This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at ACCION International.

In five years, how will the poor be accessing financial services?  If we could step back in time to 2006 with the microfinance sector scaling rapidly across the globe, it would have been hard to imagine that today mobile money users would outstrip all banked individuals in some countries, or that in other countries commercial banks would have overtaken microfinance institution (MFI) outreach to the poor in just a few years.

CGAP reports that 2.7 billion people globally remain unbanked around the world, a gap that requires a depth and breadth of financial services to truly address.  We’ve learned that scale alone is not the answer; it must be accompanied by approaches that keep client well-being at the center.  However, we still have not found an approach that meets this challenge in a way that addresses both scale and client needs at the same time.  There are a number of intriguing scenarios for how the poor could be accessing appropriate financial products and services in the future, all of which draw on players beyond the traditional microfinance space.  Here are three potential scenarios:

1) Mobile money makes the leap to mobile financial services.  Mobile money (payments and transfers) is scaling in a handful of countries, but we have yet to see a truly scalable link between mobile money and mobile financial services (credit, savings, or insurance products delivered via the phone).   To do so requires resolution of two major hurdles: 1) The interoperability challenge needs to be addressed, since few mobile network operators have the dominant market share that, for example, Safaricom did in Kenya when it launched M-Pesa; and 2) The business model conundrum must be solved: creating a viable business model for all parties in a joint bank-mobile network operator approach has emerged as one of the key hurdles.

2) Agile fringe providers – such as pawnshops in the Philippines – are able to innovate with client-centered products much faster and more nimbly than banks, MFIs or mobile network operators.  These fringe providers start to incorporate mobile phone technology in a way that allows cost-effective outreach to rural and remote populations. From the client perspective, many prefer the flexibility and accessibility of these offerings, although a potential drawback is that with many small, nimble providers, it is more difficult to ensure client protection.

3) Microfinance institutions reinvent themselves as banking correspondents, or other similar “servicer” intermediaries.  Such an approach, in partnership with commercial banks, allows outreach to the poor in an efficient way.  The value the MFIs bring to the table in this scenario is knowledge of how to reach and relate to the poor, how to design products and services that meet the needs of different client segments, and the efficiencies that come from streamlined field force management.  The banks bring economies of scale, back-end systems, and capital. We are seeing MFIs such as Cashpor in India embrace a banking correspondent approach, at the same time leveraging the mobile phone for efficiencies and scale.  Nevertheless, it remains to be seen if this is a model that will flourish in other regulatory environments.

These are but three approaches that have potential to address both the supply-demand gap and client needs.  There are surely many more innovative models that will be in play five years from now, but I expect most will reflect the common themes across these three approaches above: 1) the role of a digitized device like the mobile phone to drive outreach and scale; 2) shift from a one-size-fits-all approach to regionally-tailored models, and 3) engagement of a variety of actors and channels who we haven’t traditionally thought of as being part of microfinance.

For more information, sign up for updates from the Financial Inclusion 2020 campaign.

Camilla Nestor joined Grameen Foundation in August 2005 and previously served as Growth Guarantees Manager and Director of the Capital Management and Advisory Center. She was appointed Vice President for Microfinance in April 2009. She has 14 years of experience in microfinance and commercial banking. Before joining Grameen Foundation, she worked in Citigroup‘s Structured Corporate Finance Department where she executed credit-enhanced debt financings for emerging markets firms in Africa, the Middle East and Eastern Europe. Prior to joining Citi, she spent five years on the ground in Southeast Asia, the Balkans, and Africa working with microfinance institutions on start-up, new product development, and capital raising. Camilla holds an MBA and a masters degree in International Affairs from Columbia University and a bachelor’s degree in Political Science and International Relations from Colorado College. She speaks Bahasa Indonesia and is conversant in French.

Have you read?

It’s Time to Expand the Circle

From the Roundtable: Reflections on Improving Microfinance

Expert Exchange: Building a Movement toward Financial Inclusion by 2020

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at ACCION International.

Last month, Citi Foundation hosted a very interesting day-long roundtable that focused on the Center for Financial Inclusion’s (CFI) report on “Opportunities and Obstacles to Financial Inclusion.”  Citi Foundation’s Graham MacMillan posted on the report when it was issued in July.

This is an important report because it raises significant issues for the microfinance sector, and I strongly recommend that anyone interested in microfinance, poverty reduction, or “development through enterprise” read through it (download free pdf version here).  Co-authors Elisabeth Rhyne, managing director of CFI, and Anita Gardeva, CFI senior analyst, conducted a comprehensive survey of industry participants to get their views on “how to make full financial participation a reality.”

