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Research Topics

 Lessons and insights into how MSMEs navigated the challenges presented by the pandemic and what inclusive finance stakeholders can prioritize to improve MSME resilience.

Preparing MSMEs for Future Crises: Lessons From COVID-19

A longitudinal research program in four emerging markets

COVID-19 & MSMEs: Data and Analysis to Understand Impact

Eda Dokle

Andrea Zinn

Reflections on CSAF's 2022 State of the Sector report, highlighting 4 takeaways particularly relevant to the future of agriculture finance.

Blog Post

SMEs in agriculture play a critical role in developing the sector by creating employment, facilitating market access for farmers, and providing inputs, credit, and training for smallholder farmers. However, the <a href="https://isfadvisors.org/wp-content/uploads/2022/04/ISF_AgriSME-Finance-state-of-the-sector-report.pdf" target="_blank" rel="noopener noreferrer">gap in financing to agricultural SMEs</a> is estimated to be billions of dollars and no single actor can bridge this massive gap alone. To help address this, ten years ago a group of seven impact lenders -- Alterfin, Oikocredit, Rabobank’s Rabo Rural Fund, responsAbility Investment AG, Root Capital, Shared Interest Society, and Triodos Investment Management – formed the <a href="https://csaf.org/" target="_blank" rel="noopener noreferrer">Council on Smallholder Agricultural Finance (CSAF)</a> with the goal to expand finance to agriculture businesses that operate in developing countries by creating a platform for like-minded lenders to convene on a regular basis to share data, learning, and experiences on agriculture finance.
<blockquote class="pullquote--right">CSAF aims to improve the livelihood of smallholder farmers and promote environmentally sustainable practices by financing agricultural SMEs.</blockquote>
Today, the CSAF alliance includes 17 lending institution members and affiliates. Since 2013, they have collectively lent over <a href="https://csaf.org/wp-content/uploads/2022/07/CSAF_State_of_Sector_2022.pdf" target="_blank" rel="noopener noreferrer">$5.5B to 1,546 enterprises</a>, reaching 6 million farmers across 81 countries. Aiming to improve the livelihoods of smallholder farmers and promote environmentally sustainable practices by financing agricultural SMEs, CSAF members are impact-driven lenders that prioritize social and environmental impact over financial return by investing in higher-risk, high-impact enterprises.  As CSAF members’ lending meets only a small share of the overall financing demand of agri-SMEs, CSAF’s role in promoting industry standards and best practices aims to engage a wider set of stakeholders to build a more inclusive and impactful finance market that can help bridge the finance gap for agri-SMEs.

In 2014, CSAF members and affiliates began reporting portfolio and client data. CFI has partnered with CSAF since 2020 to collect and analyze data, in an effort to present insights on the landscape of agricultural SME finance. The results from the annual survey are shared in a published <a href="https://csaf.org/csaf-publications/" target="_blank" rel="noopener noreferrer">report</a> and data is made publicly available in the <a href="https://data.csaf.org/" target="_blank" rel="noopener noreferrer">CSAF Data Portal</a>.

Of the takeaways from the <a href="https://csaf.org/publications/2022-state-of-the-sector/" target="_blank" rel="noopener noreferrer">2022 State of the Sector report,</a> CFI found the following four to be particularly relevant as we look to the future of agriculture finance. While focusing on overall trends, the insights zoom in on developments in Sub-Saharan Africa.
<h3>1. Sub-Saharan Africa represented a growing share of lending, as CSAF annual disbursements to agricultural SMEs reached peak levels in 2021. </h3>
Lending to agricultural SMEs in 2021 grew by 35 percent from 2020 – perhaps unsurprising given that CSAF lenders contracted their disbursements in 2020 due to COVID-19 restrictions, marking a growth in disbursements by 18 percent from 2019 pre-pandemic levels. Since 2013 (the year when CSAF members began to report data), annual disbursements have more than doubled, but the increase has not been gradual.

Sub-Saharan Africa saw the greatest increase in disbursements between 2013 and 2021 (+$199M), followed by Central America (+$105M), South America (+$69M), and South &amp; East Asia (+$45M). In 2021, following a five-year trend, Sub-Saharan Africa received the majority of annual disbursements (36 percent), with Cote d'Ivoire accounting for 40 percent of regional disbursements, followed by Kenya, Uganda and Rwanda.

