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8/8/2019 Financial Infrastructure Report
1/31
FINANCIAL
INFRASTRUCTUREBuilding Access Through Transparent and Stable Financial Systems
FINANCIAL INFRASTRUCTURE POLICY AND RESEARCH SERIES
8/8/2019 Financial Infrastructure Report
2/31
2009 The International Bank or Reconstruction and Development
The World Bank
1818 H Street NW
Washington, DC 20433
Telephone 202-473-1000
Internet www.worldbank.org
E-mail [email protected]
All rights reserved. 1 2 3 4 08 07 06 05
A publication o the World Bank and the International Finance Corporation.
Financial Infrastructure is a joint World Bank and International Finance Corporation (IFC). It was prepared by Margaret
Miller, Nataliya Mylenko and Shalini Sankaranarayanan. Input on the document was provided by Michael Klein,
Simeon Djankov, Peer Stein, and Massimo Cirasino. The team would also like to thank the ollowing current and
ormer World Bank Group colleagues or their insightul comments, guidance and support in writing this piece:
Alejandro S. Alvarez de la Campa, Alison Harwood, Anjali Kumar, Asli Demirguc-Kunt, Bikki Randhawa, Carlo Corazza,
Catherine Anne Hickey, Consolate K. Rusagara, Everett Wohlers, Gregory Watson, Ketut Ariada Kusuma, Jose Antonio
Garcia Garcia Luna, Neil Gregory, Roberto Rocha, Sevi Simavi, Tony Lythgoe, and Thorsten Beck. Book cover design/
production by Aichin Lim Jones and Michele de la Menardiere. Interior & graphs design/production by Aichin Lim
Jones and James Quigley.
This volume is a product o the sta o the World Bank Group. The ndings, interpretations and conclusions
expressed in this volume do not necessarily reect the views o the Executive Directors o the World Bank or the
governments they represent. The World Bank does not guarantee the accuracy o the data included in this work.
Rights and Permissions
The material in this publication is copyrighted. Copying and/or transmitting portions or all o this work without
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For permission to photocopy or reprint any part o this work, please send a request with complete inormation
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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Ofce o the
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Photo credits: Aichin Lim Jones, Getty Images, IFC Photo Library, Kabir Kumar-CGAP, and Peer Stein.
8/8/2019 Financial Infrastructure Report
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iFOREWORD
Contents
Foreword
Overview 1
The Reach o Financial Inrastructure 4
Measuring Financial Inrastructure 6
Financial System Soundness and Financial Inrastructure 8
Financial Market Depth and Financial Inrastructure 9
Efciency o Financial Services and Financial Inrastructure 10
Access to Financial Services and Financial Inrastructure 12
Financial Inrastructure and the Crisis 14
How to Reorm 15
Data Notes 19
Reerences and Suggested Bibilography 21
8/8/2019 Financial Infrastructure Report
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ii FINANCIAL INFRASTRUCTURE
Foreword
How do nancial institutions process
payments, check a potential borrowers
past experiences with credit or evaluate
the suitability o a security interest to be
used or a loan? For many consumers inthe nancial marketplace, the answers
to these questions are taken or granted,
just part o the black box o tools and
technologies used by lenders as they
transer unds between institutions or
decide on credit applications. In this
black box are the dierent elements o
a countrys nancial inrastructure.
Te World Bank Group is a leader in
nancial inrastructure development in
emerging markets, including payment
systems and remittances, credit report-
ing and secured lending. Moreover, theBank Group is intensiying its commit-
ment to promote and disseminate the
policy and research debate on these and
other topics within the scope o nan-
cial inrastructure, including corporate
governance, auditing and accounting
standards and practices, and nancial
literacy.
For this purpose, the Financial
Inrastructure Series was launched in
mid-2008 to host original contributions
in the orm o policy notes, studies, and
essays led by World Bank Group experts,
as well as initiatives carried out in coop-
eration with or by other experts and rel-
evant institutions in the various elds o
nancial inrastructure.
Te report, Financial Infrastructure.
Building Access Trough ransparent and
Stable Financial Systems draws largely on
the Bank Groups eorts in the ollow-
ing key areas: payment and securities
settlement systems, remittances, credit
reporting, and secured transactions andcollateral registries. It denes the space,
and presents a literature review, an esti-
mate o the size o the market, develops
an index or benchmarking nancial
inrastructure, and discusses the impli-
cations o nancial inrastructure or
access, transparency, better governance
and stability in nancial markets. Tis
report is aimed at policy makers, regula-
tors, practitioners, academics as well as
other interested parties.
Financial Inrastructure broadly
dened comprises the underlying oun-dation or a countrys nancial system.
It includes all institutions, inormation,
technologies, rules and standards that
enable nancial intermediation. Poor
nancial inrastructure in many devel-
oping countries poses a considerable
constraint upon nancial institutions
to expand their oering o nancial ser-
vices credit, savings and payment ser-
vices to underserved segments o the
population and the economy. It urther
creates risks or the nancial system as a
whole, as poor payment and settlement
systems may exacerbate nancial crises,
while the absence o credit bureaus in
conjunction with strong credit growth
may lead to one. Key nancial inra-
structure elements that every devel-
oped market can rely on, such as credit
bureaus, enorcement o collateral and
unctioning payment, securities settle-
ment, and remittance systems, ofen
do not exist or are underdeveloped in
emerging markets. Tese key elementsare vital to acilitating greater access
to nance, improving transparency
and governance, as well as saeguard-
ing nancial stability in global nancial
markets.
Penelope J. Brook
ActingVice President
Financial & Private Sector Development
World Bank Group
Peer Stein
Manager
Access to Finance Advisory
International Finance Corporation
8/8/2019 Financial Infrastructure Report
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1OVERVIEW
Credit bureaus, collateral registries, and pay-
ment, remittance and securities settlement
systems are all vital parts o a countrys nan-
cial inrastructure. When nancial inrastruc-
ture is available, efcient and reliable, the
cost o nancial intermediation alls. Financia
products and services become accessible to
greater numbers o citizens and lenders and
investors have greater condence in their abil-
ity to evaluate and guard against risk.
Defnition o fnancial inrastructure
The underlying oundation or the nancia
system including the institutions, inormation
technologies and rules and standards which
enable nancial intermediation.
Overview
Financial Inrastructure (FI) is a core
part o all nancial systems. Te qual-
ity o nancial inrastructure deter-
mines the eciency o intermediation,
the ability o lenders to evaluate risk ando borrowers to obtain credit, insurance
and other nancial products at com-
petitive terms. Strengthening nancial
inrastructure takes time, resources and
political will, however, and so important
diferences persist across countries.
Access to nance is the result o a
complex interplay o diferent nancial
intermediaries, the right kinds o nan-
cial inrastructure, and a sound legal
and regulatory ramework. Expanding
access to nance and nancial services
to those at the bottom o the pyramidentails a two-pronged strategy (i)
rstly that o creating and improving
the diferent nancial inrastructure ele-
ments, such as credit bureaus, payment
and securities settlement systems, remit-
tances and collateral registries, as well as
creating an enabling legal and regulatory
ramework to allow the proper unction-
ing o these various nancial inrastruc-
ture elements; and (ii) working with
the various nancial institutions them-
selves (retail/SME banks, micronance,
housing, leasing), and developing insti-
tutional capacity within. odays nan-
cial market economy abounds with
innovations in both products and deliv-
ery channels that dey the traditional
boundaries within which nancial mar-
kets operated. Innovations in branchless
banking, mobile banking, and corre-
spondent banking models, are all thriv-
ing today and promise to lead the way in
dening the landscape o nancial mar-
kets going orward. Tese innovations
usher in new benets through increased
access points that make products andservices more afordable and available to
all. Along with the benets are the inher-
ent risks involved with the development
o new products and delivery chan-
nels, some o which have culminated in
todays crisis, and the inherent need or
adequate regulation and oversight.
