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Country-specific scores across regulations that enable, promote, and prevent financial inclusion

> Posted by Liliana Rojas-Suarez and Lucía Pacheco

The following post was originally published on the Center for Global Development’s blog and has been republished with permission.

The most recent World Bank data on financial inclusion shows that by 2014, only 54 percent of the adult population in Latin America had an account at a financial institution. This compares to an average of 62 percent of adults worldwide and 70.5 percent for those countries with a similar level of income per capita (the region’s peers). In developed economies, 94 percent of adults have an account at a financial institution.

Many factors could be cited for the low ratios of financial inclusion in Latin America, but in a recent paper published at BBVA Research, that also came as a CGD working paper, we focus on the potential role of financial regulation. We assessed and compared the quality of the policies and regulations that impinge on financial inclusion in eight Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay). Peru and Mexico came out on top, with what appear to be the best regulatory frameworks for promoting financial inclusion. But even in these top performers, there is room for improvement.

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  • Latin America and the Caribbean (LAC) and East and South Asia have the most conducive environments for financial inclusion. India stands out for the most progress in the last three years and is now ranked third
  • Further policy changes are needed if financial inclusion is to play the role envisioned in the Sustainable Development Goals
  • The digitization of financial services is key to increasing access to finance

The 2016 Global Microscope on Financial Inclusion shows that essential policies for bringing financial services to low-income groups are now widespread in the developing world. Nine of the 12 financial inclusion indicators covered in the benchmarking index improved globally in 2016, building on gains which have been made during the last decade. Even so, many countries have not moved significantly beyond basic policies, and greater focus is needed if financial inclusion is to play the critical role envisioned in the Sustainable Development Goals (SDGs).

The Global Microscope is produced by The Economist Intelligence Unit (The EIU), with policy guidance and financial support from leading organisations in the field including the Center for Financial Inclusion at Accion. Now in its 10th year, the Microscope is the global standard for financial inclusion policy in developing economies.

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> Posted by Sonja E. Kelly, Fellow, CFI

I want to let you in on a secret: the best part of the Global Microscope 2015 is a hidden gem. It’s called the Microscope Benchmarking Model (admittedly it might benefit from a better name), and it provides a user-friendly deep-dive into each country and indicator. With this tool, you can go beyond the report, with insights on questions that we may have neglected to cover in the narrative. And you can slice and dice the data to your heart’s content.

For example, where is the best place to be an insurance provider if you want to work with low-income populations? It’s India, actually, with Mexico, Peru, Colombia, Brazil, and the Philippines following. With two quick steps, the tool produced this map for me (click to enlarge):

microscope

The countries colored in red—including the Democratic Republic of Congo, Madagascar, Paraguay, and Tajikistan—are the worst places to be an insurance provider working with low-income populations.

So why is India the best?

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> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published on the MasterCard Center for Inclusive Growth blog.

Reaching full financial inclusion by 2020 will require supportive policies in every country around the globe. The Economist Intelligence Unit’s “Global Microscope on Financial Inclusion, 2014” assesses the policy environment for financial inclusion in 55 countries. The Microscope examines 12 policy dimensions essential for creating an inclusion-friendly regulatory and institutional framework. The rigorous model incorporates input from hundreds of policy makers and participants in the financial sector and a review of existing policies and implementation. The resulting rankings represent the best readily available source for judging the state of financial inclusion policy around the world.

What’s surprising about the 2014 Microscope results is their wide range. Out of a possible 100 points, the top scorer (Peru) received 87 while the lowest (Haiti) earned only 16. If full inclusion requires good policies, it is disappointing to learn that the median score across all countries was a mediocre 46.

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> Posted by Alex Counts, President and CEO, Grameen Foundation

With increasing regularity, I hear people talking about a new concept: deploying funds to earn profit while at the same time solving complex social and environmental problems, also known as impact investing. One article that stood out for me, and in fact prompted me to write this, is “Good Investments” by Dan Morrell in the Harvard Business School Alumni Bulletin. At one point the author writes: “What impact investing really needs, all agree, are pioneers.”

