Household level financial inclusion was also
positively related to economic growth. Loans and insurance products have the highest
impact. Loans could constitute a restriction on households that are planning to
human capital investments. Growth rates of income could be increased by the
greater household inclusion. The amount of household inclusion indicators that were
significantly associated with growth was small compared to the number of
significant firm inclusion most likely due to the fact that households use
financial services for nonpecuniary reasons, such as consumption smoothing.
Overall, as the utilization of formal finance (such as
firms with bank loans or firms that finance their investment through equity
issuance) increases, the long-term growth rate also rises. Credit availability may let entrepreneurs to utilize
business opportunities and to withstand economic downturns. Greater firm inclusion also could encourage
firms to leave the informal sector to use financial/ banking services.
The financial firm inclusion variables were
significantly correlated with growth, and many of these coefficients are large.
The portion of firms with access to equity investment had a foremost impact on
growth. Raising investment through equity sale could develop corporate
governance and the accountability of the firm and by so doing could improve
growth. The amount of firms with bank loans/lines of credit is significantly
and positively related to both overall growth and the bottom 40’s income growth.
The World Bank’s Global Findex and Enterprise Surveys
data were used to measure financial services. The authors made a distinction between
individuals and firms and categorized their variables with respect to the
financial service type. The selection of the variables was based on the past
research (please refer to Beck et al. 2008; Demirgüç-Kunt, et al. 2012), on the
country coverage availability.
Firm-level financial inclusion was measured by using the
Enterprise Survey. Global Findex.
Account ownership was measured by using the variable namely: “Percent of
firms with a checking or savings account.” Payment was quantified with the variable
“Used an account at a financial institution for business purposes.” Corporate
savings were analyzed by the variable “Saved to start, operate, or expand a
farm or business.” The credit usage was captured by “Percent of firms using
banks to finance working capital” and “Percent of firms using banks to finance
Gould and Melecky (2017) had the independent variables
as composite indexes composed of mean and standard deviation- centered
variables (including stability, depth, efficiency, firm-level inclusion and
household-level inclusion). The level of significance of the growth regression
determined the selection of variables in each index. Each index was formed by taking a simple
average of the variables with the properly adjusted weights for the missing observations.
Source: Risk and
Returns Managing Trade-Offs for Inclusive Growth in Europe and Central Asia, Michael
Gould and Melecky, 2017.
Private credit by deposit money
banks to GDP (%)
Liquid liabilities (M3) to GDP
Stock market capitalization to
Deposit to GDP
Average output loss during
Average number of years in a
Average fiscal cost of a
Bank credit to bank deposits (%)
Credit / GDP volatility
Increase in NPLs
Bank lending-deposit spread (%)
Bank overhead costs to total
Bank net interest margin (%)
Investments financed by equity or
stock sales (%)
Firms using banks to finance
working capital (%)
Firms identifying access to
finance as a major constraint (%)
Firms with a bank loan or line of
Borrowed from a financial
inclusion (% age 15+)
Purchased agriculture insurance
(% working in agriculture, age 15+)
Table 1.5: Index indicators
The study looked at four different indices reflected
in the table 1.5:
ECA already scored relatively high on financial
inclusion and access (frequency and ease of interaction with the financial
system by firms and individuals) so the benefits to further enhancements may be
smaller than through greater efficiency. The region may still increase growth
by adopting policies designed to advance financial access.
Financial development was positively associated with
economic growth n ECA. Higher-than-expected cumulative income growth and bottom
40 percent’s income was significantly associated with indicators of financial
development, categorized by depth, stability, efficiency, and inclusion.
Excluding the impact of financial sector development,
the median annual gross domestic product (GDP) growth in the region, for the
period 2000-14, was 1.8 percent higher than indicated by the growth
fundamentals. This corresponded to the highest unexpected growth among the
developing regions, and is even greater than the unexpected growth in the
developed European countries.
The analysis in the second chapter of the study
highlights that ECA’s financial sector development stood to benefit inclusive
growth the most. Main messages included: (i) For inclusive growth, the most
important dimension of finance was the firm level access to finance, particularly
access to equity financing. Finance can effect income growth mostly by
enhancing allocative efficiency rather than mobilizing savings for investment.
(ii) Banking crises reduced medium-term growth in both the advanced European
countries and Emerging ECA. Greater firm and individual level financial inclusion
can mitigate the busts in the cumulative growth in the course of banking
crises. However, for the bottom 40’s income growth, the mitigation factor is
The level of financial inclusion among firms was more
diverse. The number of financially constrained firms increased during the post
crisis period in several countries, and a lower share of firms had access to bank
financing or raised funds on the stock market in 2013 compared to 2019.
Banking overhead costs and cost-to-income ratios were
high across the region. Russia and Turkey have large market turnover rates,
showing their ease of capital market transactions compared to other ECA
sub-regions. Indicators of financial inclusion exceeded the global median in
many ECA countries with the exception of Central Asia and several indicators in
the South Caucasus and Other Eastern Europe. Savings remained very low across
the region. Countries in Central Asia
showed very low levels of financial inclusion.
