<h4>“When an institution finds itself in severe crisis, it’s normal to panic. As delinquencies mount, staff morale declines, and investors start calling and demanding answers, managers can be forgiven if they pine for the simplicity of the OMS — the Ostrich Management System. There is nothing quite so calming as sticking one’s head in the sand while the world goes crazy…”</h4>
Weathering the Storm II – conducted as part of our partnership with the Mastercard Center for Inclusive Growth and produced with the <a href="https://www.e-mfp.eu/" target="_blank" rel="noopener noreferrer">European Microfinance Platform</a> – is a follow-up to the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">original report and case studies</a>, published in the aftermath of the financial crisis. This updated Weathering the Storm synthesizes experiences and lessons from 16 institutions in 14 countries on four continents over 15-year period (including five new case studies from <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovina</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-financiera-fama/" target="_blank" rel="noopener noreferrer">Nicaragua</a>, and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a>). Nearly every type of institution – from NGO to bank – is included.

The goal is to inform best practices for triaging the critical and the merely very important in order to survive and thrive. Content is organized by a hierarchy of needs for survival: liquidity, confidence, portfolio, and capital. Readers will come away with a better understanding of how leaders – with the support of investors and ecosystem actors -- stabilized their financial institutions and embarked on a full recovery. The hope is that no one reading this will go through a similar crisis, but if so, Weathering the Storm II will be a useful guide in addition to a history lesson.

Weathering the Storm II: Tales of Survival from Microfinance Crises Past

Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – Azerbaijan, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovina</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.

Aynur Aliyeva began 2015 in limbo and facing uncertainty. Her CEO had just left Azerbaijan and gone back to the Philippines, thousands of miles away, having been denied a renewed work visa a few months earlier. As his deputy at the Azerbaijani microfinance company Viator, Aliyeva stepped in, working feverishly with lawyers and government authorities to bring the CEO back. Unbeknownst to her, a far greater challenge loomed just ahead.

On February 21st of that year, the Azerbaijani currency, the manat, lost 25 percent of its value — all in a single day. For a country whose currency had been steady since at least 2000, even during the height of the global financial crisis in 2008-09, such a devaluation was a major shock. It capped a year of severe economic pressures, with falling oil prices over the past year having already been felt in every corner of the petroleum-driven economy. Even with that, the devaluation was something new entirely — “snow in the middle of summer,” thought Aliyeva.

These pressures were bearing down on Viator. Like other MFIs in the country, much of Viator’s portfolio was lent out in USD-denominated loans, and most of its debt was likewise in dollars. Now its borrowers — few of whom actually earned USD incomes — were facing large payment shocks, on top of already being affected by the slowing economy. Viator was entering an existential crisis. Meanwhile, Aliyeva spent those initial few months navigating between a remote CEO, concerned investors and staff, and a loan portfolio that was fast deteriorating.

<img class="wp-image-40041 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-1-v2-1-1024x620.png" alt="" width="400" height="242" />In April 2015, Aliyeva was finally appointed CEO. With that uncertainty resolved, Viator embarked on a crisis response. Its first step was to change its lending policy; until then, Viator had been lending between a third and half of its loans in USD. With the devaluation, it began to sharply curtail this practice, bringing USD disbursements down to zero by the end of the year. That was just in time, because on December 21st, the manat was suddenly devalued again, this time by another 32 percent. With these two devaluations, the manat had lost half of its value — and the decline would continue through 2016 into 2017.

The resulting fear and uncertainty, combined with a major recession, destroyed trust and threw the entire financial sector into turmoil. Viator was a small fish, had no deposits, and certainly did not meet the too-big-to-fail test. Its primary shareholder was a Norwegian NGO that, while morally supportive, had little financial expertise and no access to additional capital. If Viator was to survive, it would have to do it on its own.

And survival was indeed at stake. Several of the country’s MFIs, far larger and more important than Viator, would not make it.

Aliyeva had never run an MFI in the midst of crisis, but that had its advantages, too — she carried no “founder’s syndrome” baggage; whatever mistakes were made previously were made by her predecessor. This allowed her to ignore the past and focus entirely on the present and the future.

<img class="wp-image-40055 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-2-v4-1024x660.png" alt="" width="600" height="387" />In the meantime, in Viator’s portfolio, things were going from bad to worse. By the end of 2015, 47 percent of its loans were overdue. A year later, that number had grown to 77 percent, comprising mostly loans that were by then more than 12 months behind. Faced with such numbers, most managers would panic.

Aliyeva did not panic. With many of the country’s financial institutions — banks and MFIs alike — hunkering down in the midst of crisis, Viator suddenly found a wide-open market. In the face of uncertainty and volatile cash flows, people still needed to borrow. And so Viator continued to lend. Indeed, no matter how bad things got during the long crisis period, Viator never stopped lending.

Having already switched to entirely local currency loans, Viator focused on the best clients and low-risk products. Chief among these was the jewelry loan, which allowed clients to monetize the gold received during weddings and other family events — a common cultural practice in Azerbaijan. With this secure and relatively liquid collateral, Viator could lend during the depths of the crisis, and still keep credit risk low.

Of course, this new lending was far below pre-crisis levels. Midway through 2016, monthly disbursements averaged AZN 0.6 million, or 70 percent lower than a year earlier. By mid-2017, this was cut again by half, down 83 percent from the level set two years before. These lower disbursements were accompanied by lower operating costs; in 2016 alone, operating expenses were halved, mainly through salary cuts and staff attrition, as well as layoffs that prioritized retention of the best-performing and most experienced staff.

<img class="aligncenter size-full wp-image-40044" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v2-e1604330128251.png" alt="" width="1200" height="438" />

Though shrinking, Viator was by no means closing its doors. Despite the greatly reduced levels, new disbursements proved crucial to its survival. By January 2017 — a year after the second devaluation that marked the full onset of the crisis — repayments from its new portfolio of jewelry-backed loans accounted for nearly two-thirds of Viator’s total cash inflows. Indeed, for nearly five years during the period 2015-2019, loan repayments were Viator’s sole source of cash inflows. That proved crucial not only for allowing Viator to continue disbursing new loans, but also to continue to repay its debt.

<img class="aligncenter wp-image-40045" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v2-1024x587.png" alt="" width="797" height="457" />

At the start of 2015, nearly all of Viator’s funding was in the form of debt from foreign social investment funds, mostly in foreign currency. Given the depth of the crisis, its investors were naturally worried. Many had also invested in other MFIs in Azerbaijan, not surprising considering that just before the crisis, the country was one of the five largest markets in the world for microfinance investment. Now these investors were faced with preserving capital and minimizing losses.

Complicating matters further, some investors had disbursed their investments as recently as February 2015, while others were already near the end of their loan maturities. With Viator in violation of multiple debt covenants, investors faced the same coordination problem that arises with nearly every crisis-stricken MFI: if all of them were to follow the loan covenants and accelerate their debts, they would be fighting for the meager leftovers of a liquidated entity. Not only would they face steep financial losses, they would also be abandoning an MFI that was one of the few institutions still providing loans to excluded rural households in Azerbaijan.

<img class="aligncenter size-large wp-image-40047" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v2-1-1024x350.png" alt="" width="1024" height="350" />

To nearly all investors, the answer was clear: the debt had to be restructured. Despite this, the negotiations among them proved challenging. Some of the investors had prior experience handling workouts, but for others, this was the first time. There were additional obstacles that some negotiators faced when needing to explain these inter-creditor discussions and tentative agreements to their own credit committees, some of which had limited experience investing in microfinance or even in emerging markets more generally. For one credit committee, the sole reference point for debt restructuring was a court-supervised process — a drawn-out and deeply uncertain option in the context of Azerbaijan. Educating them in these realities took time.

