Chapter 7 Financial Inclusion
Author:
Anta Ndoye https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. Adolfo Barajas
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Abstract

Financial inclusion, defined as the access to and use of formal financial services, is taking higher policy priority in many countries across the Middle East and North Africa (MENA) region as they face formidable challenges to achieving stronger and more inclusive growth and a more vibrant private sector.2

Introduction

Financial inclusion, defined as the access to and use of formal financial services, is taking higher policy priority in many countries across the Middle East and North Africa (MENA) region as they face formidable challenges to achieving stronger and more inclusive growth and a more vibrant private sector.2

As stated in the 2018 Opportunity for All paper (Purfield and others 2018) and in Chapter 1 of this book, financial inclusion of both households and small and medium enterprises (SMEs) in the MENA region lags that of other regions. The percentage of adults with an account in a formal financial institution—commonly referred to as the share of the “banked population”—is similar to that of the Caucasus and Central Asia (CCA) region but lower than in other regions, with the exception of sub-Saharan Africa (SSA). The average share of SMEs in total bank lending in MENA countries is only about 9 percent, the lowest in the world.

This chapter highlights the macroeconomic benefits of increasing financial inclusion in the MENA region, both in terms of growth and job creation. It also identifies the factors that can facilitate financial inclusion in the region and offers policy recommendations to expand financial inclusion.

The chapter is organized as follows: the first section presents the state of financial inclusion in the MENA region. The second section discusses the macroeconomic benefits from increasing access to finance. The third section builds on recent empirical analyses (Barajas and others 2020; Fouejieu, Ndoye, and Sydorenko 2020) to identify key policies to increase access to and use of finance. The final section reviews the role of fintech and existing efforts in the MENA region to support financial inclusion.

The State of Financial Inclusion in the MENA Region

Households

Based on the most recent data from the Global Findex Survey, in MENA countries the share of the banked population stood at 43 percent in 2017, compared with 52 percent for countries in Latin America and the Caribbean (LAC), 53 percent for Emerging and Developing Asia (EDA) countries, and 68 percent for Emerging and Developing Europe (EDE) countries (Figure 7.1, panel 1).3 On the other hand, this share is similar to that of CCA countries, and substantially greater than the 30 percent level registered in SSA countries.

A similar pattern is visible for the percentage of adults who have either borrowed from a formal financial institution or who have used a credit card: at 14 percent, this is also well below the levels of LAC and EDE, while comparable to CCA and EDA and above that of SSA countries (Figure 7.1, panel 1). Furthermore, while about half of adult men are banked in MENA countries, only 37 percent of women are (Figure 7.1, panel 2). This divergence, of about 14 percentage points, is double the world average.

Figure 7.1.
Figure 7.1.

Financial Inclusion of Households

Sources: Authors’ calculations; and Global Findex.Note: CCA = Caucasus and Central Asia; EDA = Emerging and Developing Asia; EDE = Emerging and Developing Europe; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = sub-Saharan Africa. MENA High Income refers to Gulf Cooperation Council countries, while Other MENA refers to MENA countries that are not part of the Gulf Cooperation Council.1 The figure shows the differences in financial inclusion of adults between (1) males and females, (2) those in versus out of the work force, (3) old versus young, (4) those with at least a secondary education versus those with at most a primary education, and (5) the richest 60 percent versus the poorest 40 percent.

There are also stark differences between two groups of countries within the MENA region. The high-income MENA countries have levels of account ownership and borrowing—77 and 33 percent, respectively—that exceed those in EDE, while in the other MENA countries, account ownership and borrowing are lower than in all regions except SSA. However, it is the high-income group that tends to display greater divergences in account holding according to age, income, work force participation and, particularly, level of education. In high-income MENA countries, an adult with at least a secondary education is 28 percentage points more likely to be banked than one with at most a primary education, compared to a 14 percentage point divergence in other MENA countries, and 23 points for the world as a whole, (Figure 7.1, panel 2).

In recent years, MENA countries have shown progress in boosting account ownership but not so in use of credit by households. Between 2011 and 2017, account ownership increased by an average of 9 percentage points for MENA countries, while credit by households only increased in the high-income MENA countries (Figure 7.2, panel 1). The reasons for being “unbanked” largely mirror those in the rest of the world: the most common responses in the Global Findex Survey referred to not having sufficient funds (65 percent), to services being too expensive (28 percent), and to other family members having an account (26 percent), as in the rest of the world (Figure 7.2, panel 2).