Credit Bureaus
In the Philippines, just 5% o the popu-
lation is included in the private credit
bureau. Te corresponding gures or
India and the Russian Federation aredouble that o the Philippines10%
but still quite low. Credit bureau cov-
erage is substantially higher, however,
in some developing countries including
Slovakia (40%), South Arica (65%),
Mexico (71%), El Salvador (83%) and
Argentina (100%). While Argentinas
ull coverage o the population is
unusual or developing countries, it
is not unusual or developed ones.
Australia, Canada, Iceland, Ireland,
New Zealand, Norway, Sweden, the
U.K., and the U.S. all have private credit
bureau systems which cover their entire
populations.1
FIGURE 1
Market
Infrastructure
Bank
A
Bank
B
Bank
C
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2 FINANCIAL INFRASTRUCTURE
Payment, Remittance and
Securities Settlement Systems
Te development o payment sys-
tems inrastructure also varies greatly
between countries. Large value (typi-
cally inter-bank) payments handled on
real time gross settlement (RGS) pay-
ment systems are typically many multi-
ples o GDP in developed countries. In
the U.K. the multiple is 91 times GDP,
in France 75, in Japan 50 and in the
U.S. 43. Tese gures plummet or most
developing countries with many below
10 times GDP and some around one
including Bolivia (1.2 times), Georgia
(1.4) and Lesotho (0.9). Other payment
system indicators show similar diver-
gence across countries including avail-
ability o AMs and POS terminals and
numbers o payment cards in circula-
tion.2
Payment system development andreorms also directly impact the e-
ciency and cost o remittances. Te cost
o sending remittances to Latin America,
South Asia, and the Commonwealth o
Independent States (CIS) countries alls
below the international average (10.5%
or US$200, and 6.5% or US$500),
whereas costs to Arica are relatively
high.3
Institutional arrangements or secu-
rities settlement refect the extent o
capital market (and broader economic)
development. Most high-income coun-tries have depositories or securities
immobilization (83% globally, including
all but one country in the EU), whereas
or low-income countries, the gure
is only slightly more than hal (57%).
Wealthier countries with more devel-
oped capital markets also tend to have
one depository or all types o securi-
ties (as compared to ragmented systems
with multiple depositories), have shorter
settlement cycles, and are more likely to
have a real-time interace with the pay-
ment system.4
Collateral
Te ability o lenders to use movable col-
lateral as security or a loan also depends
on the country. Data rom Doing
Business show that borrowers can, at
least theoretically, use movable collat-
eral to secure a loan while retaining pos-
session o the assets in most countries
(170/181). A much smaller percentage,
however, have the requisite legal rame-
work and unctioning modern collat-
eral registries that are necessary to make
lending against movables truly viable or
creditors, and most o these are ound in
developed economies. O the 80 coun-
tries with the least developed legal rights
index in Doing Business, which relates
to the use o collateral, only 10 have a
unied national registry organized by
asset type and borrowers name or iden-
tication number. Fewer than hal oall countries (about 40%) give secured
creditors preerence during bankrupt-
cies or reorganizations, and again most
o these countries have more developed
economies. 5
Why Financial Infrastructure
Is Important
Why is nancial inrastructure so
important? Financial markets have
a critical role in economic develop-
ment and stability because they provide
an ecient mechanism or evaluat-ing risk and return to investment, and
then managing and allocating risk
and resources across the economy.6
Credit bureaus provide the inorma-
tion needed or accurate and timely risk
analysis, especially or consumer credit.
Collateral systems provide inormation
to alert lenders to the potential exis-
tence o prior interests in collateral and
give creditors who register assurance o
their priority in the collateral, reducing
risk to lenders and acilitating access to
credit. Payment, remittance and securi-
ties settlement systems acilitate the dis-
charge o nancial obligations and the
sae transer o unds across distances
and institutions.
Financial Infrastructure and the
Current Crisis
Financial inrastructure can help to
reduce risk and increase eciency in
nancial markets, but it can also some-
times contribute to situations where
excessive risks are taken. Tis seems to
have been the case in the current nan-
cial crisis. Tink o FI as the system o
roads upon which nancial intermedia-
tion occurs. Better roads reduce the time
and cost o travel but they also increase
the potential speed, which has inherent
risks. For example, xed collateral can
contribute to a leverage cycle where
assets are used to increase lending which
increases asset prices, causing a bubble.
Credit bureau data and other nancial
inormation have made possible increas-
ingly complex models o consumer
behavior. Tese types o models werebehind many o the derivative products
which helped to create the current crisis.
Financial Infrastructure Reforms
Needed TodayDeveloping
Rules of the Road
Te current crisis is not a reason to stop
building nancial inrastructure. In act,
the importance o transparency and
disclosure, o a sound ramework or
secured lending, and o modern pay-
ment systems is especially great today
as countries ace severe economic chal-lenges. FI strengthens nancial markets
which in turn support business invest-
ment and consumption expenditures
and help reignite economic growth.
Te lessons o the current crisis, how-
ever, show the importance o establish-
ing clear rules o the roadthe legal
and regulatory rameworkand over-
sightor nance. Regulators have lim-
ited resources and limited reach, so
market participants must also help to
enorce the trac rules. Investors and
borrowers need to be educated and
pro-active in seeking inormation on
the products they buy. echnology can
also be enlisted to strengthen nancial
inrastructure, but it must be used sen-
sibly, not to justiyor hideexcessive
risk-taking as was the case with some
o the derivatives modeling. For exam-
ple, technology solutions could include
8/8/2019 Financial Infrastructure Report
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3OVERVIEW
stability enhancing eatures such as risk
monitoring and could promote diversi-
cation o assets and providers.
This Report
Financial Infrastructure discusses the
importance o credit bureaus, collat-
eral rameworks, and payment, remit-
tance, and securities settlement systems
or nancial intermediation. However,
this report does not touch on all ele-
ments o nancial inrastructure. Some
important sources o nancial inorma-
tion are not discussed, such as credit
rating agencies, business credit reports,
and corporate registries. Other impor-
tant omissions include corporate gov-
ernance and auditing and accounting
practices and standards. As more data
become available, this analysis will be
able to be extended to a broader spec-trum o nancial inrastructure.
Te elements o nancial inrastruc-
ture ofered here are typically out o
view but support a majority o nancial
transactions. Literally billions o peo-
ple are afected as they interact with the
nancial system, sending remittances,
requesting a loan or opening a savings
account. Financial Infrastructure pro-
vides estimates o number o consumers
afected and transactions value or credit
bureaus, payment systems and remit-
tances. Te report also presents an FIIndex or benchmarking progress. Te
FI Index also includes elements o the
legal ramework and is used to evaluate
the relationship between nancial inra-
structure and development goals such
as stability, depth, eciency, and access
or nancial markets. Finally, the report
looks at nancial inrastructure in the
context o the current crisis, to better
understand the reorm priorities going
orward.
NOTES
1. Data on credit bureaus rom the
Getting Credit section o Doing
Business 2009 (World Bank).
2. World Bank, Payment Systems
Worldwide: A Snapshot 2008.
3. Cirasino and Watson 2008.
4. World Bank, Payment Systems
Worldwide:A Snapshot 2008.
5. Data on collateral registries and legal
rights rom the Getting Credit section
o Doing Business 2009 (World Bank).
6. Demirgu-Kunt and Levine 2008.
8/8/2019 Financial Infrastructure Report
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4 FINANCIAL INFRASTRUCTURE
Figure 1. Total potential fnancing volumes to
be supported in emerging markets by fnancial
Financial inrastructure supports every
ormal nancial transaction rom pay-
ing a bill, to buying a house, to saving or
retirement. How signicant is nancial
inrastructure in terms o transactionvolume and number o people afected?
Unortunately there are no cross-coun-
try comprehensive data available on all
elements o nancial inrastructure so
it is not possible to provide a precise
measure.
