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Sasidaran Gopalan • Tomoo Kikuchi Editors
Financial Inclusion in Asia
Issues and Policy Concerns
Editors
Sasidaran Gopalan
National University of Singapore
Tomoo Kikuchi
National University of Singapore
Palgrave Studies in Impact Finance
ISBN 978-1-137-58336-9 ISBN 978-1-137-58337-6 (eBook)
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Preface and Introduction
An integral component of financial sector development in Asia relates to the issue of financial inclusion. Several emerging market economies in the region have put in place a plethora of initiatives to expand provision of financial services to firms and households through allowing greater access to the formal credit market. While financial inclusion and financial deepening can promote economic growth and contribute significantly to denting poverty and inequality that is rampant in the region, there are also concerns that it could aggravate systemic risk and financial instability. Considering the important role played by banks in achieving financial inclusion, especially with bank-based financial systems dominating other forms of providers of financial services, a greater understanding of the issues and policy concerns emanating from the process of financial inclusion is of critical importance.
Financial inclusion can be said to encompass the process of broadening the accessibility of financial services for households and firms. In other words, it relates to providing and enabling the firms and households in an economy with access to the formal credit market. This is also sometimes referred to as banking sector “outreach,” that is, the degree to which the banking sector is able to meet the needs of a large segment of the population. The prime objective for furthering financial inclusion is to minimize the share of individuals and firms who have been left out of financial services provision as a result of government failures or market imperfections.
In several emerging and developing economies, financial inclusion plays a pivotal role in fostering inclusive macroeconomic growth. Access to affordable financial services can potentially increase economic activities as well as employment opportunities for those left out by the formal financial system (households in rural segments especially) which could also translate into higher disposable incomes, higher degrees of savings and a diverse deposit base for banks. Greater financial inclusion is also important when viewed from the perspective of financial stability. Since financial inclusion tends to result in greater diversification of bank assets, it could potentially reduce the overall risk profile of the banks, which in turn adds an element of stability to the financial system.
Though financial inclusion has become very popular in the economic policy discourse in the region, there is no consensus on how to define financial inclusion and whether the existing definitions and measurements effectively capture the various dimensions. It must also be emphasized that most of the commonly available financial inclusion indicators such as those capturing physical outreach may not necessarily provide a holistic picture of financial inclusion. Information concerning the actual use of those financial services from the user-side, in addition to measuring the degree of financial exclusion (among women, for example), is an additional dimension that must be factored in while attempting to measure financial inclusion..
Further, despite the role it has come to occupy in the policy discourse, there is still a dearth of relevant academic literature that explores the inter-related issues concerning financial inclusion specifically in Asia. In this light, this book will examine some analytical and policy issues concerning various dimensions of financial inclusion in Asia.
The volume is broadly divided into three parts, with the first set of chapters focusing on the issue of measurement and determinants of financial inclusion in Asia. The second set of chapters comprises empirical essays exploring specific dimensions of financial inclusion and its implications on a larger set of macroeconomic and development issues. The volume then wraps up with a set of selected country case studies assessing the evolution of and policy framework pertaining to financial inclusion in emerging Asian economies. In what follows, we will offer a chapter-by-chapter synopsis below.
Part I—Measurement and Determinants
The first part of the book examines issues relating to measurement and the empirical determinants of financial inclusion in Asian economies.
Chapter 1 sets the tone for the rest of the book by focusing on the definitions of financial inclusion. An understanding of the interlinkages between financial inclusion, financial development, and economic growth require an appropriate measure of financial inclusion. While the existing literature has a set of indicators that either at the macro level or at the micro level provide interesting and useful information on the nature of inclusiveness of a financial system, there are serious limitations with the available measurements. When used individually, they may provide partial and incomplete information and may lead to a misinterpretation of the extent of financial inclusion in an economy. In this light, Chap. 1 develops an index of financial inclusion (IFI) and uses it to measure the level of financial inclusion for several Asian economies for 2004–2013.
Chapter 2 undertakes an empirical investigation of the determinants of financial inclusion in 12 Asian countries. Using data from the World Bank Global Findex database for 2011, the chapter considers three indicators of financial inclusion—namely, ownership of a bank account, savings on a bank account, and use of bank credit—to test the determinants of those three indicators. It specifically examines the influence of four individual characteristics—education, income, age, and gender— on the three indicators of financial inclusion. The empirical results suggest that there are large cross-country differences in financial inclusion and that ownership of a bank account is more common in high-income countries. However, the pattern of financial inclusion in terms of savings in a bank account or using formal credit differs across countries and is not related to per capita income. The chapter also argues that the empirical results are suggestive of many similarities across countries for the determinants of financial inclusion such as being older and better educated associated with higher values for the three financial inclusion indicators in most countries.
