financial infrastructure report

8/8/2019 Financial Infrastructure Report

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FINANCIAL

INFRASTRUCTUREBuilding Access Through Transparent and Stable Financial Systems

FINANCIAL INFRASTRUCTURE POLICY AND RESEARCH SERIES


2/31

2009 The International Bank or Reconstruction and Development

The World Bank

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Washington, DC 20433

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A publication o the World Bank and the International Finance Corporation.

Financial Infrastructure is a joint World Bank and International Finance Corporation (IFC). It was prepared by Margaret

Miller, Nataliya Mylenko and Shalini Sankaranarayanan. Input on the document was provided by Michael Klein,

Simeon Djankov, Peer Stein, and Massimo Cirasino. The team would also like to thank the ollowing current and

ormer World Bank Group colleagues or their insightul comments, guidance and support in writing this piece:

Alejandro S. Alvarez de la Campa, Alison Harwood, Anjali Kumar, Asli Demirguc-Kunt, Bikki Randhawa, Carlo Corazza,

Catherine Anne Hickey, Consolate K. Rusagara, Everett Wohlers, Gregory Watson, Ketut Ariada Kusuma, Jose Antonio

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governments they represent. The World Bank does not guarantee the accuracy o the data included in this work.

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iFOREWORD

Contents

Foreword

Overview 1

The Reach o Financial Inrastructure 4

Measuring Financial Inrastructure 6

Financial System Soundness and Financial Inrastructure 8

Financial Market Depth and Financial Inrastructure 9

Efciency o Financial Services and Financial Inrastructure 10

Access to Financial Services and Financial Inrastructure 12

Financial Inrastructure and the Crisis 14

How to Reorm 15

Data Notes 19

Reerences and Suggested Bibilography 21


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ii FINANCIAL INFRASTRUCTURE

Foreword

How do nancial institutions process

payments, check a potential borrowers

past experiences with credit or evaluate

the suitability o a security interest to be

used or a loan? For many consumers inthe nancial marketplace, the answers

to these questions are taken or granted,

just part o the black box o tools and

technologies used by lenders as they

transer unds between institutions or

decide on credit applications. In this

black box are the dierent elements o

a countrys nancial inrastructure.

Te World Bank Group is a leader in

nancial inrastructure development in

emerging markets, including payment

systems and remittances, credit report-

ing and secured lending. Moreover, theBank Group is intensiying its commit-

ment to promote and disseminate the

policy and research debate on these and

other topics within the scope o nan-

cial inrastructure, including corporate

governance, auditing and accounting

standards and practices, and nancial

literacy.

For this purpose, the Financial

Inrastructure Series was launched in

mid-2008 to host original contributions

in the orm o policy notes, studies, and

essays led by World Bank Group experts,

as well as initiatives carried out in coop-

eration with or by other experts and rel-

evant institutions in the various elds o

nancial inrastructure.

Te report, Financial Infrastructure.

Building Access Trough ransparent and

Stable Financial Systems draws largely on

the Bank Groups eorts in the ollow-

ing key areas: payment and securities

settlement systems, remittances, credit

reporting, and secured transactions andcollateral registries. It denes the space,

and presents a literature review, an esti-

mate o the size o the market, develops

an index or benchmarking nancial

inrastructure, and discusses the impli-

cations o nancial inrastructure or

access, transparency, better governance

and stability in nancial markets. Tis

report is aimed at policy makers, regula-

tors, practitioners, academics as well as

other interested parties.

Financial Inrastructure broadly

dened comprises the underlying oun-dation or a countrys nancial system.

It includes all institutions, inormation,

technologies, rules and standards that

enable nancial intermediation. Poor

nancial inrastructure in many devel-

oping countries poses a considerable

constraint upon nancial institutions

to expand their oering o nancial ser-

vices credit, savings and payment ser-

vices to underserved segments o the

population and the economy. It urther

creates risks or the nancial system as a

whole, as poor payment and settlement

systems may exacerbate nancial crises,

while the absence o credit bureaus in

conjunction with strong credit growth

may lead to one. Key nancial inra-

structure elements that every devel-

oped market can rely on, such as credit

bureaus, enorcement o collateral and

unctioning payment, securities settle-

ment, and remittance systems, ofen

do not exist or are underdeveloped in

emerging markets. Tese key elementsare vital to acilitating greater access

to nance, improving transparency

and governance, as well as saeguard-

ing nancial stability in global nancial

markets.

Penelope J. Brook

ActingVice President

Financial & Private Sector Development

World Bank Group

Peer Stein

Manager

Access to Finance Advisory

International Finance Corporation


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1OVERVIEW

Credit bureaus, collateral registries, and pay-

ment, remittance and securities settlement

systems are all vital parts o a countrys nan-

cial inrastructure. When nancial inrastruc-

ture is available, efcient and reliable, the

cost o nancial intermediation alls. Financia

products and services become accessible to

greater numbers o citizens and lenders and

investors have greater condence in their abil-

ity to evaluate and guard against risk.

Defnition o fnancial inrastructure

The underlying oundation or the nancia

system including the institutions, inormation

technologies and rules and standards which

enable nancial intermediation.

Overview

Financial Inrastructure (FI) is a core

part o all nancial systems. Te qual-

ity o nancial inrastructure deter-

mines the eciency o intermediation,

the ability o lenders to evaluate risk ando borrowers to obtain credit, insurance

and other nancial products at com-

petitive terms. Strengthening nancial

inrastructure takes time, resources and

political will, however, and so important

diferences persist across countries.

Access to nance is the result o a

complex interplay o diferent nancial

intermediaries, the right kinds o nan-

cial inrastructure, and a sound legal

and regulatory ramework. Expanding

access to nance and nancial services

to those at the bottom o the pyramidentails a two-pronged strategy (i)

rstly that o creating and improving

the diferent nancial inrastructure ele-

ments, such as credit bureaus, payment

and securities settlement systems, remit-

tances and collateral registries, as well as

creating an enabling legal and regulatory

ramework to allow the proper unction-

ing o these various nancial inrastruc-

ture elements; and (ii) working with

the various nancial institutions them-

selves (retail/SME banks, micronance,

housing, leasing), and developing insti-

tutional capacity within. odays nan-

cial market economy abounds with

innovations in both products and deliv-

ery channels that dey the traditional

boundaries within which nancial mar-

kets operated. Innovations in branchless

banking, mobile banking, and corre-

spondent banking models, are all thriv-

ing today and promise to lead the way in

dening the landscape o nancial mar-

kets going orward. Tese innovations

usher in new benets through increased

access points that make products andservices more afordable and available to

all. Along with the benets are the inher-

ent risks involved with the development

o new products and delivery chan-

nels, some o which have culminated in

todays crisis, and the inherent need or

adequate regulation and oversight.

Credit Bureaus

In the Philippines, just 5% o the popu-

lation is included in the private credit

bureau. Te corresponding gures or

India and the Russian Federation aredouble that o the Philippines10%

but still quite low. Credit bureau cov-

erage is substantially higher, however,

in some developing countries including

Slovakia (40%), South Arica (65%),

Mexico (71%), El Salvador (83%) and

Argentina (100%). While Argentinas

ull coverage o the population is

unusual or developing countries, it

is not unusual or developed ones.

