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Demand for credit in Africa exceeds supply, despite the rise in mobile money. Yet start-ups, growing daily in number, are at risk of accelerating over-indebtedness, by supplying credit to clients without conducting appropriate repayment capacity analysis. Digital lenders need to understand the risks of over-indebtedness from a client perspective, and algorithms need to evolve to take this into account. Regulation also must guide good practice for fintech digital lenders.
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> Posted by Center Staff

banana.skins.coverWhat do industry leaders feel is the biggest risk facing their institutions in 2016? This question is the focus of the latest Banana Skins report for the financial inclusion sector, Financial Services for All: It’s All about Strategy. The report ranks the top perceived risks facing those providing financial services to un/under-served people in emerging markets. Produced by the Centre for the Study of Financial Innovation (CSFI), and sponsored by Citi and CFI, the study examines the rapidly changing and expanding financial inclusion landscape to better understand how providers view challenges like new technologies, new market entrants, client repayment capacity, and macro-economic risks.

This year’s report, the sixth in the series surveying risks facing the inclusive finance industry, embraces a broader scope than previous editions, which focused exclusively on microfinance institutions. The new report reflects the advances in the provision of financial services to the base of the economic pyramid and encompasses both established providers and newer entrants like commercial banks, technology companies, and telephone and communication companies. A survey with respondents spanning practitioners, investors, regulators, and other industry stakeholders comprise the report’s findings. It’s important to note that in addition to the Banana Skins report series on inclusive finance, there is also a Banana skins report series on insurance and on banking.

So, what were the results?

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> Posted by Anton Simanowitz and Katherine E. Knotts

“Customer centricity” is the new buzz in the microfinance industry. More and more financial service providers are recognizing that their success is built on the success of their clients. Customer centricity certainly means recognizing that financial inclusion is not just about more services – it’s about better services. To achieve this, financial service providers need to grapple with the complexity of clients’ financial lives, understand what appropriate design looks like, and empower clients to use those services effectively.

But is it always a “win-win”? What if clients express preferences and make choices that are not in their long-term best interests – that is, what happens when what clients need isn’t what they might want or demand? And what if responding to client needs in the most appropriate way appears to be a riskier decision from the point of view of institutional financial performance?

These tension points (and some quite radical decisions in the face of them) can be seen in the work of AMK Cambodia, highlighted in a new book The Business of Doing Good. Witness a conversation we had with a senior manager. “We will never be a leader in client service,” he proudly announced. In the competitive Cambodian market, rapid disbursement of loans that meet customer demand is an important competitive advantage. Yet AMK accepts that its own loan disbursement is slower and more time-consuming for clients, and its loan sizes are much smaller than those of its competitors. Coming from an organization that is proudly “client focused”, this statement struck an odd note.

AMK, serving more than 360,000 people, is now the largest Cambodian MFI in terms of outreach. How can an MFI that invests heavily in understanding and responding to the needs of its clients be “less customer friendly” than others? The simple answer is that a market-led solution (responding to what clients want and are prepared to pay for) might look different from responding to what clients need in order to address the underlying complexities of their lives (i.e. poverty and vulnerability).

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> Posted by Center Staff

Today, the Centre for the Study of Financial Innovation (CSFI), Citi Foundation, and CFI released the latest Microfinance Banana Skins Report, Facing Reality. The first Microfinance Banana Skins was published in 2008, launching a regular series on risks facing the microfinance industry. This fifth iteration in the series reflects the growing complexity of microfinance as newer players such as technology companies, payment platforms, commercial banks, and others begin to serve those at the base of the pyramid. The new report outlines the risks and opportunities facing microfinance in a fast-changing environment.

Despite these challenges, the number one concern is still an old favorite: overindebtedness, which was also the number one concern in the previous report in 2012.

The report presents the risk perceptions of more than 300 practitioners and close industry observers from 70 countries, gathered through a survey. The report provides a commentary on each of the 19 risks that are identified in the survey and breaks down responses by type and region. It also includes a detailed analysis of the condition and prospects for microfinance by industry experts Sam Mendelson and Daniel Rozas.

