FINANCIAL INCLUSION INDICATORS FOR DEVELOPING COUNTRIES: The Peruvian Case Giovanna Prial Reyes, SBS Peru,* Luis

Daniel Allan Caote, SBS Peru,* and Rafe Mazer, CGAP I. Introduction The importance of sound and effective social inclusion policies has been widely accepted for more than a century. However, one aspect of social inclusion that has been given only limited consideration at the national (and global) policy level until recent years is financial inclusion. Financial inclusion refers to broad access to a portfolio of quality financial products and services which include loans, deposit services, insurance, pensions and payment systems, as well as financial education and consumer protection mechanisms. Traditionally policymakers have been more focused on the soundness of the financial system itself, and providing the right incentives for financial institutions (FIs) to engage in their business while taking into account and controlling their risk exposure. However, the emergence of country-level policy mandates around financial inclusion, coupled with new international initiatives such as the G20s Global Partnership for Financial Inclusion (GPFI), have brought considerable momentum to this topic. A central challenge for policymakers seeking to improve financial inclusion within their country is how you can measure and monitor whether changes in policy or financial inclusion strategies impact the levels of access and the types of financial services reaching its citizens. Part of the challenge of accurately measuring financial inclusion, and identifying barriers to access that limit participation by certain populations, is that data collected on financial access and inclusion remains fragmented and incomplete. Lack of clear and meaningful data makes it difficult to understand the size of the gap in the provision of financial services and the best policies that governments can put into operation to reduce it. Without such data, policymakers may find themselves acting more on hunches or best guesses as to how to increase access, reduce disparities within a country, or incentivize the right kinds of products and delivery channels for their citizens financial needs. Fortunately, the volume and quality of financial inclusion data is improving rapidly through national-level surveys in countries such as Kenya, Thailand, Mexico and Peru, as well as global efforts such as the Alliance for Financial Inclusions Financial Inclusion Data Working Group, and the GPFIs SubGroup on Data and Measurement. This brief seeks to demonstrate how financial indicators can contribute to improved analysis of a countrys state of financial access, and subsequently more informed financial inclusion policymaking. This paper will use the experience of the Superintendent of Banks and Insurance in Peru to offer insight for policymakers on 1. Establishing financial inclusion indicators that can be measures of both progress towards, and continuing gaps within, financial access; and 2. Developing second-level measurements based on these indicators to track specific topics such as intra-country distribution of financial services and the correlation of financial access and social and economic development indicators. II. Defining Financial Inclusion A first step in producing effective indicators of financial inclusion levels is defining what we mean by financial inclusion [See the example of the Peruvian governments definition in Box 1]. There has been some debate amongst specialists around this term, and there is not still a widely approved definition of financial inclusion, yet most definitions of financial inclusion to emerge recently have included certain core elements: Broad access to a range of financial products and services; Financial literacy and financial capability initiatives, and a consumer protection framework; and Minimum requirements for these financial products and services in terms of availability, quality, cost and sustainability.

The authors work at the Superintendence of Banking, Insurance Companies and Private Pension Funds of Perus Office of Products and Services to the Consumer. Please send questions and comments to gpriale@sbs.gob.pe or lallain@sbs.gob.pe. This papers findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the Superintendence. All errors in this paper are responsibility of its authors.
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Box N 1 The Peruvian Definition of Financial Inclusion Financial inclusion means that the majority of the population has broad access to a portfolio of quality financial products and services which include loans, deposit services, insurance, pensions and payment systems, as well as financial education and consumer protection mechanisms. Promoting financial inclusion requires creating or enhancing market incentives to develop and provide financial products and services focused on populations with low levels of access or use of other types of financial products and services, as well as empowering financial users with the tools needed to better understand financial products and services offered and the channels required to enforce their consumer rights. Greater financial inclusion can promote economic development through the establishment of mechanisms that allow for greater access to products and services of financial institutions; deeper knowledge about banks and microfinance institutions, insurance companies and private pension funds; and improved information disclosure regarding financial products and services features, benefits and costs for consumers.

