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> Posted by Kimberly Lei Pang, Digital Learning Specialist, UNICEF

In the story of Ali Baba and the 40 Thieves, the magical word “sesame” was used to open the seal of a cave where Ali Baba found hidden treasure. In China today, the same word is connected to another kind of magic, one that reveals hidden identities of the socially and economically disadvantaged. Sesame Credit (“芝麻信用” in Mandarin) is a product launched by Alibaba that pulls from transaction records on e-commerce platforms to understand a person or company’s creditworthiness. Such innovation in credit scoring is part of the “social credit system” that the Chinese government is building to make up for the longstanding shortage of credit data.

Access to credit, a major indicator of financial inclusion, has gained increasing attention from Chinese policymakers in recent years. For a country experiencing an economic slowdown and widening income gap between the rich and the poor, credit accessibility has the potential to spur growth and level the playing field for the poor. However, despite China’s efforts to improve financial access, a large portion of its population neither uses nor has access to credit. Data from the World Bank’s Global Findex study showed that Chinese people (aged 15+) have relatively high levels of formal bank account ownership (79 percent, 2014) but low levels of credit usage (14 percent, 2014). In fact, China’s formal credit use is the lowest among the five BRICS economies. Aside from the rigidity and costliness of financial institutions, a significant barrier to borrowing is the lack of reliable credit scoring in China. Established just 11 years ago, China’s credit bureau CCRC covers credit profiles for only a quarter of China’s 1.4 billion population and shares that information only with selected banks. Lenders thus often have no access to borrowers’ financial histories and tend to make rather arbitrary decisions on borrowers’ creditworthiness. As a result, many individuals and microenterprises find it difficult to get a loan, as steady employment and collateral assets are commonly required for formal credit.

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> Posted by Allyse McGrath, Specialist, CFI

How financially healthy are you? Financial health is a relatively new term in the financial inclusion community, and aims to provide a model for assessing how well one’s daily financial systems enable a person or household to build resilience to shocks and pursue opportunities and dreams. Last month, CFI in collaboration with The Center for Financial Services Innovation (CFSI) and Dalberg’s Design Impact Group (DIG) launched the results of a year-long study into how to adapt CFSI’s U.S.-based financial health framework to a developing country, BoP context. The study found that the concept of financial health can be applied to lower-income people in emerging markets, though the indicators and measures of financial health in this context were different. We encourage you to check out the full report, Beyond Financial Inclusion: Financial Health as a Global Framework, to learn more about our financial health framework for the developing world.

We also encourage you to engage with your own financial health in order to get a better grasp on the concept. To better understand the concept ourselves, CFI and Accion staff (building on the work of our year-long study and on the U.S. Financial Health Framework of CFSI) recently participated in an organization-wide financial health survey. Over 120 Accionistas took the survey and received assessments of their financial health. After reviewing the responses, we have uncovered some interesting insights into how people’s debts evolve as they age and the diverse set of tools they are using to manage their financial lives.

As a next step in the process of understanding, we want to share this survey with you. We hope it will help you both engage with the concept of financial health and potentially improve your own financial health. We also hope your feedback will help us strengthen our framework and this tool.  Finally, we look forward to reporting back soon on the financial health of CFI’s (anonymous) blog readers!

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> Posted by Todd A. Watkins, Paul DiLeo, Anna Kanze, and Ira Lieberman

Fintech is a shiny attractor for impact investors. Emerging financial technologies shimmer with disruptive potential for the delivery of a wide array of financial, educational, health, and social services for the poor. While microfinance still makes up a major share of impact investing portfolios, many investors appear to have moved on to fintech, the next wave of creative destruction. Rather than be toppled by it, microfinance institutions (MFIs) look to ride that wave too, to extend reach, reduce costs and prices, improve and deepen client services, and improve risk management.