Figure 7.2.
Figure 7.2.

Household Financial Inclusion

Sources: Authors’ calculations; and Global Findex.Note: CCA = Caucasus and Central Asia; EDA = Emerging and Developing Asia; EDE = Emerging and Developing Europe; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = sub-Saharan Africa. MENA High Income refers to Gulf Cooperation Council countries, while Other MENA refers to MENA countries that are not part of the Gulf Cooperation Council.1 The change from 2011 to 2017 is shown for the percentage of adults with an account in a formal financial institution. For the other two indicators, the change from 2014 to 2017 is shown.

Small and Medium Enterprises

SMEs (firms with fewer than 100 employees) represent about 97 percent of all registered companies in the MENA region and employ more than half of the total labor force, broadly in line with the world averages (Figure 7.3). A relatively large share of SMEs in the region are in the informal sector, creating a barrier for accessing formal credit channels.

Figure 7.3.
Figure 7.3.

Importance of Small and Medium Enterprises

Source: World Bank Enterprise Surveys, latest available data.Note: CCA = Caucasus and Central Asia; EDA = Emerging and Developing Asia; EDE = Emerging and Developing Europe; EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SMEs = small and medium enterprises; SSA = sub-Saharan Africa. The figure uses International Organization for Standardization (ISO) country codes.

The MENA region lags other regions in terms of SME access to financing through the banking system. According to the IMF’s Financial Access Survey, the average share of SMEs’ bank lending relative to total bank lending in the MENA region is only about 9 percent, the lowest in the world (Figure 7.4, panel 1).4 However, there are some differences between the countries in the region. The share of SMEs’ bank lending is as low as 1.9 percent in Bahrain compared to 18 percent in Morocco (Figure 7.4, panel 2). It has also stagnated over the last 15 years in the MENA region (Figure 7.4, panel 3).

Figure 7.4.
Figure 7.4.

SME Financial Inclusion in the MENA Region

Sources: IMF Financial Access Survey; National Authorities; World Bank Enterprise Surveys; and IMF staff estimates.Note: CCA = Caucasus and Central Asia; EDA = Emerging and Developing Asia; EDE = Emerging and Developing Europe; EM = emerging markets; EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean; LIC = low-income countries; MENA = Middle East and North Africa; SMEs = small and medium enterprises; SSA = sub-Saharan Africa. The average for EMDEs rather than that of the World is used due to lack of country coverage on advanced economies for the financial inclusion index. The figure uses International Organization for Standardization (ISO) country codes.

We also use firm-level data from the World Bank Enterprise Survey (WBES) (Fouejieu and others 2020) to construct a composite index that captures both access and usage of financial services by SMEs. The WBES is a firm-level data set that covers a range of business environment topics, including access to finance. Coverage is available for both large firms and SMEs, and the survey is done about every four years in each country. The SME financial inclusion index is constructed from data on (1) access to finance: percentage of SMEs with a bank loan or line of credit, percent of SMEs with a checking/savings account; and (2) usage of finance: percent of SMEs using banks to finance their investments, percent of SMEs using banks to finance working capital, proportion of SMEs’ investments financed by banks, and proportion of SMEs’ working capital financed by banks. This multidimensional data from the WBES is then reduced into a summary index using the following steps: (1) normalization of variables; (2) aggregation of normalized variables into subindices by principal component analysis, using the first component; and (3) aggregation of the subindices into the final index (see Fouejieu, Ndoye, and Sydorenko 2020 for further details on the methodology).

We find that the MENA countries also lag the rest of the world, based on this composite measure of SME financial inclusion (Figure 7.4, panel 4). Within the MENA region, fragile states such as Afghanistan, Yemen, and Iraq have the lowest level of SME financial inclusion, while emerging market countries such as Tunisia and Lebanon have the highest levels. However, unlike for household financial inclusion, there is no clear divide between high-income countries and other countries. In fact, Gulf Cooperation Council countries, which have the highest income, also have the lowest share of SME bank lending relative to total bank lending in the MENA region.

