By Lesley Wroughton
WASHINGTON (Reuters) - In some of the world's poorest countries less than half the population has a bank account and in most of Africa only one in five people has access to financial services, a new World Bank report said on Tuesday.
According to the report, "Finance for All? Policies and Pitfalls in Expanding Access," small and medium-sized companies were also constrained in developing countries by the poor access to financial services.
Only 15 percent of new investment by small firms is financed externally in the developing world, compared with 30 percent among larger companies, the report said.
It called on governments and the private sector to broaden their strategies to expand financial services to all, including by bringing down costs through new technologies and encouraging competition.
"Reforms that promote access to financial services should be at the core of the development agenda," said Asli Demirguc-Kunt, senior research manager, finance and private sector, at the World Bank. "Better access to finance not only increases economic growth, but also helps fight poverty and reduces income gaps between rich and poor."
World Bank research found that poor households and small companies, especially those in rural areas or in the informal sector, often could not access financial services because of the long distances needed to travel to reach a bank, difficulties in providing documentation, and high costs.
For example, Spain has 96 bank branches per 100,000 people and 790 branches per 10,000 square kilometers, while Ethiopia has less than 1 branch per 100,000 people and Botswana has 1 branch per 10,000 square kilometers.
TECHNOLOGICAL HELP
Thorsten Beck, one of the authors of the report, said governments should encourage innovation, including the use of cell phones or the Internet for banking, which would broaden access and reduce the cost of financial services.
"Policymakers' task will be to provide an environment that encourages this type of innovation, having a competitive environment, having a regulatory framework that allows alternative branch-like locations to provide financial services" he added.
Competition could, for example, be increased by opening markets to foreign banks, often a very controversial issue, partly for political reasons, the report said. It said increased competition for large customers could drive local banks to focus more on providing profitable services to areas they may have neglected in the past.
Evidence suggests that a country that allows foreign banks to operate in its borders is likely, over time, to improve financial access to small and medium-sized enterprises, the report said.
Beck said microfinance -- a mushrooming market that provides small loans to the poor who are unable to access financing elsewhere -- was one way of expanding financial services.
Still, Beck said even microfinance has not always reached the very poorest, while the report said it was unclear how big an impact small loans had on overall poverty.
The report said delivering financial services to the poorest without subsidies was a challenge. As credit is not the only financial service needed by the poor, the report said subsidies may be better spent on overcoming barriers to savings and payment services to encourage a modern market economy.
Beck said the private sector could also play a bigger role in helping the poor and small firms access financial services, but were often constrained by high cost and risks involved with providing such services.
He said it was not only the smallest firms that were often overlooked by the financial sector, but also companies with between 50 to 100 employees.
"These are the forgotten middle that are getting too big for the microfinance institutions but they are not big enough or formal enough for the banking system," he said. "They're stuck in the middle and they cannot grow because they can't get access to finance," Beck added.
