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> Posted by Eric Zuehlke, Web and Communications Director, CFI
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Financial inclusion stories and research are published daily, lauding various efforts to bring lower-income people into the formal banking fold. All progress deserves celebration, but also closer examination. When a new initiative takes effect, or a new service deployed, how does that advance us in achieving financial inclusion? A backdrop of sound measurement is critical. A BBVA research team, Noelia Cámara and David Tuesta, recently set out to construct an index that measures the extent of financial inclusion at the country or region level. The index is discussed and applied to 82 countries in the team’s new paper, Measuring Financial Inclusion: A Multidimensional Index. We were especially intrigued to learn that this research incorporates both supply and demand-side data. I recently sat down with Cámara to talk about the project, from challenges in measuring financial inclusion to the implications of the newly-available index.
1. What are the challenges in measuring financial inclusion?
Many issues arise when it comes to measuring financial inclusion. First, there is no single definition for financial inclusion universally accepted in the literature. Most definitions include three dimensions: use, quality, and access. However, when it comes to defining these dimensions, no consensus is found. For instance, the use of financial services is part of the financial inclusion concept, but it is not clear what “use of financial services” really means. Thus, several questions come to the fore: Do we consider having a bank account in the formal financial system to be a necessary condition for financial inclusion? Is having a pre-paid card or microinsurance enough to classify an individual as included? Is using electronic payment intermediation (e.g. paying bills with a mobile phone) a sufficient condition?
> Posted by Rishabh Khosla, Tahira Dosani, and Vikas Raj, Accion Venture Lab
Small businesses are the engine of employment, contributing up to 85 percent of new full-time jobs in low-income countries, and two out of three new jobs in countries like the U.S. The IFC finds a strong correlation between the health of the small business community, economic growth, and poverty alleviation.
Despite these Herculean responsibilities, micro, small, and medium enterprises (MSMEs) the world over struggle to access the financing they need to maintain cash flow, hire new employees, purchase new inventory or equipment, and grow their businesses. The IFC estimates that the unmet demand for MSME finance in emerging markets is $2.1-2.6 trillion (around 1/3 of outstanding loan balances to this segment). Unlike larger firms that can access capital markets, MSMEs must seek financing from banks or non-bank finance companies (NBFCs). Yet traditional lending approaches often fail to address this “missing middle” because the cost of diligence and underwriting is too high relative to the potential revenues from the smaller loans that MSMEs need. This situation is worse in emerging markets because of a lack of reliable financial data and high levels of informality. According to the Harvard Business Review, the financial crisis only exacerbated the situation: borrower balance sheets are still recovering, and banks, faced with new regulatory requirements, have reduced the share of lending to MSMEs in 9 out of 13 OECD countries.
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