Estimates o nancial inrastruc-
ture impact have been developed here
based on data rom several sourcesincluding the Doing Business project
at the World Bank, the Global Payment
Systems Survey (also World Bank), the
Remittance Prices Worldwide Database
(World Bank) and the IFCs lending port-
olio. Tese back o the envelope calcu-
lations, presented here, are based on raw
data rom these recent surveys and, when
available, rom empirical research on theimpact o nancial inrastructure. For
example, the estimate o credit bureau
impact uses an estimate o reductions
in deaults taken rom empirical studies
using actual credit bureau data.7
Financial inrastructure is a part o many nancial sector
transactions as the above estimates show on a global level
or emerging markets. Demonstrating the reach o nan-
cial inrastructure is just one step, however, in assessing
its contribution to nancial markets. Previous research hasused country-specic data or, in some cases cross-country
data, to analyze the impact o specic types o nancial
inrastructure (credit bureaus, payment systems, etc.) on
access to credit, deaults or economic growth. Relatively
ew studies, however, have taken a comprehensive view
o nancial inrastructure and its role in nancial markets.
One paper which addresses nancial inrastructure
more broadly is by Bossone, Mahajan and Zahir (2003).
The authors nd that in environments with weak FI, banks
substitute or some o its roles such as inormation gath-
ering, monitoring and contract enorcement. In exchange
they collect quasi-monopoly rents rom captive custom-
ers who nd it difcult to reveal their quality to otherlenders and unders. As nancial inrastructure develops
it promotes nancial market growth and competition
which leads to more efcient capital allocation and more
options or consumers.
The methodology used in this document is based
upon de Serres, Kobayakawa, Slok and Vartia (2006). The
authors use data rom Doing Business to demonstrate the
relationship between elements o nancial inrastructure
discussed here (credit bureaus and collateral rameworks)
and nancial development and growth. They also include
legal and regulatory variables related to contract enorce-
ment and bankruptcy, as well as measures o investor pro-
tection or corporate governance in their analysis. The authors take a similar approach to Rajan and
Zingales (1998) and evaluate whether rms that depend
more on external nance are more prevalent in countries
with better nancial inrastructure. Their ndings indi-
cate that nancial inrastructure signicantly impacts
both value-added and productivity growth by increasing
nance or these rms. They nd that approximately one
percentage point o an industrys annual growth rate can
be explained by nancial developmenta sizeable gure
given that annual growth rates are only a ew percentage
points (24%) on average.
This brie extends the analysis in de Serres, et al., and
uses the same variables rom Doing Business. However, italso creates an index to capture the general level o nan-
cial inrastructure in a country. It then relates the level o
nancial inrastructure (using the index) with key indica-
tors o nancial sector perormance such as deault rates,
interest rate spreads, and domestic credit to GDP. As such,
it extends the earlier analysis to a wider range o nancial
perormance measures.
The Reach
o Financial
Inrastructure
FIGURE 2
Total potential nancing volumes to be supported in emerging markets by
nancial infrastructure
155,000
US$billions
4,000
5,000
6,000
3,000
2,000
1,000
0
2007 Emerging Market GDP= $14.29 trillion
38499
285
RemittancesCredit
bureaus
2,068
1,256
812
Domestic
payments
154,195
89,350
64,845
Total current nancing volume Total potential nancing volume
Studies o fnancial inrastructure impact
8/8/2019 Financial Infrastructure Report
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5THE REACH OF FINANCIAL INFRASTRUCTURE
Te estimates in gure 2 show the
tremendous size o nancing and trans-
actions volumes supported by nancial
inrastructure. Te largest gure by ar
is that or payment systems, which reers
to retail transactions.In emerging markets, payments
inrastructure supports ows o more
than US$64 trillion annuallynearly
6 times combined GDP in these mar-
ketsand this gure could more than
double in the medium term. Te values
associated with the other types o FI are
o a dierent magnitude, because they
relate to credit provided, not transac-
tion volumes, or to a specic segments
o the payment system, or remit-
tances. Tese gures are sizeable: credit
bureaus, US$812 billion and remit-tances, US$285 billion. While remit-
tances are projected to decline in the
near term, nancing volumes are pro-
jected to grow in the medium to long-
term across all FI types.
Financial inrastructure is underde-
veloped in many emerging markets, and
non-existent in others. Potential nanc-
ing volumes shown in gure 2 are the
estimated amount o credit or transac-
tions that will be supported by nancial
inrastructure i it is expanded to emerg-
ing markets where it does not currently
exist or i the efciency o existing nan-
cial inrastructure is urther improved.
Te estimates are developed or the
medium to long-term (a ve to ten-year
horizon).
Te impact o nancial inrastruc-
ture is also signicant in terms o the
number o people aected. o illustrate
this, gure 3 shows the current reach o
nancial inrastructure, including about
390 million people in emerging markets
who are covered by credit bureaus, over
700 million who are aected by remit-
tances, and over 1 billion by paymentsystems. Again, estimates o the number
o people in emerging markets who have
the potential to be positively aected
are based on expected growth o nan-
cial inrastructure where it does not
currently exist, and expected increases
in the reach o existing nancial inra-
structure. Future growth is likely to
increase these gures in some cases by
100% or more. Financial inrastructure
is likely to support nancial transac-
tions or a majority o the worlds popu-
lation in the uture.
NOTES
7. Credit bureau impact data based in
part rom ndings reported in Barron
and Staten (2003). Please see Data Notes
or a more detailed explanation o the
methodology.
FIGURE 3
Total numbers of people aected in emerging markets
0.770.06
0.71
Remittances
3.50
3.00
2.50
Billions
2.00
1.50
1.00
0.50
0.00
2007 Emerging Market Population
= 5.5 billion
Credit
bureaus
1.01
0.61
0.40
Domestic
payments
2.97
1.87
1.10
Number of people currently aected Potential number of people aected
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6 FINANCIAL INFRASTRUCTURE
An adequate legal ramework, ecient
enorcement mechanisms, availability o
credit inormation and developed pay-
ment systems all contribute to the sta-
bility, depth, eciency, and access ina nancial system. Tis report devel-
ops a composite indicator to estimate
the overall role o nancial inrastruc-
ture across countries using data avail-
able in the World Bank Doing Business
database.
Consistent data on the specic ele-
ments o nancial inrastructure or a
large number o countries are limited.
Denitions and methodology or the
assessment o various aspects o nan-
cial inrastructure is also an area open
or research. As a rst step, this reportbuilds upon work done by de Serres,
Kobayakawa, Slok, and Varita (2006),
and uses indicators o nancial inra-
structure already collected in the Doing
Business report to compile a Financial
Inrastructure Index (FI Index) as shown
in gure 4.8 While these indicators are
limited in their ability to measure the
ull scale o nancial inrastructure
development and omit important areas
such as payment systems, their main
advantage is in providing a consistent
methodology and availability o indica-
tors or a large number o countries.
In this ramework, the contract
enorcement element measures the e-
ciency o the judicial system in resolv-
ing a commercial dispute. It covers the
number o procedures, time, and cost
o resolving a dispute. While the indi-
cator is based on a case study o a reso-
lution o a commercial dispute it serves
as a good proxy or enorcing credi-
tor rights in cases o non-payment. Te
access to credit component measures the
availability and scope o credit inorma-tion and the degree to which collateral
and bankruptcy laws protect the rights
o borrowers and lenders. Te investor
protection (IP) component (ollowing
the Doing Business lead we use IP here
instead o corporate governance but
the issues measured are the same) pro-
vides measures or the extent o disclo-
sure, extent o director liability, and the
extent to which shareholders can chal-
lenge transactions, including minor-
ity shareholder rights. Tis indicator
is a good proxy or the corporate gov-ernance aspect o nancial inrastruc-
ture. Te last element is bankruptcy
procedures reecting the time, cost,
and outcomes o bankruptcy proceed-
ings. As more data become available the
index can be expanded to include other
aspects o nancial inrastructure such
as payment systems, the status o audit-
ing and accounting and securities mar-
ket inrastructure.
Te FI Index numbers provide agood rst look at the status o nancial
inrastructure in countries and regions
around the world (gure 5). Interestingly,
emerging market regions do not show a
signicant variation in the value o the
FI Index. Compared to the high income
developed countries, all emerging mar-
kets all into the .45.55 band with
Eastern Europe and Central Asia hav-
ing the highest value o the Index and
Sub-Saharan Arica the lowest. However
most diferences in the regional averages
are statistically insignicant. A deeperlook into the components o the Index
reveals variation among the countries.
