A Broader Reach

• Author: Adolfo Barajas, Martin Čihák, and Ratna Sahay

A Broader Reach Finance & Development, March 2017, Vol. 54, No. 1

Adolfo Barajas, Martin Čihák, and Ratna Sahay

When more people and more firms have access to financial services, the whole society can benefit

Many households and small-scale entrepreneurs—mainly in developing and emerging market economies—find that lack of access to financial services prevents them from saving for a rainy day, borrowing funds to expand their businesses, or purchasing a house, a refrigerator, or other consumer durable goods. Their financial transactions, whether for personal or business purposes, can be costly and sometimes dangerous, because they almost always involve cash. With limited ability to save or to buy insurance, their financial condition is vulnerable to an extended illness or a natural disaster.

The lives of a vast number of people, including many poor in advanced economies, might be improved if they had access to and used a secure and affordable formal financial system and did not, for example, have to rely on extended family for emergency funds. Similarly, their savings would increase if they could deposit any funds they can accumulate in an interest-earning bank account rather than having to hide the money in their homes and if they learned how to assess and buy the products and services that banks, insurance companies, and even securities firms offer.

In other words, people who have limited or no access to financial services could be better off if they did. So might society. The benefits of financial services could lift many people out of poverty, reduce inequality, and encourage entrepreneurship and investment. Furthermore, if it makes credit available to previously excluded individuals with entrepreneurial talent, broader access to financial services might help productivity and economic growth. Promoting financial inclusion, as the process of broadening access to and use of financial services is called, has become a mantra of many central banks and finance ministries, particularly in developing economies and emerging markets. In almost 60 countries, there are national strategies and even explicit quantitative targets for financial inclusion.

Several aspectsThe notion of financial inclusion has several dimensions, but key is access to financial services such as banking and insurance at an affordable cost—particularly for the poorest—and effective and responsible use of these services.

Researchers and policymakers rely mainly on indicators from three global sources to gauge the spread of financial services and its effect on people, firms, and the economy:

The IMF’s Financial Access Survey, based on data collected annually since 2004 by central banks from providers of financial services in 189 countries: The survey shows a great expansion in financial inclusion over the past decade. Worldwide, the number of bank accounts per 1,000 adults...