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> Posted by Lizzy Bolze, Analyst, Investing in Inclusive Finance, CFI

The following post was originally published on the Accion blog. 

Accion client Ma San Htwe selling fish in Myanmar, one of the key areas discussed at European Microfinance Week 2016.

European Microfinance Platform is celebrating 10 years of supporting inclusive finance innovation, and hosted European Microfinance Week 2016 (EMW) in Luxembourg a few weeks ago. At the conference, I joined discussions about key organizations and challenges in the industry. Here are five of the main takeaways from the week:

1. The Underserved Refugee Population

The Social Performance Task Force (SPTF) is helping to provide financial services to the refugee population, which is now approximately 20 million people. In reality we don’t know very much about the socioeconomic needs of refugees, and much of the research is focused on humanitarian efforts. SPTF is working to research and provide guidelines to financial service providers to better serve the financial needs of this population. The guidelines will be published on SPTF’s website in the coming months. Learn more about leading organizations supporting refugees from CFI’s blog series on refugees.

2. Opportunity in Myanmar

Representatives from VisionFund, Advans, UNCDF, and M-CRIL provided a look at the economic landscape of Myanmar and the future of financial inclusion there. In Myanmar, 70 percent of the population was excluded from formal financial services until 2011, when microfinance rapidly expanded. After 2011, 267 licensed Monetary Financial Institutions (MFIs) opened. This opportunity comes with many barriers to inclusion, such as a lack of government regulation and funds and capacity-building issues. However, there is widespread optimism with an adoption of regulations proposed by the Smart Campaign, as well as further demand for microfinance in Myanmar. Investors should consider moving into the region for long term impact.

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> Posted by Alexandra Rizzi, Deputy Director of the Smart Campaign

The following is part of the Smart Campaign’s #FintechProtects series. We’re raising awareness about responsible digital financial services, spotlighting work from the Smart Campaign and others, and engaging with industry actors on how fintech can move forward in a way that’s best for clients. For more information on #FintechProtects, and to get involved, click here.

In financial inclusion circles there is palpable excitement around the promise of digital financial services (DFS) – most recently quantified by the McKinsey Global Institute as the potential for 1.6 billion individuals becoming banked, $2.1 trillion in loans disbursed, and 95 million new jobs. Yet, in order for this potential to be achieved, customers must trust the service. For instance, India-based MicroSave conducted research showing that while 85 percent of DFS customers said they would recommend DFS to others, they thought of it as a Plan B due to lack of trust. Issues that can erode or prevent trust from building include gaps in data protection and security, service downtime, insufficient transparency, agent misconduct and unauthorized fees, among others. As Graham Wright of MicroSave writes, “It is clear that there are immediate potential wins for DFS providers who address consumer protection issues.”

In this post the Smart Campaign spotlights a fast-growing fintech company, JUMO, that is helping to define what responsible digital finance means.

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Gail Buyske, Advisory Committee, Microfinance Information Infrastructure Project

> Posted by Center Staff

Convening of Stakeholders

Several weeks ago we learned that MFT has suspended its operations. Moody’s has discontinued its Social Performance Assessment Program. The MIX is trying to increase revenue through its MixGold program. Should we care about these developments? What are they telling us about the state of microfinance’s information infrastructure?

The Center for Financial Inclusion undertook an analysis of these issues to follow up on Elisabeth Rhyne’s provocative blog of March 11, 2014, in which she argued that the microfinance industry needs an “infrastructure fix.” Today’s blog summaries the key issues, which will be discussed at a stakeholder discussion in DC on April 14, followed by one at a later date in Europe.

Let’s start by thinking about why we should care about microfinance’s information infrastructure. Information and its natural outcome, transparency, have been guiding principles of the microfinance industry practically since its inception. These are not just feel-good concepts: they played a fundamental role in the development of microfinance. Information and transparency were critical in microfinance’s early days in enabling donors and investors to identify promising MFIs that they could support. Readily available information enabled MFIs to benchmark their performance and set goals to improve their performance. And we can never forget that a commitment to transparency is a pact between MFIs and their clients.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

Nearly every industry requires infrastructure to thrive, and this goes for the microfinance industry too. But the infrastructure that the global microfinance industry has constructed over the past two decades is looking a bit shaky today. Infrastructure investments are urgently needed to keep the industry sound and prepare it for the future.

One could argue what exactly constitutes the microfinance industry’s infrastructure, and there are a range of organizations to choose from, but for this conversation, let’s look at several key organizations dedicated to setting standards and providing information for microfinance globally: the Microfinance Information Exchange (MIX), the four specialized microfinance rating agencies, the Social Performance Task Force (SPTF), Smart Campaign, and Microfinance Transparency (MFT). These organizations, which perform vital functions for the industry, arose during two different phases of microfinance industry development.

The first generation of organizations – MIX and the rating agencies – were created to provide financial transparency and standards, primarily so that investors could identify well-performing institutions, and also so microfinance institutions could evaluate their own performance against common standards. It took a lot of work to create these organizations. MIX had to find ways to incentivize MFIs to report and to devise a system for data quality assurance. The founders of the rating agencies – Microrate, Planet Rating, Microfinanza Ratings, and M-CRIL – took substantial personal risk in devoting their careers to promoting financial transparency in microfinance.  Together, these organizations have helped spread financial standards throughout the microfinance industry and contributed to improving the financial performance of MFIs, enabling the entry of private social investors who now contribute very importantly to the funding of microfinance. We sometimes now take financial transparency for granted, but if these organizations were to stop playing their role in upholding it, adherence to standards across the industry would undoubtedly drop, with consequences for investor interest, which up to now has remained strong.