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> Posted by Philip M. Brown and Deborah Drake, Citi Microfinance and CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

What will this year’s Microfinance Banana Skins Survey top message be? We are eagerly awaiting the responses to the recently launched 2014 Microfinance Banana Skins Survey from practitioners, investors, regulators, and other industry stakeholders around the world. These responses will provide insights into the greatest perceived risks facing the sector over the next few years and reveal the risks to be avoided on the path ahead.

The titles of the past four Microfinance Banana Skins surveys paint the picture of continuous sector evolution since the first publication in 2008. If previous titles are any indication, the new headline will set the tone and raise a debate around key risk issues.

Entitled “Risk in a Booming Industry“, the 2008 report highlighted concerns of microfinance institutions about “how to scale” in a healthy way. With changed economic realities, the external environment became the area of focus with “Confronting Crisis and Change” in 2009, and “Losing Its Fairy Dust” in 2011. The most recent survey in 2012, “Staying Relevant,” highlighted the changed setting for microfinance brought on by new entrants and new technologies. The titles and changing risk rankings reflect the increasing integration of microfinance into the broader financial ecosystem, and the challenges that microfinance clients and service providers encounter as the sector evolves.

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> Posted by Danielle Piskadlo, Senior Program Specialist, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.



Governance challenges vary greatly between institutions and regions, and that is why there is such a great opportunity for boards and MFIs to learn from each other by sharing their personal experiences.

Earlier this month the CFI’s Investing in Inclusive Finance program, along with Calmeadow and Boulder Institute of Microfinance, hosted a governance seminar in Mexico called Governance Leadership in a Competitive World. The seminar was structured as a peer-to-peer learning opportunity to engage board members and CEOs in an active dialogue. Participants discussed the challenges they face in governance and risk, and their roles and responsibilities in setting and monitoring the MFI’s mission and strategy. The cases, tools, and materials presented at this seminar created an opportunity for board members to share their experiences and to learn governance best practices from each other. While there are many complexities and nuances to governance, below are 12 practices we hope will be implemented from our governance seminar.

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> Posted by Madeleine Dy, Program Specialist, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

“What does he know that I don’t know?” This is exactly the question proponents of peer learning want to provoke. In academia, peer learning has received significant attention and new peer learning communities are sprouting up around the world. From the virtual Peer 2 Peer University, or P2PU, which was founded in 2009, to the Indian non-profit Avanti with its peer Learning Centers in India, to more informal community-driven websites like Skillshare where anyone can teach anyone else about a skill.

The Center for Financial Inclusion at Accion (CFI), the Boulder Institute of Microfinance, and Calmeadow Foundation are applying the power of peer learning in our upcoming “Governance Leadership in a Competitive World” seminar in Mexico City on October 3-4, 2013. The seminar asks MFI board members and CEOs to come together to address governance and risk challenges microfinance institutions are facing. The seminar will employ a highly interactive combination of case-based peer discussion, experienced industry speakers, and problem-solving.

Peer learning actually isn’t a new concept. It had its birth around 1916 with education thinker John Dewey’s Constructivist Theory which asserts that knowledge is created through experience, rather than through the usual teacher to student lecture and memorization. Paulo Freire, the Brazilian development guru, took it a step further with his 1968 book Pedagogy of the Oppressed, which critiques traditional teaching frameworks that treat students as empty vessels into which knowledge is deposited. Freire challenged society to ensure that all participants in the classroom, both teachers and students, work together to create knowledge equitably.

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> Posted by Madeleine Dy, Program Specialist, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

Effective risk governance is critical for the growth and sustainability of an MFI, and board members play an important role in overseeing, monitoring, and controlling institutional risks. Governing Banks: MFI Edition, the latest publication of the Center for Financial Inclusion’s Running with Risk project, is a comprehensive risk and governance manual that follows a newly appointed director of an MFI bank on his journey to acquire the understanding and skills needed to meet the unique challenges of his role. Through the different characters the director meets, including the Chair of the Board, CEO, and Chair of the Risk Committee of the Board, the author Karla Brom holds a candid, educational, and easy-to-read conversation. She discusses a multitude of topics, including best practices in determining board composition, risk management roles and responsibilities, and risk appetite.

