Critical Review

ISSN: 0891-3811 (Print) 1933-8007 (Online) Journal homepage: https://www.tandfonline.com/loi/rcri20

WHY ARE BANKS SO SCARCE IN DEVELOPING

COUNTRIES? A REGULATORY AND
INFRASTRUCTURE PERSPECTIVE

Ignacio Mas

To cite this article: Ignacio Mas (2011) WHY ARE BANKS SO SCARCE IN DEVELOPING
COUNTRIES? A REGULATORY AND INFRASTRUCTURE PERSPECTIVE, Critical Review,
23:1-2, 135-145, DOI: 10.1080/08913811.2011.574476

To link to this article: https://doi.org/10.1080/08913811.2011.574476

Published online: 10 Jun 2011.

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 Ignacio Mas

WHY ARE BANKS SO SCARCE IN DEVELOPING

COUNTRIES? A REGULATORY AND
INFRASTRUCTURE PERSPECTIVE

ABSTRACT: In developing countries, banks are simply not present where the
majority of poor people live and work. This imposes burdensome access costs on
customers who need to travel to distant branches, so the majority of the population
opts out from the formal banking system. Banking services can be offered through
everyday stores that exist in every community and by new technology, particularly
mobile communications networks. Banking regulations, however, impede such
possibilities in many developing countries.

More than 2.6 billion people in the developing world do not have a bank
account of any sort. As less than 30 percent of the population in
developing countries has access to finance, banking is simply not a mass-
market proposition.1
A small, safe savings capability would have a tremendous impact on
the lives of the impoverished. People could manage cash flows more
easily and reliably, maintaining more stable daily food consumption
when their income streams are seasonal (farmers) or volatile (day
laborers). They could set aside some money on each payday to achieve
goals they set for themselves: paying school fees for their children,
buying a bicycle to reduce commuting time, investing in fertilizer when
it is time to plant. They would be able to build up assets to buffer them
from health-, work-, or crop-related shocks, which so often set families

Ignacio Mas, ignacio.mas@gatesfoundation.org, P.O. Box 23350, Seattle, WA 98102, is Senior

Advisor at the Financial Services for the Poor team at the Bill & Melinda Gates Foundation.
Critical Review 23(1
2): 135–145 ISSN 0891-3811 print, 1933-8007 online
# 2011 Critical Review Foundation DOI: 10.1080/08913811.2011.574476
136 Critical Review Vol. 23, Nos. 1
2

back. They might be able to self-fund their microenterprise one deposit

at a time, rather than paying high interest-rate charges one loan
repayment at a time.
In addition, the ability to make remote payments safely and affordably,
right where one lives and works, would allow poor people better to
support needy family members in rural areas, send money to their children
studying elsewhere, collect welfare benefits or international remittances
from migrant relatives, pay utility bills, or receive payments for goods and
services they supply in neighboring towns. To effect these payments, they
would no longer have to go to the physically and culturally distant offices
of financial service providers and wait in long lines, or rely on less secure
but much more convenient informal money transfer networks.
These are real needs. Figure 1 summarizes the main uses of finance by
poor households, which have been carefully documented based on
detailed household financial diaries in Collins et al. 2009.
Figure 1. Why Save if You Are Poor?

Some challenges poor people face: The opportunities presented by savings:

Raising productivity. By saving small amounts over time, poor people

Poor people find it difficult to escape
poverty because they are engaged in
economic activities with little or no
productivity growth.
Instability.
Poor people face unpredictable daily
income streams, often translating into
erratic food intake and education for
their children.
can fund lump-sum investments in their
microbusinesses (such as for purchasing
equipment or buying goods at wholesale prices)
or search for more productive forms of
employment. If they self-finance these
investments, they can lower the required
profitability threshold on their business and
become less exposed to onerous debt in times of
duress.
Savings effectively allow families to smooth
their short-term cash flows, thus stabilizing their
caloric intake and education investment. This in
turn raises productivity. Credit, by contrast,
introduces fixed repayment schedules that may
be unhelpful when dealing with short-term
liquidity requirements.

