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In the following post, John Owens offers an overview of his research project with the CFI Fellows Program.
Background & Research Questions
More and more online credit providers have started to offer loans to not only consumers but also to SMEs around the world.
Outside of digital banking platforms, new alternative online and digital platforms that target consumers and small SMEs include:
- Peer-to-peer (P2P) SME lenders
- Online balance sheet lenders
- Loan aggregator portals
- Tech and e-commerce giants
- Mobile data-based lending models
While the rise of alternative data-based lending has opened new and innovative credit opportunities for individuals and SMEs, these new technologies and providers also come with several consumer protection challenges. These can be categorized into seven main areas:
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> Posted by Center Staff
Today, around the world individuals, governments, and organizations are celebrating women and calling for increased action towards gender parity, including in the financial services arena. And for good reason. Research indicates that when women control finances, they’re more likely to be spent on household necessities, like food, water, and children’s education and healthcare. In recognition of International Women’s Day, we compiled some of our favorite recent industry efforts to further financial inclusion for women. But first, here’s a quick run-down of where inclusion for women stands.
The Global Findex tells us that there is a gender gap in access to accounts at seven percentage points globally (65 percent vs. 58 percent), and across developing countries it’s nine percentage points. In some regions, this gap is significantly more severe – 18 percent in South Asia, for example. Gender gaps exist in other areas, too. GSMA estimates that in developing countries there are 200 million fewer women than men who own a mobile phone. And as one example of the gap in financial capability, in the World Bank Group’s 2014 Financial Capability Survey in Morocco women scored significantly lower than men.
Prioritizing financial inclusion for women is not only the right thing to do, it benefits everyone. In addition to benefitting women and women’s households, financial inclusion of women augments economies writ large. About half of women worldwide are missing from the workforce. In Egypt, for example, the IMF estimates that achieving equal labor participation among men and women would increase GDP by 34 percent. The IFC estimates that women-owned businesses have an unmet financing need of $320 billion worldwide.
Many organizations are working to close the gap:
The latest edition of the Financial Inclusion 2020 News Feed, our weekly online magazine sharing the big news in banking the unbanked, is now available. Among the stories in this week’s edition are: the Alliance for Financial Inclusion (AFI) released the 2015 AFI Global Policy Forum Report, distilling the happenings of the network’s largest and most diverse forum to date; new startup PayJoy is attempting to solve the financing problem surrounding the 2 billion individuals globally who have access to the internet but can’t afford a smartphone; The Guardian spotlights how mobile money supported healthcare workers during the fight against Ebola in Sierra Leone. Here are a few more details:
- The 2015 AFI Global Policy Forum brought together over 500 senior financial inclusion policymakers, regulators, international organizations, and private sector partners in Maputo, Mozambique. Highlights from the forum include the adoption of the Maputo Accord, making SME finance a larger priority for the network, and sessions on green finance and gender.
- PayJoy, beginning an initial roll-out in California, is offering an alternative to the tech industry’s equivalent of payday lenders who charge upwards of 500 percent interest on loans to buy smartphones. PayJoy covers 80 percent of the cost of a phone at 50 to 100 percent interest, and if individuals aren’t able to make their monthly installments, the phone locks until the payment is received.
- In Sierra Leone, payment to healthcare workers combating Ebola was originally largely disbursed inefficiently in the form of cash, resulting in incidences of workers not being paid for months at a time, which caused disruptions to both healthcare and public trust in the system. NetHope, a consortium of NGOs working in IT, enrolled workers into an automated mobile money-based payment system using an open source facial recognition software.
For more information on these and other stories, read the latest issue of the FI2020 News Feed here. This is the final issue of the News Feed. Though if you have any stories or initiatives that you think we should cover on the blog or via our other social media channels, email your ideas to Jeffrey Riecke at firstname.lastname@example.org.