Fintech, whether new digital services or proprietary software used to evaluate and underwrite credit, brings glittery potential for MFIs, no question. But in fairy tales unicorns glitter too. Are MFIs chasing something equally illusory? Microfinance has decades of success growing and strengthening a high-touch business model. As growth slows, should MFIs now abandon that approach and use high-tech to go low-touch for cost efficiency? If MFIs stay their course, will they be overtaken by new entrants with new models, like Chinese online peer-to-peer lender Yirendai, which went IPO on the New York Stock Exchange last year? Or instead, will MFIs find innovative high-tech ways to further leverage their deep relationships with clients and understanding of client needs?

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

Ant Financial, the Chinese inclusive finance powerhouse founded by Alibaba Group, and Euronet Worldwide, a U.S. giant in the money transfer game, are in a bidding war over MoneyGram. Financially, this makes sense as the global remittance market is estimated at about US$600B and MoneyGram commands a market share of roughly 13 percent of the world’s largest remittance route, from the U.S. to Mexico.

When two large companies compete to acquire another large company you might hear about it on CNN Money and promptly move on to other thoughts. But this particular news struck me because it touches on three of the (many) insights about the future of financial inclusion that I took away from attending this year’s Harvard Business School – Accion Program on Strategic Leadership in Inclusive Finance just last month.

Big players will increasingly drive the financial inclusion sector moving forward while, in the past, only small companies served the financial needs of the low end market. Microfinance has shown the poor to be a commercially viable customer segment, and as competition heats up, many big financial players are looking for ways to better tap into the commercial potential of new clients at the base of the pyramid. These big players have the deep pockets to innovate, experiment, and take the risks required to figure out how best to serve the billions of people still financially excluded. In addition to Alibaba’s Ant Financial, China’s WeChat, the social messaging app which connects over 800 million people, now allows for money transfers.

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> Posted by Carmen Paraison, Project Associate, the Smart Campaign

The views expressed in this post don’t necessarily reflect those of CFI.

The Development Bank of Nigeria (DBN) was conceived in 2014 and this year it has come into fruition with the green light from the Federal Executive Council on April 5th. The only step standing in the way of disbursement of funds is the required approval from the National Assembly. With $1.3 billion in its coffers, the new development bank aims to spur economic development by increasing access to finance for micro, small and medium-sized enterprises (MSMEs) through relatively lower interest rates compared to commercial banks, and relatively longer loan repayment periods.

The DBN will serve as a wholesale bank to microfinance banks (MfBs) which will in turn provide medium and long-term loans to MSMEs. It will provide loans to all sectors of the economy including manufacturing, the services sector, and other industries not currently served by existing development banks, thereby filling an important gap in the provision of finance to MSMEs.

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> Posted by Sabine Spohn, Senior Investment Specialist, Private Sector Operations Department, Asian Development Bank

The following post was originally published on the Asian Development Bank blog.

In late 2016, many presumed Indian microfinance institutions would be adversely affected by India’s sudden demonetization law. Surprisingly, events unfolded quite differently to expectations.

On November 8, Prime Minister Narendra Modi announced the withdrawal from circulation of all Rs500 and Rs1,000 bank notes in a bid to combat black money and curtail the use of counterfeit cash. The objective was also to slowly introduce the country’s population to a digital economy. The action was driven by good intentions, although it initially caused many disruptions in the economy.

In India, where ADB’s Private Sector Operations Department has been carrying out the Microfinance Risk Participation and Guarantee Program since 2012, many of our partner microfinance institutions temporarily stopped lending to low-income people as they were not clear how those loans would get repaid – in particular in rural areas. In the first few days and weeks, collection rates dropped to as little as 10-20 percent.

Five months after demonetization, the uncertainty has started to fade.

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> Posted by Ira W. Lieberman, Todd A. Watkins, and Anna Kanze

We’ve identified the problem: Microfinance is no longer sexy. It’s old news. It can’t deliver “impact,” and its effect on alleviating poverty was oversold and has underwhelmed. It’s well and good to offer working capital loans, but at the end of the day, the poor need education, health care, water for drinking and irrigation, roofs, and electricity together with a wide variety of financial services. It’s time for investors seeking real innovation to move on to the next big thing that will transform the lives of poor people and save our planet. Never mind microfinance’s decades-long track record of listening to the poor and underserved clients and effectively developing products and services based on their needs.

