Most poor people in developing countries do not have a bank account. In a study prepared for the Gates Foundation, Alan Roe and colleagues argue that even the poorest families both want and have the capacity to save – and that being able to do so would significantly improve their lives.
Discussion of the financial needs of the world’s poorest people typically focuses on credit rather than savings. This is because of a widely held but mistaken belief that poor people cannot save. In fact, they have both the appetite and the capacity to save: in banking systems that target the poorest customers, there are typically five times as many depositors as there are borrowers.
Bank accounts offer a variety of benefits to poor people:
- They enable the secure accumulation of funds to finance any anticipated future expenditures
- They allow the accumulation of funds to help meet unanticipated fluctuations in income, possibly preventing the distress sale of income-generating assets (such as cattle) at knockdown prices during recessions
- They improve access to other financial services, including insurance, while enabling the client to build up a financial history
Developing countries face two key challenges in improving access to formal saving for the poor: first, how to improve overall access to savings; and second, how to improve access to savings for the poorest people.
Physical remoteness and the high running costs of banks are major constraints on getting poor people access to a bank account
In general, we have much more data about the first challenge than the second, yet both are important for poverty reduction and economic growth. We must ensure that any financial development in the developing world includes the poor as well as the better off. But the objective of getting the poorest access to a bank account faces two major constraints: physical remoteness; and the high running costs of banks.
The challenge of physical remoteness is considerable: even those banks committed to widening access to savings to the poor do not find it economic to serve rural areas with low population densities. The case of Kenya is typical: while high-density poor areas such as the outskirts of Nairobi are well served by banks, sparsely populated rural areas typically are not – and this is where some of the poorest live.
The high running costs faced by banks mean that account charges are often prohibitive for most poor families. In Zambia, for example, the middle 60% of the population by income earns $85 to $100 a month, which is barely enough to ensure food security for a family of five. But most bank charges would be 10% of family income, which is prohibitively high.
Key drivers of improved access to savings for poor people are appropriate financial infrastructure and good access to institutions
These high charges are a direct result of the high running costs of banks, which in turn are due to a heavy regulatory burden and inefficient operations. In developed countries with efficient banking systems, the ratio of operating costs to assets is typically 1.5% to 3%. But in many developing countries, the ratio exceeds 5%, and in some parts of Africa, it is higher than 10%.
What can be done? The key drivers of improved access to savings for poor people are appropriate financial infrastructure and good access to institutions. In many countries, the development of financial infrastructure is impeded by uncertainty over the meaning and enforcement of regulation. And banks need to take advantage of benign conditions (where they exist) to serve the poor. This need not be direct: Barclays has created arrangements with local financial agents in Ghana (called susu collectors) and so indirectly provides banking services to many poor people.
International institutions can also help the development of banking services for the poor. But the policy prescription depends on the level of financial development. In countries with well-developed financial infrastructure, working with existing banks may help widen access to the poor. In countries with poor financial infrastructure, it is difficult to make significant progress. Supporting advocates of reform may make a greater contribution to widening access to bank accounts than direct commercial intervention.
- "Increasing the Number of Deposit Accounts: A White Paper for Discussion," by Alan Roe, Robert Stone, and Aby Carpio, was written for the Gates Foundation.
- Weblink: http://www2.warwick.ac.uk/go/eri/bulletin/2007-08-3/roe/opm.pdf
- Alan Roe is director and principal economist of Oxford Policy Management. Now retired from Warwick, he is associate fellow in the Department of Economics.
- Robert Stone and Aby Carpio are consultants at Oxford Policy Management.