access to financial services in brazil

Access to Financial
Services in Brazil
A STUDY LED BY ANJALI KUMAR
DIRECTIONS IN DEVELOPMENT
DIRECTIONS IN DEVELOPMENT
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Access to Financial Services
in Brazil
DIRECTIONS IN DEVELOPMENT
Access to Financial Services
in Brazil
A study led by Anjali Kumar
THE WORLD BANK
Washington, D.C.
DIRECTIONS IN DEVELOPMENT
© 2005 The International Bank for Reconstruction and Development / The World Bank

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Library of Congress Cataloging-in-Publication Data
Kumar, Anjali.
Access to financial services in Brazil / Anjali Kumar.
p. cm. — (Directions in development)
Includes bibliographical references and index.

ISBN 0-8213-5716-6
1. Finance—Brazil. 2. Financial institutions—Brazil. I. Title. II. Directions in
development (Washington, D.C.)
HG185.B7K85 2004
332.1’7’0981—dc22 2004045528
v
Contents
Foreword xiii
Acknowledgments xv
Executive Summary xix
Abbreviations lix
Currency Equivalents lxxii
1. Assessing Access 1
Growth, Poverty Reduction, and Access to Financial Services 1
Basic Supply-Side Measures of Financial Services Offered
in Brazil 11
Demand-Side Measures of Access: An Enterprise Survey 33
Demand-Side Measures of Access: A Survey of
Urban Individuals 33
Analysis of Survey Results: What Factors Are Associated
with Access? 45
An Econometric Investigation of Determinants of Access 60
Summary of Findings and Policy Implications 64
Annex 1.1 Financial Markets and Welfare-Enhancement:
Microeconomic Aspects 69
Annex 1.2 Technical Note on Estimation: Urban
Financial Survey 72
2. Expanding Microfinance 77
Microcredit, Access, and Poverty: A New Paradigm? 77
Microfinance in Brazil: Evolution and Status 84

Microfinance in Brazil: Constraints and Challenges 115
Microfinance Regulation and Supervision: Future
Policy Options 126
The Credit Cooperative Movement and Its Contributions
to Access 132
Legal, Regulatory, and Supervisory Framework for Credit
Cooperatives 149
Annex 2.1 Microfinance and Technology 156
3. Downscaling Private Banks 167
Deposit Services: Small Clients and Special Savings 171
Credit Services: Provision of Small Loans 186
Entry Requirements, Prices, and Transaction Costs 190
Delivery Channels: Branches, ATMs, and Correspondent
Banking 201
New Technologies: Use of the Internet and Phone
Banking 210
Downscaling of Banks Elsewhere: What Can Banks Do? 220
Annex 3.1 Bank Downscaling: One Bank’s Viewpoint 228
4. Partnering Nonbanks 241
Introduction 241
Factoring 247
Leasing 263
Consumer Finance for Individuals and Trade Finance
for Enterprises 273
5. Channeling Rural Finance 277
Specialized Finance and Directed Credit in Brazil 277
Overview of Rural Finance in Brazil 281
Analysis of the Present System of Agricultural Credit 301
Designing Rural Financial Systems: Principles
and Experience 311

Conclusions and Recommendations 323
Annex 5.1 The Subsidy Dependence Index: Rationale
and Calculation 326
Annex 5.2 Old and New Approaches to Rural Finance:
Goals and Principles 329
Annex 5.3 The New Approach to Rural Finance: Indonesia’s
BRI–Unit Desas 334
6. Installing Institutional Infrastructure 337
Creditor Rights, Security Interests, and Access to Credit 339
Security Interests 350
Credit Information and Credit Reporting 362
VI
ACCESS TO FINANCIAL SERVICES IN BRAZIL
VII
CONTENTS
7. Enlisting the Government 381
Government Policy and Access: Macro- and Regulatory
Environment 384
Proactive Government Policies: Supportive Microeconomic
Measures 391
Conclusion 413
Appendix: Statistical Tables 415
Endnotes 529
Bibliography 557
List of Institutions and Web Addresses 589
Index 593
Figures
1.1 Growth in Numbers of Financial Institutions, 1993–2002 13
1.2 Evolution of Financial Service Outlets in Brazil, 1994–2002 16
1.3 Ownership of Bank Service Points in Brazil 17

