Corporate Governance and Access to Finance - ESBG

BoxesBox 1. German Sparkassen 27Box 2. Kenya Post Office Savings Bank (KPOSB) 36Box 3. Philippines Postal Savings Bank (PPSB) 53Box 4. Spanish Savings Banks (CECA) 55Box 5. Cajas Municipales de Ahorro y Crédito (CMACs) in Peru 646

FOREWORDI am pleased to present the findings of the “Corporate Governance andAccess to Finance” study, released by the World Savings Banks Institutein collaboration with the consultancy AFI (Analistas FinancierosInternacionales).Can adequate corporate governance increase access to financial services?While the answer is not straightforward, the following study reveals thatcountries with better standards of corporate governance tend to havehigher levels of financial inclusion and deeper banking market penetration.Moreover, corporate governance elements controlled by the institution havefar greater positive influence on financial access efforts than do externalcorporate governance elements, such as national legal frameworks.Interestingly, a clear reference to access to finance in the institution’s missionstatement is one of the internal elements that have the greatest positiveinfluence, as it helps institutions adhere to their inclusive finance policies.In the debate over how to increase financial services access to the maximumnumber of people, corporate governance is much more relevant than,say, the questions of institution ownership. WSBI is encouraged by thesefindings, for who is better positioned than savings banks to put highstandards of corporate governance to work for the benefit of those inneed of financial access?Chris De NooseWSBI-ESBG Managing Director7

EXECUTIVE SUMMARYBackground and objectives of the studynnnAccess to Finance is an important objective for WSBI members, in thecontext of their “double bottom line” banking approach, according towhich they seek (i) to bring a return to the communities where theyoperate, including by offering financial services to underservedsegments of the population and at the same time (ii) to make areasonable profit that ensures the sustainability of the institution.WSBI members foster Access to Finance from a multi-facetedperspective:• in a geographical dimension, by providing financial products tounderserved population in rural and remote areas;• in a product dimension, by offering accessible and affordableservices, adapted to the specific needs of low income population;• and in a time dimension, by maintaining a more permanentrelationship with clients and following more stable policies in thegood and bad times, thus being less pro-cyclical than the averagebanking institution.The first two features contribute to the objective of financial inclusion,and the third one both to financial inclusion and financial stability.At the same time, WSBI members follow Corporate Governancestandards set by international bodies or institutions or by nationalregulators, which is a condition for WSBI membership. According to asurvey developed for this study, 87% of members have an internalCorporate Governance code.9

nnIt seems natural to assume that Corporate Governance practicesof WSBI members are linked to their Access to Finance objective.The interactions between these two aspects, however, have neverbeen explored, despite the fact that the role of WSBI members inAccess to Finance and their compliance with Corporate Governancepractices are well established. This study therefore looks at thepotential impact of the Corporate Governance model of memberbanks on their customer outreach, trying to address questions like thefollowing: To what extent is Access to Finance influenced by CorporateGovernance practices or other factors? Are there specific CorporateGovernance practices supporting the compliance with the Access toFinance mandate? Which Corporate Governance practices contributethe most to financial inclusion (or the fight against financial exclusion)?To address these issues a questionnaire was circulated to WSBI members,and five case studies were analyzed- Sparkassen Finanzgruppe inGermany, Kenya Post Office Savings Bank, FEPCMAC (FederaciónPeruana de Cajas Municipales de Ahorro y Crédito) in Peru, the PostalSavings Bank in the Philippines and the Cajas de Ahorros (savingsbanks) grouped in CECA (Confederación Española de Cajas de Ahorro)in Spain. A review of the literature was also conducted (see Annex 1).The link between Corporate Governance andAccess to FinancenCorporate Governance can be defined in very broad terms as themechanisms connecting (i) the interests of the company’s owners andother stakeholders and (ii) the way its board of directors andmanagement exercise their functions (see OECD, 2004). In the case offinancial institutions, Corporate Governance presents a number ofspecificities as a result of their systemic relevance, their dependence ontrust of the clients and the public at large and the fact that they aresubject to strict regulation to limit risk assumption. All this implies thatthe interests of other stakeholders (different from shareholders), likedepositors, taxpayers and employees, are particularly relevant for financialinstitutions, as illustrated by the global financial crisis. Given theirinstitutional configuration, WSBI members are particularly sensitive toa wider group of stakeholders, compared to commercial banks.10

nnAccess to Finance in enshrined in WSBI members business models andpractices, which is reflected in the provision of accessible financialservices through a large distribution network. The model of proximitybanking, the design of special and innovative products for theunderserved population and the attention to the objective of financialeducation are common traits of member institutions. Measuring Accessto Finance is however challenging, both at the country level and at theinstitution level.WSBI members, despite the diversity in their ownership andinstitutional structure, present a number of common elements in theirCorporate Governance. This is explained by two factors: (i) theircompliance with common international standards, such as those ofthe Basel Committee on Banking Supervision, and (ii) their sharing ofthe Access to Finance objective.Statistical evidencenTo estimate the statistical connection between Corporate Governanceand Access to Finance, two dimensions have been considered forboth variables: the country dimension and the institution dimension.For Corporate Governance, the country dimension has a stronginfluence on the institution dimension. Therefore, an overall CorporateGovernance index was calculated taking into account both the countryCorporate Governance environment and the institution CorporateGovernance framework (this is consistent with the literature,according to which the legal and institutional environment affects theCorporate Governance quality of a given institution). For Access toFinance the three most common indicators were used: averagedeposit, average credit and deposits per 1,000 adults. Regressions forthe Corporate Governance indices (as well as their subcomponents)and the Access to Finance indicators were calculated. The resultssuggest that a link exists between Corporate Governance and Accessto Finance, although their statistical reliability could be improvedthrough a larger number of available observations.11

nnEstablishing a direct and causal relationship between CorporateGovernance and Access to Finance is not straightforward, even though acorrelation between both seems to exist. A number of other factorsexplaining savings banks’ outreach also need to be taken into account.The degree of financial development of the market in which savingsbanks operate, the financial system infrastructure or the macro -economic environment are part of those key elements. Others, such asthe degree of competition in the financial sector, the types ofintermediaries, and the range of products and services they offer(as well as their main features and cost) do also condition the successof savings banks’ Access to Finance efforts.The statistical analysis suggests a positive correlation betweenCorporate Governance and Access to Finance both at the country level(chart A) and at the individual institutions’ level (chart B).• Chart A: combining indicators from previous studies 1 with our owndatabase, Corporate Governance seems to be correlated withAccess to Finance at the country level. Furthermore, when thecountry has a good Corporate Governance framework and WSBImembers have a higher market share in the country (shown by thesize of the dots), financial outreach tends also to be higher.• Chart B: Access to Finance indicators for individual WSBI memberswere also calculated, based on references traditionally used in theliterature: average deposit size, average loan size and deposits per1,000 adults. When comparing these indicators with a CorporateGovernance index defined for the purpose of this study, we foundthat, in the case of developing countries, there is a correlationbetween the quality of Corporate Governance and the three Accessto Finance indicators, stronger and more reliable in the case of theaverage deposit size.1 See section 5 for references.12

Chart A.Corporate Governance, Access to Finance and marketshare of WSBI members (country level)Source: Own elaboration. Afi, Analistas Financieros Internacionales. See Chapter 5 for definitions,data sources and data treatment.The Honohan Index measures the fraction of adult population using formal financial inter -mediaries. It varies between 0 and 1. The Country Corporate Governance level is measuredthrough a combination of indicators including the strength of legal rights, the depth of creditinformation and the level of financial development. The size of the dots reflects the marketshare of WSBI members in their respective banking system. The tendency line helps to visualisethe correlation between both variables.This chart suggests that in countries with a better CorporateGovernance environment and a relatively higher presence ofinstitutions with an Access to Finance mission (like WSBI members)financial outreach tends to be higher.13

Chart B.Corporate Governance and Access to Finance measuredas average deposit size (individual institutions level)Source: Own elaboration. Afi, Analistas Financieros Internacionales.The average deposit is divided by GDP per capita (the lower this indicator the higher Access toFinance). The Overall Corporate Governance index combines the country index and aninstitution specific component, which takes account of the Board composition, includinggender equality, the existence of an external audit, rating from an agency of internal CorporateGovernance code and the clarity of the mission inter alia. See section 5 for the precise definition.The tendency line helps to visualise the correlation between the Overall Corporate Governanceindex and Access to Finance measured as the size of the average deposit.This chart evidences that in the case of developing countries, as thequality of Corporate Governance improves, financial outreach alsoimproves: the average deposit decreases, which indicates a deeperbanking market penetration.14

nThe study also shows that Corporate Governance components whichare under the control of the institutions have more influence onpromoting better accessibility to financial services than the countrycomponents, connected to the national legal framework or thebusiness environment. In this respect, the “internal” elements ofCorporate Governance that contribute most to a higher Access toFinance are (i) the inclusion of a clear reference to Access to Financein the mission statement of the institution; (ii) the separation betweenCEO and Chairperson; (iii) the existence of an external audit, aninternal Corporate Governance Code and/or a rating from an externalagency, and (iv) the proportion of women in the Board.Corporate Governance practices to improve Access to FinancennnThe members of the WSBI are diverse, including public banks,cooperatives, mutuals, postal savings institutions, private institutionsetc. Each of these types of institutions has certain specificities fromthe point of view of Corporate Governance, given their specificorganizational and ownership structure (see section 3). Despite thesedifferences, they share a number of common Corporate Governancecharacteristics.This similarity is partly the result of the fact that most WSBI memberscomply with standard Codes of Corporate Governance, although thelatter are in general designed for shareholder-driven institutions.Overall compliance with such codes and standards, in accordance withBasel Committee recommendations, is beneficial for any financialinstitution. It is however advisable to tailor these codes to the specificcharacteristics and mission of WSBI members, which share a “doublebottom line” objective. It is desirable that Corporate Governancemechanisms in these institutions reflect a balance between the twoobjectives of Access to Finance and sustainability.For institutions having a strong financial inclusion aim, it is importantto include an explicit reference to this objective in the mechanismsthat ensure accountability of the governing bodies. Clarity of theAccess to Finance mission is indeed essential to ensure that businessstrategic policies and operations are directed towards this goal.15

nnMechanisms to ensure management accountability vis-à-vis theseobjectives, especially in the case of public banks, are also needed.• The definition of the mission of CMAC Arequipa in Peru is a goodexample of clarity: “to benefit segments of the population lackingfinancial support of traditional banking”.• Postbank of Kenya provides another good example of soundaccountability practices, through a performance contract that setsquantitative and precise objectives of Access to Finance (like acertain increase in the deposit base, in the number of customers’accounts or in the establishment of point of sales). Managementperformance is evaluated against these objectives.Financial regulation and supervision tend in general to favor CorporateGovernance practices that consider the interest of all stakeholders(in particular depositors), beyond the narrow interest in maximizingshort-term shareholders’ value. This need to take into account theinterest of a broad group of stakeholders in the management ofbanking institutions has been enhanced by the global financial crisis.One of the distinguishing features of WSBI members is precisely thatthey are oriented towards the interest of a wider group of stakeholders.Representation of these stakeholders in the governing bodies of theinstitution should reflect this reality through an appropriate balance.The recent global financial crisis has highlighted also the damagingimpact of the pro-cyclical behaviour of certain segments of thefinancial system, which exacerbates real economy fluctuations.The long term orientation of their business strategies implies thatWSBI members tend to establish a more permanent relationship withtheir clients, lending more in relative terms in the bad times, makingtherefore a significant contribution to the stability of the financialsystem, and at the same time supporting the efforts towards greaterAccess to Finance.16

1. INTRODUCTION1.1. Focus and objectives of the studyThe World Savings Banks Institute (WSBI) members reiterated at their22nd World Congress in May 2009 their firm determination to “maintaintheir commitment in favour of the promotion of financial inclusion”(Santiago Declaration) 2 . At the same time, they “renew[ed] their call forthe opportunity to review the Corporate Governance frameworkapplicable to banking institutions”, a need that has become pressing inthe context of the current global financial crisis, which has highlighted“the strengths of the WSBI members business model”.The link between a good Corporate Governance and appropriate Accessto Finance has always been implicit in WSBI members mandate andmission, but the recent focus on banking sector governance practices(and the debate on possible reforms in the aftermath of the crisis) hasheightened the relevance of this connection. To the extent that financialinclusion is one of the key objectives of WSBI members, their CorporateGovernance practices should be designed in a way conducive to achievingthis objective, inter alia.The present study aims at investigating the connection betweenCorporate Governance and Access to Finance in WSBI members from aneminently practical point of view, trying to address questions like thefollowing: to what extent are WSBI members Corporate Governancepractices suitable to foster Access to Finance in their country or region?Which Corporate Governance practices can be identified as particularlyuseful to deepen financial inclusion (in emerging and developingcountries) or fighting financial exclusion (in industrial countries)?2 http://www.wsbi.org/template/event.aspx?id=2722&section=Santiago%20Declaration.17

Are there some general “good practices” in Corporate Governance thatcan be identified as facilitating Access to Finance? To what extent arethere differences among the diverse types of WBSI members worthmentioning in this regard?The public (households, small enterprises) need financial services both asvehicles of savings and credit. Financial inclusion concerns therefore bothsides of the banking sector balance sheet. WSBI members’ diversityimplies that while all institutions offer savings products, only 76 percentof them offer credit products, generally those that are not postal banks.The Corporate Governance requirements of these deposit-taking onlyinstitutions could be different. For example, regulation, supervision and riskcontrols are essential components of Corporate Governance in the caseof institutions that transform saving into credit, but less so in the case ofnon-lending institutions.WSBI members are, indeed, diverse: they include only-saving and savingand lending institutions; public and private institutions, mutuals andfoundations etc. All these distinctions may entail certain specificities fromthe Corporate Governance viewpoint. But common elements can also beidentified that lead all these institutions to organise themselves alongcertain principles that ensure that they fulfil their common mission offacilitating Access to Finance.1.2. Corporate Governance and WSBI member banksThe debate on Corporate Governance received increasing interest overrecent years. It focused initially on non-financial, shareholder companies,but expanded rapidly to the financial industry and to other types ofownership structures. A number of specificities of financial institutionsneed to be taken into account when dealing with Corporate Governance,as has been made clear by the global financial crisis: their systemic nature,their vulnerability to sudden losses of confidence, their ultimate dependencyon public funds (taxpayer money) in a crisis situation and, partly as aresult of all the above, the need for a strict regulation and risk controlpolicies. All this calls for a specific regulation of Corporate Governance inthe case of banking institutions, which requires accountability to a widerarray of stakeholders than the typical, non-financial firm.18

WSBI members are by definition accountable to more stakeholders thanthe average financial institution. In the case of savings banks, theinterests of depositors, employees and the local or regional communitiesare typically taken into account. Representatives of all these groups are inmany cases included in the governing bodies of these institutions,through Corporate Governance practices that are particularly suitable forfinancial inclusion. Public institutions like postal banks for example, areestablished to provide financial services to the community at large andare therefore accountable to the authorities and ultimately to taxpayers.All in all WSBI members, despite their diversity, fit particularly well in amodel of banking connected to multiple stakeholders.Through their WSBI membership, and as part of the membership criteria,savings banks are invited to comply with sound and transparent CorporateGovernance practices, in line with the generally agreed principles of goodCorporate Governance such as the 2004 OECD Principles of CorporateGovernance and the 2006 Basel Committee Guidance on CorporateGovernance for Banking Institutions revised in October 2010 in thedocument Principles for enhancing corporate governance.In 2007, WSBI amended its statutory provisions to strengthen theCorporate Governance commitment of its members 3 . These adjustmentswere introduced with a view to support the consensus which recognisesthat one of the most important criteria to assess the strength of aninstitution is not its business model nor its ownership structure, but itscommitment to good governance practices (e.g. solid control environment,high levels of transparency and disclosure, an empowered board ofdirectors etc).1.3. Access to Finance and WSBI member banksAccess to Finance has traditionally been a key objective of WSBI members.This objective is particularly important in a crisis context. When credit shrinks,financial institutions strategies become especially prudent and there is arisk of financial institutions limiting access to clients in the less profitableregions or communities, closing branches whose short-term profitabilityis below average or limiting credit to SMEs. This is particularly damagingin the case of emerging and developing countries that are in the middle ofa process of financial deepening crucial to their development strategies.3 www.wsbi.org/uploadedFiles/WSBI/Members/Member_benefits/020%20WSBIstatutes.pdf.19

The definition of Access to Finance presents certain differences in WBSImembers depending on the level of development of their countries.In emerging and developing countries, Access to Finance is closelyconnected to the notion of financial inclusion: the provision of access toappropriate, convenient, usable, valuable and affordable financialservices and products to the widest part of the population, especiallythrough the delivery of basic banking services to the low income peopleand the still unbanked, as a way out of poverty (WSBI SantiagoDeclaration). In industrial countries, where the majority of the populationhas access to financial services, the objective is to prevent and avoidfinancial exclusion, in particular in the case of the most vulnerable partsof the population (eg. unemployed, population in rural or remote areas,migrants, single parent households).While in the first case public policies should seek facilitating access to themiddle and low levels of the pyramid, in the second case they are typicallyaddressed at fighting segregation or discrimination against certainsegments of the society that, for different reasons, face difficulties inhaving access to formal financial services.The objective of Access to Finance needs to be balanced with the needto ensure the long term sustainability of the institution, in what the WSBIdefines as the “double bottom line” banking model, according to whichsavings banks have a clear dual mandate to (a) bring a return to thecommunities in which they operate, including to reach the unserved andunderserved groups and (b) try and make a reasonable profit so that theoutreach achieved can be self-sustainable. There is no trade-off betweenfinancial inclusion and profitability and the two objectives pursued byWSBI members are mutually supportive.WSBI members have traditionally worked towards fostering financialaccess as one of their main objectives. Consistent with this view, financialaccess occupies a prominent role in their mission statements and/or visiondesigns. Most of them have also adopted specific tools to achieve thesetargets and set performance indicators that measure their results in termsof Access to Finance. WSBI members globally make a substantialcontribution in deepening financial inclusion (or combating financialexclusion) in their respective regions or countries.20

For the particular case of developing and emerging economies, WSBImembers have consistently made efforts in this sense, as shown by thefact that of the estimated 1.4 billion accessible accounts existing atinstitutions across developing economies with an explicit mission to fosteraccess, some 1.1 billion are provided by savings banks 4 .1.4. Presentation of the studyThis study will address the link between Corporate Governance andAccess to Finance in WSBI members by means of (i) statistical evidencefrom previous studies, (ii) specific statistical data collected from WSBImembers through an ad-hoc questionnaire and (iii) five case studies, theselection of which was based on a sample to cover the diversity of WSBImembers, in terms of types of institutions, regional representation andnational income level.These five cases are Sparkassen Finanzgruppe in Germany, Kenya PostOffice Savings Bank/Postbank in Kenya, FEPCMAC (Federación Peruanade Cajas Municipales de Ahorro y Crédito) in Peru, the Postal SavingsBank in the Philippines and the Cajas de Ahorros (savings banks) groupedin CECA (Confederación Española de Cajas de Ahorros) in Spain. Afi visitedall these members during the research period, including visits to individualsavings banks when the member is an association (Germany, Spain andPeru). The case studies will be used along the text to illustrate some ofthe main ideas, practices and results. Table 1 highlights some of the keyfeatures of the selected institutions.This paper is distributed in six sections. The second section motivates thereport and explains the relationship between Corporate Governance andAccess to Finance, using some examples from the case studies to illustratethis link. The third section analyses the conceptual framework ofCorporate Governance, its definition, features and implementation indifferent organizational forms. The fourth section discusses Access toFinance issues, emphasizing its different dimensions and the difficultiesfor its measurement. The fifth section analyses the data collected andprovides some empirical evidence based on descriptive statistics for therelationship between Corporate Governance and Access to Finance.4 See Perspectives 52, September 2006 Savings banks and the double bottom line – A profitableand accessible model of finance, www.wsbi.org/uploadedFiles/Publications_and_Research_(ESBG_only)/Perspectives%2052.pdf.21

Table 1. General characteristics of the five selected Case StudiesGermany Kenya Peru Philippines SpainType of Institutions Saving Banks Postal Bank Saving Banks Postal Bank Saving BanksOwner Municipalities Government Municipality Post Corporation Created byare the “Traeger” of Kenya a private foundation(responsible (no owner)institution)(except 6)Supervision by Yes No, Ministry Yes Yes YesCentral Bank of FinanceNumber of institutions 430 1 12 1 46Market share 31,6 %** 3% 4% 0.1% 50%(% total deposits)*Provision of Credit Yes No Yes Yes YesWorld Bank country OECD Low income Upper middle Low upper middle OECDclassification (income) country (LIC) income country income country(MIC) (LUC)* Source: based on Access to Finance questionnaire distributed by WSBI to all members. For the Philippines’ case, market share is measured as percentage oftotal assets.** Savings banks only; the figure is 41.1% if other members of the network are included.22

2. THE LINK BETWEENCORPORATE GOVERNANCEAND ACCESS TO FINANCEThe initial objective of Corporate Governance principles is to align theincentives of managers and shareholders in order to overcome the principal– agent problem. This approach, however, assumes that shareholders’interest is to maximize profits. In the case of financial institutions,“Corporate Governance should take account of the interest of otherstakeholders (depositors, savers, life insurance policy holders, etc)” 5 , andthe objectives of the institution need to be defined more precisely, giventhe broader impact of its activities on economic development, financialstability and social cohesion. This is particularly relevant for institutionshaving a financial inclusion objective, like WSBI member banks.This section provides an overview of the main potential interactions andmutual influences between Access to Finance and Corporate Governance,as applied in financial institutions such as savings banks. A series ofpossible links are examined and good practices are identified, withparticular regard to:(i) the importance of the mission of the institution, and the impact onits proximity banking vocation as well as its translation into productsdesigned to foster financial outreach;(ii) the anticyclical behaviour of proximity banking through the longterm commitment with its clients;(iii) the broader contribution to the welfare of the community throughthe use of profits for community projects;(iv) the mechanisms to ensure accountability to stakeholders; and(v) the role of financial regulation and supervision.5 See EU Commission (2010).23

This list of topics is intended to provide a general view of the mainmechanisms that connect Corporate Governance and Access to Finance.In doing so, the experience of the five case studies – and also other WSBImembers – is used as an example when relevant.2.1. Access to Finance missionFor most WSBI members, their objectives are well summarized in the“double bottom line”: playing a role in the social and economicdevelopment of the local community, including through the provision ofAccess to Finance to unbanked/vulnerable segments of the population,and ensuring the long term sustainability of the institution through anadequate profitability. The link between Corporate Governance andAccess to Finance should seek ensuring management accountability asregards the financial inclusion objective. A pre-requisite is the clarity inthe definition of the mission of the institution.A necessary element of any strong institution that promotes Access toFinance is a clear and sustainable mandate, which should be revisedperiodically to ensure that the institution remains relevant and adaptsto the changing market circumstances. Table 2 examines the missionstatements of the five WSBI members under study.Some examples of this clarity in the mandate can be found in the PeruvianCMACs mission statement: “to benefit segments of the populationlacking financial support of traditional banking” (CMAC Arequipa) or “toprovide financial services with efficiency, timeliness and competitiveness,both to small and micro enterprises (SMEs) and to families who normally donot have access to the banking system” (CMAC Piura). Another exampleis the Postal Bank of Kenya, whose mission includes “to provide accessibleand sustainable banking and other related financial services”.The explicit reference to Access to Finance in the mission statement willserve as a basis to support financial inclusion efforts of the savings banks,mainly through the development of proximity banking activities thanks toan extended distribution network, and the offer of financial services andproducts tailored to the specific needs of underserved or unbanked people.24

Table 2. Main features of the Mission in the five selected Case StudiesStatementAccess to FinanceSustainabilityGermanyKenyaPeruPhilippinesSpainPublic mission: assuring toprovide in their respectiveregion financial servicestailored to the needs of thepopulation, the small andmedium sized companiesand the public sector withoutdiscriminating against anycustomer group and thus topromote the developmentof their respective regions.Provide accessible andsustainable banking andother related financialservices, through innovativedelivery systems for wealthcreation to the benefit ofcustomers and other stake -holders and by encouragingthrift through mobilization.Each CMAC has articulatedits own mission statement,all of them clearly related tofostering financial inclusion.Provide the Filipino peoplewith a full range ofprofessional banking andfinancial services accessiblein all areas of the countryand promote the values ofthrift, industry and prudenceespecially in the youth.(i) The creation for socialand economic wealth,(ii) The fight against socialand economic exclusionand (iii) The generation ofeconomic activity by returningearned profits to society.Defined in general termsDefined in general termsIn general, explicit referenceDefined in general termsIn general, explicit referenceDouble objective:accessibility andprofitability.Yes. In addition,Performance Contract ofBoard and Managementincludes financial indicatorsYes: i.e. CMAC Sullana("Profitable Microfinanceinstitution”).-Clearer objectiveson profitability thanon Access to Finance.Source: Own elaboration. Afi, Analistas Financieros Internacionales.25

Figure 1. Germany: population per branch in rural districts andtowns not belonging to the rural district.Source: German Central Bank and DSGVBOX 1. GERMAN SPARKASSENCorporate GovernanceSparkassen are governed by the Savings Banks Laws of the respectiveLänder. Despite differences in some detail of legal definitions,Sparkassen have a very clear mandate: to supply financial servicesto the population and to promote the development of theirrespective regions, by granting loans to SMEs, while preservingtheir long term viability. Though each Sparkasse is an independentinstitution, they form part of a network system (Verbund) wherethey share certain functions and services. It is this network systemthat is an essential basis for keeping independence and decisionmakingpower on the local/regional level and thus as close toprivate customers and SMEs as possible. An important feature ofthe network system is the support of one another by means of theJoint Liability Scheme. German savings banks are (with a fewexceptions) public-law institutions that can only be set up by localauthorities (kommunale Körperschaften), like municipalities anddistricts, who act as the “Träger” (or responsible body) for thesavings bank. As a natural consequence the major focus of thebusiness activities of the Sparkasse has to lie in the geographic areaof their “Träger”, what is called the regional principle.27

Access to financeSparkassen promote access to finance from both a regional and atemporal dimension. The German Savings Banks provide financialservices to clients in all parts of the country, in dynamic centres aswell as in the less developed regions. In most rural areas Sparkassenand cooperative banks are the only relevant financial institutions.From a temporal perspective, Sparkassen due to their very broadand diversified customer base and their strong roots in a specificregion tend to function to a certain extent in an anti-cyclicalmanner: they are less prone to overheated credit expansion in thegood times and to credit crunches in the bad times, thuscontributing to financial stability.In addition, Sparkassen play a complementary role with respect toprivately owned commercial banks, servicing underserved clients.The German Savings Banks have a customer advocacy proposition,which implies that they are obliged to open an account to anycitizen or company fulfilling certain criteria. Sparkassen very oftenare the only option to access basic financial services for clientswhose profitability is below a certain threshold. There are manyspecific examples of this complementary role of Sparkassen, e.g.the establishment of specific branches for young people, thedevelopment of special financial products for the aged, and theprovision of microcredits that benefit mostly long-term unemployedpeople and are accompanied by a financial education program,making it a critical instrument in combating financial exclusion.The link between Corporate Governance and Access to FinanceBecause their clear double mandate forces them (i) to be financiallyviable (but does not require a short-term profit similar to mainlyshareholder-value driven financial institutions) and (ii) serve a publicaim, Sparkassen keep branches, ATMs and accounts that wouldotherwise be closed if only short-term profit maximisation objectiveswere considered. A strong orientation on long-term profitabilityallows sustainable banking even in problematic geographic areas.28

