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> Posted by Philip Brown, CFI Advisory Council Member and Managing Director Risk, Citi Inclusive Finance

As new opportunities for inclusive financial services continue to grow, they are accompanied by an array of risks, many of which are not fully evident today. Since 2008, the Banana Skins surveys have charted both known risks and those that have previously been overlooked or underrated. The recently released report “It’s all about strategy” is no exception — it surveys a spectrum of participants and gathers their perceptions of the risk in the provision of inclusive financial services.

What does this year’s survey tell us?

Continuous progressive change in service provider business models is not new. But the accelerated pace and diversity of change, coupled with extent of the redesign and transformation process across all aspects of the business model, are shifting inclusive financial service provision. There are changes across the creation and delivery of services, business economics and processes, delivery infrastructure, such as payment systems, mobile networks and agent networks, and strategies for customer acquisition and the targeted customer base. The inclusive finance sector is no longer defined around segment-specific institutions but around the end clients, services provided and the now diverse and growing universe of service providers.

Digital transformation is a pervasive theme in this year’s Banana Skins report, which is a call to recognise the risk of not thinking strategically about all aspects of financial service provision. Across the globe, mobile applications are adding millions of clients versus thousands for established models. Both non-credit products and new forms of credit such as instant nano-credit for pre-paid mobile phone users continue to grow. Rather than viewing disrupters as a threat, one cited respondent positively describes new competitors as facilitators of market development, improving the quality of services and creating pressure to reduce interest rates.

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> Posted by Center Staff

banana.skins.coverWhat do industry leaders feel is the biggest risk facing their institutions in 2016? This question is the focus of the latest Banana Skins report for the financial inclusion sector, Financial Services for All: It’s All about Strategy. The report ranks the top perceived risks facing those providing financial services to un/under-served people in emerging markets. Produced by the Centre for the Study of Financial Innovation (CSFI), and sponsored by Citi and CFI, the study examines the rapidly changing and expanding financial inclusion landscape to better understand how providers view challenges like new technologies, new market entrants, client repayment capacity, and macro-economic risks.

This year’s report, the sixth in the series surveying risks facing the inclusive finance industry, embraces a broader scope than previous editions, which focused exclusively on microfinance institutions. The new report reflects the advances in the provision of financial services to the base of the economic pyramid and encompasses both established providers and newer entrants like commercial banks, technology companies, and telephone and communication companies. A survey with respondents spanning practitioners, investors, regulators, and other industry stakeholders comprise the report’s findings. It’s important to note that in addition to the Banana Skins report series on inclusive finance, there is also a Banana skins report series on insurance and on banking.

So, what were the results?

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> Posted by Kevin Fryatt, Director, Risk management Initiative in Microfinance (RIM)

“We do not engage in risk management because our CEO tells us that every department should be a profit center.” “Risk management seems useful, but how can we afford to pay for it?” Such industry sentiments have been the norm, I’ve found, in my work at the Risk management Initiative in Microfinance (RIM). These statements and many others like them reflect the reality that the value of risk management and its role within microfinance institutions (MFIs) have not yet fully been realized. As the microfinance industry matures and reaching scale through growth continues to drive the strategies of inclusive financial service providers, ways to create sustained value for their clients and shareholders will be increasingly sought after and explored. Finding ways to create sustained value, however, can often be challenging.

Risk management, if carried out effectively, is one important aspect in creating sustained value. Well-executed risk management derives organizational value by ensuring decision-making is carried out within an agreed-upon acceptable level of risk, ultimately providing greater certainty about returns against double-bottom line objectives through reducing volatility of net income and strengthening its ability to meet necessary social returns. For example, decisions on the acceptable amount of credit risk to accept may impact the amount of future financial losses an institution may suffer (financial return) while potentially impacting the type of clients it is able to serve (social return). If risk management has such a high potential to create sustained value, what then has been standing in the way of MFIs effectively implementing it to date?

Many factors explain the challenges in realizing the full value risk management can provide, and much of which point back to the lack of an appropriate risk management framework. Consider the following key framework characteristics:
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> Posted by Anton Simanowitz and Katherine E. Knotts

“Customer centricity” is the new buzz in the microfinance industry. More and more financial service providers are recognizing that their success is built on the success of their clients. Customer centricity certainly means recognizing that financial inclusion is not just about more services – it’s about better services. To achieve this, financial service providers need to grapple with the complexity of clients’ financial lives, understand what appropriate design looks like, and empower clients to use those services effectively.

