51757 FINANCIAL INFRASTRUCTURE POLICY AND RESEARCH SERIES F I NA NC I A L INFRASTRUCTURE Building Access Through Transparent and Stable Financial Systems © 2009 The International Bank for Reconstruction and Development The World Bank 1818 H Street NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. 1 2 3 4 08 07 06 05 A publication of the World Bank and the International Finance Corporation. Financial Infrastructure is a joint World Bank and International Finance Corporation (IFC). It was prepared by Margaret Miller, Nataliya Mylenko and Shalini Sankaranarayanan. Input on the document was provided by Michael Klein, Simeon Djankov, Peer Stein, and Massimo Cirasino. The team would also like to thank the following current and former World Bank Group colleagues for their insightful comments, guidance and support in writing this piece: Alejandro S. Alvarez de la Campa, Alison Harwood, Anjali Kumar, Asli Demirguc-Kunt, Bikki Randhawa, Carlo Corazza, Catherine Anne Hickey, Consolate K. Rusagara, Everett Wohlers, Gregory Watson, Ketut Ariada Kusuma, Jose Antonio Garcia Garcia Luna, Neil Gregory, Roberto Rocha, Sevi Simavi, Tony Lythgoe, and Thorsten Beck. Book cover design/ production by Aichin Lim Jones and Michele de la Menardiere. Interior & graphs design/production by Aichin Lim Jones and James Quigley. This volume is a product of the staff of the World Bank Group. The findings, interpretations and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. 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FOREWORD i Contents Foreword Overview 1 The Reach of Financial Infrastructure 4 Measuring Financial Infrastructure 6 Financial System Soundness and Financial Infrastructure 8 Financial Market Depth and Financial Infrastructure 9 Efficiency of Financial Services and Financial Infrastructure 10 Access to Financial Services and Financial Infrastructure 12 Financial Infrastructure and the Crisis 14 How to Reform 15 Data Notes 19 References and Suggested Bibilography 21 ii FINANCIAL INFRASTRUCTURE Foreword How do financial institutions process Stable Financial Systems draws largely on bureaus, enforcement of collateral and payments, check a potential borrower's the Bank Group's efforts in the follow- functioning payment, securities settle- past experiences with credit or evaluate ing key areas: payment and securities ment, and remittance systems, often the suitability of a security interest to be settlement systems, remittances, credit do not exist or are underdeveloped in used for a loan? For many consumers in reporting, and secured transactions and emerging markets. These key elements the financial marketplace, the answers collateral registries. It defines the space, are vital to facilitating greater access to these questions are taken for granted, and presents a literature review, an esti- to finance, improving transparency just part of the "black box" of tools and mate of the size of the market, develops and governance, as well as safeguard- technologies used by lenders as they an index for benchmarking financial ing financial stability in global financial transfer funds between institutions or infrastructure, and discusses the impli- markets. decide on credit applications. In this cations of financial infrastructure for "black box" are the different elements of access, transparency, better governance a country's financial infrastructure. and stability in financial markets. This The World Bank Group is a leader in report is aimed at policy makers, regula- financial infrastructure development in tors, practitioners, academics as well as emerging markets, including payment other interested parties. systems and remittances, credit report- Financial Infrastructure broadly ing and secured lending. Moreover, the defined comprises the underlying foun- Bank Group is intensifying its commit- dation for a country's financial system. ment to promote and disseminate the It includes all institutions, information, policy and research debate on these and technologies, rules and standards that other topics within the scope of finan- enable financial intermediation. Poor cial infrastructure, including corporate financial infrastructure in many devel- governance, auditing and accounting oping countries poses a considerable standards and practices, and financial constraint upon financial institutions literacy. to expand their offering of financial ser- Penelope J. Brook For this purpose, the Financial vices ­ credit, savings and payment ser- ActingVice President Infrastructure Series was launched in vices ­ to underserved segments of the Financial & Private Sector Development mid-2008 to host original contributions population and the economy. It further World Bank Group in the form of policy notes, studies, and creates risks for the financial system as a essays led by World Bank Group experts, whole, as poor payment and settlement as well as initiatives carried out in coop- systems may exacerbate financial crises, eration with or by other experts and rel- while the absence of credit bureaus in evant institutions in the various fields of conjunction with strong credit growth Peer Stein financial infrastructure. may lead to one. Key financial infra- Manager The report, Financial Infrastructure. structure elements that every devel- Access to Finance Advisory Building Access Through Transparent and oped market can rely on, such as credit International Finance Corporation OVERVIEW 1 Overview Financial Infrastructure (FI) is a core ing today and promise to lead the way in FIGURE 1 part of all financial systems. The qual- defining the landscape of financial mar- ity of financial infrastructure deter- kets going forward. These innovations mines the efficiency of intermediation, usher in new benefits through increased Market the ability of lenders to evaluate risk and access points that make products and Infrastructure of borrowers to obtain credit, insurance services more affordable and available to and other financial products at com- all. Along with the benefits are the inher- Bank petitive terms. Strengthening financial ent risks involved with the development Bank B infrastructure takes time, resources and of new products and delivery chan- A political will, however, and so important nels, some of which have culminated in differences persist across countries. today's crisis, and the inherent need for Bank C Access to finance is the result of a adequate regulation and oversight. complex interplay of different financial intermediaries, the right kinds of finan- Credit Bureaus cial infrastructure, and a sound legal In the Philippines, just 5% of the popu- and regulatory framework. Expanding lation is included in the private credit access to finance and financial services bureau. The corresponding figures for to those at the bottom of the pyramid India and the Russian Federation are entails a two-pronged strategy ­ (i) double that of the Philippines--10%-- firstly that of creating and improving but still quite low. Credit bureau cov- the different financial infrastructure ele- erage is substantially higher, however, ments, such as credit bureaus, payment in some developing countries including and securities settlement systems, remit- Slovakia (40%), South Africa (65%), tances and collateral registries, as well as Mexico (71%), El Salvador (83%) and Credit bureaus, collateral registries, and pay- creating an enabling legal and regulatory Argentina (100%). While Argentina's ment, remittance and securities settlement framework to allow the proper function- full coverage of the population is systems are all vital parts of a country's finan- ing of these various financial infrastruc- unusual for developing countries, it cial infrastructure. When financial infrastruc- ture elements; and (ii) working with is not unusual for developed ones. ture is available, efficient and reliable, the the various financial institutions them- Australia, Canada, Iceland, Ireland, cost of financial intermediation falls. Financial selves (retail/SME banks, microfinance, New Zealand, Norway, Sweden, the products and services become accessible to housing, leasing), and developing insti- U.K., and the U.S. all have private credit greater numbers of citizens and lenders and tutional capacity within. Today's finan- bureau systems which cover their entire investors have greater confidence in their abil- cial market economy abounds with populations.1 ity to evaluate and guard against risk. innovations in both products and deliv- ery channels that defy the traditional Definition of financial infrastructure boundaries within which financial mar- The underlying foundation for the financial kets operated. Innovations in branchless system including the institutions, information, banking, mobile banking, and corre- technologies and rules and standards which spondent banking models, are all thriv- enable financial intermediation. 