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> Posted by Maria Perdomo, YouthStart Programme Manager, UN Capital Development Fund
Opening a bank account in Senegal gave me first-hand experience in how a bank can fail to apply the client protection principle on transparency. On my visit to open the account, I spent one hour waiting and another hour completing forms and asking the sales representative questions. When I decided that I had spent too much time trying to understand exactly what fees were associated with the account, I asked the representative for a brochure that explained it all. She looked at me as if I were speaking another language because, in fact, the bank did not have a single document disclosing all the fees associated with the account. So there I was, writing down all the fees the representative could remember. In the end—and after a lot of probing—together we estimated that I would have to spend about US$30 (CFAF 15,000) to open the account and then US$10 to US$15 on monthly fees! But, of course, I would not know exactly how much I was paying in fees before receiving my first statement.
A couple of months later, I went to visit a financial service provider in Uganda and interviewed the group of young women and girls that you can see in the photo. I was completely taken by how these empowered young women were saving in their individual accounts as little as 1,000 Uganda shillings (US$0.39) per week. For them, every penny counts, and they can only afford saving in an institution that is transparent about its fees and responsible about its pricing. Seeing this group of young women and girls, in contrast with my not-so-positive experience at the bank, reinforced my commitment to client protection for youth, who are among the most vulnerable clients.
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Much of the financial world’s attention is directed at China and the global impact of fluctuations in its banking and financial markets. Last week saw a sharp increase in the country’s short-term borrowing costs, and a record high in the country’s interbank (bank-to-bank) overnight rate – a rate that serves as a gauge of liquidity in a market. In a statement published on Monday, the People’s Bank of China asserted that the liquidity in the country’s banking system overall is at a reasonable level, but emphasized that financial institutions need to improve “awareness about preventing risks.”
Turning with impeccable timing to China’s small and micro lending sector, last week PlaNet Finance released its latest research report, Emerging Risks on China’s Path Towards Financial Inclusion.
China first began experimenting with microfinance in the late 1990’s, much later than many other countries. Since then, in part due to a policy environment aimed at supporting rural area and small enterprise development, the industry has grown rapidly, with over 6,000 microcredit companies as of June 2012. At this time of counting, only 25 percent of these companies had operating histories of longer than three years, and only 50 percent longer than two years. Of China’s current population of over 1.3 billion, an estimated 400-500 million live on only two dollars a day. As China’s microfinance industry continues to grow and serve more individuals, effective risk management becomes increasingly important. The PlaNet Finance report reviews the development of the Chinese microfinance sector and identifies four pertinent industry risk areas.
- Many microcredit companies mainly focus on credit risk, without reference to other risks, such as governance risk, external risk, operations risk, IT systems risk, and liquidity risk
- Restrictions in access to funding create obstacles for the scaling-up of operations
- Emerging market leaders are beginning to face the risks inherent in a rapid expansion strategy, including the challenges of maintaining control and standardization, particularly as portfolio monitoring, risk management, and IT systems have not kept pace with the increasing scale and complexity of operations
- A disproportionately fast increase in lending volume in certain urban markets raises concerns about potential future risks regarding market overcrowding, over-indebtedness, and inadequate consumer protection
> Posted by Nate Gonzalez and Alina Kogan, Investment Officers, Accion Venture Lab
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Over the past year at Accion Venture Lab, a new program that invests in financial inclusion start-ups, we were initially surprised to see a rapid proliferation of online personal financial management (PFM) tools and rate comparison start-ups popping up across Latin America, particularly in Colombia and Brazil. These companies aim to present consumers with a consolidated view of their finances across various financial products (e.g., bank and investment accounts, loans, insurance products, credit cards), educate consumers on financial literacy, provide budgeting tools, and often, make money (through qualified leads to banks) by suggesting better products for consumers based on pricing and needs assessments. On the surface, this trend must seem premature, considering internet usage across the continent remains under 50 percent and online banking rates are even lower. But if you dig into the changing income distribution data across Latin America coupled with existing financial sector market dynamics, this trend toward increased financial education on available products and services begins to make a bit more sense. The rapidly evolving income shifts across the region highlight the importance of democratizing data as a means to further financial inclusion.
Latin America has experienced significant change over the past several years, which has resulted in millions of people moving into the ranks of the middle class. Between 2003 and 2009, Latin America’s middle class expanded by 50 percent, from 103 million to 152 million, accounting for roughly 30 percent of the total population in 2010. In Brazil alone, over half of Brazil’s 190+ million people are considered middle class, and a majority of them rose to middle class status in just the past five years. CFI just released a new report, Growing Income, Growing Inclusion: How Rising Incomes at the Base of the Pyramid Will Shape Financial Inclusion, which details changing income patterns across emerging economies and the subsequent implications for financial inclusion focused initiatives globally. In addition to the growth of the middle class, the report highlights that almost 40 percent of the current population in Latin America are considered part of the “vulnerable class,” defined as pre-middle class persons with incomes from $4-10 per day. This group has experienced similar high growth rates over the last five years. The CFI report predicts that this “rising tide” trend will continue.
> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published on the Huffington Post World Blog.
The High-Level Panel of Eminent Persons on the Post-2015 Development Agenda, led by David Cameron, Ellen Johnson Sirleaf, and Susilo Bambang Yudhoyono, has released its recommendations for the next round of world development goals. This document launches what is sure to be a lively debate that will take place in the coming months, as the United Nations considers this report and prepares for the Secretary General to announce the official U.N. recommendations later this fall.
The Eminent Persons panel put forward twelve illustrative goals, ranging from 1) End Poverty to 12) Create a Global Enabling Environment, and touching in between on health, education, water, energy, and other priorities.
For those in my line of work, the immediate question is: How does the report position financial inclusion?
In recent months, when the subject of financial inclusion and the Post -2015 Global Development Goals (GDGs) comes up, someone is sure to say, “Financial services aren’t development goals; they’re enablers.” And this is the crux of a dilemma. The importance of financial inclusion is increasingly recognized. But if financial services are seen through an “enabler” lens, they would not appear in the top tier of GDGs, which revolve around outcomes of intrinsic value to people and nations. What is the role of an enabler like financial inclusion in a development framework that focuses on outcomes?
It looks like the Eminent Persons recognized this dilemma, and as a result, they had a hard time finding the right place for financial inclusion. They did address it, finally, by tucking it under proposed goal 8) Create Jobs, Sustainable Livelihoods, and Equitable Growth. Specifically, sub-goal 8c says, “Strengthen productive capacity by providing universal access to financial services and infrastructure such as transportation and ICT.” They put it into a section that is mainly about job creation, and then linked it to physical and communications infrastructure. Another sub-goal (2c) calls for equal rights for women to open bank accounts (along with the right to own property and sign contracts), implying that financial services are a necessary part of an economic identity.
> Posted by Center Staff
This edition of Top Picks features three posts that each bring attention to a type of financial service: cash transfers both unconditional and conditional, mobile money, and gold savings and loans in India.
- In “The Life and Death of Cash”, a new post on the Financial Access Initiative Blog, Timothy Ogden discusses recent developments in the area of cash transfer programs. After offering an introductory overview on common perceptions of physical cash in the development and financial inclusion contexts, Ogden contends that the advent in recent years of conditional cash transfer programs as well as program evaluations have increased support for cash transfers on the whole. The post cites two recently published cash transfer studies, and includes a Q&A with Chris Blattman, who is an author on both.
- “I believe in the inevitability of mobile money, but I don’t believe we’re getting there very fast,” Ignacio Mas states in a recent CGAP Blog post. In this post on mobile money and why its successes are disappointingly slow and isolated, Ignacio tables the limitedly optimistic popular mobile money dialogue to examine barriers to industry growth, on both the demand and supply sides. Among the points made, Ignacio posits that mobile money programs don’t fit within telcos’ long-established decision models, that the services run counter to banks’ traditional attitudes and approaches to client touch-points, and that users largely do not see their mobiles as a store of value or as an expense management tool, but just as one payment instrument. Read the rest of this entry »
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Global loan portfolio growth in developing countries slowed in 2011; total number of clients in developing countries shrank slightly in 2011 but increased in Africa and Latin America; and various initiatives aimed at ensuring socially responsible practices have received commitments on industry-wide standards and frameworks over the past few years. These are some of the takeaways from this year’s Microfinance Barometer, an annual report produced by Convergences 2015 that offers a global overview of microfinance activity. The report series shares recent industry figures and trends, and highlights best practices across stakeholder groups.
This year’s report explores microfinance activity in developing and developed countries, and examines mobile money, capacity building, responsible investing, client protection, and social performance management, among other pertinent topics. The report also features an article from Deutsche Bank’s Asad Mahmood on microfinance and ethics, a feature on Accion Texas Inc., which manages the largest microloan portfolio in the United States, and a call to endorse the Global Appeal for Responsible Microfinance. Other key findings include:
- Global loan portfolio in developing countries totaled $US 78 billion in 2011, with portfolio growth slowing to 15 percent compared to 25 percent in 2009
- Activity in developing countries remained concentrated in 2011, as the leading 100 institutions represented 80 percent of the total lending portfolio and 75 percent of borrowers
- Client outreach in developing countries totaled 94 million in 2011, reflecting a 3 percent decrease since 2009
- Still affected by the Andhra Pradesh crisis and subsequent shutdowns of activity, in 2011 client outreach decreased by 10 percent in South Asia and by 20 percent in India
- Client outreach increased by 15 percent in both Africa and Latin America in 2011
- Local funding continues to drive the developing-country sector through increasing deposits and borrowings
- In 2011, 54 percent of institutions in developing countries provided both credit and savings, while 26 percent offered insurance products, and 54 percent offered non-financial services Read the rest of this entry »
> Posted by Andrea Horak, Program Coordinator, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
You may have caught Philip Brown’s blog post last month on how MFI boards can be explicit about risk strategy and appetite. Philip’s post was one of 10 responses collected for the publication, in which industry experts each candidly responded to one tough risk question that every board member should be asking, and be able to answer. The publication, Ten Risk Questions for Every MFI Board, was officially released today.
