Financial Inclusion and Development:

Recent Impact Evidence

Bob Cull, Tilman Ehrbeck and Nina Holle

June 2, 2014

1. A Vast Majority of Poor Households Live and Work

in the Informal Economy

2. Increasingly Robust Evidence of Beneficial

Economic Impact

• Microeconomic Level

• Local Economic Activity

• Macroeconomic Level

3. Additional Indirect Benefits

2

Agenda/ Outline of the paper

50+%

w/out formal

financial

account

3

~50-60%

with

informal

jobs

40+%

below

$2/day

A Vast Majority of Poor Households Live and Work in

the Informal Economy

Microeconomic Level: Credit

4

Businesses benefit from access to credit, linkage to broader welfare less clear

Mongolia (2010):

• Household Welfare: ++

• Business outcomes: ++

India/Spandana

(2009/2013):

• Household Welfare: 0

• Business Outcomes: +

SA/Consumer Credit

(2010):

• Household Welfare: ++

• Business outcomes: +

Mexico/Compartamos

(2013):

• Household Welfare: +

• Business outcomes: ++

Bosnia (2012):

• Household Welfare: -

• Business outcomes: ++

Phillipines (2011)

• Household Welfare: 0

• Business Outcomes: +

Morocco (2012):

• Household Welfare: 0

• Business outcomes: +

5

Business investments of

women (Kenya)*

Health savings and

investments (Kenya)**

* Dupas, Pascaline et al. (2012a). Savings constraints and microenterprise development: evidence from a field experiment in Kenya. AEJ: Applied Economics. Forthcoming.

** Dupas, Pascaline et al. (2012b). Why don’t the poor save more? Evidence from health savings experiments, NBER Working Paper.

*** Brune, Lasse et al. (2013): Commitments to save. A field experiment in rural Malawi. Working Paper.

0

100

Average dailybusiness

investment

Foodexpenditures

Privateexpenditures

+ 38%

+ 13%

+ 37%

0

100

200

Health savings Preventativehealth

investments

Preventativehealth

investments(commitment

account)

+ 138%

+ 66% + 75%

Agricultural activity

(Malawi)***

0

100

Agriculturalinput

Crop output Expenditures

+ 27% + 28% + 17%

Without access to c. savings With access to c. savings

Without access to savings With access to savings

Without access to savings With access to savings

Microeconomic Level: SavingsSavings help manage cash flow spikes, smooth consumption and build working capital

6

Agricultural activities (Ghana) * Protection against negative impact of

natural disasters (Kenya) **

* Karlan, Dean et al. 2012. Agricultural Decisions after relaxing credit and risk constraint, NBER Working Paper.

** Janzen, Sarah and Carter, Michael. 2012. The impact of microinsurance on asset accumulation and human capital investments: Evidence from a drought in Kenya. Working Paper.

0

100

Investments incultivation

Use of chemicalfertilizer

Land preparationcosts (incl. shift

towards riskier crop)

+ 13%

+ 24%+ 13%

Without access to insurance With access to insurance Without access to insurance With access to insurance

- 43%- 18% - 11%

0

100

Asset sales Reduction of meals Dependency on food aid

Microeconomic Level: Insurance

Access to insurance increases risk appetite and protects livelihoods

• Sharing risk in Kenya (Jack/Suri 2014)

• M-Pesa users were able to fully absorb negative income shocks through increase in remittances

• Consumption of households without access to M-Pesafell on average 7%

• Reducing transaction costs in Niger (Aker et al. 2010)

• Reductions in costs of cash transfer programs (both for implementing agency and recipient)

• Recipients’ cost savings resulted in diversification of expenditures (including food)

7

Microeconomic Level: PaymentsMobile money reduces households’ transaction costs and improves ability to share risk

• Opening bank branches in unbanked locations

reduced rural poverty in India (Burgess and

Pande 2005)

• Opening Banco Azteca branches in retail stores

had a significant impact on regional economy in

Mexico (Bruhn and Love 2013, Ruiz 2013)

• 7% increase in overall income levels

• Households were better able to smooth

consumption and accumulated more durable goods

8

Local Economic Activity

Financial access improves the local economy

9

GDP Growth Rates and Financial Depth 1980-2003

Source: Honohan, Patrick, and Thorsten Beck. 2007. Making Finance Work for Africa. Washington, D.C.: World Bank Group.

Macroeconomic LevelPositive correlation between financial depth and growth

Correlation less clear if:

− Economies with weak

institutional framework

− High inflation

environments

− Very low and very high

levels of financial

intermediation

− Short time horizon

10

ARG

AUS

AUT

BEL

BGD

BOL

BRA

CAN

CHE

CHL

CIV

CMR

COLCRIDNK

DOM

ECU

EGYESP

ETH

FIN FRA

GBR

GHA

GRC

GTM

HKG

HND

HUN IDNIND

IRL

IRN

ITA

JAMJOR

JPN

KORLKA

LSO

LUX

MDGMEX

MUS

MYS

NER

NGA

NLD

NOR

NPL

NZL

PAK

PAN

PER

PHL

PRT

ROM

SEN

SGP

SLE

SLV

SWE

THATTO

TUN

TURTZA

UGA

URY USA

VEN

ZMB

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

-3 -2 -1 0 1 2

Change in Gini coefficient

Private credit to GDP

Source: Beck, Thorsten, Aslı Demirgüç-Kunt ,and Ross Levine. 2007. “Finance, Inequality, and the Poor,” Journal of Economic

Growth, Vol. 12 (1).

Access to credit and income equality

Private credit to GDP

Change in Gini

coefficient

Macroeconomic LevelFinancial deepening reduces inequality

• More effective and efficient execution of other

social policies

• Payment of CCTs (e.g. Bolsa Familia reduced transaction

costs from 14.7% to 2.6%)

• Enabling new private-sector business models that

help address development priorities

• E.g. Microleasing for off-grid solar power,

community-based water stations (Kenya, Tanzania)

11

Additional indirect benefits

Advancing financial inclusion to improve the lives of the poor

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