<span data-contrast="auto">At COP27, the finance ministers from </span><a href="http://www.v-20.org/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">58 climate-vulnerable economies</span></a><span data-contrast="auto"> estimated that 98 percent of their nearly 1.5 billion citizens lack financial protection – a massive source of vulnerability for countries that already have lost about 20 percent of their collective GDP, or $525 billion, due to climate shocks since the year 2000. The past year alone was one of the worst in history: floods in Pakistan killed 1,700 people and left one-third of the country underwater. Persistent drought in East Africa has killed livestock and destroyed livelihoods. In Fiji, communities have been forced to relocate to escape rising sea levels. Initiatives discussed at COP27, such as the “</span><a href="https://www.v-20.org/v20-and-g7-jointly-launch-global-shield-against-climate-risks-at-cop27" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Global Shield</span></a><span data-contrast="auto">” for quickly deploying financial support during climate disasters, and a fund to cover “</span><a href="https://www.v-20.org/climate-vulnerability-monitor%3A-climate-change-causes-loss-and-damage%2C-unequally-impacts-vulnerable-nations-and-indiscriminately-creates-global-crises" target="_blank" rel="noopener noreferrer"><span data-contrast="none">loss and damage</span></a>,<span data-contrast="auto">” are designed to help vulnerable countries deal with the consequences of these shocks.</span>

<span data-contrast="auto">The role of the inclusive finance sector in this context is still up for debate. On the one hand, the role varies depending on the </span><a href="https://openknowledge.worldbank.org/handle/10986/22787" target="_blank" rel="noopener noreferrer"><span data-contrast="none">nature of climate impact</span></a><span data-contrast="auto">: Long-term gradual impact, such as sea-level rise and soil salinization, requires different coping mechanisms compared to sudden climate shocks like floods and hurricanes. On the other hand, the sector still lacks a quantitative layer to assess the role that inclusive finance can play in building resilience at the country level.  The sector has made progress in </span><a href="https://gain.nd.edu/our-work/country-index/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">measuring vulnerability</span></a><span data-contrast="auto"> and understanding the </span><a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks"><span data-contrast="none">impact pathways</span></a><span data-contrast="auto"> and </span><a href="https://www.afi-global.org/thematic-areas/inclusive-green-finance/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">policy options</span></a><span data-contrast="auto"> in </span><a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-and-vulnerable-people-respond-to-climate-change"><span data-contrast="none">green inclusive finance.</span></a><span data-contrast="auto"> But we still have a limited quantitative understanding of how inclusive finance can help prepare for and respond to climate shocks. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">Let’s examine how we can better address these gaps.
</span>

<img class="aligncenter wp-image-45751 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/Climate-shocks1-1-e1677015126745.png" alt="" width="1139" height="523" />
<h1>What Do We Know About Climate Shocks and Finance?</h1>
Answering the question of how households in developing economies prepare for and deal with climate shocks is not straightforward. <a href="https://www.cambridge.org/core/journals/environment-and-development-economics/article/abs/impacts-of-climate-shocks-on-household-consumption-and-inequality-in-india/EFA38EF02ED73ECDBD11D596322C285F" target="_blank" rel="noopener noreferrer">Research</a> has shown that most households affected by shocks face increased expenses. They need to secure their food supplies, make essential house repairs and replace essential tools and equipment, including mobile phones, electricity, livestock and farming equipment, that were damaged or lost. The range of immediate needs is extremely diverse and context dependent, hence virtually impossible to map comprehensively.

What we can model more accurately, however, is the role that financial services can play in the context of climate shocks. Existing literature (e.g.: <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/26511/114634-WP-P162629-PUBLIC-ForumTheRoleofFinancialServicesinHumanitarianCrises.pdf?sequence=1&amp;isAllowed=y">El-Zoghbi et al 2017</a> <a href="https://link.springer.com/article/10.1007/s10584-013-1035-6#citeas">and Linnerooth and Hochrainer 2015</a>) has created useful taxonomies that show that households have limited financial options in face of calamities. They can:

<img class=" wp-image-45753 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/Screenshot-2023-02-21-at-12.37.30-PM.png" alt="" width="572" height="659" />
<h4><strong>1. Tap into their own funds</strong>:</h4>
Households and small businesses often turn to their own savings as the <a href="https://www.centerforfinancialinclusion.org/preparing-msmes-for-future-crises-lessons-from-covid-19">first source of emergency funds</a> to pay for urgent needs. To be accessible in the short term, savings need to be liquid and safe.
<h4><strong>2. Access solidarity networks</strong>:</h4>
Help from social networks, via remittances, mobile payments, and other means, can be vital during emergencies. To receive this money digitally, households need accounts at financial institutions or mobile money accounts, and they need to have access to cash-in/cash-out points such as bank agents and mobile money agents. <a href="https://www.cgap.org/blog/agent-networks-vital-covid-19-response-need-support" target="_blank" rel="noopener noreferrer">Disruptions to the agents’ networks</a> can limit the effectiveness of remittances in the context of shocks.
<h4><strong>3. G2P payments and humanitarian aid</strong>:</h4>
Government payments (G2P) and various forms of humanitarian cash transfers can play a critical role in building resilience to climate shocks. In particular, “<a href="https://www.worldbank.org/en/publication/human-capital/publication/adaptive-social-protection-building-resilience-to-shocks-key-findings" target="_blank" rel="noopener noreferrer">adaptive” social protection</a> programs can be designed to address contexts of emergencies such as climate shocks.
<h4><strong>4. Leverage formal financial services</strong>:</h4>
Households may be able to access <a href="https://www.cgap.org/blog/state-of-climate-responsive-financial-product-landscape" target="_blank" rel="noopener noreferrer">traditional financial services,</a> such as <a href="https://www.sciencedirect.com/science/article/pii/S0305750X16305587" target="_blank" rel="noopener noreferrer">credit</a> and insurance, to address their increased expenses. However, payouts may be slow and access challenging for consumers with thin credit files.

