The Group of Twenty Finance Ministers and Central Bankers (G20) is targeting financial inclusion through the G20 Development Working Group (DWG), which is in the process of finalizing an agenda for its 2014 goals. The DWG focuses on developing an agenda for tackling development challenges, with the intent to remove constraints to sustainable growth and poverty alleviation. Recently, through our participation in InterAction’s G20/G8 Advocacy Alliance, CFI teamed up with other non-profits in the financial inclusion community to develop a set of recommendations for G20 leaders. While the Alliance and DWG span a diverse range of issues, our focus was, of course, on financial inclusion.

Our recommendations to the G20 were developed in coordination with CARE International UK, the Grameen Foundation, the Cherie Blair Foundation for Women, HelpAge USA, and the Microcredit Summit Campaign, among others. They urge governments to implement national strategies for financial capability and client protection, ensuring that these strategies and targets address a full suite of financial services and include underserved groups. You can read the full set of recommendations and contributing organizations here.

Last week we had the opportunity to discuss our recommendations with senior leadership from the Australian G20 presidency. As you may know, the G20 Presidency rotates each year, and this is Australia’s year. Each presidency takes a lead in setting the agenda and priorities, which are then discussed and (ideally) implemented by all G20 members.

The G20 Australian presidency issued a global development agenda, which was supported by the DWG. It highlighted two major outcomes for 2014 related to financial inclusion and remittances. We were happy to see an expressed desire to move beyond a focus on cost reduction for remittances, where there has been a great deal of progress, to maximizing the potential of remittances to increase financial inclusion.

During the meeting, our financial inclusion team brought three key points to the conversation:

1. No Financial Inclusion without Financial Capability. An example illustrating this point is CARE’s work with village savings groups for women. In order to ensure that women will benefit from the new formal financial services made possible when savings groups are linked to banks, we must ensure that the women will have the combination of knowledge, skills, attitudes, and ultimately behaviors that translate into sound financial decisions and the appropriate use of the new formal services. The methodology of savings groups is conducive to teaching members about financial services. While the G20 has been supportive of financial capability building efforts, we are calling for countries to incorporate lessons from behavioral economics and also ensure that government-to-person payments promote financial capability.

2. One Product Does Not Mean Full Financial Inclusion. Along with its support of financial capability, we’d like to applaud the G20 Development Working Group’s focus on remittances and migrants (one of the vulnerable groups we’ve identified in our Financial Inclusion 2020 (FI2020) project). But let’s not look at remittances as a stand-alone product. Remittances can be an on-ramp to additional financial services. In our FI2020 consultative process, Developing Markets Associates shared one innovative model with us, which provides financial counseling to remittance recipients, encouraging them to open a savings account.

3. National Strategies Should Focus on the Most Vulnerable Populations Backed by Data. While the current development agenda references vulnerable groups, such as youth, women, and migrants, we asked that the DWG also include the following groups: persons with disabilities, older adults, the extremely poor, rural households, refugees, subsistence farmers, and the LGBT community. We highlight a particular population that is growing in importance: older adults. In fact, older adults are the fastest growing population in the world and by 2050 will reach 2 billion people. In this light, when countries develop national strategies for financial inclusion, they need to make sure that vulnerable groups are fully considered. To ensure that we are doing this, countries should track data for each vulnerable group.

During the meeting, we learned that the G20 Development Working Group is working with the Global Alliance for Financial Inclusion (GPFI) to push the development agenda beyond government stakeholders to include private sector players (e.g. telecommunications companies, technology providers, insurance providers, private banks, NGOs). This is a new step for the GPFI, which has traditionally focused on government stakeholders. We agree with the new orientation. The promotion of public-private partnerships will be vital to increase financial capability building and create on-ramps to financial inclusion.

We encourage you to review our recommendations and comment if you would like to suggest other priorities for the G20 Development Working Group.

Image credit: G20

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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.

I have never felt as helpless as I did during the hunger seasons I experienced in Malawi. While Peace Corps Volunteers were training people on bed nets and safe sex, some people in our communities used mosquito nets to fish and others thought about the monetary value of sex. The priorities targeted by outside development experts sometimes felt nonessential when basic needs like access to food weren’t met. After Malawi, I came back to the United States cynical about international development and its ability to have a real impact. But soon after my return I learned about financial inclusion and its potential to help solve the budgeting crises of smallholder farmers and contribute to financial stability.