Part II—Financial Inclusion: Importance and Implications
The chapters in this part are empirical essays exploring specific dimensions of financial inclusion and its implications on a larger set of macroeconomic, development, and institutional policy issues.
Chapter 3 focuses on understanding the link between financial inclusion, poverty, and income inequality. The chapter empirically argues that greater financial inclusion will lead to a reduction of poverty incidence and income equality. It extends the existing literature on financial inclusion by focusing on developing Asian economies. To do this, the chapter constructs a new financial inclusion indicator to assess various macroeconomic and country-specific factors affecting the degree of financial inclusion for 37 selected developing Asian economies. The chapter then tests the impact of financial inclusion on poverty and income inequality. The results show that per capita income, rule of law, and demographic characteristics significantly affect financial inclusion in developing Asia. Furthermore, the chapter also finds that financial inclusion significantly reduces poverty and lowers income inequality.
A large share of population without access to the formal financial system is a common phenomenon in many emerging economies. Using cross-country data, Chap. 4 documents the relevance of this issue for emerging Asia and discusses some of the implications for monetary policy. The focus is on the effectiveness of interest rates as a policy tool, as well as implications for the targets of monetary policy. The econometric analysis unveils only small differences in the interest rate sensitivity of output for economies at different degrees of financial inclusion. The results also suggest that real policy rates in some economies in emerging Asia tend to move slightly more countercyclically against headline than core inflation. The latter finding is in line with recent theoretical literature on policy targets in an environment where the share of financially excluded households is large and food accounts for a considerable share of the consumption basket.
Part III—Financial Inclusion in Asia: Country Experiences
The final part of the book is a discussion of selected case studies of emerging Asian economies and their experience with different models of financial inclusion. The chapters provide an assessment of the financial inclusion initiatives undertaken by Indonesia, India, and Sri Lanka as representative examples, along with tracing the evolution of the policy framework pertaining to financial inclusion in these countries.
Chapter 5 argues that with limited facilities and limited financial access, Indonesia can expand its coverage of financial inclusion only by building a model through innovative banking. This chapter shows that with high penetration of mobile banking, a branchless banking (agent banking) model with digital financial services is suitable. Massive regulatory intervention is required to get this model to work, requiring the government’s social assistance program to jump start the model with around 15.5 million households being directly exposed to digital financial services.
The next case study covered in Chap. 6 is Sri Lanka, which is home to a large number of financial institutions, both formal and semiformal, providing a range of different financial services such as loans, savings, leasing and finance, and pawning facilities to its population. There is also evidence of increasing access and utilization of financial services by various segments of its population. However, there are multiple challenges facing the country in terms of achieving greater financial inclusion. This chapter undertakes a household level analysis of financial inclusion in Sri Lanka. It does so by looking at the extent to which households have accessed financial institutions for loans and savings, extent of multiple borrowing and multiple savings as well as the reasons for accessing multiple financial institutions for loans and savings. The chapter concludes by highlighting a number of issues policymakers should address for achieving greater financial inclusion in Sri Lanka.
The final chapter of the book deals with the microfinance industry in India. The microfinance industry in India is one of the largest in the world and has played a critical role in fostering financial inclusion in the country. Though its roots can be traced back at least to the 1970s,
x Preface and Introduction
it exploded in size and reach since the 1990s. The trends highlight that since the 1990s microfinance has largely been clustered in the Southern Indian region and already witnessed a regulation-induced crisis in 2010. The self-help group-bank linkage model and the microfinance institutions model have provided two alternative routes in the sector with the latter starting late but showing spectacular growth before getting caught in the crisis. While the sector has rebounded from a crisis mode, several challenges still remain. The chapter provides an overview of the microfinance movement in India, underlining its role in the broader financial inclusion challenge in the country. The chapter also analyzes the key forces and determinants of the microfinance movement in India as well as the lessons that other emerging market economies in the region can derive from it.
To conclude, this book brings together a set of analytical and empirical essays aimed at understanding financial inclusion in emerging markets with a focus on the Asian region. These are carefully selected papers that were presented at an international conference in Hong Kong. Despite the significant policy interest in the issue of financial inclusion especially in Asia, there is a dearth of academic literature on the topic. This book aims to fill the gap by being the first of its kind to address the relevant issues and policy concerns relating to financial inclusion. One of the distinguishing features of the book is that it brings together a mixture of empirical and case study-oriented essays. While the chapters in this volume have been written in a manner that can stand up to academic scrutiny, they are also meant to be accessible to researchers, students, policy makers, and practitioners interested in the field of financial inclusion and development, especially in Asia.