Another critical dimension is the speed with which households can access financial resources. Timing can vary from days or weeks, to far longer. For example, illiquid savings such as land and cattle for a farmer may be of little use in an emergency, irrespective of how valuable these assets are. Similarly, if payouts are too slow, formal loans and insurance products may fail to improve a household’s resilience.
<h1>Which Countries Show Financial Resilience?</h1>
To answer this question, we looked at data showing which countries are most exposed to climate shocks and how easily their populations can access different forms of finance.
<h3>1. Exposure to climate shocks</h3>
Looking at climate shocks at the country level, we found that populous countries like India, China, and the Philippines were the most exposed. To measure this, we used data on natural disasters from <a href="https://www.emdat.be/">CRED</a> and calculated the number of people who were affected by or who had died from a natural disaster between 2011 and 2021. Disasters examined included droughts, extreme temperatures, floods, landslides, storms and wildfires. However, when we normalize the indicator by population size (see table below), we see that some of the world’s poorest countries, like Afghanistan and South Sudan, had some of the highest rates of exposure to climate shocks.

<img class="alignnone wp-image-45774 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/Climate-shocks3-1-e1677081121356.png" alt="" width="3233" height="1657" />
<h3>2. Access to emergency funds</h3>
Next, we measured whether people in countries most exposed to climate shocks could access emergency funds within 30 days.  The chart below shows that South Asian countries such as India, Afghanistan, Bangladesh, and Pakistan are the most vulnerable. Not only do they have the highest number of people affected by climate shocks in absolute terms, households also have the least ability to come up with emergency funds. India is by far the most affected. CRED estimates that almost 500 million people in that country were cumulatively affected by climate shocks in the last decade, primarily from events such as the <a href="https://reliefweb.int/report/india/drought-india-2015-16-when-coping-crumbles-rapid-assessment-impact-drought-children-and" target="_blank" rel="noopener noreferrer">drought in 2015-16</a> and the <a href="https://en.wikipedia.org/wiki/2018_Kerala_floods#:~:text=On%2016%20August%202018%2C%20severe,died%2C%20and%2015%20are%20missing." target="_blank" rel="noopener noreferrer">2018 Kerala floods</a> among others, and yet fewer than 10 percent can access emergency funds within 30 days. Other countries such as the Philippines, Brazil, Kenya and South Africa perform only slightly better, with 15-20 percent of individuals capable of accessing emergency funds; this means that four in five individuals are financially exposed to climate risks.  In contrast, the bottom right quadrant shows that Eastern European countries such as Serbia, Ukraine and Bulgaria are relatively less vulnerable, having lower exposure to climate shocks and higher capacity to come up with emergency funds.

&nbsp;

<img class="wp-image-45785 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/scatter_emergency.png" alt="" width="890" height="741" />
<h3>3. Access to finance</h3>
Our analysis mapped the exposure to climate risks with the levels of access to financial services. We used <a href="https://www.worldbank.org/en/publication/globalfindex/Data" target="_blank" rel="noopener noreferrer">Findex data</a> to measure access to digital payments, savings, loans and G2P payments, which our conceptual framework identified as important coping mechanisms in case of climate shocks. Due to limitations in the data, we do not include analysis on insurance and humanitarian cash transfers.

&nbsp;

&nbsp;

<img class="wp-image-45786 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/combined_chart.png" alt="" width="901" height="1186" />

&nbsp;

There is a lot we can unpack from the figure above. Here are some takeaways:
<h4><strong>Mapping climate risks against access to financial services can be a valuable diagnostic tool to identify vulnerable countries.</strong></h4>
The chart shows, for example, that people living in Afghanistan and South Sudan are the world’s most vulnerable to climate shocks because they are both the most affected by climate emergencies (on a per capita basis) and have the least access to financial services. Countries such as India, Burkina Faso, Mali, and Bangladesh are also at risk as their exposure to climate shocks is high and access to financial services is limited in large parts of their populations.
<h4><strong>High penetration of digital payments indicates a potentially important role for solidarity networks.</strong></h4>
Digital payments have relatively high levels of penetration in most countries. Kenya, Uganda, and Ghana, for example, have a penetration rate above 60 percent. Even Venezuela, which has extremely low access to formal savings and credit, has very high penetration of digital payments. On the other hand, countries like Pakistan, Afghanistan and South Sudan have very low penetration, hence internal remittances are likely to be slower and more expensive, making it more difficult for solidarity networks to be fast and efficient. Several studies have shown the importance of digital payments in contexts of shocks -- for example, the seminal work by <a href="https://www.aeaweb.org/articles?id=10.1257/aer.104.1.183" target="_blank" rel="noopener noreferrer">Jack and Suri</a> in Kenya on the role of MPesa, and in <a href="https://voxdev.org/topic/finance/mobile-money-changing-rural-landscape-evidence-mozambique" target="_blank" rel="noopener noreferrer">Mozambique,</a> mobile money was an essential coping mechanism during severe floods.
<h4><strong>Savings and credit have limited penetration, with a few exceptions.</strong></h4>
The data suggests that a majority of households do not have any savings in formal financial institutions. Countries such as Bangladesh, Venezuela, and Uzbekistan are particularly vulnerable, as their level of savings in formal institutions is extremely low, even lower than access to credit. Countries such as Kenya, Ukraine, and Uganda have relatively high access to both formal savings and credit, though the effectiveness of these services during shocks is not yet fully understood. Formal savings require a functioning and effective cash-in/cash-out network, which <a href="https://reliefweb.int/report/pakistan/pakistan-banks-close-64-branches-affected-areas" target="_blank" rel="noopener noreferrer">can be disrupted</a> in cases of climate shocks.
<h4><strong>G2P payments are low in most countries.</strong></h4>
With a few exceptions such as Indonesia and the Philippines, the level of government transfers is low. While Kenya has the highest levels of financial inclusion overall, it has few G2P payments, despite its high exposure to climate shocks. Countries such as Nigeria, Ghana, Tanzania, and Cameroon also have extremely low levels of G2P penetration, though the populations have been relatively less affected by climate shocks.
<h1>What next?</h1>
We have only scratched the surface in exploring the intersection of climate shocks and inclusive finance.  Much more research is needed if the inclusive finance industry is to fully understand and fulfil its role in building resilience in face of climate shocks. This analysis was based on publicly available historical data, which helps paint a general picture. But it excludes the impact of prolonged and gradual environmental stresses, which are expected to become more pronounced as climate change accelerates. Moreover, each country context is different, and the types of climate shocks they are subject to have very diverse implications. Extreme heat in India, for example, affects livelihoods very differently from floods or droughts in other countries.  And the role that financial services can play also differs from country to country.