Financial Development, Depth, and Inclusion in the MENA Region

A rich literature has found that financial activity provides benefits to the macroeconomy through its key functions: mobilizing savings; producing information; allocating capital to productive activities; monitoring investments and exerting corporate control; facilitating trading, diversification, and management of risk; and easing the exchange of goods and services (Levine 2005). Financial development, therefore, can be thought of as the process through which the ability for the system to undertake these functions evolves and is improved over time. Empirical studies of financial development have longed relied on indicators of financial depth—for example, the ratio of banking system credit to the private sector—to approximate at least some of the functions being carried out. Depth indicators generally track the quantity of funds being intermediated in the economy, and therefore are reasonable but partial measures of financial development. Financial inclusion measures provide an additional dimension; while quantity undoubtedly matters, how broadly those funds are disseminated to the population of households or firms should also matter. Thus, depth and inclusion are essentially dimensions of the broader process of financial development.

One would expect a positive relationship between financial depth and financial inclusion; countries whose financial systems are deeper would also be more likely to reach broader segments of the population with financial services such as bank accounts for transacting and saving, and loans to finance consumption and investment.

This is confirmed in Figure 7.5, where we show scatter plots of the standard measure of financial depth, the ratio of bank credit to the private sector to GDP, on the horizontal axis, with several measures of financial inclusion on the vertical axis: (1) the percentage of adults who have an account in a formal financial institution, (2) the share of those who have borrowed from a formal financial institution or used a credit card in the last year, (3) the index of SME financial inclusion, and (4) the share of outstanding loans to SMEs as a share of total outstanding commercial bank loans. We include 146 countries for 2017 or the latest available observation for the respective financial depth or inclusion measure.

Figure 7.5.
Figure 7.5.

Financial Depth and Financial Inclusion

Sources: Authors’ calculations; Global Findex; IMF Financial Access Survey; World Bank Enterprise Survey; and World Bank Global Financial Development database.Note: The MENA region’s high-income countries are displayed as red dots, other MENA countries as blue dots, the rest of the world as orange dots, and world averages as a green dot in each panel. The trend lines show the relationship between the financial depth and financial inclusion measure across all countries. The figure uses the latest available data. The figure uses International Organization for Standardization (ISO) country codes. SME = small and medium enterprises.

We also find that the relationship between financial depth and inclusion is not perfect; in some countries, the financial system mobilizes large amounts of funds relative to the size of the economy but does not distribute them as broadly to the population or to SMEs as in countries with more shallow systems. Conversely, other countries overperform, providing broader financial inclusion than would be expected from their level of financial depth. In short, there can be substantial variation in financial inclusion between countries of similar financial depth.

Our results show that in the MENA region, there is again a stark contrast in household financial inclusion between the high-income countries (shown as red dots in Figure 7.5) and the rest of the region (blue dots). The former have both deeper financial systems and greater financial inclusion (as measured by the share of account holders), in fact, greater than predicted by financial depth. However, the other countries in the MENA region have not only financial depth and inclusion below world averages, but also lower inclusion than what would have been predicted by their level of financial depth (Figure 7.5, panel 1). A similar pattern is visible for household borrowing, although there are fewer high-income MENA countries represented in the sample (Figure 7.5, panel 2). Among the non-high-income countries, Iran is an exception, with account holding well above levels predicted by its financial depth, and with borrowing slightly above the predicted level. As for SME inclusion, most countries in the MENA region have levels of financial inclusion below those predicted by their financial depth. Lebanon is a notable exception, with SME financial inclusion above the predicted level (Figure 7.5, panel 3), although SMEs still represent a small share of overall commercial bank lending (Figure 7.5, panel 4).

Financial Inclusion and Its Structural Determinants: Is There a Gap?

It has been recognized that certain structural and slow-moving factors, such as income level, geographical size, population and its density, and age-dependency ratios, play a role in determining how costly it is for a banking system to provide services to the economy and, therefore, how financially developed that country is likely to be (Barajas and others 2013). Thus, a structural benchmark can be defined conceptually as the level of financial development that would be expected for a country at a given time for its observed structural characteristics. Comparing its observed level with its structural benchmark would then show whether the country is under-or overperforming relative to similar countries. Feyen, Kibuuka, and Sourrouille (2019) have operationalized the structural benchmark concept, using quantile regression techniques to estimate the expected level of a certain indicator of financial development—including depth and inclusion—given a country’s structural characteristics.