The Center reached out to a wide variety of sector participants and gave them a list of 30 “opportunities” for and 30 “obstacles” to full financial inclusion.  Each participant identified the 10 opportunities and 10 obstacles they felt were most important for achieving full financial inclusion.  The report is based on 301 completed surveys and provides a new take on the microfinance sector and lays out a very manageable agenda for action.

The roundtable brought together 45 participants to discuss the findings in the report and their implications for the sector.  In addition to the report’s co-authors, speakers included:

• Pamela Flaherty – CEO of the Citi Foundation
• Lew Kaden – Vice Chairman of Citigroup
• Diana Taylor – Chair of the board of ACCION
• Michael Schlein – CEO of ACCION
• Elisabeth Rhyne – Managing Director of the CFI
• Larry Reed – Incoming Director of the Microcredit Summit Campaign
• Ann Miles – Director of Microfinance at the Mastercard Foundation, and
• Bob Annibale – Global Director of Microfinance at Citigroup

The discussion was wide ranging.  After introductions and some context setting, Rhyne presented the survey results to the group and generated a vigorous discussion about the results, tradeoffs among priorities, and possible ways forward.

Participants then joined small-group breakout sessions to discuss/formulate action steps for the sector. I participated in the “client protection” breakout group. We had a spirited discussion. While we started with the typical “regulators should protect vulnerable clients from dishonest institutions” framing of the issue, we quickly moved on to grappling with more subtle issues. For example:

• How to protect borrowers from their own bad decisions (via financial education, some – perhaps paternalistic – limits to borrowing, etc.)
• How to prevent opportunistic borrowers from gaming the system, lobbying for debt forgiveness and ruining the sector for potential future borrowers?

While we didn’t reach clear conclusions, the consensus was that the simplistic “lenders bad, borrowers vulnerable” framing hindered rather than nurtured the development of the sector.  “Client protection” should focus on nurturing the sector for responsible participants, not focus on a few anecdotes from unfortunate borrowers.

The groups then reconvened to discuss implications and next steps at three levels – the client level, the provider level, and the enabling environment level (market and regulatory issues).

Key takeaways from the day included recommendations to:

1. Broaden the conversation to a broader and more diverse circle of stakeholders, as the sector often spends too much time talking with itself.
2. Foster strategic partnerships to bring greater product range and new technologies to the sector.
3. Develop an improved understanding of our clients.
4. Better employ technology to better collect information and move toward automating some functions.
5. Improve product design, connecting it more closely to actual behaviors and product usage.
6. Recognize that product diversification is difficult, and that full financial inclusion will likely involve a variety of organizations – some broad line and some very specialized.  That is, no one approach can meet all needs.
7. Recognize that regulation can help, but can’t solve all issues.  Regulation can shape the market, but it can’t create a market if the economics don’t make sense.

I found the discussions of better employing technology to collect information (#4) and the difficulty of product diversification (#6) to be the most thought provoking. Microfinance has been a hugely successful sector over the past 20 years.  But the sector has evolved rapidly, and few firms have managed to evolve their business models as quickly.

On the technology side, we see that mobile technologies now allow forward-thinking organizations to transform their value chains and the way they interact with clients.  Most readers will be familiar with M-Pesa, the mobile-phone based money transfer service offered by Safaricom in East Africa. ANDE’s Capacity Development Fund (CDF) recently funded another interesting mobile technology project.  Entitled “Direct Beneficiary Social Metrics Capture Using Mobile Technology,” the project (pdf link, 7^th project down at the top of page 3) is aimed at creating an IRIS compliant survey platform to transform data collection in support of social enterprises.

These types of innovations allow firms to dramatically reduce costs, reach more people, and generate the types of impact data that will mobilize more commercial and philanthropic capital investment.

The discussion of product diversification was less focused, but I believe just as important.  For most of the past 20 years, microfinance business models have evolved around two basic approaches – (1) solidarity group or asset-based lending, and (2) savings groups. (See the BancoSol Bolivia case I wrote back in 2002 for an overview). Both approaches are powerfully transformative for the unbanked, but not particularly flexible. As clients succeed, their financial needs evolve rapidly. When just entering the system, a solidarity group structure is often crucial, but requires a very particular set of organizational capabilities.

