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> Posted by Bhuvana Ramakrishnan, Daniella Llanos Flores, and Singyew Foo, Credit Suisse

The Financial Inclusion 2020 project has been talking to the experts lately to get their views on the main recommendations that came out of the 2013 Roadmap to Inclusion process. A group of Credit Suisse Virtual Volunteers conducted interviews with various experts within Credit Suisse. Insights from those conversations helped shape this post.

What can a new shampoo formula teach us about financial services? Quite a bit, as it turns out.

Procter and Gamble (P&G), one of the world’s largest fast-moving consumer goods companies (FMCGs), has an annual research and development budget of $2 billion – with nearly a half a billion going towards consumer research. In emerging markets, this money funds field research that aims to identify how existing products are used and how a new product could become a part of someone’s daily routine. In China, P&G has a simulated Hutong (a typical Chinese home) where researchers can observe consumer behavior and make on-the-spot modifications to product prototypes. They have sent teams around the country to observe how women wash their hair. Such research yielded a shampoo that suds and washes out with little water – a response to the shortage of water and privacy in the villages visited.

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> Posted by Kaj Malden, Project Manager, PlaNet Finance China

Huimin Microcredit client engaging in budgeting exercise

Poor rural women in China face challenges not dissimilar to poor rural women in other developing countries. Many are homemakers and child rearers, with much of their work tied to the home, offering little social or professional mobility. However, there are some dynamics in China that make women’s conditions somewhat different. The Communist Revolution of 1949 promulgated an ideology that favored gender equality and claimed women “hold up half the sky” (半边天). According to a recent study by the World Economic Forum, gender inequality is more apparent in the developed economies of Japan and Italy than in China. Modern China’s One-Child Policy, however, leads to a cultural view that “values males and belittles females” (重男轻女). The fact that China’s gender ratio skews towards males may support this view and suggest that parents favor males. Additionally, China’s massive urbanization continues to create large flows of migrant workers, posing other challenges for women. Husbands often find work in neighboring provinces or eastern coastal cities, leaving their wives to manage the household’s finances and run the family business independently.

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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.

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> 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.

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> Posted by Eric Zuehlke, Web and Communications Director, CFI

Students in a technical education program

With 1.2 billion people, youth between the ages of 15-24 represent approximately 18 percent of the global population, and 87 percent of youth live in developing countries. Yet only 44 percent of 15-to-24-year-olds have an account at a formal financial institution globally compared to 55 percent of adults.

Last week, I had the privilege of moderating a panel discussion on youth financial inclusion, hosted by Credit Suisse and organized by the Microfinance Club of New York. The presenters shared important examples of what has worked in providing financial education and services to youth. Joining me were:

  • Barbara Magnoni, President of EA Consultants and co-author of CGAP’s “Analyzing the Business Case for Youth Savings
  • Maria Perdomo, YouthStart, Programme Manager, UNCDF
  • Scott MacMillan, Communications Manager, BRAC USA
  • Simon Bailey, Head of Learning, Research, and Network, Aflatoun
  • Nathan Byrd, Head of Education Finance, Opportunity International

Recently, our Financial Inclusion 2020 team worked with Making Cents International to look at the barriers to and drivers of youth financial inclusion. We found that the primary reasons that youth cite for not having an account at a formal institution are a perceived lack of money, the high costs of services, and challenges in having proper identification. In addition, youth often feel that their financial assets or businesses are too small to work with a bank, especially in situations in which the costs of getting to a bank are high.

Despite these challenges, there are a few areas of opportunity. One is the business case. Since financial needs of young people grow in volume and sophistication over time there is a business case for serving them even as their financial needs are initially limited. Serving youth can help build a longer-term and loyal clientele if products are appropriate and financial capability is fostered. Another important area is financial education/capability. Establishing financial literacy early in life will help foster positive financial habits and lead to longer-term asset accumulation and higher credit scores. This needs to take place in a regulatory environment that supports financial inclusion and coordination among various players.

These three areas – the business case, financial capability, and the policy perspective – were the focus of much of the discussion at the event. I noticed that a few themes cut across the presentations:

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> Posted by Jenn Beard, Global Learning Manager, Water.org

Nearly 800 million people lack access to safe water, and 2.5 billion people lack access to improved sanitation. As many NGOs and microfinance institutions are now discovering, the way forward will include lending to individuals for their water and sanitation (WASH) needs. WASH microfinance is making it possible for the poor to take control in instances where access is difficult. However, most providers in the position to meet this financing opportunity are not yet offering these services. One thing standing in the way is the tools to get institutions started.

