Financial Inclusion in the CEMAC1
1. Financial inclusion matters for economic and social development. In recent years, and especially since the 2009 financial crisis, financial inclusion—typically defined as the proportion of individuals and firms that use financial services—has become a subject of considerable interest among policy makers, researchers, and other stakeholders (2014 Global Financial Development report) 2 There has been a growing realization that only about half of the world population has access to financial services, and that access is unequally spread across regions, countries, income levels and gender. More importantly, it has been increasingly recognized that financial inclusion affects economic and social development. Access to financial services can play a critical role in reducing poverty, inequality, and supporting inclusive development. Worldwide evidence indicates that the poor benefit from having access to basic payments, savings, and insurance services. For firms, particularly for SMEs, access to finance is crucial for investing and growing.
2. But boosting financial inclusion is neither trivial nor innocuous. On the one hand, creating new bank accounts does not always translate into regular use and on the other hand, boosting financial inclusion should not mean lending to all indiscriminately. The promotion of credit without sufficient regard for lender protection and financial stability is likely to bring problems, especially if credit starts growing rapidly. Dozens of microcredit experiments paint a mixed picture about the developmental benefits of microfinance projects targeted at particular groups in the population. It is important not to force financial service upon groups or firms that have no need or usage for them. However, there is a large scope for improvement when markets are malfunctioning and preventing people to accessing financial services.
3. The objective of this analytical note is to have a closer look at financial inclusion in the CEMAC region by benchmarking financial inclusion in CEMAC countries with peer African countries and looking at interregional comparisons for the main access indicators, as well as identifying the link between financial inclusion and social indicators. The remainder of the note is organized as follows. Section B will present a benchmarking exercise and discuss financial inclusion in the CEMAC through cross country comparisons. Section C examines the microfinance sector and innovative finance and section D discusses the link between financial inclusion and human development. Section E will conclude by presenting policy recommendations.
B. Financial Development and Inclusion in the CEMAC: Benchmarking and Cross Country Comparisons
Access to financial services varies across CEMAC countries but still lags behind the Sub-Saharan Africa average, peer countries and the benchmark level expected when considering the countries’ structural characteristics. Furthermore, in terms of financial access for the poor, this region is one of the least inclusive. In some countries the development of mobile banking outperformed regional trends and it could create good opportunities to alleviate poverty and improve access to credit. Retail and SME banking is very limited. In some countries the microfinance and informal sectors help to meet the saving and borrowing needs.
4. The objective of benchmarking is to compare financial sectors over time and relative to other countries while controlling for the level of economic development and other structural, country-specific factors. By taking into account the most important non-policy factors affecting financial sector development while excluding all policy-driven factors, the statistical benchmark determines the level at which a country’s financial system would be expected to perform in a policy-neutral environment. Deviations with respect to the benchmark can therefore be attributed, at least in part, to the quality and possible shortcomings of the country’s policies. For each country, the World Bank’s Finstat tool allows to estimate a structural benchmark based on the country’s economic and structural characteristics.3 Therefore, given the structural characteristic of the country, regressions provide an expected median level of financial development that the country could achieve. The analysis is carried out using data from 2000 onwards, where available.
5. Data availability permitting, financial sector indicators for the CEMAC countries are compared with those from peer countries. Relevant peers are selected for each CEMAC country and include WAEMU countries and in particular Senegal, Benin, and Togo, but also Rwanda, Tanzania as well as with the average for sub-Saharan Africa (SSA), excluding South Africa, and the average of the lower middle income countries group (LMC) and lower income countries group (LIC). Rwanda is an interesting example of a country taking a policy decision leading to a breakthrough in access to finance (Finscope Rwanda, 2012). Kenya and Tanzania are examples of SSA economies with a rapidly developing financial sector and rapid reduction in financial exclusion. Countries from the West African Economic Monetary Union (WAEMU) provide examples from a similar institutional setting. The SSA average (excluding South Africa) reflects the development of the rest of the continent while the LMC and LIC averages provide comparisons with countries with a similar development level as the benchmarked CEMAC country.
Depth and Inclusiveness
6. The banking system has grown in recent years but remains comparatively shallow. In most CEMAC countries, private sector credit has grown rapidly since the mid-2000s. Nevertheless, all CEMAC countries underperform compared to their benchmarks for private sector credit and bank deposits to GDP, and the banking sector remains much shallower than in other peer countries.
Private Credit to GDP
Sources: Finstat, World Development Indicators Database.
Broad Money to GDP
7. Access to financial services in the CEMAC region is limited, and is falling behind other regions in Sub-Saharan Africa and other peers. As can be seen from figure 1 below, all countries in the CEMAC region underperform their expected benchmark when it comes to financial inclusiveness as measured by the number of branches per capita. With the exception of Gabon, all countries are below the SSA median and also well below their peer group averages. In addition, the tendency in peer countries has been to catch up with the expected median while indicators in CEMAC countries have a slower evolution. There is scope for policy action to improve financial access and inclusion and the experience of some peer countries with rapid improvement in financial inclusion could help identify potential policy actions.
Figure 1.CEMAC Countries: Benchmarking Access to Financial Services
8. Access to formal savings and loans is limited, especially for the poor population. Financial inclusion can also be approached from the perspective of the contrast between bankable “rich” and “poor”4 In the CEMAC area 23 percent of the “rich” population has a formal account compared with only 4 percent among the “poor”.
