Tuesday, November 23, 2010

Cash transfers and financial inclusion

Campos and Coricelli argue that cash transfers might not only be a crucial social safety net against poverty and vulnerabilities in developing countries, but it might also benefit financial development.  CCTs are transfers often pain in cash, have an explicit poverty reduction objective, have an explicit conditionality component, and have a strong ex-post evaluation. Rather than the conditional aspect of CCT, Campos and Coricelli focus on cash aspect and its impact on financial inclusion.

CCTs have also been widely implemented after the global economic crisis.There are over 30 countries implementing conditional cash transfer programs, up from just 3 in 1997.

In recent research (Campos and Coricelli 2010), we attempt to address this neglect of financial development as a possible factor explaining the success of cash transfers. Indeed, we lament the generalised lack of attention and interest in its potential role. Our argument is that cash transfers, through the formal financial sector, may be an important channel to boost financial development and thus potentially reconcile equity and efficiency concerns.

Our thinking is in large part inspired by some of the most successful cash transfer programmes, such as the Brazilian Bolsa Família programme. One delivery instrument in Bolsa Família has been electronic benefit cards (there is an ongoing study on the possibility of using mobile phones for executing these payments). In this, as in other successful programmes around the world, the beneficiaries, mainly women, have their benefits paid periodically into bank accounts, which is controlled through a dedicated ATM system (Lindert et al. 2007). We argue that the way in which these benefits are executed (or paid) matters considerably, and deserves further attention from both academics and policymakers.

[…]The view we take is that there is a largely-unexplored virtuous cycle of conditional cash transfer programmes and financial development. Conditional cash transfers can improve access to financial services, which, in turn, can shore up financial deepening, which may lower transaction costs in the financial sector (for example, by lowering the ratio of banking fees to GDP per capita). Cheaper banking services are not only one way of improving access to finance and of fostering financial inclusion, but they may also help to support cash transfer programmes by making their delivery cheaper and more transparent. Clearly, there are important political economy issues permeating these decisions.

These qualifiers above are useful as they highlight the important policy areas. Conditional cash transfer programmes can improve financial inclusion if and when the payment of the benefits is done through the formal banking system (as opposed to a surprisingly still common way of paying beneficiaries in cash and in person). Financial inclusion can shore up financial deepening if, for instance, bank regulations are able to relax branching restrictions and allow (or lower the costs) for the operation of mobile phone-based banking systems. Financial deepening can lower banking costs, but policymakers have to focus on the ways in which these cost reductions are actually passed on to low-income consumers (by, for example, subsidising basic banking accounts, if that is required). Lower costs of formal financial services can clearly improve access. They are also likely to reduce the implementation costs of conditional cash transfer programmes, thereby enhancing their potential effectiveness.

There are plenty of studies about the impact of CCTs on poverty, inequality, women empowerment, education, health and inclusive development, among others. For instance, this study finds that cash transfers in Brazil (Bosla Familia) contributed to reductions in inequality of another 0.2 Gini points per year. 

CCTs, born out of Mexico’s Oportunidades, is already successfully implemented in Latin America and in small scale in some African and East Asian countries. CCTs have boosted the use of preventive health care services in Colombia, Honduras, Mexico, and Nicaragua by between 8 and 33 percentage points, according to the WB. See this report for a detailed discussion about the impact of CCTs on poverty, education, and healthcare.

In Pakistan, for instance, a CCT program increased the school enrollment of 10-14 year-old girls by 11 percentage points. And in Mexico, the Oportunidades program decreased dropout rates between the 6th and 7th grade by 9 percentage points.