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Access to Finance: An Empirical Analysis

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Abstract

Financial access is gradually being recognised as an important input to economic development. Using World Bank (2007) database, this study measures the extent of financial access in developed and developing countries. Further, it develops a new Socio-Economic Development Index, which incorporates financial access. It then compares socio-economic development of various countries as shown by Human Development Index (HDI) alone and by the new index incorporating financial access. The results of the study show that Spain ranks highest in terms of financial access followed by Belgium, Malta and South Korea. In addition, the ranking of countries in terms of HDI changes if financial access is taken into account.

Abstract

L’accès au financement est progressivement reconnu comme ayant un rôle important dans le développement économique. À partir de bases de données de la Banque mondiale (2007), cette étude mesure le niveau d’accès au financement dans les pays développés et pays en développement. En outre, cette étude nous a permis de développer un nouvel indice de développement socio-économique intégrant l’accès au financement. Elle compare ensuite le développement socio-économique de différents pays, tel qu’indiqué par le seul IDH, et par le nouvel indice intégrant l’accès au financement. Les résultats de l’étude montrent que l’Espagne est au premier rang en termes d’accès au financement, suivie de la Belgique, Malte et la Corée du Sud. Qui plus est, le classement des pays en termes d’IDH change lorsque l’accès au financement est pris en compte.

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Notes

  1. This view is in sharp contrast to the stance of earlier studies, which stressed that finance is important for economic growth only and achieving efficient resource allocation and profitability are the sole objectives of the financial system (Caprio and Hanohan, 2001).

  2. It, however, remains unclear what is the impact of financial sector on income distribution and whether it is more important to promote efficiency in the financial sector or expand access or both.

  3. This could be, perhaps, due to several dimensions involved of financial access, some of which may be immeasurable, leading to incomplete models of financial access.

  4. Although the term developed and developing is quite often used in common language to place countries into certain groups based on their stages of development, the criteria used is often not very clear. The World Bank’s World Development Report divides the countries according to income level. Thus, based on their per capita income economies are divided into low income, US$975 or less; lower middle income, $976–$3855; upper middle income, $3856–$11 905; and high income, $11 906 or more. This classification is vague and does not reveal clearly the level of development of the countries.

  5. De La Torre et al (2007) expressing concern on the emerging policy issues yet to be tackled by the policymakers regarding financial sector development, noted the lack of finance to the small-scale firms, stock market development and pension system. Yet they did not discuss the issues relating to access to finance.

  6. Some studies have, however, criticised HDI on the grounds of using arbitrary weights (for instance, see Chowdhary, 1991; McGillivray, 1991; Nubler, 1995; Sagar and Najam, 1997).

  7. For instance, in the latest Human Development Report for 2012 data on 187 countries was made available.

  8. Each of these approaches, however, has its own advantages and disadvantages. For details, see Decancq and Lugo (2013).

  9. The importance of each dimension can, however, vary across the countries for instance in Tanzania outreach matters, while in Sierra Leone high costs in banking transactions result in high financial exclusion (Allen et al, 2012).

  10. The technical note showing the workings of HDI and other indices are available at: http://hdr.undp.org/en/media/HDR_20072008_EN_Technical1.pdf.

  11. In the Indian context, although government-owned banks have been much maligned for their poor and inefficient lending decisions and inefficiencies, their achievements in spreading banking network far and wide, and in improving access has not been much acknowledged. Burgess and Pande (2003) have shown that bank branching in India has led to improvements in income redistribution and poverty reduction.

  12. The model of microfinance followed in India is mostly through the SHG-Bank linkage programme, wherein the non-governmental organisations that exist for rural development, women, child health and so on, and microfinance is one of their activities, form the SHGs and assist the groups in accessing credit from the banks.

  13. On the basis of the limited data available for developed economies from CGAP (2009) on cooperatives and state financial institutions, our results indicate that Spain once again tops the list followed by Germany, South Korea, Canada, Australia and Greece.

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Acknowledgements

This study was initiated while I was a Research Fellow at the Department of Accounting, Finance & Economics at Griffith University, Australia. I gratefully acknowledge valuable comments by Tom Nguyen and Tony Makin on the earlier drafts of this article. I also wish to thank Nicholas Rohde for statistical help. Any errors are solely mine.

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  1. University of Bradford, UK

    Rashmi Umesh Arora

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Arora, R. Access to Finance: An Empirical Analysis. Eur J Dev Res 26, 798–814 (2014). https://doi.org/10.1057/ejdr.2013.50

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