One crucial input into these negotiations was an assessment and recommendations from an external advisor, hired by Viator in early 2016 upon the recommendation of one of its investors. The advisor had extensive experience managing situations such as this, having worked at a crisis-stricken MFI in Bosnia and Herzegovina during its turnaround following the 2008 crash. Her report found that while Viator was deeply affected by the crisis, its operations were sound and it remained a viable institution that could survive the crisis. The report also contained a series of suggestions to Viator, especially aimed at strengthening collections on overdue loans — advice that Aliyeva readily adopted.

The consultant went further and invited several of Viator’s senior staff to her former MFI in Bosnia to directly observe the collections systems the MFI had instituted during its turnaround. This experience, along with training of Viator’s collections staff, were crucial factors into Viator’s crisis response.

The work this consultant did for Viator was not only important to the MFI; included with her report was a series of cash flow projections that showed the turnaround to be very much possible. These projections would prove a critical input for Viator’s investors.

Throughout this time, Viator’s transparency and openness with both the external advisor and with its investors played an important role in building trust. As it happens, several of the fund managers had also invested in another Azerbaijan MFI that took an approach that was diametrically opposite from Viator’s. Its unwillingness to communicate and share information made Viator’s openness even more notable in the investors’ eyes — and made them more willing to make the difficult decisions required for the workout.
<blockquote class="pullquote--left">Viator’s transparency and openness with both the external advisor and with its investors played an important role in building trust.</blockquote>
With the consultant’s report concluded in June 2016, negotiations among Viator’s creditors swung into high gear, and finally in August 2016, they signed an inter-creditor agreement that extended all loans, regardless of maturity. The agreement specified a single repayment schedule for all investors, who would be paid pro rata, but using a formula that gave some additional preference to debts with the earliest maturities. The agreement also fixed a discounted interest rate of 5 percent for all creditors. Over the course of the next two years, reflecting the depth of the crisis, this agreement would be amended twice more, adding further discounts to the interest rate.

During these negotiations, Aliyeva was adamant that rather than funneling all excess inflows from loan repayments back to its creditors, Viator should use a substantial portion of these cash flows in order to reinvest in new lending. For investors, this meant they would have to sacrifice some repayments in the short-term. It is here that the external consultant’s projections proved crucial, for they showed the value of reinvesting cash flows into new loan disbursements. Indeed, a number of Viator’s investors used these same projections as a benchmark to monitor Viator’s performance over the coming months.

<img class="alignright wp-image-40058" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-1-1024x713.png" alt="" width="550" height="383" />With its liquidity thus stabilized, Viator could focus on managing its solvency situation. Here, things were arguably even more challenging. It certainly helped that Viator entered the crisis well-capitalized, with equity comprising 40 percent of total assets at the end of 2014. Even so, that generous level of capital was not enough when 63 percent of its pre-crisis portfolio was six or more months delinquent by the end of 2016. One way that Viator handled this challenge was by adapting its provisioning practices. At the outset of the crisis in 2015, it provisioned generously (100 percent for all loans overdue by more than 90 days), in 2016-18 provisioning dropped to as low as 64 percent, even when nearly all overdue loans had by then exceeded 12 months.

The decision to change its provisioning rules helped conserve much needed equity, which by 2017 had eroded to just 13 percent of assets. Doing so bought crucial respite during the years that non-performing loans continuing to fester on its books. Finally, rescue arrived in 2019, four years after the onset of the crisis, when the Azerbaijani government implemented a rescue package for the microfinance sector. Through it, Viator received both a grant and a subsidized loan from the Central Bank of Azerbaijan that allowed it to cover a major portion of its losses. Only then did Viator once again fully provision for its delinquent portfolio. Almost exactly five years after the onset of the crisis in February 2015, Viator could finally close the last page on this difficult episode and truly look forward.

A few months later, it was facing COVID-19…

What are some dos and don’ts and key factors of success that the microfinance sector can learn from the Viator case? CFI’s forthcoming report, Weathering the Storm II, will draw on lessons from this case and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovenia</a>, India, Palestine and Nicaragua. See also CFI's original <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">Weathering the Storm</a> report from 2011.

Weathering the Storm II: A Case Study of Viator

A <a href="http://www.un.org/apps/news/story.asp?NewsID=57013#.WUkqMevyuM8">record number of people</a>, more than ever in our lifetimes, are fleeing their homes due to wars, persecution, and disasters. Nearly <a href="http://www.unhcr.org/en-us/figures-at-a-glance.html">20 people</a> are forcibly displaced every minute, amounting to 28,300 people each day. Roughly <a href="http://www.unhcr.org/en-us/figures-at-a-glance.html">65 million</a> people are currently displaced worldwide, according to the United Nations Refugee Agency. This figure is about the size of the <a href="http://www.cnn.com/2017/06/20/world/world-refugee-day-worst-crisis-in-history/">population of France</a> or the United Kingdom. About 22 million of the displaced are refugees (displaced across country borders). And more than half of whom are under the age of 18.

Today on World Refugee Day, we call on the international community to provide compassion for the displaced and support and solidarity for those working tirelessly to help them. It’s an opportunity to reflect on what we can do to overcome inaction, indifference, and fear.

Two areas in need of attention, as <a href="http://www.independent.co.uk/news/world/europe/refugees-120-migrants-drown-latest-mediterranean-disaster-boat-sinks-asylum-seekers-nigeria-sudan-a7798961.html">today’s news</a> has so painfully affirmed, <a href="http://www.unhcr.org/news/briefing/2017/6/5948dfb64/world-refugee-day-reports-three-new-shipwrecks-mediterranean-sea.html">are enhanced water rescue operations</a> and more viable and safer alternatives for those in need of international protection. Today we learned that <a href="http://www.unhcr.org/news/briefing/2017/6/5948dfb64/world-refugee-day-reports-three-new-shipwrecks-mediterranean-sea.html">several ships</a> that disembarked from the coast of Libya over the weekend sank and more than 120 refugees are feared to have drowned in the Mediterranean Sea.<a href="https://www.flickr.com/photos/126123741@N03/25780260202/in/album-72157663792457593/"><img class="wp-image-23747 alignright" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/06/25780260202_9b483f09f9_k.jpg" alt="" width="620" height="413" /></a>

The death toll this year of refugees attempting to cross the Mediterranean <a href="http://www.independent.co.uk/news/world/europe/refugees-120-migrants-drown-latest-mediterranean-disaster-boat-sinks-asylum-seekers-nigeria-sudan-a7798961.html">passed 1,000 in April</a>, a number that wasn’t reached until the end of May last year. The International Organization for Migration (IOM) indicates that during 2017 so far, at least 1,850 people have lost their lives trying to cross the Mediterranean.

As we’ve covered extensively on this blog, the financial inclusion industry is well-positioned to support internally displaced individuals and refugees. By offering payments, credit, insurance, and savings products, inclusive finance providers can help refugees stay connected to sources of financial support, transition beyond reliance on economic assistance programs, and ultimately contribute to their host countries.

