The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”
Excerpts from a conversation between Susy Cheston, Center for Financial Inclusion, and Larry Reed, Director of the Microcredit Summit Campaign. Susy writes:
Hi Larry,
Visa hosted a terrific webinar to launch the Financial Inclusion 2020 campaign a couple of weeks ago, and we promised to answer some of the questions we didn’t get to in our blog. Number one question: What’s the difference between microfinance and financial inclusion? I thought I would take a stab at that one, after having started in “microenterprise development” in 1991, progressed to “microcredit” in the mid-90’s, then “microfinance” in the late 90’s, and now heading up the Financial Inclusion 2020 campaign. I’ve always thought that “microfinance” is the heart and soul of “financial inclusion,” as microfinance pioneered a transformative vision of reaching poor people who had previously been excluded from financial services. Yet that original vision has now exploded with at least five “P’s”:
- New products beyond the original enterprise credit, to encompass all forms of credit, savings, insurance, and payments
- New populations, both upmarket and downmarket of the populations traditionally reached by microfinance, and including new groups microfinance has largely ignored, such as persons with disabilities and the elderly
- New platforms, using digital technologies to connect with people at more times and places
- New providers—not just traditional microfinance institutions, but a range of private and not-for-profit providers, with governments kicking in some helpful impetus through G2P transfers
- All facilitated by new policies.
The easiest thing to say is that microfinance covers a certain segment of the excluded market with targeted products, while financial inclusion looks at everyone who is excluded and the full range of services they need.
CFI’s vision for full financial inclusion
The Center for Financial Inclusion defines financial inclusion as: A state in which everyone who can use them has access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, with respect and dignity. Financial services are delivered by a range of providers, in a stable, competitive market to financially capable clients.
Yet I know this doesn’t capture the origins of microfinance in enterprise and community development and a holistic vision of fighting poverty. So help me out here. As head of the Microcredit Summit Campaign, how would you describe the difference?
Thanks for lunch,
Susy
Larry writes:
Thanks, Susy.
The answer to your question depends on what you see as the heart of microfinance. I recently had a discussion with David Roodman about this in his blog post about our State of the Campaign Report. Roodman described the spirit of microfinance as “delivering useful financial services to tens of millions of people in a businesslike way.” I described it, at least as it was envisioned by those who started its modern incarnation, as “providing financial services in a way that helps people move themselves out of poverty.” That original spirit contained an end objective that went beyond delivering services in a business-like way.
The difference between financial inclusion and microfinance depends on which of these definitions you use. If we use Roodman’s definition, then there is a lot of overlap between microfinance and financial inclusion, with the key difference being that financial inclusion focuses on a very broad range of services and providers, while microfinance focuses only on a targeted range of each.
But if you take my definition, then the key difference is the end objective. Financial inclusion seeks to make sure that everyone has access to useful financial tools, while microfinance wants to make sure that the use of those tools leads to positive benefits for those living in poverty. Under this definition, microfinance links in with other development needs, like health, education, housing, and access to markets. It is concerned to see how the delivery of financial services can help clients address other aspects of their lives that keep them trapped in poverty.
Cheers,
Larry
Susy writes:
Larry, thanks for this. I care about the quality of financial inclusion—making sure products really help people meet their needs—and I hope that access to quality financial services does, in fact, help people with health, education, housing, etc. One of the things that first attracted me to microfinance and microenterprise development was giving clients the tools to take charge of their own development, and I certainly think that is also true of financial inclusion.
The other issue is scale. I think highly of intimate, holistic microfinance programs that go beyond finance—I used to run one! Yet part of what attracts me to Financial Inclusion 2020 is how big the vision is: If anyone is still excluded, we have not attained “full financial inclusion.” That means David’s “tens of millions” definition becomes a great starting point, but the vision of “full inclusion” becomes much bigger than that. Of course, we then have to remind ourselves of the “quality” part of the definition, so that this heady vision of scale doesn’t result in exploitative services and overheated markets that end up harming the clients.