A recent WSBI publication 7 , shows that geographic proximity playsa crucial role in lending to SMEs in Germany and is particularlyrelevant for companies that are facing cash flow problems.The regional principle also reinforces the fight against financialexclusion. Sparkassen’s business activities are concentrated on theirregions, which prevents them from abandoning regions that maynot be as profitable and expand into growth regions.2.1.2. The offer of tailored financial services and productsto suit the needs of unserved and underserved categoriesof clientsA particularly clear reflection of the role of WSBI members in financialaccess policies is the provision of products especially designed to suit thespecific needs of unbanked or underbanked parts of the population.Most members of WSBI offer such products, adapted to the requirementsof their environment. In Peru CMACs are concentrated in the micro -finance sector, providing 29 percent of the total volume of the microcreditsin the country. In Spain, Caixanova has designed a new microcreditproduct where the residual credit risk is supported by the Obra Social (thededicated Fund for community-oriented projects), and la Caixa has aspecial product that allows migrants who open a savings account to sendremittances at no cost. In Germany, many savings banks especially invulnerable regions provide micro-loans (below 20.000 €) whoserecipients are mostly long-term unemployed, who receive also financialeducation in the context of the program.A frequent approach is to concentrate on certain segments that are notserved by the regular financial system and where the institution hasa comparative advantage or a special vocation. For example, in thePhilippines, PPSB provides special lines of credit for the transport sector,in particular for the purchase of Jeepneys, a very popular vehicle forpublic transportation in Philippine cities, using a special government fundof 0.5 billion pesos (11 million USD) earmarked for the transport sector.7 Balance Structural Policy: German Savings Banks from a Regional Economic Perspective,Perspectives 58, June 2009.29

All these examples illustrate how proximity banking enhances financialinclusion through the offering of products tailored to the needs of clientsthat are not covered by conventional banking products. To a great extentthis is possible because of the permanent contact with these clients andthe constant identification of their wishes and aspirations.2.2. Permanent commitment to the client: an anticyclicalbehaviourInstitutions with a financial access mission and a vocation to serve thelocal community are more stable in their commercial practices (in particularlending) not only in a space dimension (facilitating credit in particular torural areas) but also in a time dimension. This implies that, while commercialbanks are more aggressive in the reaction to the perception of risk(increasing their propensity to lend in the good times and contractingsharply in the bad times), WSBI members are more stable and tend tosmooth this pro-cyclicality inherent to the financial sector. Indeed, theseinstitutions’ lending policies are oriented to servicing the client with along term considerations rather than focusing on very short term profits.The recent global financial crisis has highlighted the damaging impactof the pro-cyclical behaviour of certain segments of the financialsystem, which exacerbates cyclical fluctuations of the real economy.The international community is discussing a profound reform ofinternational financial regulation to reduce this source of instability,through mechanisms like dynamic provisions or anti-cyclical capitalrequirements. Through their longer term strategy and their commitmentto foster financial access regardless of cyclical moods, savings banks andproximity banks make a significant contribution to financial stability.As can be seen in Chart 1, in 2008 and 2009 credit growth in a sampleof WSBI members, representing 77% of the total WSBI network’s assets,exceeded by 4 points the average of their respective countries. The rateof credit growth of each of the WSBI members exceeded the bankingsystem average in two thirds of the countries included in the sample.30

Chart 1.Credit growth: average for WSBI members vs. countryaverage in 2008 and 200920Issues of Sukuk (in $ billion)151050WSBITOTALSource: WSBI and own estimates based on data from national central banks.Simple average of 15 countries, representing 77% of WSBI members' assets.The long term orientation of their business strategies implies that WSBImembers make a significant contribution to the stability of the financialsystem, lending more in relative terms in the bad times. In view of thehuge costs for the taxpayers which result from the pro-cyclicality of somefinancial institutions, this contribution should be placed prominently amongthe benefits of the proximity banking model. This is the result of WSBImembers’ compliance with their mission and institutional objectives, whichare fundamental elements of their Corporate Governance mechanisms.2.3. Profits used for welfare-improving projectsMost WSBI members devote considerable resources to communityinvestment projects and activities. In 2009, Sparkassen allocated morethan half a billion euro to finance projects in the areas of culture, socialactivities, sports, science, education, environment protection and othercommunity services. Spanish savings banks’ after tax profits, and aftercovering recapitalisation needs, are dedicated to the Obra Social, whichfinances projects for the social and cultural development of thecommunity: sports centres, libraries, schools and infrastructure projectsare a few examples. 28 percent of the overall profits of cajas have beendevoted to these projects in 2008.31

In the case of Peru, the profits that are distributed to the municipalitiesshould be spent on infrastructure projects, although there are in generalno specific mechanisms to ensure the enforcement of this rule.The use of the profits of savings banks in projects improving the welfareof the community is a means of reinforcing the roots of the institutionand enhancing the visibility of its social function. After ensuring the longtermsustainability of the institution, it is natural that these profits (that are aresult of the use of the community’s resources) revert to the community.After this crisis, the perception of an excessive reliance of financial institutionson taxpayer’s support strengthens the case for a social use of banks’ profits.Chart 2. Virtuous circle between Access to Finance and socio -economic development: the double-sided contributionof WSBI membersSource: Own elaboration. Afi, Analistas Financieros Internacionales.Furthermore, contributing to the development of the community isanother way to fuel the virtuous cycle between financial inclusion andfinancial development. On top of their contribution to financial inclusion,through their day-to-day business, WSBI members promote directlyeconomic development, which in turn stimulates financial inclusion,thus accelerating the mutual feedback between both objectives.32

2.4. Accountability to stakeholdersA challenge of Corporate Governance of financial institutions, as mentionedabove, is to make them accountable not only to shareholders, but also todepositors, taxpayers, supervisors and other stakeholders. WSBI members,having their roots firmly based in their community, are in generalaccountable to different stakeholders. This is reflected in the diversity oftheir governing bodies, which contributes to ensure a balance betweenthe different interests of their stakeholders and between the different goalsof the institution. The Peruvian CMACs provide a very interesting examplein this regard: despite having only one shareholder (the municipality),the seven members of the Board are appointed by six differentconstituencies: (i) the majority and (ii) the minority representatives in themunicipality, (iii) the chamber of commerce, (iv) the association of smallbusinesses, (v) COFIDE, a public bank and (vi) the catholic church.This composition is, furthermore, protected by law. In the case of SpanishCajas, the general assembly composition varies depending on theirstatutes, but it typically includes appointees by depositors, municipalities,regional government, employees and the founding entity. In the case ofGerman Sparkassen, the composition of the Board of administrationdepends very much on the savings banks Law of the respective Land, butit is quite common that the board includes representatives appointed bythe major democratic body of the municipality or district (2/3) and thesaving bank’s staff (1/3).The proportion of women in the Board is often used as an indicator ofdiversity. In a sample of 23 WSBI members, the average of womenrepresentation in the Board is 24 percent, as compared to, for example,7 percent in EU25 commercial banks, according to Mateos de Cabo,Gimeno, and Nieto (2009). This shows not only that the Board of savingsbanks is more diverse, but also that the interests of minorities are betterrepresented in its composition and that the Board is closer to certaintypes of clients, according to the literature on microfinance institutions(see Annex 1), thus contributing to foster Access to Finance.Internal and external controls are essential ingredients of CorporateGovernance. Most WSBI members comply with standard good CorporateGovernance practices for financial institutions, as defined for instance bythe Basel Committee 8 .8 See BCBS (2010b) and Table 6.33

Among the WSBI institutions that replied the questionnaire on CorporateGovernance sent by the research team, all but one had been audited(either internal or external audit) in the last year and 87 percent have aninternal Corporate Governance code, but only 38 percent are subject to anexternal credit rating (which is related to the small size of a significantnumbers of member institutions, that do not have access to capital markets).Table 3. Corporate Governance in the five selected Case Studies: Quality ofmanagement, Control mechanisms and Corporate Governance CodeEnsuring QualifiedManagementSpecific knowledgeand qualifications.Training provided bythe academies of thenational and regionalassociations if required.Members of the ExecutiveBoard have to fulfil thecriteria defined by KWG(German banking act).Competence, agendaissues and gender.Checks and balancesmechanismsTrustee committee looksat good governance andat management.Audited by the regionalassociation and a RiskMonitoring System.CorporateGovernance CodeYesGermanyKenyaPerformance Contracts.Target accomplishment(among them, Access toFinance) is evaluated byGovernment every quarter.If targets are not metand clarifications arenot satisfactory the boardis dismissed.Senior managementevaluated with Scorecard.Risk of political interferencefrom the only shareholderis mitigated by the diversityof the Board members andregulation and supervision bythe banking supervisor (SBS).Yes and specific trainingprogram for first timeappointed directors.PeruMeet moral and technicalrequirements.No34

Ensuring QualifiedManagementMeet minimumqualifications.Corporate GovernanceCommittee reviewsthe qualifications.Mandatory DirectorEducation Program.Checks and balancesmechanismsBoard performs annualself assessment.Corporate GovernanceCommittee ensuresBoard’s effectiveness andcompliance with CorporateGovernance principlesand evaluates director’sperformance.Board’s ControlCommission, reportingdirectly to the GeneralAssembly. Two additionalCommissions at the Board:investment andremunerations.CorporateGovernance CodeYes, established bythe SEC and Central Bankof Philippines.PhilippinesSpainAge (

BOX 2. KENYA POST OFFICE SAVINGS BANK (KPOSB)Corporate GovernanceThe Government of Kenya has adopted as a policy, the applicationof Performance Contracts in the management and monitoring ofthe public service. In the case of KPOSB, the government and theBoard signed a mutually agreed document that lists the key resultsareas, the levels expected towards the achievement of agreed targets,and how the performance will be measured. Board membersand first and second level managers are evaluated according to thissystem. Other staff have been put on performance contract as well.This improves service delivery to the public by ensuring that seniormanagers are accountable for specific results. This monitoring isparticularly important given that all board members are nominatedby the government, which in the absence of a clear objective couldlead to political interference, a major threat for a successfullyfunctioning government-owned financial institution.Access to FinanceKPOSB’s mandate is to “provide accessible and sustainable banking”.Recent developments in the Kenyan financial sector have negativelyaffected KPOSB, which has lost market share. The three events thathave severely impacted the Postbank are (i) the deterioration in thesavings capacity of the low-middle income segment (KPOSB’s targetgroup) due to the post-election events in 2008 and the globalfinancial crisis; (ii) the success of the Mobile banking operatorM-PESA, a company which has provided Kenyans a cheaper andsafer method to transfer money through cell phones; and (iii) theenactment of the Deposit taking Microfinance Act that allows MFIsnot only to give credit but to collect deposits as well To keepproviding accessible banking services, KPSOB has modernized itself,moving from savings book to cards. It has reached an agreementwith M-PESA to become one of its banking agents andimplemented a new business model to improve efficiency andcustomer service. In the new business model customers can use adebit card to transact at the Point of Sale Terminals. To supplementits network it has also reached agreements with Kenswitch andPesaPoint to add more than 650 ATMs to the network. KPOSB hasinstalled 26 ATMs of their own.36

KPOSB is also part of the Bill & Melinda Gates Foundation initiativeto double the number of savings accounts among the poor.The KPOSB project’s objective is to add 1.5 million customers(of which 1 million can be classified as poor) to the customer baseby expanding a small existing pilot network of non-postal agentsinto a major new service channel in underserved rural areas.Corporate Governance and Access to FinanceKPOSB’s performance contract provides an excellent example oftools that promote sound Corporate Governance linked to financialinclusion. KPOSB’s long term goals are included in a 3-year strategicplan and the short-term goals are specified in the annual ActionPlan. The Performance Contract imposes quantitative and qualitativetargets that emphasize the development impact of the bank policyon Access to Finance (for example, in 2009, these objectives includea 30 percent increase in the deposit base, a 19 percent increase inthe number of deposit accounts, the introduction of two newmarket driven products and the expansion of the KPOSB network).This is complemented by targets in terms of bank’s sustainability(like return on investment and debt-to-equity ratio). These specifictargets are the basis for evaluating the Bank’s compliance with theAction Plan on an annual basis. Progress reports are prepared on aquarterly and annual basis. Thus, performance contracts align thebusiness strategy with the mandate of the company and makeboard directors and senior management accountable for fulfillingthis mandate. When targets are not met, clarifications andcorrective actions/measures are provided. If they are notsatisfactory, the Managing Director’s would be sanctioned includingtermination of contract. The Performance Contract system alsooffers bonus incentives for excellent performance.2.5. The role of supervision and regulationBanking institutions depend on trust, and trust (as severely revealed in therecent crisis) depends on risk control and ultimately on the support by thegovernment (the taxpayer). Mechanisms of public support like depositinsurance or the lender of last resort facilities require an adequate controlof risks by financial institutions, hence the need for a detailed regulation,and the related banking supervision structure.37

The fact that the banking system is a heavily regulated industry hasimportant implications for Corporate Governance. Adequate control ofrisks is a necessity from both the regulatory and the CorporateGovernance point of view. In many countries, banking regulatorshave encouraged the adoption of codes of Corporate Governanceencompassing prudent risk management practices. And in manyemerging and developing countries, the authorities (central banks,banking supervisors), aware of the essential contribution of financialdeepening to the development of the country, have also stimulatedpolicies to foster financial deepening.WSBI members are active part of both strategies: the tendency towardsbetter Corporate Governance practices, through the adoption ofinternational and domestic standards, and – especially in emerging anddeveloping countries – the progress towards financial inclusion.Regulation is a driver of both policies. Although the link betweenCorporate Governance and financial inclusion (from the point of view ofthe regulator) could be weak in some countries, WSBI members, ascatalysers of both lines of action, ensure their connection. All in all,financial regulation – and more broadly public sector policies – couldestablish an additional link between Corporate Governance and Accessto Finance for WSBI members.An interesting example of this connection is the role played by COFIDE inthe recapitalisation of Peruvian CMACs. As they rely only on retainedprofits for their re-capitalisation, CMACs face a challenge – common tomany other savings banks – of insufficient instruments for a pro-activerecapitalisation policy in case of need. COFIDE provides subordinateddebt to CMACs on the condition that they retain as reserves a share oftheir profits above the legal minimum (at least 75 percent instead ofthe 50 percent legal minimum), thus providing a double mechanism tostrengthen the capital base. This recapitalisation allows the PeruvianCajas to pursue their financial inclusion policies that otherwise would becurtailed by insufficient resources.38

Table 4. The link between Corporate Governance and Access to FinanceReference to Accessto Finance in MissionStatementCompliance mechanismsCapitalisation processesGermanyYesMembers of the Boardand the regional principleensure that proximitybanking is taken intoaccount along withprofitability objectives.Only retaining reserves.If no capitalisation isneeded, profits can beallocated to socialactivities in the region.KenyaYesSpecific targets inManagement performancecontracts ensure fulfilmentof the mandate.Reserves retentionand capital injectionsfrom Government.PeruYesThe presence ofrepresentatives of thelocal social, economicand political interestsguarantees that CMACactivities benefitthe local economy.Only retaining reserves.As joint stock corporationsCMACs could in theoryattract capital fromexternal sources.PhilippinesYesNoPost office has onlysubscribed 50% of capital.Capitalisation via retainedearnings insufficient.SpainYesAccess to Financeobjectives not quantitativelystated. None of theCommissions explicitlyevaluates theiraccomplishment.Only retaining reserves.Since 2007 issuance ofcuotas participativas(non-voting shares)possible, but only usedby one Caja so far 9 .Source: Own elaboration. Afi, Analistas Financieros Internacionales.9 The new law approved by the Spanish government in July 2010, when this report was inan advanced stage of finalisation, would facilitate the use of this instrument to recapitalisethe cajas.39

3. CORPORATE GOVERNANCE –CONCEPTUAL FRAMEWORKSound governance is critical to guarantee the long-term sustainability ofany institution. Corporate Governance practices can take different formsand are affected by the political and social system in which they operate,the ownership structure of the institution and the process along whichthey are designed. Good governance of a company generally tries toconnect (i) the way its board of directors and management exercise theirfunctions and (ii) the interests of the company owners and otherstakeholders (see OECD, 2004).Although this approach to Corporate Governance applies in principle toany kind of company, its scope focused initially on companies listed on astock market. Thus, most existing codes of good governance addresslisted companies. This is a reflection of the growing separation betweenthe company’s management and its shareholders as a result of thedevelopment of modern securities markets.This notion of Corporate Governance also applies to financial institutions,but in their case the emphasis shifts towards the role played by theseentities in the economy as a whole, in particular in i) deposit taking,ii) lending and iii) the functioning of the payments system. The systemicrelevance of these functions implies that the Corporate Governance offinancial institutions has a greater social dimension than in the case ofthe average non-financial company, a fact that has been dramaticallyhighlighted by the international financial crisis. In this sense, the relevance offinancial institutions’ good governance stems not so much from whetherthey are traded companies, but from the broader impact they have.41

Indeed, deposit taking ultimately depends on the trust of savers in thefinancial institutions. This trust concerns not only the reward that thosesavers will receive for their deposits, but also (and more importantly) thepossibility of withdrawing these deposits on the agreed terms. On theother side of the balance sheet, credit demand also depends on theconfidence in obtaining reasonable terms of amount, cost, time andopportunity for the loans granted, in a transparent way.In both cases, we should bear in mind that savers and borrowers arenumerous and diverse, and have in general a distant relationship withfinancial institutions. Thus, from the point of view of safeguarding theirinterests, their relationship with the management is even more remotethan that of owners.As regards the payment system, its operation and efficiency also dependscrucially on the trust by all participants: payment recipients, paymentsenders, as well as the entities operating the system.It follows from the above that sound governance of financial institutionsresponds to a variety of objectives (see Basel Committee on BankingSupervision/BCBS, 2006 and 2010b). Figure 2 below illustrates how theseobjectives interact.The listed objectives (sound management, efficiency in resourceutilization and consumer protection) are obviously interrelated. They canalso be categorized into two major groups:1. Internal objectives, which refer basically to the sound managementof the financial institution, in terms of profitability, efficiency andlong-term growth.2. External objectives, which relate to the relationship of the entity withits clients (savers and borrowers), investors and the society at large,in particular its contribution to the correct functioning and stabilityof the financial system. In the case of institutions having a financialinclusion objective this should also be taken into account.42

Figure 2. Sound Governance of Financial InstitutionsOBJECTIVE: SOUND GOVERNANCEGood managementincentivesIncentives:- Profitability- Long term survival- GrowthEfficient use of resourcesLimitations to- Clients- Society- InvestorsProtection of:Illegal/harmfuloperationsfor theentityExcessiveassumptionof risksFinancialstabilityFinancialinclusionINTERNAL OBJECTIVESEXTERNAL OBJECTIVESSource: Own elaboration. Afi, Analistas Financieros Internacionales.From the perspective of WSBI, which is formed by a diversity ofinstitutions belonging to a large number of countries (92), the issue ofCorporate Governance cannot be isolated from the economic andinstitutional environment in which these institutions operate. To be ableto draw appropriate conclusions for WSBI members, we need to considertherefore the social and political contexts of the variety of institutions thatintegrate the network.The connections between managers, owners, depositors and borrowers,crucial for financial institutions, become even more relevant whenconsidering Access to Finance as an objective, which depends closely onthe development of the financial system. All these interconnections canalso be largely influenced by the political and social system, as shown inFigure 3 on the next page.43

Figure 3. The interaction of the political and social systems (and other environmental elements) in the bankingsystem's Corporate GovernancePOLITICAL SYSTEMPOLITICAL SYSTEMSOCIAL SYSTEMSeparation of powersLegal systemRegulationSupervision/disciplineIncome distribution andpower concentrationEducation andexperienceAccess to capitalmarkets- Market normsAcquisition by foreignentities- Rules home countriesBanking crisis- Rules/normsimprovementExternal environmentof good governanceGood governance offinancial entitiesOwnership structureConflicts of interestsTransparency/stabilityBoard of Directors Management Audit StakeholdersSource: Own elaboration. Afi, Analistas Financieros Internacionales.44

As can be seen in the figure above, sound governance in financialinstitutions is closely linked to four aspects:1. The development of a political system based on a proper separation ofpowers, in which the legal system supports an appropriate regulationof banks, including their supervision and discipline to avoid excessiverisk-taking.2. A social system that creates an adequate environment for theavailability of sufficient human capital, with appropriate levels ofeducation and expertise to ensure the sound governance of bankingfirms. This needs to be accompanied by mechanisms to avoid anexcessive concentration of wealth and power.3. The ownership structure of financial institutions is a very relevantfactor in determining the potential conflicts of interest that may ariseamong owners and between them and the governing bodies.Transparency and stability of the ownership structure contributes,in general, to good Corporate Governance.4. Finally, the external environment may contribute to sound governance,specifically in areas such as: a) access to domestic or internationalcapital markets, to the extent that the rules or practices of thosemarkets reinforce sound governance; ii) the influence of foreignentities on the national banking system , when they import soundgovernance standards from their home countries to their subsidiariesor branches in the host countries, and this contributes to improvingthe overall standards of the country through emulation; or iii) theadoption of codes of conduct or the improvement of existing ones,very often as a reaction to banking crises.45

Table 5. Corporate Governance in the five selected Case Studies:Board of DirectorsGermanyKenyaPeruPhilippinesSpain 10Nomination of Board of DirectorsComposition of Board of Directors depends on Lander law and thisdiffers from State to State. Generally speaking two thirds of the Membersare appointed by the municipality/district, one third by the staff.5 non-executive members and 1 executive member.All nominated by the Government.7 members: 3 elected by the municipal representatives(2 by the majority, 1 by the minority), who cannot be members ofthe council; 1 by the Catholic Church; 1 by the Chamber of Commerce,1 by COFIDE (second tier public bank) and 1 from the local associationof small entrepreneurs.8/9 "recommended" by the President of the country. The other is the PostDirector. Full separation between Postal Corporation and Postal Bank.Each Caja has its own rules. On average, 13-17 members, appointed byGeneral Assembly (60-160 members): depositors (average 36%),municipalities (25%), Regional Government (8%), founding entity (12%),staff (10%). Max. representation of public administration: 50%.Source: Own elaboration. Afi, Analistas Financieros Internacionales.3.1. Sound governance and the different organizationalformsA common analytical framework for the different organizational formsthat constitute the WSBI membership would require taking into accounta series of elements, such as the following:nOwnership of the institutions, in terms of, for example, voting rights,or the trading of property rights in the secondary market. In particularwhether the latter are listed on a stock market has traditionally beenregarded as an important element of market discipline, through whichfinancial markets are supposed to instil elements of discipline tomanagers of listed companies. The recent crisis however has implied aconsiderable scepticism on the capacity of financial markets toperform efficiently such function (“market discipline”).10 In July 2010, when this Report was in advanced stage of production, the SpanishGovernment approved a reform of the law regulating savings banks, with importantimplications in terms of corporate governance.46

nnnAt the same time, the distance and the potential conflicts of interestsbetween owners and clients is a focus of debate, which is of courseless relevant the closer they are. At the far end of the spectrum, in themutual or co-operative models 11 , when clients and owners cancoincide, this conflict is eliminated [see Oliver Wyman (2008) for areview of the cooperative model in the financial sector].More generally, the role of other stakeholders – customers, employeesand public administration (and in the end taxpayers) – has beensubject to intense debate (see for instance Walker Review, 2009).Depending on their nature, number and dispersion, these stakeholders’objectives may be more or less likely to enter into conflict amongthemselves and with the owners’ objectives. The clarity and consistencyof the objectives of the institution, as well as the diversity in themembers of the board, are key elements in balancing these interests.Competition in other markets in which the entity operates may entailan additional discipline device. Particularly capital markets play a rolein this regard, not confined to the trading of equity for shareholderinstitutions, but also other securities, hybrid instruments, fixed ratesecurities, etc, which normally entail some obligations in terms oftransparency and Corporate Governance. The possibility that theentity has a credit rating (sometimes an obligation related to listing incertain markets) implies also certain transparency and CorporateGovernance obligations. The labour market could also introduceelements of discipline, to the extent that attracting the best talentsrequires good Corporate Governance standards.The influence of regulation and supervision is a very important factorin the Corporate Governance structure, specifically from the point ofview of the discipline imposed on the entity. In weak institutionalenvironments banking supervision is very often the only source ofpressure towards sound Corporate Governance. Nevertheless, asstressed by Mülbert (2010), the emphasis of banking regulation andsupervision on the interest of depositors (and debtors in general) mayconflict with that of owners. It is interesting to note in this regard that,according to Beltratti and Stulz (2009), “banks with more shareholderfriendly boards performed worse during the crisis.11 According to WSBI data, 4 of its members are co-operative banks or their associations(Asociación La Nacional de Ahorros y Préstamos, Dominican Republic; Banque PopulaireCaisse d’Epargne/BPCE, France; Federación de Cajas de Crédito y Bancos de losTrabajadores, El Salvador; Cooperativa de Crédito para o Desenvolvimento Rural,Mozambique) and 5 of them are mutual banks or their associations (Federación deMutuales de Ahorro y Préstamo de Costa Rica; Asociación Popular de Ahorros y Préstamos,Dominican Republic; Dongbu Savings Bank, Korea; Korean Savings Banks Group).47

Banks in countries with stricter capital requirements regulation andwith more independent supervisors performed better”. This is relatedto the debate on the possibility of excessive risk assumption in banks toofocused on short-term shareholder value, and the need for financialregulation to correct this emphasis in favor of other stakeholders.Figure 4. Ownership structure, other stakeholders andCorporate GovernanceOWNERSHIPSTAKEHOLDERSNegotiability- Number/dispersion- Clarity/compatibility of objectivesSeparation owner-clientVoting rights- Separation of decision and risk assumption- Decision-making- Agency cost incentivesMembers/owners options: - Voice- Exit- Organization structure: Regulation/disciplineMarket competition- Labor market- Capital market- RatingEfficiencyResidual riskControl & accountabilityGOOD GOVERNANCE OF THE FINANCIAL ENTITYSource: Own elaboration. Afi, Analistas Financieros Internacionales.48

The first two elements (the ownership structure and the role of stakeholders)determine the formal decision making process in financial institutions.Particularly relevant is the connection between the decision-takingprocess and risk assumption resulting from these decisions. The globalfinancial crisis has highlighted the need for consistency between ensuringan integral view by the Board of the risks facing the institution while, atthe same time, granting a certain independence of the Chief Risk Officer(CRO). The latter should have at its disposal adequate means to developthis important function and should report directly to the Board, where theultimate responsibility on the integral view of the institution lies (seeWalker Review, 2009).This raises two questions: (i) the agency costs in the organization, whichgenerally depend on the options available to the owners in reacting tomanagement decisions contrary to their interests (voice and exit from theentity); (ii) the design of the incentives, including the remuneration ofdirectors in the board and management. A considerable debate has takenplace recently on incentives and remuneration in banking institutions(see BCBS, 2010a), as a result of which principles for avoiding excessiveshort-term focus in incentives have been adopted. These principles seekto promote appropriate compensation practices to create the rightincentives for effective risk management and avoiding excessive risktaking. These practices must be approved by shareholders and be subjectto oversight by supervisors.In turn, the organizational structure must be analyzed consideringelements such as efficiency, the residual risk (which owners generallybear), control and accountability. Without these elements soundgovernance of the financial institution would not be well founded.The organisational structure of WSBI members can be grouped aroundthe following models: government-owned banks, savings banks as publicinstitutions, postal savings institutions, mutual or cooperative banks,private banks (listed or not listed) and foundations. This diversity oforganizational forms raises the issue of whether good CorporateGovernance features are common for all these types or vary among them.In general, Corporate Governance depends on ownership structures,but some general good practices are applicable to all these types ofinstitutions, especially when considering that (i) most codes andstandards originate in common banking regulation and supervision and(ii) they share similar access to finance objectives.49

