The biggest controversy to hit microfinance since the Compartamos IPO erupted this week as easygoing, bookish economist types at two East Coast microfinance research institutions dueled over the longstanding empirical question of whether the glass is half full or half empty. CGAP researchers, citing industry-consensus best-practice guidelines, accentuated the positive in observing that about 2.5 billion adults worldwide have accounts with formal banking institutions (about 2.5 billion do not). Academic researchers at the NYU-based Financial Access Initiative adopted a more skeptical stance, pointing out that Half the World is Unbanked.
OK, so I won't quit my day job for nightclub comedy.
Two new studies are indeed out tallying how many people have credit or savings accounts with commercial banks, savings banks, post office savings banks, cooperatives, government development banks, and microfinance institutions. The FAI report is short and sweet and draws on data from Patrick Honahan, who is now governor of Ireland's central bank. In contrast, the CGAP report harvests new information collected by surveying financial regulators in 139 countries.
Measuring access to formal financial services is hard. Usually what is measured is the number of savings and loan accounts outstanding among certain groups of institutions. But consider these distinctions: between having access and actually using it (which is what shows up in the data); between accounts and account holders (100 million accounts does not mean 100 million people since many people have more than one account); and between households and individuals (if I have a savings account, does that count as access for my wife?). And data are incomplete and infrequently updated.
In 2004, CGAP researchers Robert Peck Christen, Richard Rosenberg, and Veena Jayadeva did path-breaking work in this area, counting some 750 million savings and loan accounts at "alternative financial institutions," ones meant to reach poorer people, in developing countries circa 2000. (Read page 1 of their report for lots of caveats.) Earlier this year, I contacted Rich in search of guidance in updating this data. His advice was: Don't do it unless you are prepared for a LOT of work collecting and culling information from hundreds of institutions around the world. I didn't do it.
But to return to the time line: In 2006, the World Savings Bank Institute had Stephen Peachey add savings bank accounts to this data set (CGAP had counted post office savings accounts only), bringing the total to 1.4 billion. Then Patrick Honohan worked through all this data. He corrected some apparent errors. And where he could, he calibrated with results from a different kind of data source, household surveys that more directly measure how many families are connected to the formal financial system. Honohan estimated, for a large number of countries, the share of adults so connected. (Gated journal version.)
The new FAI report crunches Honohan's country-by-country percentages into a grand, global total. That means it is actually based in substantial part on a) CGAP data that is b) about 10 years old.
In contrast, CGAP's new report is based on brand new data. On the one hand, I think it may be less complete, poorly covering, e.g., postal savings banks, which put up big numbers in the old CGAP data. On the other hand, questions have been raised about those postal numbers: many of the accounts appear to be tiny and/or dormant. In the event, the new CGAP study arrives at a similar grand total: 2.7 billion instead of 2.5 billion people are unbanked. That difference is well within the large margins for error in these data.
If you think about this for about ten seconds, you realize that it's not so surprising that a lot of people have bank accounts and a lot don't. The real interest comes from subdividing the data. The old CGAP study, for instance, cuts the data by region, institution type, and credit vs. savings. In first reading it, I was struck by the modesty of microfinance's role in the bigger picture. The new studies look across countries, showing that, yes, richer countries have more access but there is diversity at any given national income, pointing to scope to improve access without just waiting for economic growth.
Perhaps the authors can comment on the pros, cons, and meanings of their tabulations.