Demand, however, for this work is accelerating. Humanitarian organizations are increasingly interested in understanding the role of financial services in responding to emergencies, especially given the frequency and scale of climate-driven shocks. Their efforts so far have largely focused on designing efficient cash transfer programs and working with local savings and loan associations to distribute the financial aid.  As humanitarian organizations focus more on building resilient market systems in the long term, the role of green inclusive finance can help them address emergencies at a market system level.

Exploring the Intersection of Climate Shocks and Financial Inclusion

<em>This post is part of a </em><em>series</em><em> examining the global phenomenon of de-risking and its impact on financial inclusion. To investigate this issue, CFI staff partnered with </em><em>Credit Suisse Global Citizen</em><em> Rissa Ofilada, a compliance lawyer based in the Philippines, to undertake a literature review and conduct interviews with key players in the conversation on de-risking.</em>

NGOs, both large and small, are often on the front lines of humanitarian efforts, assisting people who are affected by conflict and terrorism. It is troubling that so many of these organizations’ efforts are hampered by de-risking. The funding and other forms of non-monetary aid that NGOs provide are directed towards addressing seemingly intractable problems – such as <a href="https://ftsbeta.unocha.org/content/fts-data-use-ocha-humanitarian-community">humanitarian conflict</a>, <a href="http://www.globalhumanitarianassistance.org/report/forced-displacement-poverty-and-financing-seven-facts-you-need-to-know/">forced displacement</a>, natural disaster, and violent extremism – and yet, the de-risking behavior of banks, brought on in response to anti-money laundering and combatting the financing of terrorism (AML/CFT) regulation, often makes it difficult for these organizations to function and serve those who are most in need.

Given the focus on disaster- and conflict-afflicted countries, whose populations are some of the most vulnerable in the world, it is perhaps not surprising that in designing comprehensive AML/CFT risk guidelines for NGOs, governments, financial service providers (FSPs), and regulating authorities have struggled to find the ideal balance between exercising rigorous due diligence and affording more flexibility in the treatment of organizations to reflect their individual capacity.

De-risking affects NGOs when: a) banks refuse to serve them; b) donors cut off funds to broad groups of organizations; and c) NGOs de-risk themselves by getting out of certain lines of operation. A 2014 <a href="http://www.cfg.org.uk/Policy/archive/~/media/Files/Policy/Banking/Briefing%20%20Impact%20of%20banks%20derisking%20activities%20on%20charities%20%20March%202015.pdf">survey</a> conducted by the U.K.-based Charity Finance Group (CFG) highlighted the obstacles that many charities and NGOs operating in “risky” environments face, and the specific financial products and services that are most adversely impacted as a result of de-risking. The most common problems cited by charities in the CFG survey included:  international transfers delayed or denied by banks or correspondent banks; requests for further information before proceeding with transactions; problems getting funds transferred to a partner or own bank account in a high risk country; funds frozen due to a bank's due diligence process; delays in opening bank accounts; accounts closed; and donations blocked.

The CFG also identified a number of characteristics of such “problem locations” that seem to increase the difficultly of accessing financial services for the charities surveyed:
<ol>
 	<li>Area where there is no formal banking structure (e.g., Somalia);</li>
 	<li>Country where regulation is hyper-vigilant (e.g., the U.S.);</li>
 	<li>Country on a sanctions list (e.g., Iran, North Korea);</li>
 	<li>Country in a state of conflict (e.g., Syria, Ukraine);</li>
 	<li>Country where proscribed or terrorist groups are known to operate (e.g., Afghanistan);</li>
 	<li>Country in close proximity to, and typically serving as an access corridor to a region of instability (e.g., Jordan, by providing access to Syria).</li>
</ol>
Some observers worry that the lack of clarification from regulating bodies on the interpretation of AML/CFT legislation with respect to NGOs has created a <a href="https://www.irinnews.org/analysis/2014/12/31">two-tiered system</a> whereby larger and more capable organizations easily navigate the labyrinth of governmental and financial actors and regulations, while smaller organizations with fewer resources face a more existential crisis as they have great difficulty implementing compliance controls that are both vague and burdensome. Conversely, a top AML official at Wells Fargo <a href="http://www.globalcenter.org/publications/understanding-bank-de-risking-and-its-effects-on-financial-inclusion-2/">expressed a similar sentiment</a> on a perverse impact of de-risking on smaller FSPs which might not have enough capacity to adequately implement AML/CFT regulations, and which might not be as proactive in de-risking, closing their doors to certain client types:  “[t]he ironic result of de-risking is re-risking … you are sending [higher-risk customers] to banks that probably can't handle it.”

