This chapter provides an overview of financial inclusion around the world and discusses the empirical evidence on how the use of formal financial services especially among the under-served, can contribute to inclusive growth and economic development. The empirical evidence reviewed suggests that financial inclusion improves the efficiency and safety of routine transactions while helping people increase savings and consumption and manage financial risks. Yet not all financial products are equally effective in reaching economic development goals such as reducing poverty and inequality. Current evidence suggests that that the biggest impacts come from savings accounts and digital payments, while the impact of credit is mixed. There is some evidence that insurance helps people invest in riskier but more lucrative products and technologies. Empirical evidence on the link between access to financial services and changes in behavior comes primarily from the microeconomics literature that in recent years has expanded to address methodological challenges to identifying the impact of financial inclusion. More work is needed, however, to better understand the relationship between greater financial inclusion and macroeconomic growth.
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Asli Demirgüç-Kunt, Leora Klapper and Dorothe Singer
Thorsten Beck and Ross Levine
Over the past half-century, the severity of systemic banking crises has tended to increase, first in developing countries and then in a sudden and remarkable wave of failures in the advanced economies. The Global Financial Crisis, with its protracted sequel in the euro area, was marked by rapid and extensive contagion between banks and between national banking systems, and by the so-called sovereign bank doom loop, where weaknesses in the balance sheets of the banks and the sovereign fed back onto one another. Drawing on the recent experience, this chapter describes lessons learnt about the best policy approaches to management and resolution of such crises, emphasizing issues of bail-in and sovereign vulnerability. It concludes by considering the role of higher equity capital and bailable debt requirements and of other macroprudential policy measures in helping reduce the frequency of systemic banking crises.
Robert Cull and Jonathan Morduch
Microfinance is generally seen as a way to fix credit markets and unleash the productive capacities of poor people dependent on self-employment. The microfinance sector grew quickly since the 1990s, paving the way for other forms of social enterprise and social investment. But recent evidence shows only modest average impacts on customers, generating a backlash against microfinance. We reconsider the claims about microfinance, highlighting the diversity in evidence on impacts and the important (but limited) role of subsidy. We conclude by describing an evolution of thinking: from microfinance as narrowly construed entrepreneurial finance toward microfinance as broadly construed household finance. In this vision, microfinance yields benefits by providing liquidity for a wide range of needs rather than solely by boosting business income.
James R. Barth and Gerard Caprio, Jr.
This chapter re-examines the role of financial regulation and supervision in economic development, which, given concerns over international agreements and skepticism about the efficacy of regulation in banking in particular, seems timely. Historically, banking has developed and attempts have been made to stabilize it through a few rules, notably those that encouraged diversification and contained disincentives toward excessively risky activities, so that bankers were not just gambling with “other people’s money”. After reviewing the economic rationale for interventions in finance and briefly discussing the role of political economy factors in the policies adopted, the chapter reviews regulations to assess what has worked or failed, both historically and recently. It also examines differences in bank structure and regulatory environment across countries at different income levels and discusses recent innovations in finance that might affect the role banks play in the years ahead, noting significant variation in many conditioning factors and outcomes. Last, the chapter puts forth some principles and approaches that bank regulators might adopt to achieve the goal of deep, liquid and stable banking systems, avoiding the overly complex, one-size-fits-all approach that is now popular in high-income countries. Changing technology offers new possibilities to increase access to financial services for people worldwide and with it financial and economic development. While the regulatory community views safety and soundness considerations as primary, those without access to finance understandably want to gain entry, and officials should be alert to increasing the benefits to such persons from new financial technology and not just focus on the risks.
Following independence, the government of Brazil borrowed repeatedly without default. Not only did it obtain long-term loans in London, it defied “original sin” by borrowing significant amounts from the domestic market. Most of the internal debt was in paper currency without a fixed maturity, and by the 1850s was larger than the external debt. Parliamentary authority over fiscal and debt policy helped to credibly commit the government to repay. Commitment did not, however, lead to a financial revolution. On the contrary, private interest rates remained high even as the government’s cost of borrowing fell. Highly centralized political institutions concentrated authority in the hands of a narrow political elite, which restricted incorporation in general and the creation of banks in particular. The result was successful sovereign borrowing with financial underdevelopment.