MICROFINANCE PAPER WRAP UP: CGAP Financial Access 2009: Measuring Access To Financial Services Around The World

Written by CGAP (Consultative Group to Assist the Poor), Published by the World Bank Group in September 2009, 92 pages, available at: http://www.cgap.org/p/site/c/template.rc/1.9.38735/

According to this report, a common indicator for access to savings services is to measure the number of savings accounts actually owned by the poor.  Microenterprises with access to savings accounts invest more in their businesses, consume more and are less prone to sell off business assets to pay for medical emergencies.  Policies that promote savings account ownership among microfinance institutions (MFIs), cooperatives and state-owned financial institutions, like postal banking networks, have the potential to reach many poor clients in developing countries.  However, regulators in developing countries must also adapt traditional bank policies in order to maximize savings account ownership among the poor.

The “know your customer” rule is designed to verify the identity of a potential bank client and to protect the bank against illicit activity like money laundering. Typically, the rule requires potential clients to provide government-issued identification, proof of address or proof of legal status in the country. If applied without adaptation to MFIs and cooperatives, this policy has the potential adverse affect of restricting access to savings account ownership by the poor. In many instances, the poor in developing countries do not have government issued identification or even an address. Regulators in some developing countries have provided for alternative forms of identification like letters from village officials attesting to the client’s identity.   In South Africa, regulators permit more relaxed identification requirements in jurisdictions where clients do not have formal identification so long as the withdrawals do not exceed a certain level.

According to the report, a common indicator for access to credit is to measure the number of loans taken out by the poor. For the poor, access to credit can smooth consumption during times of unstable or no income and provide means to develop businesses.  With respect to microenterprises, regulators have at their disposal two broad policy measures that can improve access to credit, i.e. the availability of credit information and the enhancement of consumer protection.

Traditionally, credit bureaus provide lenders with information about the payment behavour of potential borrowers from various sources which in turn allow lenders to screen borrowers and make better lending decisions to borrowers that are approved. According to the report, without this type of credit information system, lenders typically overextend credit.  In order to allow for a comprehensive credit information system, a regulatory framework must both protect individuals’ data from theft and also insulate institutions’ customer data from other institutions, which may try to “poach” customers. According to the report, microfinance regulators should encourage the use of credit information by lenders when they screen potential borrowers.  In Peru and Ecaduor, national government registries partner with private credit bureaus which in turn provide credit information about unregulated entities, like MFIs and cooperatives.

With respect to consumer protection, regulators have at their disposal disclosure requirements that allow potential borrowers to compare the true cost of credit across different providers and shop for the best loan. Disclosure requirements encompass a number of different loan terms, such as the cost, fees and duration of the loan. In addition, some countries have imposed a “plain language” requirement on the disclosure of loan terms and the requirement that any changes in loan terms be disclosed. For microfinance borrowers, a challenge is that they may not understand the terms due to lack of financial literacy. Regulators and lenders can provide training in financial literacy in order to make disclosure meaningful. In Peru, new regulations require that lenders post easy to understand tables of loan repayment schedules so that borrowers may be able to understand the cost of a particular loan and then compare costs between different loans.

The thesis of this report is to establish a common set of indicators that measure access to financial services so that financial regulators can formulate policies that balance the accessiblity of financial services to the poor against the soundness of the financial sector as a whole.  The report draws upon a survey of financial regulators in 139 countries to propose a common set of indicators that measure access to three types of financial services, i.e., savings, credit and payment services. The goal is to provide policymakers with reliable information on access to financial services so that they can design effective policies. The focus of this wrap-up will be the policy considerations that may adversely or positively affect access to the different types of financial services for the poor in country specific examples.

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