<img class="wp-image-44977 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/08/CSAF-Blog-Post-Graphs-01-e1660328284507.png" alt="" width="776" height="550" />
<h3>2. Lenders focused on serving existing borrowers and faced challenges finding new investment-ready borrowers. </h3>
In 2021, the number of total borrowers declined from 654 agricultural SMEs in 2020 to 641 in 2021, marking an increase of only 13 percent from 2013 to 2021. New client origination remained low in past years, indicating that lenders have focused their attention on existing borrowers, which accounted for 90 percent of total borrowers. CSAF members face challenges in serving first-time borrowers, who are often riskier and require smaller, less-profitable loans that do not allow lenders to operate within their risk-return models.

<img class="wp-image-44978 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/08/CSAF-Blog-Post-Graphs-02-e1660328485632.png" alt="" width="826" height="525" />While experiencing a slight decline in 2021 from 2020, Sub-Saharan Africa reported the most borrowers (47 percent of all CSAF member borrowers), spread across 21 countries. In the past 4 years, Sub-Saharan Africa also experienced the highest borrower turnover – with almost the same number of exiting borrowers as entering, but also the highest number of new borrowers.
<h3>3. Financing to cash-crop value chains (coffee and cocoa) accounted for over 70 percent of disbursements, despite prior attempts to diversify into other crops. </h3>
In 2021, CSAF lenders increased coffee disbursements by 40 percent, in response to increased demand for financing associated with rising coffee prices. Since 2013, coffee has been the most financed commodity by CSAF members, with a high concentration in South and Central America. Attempts to diversify away from coffee and cocoa between 2013 and 2017 were met with increased portfolio-at-risk and lenders returned to expanding financing growth in less-risky coffee and cocoa sectors.

Disbursements to cocoa, the second most financed crop, increased by 36 percent in 2021, driven primarily by growth in Cote d’Ivoire and Ghana. Sub-Saharan Africa is the most diverse region in terms of crops financed, as only 62 percent of 2021 regional disbursements went to coffee and cocoa, compared to 83 percent and 94 percent in South America and Central America, respectively. However, there is still concentration in the region; the increase in cocoa disbursements in Cote d'Ivoire accounted for 45 percent of the regional increase and came primarily because of a few borrowers receiving larger loans.

<img class="wp-image-44979 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/08/CSAF-Blog-Post-Graphs-03-e1660328543415.png" alt="" width="824" height="522" />
<h3>4. Normalized portfolio quality improved as write-offs and restructured loans remained high.</h3>
In 2021, portfolio-at-risk greater than 30 days (PAR30) dropped to 7.4 percent, from 8.1 percent in 2020 value. However, trends differ by loan size and region. PAR30 doubled for loans less than $250K and fell for loans larger than $2M+, with PAR30 for loans less than $250k increasing mostly in Sub-Saharan Africa.

While PAR30 declined, the overall share of outstanding write-offs was 6 percent, with the largest share of write-offs coming from Sub-Saharan Africa. This is an indication of old loans being written off from the data set and a possibility that risk associated with COVID-19 challenges or other events is not yet reflected in the data.

When we asked CSAF members to indicate the reasons for loan delinquency, they tend to highlight factors specific to the enterprises, such as management capacity. However, they also emphasize that these challenges are amplified by uncertainty and volatility in the operating environment, particularly related to climate, market, and political factors.

<img class="wp-image-44980 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/08/CSAF-Blog-Post-Graphs-04-e1660328587658.png" alt="" width="816" height="463" />
<h1>Joining Forces to Contribute to the Sector</h1>
After a few years of data collection, CSAF members realized that while market demand was high, it was difficult to meet. The data confirmed that despite the intentions of the group to meet the finance demand of many agricultural SMEs in developing markets, CSAF lenders increasingly served existing borrowers active in cash-crop value chains through short-term trade finance products at larger loan sizes ($500K+), to ensure impact while maintaining lenders’ financial sustainability.