1.4 Branch Density by State in Brazil 20
1.5 Municipalities with No Services 24
1.6 Brazil and Other Countries: Population Served per
Bank Branch 27
1.7 Deposit and Savings Behavior: Survey of Urban
Individuals 40
1.8 Role of Location in Financial Access 48
1.9 The Role of Income in Different Measures of Financial Access 58
2.1 Growth of Loan Portfolio and Client Base of Main
Microfinance Providers in Brazil 90
2.2 Growth of the Grameen Bank in Bangladesh, Self-Help
Groups in India, and Top 10 MFIs in Bolivia 107
2.3 Comparison of Interest Rates Charged on Loans with
Other Institutions in Latin America 113
2.4 Capital, Deposits, and Loans of the SICOOB and
SICREDI Cooperative Systems, 1998–2001 134
2.5 Cooperatives in Brazil, by Type of Cooperative, 2001 136
2.6 Evolution of Profits and Equity for the SICOOB
Cooperative System 148
3.1 Interest Rates for Special Savings Deposits and Term
Deposits, 1999–2002 172
3.2 Structure of Aggregate Deposits, December 2001 174
3.3 Structure of Deposits below R$5,000 by Type, Institution,
Numbers of Clients, and Value, December 2001 177
3.4 Structure of Sight and Special Savings Deposits from
R$1,000 to R$5,000, December 2001 180
3.5 Credit Operations with Nonearmarked Funds,
July 2000 to December 2002 198
3.6 Regional Distribution of ATMs Relative to Population
and Income in Brazil 208

3.7 Bank Transactions and Cellular Phone Costs in Brazil
and Other Countries 212
3.8 Teledensity and Gross Domestic Product per Capita
and Telecommunications in Brazil and Other Countries 213
3.9 Main Telephone Line, Cellular, and Internet Penetration
in Brazil and Other Countries 217
3.10 Online Internet Banking in Brazil and Asia 218
3.11 Internet Use and Online Banking in Brazil and the
United States 219
4.1 Loans to Companies and Individuals in Brazil, by
Instrument 243
4.2 Evolution of the Portfolio of Factoring Companies
Associated with ANFAC 250
4.3 Factoring Companies’ Portfolios, by Sector, 2000–01 251
4.4 Evolution of Purchase Factor, Interest Rates, and Spreads
in Brazil, July 1994 to February 2003 253
4.5 Evolution of the Leasing Portfolio and Operations in
Brazil, by Type of Asset, 1990 to February 2003 266
4.6 Types of Indexation in Leasing Contracts in Brazil,
1998 to February 2003 267
4.7 Evolution of Leasing Operations, by Sector, 1993 to
February 2003 268
4.8 Finance Companies’ Role in Consumer Credit in Brazil 274
5.1 Trends and Composition of Directed Credit, 2000–02 279
5.2 Nominal and Real Interest Rates in Rural Credit in
Brazil, 1995–2001 282
5.3 Credit Flows to Agriculture: Reductions with
Fluctuation, 1969–2002 283
5.4 Flow of Funds under the National Rural Credit System 286
5.5 Sources of Funds for Agricultural Credit: Increased

Obligatory Lending 288
5.6 Rural Credit from PRONAF 293
5.7 Agricultural Production and Formal Agricultural Credit 302
5.8 Correlation of Volume of Credit and Land Price Value 304
5.9 Distribution of Agricultural Credit by Contract Size 305
VIII
ACCESS TO FINANCIAL SERVICES IN BRAZIL
IX
CONTENTS
5.10 Narrowing Spread between the SELIC Rate and the
Controlled Agricultural Interest Rate 309
5.11 Integrated Credit and Insurance Products: Suggestions
for Efficiency Gains 320
6.1 Spreads in Bank Intermediation in Brazil 338
6.2 Registration Costs of Mortgages in the State of São Paulo 356
6.3 Use of Credit Registries by Different Entities 363
6.4 International Examples of Credit Registry Information 370
7.1 Ratios of Credit to GDP and Debt to GDP over Time
in Brazil, January 1995 to March 2003 386
7.2 Shares of Securities in Bank Assets (December 1999
to December 2002) and Money Supply in Brazil
(July 1994 to June 2003) 387
7.3 Trends in Spreads and Reserve Requirements in Brazil,
January 1995 to March 2003 388
Tables
1.1 Income Distribution: An International Comparison 2
1.2 Depth of Financial Markets: Brazil and Other
Emerging Economies, 1999/2000 4
1.3 Branch Density across Brazilian Regions 19
1.4 Provision of Bank Services across Regions 25

