Information asymmetry, financialization, and financial access

• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/infi.12136
• Author: Simplice A. Asongu,Nicholas M. Odhiambo
• Date: 01 December 2018

DOI: 10.1111/infi.12136

ORIGINAL ARTICLE

Information asymmetry, financialization, and

financial access

Simplice A. Asongu

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Nicholas M. Odhiambo

Department of Economics, University of

South Africa, Pretoria, South Africa

Correspondence

Simplice A. Asongu, Department of

Economics, University of South Africa,

P.O. Box 392, UNISA 0003, Pretoria,

South Africa.

Email: asongusimplice@yahoo.com

Abstract

This study investigates whether information sharing

channels that are meant to reduce information asymmetry

have led to an increase in financial access. The study

employs a Generalized Method of Moments technique

using data from 53 African countries during the period from

2004 to 2011 to examine this linkage. Information sharing

channels are theoretically designed to promote the formal

financial sector and discourage the informal financial

sector. The study uses two information sharing channels:

private credit bureaus and public credit registries. The study

found that both information sharing channels have a

positive and significant impact on financial access. The

study also found that public credit registries complement the

formal financial sector to promote financial access. Policy

implications are discussed.

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INTRODUCTION

Three main tendencies in policy and scholarly circles motivate this study: (i) the need for domestic

finance (or access to credit) to accommodate growing investment needs in Africa and the shortcomings

in the literature on financial development; (ii) postulated concerns of increasing information

asymmetry (or the lack of information sharing between banks) and surplus liquidity associated with

financial institutions on the continent; and (iii) the gaps in the literature on financialization (or the

improvement of one financial sector to the detriment of other financial sectors).

First, the bulk of African business literature is consistent with the position that a fundamental challenge

to doing business on the continent is the lack of finance (Allen, Otchere, & Senbet, 2011; Daniel, 2017;

Darley, 2012; Fanta, 2016; Fowowe, 2014; Iyke & Odhiambo, 2017; Obeng & Sakyi, 2017; Osah &

Kyobe, 2017; Tchamyou & Asongu, 2017a; Tuomi, 2011). This position has recently been confirmed by

Ndikumana and Blackson (2015), who have shown that domestic investment in Africa is more positively

International Finance. 2018;21:297–315. wileyonlinelibrary.com/journal/infi © 2018 John Wiley & Sons Ltd

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linked to domestic sources of capital when compared with external sources of capital. The authors

recommended that African countries primarily look inward for ‘domestic savings mobilization’as a

sustainable mechanism to domestic investment instead of the over-reliance on imported capital.

This study incorporates this requirement of domestic sources of finance by conceiving of and

defining financial access as the ability of financial intermediaries to transform mobilized savings into

credit for investment purposes. The motivation for emphasizing this dimension of financial allocation

efficiency also builds on the evidence that the literature has largely failed to appreciate financial

development from the perspective of the bank's ability to fulfil its fundamental role of transforming

mobilized financial resources into credit for investment purposes (Batuo & Kupukile, 2010; Kablan,

2010). For instance, most indicators of financial efficiency have focused on cost efficiency (Chen,

2009), data envelopment analysis (DEA) for technical efficiency (Kablan, 2009), and profit efficiency

(Hauner & Peiris, 2005).

Second, the need for internal sources of finance unfortunately contrasts with the substantially

documented concerns of excess liquidity in African financial institutions (Asongu, 2014a; Saxegaard,

2006). A fundamental reason for the surplus liquidity is the information asymmetry between lenders

and borrowers. To tackle the concern of surplus liquidity, over the past decade, information sharing

offices (ISOs), such as public credit registries (PCRs) and private credit bureaus (PCBs),

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have been

introduced across the continent (Triki & Gajigo, 2014). This study incorporates this dimension of the

motivation by considering a broad set of African countries and employing ISOs as a policy variable for

reducing information asymmetry in order to enhance financial access. Moreover, the extant literature

on ISOs has largely focused on developed countries and the emerging nations of Asia and Latin

America, while by extension, the African continent has not received the scholarly attention that it

deserves (Barth, Lin, Lin, & Song, 2009; Galindo & Miller, 2001; Love & Mylenko, 2003).

The policy relevance of ISOs in the financial sector competition for financial access has not been

covered in the literature.For instance, Love and Mylenko (2003) have concludedthat private registries

are linked to higher bank lending and lower financial access constraints, whereas the impact of public

registriesis not apparent. Singh,Kpodar, and Ghura (2009)conclude that Africannations with ISOs enjoy

higherlevels of access to finance.Triki and Gajigo (2014) have establishedthat, compared to PCRs,PCBs

are associatedwith higher levels of financial access.Asongu, Nwachukwu, and Tchamyou(2016) show

that ISOs have influenced access to finance negatively and Asongu, Anyanwu, and Tchamyou (2017)

conclude that technology-driven information sharing is relevant in driving financialaccess. Muazu and

Alagidede(2017) conclude that,compared to countries with Frenchcivil law traditions, their counterparts

with English commonlaw traditions benefit more from financialaccess arising from the introductionof

ISOs. Kusi, Agbloyor, Ansah-Adu, and Gyeke-Dako (2017) have established that ISOs reduce bank

credit risk in high- and low-income countries in Africa, while Kusi and Opoku-Mensah (2018) have

concluded that the presence, quality, and coverage of ISOs decreases funding costs in Africa.

Third, the concept of financialization in the information asymmetry literature is sparse. Consistent

with O’Toole (2014) and Asongu (2015a), the bulk of the literature has been restricted to more specific

areas of financial development such as bank concentration and bank participation. We depart from this

strand of literature by engaging financialization measurements within the framework of financial

sector competition. In so doing, we articulate a neglected informal financial sector. The introduction of

financialization-related concepts (which are substantively discussed in section 2) merges two branches

of research by concurrently contributing to the literature on measuring development finance and to the

economic development literature on the policy relevance of ISOs in the financial sector competition for

financial access. The simultaneous contribution provides a practical means for understanding the

mechanisms by which financial access is influenced by the complementarity between various financial

sectors and ISOs.

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