FINANCIAL INCLUSION AND POVERTY

Joao Pedro Azevedo Senior Economist, The World Bank

June 3, 2014

Part 1:

WHY SHOULD WE CARE?

ECONOMIC MOBILITY

Turkey has had a positive performance on economic mobility in the recent years….

3

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

MIDDLE CLASS

VULNERABLE

POOR

Source: Azevedo and Atamanov (2014)

… and poverty reduction has been driven by labor markets (in Turkey as well as other developing countries)

– labor markets is mostly a quality of jobs story (better earnings)

– Social protection matter to reduce poverty depth/severity

4

-3.3

-7.1

-11.6

-3.3

-7.1

0.1

-0.1

1.3

-14

-12

-10

-8

-6

-4

-2

0

2

shar

e o

f ad

ult

s

shar

e o

f e

mp

loye

d

wag

es

soci

al a

ssis

tan

ce

pen

sio

ns

rem

itta

nce

s

agri

cult

ura

l in

com

e

oth

er in

com

e

po

vert

y re

du

ctio

n, p

erce

nta

ge p

oin

ts

5 USD/PPP 2005

Source: Azevedo and Atamanov (2014)

But success in poverty reduction is not just about moving people out, but also preventing those that are out of poverty from

falling back in (protecting the vulnerable group)

5

Origin (In 2002)

Percentage moving to 2011

Poor Vulnerable Middle Class

Poor 43 58 41 0 100

Vulnerable 37 1 58 40 100

Middle class 20 0 2 98 100

Total 100 22 38 40 100

Source: Azevedo and Atamanov (2014) calculations based on ECAPOV data . Notes: transition matrix is based on synthetic panel for 2002-2011. Welfare aggregate is consumption (+health, +durables) per capita and poverty line is 5 and 10 USD PPP 2005. Rsq for consumption model is 0.36. Explanatory variables include year of birth cohort, number of children, education of the head of household, rural/urban dummy and different interactions between these variables. Sample: head of households 25-55 years of age. Values based on lower bound estimates.

Part 2:

WHAT DO WE KNOW?

Financial sector development and inclusiveness can strengthen labor markets and help the poor and vulnerable to mitigate

shocks

• A large literature exists on the role of access to finance to towards growth generation and reducing inequality (see Beck and Demirguc-Kunt, 2008 for a literature review). – Beck, Demirguc-Kunt, and Levine (2007) find that 60

percent of the income growth of the poorest quintile is due to financial development’s impact on the economy.

– Claessens and Perotti (2007) offer an explanation of how financial development can be related to inequality, theorizing that in unequal societies, unequal financial access is a result of skewed political influence and regulatory capture.

7

BANKING CHALLENGES TO THE POOR

• Many poor lack a safe and secure place to store cash

• Bank fees and fines are restrictive

• Informal financing may be more unreliable and have higher interest rates

• Lack of collateral for loans

• Low loan to deposit ratios perpetuate a cycle of low lending

8

BY REGIONS

9

Account Use across Income Quintiles (2011) Adults with an account at a formal financial institution (%)

Source: FINDEX

0102030405060708090

100

Turkey BRIC Rest ofDeveloping

World

DevelopedWorld

Rest of ECA

Lowest quintile q2 q3 q4 top quintile

10

Turkey has a high proportion of formally banked adults, but account penetration varies across

individual characteristics such as gender, income, and education.

GAPS IN ACCESS, by gender and B40/T60

Access to financial institutions in Turkey across gender, % of population +15

Access to financial institutions in Turkey across groups with different level of income, % of

population +15

11

Source: Findex. Azevedo and Atamanov (2014). Pathways to the middle class in Turkey: How have reducing poverty and boosting shared prosperity helped? World Bank.

0

10

20

30

40

50

60

70

80

90

Account Loan

% o

f p

op

ula

tio

n, a

ge 1

5+

female

male

0

10

20

30

40

50

60

70

Account Loan

% o

f p

op

ula

tio

n, a

ge 1

5+

bottom 40

top 40

WITHIN TURKEY, THERE IS LARGE VARIATION IN THE RATE OF BANKED ADULTS BY GENDER…

12

Account Use by Gender Adults with an account at a formal financial institution (%)

Source: FINDEX

0102030405060708090

100

Turkey BRIC Rest ofDeveloping World

Developed World Rest of ECA

Pe

rce

nt

Male Female

…AND BY EDUCATION & AGE

13

Account Use by Individual Characteristics (2011) Adults with an account at a formal financial institution (%)