Figure 7.6 summarizes the actual vs. benchmark comparison for the share of account holders (Figure 7.6, panel 1) and a measure of access to financial services, the number of bank branches per 100,000 adults (Figure 7.6, panel 2).5 Of the 18 MENA countries represented, 12 are underperforming relative to their structural benchmarks. Certain low-income countries, such as Djibouti, Sudan, and Yemen, underperform substantially even with respect to their relatively low structural benchmarks. Some middle-income countries, such as Lebanon, Morocco, and Tunisia, also underperform, and some high-income countries with relatively high levels of inclusion, such as Kuwait and Qatar, also are seen to underperform. On the other hand, Iran again stands out as an overperformer.

Figure 7.6.
Figure 7.6.

Financial Inclusion in the MENA Region: Actual vs. Structural Benchmarks

Sources: Authors’ calculations; and Finstats.Note: The figure shows the share of adults with an account (panel 1) and the number of commercial bank branches per 100,000 adults (panel 2). In each panel, the solid bar represents the actual level, and the shaded bar represents the level predicted by the country’s structural characteristics, as estimated in the Finstats tool. High-income Middle East and North Africa countries are indicated by red bars, and the rest of the region is represented by blue bars. MENA = Middle East and North Africa; Rep. = Republic.

These benchmarking results also indicate that MENA countries have been comparatively more successful in providing access to services via commercial bank branches than in boosting account holding. Iran, Morocco, and Tunisia are particularly successful in providing an extensive branch network. However, for the latter two countries, this has not translated into corresponding success in promoting the use of accounts in the financial system.

Macroeconomic Benefits from Increasing Financial Inclusion

Financial Inclusion, Growth, and Job Creation

There is an extensive literature examining the nexus between financial depth and long-term growth, as well the beneficial economywide impacts of financial deepening for capital accumulation, productivity, poverty reduction, and lower income in equality.6 However, studies of the macroeconomic implications of financial inclusion are more recent and limited, in part because of the data limitations.

Sahay and others (2015) use panel data regressions to analyze the effects of both financial inclusion and depth on medium-term growth, and show that financial inclusion, as measured by the coverage of automated teller machines (ATMs) per 100,000 adults or the percentage of firms identifying finance as a major constraint, has a measurable impact above and beyond the effect of financial depth. Applying their estimated coefficients, one can compute an estimated growth loss from subpar financial depth and from insufficient financial inclusion for MENA countries (Table 7.1). For high-income MENA countries, the growth costs are mostly negative, due to financial depth being either very close to or above the structural benchmark, and to the measure of financial inclusion being above the global median, with the exception of Oman. For the rest of the MENA countries, growth costs range from negative values (Iran and Lebanon), to small (Jordan, Morocco, and Tunisia), to as large as 1.4–1.6 percent per year (Algeria, Djibouti, Mauritania, and Sudan), which over a 10-year period could accumulate to losses of up to 18 percent in per capita real GDP.7

Table 7.1.

Estimated Growth Costs of Financial Underdevelopment (Private Credit-GDP) and Low Financial Inclusion

(ATMs per 100,000 adults)

article image
Sources: Finstats 2019, Global Financial Development Database; and authors’ calculations. Note: Regression coefficients taken from Sahay and others (2015), corresponding to the third column of the Generalized Method of Moments (GMM) panel data regressions reported in their Annex II, which are used to illustrate the effect of financial depth and financial inclusion on long-term growth in the first panel of their Figure 5. This table shows the growth costs of MENA countries arising from the gap between observed financial depth (the private credit-GDP ratio, Column 1) and the structural benchmark as estimated by Feyen and others (2019) (Column 2), the gap between observed financial inclusion (ATMs per 100,000 adults, Column 3) and the world median, and the interaction between the two. Growth costs are expressed in terms of per capita annual real GDP growth. For unbenchmarked countries, the growth costs are calculated with respect to the world median of 0.43. ATMs = automated teller machines; MENA = Middle East and North Africa.

For SMEs, Blancher and others (2019) show that closing the financial inclusion gap with respect to the average for emerging market and developing economies (EMDEs) would also increase economic growth. Applying their estimated coefficients, we compute growth costs in MENA countries from SME access to finance falling below the EMDE average (Figure 7.7). These range from close to zero (Morocco, Jordan, and Djibouti), to small (Lebanon, West Bank and Gaza, and Sudan), to as large as 2–3 percentage points (Afghanistan, Yemen, and Iraq).

Figure 7.7.
Figure 7.7.

SME Financial Inclusion and Growth

Sources: World Bank Enterprise Surveys; and IMF staff calculations.Note: SME FI = small and medium enterprise financial inclusion. The figure uses International Organization for Standardization (ISO) country codes.

