International Journal of Managerial Finance
Financial access and economic development: the moderating role of financial
consumer protection
Maryam Kriese, Joshua Yindenaba Abor, Elikplimi Agbloyor,
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Financial access and economic Financialaccess and
development: the moderating role economic
of financial consumer protection development
Maryam Kriese, Joshua Yindenaba Abor and Elikplimi Agbloyor
Department of Finance, University of Ghana Business School, Accra, Ghana
Received 7 May 2018
Revised 18 July 2018
Abstract 8 August 2018Accepted 9 August 2018
Purpose – The purpose of this paper is to examine the moderating role of financial consumer protection
(FCP) in the access–development nexus.
Design/methodology/approach – The study is based on cross-country data on 102 countries surveyed in
the World Bank Global Survey on FCP and Financial Literacy (2013). The White heteroscedasticity adjusted
regressions and Two-stage least squares regressions (2SLS) are used for the estimation.
Findings – Interactions between FCP regulations that foster fair treatment, disclosure, dispute resolution
and recourse and financial access have positive net effects on economic development. However, there is no
sufficient evidence to suggest that interactions between financial access and enforcement and compliance
monitoring regulations have a significant effect on economic development.
Practical implications – First, policy makers should continue with efforts aimed at instituting FCP regimes
as part of strategies aimed at broadening access to financial services for enhanced economic development.
Second, instituting FCP regimes per semay not be enough. Policy makers need to consider possible intervening
factors such as the provision of adequate resources and supervisory authority, for compliance monitoring and
enforcement to achieve the expected positive effect on economic development.
Originality/value – This study extends evidence in the law–finance–growth literature by providing
empirical evidence on the effect of legal institution specific to the protection of retail financial consumers
on the access–development nexus using a nouvel data set, the World Bank Global survey on FCP and
Financial Literacy (2013).
Keywords Economic development, Financial access, Financial consumer protection
Paper type Research paper
1. Introduction
Recent reports indicate that the financial inclusion efforts instituted by the International
Monetary Fund since 2004 are yielding fruits. Rutledge (2010), for instance, reported that
before the global financial crisis, about 150m new consumers of financial services join the
global market every year. According to the World Bank (2014), the number of financially
excluded fell from 2.5bn in 2011 to 2bn in 2014. The World Bank (2013) also reports that
from 2005 to 2011 the number of depositors in Bangladesh doubled, adding 16.9m new
financial consumers to the financial market. In Peru, 5.2m new depositors were added over
the period 2005–2011.
Although efforts are underway to broaden access to financial services, concerns are
being raised about financial consumer protection (FCP) – the existence of regulations and
mechanisms protecting the consumer from abuse and the ability of the consumer to invoke
for his relief these laws and mechanisms where he or she has been abused. These concerns
have been aggravated given that the lack of effective disclosure, deceptive advertising by
suppliers of financial services and failure to understand financial products have been
identified as contributory factors to the subprime mortgage crisis and its attendant bank
runs in the USA (Ardic et al., 2011).
Consequently, the Group of 20 (G20) Finance Ministers and Central Bank Governors at
their meeting in October 2011 endorsed the High-Level Principles on FCP. In 2012, theWorld
Bank published Good Practices for FCP. Based on this framework, several countries have International Journal of ManagerialFinance
restructured and continue to restructure their institutions and legislations to ensure © Emerald Publishing Limited
1743-9132
effective protection of the financial consumer. In the USA, the Consumer Financial DOI 10.1108/IJMF-05-2018-0132
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IJMF Protection Bureau (CFPB) has been established following the passage of the U.S.C. (2010),
charged with ensuring fairness, transparency, and competition in the financial market. In
the UK, the Financial Conduct Authority was created in 2012, charged with market conduct
supervision and consumer protection. The European Parliament also issued its Directive
2008/48/EC on credit agreements for consumers which demands, inter alia, the use of a
standardised disclosure form and disclosure of annual percentage rate (APR) computed
using a harmonised methodology across all European Union member states so that financial
consumers can compare offers across various providers. These regulations are expected to
enhance financial access and thereby promote economic development via the removal of
information asymmetry, institution of fair treatment and provision of avenues for redress,
which engender trust.
According to one strand of the literature, FCP enhances access to financial services
through its disclosure requirements, which removes information asymmetry and ensures
consumers are informed, confident, and, hence, more willing to participate in financial
markets thereby enhancing savings mobilisation, access to finance for investment and
economic growth (Campbell et al., 2010). Furthermore, its fair treatment provisions prevent
the use of abusive practices such as product bundling and tying, which allow providers to
price their products above the competition, with the potential of financial exclusion by
making financial services expensive (Melecky and Rutledge, 2011; Rutledge, 2010).
Similarly, mandatory disclosures under FCP remove information asymmetry by ensuring
that consumers have adequate information to evaluate product offers before making
choices. The existence of recourse mechanisms also gives consumers confidence to purchase
risky financial products, as they know there are avenues for redress in case things go
wrong. In line with the agency theory, FCP assures investors that their funds are shielded
from expropriation by management, making them more willing to surrender funds to
corporations for investment and growth.
On the other hand, critics of FCP regulation such as Evans and Wright (2010) and
Wright and Helland (2011) argued that FCP could actually lower access and even lead to
complete withdrawal of financial products due to its cost implications. Compliance with
FCP may require revisions to human resource systems and marketing materials,
establishing complaints, monitoring and customer feedback systems, which involve costs to
providers and translate into higher costs of finance beyond the reach of several people,
fostering financial exclusion. Furthermore, the existence of FCP regulations may make
certain financial products unprofitable, forcing providers to withdraw the provision of
those financial products, which inherently deters the introduction and advancement of new,
innovative products. As noted by Evans and Wright (2010), the CFPB will increase the cost
of borrowing by 1.6 percent and reduce consumer borrowing by 2.1 percent.
