Access to finance


Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services. Those who involuntarily have no or only limited access to financial services are referred to as the unbanked or underbanked, respectively.
Accumulated evidence has shown that financial access promotes growth for enterprises through the provision of credit to both new and existing businesses. It benefits the economy in general by accelerating economic growth, intensifying competition, as well as boosting demand for labor. The incomes of those in the lower end of the income ladder will typically rise hence reducing income inequality and poverty.
The lack of financial access limits the range of services and credits for household and enterprises. Poor individuals and small enterprises need to rely on their personal wealth or internal resources to invest in their education and businesses, which limits their full potential and leading to the cycle of persistent inequality and diminished growth.
Access to finance varies greatly between countries and ranges from about 5 percent of the adult population in Papua New Guinea and Tanzania to 100 percent in the Netherlands .

Defining and measuring access to financial services

Access to finance should be distinguished from the actual use of financial services, because non-use of finance can be voluntary or involuntary. Voluntary non-users of financial services have access to but do not use financial services either because they have no need for those services or because they decided not to make use of such services due to cultural, religious, or other reasons.
Measuring financial access is essential for strengthening the link between theory and empirical evidence. Currently, the main proxy variables that measure financial access include: the number of bank accounts per 1,000 adults, number of bank branches per 100,000 adults, the percentage of firms with line of credit.
In the case of financial markets, measuring financial access requires ascertaining market concentration, for a high degree of concentration reflects greater difficulties for entry of newer and smaller firms. Other factors include the percentage of market capitalization and traded value outside of top 10 largest companies, government bond yields, ratio of private to total debt securities, ratio of domestic to total debt securities, and the ratio of new corporate bond issues to GDP.
Involuntary non-users want to use financial services, but do not have access due to a variety of reasons: First, they may be unbankable because their low income prevents them from being served commercially by financial institutions; second, they may be discriminated against based on social, religious, or ethnic grounds; third, they may be unbankable because contractual and informational networks prevent financial institutions from commercially serving these non-users; finally, the price or features of financial services may not be appropriate for the population groups of the non-users.
Because the factors that determine whether or not an individual or enterprise has access to finance may change over time, it makes sense to group the banked and unbanked into market segments that reflect their current and possible future status as users or non-users of financial services. One such approach to market segmentation is the "access frontier," which can be used for analyzing the development of markets over time. The access frontier defines the maximum proportion of the population that has access to a product or service at a given point in time, and the frontier may shift over time, e.g. as the result of technological and competitive changes in the market. The access frontier approach distinguishes between users and non-users of a product or service, and segments non-users into four groups:
The following table gives an overview of the grouping of consumers into users and non-users, the segmentation of non-users, as well as three zones that enable government policies to better match interventions to the requirements of market development.
User groupMarket segmentMarket policy zone
UsersCurrent users n/a
Non-usersVoluntary non-usersn/a
Non-usersNon-users, lying within the present access frontierMarket enablement zone
Non-usersNon-users, lying within the future access frontierMarket development zone
Non-usersThe supra-market group, lying beyond the future access frontierMarket redistribution zone

Estimating and measuring access to finance is relatively difficult because relevant data are not readily available. A lack of consistent cross-country data on the use of financial services has led to the use of the number of deposit and loan accounts as a simple measure of financial access, although this is an imperfect measure of financial access.

Formal and informal financial services

Financial services may be provided by a variety of financial intermediaries that are part of the financial system. A distinction is made between formal and informal providers of financial services, which is based primarily on whether there is a legal infrastructure that provides recourse to lenders and protection to depositors. The following table gives an overview of this distinction by showing the segments of financial systems by degree of formality.
TierDefinitionInstitutionsPrincipal clients
Formal banksLicensed by central bankCommercial & development banksLarge businesses
Government
Specialized non-bank financial institutions Licensed by central bankRural banks
Post Bank
Savings & loan companies
Deposit-taking microfinance banks		Large rural enterprises
Salaried workers
Small & medium enterprises
Semi-formalLegally registered, but not licensed as financial institution by central bankCredit unions
Microfinance NGOs		Microenterprises
Entrepreneurial poor
InformalNot legally registered at national level Savings collectors
Savings & credit associations, susu groups
Moneylenders		Self-employed
Poor

A more detailed approach to distinguishing formal and informal financial services adds semi-formal services as a third segment to the above. While formal financial services are provided by financial institutions chartered by the government and subject to banking regulations and supervision, semi-formal financial services are not regulated by banking authorities but are usually licensed and supervised by other government agencies. Informal financial services are provided outside the structure of government regulation and supervision.

Barriers and Policies to Increase Access

However, in many countries financial access is still limited to only 20–50 percent of the population, excluding many poor individuals and SMEs. Many reasons could explain the limited financial access especially among the poor. First, the poor lack the education and knowledge needed to understand financial services that are available to them. Second, loan officers might find it unprofitable to serve the small credit needs and transaction volume of the lower-income population. Additionally, banks may not be geographically accessible for the poor since financial institutions are likely to be located in richer neighborhoods. The poor are also burdened by lack of collateral and inability to borrow against their future income because their income streams tend to be hard to track and predict.
In light of the lack of financial access for the poor, over the past few decades developments in micro finance institutions have managed to provide financial services to some of the world's poorest, and achieved good repayments.
There are still work to be done to build inclusive financial systems. This includes taking advantage of the technological advances in developing financial infrastructure to lower transaction costs, encouraging transparency, openness and competition to incentivize current institutions to expand service coverage, and enforcing prudential regulations in order to provide the private sector with the right incentives.