Governing Banks: MFI Edition builds on the work of the Governing Banks supplement created by IFC’s Global Corporate Governance Forum, and modifies the document to take into account the specifics of regulated microfinance institutions. For the MFI Edition, valuable input and oversight were provided by an advisory team comprised of Lauren Burnhill of One Planet Ventures, David Risser of NestorAdvisors, Mike Lubrano of Cartica Capital, Keith Waitt of Consultancy Matters, and Deborah Drake of the CFI. The publication is the third output of the Running with Risk project, which seeks to raise awareness about the importance of effective risk governance for institutional growth and sustainability. The first two publications were Microfinance – A Risky Business and Ten Risk Questions for Every MFI Board.

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> Posted by Christian Ruehmer, Independent Consultant

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

Being a board member of an MFI is challenging. As MFIs are evolving, board members face an ongoing stream of strategic questions, and more technical expertise and specific knowledge about financial products are becoming necessary. As an MFI grows, employees and stakeholders have increasingly high expectations for board members.

The challenge for the board member is to be a coach as well as to control the management, and to stay engaged despite the fact that the MFI is always changing.

Risk management is one changing area. Risk management is no longer just a small function hidden in the finance department. More risk types are becoming relevant including such “exotic” categories as reputational and legal risk. In addition, increased integration into countries’ financial systems also means a higher exposure to interest rate and liquidity risk, and increased awareness by the regulatory authorities.

How can board members play an active and useful role for the MFI that faces such challenges?

1. Stay Engaged or Increase Your Involvement in the MFI

The MFI might look different than when the board member joined, but this is not a reason to back off. More sophisticated MFIs require stronger involvement and personal commitment. The board member should spend more time with the MFI, participate in more meetings, pay visits to the institution, and test the products the MFI is offering. One suggestion is to organize social gatherings, including dinners, around the time of board meetings and invite selected employees to join. If well organized, such gatherings promote information exchange and a better understanding of the tasks and responsibilities on both sides.

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> Posted by Jeffrey Riecke, Communications Assistant, CFI

Much of the financial world’s attention is directed at China and the global impact of fluctuations in its banking and financial markets. Last week saw a sharp increase in the country’s short-term borrowing costs, and a record high in the country’s interbank (bank-to-bank) overnight rate – a rate that serves as a gauge of liquidity in a market. In a statement published on Monday, the People’s Bank of China asserted that the liquidity in the country’s banking system overall is at a reasonable level, but emphasized that financial institutions need to improve “awareness about preventing risks.”

Turning with impeccable timing to China’s small and micro lending sector, last week PlaNet Finance released its latest research report, Emerging Risks on China’s Path Towards Financial Inclusion.

China first began experimenting with microfinance in the late 1990’s, much later than many other countries. Since then, in part due to a policy environment aimed at supporting rural area and small enterprise development, the industry has grown rapidly, with over 6,000 microcredit companies as of June 2012. At this time of counting, only 25 percent of these companies had operating histories of longer than three years, and only 50 percent longer than two years. Of China’s current population of over 1.3 billion, an estimated 400-500 million live on only two dollars a day. As China’s microfinance industry continues to grow and serve more individuals, effective risk management becomes increasingly important. The PlaNet Finance report reviews the development of the Chinese microfinance sector and identifies four pertinent industry risk areas.

  • Many microcredit companies mainly focus on credit risk, without reference to other risks, such as governance risk, external risk, operations risk, IT systems risk, and liquidity risk
  • Restrictions in access to funding create obstacles for the scaling-up of operations
  • Emerging market leaders are beginning to face the risks inherent in a rapid expansion strategy, including the challenges of maintaining control and standardization, particularly as portfolio monitoring, risk management, and IT systems have not kept pace with the increasing scale and complexity of operations
  • A disproportionately fast increase in lending volume in certain urban markets raises concerns about potential future risks regarding market overcrowding, over-indebtedness, and inadequate consumer protection

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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.