Australia, Canada, Iceland, Ireland,

New Zealand, Norway, Sweden, the

U.K., and the U.S. all have private credit

bureau systems which cover their entire

populations.1

FIGURE 1

Market

Infrastructure

Bank

A

Bank

B

Bank

C


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2 FINANCIAL INFRASTRUCTURE

Payment, Remittance and

Securities Settlement Systems

Te development o payment sys-

tems inrastructure also varies greatly

between countries. Large value (typi-

cally inter-bank) payments handled on

real time gross settlement (RGS) pay-

ment systems are typically many multi-

ples o GDP in developed countries. In

the U.K. the multiple is 91 times GDP,

in France 75, in Japan 50 and in the

U.S. 43. Tese gures plummet or most

developing countries with many below

10 times GDP and some around one

including Bolivia (1.2 times), Georgia

(1.4) and Lesotho (0.9). Other payment

system indicators show similar diver-

gence across countries including avail-

ability o AMs and POS terminals and

numbers o payment cards in circula-

tion.2

Payment system development andreorms also directly impact the e-

ciency and cost o remittances. Te cost

o sending remittances to Latin America,

South Asia, and the Commonwealth o

Independent States (CIS) countries alls

below the international average (10.5%

or US$200, and 6.5% or US$500),

whereas costs to Arica are relatively

high.3

Institutional arrangements or secu-

rities settlement refect the extent o

capital market (and broader economic)

development. Most high-income coun-tries have depositories or securities

immobilization (83% globally, including

all but one country in the EU), whereas

or low-income countries, the gure

is only slightly more than hal (57%).

Wealthier countries with more devel-

oped capital markets also tend to have

one depository or all types o securi-

ties (as compared to ragmented systems

with multiple depositories), have shorter

settlement cycles, and are more likely to

have a real-time interace with the pay-

ment system.4

Collateral

Te ability o lenders to use movable col-

lateral as security or a loan also depends

on the country. Data rom Doing

Business show that borrowers can, at

least theoretically, use movable collat-

eral to secure a loan while retaining pos-

session o the assets in most countries

(170/181). A much smaller percentage,

however, have the requisite legal rame-

work and unctioning modern collat-

eral registries that are necessary to make

lending against movables truly viable or

creditors, and most o these are ound in

developed economies. O the 80 coun-

tries with the least developed legal rights

index in Doing Business, which relates

to the use o collateral, only 10 have a

unied national registry organized by

asset type and borrowers name or iden-

tication number. Fewer than hal oall countries (about 40%) give secured

creditors preerence during bankrupt-

cies or reorganizations, and again most

o these countries have more developed

economies. 5

Why Financial Infrastructure

Is Important

Why is nancial inrastructure so

important? Financial markets have

a critical role in economic develop-

ment and stability because they provide

an ecient mechanism or evaluat-ing risk and return to investment, and

then managing and allocating risk

and resources across the economy.6

Credit bureaus provide the inorma-

tion needed or accurate and timely risk

analysis, especially or consumer credit.

Collateral systems provide inormation

to alert lenders to the potential exis-

tence o prior interests in collateral and

give creditors who register assurance o

their priority in the collateral, reducing

risk to lenders and acilitating access to

credit. Payment, remittance and securi-

ties settlement systems acilitate the dis-

charge o nancial obligations and the

sae transer o unds across distances

and institutions.

Financial Infrastructure and the

Current Crisis

Financial inrastructure can help to

reduce risk and increase eciency in

nancial markets, but it can also some-

times contribute to situations where

excessive risks are taken. Tis seems to

have been the case in the current nan-

cial crisis. Tink o FI as the system o

roads upon which nancial intermedia-

tion occurs. Better roads reduce the time

and cost o travel but they also increase

the potential speed, which has inherent

risks. For example, xed collateral can

contribute to a leverage cycle where

assets are used to increase lending which

increases asset prices, causing a bubble.

Credit bureau data and other nancial

inormation have made possible increas-

ingly complex models o consumer

behavior. Tese types o models werebehind many o the derivative products

which helped to create the current crisis.

Financial Infrastructure Reforms

Needed TodayDeveloping

Rules of the Road

Te current crisis is not a reason to stop

building nancial inrastructure. In act,

the importance o transparency and

disclosure, o a sound ramework or

secured lending, and o modern pay-

ment systems is especially great today

as countries ace severe economic chal-lenges. FI strengthens nancial markets

which in turn support business invest-

ment and consumption expenditures

and help reignite economic growth.

Te lessons o the current crisis, how-

ever, show the importance o establish-

ing clear rules o the roadthe legal

and regulatory rameworkand over-

sightor nance. Regulators have lim-

ited resources and limited reach, so

market participants must also help to

enorce the trac rules. Investors and

borrowers need to be educated and

pro-active in seeking inormation on

the products they buy. echnology can

also be enlisted to strengthen nancial

inrastructure, but it must be used sen-

sibly, not to justiyor hideexcessive

risk-taking as was the case with some

o the derivatives modeling. For exam-

ple, technology solutions could include


7/31

3OVERVIEW

stability enhancing eatures such as risk

monitoring and could promote diversi-

cation o assets and providers.

This Report

Financial Infrastructure discusses the

importance o credit bureaus, collat-

eral rameworks, and payment, remit-

tance, and securities settlement systems

or nancial intermediation. However,

this report does not touch on all ele-

ments o nancial inrastructure. Some

important sources o nancial inorma-

tion are not discussed, such as credit

rating agencies, business credit reports,

and corporate registries. Other impor-

tant omissions include corporate gov-

ernance and auditing and accounting

practices and standards. As more data

become available, this analysis will be

able to be extended to a broader spec-trum o nancial inrastructure.

Te elements o nancial inrastruc-

ture ofered here are typically out o

view but support a majority o nancial

transactions. Literally billions o peo-

ple are afected as they interact with the

nancial system, sending remittances,

requesting a loan or opening a savings

account. Financial Infrastructure pro-

vides estimates o number o consumers

afected and transactions value or credit

bureaus, payment systems and remit-

tances. Te report also presents an FIIndex or benchmarking progress. Te

FI Index also includes elements o the

legal ramework and is used to evaluate

the relationship between nancial inra-

structure and development goals such

as stability, depth, eciency, and access

or nancial markets. Finally, the report

looks at nancial inrastructure in the

context o the current crisis, to better

understand the reorm priorities going

orward.

NOTES

1. Data on credit bureaus rom the

Getting Credit section o Doing

Business 2009 (World Bank).

2. World Bank, Payment Systems

Worldwide: A Snapshot 2008.

3. Cirasino and Watson 2008.

4. World Bank, Payment Systems

Worldwide:A Snapshot 2008.

5. Data on collateral registries and legal

rights rom the Getting Credit section

o Doing Business 2009 (World Bank).

6. Demirgu-Kunt and Levine 2008.


8/31


Figure 1. Total potential fnancing volumes to

be supported in emerging markets by fnancial

Financial inrastructure supports every

ormal nancial transaction rom pay-

ing a bill, to buying a house, to saving or

retirement. How signicant is nancial

inrastructure in terms o transactionvolume and number o people afected?

Unortunately there are no cross-coun-

try comprehensive data available on all

elements o nancial inrastructure so

it is not possible to provide a precise

measure.

Estimates o nancial inrastruc-

ture impact have been developed here

based on data rom several sourcesincluding the Doing Business project

at the World Bank, the Global Payment

Systems Survey (also World Bank), the

Remittance Prices Worldwide Database

(World Bank) and the IFCs lending port-

olio. Tese back o the envelope calcu-

lations, presented here, are based on raw

data rom these recent surveys and, when

available, rom empirical research on theimpact o nancial inrastructure. For

example, the estimate o credit bureau

impact uses an estimate o reductions

in deaults taken rom empirical studies

using actual credit bureau data.7

Financial inrastructure is a part o many nancial sector

transactions as the above estimates show on a global level

or emerging markets. Demonstrating the reach o nan-

cial inrastructure is just one step, however, in assessing

its contribution to nancial markets. Previous research hasused country-specic data or, in some cases cross-country

data, to analyze the impact o specic types o nancial

inrastructure (credit bureaus, payment systems, etc.) on

access to credit, deaults or economic growth. Relatively

ew studies, however, have taken a comprehensive view

o nancial inrastructure and its role in nancial markets.

One paper which addresses nancial inrastructure

more broadly is by Bossone, Mahajan and Zahir (2003).