Best,
Susy
Larry writes:
Susy, I am finding this discussion very helpful in laying out both differences and points of convergence. One of those points of convergence is scale. I think it is time to get beyond the tired old notion that holistic programs must be small and insignificant in scale. Some of the largest microfinance programs in the world link the provision of financial services to other development needs while reaching millions of clients. If you look at the MIX data, there is really no correlation between breadth of activities and scale. You can be big and holistic and you can be small and focused, or vice versa.
I do think we have a scale question beyond this that the financial inclusion work is addressing, which is “How do we go beyond thinking about millions of people served by one institution, or hundreds of millions reached by MFIs, to thinking about making sure everyone in the world is included?” Even here I think we need to bring the spirit of microfinance, as I’ve described it, to bear. If we look to include all, and at the same time do it in a way that makes sure that the poor have products and services that help them move out of poverty (beyond quality to actual results), then we end up developing synergies between financial institutions, government transfer payments, mobile platforms, and other development providers. This is the sort of financial inclusion that I get excited about.
Cheers,
Larry
To see what CGAP has to say on this subject, click here.
For more information on Financial Inclusion 2020, and to explore becoming roadmap contributors or reviewers, sign up for campaign updates.
Larry Reed is the director of the Microcredit Summit Campaign. He has worked for more than 25 years in designing, supporting and leading activities and organizations that empower poor people to transform their lives and their communities. For most of that time Reed worked with Opportunity International, including five years as their Africa Regional Director and eight years as the first CEO of the Opportunity International Network. Reed has taught at the Boulder Institute of Microfinance for 15 years, served as the chair of the SEEP Network, and consulted with industry-wide initiatives like the Smart Campaign for Client Protection and MicroFinance Transparency.
Image credit: CFI
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February 27, 2013 at 5:37 pm
The Microcredit Summit Campaign
Reblogged this on 100 Million Ideas and commented:
Larry Reed: “The difference between financial inclusion and microfinance depends on which of these definitions you use. If we use Roodman’s definition, then there is a lot of overlap between microfinance and financial inclusion, with the key difference being that financial inclusion focuses on a very broad range of services and providers, while microfinance focuses only on a targeted range of each.”
February 27, 2013 at 5:51 pm
Susy Cheston
Larry, you got me! I agree that it is possible to focus on multiple bottom lines including scale, holistic approaches, and outreach to the excluded. Thanks for catching the false dichotomy. That said, I do expect more diversification of roles as the market grows and matures. Part of FI2020 is acknowledging that many players are needed to make full financial inclusion a reality. I like your point about synergies among the various actors, and look forward to expanding that list beyond the usual suspects. Susy
February 28, 2013 at 12:24 am
Jojo
This is a good discussion and I think expanding and/or diversifying roles will harness success of FI2020. Financial Inclusion, to my mind, is the end goal — getting people out of poverty. Microfinance is a tool of Financial Inclusion that helps people taken out of poverty not to go back to poverty. Where able, expanding the reach of microfinance to more people taken out of poverty hastens financial inclusion’s success.
February 28, 2013 at 11:19 am
John Gitau
Thank you Larry and Susie for this exciting conversation. The three definitions represents levels of development for the consumer, with financial inclusion representing a deeper and broader scope. They cover the supply side quite well and the demand side only to the extent of provision of services and the concomitant benefits. But the three definitions are missing one thing. Let me explain:
Susie, the financial inclusion definition you have given has the tale end abridged “——-Financial inclusion services are delivered by a range of providers in a stable competitive market to financially capable clients” But the financial capability element is missing in the detailed definition, not unless we assume that—-everyone who can use them— implies financial capability. If the providers operating in a stable competitive market will deliver financial services to financial capable clients, Susie, who will have made them capable, since financial capability entails financial literacy plus the understanding of how to use available financial services? Correct me if I am wrong; financial inclusion definition at CFI is weak on the financial capability component. Compare this with the Monitor’s definition in the Citi Foundation’s “Bridging the Gap” which goes ” Full financial inclusion is access for all individuals to appropriate financial products and services. This includes people having the skills, knowledge and understanding to make the best use of those products and services”
My take is that the Monitor’s definition lays emphasis on the need for financial capability as an important step in financial inclusion. If we have scale, proliferation of financial services, many providers with no emphasis on financial capability, then we shall have financial inclusion weak on its knees, and vulnerable clients.
