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Does poor people’s access to formal banking services raise their incomes?

What do we want to know?

Inability to access financial services prevents consumption smoothing and investments in health, education and income generating activities, thus limiting growth opportunities for the poor. So, providing access to financial services has significant potential to help lift the poor out of the cycle of poverty. Formal banking services, by exploiting economies of scale and/or making judicious use of targeted subsidies, may be able to reduce or remove market imperfections and facilitate financial inclusion of the poor, ultimately leading to higher incomes. However, supply and demand constraints may limit the ability of formal banking services to achieve growth.

Who wants to know and why?

Government agencies responsible for the financial sector and financial institutions will wish to ensure that their services to low-income people are structured and targeted most effectively.

What did we find?

The twelve included studies consist of three randomized controlled trials, four quasi-experimental studies, and five observational/econometric studies which examined the impacts of having access to or using formal financial services or new financial technologies on various measures of income. These studies evaluated ten distinct programmes or policies involving the introduction of new financial products, the introduction of new financial technologies, policies that expanded rural banking, or increased bank saturation in agricultural areas and villages. Most of the studies considered interventions that affected the supply of financial services, while only two considered interventions that affected the demand for financial services.

Innovative design of new savings products that increase the supply of savings and increase demand for savings by helping people address behavioural challenges were found to increase income at least in the short run. Improving banking technology by using mobile phones to facilitate remittances, transfers and payments, and enable savings, was found to have the potential to increase income by allowing households to smooth consumption and accumulate assets.

State-led expansion of the banking sector in rural areas was found to increase the supply of banking services, which in turn was found to reduce rural poverty, increase rural wages and increase agricultural investment.However, the distributional effects of such policies may be lopsided away from the poorest, while still benefiting socially backward groups, and the success of such a policy may depend on the specific context. Access to credit could increase household income by increasing consumption and/or smoothing consumption. Further, it could raise agricultural incomes by allowing farmers to purchase better and more optimal levels of inputs, leading to higher outputs and income. Moreover, an individual’s access to credit could also increase incomes of members in the individual’s social network.

How did we get these results?

We conducted a systematic search of published and unpublished material relevant to the impact of access to formal banking services on income. The search was guided by a causal mechanism, outlining the causal channels of interest and inclusion/exclusion criteria The review utilizes the realist synthesis methodology for analysis and only includes high-quality studies presenting evidence on impact of access to formal banking services.

What are the implications?

The review provides some grounds for cautious optimism about the positive effects of policies that expand formal financial access. Especially promising are innovations in savings products and improvements in banking technology which are addressing the behavioural and physical impediments to access. Such programmes may be particularly effective because they simultaneously increase supply by breaking traditional barriers and reducing the costs of expanding services for banks, as well as reducing the financial and psychological costs of consuming banking for the poor. Additionally, the review finds that farmer’s credit constraints are an important bottleneck in expanding agricultural output, preventing them from using optimal levels of inputs. Interventions that ease these constraints may be effective in reducing rural poverty and increasing agricultural production. Also, the review finds that spillovers are an important factor that must be considered when formulating policies about financial access. Even targeted programmes can lead to benefits for a larger population, perhaps giving policy makers reasons to consider mandating interventions that might otherwise be considered too costly. In terms of research implications, the review produced no evidence on financial literacy programmes combined with formal banking services and technologies like debit cards.

This report should be cited as:

Pande R, Cole S, Sivasankaran A, Bastian G, Wendel C (2012) Does poor people’s access to formal banking services raise their incomes? EPPI-Centre, Social Science Research Unit, Institute of Education, University of London.

ISBN: 978-1-907345-26-5

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