After several discussions on challenges to serve earlier-stage agricultural businesses with lower loan-size requirements and working in less-developed value chains, CSAF members recognized that they were facing similar constraints. After conducting a <a href="https://www.agrilinks.org/sites/default/files/usaid_-_csaf_financial_benchmarking_final_learning_report.pdf" target="_blank" rel="noopener noreferrer">CSAF financial benchmarking study</a> that demonstrated the elevated risks and lower returns of serving this “missing middle” agricultural SME segment, <a href="https://aceliafrica.org/" target="_blank" rel="noopener noreferrer">Aceli Africa</a> was created as an innovative approach aiming to bridge the finance gap for agri-SMEs in East Africa by incentivizing lenders to serve higher-risk market segments while amplifying impact. This is a clear testimony of CSAF's aim to facilitate dialogue and shift lending behavior among lending practitioners, mobilize stakeholders to develop new solutions that serve excluded agri-SMEs, and engage the broader industry in bringing these solutions to scale.
<blockquote>This is a clear testimony of CSAF’s aim to facilitate dialogue among lending practitioners, mobilize stakeholders to develop new solutions that serve excluded agri-SMEs, and engage the broader industry in bringing these solutions to scale.</blockquote>
In addition to finding new approaches to serve agri-SMEs, CSAF lenders have made progress in tracking impact through aligning on standardized social and environmental impact metrics focused on farm- and enterprise-level practices. However, given the impact of climate change on the livelihoods of smallholder farmers and the importance of climate finance, lenders recognize the urgency for the development of new climate-focused solutions to advance green finance initiatives.

A Decade of Shared Learnings on Agriculture Finance: What Does the Data Tell Us?

Alexandra (Alex) Rizzi

Jayshree Venkatesan

Recommendations from the Reserve Bank of India are an encouraging first step to addressing consumer risks, but there are still gaps that need to be filled.

On August 10, the Reserve Bank of India (RBI) released their <a class="Hyperlink SCXW9814176 BCX0" href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54187" target="_blank" rel="noreferrer noopener">recommendations on digital lending</a>. This is a significant moment, especially since the Indian government recently withdrew the data protection bill that aimed to protect consumers from the risks of digitalization and data proliferation. The bill, launched in 2019, was designed in light of concerns about data misuse by private players. A new bill is proposed as an alternative. However, while India awaits this, data regulation depends on sectoral regulations. These new recommendations on digital lending will help to regulate the multitude of digital lending apps that have exploded across India, and how they use consumer data.
<h1>Background on India’s Digital Lending Regulations</h1>
In this age of rapid digitalization, innovation opportunities grow as fast as the risks they pose to consumers, making it challenging for regulators to keep abreast of the changes. The RBI Working Group on digital lending reported that the <a class="Hyperlink SCXW115547155 BCX0" href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189#S24" target="_blank" rel="noreferrer noopener">volume of digital credit has grown twelve-fold</a> between 2017 and 2020. <a class="Hyperlink SCXW115547155 BCX0" href="https://www.cgap.org/blog/evolving-nature-and-scale-consumer-risks-digital-finance#:~:text=These%20risks%20include%20mobile%20app,may%20result%20in%20over%2Dindebtedness." target="_blank" rel="noreferrer noopener">CGAP’s research on risks</a> in digital financial services (DFS) reveals that as of 2021 there are over 60 identified consumer risks, compared to only seven risks identified in 2015; and this list only continues to evolve.
<blockquote class="pullquote--left">India has been at the epicenter of DFS growth, but this growth has been accompanied by growing concerns about consumer risks.</blockquote>
India has been at the epicenter of <a href="https://www.imf.org/external/pubs/ft/fandd/2021/07/india-stack-financial-access-and-digital-inclusion.htm" target="_blank" rel="noopener noreferrer">DFS growth</a>, driven by extensive investments by the government in digital infrastructure, <a href="https://indiastack.org/" target="_blank" rel="noopener noreferrer">India Stack</a> – a comprehensive digital identity, payments and data management system, and investments. The <a href="https://www.investindia.gov.in/sector/bfsi-fintech-financial-services#:~:text=The%20digital%20investment%20market%20is,to%20%2410%20tn%20by%202026." target="_blank" rel="noopener noreferrer">digital investment market</a> in India is projected to be worth $14.3 billion in 2025, growing at a 5-year CAGR of 22.4 percent. This growth in DFS has been accompanied by growing concerns about consumer risks, such as <a href="https://themorningcontext.com/internet/why-does-upi-fail-so-often-for-banks-like-sbi" target="_blank" rel="noopener noreferrer">high failure rates in digital payments</a>, fraud, and poor redressal, among other challenges. Digital lending has been leading the charge on both innovations and rising consumer risks and, in response, the Reserve Bank of India (RBI) <a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189#S1" target="_blank" rel="noopener noreferrer">constituted a working group</a> on digital lending in 2021.