Protecting against shocks. Adverse shocks related to ill health, death, or

Poor people face many risks, often
related to ill health, death, and
weather, which can easily overwhelm
their means and knock out
productivity gains.
bad weather are unpredictable in their timing but
not in their nature or probability of occurrence.
Households that use savings or insurance to plan
ahead can more easily protect against such
foreseeable risks, and may be able to avoid
going into debt when they can least afford it.
 Mas • Scarce Banks in Developing Countries 137

These needs can increase customers’ willingness to pay for financial

services. Banking services may never be as high-margin as mobile
telephony or Coca Cola bottling, but poor people are prepared to pay for
banking and payment services as long as they are packaged in a way that
is relevant to their needs, sized appropriately, and delivered conveni-
ently.
The success of microcredit shows the value of bringing proximity and
convenience to customers. The more successful microcredit institutions
in South Asia (e.g., Grameen and BRAC in Bangladesh, BASIX and
SKS in India) and in Latin America (e.g., Banco Sol in Bolivia,
Compartamos in Mexico) have largely operated on a model of deploying
armies of loan officers to the neighborhoods and villages where poor
people live. This has allowed them to conduct credit evaluations as well
as to facilitate collection of loan repayments. But microcredit organiza-
tions do not deliver the broader range of services that people need,
including savings, payments, and insurance.

Is Banking for the Poor Inherently Unprofitable?

What explains the paucity of banks in poor areas? The most common
explanation is that poor people have such small amounts of money that
their account balances will be low, their transactions small and
infrequent. In addition, their creditworthiness is uncertain and they
often have a limited capacity to understand more complex products.
Thus the majority of banks do not view banking to the poor as an
attractive business proposition.
This explanation views the customer as the main contributor to the
problem, such that if only poor people were better customers, banks
would be able to help them.
However, one can go to just about any store in any village in any
developing country and count the number of goods that cost less than
50 U.S. cents: a bottle of Coca Cola, a mobile prepaid card, a pack of
candy, a bagful of rice, a pot of cooking oil, a sachet of shampoo. The
companies behind these products stand ready to reach into their
customers’ pockets 10, 25 or 50 cents at a time, whenever the customer
can afford it*and they do so profitably.
If they can profit from such seemingly measly amounts, why can’t
banks? Why do banks turn their backs on so many customers who might
138 Critical Review Vol. 23, Nos. 1
2

occasionally want to deposit half a dollar with them? It should be easier

for banks than it is for wholesalers to serve this clientele, as banks do not
have to move physical product in exchange for that half a dollar: All they
need do is securely maintain accounting on a computer and deliver some
kind of receipt. The problem is that banks employ an operating model,
and are hence saddled with a cost structure, that is simply not suitable for
banking the poor.

The Infrastructure Gap

Think of access to finance as bridging two clouds: a cash cloud in which
poor people live today, where value gets transferred physically as paper
or metal; and an electronic cloud where financial institutions operate and
where value is mere information, taking the form of lines in a printed
ledger or zeroes and ones in a computer.
Bank branches have traditionally bridged these two clouds; more
recently, ubiquitous, cheap automated teller machines (ATMs) in
modern streets and malls and point-of-sale (POS) terminals in shops
have bridged the gap. But these bridges are largely one-way: They take
money out of your electronic account (to convert to cash or to pay for
goods directly). That is the bridging infrastructure needed by richer
people and people in richer countries, who get paid directly into their
account: Their money is born electronic, and their problem is how to
use money-as-information.
But for poor people in developing countries, money is born physical:
What little they are paid they receive in cash. Their problem is primarily
how to transform the physical to the electronic. The bridge would be a
deposit infrastructure. But as banks do not find it profitable to build
branches near where the poor live and work, poor people are shut out of
the electronic cloud, much like a highway system that does not have
on-ramps or exits near slums or in rural areas.
It is therefore at its root a ‘‘last mile’’ or infrastructure-access problem.
The very term ‘‘access to finance’’ connotes that there is a network or
infrastructure to which one needs to connect in order to avail oneself of
financial services.
Banking may be one of the last remaining business sectors that rely on
a direct distribution model. Most fast-moving consumer goods products
are channeled through multi-product distribution companies into a wide
 Mas • Scarce Banks in Developing Countries 139