The authors nd that in environments with weak FI, banks

substitute or some o its roles such as inormation gath-

ering, monitoring and contract enorcement. In exchange

they collect quasi-monopoly rents rom captive custom-

ers who nd it difcult to reveal their quality to otherlenders and unders. As nancial inrastructure develops

it promotes nancial market growth and competition

which leads to more efcient capital allocation and more

options or consumers.

The methodology used in this document is based

upon de Serres, Kobayakawa, Slok and Vartia (2006). The

authors use data rom Doing Business to demonstrate the

relationship between elements o nancial inrastructure

discussed here (credit bureaus and collateral rameworks)

and nancial development and growth. They also include

legal and regulatory variables related to contract enorce-

ment and bankruptcy, as well as measures o investor pro-

tection or corporate governance in their analysis. The authors take a similar approach to Rajan and

Zingales (1998) and evaluate whether rms that depend

more on external nance are more prevalent in countries

with better nancial inrastructure. Their ndings indi-

cate that nancial inrastructure signicantly impacts

both value-added and productivity growth by increasing

nance or these rms. They nd that approximately one

percentage point o an industrys annual growth rate can

be explained by nancial developmenta sizeable gure

given that annual growth rates are only a ew percentage

points (24%) on average.

This brie extends the analysis in de Serres, et al., and

uses the same variables rom Doing Business. However, italso creates an index to capture the general level o nan-

cial inrastructure in a country. It then relates the level o

nancial inrastructure (using the index) with key indica-

tors o nancial sector perormance such as deault rates,

interest rate spreads, and domestic credit to GDP. As such,

it extends the earlier analysis to a wider range o nancial

perormance measures.

The Reach

o Financial

Inrastructure

FIGURE 2

Total potential nancing volumes to be supported in emerging markets by

nancial infrastructure

155,000

US$billions

4,000

5,000

6,000

3,000

2,000

1,000

0

2007 Emerging Market GDP= $14.29 trillion

38499

285

RemittancesCredit

bureaus

2,068

1,256

812

Domestic

payments

154,195

89,350

64,845

Total current nancing volume Total potential nancing volume

Studies o fnancial inrastructure impact


9/31

5THE REACH OF FINANCIAL INFRASTRUCTURE

Te estimates in gure 2 show the

tremendous size o nancing and trans-

actions volumes supported by nancial

inrastructure. Te largest gure by ar

is that or payment systems, which reers

to retail transactions.In emerging markets, payments

inrastructure supports ows o more

than US$64 trillion annuallynearly

6 times combined GDP in these mar-

ketsand this gure could more than

double in the medium term. Te values

associated with the other types o FI are

o a dierent magnitude, because they

relate to credit provided, not transac-

tion volumes, or to a specic segments

o the payment system, or remit-

tances. Tese gures are sizeable: credit

bureaus, US$812 billion and remit-tances, US$285 billion. While remit-

tances are projected to decline in the

near term, nancing volumes are pro-

jected to grow in the medium to long-

term across all FI types.

Financial inrastructure is underde-

veloped in many emerging markets, and

non-existent in others. Potential nanc-

ing volumes shown in gure 2 are the

estimated amount o credit or transac-

tions that will be supported by nancial

inrastructure i it is expanded to emerg-

ing markets where it does not currently

exist or i the efciency o existing nan-

cial inrastructure is urther improved.

Te estimates are developed or the

medium to long-term (a ve to ten-year

horizon).

Te impact o nancial inrastruc-

ture is also signicant in terms o the

number o people aected. o illustrate

this, gure 3 shows the current reach o

nancial inrastructure, including about

390 million people in emerging markets

who are covered by credit bureaus, over

700 million who are aected by remit-

tances, and over 1 billion by paymentsystems. Again, estimates o the number

o people in emerging markets who have

the potential to be positively aected

are based on expected growth o nan-

cial inrastructure where it does not

currently exist, and expected increases

in the reach o existing nancial inra-

structure. Future growth is likely to

increase these gures in some cases by

100% or more. Financial inrastructure

is likely to support nancial transac-

tions or a majority o the worlds popu-

lation in the uture.

NOTES

7. Credit bureau impact data based in

part rom ndings reported in Barron

and Staten (2003). Please see Data Notes

or a more detailed explanation o the

methodology.

FIGURE 3

Total numbers of people aected in emerging markets

0.770.06

0.71

Remittances

3.50

3.00

2.50

Billions

2.00

1.50

1.00

0.50

0.00

2007 Emerging Market Population

= 5.5 billion

Credit

bureaus

1.01

0.61

0.40

Domestic

payments

2.97

1.87

1.10

Number of people currently aected Potential number of people aected


10/31


An adequate legal ramework, ecient

enorcement mechanisms, availability o

credit inormation and developed pay-

ment systems all contribute to the sta-

bility, depth, eciency, and access ina nancial system. Tis report devel-

ops a composite indicator to estimate

the overall role o nancial inrastruc-

ture across countries using data avail-

able in the World Bank Doing Business

database.

Consistent data on the specic ele-

ments o nancial inrastructure or a

large number o countries are limited.

Denitions and methodology or the

assessment o various aspects o nan-

cial inrastructure is also an area open

or research. As a rst step, this reportbuilds upon work done by de Serres,

Kobayakawa, Slok, and Varita (2006),

and uses indicators o nancial inra-

structure already collected in the Doing

Business report to compile a Financial

Inrastructure Index (FI Index) as shown

in gure 4.8 While these indicators are

limited in their ability to measure the

ull scale o nancial inrastructure

development and omit important areas

such as payment systems, their main

advantage is in providing a consistent

methodology and availability o indica-

tors or a large number o countries.

In this ramework, the contract

enorcement element measures the e-

ciency o the judicial system in resolv-

ing a commercial dispute. It covers the

number o procedures, time, and cost

o resolving a dispute. While the indi-

cator is based on a case study o a reso-

lution o a commercial dispute it serves

as a good proxy or enorcing credi-

tor rights in cases o non-payment. Te

access to credit component measures the

availability and scope o credit inorma-tion and the degree to which collateral

and bankruptcy laws protect the rights

o borrowers and lenders. Te investor

protection (IP) component (ollowing

the Doing Business lead we use IP here

instead o corporate governance but

the issues measured are the same) pro-

vides measures or the extent o disclo-

sure, extent o director liability, and the

extent to which shareholders can chal-

lenge transactions, including minor-

ity shareholder rights. Tis indicator

is a good proxy or the corporate gov-ernance aspect o nancial inrastruc-

ture. Te last element is bankruptcy

procedures reecting the time, cost,

and outcomes o bankruptcy proceed-

ings. As more data become available the

index can be expanded to include other

aspects o nancial inrastructure such

as payment systems, the status o audit-

ing and accounting and securities mar-

ket inrastructure.

Te FI Index numbers provide agood rst look at the status o nancial

inrastructure in countries and regions

around the world (gure 5). Interestingly,

emerging market regions do not show a

signicant variation in the value o the

FI Index. Compared to the high income

developed countries, all emerging mar-

kets all into the .45.55 band with

Eastern Europe and Central Asia hav-

ing the highest value o the Index and

Sub-Saharan Arica the lowest. However

most diferences in the regional averages

are statistically insignicant. A deeperlook into the components o the Index

reveals variation among the countries.

Te larger diferences are ound or the

access to nance component, but even

here, the diference is only signicant

between the top two regions (Eastern

Measuring

Financial

Inrastructure

Figure 3.Financial infrastructure index

FIGURE 4

FI Index components

Procedural efficiency

of the judicial system

Time efficiency ofdispute resolution

Cost efficiency of

court procedures

Coverage of public/

private registry

Credit informationscope

Legal rights of

borrowers and

secured transactions

infrastructure

Extent of disclosure

Extent of director

liability Ease of shareholder

suits

Time efficiency of

bankruptcy

procedures Cost efficiency of

bankruptcy

procedures

Recovery rate

Contract

Enforcement

Access

to Credit

Investor

Protection

Bankruptcy

Procedures

The next our sections use the FI

Index to analyze the impact o nan-

cial inrastructure on stability, depth,

efciency and access, using proxy

variables or these policy objectives

such as percent o non-perorm-

ing loans in the nancial system or

stability or domestic credit as a per-

centage o GDP or depth. Each sec-

tion also discusses the potential

transmission mechanisms behind

these results and the way that spe-

cic types o nancial inrastructure

contribute to the observed relation-

ships in the FI Index regressions.

