82394 M E R U T BE N NO 07 FEBRUARY 2013 FINDEX The Global Findex Database NOTES Financial Inclusion in Fragile and Conflict-Affected States In fragile and conflict-affected states just 15 percent of adults have an account at a formal financial institution while 26 percent report having saved in the past Asli Demirguc-Kunt year, according to new data from the Global Financial Inclusion (Global Findex) database. Adults in these economies are significantly more likely than those Leora Klapper in the rest of the developing world to report borrowing for health or emergency Douglas Randall purposes. And the use of financial services varies sharply across groups with different individual characteristics. The Global Findex database can be used to track the effects of financial inclusion policies in fragile and conflict-affected states and develop a deeper and more nuanced understanding of how people in these economies save, borrow, make payments, and manage risk. WWW.WORLDBANK.ORG/GLOBALFINDEX Weak institutions in the formal financial sector—public and private—are a common feature in fragile and conflict-affected states. The resulting lack of economic stability and opportunity for individuals is both a driver and a consequence of insecurity. An in- ability to smooth consumption and make investments through formal savings and credit systems often exacerbates conflicts. Indeed, recent research has shown that civil conflict in Sub-Saharan Africa is more likely to occur in years with economic shocks brought on by poor rainfall.1 People in fragile and conflict-affected states also face a unique set of payment, credit, and risk management needs related to the high levels of insecurity. Efforts to improve the scope and quality of financial access have been hindered by the lack of systematic indicators on the use of different financial services (formal and informal) across the developing world—but particularly in fragile and conflict-affected states, where individual-level data are scarce. The Global Findex database provides such indicators, measuring how people in 148 economies around the world save, borrow, make payments, and manage risk. These new indicators are constructed with survey data from interviews with more than 150,000 nationally representative and randomly selected adults age 15 and above. The survey was carried out over the 2011 calendar year by Gallup, Inc. as part of its Gallup World Poll. This note features Global Findex data based on almost 20,000 interviews across 19 fragile and conflict-affected states.2 How Many Have Accounts—and How Are They Used? Paradoxically, the insecurity and uncertainty that define fragile and conflict-affected states are precisely the conditions in which having a safe place to save or a reliable method for receiving remittances is most valuable. And too often the weakness or absence of legiti- mate financial institutions exacerbates the slow pace of recovery after conflicts—because savings have been wiped out and entrepreneurs lack capital to start new businesses.3 Data on the financial behaviors of people in fragile and conflict-affected states show that they are among the least served by formal financial services in the developing world. Just 15 percent of adults in fragile and conflict-affected states report having an account at a formal financial institution—a bank, credit union, cooperative, post office, or mi- FINDEX NOTES 1 E G 1 R U Account penetration FI Adults with an account at a formal financial institution (%) 100 80 60 40 20 0 REST OF FRAGILE & CONGO, SUDAN AFGHANISTAN CHAD LIBERIA HAITI KOSOVO DEVELOPING CONFLICT-AFFECTED DEM. REP. WORLD STATES Note: Average for fragile and conflict-affected states includes data for 19 economies. Figure shows economy-level averages for economies with a United Nations or regional peacekeep- ing force present in the past three years (excluding border monitoring operations). Source: Demirguc-Kunt and Klapper 2012. crofinance institution (figure 1).4 In only 2 of the 19 economies (Bosnia and Herzegovina and Kosovo) does account penetration exceed the average in the rest of the developing world (table 1). Account penetration varies sharply by individual characteristics in fragile and conflict- affected states (figure 2). Women are 32 percent less likely than men to have a formal account, with the largest gender gaps found in the Democratic Republic of Congo, Kosovo, Sudan, and West Bank and Gaza. The