What is Access to Finance

Poor Access to the Financial System

What is Access to Finance?

• Possibility that individuals or enterprises can access financial services including credit, deposit, payment, insurance, and other risk management services

• Those who involuntarily have no or only limited access to financial services are referred to as unbanked or underbanked respectively

Segmentation of Consumers

User Group	Market segment
Users	Current users (current market)
Non-users	Voluntary non-users
	Non-users, Lying within present access frontier
	Non-users, lying within the future access frontier
	The supra-market group, lying beyond the future access frontier

Formal & Informal Financial Services

Tier	Definition	Institutions	Principal clients
Formal banks	Licensed by central bank	Commercial & development banks	Large businesses Government
Specialized non-bank financial institutions (NBFIs)		Rural banks Post Bank Savings & loan companies Deposit-taking microfinance banks	Large rural enterprises Salaried workers Small & medium enterprises
Semi-formal	Legally registered, but not licensed as financial institution by central bank	Credit unions Microfinance NGOs	Microenterprises Entrepreneurial poor
Informal	Not legally registered at national level (though may belong to a registered association)	Savings (susu) collectors Savings & credit associations, susu groups Moneylenders	Self-employed Poor

Measuring access to financial System

• The main variables used for measuring access to finance
• Number of Bank accounts per 1000 adults
• Number of bank branches per 100,000 adults
• The percentage of firms with line of credit
• Also following factors should be considered
• Market Concentration
• % of Market capitalization
• traded value outside of top 10 largest companies

Why Access to Finance is Important

• Financial access provides credit for the most promising firms which promotes growth of enterprises
• Encourages more start ups
• Enables competitive firms to grow by exploiting growth and investment opportunities
• Benefits the economy in general by accelerating economic growth, intensifyingcompetition.
• Boost Demand of Labour
• Raises income for those in the lower end of the income distribution &reduces income inequality and poverty.

Pakistan current access to finance

• Policy measures cannot single-handedly increase financial access
• Financial institution willingness to expand access in Pakistan
• Slow technologic advances
• Weak legal foundations,
• Unsuitable financial processes and products.
• Poor socioeconomic conditions
• Gender bias, and
• Low levels of basic education and financial literacy

Formal Vs. Informal Financial Access

• Formal financial access: 14% of Pakistanis are using a financial product or service of a formal financial institution
• Informal financial access: 50.5% of Pakistanis have access to finance
•  19% of population is excluded:
• Lack of understanding,
• Awareness, or need, due to poverty
• Religious reasons

Source: Bringing Finance to Pakistan’s Poor

Tatiana Nenova

Cecile Thioro Niang

Anjum Ahmad

• Over half of the population saves, but only 8 percent entrust their money to formal financial institutions
• One-third of the population borrows, but only 3 percent use formal financial institutions to do so
• Microfinance has grown at 40 percent per year since 1999 - yet microfinance access extends to only 1.7million out of an adult population of about 80 million.
• International remittances have grown at 29 percent since 2001 - yet only 2.3 percent of Pakistanis send or receive remittances, while half of remittances, including domestic flows, are transmitted informally

Loans by Sector

• Focusing only on the consumer side, according to latest (unpublished) SBP figures, there are only 16 million personal (non-business) bank accounts and 5.5 million personal loans.

• 25 percent of the total bank deposits and 17 percent of the total borrowers are from rural areas. In value terms their shares are even smaller, 10 percent and 7 percent of the total value of deposits and advances, respectively

• The country records about 22 loan accounts per 1,000 people, compared with Bangladesh’s 55 and the world median of 81.
• The use of deposit services is equally low the country has 192 deposit accounts per 1,000 people, as compared with 229 in Bangladesh and 529 for the world median

Due to consolidation of banks, stronger banks emerged!

Such skewed distribution of farm credit negatively affects

the poverty level of agricultural households, and prevents faster development in rural areas.

Poverty Alleviation

• "Poverty alleviation" has become a common slogan. Without effectivestrong national financial system poverty reduction and economic growthare NEVER POSSIBLE.
• Financial system that develops unevenly lack transparency and no proper regulation is more vulnerable to financial shocks and prone to distress.
•  It is proved that these

     shocks and crises affect

     poor people.