Of course, we issue these statements with considerable sarcasm. But, all joking aside, industry trends and shifting sentiments are presenting investors with a real question: Should they abandon the reliable and successful platforms and infrastructure that microfinance institutions (MFIs) have built? In turn, MFIs are saddled with the question of whether to stick to what they know best, or instead, to use their platforms to deliver expanded product offerings that increase access to other essential services.

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The following is taken from an actual email conversation between Ignacio Mas and Beth Rhyne.

Beth writes:

Dear Ignacio,

I hope this message finds you well.

I wanted you to see the paper we just released on the technological underpinnings of mobile financial services. It’s from CFI Fellow Leon Perlman, who investigated the state of the technologies  – primarily, mobile data “bearer” technologies, access platforms, and user devices. If you want a short overview, see our blog and infographic.

I was fascinated to learn all about the underpinnings of mobile money, but more important, the paper has urgent messages we want opinion leaders in the financial inclusion sector to hear, which is why I’m specifically reaching out to you. The paper cautions that despite the rapid expansion and projected growth of 3G and 4G networks and smartphone-based apps, the underlying conditions are not being met to enable people in the lower end of the market to benefit from smartphone-based mobile financial services. Perlman says those conditions will remain out of reach for the low end market, especially in rural areas for some years and argues for continued support to feature phone-based systems. He also highlights major security vulnerabilities throughout both the current (feature phone) and evolving (smartphone-based) systems.

Rather than speeding toward a smartphone future, low end customers are still buying feature phones because of their longer battery life, use of 2G connectivity, and low price. This trend suggests that financial inclusion will not be able to flip to rich customer interfaces on smartphone devices any time soon, and MNOs will continue to be key to mobile financial services.

We’d like funders and policy makers to take note and take action.

I hope you enjoy the report and would enjoy talking more about it if you’re interested.

Best,

Beth

Ignacio writes: 

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> Posted by Patrick Traynor, Associate Professor, the University of Florida

CFI Fellow Patrick Traynor, an Associate Professor in the Department of Computer and Information Science and Engineering (CISE) at the University of Florida, is launching his research effort on the security of data in mobile lending applications.

Mobile phones and networks are transforming the world of financial inclusion. However, we know that we cannot simply “copy and paste” traditional financing mechanisms into this mobile context and expect widespread inclusion. For example, the traditionally-excluded often lack the standard data lenders use to underwrite credit decisions (such as government audited tax forms, formal pay stubs, property deeds, and so forth). A plethora of companies are attempting to measure creditworthiness using alternative data – including the data trail created through mobile money applications. Alternative data for underwriting holds the potential to dramatically expand access to credit if successful, but it also poses new challenges.

For instance, how secure is data used in digital credit?

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> Posted by Paul DiLeo, Todd A. Watkins, and Anna Kanze

Discussion of impact investing has grown increasingly heated. There’s a conference nearly every week. Several weekly clipping services­—even a daily one—share news of the latest investments and conversions: 100% for impact! New benchmarks! New sectors! Perpetual motion! What fuel is creating this heat? The cold conviction that someday soon, all investing will be impact investing!

Meanwhile, in a parallel universe worried about losing its gravitational pull, a debate waxes and wanes over whether microfinance should be disqualified as an impact investment, either because its subsidized, non-profit origins magnetically repel VCs or because randomized controlled trials find that the average benefit to clients of microcredit is modest.

Which is ironic, because microfinance and its sister star, financial inclusion, remain the largest impact sectors in annual investor surveys.

This hyperactivity and incoherence can only mean one thing: the term “impact investing” has achieved its financial industry apotheosis: it means whatever we need it to mean. It’s a gaseous cloud that shapeshifts depending on who’s looking.

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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.