This is not the first time the RBI has needed to formulate regulations to protect consumers. The RBI’s past interventions in <a href="https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20377" target="_blank" rel="noopener noreferrer">microfinance</a> and <a href="https://www.rbi.org.in/Scripts/FS_report.aspx" target="_blank" rel="noopener noreferrer">digital payments</a> have allowed them to balance their conflicting goals of inclusion, consumer protection, stability, and growth-led innovation.

Digitalization and modularization of financial services create new regulatory challenges. Three challenges that stand out in the Indian context are lower entry barriers, India’s complex legal regime, and the absence of guidelines about what consumer data apps can collect.

To allow innovation, entry barriers are low, a concern raised in the<a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189" target="_blank" rel="noopener noreferrer"> working group’s report</a> especially as the market matures – a <a href="https://www.tuko.co.ke/378517-digital-lending-fixing-credit-access-barriers-fostering-growth-smes.html#:~:text=Digital%20lending%20is%20uniquely%20positioned%20to%20fix%20credit,poverty%20reduction%20and%20boosting%20national%20wealth%20and%20development." target="_blank" rel="noopener noreferrer">problem that previously has been seen and addressed</a> by regulators in Kenya. In India, this led to the <a href="https://www.centerforfinancialinclusion.org/combating-the-rise-in-fraudulent-fintech-apps">creation of lending apps, several of which were fraudulent and predatory</a>, and were launched during the pandemic when demand was high due to consumers’ loss or drop in income, loss of jobs, and health shocks.

India’s <a href="https://prsindia.org/files/policy/policy_committee_reports/1370600640_FSLRC%20Report%20Summary.pdf" target="_blank" rel="noopener noreferrer">complex and fragmented regulatory and legal regime</a> has been written about extensively in the past, and was acknowledged as a challenge by the RBI Working Group on digital lending in their recent report. In an era of modularization, where efficiency in delivery of digital credit is driven by partnerships with banks and non-bank finance companies, call centers, collection agents, and others, not all entities are directly regulated by RBI. This adds a layer of complexity to India’s already complex legal system that governs lending.

