Focus on financial inclusion to combat gender and income gap

DW: What are the implications of the ongoing global trade conflict between the US, the EU and China for the economies of the countries in Eastern and Central Europe and Central Asia?

Asli Demirguc-Kunt: I think the global macro outlook is looking down. So if you have been following the World Bank products, the global economic prospects that we issue had the title: Darkening Skies. I think that encapsulates what's going on. The slowing activity in major economies, the trade tensions, the potentially disorderly developments in a number of countries, political uncertainty — these things have basically been bringing the growth forecast down generally.

For our ECA countries, the escalation of trade tensions and policy uncertainties, for example Brexit, the potential for widespread shifts in investor sentiment particularly for countries where there is significant foreign exchange debt issues, potential for the reversal of structural reforms — all these are making our forecasts more gloomy than they would have been otherwise.

The external situation is affecting the region. Certainly within the region the fact that the euro area is slowing down is affecting many of the countries. And the Turkish situation has had an influence over the region given the close trade links. And overall the investor sentiment also does have a certain impact. Aggregate growth in the developing countries of the region is 3.1% in 2018 and it's projected to slow to 2.1%. That's the outlook, but we are hoping that growth is going to pick up in 2020/2021.

You argue in your latest report that the entire region faces formidable long-term challenges, but suggest as one possible remedy that governments should focus on increasing what you call financial inclusion. Can you elaborate what you mean by financial inclusion?

Financial inclusion is the ability of individuals to access and use financial services in a country. It is a very important driver of growth and poverty alleviation. Because without proper access to financial services, people cannot invest in their health, their education and they cannot take advantage of promising business opportunities. And when they are faced with shocks they cannot manage risks. And we look at having a bank account as the marker of financial inclusion because that's the first formal step into the financial system.

All those things are extremely important in ensuring that there is growth and that there is no persistent income inequality. But I think sometimes there isn't as much recognition about how important it is to have an inclusion financial system for promoting growth and poverty alleviation and that's why we focus on this issue.

And for the Europe and Central Asia region financial inclusion is very important. Although there has been significant growth, there is still potential and there also is quite a degree of variation across the different countries.

What segments of the population in that region could most profit from efforts focused on financial inclusion?

Worldwide in developing countries the gender gap between men and women is about nine percentage points. In the region, one country stands out: Turkey. It has a gender gap of almost 30 percentage points. A lot more men have bank accounts than women. 

And when you look at income differences there is a big gap as well. When you look at the differences in account ownership between the poorest 40% and the richest 60% globally it is about 15 percentage points on average around the world for developing countries. In Romania, that difference is 33 percentage points. There is a wide disparity in some of the ECA countries in terms of how account ownership varies between poorer and richer individuals.

So there is still work to be done trying to close the gender and income gaps.

What are the reasons why the many people in that region don't have a bank account?

We asked the unbanked "why don't you have a bank account?" In different regions different things jump out and in ECA the lack of trust in banks is a very significant reason. 30% of the people across different countries say that a lack of trust in banks is the reason why they don't have a bank account. That is much more than the developing country average of 15%.

That also means that among those without a bank account informal borrowing is prevalent. So you go to families and friends to borrow money. While in high income countries 90% of people borrow from formal financial institutions, in ECA this is about 25%. So I think all those things associated with each other and it is important to figure out a way of addressing this whole trust issue. 

What then would you advise government's to do to increase financial inclusion?

There are fairly easy ways to increase account ownership. Moving government payments, private wages or agricultural payments directly into accounts would make a significant dent in the number of unbanked. About 25 million adults in ECA countries are unbanked and they still receive government payments in cash. If you would directly deposit government pensions into accounts that would increase the number of banked by 20 million. About 19 million adults are unbanked and receive private wages in cash. And about 15 million adults are unbanked and receive agricultural payments in cash. Switching that would be another easy win.  

Asli Demirguc-Kunt is chief economist of the World Bank's Europe and Central Asia Region.