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> Posted by Alexandra Rizzi and Sonia Arenaza, Deputy Director of the Smart Campaign and Director of Accion Channels and Technology
This is the first of two blog posts about responsible digital financial services, on the occasion of the Responsible Finance Forum in Perth, Australia.
The Smart Campaign has watched with excitement as new forms of digital financial services (DFS) stand poised to bring financial access to millions of lower-income households previously excluded from the financial system. The potential benefits of this new ecosystem are enormous and include an array of positive outcomes ranging from lowered transaction costs to consumption-smoothing, among many others. Nevertheless, the excitement over new possibilities must not obscure the need to evaluate and respond to new risks to clients.
In an ongoing mapping exercise conducted by the Smart Campaign and Accion’s Channels and Technology team, we identified various things that can go wrong for clients of DFS, such as:
- Clients lose their funds after an agent fails to take proper security measures or after a service outage
- Agents charge unauthorized fees for transactions under guise of complicated pricing and fees
- Clients lack or are not offered adequate customer care channels
- Lack of data privacy due to clients not being informed or misinformed on how their data and history is being used or shared
- Agents lacking liquidity serve only their favored clients
While these risks are grounded in anecdotes from the field, there is still much more evidence needed on the consumer harms that actually happen, including where they happen and how often. The Responsible Finance Forum in Perth will host several sessions that present demand-side evidence to help identify high priority risks.
But, what then? Once risks are known, how best to try to minimize them?
With under 40 days to go, the 17th Microcredit Summit is rapidly approaching. CFI’s Josh Goldstein will be speaking during a plenary session focused on new innovations for microfinance and other financial inclusion interventions to more effectively reach the excluded. With the theme “Generation Next: Innovations in Microfinance,” this should be a great opportunity to explore what is on the horizon to achieve full financial inclusion. In this post, Josh discusses industry context surrounding the Summit, and what he hopes he and those in attendance will be able to take away from the event.
I am a sometime skeptic about the proliferation of microfinance conferences, but the upcoming Microcredit Summit in Merida, Mexico seems particularly important and timely. Personally, I am very excited about it. (In the spirit of full disclosure, I should add that I will be a speaker, and of course piqued vanity can certainly lead to bias, but I don’t suspect this is the case here.)
> Posted by Jeffrey Riecke, Communications Associate, CFI
Rwanda has a lot to celebrate in terms of financial inclusion these days. Last week in Kigali the National Bank of Rwanda (NBR) hosted a conference in partnership with the World Bank, the African Development Bank, and the Alliance for Financial Inclusion (AFI) commemorating their 50-year anniversary. At the event, titled Financial Inclusion for Inclusive Growth and Sustainable Development, NBR Governor John Rwangombwa highlighted the country’s recent rise in access levels, from 48 to 72 percent between 2008 and 2012 across formal and informal providers. Rwanda now has the laudable goal of increasing this figure to 90 percent by 2020. To help it get there, on Friday the World Bank launched a $2.25 million program supporting key financial inclusion areas for the country.
Along with overall exclusion rates dropping from 52 to 28 percent over 2008 to 2012, formal services access increased from 21 to 42 percent during the same period, according to the 2012 FinScope Rwanda Survey. The new government goal of 90 percent access by 2020 is an extension of the country’s Maya Declaration Commitment of 80 percent access by 2017. Rwanda’s growth in formal access can be attributed to products offered by both banks and non-bank providers, like the country’s community savings and credit cooperatives known as Umurenge SACCOs. Over the past three years, Umurenge SACCOs have attracted over 1.6 million customers. Ninety percent of Rwandans live within a 5 km radius of one of the cooperatives. Countrywide, the number of MFIs, including Umurenge SACCOs, increased from 125 to 491 between 2008 and December 2013. Elsewhere in the sector, over the last three years, the number of banks increased from 10 to 14, the number of insurance companies increased from 9 to 13, and the number of pension providers increased from 41 to 56.
> Posted by Jamie M. Zimmerman, Senior Policy Consultant, CGAP
Achieving financial inclusion by 2020 will depend in large part on the proliferation of fast, affordable, and accessible digital financial services (DFS). Indeed these effective, scalable models were a clear theme at the FI2020 Global Forum hosted by CFI last fall. Yet as excitement for DFS dominated much of the public discussion, a small and diverse set of financial inclusion leaders convened a private side-meeting to discuss an often-overlooked question: what are the consumer risks to these new, innovative digital models?
The meeting, co-hosted by CGAP and UNCDF’s Better Than Cash Alliance, introduced the concept of “responsible digital finance” and revealed heightened awareness of and interest in an array of issues related to the potential consumer risks of digital financial services, including:
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> Posted by Sonja E. Kelly, Fellow, CFI
We are in full World Cup fervor in the Accion offices around the world, with jerseys making appearances at global staff meetings, water cooler conversations centering on surprise advancements (and eliminations), and a high incidence of lingering trips to the conference room screen to check scores in between meetings and deadlines. You could say things are getting a little heated as the group of teams still in the running gets smaller.
There have been a few attempts to use this global competition as an opportunity to better understand our world. The Wall Street Journal published a “World Cup of Everything Else,” where countries can be matched up on categories from the hottest weather to the biggest eaters of seafood, and Dean Karlan produced a set of predictions based on population, poverty level, and interest in soccer to assess which country would experience the greatest increase in happiness with a World Cup victory (spoiler: Nigeria would have had the most aggregate happiness if it had won the tournament).