Earlier this month, India’s government <a href="https://themorningcontext.com/internet/india-withdraws-personal-data-protection-bill?type=short" target="_blank" rel="noopener noreferrer">withdrew the data protection bill</a>, which sought to empower citizens with rights related to their data. The removal of this bill now creates challenges for consumers in India, especially women and minority groups who can be targeted and don’t have control over how their data is used. Recent research in India showed that the very act of going online can <a href="https://www.dai.com/fi-cyber-user-trust.pdf" target="_blank" rel="noopener noreferrer">violate societal expectations of women</a>. Besides the obstacle this creates in narrowing the gender gap in India, the lack of laws and guidelines has led digital lending apps to seek <a href="https://www.cgap.org/blog/digital-consumer-credit-india-time-take-closer-look#:~:text=While%20there%20is%20no%20official%20count%20of%20the,least%20157%20apps%20operating%20as%20of%20July%202021." target="_blank" rel="noopener noreferrer">disproportionate permissions</a>, and then use consumer data to <a href="https://www.ft.com/content/16c86479-e88d-4a28-8fa4-cd72bace5104" target="_blank" rel="noopener noreferrer">“debt shame”</a> consumers who delay repayments. The prospect of social censure can be a powerful barrier for women in adopting DFS.
<blockquote class="pullquote--right">Digital environments exacerbate financial services risks that have existed for a long time.</blockquote>
It is worth repeating that digital environments exacerbate financial services risks that have existed for a long time. There are several ways that we see risks evolve in a digital era. Digital lenders in India communicate about prices in different ways, making it harder for consumers to compare and choose. Digital lenders requested processing fees upfront, regardless of whether or not a loan would be disbursed – a scheme profitable for lenders, but detrimental to consumers. Complaint channels in a digital environment are often non-existent or dehumanized, causing many consumers <a href="https://www.cgap.org/blog/analyzing-social-media-spot-digital-consumer-credit-risks-india" target="_blank" rel="noopener noreferrer">to resort to social media</a> to air their complaints. The absence of well-designed complaint channels can be a barrier to consistent use and can contribute to a lack of trust, especially among women. Finally, credit reporting during the pandemic took a backseat due to loan moratoria, and the modularized nature of digital lending meant that fintech lenders would often not report to credit bureaus, weakening existing credit reporting mechanisms even as the digital lending space evolved.
<h1>Positives of the New Recommendations</h1>
Not all digital lending is bad. We know that <a href="https://www.imf.org/-/media/Files/Publications/covid19-special-notes/en-special-series-on-covid-19-digital-financial-services-and-the-pandemic.ashx" target="_blank" rel="noopener noreferrer">timely access to affordable loans can help smooth cash flows, address emergency liquidity requirements, and offer consumers greater choice</a>. Therefore, the RBI’s recommendations based on the working group’s report are an encouraging first step to addressing consumer risks before trust in digital lending is eroded.

The <a href="https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=54187" target="_blank" rel="noopener noreferrer">recommendations for implementation</a> made by the RBI on August 10, include direct execution of loans, mandates to reveal the annualized percentage rate (APR), and a cooling off period that allows consumers to change their minds.

Now with these recommendations in place, regulated entities – institutions that are directly regulated by the RBI – must disburse directly to borrowers’ bank accounts, except in a narrow set of cases of co-lending transactions. This is a positive step that reduces the bargaining power of intermediaries that may be involved and clearly positions that the risk of lending lies with banks and non-banks and not the originators of loans. Therefore, the onus of consumer protection lies with the institution taking on the risk of lending.

The mandate to reveal the APR creates a standard playing field for all lenders and allows consumers to compare rates – a crucial step. Finally, the cooling off period with loans is an excellent move and sets a positive precedent for regulators in other jurisdictions. While this feature is normally associated with insurance products, the extension to loans provides consumers with choice and the ability to change their minds without facing financial losses. However, the operationalization of this recommendation will require consultation with market players, since it does impact lenders’ cash flows.
<blockquote>Even though these guidelines are not a perfect replacement for a comprehensive data protection bill, they do protect against misuse of consumer data gathered through digital lending apps.</blockquote>
While India awaits a new data protection bill and eventually a new law, individual regulators must safeguard consumers’ data privacy interests. Even though these guidelines are not a perfect replacement for a comprehensive data protection bill, they do protect against misuse of consumer data gathered through digital lending apps. They prevent disproportionate permissions from being sought by lending apps, allow access to camera, microphone, and location data as a one-time event during onboarding or checking KYC, and outline standards to be achieved in case of a security breach.
<h1>Gaps That Still Need to Be Filled</h1>
More is needed to establish a common understanding of consumer protection risks and redress mechanisms among all regulated entities and institutions involved in the delivery of loans.

While being transparent about APR is a positive first step, in a market with hundreds of lending apps and several more that launch daily, consumers must be able to compare lenders. This need presents a market opportunity: while price comparison sites exist for insurance products, it is time to have them for digital loans. Ideally, lenders would compete to provide the best terms to borrowers but we likely will need to wait some time for this advancement.

Complaint channels need to be redesigned to be consumer-friendly and regulators need to use <a href="https://www.cgap.org/topics/collections/market-monitoring/tools">appropriate market monitoring tools</a> to analyze and identify early warnings. This also presents an opportunity to test and evaluate consumer complaint mechanisms that exist – an area of emerging research interest for CFI.

