Financial sector development: progress and potential

April 20183 min readFinancial InclusionEmerging Markets

The last decade has seen extraordinary progress in terms of increasing financial inclusion and promoting financial sector development.

Increasing access to finance

Between 2011 and 2014, the proportion of the world’s adult population with an account at a financial institution grew from 51 % to 62 %, an increase of around 700 million people.

Leapfrogging fixed infrastructure

Market infrastructure has also developed, although many markets have continued the trend of leapfrogging fixed infrastructure (ATMs, physical branches) to embrace mobile technology.

The rise of mobile banking

Usage of mobile banking has increased significantly in many emerging economies, a trend likely to continue over the next few years as mobile broadband usage and coverage accelerates in the developing world.

Financial inclusion levels

Developing countries still lagging behind

Nevertheless, many financial sectors in the developing world remain far behind developed economies in terms of financial infrastructure, accessibility and product range. The consequences of this gap will continue to be significant for economic development, and ultimately quality of life.

The reduction of this gap has been, and will be, accelerated by a combination of key drivers.

1) Economic growth

Long term economic growth trajectories are important in terms of context, although the nature of this growth can also have an influence, with income equality and account penetration highly correlated. 

2) Demographics

Demographic pressures also play a major role in boosting demand, a trend likely to accelerate in many emerging economies in the next decade. The chart below shows a rapid increase in the number of people reaching working age in the developing world over the next 10 – 20 years. Greater urbanisation and a growing middle class will also heighten demand for financial services further. 

3) A better market framework

The enabling environment for the financial sector is an essential ingredient for boosting the supply of credit and promoting financial sector development. A major component of this is the quality of regulations and the regulator itself. Although regulatory shocks can be growth negative for the financial sector, good, clear regulation (and sufficient oversight capacity at the regulator) can play a key role in reducing risk across the sector, encouraging investment and growth. Other enabling elements include the introduction of credit bureaus, also shown to boost credit levels and financial inclusion. [1]

4) Technological progress

Technological progress can play its part, notably in the extent to which the spread and quality of connectivity permits mobile banking, especially in remote areas. 

5) Access to financing

In order to fulfill this demand, financial sector development needs to be fuelled by access to financing for financial institutions.

Population growth as a driver

1 “The national credit bureau: a key enabler of financial infrastructure and lending in -developing economies”, 2009, McKinsey

 You can find out more about this topic in our Micro and SME Finance Market Outlook 2018 on our website.