> Posted by Elisabeth Rhyne, Managing Director, CFI
Sub-Saharan African countries may be leading the world in mobile money and growth in access to accounts, but the state of financial consumer protection in Africa is in urgent need of attention.
In the EIU Global Microscope’s 2014 overall rating of the policy environment for financial inclusion, African countries scored very close to the global average (44 SSA vs. 46 Global out of a possible 100). However, these countries were substantially below the average on consumer protection indicators – market conduct (27 SSA vs. 43 Global) and grievance redress (35 SSA vs. 45 Global).
These numbers have human consequences. The Smart Campaign commissioned research in two African countries – Benin and Uganda – which revealed the frequently harsh environment in which microfinance is conducted. In Uganda, research on what happens to clients who default showed that, lacking regulatory oversight and the calming influence of credit reference bureaus, lenders in Uganda feel compelled to resort to practices such as rapid confiscation of a borrower’s assets. They are afraid that if they do not act quickly, the borrower may flee. In the research on client experiences from Benin, clients reported major gaps in trust and transparency. For example, many reported being surprised by fees that were not explained or expected, having no place to turn when problems arose, or being publicly shamed for late payments.
The research pointed to very low trust on both sides between providers and customers. In fact, in Smart Campaign conversations with African microfinance institutions about consumer protection, one of the most frequently asked questions is, “Who will protect us (the lenders) from them (the borrowers)?”
> Posted by Susy Cheston, Senior Advisor, CFI
Of the 700 million new accounts that the Global Findex reports were opened from 2011 to 2014:
- Banks and other financial institutions accounted for 550 million;
- Mobile network operators accounted for 100-240 million, depending on your source and methodology;
- Microfinance institutions accounted for 50 million.
These numbers are rough and involve some overlap—but they point to the continued importance of commercial banks in financial inclusion. Put another way, of the 3.2 billion accounts reported in the 2014 Findex, 3.1 billion were accounts with a financial institution.
That’s why I was so interested in hearing what the commercial bankers had to say at an Institute of International Finance (IIF) roundtable held in Lima on October 9 alongside the International Monetary Fund (IMF) / World Bank meetings. The strategies they discussed for reaching the BoP were not new to those immersed in the financial inclusion world, but it was heartening to hear their commitment to putting those strategies into operation. Here are a few of the points from the discussion:
Use data to understand customers. Now more than ever, there is a wealth of available data to help us better understand customers at the base of the pyramid. These new customer insights are opening up new practices – from on-boarding, to cross-selling, to risk management. Data analytics can also enable cost reductions on credit and insurance. For example, ecommerce platforms for small manufacturers can facilitate credit offers and then arrange for automatic repayment from the ecommerce activity itself. This innovative use of data allows financing at half the cost.
> Posted by Susy Cheston, Senior Advisor, CFI
There was good news from the Alliance for Financial Inclusion (AFI) yesterday: the announcement of a partnership with MasterCard Worldwide to build technical capacity so that AFI members are better equipped to regulate innovations in products and business models.
Since its birth seven years ago, we have admired AFI for so effectively galvanizing a powerful regulator community to set a high bar on financial inclusion. Part of AFI’s strategy has been a fierce commitment to ownership of the issue by the regulators themselves. The results have been measured not only in dramatically increased access among AFI member countries, but also in higher standards around the quality of those services, as evidenced by Maya Commitments around client protection and financial capability. AFI Working Groups have also been developed for peer learning on digital financial services, financial inclusion data, and other key issues.
Yet we are among many in the industry who have felt that AFI’s circling of the wagons meant that their policy solutions were not always smart about encouraging innovation and investment in financial inclusion. To its credit, AFI got the message, and in 2014, it launched a Public-Private Dialogue Platform (PPD) to incentivize policymakers and regulators to cooperate with the private sector. Yesterday’s announcement about the new relationship with MasterCard is a strong next step toward realizing the PPD’s promise.