3.2. Public banksPublic banks are of special interest, given their relative importance inthe WSBI membership: they represent 57 percent of WSBI members, and55 percent of their assets. The BCBS (2006 and 2010b) subjects them tothe same general principles of sound governance as the ones that applyto any other bank, because the Committee believes that state-ownedbanks may face many of the same risks associated with weak CorporateGovernance than private banks (paragraph 19 of BCBS, 2010). Therefore,the Basel Committee concludes that “the general principles of soundcorporate governance should also be applied to state-owned or statesupportedbanks, including when such support is temporary (eg duringthe financial crisis that began in mid-2007, national governments and/orcentral banks in some cases provided capital support to banks)” 12 .This does not preclude the possibility to determine explicit soundgovernance principles for government-owned entities, as described byOECD (2005) for public companies in general. The BCBS documents(2006 and the 2010b) also note three specific principles relevant forgovernment-owned banks, which are:nnIn this type of bank a potential conflict of interest could take placeif it is both owned by and subject to banking supervision by a stateinstitution. Should this be the case, then there must be a fulladministrative separation of the ownership and banking supervisionfunctions to minimize political interference in the supervision activities(paragraph 59, Principle 3 of BCBS, 2010). Under a sound regulatoryframework, the role of the supervisor is essential in this regard.For instance, in the case of BancoEstado (Chile), a government-ownedbank member of WSBI, “the risks of political interference are partiallymitigated by a rigorous prudential supervision by the Chilean bankingsupervisor”, as stressed by Rudolph (2009).Governments should not participate in the daily management ofpublic banks, but respect the independence of the board. The lattermust maintain its responsibilities outside political influences that couldlead to conflicts of interest (for example, when directors explicitlyrepresent political interests or are public officials).12 Most public banks considered in this section are state-owned institutions, with theimportant exception of the German Sparkassen, where the Municipality is the “Traeger” –a German term that can be translated as “supporting or responsible institution” –, but notthe owner. See Annex 2.50

nHowever, this does not mean denying the right of the government asan owner to set the bank’s overall objectives (paragraph 20, Principle1 of BCBS, 2006).Where a bank is state-owned, disclosure policy should include “anownership policy that defines the overall objectives of state ownership,the state’s role in the Corporate Governance of the bank, and how itwill implement its ownership policy” (paragraph 50, Principle 7 ofBCBS, 2006). It is important in this regard to stress the need for a cleardefinition of the mission and objectives of public banks.Amongst government-owned banks, postal savings institutions are animportant category of WSBI members, especially in Africa. A number ofthem are currently facing institutional reform with a view to turn theminto proficient and competitive financial institutions, acting as keyintermediaries for financial inclusion, across the country. A crucialcondition to reach this objective is the development of efficient andtransparent mechanisms, which will ensure full independence of themanagement and Board of Directors from political influence.The government's influence over the banking system is not confined toownership. As mentioned above, it has a significant influence throughregulation, and can also have an impact by adopting other controls orconditions, such as the establishment of mandatory ratios and/ or limits onoperations, either to their amount or the prices (e.g. interest rate ceilings).The influence of the state in the banking system is not only a question ofsound governance, but also one of efficiency. Thus, it is necessary toavoid any sort of undue influence that may cause a deterioration of theefficiency (and therefore the long term stability) of the financial system,such as (i) an unfair competitive advantage for public-owned banks,(ii) a bias in the financing towards the public sector, (iii) the provisionof liquidity to the public sector in privileged terms or (iv) the lack ofindependence of the board of directors and/ or the management ofpublic banks. In the particular case of Postal Banks, “it is crucial to put inplace efficient and transparent mechanisms which will ensure fullindependence of the management and Board of Directors of the postalsavings institution from political influence and clear supervision rules andresponsibilities” (WSBI, 2010).51

3.3. Mutuals and cooperativesThis organizational structure presents three characteristics very relevantfor Corporate Governance:1. The voting rights may be not proportional to the size of the stake (forexample, one person, one vote).2. There is no separation between customer and owner, as ownershiprights can accrue by becoming a “customer”.3. Each owner has a claim to residual net worth, which is usually “nonexclusive”: typically new members can join on equal terms to those ofprevious ones. Ownership claims are not explicit and marketable, as ina limited company.If owners are also the customers, the implication is that the person withwhom business is done is the person for whom business is done (Penrose,2004). This has two important implications for Corporate Governance:(i) its definition is less clear, because of the ambiguity of the firms’objectives in the case of mutuals, due to the absence of an equivalent ofmaximizing shareholders’ value; and (ii) the main types of CorporateGovernance conflicts arise among the owners, since their interest tendto be different.The non exclusive claim implies that a mutualist cannot prevent thatthe mutual does business with new customers, who join the mutual withthe same rights than the former mutualists. Its capital is built fromaccumulated profits, leaving aside subordinated debt and similar financialinstruments. This has several implications:1. Market discipline is inexistent or very weak.2. There is no distribution of profits to owners, except the possibilityto dedicate part of these profits to improve the products in favor ofthe owners, as it is typical in insurance mutuals.3. Mutuals enjoy a theoretical advantage in the cost of capital, in thesense that it does not need to be explicitly remunerated.More details on Corporate Governance of mutual banks can be foundin Llewellyn (2007), in particular for British building societies.Although these entities are not members of WSBI, they are a goodexample of mutual banks.52

Cooperatives are similar to mutuals as far as the absence of separationbetween customer and owners is concerned, but in a lesser measure,because cooperatives may have a limited business with customers thatare not owners. Also, they may have externally-held capital, although, ingeneral, in a non-marketable form.BOX 3. PHILIPPINES POSTAL SAVINGS BANK (PPSB)Corporate GovernanceThe only shareholder of the PPSB is the Philippine PostalCorporation (PPC). The PPSB is a separate legal entity, with fullautonomy under the direction of its own board of directors, its ownbalance sheet, and profit and loss accounts, in accordance withWorld Bank recommendations (see World Bank, 2006). This is inline with good Corporate Governance practice, since a postalorganization and a bank are completely different businesses thatrequire different management skills. However, the completeseparation is not benefiting PPSB from a capitalisation point ofview. Only 50 percent of the PPSB authorized capital (1- billionpesos) has been subscribed by the PPC and only 30 percent waspaid up. Retained earnings over recent years have increased thisfigure to 40 percent, but the accumulation of profits is a very slowprocess to increase capital. At the present pace it will take 25 yearsto reach the level of the authorized capital.In the Philippines public banks do not provide in general any“additionality” to the private sector; government banks are rathercompetitors of private banks. Besides the PPSB there are manyother government-owned banks: Development Bank of thePhilippines (DBP), Land Bank of the Philippines (LBP), Veterans Bank(now private) and Al Amanah (an Islamic Bank). This diversity is notstrictly based on different missions, but rather on history. They wereborn to address a certain market failure, but in general this is nolonger the case. The possibility of merging some of them has beendiscussed several times, but no decision has been made. The caseof the Philippines seems to depart from good practices in thisregard, which in general recommend for public banks to have aclear mission related to an identified market failure, especially ifthere are several of them operating in the country.53

PPSB has a very comprehensive Corporate Governance Code, andthe practices are in line with central bank and SEC (the marketregulator) guidelines. The Philippines banking system benefits fromhaving a banking supervisor very concerned with CorporateGovernance. PPSB approach to Corporate Governance is inaccordance with international best practices, but not particularlytailored to Access to Finance objectives.Access to FinancePPSB is a small institution limited in its outreach by the constraintof not having the capacity to use the Post Office network ofbranches, which is normally considered as the main advantage ofpostal banks. Out of the 2,817 branches that the Post office has,only 25 are used as PPSB branches. There are two reasons for this.First, there is an IT connectivity problem in the postal network andsecond PPSB capital is considered insufficient by the Central Bankto allow for expansion.For the PPSB to be able to use the post office network, it will firstneed to find a solution to the capital increase problem. The plan is alsodependent on the central bank forthcoming regulation on “thirdparty entities as agent banks”, which includes a reference to thePostal Bank. This regulation will probably relax the conditions forthe use of agents, which may benefit the outreach capacity of PPSB.Corporate Governance and Access to FinanceThe mission of PPSB is to “be a strong and dynamic nationalinstitution that will mobilize savings and promote entrepreneurshipto widen economic opportunities. Provide the Filipino people witha full range of professional banking and financial services accessiblein all areas of the country and promote the values of thrift, industryand prudence especially in the youth”. This statement includesgeneral references to Access to Finance. These general guidelineshave not been translated, however, into specific financial inclusionpolicies or objectives. Thus, there seems to be certain disconnectbetween the Corporate Governance Code and the financialinclusion objectives as stated in the mission of the institution.54

3.4. FoundationsFoundations do not have owners but founders. Whereas owners’ objectiveis, in general, to obtain a profit from an initial investment, founders donot intend, as a rule, to recover their profits or net worth. As time passes,founders can disappear, or the weight of their initial endowment canbecome very small as compared to the total own funds, in particular if thepace of accumulation of reserves is very rapid. For this reason, it is typicalthat over time these organizations tend to be influenced by the publicadministration, as has been the case of the Spanish savings banks,including for the appointment of the members of the Board. In this case,the Corporate Governance problems of these institutions tend to convergewith those of public banks (see above), with a certain disadvantage fromthe point of view of the mechanisms for recapitalisation.BOX 4. SPANISH SAVINGS BANKS (CECA)Corporate GovernanceSpanish savings banks are private foundations, profit makingfinancial institutions designed to foster economic and financialdevelopment in their respective areas, fighting social and financialexclusion and return profits to society. All these objectives aresubject to a financial performance according to market standards.Some specificities of Spanish savings banks are the absence ofowners and the composition of their governing bodies, appointedby a plurality of stakeholders representing the community in whichthey operate: depositors, staff, municipalities, regional government,the founding entities and other private bodies of the community 13 .Access to FinanceSpanish Savings Banks have continuously promoted Access toFinance from a geographic and sectoral dimension, as a result oftheir extensive network of branches and their specialized attentionto retail clients (households and SMEs) in their area of influence.13 A Law approved in July 2010, when this report was in advance stage of finalization,included a series of changes in the Corporate Governance of savings banks, including thelimitation to 40% of members of the Board appointed by the public sector.55

The greater capillarity of the savings banks’ network vis-à-vis thatof banks is reflected in the fact that in 14 percent of rural townssavings banks provide the only banking branch.On the sectoral dimension, savings banks meet 56 percent ofthe households’ demand for finance, 43 percent of SMEs financeand over 53 percent of overall household savings. Savings bankshave also introduced new products to attend new needs ofotherwise excluded population, such as the immigrants demand forremittances services. This is the long term result of the SavingsBanks’ strategy of fighting against financial exclusion in Spain,structured around three main pillars: geographic Access to Finance,adoption of new products and services to new realities, andfinancial education.From a banking industry perspective, the existence of Savings Bankshas ensured a high level of competition in the Spanish bankingindustry, despite the profound concentration process it underwentin the 1990s. Thanks in part to Spanish savings banks, a high degreeof efficiency has been compatible with a high level of bancarization.Corporate Governance and Access to FinanceA key principle of financial regulation since the reform in the 1970sis to apply the same treatment to savings banks and commercialbanks. This reality, combined with the highly competitive bankingsector in Spain, has forced savings banks to maintain their profitgeneratingactivity close to the level of banks, and has imposedgreater responsibility to the savings banks governing bodies intheir mission of balancing the institution’s financial objectives(profitability) with the objective of facilitating Access to Finance.Although each savings bank has its own statutes and its ownmechanisms of representation, one common feature is the presenceof representatives of the Municipalities in the Board. To the extentthat they have an interest in ensuring Access to Finance in theirtown or region, this has been reflected in the high capillarity ofthe network of branches. Without the savings banks, a number ofsmaller towns in Spain would probably not have any bankingpresence, with the ensuing cost of financial exclusion for avulnerable segment of the population.56

3.5. Good Corporate Governance practices in bankinginstitutionsWhat are the practical implications of the above discussion in theCorporate Governance of WSBI members, whatever their legal form?Corporate Governance of financial institutions concerns mainly: i) thecouncil or governing body, ii) the management, iii) the supervisory bodies(risk management, compliance with the applicable laws and regulations),(iv) auditing (external and internal) and v) transactions with parties relatedto the entity (see BCBS, 2006).The main reference for sound Corporate Governance practices of bankinginstitutions is the set of Principles defined by the Basel Committee onBanking Supervision, in 2006 and revised in October 2010.Table 6.Sound Corporate Governance Principles.BCBS (October 2010)A. BOARD PRACTICESPrinciple 1Principle 2Principle 3Principle 4Board’s overall responsibilitiesThe board has overall responsibility for the bank, including approvingand overseeing the implementation of the bank’s strategic objectives,risk strategy, Corporate Governance and corporate values. The board isalso responsible for providing oversight of senior management.Board QualificationsBoard members should be and remain qualified, including throughtraining, for their positions. They should have a clear understandingof their role in Corporate Governance and be able to exercise soundand objective judgment about the affairs of the bank.Board's own practices and structureThe board should define appropriate governance practices for its ownwork and have in place the means to ensure such practices arefollowed and periodically reviewed for ongoing improvement.Group StructuresIn a group structure, the board of the parent company has the overallresponsibility for adequate Corporate Governance across the groupand ensuring that there are governance policies and mechanismsappropriate to the structure, business and risks of the group andits entities.57

B. SENIOR MANAGEMENTPrinciple 5 Under the direction of the board, senior management should ensurethat the bank’s activities are consistent with the business strategy,risk tolerance/appetite and policies approved by the board.C. RISK MANAGEMENT AND INTERNAL CONTROLSPrinciple 6 Banks should have an effective internal controls system and a riskmanagement function (including a chief risk officer or equivalent) withsufficient authority, stature, independence, resources and access tothe board.Principle 7 Risks should be identified and monitored on an ongoing firm-wideand individual entity basis, and the sophistication of the bank’s riskmanagement and internal control infrastructures should keep pacewith any changes to the bank’s risk profile (including its growth),and to the external risk landscape.Principle 8 Effective risk management requires robust internal communicationwithin the bank about risk, both across the organisation and throughreporting to the board and senior management.Principle 9 The board and senior management should effectively utilise the workconducted by internal audit functions, external auditors and internalcontrol functions.D. COMPENSATIONPrinciple 10 The board should actively oversee the compensation system’s designand operation, and should monitor and review the compensationsystem to ensure that it operates as intendedPrinciple 11 An employee’s compensation should be effectively aligned withprudent risk taking: compensation should be adjusted for all types ofrisk; compensation outcomes should be symmetric with risk outcomes;compensation payout schedules should be sensitive to the time horizonof risks; and the mix of cash, equity and other forms of compensationshould be consistent with risk alignment.E. COMPLEX OR OPAQUE CORPORATE STRUCTURESPrinciple 12 The board and senior management should know and understandthe bank’s operational structure and the risks that it poses(ie “know-your-structure”).Principle 13 Where a bank operates through special-purpose or related structuresor in jurisdictions that impede transparency or do not meetinternational banking standards, its board and senior managementshould understand the purpose, structure and unique risks of theseoperations. They should also seek to mitigate the risks identified(ie “understand-your-structure”).58

F. DISCLOSURE AND TRANSPARENCYPrinciple 14 The governance of the bank should be adequately transparent toits shareholders, depositors, other relevant stakeholders and marketparticipants.Source: BCBS (2010b): “Principles for enhancing Corporate Governance”.For the purpose of this study, the main interest would be in identifyinga link between sound Corporate Governance practices and Access toFinance. The latter obviously depends also on factors beyond theCorporate Governance of the banking institutions. However, to the extentthat Access to Finance is part of their objectives (as in the case of WSBImembers), Corporate Governance practices aimed at ensuring thatmanagement fulfils these objectives should establish a link between both.Without prejudice of the observation of the generally agreed CorporateGovernance Principles, and according to the literature (see annex 1)and the statistical evidence (see section 5), some practices that couldhelp in establishing this link with Access to Finance are for examplethe following:1. The clarity in the definition of the mission and objectives of theinstitution. For savings banks, a commitment to facilitate access tofinancial services is typically stated in the relevant savings banklegislation, in their statutes (in the case of publicly or mutually-ownedsavings banks), or in their mission statement (in the case of sociallycommitted private retail banks).2. Regulatory provisions or good practices to avoid undue interference inthe policies of the institution, by the Government, political groups,pressure groups or others.3. The size and composition of the board, including the representation ofthe diverse stakeholders having an interest in the institution and thebalance between different groups (gender balance, territorial balance).4. An appropriate distribution of responsibilities between the differentdecision- making levels. In particular, the separation between theChairperson and the CEO (Chief Executive Office) is generallyconsidered as a good practice.5. The existence of internal or external controls, in the form of internalauditing, other internal control mechanisms (such as an internalCorporate Governance code of conduct), a rating by an externalagency or an external audit are also signals of good CorporateGovernance practices.59

Of particular concern is the control of the conflicts of interest betweenthe institution and their administrators, managers or workers.6. The transparency on the policies and activities of the institution,including the regular publication of financial statements and similarreports, is also a standard element in Corporate Governanceevaluation.All these aspects will be evaluated in section 5 for WSBI members,in comparison with several measures of Access to Finance.60

4. ACCESS TO FINANCE –CONCEPTUAL FRAMEWORKAccess to Finance is an increasingly relevant policy objective, especially inemerging and developing countries, given its impact on povertyalleviation, financial stability and economic welfare. The recognition offinancial inclusion as one of the main pillars of the global developmentagenda in the G-20 summit in Seoul, in November 2010, is a signal of itsprominence as a policy objective, which was manifested in a concreteaction plan and a Global Partnership for Financial Inclusion. However, theprecise measurement of Access to Finance is difficult, given its multipledimensions. This section focuses on the relevance, definition andmeasurement of Access to Finance and introduces the specific variablesthat will be used in the quantitative analysis in section 5.The Santiago Declaration adopted by the WSBI members during their22nd World Congress (2009), reaffirmed their long term commitmentto a common objective: “to contribute to achieving a broader degree offinancial inclusion in an increasingly globalized world” 14 .WSBI members define financial inclusion as “the provision of access toappropriate, convenient, usable, valuable and affordable financial servicesand products to the widest part of the population” 15 . In developingcountries, financial inclusion involves delivering basic banking services tothe unbanked, low income population. In developed markets, Access toFinance is related to the prevention of financial exclusion of the mostvulnerable parts of the population.14 www.wsbi.org/template/event.aspx?id=272215 www.wsbi.org/template/event.aspx?id=272261

In developing economies, Access to Finance is considered a criticalcondition to break the vicious circle of poverty. In advanced industrialeconomies, the topic of financial exclusion is firmly integrated in a widerdebate about social exclusion and its welfare costs, in particular inthe case of rural areas, immigrants or minorities whose integration inthe formal financial system is complicated by geographic, social orcultural obstacles.Savings banks are critical in promoting financial inclusion. Previous WSBIstudies conclude that (i) it is difficult for developing and transitioneconomies to move towards full Access to Finance unless they havestrong savings banks or other public-purpose bank with an explicitmandate to improve Access to Finance; and (ii) savings banks are alsoimportant to maintaining access and to provide products accessible to thesocially and economically excluded in advanced economies, where theseinstitutions remain close to regions and customer groups not seen as apriority for other types of banks 16 .WSBI members’ commitment in favour of financial inclusion hastraditionally been built on the following principles and practices that haveproved effective:nnnnThe promotion of accessible, small-scale and basic services as part oftheir regular banking offer, which implies the development ofaffordable and convenient savings accounts, as well as the support ofmicrofinance as a finance tool for the low income population both indeveloping and industrial countries.The continuing construction of a large distribution network supportingproximity banking to both assess and attend clients’ specific needs,including those in low populated, economically disadvantaged andremote areas.The strengthening of the social and welfare investment activities intheir communities, as part of their Corporate Social Responsibility (CSR)activities, to support and complement the financial inclusion efforts.The recognition of the importance of financial education for a betterand broader financial inclusion.16 Perspectives 49, January 2006 Access to finance – What does it mean and how do savingsbanks foster access.www.wsbi.org/uploadedFiles/Publications_and_Research_(ESBG_only)/Perspectives%2049.pdf62

4.1. Financial deepening and improvement of socioeconomicconditionsThe objective of the financial system is the efficient allocation of savingtowards the most profitable investment opportunities, while ensuringmonetary and financial stability, as well as the security of the paymentsystems. Attaining an appropriate level of Access to Finance is the mainobjective of WSBI members, thus contributing to a deep financial system,accessible to most of the population, and an enabler of economic growthand welfare. The efficient allocation of saving is not possible if a bigportion of the population is excluded from the formal financial system.Access to financial services is indeed an essential driver for economicgrowth in both developing and industrial countries, allowing people toincrease the benefits from their economic activities and to move awayfrom short-term decision-making to a more efficient inter temporalallocation of resources. Savings banks contribute also to thediversification of the financial system. Accessing financial services is a keycondition for poverty alleviation, social and economic progress andsustainable development, as represented in Figure 5.Figure 5. Economic development and use of financial servicesSource: World Bank (2008), Finance for All. Policies and Pitfalls in Expanding Access.63

Financial sector policies that encourage competition, provide the rightincentives, and help overcome access barriers are central to attaining theabovementioned objectives.A financial system that lacks penetration beyond the higher incomesegments of population forces the majority of people to rely on less efficient,riskier and more expensive informal financial channels. WSBI memberscontribute to enhance formal access to financial services. This is the casefor example through microfinance activities, which represent a significantpart of savings banks’ business, especially in Latin America, where threeWSBI members have been forerunners of the microfinance industry intheir respective countries: Banco BCSC, formerly Banco Caja Social,in Colombia, the Cajas de Crédito, represented by FEDECREDITO in ElSalvador and CMACs in Peru (see Box 4) 17 .BOX 5. CAJAS MUNICIPALES DE AHORRO Y CRÉDITO(CMACS) IN PERUCorporate GovernanceThe supreme decree that regulates CMACs establishes asgoverning bodies the board of directors and the joint management.A very interesting feature of CMACs is that despite having onlyone shareholder (the Municipality), the appointment process ofthe Board of Directors involves different stakeholders. Thus, theboard consists of seven members: three elected by municipalrepresentatives (two elected by the majority and one by theminority, neither of them town councillors), one from the CatholicChurch, another from the Chamber of Commerce, and anotherfrom COFIDE (Corporación Financiera de Desarrollo, a second tierpublic bank) and finally one from the local association ofentrepreneurs representing the MSME business sector. This pluralitylimits political interference since the board represents the interest ofdifferent stakeholders, acting as checks and balances mechanism.17 For more information on WSBI members’ microfinance activities see Perspectives 59,July 2009 Beyond Microcredit: the role of savings banks in microfinance.www.wsbi.org/uploadedFiles/Publications_and_Research_(ESBG_only)/PERSPECTIVES%2059%20finallowres.pdf.64

The board does not have any executive function, being the JointManagement responsible for the economic, financial andadministrative functioning of the Caja. The fact that the governingbodies of the Cajas are established by law implies that theirCorporate Governance is very stable and protected from thetemptation of opportunistic changes; on the other hand, this structurelacks the flexibility to react to new, unforeseen requirements.Access to FinanceThe mission of CMACs is to contribute to the development ofthe community. Microenterprises (MES) are the dominant form ofbusiness and the natural clients of CMACs. The clear specificationof financial inclusion objectives in the mission of CMACs isa factor that also explains their concentration in the MES clients.However, the recent increase in competition in the MES segment bycommercial banks, MFIs and rural cajas led CMACs to enter thetraditional banking segments of commercial and consumptioncredit. This does not alter the Cajas’ financial inclusion policies.It is just natural that CMACs try to compete in the market andsatisfy their clients´ needs as they grow and transform themselvesinto bigger enterprises.Corporate Governance and Access to FinanceAccording to the law, at least 50 percent of the profits have to beretained for capitalisation, and the rest can be distributed to theMunicipality for social and infrastructure projects according to thepriorities established in the Provincial Development Plan. The use ofthe distributed profits for social and infrastructure projects ensuresthat the activity of CMACs contribute to the progress of thecommunity (although the mechanisms for controlling this use are ingeneral weak). There is a drawback to a generous profit distribution,since CMACs can only be capitalized through retained profits.Because the distribution is decided by the Board, composed byrepresentatives of the Municipality, they tend to distribute themaximum percentage. A remarkable example of the added value ofthe Board composition is the way COFIDE has fostered bettercapitalisation in several CMACs by providing funding in the form ofsubordinated debt with the condition that CMACs retain at least75% of the profits.65

This measure will support CMACs to advance further in theirmissions, since better capitalized Cajas can offer more credits andexpand their outreach to uncovered areas.The case of CMACs provides an example of proactive revision ofthe regulation to allow Cajas to adapt to the needs of the marketand remain relevant players. Cajas have been authorised to operateoutside their region since 1994. This revised mandate expandsthe area of action of CMACs, providing financial services tounderserved regions, and allowing CMACs to diversify their risksand to develop a more sustainable business model.4.2. Access to Finance and Financial StabilityAccording to the traditional view, Access to Finance triggers a virtuouscircle that – through risk diversification, efficiency gains and less dependencyon external capital flows – leads to higher economic growth. At the sametime, however, there is consensus around the idea that the financial sectortends to exacerbate the cyclical fluctuations of the economy, through thewell known financial accelerator mechanism. The international financialcrisis is a clear example of this potential for amplification of economicfluctuations through the financial system.How to reconcile these visions? Is there a trade-off between financialdevelopment (or financial inclusion) and financial stability? On the onehand, over the recent period emerging and developing countries havebeen able to reconcile financial development (as evidenced by high creditgrowth) with gains in financial stability (as shown by decreasing spreadsor stress indices, and by the resilience of these countries to theinternational financial crisis). On the other hand, in the case of developedcountries the most sophisticated financial systems have been subject tohigher volatility and pro-cyclicality. In particular, as a result of thesubprime crisis in the US one popular view has been that providingAccess to Finance for lower segments of the population entailsheightened risks for financial stability.One possible way to reconcile these views is that there might be a tradeoffbetween financial access and financial stability in the short term, butboth tend to be complementary in the long term.66

In other words, sustainable financial stability requires in the long term adeep and efficient financial system. And a financial system that excludesample segments of the population cannot be considered either efficientor stable.The idea that the US subprime problems were a result of a financialinclusion process requires in any case important nuances. The factorsbehind the crisis are much more related to wrong incentives in themortgage credits origination process of one particular model of banking(the so called “originate to distribute” model), inadequately supervised,amplified by a complex framework of credit derivatives and structuredproducts, blessed by credit rating agencies and propagated to the rest ofthe world due to the opacity of these products and the negligence in riskmanagement of some of the most important global banks.The experience of many emerging and developing countries shows, onthe other hand, that it is possible to foster Access to Finance whilemaintaining adequate risk controls. Savings banks, cooperatives andmicro-finance institutions in these countries have been able to contributeto financial deepening while at the same time fostering financial stability.In fact, in contrast with the pro-cyclicality of commercial banks – which tendto inflate the credit bubble in the good times and exacerbate the creditcrunch in the bad times –, institutions whose objective is facilitatingAccess to Finance are more stable in their policies and less sensitive to thechanging mood of global financial markets. This tends to smooth creditfluctuations and contributes to financial stability. As Chris De Noose,the WSBI Managing Director, recently stated, most WSBI member bankshave been generally resilient to the financial crisis, and “the focus onsupporting local markets and the real economy leads to a long-termvision and partnership which greatly reduces the impact of the volatilityof financial markets on the institutions. At the same time, though, theeconomic crisis that has affected the world has of course had an impacton the activities and life of our core clientele – households and smallentrepreneurs. Our banks do their utmost to provide support in thesedifficult times.”As a result of this crisis, a program of reforms of international financialregulation is under discussion, to improve risk management andstrengthen the capital base of financial institutions. These reforms are notaddressed at small institutions – in developing and developed economies– specialised in Access to Finance, since these institutions were notaffected by the failures that led to the crisis.67