1.5 Provision of Bank Services across Municipalities, 1996 26
1.6 Public and Private Provision of Bank Services across
Regions 26
1.7 Bank Branch Density: An International Comparison 29
1.8 What Explains Bank Branch Services across Municipalities? 29
1.9 What Explains Public versus Private Bank Branch
Services across Municipalities in Brazil? 31
1.10 Financing Constraints in Brazil: An International
Comparison 34
1.11 Indicator of Access: Access to Financial Institutions 38
1.12 Access to Loans and Credits 42
1.13 Access to Loans and Credits: Reasons for Loan Refusals 43
1.14 Determinants of Access to Financial Services: Results 62
1.15 Econometric Results: Determinants of Volume of
Credit Requested and Approved 64
1.16 Econometric Results: The Probability of Using Public
Banks for Access, Deposits, and Credit 65
1.17 Econometric Results: The Probability of Using Public
Banks for Real Estate Purchase 66
2.1 BNDES Program of Support to Microenterprises,
1997 to 2002 95
2.2 Credit Cooperatives and MFIs in Brazil, 1997–2002 96
2.3 Main Microfinance Providers in Brazil, end-2001 104
2.4 Microfinance Penetration in Brazil and Other Latin
American Countries, 2001 105
2.5 Selected Performance Indicators of Main Microfinance
Institutions in Brazil 108
2.6 Loan Quality Indicators, Selected Sample of MFIs in
Latin America 109
2.7 Operational Efficiency Indicators, Selected Sample of

MFIs in Latin America 111
2.8 Comparison of Average Loan Size across Latin America 114
2.9 Sources of Funding and Interest Rates Charged by Main
Brazilian MFIs 116
2.10 COFIDE Financing to MFIs, by December 2001 123
2.11 Capital Requirements for Regulated MFIs 129
2.12 Number of Cooperatives in Brazil, by Type 134
2.13 Distribution of Rural Credit, by Purpose and Lending
Institution 138
2.14 CRESOL Membership, by Farm Size and Annual
Income, 1999 139
2.15 Credit Cooperatives in Brazil and Other Countries, 2001 140
2.16 Evolution of WOCCU-Affiliated Credit Unions in Brazil 141
2.17 Classification of Assets for Banks and Select
Cooperatives, by Level of Risk 146
2.18 Key Financial Indicators for the SICREDI Cooperative
System 147
3.1 Structure of Deposits by Type and Institution,
December 2001 176
3.2 Three Main Reasons for Wanting a Bank Account 183
3.3 One Year of Treasury Direct Retail Bond Sales in Brazil,
January 2002 to January 2003 185
3.4 Share of Brazil’s Commercial Banks in the Small-Loan
Market in Terms of Loan Value, November 2001 187
3.5 Recent Evolution of Bank Shares in the Small-Loan
Market, December 2000 to November 2001 188
3.6 The Importance of Small Loans for the 10 Largest
Brazilian Banks, November 2001 189
3.7 Nonbanks with a Significant Market Share in the
Small-Loan Market, November 2001 190

3.8 Survey on Access to Financial Services in Brazil: Reasons
for Not Having a Bank Account 192
3.9 Fees and Requirements for Sight Deposit Services at
Key Brazilian Banks, 2002 194
X
ACCESS TO FINANCIAL SERVICES IN BRAZIL
XI
CONTENTS
3.10 Interest Rates, Outstanding Stock, and New Loans to
Consumers by Loan Type (Free Credit), December 2002 197
3.11 Constraints to Enterprise Operations and Growth:
An International Comparison 199
3.12 Average Transaction Costs by Type of Bank in Brazil 200
3.13 Transaction Cost Comparison, Banks and Nonbanks 201
3.14 Types of Distribution Channels Used by Different
Bank Groups 202
3.15 Correspondents in Brazil, 2001 and 2002 204
3.16 Geographic Coverage of the Banking System and the
Postal Network 205
3.17 ATM Fleet in the United States and in Brazil 209
3.18 Downscaling through Partnerships by Commercial
Banks in South Africa 221
3.19 Banks and Finance Companies in Microfinance, Peru
and Bolivia 224
3.20 Other Latin American Banks and Finance Companies
in Microfinance 225
3.21 Sources of External Financing for Peruvian Microfinance
Institutions, December 2000 225
4.1 Financial System Assets, by Institutional Type 241
4.2 Finance, Leasing, and Factoring Companies in Brazil,