The average Pakistani household remains outside  the
formal financial system, saving at home and 
borrowing from family or friends in cases of
dire need.  

• Policy efforts to increase access to finance in Pakistan have taken time to bear fruit, but now access is indeed expanding quickly in certain financial sectors (microfinance, remittances).
• Fourteen percent of Pakistanis are using a financial product, (including savings, credit, insurance, payments, and remittance services.

Financial access is low among the poorer, women, small and microenterprises.

• Most formal financial products remain high-end, limited to urban rich educated males.
• The formal sector could learn a lot from and partner with informal providers – their services are perceived as being more geographicallyaccessible.
• Poverty and lack of information on financial services lead to lack of interest.

Microfinance

• The formal microfinance sector reaches less than 2 percent of the poor, as opposed to over a quarter in Bangladesh, India, and Sri Lanka.
• A key challenge to microfinance institutions (MFIs) in Pakistan is raising considerable funding to grow.
• Mobile technology can help expand access considerably

Small
enterprise finance

• Small and micro enterprises have

     seen a worsening of access to finance,

                                 while

       medium-size enterprises have seen improvements.

• 3.6 percent of firms use loans for investment and only 13.9 percent use them for expenses.
• Indirect costs legal fees, collateral registration, and documentation makebank lending expensive for SMEs.
• A large-scale downscaling effort involving both the public and private sectors can forge rapid growth in SME lending.

Remittances

• Remittances to Pakistan are estimated at

      around $16 billion and growing fast,

     but formal flows do not reach the poor,

     women, and rural areas.

• Pakistan Post has a large rural network

     and is most common channel for

     domestic remittances.

• SBP has taken various measures that have significantly increased remittances through formal

The Way Ahead!

Private Sector

Public Sector

• Diversifying the product range and segmenting clients.
• Reaching out to the rural client by leveraging technology.
• Carrying out a thorough bank downscaling program and modernizing SME banking.
• Access to Remittances

• Creating awareness of the benefits of access to financial services.
• Strengthening institutions.
• Creating an enabling environment for access to the underserved.
• Promoting initiatives proving a demonstration effect of bank downscaling.

• Promoting the structuring of international flows into investments:
• Supporting remittance services of Pakistani banks abroad.

      Role of Public Private Partnership

DIASPORA FUNDS:  is a social investment fund that provides an innovative approach to leveraging the remittance to invest in small to medium size businesses that would help create jobs and in turn reduce the poverty

 Tapping into migration wealth could be an effective means of funding

“ Members of a country’s Diaspora tend to be wealthier than its resident citizens”  

FACILITATE E- OR M-PAYMENTS, AND THE BRANCHLESS BANKING

Conclusion

     In conclusion it is clear that the functioning of financial system is vitally linked to economic growth.

• A country with larger banks and more active stock markets grow faster.

measuring financial access requires ascertaining market concentration, for a high degree of concentration reflects greater difficulties for entry of newer and smaller firms. Other factors include the percentage of market capitalization and traded value outside of top 10 largest companies, government bond 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.

1

Fourteen percent of Pakistanis are using a financial product or service of a formal financial institution (including savings, credit, insurance, payments, and remittance services).

Informal access can occur through the organized sector (though committees, shopkeepers, moneylenders, hawala/hundi money transfers, and so forth), or informally through friends and family

In comparison, 32 percent of the population has access to the

formal financial system in Bangladesh, and this figure amounts to 48 percent in India and 59 percent in

Sri Lanka (World Bank, 2008c). Of the nearly 50 percent of Pakistanis who do not engage in either the

formal or informal financial system, we estimate about 19 percent have voluntarily excluded themselves

through lack of understanding, awareness, or need, due to poverty, or for religious reasons. Financial

exclusion precludes people from reducing risk, managing fluctuations in income, and investing in

microenterprises or in health and education.

2

shows the limited access to bank finance of enterprises and individuals.

3