Advocates of financial education as an important pillar in financial inclusion would be sad if the emphasis is more services, more products, better access without paying attention to clients’ preparedness to receive the goodies. Let’s also remove the ambiguity in the word “quality” as it may masquerade as a financial capability component while in essence it is a supply side service description. Larry, the business- like element is acceptable in the new financial inclusion platform. Same with the other social benefits that Susie opines will be taken care of automatically in the financial inclusion new life.
February 28, 2013 at 12:09 pm
Susy Cheston
John, thanks to input from experts like you through the Opportunities and Obstacles to Financial Inclusion survey, the Center added financial capability to our definition of financial inclusion. Certainly this brief blog post did not allow for much depth on financial capability or any of the other dimensions of inclusion, but you can see a more complete description in the “Who We Are” page on our web site: http://www.centerforfinancialinclusion.org/about
You’ll note that “quality” is a very loaded term for us. This one small word carries messages about affordability, appropriate design of products to meet client needs, client dignity, client protection, and the like–all of the important aspects that counterbalance the push for “access.” Indeed, the FI2020 campaign focuses on accelerating both the pace and quality of inclusion.
Finally, I did not mean to imply that “social benefits wil be taken care of automatically in the financial inclusion new life.” To the contrary! I think financial inclusion provides essential services that allow people (families, businesses, communities) to advance their own development, but we need to work with other leaders on how to use these tools to address water, health, education, food security, and other important needs.
February 28, 2013 at 11:55 am
Larry Reed
John, Great comment. I agree completely that financial capability has to be built into the inclusion definition. And I fully support a business-like approach. But that still leaves the question – to what end?
How do we know if the products have quality and the clients have sufficient capability to use them? Usage alone does not show positive benefit, as the recent New York Times article on internet based payday lenders illustrates. http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html?pagewanted=all&_r=0
When we can show that financial services have helped in the process of clients gaining benefits that are important to them, then we will know that product quality and financial capability have come together in a meaningful way.
March 1, 2013 at 12:47 pm
John Gitau
Susie, thank you for your clarification. I have read details on the four pillars and that clarifies my concern. The definition in the dialogue link is incomplete without further reading. I also now understand that there is need to involve other stakeholders and not assume an automatic well being as a precipitate of financial inclusion. On a light note, I sympathize with the word quality; so overloaded yet meant to carry all the positives ( with potential of misinterpretation, for example a microfinance bank can lend its customers a payday loan at 10% per month and still call the access speedy quality delivery-cost notwithstanding).
Larry has a big question; to what end? Susie, in your response, you have elaborated with a statement that “the services will advance the beneficiaries’ own development”. Semantics aside, I think Larry is asking for an outright statement of end game in the definition, in the lines of ending poverty- the included will benefit by being able to pull themselves out of poverty. I agree with Larry because the reason why the financial inclusion definition has gone to great lengths to encompass what matters is perhaps the realization that definitions are a succinct way of capturing scope and purpose. The financial inclusion stakeholders check if their interests are well covered in the definition. That’s why the financial inclusion definition goes to the lengths of mentioning the clients and their characteristics, the services and their mode of delivery, financial capability status and other details. And just as I cried out, a financial capability stakeholder, of its thin treatment in the definition, Larry, as an end game stakeholder, is saying the purpose of financial inclusion has been left out in the definition. We would have been seen as splitting hair if this post was not about definition, scope and comparison of financial inclusion with microfinance. So far, from the definition, financial inclusion is a means. What is the end? And shouldn’t that end be clearly stated in the definition? Perhaps two words is what can be introduced—-to reduce/end/alleviate poverty.
March 11, 2013 at 6:53 pm
JD Bergeron
I think it is important to balance all-encompassing approaches with which many can identify themselves–a la “Financial Inclusion”–against aspirational efforts that encourage us never to rest easy because there’s always more to be done.
Our definitions and word choice must encourage those that are able to innovate and reach deeper (and broader) with their services. If our dialogue does not force us always to look at those we have not reached (or believed we COULD NOT reach), then we are losing opportunities to inspire better models and more rigorous expectations of results.