NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, April 21, 2015

Last weekend the World Bank issued a report on the dramatic rise in global access to financial services. From 2011 to 2014 alone, 700 million people worldwide opened a bank account or joined a mobile money service.

The World Bank hails this improvement in the lives of the world’s poorest. What the report doesn’t mention is the challenge it poses to the World Bank itself. Beyond opening the way for a massive reform of national poverty relief programs, from India to Kenya, the spread of financial services suggests there may be a far more effective way for donors to end global poverty than by funneling resources through World Bank projects.

From 2011 to 2014, a global population more than twice the size of the U.S. gained access to modern financial services. In India the proportion of adults with an account climbed from 35 percent to 53 percent — and it will have increased even more since then. The country’s universal biometric ID system (based on fingerprints and iris scans) has already covered 790 million people and is forecast to reach 1 billion by December 2015. It’s being used to provide secure identification for customers opening new bank accounts. From August 2014 to March 2015 alone, more than 135 million accounts have been opened.

That’s having a dramatic effect on the delivery of government aid to the poor. India is moving from a system of subsidizing goods — from food and fuel to housing and education — to providing cash payments into bank accounts instead.

Direct payments in the country total about $280 billion a year — more than 4 percent of the country’s gross domestic product, according to the government, equal to about $225 per person. These subsidies are incredibly inefficient at reaching poor people and avoiding the waste and corruption that comes with subsidized goods. The $15 billion kerosene subsidy program, for instance, loses 40 percent of subsidized gas to “leakage,” and less than half of what’s left flows to the most impoverished households. On the whole, the bottom 30 percent of India’s population is aided by less than 30 percent of the benefits from subsidized goods.