But there is a certain risk that the reforms, if applied universally, couldlead to a move back in the financial inclusion process. It is important indesigning the reforms to keep in mind what went wrong. Segments orinstitutions that did not fail do not need to be repaired. And financialinclusion objectives need to be pursued with determination, avoidingputting them aside by the trend to emphasise financial stability.4.3. The double bottom line of WSBI membersSavings banks are by far the largest representatives of “double bottomline”institutions that explicitly target unbanked and underservedcustomers. According to WSBI estimates, these “double bottom-line”institutions provide around 1.4 billion accessible accounts acrossdeveloping and transition economies, three quarters of which (some1.1 billion accounts) come from savings banks 18 .Since 2004, WSBI has published three reference papers 19 related toAccess to Finance. They show the important role savings banks play in theprovision of financial services: savings, payments, credit and to a lesserextent, insurance; how large their distribution networks are, and howclose is the relationship with their customers.All the above has led savings banks to become a reference in their natureas “double-bottom line” financial institutions. Savings banks have longproved that it is possible to ensure long-term sustainability of the institutionwhile facilitating Access to Finance, and that outreach does not have tobe attained at the expense of profitability. Previous research by WSBI hasidentified, as a critical factor in maintaining the balance between bothobjectives, the ability to keep unit costs under control, which is closelyrelated to having products that are simple to understand and to run andthat allow for certain profitability even without high volumes.18 Perspectives 52, September 2006 Savings banks and the double bottom line – A profitableand accessible model of finance, www.wsbi.org/uploadedFiles/Publications_and_Research_(ESBG_only)/Perspectives%2052.pdf.19 WSBI Perspectives 49, Access to Finance – What does it mean and how do savings banksfoster access, January 2006; WSBI Perspectives 52, Savings Banks and the Double BottomLine – A profitable and accessible model of finance, September 2006; WSBI Perspectives56, Who are the Clients of Savings Banks – A poverty assessment of the clients reached bysavings banks in India, Mexico, Tanzania and Thailand, April 2008, accessible fromwww.wsbi.org/template/content.aspx?id=3678.68

The following table shows how the WSBI members under study promotefinancial inclusion with three different activities: density of their branchnetwork (proximity banking), special products for underservedpopulation, and innovative products.Table 7. Access to Finance in the five selected Case StudiesProximity BankingSpecial productsfor unbanked populationOther productsand servicesGermanyYes, present even in lessdeveloped regions.Yes, evolved graduallyto adapt to changingcustomers’ needs.Branches for young people;financial education atschools; special personalizedattention for the senior;microlending for the longterm unemployed.KenyaOperates through the postalnetwork. Agreement withM-PESA and other ATMs.Low requirements to openan account (zero minimumbalance in some cases).Enrolled in the Bill &Melinda Gates FoundationProgram aimed at doublingthe number of accounts forpoor people in five years.PeruAgreements with Agentsand Banco de la Nacion,a public bank with presencein rural areas.Innovative in their productoffering (microfinancetechnologies).In cooperation with the IDB,mortgage loan program thattargets home purchaseswith moderate income.PhilippinesLimited, only 25 branches(no access to post officebranches).Some products: micro -finance, remittances, andSME finance, in particularin the transport sector.Financial educationprogramme.SpainYes, 56% market share.(provision of credit).Cajas the only financialinstitution in 14% ofSpanish municipalities.Yes: remittances services,pledged loans.Microcredits through ObraSocial. Commitment withfinancial education.Source: Own elaboration. Afi, Analistas Financieros Internacionales.69

4.4. The dimensions of Access to FinanceThe World Bank and UK DFID have identified four core dimensionsof Access to Finance (Claessens, 2005), in which savings banks scoresystematically well 20 .One dimension concerns the difference between access and usage,around which there is a permanent conceptual discussion, since access ismore difficult to measure and is, by definition, larger than usage. In fact,being underserved does not necessarily mean lack of access, but could bethe result of a conscious choice. This is of course related to the costof the provision of financial services, which could explain the reluctanceof certain segments of the population to enter the financial system.The simple and affordable products offered by savings banks are useablefor even low value and irregular financial needs.The second identified dimension is whether access operates at anindividual or household level, and how to measure it. There is now acommon position, after much research and discussion, to consider theadult individual, and not the overall household, as the unit of responsefor surveys on Access to Finance.The third dimension is whether the provision of financial services falls inthe category of formal/regulated, informal/unregulated, or somewhere inbetween. As mentioned before, low-income segments of the populationmay choose to use informal financial instruments even though they haveaccess to formal services, because the former offer more flexibility andconvenience, although they may lack the quality, security, leveragepotential and sustainability of formal channels. Information requirementsrelated to AML/CFT could also increase the overall cost of formal vs.informal financial services. WSBI members have innovated with financialproducts and services by bringing “informal” features to the formalsegment, without compromising accessibility. Such is the case of the BasicSavings Accounts offered by BANSEFI in Mexico, and the use of agents(Non Banking Correspondents, NBCs) in several emerging and developingcountries such as the Caixa Económica Federal in Brazil and some ofthe Peruvian CMACs.20 Perspectives 52, September 2006 Savings banks and the double bottom line – A profitableand accessible model of finance, www.wsbi.org/uploadedFiles/Publications_and_Research_(ESBG_only)/Perspectives%2052.pdf.70

The fourth dimension refers to the type of products a financial provideroffers to its clients, and how they respond to the needs of householdsand firms. Many savings banks have products to satisfy the full spectrumof customers’ functional needs, and are continuously working towardsincorporating new products and services. This is for example the case ofthe savings banks efforts to support the financial integration of migrantsthrough the provision of high quality and fair value remittance services byimplementing the WSBI International Remittances Capability Agreement(IRCA), a common platform to support the development of these services.4.5. The challenge of measuring Access to FinanceMeasuring Access to Finance entails conceptual as well as statisticalproblems. The Financial Access 2009 report by the Consultative Group toAssist the Poor (CGAP, 2009) uses new data from a survey of financialregulators from 139 countries to estimate the number of unbankedadults in the world 21 . Their measure is the result of counting the totalnumber of deposit accounts in the 139 countries and then dividing bythree (considered this number to be an estimate of the average numberof deposits per banked adult). Using this approach the report obtains afigure very similar to results obtained by other researchers: 2.8 billion ofunbanked adults, close to the 2.5 billion estimated by the FinancialAccess Initiative – see Chart 3).Beyond the estimate of the number of actual users of financial services,it is still a challenge to define what the best indicators are for measuringoverall financial access. The ideal is probably using comparable anddisaggregated information (by country, location, level of income, year) onthe total number of individuals, households and firms that are actuallysaving, receiving credit, or being insured by formal or informal financialinstitutions.A fairly consistent measure of Access to Finance would be the number ofdepositors in a country, but this figure is rarely available either, beingusually approximated by the number of total deposits per 1,000 adults,to make it comparable across countries.21 See also Kendall, Mylenko and Ponce (2010).71

Chart 3.Percent of Total adults who do not use formal financialservices by regionSource: own elaboration from Financial Access Initiative (www.financialaccess.org).The average size of deposits is also considered a relevant indicator foraccess. The rationale is that, as the financial system reaches progressivelylower segments of the population, the accounts tend to have a smalleraverage size. This relationship may be affected by the existence of dormantaccounts, the co-existence of household and business accounts, andvariations on the average number of deposits that a person holds, estimatedby CGAP, as mentioned above, in 3. Also, to facilitate internationalcomparison, the average size of deposits is corrected by per capitaincome, as an indicator of the countries level of development.As in the case of deposits, a higher average loan size is generally interpretedas reflecting a bias towards higher income customers. As financialdeepening advances and financial markets develop, more people haveaccess to credit and the size of the average loan (relative to the country’sper capita income, as in the case of deposits) decreases.For the purpose of the present study, and in line with other internationalreports, the three abovementioned indicators of Access to Finance areused: (i) the number of deposits per 1,000 adults, (ii) the average size ofdeposits and, for those WSBI members that provide credit, (iii) theaverage size of loans. Table 10 presents a summary of the relevant dataon Access to Finance provided by the five selected Case Studies.72

Table 8. Access to Finance in the five selected Case StudiesGermany Kenya Peru Philippines SpainTotal Loans (million €) 741,438 n/a 1,272 34 911,517Total Deposits (million €) 878,928 97 1,026 68 877,382Number of deposits (million) 99.90 1.15 1.10 0.78 45.11Amount of loans to SMEs 144,991 n/a 653 2 n/a(million €)Amount of loans to individuals 290,203 n/a 322 21 n/a(million €)Total Assets (million €) 2,632,000 153 1,528 76 1,239,596Market share of total assets 34.0% 2.0% 4.4% 0.1% 40.4%Number of Outlets 15,932 493 398 25 24,985Average Deposit (€) 8,798 84 933 87 19,450Average Loan (€) n/a n/a 2,000 1,000 63,000Deposits / 1,000 adults (€) 1,421 56 55 13 1,139Source: own elaboration from WSBI data.73

5. STATISTICAL EVIDENCEAfter establishing in previous sections the theoretical framework ofthe relationship between Corporate Governance and Access to Finance,as well as the connection with the five case studies, this section providesa quantitative measure of this link.Finding empirical evidence that supports this link is, however, notstraightforward. There are three main reasons: (i) estimating CorporateGovernance quality requires defining it, setting a standard and calculatingthe deviations; (ii) the measurement of Access to Finance is also difficult,because of its many dimensions; and (iii) the complexity of identifying allthe relevant variables that make this connection meaningful.Even if we were able to measure Corporate Governance and Accessto Finance, identifying a causal relationship going from the first tothe second variable is a complex task. First, the nexus between them isriddled with endogeneity problems and it is necessary to control for otherfactors different from Corporate Governance which could influenceAccess to Finance. Second, finding an econometric relationship does notmean causality 22 .A specific questionnaire on Corporate Governance practices was distributedto all WSBI members together with the WSBI annual questionnaire onAccess to Finance and financial data. These questionnaires, the data usedin the literature and the statistical evidence collected in previous studiesby WSBI members have been used to develop specific indicators intendedto provide an accurate picture of both variables.22 Econometrically speaking the proper control variables – avoiding colinearity problems –should be included in the regression and afterwards, an evaluation of the existence of acausal relationship between the two should be performed using tests such as the GrangerCausality Test.75

Only 27 members established in 21 countries 23 answered the CorporateGovernance questionnaire; and complete information on Access toFinance was provided by 25 WSBI members. Furthermore, data on bothCorporate Governance and Access to Finance for the same institutionwere available for only nine members: Chile, Colombia, El Salvador,France, Indonesia, Peru, Philippines, Thailand and Uganda.The following table summarizes a description on the type of informationprovided by WSBI members. A more extensive data set would haveallowed performing a more elaborated analysis on the link betweenCorporate Governance and Access to Finance.Table 9. Summary of WSBI members' response ratesNo. Answers toCORPORATENo. Answers toGOVERNANCE ACCESS TO FINANCE Observations onQuestionnaire Questionnaire CG & (full) A2FSavingsLoans21 countries 23% 24 48 countries 52% 25 countries 37% 9 countries 10%(27 members) (25%) 25 (54 members) (49%) (28 members) (37%) (9 members) (8%)- Developing: 17 24% - Developing: 36 51% - Developing: 17 35% - Developing: 8 11%- Industrial: 4 19% - Industrial: 12 57% - Industrial: 8 42% - Industrial: 1 5%In the absence of a more elaborated econometric exercise, a descriptivestatistic analysis has been realised. In addition to the questionnaires,other sources of information were used to better understand crucialnational variables such as the regulatory environment and the degreeof financial development that can influence Corporate Governanceand Access to Finance both at the country and at the institution level.Several alternatives have been used since, as stated before, there is noglobal and widely agreed measure of either Corporate Governance orAccess to Finance. This section distinguishes between the country level(section 5.1.), and the WSBI members level (section 5.2.)23 WSBI members from the following countries replied to the questionnaire: Austria, Brazil,Chile, Colombia, El Salvador, France, Indonesia, Kenya, South Korea, Lesotho, Macau,Peru, Philippines, Spain, Sweden, Tanzania, Thailand, Togo, Uganda, and Vietnam.24 Percentage over total countries with WSBI member(s).25 Percentage over total WSBI member institutions.76

5.1. Corporate Governance and Access to Financeat country levelThis first analysis compares the relationship between the Honohan Index(Honohan, 2007) – our chosen measure of Access to Finance at thecountry level – and a Corporate Governance Index of our own elaborationfor the specific country. This allows us to obtain a first estimate ofwhether the basic relationship between both variables is supported byevidence. If there were no evidence at the country level it would be muchmore difficult to expect a link at the level of each institution.Honohan’s Index is a country-level index, developed in the 2007 paper“Cross-Country Variation in Household Access to Financial Services”.Honohan estimated the fraction of adult population using formalfinancial intermediaries by combining supply-side information on bankingand microfinance institutions (from CGAP and WSBI data) with a numberof demand-side estimates on the use of financial services obtained fromhousehold surveys (such as the Eurobarometer or the Finscope surveysin Africa 26 ). For WSBI member countries, the Honohan index ranks from0.05 (Tanzania) to 0.99 (Denmark, Finland, and Sweden).To estimate a country-level Corporate Governance Index, five individualcountry level indicators, based on variables from other studies, werecombined to create a single indicator which tries to capture the quality ofthe Corporate Governance in a country. This Country Index is measuredthrough a combination of indicators including the strength of legal rights,the depth of credit information and the level of financial developmentand has been constructed according to the following formula:Where:n SLR: Strength of legal rights index, obtained from Doing Business,2009, World Bank, measures the degree to which collateral andbankruptcy laws protect the rights of borrowers and lenders and thusfacilitate financial development. The index ranges from 0 to 1, withhigher scores indicating that collateral and bankruptcy laws are betterdesigned to expand access to credit.26 See Annex 4 for the country results of the Honohan Index.77

nnDCI (Depth of credit information index) – PRC (Public registrycoverage) and PBC (Private bureau coverage), obtained from Doingbusiness, 2009, World Bank, measure the scope, accessibility andquality of the credit information available through either public orprivate credit registries. PRC reports the number of individuals andfirms listed in a public credit registry and the indicator PBC doesthe same in a private credit bureau. The three indicators are normalizedto range between 0 and 1.FD (Financial Development), obtained from the Financial DevelopmentReport, 2009, World Economic Forum, ranks 55 countries accordingto the level of their financial development, analysing the drivers offinancial system development that support economic growth.The CGI ranges between 0 and 1. The higher the indicator, the greaterthe quality of the Corporate Governance at the country level.Chart 4 shows the positive and significant correlation between CorporateGovernance and Access to Finance at the country level (our CorporateGovernance Country Index and the Honohan index). In this sense,countries with better standards of Corporate Governance tend to havehigher levels of Access to Finance. In statistical terms, and in the absenceof a more sophisticated econometric analysis, almost one quarter of thevariation in the level of Access to Finance at the country level would beexplained by the Corporate Governance system in that country.In Chart 5, for those countries for which we have information, we plotthe size of the dots according to the market share of WSBI members.The results show that in those countries with higher levels of bothCorporate Governance and Access to Finance, WSBI members’ marketshare is bigger. This suggests that in countries with a better CorporateGovernance environment and a relatively higher presence of institutionswith an Access to Finance mission (like WSBI members) financial outreachtends to be higher.78

Chart 4.Corporate Governance and Access to Finance(country level)Source: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Corporate Governance indexat the country level and Access to Finance.Chart 5.Corporate Governance and Access to Financewith market share (country level)Source: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Corporate Governance indexat the country level and Access to Finance.79

5.2. Corporate Governance and Access to Financeat WSBI – member levelTo evaluate the existence of a link between Corporate Governance andAccess to Finance for WSBI members, we analyzed the relationshipbetween several specific indicators of Access to Finance for theseinstitutions (instead of the country-level Honohan index) and assess theircorrelation with a Corporate Governance index which incorporatesinstitution-specific components.We have considered the standard indicators of Access to Finance, asexplained in section 4: i) average deposit size 27 (the lower this indicator,the higher the outreach), ii) average loan size (the same logic as in theprevious case), and iii) number of deposits per 1.000 adults (the higherthe indicator, the higher the outreach).For the Corporate Governance Index we have constructed a syntheticindicator which combines the countrywide Corporate Governance indexexplained in the previous section and an institution-specific component.Nevertheless, we should always bear in mind that the contribution ofa given WSBI member to Access to Finance in its country depends interalia on its relative size in the local banking system.Our synthetic Corporate Governance Index (CGI) has been constructed bymultiplying the country level Corporate Government index by the specificindex of the WSBI member institution. The rationale, as explained inchapter 3 and consistently with the empirical literature presented inAnnex 1, is that the Corporate Governance environment impacts theinstitution. In other words, a fairly good Corporate Governance for anindividual institution could be seriously undermined by a weak legal andinstitutional environment (and conversely, a poor Corporate Governancein a given institution could be enhanced by sound country-level practices,rules and regulation).27 The “average deposit size” has been standardized among countries by their respectiveGDP per capita. It is equal to the average deposit size (in Euro) reported by the WSBImember, divided by the WSBI member country’s GDP per capita. It ranges between 0 and1.2 for this particular sample (a value of one implies that that the average deposit of thatparticular institution equals the GDP per capita of the country in which it is located).80

Specifically, the index is obtained as follows:where the Specific CGI is the average of six variables:and• BC (Board composition): measures the diversity in the compositionof the board of directors, differentiating between members appointedby the authorities, shareholders, depositors and other stakeholders.The greater the diversity in the appointment, the higher the value ofthe index, which ranges from 0 to 1, as can be seen in Annex 5.• CC (CEO-Chairperson): takes the value 1 if the CEO and thechairperson are not the same person and 0 otherwise, following theliterature on best CG practices.• POW (Proportion of women): measures the proportion of womenon the board of directors, with higher values indicating more presenceof women. Values range from 0 to 1.• AUD (Audit) – RAT (Rating) – IC (Internal Code): indicates whetherthe institution has (i) an external audit, (ii) a rating from an agency and(iii) it has to follow an internal Corporate Governance Code. The overallscore is 1 (high compliance) if the entity complies with the threerequirements, 0.67 (medium compliance) if it complies with two ofthem and 0.33 (low compliance) if it only complies with one of them.• RQ (Regulatory quality): based on the Regulatory Quality Index, oneof the six World Bank’s World Wide Governance Indicators for theperiod 1996-2008, which is a measure of the market-friendlyenvironment, flexibility and the adequacy of banking supervision, aswell as a perception of the burdens imposed by regulation in areassuch as foreign trade and business development. In the literature thequality of financial regulation is often seen as an ingredient of theinstitution’s Corporate Governance. For this reason we decided toinclude it in the specific Corporate Governance index.• MIS (Mission): indicates the importance of having Access to Financeobjectives in the mission statement of the institution. This componentwas constructed by the consultant team based on public informationavailable at WSBI members’ websites.81

5.2.1. Corporate Governance and Average Deposit SizeWhen considering the Average Deposit Size as a measure of Access toFinance we would expect a negative relationship between the twovariables. As can be seen in Chart 6 below, we find indeed a negativerelationship between both variables in the case of developing countries.For industrial countries the correlation is less clear and, in any case,the small number of observations would seriously question the reliabilityof any such correlation.The rationale for the observed correlation, in the case of developingcountries, has to do with the fact that as the quality of the CorporateGovernance practices of financial institutions with a specific mandate forpromoting Access to Finance improves, these financial institutions outreachalso increases, which in turn is reflected in a lower average deposit.Chart 6. Corporate Governance and Access to Finance –measured as average deposit sizeSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Overall Corporate Governanceindex at the country level and Access to Finance.82

Since the overall Corporate Governance index includes a countrycomponent and a specific one, it is interesting to observe the isolatedinfluence of the specific component on this Access to Finance measure.The impact of the country component on the average deposit size is alsonegative and the relationship between Corporate Governance andaverage deposit size including the country component is steeper thanwhen only the specific one is considered. This means that the countryCorporate Governance has a positive contribution to Access to Finance.Nevertheless, in this relationship, the specific component is the mainresponsible for the link between Corporate Governance and Accessto Finance.Chart 7. Corporate Governance and Access to Finance –Specific components' effects on average depositSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Specific Corporate Governanceindex and Access to Finance.Evaluating each of the elements considered in the specific CorporateGovernance index, we observe that when the CEO and the Chairpersonare different persons, the average deposit size is smaller, which reflects ahigher degree of Access to Finance (Chart 8.1). Moreover, compliancewith the audit and rating agencies, or the existence of an internalCorporate Governance Code lead to lower average deposits, as can beseen in Chart 8.2.83

Chart 8.Specific Corporate Governance Components and Accessto Finance (i)Separation of CEO/Chairpersonand average depositsAudit/Rating/Internal Codeand average depositsSource: Own elaboration. Afi, Analistas Financieros Internacionales.Chart 9.1 shows that the average deposit size is also negatively correlatedwith the score in the World Bank Regulatory Quality index. This suggeststhat market friendly policies or the adequacy of banking supervision,as well as the perception of a low burden of regulation in areas such asforeign trade and business development, tend to increase financialaccess. Chart 9.2 illustrates how the clarity in the Access to Financeobjectives in the mission statement improves financial inclusion: having aclear objective of improving Access to Finance is negatively correlatedwith the average deposit size.On the other hand, the elements of the Country-level CorporateGovernance index do not seem in general to be a relevant factor whenobserving the different levels of Access to Finance – as measured bydeposit size. Charts 10.1 and 10.2 show the country CorporateGovernance index components that most contribute to achieving thenegative relation between Corporate Governance and average depositsize. These components are: (i) the combined indicator of depth of creditinformation, coverage of public credit registries and private creditbureaus, and (ii) the Financial Development indicator.84

Chart 9.Specific Corporate Governance Components and Accessto Finance (ii)Regulatory quality andaverage deposit 28Clarity of mission andaverage depositSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the (i) regulatory quality index,(ii) the institutional mission and the average deposit size.Chart 10. Country Corporate Governance components andAccess to FinanceCredit registry coverage andaverage depositFinancial development andaverage depositSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the (i) quality of credit information,(ii) the country’s financial development and Access to Finance, measured as the averagedeposit size.28 For a definition of average deposit, see footnote No. 24.85

5.2.2. Corporate Governance and Average Loan SizeAs with deposit size, a lower average loan is usually interpreted as anindicator of a higher share of credit granted to lower income householdsor micro and small enterprises, as compared to bigger companies andbetter-off individuals. Therefore, this can also be considered as a measureof Access to Finance. As in the case of the average deposit, we canappreciate in Chart 11 that there is a negative correlation betweenthe average loan size and the overall Corporate Governance index.Also, similarly to the previously analyzed case of deposits, this correlationis clearer in the case of developing countries. For industrial countries,despite the fact that the correlation is even stronger than in the case ofdeposits, the small size of the sample seriously undermines the reliabilityof any interpretation. This finding strengthens the results obtained in theprevious section since it seems that better Corporate Governance isrelated to Access to Finance not only in the liabilities side but also in theassets side of the balance sheet.Chart 11. Overall Corporate Governance and Access to Finance -average loan size 29Source: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Overall Corporate Governanceindex and Access to Finance measured as the average loan size.29 The “average loan size” has been standardized among countries by their respective GDPper capita. It is equal to the average loan size reported by the WSBI member, divided bythe WSBI member country’s GDP per capita.86

In this case, the country component is totally responsible for the negativecorrelation since the sign of the correlation between the specific componentand the average loan size is positive (see Charts 12.1 and 12.2). It is notintuitive why the country Corporate Governance index presents theexpected sign whereas the specific Corporate Governance index presentsthe opposite sign. Since these results are based on a very small sample ofWSBI members and this negative relationship can be explained by justtwo observations, we do not attach much reliability to these results.Chart 12. Corporate Governance components and Access to FinanceSpecific components andaverage loan sizeCountry components andaverage loan sizeSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Specific Corporate Governanceindex and Access to Finance measured as the average loan size.Despite the above mentioned scepticism on the interpretation of thecorrelations between Corporate Governance and loan size as themeasure of Access to Finance, it is interesting to identify individualcomponents of the specific Corporate Governance index which wouldinduce a negative relationship with the average size of the loans: (i) theexistence of an external audit, a rating from an agency and/or an internalCorporate Governance Code and (ii) the Regulatory Quality index. It isreassuring to find that these are the very same components whichgenerated the bulk of the negative correlation in the case of the averagedeposit indicator, which points to a certain robustness of the results.87

Chart 13. Corporate Governance components and Accessto Finance (average loan size)Audit/Rating/Corporate Governance CodeRegulatory QualitySource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Regulatory Quality index andAccess to Finance measured as the average loan size.On the other hand, the country Corporate Governance index component,which contributed the most to the slight negative correlation, is basicallyrelated to the impact of the depth and coverage of the credit informationavailable through either public or private credit registries. Nevertheless,this is a very weak relationship as can be seen in Chart 14.Chart 14. Corporate Governance components and Access toFinance (average loan size): Credit InformationSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Quality of Credit Informationand Access to Finance measured as the average loan size.88

5.2.3. Corporate Governance and Number of Deposits(corrected by adult population)The third dimension of Access to Finance we have considered is thenumber of deposits per 1,000 adults (potential clients), which is atraditional measure of financial outreach. To the extent that CorporateGovernance fosters financial inclusion, one would expect a positivecorrelation between these two variables. The available data – for the caseof WSBI members– confirm the expected correlation in the case ofdeveloping countries. Nevertheless, as with the average loan size,the explanatory power of this variable is relatively small (5.7 percent) andthe small number of observations makes these results not very reliable.Chart 15. Overall Corporate Governance and Access to Finance –deposits per 1,000 adultsSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Overall Corporate GovernanceIndex and Access to Finance measured as deposits per 1,000 adults.89

Chart 16. Corporate Governance Index and Number of Depositsper 1,000 adultsSpecific componentsCountry componentsSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Corporate Governance Index (bothSpecific and at the Country level) and Access to Finance measured as deposits per 1,000 adults.As can be seen in Chart 16, although the specific component of the indexhas the expected sign, the country component has the opposite sign,which is difficult to interpret. The individual components of the specificCorporate Governance index that contribute most to strengthening therelationship with Access to Finance are (i) the presence of women in theBoard of Directors, and (ii) the separation between the Chairperson andthe CEO, as shown in the following charts.90

Chart 17. Corporate Governance Index and Number of Depositsper 1,000 adults - Proportion of women in the BoardSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the Proportion of women andAccess to Finance measured as deposits per 1,000 adults.Chart 18. Corporate Governance Index and Number of Depositsper 1,000 adults - Separation of CEO/ChairmanSource: Own elaboration. Afi, Analistas Financieros Internacionales.At the country level, the components that contribute the most topromote Access to Finance are the indicator on the depth of creditinformation and the financial development index.91