In addition to defining what is meant by financial inclusion, it is important to distinguish between two categories within the financially excluded: Those who do not use the financial system due to the barriers that prevent them from contracting with existing financial institutions, like geographical barriers, cultural barriers, trust issues or inadequate products and services for a specific environment; but who would be able to access and use the financial products and services offered by financial institutions in case such barriers were lifted. Those who do not use the financial system because they do not have the means or the resources to use the financial system; that is, their economic condition is so critical that they wouldnt have any means of repayment of a credit, however little it was, nor do they generate enough resources to cover even their most basic needs. The first category of financially excluded could in the future engage in a productive and beneficial use of the financial system if some market conditions are changed. However, the second group may be at a stage where financial inclusion policy will offer little help, and instead they would need a more direct approach to combat their poverty issues: direct transfers or subsidies of resources, social programs to enhance labor, and other actions that would have a direct impact on their income levels. When determining how to act and whom to target with expanded financial inclusion efforts, policymakers may need to be careful to include only those people who meet certain basic economic well-being in the short-term, whereas those who do not meet these conditions will need other types of support before being able to become financially included. III. Using Financial Inclusion Indicators for Targeted Policymaking: The Superintendence of Banking, Insurance Companies and Private Pensions Funds of Peru

The last decade has been one of consistent economic growth for Peru, with an average annual GDP growth of 5.98%, and GDP per-capita from $2,084 to $5,255 between 2001 and 2010. The improving economic environment allowed for sustained growth of the financial system while maintaining internal price stability during the last decade. These results are reflected in increased financial intermediation through regulated FIs, which include private and state-owned banks, finance companies and microfinance institutions (municipal savings and loans institutions, rural savings and loans institutions and entities for the development of micro and small enterprises), all of which are regulated and supervised by the SBS. Undoubtedly, the last decade has shown an explosive growth of loans and deposits, which have both increased by more than 250% between 2001 and 2010, reaching US$ 45,986 and US$ 51,667 million by the end of 2010, respectively. This growth continues, reaching US$ 51,810 and US$ 54,685 million by the end of July in 2011. However, when compared with other Latin American countries, these economic and financial results have not translated into a deeper penetration of financial products and services in relation to the size of the economy. Despite total deposits as a percentage of the GDPa commonly used ratio for measuring financial penetration

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having increased from 19.7% in 2004 to 26.9% during the last five years, Peru is still below the regional average for this indicator (considering deposits in private banking institutions only.) [see Box 2]
Box N 2 Financial Depth 2009 Loans ODCs* / GDP 12.00 29.53 74.60 19.67 30.77 20.49 28.30 Loans from Commercial Banks 11.98 23.44 73.45 16.65 25.67 20.46 24.21 Deposits ODCs* / GDP 17.19 78.45 61.94 24.27 43.15 35.27 32.86 Deposits from Commercial Banks 17.18 44.29 61.46 20.88 35.28 35.25 26.59

Argentina Brasil Chile Mxico Guatemala Uruguay Peru

*As defined by the International Monetary Fund, ODCs (Other Depository corporations) includes commercial banks and other deposit-taking institutions. The ODCs includes save and loan associations, mortgage companies, microfinance institutions and others. / Indicators of Financial Inclusion of Financial System, Insurance and Pension Funds, December 2010. /Indicators for Peru consider loans and deposits given by financial companies (multiple banking, leasing companies, municipal savings and loans institutions, rural savings and loans institutions, entities for the development of micro and small enterprises (Edpymes), Agrobanco and Banco de la Nacin, consumer loans only)

To better address the lack of full penetration of financial services and products to its population, in 2010 the Superintendence of Banking, Insurance Companies and Private Pension Funds of Peru (SBS) developed and began to measure a series of indicators to assess how deep or shallow access and use of financial products and services is within the Peruvian population; to map out how financial inclusion levels have evolved during the past decade; and to determine what measures can be taken in order to deepen financial access in Peru. The work to measure financial inclusion indicators in Peru is focused on data that can be measurable and meaningful for developing countries, in which there is urgent need to understand financial inclusion levels of low-income, lowaccess populations in particular, and to take proactive and effective action to improve upon financial access and inclusion amongst these populations. Developing National Financial Inclusion Indicators It is in this context of improving financial penetration that the SBS has developed a first set of financial inclusion indicators, whose main objective is to provide them with information regarding access and use of financial products and services, so adequate measures can be taken to correct and improve any identified weaknesses and to measure the impact of any policy action taken on financial inclusion levels, in order to identify policy actions that are effective in boosting financial intermediation. As a result, the SBS in Peru developed a set of 13 financial inclusion indicators, classified in three groups1 [see Box 3, 4, 5]: Indicators of access; Indicators of use; and Indicators of geographical inequality distribution.2 Using data for these indicators from 2001-present, the SBS has been able to observe several trends in financial inclusion within Peru:

