Access to Financial Services in Brazil

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Access to Financial Services in Brazil

• Eleoterio Codato
• October 15, 2003

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Presentation outline

• 1. Context
• 2. Justification and Objective
• 3. Banking Accessibility
• 4. Key Policy Areas
• 5. Principal Findings and Conclusions

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• 1. CONTEXT

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Financial sector structure

• Brazils financial market is the largest in Latin
  America
• Private credit to GDP 41
• Equity market capitalization to GDP 39
• Financial assets to GDP 140
• The depth of financial intermediation compares
  favorably with other countries in Latin America
  but leaves room for further improvement.

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Providers of financial services in Brazil
Financial sector structure

• Banks
• Multiple and commercial banks
• Development banks
• Investment banks

• Non-banks
• Microfinance institutions ONGs, OSCIPs, SCMs
• Credit cooperatives
• Financing companies Factoring companies
• Leasing companies
• Investment funds
• Trade finance and vendor credit

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Financial system assets in Brazil
Financial sector structure

• Heavy concentration in the banking system.
• Banks have declined in number and credit
  cooperatives have increased.
• But the share of banks in financial assets
  remains stable.

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Banking outlets Overview
Financial sector structure

• Bank branch numbers have remained broadly stable.
• New forms of services (ATMs) and service
  providers (correspondents) have increased.
• Municipalities without bank branches stabilized
  after 1997, while those with PAA increased.

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• 2. RATIONALE AND OBJECTIVES

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Why finance matters

• Financial markets provides important services for
  the effective functioning of the economy and the
  production and sale of goods and services.
• Access to finance allows individuals and
  enterprises to manage risk, to smooth out
  consumption, and take advantage of profitable
  business opportunities that could increase their
  earnings and wealth potential.
• Empirical evidence shows that financial sector
  development accelerates economic growth, reduces
  income inequality and contributes to poverty
  reduction.

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Objective

• To assess banking accessibility and financial
  depth at the municipality level by using the
  following indicators
• Branch density GDP per branch, population per
  branch, area per branch, branches per million
  people.
• Percentage of municipalities without branches.
• Credit/GDP Deposits/GDP.

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• 3. BANKING ACCESSIBILITY

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Banking accessibility per region
Banking accessibility

• Regional inequalities in banking accessibility
  are significant among Brazils regions and have
  been persistent over time.
• Much of the spatial difference in banking
  accessibility can be explained by regional
  differentials in per capita income, GDP, and
  population density.

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Access to finance varies across regions
Urban consumers survey
The North and Center-west regions have lower
access to loans and credit cards. The North and
Northeast regions have lower access to bank
accounts and debit cards. ? The North region
present lower access to financial services than
the rest of the country.
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Empirical analysis findings (a)
Banking accessibility

• The empirical analysis of the spatial
  distribution of banking accessibility shows that
• Municipalities with higher income per capita,
  higher GDP, and more urban populations have
  better banking accessibility indicators
• Less urbanized municipalities appear not to be
  underserved
• While rural areas are indeed underserved,
  agriculture is not a sector that is obviously
  neglected by the financial sector

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Empirical analysis findings (b)
Banking accessibility

• Also, the analysis find similarities and
  differences in the behavior of private and public
  banks
• Similarities Both tend to have a positive
  association with richer economic areas and both
  have some urban bias.
• Differences By some measures public banks may
  provide more services to the poor, but private
  banks appear to offer more services to
  agriculture and to small enterprises

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Access to financial institutions
Urban consumers survey
Lottery shops (Caixa Lotérica) were cited as the
most important financial institution used by
urban consumers mainly for making
payments. Private banks rank second, followed
by public banks. The use of non-banks, such as
credit cooperatives or microfinance institutions
is very limited. Financial institutions are
located closer to their users, suggesting that
proximity to a financial outlet is an important
determinant of access.
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Empirical analysis findings (c)
Banking accessibility

• The finding that richer and more developed
  municipalities have better accessibility
  indicators is common of many studies in the
  topic.
• Because the analysis focuses on supply-side data,
  it is hard to know without demand information
  whether worse banking accessibility in some
  municipalities is the result of low demand in
  these areas, high levels of risk, which could
  threaten bank solvency, or high transaction
  costs.
• Nevertheless, municipalities without banking
  outlets may face higher costs of accessing the
  formal payment system.

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Access to deposits/savings
Urban consumers survey
About 43 of urban consumers have access to bank
accounts, substantially higher than the share
with access to loans or credit cards. Thus,
about 57 of urban consumers are unbanked. In
the US only 15 of adults are unbanked. About
64 of those without bank account would like to
have one, suggesting a potential latent demand
for deposits/savings. Debit card and checking
accounts are the most frequently type of
accounts, followed by special savings and current
accounts.
Allows for multiple responses
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Income levels and access to finance
Urban consumers survey
The survey shows a positive association between
income levels and access to financial services
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Key Policy Areas for Improved Access to Financial
Services

• Sound fiscal policies and macroeconomic stability
• Regulatory reform
• Targeting and special programs of special outreach

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Principal Findings and Conclusions Twenty Key
Points

• No evidence of a trend in access to bank
  services, in terms of numbers of banking service
  outlets, although such services may have
  stagnated. Compared with other countries of
  similar levels of development, Brazil is not
  underbanked in terms of bank branch presence
• There are wide regional disparities in bank
  service provision which, nevertheless, can be
  ascribed to differences in population density and
  income. Disparities in access to financial
  services can be at least as significant between
  neighborhoods within a city as between regions of
  the country

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Principal Findings and Conclusions Twenty Key
Points