Chart 19. Specific Corporate Governance Components and Accessto FinanceDepth and quality of credit informationFinancial DevelopmentSource: Own elaboration. Afi, Analistas Financieros Internacionales.The tendency line helps to visualise the correlation between the i) Quality of credit informationand ii) Financial development and Access to Finance measured as number of deposits per1,000 adults.5.3. Some conclusions based on the statistical evidenceDespite the limited existing data, we find some evidence of a positiverelationship between sound Corporate Governance and Access toFinance. In order to assess this link we started by analyzing country-leveldata, based on Honohan (2007), to estimate access to finance and acomposite indicator calculated by the consultant team, based on WorldBank and World Economic Forum information, for Corporate Governance.The results show a positive relationship between the two variables, whichseems to confirm that the existence and enforcement of legal rights,the scope, accessibility and quality of credit information and the degreeof financial development foster financial inclusion. Moreover, whenobserving those countries where data from the WSBI members wereavailable, higher levels of both Corporate Governance and Access toFinance are related to a higher market share of the WSBI member.This suggests that in countries with a better Corporate Governanceenvironment and a relatively higher presence of institutions with anAccess to Finance mission (like WSBI members) financial outreach tendsto be higher.92

For WSBI members in developing countries, all Access to Financeindicators (average size of deposits, average size of loans and number ofdeposits per 1.000 adults) show the expected sign of the correlation withCorporate Governance indices, whereas for industrial countries, the smallnumber of observations precludes reaching meaningful conclusions.The robustness of the results is stronger for the average size of deposits,and not very reliable for the average loan size.It is worth noting that the specific components of Corporate Governance(that is, those that depend on WSBI members) have more influence onpromoting better accessibility to financial services than the countrycomponents. This is particularly relevant since the former are undercontrol of WSBI members.The components of the Specific Corporate Governance index that contributemost to the positive correlation between good Governance practices andAccess to Finance are (i) the separation between CEO and Chairman, (ii)the existence of an external audit, an internal Corporate Governancecode and/or a rating from an agency, and (iii) the quality of the financialregulation. The existence of a mission that includes a clear reference toAccess to Finance and a higher participation of women in the Board alsocontribute to foster Access to Finance. Regarding country-level components,the existence, quality and coverage of credit registries, public, private orboth have the highest impact on promoting Access to Finance.93

ANNEX 1: REVIEW OFTHE LITERATUREThe link between Corporate Governance (CG) and Access to Financeis a relative new topic of research which has not been largely studied.There is a significant amount of literature on both topics separately:(i) Corporate Governance, specifically on banking institutions, as well as(ii) the determinants and implications of Access to Finance, but much lessresearch has been done on the connection between both.The initial approach of Corporate Governance is to establish practicesto avoid the potential problems that arise when managers (agents)administer resources on behalf of the owners (principal) in a context ofasymmetric information. The agency problem arises when the agents, thathave superior information and specialized skills to manage the resourcesof the principal, behave opportunistically due to the lack of informationor abilities of the principal (Jensen & Meckling, 1976). The principal is theresidual claimant of the firm’s output because he/she assumes theresidual risk. Agency costs associated with this problem are assumed byresidual claimants who contract the professional services of managers.The goal of Corporate Governance mechanisms is to align the objectivesof the manager-Agent with the objectives of the owner-Principal.The most typical case is that of listed firms’ executives managing resourcesof a large and dispersed number of shareholders. The recommendedCorporate Governance practices are addressed to induce the managersto behave properly in the interest of shareholders through transparencymechanisms that reduce the asymmetry of information as well asintroducing control structures to make manager’s decisions accountableto shareholders. Reducing agency costs is a key element to generateconfidence of investors in companies listed in the stock markets.95

This agency problem also holds for depositors in banking institutions,although with some specificities. Depositors invest their funds in bankinginstitutions where specialized managers take risky investment decisions.In a context of asymmetric information, in which depositors cannot assessthe best investment decisions, there is a potential for opportunisticbehavior of bank managers. To build trust on the system, a relativelyburdensome regulatory scheme is necessary for banking institutions,together with transparency on the policies and actions of managers.Hence the tight link between financial regulation and CorporateGovernance, to the extent that the former might be considered as anaspect of the latter.The case of depositors points to a crucial issue: in the case of banks,the necessary trust refers to a wider category of stakeholders, whichincludes, on top of shareholders, other agents like depositors, taxpayersand in fact all economic agents. Their trust is essential for the viabilityof banks and the soundness of banks is necessary for the efficientfunctioning of the economy. Indeed, the systemic nature of banks impliesthat the interest of all stakeholders (not only in a given institution butmore broadly in the financial system) needs to be taken into account.For non-financial companies a narrower notion of trust applies, accordingto which shareholders expect an adequate return for their investmentmanaged by the company’s administrators. This approach fits intothe Schleifer and Vishny (1997) definition of Corporate Governance:“the ways in which suppliers of finance to corporations assure themselvesof getting a return on their investment”.It is useful to distinguish between listed companies – to which the CorporateGovernance literature was initially addressed – and other types ofinstitutions, where the Corporate Governance principles need to differ toa certain extent from the standard prescriptions, since the main objectiveis not necessarily or exclusively to align the incentives of managers andshareholders. At the same time, the above-mentioned specificity offinancial institutions needs also to be taken into account. Both factorspoint to a broader emphasis of Corporate Governance on all stakeholders’interest, as opposed to the narrow focus of the traditional approach onshareholders only. This different approach is very relevant for WSBImembers, whose objectives go further than short-term profitability andwhose stakeholders are broader than in the typical banking institution.96

Even among the relatively narrow universe of listed companies, the diversityin terms of ownership structure, internal organization, board compositionsand shareholder protection has driven to different recommendations ofCorporate Governance practices; and their compliance levels differ too allover the world. Under this shareholder model the results are inconclusivein terms of dominance of one system over others. Although the codes ofbest practices and recommendations were initiated under the marketoriented UK system, many changes and adaptations have beenintroduced in different countries and regimes. Mullineux and Terberger(2006) reject the idea that the UK system should be seen as a modelfor banks in Germany.More recently, the interest for an alternative approach to CorporateGovernance proposes to take into account the welfare of all stakeholdersinvolved in the firm wealth creation, allowing them to participate in thedecision process. This trend moves the overall Corporate Governanceapproach closer to the (traditionally wider) focus of financial institutions,especially those with a “double objective”, like WSBI members.Tirole (2001) models the interests of the non-investing parties includingthe goal of “social interest”, what in practice matches many of theaspects of the Corporate Social Responsibility that most companiesnowadays declare to adopt.Corporate governance of banks and savings banksAs mentioned above, the Corporate Governance of banks needs toconsider the interest of other stakeholders, the most relevant of whichare depositors; hence the need for a relatively tight banking regulationand supervision, as well as bank guarantees (depositor protectionschemes) and other protection mechanisms, including the central bankfunction as a Lender of Last Resort to insure against liquidity runs.Banking supervisors and regulators are well aware of the specificitiesof the banking sector from the Corporate Governance point of view.The Basel Committee on Banking Supervision (BCBS), in the 2010document “Principles for enhancing Corporate Governance” 30 stressesthe relevance of the Corporate Governance practices for supervisorybodies and banking regulatory rules.30 www.bis.org/publ/bcbs176.htm.97

Specifically they focused on the interests of depositors as well as those ofshareholders, asserting that “given the important financial intermediationrole of banks in an economy, the public and the market have a highdegree of sensitivity to any difficulties potentially arising from anycorporate governance shortcomings in banks. Corporate governance isthus of great relevance both to individual banking organisations andto the international financial system as a whole, and merits targetedsupervisory guidance”. More specifically, the report recommends thatbanking supervisors provide guidance for bank Corporate Governancebest practices and determine whether those have been implemented.According to Jaime Caruana, the then Chairman of the BCBS and nowManaging Director of the BIS, “effective Corporate Governance is essentialto maintaining public trust and confidence in the banking sector, andprovides a crucial anchor for sound risk management practices“.For a recent contribution to the debate from the UK perspective seeWalker Review (2009), which emphasizes five key themes: (i) the validityof the “comply or explain” approach, according to which adherence toCorporate Governance Codes should be voluntary, but departure fromstandards should be explained; (ii) the time commitment of Non-Executive Directors (NEDs) should be increased; (iii) the Board needs to bemore engaged in risk policies and the profile of the Chief Risk Officer(CRO) needs to be enhanced; (iv) Fund managers and other majorshareholders should be more involved in investee companies and (v) theBoard oversight of remuneration policies should be reinforced.The present global financial crisis illustrates that, when manager’sdecisions are guided exclusively by short term shareholders’ wealthmaximization, instead of being accountable to multi-stakeholders, costsoutweigh benefits. In this context, there seems to be a consensus aroundthe idea that regulation and supervision of banks should be basicallyaimed at safeguarding depositors’ interests and preventing disturbancesin the financial system arising from bank failures. Despite the specificitiesof different types of financial institutions, their Corporate Governanceschemes require, as a rule, a broader focus on all stakeholders.98

Figure A.1. Structure of agents' relationships in the creditinstitutions activities with stakeholdersDepositorsBorrowersFinancial servicescontractsDepositinsurance,other facilitiesSupervision andregulatory agencyMotivation andincentivemanagementcontractsCredit institutionsmanagersRisky investmentdecisionsStakeholders- Founders- Public Administration- Depositors- Local communitiesShareholders- OwnersFigure A. 1 shows a simplified scheme of the relationships between themain players in the banking institution activities. Any of the arrows reflectrelationships between them as managers, depositors, borrowers, owners,regulatory bodies and other stakeholders, which should be based ontrust, which can be reinforced through a set of Corporate Governancepractices. The financial services contracts should be provided with security,avoiding fraud, ambiguity and litigation. A system with coverage by depositinsurance schemes and the control and supervision by credible regulatorybodies help achieving this security. Efficient managers running creditinstitutions would reduce transaction costs, allowing for the compatibilitybetween the viability of the institution, appropriate remuneration ofsavings and affordable costs of the loans, and facilitating proximity tothe customers.99

This stakeholder approach becomes even more complex as morestakeholders interests’ need to be taken into account. For the purposesof this report, the diversity of ownership structures of WSBI members– including listed companies, public banks, semi-public banks, postal savingsinstitutions, foundations, cooperatives or mutual banks –, introduces avery wide range of stakeholders to whom the institution needs to beaccountable. From this point of view, the current emphasis of CorporateGovernance practices on stakeholders’ interests, which will requiresignificant changes in traditional private banks, fits very well in the typicalapproach of WSBI members. In short, the Corporate Governance modelof the financial sector is converging towards the WSBI members’ model.A wider set of interests makes the governance of the institutions morecomplex and mechanisms of participation, voice or exit, should be providedaccording to the Hansmann (1995) terminology. Table A.1 shows anumber of bank goals and the stakeholder’s interests that fit for many ofthe WSBI typology of members (savings banks).Table A.1.Stakeholders' goals in the savings banks activityMission/ goals Description StakeholdersUniversal access to Favor popular savings and Foundersfinancial services credit avoiding the exclusion Public Administrationsfrom the financial system MutualistsProfit maximization Collect savings and make Shareholdersinvestments under safe Depositorsand profitable terms SupervisorEmployeesPromote competition and Efficiency Foundersprevent monopoly abusePublic AdministrationsMake a contribution to Provide services of not-for- Founderssocial welfare and profit and charitable naturewealth distributionMake a contribution to Take notice of the genuine Public Administrationsregional or national interests of the territory/developmentcountrySource: adapted from Cestona and Surroca (2008).100

The table captures the essence of savings banks, that pursue at the sametime returns to their balance sheet and returns to the society. They contributeto the improvement of living conditions, regional development andenhanced competition in the banking marketplace.Two of the abovementioned goals are crucial for the purpose of thisstudy: promoting access to financial services and profit maximization.Empirical findings show that the broadening of their outreach by savingsbanks does not have a cost in terms of lower profitability (see WSBIPerspectives 52, 2006, for a review). The lack of systematic variation inprofitability as outreach increases is a key element to understand thatsavings banks or WSBI members more generally can achieve goals formultiple stakeholders, including shareholders when they exist, depositors,the public sector or members of a mutual society in its case.The traditional approachAccording to traditional studies, the main recommendations forCorporate Governance in firms in general apply also to bankinginstitutions, as documented by La Porta et al (2002), namely that betterresults are obtained in countries where there are mechanisms to ensureprotection of minority shareholders. Caprio et al (2007), however, arguethat the monitoring by small shareholders could be difficult in the caseof banks, even under strong shareholder protection regimes, due tothe opaque nature of their activity, the lack of information on specificborrowers and their inherent liquidity vulnerability. Their findings, though,do not differ from those of non banking firms: controlling owners withlarge cash-flow rights and strong shareholder protection make bankingfirms more valuable. These empirical findings are resulting from a datasetwith the 10 largest publicly listed banks across 44 countries. It is notpossible to derive direct implications for banking firms with no explicitowners, like mutual societies, or with a complex structure of cash flowrights, as many savings banks. For a review of Corporate Governancepractices in the case of mutual societies see Llewellyn (2007).Government intervention promoting high disclosure standards andmarket discipline is one of the main tools to combat the opacity offinancial institutions. Bank transparency would enhance market disciplineand counteract uncertainty. Transparency would also reduce moralhazard, exacerbated by the government guarantees on bank liabilities, asthe current crisis has shown.101

State owned banksState intervention in the banking industry can take many forms, from thesupervisory and regulatory role, manager of the deposit insurance schemeor owner of banking institutions. State owned banks face a potential doubleagency problem: first, between managers and the state as shareholderand second, between politicians and the society to whom they areaccountable. Since government ownership of banks normally pursuesseveral objectives, measuring performance of such banks should considerseveral dimensions, from financial performance to systemic stability, financialdevelopment or the financing of specific projects or sectors. Although initialfindings in the literature pointed to a harmful effect of state ownership,in particular in terms of efficiency and profitability, more recent researchintroduces new nuances, as more sophisticated empirical estimates introduceadditional and relevant control variables. Among these initial empiricalcontributions the most influential paper was La Porta et al. (2002), whichdocuments a negative relationship between state ownership of banks in1970 and subsequent growth of real per capita GDP. Their findings showthat increasing the state ownership of banks by 10 percent reduces theannual per capita GDP growth rate by 0.14 percent to 0.24 percent.Barth et al (2005) show that, in the case of countries with a highergovernment-controlled banking sector, banking control is stronger, butcorrupt firm-bank relationships also increase. In the Barth et al (2006)book they conclude that countries that choose to have governmentcontrol of the banking industry also tend to regulate heavily bankactivities and new entries in the banking system. Their data do notsupport that government ownership of banks helps developing thebanking sector; on the contrary, under certain conditions it tends toreduce banking development. Megginson (2005) and related empiricalstudies as Beck et al (2006) find that credit growth, portfolio quality,profitability and productivity are higher in systems dominated by privatebanks, although privatization processes may have negative implications interms of layoffs, bank lending requirements or branch closing (a measureof financial outreach).According to Clarke et al (2009), the evidence on the impact ofprivatization of banks on Access to Finance is inconclusive. It seems thata potential tension exists between the goal of performance and theextension of outreach for privatized banks, especially when contractenforcement is poor.102

A case study built by Clarke et al (2009) focuses on the privatization ofa stake of the Uganda Commercial Bank in favor of the large StanbicSouth African bank in an open sale process. They conclude that profitabilityand credit growth are similar to the remaining banks in Uganda.Profitability increased and the data does not support an outreach declineafter private control. As the authors point out, since privatization, the shareof lending devoted to agriculture increased, while the shares of governmentsecurities and lending to manufacturing declined.An empirical research by Caprio et al (2007) shows that concentration ofcash-flow rights as well as stronger law protection are positively correlatedwith banks valuation, even for state controlled banks. The conclusion that(partial) state ownership for large listed banks does not introduce adistortion on their valuation supports some impact of the so called“market discipline”, but does not necessarily hold for banks which arenot listed.Du (2005) shows that more interventionist governments control a higherproportion of banks, interpreting that a larger ownership of, and controlpower over, banks also makes it more legitimate for governments toutilize fiscal revenue to subsidize or rescue ailing banks, ensure thesolvency and liquidity of the system, enhance the stability of the bankingsector and boost the confidence of small depositors. These arguments arealigned with the thesis of Hart, Schleifer and Vishny (1997) that bankers’incentives to conduct risky lending activity will be largely eliminatedunder government control.The conclusions on the impact of government bank ownership differwhen the analysis discriminates between developed and developingcountries. Micco Panizza and Yanez (2007) find that state owned banks,compared to private banks, operating in developing countries have lowermargins and profitability as well as higher overhead costs, but publicownership does not affect their performance in developed countries.These findings are related to political influence on banks activities.The empirical analysis by Korner and Schnabel (2009) shows that theimpact of state ownership of banks on the growth of GDP per capitadepends on the degree of financial development. Contrary to thefindings of La Porta et al. (2002), their results show that the lessdeveloped the financial system is, the more negative the effect of stateownership of banks on economic growth.103

They also report that the impact of state ownership on growth dependson the quality of a country's political institutions and governancestructures. Their measure of private credit captures to some extentfinancial depth, and therefore the extent to which an economy makesuse of financial intermediation.Corporate Governance practices in the public financial sector, andspecifically for state controlled banks, tend to emphasize aspects like therespect for market institutions, restraining political interference, fosteringaccountability as well as a certain degree of agency independence,transparency in decisions and integrity of their members, which meanscompliance with the banking sector standards and codes. Moreover, theOECD Corporate Governance principles also hold for governmentcontrolled banks, including aspects related to the qualification ofmembers of their governing bodies, accountability, effective internal andexternal auditing and compensation schemes according to the bankethical values and strategy.In practical terms, good Corporate Governance practices entail thedisclosure of board of directors’ guidelines, introducing training programsfor directors, appointing auditing committees with clear and explicit rulesunder the control of independent directors, or the separation of thefinancial and non financial business. Encouraging stakeholders’participation in the governance of banking institutions, as well astransparent reporting or regular evaluation of the executives and boardperformance also increase confidence of stakeholders, especially whenthe institutions are under government control.Adrianova et al (2009) point out that the negative view of governmentowned banks – assuming that politically motivated banks make badlending decisions, resulting in non-performing loans, financial fragilityand slower growth, based on La Porta et al. (2002) findings – is notempirically supported. The coefficient of government ownership of banksbecomes insignificant in their regressions explaining economic growth.These findings suggest a robust association of government ownershipof banks with long run growth rates once controlling for countriesinstitutions. Their explanation, from Adrianova et al (2008), is thatgovernment ownership of banks is the result of institutional weaknessesrather than the desire of politicians to control banks. A similar view canbe found in von Weizsaker et. al (2004), which argues in favor of “publicownership but with a strong independent regulation”.104

A very recent contribution to the debate is Rudolph (2009), whose resultsare based on four case studies in Canada, Chile, Finland and SouthAfrica. It concludes that well functioning institutions have clear objectivesas well as checks and balances to mitigate potential mismanagementof resources and limit political interference. An also recent and moreprescriptive contribution is CGD (2009), in which a series of policyprinciples for expanding financial access are presented. As concernspublic banks, the report states that “the goal of each intervention shouldbe clearly understood. Special-purpose government agencies need to beconfined to achieving the objectives set for them”. This coincides withWorld Bank (2006b), which in a broader context states that “theobjectives of State Owned Enterprises should be as explicit as possible”.Postal Savings BanksSome postal organizations provide financial services together with mailcollecting and distributing functions, through their network of branchesand offices. The provision of financial services can be managed by PostalSavings Banks or under an agency agreement with an external provider.According to the 2007 document “A WSBI Roadmap, for Postal Reform“working on better Corporate Governance structures… is far moreimportant than the debate about the ownership structure” 31 .In developing countries, where the private sector is often not able orwilling to promote Access to Finance, government intervention using thePostal Organization could help overcoming the financial inclusionproblem. Transparency and efficiency are required to be effective in thispolicy of fostering Access to Finance. The WSBI roadmap focuses on(i) the process of government transactions, from cash to postal savingsbanks, (ii) the promotion of the postal savings banks network to channelmigrants’ payments and remittances and (iii) the promotion ofcooperation among MFIs and Postal Organizations.The relevance of the provision of financial services through the postalnetwork, and more specifically the increase of the public confidence inpostal savings, according to Scher (2001), is larger as the distrust on banksrises, as the economic situation becomes more insecure or as politicalanxiety rises.31 In June 2010 the WSBI published the position paper ”A WSBI roadmap for postal financialservices reform and development”. See WSBI (2010).105

Examples from the 1930’s Great Depression or the banking crisis of Japanin the 1990s, or even the political and economic uncertainty in Niger andTogo in the 1980s, support his assertion.The range of products offered by postal savings banks depends on theirlegal and regulatory status. Despite the fact that they take deposits, mostpostal savings banks do not have in general a full banking license, nor arethey subject to regular banking supervision, mainly because of their verystrict investment constraints (generally limited to government paper) andthe direct guarantee on deposits provided by the state. For postal banks,the interaction with the remaining postal services complicates, in its case,the accountability of managers and the assessment of financialperformance. When ownership of postal savings bank is partly (or fully)in hands of private investors, as in eastern European countries, theinclusion in the banking regulatory regime is a key condition to providepublic trust. As a World Bank Report (2006) points out, these institutionsplay an important role in providing Access to Finance.The governance of these institutions begins with an appropriate separationof their internal units: postal branch network, postal savings bank andpostal accounts or giro. The improvement in the Corporate Governanceschemes normally focuses in: (i) a professional and experienced board ofdirectors with independent members; (ii) a competitive selection processof management and executive directors; (iii) an implementation of solidinternal audit and control procedures and (iv) the implementation ofup-to-date management information systems.Micro Finance InstitutionsSavings banks typically provide affordable payments and retail savingsproducts, sometimes accompanied by a wider set of banking (credit)products. In their turn, unsupervised Micro Finance Institutions (MFI)supply lending services to microenterprises, playing a complementary rolein the Access to Finance process (but in this case in the assets instead ofthe liabilities side of the balance sheet). Some institutions combine bothfunctions, among them a significant number of WSBI members.106

For example, in Latin America, WSBI members are long-established providersof microfinance services (both savings and credits); in Africa they havetraditionally provided microsavings; in Asia they act as formalmicrofinance providers in different forms (as development banks, savingsinstitutions, postal banks and retail banks); and in Europe microcredit hasreceived recognition in recent years (see WSBI, Perspectives 59).Focusing on households as consumers of financial products, Honohan(2008) finds that a regulatory design for microfinance institutions toensure consumer protection does not impose costs in a marketcharacterized by low margins. His research shows that facilitating accessto financial services such as transactions accounts, or savings accounts,loans from a formal intermediary or insurance policy can reduce poverty.A regulatory environment protecting stakeholders does not seem to be arestriction for the entry of new banking institutions. The positiveexpected returns related to the improvement in Access to Finance seemto prevail over the costs of the regulatory restrictions.The literature does not favor any specific ownership type in microfinanceorganizations in terms of reducing costs. Mersland (2009) compares thecosts of a variety of microfinance institutions including member-basedcooperatives, non-profit organizations or shareholder firms. These costsrefer to (i) the ones derived from limited market competition, (ii) “lock-in”costs due to a single credit provider, (iii) costs related to asymmetricinformation of borrowers and credit institutions, (iv) cost of access toequity capital and (v) cost of monitoring managers. The findings showthat diversity pays: a mixture of different ownership types in the financialsystem, similar to that found in mature banking markets, best servesmicrofinance customers. This ownership typology is similar, to someextent, to the diversity of WSBI members, including many different typesof stakeholders. The conclusion is that no ownership structure type, norstakeholder composition, dominates the others, based on the expectedreduction of the mentioned costs as a yardstick. These conjectures wereempirically supported by Mersland & Strøm (2008), accounting for sixspecific performance aspects of financial access: cost, depth, breadth,length, scope and worth.This kind of evidence shows that it is possible to satisfy the needs ofdifferent types of stakeholders and providing profitable financial serviceswith diverse ownership structures of banking institutions.107

To build the necessary trust with potential users of financial servicesis a key element to succeed on the financial inclusion objective.An “adequate” corporate behavior over time, under realistic conditionsof repeated interaction with borrowers in a community, builds areputation that consolidates the necessary trust or “social capital”.Dowla (2009) analyzes the Grameen Bank in Bangladesh, concluding thatits success is based on building trust, building “social capital”, beingcredible through a conveniently trained staff, with a flexible decisionmaking system, training programs and related activities that becomemechanisms to effectively promote high rates of loans repayment.The spillover has an effect on the system, thus implying that other banksor credit institutions can benefit from a generalized trust environment.This “social capital” can be achieved through a set of CorporateGovernance practices at several levels: branch office, institution,community or the whole country.Variables used to assess Corporate Governance andAccess to Finance, and their linkComparing Corporate Governance practices among banks from differentcountries, according to the abovementioned findings, should includecountry institutional and market conditions. Mersland and Strøm (2008a)specify external governance mechanisms which include product marketcompetition and regulation. The idea is that some kind of substitutioneffect among external and internal governance mechanisms exists.They suggest a set of variables to measure external factors, related tomarket competition, banking regulation for savings banks ormicrofinance institutions, consumer education, deposit insurance and theavailability of information to monitor bank manager’s actions.Internal governance mechanisms refer to the stakeholders-boardrelationship, a particular case being the objective of aligning the interestsof board executives and owners. Bohren and Strom, (2005) refer toadditional aspects such as: the separation between the CEO and theChairman, gender issues, the existence of internal auditor or internalauditing committees and educational background or origin of directors.Comparing several types of bank ownership structures can explaindifferences in governance practices. Crespí, García-Cestona, and Salas (2004)analyze Corporate Governance in Spanish savings banks compared withcommercial banks during the period 1986-2000.108

The paper examines whether a poor economic performance triggersinternal or external governance interventions (e.g., director turnover,chairman or CEO removal or mergers and takeovers) and find that savingsbanks exhibit weaker internal mechanisms of control than commercialbanks and that the only significant relation between performance andgovernance intervention at savings banks is found in case of mergers.The variables used in these governance practices include the following:the types of owners/stakeholders governing the bank and their relevance;the relevance of state institutions in the board or their influence in thebank decision process; the accountability of managers and directors;the existence of nominating committees; the executives dismissalpractices, especially in case of poor performance; the transparency on thedirectors remuneration and the transparency in reporting commercialactivities among directors, relatives and the bank. Also for Spanishsavings banks, Cuñat and Garicano (2009) conclude that those whosechairman was previously a political appointee, did not have postgraduateeducation and/or no banking experience had significantly worseloan performance (higher bad loans).Another strand of literature relevant for this report is related to how tomeasure Access to Finance. Perotti and Claessens (2007) differentiate inthis regard between access and usage of financial services. Access is theavailability of financial services at a “reasonable cost” and usage concernsthe actual consumption of services. Although their focus is on the effectof barriers erected by insiders based on the inequality distribution ofpolitical influence, our goal is to link the diverse sets of CorporateGovernance practices in banking institutions to the access and usage offinancial services. An empirical paper by Beck et al (2007) measuresfinancial sector outreach focusing on the “access to” and “use of”banking services across countries. Their measure of outreach of thefinancial sector in terms of access to banks’ physical outlets is based onthe following indicators:1. Geographic branch penetration: number of bank branches per 1,000 km 2 .2. Demographic branch penetration: number of bank branches per100,000 people.3. Geographic ATM penetration: number of bank ATMs per 1,000 km 2 .4. Demographic ATM penetration: number of bank ATMs per 100,000people.109

