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> Posted by Ignacio Mas, Independent Consultant
That was a fun debate at Fletcher.
This or that? Formal or informal? Pro or con? Of course the answer always lies somewhere in the middle, it’s about and rather than or, to use the trite expression. It would certainly be ironic to seek to be inclusive by excluding options.
But in the case of financial inclusion, where a number of formal and informal services vie for relevance, what does this happy medium look like? I don’t see it as a bountiful fruit platter that people can pick from (now formal, now informal) as much as a richly layered cake.
The cake analogy is to represent the idea of platforms, of capabilities arranged horizontally and interworking with each other. Each layer brings a flavor, a texture, a color to the cake, but it is only when slices cut through the entire stack that the full cakeness comes through.
Let’s count the layers of financial inclusion. You need an identity layer, so that information can be traced back to individuals and histories can be constructed. You need an efficient money transfer layer, so that money can move efficiently and without delay between the various players when they are near or far. You need a cash distribution layer, with a multitude of localities where you can exchange various forms of money (cash to electronic, large bills into small change), on demand. You need enforcement mechanisms, so that IOUs can be trusted. You need a reliable accounting layer to keep track of all these contracts and IOUs. You need creative packaging of money transfers and IOUs into higher-level financial contracts (savings, credit, insurance, and combinations of all these) that connect more directly with people’s problems and needs. You need social connections and knowledge, so that people can variously give, lend, guarantee, and vouch for each other. You need people who can become evangelists, connectors, educators, marketers, to get others involved. You need, you need, you need…
I don’t mean to make it sound more complicated than it really is, or to bias the discussion towards formal just because I used some big words in there. Go through the list again: each of these functions can be done formally or informally, and in fact savings groups do all of the above in their own way. But we shouldn’t strive to create two layered cakes, the nutritious-but-wobbly and the glitzy-but-indigestible. The formal and informal layers need to mix in seamlessly.
> Posted by Jenny C. Aker, Assistant Professor of Economics, Tufts University
Today’s post continues the debate from the Extreme Inclusion conference at the Fletcher School at Tufts University. The proposition, as you will recall: “Financial inclusion means formal inclusion.” Yesterday, we heard from the Pro side of the argument (represented by green high heels), and today we hear from the Con side (pink flip flops). The Con team is represented here by Jenny C. Aker on behalf of herself and teammates Ignacio Mas and Daryl Collins.
What we have heard from the opposing team is that financial inclusion – real financial inclusion – means “formal” financial inclusion. We heard that in order to get out of the poverty trap, poor individuals want – and need – financial services that build financial security, manage risks against shocks, and invest in new business opportunities. In other words, things that the informal sector can’t fully provide.
But is formal always better? Formal services are often laden with fees (how many of you know the APR on your credit card?), unfamiliar, or simply unsafe. The 1999 banking crisis in Uganda depleted smallholder savings. It was a formal system. The collapse of the Russian banking system defrauded depositors. This, too, was a formal system. And as the financial sector has become wider and deeper in many countries, the effects of such volatility — boom one day, bust the next — are felt by more people, including the poor.
Even without these formal sector collapses, the poor must often choose between high-priced formal financial services or none at all. We often criticize the moneylenders for being usurers. But what about Banco Compartamos, which has interest rates well above 70 percent and still doesn’t offer savings services? Is that fair? Or the compulsory two savings account system of the Grameen Bank, each with separate rules? Is that useful?
> Posted by Elisabeth Rhyne, Managing Director, CFI
Kim Wilson, of the Fletcher School of Law and Diplomacy, is a consummate educator who knows that drama leads to learning. That’s why she staged a competitive debate to kick off her Extreme Inclusion conference.
The Proposition: Financial inclusion means formal inclusion.
On the Pro side were myself and my esteemed colleagues Marguerite Robinson, emerita extraordinaire, Lauren Hendricks, of Care’s Access Africa conference, with coaching from Ahmed Dermish of Bankable Frontier Associates.
Taking the Con side were Ahmed’s colleague from BFA, Daryl Collins, together with Ignacio Mas, unaffiliated innovative thinker, and Jenny Aker of Fletcher, coached by Nick Sullivan, author of Money Real Quick: The Story of M-PESA.
Peter Walker of Tufts wielded the gavel with wit and a tiny hint of malice. He symbolized the Pro side with a green spike heeled shoe, and the Con side with a pink flip flop.
Unaccustomed as I am to public speaking, I took up the last position on the Pro side, with three minutes to make my points. Here’s what I said:
1. Development is about building societies that offer opportunity and connection to everyone. The important word is building. Let’s look where we are going. While many low income people today use and possibly even prefer informal financial services, one cannot consider this the path to the future. If we want to see the bottom 20 percent of the population become economically successful, there must be a path to success. We need only look to the accomplishments of microfinance in bringing microcredit to hundreds of millions in the past two decades to be confident about the prospects for major change in the future.
> Posted by Sonja E. Kelly, Fellow, CFI
The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Recently, as part of the Extreme Inclusion Conference at the Fletcher School at Tufts University, I watched a debate between industry leaders on whether financial inclusion means formal financial inclusion. It was a debate that had me slightly uncomfortable. To impose such a rigid definition of financial inclusion seemed cruel, given that there are informal products in existence that meet many financial needs. On the other hand, I myself have seen the superiority of well-designed formal financial products in better addressing the financial needs of people living in poverty.
There was one exchange during the debate that clarified the issue for me. In defense of informal financial services, Daryl Collins waved a $10 bill in the air and thanked a Tufts PhD student for lending her the money to pay her parking fee the day before. She remarked that without this informal financial service (a short-term, no-interest loan), she would have had to find an ATM—an inconvenience when she just wanted to leave the parking lot.
While the example was effective in showing the audience that they use informal financial services every day, there were a few things that do not allow us to generalize it to those who operate largely in the informal sector. First, it isn’t dependable. While convenient, the exchange relied on the fact that this was a one-time occurrence with a great deal of trust between the two parties. If Daryl were to ask to borrow $10 every day from this PhD student, the student would likely start to say no, or would charge some kind of a fee (I know that if I were a PhD student regularly lending money to Daryl Collins, I might ask what kinds of jobs she has open in her Financial Diaries work!). Second, it is a relatively small amount of money by U.S. standards—it isn’t an exchange that is scalable. $10 might buy lunch here in the U.S. or lattes for two. Finally, and most importantly, it ignores the possibilities of technological or environmental change. If, for example, Daryl could have paid with her credit card rather than with cash, she most likely would have chosen her credit card and not have consulted the kind student. I personally operate cashless whenever possible. Read the rest of this entry »
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