The financial inclusion indicators used by the SBS in Peru are based on the work of Beck et al. (2006), with an additional five indicators developed independently. See Thorsten Beck, Asli Demirguc-Kunt and Maria Soledad Martinez Peria, Reaching out: Access to and use of banking services across countries. World Bank, March 2006. 2 These indicators have been calculated for the period 2001 2009, except for financial institutions branch data, which was available from 2000 to 2009; financial institutions ATMs and banking agents, which was only available from 2008 to 2009; and loan and debtor-related data, which covers the period 2002 2009.
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A constant increase in the past decade in the number of access points3 per 1000km and per 10,000 adults; An increasing, but still underdeveloped compared to peer countries, ATM network; A rapid growth in the number of agents4 from 2006 to 2010geographically and per capitathat is now more than triple the figure for branches (7 agents per 1,000km, in comparison to 2 branches per 1,000km); A reduction in the average size of deposits and of loans to GDP per capita, which most likely reflects an increased presence of smaller-value depositors and smaller loan amounts, both of which are signs that financial services are reaching lower-income segments of the population than previously. A growth of 18.7% in the participation of loans and deposits originating outside of Lima, the Peruvian capital and economic center, from 2001-2010. This means that the participation of loans in provinces has grown faster (or decreased slower) than participation of deposits in provinces, thus suggesting a transference of resources from Lima to other cities by via province-based financial institutions. Similarly, the normalized ratio of total loans outside Lima over total deposits outside Lima has grown by nearly 3% per year. This also suggests that funding for those loans should have come from other sources of financing not located in these provinces, like deposits from Lima or credit lines from banking institutions from Lima or abroad.
Box N 3 Financial Inclusion Indicators Used by the SBS Peru

I) Indicators of Access: Broad figure for estimating the existence and quantities of provision channels available to the adult population; that is, how many locations providing access to financial products and services are available. 2005 2006 2007 2008 2009 2010 1.Number of branches per 1,000 km 1 1 2 2 2 2 2.Number of branches per 100,000 adults 9 10 11 15 17 17 3.Number of ATMs per 1,000 km 2 2 2 3 3 4 4.Number of ATMs per 100,000 adults 13 15 18 23 25 28 0 1 2 3 5 7 5.Number of agents per 1,000 km 6.Number of agents per 100,000 adults 0 10 15 25 33 50

Examining issues of intra-country inequality and distribution via financial indicators

Box N 4 Financial Inclusion Indicators Used by the SBS Peru II) Indicators of Use: Broad estimates of the portion of the adult population who actually use financial products and services through any available channel; that is, who decide to use those products, services and access channels made available to them by FIs. 2005 2006 2007 2008 2009 2010 7. Number of depositors per 1,000 adults 558 595 638 674 714 816 8.Number of borrowers per 1,000 adults 169 183 201 227 235 251 9.Average size of total deposits per depositor to GDP 1.84 1.70 1.83 1.96 1.89 1.87 per capita (number of times) 10.Average size of total loans per borrower to GDP 0.72 0.64 0.70 0.75 0.72 0.64 per capita (number of times)

3 4

The number of access points is the sum of branches, ATMs and agents. In 2005 the SBS established the regulatory framework for the operation of the agents.

