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> Posted by Lindsey Tiers, Communications and Operations, the Smart Campaign

As successful business leaders know, regular evaluation is vital to ensure that improvements are made and growth continues. Here at the Smart Campaign, it is time to reflect on our impact and evaluate the Campaign’s global activities so that we continue to achieve the objective of embedding client protection into the fabric of the microfinance industry. For this reason, we are reaching out to all industry stakeholders for feedback via a short survey.

Launched in September of 2009, the Smart Campaign is already five years old. With over 4,200 endorsers—1,400 of which are financial institutions working to improve client protection practices—it’s clear the message is spreading, and support for keeping the industry on track is strong. Client Protection Certification, launched in January 2013, has already seen 24 financial institutions meet the requirements of adequate client protection. Across these institutions, over 8.7 million clients have access to quality services and treatment. In addition, dozens of other MFIs are in the pipeline working to become certified. With nearly 100 tools available in English, plus translations in Spanish, French, Russian, Portuguese, and Arabic, the Smart Campaign website has become a valuable resource for any institution looking to improve client protection practices. The Client Protection Principles have even been incorporated into legislation and regulations for financial service providers in some countries – such as the Industry Code of Conduct in India.

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> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI

Last August, I visited Wilmington, North Carolina to roast a friend on his sixtieth birthday with every intention of not thinking about financial inclusion or my work. Pure escapism was the only agenda and my complete itinerary. But on driving from the Wilmington Airport to his seaside home, my senses were assaulted by a series of gaudy, often neon-signed pawn shops named with pizazz like “Picasso Pawn” and “Flash Cash Jewelry and Pawn.” My professional curiosity had been piqued and it was inevitable that before reaching the beach paradise I would be taking an unexpected detour from my vacation.

You see, where I live in Boston, pawn shops are a relative rarity, so I had to take advantage of this opportunity. (And I have never watched any of the cable TV shows on pawn – which may put me in the minority.) The next day, I stopped at Pawn South on Oleander Avenue, and the perky staff guy was more than happy to talk of the role pawns played in his community. He told me some basic facts about this regulated industry:

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> Posted by Sonja Kelly, Fellow, CFI

If there’s one thing we’ve learned in taking a close look at financial inclusion efforts around the world, it’s that context matters. That’s why we are excited to be part of the team releasing the Global Microscope 2014: The Enabling Environment for Financial Inclusion. The Microscope is carried out by the Economist Intelligence Unit (EIU) with sponsorship and guidance from the Multilateral Investment Fund of the IDB, CAF, and Citi. The Microscope evaluates the environment for financial inclusion in 55 different countries and provides powerful signals to policymakers in each country on their progress. Which countries topped the list and which have the most room to grow?

We’ll tell you, but first, it’s important to know what the results mean. Each country inspected in the Microscope is assessed on 12 indicators that consider best practices in national regulatory environments and institutional support for providers serving clients at the base of the pyramid. Indicators range from government support for financial inclusion, to supervision of microfinance and other financial products, the status of credit reporting, regulations governing mobile banking and, last but not least, consumer protection.

This year is an important one in the publication’s eight year history because the focus shifted from microfinance to the environment for financial inclusion, a process that involved adapting the framework to account for today’s diversity of providers and products. What we were surprised by, however, was just how little a difference this made in the rankings. We charted last year’s results on the microfinance environment against this year’s results on the financial inclusion environment and we found a very high correlation between the two (see figure below). Environments that are enabling for microfinance are often environments that are enabling for financial inclusion. Six countries from last year’s top 10 were in this year’s top ten. Read the rest of this entry »

> Posted by Elisabeth Rhyne, Managing Director, CFI

What are the most important unanswered questions in financial inclusion?

Last week I was fortunate to participate in the small, idea-packed Conference on Financial Inclusion at Harvard Business School, organized by Professor Rajiv Lal. The attendees were a high-level microcosm of the financial inclusion world, a sort of mini-Financial Inclusion 2020 Global Forum. A prime purpose of the gathering was to identify a potential research agenda.