2 FINANCIAL INFRASTRUCTURE Payment, Remittance and Collateral Financial Infrastructure and the Securities Settlement Systems The ability of lenders to use movable col- Current Crisis The development of payment sys- lateral as security for a loan also depends Financial infrastructure can help to tems infrastructure also varies greatly on the country. Data from Doing reduce risk and increase efficiency in between countries. Large value (typi- Business show that borrowers can, at financial markets, but it can also some- cally inter-bank) payments handled on least theoretically, use movable collat- times contribute to situations where real time gross settlement (RTGS) pay- eral to secure a loan while retaining pos- excessive risks are taken. This seems to ment systems are typically many multi- session of the assets in most countries have been the case in the current finan- ples of GDP in developed countries. In (170/181). A much smaller percentage, cial crisis. Think of FI as the system of the U.K. the multiple is 91 times GDP, however, have the requisite legal frame- roads upon which financial intermedia- in France 75, in Japan 50 and in the work and functioning modern collat- tion occurs. Better roads reduce the time U.S. 43. These figures plummet for most eral registries that are necessary to make and cost of travel but they also increase developing countries with many below lending against movables truly viable for the potential speed, which has inherent 10 times GDP and some around one creditors, and most of these are found in risks. For example, fixed collateral can including Bolivia (1.2 times), Georgia developed economies. Of the 80 coun- contribute to a "leverage cycle" where (1.4) and Lesotho (0.9). Other payment tries with the least developed legal rights assets are used to increase lending which system indicators show similar diver- index in Doing Business, which relates increases asset prices, causing a bubble. gence across countries including avail- to the use of collateral, only 10 have a Credit bureau data and other financial ability of ATMs and POS terminals and unified national registry organized by information have made possible increas- numbers of payment cards in circula- asset type and borrower's name or iden- ingly complex models of consumer tion.2 Payment system development and tification number. Fewer than half of behavior. These types of models were reforms also directly impact the effi- all countries (about 40%) give secured behind many of the derivative products ciency and cost of remittances. The cost creditors preference during bankrupt- which helped to create the current crisis. of sending remittances to Latin America, cies or reorganizations, and again most South Asia, and the Commonwealth of of these countries have more developed Financial Infrastructure Reforms Independent States (CIS) countries falls economies. 5 Needed Today--Developing below the international average (10.5% "Rules of the Road" for US$200, and 6.5% for US$500), Why Financial Infrastructure The current crisis is not a reason to stop whereas costs to Africa are relatively Is Important building financial infrastructure. In fact, high.3 Why is financial infrastructure so the importance of transparency and Institutional arrangements for secu- important? Financial markets have disclosure, of a sound framework for rities settlement reflect the extent of a critical role in economic develop- secured lending, and of modern pay- capital market (and broader economic) ment and stability because they provide ment systems is especially great today development. Most high-income coun- an efficient mechanism for evaluat- as countries face severe economic chal- tries have depositories for securities ing risk and return to investment, and lenges. FI strengthens financial markets immobilization (83% globally, including then managing and allocating risk which in turn support business invest- all but one country in the EU), whereas and resources across the economy.6 ment and consumption expenditures for low-income countries, the figure Credit bureaus provide the informa- and help reignite economic growth. is only slightly more than half (57%). tion needed for accurate and timely risk The lessons of the current crisis, how- Wealthier countries with more devel- analysis, especially for consumer credit. ever, show the importance of establish- oped capital markets also tend to have Collateral systems provide information ing clear "rules of the road"--the legal one depository for all types of securi- to alert lenders to the potential exis- and regulatory framework--and over- ties (as compared to fragmented systems tence of prior interests in collateral and sight--for finance. Regulators have lim- with multiple depositories), have shorter give creditors who register assurance of ited resources and limited reach, so settlement cycles, and are more likely to their priority in the collateral, reducing market participants must also help to have a real-time interface with the pay- risk to lenders and facilitating access to enforce the traffic rules. Investors and ment system.4 credit. Payment, remittance and securi- borrowers need to be educated and ties settlement systems facilitate the dis- pro-active in seeking information on charge of financial obligations and the the products they buy. Technology can safe transfer of funds across distances also be enlisted to strengthen financial and institutions. infrastructure, but it must be used sen- sibly, not to justify--or hide--excessive risk-taking as was the case with some of the derivatives modeling. For exam- ple, technology solutions could include OVERVIEW 3 stability enhancing features such as risk NOTES monitoring and could promote diversifi- 1. Data on credit bureaus from the cation of assets and providers. "Getting Credit" section of Doing Business 2009 (World Bank). This Report 2. World Bank, Payment Systems Financial Infrastructure discusses the Worldwide: A Snapshot 2008. importance of credit bureaus, collat- 3. Cirasino and Watson 2008. eral frameworks, and payment, remit- 4. World Bank, Payment Systems tance, and securities settlement systems Worldwide: A Snapshot 2008. for financial intermediation. However, 5. Data on collateral registries and legal this report does not touch on all ele- rights from the "Getting Credit" section ments of financial infrastructure. Some of Doing Business 2009 (World Bank). important sources of financial informa- 6. Demirguç-Kunt and Levine 2008. tion are not discussed, such as credit rating agencies, business credit reports, and corporate registries. Other impor- tant omissions include corporate gov- ernance and auditing and accounting practices and standards. As more data become available, this analysis will be able to be extended to a broader spec- trum of financial infrastructure. The elements of financial infrastruc- ture offered here are typically out of view but support a majority of financial transactions. Literally billions of peo- ple are affected as they interact with the financial system, sending remittances, requesting a loan or opening a savings account. Financial Infrastructure pro- vides estimates of number of consumers affected and transactions value for credit bureaus, payment systems and remit- tances. The report also presents an FI Index for benchmarking progress. The FI Index also includes elements of the legal framework and is used to evaluate the relationship between financial infra- structure and development goals such as stability, depth, efficiency, and access for financial markets. Finally, the report looks at financial infrastructure in the context of the current crisis, to better understand the reform priorities going forward. 4 FINANCIAL INFRASTRUCTURE The Reach FIGURE 2 Total potential nancing volumes to be supported in emerging markets by nancial infrastructure of Financial 155,000 2007 Emerging Market GDP 154,195 Infrastructure = $14.29 trillion Figure 1. Total potential financing volumes to be supported in emerging markets by financial 89,350 US$ billions 6,000 5,000 4,000 64,845 3,000 2,068 2,000 99 1,000 1,256 384 285 0 812 Credit Remittances Domestic bureaus payments Total current nancing volume Total potential nancing volume Financial infrastructure supports every it is not possible to provide a precise (World Bank) and the IFC's lending port- formal financial transaction from pay- measure. folio. These "back of the envelope" calcu- ing a bill, to buying a house, to saving for Estimates of financial infrastruc- lations, presented here, are based on raw retirement. How significant is financial ture impact have been developed here data from these recent surveys and, when infrastructure in terms of transaction based on data from several sources available, from empirical research on the volume and number of people affected? including the Doing Business project impact of financial infrastructure. For Unfortunately there are no cross-coun- at the World Bank, the Global Payment example, the estimate of credit bureau try comprehensive data available on all Systems Survey (also World Bank), the impact uses an estimate of reductions elements of financial infrastructure so Remittance Prices Worldwide Database in defaults taken from empirical studies using actual credit bureau data.7 Studies of financial infrastructure impact Financial infrastructure is a part of many financial sector discussed here (credit bureaus and collateral frameworks) transactions as the above estimates show on a global level and financial development and growth. They also include for emerging markets. Demonstrating