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June 2019, No. 91


Special Report: Inclusive Finance | Part 3

Metrics and Indicators


The Government and CBI could take into account the major challenges to improve the status of financial inclusion by addressing adequate policies to improve the supply side financial services and also demand side.


The increasing complexity, mentioned throughout this article, has prompted change, multi-dimensionality and new processes and approaches which mean that sustainable solutions, objectives and outcomes can no longer be achieved through previous, singular (linear) approaches but also require new, multi-dimensional (and non-linear) type solutions. The complexity, gaps, problems and constraints have resulted in ensuing financial instabilities and crisis – which have prompted new global development and finance approaches, and a new approach to development finance gradually overcoming both the traditional boundaries between monetary and fiscal policy and between public and private concepts, thereby linking public and private goods, and forming public-private-community partnerships (PPP).

This article (1) suggests that Iran’s development would be significantly enhanced if the new “development finance” and alternative “inclusive finance” systems approaches are enabled.

Inclusive Finance – Measurement Indicators

Measuring financial inclusion through indicators and indexes is not easy. Different approaches have been proposed in the economics literature including the use of a variety of financial inclusion dimensions for estimation. Initial efforts at measuring financial sector outreach started by: i) looking at three types of banking services (deposits, loan and payments) and three types of capability (access, affordability, and eligibility) and how such factors of banking services have contributed in achieving high levels of financial inclusion;  ii) studying the relations between financial inclusion and human development, the former possibly leading the latter and especially with growth outcomes, and how better people access to banking services can result in high growth through multiplier effects which help achieve an inclusive growth outcome;  and iii) thinking about the construction of Financial Inclusion Index’s to measure relations, as an axiomatic approach of matrices for measuring financial inclusion. (see: Beck 2006; Mehrotra 2009; Chakravarty 2010).

Possible Indicators of Inclusive Finance

  • No. of deposit accounts with commercial bank (per 1000 adults);

  • No. of commercial bank branches (per 1,000 adults);

  • No. of bank outlets (per 100,000 adults);

  • No. of ATM available (per 100,000 adults);

  • No. of bank employees per customer;

  • No. of transactions per account;

  • No. of electronic payments made;

  • % of adults with an account at a formal financial institution

  • Value of outstanding deposits with commercial banks as % of GDP;

  • % households having access to savings;

  • % households having access to insurance;

  • No. of retail cashless transactions per capita;

  • % of adults that use their mobile device to make a payment;

  • % of adults with high frequency use of formal account;

  • No. of depositors per 1,000 adults (or number of deposit accounts per 1,000 adults);

  • Average savings balances;

  • No. of financial products and services matching clients’ needs;

  • Range of options available to customers;

  • Clients awareness and understanding of financial products;

  • Government resources in national budgets and GDP that are allocated as recurrent and capital spending directly to poverty reduction and employment programmes in sectors and regions that disproportionately benefit the poor and vulnerable groups;

  • % of adults with at least one loan outstanding from a regulated financial institution;

  • No. of borrowers per 1,000 adults;

  • No. of outstanding loans per 1,000 adults;

  • No. of insurance policy holders per 1000 adults segregated by life and non-life insurance;

  • % of adults receiving domestic and international remittances;

  • Saving propensity at a financial institution in the past year;

  • No. of loans given to small entrepreneurs and producers;

  • % of SMEs with an account at a formal financial institution;

  • No. of SMEs with deposit accounts/number of deposit accounts;

  • % of SMEs with outstanding loan or line of credit;

  • No. of SMEs with outstanding loans/number of outstanding loans.

The promise of inclusive finance was founded on innovation and systems views: new management structures, new contracts, new indicators and new attitudes. The approach has focused and built on innovations in financial intermediation: instruments and techniques that reduce the cost and risk of lending to poor and low-income households, and which manage to gain high leverage. Some approaches have made financial sustainability the main goal, while others have focused on access to credit. Much has been gained by focusing sharply on the mechanisms through which financial services are delivered, as well as the services provided. Current conceptions of inclusive finance best practice have centered on important but general aspects of institutional performance, such as maintaining financial transparency, standardizing products and achieving scale.