SMEs also play a key role in driving employment, especially in developing economies (Kumar 2017). Ayyagari, Demirgüç-Kunt, and Maksimovic (2014) find that SMEs account for nearly half of the workforce in the average country and that small firms (fewer than 20 employees) are the highest contributors to employment growth.

In the MENA region, firm-level regressions analyses (Ghassibe, Appendino, and Mahmoudi 2019) suggest that giving firms access to formal financing leads to an increase of 1 percentage point in their annual employment growth, in line with findings from the literature. These estimated gains are much larger for SMEs (1.3 percentage points) than for large firms (0.8 percentage point). Within SMEs, employment gains are largest for small firms (1.7 percentage points), which are the most credit constrained. Applying estimates from Ghassibe, Appendino, and Mahmoudi, we found that raising SME financial inclusion to the EMDE average could also help increase employment by about 6 million jobs by 2025 (Figure 7.8).8

Figure 7.8.
Figure 7.8.

SME Financial Inclusion and Employment

Sources: International Labour Organization; and IMF staff estimates.Note: SME = small and medium enterprises; MENA = Middle East and North Africa.

Policies to Expand Access to Finance for Households and Firms

Households

As reviewed in Barajas and others (2020), empirical studies have shown that certain policies at the economy or financial regulatory level can increase financial inclusion of households, including:

  • Relaxing certain restrictions on banking activities, requiring greater transparency of financial institutions, taking actions to increase trust in financial institutions, including the establishment of explicit deposit insurance schemes, reducing government ownership of banks, and encouraging the entry of foreign institutions.

  • Providing free or low-cost basic accounts without minimum balance requirements to address the issue of high cost and/or perceived income insufficiency to open formal accounts, cited in particular by MENA respondents to the Findex survey.

In addition, channeling of government payments to employees, pensioners, or beneficiaries of government programs directly into a bank account rather than in cash. Although coverage is relatively limited, Findex data indicate that some MENA countries have shown noticeable progress in transferring government payments directly into accounts and, to a lesser extent, into mobile phones (Figure 7.9).9

Figure 7.9.
Figure 7.9.

Government Payments into Accounts or Mobile Phones

Sources: Global Findex; and authors’ calculations.Note: MENA = Middle East and North Africa. The figure uses International Organization for Standardization (ISO) country codes.1 The figure shows the share of recipients that have received (1) public sector pensions into an account, (2) government transfers into an account, (3) public sector pensions into a mobile phone, and (4) government transfers into a mobile phone.2 The figure shows adults receiving government pensions into an account on the horizontal axis and adults receiving government transfers into an account on the vertical axis, both expressed as a percentage of total recipients. MENA countries and averages are shown in blue, other countries in orange, and the world averages in green.3 The figure shows adults receiving government pensions into a mobile phone on the horizontal axis and adults receiving government transfers into a mobile phone on the vertical axis, both expressed as a percentage of total recipients. MENA countries and averages are shown in blue, other jurisdictions in orange, and the world averages in green.4 The figure shows adults receiving government wages into an account on the horizontal axis and adults receiving government wages into a mobile phone on the vertical axis, both expressed as a percentage of total recipients. MENA countries and averages are shown in blue, other jurisdictions in orange, and the world averages in green.

There is also evidence that financial literacy is positively correlated with individuals’ use of financial services and is also correlated with income and education levels (Lusardi and Mitchell 2011). For MENA countries, a recent study by Lyons and Kass-Hanna (2019) shows that, in addition to the effects of other socioeconomic factors such as better financial and technological infrastructure, greater political stability, and stronger legal rights, countries with higher financial literacy tended to be more financially inclusive. The study also found that the more-vulnerable groups—youth, women, and the poor—were significantly more responsive to the factors identified as boosting financial inclusion, including financial education.

Small and Medium Enterprises

Blancher and others (2019) and Fouejieu, Ndoye, and Sydorenko (2020) examined the relationships between a large set of macroeconomic, financial, and institutional factors and SME financial inclusion. The following macro-financial and institutional factors were found to play a significant role in facilitating access to credit by SMEs, with factors such as economic competition and credit information among the main areas for economic reform that would reduce the SME financial inclusion gap between the MENA region and the best-performing countries.

  • Price stability has a positive impact on SME access to financing. Low inflation is a key signal of macroeconomic stability, associated with lower risk perception and thus greater demand for deposits and credit from formal financial institutions.