Here are a few of our previous posts for you to read, or re-read. They offer an introduction to the topic of financial inclusion of refugees, outline the challenges and opportunities to serve this especially vulnerable client segment, including via new technologies and business models, and share success stories for others to learn from.
<ul>
 	<li><a href="https://cfi-blog.org/2016/09/20/financial-inclusion-of-refugees-an-introduction/">Financial Inclusion of Refugees: An Introduction</a>, by Daniel Balson, Lead Specialist for Eurasia and MENA, the Smart Campaign</li>
 	<li><a href="https://cfi-blog.org/2016/09/27/financial-inclusion-of-refugees-azerbaijan-case-study/">Financial Inclusion of Refugees: Azerbaijan Case Study</a>, by Daniel Balson, Lead Specialist for Eurasia and MENA, the Smart Campaign</li>
 	<li><a href="https://cfi-blog.org/2016/10/07/financial-inclusion-of-refugees-al-majmoua-in-lebanon/">Financial Inclusion of Refugees: Al Majmoua in Lebanon</a>, by the Social Performance Task Force (SPTF)</li>
 	<li><a href="https://cfi-blog.org/2017/03/09/the-digital-demands-of-the-displaced-dont-track-me-dont-expose-me-dont-cut-me-off/">The Digital Demands of the Displaced: Don’t Track Me, Don’t Expose Me, Don’t Cut Me Off</a>, by Kim Wilson</li>
 	<li><a href="https://cfi-blog.org/2017/02/14/refugees-and-humanitarian-assistance-which-kind-of-aid-is-best/">Refugees and Humanitarian Assistance: Which Kind of Aid Is Best?</a>, by Jeffrey Riecke, Senior Specialist, CFI</li>
 	<li><a href="https://cfi-blog.org/2016/02/09/financial-inclusion-and-immigration-in-europe-disrupting-identity-norms/">Financial Inclusion and Immigration in Europe – Disrupting Identity Norms</a>, by Brenda Santoro and Ahmed Dermish with Kim Wilson</li>
 	<li><a href="https://cfi-blog.org/2016/11/15/the-future-of-refugee-financial-inclusion/">The Future of Refugee Financial Inclusion</a>, by Daniel Balson, Lead Specialist for Eurasia and MENA, the Smart Campaign</li>
</ul>
Whether you work in the inclusive finance sector or not, we hope you’ll take action. For more information, head to the UN Refugee Agency <a href="http://www.unhcr.org/en-us/get-involved.html">website</a>.

Image credit: <a href="https://www.flickr.com/photos/126123741@N03/25780260202/in/album-72157663792457593/">Julian Buijzen via Flickr.</a>

It’s World Refugee Day - Financial Inclusion Stakeholders Take Note!

&gt; Posted by Daniel Balson, Lead Specialist for Eurasia and MENA, the Smart Campaign

This is the fourth and final blog entry in a <a href="https://cfi-blog.org/tag/financial-inclusion-of-refugees-blog-series/">series</a> exploring how financial services can be leveraged to assist refugee populations. This entry will consider the future of refugee financial services and what our sector can do to ensure that the future is an inclusive one that serves genuine needs and protects refugee rights. 

Syrian refugees shop at a market with their bank card given by the Turkish Red Crescent.

It is worth asking whether the financial inclusion sector is at the forefront of the movement to financially include refugees. The humanitarian sector has long struggled to determine how to provide assistance during a crisis in a way that is sustainable, effective, and accountable. Recently, humanitarian organizations such as Oxfam and the International Finance Corporation (IFC) have begun considering whether it’s possible to use payments as an on-ramp for financial inclusion of refugees. Cash transfers have historically facilitated corruption and failed to make it into the hands of the people who needed it most. In-kind donations of goods such as tents, food, sleeping material and other items undermined local merchants who made their livelihoods selling these very goods. In response, the sector has begun experimenting with digital financial payments. In Afghanistan, for example, the World Food Program (WFP) has <a href="https://btca-prod.s3.amazonaws.com/documents/185/english_attachments/Afghanistan_Case_Study_May2016.pdf?1463507198">issued e-vouchers</a> and mobile money to cover food aid. The first e-voucher pilot was carried out on a small user base of 603 recipients in Kabul for a three-month disbursement cycle from April to June 2014. The total value of e-vouchers disbursed was US$72,360. The program proved successful and the WFP launched several follow-on pilots across the country in the subsequent year.

By eliminating the need for central distribution points, e-vouchers helped insulate staff and beneficiaries from security risks. Biometric technology such as finger-print scanning and chip and pin technology helped the WFP overcome literacy challenges and safeguard client data. As a result, e-vouchers were more effective at protecting clients’ rights to privacy and helped deliver a more transparent and approachable payment product.

Lebanon has proved to be another test case for digital financial services and refugee populations. Lebanon has welcomed 1.2 million refugees within its borders, mostly from Syria, Iraq, and Palestine. As such, it is the country with the most refugees per capita in the world. Here too, digital financial services have played a pivotal role. By creating points of access with merchants and ATMs, aid organizations have <a href="http://www.cashlearning.org/downloads/untappedhumanitariandemand-abusinesscaseforexpandingdfs.pdf">developed a fully functioning distribution network</a>, allowing refugees to use their pre-paid cards in more transactions than ever before.

With the success of these seemingly disconnected technology programs, humanitarian organizations have begun speaking to their financial sector counterparts to explore how these pilots could transition to an on-ramp for genuine financial inclusion. Whereas in the past, humanitarian organizations became adept at quickly installing basic, flexible, and effective financial networks to use in times of crisis, the new approach seems to be focused around developing a more lasting system that can continue to serve at risk populations long after reconstruction. For example, more and more humanitarian organizations are considering how payment networks can evolve into a system that facilitates savings, credit, and insurance.

What can donors do better?

To achieve results on this front, donors, aid agencies, and humanitarian organizations will have to take a critical look at prior approaches and incentives. For example, the sector may wish to reconsider whether old monitoring and evaluation paradigms are best suited to providing sustainable financial services to refugees. Previously, auditors assessing the efficacy of an intervention might have counted how much money was distributed and spent. However, if we are to work towards developing long-standing financial channels for refugees, it is imperative that we account for and encourage savings. Evaluators may be required to develop newer and more accurate metrics to determine whether pre-existing payment channels can grow to accommodate the diverse array of financial services refugees will require.

Additionally, donors and practitioners will need to learn to tell their story better. In doing so, they might consider what counts as a success and why it matters to governments, donors, practitioners, and to refugees themselves. New narratives would be most effective if boosted by emerging research on refugee financial services. For example, if the sector were to demonstrate that financially included refugees are more likely to return to their country of origin, it could use this data to make a stronger case before skeptical donors. Donors champion financial organizations like Al Majmoua in Lebanon and Microfund for Women in Jordan that experiment with financial services for refugees.  By highlighting successes, donors could use their considerable megaphone to reinforce the importance of such programs and demonstrate that they can deliver financial services for refugees in a sustainable and effective manner. Such publicity could be paired with a concerted focus on overcoming the perception of refugees as risky borrowers: donors could guarantee some portion of loans issued.

What can practitioners do better?