When available, empirical studies o

nancial inrastructure components

such as credit bureaus, collateral,

etc., are cited.

Testing the impact o fnancial inrastructure using the FI Index


11/31

7MEASURING FINANCIAL INFRASTRUCTURE

Europe and Central Asia and Latin

America and the Caribbean) as opposed

to the other emerging market regions.

Te two indicators with more varia-

tioncredit inormation and creditor

rights and bankruptcy proceduresare

also the two indicators which are more

ocused on outcomes. While the Investor

Protection indicator relies ully on the

assessment o existing legal provisions,

and contract enorcement combines

legal provisions with outcomes (time and

cost), credit inormation and bankruptcy

are based on the outcomes o an imple-

mented ramework. Te lack o varia-

tion that is ound then is attributable

in part to the anecdotal evidence that

while many countries may have good

laws on the books these laws may not be

efectively enorced. o be better able to

analyze the actual level o nancial inra-structure on development, more data

collection on outcomes is necessary.

NOTES

8. A more detailed discussion o

the methodology used to create the

Financial Inrastructure Index can be

ound in the Data Notes section at the

end o this publication.

FIGURE 5

FI Index components by region

Sub-Saharan Africa

South Asia

Middle East

and North Africa

Latin American

and the Caribbean

High-income OECD

Europe and

Central Asia

East Asia

and the Pacic

0.00 0.20 0.40 0.60 0.80 1.00

Access to credit

Bankruptcy proceedures

FI Index Contract enforcement

Investor protection


12/31


Te level o development o nancial

inrastructure is closely correlated with

nancial system soundness as measured

by percent o non-perorming loans

(NPLs) in the nancial system (gure6) using NPL data through 2006. By

improving the security and eciency o

the system and protecting investors and

creditors rights, nancial inrastructure

promotes stability. And yet, the current

nancial crisis demonstrates that nan-

cial inrastructure alone is not sucient

to create stability. In act, as will be dis-

cussed later in this brie in the section

on nancial inrastructure and the cri-

sis, by enabling nancial intermedia-

tion nancial inrastructure may have

contributed, in some cases, to excessiverisk taking by nancial market partici-

pants. Te rest o this section will, how-

ever, discuss the ways in which nancial

inrastructure supports stability in nan-

cial markets.

Payment and securities settlement

systems in particular have a strong bear-

ing on nancial stability. A sound pay-

ment system can mitigate nancial

crises by reducing or eliminating settle-

ment risks related to nancial markets

transactions, in particular credit, liquid-

ity and operational risks. Te devel-

opment o real time gross settlement

(RGS) systems, which eliminate coun-

terparty risk, is one o the key responses

to the growing awareness o the need or

sound risk management.

Equally important is the soundness

o the legal ramework, in particular as it

concerns settlement nality and protec-

tion o collateral arrangements. When

the payment system unctions prop-

erly, risk sharing among agents is more

equitable, nancial resources are distrib-

uted more eciently, and there is greatercondence in the nancial systemand

in the very use o money.

Credit inormation systems and col-

lateral registries reduce inormation

asymmetries in the system. By pooling

data in an ecient institutional mech-

anism they also support ecient credit

allocation and strengthen risk manage-

ment capabilities. Ideally, in modern

nancial markets such systems should

serve three main unctions: (i) to sup-

port credit underwriting and portolio

risk management by nancial institu-tions; (ii) to serve as a basis or model

development/scoring, including scores

eventually used in securitizing assets;

and (iii) to provide regulators with the

inormation necessary or monitoring

systemic risks including or capital ade-

quacy standards under Basle II.

Tere are numerous studies using

credit bureau data which provide evi-

dence o the eectiveness o inormation

sharing. For example, Barron and Staten

(2003) show that comprehensive credit

bureau data can reduce deault rates sig-

nicantly. In their study, deault rates ell

by more than 30% when credit bureau

data included both bank and retail pay-

ment histories and both positive and

negative inormation on borrowers.

Tere is also evidence that credit

inormation promotes stability in the

micronance market. A study by Luoto,

McIntosh and Wydick (2007) related

to the introduction o credit reporting

in the Guatemalan micronance sec-

tor ound that deault rates ell at one

institution by 13 percentage points inthe six months afer operations o the

bureau began. Tis is signicant and in

a competitive market, this would corre-

spond to a reduction in interest rates o

more than 2.5%.

Other areas o nancial inrastruc-

ture are also important or nancial sec-

tor stability and soundness. Adequate

creditor rights and investor protections

build condence among creditors and

investors in stable times and allow or

eective resolution o disputes ollowing

a crisis. Better corporate governance hasalso been linked to less volatility in stock

returns and higher average share prices.

Figure 6. Financial soundness and fnancialinrastructure

Financial

System

Soundness

and Financial

Infrastructure

FIGURE 6

Financial system soundness and nancial infrastructure

2.0

NPL(percent)

FI Index quintiles

1 2 3 54

14.0

12.0

10.0

8.0

6.0

4.0

0.0

10.0

12.5

7.8

4.6

2.4


13/31

9FINANCIAL MARKET DEPTH AND FINANCIAL INFRASTRUCTURE

Figure 7. Private credit to GDP and fnancialinrastructure

Better nancial inrastructure is closely

correlated with deeper nancial mar-

kets, even aer controlling or income

per capita and other country-level char-

acteristics (gure 7). Countries withweak nancial inrastructure tend to

have lower levels o credit as measured

by the ratio o private credit to GDP.

Each element o nancial inrastructure

has a potential to contribute to the deep-

ening o the nancial markets.

In the case o payment systems and

securities clearing and settlement ser-

vices, more modern inrastructure can

improve the ability o the nancial sys-

tem to mobilize savings and increase

the pool o assets available or invest-

ment. Moreover, new technologies, suchas mobile banking, provide opportuni-

ties to capture unds digitally which can

contribute to the monetary base in the

economy.

Credit bureaus promote deeper

nancial systems by helping to over-

come adverse selection and moral haz-

ard related to asymmetric inormation

in credit markets. As a result o cost sav-

ings through more ecient and accu-

rate credit analysis and lower expected

losses, lenders can increase their credit

extension.

A recent study by Djankov, et. al.

(2007) using data rom Doing Business

analyzes the relationship between inor-

mation sharing and credit in 129 coun-

tries. It nds that the existence o credit

registries is positively correlated with the

depth o the nancial market measured

by private credit to GDP. Te study also

estimates that the private credit to GDP

ratio is higher three to ve years aer the

establishment o a credit registry and the

diference is statistically signicant.

In the case o collateral registries,they eliminate inormation asymme-

tries about collateral and thereby reduce

the risk o lending secured by movables

o all classes, including those not avail-

able in traditional systems. By making

more efective use o existing classes o

collateral and opening new classes o

collateral to use by lenders, collateral

registries promote nancial deepening.

Financial

Market

Depth and

Financial

Infrastructure

FIGURE 7

Private credit to GDP and nancial infrastructure

rivatecred

ittoGDP(percent)

1 2 3

FI Index quintiles

54

140

120

100

80

60

40

20

0

17

37

45

56

124

P


14/31


Figure 7. Private credit to GDP and

Financial inrastructure is critical or the

ecient provision o nancial services.

