Financial Sector Operations and Policy Financial Sector Development Indicators

Comprehensive assessment through enhanced information capacity

Contact: FSDI@worldbank.org

Financial Sector Indicators Note: 1

Part of a series illustrating how the Financial Sector Development Indicators (FSDI) project enhances the assessment of financial
sectors by expanding the measurement dimensions beyond size to cover access, efficiency and stability. Data on these dimensions,
as well as other information relevant for financial sector assessment, is intended to become available online during Spring 2006.

Measuring banking sector development

• Traditional measures of size and depth of banking systems limit assessment
• New measure on access to banking, efficiency and stability enhance the analyses

Conventional measures of banking sector Financial Sector Development Indicators for banking
The traditional indicators utilized for assessing Traditional New
the size, depth and development of a country’s Size Access
Size Broad access
banking (financial) sector are: Deposit money bank assets to GDP Branch and ATM density
• The ratio of M2 to GDP Central bank assets to GDP Average loan and deposit size
M2 to GDP Loan & deposit accounts per capita
• The ratio of private credit to GDP. Deposits to GDP Household access
In particular, both these measures have been Intermediation % of people with bank account
Private credit to GDP Firm access
used to show the causal effects of financial Private credit to total credit Collateral needed for loan
Private credit to deposits % of firms with financing constraints
development on economic growth. However,
Efficiency
both measures have some limitations: Size of banking sector Profitability
• The ratio of M2 to GDP captures the degree of Percent of GDP Percent Return on assets
1.5 12
Net interest margin
monetization in the system, but does not Private
NPL/Total Loans
Efficiency
capture the degree of bank intermediation. credit/ GDP Operating costs
Lending spread
• The ratio of private credit to GDP does not 1.0 8
Days to clear check
control for non-performing loans and more Competitiveness
Concentration ratio
generally, the quality of credit allocation. 0.5 4 Ownership
• Both measures do not capture the broad Stability
Capital adequacy
access to bank finance by individuals and 0.0 0
Capital adequacy ratio
High-income: Developing
firms, the quality of bank services and the OECD countries
Asset quality
(a) Lenders
efficiency of providing banking services. NPL refers to non-performing loans. Non-performing loans
• In general, the quality and availability of indica- Real credit growth
Loan concentration
tors on financial stability is limited and the Large loan exposures to capital
documentation of institutional framework (b) Borrowers
Firm leverage
supporting banking lacks robustness. Interest coverage ratio
Household debt to GDP
Liquidity
New indicators for going beyond the size Liquid asset ratio
Other
The Financial Sector Development Indicators Net FX position-to-capital
(FSDI) project has compiled indicators that go Default probability of banks
beyond size, and can help assess access,
efficiency and stability of financial systems
across and within countries. Banking systems
can score very differently on each of these four nations. The conventionally used, as well as new
dimensions. It is therefore important to consider indicators relevant for assessment of banking
these dimensions jointly and in various combi- system are summarized in the table above. The
page 1
 Financial Sector Operations and Policy
indicators within each dimension are also
summarized in a composite index for the pur-
poses of benchmarking and classifying coun-
tries.
The majority of the new indicators refer to
access to finance. These indicators summarize
the ability of households and firms in a country
to access finance and the actual usage of
banking services. New indicators on efficiency
include the number of days it takes to clear a
check or to do a wire transfer in a country, a new
measure of the degree of bank competition, and
information on the degree of state or foreign
ownership of banks. New indicators on the
stability of the banking sector, among others,
comprise market-based measures of the prob-
ability of default of banks in a country, and data
on the quality and performance of corporate
sector and household borrowers, thus incorpo-
rating the user side of finance. In addition, the
stability dimension includes some of the new
financial stability indicators collected by the IMF,
such as information on large loan exposures
and concentration of lending activity.
The FSDI also comprises data on the develop-
ment of other parts of the financial sector, such
as capital markets and insurance, thus captur-
ing the relationships between the banking and
various other sectors. There are also new
indicators on the quality of the legal infrastruc-
ture that supports bank finance, such as creditor
rights, bankruptcy framework, credit information,
and bank regulation and supervision.
Number of bank accounts per person
This measure is an indicator of the use of banking
services. Based on a questionnaire circulated among
bank regulatory agencies and publicly available data,
information on the number and value of deposits for 54
countries for the year 2004 was collected. A higher
number of bank accounts is interpreted as a signal of
greater use of services. This is the first compilation and
analysis of consistent and comparable cross-country data
on the outreach or penetration of banking systems.
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org
Access limited in low-income countries
Utilizing information from new indicators, it
becomes clear that while the difference between
the high-income and developing countries is
relatively less pronounced in terms of size and
depth, it is quite stark in terms of access. Using
the traditional measure of financial development,
private credit to GDP, the difference between the
rich and poor countries is comparatively less
pronounced. The ratio of private credit to GDP
varies from 15 percent in low income countries
to 95 percent in high income countries, or in
other words a 6-fold difference. However, ac-
cess to finance varies widely across countries,
both in terms of high versus low-income and
within developing countries themselves. The
number of bank accounts per person in high-
income countries is on average 2.2, compared
to an average of 0.1 in low-income countries, or
a 22-fold difference. In Madagascar, only 14 out
of 1000 people have a bank account, while in
Austria; on average people have more than 3
bank accounts. Such a comparison, otherwise
restricted without information on bank accounts,
suggests that access to finance is particularly
curtailed in low income countries.
Private credit and number of deposits accounts, 2004
Percent Units
100 3
Private
credit to
Number of
accounts per
80 GDP person
2
60
40
1
20
0 0
High- Developing Low- Lower Upper
income countries income Middle-income
page 2
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