These conflicting arguments have questioned the role of FCP in broadening access to
financial services and, consequently, the moderating role of FCP in the access–development
link. Yet, the existing evidence on the moderating role of legal institutions in the
access–growth link is few, mostly based on logic and theoretical postulations backed by
little empirical evidence or focused on the legal institutional environment, in general
(see Demetriades and Law, 2006; Ergungor, 2008; Law et al., 2013).
Demetriades and Law (2006) were the first to examine the interaction between
institutional quality and financial development. Using a linear interaction model based on
institutional quality indicators for 72 countries for the period 1978–2000, they tested the
hypothesis that the interaction between institutional quality and financial development has
a separate positive influence on economic growth over and above the effect of the levels of
financial development and institutional quality. They found that financial development has
larger effects on economic growth when the financial system is embedded within a sound
institutional framework. They also found that financial development is most potent in
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middle-income economies, where its effects are particularly large when institutional quality Financial
is high. In low-income economies, more finance without sound institutions may not succeed access and
in delivering long-run economic development. In low-income countries, in the absence of economic
sound institutions, higher financial development may not have any effect on long-term
development (income level). development
Further evidence is provided in a study by Ergungor (2008) who interacted the judicial
system with financial development – the flexibility of the judicial system with bank
development – and examined the effect on growth to investigate the theory that suggests
that in inflexible judicial environments, countries will attain higher growth rates if they
have well-developed banking systems because relationships are essential for reputation
building, whereas in flexible judicial environments, countries will grow faster when they
have well-developed stock markets because entrepreneurs will invest more when they do
not have to pay holdup rents to investors. He found in support of these hypotheses that
bank-oriented financial systems are correlated with high economic growth in countries with
inflexible judicial systems.
Again, Law et al. (2013), using an innovative threshold estimation technique, examined
whether there exists an institutional quality threshold in the finance–growth relationship.
Institutions were measured using the political risk services indicators – rule of law,
corruption and bureaucratic quality. These indicators measured control of corruption, rule
of law and government effectiveness. Using private sector credit as a percentage of GDP,
commercial bank assets as a percentage of gross domestic product (GDP), liquid liabilities
as a percentage of GDP, as measures of financial development, they found that the impact
of finance on growth is positive and significant only after a certain threshold level of
institutional development has been attained. Until then, the effect of finance on growth is
non-existent.
This literature, however, examines the moderating role of the general legal framework in
the access–growth nexus as indicated in the measures of legal institutions interacted with
measures of financial development – institutional quality, rule of law, government
effectiveness, corruption and bureaucratic quality. We extend this literature by examining
the moderating role of legal institutions specific to the protection of consumers of financial
products, FCP regulations, in the access–economic development nexus.
The rest of the paper is organised as follows: the next section presents the methodology
for the study; Section 3 presents results and Section 4 presents the conclusions and policy
recommendations.
2. Econometric methodology
2.1 Data
This study uses data on 102 countries surveyed in World Bank (2013). The list of countries
used in the study is presented in Table AI.
2.2 Summary statistics
Summary statistics of the variables used in this study is shown in Table I. The mean score
on the index of FCP is 57 percent, which is just a little above average, indicating that more
needs to be done to promote FCP across countries.
2.3 Model specification
To investigate the moderating role of FCP on economic development, we specify the
following empirical model in line with the approach of Asongu et al. (2017) as follows:
Edev ¼ a0þa1 FCPiþa2FAiþa3FCP  FA þZ 1i i i bþei: (1)
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IJMF
Variable Obs Mean SD Min. Max.
Dependant variable
HDI 98 0.73 0.15 0.35 0.94
Explanatory variables
AO 101 59.38 30.57 3.49 100.00
FS 101 24.95 18.78 0.96 78.41
FC 101 13.33 7.20 1.38 40.51
IFCP 101 0.57 0.27 0.00 1.00
CMI 101 3.62 2.57 0.00 8.00
DRI 101 2.92 1.73 0.00 6.00
IFT 101 3.73 2.00 0.00 6.00
EI 101 3.20 2.00 0.00 6.00
GDI 101 2.24 1.49 0.00 4.00
DDI 101 2.90 1.79 0.00 5.00
CDI 101 2.85 1.37 0.00 4.00
Conditioning variables
GS 93 22.02 9.64 0.00 49.66
DC 98 63.58 47.56 2.45 233.40
POP 100 1.10 1.24 −1.410 5.97
PR 99 3.01 1.99 1.0 7.00
TT 100 87.83 53.36 19.46 438.76
GC 100 15.95 6.93 5.34 63.94
INF 97 4.59 8.03 −1.42 62.17
Notes: AO is account ownership; FS, formal saving; FC, formal credit; IFCP, index of financial consumer
protection; CMI, compliance monitoring index; DRI, dispute resolution and recourse index; IFT, fair treatment
index; EI, enforcement Index; GDI, general disclosure index; DDI, deposit disclosure index; CDI, credit
disclosure index; GS, gross savings/GDP; DC, domestic credit to private sector/GDP; POP is population
Table I. growth rate; PR, political risk rating; TT, sum of exports and imports/GDP; GC, government consumption;
Descriptive statistics INF, inflation
“Edev” is our dependant variable and denotes economic development, proxied by the human
development index (HDI). The economic development effect of financial access as exhibited in
the literature review extends beyond increases in income to improvements in health, education
and general wellbeing. Accordingly, the most appropriate measure of economic development
that captures this is HDI. The HDI has three component measures all of which are indicators of
economic development. These are living standards (measured by GDP per capita), longevity
(proxied by life expectancy) and knowledge (measured by educational attainments). Indeed, one
of the best development economics texts, Todaro and Smith (2012) regards the HDI as a better
measure of economic development than mere GDP growth or GDP per capita. Moreover, its use
as a measure of economic development is not alien to the literature (see Arora, 2014).
“FCP” is our main explanatory variable and denotes FCP proxied by the principal
components analysis (PCA) constructed index of financial consumer protection (IFCP) and
its five sub-indices, namely, the fair treatment index (FTI), dispute resolution and recourse
index (DRI), disclosure index (DI), compliance monitoring index(CMI) and enforcement index
(EI) to enable a more nuanced examination of the moderating role of various types of
FCP regulations.
