Figure 3: Remittances and wage payments.
Table 3:Barriers to financial inclusion in the BRICS.
Notes: Average = Simple average of the figures under each head for BRICS. Others include reasons such as family member already having an account, difficulty in operating the account, etc.
Among others, individuals report the high costs to be an overwhelming consideration: the reason was extremely important in Brazil in 2011 wherein 48% of respondents cited it as important, although its relevance has since declined significantly. Distance was an important consideration inhibiting financial inclusion in both South Africa and India, although its importance has since declined substantially in case of the latter. The role of religion in influencing financial inclusion was most important in India among the BRICS, with 1% of respondents citing it as relevant in 2017, a decline from 8% in 2011.
On a related note, the motives for involuntary exclusion are no less compelling: lack of trust and high cost are still important in several countries, most notably in Russia, with 35% of individuals citing it as important in 2014. It still remains an important concern in the country. This is consistent with Fungacova and Weill’s (2013) results which show that these factors have appeal in a country characterized by several bank failures and, more generally, financial instability.
Alternative Sources of Borrowings
Given the evidence on financial exclusion, it therefore remains to be examined as to what alternative sources of credit are relevant, apart from credit from formal sources. In Table 4, we depict these sources of borrowings. The evidence suggests that, on average, ‘family/friends’ typically dominate, with 26% of individuals having accessed credit from these sources in 2017. This factor overwhelms every other consideration in South Africa with closer to 40% of individuals relying on this method for accessing finance. Reliance on private lenders is much more prominent in India, with 4% of individuals having accessed such finance, whereas formal finance is much more important in Russia, its importance having increased from 8% to 14% during this 7-year period.
While the evidence is consistent with the fact that financial access is a necessary but not sufficient condition to ensure financial inclusion, a much more rigorous analytical framework is necessary to clearly discern this relationship. We turn to this aspect in what follows.
Determinants of Financial Inclusion
When looking at what drives financial inclusion across countries, past evidence highlights several determinants. Among others, Sarma and Pais (2011), for instance, show that income, inequality, adult literacy, and urbanization can be considered important factors for explaining the level of financial inclusion in a country. Physical and electronic connectivity and information availability have also been found to play an important role. Ardic et al. (2011) found GDP per capita and population density to be both significantly and positively associated with deposit account penetration. The number of outstanding loans, on the other hand, was found to be negatively correlated with inflation. Kendall et al. (2010) found that bank branches per 100,000 adults seem to be a significant determinant of the number of deposit accounts in commercial banks, while inflation was also found to act as a constraint.
Table 4:Alternative sources of borrowing in the BRICS.
Note: NR = Not Reported; Average = Simple average of the figures under each head for BRICS.
To investigate this carefully, we conduct a cross-country analysis of 32 emerging market and developing economies (EMDEs) for 2017, using the recently released FINDEX database. We use the following dependent variables: (a) the percentage of the population having account at a formal financial institution (age 15+), and (b) the percentage of the population that had saved at a financial institution (age 15+). Without loss of generality, the former is used as a proxy for access to finance and the latter is a proxy for the use of finance. In addition, we control for the overall country’s economic development by using GDP per capita. Inflation is taken as a proxy for macroeconomic stability and domestic credit to private sector as percentage of GDP, and commercial bank branches (per 100,000 adults) are taken as proxies for financial development and financial infrastructure, respectively. Besides, internet usage (per 100 people) is considered to capture the technological infrastructure and educational attainment (captured by the net primary enrolment ratio) as a proxy for human capital. Our focus is on the coefficient for the India dummy.
Table 5:Determinants of financial inclusion in EMDEs.
Note: Robust standard errors in parentheses.
***p < 0.01; **p < 0.05; *p < 0.10
The results in Table 5 show that GDP per capita and domestic credit to private sector are significant determinants of access. Inflation was negative and significant, indicating that in an inflationary environment, people prefer to hold real assets in place of nominal assets. Other variables such as population density, enrolment in primary school, and number of bank branches were also found to positive but not significant. The coefficient of interest — India — was positive and statistically significant, indicating that India fares better than the average EMDE with respect to access to formal finance. On average, access to finance is anywhere between 0.18 and 0.21 percentage points higher in India as compared with other EMDEs. However, when it comes to use, the evidence is less convincing. In other words, having successfully ensured access to finance, the policy needs to reorient itself towards incentivizing people into using these accounts.
Financial Crisis and Financial Inclusion
The global financial crisis compelled policymakers to take a fresh look at the financial inclusion initiative. Policymakers have often endorsed marketing to subprime borrowers as a means of ensuring financial inclusion. With the benefit of hindsight, it appears that such over-extension entailed adverse selection, in turn compromising the quality of the credit portfolio of financial entities and sowing the seeds of financial fragility. The position was further exacerbated by regulatory or governmental forbearance which vitiated the overall credit culture.
With regard to financial inclusion, the crisis provided several lessons.
First, financial inclusion helps provide a more stable retail base of deposits. Overt reliance on borrowed funds, as was manifest during the crisis, greatly eroded the soundness and resilience of financial institutions. During periods of stress, low-income clients exhibit much more stickiness in their deposit behavior, even as other sources of funds become difficult to roll over. Ratnovski and Huang (2009), for instance, note that the relative resilience of Canadian banks during the crisis was, in large part, driven by their reliance on retail deposits.
Second, financial inclusion can lead to enhanced financial stability by improving the financial health of the household sector. Lack of access to formal finance can impair the ability of households to receive government transfers, to make payments, or to accumulate cash surpluses for planned expenses or emergencies. In addition, high and usurious interest rates in the informal sector can lead households into a debt trap, with adverse economic and social consequences. Besides lowering both transactions cost and interest burden, such access also entails social benefits such as protection against loss due to theft, improved mechanisms for social transfers, and better economic linkages for the rural and deprived communities. Gine et al. (2012) find that the use of biometric identification