December 2001 244
4.3 Factoring Companies in Selected States and Regions
in Brazil, 2001 248
4.4 Differences between Financial Intermediation and
Factoring 255
4.5 Comparison of Factoring Turnover in Brazil and Selected
Other Countries, 2000 258
4.6 Summary of Characteristics of Financial and Operational
Leases in Brazil 264
4.7 Present Value of Leasing Contracts in Brazil and Other
Countries, 1999 269
5.1 Aggregate Credit to the Rural Sector in Brazil, 1969–2002 283
5.2 Concentration of Agricultural Landholdings in Brazil 284
5.3 Sources of Finance for Rural Credit in Brazil, 1995–2002 287
5.4 PRONAF Low-Cost Loans to Family Farms 292
5.5 Agricultural Insurance Relative to the Total Insurance
Market, 2001 297
5.6 Agricultural Insurance in Brazil: Basic Information and
Volume of Premiums/Losses 300
5.7 Rise in Agricultural Productivity and Decline in Formal
Agricultural Credit 303
5.8 Brazilian Farm Units, Area, Gross Value of Production,
and Total Financing 307
6.1 Frequency with Which Private Parties Resort to Justice
to Postpone Obligations, by Area of Law 343
6.2 Likelihood of Judges´ Decisions Being Politicized, by
Type of Cause 346
6.3 Registry Offices in State Capitals and Two Major Cities
in São Paulo, Brazil 351
6.4 Notarial Fees for Drafting a Public Deed of Mortgage

in the State of São Paulo 355
6.5 Registration Costs for Deeds and Documents in the
State of São Paulo 357
6.6 Major Credit Information Providers in Brazil, 2002 364
6.7 Key Characteristics of Cross-Country Comparisons of
Private Credit Bureaus 371
6.8 Cross-Country Comparison of Customer Attention
Issues in Private Credit Bureaus 374
6.9 Cost of a Credit Report in Brazil and Other Countries 376
XII
ACCESS TO FINANCIAL SERVICES IN BRAZIL
xiii
Foreword
The challenge of alleviating poverty and improving living conditions for
the poorest populations is a formidable one. It is increasingly apparent
that such a betterment of the lot of poor people requires an effort that
spans all sectors of the economy and may not be easy to achieve through
economic growth alone. Improved access to financial services helps poor
people by enabling payment transactions that then bring them into the
formal sector. Access to deposit services helps people save safely and thus
handle fluctuations in consumption needs. Financial services also enable
poor people to use profitable business opportunities and thus raise earn-
ings. And financial services help better manage risk. Beyond the role of
financial systems in providing economic stability and contributing to
growth, there is an increasing awareness of the importance of financial
services as a wider part of the development agenda.
Yet, there is relatively little accumulated knowledge of present levels of
financial access in poor countries or of the factors that are important in
expanding access. How should access be measured? The establishment of
financial institutions or service outlets does not in itself guarantee access

for poor people. Should access then be measured in terms of services actu-
ally used by them? Or by reductions in the unmet demand for financial
services? These are some of the initial questions pondered by this study,
which incorporates the results of a major survey conducted in Brazil in
several cities concerning present levels of financial access and its impedi-
ments. Frequently, access to financial services has been popularly equated
with access to credit. Yet credit needs are often described as a secondary
financial need by poor people, whose need for a stable store of value for
their savings or mechanisms for making and receiving payments is often
paramount. One contribution of the present work is its attempt to unbun-
dle the concept of financial access.
The genesis of the present work lies in the recognition, at multiple lev-
els, of the need to develop new analytic and policy tools for directly
addressing problems of financial access beyond the establishment of the
precondition of more stable and solvent financial systems. Brazil has
shown a sustained interest, in recent years and across different govern-
ment administrations, in addressing issues related to poverty alleviation
and reduction in inequality. It was Brazil’s Central Bank that first raised
the theme of financial access as an area for joint exploration with the
World Bank. And in parallel, the World Bank’s Financial Sector Network
has encouraged the development of an understanding of financial access
in response to the World Bank’s Board and in support of the Millennium
Development Goals. Within the Latin America and Caribbean Region of
the World Bank, a series of new initiatives for exploring themes of finan-
cial access has been launched in countries such as Mexico and Colombia
in addition to Brazil. New dimensions of access are under investigation,
following on the present work, examining issues specific to financial
access for enterprises, in contrast to the focus on poor individuals
adopted in this study. The present study on Brazil may thus be regarded
as an early and perhaps pioneering effort in part of a widespread move