“FA” denotes financial access proxied by three measures, account ownership (AO),
measured as the percentage of adults 15+ with an account at a formal financial institution,
formal savings (FS), measured as the percentage of adults who over the past 12 months have
saved with a formal financial institution and formal credit (FC), measured as the percentage of
adults who over the past 12 months have borrowed from a formal financial institution.
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“FCP×FA” denotes interaction between measures of FCP and financial access. We Financial
interact each indicator of financial access (AO, FS, FC) with the overall index of FCP as access and
shown in (2) to ascertain the overall impact of FCP on the access–growth nexus. We further economic
interact each indicator of financial access (AO, FS, FC) with the sub-indices of FCP, namely,
FTI, CMI, DRI, DI and EI, as set out in (3)–(7) for a more nuanced examination of the role of development
specific FCP regulations in the access–development nexus:
Edevi ¼ a0þa1 IFCPiþa2FAiþa3IFCPi  FA þZ 1i i bþei; (2)
Edevi ¼ a0þa1 FTIiþa2FAiþa3FTIi  FAiþZ 1i τþei; (3)
Edev ¼ η þη CMI þη FA þη CMI  FAþZ 1i 0 1 i 2 i 3 i i δþei; (4)
Edevi ¼ O0þO1 DRIiþO2FAiþO3DRI FAþZ 1i ωþei; (5)
Edevi ¼ δ0þδ1 DIiþδ2FAiþδ3DI FAþZ 1iϘþei; (6)
Edevi ¼ ϕ0þϕ1 EIiþϕ2FAþϕ3EI  FAþZ 1i ζþei: (7)
Z1 is a vector of control variables. Following the finance-growth literature, we include the
following control variables: population growth rate, to control for the size of the economies;
gross savings, to control for investment; government consumption and inflation, to control
for macroeconomic stability; total exports and imports to GDP, to control the openness of
the economy and domestic credit to private sector as a percentage of GDP, to control for the
level of financial development. We also include the political risk rating to control for the
institutional environment.
We expect gross savings to be positively related to economic development, as higher
gross savings result in increased availability of capital investment that promotes economic
development (Solow, 1956). The population growth rate affects economic development
through its impact on the dependency ratio, investment, savings behaviour and quality of
human capital. The effect could be positive (Petrakos et al., 2007) or negative (Pritchett,
2001). We expect an increase in domestic credit provided to the private sector to result in
higher economic development (Schumpeter, 1912). Increased government expenditure can
result in higher or lower economic development depending on whether the funds are used to
finance bloated bureaucracy, ineffective public programmes, to distort market incentives
and to assume roles more appropriate for the private sector (Loayza and Soto, 2002) or used
to finance needed infrastructure, such as education and health (Gohou and Soumare, 2012).
Investors will only invest where their rights are protected and their investments are secure
(Djankov et al., 2007). The higher the civil liberties index, the poorer the institutional quality.
Hence, we expect a negative relationship between the civil liberties index and economic
development. The more open an economy is to trade, the higher its economic development is
likely to be, as it enables the exploitation of comparative advantage, technology transfer and
diffusion of knowledge, increasing scale economies and competition. Empirical evidence of
the link between the openness of an economy and economic development is, however,
mixed. Although some find that it leads to faster growth, others find it has no significant
effect on growth (Pritchett, 2001). A detailed description of these variables and the source of
data is presented in Table AII. ӄj, ηj, Oj, δj, ϕj (j = 0,1,2,3,…,n) β, τ, δ, O, ζ are the coefficients;
i,…, n refers to countries, εi refers to the error term and Z denotes control variables.
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IJMF 2.4 Index of FCP
Following the approach of the Gallup World Poll in constructing the Disclosure and Dispute
Resolution Index found in the G20 Financial Inclusion Indicators, as well as Allen et al.
(2012) in constructing their Enforcement and Monitoring Indices, we first constructed the
sub-indices as a simple sum of the indicators of each index as follows:
XN
Xi ¼ xi; (8)
J¼1
xi in the model denotes the individual indicators of each sub-index and Xi denotes
sub-indices. Countries score “1” for the presence of each indicator and “0” otherwise.
A description of indicators used and data sources is set out in Table AIII.
Subsequently, in line with Anthony and Rao (2007), and Pradhan et al. (2014), we
combined the sub-indices to form the index of FCP using the PCA approach to index
construction, where the index is a product of extracted component loadings (w) and original
variables (X) -here, the sub-indices as follows:
XN
IFCPi ¼ Xiwj; (9)
j¼1
where IFCPi denotes, the index of financial consumer protection for country “i”; Xi denotes
sub-indices of financial consumer protection for country “i”. wj denotes weight of variable X
in relation to principal component “j”.
Each principal component is a linear weighted combination of the original variables
as follows:
Pk¼b1kX 1þ b2kX2þ  þ bjkkXk; (10)
where X1, X2,…,Xk denote the sub-indices of FCP, Pk denotes principal component,
b1k denotes component loadings, which are weights that indicate the degree of relationship
of each principal component with the sub-indices and show the variance contribution of
principal components to the sub-indices. For each country, the Pk is generated by
substituting each country’s values of Xij’s (sub-indices) into Equation (10). For each principal
component, P1, P2,…,Pk, eigenvalues are generated that indicate the percentage of variation
in the total data explained by the principal components. Using the Eigenvalue rule, one
principal component explaining 64 percent of the variation was extracted.