base of third-party stores. Mobile operators invested in prepaid billing

platforms in order to be able to sell their service as a product available at
normal retail outlets. With the spread of information and communica-
tions technologies, railway tickets are no longer just sold at railway
stations, and utility companies have franchised bill collection to a variety
of shops.
Yet people are still expected to do their banking at a bank branch or
ATM. The need to roll out such specific infrastructures results in high
fixed costs for banks. Communities that do not generate enough business
to amortize the cost of erecting and maintaining a branch are simply left
out.
As long as the unit of cost of banking remains ‘‘the branch,’’ however,
banks will not cover the territory. There is indeed no business case for
covering the entire developing world with bank branches.
In Burundi, the bank with the most extensive infrastructure has only
33 branches and two ATMs*amounting to 35 locations where 8 million
Burundians can make a deposit or a withdrawal. The entire banking
system has just over 100 physical points of presence. Less than one tenth
of the population*the richer segment*finds that presence sufficient for
them to participate in the formal banking system.
Banks will reach the mass market and eventually even the poorest in
developing countries only if they find a way to eliminate large costs.
Thus, Bank Rakyat Indonesia (BRI) built a network of low-cost village-
level mini-branches (unit desas), substantially reducing the fixed invest-
ment cost per new location. Banco Azteca in Mexico placed its
mini-branches inside a chain of 800 white-goods stores owned by its
parent group, entirely avoiding the need for new bricks-and-mortar
investments for its branch network. Caixa Economica Federal, Banco do
Brasil, and Bradesco in Brazil permitted card-based banking transactions
to occur at thousands of specially contracted and equipped retail stores
that were paid on a per-transaction commission basis, thereby avoiding
fixed teller (staff) costs as well. The M-PESA mobile money platform
promoted by mobile operator Safaricom in Kenya uses a simplified core
banking system and mobile phones, rather than a costly card and point-
of-sale terminal infrastructure, to initiate secure client transactions,
enabling it to operate through a much larger universe of over 20,000
third-party retail stores at a much lower cost.
These examples show the potential for turning fixed costs into
variable costs and leveraging infrastructures and channels that already
140 Critical Review Vol. 23, Nos. 1
2

exist.2 It is a journey that banks in developing countries have only begun

to explore. But they are often hampered by regulation, which tends to be
very specific about just how banks must interact with their customers.

Regulatory Barriers
A core objective of banking regulation is to ensure the safe and proper
investment of sums raised from the public’s deposits. Because banks are
deemed to have fairly nontransparent balance sheets, regulators think it is
necessary to control and oversee the credit risks assumed by banks on
their assets, as well as the liquidity and term mismatches between their
assets and liabilities. The body of prudential regulations focuses on the
asset side of a bank’s balance sheet (i.e., on the aggregate of funds raised
through deposits); therefore, it does not per se reduce the incentive of
banks to attract poor people’s low-denomination deposits rather than
deposits from more affluent customers.3
Beyond these prudential regulations, there are regulations that govern
the operational process by which banks physically take deposits from the
public and manage their electronic accounts. These regulations can
substantially affect how banks structure their products, channels, and
information systems, and hence can directly reduce the profitability of
low-value deposits. These regulations also impose certain rigidities in the
cost structures (and sometimes in the revenue models) of banks, such that
providing banking for the poor is unattractive.
Consider, first, regulations on branches, since*crucially*banking
regulations typically mandate that only banks can physically take deposits
from the public. In their survey of banking regulation in 95 developing
countries, the Consultative Group to Assist the Poor (CGAP 2009)
found that 78 percent of countries require formal approval for each new
bank branch.4 Sometimes, as in Kenya, new branch premises must be
physically inspected by an authorized representative of the central bank,
which can delay branch opening in more remote areas. Kenyan banks
must also give the central bank at least six months’ notice of intention to
close a bank branch (FSDT 2010).
Sometimes regulators overtly limit the number of branches banks can
have. In India, the central bank limits the ability of banks to enter into
each other’s territory under its lead-bank system. In the Philippines, the
central bank enforces a certain ratio of urban to rural branches. In other
 Mas • Scarce Banks in Developing Countries 141