The following indicators measure, in the Beck et al (2007) research, theuse of banking services, restricted to bank deposits and loans because ofdata availability:1. Loan accounts per capita: number of loans per 1,000 people.2. Loan–income ratio: average size of loans to GDP per capita.3. Deposit accounts per capita: number of deposits per 1,000 people.4. Deposit–income ratio: average size of deposits to GDP per capita.These are the indicators also used in a recent and influential report byCGAP (2009). The ratios applied to countries or large regions assume auniform distribution of bank outlets within a country and across itspopulation, while in most countries bank branches and ATMs areconcentrated in urban centers. Beck et al (2007) point out that thenumber of loans and deposit accounts is far from being a perfect proxyof the number of people that use these services in a country. Also, theaverage size of loans and deposits to GDP per capita might not berepresentative of the value of services that a typical individual mightreceive. Despite these shortcomings, their regression results show thatthese variables are positively associated with more households havingbank accounts. Honohan (2007) develops an index that tries to overcomethe usual problem of depositors having several accounts in differentinstitutions. He estimates the fraction of the adult population that usesformal financial intermediaries. The estimates are constructed bycombining information on banking and MFI account numbers (togetherwith banking depth and GDP data) with estimates from householdsurveys for a smaller set of countries.Very few studies linking Corporate Governance practices and Access toFinance can be used to establish the direct link between both. A potentialcausal relationship is even more difficult to ascertain. Mersland and Strøm(2008b) compare two types of microfinance institutions with differentgovernance schemes due to their different ownership structures: nongovernment organizations (NGOs) and shareholder-owned firms.Their conclusions are that there are no differences in terms of length,breath and scope of operations between both types of MFI. In terms ofaccess to deposits, or the average loan, they show that NGOs are moresocially oriented than shareholder firms. Some unexplored mechanismslike competition seem to drive NGOs MFI to behave financially asshareholder MFI.110

For the survival of microfinance institutions Cull et al (2007) find nosignificant relationship between profitability and average loan size.The interpretation is that making smaller loans is not necessarily lessprofitable. No specific test on governance practices is done in the study.Another source of governance related findings is Hartarska (2005), whichshows that, for a sample of central and eastern European MFI, moreindependent boards are more effective. Having larger proportions ofunaffiliated directors is associated with better results. Different stakeholdershave an impact on different outcomes: more donor representativesimprove depth, but have a negative impact on sustainability (profitability).Customers’ representation in the board achieves high sustainability levelsat the expense of depth. Contrary to some of the generally acceptedlinks, audit, rating and central bank supervision have a limited impact onthe outcomes.A general result can be derived from the empirical literature: havingmultiple goals as an organization means that the focus of managers is onmultiple tasks, and evaluating their performance becomes more difficult.As a consequence some of the traditional governance mechanisms,like management performance-based rewards focused only on profits,have externalities. Indeed, the potential transmission of risk to the financialsystem derived from the managers’ incentive schemes would be reducedin these organizations. More powerful boards, and the participation ofstakeholders, under the control of the regulatory bodies, seem to bemore appropriate for these multipurpose institutions, especially whenone of these goals is to increase Access to Finance. Another importantlesson from the literature review is that the financial and institutionalenvironment of the countries influences the Corporate Governance system,especially when the levels of Access to Finance differ substantially.111

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ANNEX 2: CASE STUDIES 32CASE STUDY 1:SPARKASSEN FINANZGRUPPE 33The structure of the German Sparkassen is relatively complex, comparedto other WSBI members. The network is integrated by the Sparkassen,the regional associations of savings banks, the Landesbanken (regional,wholesale banks), plus the DekaBank (the central asset manager for theSparkassen-Finanzgruppe), the Deutscher Sparkassen und Giroverband(DSGV, the German Savings Bank Association) and other components ofthe Sparkassen-Finanzgruppe (see chart below).Figure A.2. Structure of the Sparkassen-Finanzgruppe 2008Sparkassen-Finanzgruppe438Sparkassen10 Landes -banken10 BuildingSocieties(LBS)12 Publicregionalinsurancecompanies6 LeasingcompaniesDekaBAnkS-Broker7 CapitalInvestmentcompanies74 VentureCapitalcompanies1 IT ServiceProvider32 These case studies are based to a large extent on comments by and interviews with therespective institutions and/or Associations. We are particularly grateful to WolfgangNeumann (Sparkassen Finanzgruppe), Nyambura Koigi (KPOSB), Virgilio Mortera andDennis Llabres (PPSB), Ines Garcia-Pintós (CECA) and Walter Torres (FEPCMAC).33 This section draws to a large extent on a text provided by the DGSV.113

It is important to note that this picture simply represents the differentelements belonging to the network. It does by no means representownership relationships or hierarchy.IntroductionFor over 200 years the Sparkassen have provided access to financialservices to all strata of the population nationwide and, by granting loansto SME, promoted the development of their respective regions inGermany. This means that in addition to striving for appropriate profitsthey also pursue a public mission. Today the 430 savings banks togetherwith the Landesbanken and other network members have a strongposition in the German financial market with almost 39 million citizens inGermany having one or more accounts with the savings banks, and atotal number of clients of 50 million. They have a very high penetrationin the small and medium-sized business segment.The Sparkassen business model focuses on private customers and smalland medium-sized enterprises. The amount of loans granted to SME isclose to 145 billion euro, and the loans given to individuals amount to290 billion euro. The market share of total non-bank assets is 38 percent.Sparkassen have presence in all regions in Germany, and are the largestplayer in terms of number of branches with around 15,800. No other brandin the financial sector in Germany enjoys recognition and trust like Sparkasse.Corporate GovernanceAlmost all savings banks in Germany are institutions under public law.This specific legal form of Sparkassen is explicitly stipulated in therespective savings banks laws of the Länder. “Träger” (this German legalterm may be translated as “responsible public body”, describing thepublic body responsible for the savings bank; it does not define a strictowner-relationship) of the savings banks therefore are municipalities,districts or joint bodies of local authorities for joint mastering of certaintasks (“kommunale Zweckverbände”).114

It is one of the major characteristics of savings banks in Germany thattheir assets are strictly separated from those of their “Träger“. The savingsbanks are mission oriented. Despite the legal independence there is aclose link between the savings banks and their municipal “Träger“. It isthe “Träger” who decides on some fundamental questions like thefoundation, merger of savings banks and amendments of their statutes.The Träger, too, appoints the majority of the members of the Board ofAdministration (which has to a certain extent a similar function like theboard of directors in a stock company).The savings banks laws of the Länder define the “public mission“of thesavings banks and thus the reason and purpose for founding a municipalsavings bank. This in turn forms the basis for the engagement of thepublic sector in the area of financial services. It is a constitutionalobligation that public-law institutions or entities have to pursue a publicpurpose. For the savings banks under public law this purpose consists ofthe task of assuring to provide in their respective region financial servicestailored to the needs of the population, the small and medium sizedcompanies and the public sector without discriminating against anycustomer group. 34In many cases the respective savings banks laws of the Länder haveexplicit stipulations that the savings bank has an obligation to offercitizens of their region a current account (on credit balance only, nooverdraft facilities), to allow them a participation in the economic life.In this respect, too, the savings banks engage in social responsibility.Roughly 80 per cent of all persons receiving income support have theircurrent account at a savings bank.The operational activities of the Sparkasse focus on its region, for legalas well as for economic reasons (so-called regional principle) 35 .This concentration on the regional market leads to a limitation of risks.The fact that savings banks have to focus on their region has importantpositive economic consequences: the individual savings bank depends onits geographic region as the source for business and benefit potentials.34 Lohmiller, R.:”Sparkassen-Finanzgruppe: Rechtsgrundlagen der Sparkassen”, in:“Enzyklopädisches Lexikon des Geld-, Bank- und Börsenwesens“, 2007.35 See for instance Ayadi, Schmidt and Carbó (2009), chapter 5.115

The commercial success of a savings bank is deeply linked to the economicdevelopment of its region, since it cannot fall back on doing businessanywhere else. The Sparkasse therefore must have a significant interest ina positive economic development of this particular region. Thus a deeplywelcomed economic incentive to finance projects which are strengtheningthe economic potential of the respective region is established.It is not the first priority of the savings bank to make the highest possibleprofit, but to fulfil its task and accomplish its mission (i.e. to guaranteethe provision of financial services – ”Access to Finance“). As far as surplusesdo not have to be retained in order to increase the capital base they willbe used for public welfare oriented purposes, especially in the area ofsocial and cultural engagement as well as promotion of sports.The savings bank is being committed to run a prudent and soundbusiness policy. Based on the savings banks laws of the Länder a numberof especially risk-taking activities are excluded or subject to restrictions. 36The Board of Administration carries out typical supervision and surveillancefunctions. It gives guidance for the business policy, decides on theappointment and the discharging of the Members of the Executive Boardand decides on further issues as laid down in the legal framework:e.g. selling and mortgaging real estate, opening and closure of branchesand generally speaking on the distribution of the surplus as well. The Boardof Administration consists (in most Länder) of representatives of themajor body of the Träger, citizens and for one third of representatives ofthe savings bank’s staff.The Board is in charge to manage the saving banks and is responsible forthe well-functioning and the success of the savings bank.All credit sector institutions (including the savings banks) are supervisedby the Bundesanstalt für Finanzdienstleistungsaufsicht BaFin and theDeutsche Bundesbank. Apart from this supervision savings banks are inaddition supervised by the Sparkassenaufsicht of the Länder, whose taskit is to supervise that administration and management of the savingsbank is in line with the law and the statutes. 37 The Länder task is tocontrol that the business is performed according to the savings bank law,while BaFIN has a financial stability perspective.36,37 Lohmiller, R.:”Sparkassen-Finanzgruppe: Rechtsgrundlagen der Sparkassen”, in:“Enzyklopädisches Lexikon des Geld-, Bank- und Börsenwesens“, 2007.116

Although Sparkassen are legally and economically independent, they arenevertheless linked together by a network structure (Verbund). A veryimportant element of this network structure is the joint liability schemeor “Haftungsverbund” which safeguards the continued existence of itsmember institutions and thus de facto fully protects customers from theloss of their deposits. It means that the network as a whole assumesresponsibility for each of its member institutions. The Haftungsverbundis an amalgamation of 13 protection schemes of the financial group,11 regional Sparkassen guarantee funds, the guarantee fund of theLandesbanken and the guarantee fund of the Landesbausparkassen.These various guarantee funds are interlinked. Should the resources ofthe responsible guarantee fund not be sufficient to support a memberinstitution, the resources of the other guarantee funds will be used inaddition. This is an important factor that contributes to the stability of theGerman banking system. The internal guarantee scheme (which includesliquidity and solvency) consists in an ex-ante pool of funds and acts as aguarantee, instead of the regular deposit insurance. The first fund toreact in case of need is the regional fund. If this regional fund is not enoughto support the ailing institution, cross-regional support could be obtained.On top of this, there is a Risk Monitoring System at the level of the Groupwhich requires minimum standards, establishes common guidelines andaddresses risk situations in case of need. This mechanism is a logicalcomplement of the Joint Liability Scheme, which implies common riskexposures of the Group as a result of the decisions taken independentlyby each member. Thus, the establishment of limits to risk plays a veryimportant role in Sparkassen. The Risk Monitoring System is performed atthe regional level, with a transparency committee at DSGV level. It consistsof a traffic-light system, in which a red colour indicates a problem whichneeds to be closely monitored. If there is a need to intervene, closecooperation with BaFin is carried out. In case of problems a catalogue ofmeasures is available. The Joint Liability Scheme has further implications:for example, rating agencies provide a single rating for the entire group(group rating floor) due to this scheme.Sparkassen business model enables them to operate at the local level but atthe same time to achieve economies of scope thanks to the association withother savings banks. Activities like new product development and support tothe treasury by the Landesbanken and Deka Bank, can be carried out atthe level of the network, ensuring cost-effective processing. Sharing an ITsupplier and the payment system also brings efficiency to the group.117

Sparkassen combine efficiency and contribution to social welfare.As enterprises being in full competition with other banks they have tomake profits. On the other hand profit-maximisation is not their first aimbut on fulfilling their public mission. The minimum profitability thresholdis not defined, but left to the interpretation of each institution. DSGV givesexamples and makes results comparable so that Sparkassen can evaluatethemselves against the benchmarks. Nevertheless, given that Sparkassenare independent institutions, the responsibility for their actions lies in theindividual institution.Saving banks’ capital is the result of their normal financial activity.Regularly Sparkassen have to earn their own funds by carrying out theirbusiness under the condition of full competition. As a rule, there are nodividends distributed to the municipality (which is not the owner in astrict legal sense). Therefore, there is an implicit strategy of protecting theinstitution’s financial solvency which is in fact a necessary condition forguaranteeing sustainability. If no capitalisation is needed in the savingsbank, then profits can be allocated to social activities in the region.There is the possibility of issuing “silent participations” which have novoting rights.Access to FinanceSparkassen’s mission, natural vocation and history are all related to accessto finance. They promote financial inclusion from two dimensions:nnRegional dimension: Sparkassen are present, too, in less developedand more remote municipalities, where commercial banks usually donot have operations. Sparkassen and cooperative banks are the onlyfinancial institution in most rural areas.Time dimension: Sparkassen are more resilient and less prone to creditcrunches in the downturn (or to unreasonable credit expansions inthe booming phase). Their business policy adds to financial stability atthe country level and reduces systemic risk. Thus, in 2009, Sparkassenincreased their market share of corporate loans by 0.9%, as shown inthe following graph.118

Figure A.2. Corporate Loans Market Share-Change in 2009(percentage points)2,01,00,00,90,60,1-1,0-0,3-0,4-0,9-2,0SavingsbanksLandesbankenCooperativesectorBig banksRegionalbanks andothercommercialbanks/branchesof foreignbanksOtherbanksThe core element of Sparkassen consists in the proximity to the client andthe deep knowledge of the customer. The high branch density allowsdeveloping a close link with the customer. Thanks to this business model,more time is spent with the client and better information is collected,which leads to relying less on credit scoring techniques and other metrics(which provided a false sense of comfort in this crisis) and more on adirect and close knowledge of the client. Thus, decision making can beperformed at the local level, without losing the identification with theregion. As an outcome of this proximity and knowledge of the customer,e.g. no credit crunch was observed during the crisis.Sparkassen contribute to the diversity of the banking system. They areobliged to open a current account to any citizen in their region. For thisreason, they are very often the only option for bankarisation for clientswhose profitability is below a certain threshold, and therefore a veryimportant instrument in the fight against financial exclusion.119

Sparkassen have increased their product offer, adapting it to thechanging customer needs. Although in their origin (and even in theirname) they were more oriented to saving than to credit, both aspectshave tended to become equally important over time. The Sparkassen inEast Germany, which were limited to saving products during thecommunist times, have evolved to offering a full range of bankingproducts, too. Even though the natural orientation of Sparkassen istowards traditional SME-financing, microcredit and deposit-takingbusiness, they offer a wide range of banking products.The Sparkassen also contribute to the welfare of the community throughthe activities financed either directly by the savings bank or byfoundations created by them. In 2009 the German savings banksnetwork spent more than half a billion Euro on projects in the areas ofculture, social activities, sports, science, education, protection of theenvironment and other community services. These activities further servethe mission and the interests of all stakeholders.Link between Corporate Governance and Access to FinanceIn the case of Sparkassen there is a strong link between corporategovernance and access to finance. According to a previous edition ofPerspectives 38 , geographic proximity, which is closely linked to the regionalprinciple, plays a crucial role in shaping their lending business. The stablecustomer-bank relationships and the deep knowledge of the market allowapplying specific know-how, while maintaining independence. All thismakes Sparkassen more flexible than branches of big commercial banks.The clarity of the double objective (efficiency and public service for thearea/ region) has successfully focused the business strategy ofSparkassen. Savings banks have a public service obligation established inState savings banks laws which prevents them from concentrating solelyon the generation of profits.The independence of Sparkassen means that they decide locally how totranslate the mission into a concrete strategy, business policy, productrange and prices. This ensures that the savings banks adapt their businessactivities to the customers’ needs in their respective municipalities,thereby contributing to promote economic development.38 Balance Structural Policy: German Savings Banks from a Regional Economic Perspective,Perspectives 58, June 2009.120

Financial education is also an important objective of Sparkassen. Their indirectcontribution to financial inclusion goes therefore further than providingbanking services to underserved segments of the population. Social objectivesare another indirect contribution to access to finance. As a rule, they areset once a year and the degree of its fulfilment is analysed by the Board.Sparkassen serve the demand for smaller loans whose costs can only becovered if their fixed component can be kept low. A sufficiently low levelof fixed costs can be achieved thanks to the close proximity to the clients(which reduces costs assessing creditworthiness) and to the efficienciesgained due to the integration into a strong financial network. The proximityof the Sparkassen to their clients enables the savings banks to be rapidand flexible as compared to commercial banks thanks to the deepknowledge of the clients and the know-how of the local markets.121

CASE STUDY 2:KENYA POST OFFICE SAVINGS BANK (KPOSB)IntroductionThe savings services were introduced in 1910 when it was set up asa department within the East African Common Services. When the EastAfrican Community broke up in 1977, the Kenya Government establishedits own savings services under the Kenya Post Office Savings Bank(popularly referred to as Postbank). Postbank was incorporated underthe KPOSB Act in 1978, which enabled it to act as a deposit-takingorganization. The overall mandate of the bank is “To encourage thriftthrough mobilization of Savings for National Development”.KPOSB has currently 1.3 million customers and serves mainly rural andremote areas, where 70 percent of the population lives and where banksoften do not operate. To reach these areas KPOSB utilises the postalnetwork system through an agency agreement. The total depositsamount to EUR 97 million, which represents 3 percent of the marketshare. The profile of the bank’s average customer is a low-middle incomeperson with a mixed combination of urban and rural areas.The Kenyan financial sector has undergone a series of significanttransformations over recent years. The main one has to do with mobilemoney transfer offered by Safaricom’s M-PESA, which has providedKenyans with a cheaper and safer method to transfer money, becominga world reference as a success story. Wage-earning people belonging tolow-middle income segments have gained access to finance since someretail banks have developed loan-products specially designed forthese segments, usually not served by traditional financial institutions.This increase in competition occurred along with a deterioration in thesavings capacity of the low-middle income segment due to the post-electionevents of 2008 and the global financial crisis- which has specially harmedthe tourism industry. The enactment of the Deposit Taking MicrofinanceAct has enabled MFIs to collect deposits. These recent developments havenegatively affected KPOSB, which has lost market share.122

Corporate GovernanceKPOSB is wholly owned by the Government of Kenya and reports to theMinistry of Finance, and is not supervised by the Central Bank of Kenya.The responsibilities of the Ministry of Finance include supervision andpolicy guidance. Deposits are mainly invested in government’s TreasuryBills and Bonds.KPOSB’s Board is composed of five non-executive directors, who maintaincontrol over strategic, financial, operational and compliancerequirements, and the Managing director, who is in charge of runningthe day-to-day operations. The five non-executive Directors are theChairman, a representative of the government of Kenya, who is currentlythe Permanent Secretary to the Treasury, and three additional members.The Board is appointed by the government for a 3-year term, which maybe renewed, extended and/or terminated and new members appointed.The criteria for the appointment of the members of the Board arecompetence, strategic priorities and gender. Competence is a particularlyrelevant criterion since the lack of skills may lead to mismanagement ofthe financial institution. Regarding gender, at least one third of themembers of the Board must be women. Currently there are three womenin the Board if the Secretary (who seats in the Board) is also considered.To ensure focus on delivery of the responsibilities, three Board committeeshave been recently established: Risk, Audit and Human Resources.The committees, chaired by a member of the Board, incorporatemembers of the management team. Following good corporategovernance practices, the Chairman of the Board does not sit in thesecommittees in order to ensure neutral opinion on the issues. The HumanResources is in charge of selecting the senior managers after following aprocess where positions are advertised both internally and externally.The appointment of the Managing Director involves a process whereboth the government and the Board participate. The Board is responsiblefor pre-selecting three candidates through a competitive process, whomust meet certain skills, while the government takes the final decision onwho is to be appointed. The term of office of the Managing Director isthe same as that of the Board members (3 years). The rest of KPOSBmanagement team is selected by the Board, independently from thegovernment, and the Board has full power to sanction these managersbased on their performance which is evaluated on a semi annual basis.123

While the members of the Board may be re-appointed once their 3-yearterm is over, management tends to be very stable. As a result, and incontrast with normal private institutions, the Board may tend to focus inshorter term issues and management in the long term. However bothmanagement and the Board are involved in the strategic planning sessionwhere the strategic direction is set.The Government of Kenya has adopted as a policy, the application ofPerformance Contracts in the management and monitoring of the PublicService. This is a management tool to foster accountability to the publicfor targeted results. A performance contract is a mutually agreeddocument between the government and the public company thatspecifies the responsibilities, commitments and obligations of bothparties to the agreement. It lists the key result areas, the level ofperformance expected towards achievement of agreed targets, and howthis performance will be measured. All public institutions are ranked byexcellence in performance by using a compound score. The betterperforming earn special recognition, through trophies and other tokenawards while the worse performers, though publicly shamed, areencouraged to improve. The Board also evaluates performance of theManaging Director and its own performance on an annual basis.In the specific case of the KPOSB, a 3-year strategic plan, stating longterm goals, is prepared. The yearly review of this plan leads to an annualAction Plan that includes the short term objectives. The performancecontract is signed between the government and the Board, and thefulfilment of the targets is evaluated by the government on an annualbasis, though reports are submitted on quarterly as well as annual basis.When targets are not met, clarifications and corrective actions/measuresare provided. If they are not satisfactory, the Managing Director issanctioned with possible termination of service.The Board, not the government, appoints and fires first and second levelmanagers, whose performance is evaluated according to the mentionedPerformance Contract which is cascaded from the Board to all managersand subsequently to all staff members. This improves service delivery tothe public by ensuring that senior managers are accountable for results,and in turn they hold those below them accountable. Moreover, all staffis evaluated according to a Scorecard every 6 months (based on theobjectives of the area, derived from the Annual Plan), after which theyget a written review of their performance. Yearly salary increments arerelated to this performance.124

Among the initiatives that the government of Kenya has established toenhance corporate governance is the compulsory attendance to aCorporate Governance training program by the directors of any publicinstitution the first time they are appointed. This training includes anexam that directors should pass. And since 2008, the KPOSB’s AnnualAccounts include a Corporate Governance Statement.Access to FinanceKPOSB’s objective of providing access to finance is clear, as can be seenin its mission: “to provide accessible and sustainable banking and otherrelated financial services, through innovative delivery systems for wealthcreation to the benefit of customers and other stakeholders”.KPOSB has joined local and global players in the money transfer marketand is able to provide Kenyans with international and local moneytransfers. The extraordinary growth of the M-banking money transferthrough the M-PESA system (which started operating in 2006 andreached 8 million clients in 2009), has made transfers considerably saferand cheaper, but entails a formidable competition for KPOSB. M-PESAcustomers can buy virtual cash from a network of agents that includesairtime resellers and retail outlets acting as banking agents. The virtualcash can either be transferred or withdrawn from any of the participatingagents. M-PESA is operated by Safaricom, a Mobile network operator.Currently, there are more than 8.3 million users, 70 percent of whichhave active virtual accounts. Since Safaricom mobile users amount to 12million, there is still margin to expand the customer base. The branchlessbanking service offered by M-PESA is designed to enable users tocomplete basic banking transactions without the need to visit a bankbranch and at a very low price, which has reduced the incentives to havean account at KPOSB. The higher level of competition and a reduction insavings capacity in KPOSB’s target segment have eroded the postalsavings bank’s market share during 2009.KPOSB reacted to these changes by developing and implementing a newbusiness model to improve efficiency and customer service. To remaincompetitive, it has also reached an agreement with M-PESA to become abanking agent. KPOSB has modernized itself, moving from savings bookto cards. In the New Business Model customers use a debit card totransact at the Point of Sale Terminals.125

To supplement this network, Postbank also provides services through over650 ATMs operated by Kenswitch and PesaPoint network, distributedacross the country, to ensure that customers are served conveniently.Postbank also has installed 26 own- ATMS.To achieve its mission of providing accessible banking services, besidesthe recent incorporation of ATMs to the network, KPOSB offers savingsand payments services through a wide network of 92 online branchesand a further 350 outlets operated on agency agreement with the PostalCorporation of Kenya and other Agents.Accessibility for KPOSB does not only mean having a wider branchnetwork and reaching poor areas, but also charging smaller fees andcommissions and being a friendly bank. Requirements to open anaccount have been set at low levels, compared to the rest of Kenyanfinancial institutions. The requirements are a minimum balance of Kshs200 (~2 euros) to open the account (Kshs 300 to have a debit card), anational I.D. card, filling up the application and a photo that can be takenin the branch. It just takes 15 to 20 minutes to open an individualaccount. KPOSB also provides salary accounts (where the minimumbalance is zero) and student accounts (where the minimum balance is200 Kshs, there are no card fees and the charges for ATM utilization arelower). This enables KPOSB to reach low and middle income populationand provide depositors without access to banks with a safe, convenientmethod to save money, and to promote savings among the poor.To better serve its clients KPOSB is evaluating the possibility of providingcredit. KPOSB does not operate under the Banking Act, and its Act,the KPOSB Act, does not allow the bank to offer credit. Therefore ifKPOSB was to be allowed to give credit either the KPOSB Act wouldhave to be amended or KPOSB would have to adapt to the Banking Act.For the KPOSB to comply with the terms of this act it should implementcertain changes that include auditing of its accounts by private auditorsand not the Kenya National Audit Office, as is presently the case, beingKPOSB a State Corporation or a parastatal. Though the bank hadadopted international accounting standards, it is not capitalised andunder the Banking Act no single owner can have more than 25 percentof the capital. In the past, however, the Central Bank of Kenya (CBK) hasgranted an adaptation period to other institutions to facilitate compliancewith some of these requirements.126

Related to the concession of credit by KPOSB, the CBK is concernedabout the government’s influence on it. Political interference is one of themajor threats for the successful functioning of government-ownedfinancial institutions and there have been bad examples in Kenya in thepast. This is therefore a risk that would need to be carefully mitigated.KPOSB´s has the social responsibility of providing access to finance incompliance with international quality standards. Thus, Postbank is ISO9001:2000 certified in line with initiatives by this financial institution toimprove service quality to its customers within the requirements set bythe Ministry of Finance.KPOSB, through the World Savings Bank Institute (WSBI), is enrolled inthe Bill and Melinda Gates Foundation program aimed at doubling thenumber of accounts in rural areas, providing therefore a higher level ofoutreach. To fulfil this objective KPOSB is developing an agent structurefocusing on people with ongoing retail businesses and requiring them tohold a minimum balance (own balance) for security reasons. A team atKPOSB will monitor and manage these agents.Link between Corporate Governance and Access to FinanceIn the case of KPOSB there is a strong link between corporate governanceand access to finance. A specific and clear reference is included in themission providing a focused business strategy. The Board’s mandate alsohighlights the financial sustainability of the institution, providing incentivesto the Board members and senior management to make proper use ofavailable resources, which in the end leads to more availability of fundsthat can be used to promote financial inclusion.The most relevant instrument to ensure the fulfilment of this mandate isthe Performance Contracts and Service Level Agreements They includeagreed quantitative and qualitative objectives that monitor that theresults of the business strategy and service quality are aligned with theinstitutional mandate. The fulfilment of these objectives is monitored ona regular basis by the government. Given the clear focus of the KPOSB’smandate on both financial inclusion and sustainability, specific targets areincluded in the Performance Contract.127