Before subjecting the sub-indices to PCA, we first standardized the sub-indices using the
Z-score that imposes a standard normal distribution (i.e. a mean of 0 and a standard
deviation of 1) (Freudenberg, 2003) as follows:
¼ actual valuemean valueZ : (11)
standard deviation
We also carried out the Kaiser–Meyer–Okin (KMO) and Bartlett’s test of sphericity (BTS) to
ascertain the appropriateness of doing a PCA. KMO is a measure of sampling adequacy
used to check the case-to-variable ratio for the analysis being conducted. The BTS tests the
hypothesis that the correlation matrix is an identity matrix. For the factor analysis to be
valid, this hypothesis must be rejected. The accepted minimum score for KMO is 0.6, though
it ranges from 0 to 1. Bartlett’s test of sphericity must be less than 0.05. Test results
show that our KMO is 0.810 and our Bartlett’s test is less than 0.05, indicating that a PCA
would be useful.
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3. Discussion of results Financial
3.1 White adjusted least squares regression results access and
3.1.1 FCP and the access–economic development nexus. The net effect on economic economic
development from the interaction between financial access and FCP is presented in
Tables II–IV. Table II shows the net effect from interactions between indicators of development
financial access and the overall IFCP, whereas Tables III and IV show the net effect from
interactions between indicators of financial access and individual FCP regulations,
namely, fair treatment, disclosure, dispute resolution and recourse, enforcement and
compliance monitoring for a more nuanced analysis of the effect of FCP in the
access–economic development nexus.
In Column (1) of Table II, we interact the overall IFCP with the headline indicator of
financial access – Account Ownership (AO). In Columns (2) and (3), we interact the index
with our two additional indicators of financial access – access to formal savings (FS) and
access to formal credit (FC). From Table II, we can establish that the interaction of the
overall IFCP with AO and FS has a positive effect on economic development. The net effect
on economic development of the interaction between AO and the IFCP is 0.00277 (0.00459+
(−0.00319 × 0.57)). In the computation, 0.00459 is the effect of financial access on economic
development, given that FCP is “0”. −0.00319 is the conditional effect from the interaction
between financial access (AO) and FCP regulations, whereas 0.57 is the mean of the overall
index of FCP (see Asongu et al., 2017; Tchamyou, 2018). Similarly, the net effect on economic
development of the interaction between FS and IFCP regulations is 0.00320 (0.00714+
(−0.00691 × 0.57)) (Column (2)).
These results are in line with conventional wisdom, as we expect financial services
obtained in an environment where there is FCP to be free from abusive and unfair practices
and, hence, enhance economic development. For instance given the existence of fair
treatment and disclosure regulations, financial advice is likely to be credible, disclosures
complete and interest rates not usurious, culminating in improved consumer welfare,
(1) (2) (3)
Variables Account ownership (AO) Formal savings (FS) Formal credit (FC)
Financial access 0.00459*** (0.000862) 0.00714*** (0.00158) 0.0126** (0.00512)
Consumer protection (IFCP) 0.248*** (0.0704) 0.212*** (0.0594) 0.186** (0.0912)
Interactive term −0.00319** (0.00122) −0.00691*** (0.00245) −0.0100 (0.00684)
Gross savings/GDP 0.000777 (0.000908) 0.000663 (0.00108) 0.00133 (0.00113)
Domestic credit/GDP 0.000310 (0.000213) 0.000536* (0.000314) 0.000846*** (0.000204)
Population −0.0217* (0.0118) −0.0472*** (0.0138) −0.0444*** (0.0121)
Political risk rating −0.00492 (0.00374) −0.00379 (0.00478) −0.00564 (0.00441)
Sum of imports exports/GDP 3.73e−05 (8.72e−05) 7.96e−05 (0.000126) 0.000184 (0.000140)
Government consumption 0.00139* (0.000778) 0.00150* (0.000822) 0.00222** (0.000914)
Inflation −0.00173 (0.00168) −0.00179 (0.00164) −0.00181 (0.00189)
Constant 0.423*** (0.0542) 0.535*** (0.0534) 0.478*** (0.0709)
Net effect of FCP 0.00277 0.00320 na
R2 0.853 0.781 0.794
F-statistic 64.91 39.06 35.88
Observations 86 86 86
Notes: Robust standard errors in parentheses. Column (1) interacts financial access measured in terms of
ownership of a formal account with the index of financial consumer protection (IFCP); Column (2) interacts Table II.
formal savings measured as the percentage of adults who over the past 12 months have saved with a formal Financial consumer
financial institution with the index of financial consumer protection (IFCP); Column (3) interacts formal credit, protection and the
measured as the percentage of adults who over the past 12 months have borrowed from a formal financial access–economic
institution with the index of financial consumer protection (IFCP). *po0; **po0.05; ***po0.01 development nexus
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IJMF
Table III.