  • Greater competition among banks is found to increase access to financing for SMEs while lower asset quality undermines it. The MENA region tends to have relatively high levels of banking concentration (Figure 7.10), which are related to weak competition and often associated with higher interest rate margins and bank profitability, which may discourage lending to smaller firms.10 The MENA emerging and low-income countries tend to have weaker asset quality, which is found to undermine access to finance for SMEs (Figure 7.10).

  • Improved quality and availability of credit information can lead to large benefits in terms of financial inclusion, particularly for SMEs but also for households. In countries where collateral requirements are very high, such as Yemen and Tunisia, better credit information could help relax such constraints and unlock SME access to financing (Figure 7.11).

  • Sound financial regulatory and supervisory frameworks are critical in order to monitor and address potential emerging risks and to support financial deepening and inclusion. Fouejieu, Ndoye, and Sydorenko (2020) found that financial supervisory capacity effectively contributes to SME financial inclusion, especially in the MENA region.

Figure 7.10.
Figure 7.10.

Banking Sector Characteristics

Sources: World Bank Global Financial Development dataset, latest available data; and IMF staff calculations.Note: Banking sector charts use 2018 or latest available data. AE = advanced economies; EM = emerging markets; LIC = low-income countries; MENA = Middle East and North Africa. The figure uses International Organization for Standardization (ISO) country codes.
Figure 7.11.
Figure 7.11.

MENA Countries: Value of Collateral Needed for a Loan

Source: World Bank Enterprise Surveys.Note: EMDE = emerging market and developing economies; MENA = Middle East and North Africa.The figure uses International Organization for Standardization (ISO) country codes.

The Role of Fintech and Government Interventions in Financial Inclusion

Fintech

Fintech is nascent in the MENA region, with its development accelerating in recent years (Lukonga 2018). The United Arab Emirates, Lebanon, Jordan, and Egypt host the majority of the MENA fintech startups and have established large fintech accelerators.11 There are also encouraging signs on the proliferation of digital payments, as illustrated by the populations’ use of mobile money accounts. At 10 percent on average, according to Findex data, it is further along in the MENA region than the 5–8 percent observed in LAC, EDA, CCA, and EDE. However, it is well below the level of SSA countries, which have been worldwide leaders in this area, with an average of 25 percent of adults using these accounts.12

New technologies can help to overcome several constraints to access to credit for SMEs and households identified in the previous section: lack of credit information, weak bank competition and, more generally, the relatively high cost of servicing the financing needs of SMEs and households. Big data analytics and cloud computation facilitate the gathering and processing of large amounts of consumer credit performance and behavioral data. Registration and accounting information can be combined with geographical and socioeconomic information to generate real-time credit scores. Furthermore, new technologies can help lower regulatory compliance costs that can inhibit access to credit. Know Your Customer and Anti-Money Laundering/Combating the Financing of Terrorism procedures can, for example, be made more efficient by analyzing digitalized client and partner transaction data, and writing contracts on distributed ledgers (Blancher and others 2019).

The COVID-19 pandemic led policymakers in many countries worldwide to make supplemental transfers to individuals to compensate them for a loss of income due to mandated lockdowns and other negative shocks to economic activity. Some of these efforts were undertaken in MENA countries (Jordan, Egypt, and Morocco), with an emphasis on digital means and streamlined requirements for opening new accounts. Going forward, MENA governments and private financial institutions will increasingly grasp the potential benefits of setting up these payment channels, in terms of helping households and SMEs directly and serving as a catalyst for further financial inclusion.

However, Fintech also introduces new risks into credit activities. For example, online platforms collect large quantities of data, creating risks for both data privacy and cyber-security. Concerns about consumer protection and fraud are elevated, and many lending platforms rely on short-term funding, which may create financial stability issues.

Government Interventions

MENA countries are relying increasingly on direct public intervention to expand access to finance for SMEs, including in response to the COVID-19 crisis.

Several countries in the region relied on partial credit guarantees to support SMEs (West Bank and Gaza, Tunisia, and Morocco). As reviewed in Barajas and others (2020), the worldwide experience with partial credit guarantees in supporting SME financial inclusion has been mixed, as there are risks of unintended consequences, including large contingent liabilities that are difficult to quantify ex ante, and of misallocation of resources (Zia 2008). Therefore, it is a significant challenge to design them in such a way as to minimize these risks. As argued by the World Bank (2015), success of a PCG scheme depends on the existence of a number of preconditions in the legal, accounting, and judicial environments of the country, and it even requires a minimum degree of financial development.