But what if the World Cup were a competition based on financial inclusion indicators? If we were to create a bracket where the country with the highest level of financial inclusion advanced, the European countries would all advance, which in my opinion wouldn’t be very interesting.
What if, however, we use the World Cup system to see where the highest number of financially excluded people are? We crunched the numbers to show you, of the countries that made it to Brazil for the competition, who would “win” the title of “highest number of financially excluded people.” Basing winners on the countries with the largest number of people without a formal bank account, we noticed a few surprises.
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> Posted by Zahra Khalid, Social Analyst, Pakistan Microfinance Network
Pakistan’s financial sector is due for some client-centric changes. Over the past decade there has been rapid growth in consumer lending as well as an increase in the number of households that have taken on risks and obligations that they do not fully understand due to unfair and deceptive practices coupled with low levels of general and financial literacy.
These trends make the World Bank’s recently released industry-wide diagnostic review of the state of consumer protection and financial literacy in the country all the more relevant, and its recommendations targeting irresponsible practices, such as inadequate price disclosure, gender-based discriminatory lending practices, and lack of dispute resolution mechanisms, increasingly important. Offering key findings, recommendations, and comparisons against World Bank-developed best practices, the review is the first to cover the country’s legal, institutional, and regulatory framework from the consumer protection angle.
> Posted by Jeffrey Riecke, Communications Associate, CFI
What’s the percentage of MFI clients worldwide that are LGBT? How about the percentage of staff at MFIs? Broader yet, how inclusive is the financial services industry of queer and trans people?
As you’d probably guess, concrete answers to these questions aren’t available. And even raising the issue is controversial in many countries. Over the past year anti-gay legislation was enacted in Russia, Nigeria, Uganda, and India. The notion of financial institutions working towards LGBT-inclusive operations is far off in many countries.
But here in the U.S. (and in other areas worldwide) change is happening, as demonstrated at the Out on the Street Summit last week in New York City. The event, part of the Out on the Street initiative, featured senior leadership from some of the largest financial services providers in the world, including Michael Corbat, CEO of Citigroup, and Ajay Banga, President and CEO of MasterCard. Held on May 1, the event focused on business opportunities and leadership strategies for and within the LGBT community, as well as the financial services industry’s role in advancing LGBT equality.
> Posted by Joshua Goldstein aka Mr. Provocative
It is time for an impact study on the value of so many microfinance conferences. What drives and sustains this cottage industry, rife with redundancy, terrible for the carbon footprint, a wound to a poor NGO’s bottom line, and arguably a poor use of staff time, especially when said staff is in charge of putting the conference together?
Yes, I know the arguments for attending and/or putting on conferences: networking with newbies and golden oldies; sharing interesting, even industry disruptive ideas; exploring or deepening partnerships with other kin; raising the visibility of the industry through the media that finally this time will give microfinance the coverage it deserves.
And ABOVE ALL, may the gods be merciful, connecting us with the funders to insure the NGO’s future in perpetuity—or at least until the end of the calendar year.
All these are valid and honorable reasons to attend—in moderation.
As for me, I am a guilty regular at the parties among other guilty regulars, who I am quite sure may harbor some of the same doubts about the number of annual microfinance extravaganzas on the docket that I do—all conferences claiming to be the one indispensable conference that no one can afford to miss. Like me, they surely reflect on how the bucks spent on air fare, four star hotels, lavish meals, and other extravagances could be used directly to relieve a thousand human beings suffering in poverty somewhere with a direct cash transfer. And instead are being used to cosset us like the poverty royals that we are.
> Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School
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.”
Here’s a financial inclusion puzzle for you. In marketplaces in Peru, small shop owners often take out loans from illegal and possibly dangerous lenders, gangs that operate on motorcycles. Cheaper and safer legal lending channels are available to these customers, but they don’t use them. How would you design a product that would draw these borrowers into the formal sector?
This was the question Guillermo Palomino, chairman of the microlending organization Edpyme La Cruz in Peru and advisor to several Latin American MFIs, brought to small group discussions in the Rethinking Financial Inclusion: Smart Design for Policy and Practice program offered by Harvard Kennedy School Executive Education.
The first step was to develop a clear statement of the problem: use of illegal loans may endanger customers and exposes them to high interest rates and it may also expose their communities to increased criminality. Palomino explains, “The customer has no legal contract, no real knowledge of what the interest rate is, what the penalties are, when they might be applied, or what might happen if they default with these lenders.”
However, an effective solution would involve understanding the appeal of illegal loans. The HKS group worked to define the factors contributing to the problem, both at the surface and at deeper levels.
In essence, the formal sector was not offering customers the ease they required. With the illegal lenders, Palomino explains, “You call a cell phone and a guy shows up on a motorcycle with a little bag. He’ll give you $500 and say, ‘Okay, I’ll be back next week.’” Formal loans, in contrast, require signatures, background checks, address verification, and projected cash flow. These are minor hassles for some, like the formally-employed rich, but major hurdles for the poor. As Palomino describes, “These microbusinesses don’t have people to handle paperwork, go back and forth for signatures or pick up money—because then who takes care of selling the apples or bags of rice?” In probing for underlying causes, the small groups discussed how the regulatory demands pertaining to the loan approval process also present a challenge.