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> Posted by Joseph Smolen, Summer Associate, CFI

At this week’s U.S.-Africa Leaders Summit it was noted that even as sub-Saharan Africa (SSA) enjoys a period of unprecedented economic growth (GDP in developing SSA has increased from $43 trillion to $75 trillion since 2004), lack of financial inclusion remains an issue of paramount concern. In some ways this has been driven by a lack of foreign direct investment (FDI) in financial inclusion vehicles in SSA (primarily MFIs) – less than 10 percent of FDI in MFIs worldwide is earmarked for Africa-focused institutions. Historically, the disproportionately low amount of FDI in sub-Saharan African MFIs has been driven by a combination of the following factors:

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Posted by Ignacio Mas, Independent Consultant

I guess it happens in all human endeavors; we sometimes get carried away wishing things were the way we think they ought to be. Let me provide three cautionary observations relating to financial inclusion: about how we measure it, how we talk about it, and how we assess it. The point is not to dampen enthusiasm about the possibilities, but to reflect on our progress in a more realistic way.

Industry Showcases and the Numbers Game

Through numerous industry conferences and blogs, certain players get put up as shining examples for the industry to follow. M-Shwari is perhaps the latest one, I guess because it delivers large customer numbers to an industry that is still largely focused on coverage rather than usage, and it represents the kind of telco-bank partnership that many have been fantasizing about.

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> Posted by Rishabh Khosla and Vikas Raj, Senior Investment Analyst and Senior Investment Officer, Accion Venture Lab

In May, India’s new government, led by Narendra Modi, was elected in a landslide. Popular frustration with the Congress Party’s increasingly ineffectual 10-year reign, made most visible by persistently low GDP growth, allowed for one of the most lopsided victories in Indian history, and the first time a non-Congress candidate had an outright majority in parliament. Wisely, Modi focused his election campaign rhetoric on economic issues and more efficient governance to revive GDP growth. The markets have reacted positively: the bell-weather BSE stock-index is up 20 percent since the start of the year. Two weeks ago, the government finally proposed a budget for the next year – the first real concrete recommendations for the economy since coming to power two months ago.

India is a key market for financial inclusion investors like Accion Venture Lab because of the size, depth, and strength of its entrepreneurial pool, as well as the persistent lack of financial services for the poor. Despite the huge success of microfinance in India, two-thirds of the working-age population lacks a bank account, mobile payments have yet to take off, and access to credit for small and medium enterprises (SMEs) remains abysmal.

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> 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.

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> Posted by Jeffrey Riecke, Communications Associate, CFI

Somalia is facing another potentially life-threatening drought. Aid agencies in East Africa indicate a strong possibility that drought in 2014 will be as severe as that of 2011, which resulted in the deaths of about 260,000 people. But this year, Somalia’s people may not be able to count on a trusted lifeline in times of drought: remittances from the United States and other countries. Remittances from the United States to Somalia are responsible for roughly $214 million annually, but increasingly, U.S. regulators are imposing a string of service provider shutdowns. If these services are constrained, the effects of a drought on Somalis will likely be exacerbated.

The reason for this challenge for cash flows between friends and family across the Somali diaspora? Regulatory issues centering on the risk of these remittances funding potentially dangerous individuals. In 2011, for example, two Somali-Americans from Rochester, Minnesota were convicted of supplying cash to the terrorist group al-Shabab. Such incidents prompt often sweeping regulatory action and/or preemptive actions by banks to avoid transactions involving Somalia.

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> Posted by Verónica Trujillo Tejada, Consultant, MIF/ Inter-American Development Bank

Building up a regulatory framework for the development of a microfinance market is a complex task. It requires taking into account a broad variety of topics as well as country specific needs and features. There are some internationally-applicable recommendations for the design of microfinance regulatory frameworks (CGAP 2012, ASBA 2010, and Basel 2010) but little is known about how different countries have implemented their guidelines or what the effects are of these rules in each market.

In the recently released paper “Microfinance Regulation and Market Development in Latin America,” published by the B.E. Journal of Economic Analysis & Policy, we analyze the relationship between microfinance regulatory frameworks in 17 Latin American countries and the corresponding markets’ levels of development.

One way to characterize microfinance regulations is as either general or specific rules. The general rules are devoted to regulating typical financial system issues, while the specific rules target microfinance products or institutions. Two other regulation classifications are protection rules and promotion rules. Protection rules have the goal of preserving financial system stability or protecting the financial consumer, and promotion rules aim to favor the development of microfinance services or institutions by softening the restrictiveness of the overall regulatory framework.

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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.

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> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

According to a recent Overseas Development Institute (ODI) report, of every eight dollars sent to Africa, a whole dollar is lost to accompanying transaction fees. This loss, estimated by ODI to be between $1.4 and $2.3 billion annually, is particularly significant given that remittances comprise a significant share of African states’ economies and are rapidly increasing; the World Bank estimates they totaled around $32 billion in sub-Saharan Africa (SSA) in 2013 and may reach $41 billion by 2016. These numbers attracted The Economist to ask, “Do the middlemen deserve their cut?

Looking at these practices through the lens of the Smart Campaign’s Client Protection Principles, we question whether they are in keeping with responsible pricing. These charges can’t be explained by distance. In fact, large amounts of remittances are intra-country or intra-Africa, transmitted from urban to rural areas or by migrant workers from one country to another. Remittance corridors within Africa have some of the highest charge structures in the world. The 12.3 percent average charge for sub-Saharan Africa compares to a global average (without SSA) of 7.8 percent.

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> Posted by Hema Bansal, India Director, the Smart Campaign

As a child growing up in India, I was always intrigued by stories from Myanmar, but disturbed by conflicts that it had witnessed. Not knowing much about the country, as an adult I still had an innate desire to visit. On May 7th and 8th, I attended the Responsible Finance Seminar, organized by Entrepreneurs du Monde (EDM), held in Myanmar’s city of Yangon. I was completely awed by the mystical peace of the city, I was also impressed by the demonstrations of support at the seminar for instilling client protection in Myanmar’s microfinance industry. It’s a great opportunity for a young market to secure responsible practices from its outset.

Myanmar, the second-largest country in Southeast Asia, remains one of its poorest. Decades of isolation have severely affected its development. In terms of financial inclusion, a large proportion of the population in Myanmar relies on informal lenders. The formal sector only serves about 20 percent of the population, largely because of the existing financial institutions’ limited capability.

In May 2011, President Thein Sein publicly recognized microfinance as a means of development by enabling local and foreign investors to establish fully privately-owned MFIs. Since the rationalization of licensing in Myanmar, around 110 MFIs have been registered. Deposit-taking institutions have been allowed to set-up shop rather easily due to low minimum capital requirements and the absence of separate prudential regulations from non-deposit-taking institutions, such as rules pertaining to reporting standards and portfolio quality management.

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> 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.

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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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