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> Posted by Adam Brown, International Development Discourse Group (IDDG) Member
The following post was originally published on the IDDG Blog.
Since 2008, the Afghan mobile phone provider, Roshan, has worked to bring mobile money services to Afghanistan. With the support of USAID, all four of Afghanistan’s major mobile phone providers are currently developing mobile money capabilities. The highly successful rollout of Kenya’s mobile money and banking service, M-Pesa, has spurred a flurry of similar startup efforts – over 72 in 42 countries. Many countries, however, have failed to experience the kind of success that M-Pesa achieved, and Afghanistan is no exception.
While the mobile money program in Afghanistan is in its nascent stages, the factors that helped M-Pesa to succeed are generally lacking. The most important of these are, 1) a dominant mobile carrier; 2) an economy that depends on long distance money transfers; and 3) customer trust in the system. The Afghan mobile phone market is too divided to create the kind of widespread network required to attain the critical mass necessary for a sustainable customer base. Further complicating the issue is the fact that Afghans generally do not rely on remittances, limiting the utility that could draw future users. To fix that, mobile money providers should include banking mechanisms early in their programs instead of tacked on only once a money transfer system is in place. However, trust in banks, especially since the Kabul Bank scandal, may be too low for Afghans to put their money into another bank-like mechanism. While mobile money is not destined to fail in Afghanistan, proponents of mobile banking and USAID should adjust their expectations for success, or at least be ready to address the above issues.
> Posted by Amy Jensen Mowl and Ben Sprung-Keyser, Institute for Financial Management and Research (IFMR), Chennai and Harvard College
There is revived interest in the role of informal credit in India, with researchers using a variety of innovative tools to study informal products and their delivery channels. While the majority of informal loans may come from professional moneylenders, such lenders are not the only source of informal credit for micro and small entrepreneurs. Indeed, for households, non-bank credit is provided by a wide range of players, including moneylenders, unregulated pawn brokers and chit funds, employers and local shopkeepers, and caste and kin networks.
Interested in the range of alternative informal credit options available to businesses, we decided to take a fresh look at informal credit products in a major wholesale fruit and vegetable market in Chennai. The result: we found a market for alternative finance that revolved around merchants associations and the provision of common credit.
Two Associations, Two Loan Products, Two Outcomes
Amongst the collective loan products we examined, those offered by the Tomato Wholesaler Welfare Association (“tomato association”) and the Banana Merchant Welfare Association (“banana association”) were most notable. Like most voluntary trade associations in India, both associations function to protect and advance the common business interests of the members, share information, provide mutual assistance, and distribute gifts during festivals and ceremonies.
In addition to these basic functions, we found that the associations had credit and savings features, with mixed results. In the case of the tomato association, the individual wholesalers had devised an intricate mechanism for the collective pooling of resources amongst 50 members. All wholesalers who wish to join are required to pay a 10,000 rupee deposit and contribute an additional 50 rupees a day in membership fees. This financial arrangement lasts for five years, and so members are not permitted to withdraw their contributions before that time lapses. Instead, wholesalers in need of funds may borrow from the group at a rate of three percent per month. The tomato association deducts a small amount of interest income for operating costs and divides the interest income equally among individual members. One wholesaler explained that he had accumulated more than Rs. 200,000 in interest over the course of the last four years.
> Posted by Mary Hansen, Organizational Development and Training Associate, Accion
842 million people struggle through the hunger games yearly. The games begin as food and money run low sometime before harvest and last until the first ripe crops. This is better known as los meses flacos, the thin months, in Latin America. Or as I knew it in East Africa, wanjala in Swahili and nyengo yonjala in Chichewa (the hunger season). These recurring hunger games are not state sponsored and the participants do not fight each other to the death, but they do fight individuals, families, or communities to survive. Every day, 25,000 people around the world die from hunger-related causes, including 16,000 children. That’s one child every five seconds.
The regions deeply affected by hunger depend heavily on smallholder farming. Around 75 percent of the world’s poor are smallholder farmers. Half of the world’s undernourished people, including three-quarters of Africa’s malnourished children and the majority of those living in absolute poverty live on small farms.
Many of these farmers face the struggle of the hungry season. To understand their situation, consider how you would budget if you were only paid a few times a year.
Personally, I struggle with budgeting when paid twice a month. When I was in the Peace Corps in Malawi and was paid monthly, I struggled even more. Yet, smallholder farmers often receive payment only during harvest, or twice a year. I still do not fully understand how families survive with this income structure, even though I lived in a rural town in Malawi for two years. Yet, this is the reality for many of the 2.5 billion people that depend on smallholder agriculture for their livelihoods.
> Posted by Center Staff
Expanding financial inclusion to the 2.5 billion unbanked individuals around the world is essential, but why does it matter, and is it possible in the next six years?
