Table Of ContentBanking the World
Banking the World
Empirical Foundations of Financial Inclusion
Edited by Robert Cull, Asl ı Demirg ü ç -Kunt, and
Jonathan Morduch
The MIT Press
Cambridge, Massachusetts
London, England
© 2013 Massachusetts Institute of Technology
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Library of Congress Cataloging-in-Publication Data
Banking the world : empirical foundations of financial inclusion / edited by Robert
Cull, Asli Demirg ü ç -Kunt, and Jonathan Morduch.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-262-01842-5 (hardcover : alk. paper)
1. Finance — Developing countries. 2. Banks and banking — Developing countries.
3. Financial institutions — Developing countries. I. Cull, Robert J. II. Demirg ü ç -Kunt,
Asli, 1961 – III. Morduch, Jonathan.
HG195.B356 2013
332.109172’4 — dc23
2012016234
10 9 8 7 6 5 4 3 2 1
Contents
1 Introduction: Banking the World 1
Robert Cull, Asl ı Demirg ü ç -Kunt, and Jonathan Morduch
I Where Are We Now? 17
2 Half the World Is Unbanked 19
Alberto Chaia, Aparna Dalal, Tony Goland,
Maria Jose Gonzalez, Jonathan Morduch, and Robert Schiff
II Better Data 43
3 Cause and Effect of Financial Access: Cross-Country
Evidence from the FinScope Surveys 45
Patrick Honohan and Michael King
4 How to Ask Households about Financial Services:
Experimental Evidence from Ghana and Timor-Leste 85
Robert Cull and Kinnon Scott
5 Going with the Flow: Measuring Financial Usage in Poor
Households 109
Daryl Collins
III Creating Impact 135
6 The Economic Impact of Expanding Access to Finance in
Mexico 137
Miriam Bruhn and Inessa Love
7 Finance and Hunger: Empirical Evidence of the Agricultural
Productivity Channel 157
Stijn Claessens and Erik Feijen
vi Contents
8 Entrepreneurial Finance in the Western Balkans:
Characteristics of the Newly Self-Employed in Albania,
Bosnia and Herzegovina, and Serbia 211
Asl ı Demirg ü ç -Kunt, Leora F. Klapper, and Georgios A. Panos
IV Cautionary Tales 265
9 The Impact of International Remittances on Income, Work
Efforts, Poverty, and Inequality: Evidence from Vietnam
Household Living Standard Surveys 267
Nguyen Viet Cuong, Marrit van den Berg, and Robert Lensink
10 Mortgage Finance in Central and Eastern Europe —
Opportunity or Burden? 305
Thorsten Beck, Katie Kibuuka, and Erwin R. Tiongson
V More than Products 391
11 Measuring Personality Traits and Predicting Loan Default
with Experiments and Surveys 393
Dean Karlan, Sendhil Mullainathan, and Omar Robles
12 Valuing Financial Literacy 415
Shawn Cole, Thomas Sampson, and Bilal Zia
13 Use of Biometric Technology in Developing Countries 429
Xavier Gin é , Jessica Goldberg, Shalini Sankaranarayanan,
Peter Sheerin, and Dean Yang
14 Accessing Credit from Banks, Microfinance Institutions, and
Informal Groups: What Is the Role of Social Capital? 447
Anni Heikkil ä , Panu Kalmi, and Olli-Pekka Ruuskanen
VI Conclusion 467
15 Ten Research Questions 469
Jonathan Morduch
Contributors 483
Index 485
1 Introduction: Banking the World
Robert Cull, Asl ı Demirg ü ç -Kunt, and
Jonathan Morduch
T he story most often told when explaining the global microfinance
revolution focuses on new financial products. Those innovations—
e specially the “ g roup lending” loan contract pioneered by Bangla-
desh ’ s Grameen Bank and, more recently, the spread of mobile banking
in Africa — provide financial institutions with better ways to serve low-
income markets. The microfinance revolution has now given way to a
broader push to extend financial markets, and this push introduces
new products, new providers, and new target markets. The original
narratives of product innovation have been so powerful that it’ s been
easy to lose sight of the simultaneous developments in regulation,
investment, and business organization that enabled the initial steps. If
we are to realize the hope of extending banking services to the planet’ s
unbanked half — the hope of truly “ banking the world ” — we will con-
tinue to need progress on all fronts. That progress, in turn, requires
different varieties of evidence and ideas.
The global financial crisis touched off in 2007 – 2008 provides a sharp
reminder that expanding financial access can create opportunities and
risks simultaneously ( Demirg ü ç -Kunt and Serv é n 2010 ). The crisis also
reminds us that narrowly micro views of financial dysfunction (e.g.,
those that focus only on how loan defaults follow from particular features
of credit contracts) show only one part of the story. Large risks in the
financial crisis turned out to be systemic: political, regulatory, and tied to
macro imbalances and the broader illiquidity of the financial system.