countries, branching policy has sometimes been used as a tool of

supervisory control by withholding approval for branching decisions in
order to reinforce supervisory authority in other areas (FSDT 2010, 3).
Moreover, it is common for regulations to specify the minimum size,
building characteristics, physical layout, staffing, and management
structure of a branch; one notion of a branch is imposed on all banks,
inhibiting innovation and driving up costs. Security measures (char-
acteristics of the vault, number of security guards, thickness of glass
between tellers and customers) are usually unrelated to the location and
volume of business of the branch; CGAP (2009) reports that only 11
percent of the developing countries that require formal approval of bank
branches allowed for tiered security requirements by type of branch.
In Brazil, security requirements on branches are imposed not by the
central bank but by local government and the police, which differ
regionally, thus raising compliance costs.
Costly safety regulations often extend beyond branches to include the
operations of cash-movement companies. After the successful armed
robbery of a security vehicle in Kenya, the Ministry of Internal Security
in 2006 required cash-movement vehicles to be accompanied by an
escort vehicle and four Administration Police officers. This has
reportedly increased the cost of transporting cash by about 50 percent
(FSDT 2010).
Branch regulations sometimes preclude banks from establishing the
more sporadic forms of banking presence that may be appropriate in
remote villages. CGAP (2009) reports that there are 41 developing
countries in which regulations specify minimum branch opening hours.
While such regulations are motivated by a desire to offer a minimum
level of customer convenience, they may, for example, restrict the ability
of banks to operate a branch only on market days (often, only one or two
days a week). And only 60 percent of the developing countries surveyed
by CGAP allow for ‘‘mobile branches’’ in the form of trucks, vans, boats,
or other moving vehicles.
Banking-channel regulations in many developing countries are the
legacy of the pre–IT era. Before branches were online (i.e., connected to
centralized back-office systems), ensuring the safety of a branch was
central to maintaining the integrity of customer deposits. Account
records would be kept locally, and oftentimes they were backed by cash
kept in the local branch vault. Nowadays, branches are no more than
customer-service and cash-aggregation points. With the modern online
142 Critical Review Vol. 23, Nos. 1
2

core-banking and cash-handling systems that banks employ, it is no

longer necessary for regulations to be so prescriptive of the characteristics
and operations of branches. More recently, banking technology has been
migrating from banks’ back end to the front end and, indeed, right into
customers’ hands (in the shape of cards and mobile phones). With such
technology it is entirely possible to establish secure transactions between
customers and their bank, even if they are occurring through third-party
channels (e.g., a retail shop). It is therefore no longer necessary to limit
deposit taking to bank premises or infrastructure (whether a branch or
ATM). Yet less than a quarter of the developing countries surveyed by
CGAP permit banks to accept deposits or collect loan payments through
non-bank retail outlets. By rigidly specifying branch requirements and
banning the use of indirect banking channels, banking regulations limit
banks’ ability to establish cost-effective points of presence in lower
income or more remote areas.
Banking regulations also often impose burdensome restrictions on the
savings products that banks can issue. These can directly affect the
profitability of low-balance accounts. The requirements and process of
opening an account may impose insuperably high up-front costs on low-
value accounts, from two directions. First, Know Your Customer (KYC)
requirements impose obligations on the prospective client (in the form of
documents that need to be collected and brought to the bank) as well as
on the bank (in the form of document-verification and record-keeping
obligations). Second, consumer-protection requirements impose com-
plex contracting and disclosure obligations (e.g., signed terms and
conditions) that make it difficult for accounts to be opened through
third-party channels. This tends to constrain the expansion of banking
activity beyond the limited banking infrastructure.
This is not to dismiss the anti-money laundering (AML) concerns that
drive KYC regulations. However, law enforcement objectives are best
served by putting as many people and transactions as possible on
electronic platforms (so that transactions can be recorded and traced) and
by making large cash transactions suspect. CGAP (2009) reports that only
16 out of 95 developing countries surveyed make exceptions from
standard KYC requirements for low-income applicants or small
accounts, and only nine countries permit the opening of entry-level
accounts through non-bank retail outlets without having to go in person
to a bank branch. On the other hand, more than half of the developing
countries surveyed have a proof of income or employment requirement
 Mas • Scarce Banks in Developing Countries 143