Development banks can potentially play a role in increasing SME finance, and in particular, as a countercyclical credit provider to SMEs that are temporarily unable to access market financing. Examples in the MENA region include Kuwait, Mauritania, Morocco, and Sudan. Traditionally, the literature has found that, while active government participation in the provision of financial services can potentially help to correct market distortions in the provision of financial services in general, and to SMEs specifically, it can create distortions of its own that run the risk of undermining its objectives (World Bank Group and World Federation of Development Financing Institutions 2018). In the MENA region, development banks have been found to underperform relative to their private counterparts, mainly because they have larger holdings of government securities, contain an employment mandate that drives higher costs, and tend to require larger loan loss provisions due to their weaker asset quality (Farazi and others 2011).

Interest rate caps have been widely used to lower the cost of credit and limit predatory lending. Examples in the region include Algeria, Lebanon, Morocco, Libya, and Tunisia (World Bank 2018). However, there is evidence that interest rate caps may lead to lower bank profitability and credit supply (for example, Ferrari, Masetti, and Ren 2018), especially for small and riskier borrowers.

Financial Development and Inclusion Strategies

A growing number of MENA countries (Jordan, Morocco, Djibouti) have introduced financial inclusion strategies in recent years. These can enable financial policymakers and stakeholders to take a holistic view of the financial development needs in their country and formulate balanced financial policies.

Melecky and Podpiera (2018) assessed financial sector strategies across countries and over time using a rating criterion proposed by Maimbo and Melecky (2014), on the basis of four categories of strategic objectives: financial development, systemic risk management, implementation arrangements, and policy trade-offs. They investigated how the quality of the strategies can affect financial sector outcomes, such as financial depth, inclusion, efficiency, and stability. They found that only a few high-quality strategies, such as those for Malaysia and Switzerland, can serve as role models for other countries in their efforts to deploy financial strategies effectively. They concluded that high-quality strategies should include adequate coordination across government agencies; efforts by the leading governmental agency (in many cases, the central bank) to consult with the private sector; and regulatory reforms to promote better information sharing, contract enforcement, and insolvency regimes.13

The international experience also suggests that policymakers should exercise caution in choosing the targets of their financial inclusion strategies. They should not assume, for example, that a rapid expansion of branches or ATMs or even accounts can automatically produce the desired macro-economic benefits cited in this chapter. Similarly, policy efforts such as drives to open accounts can be successful in achieving this limited objective, but with questionable economic benefits. For example, experiments in Chile, Malawi, and Uganda led to rapid opening of accounts but little usage (Dupas and others 2018), and the massive campaign in India produced 222 million new accounts, but the majority of them remain inactive (Agarwal and others 2018).

Conclusions

The chapter documented key stylized facts and trends regarding financial inclusion in the MENA region. Despite some progress over time, both households and SMEs continue to lag in their use of financial services relative to other regions. Even though some financial systems mobilize an amount of funds that is large relative to the size of the economy, broader access to and usage of financial services is often lagging, suggesting a weak relationship between financial depth and financial inclusion in the region, and raising questions about the nature and efficiency of capital allocation in MENA countries, in line with the lack of private sector development and economic diversification in many of these economies. The chapter also used an existing benchmarking framework to establish to what extent the observed household financial inclusion levels in the region indicate an over- or underperformance relative to countries sharing similar structural characteristics. Except for high-income countries, most countries in the region exhibit significant gaps with respect to the structural benchmarks. This is a signal that policies would need to be improved to bring financial inclusion more in line with that of similar countries. Using the results of existing regression analyses relating medium-term growth to financial depth and financial inclusion, the chapter found that increasing financial inclusion for households and firms is associated with higher economic growth and greater job creation. In the MENA region, the potential benefits of increasing access to finance for households and SMEs are substantial: closing financial depth and household inclusion gaps could raise per capita real GDP by up to 18 percent over a decade and increasing SME financial inclusion for the MENA countries to the global average could boost annual economic growth and create about 6 million additional jobs by 2025.