Te larger diferences are ound or the
access to nance component, but even
here, the diference is only signicant
between the top two regions (Eastern
Measuring
Financial
Inrastructure
Figure 3.Financial infrastructure index
FIGURE 4
FI Index components
Procedural efficiency
of the judicial system
Time efficiency ofdispute resolution
Cost efficiency of
court procedures
Coverage of public/
private registry
Credit informationscope
Legal rights of
borrowers and
secured transactions
infrastructure
Extent of disclosure
Extent of director
liability Ease of shareholder
suits
Time efficiency of
bankruptcy
procedures Cost efficiency of
bankruptcy
procedures
Recovery rate
Contract
Enforcement
Access
to Credit
Investor
Protection
Bankruptcy
Procedures
The next our sections use the FI
Index to analyze the impact o nan-
cial inrastructure on stability, depth,
efciency and access, using proxy
variables or these policy objectives
such as percent o non-perorm-
ing loans in the nancial system or
stability or domestic credit as a per-
centage o GDP or depth. Each sec-
tion also discusses the potential
transmission mechanisms behind
these results and the way that spe-
cic types o nancial inrastructure
contribute to the observed relation-
ships in the FI Index regressions.
When available, empirical studies o
nancial inrastructure components
such as credit bureaus, collateral,
etc., are cited.
Testing the impact o fnancial inrastructure using the FI Index
8/8/2019 Financial Infrastructure Report
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7MEASURING FINANCIAL INFRASTRUCTURE
Europe and Central Asia and Latin
America and the Caribbean) as opposed
to the other emerging market regions.
Te two indicators with more varia-
tioncredit inormation and creditor
rights and bankruptcy proceduresare
also the two indicators which are more
ocused on outcomes. While the Investor
Protection indicator relies ully on the
assessment o existing legal provisions,
and contract enorcement combines
legal provisions with outcomes (time and
cost), credit inormation and bankruptcy
are based on the outcomes o an imple-
mented ramework. Te lack o varia-
tion that is ound then is attributable
in part to the anecdotal evidence that
while many countries may have good
laws on the books these laws may not be
efectively enorced. o be better able to
analyze the actual level o nancial inra-structure on development, more data
collection on outcomes is necessary.
NOTES
8. A more detailed discussion o
the methodology used to create the
Financial Inrastructure Index can be
ound in the Data Notes section at the
end o this publication.
FIGURE 5
FI Index components by region
Sub-Saharan Africa
South Asia
Middle East
and North Africa
Latin American
and the Caribbean
High-income OECD
Europe and
Central Asia
East Asia
and the Pacic
0.00 0.20 0.40 0.60 0.80 1.00
Access to credit
Bankruptcy proceedures
FI Index Contract enforcement
Investor protection
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8 FINANCIAL INFRASTRUCTURE
Te level o development o nancial
inrastructure is closely correlated with
nancial system soundness as measured
by percent o non-perorming loans
(NPLs) in the nancial system (gure6) using NPL data through 2006. By
improving the security and eciency o
the system and protecting investors and
creditors rights, nancial inrastructure
promotes stability. And yet, the current
nancial crisis demonstrates that nan-
cial inrastructure alone is not sucient
to create stability. In act, as will be dis-
cussed later in this brie in the section
on nancial inrastructure and the cri-
sis, by enabling nancial intermedia-
tion nancial inrastructure may have
contributed, in some cases, to excessiverisk taking by nancial market partici-
pants. Te rest o this section will, how-
ever, discuss the ways in which nancial
inrastructure supports stability in nan-
cial markets.
Payment and securities settlement
systems in particular have a strong bear-
ing on nancial stability. A sound pay-
ment system can mitigate nancial
crises by reducing or eliminating settle-
ment risks related to nancial markets
transactions, in particular credit, liquid-
ity and operational risks. Te devel-
opment o real time gross settlement
(RGS) systems, which eliminate coun-
terparty risk, is one o the key responses
to the growing awareness o the need or
sound risk management.
Equally important is the soundness
o the legal ramework, in particular as it
concerns settlement nality and protec-
tion o collateral arrangements. When
the payment system unctions prop-
erly, risk sharing among agents is more
equitable, nancial resources are distrib-
uted more eciently, and there is greatercondence in the nancial systemand
in the very use o money.
Credit inormation systems and col-
lateral registries reduce inormation
asymmetries in the system. By pooling
data in an ecient institutional mech-
anism they also support ecient credit
allocation and strengthen risk manage-
ment capabilities. Ideally, in modern
nancial markets such systems should
serve three main unctions: (i) to sup-
port credit underwriting and portolio
risk management by nancial institu-tions; (ii) to serve as a basis or model
development/scoring, including scores
eventually used in securitizing assets;
and (iii) to provide regulators with the
inormation necessary or monitoring
systemic risks including or capital ade-
quacy standards under Basle II.
Tere are numerous studies using
credit bureau data which provide evi-
dence o the eectiveness o inormation
sharing. For example, Barron and Staten
(2003) show that comprehensive credit
bureau data can reduce deault rates sig-
nicantly. In their study, deault rates ell
by more than 30% when credit bureau
data included both bank and retail pay-
ment histories and both positive and
negative inormation on borrowers.
Tere is also evidence that credit
inormation promotes stability in the
micronance market. A study by Luoto,
McIntosh and Wydick (2007) related
to the introduction o credit reporting
in the Guatemalan micronance sec-
tor ound that deault rates ell at one
institution by 13 percentage points inthe six months afer operations o the
bureau began. Tis is signicant and in
a competitive market, this would corre-
spond to a reduction in interest rates o
more than 2.5%.
Other areas o nancial inrastruc-
ture are also important or nancial sec-
tor stability and soundness. Adequate
creditor rights and investor protections
build condence among creditors and
investors in stable times and allow or
eective resolution o disputes ollowing
a crisis. Better corporate governance hasalso been linked to less volatility in stock
returns and higher average share prices.
Figure 6. Financial soundness and fnancialinrastructure
Financial
System
Soundness
and Financial
Infrastructure
FIGURE 6
Financial system soundness and nancial infrastructure
2.0
NPL(percent)
FI Index quintiles
1 2 3 54
14.0
12.0
10.0
8.0
6.0
4.0
0.0
10.0
12.5
7.8
4.6
2.4
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9FINANCIAL MARKET DEPTH AND FINANCIAL INFRASTRUCTURE
Figure 7. Private credit to GDP and fnancialinrastructure
Better nancial inrastructure is closely
correlated with deeper nancial mar-
kets, even aer controlling or income
per capita and other country-level char-
acteristics (gure 7). Countries withweak nancial inrastructure tend to
have lower levels o credit as measured
by the ratio o private credit to GDP.
Each element o nancial inrastructure
has a potential to contribute to the deep-
ening o the nancial markets.
In the case o payment systems and
securities clearing and settlement ser-
vices, more modern inrastructure can
improve the ability o the nancial sys-
tem to mobilize savings and increase
the pool o assets available or invest-
ment. Moreover, new technologies, suchas mobile banking, provide opportuni-
ties to capture unds digitally which can
contribute to the monetary base in the
economy.
Credit bureaus promote deeper
nancial systems by helping to over-
come adverse selection and moral haz-
ard related to asymmetric inormation
in credit markets. As a result o cost sav-
ings through more ecient and accu-
rate credit analysis and lower expected
losses, lenders can increase their credit
extension.
A recent study by Djankov, et. al.
(2007) using data rom Doing Business
analyzes the relationship between inor-
mation sharing and credit in 129 coun-
tries. It nds that the existence o credit
registries is positively correlated with the
depth o the nancial market measured
by private credit to GDP. Te study also
estimates that the private credit to GDP
ratio is higher three to ve years aer the
establishment o a credit registry and the
diference is statistically signicant.
In the case o collateral registries,they eliminate inormation asymme-
tries about collateral and thereby reduce
the risk o lending secured by movables
o all classes, including those not avail-
able in traditional systems. By making
more efective use o existing classes o
collateral and opening new classes o
collateral to use by lenders, collateral
registries promote nancial deepening.