Sasidaran Gopalan Tomoo Kikuchi
Acknowledgments
The book is a selected collection of papers that were a part of a conference hosted by the Institute for Emerging Market Studies (IEMS) at Hong Kong University of Science and Technology (HKUST) and co-organized by the Centre on Asia and Globalisation (CAG), Lee Kuan Yew School of Public Policy (LKYSPP) at the National University of Singapore. The editors thank the generous financial and logistical support provided by the directors of both institutes, Prof. Albert Park (HKUST IEMS) and Prof. Huang Jing (CAG). Sincere thanks due also to Prof. Ramkishen Rajan (LKYSPP) for playing an instrumental role in bringing together the various conference participants. The editors are also grateful to all the contributors of this volume and to an able administrative team including Lois Li, Carla Chan, and Christopher Dominguez at HKUST IEMS and Serene Teang at CAG who ensured the smooth functioning of the conference. The editors also appreciate the assistance of Blake Harley Berger (CAG) and Libby Beri (LKYSPP) in proofreading the manuscript.
About the Contributors
Rajesh Chakrabarti is currently Executive Vice President, Research and Policy at the Wadhwani Foundation. Previously he has been on the Finance faculty at the University of Alberta, Canada, Georgia Tech, USA and the Indian School of Business (ISB). At ISB he was also the founding Executive Director of the Bharti Institute of Public Policy. He has authored or edited six books and several articles in Finance, Economics, and Management in international scholarly journals. Rajesh is an alumnus of Presidency College, Calcutta and IIM Ahmedabad and earned his PhD from the University of California, Los Angeles.
Zuzana Fungáčová is a Senior Adviser at the Bank of Finland Institute for Economies in Transition in Helsinki. Her fields of interest include banking, emerging markets and their financial sectors as well as financial stability. She is also a research affiliate at the Institute of Economic Studies at Charles University in Prague. She has been a visiting economist at the European Central Bank and the Austrian Central Bank. Zuzana’s research has been published in academic journals including Journal of Banking and Finance, Journal of Financial Services Research, World Development, Economics of Transition, China Economic Review and Regional Studies.
Aaron Mehrotra is a Senior Economist in the Macroeconomic Analysis unit at the BIS. Previously, he worked as a Senior Economist at the BIS Representative Office for Asia and the Pacific in Hong Kong. Prior to joining the BIS in 2011, he was Adviser in the Bank of Finland Institute for Economies in Transition (BOFIT). He has authored many papers on the Chinese economy and economic policy and
his other research areas of interest include monetary policy in emerging economies. He holds a PhD from the European University Institute in Florence, Italy.
Rogelio V. Mercado Jr. is a Graduate Research Student from Trinity College Dublin.
G.V. Nadhanael is currently Assistant Adviser in the Department of Economic and Policy Research, Reserve Bank of India, Mumbai. His research interests include inflation and monetary policy in emerging economies, economic development and financial sector linkages and rural labor markets.
Cyn-Young Park is Director of the Regional Cooperation and Integration Division in the Economics Research and Regional Cooperation Department of the Asian Development Bank (ADB). She manages a team of economists to examine policy issues pertinent to Asia and the Pacific. She also participates in major international policy forums including ASEAN/ASEAN+3, APEC, and ASEM meetings. She has written extensively on the Asian economy and financial market development and published various journals, including Journal of Banking and Finance, Journal of Futures Markets, Journal of Banking Regulation, International Review of Economics and Finance, Asian Economic Policy Review, Asian-Pacific Economic Literature, and World Economy.
Kaushiki Sanyal is the Managing Director of Sunay Policy Advisory Pvt. Ltd., a policy research and consulting start-up. She also consults with Vidhi Centre for Legal Policy and Kamonohashi Project. Previously she worked at ISB’s Bharti Institute of Public Policy and at PRS Legislative Research. Other work experiences include stints at NDTV and Capital IQ. Kaushiki has published articles in journals and newspapers and has written book chapters. She is also an alumnus of the U.S. State Department’s International Visitors Leadership Program. Kaushiki has an MA in Political Science and a PhD in International Relations from the Jawaharlal Nehru University.
Mandira Sarma is an Associate Professor at Jawaharlal Nehru University, New Delhi.
Moekti Prasetiani Soejachmoen is the Head of Mandiri Institute, an independent research institute established by Bank Mandiri, the largest bank in Indonesia.
Ganga Tilakaratna is a Research Fellow and the Head of Poverty and Social Welfare Policy Unit of the Institute of Policy Studies of Sri Lanka (IPS). Her areas of research are primarily related to poverty, social protection, financial inclusion, and sustainable development goals, where she has carried out a
number of research projects and published research papers both locally and internationally. She holds a PhD in Development Policy and Management from the University of Manchester (UK), MPhil in Economics from the University of Cambridge (UK) and B.A in Economics from the University of Manchester.