But is it always a “win-win”? What if clients express preferences and make choices that are not in their long-term best interests – that is, what happens when what clients need isn’t what they might want or demand? And what if responding to client needs in the most appropriate way appears to be a riskier decision from the point of view of institutional financial performance?

These tension points (and some quite radical decisions in the face of them) can be seen in the work of AMK Cambodia, highlighted in a new book The Business of Doing Good. Witness a conversation we had with a senior manager. “We will never be a leader in client service,” he proudly announced. In the competitive Cambodian market, rapid disbursement of loans that meet customer demand is an important competitive advantage. Yet AMK accepts that its own loan disbursement is slower and more time-consuming for clients, and its loan sizes are much smaller than those of its competitors. Coming from an organization that is proudly “client focused”, this statement struck an odd note.

AMK, serving more than 360,000 people, is now the largest Cambodian MFI in terms of outreach. How can an MFI that invests heavily in understanding and responding to the needs of its clients be “less customer friendly” than others? The simple answer is that a market-led solution (responding to what clients want and are prepared to pay for) might look different from responding to what clients need in order to address the underlying complexities of their lives (i.e. poverty and vulnerability).

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> Posted by Center Staff

The microfinance industry in sub-Saharan Africa, boasting roughly 6.6 million clients, is growing fast. This expansion of financial services to the base of the pyramid, bolstered by an increasingly diverse array of providers and products, is enabling many lower-income individuals, entrepreneurs, and households to access and use essential tools like loans and savings accounts for the first time. To ensure the stability and success of the institutions that provide services, however, strong institutional governance and risk management needs to be a core priority. A new CFI initiative, generously supported by The MasterCard Foundation, sets out to address this.

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

Embed from Getty Images

I have written in the past about some of the advantages of having women on boards, including research correlating women on boards with better bottom lines. I recently came across a fantastic piece published by the IFC, Women on Boards: A Conversation with (Male) Directors, which does a wonderful job of explaining more precisely how women add value to boards. Here are a few quotes from the male directors that contributed their thoughts to the publication.

  • “When women are at the table, there is less joking around and more objective discussion. I’ve also found that women tend to be more sensible and more thoughtful. I think they care much more about how decisions made in the boardroom will impact people.”
  • “Diversity brings more energy to the boardroom.”
  • “Women provide good balance. The dynamics change because women are more willing to give the other side a chance than men.”
  • “Women are more strategy oriented. They tend to look at where the company is heading, whether things are on the right track, and why the company might be diverging from its strategic goals.”
  • “Women are more likely to be conservative and more attuned to good risk management. I don’t think they are more risk adverse but they have more of a long-term and sustainable approach to issues and less short-termism.”

So, how do we get more women on boards? All hands on deck.

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> Posted by Philip M. Brown and Deborah Drake, Citi Microfinance and 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.

What will this year’s Microfinance Banana Skins Survey top message be? We are eagerly awaiting the responses to the recently launched 2014 Microfinance Banana Skins Survey from practitioners, investors, regulators, and other industry stakeholders around the world. These responses will provide insights into the greatest perceived risks facing the sector over the next few years and reveal the risks to be avoided on the path ahead.

The titles of the past four Microfinance Banana Skins surveys paint the picture of continuous sector evolution since the first publication in 2008. If previous titles are any indication, the new headline will set the tone and raise a debate around key risk issues.

Entitled “Risk in a Booming Industry“, the 2008 report highlighted concerns of microfinance institutions about “how to scale” in a healthy way. With changed economic realities, the external environment became the area of focus with “Confronting Crisis and Change” in 2009, and “Losing Its Fairy Dust” in 2011. The most recent survey in 2012, “Staying Relevant,” highlighted the changed setting for microfinance brought on by new entrants and new technologies. The titles and changing risk rankings reflect the increasing integration of microfinance into the broader financial ecosystem, and the challenges that microfinance clients and service providers encounter as the sector evolves.

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> Posted by Amanda Yap, Research and Communications, PlaNet Finance

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.