toward the adoption of issues of financial access as a key theme in World
Bank–led work on financial systems.
Eventually the value of such a work lies in its messages for policymak-
ers and financial institutions and in the extent to which it provides them
with a functional framework with which to address problems of access.
The book shows that, despite a contraction in the number of banks, Brazil
has made important strides in financial access in recent years, and thus it
is not underbanked in comparative terms. While recognizing that the
expansion of financial access presents enormous challenges to a govern-
ment focused on poverty reduction, the study cautions that traditional
approaches toward the expansion of access may be both more expensive
and less successful than desirable. Options for policy discussed here draw
on the experience of several countries, illustrating that solutions to the
difficult dilemma of incentive compatible service expansion lie in not one
but in several directions. These include the use of products and institu-
tional interfaces designed specifically for the target group of clients, as
well as appropriate lending techniques, incentives, and instruments; the
expansion of information; and adoption of new technology.
We hope that this volume fills a gap in our development knowledge
and that it will assist policymakers, researchers, and practitioners in the
efforts to expand financial access to poor people.
March 2004
Fernando Montes-Negret Danny Leipziger
Manager Director
Financial Sector Unit Finance, Private Sector
Latin America and the Development and Infrastructure
Caribbean Region Latin America and the
The World Bank Caribbean Region
The World Bank
XIV

ACCESS TO FINANCIAL SERVICES IN BRAZIL
xv
Acknowledgments
This study was conceived and undertaken under the joint leadership of
the Brazil Country Unit of the World Bank, led by Gobind T. Nankani and
Vinod Thomas, Country Directors, and Joachim von Amsberg, Lead
Economist, and of the Financial Sector Unit of the Latin America and the
Caribbean Region, led by Fernando Montes-Negret, Sector Manager, and
Danny Leipziger, Director. The project has received extensive support
from the World Bank’s Financial Sector Board, in recognition of the
importance of access to financial services for reducing poverty and
inequality and raising welfare. This work is the outcome of a collabora-
tion of an extensive team of people from within the World Bank, from
Brazil, and external consultants. The team was led by Anjali Kumar, Lead
Financial Economist in the Finance Cluster of the Latin America and the
Caribbean Region of the World Bank.
Scholars in Brazil who collaborated and participated with this effort
include, notably, Professor Rosane Mendonça and students from the Insti-
tute of Applied Economic Resarch (IPEA) and the Federal University of
Nateroi (Rio de Janeiro), in particular Cristine Campos and Daniel Santos.
Professor Mendonça also helped coordinate a field survey, undertaken by
the firm Sensus (Belo Horizonte), led by Ricardo Guedes. The team bene-
fited from the guidance of Professor Ricardo Paes de Barros, IPEA. Core
background papers were prepared by Armando Castelar Pinheiro (IPEA),
the firm of Thomas Felsberg and Associates (São Paulo), and a team
headed by Professor Ricardo Leal and students from the COPPEAD Busi-
ness School (Rio de Janeiro). Contributions were also received from
Moysés Kessel, formerly of the Central Bank of Brazil.
The study was also enriched by discussions and contributions from the
Comunidade Solidária and Serviço Brasileiro de Apoio às Micro e Peque-

nas Empresas and with Jaime Mezzera and Henry Jackelen of the Brasília
offices of the International Labour Organisation and the United Nations
Development Programme. The team met with numerous financial insti-
tutions in Brazil, and close discussions were maintained during the
process with financial-sector associations, notably FEBRABAN, the asso-
ciation of banks, and also ANFAC and ABEL, which represent the factor-
ing and leasing industries. Particularly valuable collaboration was
extended by the team of Beatriz Azeredo da Silva of the Banco Nacional
de Desenvolvimento Econômico e Social (BNDES) and Lara Goldmark,
consultant to BNDES.
World Bank and International Finance Corporation (IFC) staff and con-
sultants contributing to this report included, notably, Thorsten Beck,
McDonald Benjamin, Soumya Chattopadhyay, Thomas Glaessner, Mario
Guadamillas, Margaret Miller, Nataliya Mylenko, Susana Sanchez, Sophie
Sirtaine, and Jacob Yaron. Contributions were also provided by Alfredo
Ebentrich, Lydie Ehouman, Daniela Klingebiel, Peer Stein, and Robert
Vogel. Significant background papers were prepared by a team from
Shorebank Advisory Services (Chicago and Washington). Ricardo
Gonçalves and Adam Parsons contributed technical notes and partici-
pated in the initiation, preparation, and finalization of all parts of the
study. Micky Ananth provided extensive support with document prepa-
ration.
Thoughtful comments from several World Bank colleagues as well as
external persons are reflected in this study. Reviewers and advisors in the
World Bank have included Mauricio Carrizosa, Robert Christen, Fran-
cisco Ferreira, Joselito Gallardo, James Hanson, Aart Kraay, Soledad Mar-
tinez, Steven Schonberger, Shahid Yusuf, and Dimitri Vittas. Comments
and contributions have also been provided by Marguerite Berger and
Rogerio Studart of the Inter-American Development Bank and Ashoka
Mody and Kenichi Ueda of the International Monetary Fund. Professor