Financial
Market
Depth and
Financial
Infrastructure
FIGURE 7
Private credit to GDP and nancial infrastructure
rivatecred
ittoGDP(percent)
1 2 3
FI Index quintiles
54
140
120
100
80
60
40
20
0
17
37
45
56
124
P
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10 FINANCIAL INFRASTRUCTURE
Figure 7. Private credit to GDP and
Financial inrastructure is critical or the
ecient provision o nancial services.
Te eciency issue is especially evi-
dent in the case o payments, where the
per-transaction cost is relatively easy tocompare and savings rom moderniza-
tion eforts can be calculated. Eciency
improvements rom the introduction o
credit bureaus and/or credit scoring are
also highly signicant. Lenders armed
with these data can automate or semi-
automate certain market segments (such
as credit cards and small business loans)
and can substantially reduce other pro-
cedures such as veriying identication,securing co-signers, and visiting homes
or businesses, which reduces both the
time and cost o extending credit. In
the case o collateral registries, they can
also increase eciency by acilitating
credit evaluation or easily-valued assets
such as new cars, computer equipment,
and even commodities. In the case o
non-payment, collateral registries and
the systems which support them canhelp liquidate the asset and reduce loan
losses. Similarly, good corporate gover-
nance and strong accounting and audit-
ing standards promote more ecient
evaluation o companies.
Improvements in payments inra-
structure can result in signicant cost
savings and eciency improvements.
aking a sample o 12 European coun-
tries, Humphrey, Willesson, Bergendhal
and Lindblom (2003) estimate that
bank operating costs ell by about 24%
between 1987 and 1999 due to paymentsystem reorms, resulting in savings o
US$32 billion. Looking at the U.S. mar-
ket, Bauer and Hancock (1995) and
Bauer and Ferrier (1996) estimate that
technological change was responsible
or a reduction o about 10% per year
in the cost o automatic clearing house
(ACH) transers since 1989 and or an
annual reduction o about 8% or annual
Fedwire processing costs in the early
1990s. Tese gures again correspond to
massive savings or the system.
World Bank estimates suggest reduc-
tions in transactions costs o nearly 80
percent when starting rom the highest
cost margins or credit evaluations, col-
lateralizing loans, remittances, and pay-
ments. Figure 9 presents these data. For
example, one o the least ecient remit-
tance corridors, according to the World
Bank Remittance Price Website9 is South
Efciency
o Financial
Services and
Financial
Inrastructure
FIGURE 8
Interest rate spread and nancial infrastructure
Interes
tratespread
1 2 3
FI Index quintiles
54
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
12.2
6.8
8.2
7.1
3.6
Figure 9. Financial
FIGURE 9
The potential for lower transaction costs using ecient nancial infrastructure
Costsper$100lentorsent(USD)*
Unsecured micro,
retail and small
business loans
60
50
40
30
20
10
0
Least ecient system
Notes:
The chart serves to illustrate the range of possible reductions in transactio ns costs with the use of more ecientnancial infrastruc ture. These ranges are meant to be indicative only. Actual cost reductions are contingentultimately on the eciency of the system and the level of competition in the market.All costs are per $100 lent or sent, except for remittance costs, which are per $200 sent.
Credit Bureaus: Illustrates the range of costs associated with unsecured lending by micro and small business lendersand the potential for reduction from using credit reporting technologies. The upper limit indicates average lendingcosts for micronance institutions based on 2006 MIX Market data for 798 MFIs in 96 countries. Lower limit is based onaverage small business lending costs in developed markets. Graph does not suggest that the entire reduction in costsis attributable to the use of credit bureaus alone.
Collateral:Lending costs on secured credit and leases. Based on World Bank expert estimates.
Remittances: Cost of sending remittances to remitters home country. Estimates reect the costs for sending $200 inthe most expensive corridor (South Africa to Zambia) and least expensive corridor (Saudi Arabia to Pakistan). Based onthe World Bank Remittance Price Database.
Domestic payments: Cost of sending payments in country. Based on World Bank expert estimates.
Most ecient system Total potential reduction in costs
Loans securitized
with moveable
collateral
Remittances Domestic payments
90%
80%
90%
90%
Financial
infrastructure
helps reduce
transaction
costs
8/8/2019 Financial Infrastructure Report
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11EFFICIENCY OF FINANCIAL SERVICES AND FINANCIAL INFRASTRUCTURE
Arica to Zambia which costs US$49.81
per US$200 sent. Compare this to send-
ing money to Pakistan rom nearby Saudi
Arabia where the ee is only US$5.00 per
US$200a diference o 90%.
Overall, better nancial inrastruc-
ture, such as ecient bankruptcy and
contract enorcement mechanisms
and more available credit inormation,
reduce intermediation costs, stimu-
late competition, and lead to narrowing
interest spreads.10 As gure 8 shows,
countries with more developed nan-
cial inrastructure as measured by the
FI Index exhibit higher levels o inter-
mediation eciency as demonstrated by
lower interest rate spreads.
NOTES
9. http://remittanceprices.worldbank.
org/10. See Beck, Demirgu-Kunt, and
Maksimovic (2004). Te authors show
that ecient credit registries reduce the
impact o concentration in banking and
increase access to nance.
8/8/2019 Financial Infrastructure Report
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12 FINANCIAL INFRASTRUCTURE
Figure 10. Access to fnance and fnancial
Financial inrastructure is also critical or
improving access to nance. First, nan-
cial inrastructure provides the rame-
work or growth o the nancial system.
For example, innovations in paymentsystems can help reach customers where
bank branches do not exist, as with
mobile banking and other point-o-sale
(POS) arrangements. Since the number
o people with cell phones in many econ-
omies ar exceeds the number o those
with bank accounts, this new distribution
mechanism oers great potential.
Financial inrastructure can also
reduce transactions costs, allowing
private lenders to serve more people,
protably. For example, strong credi-
tor rights reduce the time and expenselenders ace in dealing with delinquent
or deaulted loans, and credit bureaus
reduce the time and cost required or
loan processing and due diligence. As
the costs o nancial intermediation all,
smaller loans and account sizes become
more attractive, allowing greater pene-
tration o rural and low income commu-
nities by credit providers and nancialservices rms.
Credit bureaus, by reducing inor-
mation asymmetries and stimulating
competition in the market, are also
supporting improved access to nance
or good borrowers. Firms report ewer
obstacles to nancing where credit
bureaus are more developed. Galindo
and Miller (2001) and Galindo and
Schiantarelli (2002) nd that rms
have improved access to nance where
credit inormation is available. Credit
inormation is also highly signicantas a predictor o the level o actoring
in an economy (weighted or GDP)
and much stronger than creditor rights
(Klapper 2006).
Another study by Love and Mylenko
(2003) uses rm-level inormation to
assess the correlations between the
existence o credit registries and use
o nance, and perceptions o nanc-ing constraints by borrowers. Using
inormation on 5,000 rms in 51 coun-
tries the study nds that rms are less
likely to report access to nance as a
major problem in countries with credit
bureaus. Te study also nds that usage
o credit is higher in countries with
credit bureaus (see gure 11).
Collateral registries and collateral
reorm have also been shown to improve
nancial system perormance, especially
access to nance or SMEs. For exam-
ple, in Romania in the ve years afersecured transactions reorm the number
o annual lings increased rom only 95
in 2000 to 359,000 in 2005. While some
o these were related to the 177,000
borrowers in the ormal nancial sys-
tem,11 many more were obtaining credit
rom non-bank lenders who urther
opened access to nanceespecially
or small rms. Research on the nanc-
ing patterns o Spanish SMEs showed
that rms pledging collateral had bet-
ter access to long-term bank loans and
young rms (which lacked credit his-
tories) used collateral pledges to signal
their quality. One o the most dramatic
cases o improvement o nancial sys-
tem perormance is the case o the
registry or security in accounts receiv-
able in the Peoples Republic o China.