the reach of finan- legal and regulatory variables related to contract enforce- cial infrastructure is just one step, however, in assessing ment and bankruptcy, as well as measures of investor pro- its contribution to financial markets. Previous research has tection or corporate governance in their analysis. used country-specific data or, in some cases cross-country The authors take a similar approach to Rajan and data, to analyze the impact of specific types of financial Zingales (1998) and evaluate whether firms that depend infrastructure (credit bureaus, payment systems, etc.) on more on external finance are more prevalent in countries access to credit, defaults or economic growth. Relatively with better financial infrastructure. Their findings indi- few studies, however, have taken a comprehensive view cate that financial infrastructure significantly impacts of financial infrastructure and its role in financial markets. both value-added and productivity growth by increasing One paper which addresses financial infrastructure finance for these firms. They find that approximately one more broadly is by Bossone, Mahajan and Zahir (2003). percentage point of an industry's annual growth rate can The authors find that in environments with weak FI, banks be explained by financial development--a sizeable figure substitute for some of its roles such as information gath- given that annual growth rates are only a few percentage ering, monitoring and contract enforcement. In exchange points (2­4%) on average. they collect quasi-monopoly rents from captive custom- This brief extends the analysis in de Serres, et al., and ers who find it difficult to reveal their quality to other uses the same variables from Doing Business. However, it lenders and funders. As financial infrastructure develops also creates an index to capture the general level of finan- it promotes financial market growth and competition cial infrastructure in a country. It then relates the level of which leads to more efficient capital allocation and more financial infrastructure (using the index) with key indica- options for consumers. tors of financial sector performance such as default rates, The methodology used in this document is based interest rate spreads, and domestic credit to GDP. As such, upon de Serres, Kobayakawa, Slok and Vartia (2006). The it extends the earlier analysis to a wider range of financial authors use data from Doing Business to demonstrate the performance measures. relationship between elements of financial infrastructure THE REACH OF FINANCIAL INFRASTRUCTURE 5 FIGURE 3 Total numbers of people a ected in emerging markets 3.50 2007 Emerging Market Population 2.97 3.00 = 5.5 billion 2.50 Billions 2.00 1.87 1.50 1.01 1.00 0.77 0.06 0.61 1.10 0.50 0.71 0.40 0.00 Credit Remittances Domestic bureaus payments Number of people currently a ected Potential number of people a ected The estimates in figure 2 show the this, figure 3 shows the current reach of tremendous size of financing and trans- financial infrastructure, including about actions volumes supported by financial 390 million people in emerging markets infrastructure. The largest figure by far who are covered by credit bureaus, over is that for payment systems, which refers 700 million who are affected by remit- to retail transactions. tances, and over 1 billion by payment In emerging markets, payments systems. Again, estimates of the number infrastructure supports flows of more of people in emerging markets who have than US$64 trillion annually--nearly the potential to be positively affected 6 times combined GDP in these mar- are based on expected growth of finan- kets--and this figure could more than cial infrastructure where it does not double in the medium term. The values currently exist, and expected increases associated with the other types of FI are in the reach of existing financial infra- of a different magnitude, because they structure. Future growth is likely to relate to credit provided, not transac- increase these figures in some cases by tion volumes, or to a specific segments 100% or more. Financial infrastructure of the payment system, for remit- is likely to support financial transac- tances. These figures are sizeable: credit tions for a majority of the world's popu- bureaus, US$812 billion and remit- lation in the future. tances, US$285 billion. While remit- tances are projected to decline in the NOTES near term, financing volumes are pro- 7. Credit bureau impact data based in jected to grow in the medium to long- part from findings reported in Barron term across all FI types. and Staten (2003). Please see Data Notes Financial infrastructure is underde- for a more detailed explanation of the veloped in many emerging markets, and methodology. non-existent in others. Potential financ- ing volumes shown in figure 2 are the estimated amount of credit or transac- tions that will be supported by financial infrastructure if it is expanded to emerg- ing markets where it does not currently exist or if the efficiency of existing finan- cial infrastructure is further improved. The estimates are developed for the medium to long-term (a five to ten-year horizon). The impact of financial infrastruc- ture is also significant in terms of the number of people affected. To illustrate 6 FINANCIAL INFRASTRUCTURE Measuring Financial Infrastructure FIGURE 4 FI Index components Contract Access Investor Bankruptcy Enforcement to Credit Protection Procedures Figure 3.Financial infrastructure index · Coverage of public/ · Procedural efficiency · Extent of disclosure · Time efficiency of of the judicial system private registry · Extent of director bankruptcy · Time efficiency of · Credit information liability procedures dispute resolution scope · Ease of shareholder · Cost efficiency of · Cost efficiency of · Legal rights of suits bankruptcy court procedures borrowers and procedures secured transactions · Recovery rate infrastructure An adequate legal framework, efficient lution of a commercial dispute it serves aspects of financial infrastructure such enforcement mechanisms, availability of as a good proxy for enforcing credi- as payment systems, the status of audit- credit information and developed pay- tor rights in cases of non-payment. The ing and accounting and securities mar- ment systems all contribute to the sta- access to credit component measures the ket infrastructure. bility, depth, efficiency, and access in availability and scope of credit informa- The FI Index numbers provide a a financial system. This report devel- tion and the degree to which collateral good first look at the status of financial ops a composite indicator to estimate and bankruptcy laws protect the rights infrastructure in countries and regions the overall role of financial infrastruc- of borrowers and lenders. The investor around the world (figure 5). Interestingly, ture across countries using data avail- protection (IP) component (following emerging market regions do not show a able in the World Bank Doing Business the Doing Business lead we use IP here significant variation in the value of the database. instead of corporate governance but FI Index. Compared to the high income Consistent data on the specific ele- the issues measured are the same) pro- developed countries, all emerging mar- ments of financial infrastructure for a vides measures for the extent of disclo- kets fall into the .45­.55 band with large number of countries are limited. sure, extent of director liability, and the Eastern Europe and Central Asia hav- Definitions and methodology for the extent to which shareholders can chal- ing the highest value of the Index and assessment of various aspects of finan- lenge transactions, including minor- Sub-Saharan Africa the lowest. However cial infrastructure is also an area open ity shareholder rights. This indicator most differences in the regional averages for research. As a first step, this report is a good proxy for the corporate gov- are statistically insignificant. A deeper builds upon work done by de Serres, ernance aspect of financial infrastruc- look into the components of the Index Kobayakawa, Slok, and Varita (2006), ture. The last element is bankruptcy reveals variation among the countries. and uses indicators of financial infra- procedures reflecting the time, cost, The larger differences are found for the structure already collected in the Doing and outcomes of bankruptcy proceed- access to finance component, but even Business report to compile a Financial ings. As more data become available the here, the difference is only significant Infrastructure Index (FI Index) as shown index can be expanded to include other between the top two regions (Eastern in figure 4.8 While these indicators are limited in their ability to measure the full scale of financial infrastructure Testing the impact of financial infrastructure using the FI Index development and omit important areas such as payment systems, their main The next four sections use the FI transmission mechanisms behind advantage is in providing a consistent Index to analyze the impact of finan- these results and the way that spe- methodology and availability of indica- cial infrastructure on stability, depth, cific types