overall gender gap is significantly larger than in other developing economies, where women are on average 19 percent less likely than E G 2 R U Account penetration in fragile and conflict-affected states FI men to have a formal account. by individual characteristics Adults with an account at a formal financial institution (%) In fragile and conflict-affected states, where Gender disenfranchisement of youth often propels FEMALE 13 the cycle of conflict, those ages 15–24 are MALE 19 39 percent less likely than those ages 25–64 Age group to have an account. In West Bank and Gaza 15-24 11 25-64 18 just 9 percent of youth have an account, 65+ 16 compared with 26 percent of older adults. Within-economy income quintile Finally, adults who report working full time POOREST 8 Q2 11 for an employer are more than twice as Q3 15 likely as other adults to have a formal ac- Q4 19 RICHEST 29 count, though this segment makes up just Education level 12 percent of the adult population in these PRIMARY OR LESS 10 economies. SECONDARY 21 TERTIARY OR MORE 36 The use of accounts in fragile and conflict- Residence affected states differs significantly from RURAL 13 URBAN 23 that in the rest of the developing world. About 25 percent of adults with a formal Note: Data by education level exclude Zimbabwe. account in these economies report using Source: Demirguc-Kunt and Klapper 2012. their account to receive remittances from 2 FINDEX NOTES family members living elsewhere, compared with 14 percent in the rest of the developing world. In Somaliland 66 percent of account holders report using their account to receive remittances, in Zimbabwe 55 percent, and in Haiti 49 percent. These remittances can be a lifeline for people lacking employment and economic op- portunity and may be a principal reason for opening accounts in these economies. In Somaliland several large remittance companies—including Dahabshiil—serve as de facto banks, offering basic accounts to customers. And with the blessing of the government, they are now moving toward offering a wider range of banking products, such as credit and insurance.5 Account holders in fragile and conflict-affected states are also more likely than those in other developing economies to use their account to receive government payments. Requirements to pay salaries into accounts rather than in cash have proved to be effec- tive in stemming corruption in both the public and private sector. What Are the Barriers to Account Ownership— and the Alternatives? Why do more than 85 percent of adults in fragile and conflict-affected states remain outside the formal financial system? As in the rest of the developing world, the most frequently cited reason for not having a formal account is lack of enough money to use one: this is the response given by 66 percent of adults without a formal account in these economies, with 24 percent citing it as the only reason (multiple responses were permitted; figure 3). But unbanked adults in fragile and conflict-affected states are significantly more likely to cite religious reasons (10 percent), lack of trust (20 percent), documentation require- ments (23 percent), distance (26 percent), and cost (31 percent) as obstacles to account ownership, suggesting that policy makers and private sector leaders in these economies face nontrivial challenges in expanding financial inclusion. While concrete strategies and reforms—such as national ID programs, improved regulation, or subsidies for rural E 3 R U Self-reported barriers to use of formal accounts G FI Non-account-holders reporting barrier as a reason for not having an account (%) FRAGILE & 60 CONFLICT-AFFECTED STATES REST OF DEVELOPING WORLD 40 20 0 FAMILY MEMBER RELIGIOUS LACK OF LACK OF TOO FAR TOO NOT ENOUGH ALREADY HAS REASONS TRUST NECESSARY AWAY EXPENSIVE MONEY ACCOUNT DOCUMENTATION Note: Respondents could choose more than one reason. Source: Demirguc-Kunt and Klapper 2012. FINDEX NOTES 3 branches—can alleviate obstacles of documentation, distance, and cost, building trust in institutions or governments with a history of corruption or ineffectiveness is an ex- tremely challenging task. In Afghanistan, where 37 percent of adults without an account cite lack of trust as an obstacle, the recent banking scandal suggests that formal financial institutions may in fact not deserve the trust of their clients. An emerging alternative to formal banking systems is the use of “mobile money.” About 11 