Through the publication, we set out to cover topics such as over-indebtedness, risk management measures, fraud, “newer” risks, and lack of communication, offering insight on some of the most difficult risk issues that board members face. Ten Risk Questions for Every MFI Board provides concrete warning signs and strategies for effectively managing or avoiding specific risks. We hope this resource will empower board members to speak up when they are uncomfortable about a move the MFI is making, or when they think an early warning sign of a larger problem may be present.
The publication is part of the Center’s Running with Risk project, which seeks to raise awareness about and enable effective risk governance for the institutional growth and sustainability of MFIs. Running with Risk is creating a common framework and language around risk so both the MFI’s management and board of directors better understand the potential of their roles, and can more adequately anticipate and manage risks. In Ten Risk Questions for Every MFI Board, the various experts discuss the importance of boards in determining and assessing how much risk is acceptable for the MFI and taking responsibility in leading the institution to ensure that the proper policies, procedures, and people are in place.
> Posted by Amit Jain, Principal, Global Thought Leadership, MasterCard Advisors
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
As an avid advocate of financial inclusion, I am deeply saddened by the fact that several hundred years after the first bank opened, 50 percent of the global adult population still lacks access to formal financial services.
The good news is that this may not be the case any longer. So I eagerly read the recent paper from Elisabeth Rhyne and Sonja Kelly from the Center for Financial Inclusion at Accion that talks about how growing incomes could lead to growing inclusion. I am glad that the authors have brought this phenomenon to the forefront.
I agree that rising incomes could be a key catalyst for elevating financial inclusion globally. I have experienced firsthand the tectonic shift in the income profiles and demand for financial services in India reflected in data from the United Nations Statistics Division. It shows that the percent of the population below the poverty line in India has dropped from 45 percent in 1994 to less than 30 percent in 2010. Read the rest of this entry »
> Posted by Bindu Ananth and Amit Shah, President of IFMR Trust and Head of Business Intelligence at IFMR Rural Finance
Bindu and Amit co-edited the recently published book Financial Engineering for Low-Income Households. An edited compilation of articles, the book focuses on using financial engineering to design financial services for low-income households. A Q&A with Bindu and Amit follows.
For someone unfamiliar with the field, how would you describe financial engineering, and to what extent do you see financial engineering being applied by retail providers serving low-income households today?
In the Foreword to the book, Dr. Nachiket Mor, a mentor to us at IFMR Trust, observes that the retail finance industry the world over has gone in the direction of standardized products and transferring the burden of decision-making away from bankers and to the consumer. This is also true of providers serving low-income households. This, we think, misses the power of finance. The motivation of this book is to systematically compile principles from finance and economics theory and apply them to the context of design and delivery of financial services for low-income households. We use the term financial engineering in this context.
Do you think that this framework addresses any misapprehensions, gaps, or problems in the way that financial products are currently designed for low-income households?
I think it is safe to say that there is negligible design today – largely because so much of the energy and focus has been on sheer distribution. Just getting a small loan delivered in a remote context is hard enough, leave alone worrying about whether the loan is structured well to suit the customer. This book lays out an approach for a new generation of providers, who are concerned about distributing well-designed products to meet client needs, not just any product.
One of the goals of your book is to provide an understanding of the risk-reward trade-offs facing low-income households. In your experience, what is the most widespread risk barrier, perceived or actual, preventing greater financial services adoption in India?
I think one of the big challenges that we worry a lot about is that so much of the portfolio of low-income households is dominated by physical assets (land, house, and livestock). These are typically low return, high risk, and highly correlated with their human capital. The opportunities to do better than that are therefore infinite.
> Posted by Andrea Horak, Program Coordinator, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
When you hear the word “democracy,” you probably think of equality, elected representatives, voting rights, and so on. You probably also think of specific contexts. In the United States, for example, many of its citizens pride themselves on living in a democratic country. But what about democracy in business? Or more specifically, democracy in microfinance institutions (MFIs)? Should democracy extend to the decision-making in their governing boardrooms?
Although good governance has become a top priority for microfinance investors, donors, and regulators worldwide (CGAP’s Microfinance Gateway lists it as a Hot Topic), the structures of boardrooms and views on governance vary from institution to institution, country to country, and continent to continent. None of these structures, however, seem to be “democratic” in the way we define the word – representative of all parties involved. For example, as we covered in a previous blog post, the Anglo-American model of governance empowers CEOs to also serve as chair of their corporate board, which can result in management dominance of decision-making.
At the CMEF’s most recent meeting in April in Lima, Peru, a portion of the discussion was dedicated to asking why the client voice is not heard in the boardroom. Although it was generally agreed that financial institutions should strive to incorporate clients at the governance level in some way, the response on “how” varied greatly.
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