Classification of countries by number of bank deposits Bank branches and ATMs

Number of Bank
deposits per 1,000 branches ATMs
people (per 100,000) (per 100,000)
Bottom 5 countries Bottom-5 Bottom-5
Madagascar 14 Ethiopia 0.4 Bangladesh 0.1
Uganda 0.5 Nepal 0.1
Bolivia 41
Tanzania 0.6 Tanzania 0.2
Uganda 47
Madagascar 0.7 Madagascar 0.2
Kenya 70 Honduras 0.7 Pakistan 0.5
Nicaragua 96 Top-5 Top-5
Portugal 52 Portugal 109
Top 5 countries Italy 52 Japan 114
Austria 3120 Belgium 53 United States 121
Belgium 3080 Austria 54 Spain 127
Denmark 2706 Spain 96 Canada 135
Malta 2496
Greece 2418

The limited access to bank finance is also Financial depth and access
highlighted in the relationship between traditional Number of deposit accounts per capita

measures of size (or depth and development) 4

and other new data on access to banking. The Depth and access not
correlated at intermediate
chart (top) shows the relationship between M2/ 3 level of financial development
GDP (a traditional measure of financial depth)
and the number of bank accounts (deposits) per
2
person, which is a proxy for the use of banking
services. The data on bank accounts are col- 2
R = 0.2565
lected using a extensive survey of bank regula- 1
tory agencies. The data show that, especially at
intermediate levels of financial development, 0
financial size and access to banking are not 0.0 0.5 1.0 1.5
correlated. This illustrates the importance of M2/GDP (%)
comparing data on access to finance when
assessing financial development in countries. Concentration is not correlated with efficiency
Operating costs to total assets
0.18
Concentration does not imply low efficiency
For the bank efficiency dimension, FSDI in-
cludes not only traditional measures of bank
profitability (e.g. return on assets) and efficiency 0.12
(e.g. ratio of operating costs to assets) but also
information on the structure of banking system
and measures of the competitiveness of the 0.06
banking systems (e.g. percentage of banks
assets that are foreign or state-owned, or the
three-bank concentration ratio). 0.00
0 50 100 150 200
3-bank asset concentration ratio (%)

page 3
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

The general notion is that a more concentrated More efficient banking systems exhibit greater depth
M2/GDP (%)
banking sector is less efficient. However, the
300
chart (bottom, previous page) below shows that
the three-bank asset concentration is not corre-
lated with the ratio of operating cost to assets, a
traditional measure of efficiency. This suggests 200

that one should not focus solely on concentra-

tion ratios as a measure for competition when
making inferences about the efficiency of the 100
2
banking sector. R = 0.2875

But less depth does indicate less efficiency 0

Financial depth and efficiency, on the other 0.00 0.05 0.10 0.15
hand, appear more closely correlated. The chart Operating costs to Total assets