In recent years, the inclusion movement has achieved critical support and rapid progress. Last year universal financial access by 2020 was endorsed by World Bank President Jim Kim. Technology-enabled business models are catalyzing outreach, building on infrastructure like the mobile phones now accessible to six of the world’s seven billion people.
In the following video, global financial inclusion leaders explore the questions of whether financial inclusion is possible by 2020, and why we should work towards that goal.
> Posted by Laura Galindo and Alexandra Rizzi, Senior Associate and Deputy Director, the Smart Campaign
A few days ago a post on this blog detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of Consumers International, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.
Once a client becomes seriously delinquent and moves into default, the possibilities for serious consequences for the client arise. Yet little is known about how microfinance institutions treat clients at these later stages. What alternatives do providers offer to clients who are in protracted arrears? How are clients treated when they are defaulting on multiple loans? What do clients experience during this difficult and stressful stage? And after the default, are client debt obligations resolved? Is there a concerted effort to rehabilitate or re-include defaulters?
In September, the Smart Campaign kicked off a research project to explore what happens to clients who default. The project focuses on how microfinance practitioners treat defaulting clients. It is scanning for best practices around the world – like debt mediation projects in Europe and middle-income countries – and examining practices in detail through interviews with practitioners and regulators in Peru, India, and Uganda. Interviews were also conducted with credit bureaus, debt collections agencies, consumer advocacy/protection groups, and researchers specialized in those markets. These countries were chosen, in part, because of their variation in credit bureau infrastructure and the hypothesis that this would have significant impact on provider practices.
> Posted by Pina D’Intino, Senior Manager, Scotiabank
The Financial Inclusion 2020 campaign 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.”
In 1998, I unexpectedly lost my sight as a result of a medical complication. One of the first things that struck me was the impact this disability had on my day-to-day living, including my ability to independently and confidentially access and conduct my banking. Thankfully, I was still employed and could continue to save and invest towards the purchase of a home and ultimately plan for retirement. However, this proved to be much more difficult than I imagined.
Today, 15 years later, and after acquiring sufficient skills to use a screen reader, I am able to access my retail accounts for basic banking but am still unable to effectively use tools with my screen reader that will allow me to estimate the cost of purchasing a home or what my mortgage would be, nor am I able to independently use simple investment or trade tools that would allow my savings to grow. All this despite the evolving technical enablers and my digital literacy increasing.
As more and more branches are moving towards self-service tools, it has become harder to meet in person with a financial advisor. And yet, I cannot independently access information that would allow me to make informed decisions, cannot independently conduct or monitor my investments, and need someone to read to me the complex and lengthy application forms that I need to complete. Furthermore, if I go to a branch with someone else, at times, the staff will not allow me to include the person in the conversation unless a proxy or power of attorney is on file for them to disclose any personal information. At other times, they will speak to the person who comes with me, rather than speaking to me directly. Read the rest of this entry »
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Thirty million Americans are currently being pursued by debt collectors. During 2012, the Federal Trade Commission (FTC) received 180,000 complaints about the practices of these companies – a 13 percent increase over 2000 levels and more FTC complaints than from any other industry. Troublesome practices seem to only be limited by the imagination, but some of the more reported-on ones are incessant calling at all hours and issuing unsubstantiated, misleading threats. Today the U.S. debt collection industry stands at over 4,500 companies and $12 billion.
To make matters worse, many of those being pursued don’t even have the debt in question. About one-quarter of the collection-related complaints the Consumer Financial Protection Bureau (CFPB) received last year were from individuals who were being wrongly pursued.
Debt collection happens, with some variation, in one of three ways: lenders carry out the collection in-house; third-party companies are hired and paid to complete the collection; or third-party companies buy a lender’s debt and independently complete the collection. In the latter case, collection companies buy individual’s debts from lenders for as low as a few cents for each dollar of debt and in return they receive a spreadsheet with basic information like names, phone numbers, and debt amounts. Collectors pocket the difference between what they paid to the lenders and the total they collect. It’s not uncommon for this spreadsheet information, intentionally or not, to be inaccurate or faulty. And even when a person is wrongly pursued, the consequences can be serious.
A popular debt collections practice brought to public attention in recent years thanks to legal suits centers on collectors taking debtors to court without their awareness (giving new meaning to the phrase blind judgment). Collections agents fail to serve a debtor a notice of complaint, produce a false affidavit claiming the individual has been properly served, and then proceed with a court hearing. The defendant, of course, does not attend, and so most often the debt collector wins the case and a default judgment is issued. (More than 95 percent of credit card lawsuits end in a default judgment, an automatic win for the collector or lender.) Such rulings could include the freezing of bank accounts, garnishing of wages, and they are very likely to reduce credit scores.
> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published on the IFMR Trust Blog.
The Mor Committee Report offers a radical take on client protection, built around the concept of a legal right to suitability. After describing the recommendations briefly, I would like to tell IFMR’s readership why I’m excited about the approach (two big cheers), provide some thoughts on how to make it work (and how the Smart Campaign could assist), and raise a couple of questions.