Robert Townsend of Chicago University provided valuable insights on
alternative frameworks for analysis. Professor André Urani of Instituto de
Estudos do Trabalho e Sociedade was a special advisor to the project, and
Professor Marcelo Neri of the Fundação Getulio Vargas provided helpful
comments on Brazilian data sources at the outset of the study.
The key counterpart agency for the project has been Brazil’s Central
Bank. Initial endorsement for the study came from the Central Bank Gov-
ernor Armínio Fraga, and discussions of the final report continued with
Central Bank Governor Henrique Meirelles, Afonso Bevilaqua, and
Eduardo Loyo. Director Sérgio Darcy and his office, including Clarence
Hillerman Jr. and Marden Soares, provided guidance throughout, espe-
cially on microfinance and financial regulation in Brazil. Subsequent dis-
cussions on themes of financial access within the Central Bank included
especially Eduardo Lundberg and Márcio Nakane. Discussions with the
Ministry of Finance were held with Marcus Lisboa and Otaviano Canuto.
The report benefited immensely from intensive reviews by technical
teams within the administration, including notably Wagner Guerra Jr.,
Roberto Shoji, and Otávio Damaso at the Ministry of Finance and Amaro
Gomes at the Central Bank.
Early versions of this study have been presented and discussed at sem-
inars and workshops in Washington and Brazil. In Washington, early
results from Brazil have been compared with ongoing parallel work in
Mexico and Colombia, organized by Tova Solo of the Latin America
XVI
ACCESS TO FINANCIAL SERVICES IN BRAZIL
XVII
ACKNOWLEDGMENTS
region, FPSI unit. Events organized in Brazil have included an IETS/
World Bank seminar on inequality and social justice at Rio de Janeiro,
held in tandem with an IFC workshop on microfinance; a workshop that

included themes of urban poverty, by the Cities Alliance at São Paulo, in
October 2003; and a Central Bank workshop on microfinance. And
recently, results of this study were shared with an audience in Delhi,
India, drawing comparisons between India and Brazil on financial access.
Valuable messages were received from participants at these events, which
also have been reflected. We would like to take this opportunity to thank
all the people in government, financial, and academic communities who
have provided their time, thoughts, and contributions to the team and to
the study.
xix
Executive Summary
This study evaluated present levels of access to financial services in Brazil
and government policies that have had an impact on access. Based on
these findings, the study explored options for increasing future access to
financial services in Brazil. The first section of this summary highlights
the core conclusions to emerge from the study and their implications for
government policy. The next section describes the findings and recom-
mendations of each chapter, and is followed by an in-depth look at spe-
cific areas examined by the study.
Principal Conclusions
Financial markets constitute a significant part of a broad group of factor
markets, including land and labor markets, which are the basic institu-
tions underlying the effective functioning of an economy and the produc-
tion and sale of its goods. Financial exclusion reduces the potential
welfare of individuals and the productivity of enterprises in an economy.
Effective participation in financial markets and other factor markets,
which are different from normal (product) markets, is a precondition for
effective participation in the economy.
Access of disadvantaged groups to financial markets is thus of strate-

gic importance for social and economic development and social inclusion.
Market failures in these markets have particularly detrimental effects on
economic productivity and social benefit. Therefore, these markets are
typically closely regulated. But regulation, in turn, generates risk of regu-
latory failure, and many regulations may hinder access to the poor. These
are the reasons for analyzing financial access and for reviewing the role of
public policies to promote access.
The overarching message to emerge from this study is that increased
financial access would be promoted by sound overall macroeconomic and
financial sector policy. Beyond that, the government could and should
undertake regulatory reforms to enable financial markets to function
more smoothly, and undertake targeted policies to improve access. How-
ever, care should be taken to ensure that such targeted policies let the
excluded groups participate efficiently in financial markets. This would
direct the focus toward a review of incentives rather than public financ-
ing of special programs.
Sound macroeconomic policy implies, first, the reduction of the gov-
ernment’s borrowing requirement, which will enable more borrowing by
individuals and enterprises in the economy, and, second, the reduction
and harmonization of taxes on the financial sector that will reduce the
burden on overall intermediation and also reduce current opportunities
for regulatory arbitrage across different segments of the financial system.
Beyond that, efforts should be made to ensure that competition is main-
tained in financial markets.
Regulatory reforms, which would stimulate outreach and affect disad-
vantaged groups, require a move away from expensive special public
financing that often fails to meet target groups, toward improved regula-
tory regimes that stimulate access. Present subsidies on some costly spe-
cial programs, such as those for the rural sector, could be reduced in a
phased program. Subsidies, mandatory lending targets, and measures

