MODULE 2

Introduction to Measuring FDFI

In this module, we will focus on measuring financial development for a

country using a wide array of indicators. We will describe measure for the
different dimension of financial development, namely financial depth,
financial efficiency, and financial inclusion.

In this module, we will introduce the different ways in measuring financial

development using individual, composite, and benchmark indicators.

Finally, in this module, we will present free database on financial

development, such as the World Bank Global Findex database, the IMF
Financial Access Survey, and others.
By the end of this module, you will be able to do the following: 

 Describe the different dimensions (and their

indicators) of a country’s FDFI level.
 Compare the different ways of measuring FDFI
(individual, composite, benchmarked).
 Examine and interpret a country’s FDFI using
financial tools

Functions of a Financial System

In the first module, we explored the financial development framework,
including definitions, roles, and needs for different players. 
In this module, we delve into the different dimensions (and indicators) that
will help you assess a country’s FDFI level. 
Let us consider the first element of FDFI: financial development. We will
start by reviewing the five functions of a well-developed financial system, as
improvements in these functions will lead to financial development. Click on
each to learn more

Producing Information and Allocating Capital

Evaluating investment is costly (it includes collecting information on the

project, assessing profitability, writing and enforcing contracts, etc.), and an
individual saver may not have the ability nor the means to undertake it. If a
financial institution saves on all these costs (through economy of scale,
expertise, etc.), resource allocation and growth will improve.

Monitoring Investment and Improving Corporate Control

Financial intermediaries that improve corporate governance by saving on
monitoring expenses (economy of scale) will promote production,
investment, and economic growth. Moreover, stock markets help align
owners’ and managers’ interests through stock options and takeover threats.

Managing Risk

Financial systems may reduce the risks associated with individual

investments through diversification, which facilitates shifting investment
towards riskier high-return projects. Moreover, by eliminating liquidity risk
(e.g., transferring resources across time), financial intermediaries and stock
markets increase investment in illiquid high-return projects.

Mobilizing and Pooling Savings

Financial intermediaries save on the costs related to multiple bilateral

contracts by pooling multiple investors to invest in a large number of
projects. Better saving mobilization boosts investment and capital allocation

Easing Transactions

The financial system provides payment services that ease the exchange of
goods and services.

Measuring Functions of a Financial System (VIDEO)

Financial inclusion is defined as the proportion of individuals and firms

that have access and uses financial services. For example, households can
open an account, access function, and they decide not to use function.

Financial stability is defined in terms of the ability to facilitate and

enhance economic processes, manage financial risks, and absorb shocks.

We will focus in our module on three dimensions only. We will exclude

financial stability because it is not a financial development dimension, but
rather pertains to policy that help ensure that financial development will not
grow out of control.

In the rest of this module, we will first focus on financial depth and
efficiency, which are traditional measures of financial development.

Next, we will consider financial inclusiveness measures. We will do all this

while exploring four essential FDFI databases. These are concepts and tools
important for all policymakers.
What is Financial Depth?

To define financial depth, understanding what it measures is critical. Let us

begin by revisiting the definition of financial depth, which refers to the
sizes of banks, nonbank financial institutions, bond markets, and equity
markets.
Size is often measured through credit, assets, liabilities, deposits, equities,
loans, and bond issuance.

The Global Financial Development Database (GFDD) provides the following

sample indicators of each measure of size:

Let us explore GFDD further. 

Use this link to access the GFDD:

https://www.worldbank.org/en/publication/gfdr/data/global-financial-
development-database. 
2. Click and download the latest version of the dataset. [As of Sept 2019,
the newest version is July 2018.] 
3. Look at the GFDD dataset’s second tab, titled “Data – July 2018” and
answer the following questions comparing US and Germany in 2016. 
Question 1: What is the value of private credit by deposit money banks to
GDP (percent)?
Question 2: What is the value of stock market capitalization?
Question 3: What does this imply about the financial systems of the US and
Germany? 
Note: After you’ve made your post, review the video below to see how we
derived the answer. 

The aim of Activity 1.1 is to know how to use the global financial
development database. To do it, you will have to answer two questions by
using the last version of the GFDD data set that you can download from the
website of the Financial Development Report using the link in Step 1 of
Activity 1.1.

 The first question is to find the value of two indicators, private credit
to GDP and stock market capitalization to GDP for two countries,
namely Germany and the US, in 2016.
 The second question is to compare the indicators for Germany and US
and characterize the financial system in both countries by saying if
they are bank based or market oriented.

I'm supposing here that you have already downloaded the GFDD database
on your computer. To answer the first question, please open the Excel file,
July 2018 GFDD database and click on the top Definition and Sources.

 Use the Find and Select option and search for private credit by deposit
money banks to GDP.
 You will find that the indicator private credit deposit money banks to
GDP it associated with the code GFDD.DI.01
 Then, go to the tab Data July 2018 and use again the Find and Select
option and search for code GFDDDI01.
 You will find that the code GFDDDI01 is associated with the column
AV.
 Use the Filter function to select the appropriate year and country.
 Select 2016 for year, and Germany for country.
 You will find the value of the private credit deposit money banks to
GDP in 2016 for Germany in line 4,118 and column AV.
 And it corresponds to 75.78%.
  By using the same procedure, we find that the private credit to GDP in
the USA is 51.8%.

The stock market capitalization to GDP in Germany is 49.05%. And the stock
market capitalization to GDP in the USA is 141.28%.

Let's now answer the second question of the type of financial system. We
can say that the size of the banking sector in Germany measured by private
trade to GDP is almost 50% bigger than the US. We can also say that the
size of the stock market in the US measured by the stock market
capitalization to GDP is almost three times bigger than Germany.

We can conclude that the US is a market based financial system and

is a bank centric financial system

Private Credit to GDP

With regard to financial depth, the measure used most often in the finance
and growth literature is private credit to GDP.
Private credit to GDP is defined as domestic private credit by deposit money
banks (which includes commercial banks and other financial institutions that
accept deposits) divided by nominal GDP. The ratio excludes credit issued to
the public sector and by central banks.  