According to reports rom the Peoples
Bank o China, twenty months afer the
Access to
Financial
Services and
Financial
Infrastructure
FIGURE 10
Access to nancial services and nancial infrastructure
Numberofbankaccountsper100adults
1 2 3
FI Index quintiles
54
1400
1200
1000
800
600
400
200
0
113
330449
1042
1148
Figure 11. Access to fnance is easier in
FIGURE 11
Without
credit bureau
With
credit bureau
Without
credit bureau
With
credit bureau
49%
27%
28%
40%
Probability of obtaining a bank loan
Love and Mylenko (2003).
8/8/2019 Financial Infrastructure Report
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13ACCESS TO FINANCIAL SERVICES AND FINANCIAL INFRASTRUCTURE
on-line registry began operation, there
had been nearly 75,000 lending transac-
tions using receivables as collateral reg-
istered in the registry. Tese loans had a
cumulative value o over 5 trillion Yuan
(1 USD = 6.83 Yuan). Well over hal o
these transactions were made to SME
borrowers. Nearly all middle and large
lenders have developed receivables lend-
ing products. Te success o the regis-
try has been so dramatic that it is now
being expanded to include notices o
nance leases, which amount to a vari-
ation o secured lending. In general, in
industrial countries borrowers with col-
lateral get nine times the level o credit
given their cash fow compared to bor-
rowers without collateral. Tey also ben-
et rom longer repayment periods (11
times longer) and signicantly lower
interest rates (50% lower).12,13
At the same time, it is important to
keep in mind the larger economic con-
text or nancial services. For example,
a recent World Bank study showed that
a critical actor in becoming banked
was having a salaried job and regu-
lar income.14 Understanding the moti-
vations or people to engage with the
nancial system or to use alternatives
both ormal and inormalis important
or making progress toward nancial
inclusion.
NOTES
11. Chaves, de la Pea, and Fleisig 2004.
12. Gonzalez, Lopez, and Saurina 2007.
13. Jimenez, Salas, and Saurina 2006.
14. World Bank Banking the Poor, 2008.
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14 FINANCIAL INFRASTRUCTURE
Te nancial crisis acing the world has
complex roots, but some lessons about
the causes are already emerging. Gaps
in regulation and oversight were a crit-
ical actor in the crisis but are not ourocus here. Rather, this section discusses
the unintended role played by nan-
cial inrastructure in the development
o the crisis. Te ollowing section then
provides suggestions or nancial inra-
structure reorms.
Financial inrastructure can help to
reduce risk and increase eciency in
nancial markets, but it can also some-
times contribute to situations where
excessive risks are taken. Tis seems to
have been the case in the current nan-
cial crisis. Earlier, nancial inrastruc-ture was compared to a system o roads
upon which nancial intermediation
occurs. Better roads reduce the time and
cost o travel but they also increase the
potential speed so accidents, when they
happen, are more severe.
Te role o collateral, and especially
xed collateral, in the current crisis is
o particular importance. Fixed collat-
eral can contribute to a leverage cycle
where assets are used to increase lending
which in turn eeds back into increases
in asset prices, causing a bubble. Also,
credit risks and the assets that are
designed to mitigate these risks are cor-
related in a crisis, urther adding to the
potential or loss when a deault occurs.
Te eciency o nancial inrastruc-
ture related to contract enorcement
and bankruptcythe two legal/regula-
tory variables in the FI Indexmay also
have contributed to a lax lending envi-ronment. I lenders believe that ore-
closure is relatively quick and low-cost
then they will be more willing to lend to
riskier borrowers. Tis positively afects
access to credit but at the same time
increases the level o risk in the system.
When widespread ailures occur and
asset prices (and demand) all, lenders
can nd themselves with illiquid assets
and capital shortalls.
Credit inormation and the empir-
ical models based on these data also
played a part in the current crisis. Insome cases, such as low-documenta-
tion loans made to borrowers with little
or no credit histories, the data (or lack
o them) in credit bureaus was ignored.
In other instances, however, there was
overreliance on the ability o sophisti-
cated empirical models to predict uture
risks. Te very complexity o some o
these models also contributed to the cri-
sis, as they obscured the risks lenders
were taking and discouraged scrutiny by
proessionals embarrassed to admit they
didnt understand them.
Finally, payment systems played a role
in the extent o the current crisis by acil-
itating the increasingly global and com-
plex web o nancial intermediation.
Tese insights should not reduce
enthusiasm or nancial inrastructure.
However, they do present challenges or
policy makers who seek to increase the
speed and eciency o their FI roadswhile still protecting the saety o the
nancial system. Te nal section on
reorms suggests ways to balance these
sometimes competing objectives.
Financial
Infrastructure
and the
Crisis
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15HOW TO REFORM
Te reorm agenda or nancial inra-
structure relates to a broad set o issues,
including responding to the nancial
crisis with adequate measures or super-
vision and oversight, promoting thedevelopment o access to nancial ser-
vices as measured by the number o peo-
ple served, the types and aordability o
products and services delivered and the
types o delivery channels and technol-
ogies leveraged. At a global level, the
reorm agenda entails the development
o various standards and guidelines or
the dierent areas o nancial inra-
structure that do not currently have any
specic standards and consistent appli-
cation o standards in cases where they
do exist. At the country level, policymakers and regulators need to pay heed
to reorming individual components o
nancial inrastructure, such as credit
reporting, remittances, and payment
systems, to meet global best practice
standards. It is important to emphasize
that this section is not advocating or the
development o new regulatory institu-
tions in all instances, but more impor-
tantly, a more consistent application o
existing principles governing nancial
markets in general.
Te various issues or consideration
on the reorm agenda are listed below:
Developing global standards
and guidelines or fnancial
inrastructure areas
Various standards and guidelines have
already been developed over the course
o time to cover dierent areas o nan-
cial inrastructure. Tese were devel-
oped based on proven best practices in
countries with more developed nancial
inrastructure systems, and can oen
serve as a good sounding board or pol-icy makers and regulators looking to
reorm in their own countries. Some
o the nancial inrastructure areas,
such as payment, securities settlements,
remittances, and secured transactions,
are airly advanced in this regard, and
already have a wealth o standards and
best practice guidelines to rely upon.
Tese provide useul guidance or policy
makers and regulators looking to reorm
these key nancial inrastructure areas
and include:
l Committee on Payment andSettlement Systems (CPSS): Core
Principles or Systemically Important
Payment Systems (Large-value pay-
ment systems)
l CPSS: Settlement risk in FX trans-
actions (on oreign exchange settle-
ment risks)
l CPSS-International Organization o
Securities Commissions (IOSCO)
Recommendations or Securities
Settlement Systems
l CPSS-IOSCO Recommendations or
Central Counterparties
l CPSS: Central Bank Oversight o
Payment and Settlement Systems
l CPSS-World Bank General Principles
or International Remittance Services
l CPSS: Te Interdependencies o
Payment and Settlement Systems
l CPSS: General Guidance or National
Payment System Development
l CPSS: New Developments in Clearing
and Settlement Arrangements or
OC Derivatives
l CPSS: Cross-border Collateral
Arrangementsl United Nations Commission
on International rade Law
(UNCIRAL): Legislative Guide on
Secured ransactions
Other areas o nancial inrastruc-
ture, on the other hand, including credit
reporting, are yet to develop their own
set o standards. Reorm eorts in the
area o nancial inrastructure, going
orward, require the development o
standards or each o the key nancial
inrastructure areas.
Regulation and oversight in
response to the crisis
Te current crisis has ocused attention
on gaps and ailures in regulation and
oversight o nancial markets. Tere
is widespread agreement that more
eective oversight could have identi-
ed problems earlier and potentially
reduced the extent o the current crisis.
In broad terms, priorities or regulatory
reorm or FI are the same as those or
the nancial sector as a whole: increas-
ing transparency and disclosure; limit-
ing conficts o interest and incentives
problems; and establishing authority or
oversight o complex systems which may
include unied supervision.
Tere are some valid questions, how-
ever, about the ability o regulations and
regulators to stay ahead o innovation in
the nancial marketplace. Regulations
How to
Reform
8/8/2019 Financial Infrastructure Report
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16 FINANCIAL INFRASTRUCTURE
and oversight are a critical part o the
reorm agenda but must be accompa-
nied by other important changes in
the system involving both providers
and consumers. Tese changes include
enhanced transparency and disclosure,
strengthening business ethics and devel-
oping nancial capability in the popula-
tion to create more inormed and critical
nancial consumers.