The benefits of financial services for smallholder farmers can be enormous. Without savings accounts, farmers have to transport physical cash long distances and store it unsecurely at home. Savings accounts allow funds to accumulate without the increased threat of theft, weather damage, or other shocks. Money in the bank can allow farmers to make purchases like new agricultural inputs. Lines of credit allow farmers to invest in larger agricultural inputs, like new machinery or animals. Credit can also be instrumental for weathering the hunger season, providing funds between harvests, especially right before a new season when one wants to buy new seeds, fertilizer, and other inputs. Insurance helps protect farmers against crop loss, and reduces the risk of borrowing, which in turn opens the ability to plan farther into the future.

Sadly formal financial services reach few smallholder farmers. According to the Global Findex, in Sub-Saharan Africa 12 percent of adults living in rural areas saved at a financial institution in the past year, compared to 23 percent of adults living in urban areas. Estimates for 2011 indicate that smallholder farmers took out roughly $9.4 billion in loans, while the demand for financing could have been as large as $450 billion, according to Dalberg Research.

Physically reaching the unbanked is one of the core challenges of financial inclusion – a barrier that’s heightened in extending services to rural areas. To put it simply, it’s costly for providers to extend branches to rural areas. Another challenge is designing financial services that fit the needs of both the financial institutions and the farmers.

Advancements in technology and product design are now starting to create rapid growth in rural financial services. Mobile money services like AgriLife in Uganda allow subscribers to receive payments from buyers or farmers cooperatives directly through their phone. Other advancements in portability include Opportunity International’s portable banks-on-wheels, Entrepreneurial Finance Lab’s smartphone/ tablet-based credit application for agent banking, and M-KOPA’s mobile phone-based asset financing tool.

When it comes to credit, smallholder farmers’ financial footing leads to difficulty with most lenders’ collateral requirements, rigid payment schedules, and short loan durations. Of the $9.4 billion in loans disbursed to smallholder farmers in 2011, 90 percent was for short-term financing. However, new products better suited to farmers needs are generating promising results. Lenders know  that monthly repayment is more efficient than weekly repayment, if it can be done without sacrificing repayment rates. Member banks of the China Association of Microfinance have successfully incorporated flexible repayment methods in their loan products to farmers, as well as larger loan amounts and alternative collateral. Non-traditional insurance products are also gaining traction, like a microinsurance product in Ghana that uses airtime and offers loyalty benefits.

Yet, budgeting for the hungry season is hardly the only challenge smallholder farmers face. In my opinion, the bigger issue is the price that small farmers can receive for their crops on the world market.

I worked with small cotton growers for a year in Malawi. Months of work led to an average production of 700kg of cotton per hectare. Most small farmers in Malawi had half a hectare and in 2012 the average price for cotton was 40 cents per kg. This meant that the average cotton farmer was paid $140 for a year’s work. The input cost was about $20 a year, leaving a net of $120. That’s not much to live on.

Thanks to producer groups, there is progress in fair pricing for smallholder farmers’ products. The Fair Trade network now includes more than 1.2 million farmers and merchants, harnessing their collective bargaining power for fair prices and increased market access. In addition to fairtrade networks, Fairtrade International, Grameen Foundation, Incofin IM, and Incofin cvso launched the Fairtrade Access Fund last year. The impact investing fund increases farmers’ market access and facilitates their adoption of financial products and technical assistance. Small scale producer groups are gaining traction elsewhere in the industry, too. A set of case studies on such groups can be found in the CARE-produced Integrating Very Poor Producers Into Value Chains Field Guide. Along with improved commercial relationships with buyers, suppliers, and financial services providers, producer groups often lead to increased market information dissemination.

On the other side of this equation, consumers can improve pricing for smallholder farmers by exercising their individual purchasing power. We rely on and want the products that small farmers provide, but often do not demand that they receive a fair price or have safe working conditions. It is time that all of us consumers recognize our effect on global markets and the lives of billions of people. Learn where the products you buy are from, follow the value chain, and demand that buyers provide a living wage to their farmers.

Image credit: Travis Lupick

Have you read?

Sowing Sustainable Finance: Making Rural Inclusion a Priority

Silos No More: Financial Inclusion for the Whole Value Chain

The Secret (Financial) Lives of Rural Residents – What Every Market Researcher Needs to Know