(top) shows the ratio of M2/GDP (financial

depth) against the ratio of average operating
costs-to-total assets, a traditional measure of
bank operating efficiency. The figure shows quite
clearly that countries with less deep banking
systems also have less efficient banks.
Banking and corporate vulnerabilities
For the stability dimension of the financial sector,
FSDI covers not only traditional CAMEL-type
indicators using banks’ balance sheets, but also
indicators based on the balance sheets of
corporate borrowers. The combination of bank-
ing and corporate sector indicators provides a
more comprehensive picture of the health of the
banking sector. The chart (bottom) shows that
firms’ financial leverage, measured as the ratio
of corporate debt-to-equity, is positively corre-
lated with the banks share of non-performing
CAMEL Indicators
The acronym "CAMEL" refers to the five components of a
bank's condition that are assessed: Capital adequacy,
Asset quality, Management, Earnings, and Liquidity. These
aspects reflect the variation in bank asset risk and
leverage, because they capture the market, credit,
operational, and liquidity risk faced by banks.
Corporate leverage and bank non-performing loans
Non-performing loans to total loans (%)
25
20
R2 = 0.131
15
10
5

loans in the banking sector. This illustrates the

0
relationship between the vulnerability of the
0 50 100 150 200 250
corporate sector and the quality of banking Corporate Debt to Equity Capital (%)
sector assets.

Legal rights facilitate intermediation tor rights features as an important determinant

Finally, FSDI contains detailed information about
the legal and regulatory infrastructure for the
banking sectors, including creditor rights and
supervisory rules and practices. The main
variables for this set of information are pre-
sented in table below. Legal protection of credi-
of bank lending. The chart (next page) shows
the strong correlation between private credit-to-
GDP, a measure of financial intermediation,
against an index of legal rights that measures
the degree to which collateral and bankruptcy
laws facilitate lending.

page 4
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

Legal rights index

This index, reflecting the legal rights of borrowers and lenders, measures the degree to which collateral and
bankruptcy laws facilitate lending. It is based on data collected through study of collateral and insolvency laws,
supported by the responses to the survey on secured transactions laws. The index includes 3 aspects related to
legal rights in bankruptcy and 7 aspects found in collateral law. A score of 1 is assigned for each of the following
features of the laws:
• Secured creditors are able to seize their collateral when a debtor enters reorganization — there is no “automatic
stay” or “asset freeze” imposed by the court.
• Secured creditors, rather than other parties such as government or workers, are paid first out of the proceeds
from liquidating a bankrupt firm.
• Management does not stay during reorganization. An administrator is responsible for managing the business
during reorganization.
• General, rather than specific, description of assets is permitted in collateral agreements.
• General, rather than specific, description of debt is permitted in collateral agreements.
• Any legal or natural person may grant or take security in the property.
• A unified registry that includes charges over movable property operates.
• Secured creditors have priority outside of bankruptcy.
• Parties may agree on enforcement procedures by contract.
• Creditors may both seize and sell collateral out of court.
The index ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better de-
signed to expand access to credit.

Intermediation correlated with creditor's legal rights Infrastructure and regulations

Private credit to GDP (%) Creditor rights
160 Legal protection of creditor rights
Cost to complete bankruptcy (% of estate)
Cost to resolve disputes (% of debt value)
120
Credit information sharing
Cost of registering property (% of property value)
80 Supervision and regulation
2
R = 0.2504 Activity and ownership restrictions
Bank entry restrictions
40
Capital stringency
Official supervisory action
0 Official supervisory resources
0 2 4 6 8 10 Independence of supervisory authority
Legal Rights Index

Select references Availability of information through the FSDI Web site

Beck, T., Demigurc-Kunt, A., and Martinez Peria, S.
(2005). “Reaching out: Access to and use of banking
services across countries.”
Claessens, S., and Laeven, L. (2005). “What Drives Bank
Competition? Some International Evidence”, Journal of
Money, Credit, and Banking 36(3), 563-583.
Djankov, S., McLiesh, C., and Shleifer, A. (2005). “Private
Credit in 129 Countries”, Department of Economics,
Harvard University.
Levine, R. (2004). “Finance and Growth: Theory and
Evidence.” forthcoming in Philippe Aghion and Steven
Durlauf, eds. Handbook of Economic Growth. The
Netherlands: Elsevier Science.
Data on traditional, as well as new indicators for assess-
ment of banking sectors will all become available through
the FSDI interactive Web site, currently under construction.
Such indicators, along with various other variables, would
form part of an overall framework for assessing financial
sectors that would be available online. Provision of
regional and country details in the Web site will offer
users the flexibility of customizing information to their
unique requirement.
page 5