Te crisis also provides a learning
opportunity or even the most devel-
oped markets that have been shown to
be no less susceptible to it. Past crises
have taught us, however, to exercise cau-
tion while advocating or new laws and
regulations that threaten to over burden
the nancial sector and stie innovation
and the development o nancial mar-
kets in general. In other words, regula-
tors and policy makers should strike ane balance between the two competing
objectives o oversight and supervision
on the one hand, and making nancial
services aordable and available to all on
the other hand.
Reorming access to fnancial
services
Ultimately, nancial inrastructure in
any given country should aim to maxi-
mize the coverage o nancial products
and services in terms o the numbers o
people reached, and through efciencyand reduced transactions costs pro-
mote the development o a wider range
o client-ocused and aordable prod-
ucts. Reorms on nancial inrastruc-
ture should keep in mind the need or
simultaneous reorm in existing systems
that enable access to nancial products
and services.
Keeping these broader objectives
in mind, rom the perspective o pol-
icy makers and regulators, reorming
access to nancial services include the
ollowing:
l Developing more inclusive legal and
regulatory rameworks. Reorms
to existing credit reporting laws or
secured transactions rameworks,
or instance, can enhance the inor-
mation base upon which lenders
make lending decisions, and expand
the provision o nancial products
and services to the underserved and
unbanked;
l As in other areas o regulation,
ensuring proportionate policies on
nancial integrity. For example, pro-
portionate regulatory policies should
aim to reduce the burden o reporting
and compliance on smaller transac-
tions, and thereby ensure competi-
tiveness in markets;
l Leveraging new technologies. Te
most prominent example o a new
technology that has implications or
greater nancial inclusion, is that
o mobile banking applications. In
some markets today, cell phones ar
outnumber the number o banks
accounts. Policy makers and regula-
tors should leverage this and other
technologies as a means to expanding
the number o access points to pro-vide nancial products and services,
and thereby the reach o nancial
inrastructure. Tis includes putting
in place appropriate rules and over-
sight or agent banking, and level-
ing the playing eld between bank
and non-bank players, while at the
same time maintaining a high level
o operational security and sufcient
interoperability across systems and
networks;
l Enabling bundling o nancial ser-
vices. Te practice o bundling pro-duces efciencies through economies
o scale and lowered transaction
costs, which are passed on to the nal
consumer. Policy makers and regula-
tors should also emphasize the need
or transparency and more disclosure
on bundled nancial services, which
relates to the promotion o responsi-
ble nancial practices;
l Actively promoting more respon-
sible nancial practices. In the all-
out o the crisis, more emphasis is
being placed on responsible nance.
Responsible lending practices have
already stimulated some o the dia-
logue on nancial markets reorm in
the more developed markets, like the
U.S. or instance, and will largely be
driven by the supervisory authori-
ties. Reorm in this area would entail
the provision o ull disclosure on the
part o lenders and nancial services
providers, and potentially the devel-
opment o consumer education as a
natural extension o nancial ser-
vices and products.
l Educating the consumer. Te onus
o creating responsible consumers
lies in part on lenders and in great
part on the ultimate consumer him-
or hersel. Reorms to instill greater
consumer awareness and education
have been instigated on the part o
the government in several coun-
tries, such as in Canada, Mexico,
and the UK, through, or instance
school education, the development
o national commissions on nancial
education and awareness and other
such activities. Given the sheer num-
ber o consumers, reorm eorts in
this area should emphasize the devel-opment o as many delivery channels
as possible or the education o the
consumer.
Reforming the key Financial
Infrastructure areas
Credit bureaus
Credit bureaus are critical elements
o nancial inrastructure that serve
to reduce inormational asymmetries
between lenders and borrowers. Tey
are only as useul as the level o detail oinormation, and quality o inormation
available in them. Te key priorities or
reorm in this area or emerging mar-
kets, thereore, entail the development
o comprehensive credit reporting sys-
tems with an emphasis on the ollowing:
l Promoting the development o ull-le or positive and negative reporting;
l Enabling comprehensive creditreporting and the inclusion o data
rom nancial and non-nancial
institutions, such as retailers, utili-
ties, and telecoms;
l Coverage o retail, micronance, andSME sectors;
l Strengthening prudential super- vision capacity through the use o
credit inormation data; and
l Encouraging the development o anancial education oering through
bureaus themselves.
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17HOW TO REFORM
Remittances
Te priorities or reorm under remit-
tance services are to expand outreach
and the number o access points to con-
sumers at aordable rates. Tis can be
done by encouraging competition and
leveling the playing eld between bank
and non-bank providers o remittance
services. Public policy makers and reg-
ulators looking to reorm remittance
services are oen aced with confict-
ing objectives o providing adequate
saeguards against money laundering
and terrorist nancing activities, and
the need to encourage more compe-
tition, transparency and greater con-
sumer choice. Te General Principles
on Remittances provide the general
ramework or public policy objectives
with respect to remittance services and
can guide policy makers and regulatorswith respect to the key priority areas or
reorms in this area (see Box below).
Payment and securities settlement
systems
Reorms to payment and securities set-
tlement systems traditionally begin with
the development o a national payment
system strategy. Key priorities under
this strategy would include:
l Strengthening o both organizedmarkets and central bank acilities
or liquidity provision;
l Settlement o securities transactionsin a true delivery-versus-payment
basis;
l Settlement o oreign exchange trans-actions in a payment-versus-pay-
ment basis (e.g. CLS Bank);
l Design o sae settlement mecha-nisms or nancial derivatives (both
exchange-traded and OC);
l Application o international stan-dards or central counterparties; and
l Design o better oversight andcoordination mechanisms by the
authorities.
For a more in-depth review o what
can be done to reorm the payment and
settlement systems inrastructure in a
country, policy makers, and regulatorscan consult the numerous standards and
best practice guidelines already estab-
lished in this area. Te World Bank
Groups Payment System web site hosts
these and other related inormation. 16
Te realm o payment and settlement
systems have expanded beyond tradi-
tional access points and now involve
new delivery channels such as branch-
less banking, mobile banking and the
introduction o e-money. With these
new access points come new concerns
as regulatory and supervisory authori-
ties now have to look beyond their tra-
ditional regulatory perimeters and
collaborate with other supervisory agen-
cies having a purview o other industries
that are now involved in the business o
providing nancial services. Branchless
banking, or instance, cuts across a
number o regulatory domains and
industries, and enorcement will only be
eective i there is greater coordination
between the various supervisory agen-
cies involved. In addition, regulators are
grappling with issues o providing ade-
quate consumer protection as these new
agents and technologies bring with them
a host o issues such as agent liability
issues, excessive service ees, inadequate
or non-existent customer service, raud-ulent practices and others to name a ew.
Collateral
Reorms or collateral extend rom the
establishment o a sound legal and reg-
ulatory ramework or collateral to the
creation o a unied collateral registry
system in a country. Te legal rame-
work or collateral should provide or
the creation, perection, and enorce-
The General Principles on Remittances
are aimed at the public policy objec-
tives o achieving sae and efcient
international remittance services. To
this end, the markets or the services
should be contestable, transparent,
accessible and sound.
Transparency and consumer
protection
l General Principle 1. The marketor remittance services should be
transparent and have adequate
consumer protection.
Payment system infrastructure
l General Principle 2. Improve-ments to payment system inra-
structure that have the potential
to increase the efciency o
remittance services should be
encouraged.
Legal and regulatory environment
l General Principle 3. Remittanceservices should be supported by
a sound, predictable, nondiscrim-
inatory, and proportionate legal
and regulatory ramework in rel-
evant jurisdictions.
Market structure and competition
l General Principle 4. Competitivemarket conditions, including
appropriate access to domestic
payment inrastructures, should
be ostered in the remittance
industry.
Governance and risk management
l General Principle 5. Remittanceservices should be supported by
appropriate governance and risk
management practices.