of financial infrastructure tors for a large number of countries. efficiency and access, using proxy contribute to the observed relation- In this framework, the contract variables for these policy objectives ships in the FI Index regressions. enforcement element measures the effi- such as percent of non-perform- When available, empirical studies of ciency of the judicial system in resolv- ing loans in the financial system for financial infrastructure components ing a commercial dispute. It covers the stability or domestic credit as a per- such as credit bureaus, collateral, number of procedures, time, and cost centage of GDP for depth. Each sec- etc., are cited. of resolving a dispute. While the indi- tion also discusses the potential cator is based on a case study of a reso- MEASURING FINANCIAL INFRASTRUCTURE 7 FIGURE 5 Europe and Central Asia and Latin FI Index components by region America and the Caribbean) as opposed to the other emerging market regions. Sub-Saharan Africa The two indicators with more varia- tion--credit information and creditor South Asia rights and bankruptcy procedures--are also the two indicators which are more Middle East focused on outcomes. While the Investor and North Africa Protection indicator relies fully on the Latin American assessment of existing legal provisions, and the Caribbean and contract enforcement combines legal provisions with outcomes (time and High-income OECD cost), credit information and bankruptcy are based on the outcomes of an imple- Europe and mented framework. The lack of varia- Central Asia tion that is found then is attributable East Asia in part to the anecdotal evidence that and the Paci c while many countries may have good 0.00 0.20 0.40 0.60 0.80 1.00 laws on the books these laws may not be effectively enforced. To be better able to FI Index Contract enforcement analyze the actual level of financial infra- Investor protection Access to credit structure on development, more data collection on outcomes is necessary. Bankruptcy proceedures NOTES 8. A more detailed discussion of the methodology used to create the Financial Infrastructure Index can be found in the Data Notes section at the end of this publication. 8 FINANCIAL INFRASTRUCTURE Financial FIGURE 6 Financial system soundness and nancial infrastructure System 14.0 12.0 12.5 Soundness 10.0 10.0 and Financial NPL (percent) 8.0 7.8 Infrastructure 6.0 Figure 6. Financial soundness and financial infrastructure 4.6 4.0 2.4 2.0 0.0 1 2 3 4 5 FI Index quintiles The level of development of financial tion of collateral arrangements. When McIntosh and Wydick (2007) related infrastructure is closely correlated with the payment system functions prop- to the introduction of credit reporting financial system soundness as measured erly, risk sharing among agents is more in the Guatemalan microfinance sec- by percent of non-performing loans equitable, financial resources are distrib- tor found that default rates fell at one (NPLs) in the financial system (figure uted more efficiently, and there is greater institution by 1­3 percentage points in 6) using NPL data through 2006. By confidence in the financial system--and the six months after operations of the improving the security and efficiency of in the very use of money. bureau began. This is significant and in the system and protecting investors' and Credit information systems and col- a competitive market, this would corre- creditors' rights, financial infrastructure lateral registries reduce information spond to a reduction in interest rates of promotes stability. And yet, the current asymmetries in the system. By pooling more than 2.5%. financial crisis demonstrates that finan- data in an efficient institutional mech- Other areas of financial infrastruc- cial infrastructure alone is not sufficient anism they also support efficient credit ture are also important for financial sec- to create stability. In fact, as will be dis- allocation and strengthen risk manage- tor stability and soundness. Adequate cussed later in this brief in the section ment capabilities. Ideally, in modern creditor rights and investor protections on financial infrastructure and the cri- financial markets such systems should build confidence among creditors and sis, by enabling financial intermedia- serve three main functions: (i) to sup- investors in stable times and allow for tion financial infrastructure may have port credit underwriting and portfolio effective resolution of disputes following contributed, in some cases, to excessive risk management by financial institu- a crisis. Better corporate governance has risk taking by financial market partici- tions; (ii) to serve as a basis for model also been linked to less volatility in stock pants. The rest of this section will, how- development/scoring, including scores returns and higher average share prices. ever, discuss the ways in which financial eventually used in securitizing assets; infrastructure supports stability in finan- and (iii) to provide regulators with the cial markets. information necessary for monitoring Payment and securities settlement systemic risks including for capital ade- systems in particular have a strong bear- quacy standards under Basle II. ing on financial stability. A sound pay- There are numerous studies using ment system can mitigate financial credit bureau data which provide evi- crises by reducing or eliminating settle- dence of the effectiveness of information ment risks related to financial markets sharing. For example, Barron and Staten transactions, in particular credit, liquid- (2003) show that comprehensive credit ity and operational risks. The devel- bureau data can reduce default rates sig- opment of real time gross settlement nificantly. In their study, default rates fell (RTGS) systems, which eliminate coun- by more than 30% when credit bureau terparty risk, is one of the key responses data included both bank and retail pay- to the growing awareness of the need for ment histories and both positive and sound risk management. negative information on borrowers. Equally important is the soundness There is also evidence that credit of the legal framework, in particular as it information promotes stability in the concerns settlement finality and protec- microfinance market. A study by Luoto, FINANCIAL MARKET DEPTH AND FINANCIAL INFRASTRUCTURE 9 Financial FIGURE 7 Private credit to GDP and nancial infrastructure Market 140 124 120 Depth and Private credit to GDP (percent) 100 Financial 80 56 Infrastructure Figure 7. Private credit to GDP and financial 60 infrastructure 45 40 37 20 17 0 1 2 3 4 5 FI Index quintiles Better financial infrastructure is closely estimates that the private credit to GDP correlated with deeper financial mar- ratio is higher three to five years after the kets, even after controlling for income establishment of a credit registry and the per capita and other country-level char- difference is statistically significant. acteristics (figure 7). Countries with In the case of collateral registries, weak financial infrastructure tend to they eliminate information asymme- have lower levels of credit as measured tries about collateral and thereby reduce by the ratio of private credit to GDP. the risk of lending secured by movables Each element of financial infrastructure of all classes, including those not avail- has a potential to contribute to the deep- able in traditional systems. By making ening of the financial markets. more effective use of existing classes of In the case of payment systems and collateral and opening new classes of securities clearing and settlement ser- collateral to use by lenders, collateral vices, more modern infrastructure can registries promote financial deepening. improve the ability of the financial sys- tem to mobilize savings and increase the pool of assets available for invest- ment. Moreover, new technologies, such as mobile banking, provide opportuni- ties to capture funds digitally which can contribute to the monetary base in the economy. Credit bureaus promote deeper financial systems by helping to over- come adverse selection and moral haz- ard related to asymmetric information in credit markets. As a result of cost sav- ings through more efficient and accu- rate credit analysis and lower expected losses, lenders can increase their credit extension. A recent study by Djankov, et. al. (2007) using data from Doing Business analyzes the relationship between infor- mation sharing and credit in 129 coun- tries. It finds that the existence of credit registries is positively correlated with the depth of the financial market measured by private credit to GDP. The study also 10 FINANCIAL INFRASTRUCTURE Efficiency FIGURE 8 Interest rate spread and nancial infrastructure of Financial 14.0 12.2 12.0 Services and 10.0 Interest rate spread Financial 8.0 6.8 8.2 7.1 Infrastructure Figure 7. Private credit to GDP and 6.0 4.0 3.6 2.0 0.0 1 2 3 4 5 FI Index quintiles Financial infrastructure is critical for the with these data can automate or semi- credit evaluation for easily-valued assets efficient provision of financial services. automate certain market segments (such such as new cars, computer equipment, The efficiency issue is especially evi- as credit cards