Access to finance is the ability of individuals or enterprises to obtain

financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...

, including

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

, deposit,

payment A payment is the voluntary tender of money or its equivalent or of things of value by one party (such as a person or company) to another in exchange for goods, or services provided by them, or to fulfill a legal obligation. The party making the ...

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

, and other risk management services.Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). ''Finance for All?: Policies and Pitfalls in Expanding Access.'' Washington, D.C.: The World Bank. Retrieved March 21, 2008, from http://siteresources.worldbank.org/INTFINFORALL/Resources/4099583-1194373512632/FFA_book.pdf Those who involuntarily have no or only limited access to financial services are referred to as the ''

unbanked The unbanked are adults who do not have their own bank accounts. Along with the underbanked, they may rely on alternative financial services for their financial needs, where these are available. Causes Some reasons a person might not have a bank ...

'' or ''

underbanked The underbanked is a characteristic describing people or organizations who do not (or volunteer to not) have sufficient access to mainstream financial services and products typically offered by retail banks and thus often deprived of banking servic ...

,'' respectively.Richardson, B. (2008, July 15). Enhancing Customer Segmentation Processes and Optimising Adoption Techniques to Support Efforts to "Bank the Unbanked." Presentation given during the ''Mobile Banking & Financial Services Africa'' conference in Johannesburg, South Africa. Accumulated evidence has shown that financial access promotes growth for enterprises through the provision of credit to both new and existing businesses. It benefits the economy in general by accelerating economic growth, intensifying competition, as well as boosting demand for labor. The incomes of those in the lower end of the income ladder will typically rise hence reducing

income inequality There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...

and poverty.Beck, Demirgüç-Kunt and Levine, 2007 and Beck, Levine, and Levkov, 2010 The lack of financial access limits the range of services and credits for

household A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is im ...

and enterprises. Poor individuals and small enterprises need to rely on their personal wealth or internal resources to invest in their education and businesses, which limits their full potential and leading to the cycle of persistent inequality and diminished growth.Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). Finance for All?: Policies and Pitfalls in Expanding Access. Washington, D.C.: The World Bank. Access to finance varies greatly between countries and ranges from about 5 percent of the adult population in

Papua New Guinea Papua New Guinea (abbreviated PNG; , ; tpi, Papua Niugini; ho, Papua Niu Gini), officially the Independent State of Papua New Guinea ( tpi, Independen Stet bilong Papua Niugini; ho, Independen Stet bilong Papua Niu Gini), is a country i ...

and

Tanzania Tanzania (; ), officially the United Republic of Tanzania ( sw, Jamhuri ya Muungano wa Tanzania), is a country in East Africa within the African Great Lakes region. It borders Uganda to the north; Kenya to the northeast; Comoro Islands and ...

to 100 percent in the

Netherlands ) , anthem = ( en, "William of Nassau") , image_map = , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of the Netherlands , established_title = Before independence , established_date = Spanish Netherl ...

(for a comprehensive list of estimated measures of access to finance across countries, see Demirgüç-Kunt, Beck, & Honohan, 2008, pp. 190–191).

Defining and measuring access to financial services

Access to finance (the possibility that individuals or enterprises can access financial services) should be distinguished from the actual use of financial services, because non-use of finance can be voluntary or involuntary. Voluntary non-users of financial services have access to but do not use financial services either because they have no need for those services or because they decided not to make use of such services due to cultural, religious, or other reasons. Measuring financial access is essential for strengthening the link between theory and empirical evidence. Currently, the main proxy variables that measure financial access include: the number of bank accounts per 1,000 adults, number of bank branches per 100,000 adults, the percentage of firms with

line of credit A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A line of credit takes se ...

(large and small firms).The World Bank GFDR Report In the case of

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...

s, measuring financial access requires ascertaining

market concentration In economics, market concentration is a function of the number of firms and their respective shares of the total production (alternatively, total capacity or total reserves) in a market. In any industry, a handful of firms that hold a significa ...

