Beyond access to finance : essays on financial inclusion and development

Abstract

This dissertation contributes to enhancing the knowledge about financial inclusion by focusing on its consequences in emerging economies. Chapter 1 emphasizes the importance of financial inclusion, defined as access to and use of financial services, and relates the different chapters to the overall topic. Chapter 2 analyzes whether the mode of providing access to finance itself changes financial behavior and business outcomes. It analyzes a randomized controlled trial which provided a one-time cash transfer to micro and small entrepreneurs in Kampala, Uganda, in 2013. One half of the treatment group received the transfer in cash, the other half had the money transferred on their bank accounts, which we assume to work as a soft commitment device inducing entrepreneurs to rather use the money for business related expenses. We do not find any direct effect of the transfer on monthly profits and capital stock. However, we detect positive short-term treatment effects on the more "upstream" variables inventories and sales for entrepreneurs in the account treatment group.

Chapter 3 analyzes determinants of financial inclusion and focuses on financial literacy as a possible demand side driver of inclusion. It combines cross country data on financial literacy with information on financial inclusion, financial infrastructure, and other country characteristics. We establish a robust positive relation between financial literacy and four different dimensions of financial inclusion. Considering institutional variation across countries and regarding "access to finance", financial literacy and financial infrastructure mainly substitute each other. With regards to the "use of finance", higher financial literacy strengthens the effect of more financial depth. To respond to reverse causality concerns, we employ an instrumental variable strategy, which supports a causal interpretation of our results. Further robustness checks do not alter the findings either.

Last, Chapter 4 points out a possible drawback of using financial services. It asks whether too high expectations regarding future income may actually harm households and lead them to accumulate too much debt. We collect extensive data on debt and borrowing behavior of households in rural Thailand which enable us to calculate both expectations about future monthly income as well as various debt indicators. Controlling for specific household characteristics, we find a strong relationship between our two measures of biased expectations and (over-)indebtedness. The more quantitative expectation measure is stronger related to objective debt and the more subjective expectation measure is rather related to our subjective debt measure. An additional lab-in-the-field experiment shows that over-confidence is indeed related to over-borrowing.