Practitioners can find new ways to leverage digital services to address challenges refugees face. Myriad avenues are being explored; a few of the more promising ones are highlighted below:
<ul>
 	<li>Currently, refugees risk losing credit histories that they carefully built in their home countries – as well as credit histories they start from scratch and build in their host country. Credit score portability can help mitigate these challenges and encourage refugees to take up financial services in their host country as well as return to their home countries when it is safe, with the knowledge that their sound financial decision making will be recognized.</li>
</ul>
<ul>
 	<li>Refugees often arrive to their host countries with few fixed assets and limited collateral. Creditors can harness the power of crowdfunding to create digital stores of collateral for potential refugee clients, allowing them to get a foot in the door of the credit marketplace.</li>
</ul>
<ul>
 	<li>As refugees might arrive with limited documentation, they are often unable to demonstrate their creditworthiness. Alternative creditworthiness analysis tools offer one promising solution. By leveraging a refugee’s social media presence, contacts and networks, loan officers can get a sense of the client’s trustworthiness and diligence, allowing the provider to lower the interest rate on an otherwise prohibitively risky product.</li>
</ul>
<ul>
 	<li>Many refugees face political persecution in both their home country and their host country. As such, they are often reticent to divulge personal information necessary to secure a loan. Strong digital safeguards can help protect a refugee’s privacy, anonymize data and minimize risk to the client’s contacts back home.</li>
</ul>
Technology, of course, will not be a substitute for appropriate strategizing and good sense. Many of the core obstacles facing refugees’ financial inclusion can be best solved not through novel technical approaches but by reviewing and carefully internalizing lessons already uncovered by the sector. For example:
<ul>
 	<li>Mobile lending units allow the product to come to the client in cases where the client cannot come to the product. In Syria, UNRWA developed a small fleet of mobile lending units, allowing loan providers to reach clients in areas with few security threats but limited financial infrastructure.</li>
</ul>
<ul>
 	<li>Appropriate and flexible products can help an institution adapt to a rapidly changing situation. In Syria, UNRWA launched its <a href="http://www.unrwa.org/sites/default/files/content/resources/microfinance_department_annual_report_2015.pdf">BST (“Bastat”)</a> product aimed specifically at street peddlers and designed to cope with their frequent displacement, in part through low repayment amounts. A separate product provides home reconstruction loans for Syrians. These highly tailored products help address real and pressing needs faced by Syrian victims of conflict. These strategies are an effective illustration of appropriate product design, the first of the Smart Campaign’s Client Protection Principles. You can learn more about how the Smart Campaign views this principle <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">here</a>.</li>
</ul>
<ul>
 	<li>Providing financial services to refugees is often a contentious proposition. In countries where resources are limited, politics are fraught and conflict is a recent memory, the public and the government are often skeptical when precious funds are redirected to temporary and foreign visitors. Recognizing this reality, institutions can minimize disruption by supporting activities that do not compete with the local economy. For example, in Lebanon, Al Majmoua has funded refugee families who make aghabani table cloths, a traditional Syrian textile in high demand throughout the Middle East.</li>
</ul>
<ul>
 	<li>Institutions serve refugees best when they focus on people. As we’ve seen in <a href="https://cfi-blog.org/2016/09/27/financial-inclusion-of-refugees-azerbaijan-case-study/">our Azerbaijan case study</a>, one of the easiest and most effective ways financial institutions can learn about how to serve refugees and the internally displaced is to hire them. Refugee staff come with an intuitive feel for the clients and their culture and an eagerness to work and learn. Additionally, financial institutions have found success by creating joint refugee and host borrower groups to create interdependence and build bridges between individuals who might not normally associate with one another. Additionally, by offering financial products to women refugees specifically, institutions are more likely to assist an underserved market segment and less likely to be seen as intrusive.</li>
</ul>
What governments can do better:

Meaningful progress on providing financial services to refugees requires the assistance of governments. Elected and appointed officials set the rules of the market, determine the country’s overarching policy towards refugees, signal moral support for migrants’ rights, and channel public concerns. Their support is fundamental to ensuring that refugees and the internally displaced can access meaningful economic opportunities.

Government officials can begin by stimulating an honest dialogue about the political dimensions of refugee financial inclusion and steering the rhetoric away from a binary option. Rather than forcing the public to make an imagined choice between citizen rights and refugee assistance, governments could explore avenues for how refugees can be financially included while benefiting their host communities.

Recognizing that refugees are some of their most vulnerable populations, officials can enact rules that would ensure their protection. By encouraging formal institutions to enter the market before they are superseded by less reputable lenders, officials can prevent the emergence of a black market for credit and thwart abuses before they appear.

While financial inclusion practitioners know far more about what it takes to assist refugees today than ten or even five years ago, there is much more to learn. Are refugees with more access to capital more likely to return to their home country? What types of financial services offered to refugees have the greatest net-positive effect on their host communities? These and other questions require additional research. Governments have the resources and the moral suasion to commission and implement such studies and should be vocal about the need to learn more on this critical topic.

Have you read?

<a href="https://cfi-blog.org/2016/09/20/financial-inclusion-of-refugees-an-introduction/">Financial Inclusion of Refugees: An Introduction</a>

<a href="https://cfi-blog.org/2016/09/27/financial-inclusion-of-refugees-azerbaijan-case-study/">Financial Inclusion of Refugees: Azerbaijan Case Study</a>

<a href="https://cfi-blog.org/2016/10/07/financial-inclusion-of-refugees-al-majmoua-in-lebanon/">Financial Inclusion of Refugees: Al Majmoua in Lebanon</a>

The Future of Refugee Financial Inclusion

&gt; Posted by Daniel Balson, Lead Specialist for Eurasia and MENA, The Smart Campaign

The following is the second post in a four-part blog series on the financial inclusion of refugees and the internally displaced. The first post can be found <a href="https://cfi-blog.org/2016/09/20/financial-inclusion-of-refugees-an-introduction/">here</a>.

In 1992, sporadic clashes between ethnic Armenians and Azerbaijanis in the mountainous region of Nagorno Karabakh erupted into full scale war. By the time a ceasefire was reached two years later, the territory lay under Armenian control, and between 800,000 and 1 million Azerbaijanis were displaced from their homes. Since the end of hostilities, ethnic Azerbaijani internally displaced persons (IDPs) who fled from Armenian-controlled to Azerbaijani-controlled territory have continued to face difficulties accessing economic opportunity. However, a financial sector inclusive to IDPs is emerging, lessening these difficulties and demonstrating that IDPs can be a bankable client segment. 

First, it’s important to distinguish IDPs from refugees. Unlike refugees, IDPs have not crossed an international border when fleeing violence or disaster; they are likely to remain in the same (or similar) cultural, linguistic, religious, and political milieu as the one they fled. It is likely that their documentation and identity is still recognized by the relevant local authorities. Nonetheless, IDPs form a specifically vulnerable population. Across the world, the majority of IDPs continue to lag the rest of the population on most economic indicators. Globally, IDPs are frequently forced to rely on services from informal actors in the grey economy, particularly when the government is the cause of their original displacement. In Azerbaijan and elsewhere, many IDPs <a href="http://www.unhcr.org/protection/convention/4bd7edbd9/azerbaijan-analysis-gaps-protection-internally-displaced-persons-idps.html">rely on government or international assistance</a> for basic provisions and are unable to secure property rights to their government-provided homes. Children of internally displaced persons typically find their schooling interrupted.

To address the financial difficulties faced by the IDP population, the government registers internally displaced Azerbaijanis and provides them with housing and a modest stipend. Additionally, it has put forward numerous schemes to promote IDPs’ self-reliance. While the housing assistance has proved successful in helping alleviate IDP poverty, the economic development schemes have yielded limited results. Because rural IDPs reside in areas far from major towns and near the conflict zone, they face limited opportunities to participate in commerce or trade. Moreover, Azerbaijani IDPs are unable to gain access to the country’s most fertile land, which was claimed and farmed long before they were displaced. As a result, many Azerbaijani IDPs are concentrated in urban and semi-urban areas where arable land is scarce and of poor quality.

While the details of their displacements vary, the vast majority of Azerbaijani IDPs have very limited access to financial services. For the most part, major financial institutions in Azerbaijan consider investing in internally displaced persons to be a risky proposition.

Major financial institutions shy away from providing IDPs with financial products because they require very small loans that have historically been expensive to administer. Often, IDPs lack a permanent or stable income as well as property in their name to use as collateral. Many IDPs suffer serious disabilities that prevent them from working, a legacy of the mine fields circling the conflict area. IDPs disproportionately live in or around the conflict zone, and violent incidents are not uncommon. Basic sanitation and access to energy are often substandard. These challenging conditions take a toll on the population’s health and circumscribe their ability to grow a business. Moreover, financial institutions fear their efforts to enforce collections actions against internally displaced families would die in the courts.

With major financial organizations refusing to provide credit, a number of internationally-funded boutique microlenders have stepped in to fill the gap. Today, 16 percent of IDPs bank with microcredit organizations, compared to 3 percent of the Azerbaijani population as a whole. Using seed capital provided by international non-governmental and development organizations, institutions including Eurasia Credit, Caspian Invest, Caucasus Credit, and Azeristar Microfinance focus on providing small loans for IDPs.

