Thorsten Beck and Augusto de la Torre

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Thorsten Beck and Augusto de la Torre The World
Bank
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Access asymmetries and segmentationsThe symptoms

• Geographic deficient access to branches and
  outlets
• Problems population density, underdeveloped
  rural areas (e.g., physical infrastructure),
  security, lack of demand
• Socio-economic deficient access for some
  population segments
• Problems high minimum deposits, administrative
  burden and fees, segmentation
• Opportunity reliance on past record and real
  estate collateral (instead of on expected future
  performance)
• Problems credit services limited to
  entrepreneurs with credit history, connections,
  or immovable collateral, lack of formality

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But should lack of access concern us?Defining
the access problem is not easy

• Lack of access to financial services is not
  necessarily a problem
• Households/firms able to have access might not
  want use it
• or may want access (given prices) but are
  rationed out
• Financial service providers unable to generate a
  sustainable business activity within a feasible
  combination of costs and risk-adjusted returns
• gt Must increase bankable demand
• Access to credit may be a problem impoverishing
  indebtedness
• Broadening access (micro setting) may not relax
  credit/savings constraints
• Selection bias households with good prospects
  anyway apply for credit
• No additionality clients that have access
  already move to new providers
• That the poor and disenfranchised lack access may
  be more a problem of poverty than a problem of
  access
• Strong evidence indicates that access rises with
  per capita income and wealth, with complex
  causality links
• In this perspective, the focus should be on
  poverty-reducing growth greater access would
  follow as corollary

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Access Alternative definitions

• In an ideal world, without market frictions,
  information asymmetries and transaction costs,
• Agents can separate consumption-saving from
  investment decision, and are subject to
  intertemporal budget, but not liquidity
  constraints.
• Idiosyncratic risk can be diversified
• Payment services enhance market exchange
• Market frictions, information asymmetries and
  transaction costs reduce access, especially for
  the small and risky clients
• Why do we observe limited access?
• Constrained optimum maximum access given
  exogenous constraints
• Suboptimal equilibrium below constrained optimum

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Towards defining the problemTransaction costs as
limit to access

• Transaction costs
• Fixed costs in financial intermediation lead to
  decreasing unit costs as transaction volume
  increases
• Economies of scale small client, small
  institution, and small market
• Applies to deposit, lending and payment services
• Cost management
• Better cost managements leads to lower unit cost
  and thus higher outreach to low-income clientele
• Cost management on level of individual
  institution
• Cost management on country-level

Better cost management lower unit cost
Dollar sense threshold
Limit for individual Institution
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Towards defining the problem Risks as limit to
access

• Adverse selection problem (ex-ante default risk)
• Increases with informational opacity (higher in
  the case of small and new debtors) and is
  mitigated by screening techniques
• Moral hazard problem (ex-post default risk)
• Increases with leverage and is mitigated by
  collateral and monitoring (assumes no
  principal-agent problem within firm)
• Limits to diversify risk given small markets
  with correlated risks
• Macro-economic instability
• Risk management
• Applies mostly to lending services
• Better risk management results in higher outreach
  to more opaque, less wealthy and riskier clients
• Risk management on level of individual
  institution
• Risk management on country level

Better risk management lower risk
Prudence threshold
Limit for individual Institution
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The access problem - opportunities
constraintsThe access possibilities frontier
Spendthrift conservative
Risk Management
Prudence threshold
Risk-loving penny pincher
Cost Management
Dollars sense threshold
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What can be done about it?Expanding access
implies

• Improved management of risk
• To mitigate adverse selection and moral hazard in
  credit risk
• Improved management of transaction costs
• To overcome the small client, small institution
  and small marketproblem
• Improving access has two dimensions
• Moving towards the access possibilities frontier
• Private solutions the role of technology and
  competition
• Government solutions pitfalls abound
• Public-private solutions promising experiences
• Expanding the access possibilities frontier
• Macroeconomic stability
• Contractual environment
• Transparency reducing information asymmetries
• Infrastructure
• Competition and regulatory policies
• We have to know where we are relative to the
  access possibilities frontier in order to know
  what to do about access

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Moving towards the frontier -Government solutions

• Subsidizing transaction costs
• State-owned banks
• Subsidizing branches/outlets
• and risk-related costs
• Directed credit programs
• Subsidized credit
• Credit guarantee programs
• But pitfalls abound
• Opportunity costs often outweigh hard-to-measure
  benefits
• Markets often stifled, rather than promoted
• Target clientele not reached
• Risk and cost shifting to taxpayer

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Moving towards the frontier Private solutions

• Taking macro / contractual environment as given
  and driven by
• technical revolution (IT, expansion of
  communication technology)
• increased competition (foreign bank entry,
  regulatory liberalization)
• financial service providers have developed new
  technologies
• to reduce transaction costs
• mobile banking / broadening range of delivery
  points / e-/phone finance
• to reduce credit risk
• disciplining short maturities / individualized
  collateral / group monitoring
• benefiting specific groups
• Consumer-lending scoring models, using advantage
  of large numbers
• Micro-enterprises specialized micro-finance
  programs
• But unable to shift the frontier outwards and
  hampered by difficulties in capturing economies
  of scale and diversifying risks

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Moving towards the frontier Public-private
solutions

• Building on private solutions, but overcoming
  problems of scale economies and coordination
• Using the Post Office Network
• Post offices in Brazil
• Government auctioned exclusive right to
  distribute financial services through post
  offices in 2001, large private bank was winner
• Post office is present in 1,738 out of gt5,000
  municipalities without bank outlet
• Post offices in South Africa
• E-finance services
• Platform to apply for loans from any bank
• Nafins internet-based market for receivables in
  Mexico
• Reverse factoring links many small suppliers
  with few large credit-worthy buyers
• Subsidized overhead costs
• Lowering costs and increasing transparency for
  SME working capital
• Credit scoring
• Requires information on many performing,
  non-performing and rejected loans might be too
  costly for one institution
• Encourage cooperation without collusion

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Moving the frontierImproving the macro and
contractual environment

• Macroeconomic stability
• Reduces interest rates and spreads
• Helps lengthen maturities
• Contractual environment
• Creditor rights and other property rights
  protection
• Reliable contract enforcement
• Transparency
• Accounting, auditing, and disclosure standards
• Credit information systems
• Infrastructure
• Telecommunication, payment system, e-security
  etc.
• Competition and regulation
• Proper entry and exit regulation and supervision
• Foreign bank entry
• Entry barriers to infrastructure, such as payment
  system
• Regulatory requirements/burden for branching

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Conclusions

• Two-pronged approach
• Move towards access possibilities frontier
• Move the access possibilities frontier
• Address the constraint that is most binding
• Short-term facilitate and foster public-private
  solutions
• Medium to long term improvements in macro and
  contractual environment, infrastructure,
  competition and regulation