The above indicators suggest these. Like all calculations, these rest on assumptions (and simplifications). As an example, this author has undertaken an estimation for access in Iran by various groups, using available relative income poverty statistics for various groupings which have been transformed so as to provide proxy indicators for access. It has a margin of error of about 20% - but it is qualitatively indicative. As below. The general indication is that throughout a twenty year period (1995-2015) nearly half of the Iranian population did not have appropriate access to loans and credits that could have been considered useful for sustainably prompting growth in their incomes. Unskilled labourer’s and skilled agricultural labourer’s had least access, of which only 46% and 42% respectively had access to credits and savings; construction and agriculture sector persons had least access to credit, with both indicating that only 38% of them had access; and in the age groups, youngsters had least access to finance and credit. That is about 14 million working age persons in Iran probably lacked access during this period. The structural approach undertaken here enables identification of possibilities for the development programme targeting needed to compensate for the deprivations in access involved in working groups.

Group

Method: Average

Method:

Targeting

Average

Employment and Population

No. without access

Technicians

0.610

0.64

0.63

0.55

1.5

25

13.66

Governance and Professions

0.607

0.63

0.62

6

Scientists

0.601

0.63

0.62

0.5

Office Employees

0.574

0.61

0.59

2

Industrial Workers

0.519

0.56

0.54

4

Self-Employed

0.488

0.51

0.50

3

Unskilled Labour

0.410

0.51

0.46

6

Skilled Agricultural Labour

0.414

0.43

0.42

2

Finance

0.627

0.65

0.64

0.50

0.5

 25

12.50

Services and Marketing

0.536

0.56

0.55

6

Industry and Mining

0.490

0.56

0.53

1

Utilities

0.499

0.52

0.51

0.5

Wholesale and Retail

0.502

0.51

0.51

4

Hotel and Catering

0.499

0.51

0.50

4

Transport and Communications

0.494

0.51

0.50

1

Agriculture

0.359

0.41

0.38

6

Construction

0.372

0.39

0.38

2

26-65 Employed

0.364

0.45

0.41

 0.26

25

43

11.38

26-45 Female Employed

0.346

0.40

0.37

5

66> Retired

0.152

0.17

0.16

13

15-25

0.096

0.14

0.12

5

Iran - average

0.510

0.54

0.52

0.52

25

 

 

Index average

 

 

 

0.46

 

 30

13.75

Authors own estimations

How to measure all this complication? Development cost and benefit analysis (CBA) calculations are used in various ways with these indicators. CBA results suggests that although investing in inclusive finance programmes that target poverty reduction are not perfect winners, they do seem to be better than other alternative programmes and initiatives. A simple CBA measure is utilized to assess this: dividing the cost of an inclusive finance programme by the benefits accruing to its borrowers or beneficiaries. For example, borrowing with respect to improvements in household consumption (or income). The total cost of the borrowing would be divided by the change in the borrowers household consumption (or income) during the period under contract. So a cost-to-benefit ratio of 1 has same cost and benefit outcome; less than one indicates more benefit than cost; and more than one vice versa. If such a ratio is 0.8, it would cost society .80 index points for every 1 index point of benefit to clients. So one would prefer credit facilities that have CBA outcomes of less than one.

A comparison undertaken in the first decade of the 21st Century period, between two of Bangladesh’s inclusive finance institutions, Grameen and BRAC, indicated the following. The CBA ratios calculated for improvements in household consumption for Grameen was 0.9 borrowing by women and 1.48 borrowing by men (i.e. Grameen lending to men had a smaller impact on household consumption). The micro-finance programmes of the BRAC compare less favorably, however: 3.53 and 2.59 for borrowing by women and men respectively. Nevertheless, the Grameen inclusive finance programme borrowing compared favorably to alternative direct poverty alleviation programmes in Bangladesh: the Food-for-Work programme at the time had a cost–benefit ratio of 1.71.

Perhaps the most difficult problem is that simple CBA calculations fail to provide insight about the relevant counter-factual (or potential) scenario. CBA ratios also may be improved (or worsened) by reducing subsidies even slightly, and a simple cost–benefit ratio provides minimal information on the optimality or sustainability of such a change (in the sensitivity analysis).