Among the ideas emerging from very rich conversations, I identified three distinct areas of research: business questions that could be addressed through HBS’s famous case method; research focused on regulation; and social science research focused on consumers. Because what one says at HBS stays at HBS, I cannot identify who offered what idea, but here is a brief summary.

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> Posted by Sonja Kelly, Fellow, CFI

2014 World Bank/IMF Annual Meeting

Sound financial inclusion regulation and policy does not an ethical financial system make. In financial inclusion, we often talk about the importance of consumer protection, industry transparency, and fair market conditions. In the absence of universal standards of what these principles look like in practice, we turn to regulators and policymakers. I contend that we cannot keep relying on regulation to make the financial system moral and just. Since much of my own research promotes financial inclusion policy and regulation, this is a fairly inflammatory statement for me to make. But when we look only to regulators to create a financially inclusive and fair marketplace, we miss the mark.

In my own life, I see an analogy to our family game night. I am a very competitive person. I confess that there are times (fairly frequent times) that I cheat. I can easily miscount the number of spaces my piece is moving in Monopoly, or I can set down three cards and make it look like one card in Uno. My husband sometimes catches me, or my efforts to cheat simply aren’t drastic enough, so very rarely do I change the outcome of the game. But no number of rules can keep me from trying. Nevertheless, I’m sure my husband would agree that rules and regulations are not sufficient. Game night would be far more ethical if, instead of relying on the game rules, we relied on our responsibility to one another (check back with me in a few months to ask how a recalibration of my own internal compass is going).

In his remarks to during the recent World Bank Annual Meetings, the Most Reverend Justin Welby (Archbishop of Canterbury) emphasized that ethics in finance is not about creating carrots and sticks, but about doing the right thing because it is the right thing to do. Welby’s charge to participants in the meeting, including Governor of the Bank of England Mark Carney and Managing Director of the International Monetary Fund Christine Lagarde, recognizes the necessity of the personal ethical compass—not solely a reliance on regulators.

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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 Alexandra Rizzi, Deputy Director, the Smart Campaign

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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.

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> Posted by Jeffrey Riecke, Communications Associate, CFI

Wonga, the U.K.’s largest payday lender, is forgiving £220 million in loans from 330,000 clients in arrears. Another 45,000 Wonga clients on precarious financial footing will no longer have to pay interest on their active loans. The news came last Thursday after talks between Wonga and the U.K. regulator, the Financial Conduct Authority (FCA), which culminated in Wonga instilling new, and reportedly urgently needed lending affordability checks. The forgiveness measures are intended to cover clients that wouldn’t have been given loans under the new affordability measures. They follow what has been a controversial rise for the lending firm and suggest where the U.K’s payday industry may be headed.

Wonga, which currently lends to about a million clients a year, has incurred complaints in the past for its lack of affordability checks, high interest rates, unscrupulous debt collection practices, and misleading advertising. Those speaking out against the firm include politicians, trade unions, and public demonstrators. Even Archbishop of Canterbury Justin Welby once stated that he would “compete [Wonga] out of business” through the launch of a Church-backed group of credit unions.

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> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI

Shakespeare asked, “What’s in a name? That which we call a rose by any other name would smell as sweet.” Having recently married and changed my last name, I can attest that there is a refreshing feeling that comes with a new name and clean slate. It is an opportunity to leave the past in the past and start anew.

Starting fresh with a new name must be especially freeing if the past was not a sweet smelling rose. According to a recent report, the Bank of Ghana (BoG) is cracking down on MFIs that repeatedly change their names to cover their tracks after they have duped members of the public. Raymond Amanfu, the Head of Other Financial Institutions Department of the Bank of Ghana reports, “Every day, I get at least five applications from companies wanting to change their names….Quite a number of them are actually messed up and want to clean up by changing their name.”

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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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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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