Brazil's innovative 'banking correspondents' expand financial services to underserved areas

PUC-Rio Economist's research shows benefits, growth

CHICAGO, June 5, 2012 /PRNewswire-USNewswire/ -- Brazil's program of using lottery outlets, post offices and small retailers to distribute financial products in places too small for bank branches pioneers a way to bring key services to economically underdeveloped areas, a new study found.

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A study of Brazil's "banking correspondents" by the Consortium on Financial Systems and Poverty shows that relying on the existing infrastructure of these other service groups can reduce the fixed cost of entry for providing banking services to underserved communities.

A new working paper entitled "Eliminating entry barriers for the provision of banking services: Evidence from 'banking correspondents' in Brazil" by Juliano Assuncao of the Economics Department at Pontifícia Universidade Catolica do Rio de Janeiro (PUC-Rio) traces the rapid growth of banking correspondents in the period 2002 to 2007.

"In addition to the recent mobile money technology," the author says, "banking correspondents represent an innovative and feasible means of increasing the outreach of banking services at low setup costs."

Assuncao shows that banking correspondents have virtually eliminated the entry threshold for providing banking services in Brazil and serve as an innovative model for financial outreach in less populated and more isolated regions. Based on an analysis of the time period between 2000 and 2007, Assuncao estimates that the entry barriers were reduced to zero in 2002 for banking correspondents while the entry threshold to establish a bank branch remained steady at between 7,800 and 9,300 people.

To date, research has suggested that physical access to banking facilities is essential to economic development. Various studies have shown that it helps individuals to improve living conditions and overcome poverty, enhances risk sharing, promotes startup businesses and enables established firms to grow.

Brazil's central bank approved the use of banking correspondents in 1999. The legislation allowed banking correspondents to receive applications for opening checking and savings accounts; collect deposits and provide payments for checking and savings accounts as well as investment funds; and receive credit applications and perform credit evaluations, among other services.

Approximately 2,200 of Brazil's 5,500 municipalities, representing 20 million people, had no bank branches in 2000, and represented a challenge for connecting individuals to financial service.

The format proved so popular that banking correspondents spread as well to places that had bank branches. By 2007, Assuncao's research found, only 217 municipalities did not have banking correspondents. Central bank figures indicate that by 2010 this number had fallen to 30 municipalities with no banking correspondents.

In addition to his position at PUC-Rio, Assuncao is a research member of the Consortium on Financial Systems and Poverty. CFSP, which is based at the University of Chicago, helped provide financial support for the study. The paper can be found on their website at http://www.cfsp.org. CFSP is a private research organization comprised of leading and emerging economists. Their goal is to improve the lives of the world's poor and to reduce poverty through helping to identify, design and implement more efficient financial systems. Principal researcher for the program is Robert M. Townsend, Elizabeth and James Killian Professor of Economics in the Department of Economics at MIT.

SOURCE Consortium on Financial Systems and Poverty