and small business loans) and even commodities. In the case of dent in the case of payments, where the and can substantially reduce other pro- non-payment, collateral registries and per-transaction cost is relatively easy to cedures such as verifying identification, the systems which support them can compare and savings from moderniza- securing co-signers, and visiting homes help liquidate the asset and reduce loan tion efforts can be calculated. Efficiency or businesses, which reduces both the losses. Similarly, good corporate gover- improvements from the introduction of time and cost of extending credit. In nance and strong accounting and audit- credit bureaus and/or credit scoring are the case of collateral registries, they can ing standards promote more efficient also highly significant. Lenders armed also increase efficiency by facilitating evaluation of companies. Improvements in payments infra- structure can result in significant cost FIGURE 9 savings and efficiency improvements. The potential for lower transaction costs using e cient nancial infrastructure Taking a sample of 12 European coun- Financial tries, Humphrey, Willesson, Bergendhal infrastructure 60 helps reduce and Lindblom (2003) estimate that transaction costs bank operating costs fell by about 24% Costs per $100 lent or sent (USD)* 50 between 1987 and 1999 due to payment 40 system reforms, resulting in savings of US$32 billion. Looking at the U.S. mar- 30 90% ket, Bauer and Hancock (1995) and 20 Figure 9. Financial Bauer and Ferrier (1996) estimate that 90% technological change was responsible 10 80% for a reduction of about 10% per year 90% 0 in the cost of automatic clearing house Unsecured micro, Loans securitized Remittances Domestic payments (ACH) transfers since 1989 and for an retail and small with moveable business loans collateral annual reduction of about 8% for annual Least e cient system Most e cient system Total potential reduction in costs Fedwire processing costs in the early 1990s. These figures again correspond to Notes: The chart serves to illustrate the range of possible reductions in transactions costs with the use of more e cient massive savings for the system. nancial infrastructure. These ranges are meant to be indicative only. Actual cost reductions are contingent World Bank estimates suggest reduc- ultimately on the e ciency of the system and the level of competition in the market. All costs are per $100 lent or sent, except for remittance costs, which are per $200 sent. tions in transactions costs of nearly 80 Credit Bureaus: Illustrates the range of costs associated with unsecured lending by micro and small business lenders percent when starting from the highest and the potential for reduction from using credit reporting technologies. The upper limit indicates average lending costs for micro nance institutions based on 2006 MIX Market data for 798 MFIs in 96 countries. Lower limit is based on cost margins for credit evaluations, col- average small business lending costs in developed markets. Graph does not suggest that the entire reduction in costs is attributable to the use of credit bureaus alone. lateralizing loans, remittances, and pay- Collateral: Lending costs on secured credit and leases. Based on World Bank expert estimates. ments. Figure 9 presents these data. For Remittances: Cost of sending remittances to remitter's home country. Estimates re ect the costs for sending $200 in example, one of the least efficient remit- the most expensive corridor (South Africa to Zambia) and least expensive corridor (Saudi Arabia to Pakistan). Based on the World Bank Remittance Price Database. tance corridors, according to the World Domestic payments: Cost of sending payments in country. Based on World Bank expert estimates. Bank Remittance Price Website9 is South EFFICIENCY OF FINANCIAL SERVICES AND FINANCIAL INFRASTRUCTURE 11 Africa to Zambia which costs US$49.81 per US$200 sent. Compare this to send- ing money to Pakistan from nearby Saudi Arabia where the fee is only US$5.00 per US$200--a difference of 90%. Overall, better financial infrastruc- ture, such as efficient bankruptcy and contract enforcement mechanisms and more available credit information, reduce intermediation costs, stimu- late competition, and lead to narrowing interest spreads.10 As figure 8 shows, countries with more developed finan- cial infrastructure as measured by the FI Index exhibit higher levels of inter- mediation efficiency as demonstrated by lower interest rate spreads. NOTES 9. http://remittanceprices.worldbank. org/ 10. See Beck, Demirguç-Kunt, and Maksimovic (2004). The authors show that efficient credit registries reduce the impact of concentration in banking and increase access to finance. 12 FINANCIAL INFRASTRUCTURE Access to FIGURE 10 Access to nancial services and nancial infrastructure Financial 1400 1148 Number of bank accounts per 100 adults 1200 Services and 1000 1042 Financial 800 Infrastructure Figure 10. Access to finance and financial 600 449 330 400 200 113 0 1 2 3 4 5 FI Index quintiles Financial infrastructure is also critical for the costs of financial intermediation fall, Another study by Love and Mylenko improving access to finance. First, finan- smaller loans and account sizes become (2003) uses firm-level information to cial infrastructure provides the frame- more attractive, allowing greater pene- assess the correlations between the work for growth of the financial system. tration of rural and low income commu- existence of credit registries and use For example, innovations in payment nities by credit providers and financial of finance, and perceptions of financ- systems can help reach customers where services firms. ing constraints by borrowers. Using bank branches do not exist, as with Credit bureaus, by reducing infor- information on 5,000 firms in 51 coun- mobile banking and other point-of-sale mation asymmetries and stimulating tries the study finds that firms are less (POS) arrangements. Since the number competition in the market, are also likely to report access to finance as a of people with cell phones in many econ- supporting improved access to finance major problem in countries with credit omies far exceeds the number of those for good borrowers. Firms report fewer bureaus. The study also finds that usage with bank accounts, this new distribution obstacles to financing where credit of credit is higher in countries with mechanism offers great potential. bureaus are more developed. Galindo credit bureaus (see figure 11). Financial infrastructure can also and Miller (2001) and Galindo and Collateral registries and collateral reduce transactions costs, allowing Schiantarelli (2002) find that firms reform have also been shown to improve private lenders to serve more people, have improved access to finance where financial system performance, especially profitably. For example, strong credi- credit information is available. Credit access to finance for SMEs. For exam- tor rights reduce the time and expense information is also highly significant ple, in Romania in the five years after lenders face in dealing with delinquent as a predictor of the level of factoring secured transactions reform the number or defaulted loans, and credit bureaus in an economy (weighted for GDP) of annual filings increased from only 95 reduce the time and cost required for and much stronger than creditor rights in 2000 to 359,000 in 2005. While some loan processing and due diligence. As (Klapper 2006). of these were related to the 177,000 borrowers in the formal financial sys- tem,11 many more were obtaining credit FIGURE 11 from non-bank lenders who further opened access to finance--especially Probability of obtaining a bank loan for small firms. Research on the financ- ing patterns of Spanish SMEs showed 49% 40% that firms pledging collateral had bet- ter access to long-term bank loans and 28% young firms (which lacked credit his- Figure 11. Access to finance is easier in 27% tories) used collateral pledges to signal their quality. One of the most dramatic cases of improvement of financial sys- tem performance is the case of the registry for security in accounts receiv- Without With Without With able in the People's Republic of China. credit bureau credit bureau credit bureau credit bureau According to reports from the People's Love and Mylenko (2003). Bank of China, twenty months after the ACCESS TO FINANCIAL SERVICES AND FINANCIAL INFRASTRUCTURE 13 on-line registry began operation, there had been nearly 75,000 lending transac- tions using receivables as collateral reg- istered in the registry. These loans had a cumulative value of over 5 trillion Yuan (1 USD = 6.83 Yuan). Well over half of these transactions were made to SME borrowers. Nearly all middle and large lenders have developed receivables lend- ing products. The success of the regis- try has been so dramatic that it is now being expanded to include notices of finance leases, which amount to a vari- ation of secured lending. In general, in industrial countries borrowers with col- lateral get nine times the level of credit given their cash flow compared to bor- rowers without collateral. They also ben- efit from longer repayment periods (11 times longer) and significantly lower interest rates (50% lower).12,13 At the same time, it is important to keep in mind the larger economic con- text for financial services. For example, a recent World Bank study showed that a critical factor in becoming "banked" was having a salaried job and regu- lar income.14 Understanding the moti- vations for people to engage with the financial system or to use alternatives-- both formal and informal--is important for making progress toward financial inclusion. NOTES 11. Chaves, de la Peña, and Fleisig 2004. 