Suitability is about ensuring that clients are sold financial services that are appropriate for their circumstances. A suitable product is one the client can be expected to manage with a low probability of serious hardship and a reasonable prospect that it will provide value. The concept has been present for some time in financial consumer protection regulation, most notably in the UK and Australia. The Mor Report proposes a unique approach to implementing suitability, which places responsibility on the service provider to install processes to ensure that clients are sold suitable products, e.g., client targeting and underwriting procedures that adequately assess repayment capacity. Regulation would hold the board of directors responsible for approving and overseeing the implementation of these processes, subject to external review. Hand in hand with this, the report recommends an energetic grievance redress system (which I will not address here), including both internal and external mechanisms to cope with individual problems.
The first big cheer goes to the decision to focus on suitability as the heart of client protection. This directs attention exactly where the greatest potential for harm occurs. Overindebtedness, is perhaps the greatest failure of suitability, resulting from selling loans that exceed a client’s debt threshold. This is why the Smart Campaign places Appropriate Product Design and Delivery and Prevention of Overindebtedness as Client Protection Principles #1 and #2, even ahead of Transparency. Among all the standard client protection problems, only overselling of credit has repeatedly caused sector-wide crisis and collapse, and thus if there is to be a focal point, this is the right one. (The report discusses the relative merits of suitability vs. disclosure as the core of consumer protection policy, which raises both practical and philosophical issues – an engaging topic for another day’s post.)
> Posted by Alex Counts, President and CEO, Grameen Foundation
The following post was originally published on the Grameen Foundation Insights Blog. It’s the first part of Counts’ two-part post on scarcity and its implications for microfinance and poverty alleviation. Part two can be found here.
The field of behavioral economics – the intersection of psychology and economics – is fairly new. This is a partial explanation of why its lessons have not yet been applied much to microfinance and anti-poverty programs generally. But this is clearly changing, and none-too-soon, as microfinance in particular is in need of reinvention and rebranding.
In fact, I am coming to believe that thoughtful applications of behavioral economics can be a central part of defining and realizing the idea of “responsible microfinance” that the Microfinance CEO Working Group and others are championing and also “full financial inclusion” that moves the dial on poverty.
An excellent new book titled Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir (Times Books, 2013), will make this process of leveraging the insights of behavioral economics into microfinance much easier. Drawing on decades of research, it focuses on an analysis of the phenomenon of scarcity – having too little of anything important to the human experience – and the implications of that analysis for policy and practice.
A note of caution. Lest behavioral economics becomes a new fad in international development and microfinance, or worse yet that I receive part of the blame for that, let me say something clearly. I see behavioral economics as an important lens, which is to say a powerful vantage point to look at efforts to reduce poverty and improve the human condition. Gender is another powerful lens. Race, political economy, biology, mental health, and asset building are also potentially useful lenses.
Now, let me explore a bit what the world looks like when viewed through this lens.
Understanding Poverty through the Psychology and Economics of Scarcity
The study of scarcity through the discipline of behavioral economics tells us something profoundly important. When the human mind perceives scarcity of anything important – money, time, or human contact, to cite three examples – it starts behaving in fundamentally different ways. It focuses on managing and alleviating the short-term scarcity, and in general it does that very effectively. The authors call this the “focus dividend.” Research cited in the book shows, for example, that many dimensions of performance are improved in a situation of scarcity.
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Electronic payment systems are spreading so rapidly they’ve become a challenge to size up. Payment cards have been around in some form since the early 20th Century, but their outreach is still far from ubiquitous, even in countries like the United States. To get a sense of where we stand with the expansion of modern payment systems, I compiled some recent statistics from around the world.
In the United States, employers are increasingly using electronic payment cards to distribute compensation. As compared to checks that require processing, the cards receive funds immediately, and can be used like any other payment card to make purchases, transfers, and withdrawals. In 2012, more than $34 billion was loaded onto 4.6 million active payroll cards. By 2017, this is expected to grow to $69 billion over 10.8 million cards.
Electronic payments are experiencing rapid outreach in India in part through the government’s Aadhaar identification card initiative. Increasingly banks are accepting the biometric information-backed Aadhaar numbers as adequate Know-Your-Client information, and as part of its financial inclusion report released last week, the Reserve Bank of India (RBI) Committee on Comprehensive Financial Services for Small Businesses and Low Income Households recommends that every individual over the age of 18 receive an electronic bank account when they’re issued an Aadhaar number. As of December 2013, about half the country’s population had enrolled for the identification cards. The RBI plans to have the entire adult population enrolled in the system by January 2016. Among their utilities, the cards are being used to distribute social benefits of the government’s Direct Benefit Transfer scheme. A recent UBS Securities report estimates that the efficiencies gained from the card-based social benefit system could total up to 1.2 percent of India’s GDP.
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