This publication discusses the following key points:
- ODI research shows, for the first time, a clear link between access to financial services and the ability of households to invest in education or a business, that can contribute to economic growth in developing countries.
- Semi-formal and informal financial services are very important in providing access, but formal financial services tend to be used more for investment purposes.
- A range of barriers prevent people accessing formal financial services, and undertaking such investment.
- Policies to address these barriers would help promote investment and economic growth in poor countries.
The empirical relationship between access to financial services and growth is not well established, despite a range of theoretical literature hypothesising about the potential economic linkages. This is because of the lack of suitable data on access to financial services with which to examine the question until recently.
This report summarises the findings of research by the Overseas Development Institute (ODI) which utilises relatively recent FinScope survey data from Kenya (where it is called FinAccess) and Tanzania to examine this question by looking at the impact of access to financial services on household investment.
Growth depends on the stock of physical and human capital in the economy, as well as technological progress. Investment at the level of the individual or the firm can contribute directly to increasing these things. Thus by showing empirically that access to financial services enables households to make investments in education (which contributes to human capital), starting or expanding a business, or investing in agricultural inputs or new equipment (which contributes to physical capital and technological progress), the study has established one of the key potential linkages between access to financial services and growth, with important implications for policy.