For example, almost all adults in Slovenia had a bank account, in
Turkmenistan the level of account ownership was very low and improved only
slightly from 2011 to 2014. In Central Asia, adults with borrowings from a financial
intermediary compromise a very low share. The debit card usage was very common
in Central Europe but low in some countries in Central Asia and South Caucasus.
In addition, saving at a financial institution was higher in Central Europe.
Financial inclusion for the median country in Central
Asia, South Caucasus and other Eastern Europe was lower than the global median,
although theses sub-regions showed some improvement in recent years. Central
Europe had higher level of financial inclusion albeit with a decline in recent
years. Private credit by financial intermediaries and bank deposits are
relatively higher than the global median benchmark, for all sub-regions except
Central Asia, South Caucasus, and Other Eastern Europe. Stock market
capitalization to GDP has remained low for most sub-regions.
This paper compared the level of financial development
with the global median values. Indicators with a value greater than zero
indicated financial outcomes that were greater than the global median values.
Source: Risk and
Returns Managing Trade-Offs for Inclusive Growth in Europe and Central Asia,
Gould and Melecky, 2017.
ECA median value
Global median value
Depth (% of GDP)
Private sector credit
Domestic bank deposits
Mutual fund assets
Pension fund assets
Liquid assets to
Bank capital to assets
Net interest margin
Stock market turnover
Account at a financial
Saved at a financial
Number of branches
Benchmarked ECA financial development indicators
The four dimensions (listed in table 1.4) showed that
ECA was situated below the global average compared to other regions on depth
and stability and about average when it comes to efficiency and inclusion. ECA’s
financial systems were governed by banks. More than half of ECA countries had
higher credit and cross-border banking than other countries. Furthermore, ECA
countries were behind pertaining to financial stability. Levels of
non-performing loans were considerably higher. Banking sector efficiency was
relatively high in ECA, more than half of ECA countries have lower cost to income
ratios and overhead costs than the global median. However, the stock market
turnover ratio was significantly lower, which indicated that there is a greater
reliance on banking compared to the nonbank sector. Finally, most of the financial inclusion indicators
in the region, containing the number of bank account owners, loan and/or credit
card holders were over the world average. However, the share of population
savings formally was low.
The paper used four financial outcomes to assess ECA
financial systems: (i) depth (all indicators as percentage of GDP): private sector
credit by financial intermediaries; domestic bank deposits; consolidated
foreign claims of banks which is reported to the Bank for International
stock market capitalization; and assets of nonbank financial intermediaries;
(ii) stability: nonperforming loans to total gross loans, balance sheet Z
score, percentage of liquid assets in deposits and in short-term funding; and
banks’ equity to assets ratio; (iii) efficiency: net interest margin (percentage
of interest bearing assets); overhead costs (percentage of total assets); cost
to income ratio of the bank; stock market turnover ratio (representing percentage
of average market capitalization); (iv) inclusion: amount of branches for each
100,000 adults; percentage of adults with an account at a financial intermediary,
with borrowings from a financial institution, debit or credit card, or savings
at a financial intermediary.
ECA has reached comparatively high levels on firm and household
access to finance. By the early 1990s, ECA displayed nascent financial systems.
Rapid financial deepening during the last two decades advanced ECA’s financial
inclusion. However, this also resulted in two waves of banking crisis- that of
late 1990s and that associated with the 2008 global financial crisis. Overall
ECA’s financial development is still low given the region’s medium income
standing. Even though ECA has deep banking systems and displays progress in
financial inclusion, financial stability and efficiency remained frail and
capital markets were shallow.
Within ECA, financial progress changes remarkably from country to
country. ECA displays the poorest performance in the efficiency frontier and
top performance in financial inclusion. The financial inclusion is contributing
the most to long term growth. Only firm inclusion and household inclusion are
strongly related to long term income growth pertaining to the bottom 40 percent
of earners. For overall growth, firm inclusion is mostly associated with
growth, followed by efficiency, stability, household inclusion; and depth. The
global financial crisis has effected ECA significantly. Although credit growth
decelerated in the crisis, financial inclusion was high compared with other
regions- albeit very uneven across ECA sub-regions.
According to Gould and Melecky (2017), emerging ECA’s financial
system is significantly less developed and less diversified than Western Europe
and East Asia and Pacific which is its middle income peer. The paper clearly
states that finance can be most useful for inclusive growth when people and
firms can access and use finance responsibly; when finance is priced
competitively; and when it is reliable and when finance helps people confront
shocks rather than spreading shocks.
Although there is no direct comprehensive index formation to
examine financial inclusion, this study is worthwhile to summarize given it
highlights important dynamics of the region this paper is covering, namely ECA. The study looked at depth, stability,
efficiency and inclusion separately and compared ECA with regional and world
averages. The second chapter briefly introduced an inclusion index which will
be summarized in the upcoming section.