asli Demirguc-Kunt, Senior Research Manager, Finance and Private Sector at the World Bank, and lead author of the report.
"Better access to finance not only increases economic growth, but also helps fight poverty, and reduces income gaps between rich and poor people," he said.
Poor people and small firms, especially those in rural areas or in the informal sector, face many barriers to financial access-distance from services, the inability to produce formal documents when needed, and prohibitive costs.
Ethiopia has less than one bank branch per 100,000 people, and in Cameroon it costs 700 dollars-more than GDP per capita-to open a checking account. Across Sub-Saharan Africa, only 20 per cent of households have accounts with financial institutions.
In small firms in developing countries, only 15 per cent of new investments are financed externally, compared with 30 per cent among larger firms. Without financial access, small and new firms face obstacles to both entry and prospective growth.
Governments should strengthen institutions and adopt new technologies to bring down transaction costs, said the report.
Research suggests that they should also encourage competition-including foreign bank entry-and provide the right regulatory incentives.
In contrast, direct interventions by governments, such as through credit subsidies or government-owned financial institutions, can be counter-productive, reducing incentives for the private sector to deliver services to the poor, according to the report.
Expanding access to financial services remains an important policy challenge in many countries, with much for governments to do. However, policymakers need to have realistic goals. For example, in many instances, lax credit policies have hampered national welfare.
According to the report, government policies in the financial sector should focus on prioritising institutional reforms, promoting cost-effective technologies and also promoting competition and stability.
Policymakers should also help deliver financial services to the poorest without subsidies remains difficult, said the report.
As credit is not the only, or in many cases, the main financial service needed by the poorest, the report suggested that subsidies may be better spent on overcoming barriers to savings and payment services, which are necessary to participate in a modern market economy.