T hat’ s a helpful context for understanding the contribution of ran-
domized controlled trials (RCTs) to financial product innovation. The
randomized trials have put an important focus on impact evaluations
( Banerjee and Duflo 2011 ; Karlan and Appel 2011 ), and many of
the important applications have been to finance. The new results are
contributing to a broader restitching of understandings of household
2 Chapter 1
demand. Randomized trials have proved well suited for critical micro
questions, such as how borrowers respond to interest rates and the
impacts of access to microcredit or saving accounts. But the likely
legacy of the push for randomized trials will be less in the specific
method than in the renewed stress on rigorous research.
A s chapters 12 and 13 demonstrate, randomized trials deserve atten-
tion because they provide a new way to tackle long-recognized biases
that undermine the reliability of empirical work, biases created because
it is far from random who does and doesn ’ t seek finance and where
banks do and do not operate (B auchet and Morduch 2010) . In the end,
however, banking the world will require much evidence that random-
ized trials cannot deliver: for example, the effects of economy-wide
regulation, understandings of corporate governance, analyses of bank-
level subsidy and profit, and meaningful descriptions of the financial
lives of the poor.
We have learned a great deal in recent years, even as the context of
financial access steadily changes. 1 The changes are driven in part by
humility in the wake of the 2007 – 2008 financial crisis, which put a
spotlight on mismatches between the financial products being supplied
and those demanded. The crisis has also driven a push for greater
consumer protection and regulation. Alongside those changes has
come the innovation — in technology, product, and service — that is
altering the definition of financial access and who has it. In Kenya
today, 10 million citizens use their mobile phones to make financial
transactions ( Jack and Suri 2010 ). In India, private-sector microfinance
institutions and government-sponsored self-help groups have grown
at such a remarkable pace that the new agenda hinges on fears of over-
indebted customers and overly intrusive politicians ( Sinha 2009 ). In
Brazil, smart cards and point-of-service devices contribute to slashing
the costs that limit bank access.
The changing context makes it all the more important to bring evi-
dence to bear on fundamental questions — who has financial access?
Who needs it? Why? Which ideas show the most promise for extending
access to the poor? Where are the big unknowns? Banking the World
collects studies by leading scholars that frame these global shifts and
their implications for practice and policy.
Lifting the Veil on the Financial Lives of the Poor
T he growing inclusiveness of financial systems is often associated with
microcredit : the idea of extending small, uncollateralized loans designed
Introduction 3
to unleash the productivity of cash-starved entrepreneurs. The rapid
growth and the attention given to microcredit— a nd its associated mar-
keting narrative— h ave driven interest in other elements of financial
access. That process has not only allowed us to create a more complete
picture but has also led us to rethink assumptions about microcredit
itself.
F ine-grained evidence from “ f inancial diaries” in Bangladesh, India,
and South Africa reveals the surprising complexity of the financial lives
of poor families, with rapidly changing portfolios composed of a mix
of services from formal and informal providers ( Collins et al. 2009 ).
Historically, the assumption has been that poor households are unso-
phisticated and sparing users of financial services simply because their
incomes are so small— a nd because their main interest is in loans
for running businesses. The evidence from the financial diaries
suggests the opposite. In fact, it suggests that financial dealings are
complex precisely b ecause households are poor, operating on tight
margins with few convenient, cost-effective options for meeting finan-
cial emergencies.
The financial diaries reveal patterns that change how we think about
financial access: (1) even very poor families can save and do save,
though they often do so outside of the formal sector and most often for
expenses within a year; (2) families seek small loans, but most often for
purposes beyond business finance; and (3) dealing with risk is difficult
because lump sums are needed quickly and the resources of family and
friends are quickly exhausted. Perhaps most fundamentally, an ongoing
need for families is to find ways to translate small, irregular cash flows
into “ usefully large sums ” ( Rutherford 2010 ).
T he financial diaries are best seen as delivering a set of patterns and
hypotheses. They are helping us extend theoretical frameworks rather
than formally testing existing frames. For the latter, larger samples are
needed, and the focus must be on establishing causal pathways.
T he financial diaries reorient expectations for the net impacts of
extending financial access. The diary evidence emphasizes priorities
placed on financial management rather than business investment. That
sense comes through in new evidence from randomized trials ( Morduch
2011 ), such as evidence from the Philippines that fails to find strong
positive impacts of microcredit on business but finds suggestive evi-
dence of risk mitigation ( Karlan and Zinman 2011 ). It similarly emerges
in a U.S. study by M organ and Strain (2008), which finds that in U.S.
locales where payday loans were made illegal, bankruptcies, bounced
checks, and complaints about debt collectors spiked.