In the current policy environment, it is understandable if AML/CFT compliance specialists convince their clients to de-risk by exiting certain business segments or ceasing operations in “risky” countries. However, as one executive from a charitable organization <a href="http://files.acams.org/pdfs/2016/Derisking-Final.pdf">put it bleakly</a>, “[t]he impact of de-risking is real and strong. In trying to prevent money laundering and terrorism finance, restrictions on sending money are resulting in the death of persons, particularly victims of terrorism.”

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2016/10/05/does-global-de-risking-create-financial-abandonment-the-background-you-need-to-know/">Does Global De-Risking Create “Financial Abandonment”? The Background You Need to Know</a>

<a href="https://cfi-blog.org/2016/09/29/de-risking-why-should-you-care/">De-Risking: Why You Should Care?</a>

<a href="https://cfi-blog.org/2016/10/13/who-is-to-blame-for-global-de-risking-the-united-states/">Who Is to Blame for Global De-Risking? The United States?</a>

&nbsp;

&nbsp;

Does De-Risking Hinder NGOs and Humanitarian Relief?

<em>&gt; Posted by Jeffrey Riecke, Communications Associate, CFI</em>

[getty src="142765195?et=R5H1wf3HRzVY85zP-SHj7A&amp;socialOnLoad=off&amp;sig=MCzrHiaz1fbKeXXBgrpdooZt9BGrF3EX8HvxLFGuv-s=" width="506" height="339"]

Islamic finance is expected to expand substantially in 2015, from 2014’s total of <a href="http://www.brecorder.com/money-a-banking/198/1138766/">$2.1 trillion to $2.5 trillion</a>, according to figures released last week by the Al-Huda Centre of Islamic Banking and Economics. In 2011, the industry had assets of about <a href="http://www.cgap.org/topics/islamic-products">$1 trillion</a>. Islamic microfinance, the segment of Sharia-compliant services targeting clients at the base of the pyramid, only occupies a small slice of the pie, at 1 percent of all Islamic finance globally. However this uptick in Sharia-compliant finance, as well as encouraging recent support for the 650 million Muslims living on less than 2 dollars a day, suggest a rising tide for Islamic microfinance.

The industry findings indicate that not only did Islamic finance surpass the $2 trillion landmark in 2014, it gained traction in nascent markets and entered new ones. Markets still green in offering Islamic finance that showed growth in 2014 include Morocco, Tunisia, Azerbaijan, Libya, and several non-Muslim-majority countries including Nigeria, Tanzania, and South Africa. Among the new markets where Islamic finance took root last year are Australia, Brazil, and China. Globally, there are 1,500 organizations working in Islamic finance across 90 countries – 40 percent of which are non-Muslim-majority countries. The expansion of Islamic finance opens the door for the many Muslims whose beliefs preclude them from accepting finance with interest rates and fee structures outlawed by Sharia doctrine.

Islamic microfinance, which has typically grown slower than its mainstream microfinance counterpart, could be in for a big year. In 2013, Islamic microfinance had an estimated <a href="http://cfi-blog.org/2013/04/26/sharia-and-savings-islamic-microfinance/">1.28 million clients</a>, about 82 percent of whom lived in three countries – Bangladesh, Indonesia, and Sudan. (Nevertheless, the number of Islamic microfinance clients in Muslim-majority Bangladesh is dwarfed by the 8 million conventional microfinance borrowers in the country.) Along with the Al-Huda estimation of 19 percent growth in 2015 for all Islamic finance, a report by TechNavio from November found that the Islamic microfinance market would grow at a compound annual growth rate of about <a href="http://www.prnewswire.com/news-releases/global-islamic-microfinance-market-2014-2018-281593461.html">20 percent</a> between 2014 and 2018. The current Microfinance Market Outlook forecasts <a href="http://www.microfinancegateway.org/library/microfinance-market-outlook-2015">15-20 percent</a> growth for 2015.

Strong government support, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/534-global-microscope">instrumental for financial inclusion efforts</a>, has been <a href="http://www.emirates247.com/business/economy-finance/islamic-banking-finance-set-to-reach-dh9-1trn-in-2015-2015-01-01-1.575128">demonstrated</a> for Islamic microfinance in countries including Yemen, Afghanistan, Sudan, Malaysia, and Pakistan. As part of its larger Financial Inclusion Program, the State Bank of Pakistan launched the partially U.K.-funded <a href="http://www.sbp.org.pk/AC&amp;MFD/events/FICF-Round-3-Guidelines.pdf">3<sup>rd</sup> Financial Innovation Challenge Fund</a>, which focuses on Islamic microfinance. Until the application deadline of February 20, 2015, the bank will accept proposals for grants to test solutions for delivering low cost Islamic microfinance services to more markets. One aim of the challenge is to develop Pakistan’s base of Islamic finance professionals.

