Financial Access for the BoP: Recent Advances and Business Models
In “The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid,” the authors analyzed several markets. However, only one market – financial services – was not estimated in terms of exact size and scope.
Financial services can be a fiendishly hard thing to measure, but is at the same time a crucial tool to develop markets for BoP customers. In fact, financial markets often help other BoP markets flourish. Data measuring access and efficiency in financial markets are notoriously hard to come across in emerging countries, because most of these markets lie under the cover of informal economies.A new publication by the World Bank, Finance for All? Policies and Pitfalls in Expanding Access, tries to give an overview of the most recent advances and conclusions about the improvement of access to financial services for the poor. It is a superb report. Superb, but very hard to read. For those who want to avoid the econometrics and statistical analysis, I would suggest reading only the Overview.
The study analyzes how financial access provides opportunities for the poor and for small to medium sized enterprises (SMEs). Since a defining characteristic of BoP markets is their non-integration with global markets and their subjection to higher prices (monetary or not) for most of their goods, building inclusive financial systems means equalizing opportunities between BoP and non-BoP markets.
Furthermore, recent research has proven that improving access to finance not only accelerates economic growth, but reduces income inequality and poverty. Therefore, improving financial access is a both pro-growth and pro-poor policy. The barriers that prevent households and firms from accessing financial services include the lack of proper documentation, physical distance, and high banking fees or minimum account balances required by the providing institution.
SMEs are often overlooked in terms of financial access – they may deliver the most bang for the buck when compared to client-driven services. Financial inclusion for SMEs will enable them to enter formal markets, grow faster (generating larger profits and employing more people), promote the entry of new firms, reduce the risk involved in running a business and stimulate competition and innovation. Spillover effects of financial development are likely to be important by improving employment opportunities and wages.
Although access to financial services for households may not be the most important channel through which finance reduces poverty and income inequality, it still plays an important role. Additional barriers that households face in accessing the most basic services are lack of financial education, prejudice, lack of collateral and the paucity and small size of many of their transactions.
In spite of many innovations from specialized microfinance institutions, the jury is still out on whether this sector can be commercially profitable at serving the very poor. At any rate, it seems evident that the most important services are savings and payment services, rather than credit.
Financial access for the BoP – through savings accounts, payment services and insurance – requires sustainable business models to deliver services. This sector is still at a very young (and exciting) stage. Expect lots of research and innovations around financial services in the coming years.