The business case for financial institutions to add WASH financial products to their portfolios is significant. A study sponsored by the Bill and Melinda Gates Foundation estimated global demand for microfinance for water and sanitation at over US$12 billion between 2004 and 2015. After all, the poor are already spending money in these areas—both directly (purchasing water from vendors/kiosks or paying to use a community toilet) and indirectly (higher healthcare costs and/or lost time and wages while looking for or collecting water). Microfinance providers have highly relevant goals, experience, processes, and outreach activities to play a key role in increasing access to WASH facilities. As financial institutions broaden their services beyond business lending and develop products to more fully address their clients’ diverse financial service needs, WASH financing emerges as a clear opportunity.

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> Posted by Guy Stuart and Eric Noggle, Executive Director and Research Officer, Microfinance Opportunities

In our first post in this series, we described the need for an approach to financial education that was both effective and scalable, and we offered embedded education as a potential solution. Our second and third posts described how the embedded education approach works and showed its potential effectiveness by describing the improved money management behavior displayed by clients in Zambia after participating in our program. We believe that these findings also revealed the potential for a business case for delivering financial education using the embedded approach.

For a business case to exist, two things have to be true: financial service providers (FSPs) need to see a positive, bottom-line impact from an embedded program and a financing mechanism needs to exist that can compete with the current grant-based model for funding financial education.

Bottom-Line Impact

Financial education can positively impact financial service providers in a number of ways (aside from knowing that they’re empowering individuals to take control of their financial lives). Offering training could improve client retention by strengthening loyalty. It could reduce customer service requests by increasing familiarity with a banking process. But our market research suggests that the biggest potential impact is lowering write-off ratios and increasing savings balances.

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> Posted by Juan Blanco, Associate, Financial Inclusion 2020, CFI

A Spanish-language version of this post follows the English version.

After five months of discussion, Colombia’s Financial Inclusion Bill has been approved by Congress, now only needing presidential sanction to become law. Earlier this year the country’s Minister of Treasury and Public Credit and Minister of Information Technologies and Communications filed the bill in Congress. The bill articulates a framework for the expansion of savings and payment services by engaging a wider range of providers in offering digital services.

The new law would allow for the creation of a new type of financial institution, Organizations Specialized in Electronic Deposits and Payments. These institutions can be established by individuals or legal entities, with a minimum capital requirement of $3 million, approximately 10 percent of the minimum currently required for commercial banks. The new electronic deposit and payment providers can receive capital investments from commercial banks and financial corporations.

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> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign

Close to Washington, D.C.’s antipode in Perth, Australia I attended the Fifth Annual Responsible Finance Forum, which this year focused on responsible digital finance. The organizers assembled an impressive mix of representatives from all three legs of the responsible finance stool – industry, regulators, and consumers. A number of familiar risk areas were examined during the two great days of presentations, debate, and discussion, and three prominent themes emerged for me: the centrality of the service agent, the increasing importance of financial education, and considering responsible finance at the ecosystem level.

The first day of the forum focused on the identification of risks to consumers from digital financial services (DFS) and the second day was framed around how to mitigate and minimize those risks. An online “Global Pulse Survey” that CGAP conducted as well as some demand-side research conducted by MicroSave and Bankable Frontier Associates (BFA) brought both the practitioner and consumer perspectives on DFS risks to the forefront. The MicroSave and BFA research canvassed nearly 700 DFS users and 50 non-users through focus groups in Colombia, Bangladesh, the Philippines, and Uganda. While respondents of the survey and focus groups identified a wide variety of harms or worries, some common items emerged, listed in the table below. Though preliminary, this data is extremely important in helping us frame the areas where stakeholders could focus to mitigate against client harm and risk. These risks fall squarely into the framework of the Smart Campaign’s seven Client Protection Principles, furthering our belief that a principles framework can carry forward into digital financial services.

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> Posted by Guy Stuart and Eric Noggle, Executive Director and Research Officer, Microfinance Opportunities

pictureLast week’s post discussed how we implemented an embedded education program with VisionFund and Zoona in Zambia that leveraged touch points in an effort to improve clients’ financial capabilities. While we hope this blog series has begun to convince you that embedded education can help solve the financial capability gap, one important issue remains: where is the evidence of success? Does this approach really improve outcomes for clients and businesses?

Microfinance Opportunities (MFO) aimed to add to the knowledge base of “what works” in financial education with our evaluation of the Consumer Education for Branchless Banking (CEBB) project in Zambia. The evaluation applied a mixed-methods approach with multiple data sets. We analyzed information from in-depth interviews, focus groups, knowledge surveys, and transaction data from VisionFund and Zoona’s management information systems.

The data tell a compelling story. Qualitative interviews indicated that both clients and branch staff thought the education program was having a positive impact on how clients were interacting with the branchless banking service and on their overall financial capabilities.

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Credit Suisse is a founding sponsor of the Center for Financial Inclusion. The Credit Suisse Group Foundation looks to its philanthropic partners to foster research, innovation and constructive dialogue in order to spread best practices and develop new solutions for financial inclusion.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.
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