12. Gonzalez, Lopez, and Saurina 2007. 13. Jimenez, Salas, and Saurina 2006. 14. World Bank Banking the Poor, 2008. 14 FINANCIAL INFRASTRUCTURE Financial Infrastructure and the Crisis The financial crisis facing the world has The efficiency of financial infrastruc- These insights should not reduce complex roots, but some lessons about ture related to contract enforcement enthusiasm for financial infrastructure. the causes are already emerging. Gaps and bankruptcy--the two legal/regula- However, they do present challenges for in regulation and oversight were a crit- tory variables in the FI Index--may also policy makers who seek to increase the ical factor in the crisis but are not our have contributed to a lax lending envi- "speed" and efficiency of their "FI roads" focus here. Rather, this section discusses ronment. If lenders believe that fore- while still protecting the safety of the the unintended role played by finan- closure is relatively quick and low-cost financial system. The final section on cial infrastructure in the development then they will be more willing to lend to reforms suggests ways to balance these of the crisis. The following section then riskier borrowers. This positively affects sometimes competing objectives. provides suggestions for financial infra- access to credit but at the same time structure reforms. increases the level of risk in the system. Financial infrastructure can help to When widespread failures occur and reduce risk and increase efficiency in asset prices (and demand) fall, lenders financial markets, but it can also some- can find themselves with illiquid assets times contribute to situations where and capital shortfalls. excessive risks are taken. This seems to Credit information and the empir- have been the case in the current finan- ical models based on these data also cial crisis. Earlier, financial infrastruc- played a part in the current crisis. In ture was compared to a system of roads some cases, such as "low-documenta- upon which financial intermediation tion" loans made to borrowers with little occurs. Better roads reduce the time and or no credit histories, the data (or lack cost of travel but they also increase the of them) in credit bureaus was ignored. potential speed so accidents, when they In other instances, however, there was happen, are more severe. overreliance on the ability of sophisti- The role of collateral, and especially cated empirical models to predict future fixed collateral, in the current crisis is risks. The very complexity of some of of particular importance. Fixed collat- these models also contributed to the cri- eral can contribute to a "leverage cycle" sis, as they obscured the risks lenders where assets are used to increase lending were taking and discouraged scrutiny by which in turn feeds back into increases professionals embarrassed to admit they in asset prices, causing a bubble. Also, didn't understand them. credit risks and the assets that are Finally, payment systems played a role designed to mitigate these risks are cor- in the extent of the current crisis by facil- related in a crisis, further adding to the itating the increasingly global and com- potential for loss when a default occurs. plex web of financial intermediation. HOW TO REFORM 15 How to Reform The reform agenda for financial infra- cial infrastructure. These were devel- l CPSS: New Developments in Clearing structure relates to a broad set of issues, oped based on proven best practices in and Settlement Arrangements for including responding to the financial countries with more developed financial OTC Derivatives crisis with adequate measures for super- infrastructure systems, and can often l CPSS: Cross-border Collateral vision and oversight, promoting the serve as a good sounding board for pol- Arrangements development of access to financial ser- icy makers and regulators looking to l United Nations Commission vices as measured by the number of peo- reform in their own countries. Some on International Trade Law ple served, the types and affordability of of the financial infrastructure areas, (UNCITRAL): Legislative Guide on products and services delivered and the such as payment, securities settlements, Secured Transactions types of delivery channels and technol- remittances, and secured transactions, Other areas of financial infrastruc- ogies leveraged. At a global level, the are fairly advanced in this regard, and ture, on the other hand, including credit reform agenda entails the development already have a wealth of standards and reporting, are yet to develop their own of various standards and guidelines for best practice guidelines to rely upon. set of standards. Reform efforts in the the different areas of financial infra- These provide useful guidance for policy area of financial infrastructure, going structure that do not currently have any makers and regulators looking to reform forward, require the development of specific standards and consistent appli- these key financial infrastructure areas standards for each of the key financial cation of standards in cases where they and include: infrastructure areas. do exist. At the country level, policy l Committee on Payment and makers and regulators need to pay heed Settlement Systems (CPSS): Core Regulation and oversight in to reforming individual components of Principles for Systemically Important response to the crisis financial infrastructure, such as credit Payment Systems (Large-value pay- The current crisis has focused attention reporting, remittances, and payment ment systems) on gaps and failures in regulation and systems, to meet global best practice l CPSS: Settlement risk in FX trans- oversight of financial markets. There standards. It is important to emphasize actions (on foreign exchange settle- is widespread agreement that more that this section is not advocating for the ment risks) effective oversight could have identi- development of new regulatory institu- l CPSS-International Organization of fied problems earlier and potentially tions in all instances, but more impor- Securities Commissions (IOSCO) reduced the extent of the current crisis. tantly, a more consistent application of Recommendations for Securities In broad terms, priorities for regulatory existing principles governing financial Settlement Systems reform for FI are the same as those for markets in general. l CPSS-IOSCO Recommendations for the financial sector as a whole: increas- The various issues for consideration Central Counterparties ing transparency and disclosure; limit- on the reform agenda are listed below: l CPSS: Central Bank Oversight of ing conflicts of interest and incentives Payment and Settlement Systems problems; and establishing authority for Developing global standards l CPSS-World Bank General Principles oversight of complex systems which may and guidelines for financial for International Remittance Services include unified supervision. infrastructure areas l CPSS: The Interdependencies of There are some valid questions, how- Various standards and guidelines have Payment and Settlement Systems ever, about the ability of regulations and already been developed over the course l CPSS: General Guidance for National regulators to stay ahead of innovation in of time to cover different areas of finan- Payment System Development the financial marketplace. Regulations 16 FINANCIAL INFRASTRUCTURE and oversight are a critical part of the and services to the underserved and part of lenders and financial services reform agenda but must be accompa- unbanked; providers, and potentially the devel- nied by other important changes in l As in other areas of regulation, opment of consumer education as a the system involving both providers ensuring proportionate policies on natural extension of financial ser- and consumers. These changes include financial integrity. For example, pro- vices and products. enhanced transparency and disclosure, portionate regulatory policies should l Educating the consumer. The onus strengthening business ethics and devel- aim to reduce the burden of reporting of creating responsible consumers oping financial capability in the popula- and compliance on smaller transac- lies in part on lenders and in great tion to create more informed and critical tions, and thereby ensure competi- part on the ultimate consumer him- financial consumers. tiveness in markets; or herself. Reforms to instill greater The crisis also provides a learning l Leveraging new technologies. The consumer awareness and education opportunity for even the most devel- most prominent example of a new have been instigated on the part of oped markets that have been shown to technology that has implications for the government in several