Fair treatment,
disclosure, dispute
resolution and
recourse regulations
and the access-
development nexus
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Fair treatment Disclosure Dispute resolution and recourse
(1) AO (2) FS (3) FC (4) AO (5) FS (6) FC (7) AO (8) FS (9) FC
Account Formal Account Formal Formal Account Formal Formal
Variables ownership savings Formal credit ownership savings credit ownership savings credit
Financial access 0.00398*** 0.00570*** 0.0171*** 0.00397*** 0.00513*** 0.0126*** 0.00427*** 0.00543*** 0.0134***
(0.000707) (0.00131) (0.00393) (0.000562) (0.000919) (0.00339) (0.000684) (0.00112) (0.00327)
Consumer protection (FTI) 0.0257*** 0.0249*** 0.0367*** 0.0425*** 0.0208*** 0.0234* 0.0332*** 0.0258*** 0.0339**
(0.00876) (0.00738) (0.0113) (0.0126) (0.00770) (0.0139) (0.0102) (0.00859) (0.0136)
Interactive term −0.000313** −0.000706** −0.00253*** −0.00045*** −0.00071*** −0.00186** −0.000497*** −0.000870*** −0.00231**
(0.000141) (0.000277) (0.000815) (0.000161) (0.000209) (0.000916) (0.000166) (0.000294) (0.000983)
Gross savings/GDP 0.00122 0.00116 0.00114 0.000419 0.00115 0.00180 0.000752 0.000822 0.00104
(0.000885) (0.00107) (0.00111) (0.000973) (0.00114) (0.00115) (0.000951) (0.00114) (0.00117)
Domestic credit/GDP 0.000275 0.000477 0.000869*** 0.000180 0.000510* 0.000936*** 0.000346* 0.000577* 0.000915***
(0.000209) (0.000299) (0.000183) (0.000194) (0.000304) (0.000179) (0.000203) (0.000303) (0.000214)
Population −0.0228* −0.0468*** −0.0390*** −0.0219** −0.0498*** −0.0485*** −0.0233* −0.0489*** −0.0453***
(0.0117) (0.0137) (0.0103) (0.00973) (0.0135) (0.0112) (0.0117) (0.0135) (0.0105)
Political risk rating −0.00564 −0.00499 −0.00532 −0.00445 −0.00548 −0.00682 −0.00369 −0.00354 −0.00537
(0.00386) (0.00481) (0.00416) (0.00410) (0.00532) (0.00455) (0.00380) (0.00483) (0.00439)
Sum of imports exports/GDP 2.44e−05 7.70e−05 0.000188 4.12e−05 0.000152 0.000166 6.12e−05 0.000127 0.000156
(9.21e−05) (0.000147) (0.000128) (8.77e−05) (0.000142) (0.000144) (9.41e−05) (0.000132) (0.000156)
Government consumption 0.00101 0.00120 0.00240** 0.000538 0.000734 0.00194** 0.000975 0.00108 0.00199**
(0.000713) (0.000777) (0.000985) (0.000703) (0.000716) (0.000879) (0.000700) (0.000765) (0.000898)
Inflation −0.00184 −0.00217 −0.00229 −0.00144 −0.00129 −0.00141 −0.00190 −0.00195 −0.00194
(0.00148) (0.00159) (0.00208) (0.00138) (0.00150) (0.00160) (0.00139) (0.00144) (0.00167)
Constant 0.465*** 0.563*** 0.437*** 0.480*** 0.593*** 0.505*** 0.464*** 0.581*** 0.498***
(0.0471) (0.0476) (0.0564) (0.0395) (0.0404) (0.0591) (0.0444) (0.0429) (0.0512)
Net effect of FCP 0.00281 0.00307 0.00766 0.00296 0.00307 0.00730 0.00282 0.00289 0.00665
R2 0.848 0.779 0.811 0.861 0.767 0.785 0.847 0.774 0.796
F-statistic 66.40*** 37.23*** 45.45*** 66.63*** 47.06*** 39.31*** 58.57*** 37.15*** 43.87***
Observations 86 86 86 86 86 86 86 86 86
Notes: Robust standard errors in parentheses. Columns (1)–(3) interacts financial access measured in terms of ownership of a formal account, formal savings and formal
credit with the index of fair treatment regulations (IFT); Columns (4)–(6) interacts with index of disclosure regulations(DI); Columns (7)–(8) with the index of dispute
resolution (DRI). Interaction effect in columns (4)–(6) are calculated using the mean of general disclosure index (GDI), deposit disclosure index (DDI) and credit disclosure
index (CDI), respectively. *po0; **po0.05; ***po0.01
Financial
access and
economic
development
Table IV.
Enforcement,
compliance monitoring
regulations and the
access–economic
development nexus
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Enforcement Compliance monitoring
(1) AO Account (4) AO Account
Variables ownership (2) FS Formal savings (3) FC Formal credit ownership (5) FS Formal savings (6) FC Formal credit
Financial access 0.00276*** (0.000574) 0.00274** (0.00122) 0.00569** (0.00223) 0.00394*** (0.000609) 0.00398*** (0.000903) 0.00737*** (0.00267)
Consumer
protection (EI) −0.000741 (0.00915) 0.00284 (0.00875) 0.000654 (0.00799) 0.0221*** (0.00725) 0.0129** (0.00636) 0.00739 (0.00738)
Interactive term 6.79e–05 (0.000131) 5.21e–06 (0.000281) 0.000356 (0.000475) −0.000272** (0.000107) −0.000302 (0.000196) −0.000159 (0.000425)
Gross savings/
GDP 0.00149 (0.000932) 0.00141 (0.00118) 0.00197* (0.00109) 0.00104 (0.000854) 0.00105 (0.00112) 0.00188* (0.00113)
Domestic credit/
GDP 0.000205 (0.000206) 0.000499 (0.000306) 0.000900*** (0.000200) 0.000260 (0.000200) 0.000520 (0.000322) 0.000891*** (0.000190)
Population −0.0306** (0.0127) −0.0552*** (0.0142) −0.0517*** (0.0122) −0.0236* (0.0119) −0.0510*** (0.0142) −0.0490*** (0.0122)
Political risk
rating −0.00568 (0.00404) −0.00650 (0.00537) −0.00548 (0.00449) −0.00496 (0.00382) −0.00586 (0.00524) −0.00618 (0.00447)
Sum of imports
and exports/
GDP 9.78e−06 (9.86e−05) 8.99e−05 (0.000149) 0.000208 (0.000153) 2.81e−05 (9.25e−05) 7.70e−05 (0.000135) 0.000194 (0.000145)
Government
consumption 1.89e−05 (0.000736) 0.000494 (0.000780) 0.00151* (0.000861) 0.000682 (0.000651) 0.000721 (0.000701) 0.00174** (0.000866)
Inflation −0.00102 (0.00129) −0.00129 (0.00174) −0.00116 (0.00154) −0.00162 (0.00153) −0.00170 (0.00156) −0.00162 (0.00163)
Constant 0.566*** (0.0427) 0.660*** (0.0460) 0.571*** (0.0462) 0.480*** (0.0435) 0.623*** (0.0443) 0.550*** (0.0510)
Net effect of FCP na na na 0.00296 na na
R2 0.825 0.748 0.783 0.846 0.760 0.783
F-statistic 64.53*** 33.67*** 47.88*** 57.18*** 45.61*** 42.34***
Observations 86 86 86 86 86 86
Notes: Robust standard errors in parentheses. Columns (1)–(3) interacts financial access measured in terms of ownership of a formal account, formal savings and formal
credit with the Index of enforcement regulations (EI); Columns (4)–(6) interacts financial access with the Index of Compliance regulations (CMI). *po0; **po0.05;
***po0.01
IJMF sound competition, efficiency and stability in the financial marketplace which ultimately
result in enhanced economic development. However, they contradict the argument that
compliance with FCP regulations imposes additional costs on providers, which providers
may pass on to consumers ultimately, making financial access costly and accessible to only
a few (Evans and Wright, 2010; Wright and Helland, 2011) and resulting in inefficient
resource allocation that is inimical to economic development.
