Household such as consumption smoothing. Overall, as the utilization

Household level financial inclusion was alsopositively related to economic growth.

Loans and insurance products have the highestimpact. Loans could constitute a restriction on households that are planning tohuman capital investments. Growth rates of income could be increased by thegreater household inclusion. The amount of household inclusion indicators that weresignificantly associated with growth was small compared to the number ofsignificant firm inclusion most likely due to the fact that households usefinancial services for nonpecuniary reasons, such as consumption smoothing.  Overall, as the utilization of formal finance (such asfirms with bank loans or firms that finance their investment through equityissuance) increases, the long-term growth rate also rises.  Credit availability may let entrepreneurs to utilizebusiness opportunities and to withstand economic downturns.

  Greater firm inclusion also could encouragefirms to leave the informal sector to use financial/ banking services.   The financial firm inclusion variables weresignificantly correlated with growth, and many of these coefficients are large.The portion of firms with access to equity investment had a foremost impact ongrowth.

Raising investment through equity sale could develop corporategovernance and the accountability of the firm and by so doing could improvegrowth. The amount of firms with bank loans/lines of credit is significantlyand positively related to both overall growth and the bottom 40’s  income growth. The World Bank’s Global Findex and Enterprise Surveysdata were used to measure financial services. The authors made a distinction betweenindividuals and firms and categorized their variables with respect to thefinancial service type. The selection of the variables was based on the pastresearch (please refer to Beck et al.

2008; Demirgüç-Kunt, et al. 2012), on thecountry coverage availability.   Firm-level financial inclusion was measured by using theEnterprise Survey. Global Findex. Account ownership was measured by using the variable namely: “Percent offirms with a checking or savings account.” Payment was quantified with the variable”Used an account at a financial institution for business purposes.

” Corporatesavings were analyzed by the variable “Saved to start, operate, or expand afarm or business.” The credit usage was captured by “Percent of firms usingbanks to finance working capital” and “Percent of firms using banks to financeinvestments”. Gould and Melecky (2017) had the independent variablesas composite indexes composed of mean and standard deviation- centeredvariables (including stability, depth, efficiency, firm-level inclusion andhousehold-level inclusion). The level of significance of the growth regressiondetermined the selection of variables in each index.  Each index was formed by taking a simpleaverage of the variables with the properly adjusted weights for the missing observations. Source: Risk andReturns Managing Trade-Offs for Inclusive Growth in Europe and Central Asia, MichaelGould and Melecky, 2017. Depth Index –         Private credit by deposit money banks to GDP  (%) –         Liquid liabilities (M3) to GDP (%) –         Stock market capitalization to GDP (%) –         Deposit to GDP Stability Index –         Average output loss during banking crisis –         Average number of years in a financial crisis –         Average fiscal cost of a financial crisis –         Bank credit to bank deposits (%) –         Credit / GDP volatility –         Increase in NPLs   Efficiency Index –         Bank lending-deposit spread (%) –         H-statistic –         Bank overhead costs to total assets (%) –         Bank net interest margin (%)   Firm Inclusion Index –         Investments financed by equity or stock sales (%) –         Firms using banks to finance working capital (%) –         Firms identifying access to finance as a major constraint (%) –         Firms with a bank loan or line of credit (%)   Household Inclusion Index –         Borrowed from a financial inclusion (% age 15+) –         Purchased agriculture insurance (% working in agriculture, age 15+)   Table 1.5:  Index indicatorsThe study looked at four different indices reflectedin the table 1.

5: ECA already scored relatively high on financialinclusion and access (frequency and ease of interaction with the financialsystem by firms and individuals) so the benefits to further enhancements may besmaller than through greater efficiency. The region may still increase growthby adopting policies designed to advance financial access. Financial development was positively associated witheconomic growth n ECA. Higher-than-expected cumulative income growth and bottom40 percent’s income was significantly associated with indicators of financialdevelopment, categorized by depth, stability, efficiency, and inclusion. Excluding the impact of financial sector development,the median annual gross domestic product (GDP) growth in the region, for theperiod 2000-14, was 1.8 percent higher than indicated by the growthfundamentals.

This corresponded to the highest unexpected growth among thedeveloping regions, and is even greater than the unexpected growth in thedeveloped European countries.  The analysis in the second chapter of the studyhighlights that ECA’s financial sector development stood to benefit inclusivegrowth the most. Main messages included: (i) For inclusive growth, the mostimportant dimension of finance was the firm level access to finance, particularlyaccess to equity financing.

Finance can effect income growth mostly byenhancing allocative efficiency rather than mobilizing savings for investment.(ii) Banking crises reduced medium-term growth in both the advanced EuropeanUnion (EU)countries and Emerging ECA. Greater firm and individual level financial inclusioncan mitigate the busts in the cumulative growth in the course of bankingcrises.

However, for the bottom 40’s income growth, the mitigation factor isnot noteworthy. The level of financial inclusion among firms was morediverse. The number of financially constrained firms increased during the postcrisis period in several countries, and a lower share of firms had access to bankfinancing or raised funds on the stock market in 2013 compared to 2019. Banking overhead costs and cost-to-income ratios werehigh across the region.

Russia and Turkey have large market turnover rates,showing their ease of capital market transactions compared to other ECAsub-regions. Indicators of financial inclusion exceeded the global median inmany ECA countries with the exception of Central Asia and several indicators inthe South Caucasus and Other Eastern Europe. Savings remained very low acrossthe region.  Countries in Central Asiashowed very low levels of financial inclusion. For example, almost all adults in Slovenia had a bank account, inTurkmenistan the level of account ownership was very low and improved onlyslightly from 2011 to 2014. In Central Asia, adults with borrowings from a financialintermediary compromise a very low share. The debit card usage was very commonin Central Europe but low in some countries in Central Asia and South Caucasus.