Te eciency issue is especially evi-

dent in the case o payments, where the

per-transaction cost is relatively easy tocompare and savings rom moderniza-

tion eforts can be calculated. Eciency

improvements rom the introduction o

credit bureaus and/or credit scoring are

also highly signicant. Lenders armed

with these data can automate or semi-

automate certain market segments (such

as credit cards and small business loans)

and can substantially reduce other pro-

cedures such as veriying identication,securing co-signers, and visiting homes

or businesses, which reduces both the

time and cost o extending credit. In

the case o collateral registries, they can

also increase eciency by acilitating

credit evaluation or easily-valued assets

such as new cars, computer equipment,

and even commodities. In the case o

non-payment, collateral registries and

the systems which support them canhelp liquidate the asset and reduce loan

losses. Similarly, good corporate gover-

nance and strong accounting and audit-

ing standards promote more ecient

evaluation o companies.

Improvements in payments inra-

structure can result in signicant cost

savings and eciency improvements.

aking a sample o 12 European coun-

tries, Humphrey, Willesson, Bergendhal

and Lindblom (2003) estimate that

bank operating costs ell by about 24%

between 1987 and 1999 due to paymentsystem reorms, resulting in savings o

US$32 billion. Looking at the U.S. mar-

ket, Bauer and Hancock (1995) and

Bauer and Ferrier (1996) estimate that

technological change was responsible

or a reduction o about 10% per year

in the cost o automatic clearing house

(ACH) transers since 1989 and or an

annual reduction o about 8% or annual

Fedwire processing costs in the early

1990s. Tese gures again correspond to

massive savings or the system.

World Bank estimates suggest reduc-

tions in transactions costs o nearly 80

percent when starting rom the highest

cost margins or credit evaluations, col-

lateralizing loans, remittances, and pay-

ments. Figure 9 presents these data. For

example, one o the least ecient remit-

tance corridors, according to the World

Bank Remittance Price Website9 is South

Efciency

o Financial

Services and

Financial

Inrastructure

FIGURE 8

Interest rate spread and nancial infrastructure

Interes

tratespread

1 2 3

FI Index quintiles

54

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

12.2

6.8

8.2

7.1

3.6

Figure 9. Financial

FIGURE 9

The potential for lower transaction costs using ecient nancial infrastructure

Costsper$100lentorsent(USD)*

Unsecured micro,

retail and small

business loans

60

50

40

30

20

10

0

Least ecient system

Notes:

The chart serves to illustrate the range of possible reductions in transactio ns costs with the use of more ecientnancial infrastruc ture. These ranges are meant to be indicative only. Actual cost reductions are contingentultimately on the eciency of the system and the level of competition in the market.All costs are per $100 lent or sent, except for remittance costs, which are per $200 sent.

Credit Bureaus: Illustrates the range of costs associated with unsecured lending by micro and small business lendersand the potential for reduction from using credit reporting technologies. The upper limit indicates average lendingcosts for micronance institutions based on 2006 MIX Market data for 798 MFIs in 96 countries. Lower limit is based onaverage small business lending costs in developed markets. Graph does not suggest that the entire reduction in costsis attributable to the use of credit bureaus alone.

Collateral:Lending costs on secured credit and leases. Based on World Bank expert estimates.

Remittances: Cost of sending remittances to remitters home country. Estimates reect the costs for sending $200 inthe most expensive corridor (South Africa to Zambia) and least expensive corridor (Saudi Arabia to Pakistan). Based onthe World Bank Remittance Price Database.

Domestic payments: Cost of sending payments in country. Based on World Bank expert estimates.

Most ecient system Total potential reduction in costs

Loans securitized

with moveable

collateral

Remittances Domestic payments

90%

80%

90%

90%

Financial

infrastructure

helps reduce

transaction

costs


15/31

11EFFICIENCY OF FINANCIAL SERVICES AND FINANCIAL INFRASTRUCTURE

Arica to Zambia which costs US$49.81

per US$200 sent. Compare this to send-

ing money to Pakistan rom nearby Saudi

Arabia where the ee is only US$5.00 per

US$200a diference o 90%.

Overall, better nancial inrastruc-

ture, such as ecient bankruptcy and

contract enorcement mechanisms

and more available credit inormation,

reduce intermediation costs, stimu-

late competition, and lead to narrowing

interest spreads.10 As gure 8 shows,

countries with more developed nan-

cial inrastructure as measured by the

FI Index exhibit higher levels o inter-

mediation eciency as demonstrated by

lower interest rate spreads.

NOTES

9. http://remittanceprices.worldbank.

org/10. See Beck, Demirgu-Kunt, and

Maksimovic (2004). Te authors show

that ecient credit registries reduce the

impact o concentration in banking and

increase access to nance.


16/31


Figure 10. Access to fnance and fnancial

Financial inrastructure is also critical or

improving access to nance. First, nan-

cial inrastructure provides the rame-

work or growth o the nancial system.

For example, innovations in paymentsystems can help reach customers where

bank branches do not exist, as with

mobile banking and other point-o-sale

(POS) arrangements. Since the number

o people with cell phones in many econ-

omies ar exceeds the number o those

with bank accounts, this new distribution

mechanism oers great potential.

Financial inrastructure can also

reduce transactions costs, allowing

private lenders to serve more people,

protably. For example, strong credi-

tor rights reduce the time and expenselenders ace in dealing with delinquent

or deaulted loans, and credit bureaus

reduce the time and cost required or

loan processing and due diligence. As

the costs o nancial intermediation all,

smaller loans and account sizes become

more attractive, allowing greater pene-

tration o rural and low income commu-

nities by credit providers and nancialservices rms.

Credit bureaus, by reducing inor-

mation asymmetries and stimulating

competition in the market, are also

supporting improved access to nance

or good borrowers. Firms report ewer

obstacles to nancing where credit

bureaus are more developed. Galindo

and Miller (2001) and Galindo and

Schiantarelli (2002) nd that rms

have improved access to nance where

credit inormation is available. Credit

inormation is also highly signicantas a predictor o the level o actoring

in an economy (weighted or GDP)

and much stronger than creditor rights

(Klapper 2006).

Another study by Love and Mylenko

(2003) uses rm-level inormation to

assess the correlations between the

existence o credit registries and use

o nance, and perceptions o nanc-ing constraints by borrowers. Using

inormation on 5,000 rms in 51 coun-

tries the study nds that rms are less

likely to report access to nance as a

major problem in countries with credit

bureaus. Te study also nds that usage

o credit is higher in countries with

credit bureaus (see gure 11).

Collateral registries and collateral

reorm have also been shown to improve

nancial system perormance, especially

access to nance or SMEs. For exam-

ple, in Romania in the ve years afersecured transactions reorm the number

o annual lings increased rom only 95

in 2000 to 359,000 in 2005. While some

o these were related to the 177,000

borrowers in the ormal nancial sys-

tem,11 many more were obtaining credit

rom non-bank lenders who urther

opened access to nanceespecially

or small rms. Research on the nanc-

ing patterns o Spanish SMEs showed

that rms pledging collateral had bet-

ter access to long-term bank loans and

young rms (which lacked credit his-

tories) used collateral pledges to signal

their quality. One o the most dramatic

cases o improvement o nancial sys-

tem perormance is the case o the

registry or security in accounts receiv-

able in the Peoples Republic o China.

According to reports rom the Peoples

Bank o China, twenty months afer the

Access to

Financial

Services and

Financial

Infrastructure

FIGURE 10

Access to nancial services and nancial infrastructure

Numberofbankaccountsper100adults

1 2 3

FI Index quintiles

54

1400

1200

1000

800

600

400

200

0

113

330449

1042

1148

Figure 11. Access to fnance is easier in

FIGURE 11

Without

credit bureau

With

credit bureau

Without

credit bureau

With

credit bureau

49%

27%

28%

40%

Probability of obtaining a bank loan

Love and Mylenko (2003).