Private credit to GDP = Domestic private credit by deposit bank

money ÷ Nominal GD

Based on the table below, which region has the deepest banking sector
(based on average)? What region has the shallowest banking sector? 
Private Credit in the Finance/Growth Literature

As you learned from the previous activity, high-income OECD regions have
the deepest banking sectors, and sub-Saharan Africa has the shallowest
banking sector.  You may now be wondering...

WHAT DETERMINES FINANCIAL DEPTH? 

Vighouei et al. (2011) review the theoretical and empirical literature on the
relationship between financial development and its determinants. They found
that banking depth is determined by the following factors. Click on the (+)
icon to learn more. 

 Legal tradition
To develop the banking sector further, the country must have a well-
functioning legal and regulatory system, with well-protected property
rights, good accounting practices, good contract enforcement, and
protected creditor and shareholder rights
 Quality of institutions
Financial systems must be well regulated and supervised in order to
maintain confidence in the system and allocate financial resources to
the most productive investments. Therefore, institutions that
effectively regulate and supervise their financial systems will certainly
help promote banking sector development.
 Capital account openness
Klein and Olivei (2001) point out that, by opening capital accounts,
“subsidiaries or branches of foreign banks can enlarge the domestic
banking system, serve formerly neglected market niches, and
introduce financial innovation that broadens the scope of financial
services.” Furthermore, Chinn and Ito (2005) note that removing
capital controls would allow domestic and foreign investors to engage
in portfolio diversification. Capital cost would thereby be reduced,
making it increasingly available to borrowers. Empirical studies show
that some preconditions must be met in order for capital account
liberalization to impact bank development positively: a stable
macroeconomic environment, good quality institutions, and an
effective regulatory system.
 Trade openness
By expanding opportunities and increasing competition, trade
openness contributes to financial sector development.
 IS A HIGH VALUE OF PRIVATE CREDIT TO GDP PRODUCTIVE? 
We must note that there is a large proportion of literature demonstrating
that financial development measured by private credit to GDP helps promote
economic development (Levine, 2005). These results have encouraged
countries to increase the sizes (depths) of their financial systems to boost
economic growth. The deeper the banking sector, the better the economy.
However, the 2008 global financial crisis has challenged these policies. And
more recently, Arcand et al. (2012) reexamined the financial depth and
growth nexus using more recent data and a nonlinear approach (to test
whether there is a threshold above which financial development no longer
has a positive effect on economic growth). Their results suggest that finance
begins negatively affecting output growth when credit to the private sector
reaches 100 percent of GDP. 

HOW CAN WE EXPLAIN WHY FINANCIAL DEVELOPMENT HAS A

LOWER OR NEGATIVE IMPACT ON GROWTH WHEN FINANCIAL
DEEPENING REACHES A HIGH LEVEL? 
Four explanations are provided in Arcand et al. (2015):

 The first one involves the changing roles of credit and

security markets. This explanation suggests that, as economies become
wealthier, banking sectors become less important to economic growth, while
market-based financial systems become more important.
 The second involves economic volatility and the
increased probability of economic crashes related to excessive financial
deepening (Rajan, 2005).
 The third one is based on Tobin’s (1984) argument that a
large financial system may cause a brain drain from the productive
sectors of the economy to finance occupations, impacting the economy
negatively. 
 The final one is related to credit composition. Beck et al.
(2012) find that enterprise credit is positively associated with economic
growth, whereas household credit is not. As economies develop, household
credit becomes more prevalent than enterprise credit. This change reduces
the impact of credit in the private sector in terms of economic growth

Alternative Banking Depth Measures

There are other measures of banking sector depth besides private credit to
GDP. The GFDD provides three alternative banking sector measures besides
private credit to GDP:
1. Deposit money banks’ assets to GDP. The assets include claims on the
domestic real nonfinancial sector. The domestic real nonfinancial sector
contains central, state, and local governments, nonfinancial public
enterprises, and private sectors. This measure is generally considered more
comprehensive than private credit to GDP, as it includes not only credit to
private sector, but also credit to government.
2. Banking system liquid liabilities to GDP. Liquid liabilities are also
known as broad money or M3. Banking system liquid liabilities (M3) are the
sum of currency and deposits in the central bank (=M0), plus transferable
deposits and electronic currency (=M1), plus time and savings deposits,
foreign currency transferable deposits, certificates of deposit, and
repurchase agreements (=M2), plus travelers checks, foreign currency time
deposits, commercial paper, and shares of mutual funds or market funds
held by residents (=M3). 

3. Deposit money bank assets to sum of central bank assets and

deposit bank assets. Deposit money banks comprise commercial banks
and other financial institutions that accept deposits. Assets of deposit money
banks include claims on domestic nonfinancial sectors (defined above). The
sum of deposit bank assets and central bank assets is the monetary survey,
which provides a consolidated balance sheet of the central bank and
depository corporations.
The last two indicators have some key differences:
Related to intermediation, a country may have a high M3/GDP ratio
(capacity to intermediate), but little intermediation by deposit banks. This is
not a financially developed economy.

Banking Deepening and Inequality

The measures of banking sector depth described so far have been widely
used to study the impact of financial development on economic growth and
inequality. 
What exactly is the relationship between banking sector deepening and
inequality? 
Income inequality is measured by the Gini coefficient, which is a relative
ratio of the areas on the Lorenz curve diagram. It is scaled from 0 to the
100th percentile. Zero percent represents a perfectly equal economy, in
which everyone has the same income level. One hundred percent represents
an extremely unequal economy, where one person receives all the income.
As you will see in the following figure, a higher level of financial depth is
associated with a decline in inequality. 
Nonbanking Measures of Financial Depth

The GFDD also offers a vast array of nonbanking financial depth measures. 
We can split the measures into two categories: the ones related to
nonbanking financial institutions and the ones related to capital
markets.

