Table Of ContentFinancial Inclusion in Asia
Issues and Policy Concerns
Edited by
SASIDARAN GOPALAN
TOOMOO KIKUCHI
Palgrave Studies in Impact Finance
Edited by Mario La Torre
Palgrave Studies in Impact Finance
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Sasidaran Gopalan • Tomoo Kikuchi
Editors
Financial Inclusion
in Asia
Issues and Policy Concerns
Editors
Sasidaran Gopalan Tomoo Kikuchi
National University of Singapore National University of Singapore
Palgrave Studies in Impact Finance
ISBN 978-1-137-58336-9 ISBN 978-1-137-58337-6 (eBook)
DOI 10.1057/978-1-137-58337-6
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Preface and I ntroduction
An integral component of fi nancial sector development in Asia relates to
the issue of fi nancial inclusion. Several emerging market economies in
the region have put in place a plethora of initiatives to expand provision
of fi nancial services to fi rms and households through allowing greater
access to the formal credit market. While fi nancial inclusion and fi nancial
deepening can promote economic growth and contribute signifi cantly to
denting poverty and inequality that is rampant in the region, there are
also concerns that it could aggravate systemic risk and fi nancial instabil-
ity. Considering the important role played by banks in achieving fi nan-
cial inclusion, especially with bank-based fi nancial systems dominating
other forms of providers of fi nancial services, a greater understanding of
the issues and policy concerns emanating from the process of fi nancial
inclusion is of critical importance.
F inancial inclusion can be said to encompass the process of broadening
the accessibility of fi nancial services for households and fi rms. In other
words, it relates to providing and enabling the fi rms and households in an
economy with access to the formal credit market. Th is is also sometimes
referred to as banking sector “outreach,” that is, the degree to which the
banking sector is able to meet the needs of a large segment of the popula-
tion. Th e prime objective for furthering fi nancial inclusion is to minimize
the share of individuals and fi rms who have been left out of fi nancial ser-
vices provision as a result of government failures or market imperfections.
v
vi Preface and Introduction
In several emerging and developing economies, fi nancial inclusion
plays a pivotal role in fostering inclusive macroeconomic growth. Access
to aff ordable fi nancial services can potentially increase economic activi-
ties as well as employment opportunities for those left out by the formal
fi nancial system (households in rural segments especially) which could
also translate into higher disposable incomes, higher degrees of savings
and a diverse deposit base for banks. Greater fi nancial inclusion is also
important when viewed from the perspective of fi nancial stability. Since
fi nancial inclusion tends to result in greater diversifi cation of bank assets,
it could potentially reduce the overall risk profi le of the banks, which in
turn adds an element of stability to the fi nancial system.
Th ough fi nancial inclusion has become very popular in the economic
policy discourse in the region, there is no consensus on how to defi ne
fi nancial inclusion and whether the existing defi nitions and measure-
ments eff ectively capture the various dimensions. It must also be empha-
sized that most of the commonly available fi nancial inclusion indicators
such as those capturing physical outreach may not necessarily provide a
holistic picture of fi nancial inclusion. Information concerning the actual
use of those fi nancial services from the user-side, in addition to measur-
ing the degree of fi nancial exclusion (among women, for example), is
an additional dimension that must be factored in while attempting to
measure fi nancial inclusion..
Further, despite the role it has come to occupy in the policy discourse,
there is still a dearth of relevant academic literature that explores the
inter-related issues concerning fi nancial inclusion specifi cally in Asia. In
this light, this book will examine some analytical and policy issues con-
cerning various dimensions of fi nancial inclusion in Asia.
Th e volume is broadly divided into three parts, with the fi rst set of
chapters focusing on the issue of measurement and determinants of
fi nancial inclusion in Asia. Th e second set of chapters comprises empiri-
cal essays exploring specifi c dimensions of fi nancial inclusion and its
implications on a larger set of macroeconomic and development issues.
Th e volume then wraps up with a set of selected country case studies
assessing the evolution of and policy framework pertaining to fi nancial
inclusion in emerging Asian economies. In what follows, we will off er a
chapter-by-chapter synopsis below.
Preface and Introduction vii
Part I—Measurement and Determinants
Th e fi rst part of the book examines issues relating to measurement and
the empirical determinants of fi nancial inclusion in Asian economies.
Chapter 1 sets the tone for the rest of the book by focusing on the
defi nitions of fi nancial inclusion. An understanding of the interlink-
ages between fi nancial inclusion, fi nancial development, and economic
growth require an appropriate measure of fi nancial inclusion. While the
existing literature has a set of indicators that either at the macro level
or at the micro level provide interesting and useful information on the
nature of inclusiveness of a fi nancial system, there are serious limita-
tions with the available measurements. When used individually, they
may provide partial and incomplete information and may lead to a mis-
interpretation of the extent of fi nancial inclusion in an economy. In this
light, Chap. 1 develops an index of fi nancial inclusion (IFI) and uses it
to measure the level of fi nancial inclusion for several Asian economies
for 2004–2013.