As incomes increase, clients need larger, individual loans, savings products, trade and money transfer products, and an ever-increasing array of financial products. Many pioneering organizations in the sector have struggled with this evolution – not because they are poorly run, but because these new services require very different organizational capabilities and processes. The discussion at the roundtable focused on how to great alliances across different types of organizations, and to encourage policymakers to recognize the value of organizational diversity.

As Graham noted in his July NextBillion post, the CFI report provides many important insights. The roundtable discussion added two additional layers to our understanding:

• A vigorous back and forth about the sectors shortcomings to date (the “obstacles”), and
• Concrete suggestions for next steps (how best to seize the “opportunities”)

I encourage all Nextbillion readers to check out CFI’s report, and to follow the discussion of these issue on both NextBillion and on the CFI blog.

For more information, sign up for updates from the Financial Inclusion 2020 campaign.

Robert (Bob) Kennedy is Executive Director of the William Davidson Institute (WDI), a non-profit research and educational institute that focuses on business and policy issues in emerging market economies.  He also serves as the Tom Lantos Professor of Business Administration at Michigan’s Ross School of Business, where he teaches corporate strategy and international business courses in the MBA, EMBA, and Executive Education programs.  

This post was originally written in October 2011 for NextBillion.

Have you read?

It’s Time to Expand the Circle

Expert Exchange: Building a Movement Toward Financial Inclusion by 2020

Voices of Financial Inclusion: ‘It’s the Clients, Stupid’

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at ACCION International.

In September, I had the opportunity to participate in a dialogue with more than 45 other participants as part of a roundtable hosted by ACCION’s Center for Financial Inclusion. The purpose of this new blog is to continue the conversation we started that day – and I am honored to be the first to post here.

At Calvert Foundation, we often talk about impact investing as a virtuous circle, one that creates empowerment, opportunity, and engagement by connecting investors, underprivileged individuals, and communities. This connection – to me – is the ultimate goal of financial inclusion. It’s about a connected circle of people, with mutual benefit for all the stakeholders involved, and with clients at the center.

So how do we make finance more inclusive?

First, we have to build out the community of those dedicated to financial inclusion by expanding the types of partnerships we pursue. Strategic partnerships are difficult due to competing interests. Key information can be proprietary, and goals don’t always align. In general, the financial inclusion industry needs to continue to build that capacity.

I am proud of the collaboration we at Calvert Foundation (through our subsidiary, Community Investment Partners) established with Citibank to get more dollars to communities where jobs and investments are needed most. In less than two years, this cooperation increased our lending activities by more than 50 percent. Partnerships are critical. At an industry level, therefore, we need to think about what partnership models will look like in the future, moving partnerships beyond the typical investor/service provider relationship. We need to do more – and we can’t do it alone.

Second, we also need to constantly look ahead. The needs of microfinance institutions and their clients are evolving and changing every day. New technologies bring new opportunities, but are also disruptive. The microfinance community can continue to provide niche services, or it can explore new products and new business models that will take it out of its comfort zone. Throughout, there will continue to be a need for patient, flexible, and affordable capital – but this is just one building block, and the delivery mechanisms are changing.

Finally, we must work to protect clients and continue to evaluate social impact. In 2009 Calvert Foundation began working with CGAP and ACCION to provide an investor perspective at the beginning stages of the Client Protection Principles now calledthe Smart Campaign. We were proud to become one of the first signatories, and have since worked to incorporate the principles into our investment process from beginning to end. We began using social impact covenants in our loan agreements, requiring MFI borrowers to comply with the Smart Campaign, or have their own code of ethics with equivalent emphasis on client protection. We have expanded the social impact section of our due diligence reports to include evaluation of the potential MFI borrower’s compliance with the principles. As of Q3 2011, 77 percent of Calvert Foundation’s MFI borrowers had signed on to the Smart Campaign. We hope by the end of 2012 that number will be 100 percent.

This last point about client protection and social impact is fundamental.  When I was at the TBLI Conference in London earlier this month, I saw “Occupy” protesters just a block from where the conference was being held. They were camped out in tents near St. Paul’s Cathedral, waving signs that expressed frustration about a system they felt had harmed more than helped them. Financial inclusion is about bringing everyone into the system – but also about ensuring that that system is beneficial for those who participate.

For more information, sign up for updates from the Financial Inclusion 2020 campaign.

Lisa Hall leads Calvert Foundation as President and CEO, a post she assumed in January 2011. Having joined Calvert Foundation in 2005, Lisa’s background includes nearly 25 years of industry experience at multiple policy and financial posts.