NONBANKING FINANCIAL INSTITUTION DEPTH 

Nonbank financial institutions do not accept transferable deposits but
perform financial intermediation by accepting other types of deposits, or by
issuing securities or other liabilities that are close substitutes for deposits. 
These institutions comprise savings and mortgage loan institutions, building
and loan associations, finance companies, development banks, and offshore
banking institutions.
The GFDD provides five measures (ratios) of financial institution depth:

The asset-to-GDP ratio indicator measures the size of the nonbanking

financial sector.
Assets include claims on the domestic real nonfinancial sector, such as
central, state, and local governments, nonfinancial public enterprises, and
the private sector.
 *The premium volume is defined as the insurer’s direct premium earned (if
property/casualty) or received (if life/health) during the previous calendar
year.

CAPITAL MARKET DEPTH

According to Investopedia, “Capital markets are venues where savings and
investments are channeled between the suppliers who have capital and
those who are in need of capital. The entities who have capital include retail
and institutional investors while those who seek capital are businesses,
governments, and people. Capital markets are composed of primary and
secondary markets. The most common capital markets are the stock market
and the bond market.”
To measure capital market depth, we will distinguish between two types of
GFDD indicators: the ones related to the stock market, and those related to
the bond market.
The following are the most widely used indicators that measure stock and
bond market depth (click on each indicator for a more detailed
description):By combining the above indicators, we can undertake the
following:

Frequently used indicators for Stock market depth:

 Stock market capitalization to GDP: measures the total value of all
listed shares in a stock market as percentage of GDP. It proxies size of
the equity market in the economy
 Stock market total value traded to GDP: measures the total value
of all traded shares in a stock market exchange as percentage of GDP.
It proxies the liquidity of the stock market

Frequently used indicators for Stock market depth:

 Outstanding domestic private debt securities to GDP: measures

the total amount of domestic private debt securities (amount
outstanding) issued in domestic currencies. It covers data on long-
term bonds and notes, commercial paper and other short-term notes.
 Outstanding domestic public debt securities to GDP: measures
the total amount of domestic public debt securities (amount
outstanding) issued in domestic markets as a share of GDP. It covers
long-term bonds and notes, treasury bills, commercial paper and other
short-term notes.

 Measure the size of the bond market relative to the

economy by summing the above bond market measures (public + private
sector).
 Measure the size of the capital market relative to the
economy by summing the sizes of the outstanding domestic private debt
securities to GDP and stock market capitalization to GDP.

Let us put all of this into practice! The table below measures the size of the
financial market relative to the economy

Financial Institution Efficiency

So far, we have covered the various measures of financial depth, which

constitute one dimension of financial development. Now, we move on to
another dimension: financial efficiency. Recall that financial efficiency is
defined as “how well financial institutions and markets deliver financial
services.” 
In terms of measuring efficiency, Čihák et al. (2012) assert the following:

These measures are primarily related to the costs of intermediating credit. 

Let’s distinguish between the efficiency measures of the financial institution
and capital market, as we did for the financial depth dimension.
First, we suggest classifying the measures of financial institution efficiency
into two categories: cost of intermediation measures and profitability
measures.

COST OF INTERMEDIATION INDICATORS

The GFDD displays several cost of intermediation indicators, including the
bank’s net interest margin (NIM), which we explore in further detail below.
The financial literature uses these measures to assess bank sector efficiency.
Click on each indicator for a more detailed description. 

Banks' net interest margin (NIM)

The difference between the interest income received by banks or other

financial institutions and the amount of interest paid out on their liabilities
(e.g., deposits), relative to the amount of their (interest-earning) assets

Bank lending-deposit spread

The difference between the lending rate and deposit rate. The lending rate is
charged by banks on loans to private sectors.The deposit rate is offered by
commercial banks on three-month deposits. The higher this
indicator,thehigher the cost of banking intermediation. It is very close to the
NIM indicator.

Bank noninterest income to total income

Measures noninterest-related income and includes net gains on trading and
derivatives, net gains on other securities, net fees and commissions,and
other operating incomes. The higher this indicator, the higher the cost of
market intermediation. It is also a measure of bank diversification. The
higher this ratio, the more diversified the banking sector.

Bank overhead cost to total assets

Measures the operating cost incurred for each dollar of assets. A higher ratio
indicates higher expenses and lower efficiency.

Take a simple example in which financial institution X offers loans in the

amount $10 million in a year. From those loans, it receives $1 million in
interest income. It also pays out $0.5 million in interest on its debt.
Therefore, this bank's net interest margin would be 5 percent, shown below. 

Net interest margin =  (Interest income - Interest paid out of

liabilities) 
                        Interest-earning assets

Example: NIM = ($1 million - $0.5 million)/$10 million = 5%.

The bank’s net interest margin captures compensation for operational costs,
risks, and uncertainty. The higher the margin, the higher the cost of
intermediation in the economy.
A simple regression analysis was conducted—encompassing a basic set of
bank characteristics and macroeconomic variables—to explain the NIM in a
sample of 100 countries from 1996–2015 (Jarmuzek and Lybek, 2018). The
following video explains the main factors that impact the net interest
margin.

Recall that financial institution efficiency is mainly related to the cost of

intermedating credit. That is, the matching of lender who's saving to
borrower who need money. And one of the most important indicators in
measuring cost of intermediation is net interest margin.

In this video, let's review the main factors that impact net interest margin.
Let's start by the factor impacting negatively on the net interest margin.
Banking sector concentration, which is the share of assets of the three
largest banks, is significantly correlated with a smaller net interest margin.