coun- be no less susceptible to it. Past crises greater financial inclusion, is that tries, such as in Canada, Mexico, have taught us, however, to exercise cau- of mobile banking applications. In and the UK, through, for instance tion while advocating for new laws and some markets today, cell phones far school education, the development regulations that threaten to over burden outnumber the number of banks of national commissions on financial the financial sector and stifle innovation accounts. Policy makers and regula- education and awareness and other and the development of financial mar- tors should leverage this and other such activities. Given the sheer num- kets in general. In other words, regula- technologies as a means to expanding ber of consumers, reform efforts in tors and policy makers should strike a the number of access points to pro- this area should emphasize the devel- fine balance between the two competing vide financial products and services, opment of as many delivery channels objectives of oversight and supervision and thereby the reach of financial as possible for the education of the on the one hand, and making financial infrastructure. This includes putting consumer. services affordable and available to all on in place appropriate rules and over- the other hand. sight for agent banking, and level- Reforming the key Financial ing the playing field between bank Infrastructure areas Reforming access to financial and non-bank players, while at the services same time maintaining a high level Credit bureaus Ultimately, financial infrastructure in of operational security and sufficient Credit bureaus are critical elements any given country should aim to maxi- interoperability across systems and of financial infrastructure that serve mize the coverage of financial products networks; to reduce informational asymmetries and services in terms of the numbers of l Enabling bundling of financial ser- between lenders and borrowers. They people reached, and through efficiency vices. The practice of bundling pro- are only as useful as the level of detail of and reduced transactions costs pro- duces efficiencies through economies information, and quality of information mote the development of a wider range of scale and lowered transaction available in them. The key priorities for of client-focused and affordable prod- costs, which are passed on to the final reform in this area for emerging mar- ucts. Reforms on financial infrastruc- consumer. Policy makers and regula- kets, therefore, entail the development ture should keep in mind the need for tors should also emphasize the need of comprehensive credit reporting sys- simultaneous reform in existing systems for transparency and more disclosure tems with an emphasis on the following: that enable access to financial products on bundled financial services, which l Promoting the development of full- and services. relates to the promotion of responsi- file or positive and negative reporting; Keeping these broader objectives ble financial practices; l Enabling comprehensive credit in mind, from the perspective of pol- l Actively promoting more respon- reporting and the inclusion of data icy makers and regulators, reforming sible financial practices. In the fall- from financial and non-financial access to financial services include the out of the crisis, more emphasis is institutions, such as retailers, utili- following: being placed on responsible finance. ties, and telecoms; l Developing more inclusive legal and Responsible lending practices have l Coverage of retail, microfinance, and regulatory frameworks. Reforms already stimulated some of the dia- SME sectors; to existing credit reporting laws or logue on financial markets reform in l Strengthening prudential super- secured transactions frameworks, the more developed markets, like the vision capacity through the use of for instance, can enhance the infor- U.S. for instance, and will largely be credit information data; and mation base upon which lenders driven by the supervisory authori- l Encouraging the development of a make lending decisions, and expand ties. Reform in this area would entail financial education offering through the provision of financial products the provision of full disclosure on the bureaus themselves. HOW TO REFORM 17 Remittances l Strengthening of both organized introduction of e-money. With these The priorities for reform under remit- markets and central bank facilities new access points come new concerns tance services are to expand outreach for liquidity provision; as regulatory and supervisory authori- and the number of access points to con- l Settlement of securities transactions ties now have to look beyond their tra- sumers at affordable rates. This can be in a true delivery-versus-payment ditional regulatory perimeters and done by encouraging competition and basis; collaborate with other supervisory agen- leveling the playing field between bank l Settlement of foreign exchange trans- cies having a purview of other industries and non-bank providers of remittance actions in a payment-versus-pay- that are now involved in the business of services. Public policy makers and reg- ment basis (e.g. CLS Bank); providing financial services. Branchless ulators looking to reform remittance l Design of safe settlement mecha- banking, for instance, cuts across a services are often faced with conflict- nisms for financial derivatives (both number of regulatory domains and ing objectives of providing adequate exchange-traded and OTC); industries, and enforcement will only be safeguards against money laundering l Application of international stan- effective if there is greater coordination and terrorist financing activities, and dards for central counterparties; and between the various supervisory agen- the need to encourage more compe- l Design of better oversight and cies involved. In addition, regulators are tition, transparency and greater con- coordination mechanisms by the grappling with issues of providing ade- sumer choice. The General Principles authorities. quate consumer protection as these new on Remittances provide the general For a more in-depth review of what agents and technologies bring with them framework for public policy objectives can be done to reform the payment and a host of issues such as agent liability with respect to remittance services and settlement systems infrastructure in a issues, excessive service fees, inadequate can guide policy makers and regulators country, policy makers, and regulators or non-existent customer service, fraud- with respect to the key priority areas for can consult the numerous standards and ulent practices and others to name a few. reforms in this area (see Box below). best practice guidelines already estab- lished in this area. The World Bank Collateral Payment and securities settlement Group's Payment System web site hosts Reforms for collateral extend from the systems these and other related information. 16 establishment of a sound legal and reg- Reforms to payment and securities set- The realm of payment and settlement ulatory framework for collateral to the tlement systems traditionally begin with systems have expanded beyond tradi- creation of a unified collateral registry the development of a national payment tional access points and now involve system in a country. The legal frame- system strategy. Key priorities under new delivery channels such as branch- work for collateral should provide for this strategy would include: less banking, mobile banking and the the creation, perfection, and enforce- The General Principles and Related Roles 15 The General Principles on Remittances remittance services should be Governance and risk management are aimed at the public policy objec- encouraged. l General Principle 5. Remittance tives of achieving safe and efficient Legal and regulatory environment services should be supported by international remittance services. To appropriate governance and risk l General Principle 3. Remittance this end, the markets for the services management practices. services should be supported by should be contestable, transparent, a sound, predictable, nondiscrim- Roles of remittance service provid- accessible and sound. inatory, and proportionate legal ers and public authorities Transparency and consumer and regulatory framework in rel- l Role of remittance service pro- protection evant jurisdictions. viders. Remittance service pro- l General Principle 1. The market Market structure and competition viders should participate actively for remittance services should be in the implementation of the l General Principle 4. Competitive transparent and have adequate General Principles. market conditions, including consumer protection. l Role of public authorities. Public appropriate access to domestic Payment system infrastructure payment infrastructures, should authorities should evaluate what l General Principle 2. Improve- be fostered in the remittance action to take to achieve the ments to payment system infra- industry. public policy objectives through structure that have the potential implementation of the General to increase the efficiency of Principles. 