that seek to curb market prices could perversely lead to reduced access
over time. Examples of desirable regulatory reforms include a review of
Brazil’s extensive regulatory and reporting requirements for micro-
finance, compared to what may be merited by its present non-deposit-
taking nature. Reliance on relatively low-cost credit could be gradually
weaned, although alternative sources of funds may be needed and
deposit-taking could be considered once the industry adopts mature
microcredit practices.
In microfinance, a series of new regulatory initiatives have been
adopted, many positive. However, many other recent programs that rely
on subsidies, lending limits, and mandated lending could limit the devel-
opment of some credit markets. Care should be taken not to overburden
financial institutions with the task of intermediation of special govern-
ment assistance programs, which could detract from the establishment of
orthodox credit practices. In the banking sector, several new regulations
have been adopted recently that are moves in the right direction, includ-
ing the simplification of processes for opening accounts, expanding the
scope for correspondents to financial institutions, and establishing basic
accounts. Bank branch opening could also be simplified. However,
microlending by microfinance institutions (MFIs) such as Civil Society
Organizations with a Public Interest (OSCIPs) and Microcredit Com-
panies (SCMs) could find their activities restricted by controls on onlend-
ing interest rates. New policies in this area should be monitored in terms
of cost and impact.
For nonbanks there is a fragmentation of regulation in some areas such
as factoring, which is outside the defined scope of financial sector activi-
ties, and which otherwise might help to contribute to the sector’s devel-
opment. Such policies could extend beyond financial institutions
themselves to the overall infrastructure for financial intermediation. A
XX

ACCESS TO FINANCIAL SERVICES IN BRAZIL
XXI
EXECUTIVE SUMMARY
first concern in this area relates to creditor rights; regulatory reform can
focus on attention to procedural delays in reaching judgments in credit
disputes and examining the rationale of tax write-offs on uncollected
small claims. To enhance credit reporting, regulations limiting informa-
tion to five years, restricting the sharing of information, and limiting the
use of positive information should be reevaluated.
Targeting and programs of special outreach imply not so much the
public financing of programs as their appropriate design, to insure their
outreach to and impact on desired groups of the population. For example,
geographic targeting should go beyond efforts to place a service outlet in
each broadly defined geographic area, such as a municipality, to focus on
the identification of deprived neighborhoods, which could include inner
city areas within broader urban municipalities. Such targeting would be
based on systematic tracking of deprivation. Appropriate designs would
include designing community outreach strategies to target customers
with limited access, introducing image differentiation, adopting new
lending methodologies and technologies, strengthening credit reporting,
easing the use of secured credit, and offering incentive-compatible sup-
port. Basic accounts and ‘lifeline’ services, which provide minimal service
packages, can be reinforced with government support to employees or
banks to open such accounts. Government could also support the use of
such accounts to deposit government transfers as well as provide careful
monitoring of the costs of basic service packages.
Incentive-compatible support can take forms such as start-up support,
initial tax breaks, matching grants, partial risk or credit guarantee support
for the development of community finance institutions, and enhancement
of regulatory measures to increase disclosure of practices aimed at access.

In the context of microcredit institutions, there is now a series of recog-
nized sound practices for microcredit that boost its sustainability, and
microfinance entities that can demonstrate the incorporation of such good
practice should be the recipients of funding support for institutional
development or expansion. Encouragement can also be offered for the
establishment of formal or informal partnerships and institutional sup-
port programs between banks, nonbanks, or even nonfinancial entities
(such as factoring companies) and microfinance. Finally, judicial educa-
tion as well as programs of financial education and literacy are also key.
Concern about financial exclusion increased over the last decade in
Brazil, with the decline in the number of banks since the late 1990s. Only
some 60 million of Brazil’s population of 176 million have bank accounts,
or around a third of its population. Meanwhile, not only is the cost of
credit high, but bank spreads are arguably among the highest in the world.
The study points to a series of factors that affect volumes and costs of
financial intermediation. It emphasizes that despite the absence of simple
remedies, areas exist in which actions can be taken that together would
help to expand access and lower the cost of financial intermediation.
Twenty key findings and areas for future action follow.
1. This study finds that there is no evidence of a trend decline in access to bank
services in terms of numbers of banking service outlets, although such ser-
vices, measured in traditional terms, may have stagnated. Despite
concerns regarding diminishing numbers of banks over the last
decade, comparing Brazil with other countries at similar levels of
development, Brazil is not ‘underbanked’ in terms of bank branch
presence.
2. The wide regional disparities in bank service provision can be significantly
ascribed to differences in population density and income. Also, disparities in
financial access can be at least as significant between neighborhoods within
a city as between regions of the country. Locational emphasis, which is