Laurent Weill is Full Professor of Economics at EM Strasbourg Business School, University of Strasbourg. He is the Director of the research centre in finance (LaRGE) of University of Strasbourg. His research focuses on banking, corporate finance and institutions with a focus on emerging economies. He has published more than 80 papers in journals, among others Journal of Comparative Economics, Journal of Banking and Finance, Economics of Transition, Journal of Financial Stability, China Economic Review and International Review of Law and Economics. He is a frequent visiting researcher at Bank of Finland (BOFIT) where he has been Research Fellow.
About the Editors
Sasidaran Gopalan is a Research Fellow at the Asia Competitiveness Institute at the Lee Kuan Yew School of Public Policy, National University of Singapore. Prior to this, he was a Post-Doctoral Fellow at the Institute for Emerging Market Studies at the Hong Kong University of Science and Technology (HKUST) and the HKUST Jockey Club Institute for Advanced Study.
Tomoo Kikuchi is a Senior Research Fellow at the Centre on Asia and Globalisation at the Lee Kuan Yew School of Public Policy, National University of Singapore and a Visiting Research Fellow at the Global Security Research Institute at Keio University.
Fig. 2.1
Fig. 2.2
Fig. 3.1
Fig. 3.2
Fig. 3.3
Fig. 3.4
Fig. 3.7
Fig. 3.8
Fig. 3.9
Fig. 4.1
Fig. 4.3
List of Figures
Fig. 4.6 Asymmetric impact of food price driven inflation 117
Fig. 4.7 Employment profile of households in India 118
Fig. 4.8 Persistence of inflation 119
Fig. 5.1 Indonesian macroeconomic indicators, 2001–2014 136
Fig. 5.2 Reasons for low use of financial services 142
Fig. 5.3 KUR beneficiaries by expenditure deciles (in %) 150
Fig. 5.4 Banking through third-party agent, branchless banking 156
Fig. 5.5 Branchless banking—mobile based with agent 172
Fig. 5.6 Ownership of cellular phone among the poor and vulnerable: comparing BLSM and non-BLSM recipients 174
Fig. 5.7 G2P transfer through digital financial service, November 2014 180
Fig. 6.1 Financial institutions in Sri Lanka 189
Fig. 6.2 Density of banks by province (2009 and 2014) 190
Fig. 6.3 Number of branches of LFCs and SLCs by province (2010 and 2014) 191
Fig. 6.4 Share of adults (15 years and above) with an account at a financial institution (2014) 195
Fig. 6.5 Share of women (15 years and above) with an account at a financial institution (2014) 196
Fig. 6.6 Adults who have borrowed from a financial institution in the past year (2014) 197
Fig. 6.7 Number of financial institutions accessed by households for loans and/or savings—2006/07 and 2009/10 198
Fig. 6.8 Number of financial institutions accessed by households for savings—2006/07 and 2009/10 199
Fig. 6.9 Number of financial institutions accessed by households for loans—2006/07 and 2009/10 199
Fig. 6.10 Type of FIs accessed by households for savings—2006/07 and 2009/10 200
Fig. 6.11 Type of FIs accessed by households for loans—2006/07 and 2009/10 201
Fig. 6.12 Regulation of financial institutions in Sri Lanka 204
Fig. 7.1 Market size and growth 212
Fig. 7.2 Distribution of outstanding MFI loans 213
Fig. 7.3 Bank loans disbursed in 2013–2014 region-wise (SBLP) 214
Fig. 7.4 SHG coverage in India
Fig. 7.5 Microfinance growth outlook for 2014 by region (year on year growth in gross loan portfolio)
Fig. 7.6 Borrowers and portfolio outstanding of MFIs in India across years
Fig. 7.7 Growth trends of NBFC-MFIs
List of Tables
Table 3.6
Table 3.7
Table 4.1
Table 4.2
Table 4.3
Table 5.1
of shocks to nominal interest rate
access indicators, 2004–2013
Table 5.2 IMF-FAS usage indicators, 2005–2013
Table 5.3
Table 5.4 Characteristics of beneficiaries: KUR vs. other programmes
Table 5.5
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Table 7.1
Table
segments and financial products in National
inclusion in Sri Lanka: a comparative
Part I
Measurement and Determinants
1
Measuring Financial Inclusion for Asian Economies
Mandira Sarma
Introduction
Asian economies are at different levels of economic and financial sector development. While Japan, Singapore, and the Republic of Korea belong to the high-income Organisation for Economic Co-operation and Development (OECD) group of countries, on the other end of the wide spectrum are low-income countries that include Cambodia, Nepal, and Bangladesh. Within the middle-income countries of Asia, there are countries such as Malaysia and the Maldives that are far better off than Pakistan and India. The various stages of economic development are also reflected in the diverse stages of financial sector development in these economies. While the literature on economic development has adequately discussed the link between financial sector development and
M. Sarma (*) Jawaharlal Nehru University, Delhi, India e-mail: msarma.ms@gmail.com
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