Impact investing advocates can sometimes give the impression that they have “outsmarted poverty” (and other societal problems) by discovering the need for this profit-making approach, one that allows high net worth individuals to further increase their assets while also having (in the words of another impact investor quoted in the HBS article) a “fabulous social impact.”

Count me as someone who does not feel that what “impact investing” needs now are “pioneers” per se. Rather, it needs pragmatic, risk-taking, deeply curious, and disciplined people with access to funding who can work collaboratively to move an old idea forward, bearing in mind the lessons of the past and the opportunities of the present.

In fact, the actual pioneers of impact investing began laying the groundwork for this latest incarnation decades ago. Think of the Ford Foundation’s work in the 1960s to establish, legitimize, and get U.S. government policy support for Program Related Investments, the “Philanthropy at Five [Percent]” movement in nineteenth century America and England, the Russell Sage Foundation’s financing of low-income housing in New York in the early 1900s, or, in more recent times, the Calvert Foundation, just to name a few.

Or simply consider the modern microfinance industry and how an ecosystem of financing mechanisms – including dozens of “microfinance investment vehicles” (MIVs) – grew up around it in the 1990s and 2000s. Even today, according to an important study by the Global Impact Investing Network (GIIN) and JPMorgan Social Finance, close to 40 percent of impact investments are in microfinance institutions (MFIs) or funds. Microfinance is the largest single sector for receiving impact investments, and is larger than its two closest competitors combined. Clearly there are strong linkages between microfinance and impact investing, and additional opportunities for sharing lessons.

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The most exciting trends and startups in inclusive finance this year

> Posted by Vikas Raj, Director of Investments, Accion Venture Lab

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There has been a lot of buzz in the financial technology (FinTech) space over the last several months, with a high-profile IPO, several more apparently on the way, and more and more venture funding flowing into FinTech startups. Bold ideas for financial services innovation are getting more visibility – just this month, Australian Wealth Index (AWI) listed the 50 Best FinTech Innovators, and CFI’s Elisabeth Rhyne conveniently categorized the list so it’s easy to see at a glance where the innovations are.

At Venture Lab, we found the AWI list interesting but also felt it missed something significant: namely, that one of the biggest opportunities for FinTech is figuring out new solutions to include the billions of lower-income people who are today excluded from formal financial services. And it’s not charity that compels us to reach these customers – it’s good business. These customers represent a big market. In fact, they’re such a significant part of any emerging market’s customer base that any global providers with dreams of international expansion must cater to them if they want to succeed.

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> Posted by Jeffrey Riecke, Communications Associate, CFI

Embed from Getty Images

Islamic finance is expected to expand substantially in 2015, from 2014’s total of $2.1 trillion to $2.5 trillion, according to figures released last week by the Al-Huda Centre of Islamic Banking and Economics. In 2011, the industry had assets of about $1 trillion. Islamic microfinance, the segment of Sharia-compliant services targeting clients at the base of the pyramid, only occupies a small slice of the pie, at 1 percent of all Islamic finance globally. However this uptick in Sharia-compliant finance, as well as encouraging recent support for the 650 million Muslims living on less than 2 dollars a day, suggest a rising tide for Islamic microfinance.

The industry findings indicate that not only did Islamic finance surpass the $2 trillion landmark in 2014, it gained traction in nascent markets and entered new ones. Markets still green in offering Islamic finance that showed growth in 2014 include Morocco, Tunisia, Azerbaijan, Libya, and several non-Muslim-majority countries including Nigeria, Tanzania, and South Africa. Among the new markets where Islamic finance took root last year are Australia, Brazil, and China. Globally, there are 1,500 organizations working in Islamic finance across 90 countries – 40 percent of which are non-Muslim-majority countries. The expansion of Islamic finance opens the door for the many Muslims whose beliefs preclude them from accepting finance with interest rates and fee structures outlawed by Sharia doctrine.