Roles of remittance service provid-
ers and public authorities
l Role of remittance service pro-viders. Remittance service pro-
viders should participate actively
in the implementation o the
General Principles.
l Role of public authorities. Publicauthorities should evaluate what
action to take to achieve the
public policy objectives through
implementation o the General
Principles.
The General Principles and Related Roles 15
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18 FINANCIAL INFRASTRUCTURE
ment o security interests. In particular
these entail:
l Creation o a security interest bysimple agreement o the parties
(creation);
l Establishment o priority o a secu-rity interest against third parties
(commonly known as perection);
l Use o notice registration (alsoknown as ling) and creation o a
notice registration system; and
l Simple and expeditious enorcemento a security interest upon deault by
the debtor (enorcement).
A well-developed collateral rame-
work also has synergies with important
aspects o the legal ramework such as
contract enorcement and insolvency
/ bankruptcy. When creditor rights are
clearly established, contracts are more
easily enorced and disposition o assetso distressed borrowers can proceed
more efciently and systematically.
NOTES
15. Committee on Payment and
Settlement Systems and Bank or
International Settlements, 2007.
16. World Bank Group Payment Systems
and Remittances. http://www.world
bank.org/paymentsystems.
8/8/2019 Financial Infrastructure Report
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19DATA NOTES
Data and methodology used to
estimate reach of FI
Several dierent data sources were used
to develop the impact measurements or
nancial inrastructure including theWorld Bank Doing Business Database,
the World Bank Global Payment Systems
Survey and IFC and World Bank data on
securities markets, collateral registries,
and remittances. Tis section briefy
describes how the estimates presented
in this document were developed.
Credit Bureaus
Doing Business data indicate that
approximately 396 million individuals
have les in credit bureaus. We assume
that 50% (198 million) actually receivenancing, as not every credit bureau le
results in access to credit or is tied to a
loan. Tis number (198 million) is then
multiplied by the average small enter-
prise loan (US$4,100) as per data rom
Doing Business surveys. Tis gives us
total nancing volume o approximately
US$812 billion.
Te number o people positively
aected by credit reporting is estimated
to roughly double over the next ve
years, to reach a total o nearly 1 billion
people worldwide. Tis gure is based
on growth in emerging markets which
already have credit bureaus as well as
the establishment o credit reporting in
countries where it doesnt already exist.
For these estimates we take the eco-
nomically active population in countries
with (1.23 billion) and without (1.28 bil-
lion) credit reporting and then make
some assumptions: 40% o the economi-
cally active population would be credit
worthy and only hal o these would get
credit. Volume o credit is again esti-
mated by multiplying by US$4,100 oreach additional person receiving credit
(totaling US$1.3 trillion) and the bor-
rower as well as at least one other person
(their household) are expected to benet
rom each o these loans (610 million).
Remittances
Te estimates or remittances rely
on extensive research done by the
Inter-American Development Bank
(IADB), World Bank, and International
Organization or Migration on the
global remittance market. Te IADBestimates that 75% o the approximately
190.6 million migrants worldwide send
remittances. Since remittances typically
support amilies, the IADB multiplies
this number by our to get the total num-
ber o people impacted by remittances
about 715 million. Growth o 1.5% per
annum or migration is used as the basis
or uture remittance fows, as lower levels
o economic growth are likely to impact
migration patterns. Tis yields another
55 million people who would be aected
in the next ve years (and includes both
the migrants and their amilies).
Te value o remittance fows is now
being tracked by international organiza-
tions. Te World Bank estimates that in
2007, remittances to developing coun-
tries were approximately US$285 bil-
lion. Te World Bank is projecting the
remittance market to be US$384 bil-
lion in the next ve to ten years, using
average growth o 3% per annum which
accounts or some slowdown due to the
global economic downturn. On the one
hand, given the current economic cli-mate and possible decrease in remit-
tance fows on an annual basis in 2009,
this gure may be too large. At the same
time, increasing eorts to move remit-
tances into the ormal system will con-
tribute to higher gures as a greater
share o the total fows are captured by
ormal statistics.
Payment Systems
Te World Banks Global Payment
Systems Survey provides the rst source
o comparable data on payment systems.Te survey covered 142 countries, o
which 96 are developing countries. Te
estimate o number o people currently
impacted assumes that slightly more
than 60% o the economically active
population in these countries is directly
using the payment systemto some
extent. Tis number is multiplied by 2
to account or the household impact (as
was also done or credit bureaus) yield-
ing 1.1 billion participating in payment
systems.
Te volume o retail payment system
transactions is reported to be approxi-
mately US$65 trillion in the survey. A lit-
tle more than hal o this amount (US$36
trillion) is processed as checks, ollowed
by direct credits (US$19 trillion) and
debit cards (US$9 trillion).
Estimates or growth in payment
systems start with the assumption that
Data Notes
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20 FINANCIAL INFRASTRUCTURE
60% o the economically active popu-
lation will be using the payment system
in developing countries in the medium
term. Tis means that an additional
1.5 billion will ultimately be aected
in countries or which survey data are
available. In non-survey countries, tak-
ing the assumption that 60% o the eco-
nomically active population will be
aected results in an additional 390 mil-
lion people. (Tese fgures include peo-
ple both directly and indirectly aected;
as beore, the indirect aect still assumes
a doubling o the number.)
In terms o transaction volumes,
some expert assumptions are used to
develop growth estimates. For surveyed
countries annual growth rates o 24,
18, and 16% are used or low-income,
lower-middle and upper-middle income
countries respectively. Te result is anadditional US$86.5 trillion in transac-
tions volume in the surveyed countries
over the next fve yearswhich includes
the largest emerging market countries.
Based on BIS statistical inormation col-
lected on payment systems in devel-
oped countries, it is estimated that the
average value o a payment system
transaction per inhabitant is approxi-
mately US$250,000. Using this fgure
as a benchmark, we estimate that the
average value o payment system trans-
actions in upper-middle income coun-tries is approximately US$25,000 (10%);
in lower-middle income countries,
US$10,000 (4%); and in low income
countries, US$2,500 (1%). Applying
these per inhabitant averages to the
respective countries population, we
get a total fnancing volume acilitated
by payment systems o approximately
US$2.9 trillion in non-survey countries.
aken with the additional US$86.5 tril-
lion growth in the surveyed countries,
the total estimated growth in transac-
tions volume is US$89.4 trillion.
The FI Index
Te FI Index aims to measure the state
o development o fnancial inrastruc-
ture at a country level. Te index cur-
rently covers three areas o fnancial
inrastructure:
l credit reportingl creditor rights and movable collaterall corporate governance
Te index will be expanded in the
uture, and existing measures will
be refned to better capture the scale
and scope o fnancial inrastructure
development.
Te FI Index represents quintile
rankings o a simple average o fnancial
inrastructure component indexes and
ranges on scale o 1 to 5. A country with
a ranking o 5 on the FI Index has a moredeveloped fnancial inrastructure and is
in the top 20% globally. A country with a
ranking o 1 is in the bottom 20%.
Te average fnancial inrastructure
component index is calculated as a sim-
ple average o credit reporting, credi-
tor rights, and payment system indexes.
All o these indexes are rescaled to 10 to
allow equal weight or each component.
Te credit reporting index captures
both scale and scope o inormation
sharing. It is calculated as a product o
credit registry coverage and the creditinormation index rom Doing Business.
Te calculations are based on the inor-
mation published in the DB 2008 report.
Credit registry coverage measures the
scale o credit reporting inrastructure
and is calculated as a maximum o pri-
vate and public registry coverage. Te
Credit Inormation Index measures the
scope and quality o inormation and
ranges rom 1 to 6. Please see Doing
Business 2008 or the methodology o
the credit inormation index, private
bureau, and public registry coverage.
Te Strength o Legal Rights Index
available in the Doing Business Report
is used to measure the degree to which
collateral and bankruptcy laws pro-
tect the rights o borrowers and lend-
ers. Te index ranges rom 1 to 10.
Please see Doing Business 2008 or the
methodology.
8/8/2019 Financial Infrastructure Report
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21REFERENCES AND SUGGESTED BIBLIOGRAPHY
References
and
Suggested
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