> Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School
The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”
Here’s a financial inclusion puzzle for you. In marketplaces in Peru, small shop owners often take out loans from illegal and possibly dangerous lenders, gangs that operate on motorcycles. Cheaper and safer legal lending channels are available to these customers, but they don’t use them. How would you design a product that would draw these borrowers into the formal sector?
This was the question Guillermo Palomino, chairman of the microlending organization Edpyme La Cruz in Peru and advisor to several Latin American MFIs, brought to small group discussions in the Rethinking Financial Inclusion: Smart Design for Policy and Practice program offered by Harvard Kennedy School Executive Education.
The first step was to develop a clear statement of the problem: use of illegal loans may endanger customers and exposes them to high interest rates and it may also expose their communities to increased criminality. Palomino explains, “The customer has no legal contract, no real knowledge of what the interest rate is, what the penalties are, when they might be applied, or what might happen if they default with these lenders.”
However, an effective solution would involve understanding the appeal of illegal loans. The HKS group worked to define the factors contributing to the problem, both at the surface and at deeper levels.
In essence, the formal sector was not offering customers the ease they required. With the illegal lenders, Palomino explains, “You call a cell phone and a guy shows up on a motorcycle with a little bag. He’ll give you $500 and say, ‘Okay, I’ll be back next week.’” Formal loans, in contrast, require signatures, background checks, address verification, and projected cash flow. These are minor hassles for some, like the formally-employed rich, but major hurdles for the poor. As Palomino describes, “These microbusinesses don’t have people to handle paperwork, go back and forth for signatures or pick up money—because then who takes care of selling the apples or bags of rice?” In probing for underlying causes, the small groups discussed how the regulatory demands pertaining to the loan approval process also present a challenge.
When it came to designing the actual product, harnessing technology-enabled mobility was a key theme. It’s to be expected that many clients favor convenience, like gang lenders arriving at their door. Agent banking can offer neighborhood convenience, minus the gangsters. To lessen the costs associated with such a model, incorporating mobile technology at consumer touch points, like data collection via phone or tablet devices for credit scoring, can increase efficiency. The group also expressed the need to work alongside regulators to allow more streamlined rules for small loans. And they acknowledged that the fundamental advantages of formal financial services, like client protection, might not be understood by first-time customers. Marketing could help here, and so could on-site agents conveying this information face-to-face.
The fourth step, how to install monitoring and evaluation into the product, was a particular challenge for several of the small groups. Given the high level of participants and their spread across the microfinance, NGO and regulatory sectors (click here for a breakdown), this indicates an area for closer examination: How often is this element missing when designing products for financial inclusion? In the Peru case, participants included monitoring and evaluation practices now increasingly common among MFIs, such as tracking new and repeat customers through administrative data, quantifying market share, and conducting satisfaction surveys. Further, they proposed watching portfolio quality to evaluate streamlined credit scoring models.
So how did the course’s design steps work as a whole? To your correspondent, who sat in on several small groups throughout the week, the process was useful for the very reason it sometimes frustrated participants: each day they had to deal with a single step, rather than skipping forward toward preconceived solutions.
On the final day of the program, the small groups presented their designs to the class as a whole. In one of the grilling sessions that followed, one program participant asked if the formal lender could work with the loan gangs themselves. The presenter pointed out that this wouldn’t be feasible, since they are borderline criminal organizations, fly-by-night, and possibly armed. Yet the point was well taken that the product the group had designed was based on the model of these gangs—a successful model that could be improved with the consumer protections and lower costs that legitimacy can provide.
Rohini Pande and Asim Ijaz Khwaja of Evidence for Policy Design (EPoD) at Harvard Kennedy School will offer the “Rethinking Financial Inclusion: Smart Design for Policy and Practice” program again next May 10-15, 2015. Visit the HKS Executive Education website for details.
For more information on Financial Inclusion 2020, sign up for campaign updates.
V. McIntyre is a freelance writer based in London.
Image credit: Pierre Pouliquin
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