based on the importance of providing a basic service outlet in each
municipality, may need to be refocused and supplemented by a
locational policy that looks more at deprived areas, which may well
be identified at a smaller and more disaggregated level than munici-
palities. Moreover, even if properly identified, the provision of
a service outlet in itself is not sufficient to ensure access by lower-
income groups, without more explicit design features to reach the
excluded.
3. Initial measures designed to expand access adopted over the last few years,
especially for the microfinance and cooperative sectors and later for banking
correspondents, have been successful and point toward new modes of access
to financial services. More recently, a number of new initiatives have
been made that have relied more on mandated lending and controlled
interest rates for target groups. The mainstay of policies to expand
access remains traditional, focusing on the allocation of credit, fre-
quently at low interest rates, with considerable reliance on large pub-
lic banks to support this mandate; some recent measures are also in
this tradition.
4. Traditional policies to expand access that emphasize the quantitative
rationing of credit at low interest rates, based on low-cost sources of funding
and administered substantially through Brazil’s public banks, have a high
cost. Conservative estimates suggest that concessions and support
could amount to several billion Reals. The cost of a special program
such as the National Program to Strengthen Family Agriculture
(PRONAF) is estimated at R$1.1 billion. As illustrated by the analysis
of rural finance programs, many such programs fail to reach intended
beneficiaries, and tend to be captured by a small number of the bet-
ter-off, to the detriment of broad-based access. In agriculture, which
XXII
ACCESS TO FINANCIAL SERVICES IN BRAZIL

XXIII
EXECUTIVE SUMMARY
is the beneficiary of many special programs, the largest 2 percent of
borrowers receive 57 percent of loans, whereas the smallest 75 percent
of borrowers receive only 6 percent of credit. Programs that propose
ceilings on lending rates for target sectors or clients are costly, as
measured by the volume of credit provided and by the interest rate
differentials that are eventually borne by society. Additional costs are
the crowding out of intermediation at market rates. It is recom-
mended that such programs, including some recently introduced spe-
cial programs for microcredit, be closely monitored for cost. The
regressive incidence of some directed credit interventions may be
compounded if they are funded through broad-based and popular
programs such as the Worker Assistance Fund (FAT), which imply
lower returns to the workers, who are the intended beneficiaries of
the FAT fund.
5. Alternative measures to the traditional programs could include new instru-
ments that offer possibilities for market-based expansion of services. For
example, in agriculture, new forms of index-based yield insurance, or
loans combined with put options on crop prices, and the combination
of different instruments (for example, credit and insurance) should be
explored. The costs of individual programs, and implied subsidies,
need to be systematically tracked. Also, there is scope for gradually
phasing in reductions in quantitative allocations (such as earmarked
funds for housing and rural lending) and for allowing rates to more
closely reflect market rates. Successful programs for microcredit, such
as the CrediAmigo program, which has achieved outreach to the
poorer segments, demonstrate the possibility of onlending at market
rates. New forms of technology-based microfinance can also be con-
sidered.

6. Measures to expand the role of the banking system as a whole in the area of
access are valuable, but care should be taken that they are established on a
sound footing. Brazil’s banks provide the bulk of the country’s finan-
cial services and remain the mainstay of all intermediation. As the
study shows, Brazil’s private banks are already servicing small clients
and scale of transaction may be less of an issue than costs of basic
services. Surprisingly, private banks dominate the provision of cur-
rent and deposit accounts to small account holders. Survey results
suggest that public banks do not demonstrate a clearly dominant role
in terms of access, except with regard to certain types of services such
as payment services. Recently simplified procedures for opening
accounts affecting low-income clients are welcome, especially simpli-
fications in the proof of identity and income. The possibility of alter-
natives to taxpayer numbers could also be considered. Such measures
could gradually be extended to all bank clients. Many obligatory costs