Measuring multi-dimensionality is also difficult. How to put these indicators together? How do they adjust to each other? Why can’t different types of programmes coexist? More generally, how will the existence of a subsidized direct development programme and a social banking initiative complement each other in a regional planning framework? How will they affect the profitability of both and of the formal and informal institutions operating together to achieve the goals? And so on.

For example, achieving financial sustainability is a real challenge, and measuring this is also complicated. Programme types and financing types are crucial in the development process. Most micro finance programmes do not fully cover their full costs and have trouble without ongoing subsidies and supports. The continuing dependence of these programmes on subsidies necessitates the need for government and public funding. But the fact is that subsidies are an ongoing reality: and some initial start-ups have remained weak, despite growing up. There is also a broader concern with financing impact on non-borrowers – that is complementary programmes to inclusive finance for development and growth. Subsidized development programmes may either improve or worsen the terms and availability of loans offered by social banks and or local money lenders in the informal sector. For example, the impacts occur because a subsidized programme may reduce optimal scale and take out the best borrowers, leaving the non subsidized lenders with a riskier pool of clients and higher enforcement costs than before (2) – and clients might borrow simultaneously from both formal and informal sources (but where the scale advantages of the formal sector outweigh the informational advantages of local money lenders).

For example, Pineyro (2013) measuring the level of financial inclusion in 32 states of Mexico and its Municipalities, found that around 36% of Municipality are financial inclusive whereas 29% of them are still excluded. He found a direct relationship between education and financial inclusion and to some extent the high correlation between poverty and financial inclusion. He suggested that in order to benefit a large mass of excluded population, Mexican government should encourage equitable growth and equal opportunities.

Conclusion

There is an urgent need to focus on resolving complex problems; on the possible ensuing instabilities; and on people and human development. This articles suggests that Iran’s development would be significantly enhanced if “inclusive finance” systems are adopted and appropriately measured. The measurement of the extent of financial inclusion across different times and conditions of the Iranian economy provides evidence that small and medium level financial inclusion has not been prevalent. There are many possible reasons behind this: supply side financial services and branch networks have not necessarily been effective in poorer and rural areas; fall in credit deposit ratios in rural areas; high transaction costs; bank staff attitude and complexity in financial instruments and products; etc. etc.

Hence, the Government and CBI could take into account the major challenges to improve the status of financial inclusion by addressing adequate policies to improve the supply side financial services and also demand side. By the achievement of full or high financial inclusion, it will become easy to reduce indebtedness, promote inclusive growth, improve the standard of living and promote grassroots innovations and entrepreneurship etc.


Endnotes

1 This article is based on Inclusive Finance: Approaches and Measurement for Iran – Working Paper 2018 by this author

2 the following writings illustrate such cases: Beck, T. Demirguc-Kunt and Peria, M., 2007. Reaching out: Access to and use of banking services across countries, Journal of Financial Economics, Vol. 85; Camara, N. and David, T., 2014. Measuring Financial Inclusion: A Multidimensional Index, BBVA Working Paper.; Farzin, M.A. 2017. A Complementary Sustainable Growth Programme to Conventional Sole Economic Growth Oriented Policy in Iran.  Mimeo.; Farzin, M.A. 2001. Poverty Reduction and Micro-Credit. UNDP Iran; Hoff, K and Stiglitz J. 1990. “Introduction: Imperfect Information and Rural Credit Markets – Puzzles and Policy Perspectives.” The World Bank Economic Review 4.; Mehrotra, N. et al., 2009. Financial Inclusion: An overview National Bank for Agriculture and Rural Development, Department of Economics Analysis and Research: Occasional Paper – 48, Mumbai.; Ocampo, J.A., 1999. “Reforming the International Financial Architecture: Consensus and Divergence.” WIDER.; Pineyro, C.M.Z., 2013. Financial inclusion index: Proposal of Multidimensional Measure for Mexico, The Mexican Journal of Economics and Finance.; Von Pischke, J.D. 1991. Finance at the Frontier: Debt Capacity and the Role of Credit in the Private Economy. World Bank. 

 

 

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