Financial Inclusion by Income
Financial Inclusion by Gender
9. Financial inclusion indicators also reveal stronger than average gender inequality compared to other SSA countries. Women in the CEMAC region have a lower access to financial services than men compared to their peers in SSA. Only 6.8 percent of women have a formal financial account compared to 11.3 percent of the male population. The ratio of men to women with formal accounts is therefore around 1.66 which is much higher than in Sub-Saharan Africa frontier and emerging economies where this ratio is only 1.22.5
10. The share of adults with formal savings is on average around 7.5 percent in the CEMAC region. Formal savings in Central African Republic are at the lowest level while Cameroon ranks highest. The most important constraint cited by adults for not having a formal account is lack of money, possibly reflecting a lack of demand. However, costs of service and distance to the closest banking branch are also commonly cited factors. Banks services (e.g. opening and maintenance fees) in the CEMAC are costlier compared with other banks in the region.
Reasons for not Having a Formal Financial Account
C. Microfinance and Mobile Banking Services
11. Micro Finance Institutions (MFIs) help reach the unbanked population. Saving and lending behaviors of households and SMEs reflect the importance of informal and micro finance institutions. While less than 8 percent of the population has access to formal accounts, more than 35 percent of the adults in CEMAC have saved money with formal and informal institutions. Microfinance institutions are particularly prevalent in Cameroon and Chad where they help boost financial inclusiveness. As can be seen from the charts below, while the MFIs still represent a small share of the banking sector, the sector is rising rapidly – therefore presenting some supervision challenges. Similarly, the vast majority of loans are obtained though family and friends followed by private lenders. Less than three percent of the population has received a loan from a bank in the past 12 month underscoring the marginal dimension of retail banking.
CEMAC: Number of Microfinance Institutions, 2000–2012
CEMAC: MFI’s Deposit and Credit to Banks, 2000–2012
Sources: COBAC, WEO Database.
12. Mobile banking is growing in the CEMAC region-even though it remains much less developed than in other SSA countries - and it could help promote an alternative to traditional forms of financial services. On average, almost 30 percent of the adult population has used mobile phone services to make financial transactions: to pay bills, to transfer or borrow money. Among the best performers, Gabon ranks second, with almost 50 percent of the population while Republic of Congo is in the fourth place in SSA according to the Global Findex database.
D. Financial access and inequality
13. Lack of financial access hampers poverty reduction and promotes wealth inequality. Financial access is positively correlated with per capita GDP but also Human Development Indicators in SSA. In addition, access to loans and insurance creates heterogeneous opportunities for businesses and growth.6 Moreover, diversifying income sources to interest and dividend payments can augment the return and improve wealth. Thus, when the “rich” have better access to financial services than the “poor”, they have higher chances to become richer, tilting the income distribution.
E. Policy Recommendations
14. International experiences show that public policies can significantly improve financial inclusion. While financial inclusion in SSA differs widely from country to country, some countries such as Tanzania, Rwanda, and Kenya have made rapid progress in widening access to financial services. Worldwide, more than half of financial regulatory frameworks include measures for promoting financial inclusion and a set of relevant best practices can be identified.
15. The public policy agenda should include measures to address the main supply barriers to financial access. A national or regional strategy needs to be set up with measurable targets and a coordinating institution. Regulations should foster innovative finance such as mobile banking as they lower transaction costs and will allow offering financial services at lower costs, thereby widening their usage. At the same time, it remains paramount to protect the consumers and ensure proper supervision of innovative banking or microfinance. In particular, the efforts to create a good environment for microfinance and mobile banking should continue by fostering collaboration between commercial banks and microfinance institutions and telecommunication companies. Improving legislation, property rights and documentation should improve access to finance. Ongoing implementation of the electronic payment system for taxes and utilities has to move forward and development of the banking branches network encouraged. Further reforms should aim to improve the business environment and judicial framework, boost supervision capacities, reduce asymmetry of information, and facilitate loan recovery to boost the financing of new investments and growth.
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Demirguc-KuntA. and L.Klapper.2012a. “Measuring Financial Inclusion: The Global Findex Database.” World Bank Policy Research Working Paper 6025.
Demirgüç-KuntA. and L.Klapper. 2012b. “Financial Inclusion in Africa: An Overview.” World Bank Policy Research Working Paper 6088.
Finscope2012Financial Inclusion in Rwanda 2008–2012http://www.finmark.org.za/blog/publication/financial-inclusion-in-rwanda-2012/
G20 Information Center. “G20 Leaders Statement: The Pittsburgh Summit.” http://www.g20.utoronto.ca/2009/2009communique0925.html
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LevineRoss. 2005. “Finance and Growth: Theory and Evidence” in PhilippeAghion and StevenDurlauf (eds.) Handbook of Economic Growth. Amsterdam: North-Holland Elsevier Publishers.
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Prepared by Adrian Alter and Boriana Yontcheva.
In international forums, such as the Group of Twenty (G-20), financial inclusion has moved up the reform agenda. At the country level, about two-thirds of regulatory and supervisory agencies are now charged with enhancing financial inclusion. In recent years, some 50 countries have set formal targets and goals for financial inclusion.
The structural benchmarks are calculated based on Beck et al. (2006) and FinStats from the World Bank. Using a large dataset of countries, the financial indicator is regressed on a set of structural characteristics, such as GDP per capita and its square, population size and density, the age dependency ratio and country-specific dummies and year fixed effects.
Here we refer to the “bankable” population as the opposite of the “unbankable” population, defined in the Demirguc-Kunt and Klapper (2012a, 2012b). The former represents the share of the adult population with access to a formal financial account. The “rich” and the “poor” are the top 20% quintile and bottom 20% quintile, respectively, of the adult population ranked by income.
The group of SSA frontier and emerging economies refers to following countries: Ghana, Kenya, Mauritius, Nigeria, Senegal, South Africa, Tanzania, Uganda, and Zambia. This group was constrained by data availability.
For a discussion about the link between finance and growth see Levine (2005).