This also suggests that MENA countries with large gaps—with respect to other regions or to structural benchmarks—could obtain substantial benefits from increasing financial inclusion. The key question then, is what is the best policy approach to achieve meaningful increases in financial inclusion?14

The empirical results suggest that a holistic approach is needed to address the main market frictions and other obstacles holding back financial inclusion. This approach would encompass a broad range of areas, such as institutional quality, macroeconomic stability, and adequate financial policy frameworks, as well as legal and regulatory conditions. In particular, policymakers should consider enhancing financial sector competition and credit information, and encourage the development of fintech activities. For increasing household financial inclusion, efforts at facilitating opening of basic accounts, channeling government payments directly into bank accounts, and enhancing trust in the financial system—including through targeted financial education programs—have proved effective. Broad strategies for financial development and inclusion can have an important impact as well, provided they are well-designed and are not limited to the achievement of a rigid and narrow numerical target for financial inclusion.

These policies are also likely to trigger a virtuous circle of greater financial inclusion and reduced informality, bringing about broader benefits to the economy. In contrast, partial policy approaches, such as strategies focusing solely on direct government interventions through state-owned financial institutions, credit guarantees, or interest rate caps, are unlikely to yield substantial benefits.

Finally, the chapter described how the COVID-19 crisis spurred policymakers in MENA countries, as in the rest of the world, to enact policies to cushion SMEs and households from the negative economic impact of the pandemic, indirectly enhancing financial inclusion. For households, the recent government transfers into a variety of traditional and fintech accounts has provided a gateway into further use of financial services, and time will tell if this catalytic effect proves substantial or durable. For SMEs, initiatives aimed at increasing their access to credit have relied mostly on credit guarantees which, while effective in the short term in providing necessary funds during a crisis, should not be viewed as a desirable longer-term option for increasing SME financial inclusion, given the difficulties and unintended consequences that have been encountered by these schemes internationally.

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1

Shant Arzoumanian provided outstanding research assistance.

2

The Middle East and North Africa region refers to the following countries: Algeria, Afghanistan, Bahrain, Djibouti, Egypt, Iraq, Islamic Republic of Iran, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Somalia, Syria, Tunisia, the United Arab Emirates, West Bank and Gaza, and Yemen.

3

The Global Findex is a worldwide survey of the use of financial services covering over 150,000 adults across more than 140 countries. So far, there have been three rounds of the survey: in 2011, 2014, and 2017. See Demirgüç-Kunt and others (2018) for details.

4

The Financial Access Survey is a survey of providers of formal financial services spanning member countries of the IMF.

5

The share of account holding is the only household-related financial inclusion indicator that has been benchmarked in Finstats. Bank branches per 100,000 adults is obtained from the Financial Access Survey.

7

A word of caution: these estimates rely on one measure of access to financial services—partly due to the time series requirements of the regressions—which may not adequately reflect the full picture of financial inclusion in a given country. Thus, while the precise estimated values should not be taken literally, this exercise reveals that deficiencies in financial inclusion in the MENA region could be a substantial factor limiting long-term economic growth.

8

Assuming that SMEs represent about half of total employment in the MENA region.

9

Some more recent progress may not be reflected in the 2017 Findex data. For example, there are indications that direct public and private sector payments into accounts have been expanding in Iraq, reaching about one-sixth of the population as of 2019 (Cornish 2019).

10

Anzoategui, Martínez Pería, and Rocha (2010) estimate two measures of banking competition across the world and over the 1994–2008 period, and find that MENA countries exhibit low levels of competition in comparison to other regions. They identified two major factors contributing to this lack of competition: a deficient environment regarding credit information, and relatively strict obstacles to entry into the banking market.

11

A fintech accelerator is a program aiming to support startups that are focused on building products and services for the digital payments industry. Examples include Bahrain-based PayTabs and Jordan-based ProgressSoft and eFAWATEERcom, which provide digital payment solutions for banks and SMEs. United Arab Emirates-based Beehive and Eureeca, Lebanon-based Zoomaal, and Jordan-based Liwwa provide crowdfunding and peer-to-peer lending in the region.

12

See Suri (2017) for an overview of the global rise of mobile money.

13

Malaysia is an example where an SME agency was given strong coordination powers and was able to reach across jurisdictions to gain consensus on policy priorities.

14

In the case of financial depth, Barajas and others (2013) identify main policy determinants of gaps with respect to structural benchmarks, which they group into three categories: market-enabling, market-developing, and market-harnessing policies. Many of the policies they found to be consistent with closing the depth gaps have also been identified elsewhere as contributing to financial inclusion, and are cited in this section as well.

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