In addition, saving at a financial institution was higher in Central Europe.  Financial inclusion for the median country in CentralAsia, South Caucasus and other Eastern Europe was lower than the global median,although theses sub-regions showed some improvement in recent years. CentralEurope had higher level of financial inclusion albeit with a decline in recentyears. Private credit by financial intermediaries and bank deposits arerelatively higher than the global median benchmark, for all sub-regions exceptCentral Asia, South Caucasus, and Other Eastern Europe. Stock marketcapitalization to GDP has remained low for most sub-regions. This paper compared the level of financial developmentwith the global median values.

Indicators with a value greater than zeroindicated financial outcomes that were greater than the global median values.  Source: Risk andReturns Managing Trade-Offs for Inclusive Growth in Europe and Central Asia,Gould and Melecky, 2017. Indicator ECA median value Global median value Percent Difference Depth (% of GDP)       Private sector credit 57.3 41.9 26.9 Domestic bank deposits 45.

1 48.8 -8.2 Consolidated BIS claims 30.7 20.2 34.1 Stock market capitalization 13.0 28.1 -116.

2 Insurance company assets 4.0 5.3 -32.5 Mutual fund assets 2.9 11.

9 -310.3 Pension fund assets 4.0 9.7 -142.

5 Stability       Nonperforming loans 11.3 4.3 61.9 Z-score 11.1 13.

4 -20.7 Liquid assets to short-term funding 25.8 28.0 -8.5 Bank capital to assets 13.5 9.6 28.

9 Efficiency (%)       Net interest margin 4.2 3.8 9.5 Overhead costs 3.2 2.8 12.5 Bank cost-to-income ratio 59.0 56.

1 4.9 Stock market turnover ratio 5.2 13.2 -153.8 Inclusion       Account at a financial institution 56.

5 45.1 20.2 Borrowed from financial institution 13.2 9.7 26.5 Debit card 39.7 28.

5 28.2 Saved at a financial institution 8.7 14.9 -71.3 Credit card 13.5 10.1 25.2 Number of branches 24.

3 12.3 49.4 Firms financially constrained 16.3 25.3 -55.2 Table 1.4:Benchmarked ECA financial development indicators The four dimensions (listed in table 1.4) showed thatECA was situated below the global average compared to other regions on depthand stability and about average when it comes to efficiency and inclusion.

ECA’sfinancial systems were governed by banks. More than half of ECA countries hadhigher credit and cross-border banking than other countries. Furthermore, ECAcountries were behind pertaining to financial stability. Levels ofnon-performing loans were considerably higher.

Banking sector efficiency wasrelatively high in ECA, more than half of ECA countries have lower cost to incomeratios and overhead costs than the global median. However, the stock marketturnover ratio was significantly lower, which indicated that there is a greaterreliance on banking compared to the nonbank sector.  Finally, most of the financial inclusion indicatorsin the region, containing the number of bank account owners, loan and/or creditcard holders were over the world average. However, the share of populationsavings formally was low.

 The paper used four financial outcomes to assess ECAfinancial systems: (i) depth (all indicators as percentage of GDP): private sectorcredit by financial intermediaries; domestic bank deposits; consolidatedforeign claims of banks which is reported to the Bank for InternationalSettlements (BIS);stock market capitalization; and assets of nonbank financial intermediaries;(ii) stability: nonperforming loans to total gross loans, balance sheet Zscore, percentage of liquid assets in deposits and in short-term funding; andbanks’ equity to assets ratio; (iii) efficiency: net interest margin (percentageof interest bearing assets); overhead costs (percentage of total assets); costto income ratio of the bank; stock market turnover ratio (representing percentageof average market capitalization); (iv) inclusion: amount of branches for each100,000 adults; percentage of adults with an account at a financial intermediary,with borrowings from a financial institution, debit or credit card, or savingsat a financial intermediary.  ECA has reached comparatively high levels on firm and householdaccess to finance. By the early 1990s, ECA displayed nascent financial systems.

Rapid financial deepening during the last two decades advanced ECA’s financialinclusion. However, this also resulted in two waves of banking crisis- that oflate 1990s and that associated with the 2008 global financial crisis. OverallECA’s financial development is still low given the region’s medium incomestanding.

Even though ECA has deep banking systems and displays progress infinancial inclusion, financial stability and efficiency remained frail andcapital markets were shallow. Within ECA, financial progress changes remarkably from country tocountry. ECA displays the poorest performance in the efficiency frontier andtop performance in financial inclusion. The financial inclusion is contributingthe most to long term growth. Only firm inclusion and household inclusion arestrongly related to long term income growth pertaining to the bottom 40 percentof earners. For overall growth, firm inclusion is mostly associated withgrowth, followed by efficiency, stability, household inclusion; and depth.

Theglobal financial crisis has effected ECA significantly. Although credit growthdecelerated in the crisis, financial inclusion was high compared with otherregions- albeit very uneven across ECA sub-regions. According to Gould and Melecky (2017), emerging ECA’s financialsystem is significantly less developed and less diversified than Western Europeand East Asia and Pacific which is its middle income peer. The paper clearlystates that finance can be most useful for inclusive growth when people andfirms can access and use finance responsibly; when finance is pricedcompetitively; and when it is reliable and when finance helps people confrontshocks rather than spreading shocks.

 Although there is no direct comprehensive index formation toexamine financial inclusion, this study is worthwhile to summarize given ithighlights important dynamics of the region this paper is covering, namely ECA. The study looked at depth, stability,efficiency and inclusion separately and compared ECA with regional and worldaverages. The second chapter briefly introduced an inclusion index which willbe summarized in the upcoming section.