And finally, the RBI proposes that underwriting algorithms used by lenders should be subject to audits. The RBI noted that while this recommendation was accepted in principle, it would require further examination prior to implementation. This is an important first step to ensure that high-stakes algorithms aren’t <a href="https://www.centerforfinancialinclusion.org/digital-credit-algorithms-in-india-expanding-access-or-cementing-exclusion">further cementing</a> financial exclusion. At the same time, algorithmic auditing, particularly by regulators of private sector algorithms, is a nascent field and must balance accountability with a company’s proprietary intellectual property. <a href="https://dai-global-digital.com/how-four-awardees-are-paving-the-way-for-a-more-equitable-ai-powered-future.html">Global research on this topic</a> is just beginning and partnerships with regulators would enable practical action.

It Is the Best of Times, and the Worst of Times: India’s New Digital Lending Recommendations

Devina Srivastava

CFI explores how automated decision-making tools for digital credit are playing out for one demographic in India: interstate migrants.

“Essentially all models are wrong, but some are useful,” British statistician George E. P. Box declared. Despite progress made in machine learning and artificial intelligence, digital credit models risk being considered “wrong, but useful” – useful for certain groups such as urban salaried workers, but wrong as they leave behind large segments of the economy whose data trails are too faint or complex for a credit scoring algorithm.  

CFI recently explored how automated decision-making tools for digital credit are playing out for one demographic in India – <a href="https://www.habitat.org/sites/default/files/documents/Leaving-the-City-Behind_Rapid-assessment-with-migrant-workers-Maharashtra.pdf" target="_blank" rel="noopener noreferrer">the more than 54 million</a> interstate migrants – and what this might teach us about the ways data inputs and algorithms intersect with the digital lives of those at the margins.
<h1>Digital Credit in India is Booming, Yet Leaving Behind Large (and Possibly Viable) Segments of the Economy</h1>
The fintech ecosystem has ballooned in India in recent years, with an estimated 2,000 fintech startups and 300 digital lenders, including Buy-Now-Pay-Later (BNPL) players, operating by the end of 2020. Digital lending alone is expected to reach <a href="https://www.reuters.com/article/india-tech-financing-idUSL5N2NK4XL" target="_blank" rel="noopener noreferrer">$1 trillion by 2023</a>. While digital lenders existed prior to the pandemic, they have boomed over the last two years in the rush to conduct business and daily tasks remotely.

Earlier this year, CFI conducted desk research and interviews across the digital finance ecosystem in India and learned that most digital lenders are focused on serving urban, young, and employed consumers. With higher and more predictable income streams, this customer segment creates large volumes of digital data that can be mined to determine creditworthiness. And given the overall size of the Indian market, there is still room to grow before even this segment is saturated. But where does that leave the rest of consumers, including migrants?

While migrants have propelled the growth of vital industries such as <a href="https://cprindia.org/wp-content/uploads/2022/04/Push-the-policy-needle-forward-on-migrant-support.pdf" target="_blank" rel="noopener noreferrer">construction, hospitality, and commercial agriculture</a>, they historically have faced hurdles in accessing formal financial services and government benefits. And now with the increasing reliance on digital data to allocate benefits and make credit decisions, migrants potentially could be further marginalized.
<blockquote class="pullquote--right">A migrant's data trails do not fit the mold built for the urban, young, employed segment digital lenders were designed to serve.</blockquote>
Take the case of Mohan Kumar, an archetypal migrant whose data trails systematically exclude him from financial services. Mohan works in Surat, India in a garment factory, but is originally from a village near Ganjam, Odisha where his family still lives. Recently married, he visits his wife, who now lives with his parents back in Ganjam, for two weeks twice a year. On his last visit home, Mohan and his wife decided to open a stationary store. When seeking advice from friends, Mohan learned about digital loans available through the phone. Although small, these loans helped a few of his peers with fledgling, entrepreneurial ventures. Despite having a steady, full-time job in Surat for the last four years, Mohan is rejected again and again from numerous digital lenders. Simply put, his data trails do not fit the mold built for the urban, young, employed segment they were designed to serve.

Millions of migrants face similar challenges as Mohan. In general, migrants have fainter data trails due to lower levels of digital activity. Many low-income migrants have limited financial and digital capability and do not possess smartphones. And those who do have a smartphone typically only use mobile data when necessary due to the high cost. Additionally, migrants often rely on agents, such as kirana store owners, to assist them with digital transactions, and these transactions may not be directly associated with their identity.

