> Posted by Anne H. Hastings, Manager, Microfinance CEO Working Group
Global Forum Venue: The Lancaster London
As I traveled to London to attend the FI2020 Global Forum, my mind was filled with many thoughts. First was excitement that I had been invited to attend when I was still very much a microfinance practitioner. I was still in the process of adjusting after 17 years living in Haiti struggling to build an institution that would be a model of a client-centric, double bottom line microfinance institution (MFI) committed first and foremost to reaching the very poorest people in Haiti and providing them a pathway to a better life. For me, this meant providing them with a full range of financial and social services. My commitment to these clients had been solidified through my years in Haiti but also by my service on the Smart Campaign Steering Committee and the Board of the Social Performance Task Force and more recently by my role as a practitioner advisor to Truelift.
But now that I was in the plane and on my way, I had taken on a new role: Manager of the Microfinance CEO Working Group, a collaborative effort of the CEOs of eight pioneering global microfinance networks – Accion, FINCA, Freedom From Hunger, Grameen Foundation, Opportunity International, Pro Mujer, VisionFund International, and Women’s World Banking – all dedicated to advocating for more responsible microfinance practices and to instituting the highest standards of performance within their own MFIs. These eight CEOs represent 250 MFIs in 70 countries, serving some 40 million families. Suddenly I had been boosted from deep concerns about the future of poverty in one tiny country of 9.5 million to a preoccupation with the future of MFIs worldwide.
The Forum was a beautiful reflection of the often chaotic financial services marketplace of today where traditional banks, telecoms, retail stores, donors, investors, policymakers, regulators, and MFIs often collide in seeking to capture new markets. In attendance were the CEOs of institutions like Citi and MasterCard, along with several former Governors of Central Banks, technology innovators like the CEO of bKash, executives of insurance companies like MetLife and Swiss Re, Managing Directors of investment companies like Wolfensohn Fund Management, experts in alternative data systems like Cignifi. There were times when I thought maybe I had actually entered the wrong conference! Who were all these people, and what did they have to do with the future of microfinance?
But as time went on and the discussions deepened, it started to be clearer what they had to do with microfinance. These are some of the lessons for microfinance that I took away from the Forum:
1. It’s time we all learn and consider for our own work the implications of the “new” definition of full financial inclusion:
A state in which all people who can use them have access to a suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, to financially capable clientele.
How many of us can say that we have achieved this goal, if only for our own target group in our own geographic region? What this means, for starters, is that credit is certainly not enough in today’s world – our clients need savings, insurance, remittances, payments, currency exchange, etc. And they need them at affordable prices in convenient places for them to reach and with respect.
2. And what is this new phrase – financially capable? What exactly does that mean? Does it just mean financial education? No, it doesn’t. At the Forum, we learned that it doesn’t mean simply imparting knowledge and transferring skills; it also means adopting the attitudes and behaviors that a person needs to make sound financial decisions that support well-being. To achieve it, we need more than just the 3-day pre-loan training in group lending processes that most of us are used to offering. It means shifting from financial education as knowledge transfer to financial capability as promoting sound financial choices and behavior. Do you know how to do that?
3. When we move to the phrase “all people who can use them”, is it reasonable to think MFIs could do that? After some thirty years or more of testing and building and stretching, we’ve reached an estimated 200 million borrowers across the globe whose families comprise about one billion people, according to the Microcredit Summit Campaign Report of 2012. But there are 2.5 billion people who are today excluded from formal financial services, and they include, in addition to the poor and poorest, youth, seniors, persons with disabilities, migrants, women in many countries around the world, and those living in areas so remote they can’t even be reached with a motorcycle. The only way to get close enough to “touch” them is to walk for hours on end. Could technology provide a faster, even better way to reach these 2.5 billion? At the Forum, we heard about a relatively new product launched through a partnership between Commercial Bank of Africa and Safaricom that gives users the possibility of saving their money and taking out loans. In just 13 months, they have reached 5 million customers! Regardless of what you think about the product, the reach is truly amazing!
