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> Posted by Center Staff
This edition of top picks features posts highlighting initiatives to optimize smallholder finance data collection and usage, efforts to improve youth financial capability, and insights on how mobile money services can effectively reach women.
To better provide financing for the 450 million smallholder farmers around the world, there’s a big opportunity in developing shared knowledge bases and coordinated learning agendas for this topic area. A new post on the CGAP blog shares the work of Dalberg Global Development Advisors and the Initiative for Smallholder Finance to ascertain the state of the smallholder financing knowledge base and put in place a number of complementary tools so that those addressing this financing gap can work together, repurpose what others have already learned, and build off of the field’s scarce resources to drive it forward. The post highlights a smallholder impact literature wiki, an interactive map of smallholder finance tools, a framework for data collection that includes a shared learning agenda, and new briefings offering supply and demand side insights as well as indications of where data is lacking.
> Posted by Lindsey Tiers, Communications and Operations, the Smart Campaign
According to a recent article in The New York Times, a number of lenders seem to have adapted General Douglas MacArthur’s views on government regulation: “Rules are mostly made to be broken.” Research conducted on the effectiveness of the U.S. government’s Military Lending Act over the past few years has illustrated that “lenders, intent on offering loans regardless of the federal restrictions, devised loan products that fell squarely outside the loan’s restrictions.” When interest rate caps were limited to loans of up to $2,000, lenders started offering loans for $2,001. When protections were applied to auto-title loans with terms under 181 days, loan periods were extended to just over 181 days.
The Obama Administration is suggesting an expansion of the law in order to close some of the loopholes, but will more rules truly deter predatory lenders? Regulators might find themselves overburdened with a multitude of rules and a decreasing ability to enforce them. A few well-supervised regulations seem preferable to a tangled web of unenforceable ones. Additionally, it would be foolish to underestimate the innovative abilities of those intent on making a buck from those in the military, based on the case precedents we’ve seen.
Even when the law does actually catch up to bad actors, there is evidence that they can go out again with the same or similar practices. Julio Estrada, a used-car dealer featured in an earlier article in The New York Times on subprime auto lending, continued to dupe customers into accepting predatory loans for several months after he was “indicted by the Queens district attorney on grand larceny charges that he defrauded more than 23 car buyers with refinancing schemes” less than a year earlier.
Predatory lending to military personnel is made easy because military salaries are largely transparent. Lenders have near perfect knowledge of just how much a servicemember desperate for cash can afford in monthly payments. The reliability of a government paycheck has fostered the creation of systems that withdraw installments before income even reaches a servicemember’s account, further minimizing the risk to lenders and increasing their relative advantage. Yet the most egregious imbalance in knowledge stems from the fact that lenders know the “military considers personal indebtedness to be a threat to national security, so high levels of debt can imperil service members’ security clearances,” and ultimately their job. Predatory lenders leverage this knowledge to threaten servicemembers.
Perhaps instead of relying on regulation, and hoping that everyone plays by the rules, we should refocus our efforts on adequately arming our servicemen and women with the knowledge they need to defend themselves. The Consumer Financial Protection Bureau (CFPB) took steps to do just that when it created the Office of Servicemember Affairs to focus on the challenges faced by military employees. However, it primarily addresses ways to save, funding for higher education, and accessing VA benefits, and only touches on indebtedness in a section on deployment and credit cards. While educating servicemembers on these issues is important, increasing savings and controlling the interest charged on credit card bills are ways to preempt debt, and might not necessarily be relevant for someone already in debt. These individuals are most likely to fall prey to abusive payday lending schemes.
> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign
India’s new Prime Minister Narendra Modi created much fanfare and excitement upon the launch of a financial inclusion plan for the millions of unbanked Indians (currently estimated at 40 percent of the entire population). The Jan-Dhan Yojana (Scheme for People’s Wealth) will provide a free, zero-balance bank account and a debit card allowing for electronic payments, coupled with accident insurance and overdraft protection. Indian media went wild for the aggressive first day of the program wherein 15 million bank accounts were opened.
While all should cheer the intention of Prime Minister Modi to build a more inclusive financial system, there are some cautionary tales, both old and new, that the scheme should learn from. The tool of a basic savings account has been touted for close to a decade in India where, in 2005, the RBI promoted a ‘no-frills’ account scheme. While millions of new bank accounts where opened under this scheme, researchers found that many of the accounts were dormant, underutilized, and hence ineffective at ushering the formally excluded into the formal system. Even in districts dubbed 100 percent included, the reality on the ground was far less exemplary in terms of enrollment and usage of accounts.