for account opening, in addition to proof-of-identity or proof-of-address

requirements. This represents an important access barrier in poor
countries where a large percentage of the population is either self- or
informally employed. In the interest of preventing theft through money
laundering, people with extremely tenuous income are prevented from
saving it without fear of it being stolen.
Sometimes regulations also constrain the features and pricing of
savings products. In Brazil, for instance, the government mandates a
minimum number of free monthly transactions from a savings account,
which forces banks to set monthly account fees to pay for the bundled
transactions. Such fixed charges diminish the value of banking for poor
people who prefer to pay for actual services used and do not want to
commit to any fixed monthly fees. In India, the central bank expects
charging for basic (‘‘no frills’’) deposit accounts to be ‘‘reasonable,’’
without specifying clear definitions or criteria. In many countries, banks
are still obligated to issue a written monthly statement to all customers,
which is no longer necessary if customers can access mini-statements
from their mobile phones.
A final set of operational regulations that can limit the profitability of,
and hence a bank’s appetite for pursuing, low-value accounts relates to
banks’ internal processes and IT systems. Banks are often precluded from
outsourcing certain functions, which may limit their ability to form
partnerships with mobile operators to (for instance) offer a simplified,
low-value/high-volume account platform. And banks may be required
to implement electronic security standards that, while appropriate for the
more affluent bank customers, may be overkill for low-value banking
platforms. Such rules further constrain the profitability of low-value
accounts and limit the marketing freedom of banks. They can be
counterproductive by resulting in more expensive services and in leading
banks to shy away from offering accounts to the impoverished.

* * *

The market success of M-PESA in Kenya inspires the thought that near-
universal financial access is possible in developing countries. In the
4 years since launch, M-PESA now has 15 million customers, or about 60
percent of the adult population*and counting.5 With the spread of
ubiquitous mobile communications, there is now a historic opportunity
to deploy new low-value banking and transactional platforms that truly
144 Critical Review Vol. 23, Nos. 1
2

reach everyone in developing countries and meet the needs of even the
poorest.

NOTES

1. These two estimates come from Chaia et al. 2009 and Demirguc-Kunt et al. 2008.
2. For more on these experiences, see Robinson 2002 for Indonesia, Bruhn and
Love 2009 for Mexico, Kumar et al. 2006 for Brazil, and Mas and Radcliffe 2010
for Kenya.
3. There can, of course, be second-order effects, if the deposits of the rich and the
poor have different interest elasticities or sensitivities to macroeconomic shocks.
4. CGAP 2009 provides country-by-country information, but does not aggregate
the data across countries. I am defining developing countries here as all countries
other than Japan, the four ‘‘Asian tigers,’’ Australia, New Zealand, the United
States, Canada, and the countries of Western and Eastern Europe.
5. Access to formal financial services around the time of launch of M-PESA was
estimated by 19 percent in FSDT 2007. Interestingly, the number of bank
accounts in the country has grown very rapidly alongside the growth of M-PESA
to over 10 million, driven largely by the success of Equity Bank.

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