4. And how many of you MFI practitioners out there live in countries with an effective credit reporting system that works for all parties and seamlessly covers the poorest? Certainly I did not. In fact, I was the person who argued that while a credit reporting system might work for SME clients, it wouldn’t work for the poorer clients because first and foremost we had no way to identify them! Moreover, much of the financial activity of the poor, as we learned in Portfolios of the Poor, takes place in the informal sector so that we know very little about it. But at the Forum, we heard about the use of alternative data. Alternative data might consist of phone records, rental information, remittance data, etc. and there are new companies out there like DeMyst and Cignifi that work with alternative data to build new models for assessing creditworthiness. Is this a possible solution?
There is no doubt that the field of microfinance is changing rapidly as we all struggle to figure out how to implement client protection and social performance management through SPTF, the Smart Campaign, True Lift, SPI 4, etc. However, what I learned in London is that we must be vigilant because the changes in the larger ecosystem in which we operate are coming just as fast and perhaps even faster. In today’s world, we need to know what all these players – banks, telecoms, technology innovators, insurance companies, behavioral economists, remittance companies, regulators and policymakers, consumer protection agencies – are thinking when they enter the base of the pyramid and we must consider their roles in our world. Finally, we should also seek to distinguish those who are entering this space for the wrong reasons from those who are focused on real value creation for the poor as part of doing business with them.
The bottom line is we need to know exactly what value we bring to these other players as well as what value they can bring to us. What is clear to me is that some of the very important values the best MFIs bring is their (1) knowledge of their clients (who tend to be the most difficult to serve), (2) understanding of what their clients’ needs are, (3) grasp of their clients’ perceptions of formal institutions, which in the end have discouraged them from using those services, (4) skill in designing products that do meet their clients’ needs, and (5) ability to help their clients learn and grow – which they have acquired from years of on-the-ground experience working with them. The best MFIs have long-term, intimate relationships with their clients, and they have successfully learned to listen well to what they have to say. They have systems in place to protect their clients and know the importance of giving them voice in everything they do. And, finally, and most importantly they know how to advocate for their target group whether it be the poorest, the most rural, women, or youth – and that means that if the financial inclusion movement leaves any of those groups out, they will be prepared to hold them accountable.
What value, on the other hand, do the telecoms and the insurance companies and the behavioral economists and the consumer protection agencies have to offer us? That’s a question that I hope we will all reflect on in the months to come. Here are a couple of examples. The telecoms understand scale and how to reach it. Moreover, they can offer technology-enabled business models that they have been building and testing. The insurance companies bring a deep understanding of risk and how to mitigate those risks that can be mitigated and manage those that cannot. With their insights, the behavioral economists can help us learn how to better develop financial capability among our clients. The consumer protection agencies can help us move from “protection” of our clients to their “empowerment” so they know how to protect their own interests.
The biggest threat to the microfinance sector today is not the entry of telecoms and other major players. It is refusing to collaborate, to partner with, and to learn from these new players to expand our services and do a better job of reaching our clients. The Global Forum made it clear that, as Michael Schlein put it, “Everyone has a significant role to play in actually achieving a financially inclusive world.” It’s not only MFIs that have a role to play, but, on the other hand, the role they will continue to play is substantial.
Image credit: The Center for Financial Inclusion
Have you read?
Kate McKee: On the Behavioral Economics of Poverty and Implications for Financial Inclusion
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4 comments
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November 15, 2013 at 8:18 am
George Kinyanjui PhD
Dear Anne,
Great reading!
‘It means shifting from financial education as knowledge transfer to financial capability as promoting sound financial choices and behavior. Do you know how to do that?’
For me it starts with financial awareness, financial education,financial literacy, financial capability, financial freedom of choice, and financial emancipation then financial inclusion.
At FinInc Systems we have walked this path. It is not a well trodden path. No wonder because it is not an easy path. It involves all the players as Michael very correctly puts it. Getting them to see the same elephant is quite a task given that each has their own interests which override their need to corroborate. Its a careful walk through tenets of Project management, change management, organizational development, and behavioral science. The tools that work in Haiti will not necessarily work in Indonesia,Africa or anywhere else. So we draw board for every intervention. Can we do it? We give it a pretty good shot! There needs to be goodwill nurtured in the process. Its a development paradigm shifting walk and like in all development implementations requires time, Patience here is a truly a virtue.