Furthermore, digital lending algorithms do not understand the data trails of migrants very well. Migrants’ mobility causes multiple barriers. Some migrants change phones and phone numbers between their destination and home, which can impede the verification of transactions or authorizing identity via one-time-passwords (OTP), leading to KYC failures. Additionally, a mismatch between the location of the cell tower where a potential borrower applies for a loan and the location where the phone’s SIM is registered could cause the applicant to be rejected. While providers rationalize that the geographic mismatch might imply that a customer would be hard to reliably reach, unfortunately, this can unintentionally screen out viable borrowers who are inherently on the move, such as migrants.
<blockquote class="pullquote--left">Migrants' payment patterns are not well-understood or formalized, organized, or digitized.</blockquote>
When it comes to assessing cashflows to determine repayment capacity, migrants’ digital data trails make it difficult to see the full picture of their economic lives. For example, even if a migrant has established a stable income over multiple years, as is the case with Mohan, often their payment patterns are not well-understood or formalized, organized, or digitized. For example, some contractors provide an advance payment while others pay weekly or monthly, and some cover living expenses for migrants but deduct the costs from their salaries. In addition, migrants’ data trails might show varied consumption patterns in their two locations – for instance, in Surat, Mohan spends his money on accommodations and food, while back in Odisha he spends on household expenses and children’s education. Such variations in earning and spending tend not to fit within lending models’ range of what makes a viable borrower.

Finally, there is the issue of accessibility. Examining the top 30 downloaded digital credit apps in India (15 on the App Store and 15 on the Google Play Store), we found that 28 out of 30 worked only in English, with just 2 offering Hindi. Such limitations favor highly educated segments and inherently exclude vast numbers of potential clients.
<h1>More Effort is Needed to Ensure Digital Credit Does Not Further Exclude Marginalized Groups</h1>
The Reserve Bank of India (RBI) has taken an interest in digital lending and consumer protection issues over the last two years, asking Google to <a href="https://economictimes.indiatimes.com/tech/technology/google-removes-personal-loan-apps-violating-user-safety-policies-from-play-store/articleshow/80267043.cms?from=mdr" target="_blank" rel="noopener noreferrer">remove at least 30 lending apps from the Play store</a> that did not comply with local laws, <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52589" target="_blank" rel="noopener noreferrer">convening a working group</a> under the chairmanship of executive director Jayant Kumar Dash, and empowering <a href="https://faceofindia.org/index.html" target="_blank" rel="noopener noreferrer">FACE</a> to become a self-regulatory organization (SRO). The working group focused on a range of consumer protection issues including transparency and disclosure, aggressive sales, consent, and algorithmic design. For instance, one of the group’s recommendations suggests that providers have verifiable audit trails for their algorithms and models should be documented to ensure transparency. While a promising direction, little is understood about what this will look like in practice and how it will balance accountability with the proprietary nature of the models.

Moving forward, digital lenders should find ways to understand and assess the unique activities of groups like migrants through more nuanced models and data inputs that give a more complete picture of a migrant’s economic life. For example, do workers travel back to the same destination each working cycle? How many trips home do they make? How have income patterns shifted within their employment – is it consistent or is it varied?
<blockquote>Digital lenders should find ways to understand and assess the unique activities of groups like migrants through more nuanced models and data inputs that give a more complete picture of a migrant’s economic life.</blockquote>
Providers could draw inspiration from the work of <a href="https://indiamigrationnow.org/" target="_blank" rel="noopener noreferrer">India Migration Now</a> (IMN), which is working to understand the nuances of the data trails of migrants. They are preparing to launch a pilot for a customized, digital lending product for migrants that will leverage both traditional and non-traditional indicators to determine creditworthiness. IMN’s scoring model will leverage data inputs such as frequency of travel, place of origin, destination for migration, frequency of remittance transfer, length of stay at migration location, GPS, and mobile top-up amounts. IMN’s focus on migrants requires commitment, research, time, and resources, which may be less attractive to other digital lenders when there are still potential customers with more robust data trails who are easier to reach.
<h1>What Can Be Done to Maximize the Inclusivity of Algorithms?</h1>
Research: We must do more to understand <a href="https://escholarship.org/content/qt3gt9x28k/qt3gt9x28k.pdf?t=qx7nai" target="_blank" rel="noopener noreferrer">whether specific segments that are already at risk for exclusion</a> are further included or excluded by algorithmic decisions. Researchers could help by leveraging context-specific research about specific segments – for instance, migrants or <a href="https://ncst.nic.in/" target="_blank" rel="noopener noreferrer">scheduled tribes</a> in India – to help data scientists better understand the data trails of these groups and incorporate insights into models.