GIZ, the German government’s international development agency, is <a href="http://www.reuters.com/article/2014/11/05/islam-microfinance-idUSL6N0SH04020141105">working with CGAP and others</a> to develop model regulations, education, and trainings to expand Islamic microfinance in developing countries. A current GIZ study is exploring demand factors, while another is comparing Islamic finance regulations in five countries. A study by GIZ and CGAP on Islamic microfinance aims to find ways to lower costs – a key obstacle for product adoption. Difficulties in adapting traditional microfinance products to Islamic microfinance have limited product offerings, with the <a href="http://www.cgap.org/news/innovation-islamic-microfinance">most popular</a> being <em>murabaha</em>, a cost-plus-markup product for asset purchases. Last year’s CGAP <a href="http://www.cgap.org/news/pakistan%E2%80%99s-wasil-foundation-wins-islamic-microfinance-challenge">Islamic Microfinance Challenge</a>, a global contest to identify innovative Sharia-compliant products, was themed “Beyond Murabaha.”

We look forward to following the developments in Islamic microfinance throughout the year.

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2013/04/26/sharia-and-savings-islamic-microfinance/">Sharia and Savings: Islamic Microfinance</a>

<a href="http://cfi-blog.org/2013/01/15/continuing-the-conversation-on-inclusion-in-the-arab-world/" target="_blank" rel="noopener">Continuing the Conversation on Inclusion in the Arab World</a>

<a href="http://cfi-blog.org/2014/08/07/financial-inclusion-of-disabled-people-in-bangladesh-the-broken-promises-of-mfis/" target="_blank" rel="noopener">Financial Inclusion of Disabled People in Bangladesh: The Broken Promises of MFIs</a>

&nbsp;

Set to Grow in 2015: Islamic Microfinance

<em>&gt; Posted by Danielle Piskadlo and Jeffrey Riecke, Senior Program Specialist and Communications Associate, CFI</em>

In Iraq and Afghanistan, about <a href="http://www.iraq-businessnews.com/tag/poverty/" target="_blank">23</a> and <a href="https://www.cia.gov/library/publications/the-world-factbook/geos/af.html" target="_blank">35 percent</a> of people live below the poverty line. Both countries have microfinance industries, though they’re small and financial inclusion rates are low. In the effort to combat these low levels of inclusion, an unlikely financial service player, the U.S. military, is using the principles of microfinance to optimize fund dispersal by local ground commanders in order to strengthen communities in conflict areas.

[caption id="14538" align="aligncenter" width="586"]<a href="https://www.flickr.com/photos/29456680@N06/5604883445/"><img class="wp-image-14538 size-none" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/04/5604883445_497004a959_b.jpg" alt="" width="586" height="392" /></a> Charkh, Afghanistan[/caption]

We recently become aware of this military effort when contacted by a group of West Point cadets interested in learning more about microfinance. In the conversation we learned that U.S. military ground commanders in Iraq and Afghanistan each receive about five thousand dollars a month to allocate as they see fit toward development projects in the local communities where they are posted. The money can go towards public roads, schools, medical clinics – projects contributing to community rebuilding and reconstruction. These allotments from ground commanders are part of the Commander’s Emergency Response Program (CERP) developed in 2008. Currently, ground commanders don’t have specific guidance on how they should allocate these funds so they often rely on suggestions from village elders, who the cadets recognized are sometimes biased and self-interested in the projects they recommend.

The cadets are therefore working to develop a portfolio optimization template - based on the principles of microfinance - to guide ground commanders on how to allocate their CERP funds as microgrants to help raise the standard of living within local communities. The project objective is to enable ground commanders to allocate their funds as loans to small-businesses, entrepreneurs, and individuals, facilitating income growth, economic development, and community strengthening. The template is modeled after microfinance practices because of similarities in distribution methods found between microcredit loans and the financial aid provided by ground commanders through CERP funds.

The cadets identified economic development and stability as important goals for the military that in impoverished regions help to reduce the number of people attracted to extremist behavior. Ideally, utilizing this financial support in the form of microgrants to start and grow businesses would help mitigate the extremism that often results in regions of conflict, violence, poverty, and instability. Using CERP funds to provide microgrants is a grassroots way of helping to kick-start economic development in areas where the microfinance sector is otherwise nascent.

To design the tool, the team is utilizing historical microfinance loan data on dimensions including return on investment, loan size, and intended versus actual loan use, and reaching out to members of the microfinance community.

According to the MIX, Iraq’s lending portfolio is about <a href="http://www.mixmarket.org/mfi/country/Iraq" target="_blank">US$ 143 million across 66,566 borrowers</a>. Afghanistan’s <a href="http://www.mixmarket.org/mfi/country/Afghanistan" target="_blank">US $136 million across 251,846 borrowers</a>. For comparison, the nearby Azerbaijan microfinance industry has US$ 3.2 billion in loans and 792,666 borrowers. Iraq and Afghanistan have populations of roughly 33 million and 30 million, while Azerbaijan is about 9 million. Financial inclusion <a href="http://www.centerforfinancialinclusion.org/fi2020/mapping-the-invisible-market/country-profiles" target="_blank">in Iraq is at about 11 percent, and in Afghanistan 9 percent</a>.

There is a need for available capital in many conflict countries where U.S. military ground commanders have capital and microfinance providers are scarce. Whether the military is in a position to act effectively as grantors is a question that remains to be seen. Regardless, if ground commanders continue dispersing funds within impoverished and unstable communities where MFIs are not present, and employ the principles of microfinance in doing so, that seems to be an advance for both the military and microfinance communities.