Further detailed analyses of the role of FCP in the access–economic development nexus based
on the sub-indices of FCP regulations presented in Tables III and IV reach similar conclusions.
FromTable (III), we can establish a positive net effect on economic development from interactions
between account ownership, access to saving or credit at a formal financial institution and the
indices of fair treatment, disclosure, dispute resolution and recourse regulations.
For fair treatment regulations, this finding is supported by the argument that these
regulations promote competition and reduce the tendency for providers to make quick
profits through the obfuscation of consumers of financial products and, hence, improves
consumer welfare. Regulations that prohibit deceptive advertising, for instance, hold
providers legally responsible for statements made in their adverts.
Similarly, for disclosure regulations, our findings are in line with the argument that
mandatory disclosures at account opening remove information asymmetry, engender trust
and willingness to participate in financial markets, resulting in improved economic
development. However, our findings contradict the position of the behavioural law, and
finance scholars such as Bar-Gill and Warren (2008) and Thaler and Sunstein (2008) stated
that disclosures per se are ineffective as a consumer protection tool unless used in
conjunction with financial education, due to cognitive limitations. Barr et al. (2008) for
instance argued that due to behavioural tendencies, even well-established and efficient
disclosures may be insufficient. Campbell et al. (2011, p. 7) also note that, “consumers may
lack the cognitive capacity to optimise their financial situation even if presented with all the
information that in principle is required to do so.”
From Table (IV), we can establish that, interactions between enforcement regulations and
account ownership, access to savings or credit has no significant effect on economic development.
The existence of enforcement mechanisms such as the imposition of fees and penalties deters
abuse by providers, engender competition, and instil confidence in the financial system and,
hence, is expected to contrary to our findings, enhance economic development. However, our
findings are in line with the argument that implementing these enforcement mechanisms require
a lot of resources and expertise, which most supervisory authorities lack so that while these
regulations exist, they are actually ineffective and, hence, make no impact on economic
development. As noted by CGAP 2010, for instance, out of 85 countries that had regulations that
authorised supervisors to issue warnings, only 21 reported to have actually issued warnings.
Similarly, although the effect on economic development from the interaction between
compliance regulations and account ownership is positive, Table (IV ) shows that there is no
sufficient evidence to suggest that interactions between these regulations and access to
savings or credit significantly affect economic development. Again this is contrary to
expectation as the existence of compliance monitoring regulations, such as requiring
providers to report fees for products advertised on their website enables consumers to
compare prices, which promotes competition and maximises consumer welfare. However,
our results are not surprising given the report by CGAP 2010, that most economies do not
have appropriate compliance monitoring mechanisms in place. Furthermore, though
responsible for monitoring compliance, the authority of supervisory agencies to take action
tends to be limited by the requirement that, they could only take action if identified
consumer protection violations posed a risk to financial stability. According to the World
Bank (2013), although in most countries supervisors have the responsibility of collecting
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complaint statistics, few have the authority to assist directly in resolving complaints or to Financial
make binding decisions. access and
Concerning the conditioning variables, our results indicate that investment, openness of economic
the economy, the institutional environment and macroeconomic stability have no significant
impact on economic development, whereas government consumption and financial development
development have a significantly positive effect on economic development. Financial
development proxied by domestic credit provided to the private sector as a percentage of
GDP is also positively related to economic development in line with Schumpeter (1912).
The political risk rating is also negatively related to economic development, as expected.
A high political risk rating indicates a weak institutional environment, which is inimical to
economic development. Investors will only invest where their rights are protected, and their
investments are secure (Djankov et al., 2007). We find government consumption has a
significant positive effect on economic development. This can be expected, where public
funds are invested in infrastructure that promotes economic development such as education
and health (Gohou and Soumare, 2012). The population growth rate also has a negative
effect on economic development. This is in line with the findings of Petrakos et al. (2007) who
indicate that the high population growth rate has a negative impact on economic growth
through its impact on the dependency ratio, on investment and savings behaviour and
quality of human capital.
3.2 Robustness test -instrumental variable estimation
To address potential endogeneity bias arising from the possible reverse causality between
financial access and economic development as well as between FCP and economic
development, we estimate the link between financial access, FCP and economic development
using the two-stage least squares regressions (2SLS) as follows:
Y 1 ¼ y2b1þx1b2þu; (12)
where Y1 is the dependant variable, economic development, y2 is the estimated value of the
endogenous variable (here financial access and FCP) and x1 denotes the exogenous
variables. At the first stage, we estimate the following equation:
y2 ¼ x1y1þx2y2þe; (13)
and subsequently incorporate the estimate value for y2 into Equation (12).
3.2.1 Choice of instruments. Several instruments have been used in the finance-growth
literature to control reverse causality between finance and growth, including legal origin
(Beck et al., 2006), risk aversion, ethnic fractionalization (Barth et al., 2009; Beck et al., 2006)
and percentage of years that the country has been independent since 1776 (e.g. Beck et al.,
2006; Houston et al., 2010). In examining the access–growth nexus, Honohan (2008) used
bank trust and financial sector knowledge as instruments for the use of finance. Others
researchers used a lag of growth or economic development as instruments. Beck et al. (2014)
and Fowowe (2017) recently used measures of the banking regulatory and supervisory
structure as instrumental variables. None of these, however, was strong enough for our
model (first stage F-statistic less than 10). We used the number of Automated Teller
Machines (ATMs) per 100,000 adults as an instrument for financial access. The rationale is
that increased proximity to a provider, measured as the demographic or geographic spread
of bank branches, ATM or POS terminals will increase access to financial services while
being orthogonal to economic development.