17/31

13ACCESS TO FINANCIAL SERVICES AND FINANCIAL INFRASTRUCTURE

on-line registry began operation, there

had been nearly 75,000 lending transac-

tions using receivables as collateral reg-

istered in the registry. Tese loans had a

cumulative value o over 5 trillion Yuan

(1 USD = 6.83 Yuan). Well over hal o

these transactions were made to SME

borrowers. Nearly all middle and large

lenders have developed receivables lend-

ing products. Te success o the regis-

try has been so dramatic that it is now

being expanded to include notices o

nance leases, which amount to a vari-

ation o secured lending. In general, in

industrial countries borrowers with col-

lateral get nine times the level o credit

given their cash fow compared to bor-

rowers without collateral. Tey also ben-

et rom longer repayment periods (11

times longer) and signicantly lower

interest rates (50% lower).12,13

At the same time, it is important to

keep in mind the larger economic con-

text or nancial services. For example,

a recent World Bank study showed that

a critical actor in becoming banked

was having a salaried job and regu-

lar income.14 Understanding the moti-

vations or people to engage with the

nancial system or to use alternatives

both ormal and inormalis important

or making progress toward nancial

inclusion.

NOTES

11. Chaves, de la Pea, and Fleisig 2004.

12. Gonzalez, Lopez, and Saurina 2007.

13. Jimenez, Salas, and Saurina 2006.

14. World Bank Banking the Poor, 2008.


18/31


Te nancial crisis acing the world has

complex roots, but some lessons about

the causes are already emerging. Gaps

in regulation and oversight were a crit-

ical actor in the crisis but are not ourocus here. Rather, this section discusses

the unintended role played by nan-

cial inrastructure in the development

o the crisis. Te ollowing section then

provides suggestions or nancial inra-

structure reorms.

Financial inrastructure can help to

reduce risk and increase eciency in

nancial markets, but it can also some-

times contribute to situations where

excessive risks are taken. Tis seems to

have been the case in the current nan-

cial crisis. Earlier, nancial inrastruc-ture was compared to a system o roads

upon which nancial intermediation

occurs. Better roads reduce the time and

cost o travel but they also increase the

potential speed so accidents, when they

happen, are more severe.

Te role o collateral, and especially

xed collateral, in the current crisis is

o particular importance. Fixed collat-

eral can contribute to a leverage cycle

where assets are used to increase lending

which in turn eeds back into increases

in asset prices, causing a bubble. Also,

credit risks and the assets that are

designed to mitigate these risks are cor-

related in a crisis, urther adding to the

potential or loss when a deault occurs.

Te eciency o nancial inrastruc-

ture related to contract enorcement

and bankruptcythe two legal/regula-

tory variables in the FI Indexmay also

have contributed to a lax lending envi-ronment. I lenders believe that ore-

closure is relatively quick and low-cost

then they will be more willing to lend to

riskier borrowers. Tis positively afects

access to credit but at the same time

increases the level o risk in the system.

When widespread ailures occur and

asset prices (and demand) all, lenders

can nd themselves with illiquid assets

and capital shortalls.

Credit inormation and the empir-

ical models based on these data also

played a part in the current crisis. Insome cases, such as low-documenta-

tion loans made to borrowers with little

or no credit histories, the data (or lack

o them) in credit bureaus was ignored.

In other instances, however, there was

overreliance on the ability o sophisti-

cated empirical models to predict uture

risks. Te very complexity o some o

these models also contributed to the cri-

sis, as they obscured the risks lenders

were taking and discouraged scrutiny by

proessionals embarrassed to admit they

didnt understand them.

Finally, payment systems played a role

in the extent o the current crisis by acil-

itating the increasingly global and com-

plex web o nancial intermediation.

Tese insights should not reduce

enthusiasm or nancial inrastructure.

However, they do present challenges or

policy makers who seek to increase the

speed and eciency o their FI roadswhile still protecting the saety o the

nancial system. Te nal section on

reorms suggests ways to balance these

sometimes competing objectives.

Financial

Infrastructure

and the

Crisis


19/31

15HOW TO REFORM

Te reorm agenda or nancial inra-

structure relates to a broad set o issues,

including responding to the nancial

crisis with adequate measures or super-

vision and oversight, promoting thedevelopment o access to nancial ser-

vices as measured by the number o peo-

ple served, the types and aordability o

products and services delivered and the

types o delivery channels and technol-

ogies leveraged. At a global level, the

reorm agenda entails the development

o various standards and guidelines or

the dierent areas o nancial inra-

structure that do not currently have any

specic standards and consistent appli-

cation o standards in cases where they

do exist. At the country level, policymakers and regulators need to pay heed

to reorming individual components o

nancial inrastructure, such as credit

reporting, remittances, and payment

systems, to meet global best practice

standards. It is important to emphasize

that this section is not advocating or the

development o new regulatory institu-

tions in all instances, but more impor-

tantly, a more consistent application o

existing principles governing nancial

markets in general.

Te various issues or consideration

on the reorm agenda are listed below:

Developing global standards

and guidelines or fnancial

inrastructure areas

Various standards and guidelines have

already been developed over the course

o time to cover dierent areas o nan-

cial inrastructure. Tese were devel-

oped based on proven best practices in

countries with more developed nancial

inrastructure systems, and can oen

serve as a good sounding board or pol-icy makers and regulators looking to

reorm in their own countries. Some

o the nancial inrastructure areas,

such as payment, securities settlements,

remittances, and secured transactions,

are airly advanced in this regard, and

already have a wealth o standards and

best practice guidelines to rely upon.

Tese provide useul guidance or policy

makers and regulators looking to reorm

these key nancial inrastructure areas

and include:

l Committee on Payment andSettlement Systems (CPSS): Core

Principles or Systemically Important

Payment Systems (Large-value pay-

ment systems)

l CPSS: Settlement risk in FX trans-

actions (on oreign exchange settle-

ment risks)

l CPSS-International Organization o

Securities Commissions (IOSCO)

Recommendations or Securities

Settlement Systems

l CPSS-IOSCO Recommendations or

Central Counterparties

l CPSS: Central Bank Oversight o

Payment and Settlement Systems

l CPSS-World Bank General Principles

or International Remittance Services

l CPSS: Te Interdependencies o

Payment and Settlement Systems

l CPSS: General Guidance or National

Payment System Development

l CPSS: New Developments in Clearing

and Settlement Arrangements or

OC Derivatives

l CPSS: Cross-border Collateral

Arrangementsl United Nations Commission

on International rade Law

(UNCIRAL): Legislative Guide on

Secured ransactions

Other areas o nancial inrastruc-

ture, on the other hand, including credit

reporting, are yet to develop their own

set o standards. Reorm eorts in the

area o nancial inrastructure, going

orward, require the development o

standards or each o the key nancial

inrastructure areas.

Regulation and oversight in

response to the crisis

Te current crisis has ocused attention

on gaps and ailures in regulation and

oversight o nancial markets. Tere

is widespread agreement that more

eective oversight could have identi-

ed problems earlier and potentially

reduced the extent o the current crisis.

In broad terms, priorities or regulatory

reorm or FI are the same as those or

the nancial sector as a whole: increas-

ing transparency and disclosure; limit-

ing conficts o interest and incentives

problems; and establishing authority or

oversight o complex systems which may

include unied supervision.

Tere are some valid questions, how-

ever, about the ability o regulations and

regulators to stay ahead o innovation in

the nancial marketplace. Regulations

How to

Reform


20/31


and oversight are a critical part o the

reorm agenda but must be accompa-

nied by other important changes in

the system involving both providers

and consumers. Tese changes include

enhanced transparency and disclosure,

strengthening business ethics and devel-

oping nancial capability in the popula-

tion to create more inormed and critical

nancial consumers.