<em>Image credit: <a href="https://www.flickr.com/photos/29456680@N06/5604883445/" target="_blank">isafmedia</a></em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2014/01/31/mobile-money-in-afghanistan-an-uphill-battle/" target="_blank">Mobile Money in Afghanistan: An Uphill Battle</a>

<a href="http://cfi-blog.org/2014/03/19/mobile-moneys-newest-outpost/" target="_blank"><span style="text-decoration:underline">Mobile Money's Newest Output</span></a>

<a href="http://cfi-blog.org/2013/07/08/fighting-for-inclusion-in-an-expectant-brazil/" target="_blank">Fighting for Inclusion in an Expectant Brazil</a>

The Military as a Provider of Microgrants in Conflict Areas

<em>&gt; Posted by Adam Brown, International Development Discourse Group (IDDG) Member</em>

<em>The following post was originally published on <a href="http://iddgblog.wordpress.com/2014/01/24/mobile-money-in-afghanistan-an-uphill-battle/" target="_blank">the IDDG Blog</a>.</em>

Since 2008, the Afghan mobile phone provider, <a href="https://www.cimicweb.org/cmo/afg/Documents/Economic/Mobile_Phone_Banking_in_Afghanistan.pdf">Roshan, has worked to bring mobile money services to Afghanistan</a>. With the support of USAID, all four of Afghanistan’s major mobile phone providers are currently developing mobile money capabilities. The highly successful rollout of Kenya’s mobile money and banking service, M-Pesa, has spurred a flurry of similar startup efforts – <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2010/02/Scaling-mobile-money.pdf">over</a><a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2010/02/Scaling-mobile-money.pdf"> 72 in 42 countries</a>. Many countries, however, have failed to experience the kind of success that M-Pesa achieved, and Afghanistan is no exception.
<p style="text-align:left"><a href="http://iddgblog.wordpress.com/2014/01/24/mobile-money-in-afghanistan-an-uphill-battle/" target="_blank"><img class="aligncenter  wp-image-13861" style="border:0;margin-top:10px;margin-bottom:10px" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/01/afghanistan.jpg" width="525" /></a>While the mobile money program in Afghanistan is in its nascent stages, the factors that helped M-Pesa to succeed are generally lacking. The most important of these are, 1) a dominant mobile carrier; 2) an economy that depends on long distance money transfers; and 3) customer trust in the system. The Afghan mobile phone market is too divided to create the kind of widespread network required to attain the critical mass necessary for a sustainable customer base. Further complicating the issue is the fact that Afghans generally do not rely on remittances, limiting the utility that could draw future users. To fix that, mobile money providers should include banking mechanisms early in their programs instead of tacked on only once a money transfer system is in place. However, trust in banks, especially since the <a href="http://www.nytimes.com/2013/03/06/world/asia/afghanistan-convicts-21-in-kabul-bank-scandal.html?_r=0">Kabul Bank scandal</a>, may be too low for Afghans to put their money into another bank-like mechanism. While mobile money is not destined to fail in Afghanistan, proponents of mobile banking and USAID should adjust their expectations for success, or at least be ready to address the above issues.</p>
<p style="text-align:left">The gold standard for mobile money is Kenya and its M-Pesa system. Four factors facilitated success of mobile money in Kenya. First, Safaricom, Kenya’s largest mobile phone provider, already owned over <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2010/02/Scaling-mobile-money.pdf">70 percent of the mobile phone market</a> in Kenya when it began rolling out M-Pesa. Secondly, once a user adopted M-Pesa, they could be reasonably certain that those around them would also be using M-Pesa and not a mobile money system from a competing provider. This meant Safaricom had already overcome the critical mass issue that plagues so many other mobile money startups. Third, <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2010/02/Scaling-mobile-money.pdf">Kenya’s population relied heavily on remittances</a>, with many urban dwelling breadwinners sending money back to their families in rural areas. M-Pesa’s ability to send Kenyans’ remittances more quickly and reliably than traditional money transfer systems rapidly built up a widespread customer base. Finally, the brand name of Safaricom, along with reliable and consistent positive user experiences worked to build the trust of users, while word of mouth has helped <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2010/02/Scaling-mobile-money.pdf">M-Pesa add almost 12 million users</a> since its launch.</p>
Afghanistan offers a drastically different example. Beset by a market <a href="https://www.cimicweb.org/cmo/afg/Documents/Economic/Mobile_Phone_Banking_in_Afghanistan.pdf">divided among four major providers</a>, <a href="http://countrystudies.us/afghanistan/57.htm">familial structures that are geographically localized</a>, and a <a href="http://www.frogdesign.com/pdf/frog_In_The_Hands_Of_God.pdf">deep-seeded distrust of banking systems</a>, mobile money systems are hard pressed to set up effective networks. Unlike the near monopoly held by Safaricom in Kenya, Afghanistan’s mobile market is shared by four major mobile providers. If a user chooses to open a mobile money account with any one of the providers, it is likely that only a quarter of the people in Afghanistan would be on the same mobile network and thus able to send and receive money with them. With only a fourth of the market share, it is difficult for mobile money programs run by any of the mobile providers to offer the kind of widespread utility needed to attract new users. To fix this, mobile phone companies and their foreign investors should work on developing a common mobile financial infrastructure that allows users to send and receive money across providers. Giving users the ability to send money unrestricted by inter-company compatibility will remove the biggest hurdle to integrating mobile money.