These small financial firms quickly found that IDPs were not as risky as many had suggested. Prior to the recent devaluation of Azerbaijan’s currency, internally displaced clients demonstrated an outstanding recovery percentage – with 98 percent of loans repaid on time. While financial over-indebtedness is a common problem across the country, IDP clients were no more susceptible than other Azerbaijanis. As the price of oil fell and Azerbaijan’s central bank devalued the manat, IDP clients proved that, in some ways, they are the less risky demographic. Since IDPs typically take on far smaller loans, their credit was less likely to be dollarized, leaving them less susceptible to currency fluctuations.

As this Azerbaijani IDP market segment became established, participating financial institutions found that to stay competitive, they had to differentiate themselves by providing exceptional customer service and client protection. Financial organizations began hiring IDPs and training them to serve as branch managers, thereby providing the firm with an internal perspective on the trials and opportunities IDPs faced. By hiring and training community members, financial institutions quickly learned that to succeed, they needed to cultivate the talents of people who culturally knew the communities in which they operated.

Financial institutions serving IDPs in Azerbaijan quickly identified several policies and practices that could be implemented to protect this population. Even more than ordinary Azerbaijanis, IDPs require flexible loans. Given their perceived riskiness, the precariousness of their economic situation, and their limited assets, IDPs face higher interest rates. To compensate, financial organizations offer refugees more flexible products with a variety of repayment schedules and conditions. Agriculture loans are developed with especially accommodating terms to ensure vulnerable farmers are able to meet their obligations. And branches serving IDPs are typically given a greater degree of decision-making autonomy, allowing them to modify and adjust products based on the feedback they receive. Some branches are even empowered to adjust financial products to a particular customer’s needs (within certain bounds).

Readers familiar with <a href="http://smartcampaign.org/">the Smart Campaign</a> will see that the above strategies are closely tied to the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">client protection principles</a>. Appropriate Product Design and Delivery, for example, ensures that providers take adequate care to design products and delivery channels so as not to cause clients harm and to take into account clients' unique characteristics. Fair and Respectful Treatment mandates non-discrimination. Mechanisms for Problem Resolution requires recourse mechanisms so that clients who wish to complain can do so and will have their complaints taken seriously and handled responsibly.

While these positive client protection approaches ameliorate the harm caused to Azerbaijani IDPs by financial institutions, IDPs remain a particularly vulnerable client segment. Even though they are unlikely to borrow dollarized loans, the country’s economic downturn, precipitated by a currency devaluation and falling commodity prices, hits them hardest nonetheless. In regions with large refugee populations, Portfolio at Risk has risen to 30 percent. When quizzed about refugees’ unique economic vulnerability, a representative of Azerbaijan’s microfinance association said, “It’s really simple. When Azerbaijan sneezes, the IDPs catch pneumonia.”

Far from being unreliable borrowers, Azerbaijani IDPs have catalyzed a diverse and active industry of microfinance institutions catering to their needs. IDPs have shown themselves willing and able to help their institutions serve them better both by providing feedback to and working with their creditors. Nonetheless, they remain an economically disadvantaged population, highly vulnerable to economic downturns and shut out of the best economic opportunities their country has to offer. If special care is not taken to understand their needs and protect their rights, they risk being left substantially worse off than their neighbors during times of economic trouble.

&nbsp;

Financial Inclusion of Refugees: Azerbaijan Case Study

&gt; Posted by Daniel Balson, Lead Specialist for Eurasia and MENA, The Smart Campaign

The following is the first post in a four-part blog series on the financial inclusion of refugees and the internally displaced. 

The unresolved Syrian conflict and the slow collapse of nation-states on Europe’s periphery have brought the topic of refugees back into the media spotlight. Whereas previously, refugees were often seen as a problem of the Global South, events have now brought migrants to Europe’s doorstop, forcing OECD countries to consider new strategies to provide for and integrate this population. Yet as refugee assistance becomes a hot topic once again, old myths and fictions have reemerged. Refugees are often described as highly transitory populations with few marketable skills who will inevitably rely on long-term government assistance. But these stereotypes are frequently inaccurate.

Providers of financial services for the poor can play a critical role in empowering refugee populations. By offering credit, insurance, savings and other products, these providers can help refugees transition beyond reliance on economic assistance programs, achieve independence, and contribute to their host countries. To attain this goal, however, the financial inclusion sector needs to gain a better understanding of the specific challenges and opportunities that refugees face and the financial needs they are likely to have. This is the first in a series of blog posts where we’ll discuss some of these critical questions. What happens when a previously included individual is excluded from the formal financial system? What special vulnerabilities do refugee populations face and what special protections can help ensure that they are not taken advantage of by lenders? How have other countries used financial services to help meet this challenge in the past?

In this post, we discuss two commonly told refugee narratives and explore what we already know about including forced migrants in the formal financial sector.

Myth 1. Refugees are transitory. To begin, how long do refugees typically stay in a refugee camp? It’s a lot longer than most people think. The most commonly quoted statistic (see <a href="http://www.cnn.com/2016/05/18/architecture/sean-anderson-moma-refugee-architecture/">CNN</a> and <a href="http://www.huffingtonpost.com/dale-buscher/why-refugees-need-to-make_b_256589.html">The Huffington Post</a>) is that the average length of stay in a refugee camp is 17 years. <a href="http://www.bbc.co.uk/programmes/p03wgr2n#play">According to the BBC</a>, this figure comes from a partial misreading of a 2006 report by the United Nations High Commission for Refugees (UNHCR), which used the figure to describe the average duration of refugee situations rather than the average duration of refugee encampment. More accurate statistics are hard to come by: the definition of a refugee often depends on the individual or organization deploying it. Nevertheless, while the average stay in a refugee camp may be well under 17 years, it is clear that refugees are far from the transitory population they are often depicted as in the popular imagination.

<a href="#_ftnref1" name="_ftn1"></a>

Myth 2. Refugees are an economic burden and do not contribute to the local economy. The world currently has the highest number of forcibly displaced people since World War II, but this has not been matched by an increase in pathways to increased economic opportunities for this vulnerable population. Were they to gain access to these opportunities, they could provide a boon for their host countries.

Research has shown that refugees aren’t merely passive victims but are engaged in a wide and diverse array of productive economic activities, leveraging a pool of extensive skills and experiences acquired both in their host countries and countries of origin. Indeed, a <a href="http://www.rsc.ox.ac.uk/refugeeeconomies">recent report</a> by the Refugee Studies Center at the University of Oxford challenges commonly-held myths that refugees are necessarily an economic burden, are technologically illiterate, and exclusively dependent on international assistance. A <a href="http://www.fmreview.org/sites/fmr/files/FMRdownloads/en/preventing/zetter.pdf">study</a> of the Dadaab Refugee Camp on the Kenya-Somalia border assessed the camp’s economic value at $14 million dollars – a full 25 percent of the economy of the province that hosted it. A <a href="http://www.irinnews.org/report/101624/benefits-hosting-refugees">joint study</a> by the United Nations Development Program (UNDP) and the UN’s refugee agency, UNHCR, found that, for every dollar invested in refugee assistance, roughly $.50 returns into the local economy through the multiplier effect. This shouldn’t be surprising. Scholars often term war and natural disaster as “social status agnostic;” physicians are as likely to flee violence as manual laborers, though they often do so under different circumstances and in different ways.