In searching for an instrument for FCP, we examined the legal institutions and
economics growth literature. Studies that examine the impact of institutions on economic
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IJMF growth have used various instruments for legal institutions, including the latitude and share
of the population that speak a western language (see Hall and Jones, 1999), log of settler
mortality rate (see Acemoglu et al., 2001), legal tradition or origin (Berggren and Jordahl,
2006; Faria and Montesinos, 2009), identity of colonizer and settlement conditions, proxied
by indigenous population density (Bennett et al., 2017). We use supervisory responsibility
for financial education as our instrument for FCP. The intuition is that financial literacy
enhances consumer protection in that, all other things being equal, financially literate
consumers will be more informed and capable of evaluating product offers and, hence, are
less susceptible to unfair treatment and obfuscation as they are equipped to make informed
judgement about their finances (World Bank, 2014). As shown by evidence from the US
mortgage market (see Van Order et al., 2007), well-educated consumers are less likely to
make mistakes. Again, providers are cautious when dealing with financially literate
consumers. Furthermore, the World Bank, 2014 indicates that there is a higher tendency for
financial institutions to target risky and costly products at financial consumers who are not
well-educated and, hence, more prone to making mistakes in choosing financial products.
Hence, in an environment where there is a deliberate policy for financial education, we
expect that FCP will be enhanced, which will in turn enhance economic growth. Supervisory
responsibility for financial education is highly correlated with FCP, and it enhances
economic growth through its effect on FCP and, hence, serves as a good instrument for FCP.
3.3 Results – instrumental variable estimation
As we use robust standard errors for our regressions, we perform the Woolridge robust and
robust score tests to examine the endogeneity of financial access and FCP. The Woolridge
robust and robust score test the null hypothesis that the variables are exogenous.
Significant p-values indicate the rejection of the null hypothesis and confirmation that the
variable is endogenous.
We limit the analysis to AO, our headline indicator of financial access, as the number of
ATMs per 100,000 adults was a weak instrument for access to savings and credit. The
first-stage F-statistics for financial access is 11.0757. As this exceeds 10, it indicates that our
instruments are not weak (Staiger and Stock’s, 1997 rule of thumb for one endogenous
variable). First-stage regression summary statistics for financial access is presented in
Table AIV.
Due to the endogenous financial access variable, and consequently, the interaction term, we
re-estimate Equation (1) using the number of ATMs per 100,000 adults (ATM) as an
instrument for FA and ATM X FCP as an instrument for the interactive term (see Ozer-Balli
and Sørensen, 2010) as follows:
Edevi ¼ a0þa1 FCPiþa2ATM þa FCP  ATM þZ 1i 3 i i i bþei: (14)
From Table V, we can establish that, after controlling for endogeneity, the net effect on
economic development of interactions between the overall index of FCP regulations and AO
is positive, 0.00113 (0.00242+ (−0.00226 × 0.57)).
4. Conclusions, policy implications and recommendations
Over the past decade, FCP has come to the forefront of international development strategy
following evidence that the lack of effective disclosure, deceptive advertising by suppliers of
financial services and failure to understand financial products were contributory factors to
the subprime mortgage crisis and its attendant bank runs in the USA (Ardic et al., 2011).
Coupled with the increasing array and complexity of financial products and services,
increased onus being put on consumers to take their own financial decisions, as well as the
global agenda of broadening financial access it has become increasingly important to have a
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Financial
Variables (1) AO Account ownership access and
Financial access IV 0.00242*** (0.000844) economic
Consumer protection (IFCP) 0.206*** (0.0610)
Interactive term −0.00226** (0.00112) development
Gross savings/GDP 0.00153 (0.00101)
Domestic credit/GDP 0.000739** (0.000297)
Population −0.0314** (0.0124)
Political risk rating −0.00924** (0.00431)
Sum of imports exports/GDP 0.000438* (0.000226)
Government consumption 0.00172** (0.000812)
Inflation −0.00132 (0.00203)
Constant 0.481*** (0.061)
Net effect 0.00113 Table V.
R2 0.786 Endogeneity
F-statistic 27.88*** adjusted OLSregression results:
Observations 83 financial consumer
Notes: Robust standard errors in parentheses. Column (1) interacts financial access (measured in terms of protection and the
ownership of a formal account but instrumented with “the number of ATMs per 100,000 adults”) with the access–economic
index of financial consumer protection (IFCP). *po0; **po0.05; ***po0.01 development nexus
legal and regulatory framework for the protection of financial consumers. Proponents argue
that FCP enhances access to financial services through its disclosure requirements, which
remove information asymmetry and ensure consumers are informed, confident, and, hence,
more willing to participate in financial markets (Davies, 1999), whereas critics argue that the
cost of complying with consumer protection regulations makes the cost of financial products
and services high and out of reach of several people fostering financial exclusion, which is
inimical to economic development (Evans and Wright, 2010; Wright and Helland, 2011).
In this study, we examined the moderating role of FCP in the access-development nexus.
First, the study established positive net effects on economic development from interactions
between FCP regulations that foster fair treatment, disclosure, dispute resolution and recourse
and financial access, namely, account ownership, access to savings and credit. This is in
line with the argument that FCP through its fair treatment, dispute resolution and disclosure
regulations remove information asymmetry, limit consumer exploitation, boost their
confidence and make them more willing to participate in financial markets thereby
enhancing savings mobilisation, access to finance for investment and economic development
(Campbell et al., 2010; Melecky and Rutledge, 2011; Rutledge, 2010). The finding has important
policy implications for the financial inclusion agenda given increasing recognition of FCP
arising from increasing concern over the protection of the growing number of naïve financial
consumers participating in the financial markets for the first time. Due to these concerns, efforts
continue to be made to institute FCP regimes as part of financial inclusion efforts. Our findings
indicate positive effects on economic development of interactions between financial access and
FCP regimes. Policy makers should, thus, be sceptical of advocated negative consequences on
economic development by critics of FCP of the interactions between FCP and financial access.