<em>To read the rest of this post, visit <a href="http://iddgblog.wordpress.com/2014/01/24/mobile-money-in-afghanistan-an-uphill-battle/" target="_blank">the International Development Discourse Group Blog</a>.</em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2013/09/30/savings-is-the-key-to-merchant-payments-in-developing-countries/" target="_blank">Savings Is Key to Merchant Payments in Developing Countries</a>

<a href="http://cfi-blog.org/2013/11/04/innocent-ephraim-on-mobile-money-innovation-to-catalyze-inclusion/" target="_blank">Innocent Ephraim: On Mobile Money Innovation to Catalyze Inclusion</a>

<a href="http://cfi-blog.org/2013/09/06/savings-groups-payments-in-south-asia-cash-or-cows-top-picks-of-the-microfinance-blogosphere/" target="_blank">Savings Groups, Payments in South Asia, Cash or Cows? Top Picks of the Microfinance Blogosphere</a>

Mobile Money in Afghanistan: An Uphill Battle

<em>&gt; Posted by Isobel Coleman, Senior Fellow for U.S. Foreign Policy, Director of the Civil Society, Markets, and Democracy Initiative, the Council on Foreign Relations</em>

<a href="http://blogs.cfr.org/coleman/2013/05/30/financial-inclusion-and-the-worlds-unbanked-population/" target="_blank" rel="noopener"><img class="alignright wp-image-11357" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/06/mobile-money-m-pesa.jpg" alt="" width="310" /></a>

<em>The following post was <a href="http://blogs.cfr.org/coleman/2013/05/30/financial-inclusion-and-the-worlds-unbanked-population/" target="_blank" rel="noopener">originally published</a> on <em>Democracy in Development, </em>Coleman's CFR blog.</em>

Imagine life without a bank account. Completing a simple financial transaction can require traveling a distance, incurring expenses, and losing precious income. Savings are more difficult to track and certainly don’t earn interest. Theft or loss of the proverbial “cookie jar” is a constant worry. Indeed, studies show that informal savers lose as much as <a href="http://blogs.cfr.org/coleman/2012/07/31/the-slow-shift-from-cash-economies-to-mobile-banking/" target="_blank" rel="noopener">25 percent</a> of their hard-earned cash each year due to theft and loss. Yet for over <a href="http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,contentMDK:23173842~pagePK:64165401~piPK:64165026~theSitePK:469372~isCURL:Y,00.html" target="_blank" rel="noopener">2.5 billion people</a> globally, this inconvenient, inefficient, and expensive reality is the case.

There are many reasons to believe that the number of unbanked people will shrink significantly in years to come, with important positive implications for economic growth and poverty reduction. First, grassroots and country-level efforts, both nonprofit and for-profit, are already showing how “unbanked” doesn’t have to be the status quo—and these efforts are greatly facilitated by mobile phones. Kenya is well-known for the widespread use of its mobile money system <a href="http://blogs.cfr.org/coleman/2011/04/13/the-transformative-power-of-mobile-banking/" target="_blank" rel="noopener">M-Pesa</a>, which allows people to pay for goods and services through cell phones instead of with cash. Started in 2007, M-Pesa has already been used by the <a href="http://blogs.cfr.org/coleman/2012/07/31/the-slow-shift-from-cash-economies-to-mobile-banking/" target="_blank" rel="noopener">vast majority</a> of Kenya’s adults.

Second, major financial institutions are supporting efforts to give more of the world’s population access to bank accounts and standard financial tools. Last summer, I <a href="http://blogs.cfr.org/coleman/2012/07/13/new-partnerships-for-mobile-banking-in-the-developing-world/" target="_blank" rel="noopener">wrote about</a> Visa’s purchase of the mobile payments system Fundamo and the collaboration between USAID and Citi to expand financial inclusion, a promising instance of big financial institutions bringing their resources to bear on closing the financial inclusion gap.

Third, governments–recognizing the value of getting citizens into the financial system–are driving change by increasingly moving to electronic payments. A USAID-backed <a href="http://blogs.cfr.org/coleman/2012/07/31/the-slow-shift-from-cash-economies-to-mobile-banking/#more-2622" target="_blank" rel="noopener">program in Afghanistan</a>, for instance, has enabled the government to pay civil servants directly through mobile money. Graft was so reduced that some police officers <a href="http://blogs.cfr.org/coleman/2012/07/19/an-update-on-mobile-technology-in-development-part-ii/" target="_blank" rel="noopener">mistakenly believed</a> that they had received a 30 percent raise. Some countries are beginning to migrate their large cash-transfer programs and other socioeconomic support for the poor onto electronic benefit cards and mobile systems. <a href="http://fletcher.tufts.edu/CEME/publications/~/media/Fletcher/Microsites/CEME/pubs/pdfs/Apr%2011%20Mexico%20Kills%20Cash.pdf" target="_blank" rel="noopener">Mexico</a> and <a href="http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/282044-1323805522895/WB_2012_Guidelines_10_11_12.pdf" target="_blank" rel="noopener">Brazil</a> have moved aggressively in this direction. India’s emerging efforts in this area could be a game changer for that country. As of this year, it is now depositing pensions and scholarship money directly into bank accounts for <a href="http://blogs.cfr.org/coleman/2013/01/11/missing-pieces-indias-cash-transfers-goals-for-2030-and-more/" target="_blank" rel="noopener">245,000 people</a>. The real shift could come if and when it is able to achieve its goal of replacing its hugely inefficient subsidy programs with direct cash transfers to the poor distributed electronically through mobile phones and benefit cards. Nonprofits such as <a href="http://givedirectly.org/" target="_blank" rel="noopener">GiveDirectly</a> are also <a href="http://blogs.cfr.org/coleman/2012/05/08/mobile-money-and-direct-cash-transfers/" target="_blank" rel="noopener">experimenting</a> with direct cash transfers through mobile technology.