18 FINANCIAL INFRASTRUCTURE ment of security interests. In particular these entail: l Creation of a security interest by simple agreement of the parties ("creation"); l Establishment of priority of a secu- rity interest against third parties (commonly known as "perfection"); l Use of notice registration (also known as "filing") and creation of a notice registration system; and l Simple and expeditious enforcement of a security interest upon default by the debtor ("enforcement"). A well-developed collateral frame- work also has synergies with important aspects of the legal framework such as contract enforcement and insolvency / bankruptcy. When creditor rights are clearly established, contracts are more easily enforced and disposition of assets of distressed borrowers can proceed more efficiently and systematically. NOTES 15. Committee on Payment and Settlement Systems and Bank for International Settlements, 2007. 16. World Bank Group Payment Systems and Remittances. http://www.world bank.org/paymentsystems. DATA NOTES 19 Data Notes Data and methodology used to some assumptions: 40% of the economi- lion in the next five to ten years, using estimate reach of FI cally active population would be credit average growth of 3% per annum which Several different data sources were used worthy and only half of these would get accounts for some slowdown due to the to develop the impact measurements for credit. Volume of credit is again esti- global economic downturn. On the one financial infrastructure including the mated by multiplying by US$4,100 for hand, given the current economic cli- World Bank Doing Business Database, each additional person receiving credit mate and possible decrease in remit- the World Bank Global Payment Systems (totaling US$1.3 trillion) and the bor- tance flows on an annual basis in 2009, Survey and IFC and World Bank data on rower as well as at least one other person this figure may be too large. At the same securities markets, collateral registries, (their household) are expected to benefit time, increasing efforts to move remit- and remittances. This section briefly from each of these loans (610 million). tances into the formal system will con- describes how the estimates presented tribute to higher figures as a greater in this document were developed. Remittances share of the total flows are captured by The estimates for remittances rely formal statistics. Credit Bureaus on extensive research done by the Doing Business data indicate that Inter-American Development Bank Payment Systems approximately 396 million individuals (IADB), World Bank, and International The World Bank's Global Payment have files in credit bureaus. We assume Organization for Migration on the Systems Survey provides the first source that 50% (198 million) actually receive global remittance market. The IADB of comparable data on payment systems. financing, as not every credit bureau file estimates that 75% of the approximately The survey covered 142 countries, of results in access to credit or is tied to a 190.6 million migrants worldwide send which 96 are developing countries. The loan. This number (198 million) is then remittances. Since remittances typically estimate of number of people currently multiplied by the average small enter- support families, the IADB multiplies impacted assumes that slightly more prise loan (US$4,100) as per data from this number by four to get the total num- than 60% of the economically active Doing Business surveys. This gives us ber of people impacted by remittances-- population in these countries is directly total financing volume of approximately about 715 million. Growth of 1.5% per using the payment system--to some US$812 billion. annum for migration is used as the basis extent. This number is multiplied by 2 The number of people positively for future remittance flows, as lower levels to account for the household impact (as affected by credit reporting is estimated of economic growth are likely to impact was also done for credit bureaus) yield- to roughly double over the next five migration patterns. This yields another ing 1.1 billion participating in payment years, to reach a total of nearly 1 billion 55 million people who would be affected systems. people worldwide. This figure is based in the next five years (and includes both The volume of retail payment system on growth in emerging markets which the migrants and their families). transactions is reported to be approxi- already have credit bureaus as well as The value of remittance flows is now mately US$65 trillion in the survey. A lit- the establishment of credit reporting in being tracked by international organiza- tle more than half of this amount (US$36 countries where it doesn't already exist. tions. The World Bank estimates that in trillion) is processed as checks, followed For these estimates we take the eco- 2007, remittances to developing coun- by direct credits (US$19 trillion) and nomically active population in countries tries were approximately US$285 bil- debit cards (US$9 trillion). with (1.23 billion) and without (1.28 bil- lion. The World Bank is projecting the Estimates for growth in payment lion) credit reporting and then make remittance market to be US$384 bil- systems start with the assumption that 20 FINANCIAL INFRASTRUCTURE 60% of the economically active popu- The FI Index The Strength of Legal Rights Index lation will be using the payment system The FI Index aims to measure the state available in the Doing Business Report in developing countries in the medium of development of financial infrastruc- is used to measure the degree to which term. This means that an additional ture at a country level. The index cur- collateral and bankruptcy laws pro- 1.5 billion will ultimately be affected rently covers three areas of financial tect the rights of borrowers and lend- in countries for which survey data are infrastructure: ers. The index ranges from 1 to 10. available. In non-survey countries, tak- Please see Doing Business 2008 for the ing the assumption that 60% of the eco- l credit reporting methodology. nomically active population will be l creditor rights and movable collateral affected results in an additional 390 mil- l corporate governance lion people. (These figures include peo- ple both directly and indirectly affected; The index will be expanded in the as before, the indirect affect still assumes future, and existing measures will a doubling of the number.) be refined to better capture the scale In terms of transaction volumes, and scope of financial infrastructure some expert assumptions are used to development. develop growth estimates. For surveyed The FI Index represents quintile countries annual growth rates of 24, rankings of a simple average of financial 18, and 16% are used for low-income, infrastructure component indexes and lower-middle and upper-middle income ranges on scale of 1 to 5. A country with countries respectively. The result is an a ranking of 5 on the FI Index has a more additional US$86.5 trillion in transac- developed financial infrastructure and is tions volume in the surveyed countries in the top 20% globally. A country with a over the next five years--which includes ranking of 1 is in the bottom 20%. the largest emerging market countries. The average financial infrastructure Based on BIS statistical information col- component index is calculated as a sim- lected on payment systems in devel- ple average of credit reporting, credi- oped countries, it is estimated that the tor rights, and payment system indexes. average value of a payment system All of these indexes are rescaled to 10 to transaction per inhabitant is approxi- allow equal weight for each component. mately US$250,000. Using this figure The credit reporting index captures as a benchmark, we estimate that the both scale and scope of information average value of payment system trans- sharing. It is calculated as a product of actions in upper-middle income coun- credit registry coverage and the credit tries is approximately US$25,000 (10%); information index from Doing Business. in lower-middle income countries, The calculations are based on the infor- US$10,000 (4%); and in low income mation published in the DB 2008 report. countries, US$2,500 (1%). Applying Credit registry coverage measures the these per inhabitant averages to the scale of credit reporting infrastructure respective countries' population, we and is calculated as a maximum of pri- get a total financing volume facilitated vate and public registry coverage. The by payment systems of approximately Credit Information Index measures the US$2.9 trillion in non-survey countries. scope and quality of information and Taken with the additional US$86.5 tril- ranges from 1 to 6. Please see Doing lion growth in the surveyed countries, Business 2008 for the methodology of the total estimated growth in transac- the credit information index, private tions volume is US$89.4 trillion. bureau, and public registry coverage. REFERENCES AND SUGGESTED BIBLIOGRAPHY 21 References and Suggested Bibliography References Chaves, Rodrigo, Nuria de la Peña and Galindo, Arturo and Fabio Schiantarelli, Barron, J. M. and Michael Staten. 2003. Heywood Fleisig. 2004. "Secured editors. 2003. 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