, for a high degree of concentration reflects greater difficulties for entry of newer and smaller firms. Other factors include the percentage of

market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by t ...

and traded value outside of top 10 largest companies,

government bond A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity dat ...

yields (3 month and 10 years), ratio of private to total debt securities (domestic), ratio of domestic to total debt securities, and the ratio of new corporate bond issues to GDP. Involuntary non-users want to use financial services, but do not have access due to a variety of reasons: First, they may be unbankable because their low income prevents them from being served commercially (i.e. profitably) by financial institutions; second, they may be discriminated against based on social, religious, or ethnic grounds; third, they may be unbankable because contractual and informational networks (such as high

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

requirements or a lack of information from credit registries) prevent financial institutions from commercially serving these non-users; finally, the price or features of financial services may not be appropriate for the population groups of the non-users. Because the factors that determine whether or not an individual or enterprise has access to finance may change over time, it makes sense to group the banked and unbanked into

market segment In marketing, market segmentation is the process of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers (known as ''segments'') based on some type of shared charact ...

s that reflect their current and possible future status as users or non-users of financial services. One such approach to market segmentation is the "access frontier," which can be used for analyzing the development of markets over time.Porteous, D. (2005, May 26). ''The Access Frontier as an Approach and Tool in Making Markets Work for the Poor.'' Somerville, MA: Bankable Frontier Associates. Retrieved May 28, 2008, from http://www.bankablefrontier.com/assets/access-frontier-as-tool.pdf The access frontier defines the maximum proportion of the population that has access to a product or service at a given point in time, and the frontier may shift over time, e.g. as the result of technological and competitive changes in the market. The access frontier approach distinguishes between users and non-users of a product or service, and segments non-users into four groups: * Those who are able to use the product or service but choose not to (voluntary non-users) * Those who can currently access the product or service but do not yet (non-users, lying within the present access frontier) * Those who should be able to use the product or service within the next three to five years, based on changes in the features of the product or service, or of the market, respectively (non-users, lying within the future access frontier) * Those beyond the reach of market solutions in the next three to five years (the supra-market group, lying beyond the future access frontier) The following table gives an overview of the grouping of consumers into users and non-users, the segmentation of non-users, as well as three zones that enable government policies to better match interventions to the requirements of market development. Estimating and measuring access to finance is relatively difficult because relevant data are not readily available. A lack of consistent cross-country data on the use of financial services has led to the use of the number of deposit and loan accounts as a simple measure of financial access, although this is an imperfect measure of financial access.

Formal and informal financial services

Financial services may be provided by a variety of

financial intermediaries A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...

that are part of the financial system. A distinction is made between formal and informal providers of financial services, which is based primarily on whether there is a legal infrastructure that provides recourse to lenders and protection to depositors.Ledgerwood, J. (1998). ''Microfinance Handbook: An Institutional and Financial Perspective.'' Washington, D.C.: The World Bank. The following table gives an overview of this distinction by showing the segments of financial systems by degree of formality.Steel (2006), cited in Aryeetey, E. (2008, March). ''From Informal Finance to Formal Finance in Sub-Saharan Africa: Lessons from Linkage Efforts.'' Washington, D.C.: International Monetary Fund. Retrieved March 8, 2009, from https://www.imf.org/external/np/seminars/eng/2008/afrfin/pdf/Aryeetey.pdf A more detailed approach to distinguishing formal and informal financial services adds semi-formal services as a third segment to the above. While formal financial services are provided by financial institutions chartered by the government and subject to banking regulations and supervision, semi-formal financial services are not regulated by banking authorities but are usually licensed and supervised by other government agencies. Informal financial services are provided outside the structure of government regulation and supervision.

Barriers and Policies to Increase Access

However, in many countries financial access is still limited to only 20–50 percent of the population, excluding many poor individuals and

SMEs Superconducting magnetic energy storage (SMES) systems store energy in the magnetic field created by the flow of direct current in a Superconductivity, superconducting coil which has been Cryogenics, cryogenically cooled to a temperature below ...

. Many reasons could explain the limited financial access especially among the poor. First, the poor lack the education and knowledge needed to understand financial services that are available to them. Second, loan officers might find it unprofitable to serve the small credit needs and transaction volume of the lower-income population. Additionally, banks may not be geographically accessible for the poor since financial institutions are likely to be located in richer neighborhoods. The poor are also burdened by lack of collateral and inability to borrow against their future income because their income streams tend to be hard to track and predict. In light of the lack of financial access for the poor, over the past few decades developments in micro finance institutions have managed to provide financial services to some of the world's poorest, and achieved good repayments. There are still work to be done to build inclusive financial systems. This includes taking advantage of the technological advances in developing financial infrastructure to lower transaction costs, encouraging transparency, openness and competition to incentivize current institutions to expand service coverage, and enforcing prudential regulations in order to provide the private sector with the right incentives.

Notes

External links

World Bank GFDR Report

Defining and measuring access to financial services

Formal and informal financial services

Barriers and Policies to Increase Access

See also

Notes

External links

Further reading