In principle, higher concentration should mean more market power, less

competition and hence higher net interest margin. However, there may be
returns to scale and efficiency gains. If the latter factor dominates our
measure of larger concentration, would imply lower net interest margin,
which is the case here. Transaction size which is claims on domestic real
non-financial sector by deposit money banks as a share of GDP is negatively
associated with net interest margin, pointing to the importance of increasing
return to scale in banking consistent with previous findings.

Let us turn to the factors impacting positively on the net interest margin.
Overhead costs which are the average value of a bank's overhead cost as a
share of its total assets is found to be positively associated with net interest
margin, reflecting that banks tend to pass this cost onto their clients.

Risk aversion which is regulatory capital to risk weighted assets is positively

associated with net interest margin, reflecting that banks that are better
capitalized should, in turn, have lower funding costs and consequently,
higher net interest margin, which is in line with earlier results.

Credit risk, which is the share of NPL's provision is positively associated with
net interest margin, confirming that banks charge additional risk premium to
compensate for exposed credit risk, which is also consistent with previous
findings.

PROFITABILITY INDICATORS
As previously mentioned, profitability measures are also included in the
measures of efficiency. Click on each indicator for a more detailed
description

Bank return on assets after tax - Measures the commercial banks’ after-
tax incomes to yearly averaged total assets

Bank return on equity after tax- Measures the commercial banks’ after-
tax net incomes to yearly averaged equity.

Considering this, you may conclude that profitability is not a good proxy for
efficiency. A bank could be inefficient in good times, though still profitable.
The bank might oblige its customers to compensate for its higher operating
costs by imposing higher lending rates when the economy is booming, while
benefiting from higher revenues. In bad times, even if the bank is operating
at lower cost, reduced intermediation activity could lower bank revenue
below its operating costs.

Stock Market Efficiency

Previously, we presented the efficiency measures for financial institutions. 

We will now discuss the measures of capital market efficiency. 
 The GFDD includes only one indicator of stock market efficiency, which is the
turnover ratio. It is the total value of shares traded during the period
divided by the average market capitalization for the period. 

Turnover ratio = Total value of shares traded ÷ Avg. market

capitalization

Higher turnover means more market liquidity, which, in turn, allows the
market to be more efficient. Investopedia defines a stock market as liquid
when “its shares can be quickly bought and sold, and the trade has little
impact on the stock's price.”
Čihák et al. (2012) discuss other efficiency measures without including them
in the GFDD. Below are the two most important ones. Click to learn more. 

Bid-ask spread

Difference between the highest price that a buyer is willing to pay for an
asset and lowest price that a seller is willing to accept. 

The lower the spread the more liquid is the market and lower is the cost of
transacting in the market (higher efficiency).

Real transaction cost

Measures the transaction costs of trading a particular security. 

It is based on the daily return data of the listed stocks, and helps to
determine barriers to efficiency in the market

The table below summarizes the results for the stock market turnover ratio
by region and income level. It shows a wide dispersion of stock market
turnover across countries and regions, as well as income groups: 

 The world-wide weighted average of the turnover ratio is

44 percent, but the country-by-country observations range from less than 1
percent to over 330 percent. 
 The developing economy average is 28 percent, which is
much lower than the developed economy average of 52 percent. 
 Among the different regions, high income: OECD scores
the highest, at 66 percent, and Sub-Saharan Africa and Middle East and
North Africa the lowest, at about 12 percent. 
Country size (measured by GDP) is a helpful factor in explaining the
difference in turnover ratio. Countries with high scores include developed
economies, and large emerging markets.

Databases that Measure Financial Inclusion

The first public database to provide indicators for financial product and
service usage across economies is the Global Financial Inclusion Indicators
(Global Findex).
The Global Findex was launched in 2011, for 148 countries, with 60
indicators on how adults save, borrow, make payments, and manage risk.
The 2014 Global Findex provides 100 indicators for 143 countries. This
version provided more nuanced data on mobile payment.
 The latest edition (2017) reflects progress in digital payment, government
policy, and a new generation of financial services accessed through mobiles
phones and the internet (fintech). It is available at
https://globalfindex.worldbank.org/node.
The Global Findex groups inclusion indicators into four broad categories:
 Account ownership
 Payment services
 Use of account
 Saving, credit and finncial resilence

In the remainder of this section, we will examine these categories in greater

detail. 
Note: There are other databases on financial inclusion besides the Global
Findex, including the IMF Financial Access Survey (FAS), Enterprise Survey
(ES), and G20 Financial Inclusion Indicators. We will describe these at the
end of this section.

Global Findex: Account Ownership Indicators

Let us begin by discussing account ownership indicators.

The 2017 Global Findex database defines account ownership as an individual
or jointly owned account, either found at a financial institution or made
through mobile payment. Let us dissect each of the indicators that lie within
the definition a bit further:

 Account (percent): The percentage of respondents who

reported having an account (independent or joint) at a bank or other
financial institution or reported personally using a mobile money service in
the past 12 months.
 Financial institution account (percent): The
percentage of respondents who reported having an account (independent or
joint) at a bank other financial institution.
 Mobile money account (percent): The percentage of
respondents who reported personally using a mobile money service in the
past 12 months

The mobile money account measures the mobile-phone-based services (not

linked to financial institutions) used to pay bills or to send or receive
payments. 
To better understand these measures, we will refer to the following charts
from the 2017 Global Findex.

This video, let's have a closer look at the account ownership indicators. The
figure shows that the share of adults worldwide with an account increased
from 51% in 2011 to 62% in 2014, and then to 69% in 2017. While growth
is generally much quicker in developing economies, it has been erratic
across countries.

In India, the share of adults with an account has more than doubled since
2011 to reach 80% in 2017. Why did this happen? India used biometric
identification cards to increase account opening. Mobile payment has had a
huge impact on financial inclusion in fragile and conflict affected economies.
Overall, account ownership is very low in these countries with only 27% of
adults reporting having an account in 2017.

Yet, mobile money accounts boosted account ownership in some of them.

Haiti has more than 40% of account owners who have a mobile account in
2017.