You have said well in your blog and God speed in your new role
November 15, 2013 at 2:00 pm
Hugh Sinclair
Anne, this is an interesting post. You begin with an encouraging definition of full financial inclusion – a simple summary that states quite explicitly that loans to the poor should be “affordable”. Do you observe any irony in the fact, sourced entirely from publicly available information provided by Chuck Waterfield’s excellent transparency initiative, that Opportunity International do not appear to meet this rather simple criteria? As manager of the Microfinance CEO Working Group I wonder what criteria you apply to the members of this elite organisation with regards their own compliance with the definition you cite. Conveniently the word “affordable” is not defined explicitly.
In my blog of October this year (“Exploitation Declines, a bit”), using data from http://www.mftransparency.org, I wonder if you find interest rates to Kenyans of 135% affordable? Ghanaians pay up to 124.1%, Malawians 144.5%, Mozambicans cough up 152.7%, and Ugandans pay a mere 103.1%. Rwandans and Tanzanians receive relative bargains, with rates not exceeding 76.8% and 92.1% respectively.
These are the interest rates charged by Opportunity International, according to publicly available, and independently verified data.
Do these qualify as “affordable”?
It appears there are only three answers possible here. Firstly, that you do find these affordable, in which case some may wonder what the purpose of such a ridiculous definition is. Where do you draw the line? is an APR of 1.000% “affordable”? Or you may suggest these are not affordable, in which case does Opportunity International deserve a place in this club? Or thirdly, you may evade the question entirely and retain a nebulous, nice-sounding but toothless definition of such an obvious point in order to present the image of ethical microfinance without actually obliging exploitative operators to address such a simple facet of lending to poor, vulnerable people.
And do also note that despite the fact that MFTransparency manages to calculate Opportunity’s interest rates to two decimal places, Opportunity themselves make no mention of interest rates on their entire website save a vague comment on their FAQ section: “Opportunity International charges interest in order to cover its costs and achieve operational sustainability”. Would this fall under any sensible defintion of “transparency” I wonder? Another buzz word we hear much of nowadays but see little evidence of.
You are striving to do good work, which I applaud, but you need to ensure those you partner with credible players, and live up to the same standards that you promote. Otherwise you risk looking like yet another failed attempt to perk up the reputation of an ailing sector. Take action, not simply sprout nice heart-warming words. So, I ask the question directly, and would respect you a lot more if you would dare to provide an explicit answer: what is an “affordable” loan? If you prefer not to define the words you use, perhaps you could pay us the courtesy of simply not using these words.
November 19, 2013 at 9:35 am
Geprge Robert Kinyanjui
I posted a comment a few days ago. We need to collaborate.
February 22, 2014 at 12:34 am
Frank Cianciullo
Post offices can offer the financial services that people need and they can be successful as we have seen in Brazil. However, first we must dramatically expand the networks of post offices in countries at the base of the pyramid.
Post Offices can offer postal, banking, financial services, telecommunication services and any number of government-to-citizen services such as licensing, access to social programs, vital certificates, etc. through a Microfranchised Village Post Office model.
Microfranchising provides all of the same fundamentals of the business-format or packaged franchise model, but requires a much smaller investment from both the franchisor (the Post supported by an NGO or Multinational Development Bank) and the franchisee. It borrows the existing, successful franchise business concepts, scales them down and applies them in countries at the base of the pyramid. A microfranchised post office model, in every village, that has a minimum sustainable number of people, would make the village post office relevant to the people; develop a host business or make it more successful and may have a dramatic, positive impact on the economy and the quality of life of poor people, at very little cost.
When you apply microfranchising principles of branding and standardization to ensure quality and replication, it allows a postal administration, even one that lacks any great amount of development funds, the ability to expand quickly to reach a critical mass, achieve economies of scale and the ability to sustain itself, which in-turn lowers the service and product cost for the group of franchisees to offer the services.