Source: FINDEX

51 39 18

71

22

58 56 35

86

37

100 70 62

94

61

0

50

100

150

Turkey BRIC Rest of DevelopingWorld

Developed World Rest of ECA

Pe

rce

nt

Primary Secondary Tertiary

44 36

19

71

24

62 50

33

89

42

67

37 26

83

33

0

20

40

60

80

100

Turkey BRIC Rest of DevelopingWorld

Developed World Rest of ECA

Pe

rce

nt

15-24 25-64 65+

LACK OF MONEY AND TRUST ARE TOP REASONS FOR NOT HAVING AN ACCOUNT

14

Non-account holders reporting of reasons behind not having an account (%)

Note: Multiple responses allowed. Source: FINDEX

27

21

29

22

20

27

14

18

17

24

50

66

72

54

70

0 20 40 60 80 100 120 140 160 180 200

Turkey

BRIC

Rest of Developing World

Developed World

Rest of ECA

Too Far Away Too Expensive Lack Documentation

Lack Trust Lack of Money Religious Reasons

Family Member Already Has One

Part 3:

HOW CAN THIS CHANGE?

DEPOSITS & POVERTY

16

• Awareness and behavior is critical • Programs of financial literacy are gaining much momentum, but much

of its demonstrated success seem to be skewed towards the youth • Education is an important channel

• Legislation needs to be changed so a missing middle can grow • From Microcredit to Microfinance • Legal framework and Regulation

• Innovation is often required • Mobile banking • Deposit-collection services: Deposit-collection services result in a

substantial increase in savings for those offered the service • Access: Providing collection boxes, drop-off sites

DEPOSITS & POVERTY

17

• Integration with social programs • Bolsa Familia (Brasil) 3 million beneficiaries receive their transfer

through a simplified account • Self-exclusion still a challenge

• it is not just about deposits • Intermediation & savings commitment: Experiment in Sri Lanka, workers

had direct deposits but can only withdraw at a bank (Mel, McIntosh, Woodruff)

• It is important to add value : payment systems; savings; credit

RECAP: DEPOSITS FOR THE POOR

• It matters!

• Existing coverage is heterogeneous – Low account use among females, less educated, and the young

– Lack of money and trust are common reasons for not holding a formal account

– Low savings for all

– Formal borrowing is uncommon, informal lending is very high

• The solution requires working form multiple fronts – Supply and Demand factors

– Behavior and awareness

– Legislation (legal framework and regulation)

– Integration with other efforts (social sector)

18

Thank you

jazevedo@worldbank.org

FINANCIAL INCLUSION DATA

• Analysis in this section is conducting using data from The World Bank’s FINDEX 2011 database.

• The data provides indicators on the access and utilization of financial services for the population of individual 15 years and older.

• 147 countries: in most countries, the sample size is 1,000 individuals

20

ANNEX:

SAVINGS & CREDIT

22

Source: FINDEX

LOW SAVINGS % of Population (15+) that has saved money in

the past 12 months

0

10

20

30

40

50

60

70

Turkey BRIC Rest of DevelopingWorld

Developed World Rest of ECA

Lowest quintile q2 q3 q4 Highest quintile

METHOD OF SAVING

23

Formal and Informal Savings (2011) Adults who reported saving any money in the past year (%)

Source: FINDEX

0

10

20

30

40

50

60

Turkey BRIC Rest of DevelopingWorld

Developed World Rest of ECA

Saved at Financial Institution Saved using savings club

DEBIT & CREDIT CARD USE

Has Debit Card Has a Credit Card

24 Source: FINDEX

0

10

20

30

40

50

60

70

80

Turkey BRIC Rest ofDeveloping

World

DevelopedWorld

Rest of ECA

0

10

20

30

40

50

60

70

Turkey BRIC Rest ofDeveloping

World

DevelopedWorld

Rest of ECA

Lowest quintile q2 q3 q4 top quintile

25

Source: FINDEX

TURKISH DEPOSITORS HAVE HIGH ATM USE

69.5

17.8

12.1

28.5

17.6

29.7

79.1

83.4

66.6

77.6

Turkey

BRIC

Rest of Developing

Developed

Rest of ECA

At an ATM At a Bank At a retail location Via another person

Most frequent mode of cash deposit

26

Source: FINDEX

FORMAL BORROWING UNCOMMON

Adults borrowing from formal or informal sources in the past year (%)

0

5

10

15

20

25

30

35

40

45

50

Financial Institution Store Credit Family/Friends Past Employer Other

Turkey BRIC Rest of Developing World Developed World Rest of ECA