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> Posted by Center Staff

“The old ideas have become akin to the sixteenth century assertion that the world was flat; yet it did gradually became established that the earth was round after all. Microfinance needs to be rounded too.” – Sanjay Sinha

Sanjay Sinha, founder of Micro-Credit Ratings International Limited (M-CRIL), recently released a candid wake-up call for the industry to move beyond the now outdated microfinance principles initially propagated in the 1990s and employ a more diverse and client-friendly approach. In his note, A Challenge to Flat-Earth Thinking in Microfinance, Sinha cites four tenets he finds especially problematic, contextualizing their adoption and negative implications, and positing how the industry can better move forward in meeting the needs of the poor. Sinha’s note follows:

The intensive promotion of microfinance worldwide as a palliative if not a panacea for poverty started in the mid‐1990s with initiatives like the establishment of CGAP, the Microcredit Summit Campaign, and various national-level apex agencies often sponsored by multilateral or bilateral development agencies like the World Bank and the regional development banks. Led by CGAP, as the main international technical agency for the support of microfinance, a strong message on the principles of good microfinance practice was propagated worldwide. These principles included (but were not limited to) the following:

  • MFIs must adopt the principle of “zero tolerance of delinquency” in order to minimize default.
  • There must be a continuous effort to limit operating costs in order to deliver microfinance at the lowest possible price to low income clients.
  • Microfinance services must be offered by specialist MFIs in order to ensure that there are no conflicts of interest that confuse MFI managements, staff or borrowers.
  • MFIs should focus on growth in order to maximize outreach to the vast numbers of financially excluded families across the globe.

This note argues that while these principles may have been appropriate at the time when they were formulated (in the mid‐1990s) their time passed a few years ago and the entrenchment of these principles as microfinance orthodoxy is now damaging the development objective – financial inclusion to serve the needs of poor and low income people, and facilitating income enhancement – for which the microfinance movement was propagated. Therefore, the time has come for a concerted effort to swing the pendulum back to equilibrium.

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> Posted by the Smart Campaign

The Smart Campaign recently launched the Client Protection Certification Program (CP2). In designing the certification program the Campaign worked with many stakeholders in microfinance, and especially with the four specialized microfinance rating agencies, M-CRIL, Planet Rating, MicroFinanza Rating, and MicroRate. These four have been licensed by the Smart Campaign as certifiers and are now welcoming calls from organizations that wish to become certified.

We urge organizations that are scheduling ratings in 2013 – and that have strong client protection practices – to consider requesting a client protection certification at the same time as a rating. Here’s why:

  • Assurance about client protection standards. Client protection certification treats client protection in more depth than ratings and measures practices against specific, industry-wide standards. The certification provides greater assurance that client protection practices meet these standards.
  • Use of certification as a public mark of achievement. Client protection certification carries a message about an issue of public concern that can be shared with a broad array of stakeholders, including investors, the media, and even clients. It can be used to convey a simple and powerful message.
  • Costs less and is less disruptive. Client protection certification was designed to work in tandem with ratings. When a client protection certification visit is combined with a rating visit it adds a relatively small amount to the cost of the rating, a cost that is much less than a standalone certification. And because only one on-site visit is needed, combining ratings and certification is less burdensome for the organization.
  • Upgrading practices. The process of preparing for and passing certification assists organizations to upgrade their client protection practices.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published on the Huffington Post Business Blog. 

The global microfinance industry realized a significant and long-awaited goal this week with the introduction of Client Protection Certification as promoted by the Smart Campaign. With certification, lenders and banks for low-income people will be able to demonstrate — on the basis of an on-site, third-party evaluation — that they take adequate care to protect their clients.

As one of the founders of the Smart Campaign, my high hopes are that Client Protection Certification will become a kind of Fair Trade mark for the microfinance industry. If established as we envision, donors, investors, regulators, and even clients will check the certification registry before they invest in or bank with microfinance institutions, choosing the ones that meet the standards. This in turn will create positive incentives for institutions to improve, ultimately leading to safer, more respectful services for the low income clients microfinance reaches.

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> Posted by Beth Rhyne

MCRIL report on MF 2011As leaders of the microfinance industry in India assemble in Delhi this week for the ACCESS Microfinance India Summit, India-watchers outside the country can follow events in the sector by taking a look at the latest report from M-CRIL: “M-CRIL Microfinance Review 2011: Anatomy of a Crisis.”  The executive summary is available as a stand-alone document, and it provides instructions for purchasing the entire data-drenched report.

For me, the best parts of the report are the numbers that help dimension the sector and its crisis, as well as its no-holds-barred approach to stating conclusions.  Here is a small sampling:

On the role of microfinance in India: “Microfinance is now established as a significant component of the financial system in the country and its contribution to financial inclusion continues to rival, if not exceed, that of the rural banking system.”  “With 31.8 million borrower accounts the size of the microfinance sector more than matches significant parts of the Indian financial system in terms of the number of citizens affected. This number is more than three times the number of micro‐credit accounts serviced by the Regional Rural Banks and is greater even than the total number of such micro‐accounts held by the commercial banks.” Read the rest of this entry »

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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.