Measuring banking sector outreach

• A well developed financial system is necessary for economic development and poverty alleviation (Beck, Demirguc-Kunt and Levine 2004 and Honohan 2004a). The empirical relationship between finance and growth is well established in theoretical literature, as surveyed by Levine (2005). Financial market imperfections are particularly binding on poor or small entrepreneurs lacking collateral, credit history or networks. Credit constraints impede financing of high-return projects and hamper efficient resource allocation, as well as adversely impact economic growth and poverty reduction (Galor and Zeira, 1993). • Financial development facilitates entry of new firms which fosters economic growth (Klapper, Laeven and Rajan, 2006). Wide access to finance is seen not only as expanding opportunities beyond the rich and the connected, but also promoting democracy and market economy (Rajan and Zingales, 2003). • Access to finance can contribute to technological progress and innovation (Ayyagari, Demirguc-Kunt and V. Maksimovic 2006). • Finally, given its social (and economic) benefits, access to finance can be seen on a similar level as access to basic needs such as safe water, health services, and education (Peachey and Roe, 2004). Depth versus outreach So far the literature on financial sector development has focused primarily on the dimension of depth, its measurement, determinants and its economic impact. Little is known about the breadth or the outreach of financial systems across countries, its determinants and impact on development. This is partly due to a dearth of adequate data (see Honohan 2004b). However, when discussing outreach or access, distinction has to be made between access versus use since the two are not synonymous. Access to and the possibility of utilizing financial services is a different concept than actual usage.