Some examples of the relevance of the access to finance objectives in theperformance contract are the following 39 :n Under the Non-financial indicators category, one objective is theintroduction of deposit collection through mobile phone services.n Related to Operations, the objectives are to increase the deposit baseby 30 percent and the number of customer accounts by 19 percent.In both cases, this growth will be driven by introducing an efficientdelivery system; removing maintenance and ledger fees, developingmarket led products, and savings and financial literacy educationcampaigns.n For 2009 KPOSB has also the objective of introducing two newproducts and 50 new Points of Sale (POS).For more information on Kenya Post Office Savings Bank (Postbank)please visit their website: www.postbank.co.ke.Table A.2.Performance evaluation criteria, criteria weights and performancetargets for year 20092008 2009CRITERIA UNITS WGT (%) 2006 2007 Prov TargetsOPERATIONS1) Deposit base Kshs (Billion) 8 10,78 11,539 11,757 15,2922) Customers’ accounts Number (Million) 6 1,090 1,280 1,295 1,5443) Product range Number 5 11 13 18 204) Compliance withthe approved budget % 3 N/A N/A N/A 100%5) Project Implementation:a) Timeliness % 2 100% 100% 100%b) Quality % 1.5 100% 100% 100%c) Relevance % 1.5 100% 100% 100%d) Cost Efficiency % 1.5 100% 100% 100%e) Completion Rates % 1.5 100% 100% 100%SUB-TOTAL 3039 An example for the Operations sections is included below.128

OPERATIONS1. Deposit Base: It was projected to grow by 30.1 percent from a totaldeposit base of Kshs 11,757 billion (provisional) in 2008 to Kshs15,292 billion in 2009. The growth would be driven by:i) Introduction of efficient delivery systemii) Removal of maintenance and ledger feesiii) Development of market led productsiv) Savings/financial literacy educations/campaigns2. Customers’ Accounts: The total number of accounts for 2009will increase by 19.23 percent from 1,295 million to 1,544 million.The growth will be driven by:i) Target marketingii) Removal of maintenance and ledger feesiii) Introduction of efficient delivery systemiv) Savings/financial literacy educations/campaignsv) Creation of business alliances3. Increase in product range: The Bank will introduce 2 new marketdriven products in 2009.4. Compliance with the Approved Budget: The Bank will adhere tothe approved budget.5. Project Implementation: The Bank will identify, appoint, and trainindependent agents in 50 locations to transact its business on anagency basis. The project also entails the installation of 50 Point ofSale (POS) terminals in the appointed locations. The project will costKshs 5 million.129

CASE STUDY 3:PHILIPPINES POSTAL SAVINGS BANK (PPSB)IntroductionThe Philippine Postal Savings Bank (PPSB) has a long and eventful history.Initially created at the beginning of the last century as a division of theBureau of Posts, its purpose was to foster savings by bringing bankingservices to rural areas. Its operations were severely damaged during theSecond World War and it was not until 1946 that the Postal Savings Bankwas able to resume operations. In the 1960´s it was unable to competewith private banks that offered higher interest on savings deposits.While the private banking sector, particularly rural banks, expanded intothe countryside with more attractive products and services, PPSB’s operationsdeteriorated and its solvency status declined. In 1976 the governmentdissolved PPSB. Almost more than twenty years later, in 1994 the PhilpostBoard of Directors reopened the Philippines Postal Savings Bank as asubsidiary to “develop the rural financial sector to ensure adequatesupply of credit to the countryside.”The Central Bank considers the PPSB as an institution in general termssimilar to other thrift Institutions, a sub-sector composed by 74 institutionswith a market share of 9 percent of the system. PPSB share is around0.1 percent of the system. PPSB deposits amount to EUR 68 million andits loans EUR 34 million, of which EUR 2 million to SME.The activities of thrift institutions are similar to those of commercialbanks, but banking regulation establishes certain limits: in particular, theycannot develop international activity and letters of credit. However, in thespecific case of PPSB, it benefits from the privilege of receiving depositsfrom Government institutions, limited only to government-owned banks.This is reflected in the deposit mix: 52 percent of its total deposits(according to the latest figures) were contributed by government entities,while the remaining 48 percent were generated by the private sector.At the same time, since the former are subject to much higher reserverequirements (50 percent, compared to 6 percent in the case of depositsof the public), it follows that a significant amount needs to be invested ingovernment bonds or paper issued by the Central Bank. The final resultis that PPSB’s balance sheet includes significant positions vis-à-vis thepublic sector both in the asset and the liability side, with a relativelybalanced net position.130

Corporate GovernanceThe Central Bank of Philippines is playing an important role in creating asound corporate environment in the banking sector. The Central Bankissued a Code of Good Practices that all the institutions (PPSB among them)are expected to comply with. In addition, it is preparing a comprehensivestrategy to raise the standards of corporate governance by supporting theamendment of the Corporation Code and by developing a corporategovernance assessment and a manual to provide a standard method forevaluating governance structures and practices of financial institutions.Furthermore, locally organized and commercial banks had to participatein the Corporate Governance Survey using the Performance Scorecard forBanks. The results of this evaluation show that universal and commercialbanks get a high score, 84 percent, while government corporations getjust 57 percent, indicating that there is room for improvement amongpublic banks.In the specific case of PPSB, it has a Corporate Governance Code thatwas revised in 2009, according to which “effective bank governancecannot be legislated; sound bank governance is an attitude, a way ofdoing things, and the manner in which owners, directors & managementfulfil the obligation assigned by the public trust”.A major shortcoming in the governance of PPSB is the lack of a charter.The institution is governed by its “Articles of Incorporation”, which canbe approved or amended by its own Board. This is felt as a drawback byPPSB management, in particular from the point of view of having arelatively clear and stable mission and legal protection.In the Philippines there are many other government-owned banks:Development Bank of the Philippines (DBP), Land Bank of the Philippines(LBP), Veterans Bank (now private), Al Amanah (an Islamic Bank). Thisdiversity is based on history and not on strictly different missions. Initiallyborn to address a certain market failure, this in general is no longer thecase. The possibility of merging some of them has been discussed severaltimes, but no decision has been made. The Central Banks does notconsider that these public banks do provide in general any “additionality”to the private sector; government banks being rather competitors ofprivate banks.131

The Board of PPSB consists of nine executive and non-executive directors.The President of the country “recommends” the nomination of eightof them to the Postmaster General, but in practice this is tantamountto a direct nomination. The remaining director is the Postmaster Generalex-officio.Members of the Board are subject to a self assessment process annuallyin which they need to evaluate their performance and the procedures ofthe institution. The actual performance measures cover governancequality and performance, controlling, compliance, working relationship,and also complaints and cases against any director. The governanceperformance indicators refer in general to the establishment of objectivesconsistent with the bank’s goals, but there is no specific indicator relatedto access to finance.The only shareholder is the Philippine Postal Corporation (PPC), but thePPSB is a separate legal entity, with full autonomy under the supervisionof its own board of directors, and its own balance sheet, and profit andloss accounts. This seems the right approach to promote the efficientmanagement of the postal savings bank, since running a postalorganization and running a bank are completely different businesses,with different risks and challenges, requiring different strategic plans,know-how and management skills.Capitalisation is a pending issue. PPSB has an authorized capital stock ofPHB 1 billion (USD 22 million), only 50 percent of which was subscribedby the Post Office and only 30 percent was paid-up. Retained earnings overrecent years increased this figure to 40 percent, but the accumulation ofprofits is a very slow process to increase capital: at the present pace it willtake 25 years to reach the level of the authorised capital.As a “quid pro quo” for the insufficiency of capital, PPSB does notdistribute dividends to its only shareholder. This seems to be a “badequilibrium”, as a result of which PPSB does not get capital from itsshareholder (Post Office) to allow for expansion and the shareholder doesnot extract any tangible benefit from its investment in PPSB. This institutionranks number 16 among Thrift Institutions in terms of deposits, number17 in loans, number 12 in investments (basically public debt) and onlynumber 31 in terms of capital, which is revealing of its undercapitalisation.132

To address the problem of capital, PPSB is considering the entrance ofnew shareholders. There is a major drawback. If the participation of othershareholders exceeds 50 percent PPSB will automatically lose the privilegeto receive government deposits, which would put at risk its currentbusiness model.Several other alternatives have been considered to address the problemof capital, but for some reason or another all have been turned down bydifferent stakeholders. PPSB privatization is under discussion in thecontext of a national strategy directed by the Privatization ManagementOffice (PMO), which depends on the Department of Finance (DOF).Access to FinanceThe mission of PPSB is to “be a strong and dynamic national institutionthat will mobilize savings and promote entrepreneurship to wideneconomic opportunities. Provide the Filipino people with a full range ofprofessional banking and financial services accessible in all areas of thecountry and promote the values of thrift, industry and prudenceespecially in the youth”. The mission of PPSB, although related tofinancial inclusion, is defined with certain flexibility, so that the preciseimplications in terms of policies are open to decision by PPSB Board andmanagement. For now, access to finance goals have not been translatedinto specific objectives. Thus, the activity of PPSB is similar to that of otherThrift Institutions, apart from its role in receiving public deposits.There is no clear division of labour in the Philippines among the fourgovernment owned banks. Furthermore, they tend to compete withcommercial banks in their offer of financial services. According tointernational good practices, the presence of public banks normallyrequires a very clear mission and mandate that addresses a market failure,especially if there are more than one such institutions. The case of thePhilippines seems to depart from these good practices.The range of products offered by the institution is relatively broad.Some of these products are related to access to finance objectives, butthe extent of the latter is limited by the small number of branches andthe ensuing lack of penetration in rural areas.133

The Post Office has 2,817 branches, 25 of which are used as PPSB branches.There are two reasons for this. First, there is an IT connectivity problem inthe post network. And second the fact that PPSB capital is consideredinsufficient by the Central Bank blocks expansion in practice. This situationimplies that PPSB does not benefit from what is normally considered asthe main advantage of postal banks, namely the capillarity of the postalnetwork. This has also significant implications for the access to financepolicies, which are constrained by this limited penetration of the network.The limited number of ATMs (32, 25 of which are in the branches) doesnot contribute to provide local and regional outreach either.For the PPSB to be able to use the post office network, it would first needto find a solution to the capital increase problem. The plan is alsodependant on the Central Bank forthcoming regulation on “third partyentities as agent banks”, which includes a reference to the Postal network:“government-owned post offices form part of the Bangko Sentral ngPilipinas financial inclusion scheme” 40 . According to interviews with thecentral bank, this regulation will probably relax the conditions for the useof agents, which may benefit the outreach capacity of PPSB.This regulation also considers building the policy framework that willallow thrift and rural banks to network with retailers such as 24-hourconvenience stores, particularly those based in provinces. This frameworkwill help to service underserved areas in the country that have yet to bereached by banks that tend to operate in highly urbanized areas.The financial inclusion strategy of the Central Bank includes other optionslike tapping third-party entities such as sari-sari stores (conveniencestores) to act as bank agents in the use of electronic cash transfers.Under this plan, sari-sari stores will be allowed to act as cash centreswhere Filipinos can buy or cash e-money. It is important to bear in mindthat the Philippines is one of the leading countries in the world in the useof e-money and M-Banking, along with Kenya and South Africa. The planwill also include big chain stores. This scheme seeks to provide everyFilipino access to financial services, which now are hardly accessible bythose in rural areas.40 BSP Regulations in the Pipeline, Updates on BSP Supervised/Regulated FinancialInstitutions, Bangko Sentral Ng Pilipinas, Supervision and Examination Sector, September2009.134

Financial inclusion ranges very high among the priorities of the country’sfinancial policies. The Central Bank considers M-Banking as one of themain lines of action in this strategy, hence its favourable regulatorytreatment. PPSB, due to its limited outreach and small size, is howevernot seen by the authorities as a very important instrument in financialinclusion policies.PPSB does not see itself as an institution specialised in either saving orlending products, having both the same importance. The institution,besides offering deposits (both in Philippines pesos and in dollars) andconsumer and commercial loans, offers products related to access tofinance. The latter include a micro-finance program, loans, remittances,and provision of credit to small and medium enterprises, in particular inthe transport sector (the Post depends on the Transport Ministry, hencethe connection). There is a special Government Fund of PHB 0.5 billion(USD 11 million) for the transport sector channelled through PPSB. As anexample, PPSB has a special line of credit for financing the purchase of“Jeepneys”, the most popular means of transportation in the countryand a typical sector for SME.PPSB depends excessively on government deposits, a source of activitythat is neither particularly related to financial inclusion, nor sustainable inthe long term, to the extent that countries in the process of financialdeepening tend to liberalise these deposits at a certain stage ofdevelopment. Without this advantage, PPSB viability would be questioned.Link between Corporate Governance and Access to FinanceThe divide between success and failure in promoting sound corporategovernance and access to finance depends largely on the strength of aclear policy and a strong political commitment. Aware of this, the CentralBank has developed an integrated and comprehensive vision and policyfor the financial sector that takes into account the current situation andthe role of the different players as well as the benefits for the low-incomepopulation. The strategies of the central bank concerning corporategovernance and access to finance are however relatively independent:the first is aimed at ensuring adequate risk control and transparencywhereas the second focuses on the use of new technologies to reduceintermediation costs.135

PPSB is an institution concerned with good corporate governancepractices, in line with general banking sector standards sponsored by theregulatory and supervisory authorities. These corporate governancestandards are aligned with typical banking objectives, but not tailored inparticular at access to finance objectives.The mission of PPSB includes general references to access to finance.These general guidelines have only partly been translated, however, intospecific financial inclusion policies or objectives. Thus, it seems to becertain disconnect between the Corporate Governance Code and thefinancial inclusion objectives as stated in the Mission of the institution.Given its limited number of branches, PPSB needs to develop a strategyto increase its outreach. The postal branch network could be leveragedto expand its distribution network and reach underserved communities.This strategy would require in its turn a solution of the problem ofre-capitalisation. PPSB could also consider benefiting from the policyframework that will allow thrift banks to use the convenience storeoutlets to increase its capillarity.PPSB also promotes activities that indirectly contribute to promotefinancial inclusion. Thus, it has financed part of the Financial LiteracyProject, which aims at increasing savings among small savers through theprovision of teaching guides on Financial Literacy to all public elementaryschools across the country. Improving financial literacy programs anddedicated products to educate the young on financial services help tolower the barriers to entry.136

CASE STUDY 4:SPANISH SAVINGS BANKS 41Spanish savings banks (Cajas) are financial institutions assimilated tobanks in their operational capacity, while they maintain singular attributes incritical aspects such as (i) their legal nature, (ii) the composition of theirgoverning bodies and (iii) their regulation. The latter has two sources:(i) some aspects related to organizational issues (for example, theircorporate governance), depend on the regional governments; (ii) aspectsrelated to their condition as credit institutions (prudential regulation)depends on the central bank (Banco de España), whose regulation andsupervision of Cajas is harmonised with that of commercial banks.Savings banks are private foundations with a social mission related topublic interest and subject to market financial performance standards.A fairly singular feature is the allocation of a percentage of their profits to“community welfare activities and projects”, the Obra Social. A minimumof 50 percent of after tax profits should be retained as reserves, and therest is assigned to Obra Social. On average in the last decade the ObraSocial has received between 20 percent and 30 percent of the profits,over 1,600 million euro only in 2008.Cajas are specialized in channelling popular savings to finance retailclients and SME. They have strong local roots and a dense network ofbranches, which have expanded considerably since a 1988 law eliminatedthe legal restrictions to geographical expansion beyond their region.The origins of Spanish Savings Banks go back to the 18th century and thethen popular Montes de Piedad (pawnshops). The first Spanish savingsbanks were born in the 1830s with a mission of fighting usury,channelling savings towards reasonable investments, and developingsocial activities in their own region. Many of them were then sponsoredand founded by catholic organizations and/or the municipalities.Modern savings banks offer a complete range of products and services totheir clients. As of end 2009 they had a market share of 47 percent in theprovision of credit and 48 percent in savings products 42 .41 In July 2010, when this report was in an advance stage of production, the Spanishgovernment approved a reform of the Law regulating saving banks, with importantimplications in terms of corporate governance. These proposed changes are not includedin the case study.42 Source: CECA, www.cajasdeahorros.es/instantanea.htm, December 2009.137

The two biggest savings banks (La Caixa and Cajamadrid) rank 3rdand 4th in the Spanish financial system (which includes banks andco-operatives). The Spanish savings banks have made an importantcontribution to competition in the system, which underwent a profoundconcentration process in the 1990s. Had it not been by the role of thesavings banks in their respective regions, this concentration would haveentailed a decrease in competition. The Herfindal-Hirschman index forthe Spanish banking sector stands at 631 in 2008, indicative of a lowconcentration. When only banks are considered, the concentration indexalmost triples to 1,725 (CECA Social Responsibility Report 2008).According to their charter, Cajas are “profit-making” financial institutions,that is, private foundations created for the provision of financial services andthe satisfaction of the demand of the community. One of these objectivesis to foster saving, consistently with their originally principal activity.They also pay special attention to lending to households and SME, thanks totheir extensive and dense network of branches. Spanish Cajas participateactively in special financial institutions such as the Spanish MutualGuarantee Societies (Sociedades de Garantía Recíproca - SGR) that haveproven to be an effective tool to support collateral-less entrepreneur’saccess to finance through the provision of joint guarantees.Cajas have also been the main provider of mortgage finance for homeacquisition (with a 57 percent market share). The large exposure of someCajas to the building sector has affected them in a negative and severeway once this sector began to undergo major contraction in the recentglobal crisis context.Cajas are a good exponent of proximity banking, as shown by the factthat they are the only provider of financial services in over 14 percent ofthe municipalities in Spain (vis-à-vis just 0,5 percent for commercial banksand 3,50 percent for cooperatives). Moreover, 70 percent ofmunicipalities below 1,000 inhabitants that only have one provider offinancial services are attended exclusively by savings banks.Spanish savings banks have pursued a strong social orientation since theircreation. Cajas’ strategy of fighting against financial exclusion isstructured around three main pillars: proximity banking, adoption of newproducts and services to new realities aimed at servicing the financiallyexcluded and financial education.138

The uniform financial regulation of banks and savings banks and theauthorisation of geographical expansion in the late 1980s fostered,however, an increasing focus of their commercial activity on theprofitability objectives, whereas the social orientation is reached throughthe abovementioned out-of-balance community welfare activities andprojects (financed through the allocation of profits to social, cultural andenvironmental projects - Obra Social) and their business model.Corporate GovernanceThe absence of owners in the savings banks explains why they are subjectto extremely detailed regulation by the regional governments, especiallyin the areas related to governing bodies and their decision makingprocesses. This strong relation between savings banks and the regionalgovernments allows them to play an important role in the economic andsocial activities of their geographic areas. Their proximity to the economicagents and their knowledge of their financial and social needs facilitatethe orientation of the Obra Social towards the projects most importantfor the community (see Guindos et al, 2009).However, this close link with regional governments has other implications.The risk of political interference in the management of savings banksneeds to be countered by effective corporate governance practices.A plurality of stakeholders is represented in the governing bodies ofsavings banks (General Assembly, Board of Directors and ControlCommission): depositors, staff, municipalities, regional governments, thefounding entities and other community representatives (such aseducational, social and professional associations). Most of the savingsbanks’ charters establish an identical distribution in the Board of Directorsand the General Assembly, following four general principles for thegoverning bodies: diversified participation, balanced assignation of powers,no permission for majority public participation and independence.This diversity allows for the alignment of the institution’s financialobjectives (profitability) and other stakeholders’ aspirations (positivesocial impact). Compliance with the institutional mission of the savingsbanks, worded as “the creation for social and economic wealth, the fightagainst social and economic exclusion and the generation of economicactivity”, has been somehow translated into obtaining a sufficientfinancial profit that allows for the channelling of funds to the Obra Social.139

For example, the charter of Caixanova states among its main social objectivesthe “facilitation of all kind of financial and para-financial services aimedat improving both satisfaction and coverage of the community’s needsand demands, as long as they are compatible with a reasonable globalprofitability and the limits of the corporate social responsibility”.The Civic Banking model of Caja Navarra (CAN) provides a very goodexample of stakeholders’ participation in the use of the profits. Clients areinformed of the amount of profits generated by their individual transactions,an innovative aspect of transparency that will surely be extended to otherparticipants in the market, and they decide to which projects, amongthose fulfilling certain criteria, should these profits be allocated. Only in2008, nearly 600,000 clients participated in this initiative.Among represented stakeholders, the role of Municipalities stands out fortheir relevance in maintaining the regional roots of the institution.Municipal bodies have a particular interest in guaranteeing access tofinance in their respective towns, which partly explains the vocation ofCajas for being present in as many rural locations as possible. Apart fromtheir specific representation in the General Assembly (25% on averagefor the whole system), Municipalities often hold additional seats withinthe founding entities representation, which renders them the biggestunified voice among all stakeholders, after depositors (see figure A.3.).In the context of a new regulation to promote transparency of entitiesissuing securities tradable in official secondary markets, the mandatorypublication of an Annual Corporate Governance Report was introducedin 2003, also affecting savings banks. However, no specific CorporateGovernance recommendations for savings banks have been issued at themoment, although there are several ongoing initiatives in this direction.In this sense, it is worth pointing out that the Spanish Cajas were pioneer inthe adaptation of the disclosure of social and environmental information tothe guidelines of the Guide for the elaboration of sustainability reports 2006(GRI-G3) and more specifically to its Financial Services Sector Supplement.The Cajas’ commitment to transparency and communication to itsstakeholders has been systematically fulfilled with the adoption of the G3and the creation of a working group aiming at achieving standardizationof relevant sectoral information and the definition of the financial sectorindicators, under GRI framework and coordination.140

Figure A.3. Governing Bodies - Spanish savings banksStakeholders’ representation in the General Assembly(system average in 2008)GENERAL ASSEMBLY- Depositors (36,4%)- Founding entity (12,3%)- Staff (9,8%)- Municipalities (25,0%)- Regional Government (8,1%)- Public interest bodies/other (8,4%)Board of DirectorsControl CommissionExecutive CommissionBoard of Directors’CommissionsAuditing CommissionSource: Guindos, L., Martínez-Pujalte, V., Sevilla Segura, J.(directores) (2009) “Pasado, Presentey Futuro de las Cajas de Ahorro (Past, Present and Future of the Savings Banks)”.Access to FinanceThe founding objectives of Spanish savings banks are (i) fostering economicand financial development in their respective areas of influence, (ii) fightingsocial and financial exclusion and (iii) return earned profits to society.In their day to day business, savings banks are the main providers of creditand saving mechanisms to households and small businesses. The strategyof fighting against financial exclusion of the Cajas is structured aroundthree main pillars:1. Geographic access to finance, materialized in the capillarity of theirextensive network of branches and offices, especially in thoselocations where savings banks are the only bank offer.141

According to the Banco de España there were 24,292 savings banksoffices in September 2009, as compared to 14,987 banks’ offices.With data for 2008, savings banks are present in municipalities thatcover 97 percent of the Spanish population. This pillar is the result ofthe Cajas business model flexibility and the development of efficientbranch models in small of marginal areas such as mobile branches,small offices (basically for savings collection), agents, etc. that allowfor attending the demands of each community by offering the servicesthat are really needed. Ibercaja and Caja Ávila, for example, stand outfor being present in locations with very low population, as low as369 citizens (on average) in Aragon in the case of the former and538 in Castilla Leon in the case of the latter.2. Adoption of new products and services to new realities, aimed atservicing the financially excluded. Three initiatives are worthmentioning in this regard: micro credits, the Montes de Piedad (whichprovide of collateralized or pledged loans) and remittances services.a. Micro-credits provided by savings banks’ Obra Social haveconsistently grown both in number and volume. Cajas have granted1,492 microcredits in 2008, amounting EUR 15 million, the accumulatedfigures from 2001 exceeding EUR 100 million in 11.500 operations.b. In 2008, 26 Montes de Piedad, all of them owned and administeredby savings banks, financed over 270,000 new pledged loans, anoutstanding increase in activity due mainly to the financial crisis.Even though Spain has very high level of bankarization, Montes dePiedad serve thousand of clients who are not formally integrated inthe financial system, 18 percent of which are immigrants.c. Remittances services are one of the typical catalysers of financialintegration for migrants. Savings banks soon acknowledged this realityand joined efforts with CECA to develop a mechanism to improvethe remittances services and therefore facilitate migrants’ regularsending of money back home. In 2008, over 135,000 remittanceswere processed through the savings banks’ remittances platform“BRAVO”, created in 2004 by CECA and 32 Spanish savings banks.3. Financial education. Spanish savings banks have signed an agreementwith the Bank of Spain and the Securities and Exchange Commissionto collaborate in the National Financial Education Plan. CECA has alsocreated the first Spanish Network on Financial Education.142

The web-based tool www.rededucacionfinanciera.es is a platform forsharing specific initiatives and experiences on financial education.In addition to these initiatives, some individual savings banks have beenvery active in providing their communities with the necessary capacitybuilding in finance (see examples in www.rededucacionfinanciera.es).Link between Corporate Governance and Access to FinanceThe uniformity of regulatory treatment with banks and the very high levelof competition in the sector have forced Spanish savings banks to maintaintheir profit-generating capacity around the market average. This hasimplied a challenge for the savings banks governing bodies in their dutyof ensuring the dual mandate of financial objectives (profitability) withother stakeholders’ goals (positive social impact).The variety of stakeholders represented in their governing bodies tends toensure that the Cajas follow the double bottom line objectives. Thisdiversity is also a mechanism to avoid political interference, since intheory not single stakeholder has the capacity to control the institution.One very important contribution of Spanish savings banks to financialoutreach is the capillarity of their branch network. The fact that Cajasare the only bank offer in many rural locations may be explained to alarge extent by the important role municipalities play in the corporategovernance of the institution, through their representatives in the GeneralAssembly and the Board of Directors.Spanish savings banks play a prominent role in the development offinancial products tailored at minorities, low income segments and/orunbanked population. They are pioneers in micro-finance, offer specialproducts for immigrants (in particular remittances) and have a strongcommitment with financial education programs.143

CASE STUDY 5:CAJAS MUNICIPALES DE AHORRO Y CRÉDITO (CMAC) IN PERUIntroductionWith 20-25 years of experience, CMAC are now consolidated institutionsin the Peruvian financial landscape. They withstood very serious shocks andchallenges: the hyperinflation in the late 80s and early 90s, the privatisationsin the 90s, the Asian crisis and its aftermath in the Latin American regionand, more recently, the 2009 crisis (which in the case of Peru has beenrelatively mild). They have grown to become significant players in criticalsegments of the Peruvian economy, offering an increased variety offinancial products, becoming a reference in the microfinance industryboth nationally and internationally and spanning across the country,especially in remote areas.CMAC are savings banks, modelled on the German savings bank system,created in the early 80s to correct the market failure of restricted accessto banking services for large segments of the population, mainly inthe provinces.The General Law of the Financial System defines CMAC as entitiesthat offer deposits to the public and whose specialty consists on lendingto micro and small enterprises. Although their market share in Peru’sbanking system (measured as the percentage of total loans) is small,just 6 percent, CMAC have remarkably contributed to the excellent healthof the microfinance business environment in the country, as a result ofwhich Peru has been awarded the top position in the 2009 MicroscopeIndex. This index, launched by the Inter-American Development Bank,Corporación Andina de Fomento, International Finance Corporation andthe Economist Intelligence Unit, covers 55 countries.CMAC have gradually expanded the scope of its financial services fromcredit pledged with gold or silver jewels as guarantees to consumercredits and microfinance. In the last decade their services have expandedto include a range of new activities, from agricultural credit (since 1999)to housing finance (since 2002). A recent modification to the GeneralLaw of the Financial Insurances and Administrator of Pensions FundsSystem in 2008 authorizes new operations to the CMAC, such as leasing,factoring and discount of bills of exchange.144