percent of adults in fragile and conflict-affected states report having used a mobile phone to pay bills or to send or receive money in the past 12 months, compared with 4 percent in the rest of the developing world. Mobile phones can be used to make pay- ments linked to a bank account, to make payments linked to a mobile-only account, or to simply transfer airtime—although the first two uses are more likely to serve as an entry point into the formal financial system. The ability to quickly and safely transfer funds to family members or program recipients holds much potential for improving people’s financial lives. Evidence from Kenya suggests that users of mobile money are less likely to experience reductions in consumption following negative income shocks, largely because of their ability to smooth risk via remittances.6 And in Haiti support from international donors for the mobile payment industry has facilitated its adoption as a mechanism for disbursing cash-for-work payments and social benefits to earthquake victims.7 How Do People Save? The share of adults in fragile and conflict-affected states who report having saved in the past year (26 percent) is only slightly smaller than the share in the rest of the developing world (31 percent). But the methods used for saving differ substantially. Savers in fragile and conflict-affected states are less than half as likely as those in the rest of the develop- ing world to save at a formal financial institution—and almost 50 percent more likely to save using a community-based method (figure 4). They are also significantly more likely to save using other methods, such as storing cash in their home. In Chad, for example, 29 percent of adults report having saved or set aside money in the past year. But just 7 percent of adults did so using a formal financial institution, while 12 percent used an informal savings club and 13 percent used only other methods, such as saving at home. E G 4 R U Formal and informal saving FI Adults saving any money in the past year (%) 50 40 30 SAVED USING OTHER METHODS ONLY SAVED USING 20 COMMUNITY-BASED AND NOT FORMAL METHODS 10 SAVED FORMALLY 0 REST OF FRAGILE & BOSNIA AND WEST BANK IRAQ CHAD SIERRA DEVELOPING CONFLICT-AFFECTED HERZEOGOVINA AND GAZA LEONE WORLD STATES Source: Demirguc-Kunt and Klapper 2012. 4 FINDEX NOTES E G 5 R U Reasons for loans reported by borrowers FI Adults with an outstanding loan for purpose specified (%) 25 FRAGILE & CONFLICT-AFFECTED 20 STATES REST OF DEVELOPING WORLD 15 10 5 0 HOME HOME FUNERALS SCHOOL FEES EMERGENCY PURCHASE CONSTRUCTION OR WEDDINGS OR HEALTH PURPOSES Source: Demirguc-Kunt and Klapper 2012. What Are the Sources and Purposes of Borrowing? Just 6 percent of adults in fragile and conflict-affected states report having borrowed money from a formal financial institution in the past year. Significantly larger shares report having borrowed money from family or friends (34 percent), from a retailer using installment or store credit (12 percent), or from an informal lender (9 percent). People in these economies appear to be in far greater need of credit than those in the rest of the developing world: while 48 percent of adults in fragile and conflict-affected states report some form of borrowing in the past year, only 34 percent do in other developing economies. And those in fragile and conflict-affected states who report having borrowed also report borrowing from significantly more sources. The reasons for borrowing—whether from formal or informal sources—also differ sharply. The most common purpose of current loans in fragile and conflict-affected states is emergency or health reasons, reported by 22 percent of adults—twice the average in the rest of the developing world (figure 5). In Afghanistan, Burundi, Guinea, Haiti, Iraq and Sudan more than 25 percent of adults report currently having a loan for emergency or health purposes. This large share almost certainly reflects the high incidence of violent conflict as well as the general lack of government-sponsored health insurance in these economies. Adults in fragile and conflict-affected states are also more than twice as likely as their counterparts in other developing economies to report having a current loan for school fees or for funerals or weddings. Conclusion As the first public database of indicators that consistently measure people’s use of finan- cial products across economies and over time, the Global Findex