Access to finance
Encyclopedia
Access to finance refers to the possibility that individuals or enterprises can access 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.
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
(for a comprehensive list of estimated measures of access to finance across countries, see Demirgüç-Kunt, Beck, & Honohan, 2008, pp. 190–191). Meanwhile, the European Commission estimates that 30% of the UK population is underbanked.
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 (i.e. profitably) by financial institutions; second, they may be discriminated against based no social, religious, or ethnic grounds; third, they may be unbankable because contractual and informational networks (such as high collateral
requirements or a lack of information from credit registries) 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 segment
s 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 gouping 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.
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.
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.
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.
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
, including credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
, deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
, payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, and other risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
services. Those who involuntarily have no or only limited access to financial services are referred to as the unbanked
Unbanked
The unbanked are citizens of a country who do not have their own bank account. Along with the underbanked, they may rely on alternative financial services for their financial needs, where these are available.-The unbanked in the United States:...
or underbanked, respectively.
Access to finance varies greatly between countries and ranges from about 5 percent of the adult population in Papua New Guinea
Papua New Guinea
Papua New Guinea , officially the Independent State of Papua New Guinea, is a country in Oceania, occupying the eastern half of the island of New Guinea and numerous offshore islands...
and Tanzania
Tanzania
The United Republic of Tanzania is a country in East Africa bordered by Kenya and Uganda to the north, Rwanda, Burundi, and the Democratic Republic of the Congo to the west, and Zambia, Malawi, and Mozambique to the south. The country's eastern borders lie on the Indian Ocean.Tanzania is a state...
to 100 percent in the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
(for a comprehensive list of estimated measures of access to finance across countries, see Demirgüç-Kunt, Beck, & Honohan, 2008, pp. 190–191). Meanwhile, the European Commission estimates that 30% of the UK population is underbanked.
Defining and measuring access to financial services
Access to finance (the possibility that individuals or enterprises can access financial services) should be distinguished from the actual use of financial services, because none-use of finance can be voluntary or unvoluntary. 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.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 (i.e. profitably) by financial institutions; second, they may be discriminated against based no social, religious, or ethnic grounds; third, they may be unbankable because contractual and informational networks (such as high collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
requirements or a lack of information from credit registries) 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 segment
Market segment
Market segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function...
s 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:
- Those who are able to use the product or service but choose not to (voluntary non-users)
- Those who can currently access the product or service but do not yet (non-users, lying within the present access frontier)
- Those who should be able to use the product or service within the next three to five years, based on changes in the features of the product or service, or of the market, respectively (non-users, lying within the future access frontier)
- Those beyond the reach of market solutions in the next three to five years (the supra-market group, lying beyond the future access frontier)
The following table gives an overview of the gouping 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 group | Market segment | Market policy zone |
|---|---|---|
| Users | Current users (current market) | n/a |
| Non-users | Voluntary non-users | n/a |
| Non-users, lying within the present access frontier | Market enablement zone | |
| Non-users, lying within the future access frontier | Market development zone | |
| The supra-market group, lying beyond the future access frontier | Market 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 intermediariesFinancial intermediary
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents...
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.
| Tier | Definition | Institutions | Principal clients |
|---|---|---|---|
| Formal banks | Licensed by central bank | Commercial & development banks | Large businesses Government |
| Specialized non-bank financial institutions (NBFIs) | Rural banks Post Bank Savings & loan companies Deposit-taking microfinance banks |
Large rural enterprises Salaried workers Small & medium enterprises |
|
| Semi-formal | Legally registered, but not licensed as financial institution by central bank | Credit unions Microfinance NGOs |
Microenterprises Entrepreneurial poor |
| Informal | Not legally registered at national level (though may belong to a registered association) | Savings (susu) 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.
Further reading
- Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). Finance for All?: Policies and Pitfalls in Expanding Access. Washington, D.C.: The World Bank. Available from http://siteresources.worldbank.org/INTFINFORALL/Resources/4099583-1194373512632/FFA_book.pdf
- Helms, B. (2006). Access for All: Building Inclusive Financial Systems. Washington, D.C.: Consultative Group to Assist the Poor. Available from http://www.cgap.org/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/Documents/Book_AccessforAll.pdf
- Honohan, P., & Beck, T. (2007). Making Finance Work for Africa. Washington, D.C.: The World Bank. Available from http://siteresources.worldbank.org/AFRICAEXT/Resources/Africa_Finance_report.pdf
- Access to Finance on Making Finance Work for Africa http://www.mfw4a.org/access-to-finance/access-to-finance.html
- Fong, S.F.& Perrett, H.(1991).Women and Credit, Foreword by Arnaldo Mauri, Finafrica, Milano.