Te crisis also provides a learning

opportunity or even the most devel-

oped markets that have been shown to

be no less susceptible to it. Past crises

have taught us, however, to exercise cau-

tion while advocating or new laws and

regulations that threaten to over burden

the nancial sector and stie innovation

and the development o nancial mar-

kets in general. In other words, regula-

tors and policy makers should strike ane balance between the two competing

objectives o oversight and supervision

on the one hand, and making nancial

services aordable and available to all on

the other hand.

Reorming access to fnancial

services

Ultimately, nancial inrastructure in

any given country should aim to maxi-

mize the coverage o nancial products

and services in terms o the numbers o

people reached, and through efciencyand reduced transactions costs pro-

mote the development o a wider range

o client-ocused and aordable prod-

ucts. Reorms on nancial inrastruc-

ture should keep in mind the need or

simultaneous reorm in existing systems

that enable access to nancial products

and services.

Keeping these broader objectives

in mind, rom the perspective o pol-

icy makers and regulators, reorming

access to nancial services include the

ollowing:

l Developing more inclusive legal and

regulatory rameworks. Reorms

to existing credit reporting laws or

secured transactions rameworks,

or instance, can enhance the inor-

mation base upon which lenders

make lending decisions, and expand

the provision o nancial products

and services to the underserved and

unbanked;

l As in other areas o regulation,

ensuring proportionate policies on

nancial integrity. For example, pro-

portionate regulatory policies should

aim to reduce the burden o reporting

and compliance on smaller transac-

tions, and thereby ensure competi-

tiveness in markets;

l Leveraging new technologies. Te

most prominent example o a new

technology that has implications or

greater nancial inclusion, is that

o mobile banking applications. In

some markets today, cell phones ar

outnumber the number o banks

accounts. Policy makers and regula-

tors should leverage this and other

technologies as a means to expanding

the number o access points to pro-vide nancial products and services,

and thereby the reach o nancial

inrastructure. Tis includes putting

in place appropriate rules and over-

sight or agent banking, and level-

ing the playing eld between bank

and non-bank players, while at the

same time maintaining a high level

o operational security and sufcient

interoperability across systems and

networks;

l Enabling bundling o nancial ser-

vices. Te practice o bundling pro-duces efciencies through economies

o scale and lowered transaction

costs, which are passed on to the nal

consumer. Policy makers and regula-

tors should also emphasize the need

or transparency and more disclosure

on bundled nancial services, which

relates to the promotion o responsi-

ble nancial practices;

l Actively promoting more respon-

sible nancial practices. In the all-

out o the crisis, more emphasis is

being placed on responsible nance.

Responsible lending practices have

already stimulated some o the dia-

logue on nancial markets reorm in

the more developed markets, like the

U.S. or instance, and will largely be

driven by the supervisory authori-

ties. Reorm in this area would entail

the provision o ull disclosure on the

part o lenders and nancial services

providers, and potentially the devel-

opment o consumer education as a

natural extension o nancial ser-

vices and products.

l Educating the consumer. Te onus

o creating responsible consumers

lies in part on lenders and in great

part on the ultimate consumer him-

or hersel. Reorms to instill greater

consumer awareness and education

have been instigated on the part o

the government in several coun-

tries, such as in Canada, Mexico,

and the UK, through, or instance

school education, the development

o national commissions on nancial

education and awareness and other

such activities. Given the sheer num-

ber o consumers, reorm eorts in

this area should emphasize the devel-opment o as many delivery channels

as possible or the education o the

consumer.

Reforming the key Financial

Infrastructure areas

Credit bureaus

Credit bureaus are critical elements

o nancial inrastructure that serve

to reduce inormational asymmetries

between lenders and borrowers. Tey

are only as useul as the level o detail oinormation, and quality o inormation

available in them. Te key priorities or

reorm in this area or emerging mar-

kets, thereore, entail the development

o comprehensive credit reporting sys-

tems with an emphasis on the ollowing:

l Promoting the development o ull-le or positive and negative reporting;

l Enabling comprehensive creditreporting and the inclusion o data

rom nancial and non-nancial

institutions, such as retailers, utili-

ties, and telecoms;

l Coverage o retail, micronance, andSME sectors;

l Strengthening prudential supervision capacity through the use o

credit inormation data; and

l Encouraging the development o anancial education oering through

bureaus themselves.


21/31

17HOW TO REFORM

Remittances

Te priorities or reorm under remit-

tance services are to expand outreach

and the number o access points to con-

sumers at aordable rates. Tis can be

done by encouraging competition and

leveling the playing eld between bank

and non-bank providers o remittance

services. Public policy makers and reg-

ulators looking to reorm remittance

services are oen aced with confict-

ing objectives o providing adequate

saeguards against money laundering

and terrorist nancing activities, and

the need to encourage more compe-

tition, transparency and greater con-

sumer choice. Te General Principles

on Remittances provide the general

ramework or public policy objectives

with respect to remittance services and

can guide policy makers and regulatorswith respect to the key priority areas or

reorms in this area (see Box below).

Payment and securities settlement

systems

Reorms to payment and securities set-

tlement systems traditionally begin with

the development o a national payment

system strategy. Key priorities under

this strategy would include:

l Strengthening o both organizedmarkets and central bank acilities

or liquidity provision;

l Settlement o securities transactionsin a true delivery-versus-payment

basis;

l Settlement o oreign exchange trans-actions in a payment-versus-pay-

ment basis (e.g. CLS Bank);

l Design o sae settlement mecha-nisms or nancial derivatives (both

exchange-traded and OC);

l Application o international stan-dards or central counterparties; and

l Design o better oversight andcoordination mechanisms by the

authorities.

For a more in-depth review o what

can be done to reorm the payment and

settlement systems inrastructure in a

country, policy makers, and regulatorscan consult the numerous standards and

best practice guidelines already estab-

lished in this area. Te World Bank

Groups Payment System web site hosts

these and other related inormation. 16

Te realm o payment and settlement

systems have expanded beyond tradi-

tional access points and now involve

new delivery channels such as branch-

less banking, mobile banking and the

introduction o e-money. With these

new access points come new concerns

as regulatory and supervisory authori-

ties now have to look beyond their tra-

ditional regulatory perimeters and

collaborate with other supervisory agen-

cies having a purview o other industries

that are now involved in the business o

providing nancial services. Branchless

banking, or instance, cuts across a

number o regulatory domains and

industries, and enorcement will only be

eective i there is greater coordination

between the various supervisory agen-

cies involved. In addition, regulators are

grappling with issues o providing ade-

quate consumer protection as these new

agents and technologies bring with them

a host o issues such as agent liability

issues, excessive service ees, inadequate

or non-existent customer service, raud-ulent practices and others to name a ew.

Collateral

Reorms or collateral extend rom the

establishment o a sound legal and reg-

ulatory ramework or collateral to the

creation o a unied collateral registry

system in a country. Te legal rame-

work or collateral should provide or

the creation, perection, and enorce-

The General Principles on Remittances

are aimed at the public policy objec-

tives o achieving sae and efcient

international remittance services. To

this end, the markets or the services

should be contestable, transparent,

accessible and sound.

Transparency and consumer

protection

l General Principle 1. The marketor remittance services should be

transparent and have adequate

consumer protection.

Payment system infrastructure

l General Principle 2. Improve-ments to payment system inra-

structure that have the potential

to increase the efciency o

remittance services should be

encouraged.

Legal and regulatory environment

l General Principle 3. Remittanceservices should be supported by

a sound, predictable, nondiscrim-

inatory, and proportionate legal

and regulatory ramework in rel-

evant jurisdictions.

Market structure and competition

l General Principle 4. Competitivemarket conditions, including

appropriate access to domestic

payment inrastructures, should

be ostered in the remittance

industry.

Governance and risk management

l General Principle 5. Remittanceservices should be supported by

appropriate governance and risk

management practices.