In Cote d'Ivoire, or the Ivory Coast, 64% have a mobile account in 2017.

Algeria has a low overall rate of account ownership in 2017.In Algeria, 56%
of men have an account, but only 29% of women. This is pulling down the
overall rate to 43%.

There are similar situations in Jordan, Lebanon, Burkina Faso, Mozambique,

Nigeria, Peru, and Togo. To increase the overall rate, policies need to
improve gender equality of financial access Payment Service Indicators

Let us now turn to the financial access indicators related to payment

services. The 2017 Global Findex defines five types of payment use
indicators. Click below to reveal the description of each indicator

Accounts used for government payments

Received Public sector wages -Refers to the percentage of respondents

who reported being employed by the government, military, or public sector
and receiving any money from an employer in the past 12 months in the
form of a salary or wages for doing work.

Received a public sector pension-Refers to the percentage of

respondents who reported personally receiving a pension from the
government, military, or public sector in the past 12 months.

Received a public sector pension into an account- Refers to the

percentage of respondents who reported personally receiving a pension from
the government, military, or public sector in the past 12 months directly into
a financial institution account, into a card, or into a mobile money account.

Received a public sector pension in cash only -Refers to the percentage

of respondents who reported personally receiving a pension from the
government, military, or public sector in the past 12 months in cash only.

Received government payments-Refers to the percentage of respondents

who reported personally receiving any payment from the government in the
past 12 months. This includes payments for educational or medical
expenses, unemployment benefits, subsidy payments, or any kind of social
benefits (see definition for received government transfers in the past year).
It also includes pension payments from the government, military, or public
sector (see definition for received a public sector pension in the past year)
as well as wages from employment in the government, military, or public
sector (see definition for received public sector wages in the past year).

Received government payments into an account-Refers to the

percentage of respondents who reported personally receiving payments from
the government in the past 12 months directly into a financial institution
account, into a card, or into a mobile money account

Received government payments in cash only-Refers to the percentage

of respondents who reported personally receiving payments from the
government in the past 12 months in cash only.

Received government transfers-Refers to the percentage of respondents

who reported personally receiving any financial support from the
government in the past 12 months. This includes payments for educational
or medical expenses, unemployment benefits, subsidy payments, or any
kind of social benefits. It does not include a pension from the government,
military, or public sector; wages; or any other payments related to work.

Received government transfers into an account-Refers to the

percentage of respondents who reported personally receiving any financial
support from the government in the past 12 months directly into a financial
institution account, into a card, or into a mobile money account.
Received government transfers in cash only-Refers to the percentage of
respondents who reported personally receiving any financial support from
the government in the past 12 months in cash only.

Accounts used to receive private sector wages

Received private sector wages-Refers to the percentage of respondents
who reported being employed in the private sector and receiving any money
from an employer in the past 12 months in the form of a salary or wages for
doing work. 

Received private sector wages into an account-Refers to the

percentage of respondents who reported being employed in the private
sector and receiving any money from an employer in the past 12 months in
the form of a salary or wages for doing work directly into a financial
institution account, into a card, or into a mobile money account. 

Received private sector wages in cash only-Refers to the percentage of

respondents who reported being employed in the private sector and
receiving any money from an employer in the past 12 months in the form of
a salary or wages for doing work in cash only. 

Account used to send and receive domestic remittances

Sent or received domestic remittances-Refers to the percentage of

respondents who reported personally sending any of their money in the past
12 months to, or receiving any of it from, a relative or friend living in a
different area of their country

Sent or received domestic remittances in cash only-Refers to the

percentage of respondents who reported personally sending any of their
money in the past 12 months to, or receiving any of it from, a relative or
friend living in a different area of their country in person, or through
someone they know, and in cash only. 
Sent or received domestic remittances using an OTC service-Refers to
the percentage of respondents who reported personally sending any of their
money in the past 12 months to, or receiving any of it from, a relative or
friend living in a different area of their country over the counter (OTC) in a
branch of their financial institution, through a mobile banking agent, or
through a money transfer service.

Sent or received domestic remittances using an account-Refers to the

percentage of respondents who reported personally sending any of their
money in the past 12 months to, or receiving any of it from, a relative or
friend living in a different area of their country using a financial institution
account or a mobile money account.

Received domestic remittances-Refers to the percentage of respondents

who reported personally receiving any money in the past 12 months from a
relative or friend living in a different area of their country. This includes any
money received in person. 

Sent domestic remittances-Refers to the percentage of respondents who

reported personally sending any of their money in the past 12 months to a
relative or friend living in a different area of their country. This can be
money they brought themselves or sent in some other way.

Account used to pay from people to business

Paid utility bills-Refers to the percentage of respondents who reported

personally making regular payments for water, electricity, or trash collection
in the past 12 months. 

Paid utility bills from an account-Refers to the percentage of

respondents who reported personally making regular payments for water,
electricity, or trash collection in the past 12 months directly from a financial
institution account or using a mobile money account. 

Paid utility bills in cash only-Refers to the percentage of respondents who

reported personally making regular payments for water, electricity, or trash
collection in the past 12 months in cash only. 

Account used for othr payments for work

Received payments for agricultural products in cash only-Refers to
the percentage of respondents who reported personally receiving money
from any source for the sale of agricultural products, crops, produce, or
livestock in the past 12 months in cash only. 

Received payments for agricultural products-Refers to the percentage

of respondents who reported personally receiving money from any source for
the sale of agricultural products, crops, produce, or livestock in the past 12
months. 

Received payments for agricultural products into an account-Refers

to the percentage of respondents who reported personally receiving money
from any source for the sale of agricultural products, crops, produce, or
livestock in the past 12 months directly into a financial institution account,
into a card, or into a mobile money account. 

Received payments from self- employment in cash only-Refers to the

percentage of respondents who reported personally receiving money from
their business, from selling goods, or from providing services (including part-
time work) in the past 12 months in cash only. 