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Box N 5 Financial Inclusion Indicators Used by the SBS Peru III) Indicators of Geographical Inequality Distribution 2005 2006 2007 2008 2009 2010 11.Difference between participation of loans in 6.92 8.18 9.05 12.20 15.93 18.72 provinces and participation of deposits 12.Total loans in provinces to total deposits in 1.06 1.12 1.16 1.28 1.25 1.19 provinces (index) 13. Gini indexes between population, loans, deposits, and access points per region [discussed in the Annex of this brief]

Examining issues of intra-country inequality and distribution via financial indicators Financial indicators such as those utilized by the SBS are useful to monitor how financial access is changing from year-to-year and over a large time-series at the national level. This basic indicator data can also be used to examine further specific topics that can provide clues to where policymakers should focus their financial inclusion efforts to address existing gaps or inequalities in access. For example, in Peru the initial data provided from their 13 financial inclusion indicators was aggregated at the regional level and run against the Lorenz curve and Gini coefficients to identify if there are particular financial access gaps in certain regions of the country. These indicators seek to measure two key variables for financial inclusion: The effect of regional FIs operating outside their base cities on the allocation of financial services and products to different regions. The SBS was interested in analyzing the behavior of municipal and rural savings and loans institutions whose main offices are located outside of Lima, and if they are using their branches in Lima to cross-finance projects in lower-income cities; that is, if the presence of a bigger branch network allows for resource transfers between high-income and low-income regions. The hypothesis here is that municipal and rural savings and loans institutions are financing the creation of loans in Peruvian provinces with deposits raised in Lima, effectively contributing to a redistribution of resources. As a first approach, the SBS has followed the evolution of credits and deposits generated in Lima and in other regions considering that average income levels in Lima are superior to those of other cities. The distribution of loans, deposits and FI branches, comparing them against the population distribution in Peru, at the departmental level. For this indicator, the SBS estimated Gini indexes to compare the cumulative distribution of resources against the cumulative distribution of population (the Lorenz curve), thus measuring deviations in resource distribution from a perfectly equitable distribution. These indexes do not take into account other factors like regional production levels or initial wealth of the population in each department, thus allowing us to see the pure statistical distribution, which then can be used as a starting point to find some answers about financial inclusion in each department.

To measure these two variables, the SBS utilized three series of Gini indexes to gauge financial access and compare the cumulative distribution of Peruvian population per department against the total value of the loans, the total value of the deposits, and the number of financial institutions branches opened in each department. These three series allow the SBS to study the evolution of the inequality in the distribution of loans, deposits, and FI branches, while the three of them combined allow them to investigate the relationship between these three distributions.

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Distribution of Loans During the past decade, the Gini index for the distribution of total loans decreased from 0.60 to 0.46, due to the reduction in the participation of loans created in Lima from 85% to a little over 70% of the total portfolio of loans in the financial system. This process has been continuing steadily during the decade, with each year registering a constant increase of the participation of loans in provinces over the total loan portfolio and a constant decrease of the Gini index of about 0.02 points and during the year 2010 the index was constant. Distribution of Deposits Regarding deposit distribution, however, the SBS did not observe the same process. The Gini index of deposits against population decreased from 0.58 to 0.54 between 2001 and 2010, but most of that decrease was achieved between 2008 and 2009 (0.04 points). In fact, this Gini index increased during 2010, due to a significant raise of deposits in Lima. Total deposits in Lima have accounted for 78% - 79% of total deposits during most of this period, which could mean that people in Lima have a greater capability for savings, but could also be the result of a strategy in the financial system for raising resources in Lima in order to finance their lending in other regions.

2010 2001

2010 2001

Distribution of Access Points In 2005 the SBS established the regulatory framework for the 2010 operation of the agents. They are typically small retail points such as pharmacies, grocery stores and other retail 2006 establishments. One of the main suppositions regarding financial exclusion is lack of access points (branches, ATMS and agents), but in the Peruvian case this has not been the case. The Gini index has been very low during the decade, ranging from 0.33 in 2006 to 0.31 in 2010, which means that inequality in the distribution of access points against population of each department has been low. Even more surprising, Lima is not located at the top of the access points distribution, but Arequipa, is before Lima in 20010 (Lima has 144 access points per 100,000 people while Arequipa has 178 access points per 100,000 adults in 2010). Besides, Lima branches have decreased their participation from 43% in 2006 to 41% of the total branch network. This result indicates that the observed inequalities in the geographical distribution of loans and deposits could be less related to lack of access and more related to other factors, like lack of knowledge about the products and services offered by the financial system, low levels of trust in the financial system or a perception that existing products and services are not adequate for part of the population (especially in the case of deposit accounts). The results of the 13 financial indicators and related Gini coefficients exhibit how financial institutions in Peru have been making an effort to increase their network reach, especially in later years, with agents being one of their most potent tools in doing so. However, while branch distribution has never been as unequal as deposits or loans, and loan distribution has been reducing its inequality levels in a slow but constant rate, the deposit distribution is still heavily concentrated in Lima. This leads to the conclusion that the financial inclusion process in Peru to date has been pushed principally from the credit side (retail or small-business loans). So while more funding is available for people living outside Lima, there is not a deposit-creation process of the same level going on, despite the existence of financial institution branches (often named as one of the most important drivers of

