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This paper summarizes the fi ndings of research in Bogotá, Colombia and Mexico City on the use of fi nancial services by the urban population. The focus is on the majority of persons who have no relation whatever with a formal bank, cooperative or credit union. The paper identifi es the characteristics of those who are "unbanked" and the range of reasons for their exclusion. It also discusses the multiple and considerable costs that this exclusion imposes on the unbanked population, as well as the loss in income that results for formal sector fi nancial institutions. The paper concludes by describing some measures taken to extend fi nancial services to the low-income population, and proposes the importance of linking "fi nancial inclusion" to programmes of urban development and upgrading focused on the poor in developing countries.KEYWORDS Brazil / Colombia / deposits / electronic transactions / fi nancial institutions / informality / loans / Mexico / micro credits / micro savings / unbanked I. INTRODUCTIONEconomic literature has long stressed the role of fi nancial services in economic development, and the consequent importance of an effective banking industry. But while most experts on fi nance and development focus on the stability and effi ciency of the banking sector, few have looked at the question of access to fi nancial services, or at the microeconomic or household effects of the sector as an issue for developing countries. Although the growth of microcredit programmes has been celebrated, they continue to operate on a miniscule scale. Furthermore, lending to the poor represents only one aspect of fi nancial services, and one that, in the fi nal analysis, leaves the poor in debt. Financial exclusion refers to the limited access low-income groups have to the full range of fi nancial services: to deposit and savings accounts, and to payment systems as well as to credit. Few have looked at the question of how fi nancial exclusion affects economic development, and in particular the development of the urban communities where it is felt. This article summarizes the fi ndings of research in Bogotá, Colombia and in Mexico City that identifi es the extent of fi nancial exclusion and the cost it imposes on the "unbanked" (1) population groups, as well as on the formal sector fi nancial institutions. It concludes by describing some measures taken to overcome fi nancial exclusion, and proposes the importance of linking "fi nancial inclusion" to programmes of urban development and upgrading focused on the poor in developing countries.

unbanked, coverage of banking services, best practices experiences, public mechanisms to stimulate access to financial services, savings and deposit services, credit and payment services for low-income and minority groups World Bank Policy Research Working Paper 3835, February 2006 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished.

This paper describes the importance of small-scale private sector or NGO providers of water and sanitation in a great range of urban areas in Africa, Asia and Latin America. It includes many examples of where-contrary to conventional wisdom-they provide good quality, low-cost services. Without these operations, large sections of the South's urban populations, including tens of millions of low-income households, would be worse off. Yet these generally operate with no subsidy and have to recover their costs. This paper discusses how public policy can support (or at least not seriously constrain) small-scale entrepreneurs in water and sanitation provision while ensuring checks on the quality and price of the services they provide. Once upon a time, about five years ago in fact, there was a beautiful kingdom with a big public water company which had real-life management problems. The beautiful kingdom advertised far and wide for a private sector prince to carry off the big water problems so that the kingdom could live happily ever after. One day a handsome foreign company appeared and won the hand of the big water company. The handsome foreign company reduced unaccounted for water, raised revenues and legalized clandestine connections. "Now that I've settled all the administrative problems," it asked, "how do I go about extending services to the poor?" "Oh, no problem," said the beautiful kingdom, "all those poor people have to buy their water from the terrible trucker dragons. They pay 15 to 30 times what you charge for water. They'll open their arms to you." The handsome foreign company got on its silver charger and rode off to where the poor people lived, ready to kill the terrible trucker dragons and win the poor people's hearts and business. But, to its great shock and dismay, the people wanted nothing to do with the handsome foreign company. "But I've come to free you from the terrible trucker dragons who charge unscrupulous rates," cried the handsome foreign company. "What unscrupulous rates ? What dragon ? What truckers ?" asked the people. "We get our water from our own artesian wells Tova Solo is an urban specialist with the World Bank's Water and Sanitation Division, coming from a background of urban planning which mixed community based development with support for local governments and international agencies. Since 1998, she has been working on issues of private sector participation in water and the poor, in particular regarding small and medium enterprises delivering water and sanitation services. In her spare time, Tova Solo likes to ride around town in a vacuum truck looking for septic tanks to clean out.

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