Received payments from self- employment-Refers to the percentage of

respondents who reported personally receiving money from their business,
from selling goods, or from providing services (including part-time work) in
the past 12 months

Received payments from self- employment into an account-Refers to

the percentage of respondents who reported personally receiving money
from their business, from selling goods, or from providing services (including
part-time work) in the past 12 months directly into a financial institution
account, into a card, or into a mobile money account. 
Global Findex: Use of Account Indicators

USE OF ACCOUNTS FOR DIGITAL PAYMENTS

Made or received digital payments in the past year -The percentage of respondents who
reported using mobile money, a debit or credit card, or a mobile phone to make a payment
from an account or reported using the internet to pay bills or make online purchases in the
past 12 months. This also includes respondents who reported paying bills, sending or
receiving remittances, receiving payments for agricultural products, receiving government
transfers, receiving wages, or receiving public sector pensions directly from or into financial
institution accounts, or through mobile money accounts, in the past 12 months.

USED OF DEBIT OR CREDIT CARD TO MAKE PURCHASES

Used a credit card in the past year-Respondents (percentage) who reported using their
own credit cards in the past 12 months

Used a debit card to make a purchase in the past year:Respondents (percentage) who
reported using their own debit cards directly to make purchases in the past 12 months.

USED A MOBILE PHONE OR THE INTERNET TO MAKE PAYMENT

Used a mobile phone or the internet to access an account in the past year-The
percentage of respondents who reported using a mobile phone or the internet to make a
payment/purchase or send/receive money through a financial institution account or by using
a mobile money service in the past 12 months

Used the internet to pay bills or to buy something online in the past year- The
percentage of respondents who reported using the internet to pay bills or make online
purchases in the past 12 months.

NO USE OF ACCOUNT

No deposit and no withdrawal from an account in the past year-The percentage of

respondents who reported neither a deposit into nor a withdrawal from an account in the
past 12 months.

By exploring the Findex data, we can draw some interesting conclusions. For
example, account owners in China tend to make mobile payments through apps,
while Kenyans typically use mobile money accounts.
Globally, 20 percent of account owners reported having an inactive account. In
India, the share is 48 percent, the highest in the world. India has launched the
“Yojana program” to increase account ownership. The number of new accounts
added is 310 million, though most of them are inactive. 

Global Findex: Saving, Credit, and Financial Resilience

SAVINGS INDICATORS

Saved any money in the past year -The percentage of respondents who reported
personally saving or setting aside any money for any reason, using any savings mode, in
the past 12 months.

Saved for old age-The percentage of respondents who reported saving or setting aside
any money in the past 12 months for old age.

Saved formally-The percentage of respondents who reported saving or setting aside any
money in a bank or other financial institution in the past 12 months.

Save semi formally-The percentage of respondents who reported saving or setting aside
any money in the past 12 months through a savings club or person outside the family.

BORROWING INDICATORS
Borrowed any money in the past year-The percentage of respondents who reported
borrowing any money (independently or jointly) for any reason, and from any source, in the
past 12 months

Borrowed formally-The percentage of respondents who reported borrowing money from

banks or other financial institutions, or using credit cards, in the past 12 months.

Borrowed from family and friends-The percentage of respondents who reported

borrowing any money from family, relatives, or friends in the past 12 months.

Borrowed semi formally-The percentage of respondents who reported borrowing any

money from a savings club in the past 12 months.

Financial institution account- The percentage of respondents who reported having an

account (independently or jointly) at a bank or other financial institution.

Outstanding housing loan-The percentage of respondents who reported having an

outstanding loan (independently or jointly) from a bank or other financial institution due to a
home, apartment, or land purchase.

FINANCIAL RESILENCE INDICATORS

Able to raise emergency funds- The percentage of respondents who reported that, in
case of an emergency, it would be possible for them to gather 1/20 of the gross national
income (GNI) per capita in local currency within the next month.

IMF Financial Access Survey

We have just explored the Global Findex and the four indicator groups it outlines.
As we previously mentioned, there are other financial inclusion databases. One
example is the IMF FAS, which provides “supply side information” (information
provided by commercial banks and complied by central banks). This database
provides annual data (2004–2018) on all IMF members (198 countries). Data is
collected by national regulators and supervisors based on the IMF’s guidelines and
survey formats. 
WHAT ARE THE FAS OBJECTIVES?
1. Collect, validate, analyze, and disseminate internationally comparable financial
inclusion data on an annual basis.
2. Enable cross-country comparability by ensuring methodologically robust high-
quality survey data.
 3. Design, develop, and update reporting guidelines, concepts and methodologies,
and survey reporting templates.
4. Promote survey outcomes to inform research, policy analysis, and evidence-
based decisions associated with financial inclusion.

WHAT DOES FAS COVER?

The FAS covers the following financial corporations, as well as users of financial
services:

WHAT TYPES OF INDICATORS ARE PRODUCED?

The FAS questionnaire collects data on 180 time series. Key series from the
questionnaires are converted into 47 indicators that assess two dimensions of
financial inclusion:

 Access to basic consumer financial services (e.g., ATMs per 100,000

adults).
 Use of basic consumer financial services (e.g., commercial bank
depositors per 1000 adults).
 The FAS began collecting data on mobile banking in 2014 and piloted gender
disaggregated data in 2016, which is now mainstreamed to include nine time series
and 12 indicators for traditional banking access.
WHAT ARE THE NINE FAS INDICATORS ENDORSED BY THE G20 FINANCIAL INCLUSION
INDICATORS?
The nine FAS indicators, which were later endorsed by the G20, are as follows:

 Number of ATMs per 100,000 adults

 Number of commercial bank branches per 100,000 adults
 Number of mobile transactions per 100,000 adults
 Number of household sector deposit accounts at commercial banks
per 1000 adults
 Number of life insurance policyholders per 1000 adults
 Number of nonlife insurance policyholders per 1000 adults
 SME deposit accounts at commercial banks (as a percentage
nonfinancial corporations)
 SME loan accounts at commercial banks (as a percentage of
nonfinancial corporations)
 Number of registered mobile money agent outlets per 100,000 adults

Other Financial Inclusion Databases

ENTERPRISE SURVEY
Another financial inclusion database is the Enterprise Survey. 
The World Bank defines the Enterprise Survey as “a firm-level survey of a
representative sample of an economy’s private sector. The surveys cover a broad
range of business environment topics including access to finance.”
The World Bank began conducting these surveys in 2002 and, to date, 135,000 firms
(manufacturing and service sectors are the primary business sectors of interest)
have been interviewed in 139 countries under the Global Methodology. More
detailed information about the Enterprise Survey methodology can be found here:
http://www.enterprisesurveys.org/methodology. 
For most countries, Enterprise Surveys are performed approximately every 3–4
years. A list of current surveys and expected data delivery dates may be found here:
http://www.enterprisesurveys.org/methodology/current-projects. 
You may read all of the reports by following this link:
http://microdata.worldbank.org/index.php/catalog/enterprise_surveys/.
Here, we will present only the indicators that measure financial inclusion. 
G20 FINANCIAL INCLUSION INDICATORS
The other database on financial inclusion is the G20 Financial Inclusion
Indicators, produced by the Global Partnership for Financial Inclusion (GPFI).
The GPFI is an inclusive platform for all G20 countries, interested non-G20
countries, and relevant stakeholders, designed to carry out work on financial
inclusion, including implementing the G20 Financial Inclusion Action Plan, endorsed
at the G20 Summit in Seoul (2012). 
The GPFI developed the indicators, which were approved by G20 leaders in 2012.
Additional indicators, covering financial literacy and the use and quality of financial
services, were approved by the GPFI in 2013. In 2016, more indicators measuring
the use of digital payment and access to digital infrastructure were added. This
portal is managed by the World Bank’s Data Group. Through this portal, you can
find the most recent data on the G20 Financial Inclusion Indicators:
https://www.gpfi.org/news/g20-financial-inclusion-indicators.
 As you may recall, financial inclusion covers three dimensions, and the G20
indicators are also grouped according to these dimensions:
(i) access to financial services; 
(ii) usage of financial services; and 
(iii) quality of products and service delivery. 
Both supply- and demand-side data are combined to create a comprehensive
database. 
The data comes from the World Bank Global Findex database, IMF Financial Access
Survey, Gallup World Poll, World Bank Enterprise Surveys, OECD National Financial
Literacy and Financial Inclusion Surveys, OECD Financing SMEs and Entrepreneurs
Scoreboard, World Bank Doing Business, World Bank Global Survey on Consumer
Protection and Financial Literacy, World Bank Financial Capability Surveys, and
World Bank Global Payments Systems Survey.
A glossary of indicator definitions can be downloaded from the GPFI data portal:
http://datatopics.worldbank.org/g20fidata/. 

Introduction to FinStats
In order to gain a comprehensive understanding of your country’s degree of
financial development, you must compare the measures of financial depth,
efficiency, and inclusion to certain benchmarks or other financial sectors over time,
and relative to other countries. To that end, the World Bank has created FinStats
2019. In this section, we will learn how to use this tool.
FinStats has three components:

 Indicator benchmarking methodology: Used to produce

statistical benchmarks to assess a country’s performance based on a regression
framework. The calculation of these benchmarks follows a four-step methodology: 

1. Collect annual country-level data for all financial indicators to benchmark.

2. Transform and clean the data (all variables are log transformed and outliers are
excluded). 
3. Estimate the quantile regression benchmark for each indicator (medium, 25th,
and 75th percentiles).
4. Display country-year statistical benchmarks for all indicators.

 Financial indicator database: Includes 46 financial

development indicators for 187 countries that cover the banking sector, capital
markets, and nonbank financial institutions.
 Excel-based dashboard: Allows for the creation of charts and
tables for financial indicators and their benchmarks. 

Benchmarking Methodology
Let us begin by presenting the benchmarking methodology before delving into
using FinStats.
The World Bank warns that, although statistical benchmarks account for country
differences and thus produce better benchmarks than simple country peers, users
should interpret the benchmarks with caution, because regressions do not address
the explanatory variables' endogeneity and do not include ALL structural factors. 
Two factors determine a country’s level of financial development (benchmark):
economic and structural (or nonpolicy) factors, and policy factors.
Let us focus first on the economic and structural factors. These factors are external
to policy and include five types of variables, which are illustrated below, along with
simple explanations for why each variable is controlled. 
  Before delving into the policy factors, let us define the financial frontier (Barajas et
al., 2013).

Defining the Financial Frontier

1. The graph shows a very simple representation of the factors underlying

financial development. The horizontal axis summarizes structural factors that are
 expected to affect the viable level of financial development. For example, income
per capita, population and its density. As

we move to the right, the structural factor becomes more conducive to finance--
higher income, larger and more dense population, and lower degree of informality.
Thus, there is a positive relationship between structural factors and the level of
financial development vertical axis represented by the bold line in the graph
labeled the structural development line, which shows the expected amount of
financial development for given structural characteristics. We can compare two
countries, A and B, where B has a higher level of financial development. DB is
higher than DA. However, we also note that structural characteristics are much
more advantageous in B; structure B is higher than structure A. And therefore, B
will be expected to have higher financial development than A. SDB is higher than
SDA. In fact, while A is over performing relative to peers, B is underperforming and
is below the line.