Chapter 2 undertakes an empirical investigation of the determinants
of fi nancial inclusion in 12 Asian countries. Using data from the World
Bank Global Findex database for 2011, the chapter considers three
indicators of fi nancial inclusion—namely, ownership of a bank account,
savings on a bank account, and use of bank credit—to test the determi-
nants of those three indicators. It specifi cally examines the infl uence of
four individual characteristics—education, income, age, and gender—
on the three indicators of fi nancial inclusion. Th e empirical results sug-
gest that there are large cross-country diff erences in fi nancial inclusion
and that ownership of a bank account is more common in high-income
c ountries. However, the pattern of fi nancial inclusion in terms of sav-
ings in a bank account or using formal credit diff ers across countries
and is not related to per capita income. Th e chapter also argues that the
empirical results are suggestive of many similarities across countries for
the determinants of fi nancial inclusion such as being older and better
educated associated with higher values for the three fi nancial inclusion
indicators in most countries.
viii Preface and Introduction
Part II—Financial Inclusion: Importance
and Implications
Th e chapters in this part are empirical essays exploring specifi c dimen-
sions of fi nancial inclusion and its implications on a larger set of macro-
economic, development, and institutional policy issues.
Chapter 3 focuses on understanding the link between fi nancial inclu-
sion, poverty, and income inequality. Th e chapter empirically argues that
greater fi nancial inclusion will lead to a reduction of poverty incidence
and income equality. It extends the existing literature on fi nancial inclu-
sion by focusing on developing Asian economies. To do this, the chapter
constructs a new fi nancial inclusion indicator to assess various macro-
economic and country-specifi c factors aff ecting the degree of fi nancial
inclusion for 37 selected developing Asian economies. Th e chapter then
tests the impact of fi nancial inclusion on poverty and income inequality.
Th e results show that per capita income, rule of law, and demographic
characteristics signifi cantly aff ect fi nancial inclusion in developing Asia.
Furthermore, the chapter also fi nds that fi nancial inclusion signifi cantly
reduces poverty and lowers income inequality.
A large share of population without access to the formal fi nancial
system is a common phenomenon in many emerging economies. Using
cross-country data, Chap. 4 documents the relevance of this issue for
emerging Asia and discusses some of the implications for monetary
policy. Th e focus is on the eff ectiveness of interest rates as a policy tool,
as well as implications for the targets of monetary policy. Th e economet-
ric analysis unveils only small diff erences in the interest rate sensitivity
of output for economies at diff erent degrees of fi nancial inclusion. Th e
results also suggest that real policy rates in some economies in emerging
Asia tend to move slightly more countercyclically against headline than
core infl ation. Th e latter fi nding is in line with recent theoretical litera-
ture on policy targets in an environment where the share of fi nancially
excluded households is large and food accounts for a considerable share
of the consumption basket.
Preface and Introduction ix
Part III—Financial Inclusion in Asia: Country
Experiences
Th e fi nal part of the book is a discussion of selected case studies of
emerging Asian economies and their experience with diff erent models of
fi nancial inclusion. Th e chapters provide an assessment of the fi nancial
inclusion initiatives undertaken by Indonesia, India, and Sri Lanka as
representative examples, along with tracing the evolution of the policy
framework pertaining to fi nancial inclusion in these countries.
Chapter 5 argues that with limited facilities and limited fi nancial access,
Indonesia can expand its coverage of fi nancial inclusion only by building
a model through innovative banking. Th is chapter shows that with high
penetration of mobile banking, a branchless banking (agent banking)
model with digital fi nancial services is suitable. Massive regulatory inter-
vention is required to get this model to work, requiring the government’s
social assistance program to jump start the model with around 15.5 mil-
lion households being directly exposed to digital fi nancial services.
Th e next case study covered in Chap. 6 is Sri Lanka, which is home
to a large number of fi nancial institutions, both formal and semiformal,
providing a range of diff erent fi nancial services such as loans, savings,
l easing and fi nance, and pawning facilities to its population. Th ere is also
evidence of increasing access and utilization of fi nancial services by various
segments of its population. However, there are multiple challenges facing
the country in terms of achieving greater fi nancial inclusion. Th is chapter
undertakes a household level analysis of fi nancial inclusion in Sri Lanka.
It does so by looking at the extent to which households have accessed
fi nancial institutions for loans and savings, extent of multiple borrowing
and multiple savings as well as the reasons for accessing multiple fi nancial
institutions for loans and savings. Th e chapter concludes by highlight-
ing a number of issues policymakers should address for achieving greater
fi nancial inclusion in Sri Lanka.
Th e fi nal chapter of the book deals with the microfi nance industry
in India. Th e microfi nance industry in India is one of the largest in the
world and has played a critical role in fostering fi nancial inclusion in
the country. Th ough its roots can be traced back at least to the 1970s,