Prime Minister Modi might also take heed of a much more recent cautionary tale added by researchers at IFMR, a business school in Chennai. Co-authors Amy Mowl and Camille Boudot wanted to understand whether there were hidden barriers to individuals interested in savings and investing using a basic savings account. That savings account, formerly called no-frills, and now called a BSBDA (Basic Savings Bank Deposit Account), are mandated by the Reserve Bank of India to be offered by all banks. Mowl and Boudot hired and trained a group of mystery shoppers to pose as low-income customers interested in opening a BSBDA at 42 branches of 27 large banks in metropolitan Chennai. The experiences of these mystery auditors was tracked, recorded, and analyzed by the researchers. The results were stark.
> Posted by Hillary Miller-Wise, CEO, Africa Region, Grameen Foundation
Veteran journalist Walter Cronkite once said of America’s health care system that “it is neither healthy, caring, nor a system.” Imagine what he would have thought about some of the public health care systems in the developing world.
Consider Kenya, which is now a middle-income country, due to recent rebasing of the economic calculations. Public expenditure on health care is about 6 percent of GDP, compared to 9.3 percent in OECD countries. About 33 million Kenyans – or nearly 75 percent of the population – are uninsured, of whom 70 percent live on less than $2 per day. And there is no Obamacare on the horizon.
CFI and HelpAge’s New Research Initiative Examines the Financial Needs of Older Persons
> Posted by Eric Zuehlke, Web and Communications Director, CFI
A few years ago, my 90-year-old grandfather moved from Japan, where he had lived his entire life, to live with my parents in Virginia. Although he was retired and living comfortably, the death of my grandmother left him without an adequate support system. With his healthy pension and public assistance from the Japanese government, mixed with the security of living with my parents, he is well cared for. I’d say he is financially included. But on a global scale, he’s one of the lucky ones. All his supports – close family, a pension, good health care, and insurance – are inadequate for many. And the need for appropriate services is growing.
The facts speak for themselves. Between 2010-2020, the population of older persons will almost double in middle-income countries and increase by 40 percent worldwide. Yet despite this growing population, the provision of financial services is woefully inadequate. One in four older people in low and middle-income countries do not have a pension, and most pensions are inadequate to meet individual needs. Not only are financial services lacking, we don’t even fully understand financial inclusion in older age. The mismatch between the scale of the need and the attention devoted to it is staggering.
> Posted by Lynn Exton, Managing Partner, Exton & Partners Risk, Governance & Analytics LLP
With the benefits of digital financial services (DFS) for enhancing financial inclusion now widely accepted, many microfinance institutions (MFIs) have or are planning to add new digital products to their delivery channels. But just because the benefits of DFS are relatively straightforward doesn’t mean the calculus behind whether or not institutions should take the digital plunge is. Institutions encounter practical challenges when adopting DFS, like big up-front investments in resources, the need for buy-in from staff and management, and the necessity for clients to change their behavior and adopt new technology. As with any new product, DFS also can introduce a wide range of risks to the MFI.
The Digital Financial Services Working Group recently released its newest publication, entitled, “The Digital Financial Services Risk Assessment for Microfinance Institutions – A Pocket Guide.” The guide was developed to assist MFIs in understanding the risks and corresponding mitigation strategies associated with DFS as well as to support institutions in choosing among the diverse business models available for providing these services. The DFS Working Group is a virtual community of practitioners and organizations developing knowledge management products promoting inclusive finance.
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
Growing up, my father fixed cars in exchange for payment in whatever form his customers could afford – granite tables, sheep skin rugs, and so on. In our town, he was the king of barter. Unfortunately, it was rather difficult for my mother to re-barter these items for things our family actually needed, like food and clothes. The system was limited in participants and so in utility. But thanks to the internet, the art of barter is back.
> Posted by Jeffrey Riecke, Communications Associate, CFI
Albeit a relative newcomer to microfinance, China’s market has grown rapidly in recent years. In 2012 the country had 6,000 microcredit providers, but only 25 percent had been in operation for more than three years. Today the number of providers is a few thousand higher, spanning nonprofit institutions, government programs, microcredit companies, commercial banks, rural credit cooperatives and banks, village and township banks, and P2P lenders. Even Alibaba, China’s internet giant, is involved. It has offered loans to over 230,000 micro-entrepreneurs through its AliFinance arm, launched in 2011.
Earlier this year Accion’s Channels and Technology team conducted a comprehensive assessment to determine the training and knowledge-sharing needs of the microfinance providers sustainably serving the poor in China. The assessment was carried out in partnership with the China Microfinance Institution Association, the China Association of Microfinance, and the PBC School of Finance Tsinghua, with support from the MetLife Foundation. As part of the assessment, the team compiled a landscape of the country’s microfinance institutions. Offering a snapshot of the state of the market and the challenges that lie ahead, here are some of its findings.