Therefore, B is said to have a positive financial gap relative to the structural

benchmark while A has a negative gap. The second line is the financial possibility
frontier, the maximum desirable level of financial development for a given set of
structural characteristics. This incorporates the idea that there might be a
maximum level beyond which finance becomes unproductive. Country C would
represent a country that has pushed finance beyond its desirable or socially
optimal maximum

Benchmarking: Policy Perspectives

Let us move on to policy factors, which are also used to determine a country’s level
of financial development. Barajas et al. (2013) describe three sets of policies:

 Market-developing policies aim at expanding the financial

possibility frontier. They include, for instance, legal changes and substantial
upgrades of macroeconomic (particularly fiscal) performance. Constraints imposed
by market size can also be partly overcome through regional integration and
foreign bank entry, although risks are to be carefully managed here, as well. Policy
interventions that strengthen informational and contractual frameworks and
provide supporting market infrastructures can also help to expand the frontier. In
general, the benefits of market-developing policies materialize over the longer
term.
 Market-enabling policies help push a financial system closer to
the frontier and include more short- to medium-term policy and regulatory reform.
 For instance, policies aimed at fostering greater competition can result in efficiency
gains, as illustrated by the recent vigorous expansion of profitable micro- and
consumer lending across many developing countries. Such policies may also
include removing regulatory impediments and reforming tax policies. Enabling
policy is not just limited to facilitating new entry and contestability, but also
includes “activist” competition policies, such as opening up infrastructures (e.g.,
payment systems and credit registries) to a broader set of institutions or forcing
institutions to share platforms and infrastructures. 
 Market-harnessing or market-stabilizing policies aim at
preventing the financial system from moving beyond the frontier. Such policies
encompass risk oversight and management, and include the regulatory framework,
as well as macroeconomic and macroprudential management. This involves
upgrading regulatory frameworks to mitigate risks stemming from increased
competition from new nonbank financial service providers, carefully calibrating the
pace of financial liberalization to prudential oversight capacity and establishing
cross-border regulatory frameworks to mitigate risks stemming from increased
international financial integration. Such policies are also important for the user
(minimizing the risk of household over-indebtedness through financial literacy
programs and consumer protection frameworks).

How to Use the FinStats Dashboard

Now that we have a better sense of the economic, structural (nonpolicy), and policy
factors of the FinStats methodology, we are ready to explore FinStats Dashboard
usage, which consists of three major steps. 
Step 1: Selection | Select a country, one or two indicators, and peer group
countries. 
Step 2: Overview of latest data | Review displayed table and charts for the latest
available year.
Step 3: Benchmark analysis | Review benchmark data analysis.
In the following video, we will walk you through each of these steps. 
Note: Before you begin, make sure that you enable macros in Excel. This document
shows you how to do so. 

In this video, I will demonstrate how to use the FinStats dashboard to conduct
benchmark analysis. FinStats is a ready-to-use financial indicator tool that allows
users to benchmark and compare financial sectors over time and relative to other
countries.
Benchmarking is a simple, standardized methodology that allows users to produce
financial benchmarks to assess the performance of individual countries based on a
broad regression framework. It is created to meet the needs of policymakers and
analysts in the financial sector engaged in diagnostic work.

Let's get started. The first step is the selection stage where you select a country,
indicators, and peer group countries. Let's select Turkey along with two indicators,
which are percentage of outstanding domestic public debt securities to GDP and
percentage of outstanding domestic private debt to GDP.

After selecting the country, five peer countries are automatically generated based
on GDP per capita, population size data indexes. Also, feel free to manually add up
to five additional countries of your choice in this section. The maximum you can
select in total is 10. And make sure to check the box next to the countries you want
to include as comparators. You can use the advanced peer group selection criteria
by clicking on this box.

You can restrict the countries in the selected pool by imposing constraints on
population size, GDP per capita, the region, and the income groups. The peer group
selection algorithm suggests the five closest countries that match the criteria you
set in the selection page in addition to the GDP per capita and population factors.

By default, the factors are given equal weight. But you can modify them here. We
can constrain the selection by choosing your region. For instance, Europe and
Central Asia. Then the algorithm suggests five peer countries, which in this case are
Russia, Romania, Kazakhstan, Ukraine, and Bulgaria. Now, let's move on to the
second step by clicking the Overview Table.

FinStats provides a Summary Table and its associated charts on all 46 indicators for
the country of interest, including a set of benchmarks, such as the statistical,
regional, and income group benchmark and the observed values for the selected
peer countries for the latest available year.

For instance, take a look at the accounts per 1,000 adults at commercial banks.
Turkey is outperforming its peers and its expected regional and income group
median in 2017. The table is dynamic and automatically updates whenever the
selection is changed. By clicking the Overview Charts, we can see a different display
of the results. The next step is the Benchmark section, which gives detailed
historical data and charts for Turkey for selected indicators as well as multiple
comparators, which are regional average and median, average, median, and high-
income median, simple average for the peer group countries selected in step 1, and
the statistical benchmarks, which are the expected median and expected 25th and
75th percentile, which are calculated based on the country's structural
characteristics.

The Benchmark page provides tables and charts for Turkey using two financial
indicators compared to the benchmark of your choice, such as regional median,
peer group average, and expected median. Although great care was taken to
assemble the FinStats database from multiple primary sources, data are provided
on an as-is basis.

Therefore, their accuracy is not always guaranteed. Statistical benchmarks take

country differences into account, and therefore typically produce better
benchmarks than ad hoc approaches. However, they should be interpreted with
good judgment and in the country's specific context.

Now, let's move on to the activities.

Using Statistical Benchmarks

Now that you understand how to populate the statistical benchmark data using FinStats, it is time to
interpret the data using country examples.

Use FinStats as described in the previous unit to produce a chart illustrating Brazil’s
bank private credit to GDP. Based on the regional benchmark, what trends do you
observe in Brazil’s performance? 
2.  Use FinStats as described in the previous unit and produce a chart showing
domestic bank deposits to GDP for Argentina. What can you say on the
performance of the banking sector in Argentina by looking at expected percentiles? 
Before reviewing the solution video below, state your observations in the
discussion post below.