Financial exclusion at root of poverty trap-WB

By Rommer M. Balaba

Reporter

A WORLD Bank policy research note has suggested financial exclusion was a major reason for persistent inequality, the poverty trap and slower economic growth  among developing nations, even as some government policies are not as effective in removing this barrier. “While most people in the developed world take access to banking services for granted, price and nonprice barriers prevent large parts of the population in developing countries from accessing and using formal banking services,” said the note, written by Thorsten Beck, Asli Demirguc-Kunt and Maria Soledad Martinez Peria of the Bank’s research department. Fees imposed by some banks in many developing countries likewise prevent the poor from maintaining checking or savings accounts, the same way a physical address or a regular employment is required to obtain these  banking services, it noted. As an example, the Bank noted that fees needed to maintain a checking account in Sierra Leone exceed 25 percent of gross domestic product per capita (GDPPC) while there are no such fees in the Philippines. It also costs $50 to transfer $250 internationally in the Dominican Republic, but only $0.30 in Belgium. The authors, however, clarified that “barriers to banking services could in principle arise as a result of the banks’ rational business decisions based on their business  model, their market position, the macroeconomic, contractual and regulatory environment in which they operate and the level of competition they face.” A list of banking barriers negatively correlated with economic development: minimum balances to open accounts and fees to maintain them, the number of documents to open accounts, minimum amounts of consumer and SME (small and medium enterprises) loans and the days to process consumer and SME loans. For the Philippines, the Bank reported the relative ease —with a rating of 2 with 3 as highest—in locating banks to open deposit accounts, but also noted the 14.54 percent and 11.88 percent of GDP per capita required to open and maintain a  checking and savings account, respectively. Other Asian countries’ rates such as Thailand range from 0.31 percent to 6.74 percent; Indonesia from 0.65 percent to 9.54 percent; India from 5.02 percent to 8.85 percent and South Korea from zero percent to 3.32 percent of GDP per capita. “Bank regulation and supervision might have both a direct and indirect effect on the barriers that banks impose. Some barriers such as documentation requirements might directly result from regulatory requirements. In other cases, regulatory costs might be passed on by banks to customers,” the report said.

 

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