Despite their tremendous economic potential, refugees face very specific challenges in securing quality financial products that are rarely encountered by other vulnerable populations. If they were forced to flee conflict or natural disaster, they are likely to have had limited prior preparation. As such, refugees often lack the fixed assets necessary to secure a business or consumption loan, even if they had such assets where they originally lived. While many countries are parties to international agreements that enshrine the refugee’s right to work, refugees often encounter legal obstacles that prevent this right from translating into a reality. Of 15 countries examined by UNHCR, nearly <a href="http://asylumaccess.org/wp-content/uploads/2014/09/FINAL_Global-Refugee-Work-Rights-Report-2014_Interactive.pdf">45 percent</a> have effectively prohibitive legal barriers to employment for refugees. As a result, refugees are often drawn to black and grey markets, rendering them unable to document income as is necessary to secure a loan. Refugees have little say in where they reside. They often have a limited grasp of the language and culture and minimal experience navigating the bureaucracy in their host country. Finally, refugees are often perceived as a flight risk, and are not trusted by financial service providers to return borrowed funds. In cases where they are able to secure access to financial services, unscrupulous lenders may view them as easy targets for abuse, given their limited access to recourse. Moreover, creditors are rarely interested in arranging a lending infrastructure that can continue to serve refugee populations after they return to their home country. As such, credit scores built up in exile are valueless when refugees return to their countries of origin.

Systemic and concerted research on refugees and financial inclusion is new, and many questions remain unanswered. In the 1960s and 1970s, <a href="http://www.unhcr.org/en-us/research/epau/3f978a894/unhcr-refugee-livelihoods-self-reliance-brief-history.html">the UNHCR began to study</a> how refugees could be assisted in a sustainable way. The original plan was to develop large agricultural communities in host countries that, through international aid, would become economically self-reliant and subsequently ceded to the host-country, which would assume responsibility for governance and service provision. This approach proved unsuccessful and was overtaken in the subsequent decade by a focus on emergency response prompted by the collapse of communism and by famine in the Horn of Africa. In the 1990s, UNHCR saw a resurgence of interest in refugee livelihoods and assistance programs built around self-reliance in recognition of the greater prevalence of protracted displacement versus immediate crises. Organizations including NGOs and the UN began to explore how to leverage microcredit to assist refugees and the internally displaced.

In a recent effort to stimulate interest in and understanding of how to offer financial services to refugees, the Social Performance Task Force (SPTF) partnered with the UNHCR to <a href="http://sptf.info/working-groups/refugee-microfinance">design guidelines</a> for financial service providers. In addition to building the skills of financial service providers, the guidelines help dispel myths about refugee populations and encourage the adoption of delivery mechanisms and services that meet this population’s specific needs.

There’s no doubt that the financial inclusion sector is far better informed about providing assistance to refugees today than in the past. Still, major knowledge gaps remain. First, while the research has provided greater clarity on what it takes to sustain financial services for refugees, it has rarely explored how these services are experienced from the perspective of the refugee. Second, the research pays little attention to new products, services and methods of delivery that have emerged in the past few years. Finally, ongoing research has yet to explore how refugee populations can be protected from abuse by lenders, given their specific and unique needs.

This blog series will make a very modest attempt to explore some of these gaps through three follow-on blog posts. The next post will look at Azerbaijan, where the microfinance sector emerged specifically to serve internally displaced persons from that country’s war with Armenia. In a subsequent post, we will speak about Al Majmoua, a pioneering Lebanese institution that provides loans to mixed groups of Lebanese and Syrian refugee women. Finally, we’ll take a look at the future of financial services provision for refugees and consider how new technologies are opening up a world of possibilities for assisting migratory populations.

<a href="#_ftnref1" name="_ftn1"></a>

Have you read?

<a href="https://cfi-blog.org/2014/12/08/smart-certification-the-view-from-azerbaijan/">Smart Certification: The View from Azerbaijan</a>

<a href="https://cfi-blog.org/2016/03/31/client-voices-at-the-georgian-parliament/">'Client Voices' at the Georgian Parliament</a>

<a href="https://cfi-blog.org/2016/02/09/financial-inclusion-and-immigration-in-europe-disrupting-identity-norms/">Financial Inclusion and Immigration in Europe – Disrupting Identity Norms</a>

Financial Inclusion of Refugees: An Introduction

&gt; Posted by the Smart Campaign

<img class="alignright wp-image-5103" src="https://centerforfinancialinclusionblog.files.wordpress.com/2012/01/smart-campaign2.jpg" alt="" width="251" height="147" />It’s been an exciting few months for client protection in the microfinance industry. FINCA Kyrgyzstan, MBK Ventura in Indonesia, SKS Microfinance in India, and a number of other MFIs around the world demonstrated that they successfully integrate the client protection principles into their practices and joined the rapidly growing list of institutions that are <a href="http://smartcampaign.org/certification/">Smart Certified</a>. Today, we’re pleased to share that the number of clients across all the Smart Certified institutions surpassed the 15-million-client benchmark.

To date, 28 microfinance institutions, from Latin America to Eastern Europe and South Asia, have achieved Smart Certification, including some of the world’s largest and best-known MFIs. These institutions are not only ensuring that their clients are equipped and best positioned to effectively use financial services, they’re also demonstrating to their respective markets and the global industry the good business that is responsible microfinance.

“Momentum to improve client protection is accelerating, with scores of MFIs across the globe improving their client protection practices, and being recognized for it through certification,” stated Isabelle Barrès, director of the Smart Campaign, in a press release. In Eastern Europe, there are certified institutions in Azerbaijan, Tajikistan, Bosnia, Serbia, and Kyrgyzstan. In Kyrgyzstan, with the certification of the nation’s network of FINCA MFIs, the country’s market crossed an important threshold. “As measured by MixMarket data, more than 50 percent of all microfinance clients in Kyrgyzstan do business with certified MFIs,” noted Barrès. The certified MFIs in Kyrgyzstan include the first formal financial institution serving low-income entrepreneurs in the region, as well as a relatively young institution, and encompass a range of service offerings like individual, group, and agricultural loans. Elsewhere in the region, the proportion of clients in certified institutions by country market is about 45 percent in Bosnia, and 40 percent in Tajikistan.

India, which boasts the largest microfinance market in the world, is making significant client protection progress. There are six Smart Certified MFIs in the country, serving over 10 million clients, more than 25 percent of the market. Along with demonstrating the necessary standards of client care throughout their operations, these institutions stand out for unique practices that are exemplary for the industry. Ujjivan, in combating a previous incidence of multiple borrowing, created an educational video and disseminated it to over a million individuals, including every new client, using local television channels and lending group meetings. Of the expanding influence of certified institutions, Isabelle Barrès said, "When a critical mass of institutions in a market demonstrates good practices, pressure grows on other institutions to do the same.”

The <a href="http://microfinanceceoworkinggroup.org/">Microfinance CEO Working Group</a>, a collaboration comprising many of the world’s leading microfinance institutions, has advanced the cause of client protection. “We’re approaching the tipping point in the adoption of consumer protection standards for the poor,” indicates Anne Hastings, managing director of the Microfinance CEO Working Group. “Thanks to the unwavering commitment of the leadership of these organizations, the majority of the 220 MFIs in the Working Group’s networks are either certified or working hard to become certified.” The Working Group includes the CEOs of Accion, FINCA, Freedom from Hunger, Grameen Foundation, Opportunity International, Pro Mujer, Vision Fund and Women’s World Banking, as well as the directors of microfinance of CARE International, BRAC and BRAC International.

As you might know, in addition to our efforts to embed client protection in the microfinance industry through certification, the Campaign conducts a variety of projects to engage the industry and further responsible microfinance. We facilitate client protection trainings and capacity-building for stakeholders around the world, including through the recently-launched <a href="http://www.smartcampaign.org/news-a-highlights/responsible-microfinance-facility" target="_blank" rel="noopener">Responsible Microfinance Facility</a>. A few weeks ago we released a research publication examining <a href="http://www.smartcampaign.org/tools-a-resources/1030" target="_blank" rel="noopener">what happens to microfinance clients who default</a>. The report along with other Smart publications is available on the Campaign website. Also on the Campaign website are dozens of <a href="http://www.smartcampaign.org/tools-a-resources" target="_blank" rel="noopener">tools and resources</a> for providers - available in English, Spanish, French, Arabic, Russian, and Portuguese.