Before the advent of the People’s Bank of China’s county-level pilot program to create microcredit companies (MCCs) and village and township banks (VTBs), there was a large number of unbanked individuals and micro-entrepreneurs whom commercial banks were unwilling to serve. Hence when the pilot program to create MCCs, the product of a financial inclusion plan by the Chinese government, went into action in 2005 the number of MCCs boomed, and in the past few years they have mushroomed to an astounding number of 9,000 as of 2013. The Chinese financial sector has been plagued with corruption in the past few years – for example, the Wu Ying private lending network scandal and the Qilu commercial bank forgery in Shandong. To circumvent corruption and maintain control of the increasingly overpopulated sector, regulators enforce strict capital requirements and caps on interest rates. However, these requirements are stifling the operational sustainability of these MCCs. Joe Zhang, author of the book Inside China’s Shadow Banking: the New Sub-prime Crisis? writes, “The regulation is killing the dynamism of the sector. Everyone in the sector is working extra hard to make a modest return (after huge expenses and bad debts).”

Should 9,000 MCCs all be painted with the same regulatory brush?

Some industry leaders believe a rating system for microcredit companies is the answer. Liu Ping, Director General of the Senior Advisors of the People’s Bank of China, believes ratings can be a yardstick to measure the sustainability of microcredit companies and differentiate the good apples from the bad. MCC investors hope that high grades based on credible ratings could move the authorities to loosen restrictions on outlets, so that business costs could be better covered, individual company branches could grow, and the sector could eventually be made more sustainable. Conversely, low rating grades would expose institutions with questionable practices that require operational changes. In addition, a ratings system may change the popular perception that these institutions are “loan sharks”, leading to increased investment, institutional growth, and client outreach.

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> Posted by Madeleine Dy, Program Specialist, 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.

Making the case for more attention to risk management and governance in both the financial inclusion sector and corporate world can be an uphill battle, but McKinsey’s Global Survey findings provide some strong reinforcement. If we let the numbers speak for themselves, they tell an interesting story. Their survey of 772 corporate directors showed that although over 90 percent of respondents reported that their boards have become more effective over the past five years, risk management still surfaces as the biggest difficulty faced by boards.

The survey shows that board directors have improved their knowledge on various company issues since the last survey conducted in 2011. More specifically, about one-third say they have a complete understanding of their organization’s current strategy, as compared to about 20 percent in 2011. However, only 15 percent can say the same for the risks their company faces. In fact, the reality is that 30 percent of directors reported they have limited to no understanding of the risks facing their company.

You might ask why there is such a difference. The answer lies in the time directors spend on the two topics. Directors responded that they spend more time on strategy than any other area, 28 percent compared to only 12 percent for risk management. This clearly shows where their priorities and attention are focused. McKinsey mentions that companies and boards are becoming more complacent about risks as the 2008 financial crisis becomes a more distant memory — unfortunately fading memories do not translate to fading risks. Read the rest of this entry »

> Posted by Danielle Piskadlo, Senior Program Specialist, 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.

What good are industry best practices for risk management if many MFIs don’t have the tools and resources to follow them? Sure, you can state that it is an industry best practice to have a risk committee on your board. And it undoubtedly is important to identify that there is value in applying such a practice. But what use is that really if you don’t examine the underlying reasons why 40 percent of MFIs that responded to a MIX survey said they don’t. Or why 32 percent reported not having a risk manager, and 23 percent said they don’t have an internal auditor – and if they did have either, respondents indicated, “both functions tend to report to the CEO contrary to accepted best practice.”

To address this disconnect between where we are as an industry and where we want to be in terms of risk management best practices is why the Risk management Initiative in Microfinance (RIM) was recently launched. RIM is a collaborative effort of Appui au Développement Autonome (ADA), Calmeadow, the Center for Financial Inclusion at Accion (CFI), Mennonite Economic Development Associates (MEDA), MFX Solutions, Microfinanza, Oikocredit, and Triple Jump to raise awareness about the importance of risk management, and build MFIs’ capacity to more effectively understand and manage risk.

It has been shown time and again that there is no one-size-fits-all solution in the microfinance industry. What works in one region for one MFI could be a disaster in a different region or for another MFI. And risk management is no different. Putting out one set of risk standards would create a divide between those that meet them and those that don’t, and those that are a good fit for them and those that aren’t. Instead RIM is in the process of developing a “risk roadmap” to help MFIs assess where their risk management capabilities currently stand, and to then help them navigate to where they want to be in terms of risk management. This risk model will help MFIs continue to “graduate” to higher levels of risk management capabilities as they grow and mature as institutions. This roadmap will provide the microfinance industry with a flexible resource, appropriate to address the wide variety of risk management challenges MFIs face.

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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.


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.