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> Posted by Verónica Trujillo Tejada, Consultant, MIF/ Inter-American Development Bank

Building up a regulatory framework for the development of a microfinance market is a complex task. It requires taking into account a broad variety of topics as well as country specific needs and features. There are some internationally-applicable recommendations for the design of microfinance regulatory frameworks (CGAP 2012, ASBA 2010, and Basel 2010) but little is known about how different countries have implemented their guidelines or what the effects are of these rules in each market.

In the recently released paper “Microfinance Regulation and Market Development in Latin America,” published by the B.E. Journal of Economic Analysis & Policy, we analyze the relationship between microfinance regulatory frameworks in 17 Latin American countries and the corresponding markets’ levels of development.

One way to characterize microfinance regulations is as either general or specific rules. The general rules are devoted to regulating typical financial system issues, while the specific rules target microfinance products or institutions. Two other regulation classifications are protection rules and promotion rules. Protection rules have the goal of preserving financial system stability or protecting the financial consumer, and promotion rules aim to favor the development of microfinance services or institutions by softening the restrictiveness of the overall regulatory framework.

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> Posted by Sonja E. Kelly, Fellow, CFI

We are in full World Cup fervor in the Accion offices around the world, with jerseys making appearances at global staff meetings, water cooler conversations centering on surprise advancements (and eliminations), and a high incidence of lingering trips to the conference room screen to check scores in between meetings and deadlines. You could say things are getting a little heated as the group of teams still in the running gets smaller.

There have been a few attempts to use this global competition as an opportunity to better understand our world. The Wall Street Journal published a “World Cup of Everything Else,” where countries can be matched up on categories from the hottest weather to the biggest eaters of seafood, and Dean Karlan produced a set of predictions based on population, poverty level, and interest in soccer to assess which country would experience the greatest increase in happiness with a World Cup victory (spoiler: Nigeria would have had the most aggregate happiness if it had won the tournament).

But what if the World Cup were a competition based on financial inclusion indicators? If we were to create a bracket where the country with the highest level of financial inclusion advanced, the European countries would all advance, which in my opinion wouldn’t be very interesting.

What if, however, we use the World Cup system to see where the highest number of financially excluded people are? We crunched the numbers to show you, of the countries that made it to Brazil for the competition, who would “win” the title of “highest number of financially excluded people.” Basing winners on the countries with the largest number of people without a formal bank account, we noticed a few surprises.
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> Posted by Sonja E. Kelly, Fellow, CFI

In our recent paper on income growth and financial services, Elisabeth Rhyne and I argued that as people’s incomes rise, so does demand. Soon after we published the paper, protests began in Brazil. Many are citing this social movement as the result of increased economic growth and prosperity. When we look closely at those protesting, we see that the majority of the protesters may not even be middle class. Instead many, if not most, are in the “vulnerable class,” with incomes between approximately $4 and $10 per day.

Last week, the Center for Global Development wrote a blog post that highlights the findings from their forthcoming paper on the growing vulnerable class in Brazil. Nancy Birdsall holds that this vulnerable class is demanding more and better public services such as infrastructure, education, and health, consistent with our own hypothesis linking income growth and demand.

The Center for Development blog post begins:

“Sorry for the nuisance: we are changing Brazil,” reads the sign carried by a young woman marching down the streets of São Paolo on June 17.

So who is this “we” she refers to? Fellow protestors, certainly. But “we” might also refer to the large, frustrated group of “strugglers” in Brazil—those who are no longer poor—but have income still too low to be part of Brazil’s new middle class. In a revolution of rising expectations they are demanding a better government. Their demands put Brazil’s still-young democracy (the military withdrew less than 30 years ago) at a crossroads. If their evolving needs and demands are met, they will have acted as agents of inclusive growth and change in their society. If their problems are neglected and they lack sufficient schooling, skills, and opportunities, they could become a restive underclass, and likely supporters of populism and civil strife.

On paper, the past two decades have brought significant improvements for Brazilians: Supported by good macroeconomics, median household income has more than doubled while income inequality has decreased. Brazilian President Dilma Rousseff likes to point out that the country has lifted millions of people out of poverty and into the “middle class.”

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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.