Stay tuned for more updates on certification and all our other Smart Campaign happenings in the months ahead.

*All client numbers are calculated using MixMarket data

Have you read?

<a href="http://cfi-blog.org/2014/12/08/smart-certification-the-view-from-azerbaijan/">Smart Certification: The View from Azerbaijan</a>

<a href="http://cfi-blog.org/2013/05/09/how-smart-assessments-and-client-protection-certifications-work-harmoniously/">How Smart Assessments and Client Protection Certifications Work Harmoniously</a>

<a href="http://cfi-blog.org/2015/02/09/taking-it-from-the-top-how-market-infrastructure-sets-the-rhythm-of-default-management/" target="_blank" rel="noopener">Taking It from the Top - How Market Infrastructure Sets the Rhythm of Default Management</a>

Consumer Protection in Microfinance Exceeds 15-Million-Client Mark via Smart Certified Institutions

&gt; Posted by Jeffrey Riecke, Communications Associate, CFI

[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">3rd 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 murabaha, 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.

Have you read?

<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

&gt; Posted by Daniel Balson, Lead Specialist, The Smart Campaign

<img class="aligncenter size-large wp-image-16782" src="https://centerforfinancialinclusionblog.files.wordpress.com/2014/12/azercredit-photo.jpg?w=490" alt="Visionfund Azercredit" width="490" height="327" />

Readers of this blog are likely familiar with the <a href="http://smartcampaign.org/">Smart Campaign</a>, a global initiative to embed client protection into the institutional culture and operating principles of the microfinance industry. Smart Certification, introduced last year, awards special status to microfinance institutions (MFIs) that can demonstrate that they meet strong standards of client protection.

Getting Smart Certification is not easy. A third-party certifier conducts a thorough desk review and extensive field visit where the candidate MFI’s policies and practices are placed under a microscope. To become certified, MFIs must be in full compliance with all the Smart Campaign’s indicators, both in letter and in spirit. These indicators are derived from the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">seven Client Protection Principles</a> and touch on everything from appropriate product design to the existence of effective complaint resolution mechanisms. The certification process often requires an MFI to make significant adjustments to its internal policies and practices. But once certified, an MFI can affirm its responsible practices to investors, staff, partners, regulators, and clients alike. To date, <a href="http://smartcampaign.org/certification/certified-organizations">26 organizations</a> worldwide have received certification, covering nearly 9 million clients.

<a href="http://smartcampaign.org/certification/certified-organizations#AzerCredit">VisionFund Azercredit </a>became the first MFI in Azerbaijan and in the Caucasus region to acheive certification. The Smart Campaign sat down with Mehriban Yusifova, VisionFund Azercredit’s Head of Marketing &amp; Product Development, to better understand the significance of certification from the MFI’s perspective.

Smart Campaign (SC): When and why did VisionFund AzerCredit decide to get Smart Certified? What inspired you to pursue your certification?



 Mehriban Yusifova (MY): We’ve followed the campaign for quite some time. We were happy to be the first <a href="http://smartcampaign.org/about/campaign-endorsers">endorser</a> in Azerbaijan and we participated in several Smart Campaign initiatives in Azerbaijan previously. At the end of 2013, we became familiar with the certification program and we thought it was a great opportunity to add visibility to our client protection efforts. With certification, we’re not just claiming to have a client-centric approach on the basis of some alleged reforms we conducted behind closed doors. Rather, we are protecting our clients in a very public and visible way. Client protection was integrated in our most recent institutional strategic plan and we view certification as the culmination of that effort.

SC: How did you prepare for certification?

MY: It really was a gradual process. Because the seven client protection principles were always a core part of our work, we weren’t expecting any tremendous gaps or problems. We started off by speaking with rating companies, peers, networks, and other individuals or organizations who had gone through with <a href="http://smartcampaign.org/certification/assessments">client protection assessments. </a>We built on these conversations by conducting a self-assessment. We expected that, if there were problems or drawbacks, we could quickly identify and solve them. We did find a few issues that we were able to address as a result. For example, our prices were always clearly published on our website but the certifier told us that it’s important to post them on the walls in our branch offices. Not everybody has internet, after all. We found suggestions like this to be very helpful. The interesting thing about certification is the high level of proof required. It wasn’t enough to tell the certifier that we made some reform; we had to send in pictures, list names of staff that were responsible for changes, and other documents. It took some time because we had to make updates/changes and send the proof but, in the end, we felt it was well worth it.

 SC: What were the biggest benefits of certification?

 MY: We’re the first organization to become certified in Azerbaijan or in the Caucasus and this really positioned us as a regional leader. It’s been great to use certification to promote ourselves on TV and in press releases. It has proven to be an effective message for even those people who are unfamiliar with the Smart Campaign – clients are always happy to hear that Azercredit got international recognition for protecting their interests. Similarly, we found that our certified status was really important for recruiting and retaining staff. Everybody wants to work for an organization that is committed to defending clients and not just pushing a financial product that can harm the vulnerable. When staff comes in to work, they're not just driving performance goals or a bottom line but they're supporting a very responsible type of customer treatment. Certification encouraged some of our clients to increase their financial literacy. They learned more about what client certification is and what their rights and responsibilities are. That's critical because we want to work with an educated consumer. Finally, certification also helped us hone our message to investors. Investors are very familiar with the Campaign.

 SC: Have you had any experiences where clients are better protected now than before? Any instance where reforms you made helped you serve your clients better?

 MY: Yes, there are many. Let’s take the issue I mentioned with publicly displaying pricing information. Before certification, we had never articulated a clear vision of the future of our relationship with our customers. Following our recent changes, the loan amount, repayment period, cycle days, insurance price, and everything else is clearly laid out in our office and in the loan contract. Now, clients can approach our offices and see the all prices and compare them easily to our competitors’. Client data confidentiality practices also clearly improved. Before, as now, we kept our clients’ data confidential. After certification, however, we realized the importance of explaining confidentiality practices to our clients. We explain to them under what circumstances their information may be shared and when it may not be shared. As a result, the confidentiality practices also became far clearer to our loan officers and branch managers. As a final example, I’ll mention the customer complaints hotline. Before certification, branches would face complaints that were beyond their ability to resolve. Now, all loan products inform the client of their right to complain and present details on how to reach our hotline. Our branches have become the hotline’s biggest supporters. The hotline allows them to escalate systemic problems or unique queries to management in a timely fashion.

 SC: What would you say to organizations about to begin the certification process?

MY: To be financially sustainable and to appropriately serve its customers, every institution needs to establish good internal systems. This certification process is a very good opportunity to do just that. It’s easy to launch growth initiatives when you have solid internal systems and practices established. If you pursue growth before inculcating effective internal systems, you’ll simply ingrain bad practices and they’ll be that much harder to change in the future. It’s about building the right practices and the right culture at the right time. Certification forces you to take a detailed look at every aspect of how you do business – information technology, management, marketing, human resources, everything. Also, I would encourage MFIs looking to get certified to think about timing carefully. We launched our major reforms during the summer. Since you’re changing institutional practices, you often need to get key stakeholders in the room together. As such, you might have to get leaders of your credit, legal, and marketing teams together and if some people are out of the office it becomes harder.

SC: Overall, are you happy you went through this process?

 MY: It was absolutely the right thing to do.

SC: Thank you so much for your time.

MY: It was a pleasure.

Photo credit: Visionfund Azercredit.

Have you read?

