In Brazil, bank customers can access their accounts aboard a floating
bank on the Amazon River. In Mexico, rural residents find banking
services inside popular stores like Walmart or 7-Eleven, or at their
local pharmacy.
Mobile technology and regulatory reforms have
made it easier and cheaper for private and public companies around the
world to offer banking services to the poor, youth, women and rural
residents, and others who lacked access.
But in a new report
released on Monday, the World Bank warns that while some services, like
low-fee accounts, clearly benefit the poor and small firms, others -
such as microcredit, microinsurance, and debt relief - can do more harm
than good.
"We're very careful to make sure we're not saying that
everyone should be borrowing," said Asli Demirguc-Kunt, the World
Bank's director of research and co-author of the report.
Instead,
the World Bank encourages governments to reduce regulatory barriers,
legal hurdles or other factors that make financial services too
expensive for some, such as boosting competition and protecting the
rights of creditors.
Access to finance helps the world's poorest
save so they can invest in education and improve standards of living,
and enables small companies to borrow so they can grow. It also makes it
easier for governments to target subsidies and financial assistance to
the bank accounts of the neediest.
More than 50 governments have
pledged to improve financial inclusion, or the number of people and
companies that use financial services. World Bank President Jim Yong Kim
last month also announced a target of universal financial access by
2020. Now, about 2.5 billion people, or half the world's adult
population, lack access to financial services.
Microcredit, or
tiny loans to the poor, came into vogue in the late 1990s as a way of
providing banking services to the world's poorest in order to combat
poverty and boost entrepreneurship.
But several studies in recent
years have shown that microcredit, which often comes with very high
interest rates, has little or no impact on the financial fates of people
in nations such as Mexico, the Philippines, Morocco and India.
The
World Bank said India in particular offers a cautionary tale about the
overextension of credit, after reports of dozens of suicides by poor
borrowers in 2010 in the southern state of Andhra Pradesh.
India
lacked appropriate protection for consumers and legal provisions for
personal bankruptcy, the bank said. In general, governments should avoid
directed credit and lending through state-owned banks, as these
interventions can become tied to politics, according to the World Bank.
Fingerprinting, Iris scansBut
innovative financial instruments and new technology have made it easier
to expand access, even in countries without strong institutions.
One
experiment in rural Malawi collected the fingerprints of some farmers
that wanted loans to grow paprika. The experiment showed that farmers
who were at highest risk for default were more likely to pay back a loan
if they were fingerprinted, since they worried they might not get
another loan in the future.
The identification could also make
lenders more likely to extend credit since they would have better
information about borrowers.
"Recent research suggests that
biometric identification (such as fingerprinting, iris scans, and so on)
can substantially reduce information problems and moral hazard in
credit markets," the World Bank said.
Other tools that can
encourage people to save in formal bank accounts are commitment savings
accounts, where people give up access to their money for a set period of
time, or regular reminders of savings goals.
But the World Bank
said it was important to have more educated consumers in addition to
enabling government policies. For that, standard financial literacy
classes generally fail at preparing people for major financial
decisions.
"A person can learn the meaning of street signs, but this does not make him capable of driving in traffic," the bank said.
Instead,
what seems to work better is providing information just as a person is
starting a new job or purchasing a financial product.
"You need
the right regulations in place, but also to educate consumers so that
they watch out for themselves," Demirguc-Kunt said.
