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International Remittances and Financial Inclusion in Sub-Saharan Africa

29.09.2014Maria Soledad Martinez Peria

Remittances to Sub-Saharan Africa (SSA) have increased steadily in recent decades and are estimated to have reached about $32 billion in 2013. Though studies have shown that remittances can affect aggregate financial development in SSA - as measured by the share of deposits or M2 to GDP (Gupta et al. 2009), to my knowledge there is no evidence for this region on the impact of remittances on household financial inclusion defined as the use of financial services. This question is important because there is growing evidence that financial inclusion can have significant beneficial effects for households and individuals. In particular, the literature has found that providing individuals access to savings instruments increases savings, female empowerment, productive investment, and consumption. Furthermore, the topic of financial inclusion has gained importance among international bodies. In May 2013, the UN High-Level Panel presented the recommendations for post-2015 UN Development Goals, which included universal access to financial services as a critical enabler for job creation and equitable growth. In September 2013, the G20 reaffirmed its commitment to financial inclusion as part of its development agenda.

In a recent paper, my co-author, Gemechu Ayana Aga and I explore the link between international remittances and one aspect of financial inclusion in SSA: households' use of bank accounts [1]. This issue is particularly important for SSA, given that on average only 24 percent of the population has an account with a formal financial institution. In contrast, 55 percent of adults in East Asia, 35 percent in Eastern Europe, 39 percent in Latin America, and 33 percent in South Asia have accounts.

Remittances may affect households' use of bank accounts in at least two ways. First, remittances might increase the demand for savings instruments. The fixed costs of sending remittances make the flows lumpy, potentially providing households with excess cash for some period of time. This might increase their demands for deposit accounts, since financial institutions offer households a safe place to store this temporary excess cash. Second, remittances recipients' exposure to banks, for example, when banks act as remittances paying agents, may familiarize them with the services offered by banks and increase their demand for bank accounts. Therefore, so long as lack of awareness is the main reason for households' financial exclusion, remittances may increase households' use of bank accounts.

Using World Bank survey data including about 10,000 households in five countries -- Burkina Faso, Kenya, Nigeria, Senegal and Uganda - we find that receiving international remittances increases the probability that the household opens a bank account in all the countries in our study. This result is robust to controlling for the potential endogeneity of remittances, using as instruments indicators of the migrants' economic conditions in the destination countries.

The size of the impact varies across countries (see Figure 1). In Kenya and Nigeria, receiving international remittances increases the probability of a household having a bank account by about 10 percentage points. The size of the coefficient is larger for Uganda, where receiving international remittances increases the probability of having a bank account by about 15 percentage points. The size of the coefficient is smaller for Senegal and Burkina Faso, where receiving international remittances increases the likelihood of having a bank account by about 5 and 6 percentage points, respectively.

Figure 1: The impact of remittances on the likelihood that households own a bank account

                        

 

Want to know more about the remittances of migrants from the perspective of a local user? Read this very interesting article about a taxi driver from the Togolese diaspora. 

Maria Soledad Martinez Peria is the Research Manager of the Finance and Private Sector Development team of the Development Economics Research Group at The World Bank. Prior to joining The World Bank, Sole worked at the Brooking Institution, the Central Bank of Argentina, the Federal Reserve Board and the International Monetary Fund.

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[1] Ayana Aga, Gemechu and Maria Soledad Martinez Peria, 2014. "International Remittances and Financial Inclusion in Sub-Saharan Africa." World Bank Policy Research Working Paper 6991. econ.worldbank.org/external/default/main

Movable collateral registries and firms’ access to finance

06.01.2014Maria Soledad Martinez Peria

To reduce asymmetric information problems associated with extending credit and increase the chances of loan repayment, banks typically require collateral from their borrowers. Movable assets - assets that are not affixed permanently to a building (e.g., equipment, receivables)- often account for most of the capital stock of private firms and comprise an especially large share for micro, small and medium-size enterprises. Hence, movable assets are the main type of collateral that firms, especially those in developing countries, can pledge to obtain bank financing. While a sound legal and regulatory framework is essential to allow movable assets to be used as collateral, without a well-functioning registry for movable assets, even the best secured transactions laws could be ineffective or even useless.

Given the importance of collateral registries for moveable assets, 18 countries have established such registries in the past decade. However, to my knowledge there is no systematic empirical evidence on whether such reforms have been effective in fulfilling their primary goal: improving firms' access to bank finance.

In a recent paper, Inessa Love, Sandeep Singh and I explore the impact of introducing collateral registries for movable assets on firms' access to bank finance using firm-level surveys for 73 countries. Following a difference-in-difference approach, we compare access to bank finance pre and post the introduction of movable collateral registries in seven countries (Bosnia, Croatia, Guatemala, Peru, Rwanda, Serbia, and Ukraine) against three different "control" groups: a) firms in all countries that did not implement collateral reforms during our sample frame (59 countries), b) firms in a sample of countries matched by location and income per capita to the countries that introduced movable collateral registries (7 countries), and c) firms in countries that undertook collateral legal reforms but did not set up registries for movable assets (7 countries). This difference-in-difference approach controlling for fixed country and time effects allows us to isolate the impact of the introduction of movable collateral registries on firms' access to bank finance.

Overall, we find that introducing movable collateral registries increases firms' access to bank finance. In particular, our baseline estimations indicate that the introduction of registries for movable assets is associated with an increase in the likelihood that a firm has a bank loan, line of credit or overdraft, a rise in the share of the firm's working capital and fixed assets financed by banks, a reduction in the interest rates paid on loans, and an increase in the maturity of bank loans.

The impact of the introduction of movable collateral registries is economically significant: registry reform increases access to bank finance by almost 8 percentage points and access to loans by 7 percentage points. These are sizeable effects considering that in our sample, about 60 percent of firms have access to finance and 47 percent have a loan. There is also some evidence that the impact of the introduction of registries for movable assets on firms' access to bank finance is larger among smaller firms, who also report a reduction in a subjective, perception-based measure of finance obstacles.

Our findings suggest that policymakers in Africa would be wise to adopt movable collateral registries to facilitate firms' access to finance. Currently, in the region, only 8 countries (Ghana, Kenya, Mauritius, Nigeria, Rwanda, Seychelles, South Africa, and Tanzania) have such registries. Clearly, there is scope for reform throughout the continent in this area.

MARIA SOLEDAD MARTINEZ PERIA is the Research Manager of the Finance and Private Sector Development Team of the Development Economics Research Group at The World Bank. Her published work has focused on currency and banking crises, depositor market discipline, foreign bank participation in developing countries, bank financing to SMEs, the impact of remittances on financial development and the spread of the recent financial crisis. Prior to joining The World Bank, Sole worked at the Brookings Institution, the Central Bank of Argentina, the Federal Reserve Board, and the International Monetary Fund. She holds a Ph.D. in economics from the University of California, Berkeley and a B.A. from Stanford University.

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