At a meeting on financial inclusion that I hosted yesterday at the Council on Foreign Relations with Bob Annibale, global director of microfinance at Citigroup, and Shamshad Akhtar, assistant secretary-general for economic development at the UN’s Department of Economic and Social Affairs, we discussed many of these points. You can access the audio <a href="http://www.cfr.org/emerging-markets/rest-leapfrogging-west-rising-incomes-technological-innovation-driving-financial-inclusion-emerging-markets/p30805" target="_blank" rel="noopener">here</a>. The speakers noted that the microfinance revolution began the drive for financial inclusion of the world’s poorest some forty years ago. The focus was on credit because extending small, non-collateralized loans was an innovation the nonprofits behind the movement were able to do. Today, due to changes in regulation and technology, microfinance institutions are now able to provide a range of financial services—including savings, insurance and electronic payments—to the very poor, which should speed up the pace of change in financial inclusion around the world. In some sub-Saharan African countries, still upwards of 70 percent of the population has no access to financial services. As Bob Annibale pointed out, even in Mexico, an OECD country with a growing middle class, some 50 percent of the population is still unbanked.

The <a href="http://www.centerforfinancialinclusion.org/" target="_blank" rel="noopener">Center for Financial Inclusion</a> notes that as more developing countries move through their demographic transitions, with larger working-age and smaller dependent populations, greater financial inclusion is critical for <a href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/01/demographic-window-fact-sheet.pdf" target="_blank" rel="noopener">realizing the benefits</a> of this “demographic dividend.” Its <a href="http://www.centerforfinancialinclusion.org/fi2020" target="_blank" rel="noopener">Financial Inclusion 2020 Campaign</a> aims to help bring about total financial inclusion “using the year 2020 as a focal point to galvanize action.” With partners such as Visa, Citi, MasterCard Worldwide, and the Gates Foundation, it should make great progress in expanding financial services globally. Stay tuned for more about FI2020 in the run-up to their <a href="http://www.centerforfinancialinclusion.org/fi2020/global-forum" target="_blank" rel="noopener">Global Forum</a> in London at the end of October.

<em>Image credit: <a href="http://blogs.cfr.org/coleman/2013/05/30/financial-inclusion-and-the-worlds-unbanked-population/" target="_blank" rel="noopener">Noor Khamis/Courtesy Reuters/CFR</a></em><em><a href="http://janchipchase.com/2010/08/mobile-money-afghanistan/" target="_blank" rel="noopener">
</a></em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2013/02/21/first-look-at-fi2020s-recommendations-to-advance-financial-inclusion/" target="_blank" rel="noopener">First Look at FI2020's Key Findings to Advance Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/02/04/first-report-from-fi2020s-mapping-the-invisible-market-highlights-implications-for-financial-inclusion-as-worlds-demography-changes/" target="_blank" rel="noopener">First Report from FI2020's Mapping the Invisible Market Highlights Implications for Financial Inclusion as World's Demography Changes</a>

<a href="http://cfi-blog.org/2013/01/28/cfi-citi-and-visa-inc-launch-financial-inclusion-2020-to-accelerate-universal-financial-access/" target="_blank" rel="noopener">CFI, Citi, and Visa Inc. Launch Financial Inclusion 2020 to Accelerate Universal Financial Access</a>

Financial Inclusion and the World’s “Unbanked” Population

Lucciana Alvarez Ruiz

Edoardo Totolo

Tess Johnson

Danielle Piskadlo

Adam Brown

Isobel Coleman

Afghanistan

Bangladesh

China

East Asia and Pacific

Ghana

India

Kenya

Pakistan

Philippines

South Asia

Sub-Saharan Africa

Uganda

Iran, Islamic Rep.

Jordan

Korea, Rep.

Somalia

Syrian Arab Republic

Australia

Azerbaijan

Brazil

Colombia

Dominican Republic

Guatemala

Indonesia

Libya

Malaysia

Mexico

Morocco

Nigeria

Paraguay

Peru

South Africa

Sudan

Tanzania

Tunisia

United States

Yemen, Rep.

Zambia

Iraq

Challenges and Crises

Credit

Enabling Environment

Financial Health

Payments

Remittances

Resilience

Saving

Risk Management

Aging and Older Adults

Consumer Protection

Financial Capability

Financial Inclusion Strategy

Fintechs

Housing Finance

Impact Investing

Microfinance

Persons With Disabilities

Policy, Regulation and Government Initiatives

Social Performance

Women

Youth

Agent Banking

Mobile Banking

Blog Post

China’s economy has experienced tremendous growth in recent years, with a booming micro, small, and medium enterprise (MSME) market. There are over 50 million MSMEs in China that collectively account for over 60% of China’s GDP and over 50% of the government’s tax income. These businesses create 80% of total employment in China’s urban areas.

Despite China’s overall economic growth, the need to foster full financial inclusion is still imperative. In 2010, 38 million MSMEs lacked access to formal financial services, forcing them to borrow informally from friends, family, and moneylenders.

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

Jeffrey Riecke

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

South Africa is a global hub for fintech innovation. Accion supports and advises South African innovators using technology to help entrepreneurs expand their businesses and families protect their homes around the world.