Guidance and Incentives for Providers: While advancements in auditing and disparate impact testing can measure models' results across a set of sensitive characteristics (e.g. gender, race, religion, ethnic group), providers may not prioritize the inclusivity of their algorithms. In markets like India, for instance, financial service providers continue to focus on growth among customer segments with more “intuitive” data trails and on keeping customer acquisition costs low. In our view, stakeholders such as impact investors and industry associations can engage with providers to provide guidance and/or incentives for inclusive algorithms. CFI <a href="https://dai-global-digital.com/how-four-awardees-are-paving-the-way-for-a-more-equitable-ai-powered-future.html" target="_blank" rel="noopener noreferrer">recently launched a project</a> to help impact investors engage with fintechs on their algorithms during their due diligence processes.

Government Engagement: Because this is a very nascent field, more work is needed to test regulatory approaches and efforts to build the public sector’s capacity for supervision. Government entities, such as the Reserve Bank of India, have begun to think <a href="https://www.centerforfinancialinclusion.org/accountability-for-algorithms-a-balancing-act-for-governments">more strategically about the supervision</a> of high-stakes algorithmic decisions. Ongoing work is needed to understand and advance data protection regulation, national AI strategies, and sector-specific initiatives, such as the RBI working group or Project Veritas in Singapore, to name a few.

Digital Credit Algorithms in India: Expanding Access or Cementing Exclusion?

Lucciana Alvarez Ruiz

Edoardo Totolo

CFI reflects on findings that excite us from the latest Global Findex and what we can focus on next that will help us rethink financial inclusion.

Global Findex 2021: Growth, Stagnation, and (Relative) Decline in Global Financial Inclusion

RFF convenes this week for the first time since 2020, and the rapid pace of change in financial services, and the external world at large, supplies stakeholders with a plethora of issues to discuss regarding emerging risks to consumers.

We Are All in This Together

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Registration for #FinclusionWeek 2022 is now open!

Event

Financial Inclusion Week (FIW) is an annual gathering of the global community working to advance inclusive finance. The four-day virtual event is a forum for exchanging ideas, research, and perspectives from around the world. The Center for Financial Inclusion (CFI) convenes FIW each year and invites partner organizations to showcase work, share ideas on what’s ahead, network with others, and more. The community-driven agenda covers the most pressing topics in our space, helping to inform and advise global efforts to advance inclusive finance. FIW 2022 will be held October 17-20.

The theme for FIW 2022 is "Inclusive Growth in a Digital Era."

Registration is open and free to everyone at <a href="http://financialinclusionweek.org" target="_blank" rel="noopener noreferrer">financialinclusionweek.org</a>.

Financial Inclusion Week 2022

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Moving Beyond Access Toward Improving Outcomes

#strategyvideo

Lauren Braniff

Report

Accounting for about 90 percent of businesses and employing more than 50 percent of the labor force in some markets, micro, small, and medium enterprises (MSMEs) are the backbone of the economy. However, since the pandemic began, MSME owners have experienced severe crises and challenges to their businesses. To understand the impact of the pandemic on these businesses and households, CFI conducted a <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">longitudinal survey</a> of over 1,600 MSME owners from June 2020 to October 2021 over six waves, and conducted focus groups of 130 MSME owners from march to April 2022 in four countries — Colombia, India, Indonesia, and Nigeria.

This publication provides insights into how MSMEs have navigated challenges presented by the pandemic and what support they had available. It also presents lessons learned to help prepare for future crises, as well as recommendations for what inclusive finance stakeholders can prioritize to improve MSME resilience.

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