Second, the study establishes that there is no significant effect on economic development
from interactions between enforcement regulations and account ownership, access to
savings and credit. Similarly, although interactions between compliance monitoring
regulations and AO have a positive net effect on economic development, we find no
sufficient evidence to suggest that interactions between these regulations and access to
savings and credit have a significant effect on economic development. This is attributed to
the existence of enforcement and compliance monitoring mechanisms without the requisite
supervisory authority and resources, consequently limiting the ability of supervisory
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IJMF authorities to implement these mechanisms. Therefore, although these regulations exist,
they are actually ineffective and make no impact on economic development (World Bank,
2013). The positive net effect when compliance monitoring regulations interacted with AO
could be attributed to the mere existence of these regulations instilling confidence and
making consumers willing to take that initial step of having an account in a formal financial
institution. Subsequently implementation constrains result in their existence having no
impact on access to savings and credit and hence economic development.
These findings should, however, not be construed as indicating that these regulations are
less important. Conversely, they highlight the fact that instituting FCP regimes per se may
not be enough. Policy makers need to consider possible intervening factors such as
provision of adequate resources and supervisory authority for compliance monitoring and
enforcement to achieve the expected positive effect on economic development.
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Further reading
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Appendix 1
Albania Czech Republic Kyrgyz Republic Portugal
Algeria Denmark Latvia Romania
Argentina Dominican Republic Lebanon Russian Federation
Armenia Ecuador Lithuania Senegal
Australia El Salvador Macedonia Serbia
Austria Estonia Madagascar Slovak Republic
Azerbaijan Finland Malawi Slovenia
Bangladesh France Malaysia South Africa
Belarus Georgia Mali Spain
Belgium Germany Mauritius Sri Lanka
Benin Greece Mexico Sudan
Bolivia Guatemala Moldova Switzerland
Bosnia and Herzegovina Honduras Mongolia Taiwan
Botswana Hong Kong SAR, China Namibia Tajikistan
Brazil Hungary Nepal Tanzania
Bulgaria Indonesia The Netherlands Thailand
Burkina Faso Islamic Republic of Iran Nicaragua Togo
Burundi Ireland Niger Turkey
Canada Israel Nigeria Uganda
Chile Italy Norway Ukraine
China Jamaica Pakistan United Arab Emirates
Colombia Japan Panama UK
Costa Rica Kazakhstan Peru USA
Cote d’Ivoire Kenya Philippines Uruguay Table AI.
Croatia Republic of Korea Poland Venezuela, RB List of countries
Zambia used in the study
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IJMF Appendix 2
Variable Description Source of data
HDI Human development index UNDP
AO Account ownership Global findex (2014)
Percentage of adults 15+ with an account at a financial
institution
FS Formal savings –
the percentage of adults who over the past 12 months have
saved with a formal financial institution
FC Formal credit –
the percentage of adults who over the past 12 months have
saved with a formal financial institution; and formal credit
FCP Financial consumer protection World bank survey on financial
consumer protection and financial
literacy (2013)
FTI Fair treatment regulations
DRI Dispute resolution and recourse mechanisms
EI Enforcement regulations
CMI Compliance monitoring regulations
DI Disclosure regulations
POP Population growth rate WDI
GS Gross savings/GDP WDI
DC Domestic credit/GDP WDI
Table AII. TT Sum of imports and exports/GDP WDI
Dependant, INF Inflation WDI
explanatory and GC Government consumption expenditure/GDP WDI
conditioning variables PR Political risks rating
a Freedom house
and data source Number of ATMs per 100,000 adults Financial access survey 2014
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Appendix 3 Financial
access and
economic
Indicators Description of indicators Data source development
Compliance (1) Financial institutions required to report complaint statistics to Agency, World bank survey
monitoring (2) financial institutions required to report rates and fees on services posted on financial
index on their websites, (3) financial institutions required to operate a hotline/call consumer
centre to receive complaints, (4) markets, ads and websites monitored, (5) protection and
mystery shopping used, (6) focus group interviews and consumer research financial literacy
done to ensure compliance, (7) onsite inspection and (8) offsite inspection 2013
Enforcement (1) Warnings issued, (2) providers required to refund excess, (3) providers
index required to withdraw misleading ads, (4) fees and penalties are imposed, (5)
public notices of violations issued and (6) offending providers license withdrawn
Dispute (1) Financial ombudsman, (2) general ombudsman, (3) mediation service, (4)
resolution and procedures and processes, (5) timeliness of response and (6) accessibility
recourse index
Fair treatment (1) Deceptive advertising, (2) unfair/high pressure selling practices, (3) abusive
index collection practices, (4) unauthorised use of data or breach of client
confidentiality, (6) prepayment and (7) bundling and tying
Disclosure General disclosures at account opening
index (1) plain language1, (2) local language, (3) standard disclosure format, (4)
recourse rights and processes
Deposit disclosures at account opening
(5) APY and interest rate, (6) compounding method, (7) minimum balance
requirements, (8) fees and penalties, (9) early
withdrawal penalties
Credit disclosures at account opening Table AIII.
(10) APR using standard formula, (11) fees, (12) computation method, (13) Indicators of financial
required insurance, (14) free monthly statement for banks and (15) free consumer protection
monthly statement for non-banks and data source
Appendix 4
Table AIV.
Adjusted Partial Robust First-stage regression
Variable R2 R2 R2 F (1, 74) Prob W F summary statistics–
financial access and
FA 0.7107 0.6794 0.1302 11.0757 0.0014 economic development
Corresponding author
Maryam Kriese can be contacted at: ustarz2000@yahoo.com
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