Background - Inability to access financial services prevents consumption smoothing and investments in health, education and income generating activities, thus limiting growth opportunities for the poor. So, providing access to financial services has significant potential to help lift the poor out of the cycle of poverty.
Formal banking services, by exploiting economies of scale and/or making judicious use of targeted subsidies, may be able to reduce or remove market imperfections and facilitate financial inclusion of the poor, ultimately leading to higher incomes. However, supply and demand constraints may limit the ability of formal banking services to achieve growth.
Methods - We conducted a systematic search of published and unpublished material relevant to the impact of access to formal banking services on income. The search was guided by a causal mechanism, outlining the causal channels of interest and inclusion/exclusion criteria, as the requirements of studies to be included in the review.
A coding tool, based on the EPPI-Reviewer platform, characterizing studies and collecting information on context, mechanisms and outcomes, was used to collect information from the included studies. The review utilizes the realist synthesis methodology for analysis and only includes high-quality studies presenting evidence on impact of access to formal banking services.
Results - Innovative design of new savings products that increase the supply of savings and increase demand for savings by helping people address behavioral challenges were found to increase income at least in the short run. Improving banking technology by using mobile phones to facilitate remittances, transfers and payments, and enable savings, was found to have the potential to increase income by allowing households to smooth consumption and accumulate assets.
State-led expansion of the banking sector in rural areas was found to increase the supply of banking services, which in turn was found to reduce rural poverty, increase rural wages and increase agricultural investment. Access to credit could increase household income by increasing consumption and/or smoothing consumption. Further, it could raise agricultural incomes by allowing farmers to purchase better and more optimal levels of inputs, leading to higher outputs and income. Moreover, an individual’s access to credit could also increase incomes of members in the individual’s social network.
Conclusions - The review finds that offering new savings products can increase income by allowing households to accumulate assets. Improving banking technology has the potential to increase income by allowing households to smooth consumption and accumulate savings. State-led expansion of the banking sector in rural areas can reduce rural poverty, increase rural wages, and increase agricultural investment. Access to credit is associated with higher agricultural incomes and increased and/or smoother consumption for rural farming populations.
In terms of research implications, the review produced no evidence on financial literacy programs combined with formal banking services and technologies like debit cards. In terms of policy, the review finds that innovations in savings products and improvements in banking technology may be particularly effective. The review also finds that farmer’s credit constraints are an important bottleneck in expanding agricultural output, and interventions that ease these constraints may be effective in reducing rural poverty and increasing agricultural production.
Pande, R.; Cole, S.; Sivasankaran, A.; Bastian, G.; Durlacher, K. Does poor people’s access to formal banking services raise their incomes? EPPI-Centre, Social Science Research Unit, Institute of Education, University of London, London, UK (2012) 102 pp. ISBN 978-1-907345-26-5