Roles of remittance service provid-

ers and public authorities

l Role of remittance service pro-viders. Remittance service pro-

viders should participate actively

in the implementation o the

General Principles.

l Role of public authorities. Publicauthorities should evaluate what

action to take to achieve the

public policy objectives through

implementation o the General

Principles.

The General Principles and Related Roles 15


22/31


ment o security interests. In particular

these entail:

l Creation o a security interest bysimple agreement o the parties

(creation);

l Establishment o priority o a secu-rity interest against third parties

(commonly known as perection);

l Use o notice registration (alsoknown as ling) and creation o a

notice registration system; and

l Simple and expeditious enorcemento a security interest upon deault by

the debtor (enorcement).

A well-developed collateral rame-

work also has synergies with important

aspects o the legal ramework such as

contract enorcement and insolvency

/ bankruptcy. When creditor rights are

clearly established, contracts are more

easily enorced and disposition o assetso distressed borrowers can proceed

more efciently and systematically.

NOTES

15. Committee on Payment and

Settlement Systems and Bank or

International Settlements, 2007.

16. World Bank Group Payment Systems

and Remittances. http://www.world

bank.org/paymentsystems.


23/31

19DATA NOTES

Data and methodology used to

estimate reach of FI

Several dierent data sources were used

to develop the impact measurements or

nancial inrastructure including theWorld Bank Doing Business Database,

the World Bank Global Payment Systems

Survey and IFC and World Bank data on

securities markets, collateral registries,

and remittances. Tis section briefy

describes how the estimates presented

in this document were developed.

Credit Bureaus

Doing Business data indicate that

approximately 396 million individuals

have les in credit bureaus. We assume

that 50% (198 million) actually receivenancing, as not every credit bureau le

results in access to credit or is tied to a

loan. Tis number (198 million) is then

multiplied by the average small enter-

prise loan (US$4,100) as per data rom

Doing Business surveys. Tis gives us

total nancing volume o approximately

US$812 billion.

Te number o people positively

aected by credit reporting is estimated

to roughly double over the next ve

years, to reach a total o nearly 1 billion

people worldwide. Tis gure is based

on growth in emerging markets which

already have credit bureaus as well as

the establishment o credit reporting in

countries where it doesnt already exist.

For these estimates we take the eco-

nomically active population in countries

with (1.23 billion) and without (1.28 bil-

lion) credit reporting and then make

some assumptions: 40% o the economi-

cally active population would be credit

worthy and only hal o these would get

credit. Volume o credit is again esti-

mated by multiplying by US$4,100 oreach additional person receiving credit

(totaling US$1.3 trillion) and the bor-

rower as well as at least one other person

(their household) are expected to benet

rom each o these loans (610 million).

Remittances

Te estimates or remittances rely

on extensive research done by the

Inter-American Development Bank

(IADB), World Bank, and International

Organization or Migration on the

global remittance market. Te IADBestimates that 75% o the approximately

190.6 million migrants worldwide send

remittances. Since remittances typically

support amilies, the IADB multiplies

this number by our to get the total num-

ber o people impacted by remittances

about 715 million. Growth o 1.5% per

annum or migration is used as the basis

or uture remittance fows, as lower levels

o economic growth are likely to impact

migration patterns. Tis yields another

55 million people who would be aected

in the next ve years (and includes both

the migrants and their amilies).

Te value o remittance fows is now

being tracked by international organiza-

tions. Te World Bank estimates that in

2007, remittances to developing coun-

tries were approximately US$285 bil-

lion. Te World Bank is projecting the

remittance market to be US$384 bil-

lion in the next ve to ten years, using

average growth o 3% per annum which

accounts or some slowdown due to the

global economic downturn. On the one

hand, given the current economic cli-mate and possible decrease in remit-

tance fows on an annual basis in 2009,

this gure may be too large. At the same

time, increasing eorts to move remit-

tances into the ormal system will con-

tribute to higher gures as a greater

share o the total fows are captured by

ormal statistics.

Payment Systems

Te World Banks Global Payment

Systems Survey provides the rst source

o comparable data on payment systems.Te survey covered 142 countries, o

which 96 are developing countries. Te

estimate o number o people currently

impacted assumes that slightly more

than 60% o the economically active

population in these countries is directly

using the payment systemto some

extent. Tis number is multiplied by 2

to account or the household impact (as

was also done or credit bureaus) yield-

ing 1.1 billion participating in payment

systems.

Te volume o retail payment system

transactions is reported to be approxi-

mately US$65 trillion in the survey. A lit-

tle more than hal o this amount (US$36

trillion) is processed as checks, ollowed

by direct credits (US$19 trillion) and

debit cards (US$9 trillion).

Estimates or growth in payment

systems start with the assumption that

Data Notes


24/31


60% o the economically active popu-

lation will be using the payment system

in developing countries in the medium

term. Tis means that an additional

1.5 billion will ultimately be aected

in countries or which survey data are

available. In non-survey countries, tak-

ing the assumption that 60% o the eco-

nomically active population will be

aected results in an additional 390 mil-

lion people. (Tese fgures include peo-

ple both directly and indirectly aected;

as beore, the indirect aect still assumes

a doubling o the number.)

In terms o transaction volumes,

some expert assumptions are used to

develop growth estimates. For surveyed

countries annual growth rates o 24,

18, and 16% are used or low-income,

lower-middle and upper-middle income

countries respectively. Te result is anadditional US$86.5 trillion in transac-

tions volume in the surveyed countries

over the next fve yearswhich includes

the largest emerging market countries.

Based on BIS statistical inormation col-

lected on payment systems in devel-

oped countries, it is estimated that the

average value o a payment system

transaction per inhabitant is approxi-

mately US$250,000. Using this fgure

as a benchmark, we estimate that the

average value o payment system trans-

actions in upper-middle income coun-tries is approximately US$25,000 (10%);

in lower-middle income countries,

US$10,000 (4%); and in low income

countries, US$2,500 (1%). Applying

these per inhabitant averages to the

respective countries population, we

get a total fnancing volume acilitated

by payment systems o approximately

US$2.9 trillion in non-survey countries.

aken with the additional US$86.5 tril-

lion growth in the surveyed countries,

the total estimated growth in transac-

tions volume is US$89.4 trillion.

The FI Index

Te FI Index aims to measure the state

o development o fnancial inrastruc-

ture at a country level. Te index cur-

rently covers three areas o fnancial

inrastructure:

l credit reportingl creditor rights and movable collaterall corporate governance

Te index will be expanded in the

uture, and existing measures will

be refned to better capture the scale

and scope o fnancial inrastructure

development.

Te FI Index represents quintile

rankings o a simple average o fnancial

inrastructure component indexes and

ranges on scale o 1 to 5. A country with

a ranking o 5 on the FI Index has a moredeveloped fnancial inrastructure and is

in the top 20% globally. A country with a

ranking o 1 is in the bottom 20%.

Te average fnancial inrastructure

component index is calculated as a sim-

ple average o credit reporting, credi-

tor rights, and payment system indexes.

All o these indexes are rescaled to 10 to

allow equal weight or each component.

Te credit reporting index captures

both scale and scope o inormation

sharing. It is calculated as a product o

credit registry coverage and the creditinormation index rom Doing Business.

Te calculations are based on the inor-

mation published in the DB 2008 report.

Credit registry coverage measures the

scale o credit reporting inrastructure

and is calculated as a maximum o pri-

vate and public registry coverage. Te

Credit Inormation Index measures the

scope and quality o inormation and

ranges rom 1 to 6. Please see Doing

Business 2008 or the methodology o

the credit inormation index, private

bureau, and public registry coverage.

Te Strength o Legal Rights Index

available in the Doing Business Report

is used to measure the degree to which

collateral and bankruptcy laws pro-

tect the rights o borrowers and lend-

ers. Te index ranges rom 1 to 10.

Please see Doing Business 2008 or the

methodology.


25/31

21REFERENCES AND SUGGESTED BIBLIOGRAPHY

References

and

Suggested

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