• Certain measures to expand access adopted over
  the last few years have been successful and point
  to an expansion of new types of financial
  services. Yet, the mainstay of policies to
  expand access remain traditional
• Traditional policies to expand access which
  emphasize the quantitative rationing of credit,
  at low interest rates, based on low cost of
  funding, and administered substantially through
  public banks have a high cost

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Principal Findings and Conclusions Twenty Key
Points

• One form of alternative measures to the
  traditional programs include new instruments to
  offer possibilities for market-based expansion of
  services. Additionally, there is scope for
  gradual reductions in quantitative allocations
  (such as in the case of earmarked funds for
  housing and agriculture)
• Measures (simplified procedures for opening
  accounts, review of obligatory costs of
  maintaining bank branches) to expand the role of
  the banking system as a whole in the area of
  access should be taken, as long as they are
  established on sound footing

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Principal Findings and Conclusions Twenty Key
Points
wb22200
wb22200
wb22200
wb22200 The government can encourage the
establishment of such services, for example, by
channeling public payments through bank accounts,
by offering incentives to employers or their
financial institutions for establishing such
accounts for payroll purposes, and by initial tax
brakes to financial institutions for setting up
such accounts

• Lower income persons could benefit from
  lifeline banking with basic services for access
  to deposit and payment services.
• The government could also consider (a) the
  adoption of disclosure-based requirements to
  promote financial services for the underserved
  (b) partial guarantees or credit insurance for
  loans provided by banks to excluded groups and
  (c) a review of banking sector competition,
  particularly in areas such as access to payment
  networks

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Principal Findings and Conclusions Twenty Key
Points

• Private banks could expand their services to the
  underserved by making use of new lending
  methodologies (image differentiation,
  partnerships with local or community based
  organizations) and technologies with appropriate
  incentives and support from the government
• Encouraging progress with the expansion of
  microfinance in recent years has shown in BNBs
  CrediAmigo program that both outreach and
  efficiency can be achieved and that micro-lending
  can approach sustainability on a cash flow basis

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Overview Microfinance industry (a)
Microfinance in Brazil

• Microfinance in Brazil has grown significantly
  over the past 10 years, because of three main
  factors
• Internal debate about microfinance with
  Comunidade Solidária
• Political support to build a network of
  specialized intermediaries (since 1999)
• The demonstration effect of CrediAmigo (a large
  scale experiment incorporating best practices
  lessons at BNB)

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Overview Microfinance industry (b)
Microfinance in Brazil
Microfinance in Brazil lags behind other
countries in the region in terms of number of
clients and market penetration. It serves about
2 of the estimated market size.
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Key players (a)
Microfinance in Brazil
Other providers include BNDES PCPP Portfolio
state/municipality-run programs (e.g. Banco do
Povo)
CrediAmigo, a program of BNB, is the largest
microfinance player in Brazil. It presents faster
growth rate in terms of number of clients and
loan portfolio than the rest of the market.
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Key players (b)
Microfinance in Brazil
Microfinance providers seem to be reaching the
poor, as evidenced by the small size of their
loans. CrediAmigo, which operates in the NE,
presents a smaller average loan size than the
rest of the market.
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Key players (c) Outreach Indicators June 2001
Microfinance in Brazil
CEAPE network constitutes the second largest MFI
in Brazil. Most MFIs are very small in terms of
loan portfolio and number of clients. Growth
has been unequal across institutions. CrediAmigo
has maintained rapid growth but other large MFI,
such as CEAPE network, have been largely stagnant.
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Principal Findings and Conclusions Twenty Key
Points

• A phased and gradual increase to market levels
  for the funding of microfinance institutions
  would be desirable
• Even in the absence of recent measures, expansion
  of microfinance on a significant scale would be
  difficult, unless large scale partnerships with
  formal financial institutions are considered or,
  alternatively, with a radical change in services
  offered to include deposit taking. Additionally,
  harmonization of regulations for different forms
  of microfinance should be considered

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Principal Findings and Conclusions Twenty Key
Points

• Despite membership restrictions, credit
  cooperatives have a less restricted base than
  microfinance due to their ability to accept
  deposits
• Until recently, leverage and liquidity
  restrictions may have been more important for
  cooperatives than membership restrictions. The
  establishment of a liquidity facility for credit
  cooperatives is suggested, to reduce opportunity
  costs relative to commercial banks backed by the
  FGC deposit insurance fund

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Principal Findings and Conclusions Twenty Key
Points

• Non-financial companies, such as factoring
  companies, have contributed to the provision of
  credit to small enterprises and constitute a
  promising area for attention
• Credit to small borrowers is impeded by
  difficulties in loan recovery, due partly to
  judicial activism and also to difficulties in
  the use of collateral. Current tax write offs
  against profits on uncollected small claims may
  be sending perverse signals to both borrowers and
  lenders

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Principal Findings and Conclusions Twenty Key
Points

• Infrastructure for perfecting security interests
  use can be strengthened by electronic filing,
  retrieval and indexation systems and
  establishment of networks for interlinking
  registries
• Further improvements in credit registries and
  credit reporting will help to ease lending to
  small borrowers with limited credit history

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Principal Findings and Conclusions Twenty Key
Points

• The governments large borrowing needs impact
  negatively upon private credit and the high
  taxation of the financial system is another
  deterrent. High reserve requirements add to
  implicit taxation
• The eventual success of government policies in
  improving access to financial services will
  depend largely on fundamental changes in overall
  approach to access through broad-based financial
  sector reforms which limit constraints on the
  price and quantity of credit and allow the
  participation of a larger number of financial
  institutions