On the liability side, CMAC offer mainly savings accounts and fixeddeposits. The total credit granted by the CMAC system increased 39percent in 2008, amounting to USD 1,795 million. At the end of 2009,all CMAC together had almost 400 branches. The majority of the loanswere granted in the provinces (93.1 percent) and the rest in Lima, thoughonly 79.8 percent of the deposits came from the provinces (which reflectthe fact that branches in Lima are mainly used to collect deposits).Around half of the loans were granted to small and medium-sizeenterprises. CMAC have received almost USD 1.5 billions in deposits(as of December 2008), 2.5 times more than Mibanco, a leading bank formicroenterprises (MES).Corporate GovernanceThe mandate of CMAC is clearly related in the law to the support ofthose segments of the population that are not bankarized, mentioningspecifically the micro and small companies. Commercial banks often facedifficulties in assessing the risks of projects from this sort of enterprisesand are thus reluctant to provide credit to them.The cajas have increased their organizational complexity to centralizesome business functions. The twelve CMAC that exist today in Peru aregrouped in the Peruvian Federation of Municipal Savings and Loans Cajas(FEPCMAC). This umbrella organization was created in 1986 with themission of representing the CMAC and to identify, develop and manageservices of common interest. A private, financially and administrativelyindependent organization, it performs evaluation, advisory and trainingtasks. FEPCMAC provides information on the performance of CMAC tothe Banking and Insurance Superintendency (SBS) that conducts bankingsupervision and wields the necessary power of sanction. This division oflabour has contributed to the effective supervision of CMAC, given theclose proximity of FEPCAMC to individual cajas. The FEPCMAC alsopromotes economies of scale through joint projects for developing newproducts and financial services.The governing body of the FEPCMAC is the General Assembly, whichconsists on three representatives from each of the twelve CMAC: theMayor, the President of the board of directors and a manager of each ofthe member CMAC. The General Assembly gathers once a year andelects through secret ballot the president and six directors of the Board.145

A distinctive characteristic of CMAC is its governance structure. The supremedecree that regulates CMAC establishes as governing bodies the Boardof directors and the joint management. A very interesting feature ofCMAC is that, despite having only one shareholder (the Municipality),the appointment process of the board of directors involves differentstakeholders. The board consists of 7 members: three elected by themunicipal representatives or town councillors (two elected by the majorityand one by the minority, which cannot be one of the councillors); onedesignated by the Catholic Church; one from the chamber of Commerce,one from Corporación Financiera de Desarrollo (COFIDE) – a second tierpublic bank – and finally one from the local association of MSME.This plurality implies that the board represents the interest of differentstakeholders. This corporate governance system enhances theindependence and representativeness of the Board.Like in the case of similar institutions in other countries, CMAC face somechallenges from the point of view of increasing their capital throughmechanisms different from retaining profits. Several possibilities havebeen explored to broadening the capital base, including a partnershipwith multilateral organizations. The law does not exclude the presence ofother shareholders, different from the Municipality. However, there arechallenges to their participation in the board. According to the bankingsupervisor, if this participation does not reach 50 percent, it is difficult forthe new shareholders to get a seat in the Board; if it exceeds 50 percent,the new shareholder would take over the board and decide on the directorywithout a restriction, which would damage the plurality of the Board.The fact that there is only one shareholder entails some problems fromthe corporate governance point of view. Rating agencies have declaredthat they are not increasing the rating unless there are privateshareholders. There have been attempts, but there is strong politicalresistance in some municipalities for the risk of a loss of their identity.The board of directors exercises the institutional representation of theCMAC and does not have executive responsibilities. The board of directorsdesignates the Joint Management members for four-year renewable periods.It is formed by three managers and it has under its command the legalrepresentation of the CMAC, being this the only executive unit responsiblefor its economic, financial and administrative functioning. The jointmanagement has a common responsibility for the daily conduct of business,which instils a culture of consensus in the decision making process.146

A specificity of CMAC is that the managing body tends to focus on longterm issues, whereas the Board tends to have a shorter view. While themembers of the Board rotate annually (though they can be re-elected)management is in general more stable. As a result, in contrast with theaverage private institutions, the Board tends to focus on short term issuesand the management takes a more strategic perspective and a longer runview. This implies profound differences in corporate governance ascompared to the standard approach.Like in any public institution, the risk of undue political interference isalways present. It seems, however, that CMAC manage to contain thisrisk. The main elements of the corporate governance that facilitatelimiting political intervention are the following:nnnnAfter promulgation of Law 23039 in 1980 creating the CMAC, theSupreme Decree 157-90 EF (special law) regulates the operations ofthe CMAC at the national level dealing with extent and jurisdiction;establishment; control, supervision, and regulation; assets andreserves; operations; limitations; and governing bodies. Of specialrelevance are article 4 that establishes the obligation to retain at least50% of earned profits into reserves for capitalisation, and article 8that clearly defines the CMAC governing bodies and their functioning.The banking supervisor (SBS) also plays an important role byreinforcing the pressure to retain profits and ensuring prudent riskmanagement. As emphasised by the Basel Committee, “a fulladministrative separation of the ownership and banking supervisionfunctions [is necessary] to minimize political interference in thesupervision activities”. The case of CMAC is a case in point of howpublicly-owned financial institutions require checks and balances fromother Government agencies to prevent political interference, whichare a threat to the successful functioning of savings banks.The role of the financiers, among which COFIDE stands out.Besides appointing one member of the Board, this second tier publicbank introduces incentives for adequate capitalisation. For example,the injections of subordinated debt by COFIDE have been made conditionalto a higher share of retained profits (75 percent instead of theminimum of 50 percent that is included in the law). Other financiers,such as international financial institutions and bilateral agencies playa significant role in the mitigation of this potential risk.The General Comptroller of the Republic, responsible for the adequatemanagement of public resources, also exercises control over CMAC aspublicly owned institutions.147

There are other creative ways to limit political intervention. According toCaja Piura, a good understanding of the objectives of the caja by theMunicipality serves two important goals. On one hand, it focuses theactivities of the CMAC, and on the other hand, it helps to preventpolitical interference. In addition, this caja promotes financial educationamong staff, management and owners (municipality).Being subject to public procurement rules is an important shortcoming ofCMAC. These rules limit savings banks’ competitiveness vis-à-vis banksand introduce a layer of complexity in CMAC’s daily operations. This issuehas been raised to the attention of the Peruvian Congress, where a lawon competitiveness improvement is under study. CMAC are also at adisadvantage to attract and retain the human talent needed to run thebusiness, as a consequence of the limits on remuneration. To compensateemployees CMAC have implemented generous training policies thatfurther benefit the institution.Compared to banks, CMAC have a higher cost of deposits. This is dueto the prohibition to CMAC to offer current accounts, which have alower rate as well as to the struggle of smaller CMAC to get funding.The removal of this prohibition will improve the level playing field forcajas and banks. CMAC have also higher capital requirements thancommercial banks (14 percent against 9 percent), which exacerbates theproblem of recapitalisation.Access to FinanceThe mission of CMAC is undoubtedly related to fostering financial inclusion(see table below with the mission of selected CMAC). The General Lawof the Financial System defines CMAC as entities that obtain resourcesfrom the public and whose specialty consists on lending to micro andsmall enterprises.148

Table A.3.MissionMissionCMAC AREQUIPACMAC PIURACMAC SULLANACMAC TRUJILLOCMAC CUSCOTo benefit segments of the population lacking financial support oftraditional banking, thus promoting growth, development and labourin the Arequipa community.To provide financial services with efficiency, timeliness andcompetitiveness, both to small and micro enterprises (SME) andto families who normally do not have access to the banking system,by encouraging their self-sustainable development, based on savingand self-help.Profitable microfinance institution, focused on providing timely andquality services.To improve the quality of life of the population, through innovativeand excellent financial services and advanced technology.To promote socio-economic development, promoting saving andgrowth of the micro and small enterprise sector with quality ofservice, undertaking the commitment to improve the welfare of ouremployees, creating value for shareholders, customers and thecommunity at large.The mission of CMAC is to contribute to the development of the community,where MES are the predominant form of enterprise and therefore theirnatural clients. The clear specification of financial inclusion objectives inthe mission is a factor that explains their perseverance in following thisendeavour. CMAC have been very successful in mobilizing the lending tomicro entrepreneurs from the very beginning despite the adverse nationaleconomic climate in the early 1980s. CMAC have granted more than653 million euros in loans to MSME and 322 million euros in loans toindividuals. As stated above, CMAC have played an active role in thedevelopment of the microfinance business industry, being the very firstformal/supervised financial institutions massively providing microcredit inthe country in a sustainable way.A further measure of the success of cajas is the recent dramatic increaseof competition in the MES segment, partly related to the “demonstrationeffect” of the good results obtained by CMAC, which has attractedother entrants: CRACs (Cajas Rurales de Ahorro y Credito), Edpymes(Entidades de Desarrollo para la Pequeña y Microempresa) and bankshave aggressively entered this segment, as a result of which CMAC havefaced a severe competition.149

CMAC play a complementary role to private commercial banks by lendingto segments that lack financial support. However, the increasedcompetition in the MES segment has led CMAC to also entering thetraditional banking segments of commercial and consumption credit.It seems natural that CMAC try to satisfy their clients‘ needs as theyimprove their standards of living. Offering services to other segments inthe market does not alter the cajas’ financial inclusion policies. The increasein commercial lending compared to MES in some cajas should not implya departure from their original function. Given that for CMAC the marginsof commercial loans are smaller than MES loans, cajas may reconsidertheir strategy and focus on their core business.It is noteworthy that CMAC provide access to finance both in the goodand in the bad times, whereas commercial banks retire when economicconditions worsen. Thus, CMAC supported their clients during “El Niño”and during the recent global crisis (although mild and short-lived in Peru)while banks tended to abandon the MES clients when conditionsdeteriorate. This anti-cyclical behaviour contributes to financial stability.According to the interviews with CMAC Arequipa, Piura and Sullana, theirclients recognize their support, and once they “mature” and are temptedby banks, they tend to remain loyal to the cajas. This confirms that onlyinstitutions with a vocation for MES foster financial inclusion permanently.A further contribution of CMAC to the Peruvian economy is that thecomposition of credit of CMAC is particularly centred on local currency,in a country where dollarisation is widespread (although showing a certaindeclining trend). CMAC have contributed to the de-dollarisation of thePeruvian financial system and therefore also to enhance financial stability.As in the case of the German savings banks, the regional principle initiallyapplied to CMAC, precluding them from competing in a region differentfrom their own. However, the wide regional income disparities and thedesire to reduce geographical concentration of risks led the SBS toauthorize the opening of branches in other geographical areas, includingLima Metropolitan, the biggest nationwide. This authorization has hadpositive effects, since it allows for better risk diversification and makes itpossible to extend financial services to a wider segment of small andmicro entrepreneurs. Furthermore, it has promoted lower interest ratesand the competition is now more dynamic in the micro finance market.150

As of September of 2009, the twelve CMAC have 398 offices, 35.8 percentmore than in September of the previous year, of which 18 percent arelocated in Lima and 82 percent in the provinces. This geographicdistribution shows that CMAC have a broadly decentralized distributionnetwork and are committed to provide local and regional outreach.Agreements with non-banking correspondents (NBC) have beeninstrumental to the geographic diversification process in urban areas,which has only started. The agreements signed with NBC increase theoutreach and foster financial inclusion, but have some potentialdrawbacks that should be checked, like for example entering onto areaswhere the new entrant has no previous experience or knowledge, andobtains the marginal clients. The SBS is considering removing certainbarriers to the operational capability of NBC, like the opening ofaccounts, a move that would be positive for financial outreach.The alliance with Banco La Nación, a public bank, to use its branches inremote areas where it is the “Única Oferta Bancaria”– sole banking offer –has been positive and could be enhanced. However, this developmentshould be carefully assessed considering the long term synergies ofpotential partners.Some cajas are being particularly innovative in the implementation ofplans in their geographic expansion. For example, caja Sullana, is increasingits penetration by negotiating broader agreements with other networkssuch as pharmacies and gas stations under the new NBC regulation.To further expand its network CMAC Sullana is also using their own“Oficinas de Informe”, which do not perform operations but study creditunderwriting and channel clients to the nearest branch or NBC. Some areacquiring CRACs as a way to increase outreach in rural areas. Caja Piura’splan to expand its geographic coverage consists on moving from thecoast (the most developed and bankarised areas) to the interior (sierra(mountain) and selva (jungle) areas), which is less developed and lessbankarised. To rapidly increase its presence in rural areas CMAC Piura hasrecently acquired a CRAC (Caja Rural San Martín).Besides targeting segments of MES, which indirectly contributes to localentrepreneurship, CMAC reinvest a part of their profit in socio-economicdevelopment by financing projects in their provinces.151

According to the law, at least 50 percent of the profits have to be retainedfor capitalisation, and the rest can be distributed to the Municipality forsocial and infrastructure projects according to the priorities established inthe Provincial Development Plan. The use of the distributed profits forsocial and infrastructure projects ensures that the activity of CMACcontribute to the progress of the community. It is also an important elementfor the visibility of the social usefulness of CMAC that contributes to theirimage. In practice, however, these profits enter the regular budget ofthe Municipality as an additional income, without neither a mechanismto earmark these profits to the aforementioned projects, nor any methodto ensure the enforcement of this legal requirement.There is a drawback to a generous profit distribution, since CMAC canonly be capitalized through retained profits. Since the distribution isdecided by the Board of Directors, composed by representatives of theMunicipality, there is a certain trend to decide to distribute the maximumpercentage. COFIDE, which is a member of the board, has fostered theadequate capitalisation of several CMAC by providing funding in theform of subordinated debt with the condition that CMAC retain at least75 percent of the profits. Better capitalized CMAC can grant morecredits, further promoting access to finance.According to CMAC, the access to the wholesale payment system wouldallow them to grow and improve their connection with the rest of thesystem, facilitating the liquidation of cheques transactions by clients.Nevertheless, the Central Bank has until now attached more importanceto preserve the stability of the payments infrastructure by maintaining accesslimited to players above a certain threshold in terms of external rating.To remain relevant to their customers, CMAC innovate in their productoffering, tailoring them to market needs. For example, CMAC Arequipahas launched a new product, “micropyme”, which reduces collateralrequirements to obtain a credit (which is compensated by an enhancedtrack record as MES).Link between corporate governance and access to financeIn the case of CMAC several corporate governance mechanisms tend toincrease financial inclusion. The diversity of stakeholders in the appointmentof the Board of Directors ensures a community approach in the strategyof the institution.152

Furthermore, the consensus culture as a result of the Joint Managementstructure further contributes to the mission and objectives of the institutionof reaching remote areas and promoting banarization, since consensus ismore easily built along the natural objectives of the institution.The fact that CMAC can only be capitalized through retained profits isone of their main weaknesses. The role of COFIDE (and also the SBS) toensure that a sufficient part of profits is retained is important to fosteradequate capitalisation.The distribution of profits for social and infrastructure projects is also ameans to ensure that the activity of CMAC contributes to the progress ofthe community. However, currently there are no mechanisms to earmarkfunds to these projects. The development of such control tools and givingpublicity of the link between CMAC profits and public investments wouldhelp to improve the public image of the CMAC.The case of Peru provides an excellent example of proactive revision ofthe mandates to allow cajas to adapt to the needs of the market andremain relevant players. The revision of the law to authorize geographicexpansion is an example of regulation (in combination with a certaincorporate governance principles already at place) aimed at fosteringfinancial inclusion. It has allowed CMAC to reach underserved segmentsof the population in other regions. It has also dynamized the market,by increasing competition, lowering interest rates, further promotingfinancial inclusion. Furthermore, it has contributed to ensure the longtermviability of the cajas by allowing them to increase risk diversification.153

154

ANNEX 3: QUESTIONNAIREQUESTIONI. General information1 Name of your institution (in English)2 Name of your institution (in your national language)3 Country in which headquarters are located4 Name of person who completed this questionnaireFunctionE-mail address5 Telephone (general number, with international and local code)6 Internet site7 General E-mail address8 Is this a Post Bank institution? (mark 1 if the answer is yes, zero otherwise)9 Is the institution, in majority, a rural institution?(mark 1 if the answer is yes, zero otherwise)II. Access to Finance10 How many credit accounts does the institution have?11 How many deposit accounts does the institution have?12 Amount of loans given to micro companies?(in millions of national currency)13 Non Performing Loans (NPL) (in Millions of your national currency,90 days delay)III. Organization information-Board of Directors14 How many people are in the board of directors?15 How many board of directors members are appointed by the authorities(national, regional or local)?16 How many board of directors members are appointed by Shareholders?17 How many board of directors members are appointed by Clients?ANSWER155

QUESTION18 How many board of directors members are appointed byOther stakeholders?(If relevant, please specify)19 How many members of the board of directors have a life mandate?20 How long is the average mandate of a board member?21 Is the CEO and the Chairman the same person in the institution?(mark 1 if the answer is yes, zero otherwise)22 Is the CEO of your institution a women? (mark 1 if the answer is yes,zero otherwise)23 What is the proportion of women in the board of directors ? (in %)24 What is the proportion of shareholders in the board of directors? (in %)25 How many times a year does the board of directors have a meeting(any type)?26 Years of experience of the General Manager/Managing DirectorIV. Financial Reporting27 Is it mandatory for your institution to report regularly to anymarket regulator?28 Does your institution have a rating from an agency?(mark 1 if the answer is yes, zero otherwise)29 Does the institution have internal audit? (mark 1 if the answer is yes,zero otherwise)30 Does the institution have external audit? (mark 1 if the answer is yes,zero otherwise)31 What is the Rating of your instituition given by an outside agency?V. Corporate Governance32 Does the institution have to follow an internal CorporateGovernance Code?(mark 1 if the answer is yes, zero otherwise)33 Does the institution has to follow an external Corporate Governance Code?(mark 1 if the answer is yes, zero otherwise)34 Does your institution publically informs about operations related todirectors and stakeholders (including shareholders)?35 Does your institution informs CEO and top executives salaries?ANSWER156

ANNEX 4:THE HONOHAN INDEX 43COMPOSITE MEASURE OF ACCESS TO FINANCIAL SERVICESAlbania 34 Cambodia 20Algeria 31 Cameroon 24Angola 25 Canada s 96Antigua & Barbuda 48 Cape Verde 40Argentina 28 Cent African Rep. 19Armenia s 9 Chile 60Austria s 96 China 42Azerbaijan 17 Colombia s 41Bahamas, The 53 Comoros 20Bangladesh 32 Congo, Rep. 27Barbados 56 Costa Rica 29Belarus 16 Cote d'Ivoire 25Belgium s 97 Croatia 42Belize 46 Cuba 45Benin 32 Cyprus s 85Bermuda 48 Czech Republic s 85Bhutan 16 Denmark s 99Bolivia 30 Dominica 66Bosnia & Herzeg. 17 Dominican Rep. 29Botswana 47 Ecuador s 35Brazil s 43 Egypt 41Bulgaria s 56 El Salvador 26Burkina Faso 26 Eritrea 12Burundi 17 Estonia s 8643 Note: ‘s’ means household survey data used; ‘b’ means fitted data using bank depositnumbers and not WSBI numbers.157

COMPOSITE MEASURE OF ACCESS TO FINANCIAL SERVICESEthiopia 14 Liberia 11Fiji 39 Libya 27Finland s 99 Lithuania s 70France s 96 Luxembourg s 99Gabon 39 Macao, China [14]Gambia 21 Macedonia, FYR 20Georgia 15 Madagascar 21Germany s 97 Malawi 21Ghana 16 Malaysia 57Greece s 83 Mali 22Grenada 37 Malta s 90Guatemala s 32 Mauritania 16Guinea 20 Mauritius 60Guyana s 14 Mexico s 25Haiti 15 Moldova 13Honduras 25 Mongolia 25Hong Kong, Chn 38 Morocco 39Hungary s 66 Mozambique 12India 48 Myanmar 19Indonesia 40 Namibia s 28Iran, Isl. Rep. 31 Nepal 20Iraq 17 Netherlands 100Ireland s 88 Nicaragua s 5Italy s 75 Niger 31Jamaica 59 Nigeria 15Jordan 37 Norway 84Kazakhstan 48 Oman 33Kenya s 10 Pakistan 12Korea, Rep. 63 Panama 46Kyrgyz Republic 1 Papua New Guinea 8Latvia 64 Paraguay 30Lebanon [79] Peru 26Lesotho 17 Philippines 26158

COMPOSITE MEASURE OF ACCESS TO FINANCIAL SERVICESPoland s 66 Sweden s 99Portugal s 84 Switzerland 88Romania 23 Syrian A.R. 17Russian Federation 69 Tajikistan 16Rwanda 23 Tanzania 5Samoa 19 Thailand 59Saudi Arabia 62 Timor-Leste 13Sao Tome & Principe 15 Togo 28Senegal 27 Trinidad & Tobago 53Seychelles 41 Tunisia 42Sierra Leone 13 Turkey 49Singapore 98 Uganda 20Slovak Republic 83 Ukraine 24Slovenia 97 United Kingdom s 91Solomon Islands 15 United States s 91South Africa 46 Uruguay 42Spain s 95 Uzbekistan 16Sri Lanka 59 Venezuela 28St. Kitts and Nevis 49 Vietnam 29St. Lucia 40 West Bank & Gaza 14St. Vincent & Gren. 45 Yemen, Rep. 14Sudan 15 Yugoslavia, FR 21Suriname 32 Zambia 15Swaziland 35 Zimbabwe 34159

160

ANNEX 5:QUANTITATIVE RESULTSCountry Corporate Governance IndexOverall Corporate Governance IndexSpecific Corporate Governance Index161

Country Corporate Governance IndexDOING BUSSINESS 0 1WORLDECONOMICFORUMDepth ofcreditinformation,Public registry Depth ofStrength and Private credit Public Privateof legal bureau information registry bureau FinancialCountry rights index coverage index coverage coverage developmentAustria 0.50 0.70 0.19 0.17 0.01 0.39 0.61Botswana 0.55 0.70 0.39 0.67 0.00 0.51 0.56Brazil 0.45 0.30 0.55 0.83 0.23 0.59 0.49Chile 0.48 0.40 0.52 0.83 0.33 0.39 0.51Colombia 0.47 0.50 0.48 0.83 0.00 0.61 0.42El Salvador 0.50 0.50 0.44 0.17 0.21 0.95 0.56France 0.56 0.70 0.33 0.67 0.33 0.00 0.65Indonesia 0.34 0.30 0.30 0.67 0.22 0.00 0.41Kenya 0.55 1.00 0.23 0.67 0.00 0.02 0.41Korea 0.54 0.70 0.37 0.17 0.00 0.94 0.56Lesotho 0.37 0.70 0.00 0.00 0.00 0.00 0.41Macau 0.51 0.60 0.37 0.50 0.17 0.45 0.56Peru 0.46 0.70 0.24 0.17 0.23 0.32 0.44Philippines 0.30 0.30 0.19 0.50 0.00 0.06 0.41Spain 0.56 0.60 0.45 0.83 0.45 0.08 0.63Sweden 0.57 0.50 0.56 0.67 0.00 1.00 0.64Tanzania 0.40 0.80 0.00 0.00 0.00 0.00 0.41Thailand 0.42 0.40 0.39 0.83 0.00 0.33 0.48Togo 0.27 0.30 0.07 0.17 0.03 0.00 0.43Uganda 0.39 0.70 0.00 0.00 0.00 0.00 0.46Vietnam 0.51 0.80 0.29 0.67 0.19 0.00 0.43162

Overall Corporate Governance IndexOverall =Specific*Country Specific CountryAustria 0.34 0.67 0.50Botswana 0.32 0.58 0.55Brazil 0.25 0.56 0.45Chile 0.34 0.71 0.48Colombia 0.32 0.69 0.47El Salvador 0.13 0.27 0.50France 0.39 0.70 0.56Indonesia 0.14 0.41 0.34Kenya 0.31 0.57 0.55Korea 0.27 0.49 0.54Lesotho 0.18 0.48 0.37Macau 0.28 0.55 0.51Peru 0.29 0.63 0.46Philippines 0.20 0.66 0.30Spain 0.43 0.76 0.56Sweden 0.46 0.81 0.57Tanzania 0.27 0.68 0.40Thailand 0.24 0.58 0.42Togo 0.10 0.36 0.27Uganda 0.22 0.56 0.39Vietnam 0.14 0.28 0.51163

Specific Corporate Governance IndexAudit -Rating -Specific Board CEO- Proportion Internal RegulatoryCGI composition Chairman of women Code quality MissionAustria 0.67 0.70 1 0.22 0.67 0.94 0.5Botswana 0.58 0.00 1 0.22 0.67 0.67 0.9Brazil 0.56 0.00 1 0.60 1.00 0.58 0.2Chile 0.71 0.00 1 0.66 0.67 0.93 1.0Colombia 0.69 0.00 1 0.57 1.00 0.59 1.0El Salvador 0.27 0.00 0 0.13 0.67 0.61 0.2France 0.70 0.41 1 0.12 1.00 0.87 0.8Indonesia 0.41 0.00 1 0.00 1.00 0.45 0.0Kenya 0.57 0.00 1 0.67 0.67 0.51 0.6Korea 0.49 0.00 0 0.00 0.67 0.73 0.6Lesotho 0.48 0.00 1 0.30 0.67 0.29 0.6Macau 0.55 0.00 1 1.00 0.50 0.8 0.0Peru 0.63 0.75 1 0.14 1.00 0.62 0.3Philippines 0.66 0.00 1 0.67 1.00 0.52 0.8Spain 0.76 1.00 1 0.39 1.00 0.88 0.3Sweden 0.81 0.58 1 1.00 1.00 0.96 0.3Tanzania 0.68 0.66 1 0.86 0.67 0.38 0.5Thailand 0.58 0.00 1 0.40 0.67 0.6 0.8Togo 0.36 0.00 1 0.33 0.67 0.15 0.0Uganda 0.56 0.63 1 0.26 0.67 0.5 0.3Vietnam 0.28 0.00 0 1.00 0.33 0.32 0.0164

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WSBI – ESBG – The Global Voice of Savingsand Retail BankingWSBI (World Savings Banks Institute) is one of the largest internationalbanking associations and the only global representative of savings and retailbanking. Founded in 1924, it represents savings and retail banks andassociations thereof in 90 countries of the world (Asia-Pacific, the Americas,Africa and Europe – via ESBG, the European Savings Banks Group). It worksclosely with international financial institutions and donor agencies andpromotes access to financial services worldwide – be it in developing ordeveloped regions. At the start of 2009, assets of member banks amountedto almost €9,000 billion, non-bank loans to €4,300 billion and non-bankdeposits to 4,600 billion. Together, the member banks conducted operationsthrough more than 160,000 outlets.ESBG (European Savings Banks Group) is an international banking associationthat represents one of the largest European retail banking networks,comprising about one third of the retail banking market in Europe, with totalassets of more than € 6,000 billion, non-bank deposits of €3100 billions andnon-bank loans of € 3300 billions (1 January 2009). It represents the interestsof its members vis-à-vis the EU Institutions and generates, facilitates andmanages high quality cross-border banking projects.WSBI and ESBG members are typically savings and retail banks or associationsthereof. They are often organised in decentralised networks and offer theirservices throughout their region. WSBI and ESBG member banks have reinvestedresponsibly in their region for many decades and are a distinct benchmark forcorporate social responsibility activities throughout Europe and the world.Rue Marie-Thérèse, 11 n B-1000 Brussels n Tel: +32 2 211 11 11 n Fax: +32 2 211 11 99info@savings-banks.com n www.savings-banks.comPublished by WSBI/ESBG. Copyright WSBI September 2010. Responsible editor: Chris De Noose