1. Enterprise and Household Demand for Financial Services 0 Nairobi, May 15-17, 2006 World Bank Seminar on Financial Stability and Development ENTERPRISE AND HOUSEHOLD DEMAND FOR FINANCIAL SERVICES Yira Mascaró Senior Financial Economist World Bank

2. Enterprise and Household Demand for Financial Services 1 Nairobi, May 15-17, 2006 Structure Of Presentation I.Importance of demand side analysis: completing the picture  Financial stability  Financial development II.Understanding the demand for financial services  Characteristics of households and firms  Using available data  Accounting and auditing standards

3. Enterprise and Household Demand for Financial Services 2 Nairobi, May 15-17, 2006 Structure Of Presentation III.Assessing the financial health of firms  Recent trends  Performance: financial ratio analysis  International benchmarking IV.Legal and institutional constraints  Existing infrastructure  Legal and institutional aspects  Other aspects V.Concluding remarks

4. Enterprise and Household Demand for Financial Services 3 Nairobi, May 15-17, 2006 1. Financial stability Large exposures of financial institutions to: –groups of troubled debtors (e.g., after crisis) –systemic exposures to a few large debtors –dollar liabilities of debtors in non-tradable sectors »indirect exchange rate effect –Worrisome sectoral concentrations and trends »e.g., tourism, construction –Related lending »Masked interrelations between economic and financial groups I. Importance of demand side analysis: completing the picture

5. Enterprise and Household Demand for Financial Services 4 Nairobi, May 15-17, 2006 I. Importance of demand side analysis: completing the picture 1. Financial stability Large exposures to deposit runs: –Deposit concentration in a few large accounts –Political and social instability Stress testing (bank and corporate) –Shocks »oil prices »“sudden stop” of capital flows; Foreign credit lines of banks »natural disasters –Scenario analysis »E.g., deteriorating portfolio

6. Enterprise and Household Demand for Financial Services 5 Nairobi, May 15-17, 2006 I. Importance of demand side analysis: completing the picture Bolivia: Deposit trends 2001-2005; Source: Superintendency of banks and financial Institutions (SBEF)

7. Enterprise and Household Demand for Financial Services 6 Nairobi, May 15-17, 2006 2. Financial development Lending and savings trends –e.g., credit crunches: demand or supply driven (econometric analysis) –Outreach Interest rates and spreads Unmet needs of households and firms (data limitations) Opportunities for improving existing products and developing new ones Legal, regulatory and institutional constraints I. Importance of demand side analysis: completing the picture

8. Enterprise and Household Demand for Financial Services 7 Nairobi, May 15-17, 2006 1. Characteristics of households and firms Households: –Saving patterns, special characteristics »Income levels, concentration of wealth »Education, language, religion –Assess needs for new and improved financial products »savings vehicles »payment of basic services and taxes »pension services »housing and insurance needs »consumption etc. II. Understanding the demand for financial services

9. Enterprise and Household Demand for Financial Services 8 Nairobi, May 15-17, 2006 1. Characteristics of households and firms Firms: –Structure and characteristics »Distribution by size »Extent of informality »Growing patterns (by economic sectors and size) »Common features by size (e.g. microenterprises- collateral substititution) –Vulnerabilities to shocks »Natural disasters (e.g., hurricanes, earthquakes) »Economic shocks (oil price) II. Understanding the demand for financial services

10. Enterprise and Household Demand for Financial Services 9 Nairobi, May 15-17, 2006 1. Characteristics of households and firms Firms: –Trends of lending by economic sectors and geography –Financing sources : formal or informal »Financial institutions (banks, NBFIs, moneylenders) »Foreign financing »Suppliers and trade credit »Internal resources »Family and friends –Residual effects from recent crises »Over-leveraged »Excess of fixed assets (collateral for debt) »illiquid II. Understanding the demand for financial services

11. Enterprise and Household Demand for Financial Services 10 Nairobi, May 15-17, 2006 2. Using available data (limitations) Firms: –Public data »listed firms, bankscope, bloomberg, chambers of commerce »ICAs (e.g., financing structure of firms) »Moodys, S&Ps –Superintendencies »credit registries, large debtor analysis (supervisory reports) –Tax authority, central banks »Labor claims, foreign credit lines II. Understanding the demand for financial services

12. Enterprise and Household Demand for Financial Services 11 Nairobi, May 15-17, 2006 Sample ICA data on financing of firms: Kenya

13. Enterprise and Household Demand for Financial Services 12 Nairobi, May 15-17, 2006 Sample ICA data on financing of firms: Regions

14. Enterprise and Household Demand for Financial Services 13 Nairobi, May 15-17, 2006 3. Accounting and auditing standards Transparency and availability of information –Tax considerations Comparability of data across firms Quality of financial statements –Reporting requirements II. Understanding the demand for financial services

15. Enterprise and Household Demand for Financial Services 14 Nairobi, May 15-17, 2006 1.Recent trends Concentration of debtors: –By financial intermediary; –by quality of loans (NPLs by sectors); –Over-indebtedness 2.Performance: Financial ratio analysis Leverage –debt to equity, long-term debt to equity, long-term financial liabilities to equity Interest coverage –EBITDA to interest charges, EBITDA to (interest charges plus current portion of long-term debt) III. Assessing the financial health of firms

16. Enterprise and Household Demand for Financial Services 15 Nairobi, May 15-17, 2006 Current exposures –current assets to current liabilities Efficiency –operating and administrative costs to operating revenues, net margin Leverage –net income to sales, net income to equity Leverage –foreign currency debt to total debt 3.International benchmarking Peer countries Peer firms (by size, degree of financial development) III. Assessing the financial health of firms

17. Enterprise and Household Demand for Financial Services 16 Nairobi, May 15-17, 2006 1.Existing infrastructure Credit bureaus and informational frameworks Payments systems –Small value; large transactions Titling and registries –quality –speed IV. Assessing legal and institutional constraints

18. Enterprise and Household Demand for Financial Services 17 Nairobi, May 15-17, 2006 2.Legal and institutional aspects Collateral and framework for execution Framework for corporate restructuring and insolvency Accounting and auditing standards; reporting standards Credit culture Capacity to systematically evaluate firms 2.Other aspects Political and economic environment –investment climate, business environment (e.g. doing business) physical infrastructure –Roads, ATMs, branches IV. Assessing legal and institutional constraints

19. Enterprise and Household Demand for Financial Services 18 Nairobi, May 15-17, 2006 Important issues related to financial stability to better assess extent of exposures and mitigate effects Complement supply side analysis to enable deepening of financial markets and broadening of financial services Key aspects related to: –Unveiling exposures and analyzing worrisome trends –Systematic analysis of firms’ health to assess large bank exposures –Differentiation of agents by size, sectors, and characteristics to address specific demand needs –Data constraints –Supporting infrastructure, legal and institutional frameworks –Lending booms- adequate measure of risks V. Concluding remarks