database fills a big gap in the financial inclusion data landscape. The data set can be used to track the effects of financial inclusion policies globally and develop a deeper and more nuanced understand- ing of how people in fragile and conflict-affected states save, borrow, make payments, and manage risk. By enabling policy makers to identify segments of the population excluded from the formal financial sector, the data can help them prioritize reforms accordingly and, as future rounds of the data set become available, track the success of those reforms. FINDEX NOTES 5 LE TA 1 Selected Global Findex indicators by economy B Accounts and payments Saving and credit Adults using a Share with an account formal account Adults originating at a formal financial in the past year to Adults saving a new loan in the Adults with an institution receive Adults in the past year past year outstanding loan using mobile Using a From a For Poorest Payments money in Using community- Using a formal From emergency For All income Ages from Family the past any based formal financial family or or health funerals or adults quintile Women 15-24 government remittances year method method account institution friends purposes weddings (%) (%) (%) (%) (%) (%) (%)a (%) (%) (%) (%) (%) (%) (%) World 50 – 47 37 13 7 – 36 – 22 9 23 15 7 Fragile and conflict- 15 – 13 11 3 4 11 26 6 6 6 34 22 9 affected states Rest of developing 43 – 39 33 6 6 4 31 5 18 8 25 11 2 world Afghanistan 9 0 3 6 2 2 7 15 3 3 7 30 27 29 Angola 39 31 39 30 10 8 26 37 8 16 8 26 16 9 Bosnia and Herzegovina 56 35 48 46 15 8 2 14 1 6 13 16 5 2 Burundi 7 3 6 5 2 1 5 25 2 3 2 44 30 5 Chad 9 6 7 7 3 3 18 29 12 7 6 31 20 13 Comoros 22 9 18 7 5 4 4 29 16 11 7 25 24 13 Congo, Dem. Rep. 4 0 3 2 0 1 2 24 8 1 2 30 25 4 Guinea 4 2 3 2 1 1 7 27 6 2 2 35 30 16 Haiti 22 4 21 6 1 11 15 32 6 18 8 36 27 8 Iraq 11 5 8 7 4 2 8 26 6 5 8 41 27 13 Kosovo 44 24 31 34 10 9 18 15 1 5 6 17 2 1 Liberia 19 3 15 15 6 7 19 35 16 14 6 42 15 5 Nepal 25 15 21 24 1 5 0 18 6 10 11 33 24 6 Sierra Leone 15 4 13 11 4 7 2 33 10 14 6 43 9 2 Sudan 7 4 4 4 2 2 52 23 9 3 2 47 30 9 Syrian Arab Republic 23 20 20 22 0 1 0 48 1 5 13 20 3 8 Togo 10 2 9 7 2 1 1 20 4 4 4 19 14 2 West Bank and Gaza 19 8 10 9 6 2 4 16 3 5 4 42 20 11 Zimbabwe 40 22 37 22 10 22 4 40 11 17 5 57 7 3 – = not available. a. Data refer to adults who report having used a mobile phone in the past year to pay bills or send or receive money. Source: Demirguc-Kunt and Klapper 2012. WWW.WORLDBANK.ORG/GLOBALFINDEX 1. Satyanath, Miguel, and Sergenti 2004. 2. Fragile states are identified on the basis of the World Bank’s Fragile Situations List, available at http://go.worldbank.org/BNFOS8V3S0. The fragile and conflict-affected states included in this analysis are listed in table 1. Data for the Central African Republic and Somalia are available online but are not included in the aggregate statistics because more than 35 percent of the population in each country was excluded from sampling as a result of security concerns. 3. World Bank 2011. 4. Statistics are weighted by economy-level adult population. 5. Tran 2012. 6. Jack and Suri 2011. 7. USAID 2012. References Demirguc-Kunt, A., and L. Klapper. 2012. “Measuring Financial Inclusion: The Global Findex Database.” Policy Research Working Paper 6025, World Bank, Washington, DC. Jack, W., and T. Suri. 2011. “Risk Sharing and Transaction Costs: Evidence from Kenya’s Mobile Money Revolution.” Working paper. Satyanath, S., E. Miguel, and E. Sergenti. 2004. “Economic Shocks and Civil Conflict: An Instrumental Variables Approach.” Journal of Political Economy 112 (4): 725–53. Tran, M. 2012. “Somaliland Moves towards New Banking Era.” The Guardian, July 23. http://www.guardian.co.uk/global-development/2012/jul/23/somaliland- towards-news-banking-era. USAID (U.S. Agency for International Development). 2012. “USAID’s HIFIVE/Haiti Mobile Money Initiative Announces That Mobile Money Services in Haiti Have Passed the One Million Transaction Milestone.” Press release, June 1. http://haiti.usaid.gov/media/releases/060112_mobile_money.pdf. World Bank. 2011. World Development Report 2011: Conflict, Security, and Development. Washington, DC: World Bank. The reference citation for the Global Findex data is as follows: Demirguc-Kunt, A., and L. Klapper. 2012. “Measuring Financial Inclusion: The Global Findex Database.” Policy Research Working Paper 6025, World Bank, Washington, DC. 6 FINDEX NOTES