This trajectory resonates with recent interviews on client protection that we have carried out at FI2020. Among the regulators we interviewed, what was striking was the path many have followed toward empowering the private sector to play an active role in customer protection. We heard about a number of good practices that build capacity and break down communication silos between the public and private sectors.
> Posted by Jeffrey Riecke, Communications Associate, CFI
Last week global leaders across industries gathered in the tiny mountain town of Davos, Switzerland for the 2015 World Economic Forum (WEF). (Though you probably already knew that, given the annual event’s ever-swelling stature and press.) The WEF fosters strategic dialogues in the hopes of developing ideas, insights, and partnerships around the most pressing issues and transformations reshaping our world. This year’s WEF included sessions from Jack Ma of Alibaba on the future of commerce, German Chancellor Angela Merkel on global responsibilities in a digital age, IMF Director Christine Lagarde on global monetary policy, former Israeli President Shimon Peres on political affairs affecting the region, and Bill Gates on sustainable future development. Of course we were following the topic of financial inclusion, and the action that got underway made it a week worth noting. Here’s a snapshot of some of the financial inclusion happenings at Davos.
In the “Inclusive Growth in a Digital Age” session held on Wednesday, a panel, which included MasterCard CEO Ajay Banga, considered how our age of digitization can confront income and wealth inequality, support investments in education and work-based training, and address vulnerable employment. Among the points of discussion was mobile phone penetration leveraged for financial services access. A full video recording of the session is available, here.
> Posted by Jeffrey Riecke, Communications Associate, CFI
Rwanda has a lot to celebrate in terms of financial inclusion these days. Last week in Kigali the National Bank of Rwanda (NBR) hosted a conference in partnership with the World Bank, the African Development Bank, and the Alliance for Financial Inclusion (AFI) commemorating their 50-year anniversary. At the event, titled Financial Inclusion for Inclusive Growth and Sustainable Development, NBR Governor John Rwangombwa highlighted the country’s recent rise in access levels, from 48 to 72 percent between 2008 and 2012 across formal and informal providers. Rwanda now has the laudable goal of increasing this figure to 90 percent by 2020. To help it get there, on Friday the World Bank launched a $2.25 million program supporting key financial inclusion areas for the country.
Along with overall exclusion rates dropping from 52 to 28 percent over 2008 to 2012, formal services access increased from 21 to 42 percent during the same period, according to the 2012 FinScope Rwanda Survey. The new government goal of 90 percent access by 2020 is an extension of the country’s Maya Declaration Commitment of 80 percent access by 2017. Rwanda’s growth in formal access can be attributed to products offered by both banks and non-bank providers, like the country’s community savings and credit cooperatives known as Umurenge SACCOs. Over the past three years, Umurenge SACCOs have attracted over 1.6 million customers. Ninety percent of Rwandans live within a 5 km radius of one of the cooperatives. Countrywide, the number of MFIs, including Umurenge SACCOs, increased from 125 to 491 between 2008 and December 2013. Elsewhere in the sector, over the last three years, the number of banks increased from 10 to 14, the number of insurance companies increased from 9 to 13, and the number of pension providers increased from 41 to 56.
> Posted by Center Staff
Last week Palestinian government officials announced plans to create a national financial inclusion strategy, an initiative that would put it on a short list of two countries in the Middle East and North Africa (MENA) region that have nationwide, government-led inclusion plans (Morocco being the other).
The Palestine Monetary Authority (PMA) and the Palestine Capital Markets Authority (PCMA), the country’s central bank and a national regulating body will co-lead the project along with support from the Alliance for Financial Inclusion (AFI) and other public and private groups.
The policies and guidelines of the strategy will aim to facilitate greater access, improve awareness and financial education, and reinforce client protection. An area inviting particular attention is access to credit, which is low for both individuals and SMSEs. The strategy will build on inclusion principles endorsed by the G20, World Bank, AFI, and the OECD Principles on National Strategy for Financial Education.