Financial Sector Development and the Millennium Development Goals

This study was commissioned by the Netherlands Financial Sector Development Exchange (NFX) for its conference, 'Mind the Gap: Bankable approaches to increase access to finance,' November 2006, Amsterdam. The study:

• Shows that financial sector development can contribute to reaching the eight Millennium Development Goals (MDGs);
• Quantifies the effects of financial development on the MDGs.

The goal of the study is three-fold:

• Assess the strength of the links between financial development and the MDGs, and the manner in which the links work;
• Document the state of access to financial services to poor households and smaller firms, and identify its main barriers;
• Develop recommendations to increase access to financial services.

Further, the document:

• Focuses on four of the six MDGs themes: poverty, education, health, and gender equality;
• Reviews the theoretical channels, surveys existing empirical evidence - both cross-country and case study evidence;
• Provides in-depth econometric analysis on the relationship between financial development and several MDGs indicators;
• Identifies barriers to increase access to financial services.

The findings of the study include:

• Financial development is an important force for economic welfare as it leads to income growth and reduces income poverty;
• It reduces undernourishment;
• There is positive association between financial development and health, education, and gender equality;
• Access to financial services can be much improved in developing countries;
• Important barrier to access to finance is the small size and lack of outreach of many financial systems.

Finally, the study makes the following recommendations:

• Increase the size and outreach of financial systems;
• Improve the general economic and institutional environment;
• Address supply and demand mismatches;
• Improve data and expand research.