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deposit creation), which could mean that people outside Lima face other barriers besides lack of physical access to become financially included, at least from the savings side. Without more detailed information regarding financial access, use of financial services, and financial literacy of the Peruvian population, it is difficult to pinpoint the exact nature of these barriers. To address this limitation of first-round measurements of financial access, it would be beneficial to pursue greater measurements of three different types of barriers: a) geographical (even at the department level, branches are more concentrated in urban areas while the population is distributed in rural areas, and travelling to the closest branch is difficult or costly); b) informational (the population doesnt know, or doesnt know how to use, or doesnt trust in financial institutions deposit accounts, so they dont use them) or c) operational (deposit accounts in the market are difficult to use or very costly to use for the population i.e. its difficult to access a branch, a FI agent or an ATM to make a withdrawal so they dont have the incentives to use them). Next steps in measurement In order to take into account these distribution inequalities across different regions and deepen analysis of the reasons behind these different behaviors, the SBS is currently developing a composite indicator, The Financial Touch-Point Access matrix, to provide more information about the correlation between population, physical availability of financial products and services and welfare indicators. This composite indicator will provide deeper insight into the relationships between financial inclusion and economical well-being and will allow the SBS to take into account different levels of financial inclusion across different districts, provinces and regions. The Financial Touch-Point Access matrix correlates in a 5 x 5 grid three indicators: population (in percentage), districts (in percentage) and the needs index estimated for each group, according to the Poverty Map elaborated by Perus Cooperation for Social Development Fund (FONCODES). Each group (which accounts for a cell in the 5 x 5 grid) is formed by categorizing districts with 0, 1, 2, 3 or more than 3 financial institution branches, and districts with 0, 1, 2, 3 or more than 3 financial agents. This matrix operates under the assumption that more branches and agents will be correlated to lower levels in the needs index. An additional next step for the SBS in Peru will be to estimate another set of qualitative indicators for financial inclusion, by using surveys specifically developed to measure financial literacy, access and use among the population. These financial surveys will measure financial knowledge related to products and services offered by the financial system and levels of use, trying to find out why people use (or dont use) financial institutions products and services, and its results should be ready in December 2011. These surveys will cover different target populations, including students, young adults, dependent and independent workers, soon-to-be-retired and retired adults, and will be applied in different cities in Peru, and the questionnaire covers topics like day-to-day money management, use of financial products and services, and basic financial math and financial concept questions. Regarding financial capability, the SBS has conducted an informal survey in towns where the state-owned banking institution5 was the only financial institution. Based on these surveys, they were able to determine that while most respondents knew about different products and services offered by the bank, none of them knew about the regulators role in overseeing the financial system nor about their right, as users, to complain in case of dissatisfaction with a product or service or the procedure to place a complaint with the financial system. Through this next series of qualitative indicators the SBS hopes to further understand the impact of geographical, literacy and poverty barriers in financial inclusion levels as well as develop a tool to estimate if low financial inclusion levels in some areas are a product of geographical barriers or barriers of other types (lack of trust, lack of information or cultural reasons). IV. Concluding Remarks

In this paper we have examined how a set of financial inclusion indicators has provided the SBS in Peru with effective information about the access and use of financial services by the population. These indicators also provide a first explanation of the evolution of financial access in Peru over the last decade, and what policy
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Banco de la Nacin

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approaches it could suggest going forward to increase both access and use of financial products and services. This data, aggregated over time, will help financial institutions, policymakers and researchers alike to understand the problem of access to financial products and services, propose adequate measures to enhance financial inclusion and evaluate their impact, both in the short and in the long term. The Peruvian case also shows how basic financial inclusion indicators can be cross-reference to monitor any correlations (although not causation) between financial access and changes in other socio-economic indicators that contribute to a countrys economic development.

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