<a href="http://cfi-blog.org/2014/11/19/win-an-ipad-take-the-smart-campaign-survey/">Win an iPad! Take the Smart Campaign Survey</a>

<a href="http://cfi-blog.org/2013/12/03/microfinance-in-azerbaijan-who-is-not-invited-to-the-party/">Microfinance in Azerbaijan: Who is Not Invited to the Party?</a>

<a href="http://cfi-blog.org/2013/05/09/how-smart-assessments-and-client-protection-certifications-work-harmoniously/">How Smart Assessments and Client Protection Certifications Work Harmoniously</a>

&nbsp;

Smart Certification: The View from Azerbaijan

&gt; Posted by Bob Bragar, Principal, Strategies for Impact Investors

<a href="http://cfi-blog.org/category/investing-in-inclusive-finance/" target="_blank" rel="attachment wp-att-9676"><img class="alignright" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/02/untitled2.jpg" width="310" height="54" /></a>The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/investing-in-inclusive-finance" target="_blank">Investing in Inclusive Finance</a> program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

Baku, Azerbaijan doesn't look like a place that needs microfinance, at least not at first glance. Oil money is coursing through the streets. The shops include Tiffany's, Cartier, Baccarat crystal, and every expensive fashion designer that New York and Paris have to offer. New apartment buildings line the road. This post-Soviet republic is transforming very fast.

But this is not the whole story. There is still a need to expand financial inclusion, despite the government’s efforts to do this. According to MicroRate's report, “<a href="http://www.microrate.com/the-state-of-microfinance-investment-2013-survey-and-analysis-of-mivs-8th-edition" target="_blank">The State of Microfinance Investment 2013</a>”, Azerbaijan is one of the largest microfinance markets for international investors. The 45 percent annual growth in Azeri microfinance is one of the fastest in the world. The Azerbaijan Microfinance Association (AMFA) reports that Azerbaijan’s microfinance portfolio, including via banks, is approaching USD 1 billion.

One group that is doing very important work, however, seems to be excluded from the party. These are the rural credit unions that are supporting agricultural finance.

By every measure, these credit unions are doing exactly what Western social investors want. They are committed to agriculture, and helping small farmers keep their holdings. Client protection is deep in their DNA, even if they are not familiar with the Smart Campaign. Rather than clients, they have members. Their governance is a cooperative structure, designed to serve the needs of these members. Interest rates are relatively low, aimed at sustainability rather than large profits. Loan amounts are small, designed to meet the farmers’ business needs.

Last month, I was invited to meet the Azeri credit unions at the invitation of <a href="http://ia-az.net/eng/" target="_blank">Credit Implementing Agency</a>, which is an umbrella institution that provides loan capital and support. Starting early in the morning, we drove for hours away from Baku to meet the credit unions on their own turf and have them explain their situation in their own words. We met in the simple structure that serves as the headquarters of one of the larger credit unions.
<a href="http://www.flickr.com/photos/8121030@N08/4085199202/" target="_blank"><img class="aligncenter wp-image-13422" style="border:0;margin-top:10px;margin-bottom:10px" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/12/sheep.jpg" width="600" /></a>On his computer screen connected to a camera, the credit union’s managing director could see the customers approaching the bank to transact business. He knew many of his customers by name and was proud that he was familiar with their business and family situations. I couldn’t help but think of Jimmy Stewart’s portrayal of the good-hearted small-town banker in Frank Capra’s 1946 classic film, “It’s a Wonderful Life”.
The Azeri rural credit unions extend enterprise loans to help members buy inputs and pre-finance crops. They understand their borrowers and work closely with them to develop lending cycles that match the business plans. Consumer lending is minimal.
Credit Implementing Agency is a pioneer in Azerbaijan. This umbrella organization for the credit unions was started with seed capital from the World Bank. It has financed 15,000 low-income borrowers via 70 credit unions operating in 51 regions of Azerbaijan. I was told that the average farms are three to five hectares, and the average loan size is US$3,000 to US$5,000.

Even so, capital is scarce. Located in remote areas that have the fewest financial services, the credit unions have great difficulty in obtaining capital, and international investors have not yet shown an interest.

Why is this? Why should these institutions, which in many ways do the kind of microfinance that international investors say that they want, find it so difficult to expand?

Much of the difficulty can be attributed to the nature of credit unions. As membership enterprises, they tend to be isolated from the general business environment. They can take deposits, effectively equity capital, only from their members. This puts a brake on growth.

There are creative ways to funnel capital to this impact-driven sector. If we are truly committed to financial inclusion, then it’s incumbent on international microfinance investors not to leave out such vital players as the Azeri credit unions.

Should investors tread carefully? Of course. Every new industry has had some painful experiences that serve as lessons for the future, and Azeri credit unions probably have as well. Transparency might be better. Organizational capacity and IT could be expanded. Many credit unions need to learn to tell their stories better. English-language ability is limited. And how can credit unions safely take on external debt?

But we look to the future rather than the past. How can we support something valuable here?

There’s a great microfinance party going on in Azerbaijan. Let’s be sure everyone who deserves to be there is invited.

Bob Bragar is the Principal of Strategies for Impact Investors. He is also a member of the <a href="http://www.centerforfinancialinclusion.org/collaborators-a-sponsors/governance-working-group" target="_blank">Governance Working Group</a>. You can contact him <a href="http://strategiesforimpactinvestors.com/" target="_blank">here</a>.

Image credit: <a href="http://www.flickr.com/photos/8121030@N08/4085199202/" target="_blank">Mike Raybourne</a>


Have you read?

<a href="http://cfi-blog.org/2012/06/05/sowing-sustainable-finance-making-rural-inclusion-a-priority/" target="_blank">Sowing Sustainable Finance: Making Rural Inclusion a Priority</a>

<a href="http://cfi-blog.org/2012/02/10/improving-sector-transparency-a-case-study-on-the-azerbaijan-microfinance-association/" target="_blank">Improving Sector Transparency: A Case Study on the Azerbaijan Microfinance Association</a>

<a href="http://cfi-blog.org/2012/05/24/new-smart-note-supporting-members-to-adopt-client-protection-at-azerbaijan-microfinance-association/" target="_blank">New Smart Note: Supporting Members to Adopt Client Protection at Azerbaijan Microfinance Association</a>

Microfinance in Azerbaijan: Who is Not Invited to the Party?

Daniel Rozas

Joana Afonso

Daniel Balson

Bob Bragar

Azerbaijan

Benin

Bosnia and Herzegovina

East Asia and Pacific

Europe and Central Asia

Ghana

India

Indonesia

Kazakhstan

Latin America and The Caribbean

Middle East and North Africa

Morocco

Nicaragua

North America

Pakistan

South Asia

Sub-Saharan Africa

United States

West Bank and Gaza

Lebanon

Libya

Iraq

Jordan

Syrian Arab Republic

Kenya

Somalia

Serbia

Tajikistan

Tanzania

Afghanistan

Australia

Bangladesh

Brazil

China

Colombia

Dominican Republic

Guatemala

Malaysia

Mexico

Nigeria

Paraguay

Peru

South Africa

Sudan

Tunisia

Yemen, Rep.

Zambia

Challenges and Crises

Credit

Enabling Environment

Financial Service Providers

Microfinance

Microfinance Institutions

Banks

Agent Banking

Refugees and Migrants

Crowdfunding

Mobile Banking

Privacy

Consumer Protection

Underserved Groups

Social Performance

Responsible Digital Finance

Smart Certification

Aging and Older Adults

Financial Capability

Financial Inclusion Strategy

Fintechs

Housing Finance

Impact Investing

Persons With Disabilities

Policy, Regulation and Government Initiatives

Risk Management

Saving

Women

Youth

Agricultural and Rural Finance

Report

Brief

Blog Post

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.

Jeffrey Riecke

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.

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.

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.