A household budget, saving for a business investment, or managing an unforeseen emergency can cause stress in the most adept household, let alone those experiencing the vulnerability and volatility of poverty. Learning to navigate financial systems and products is a long-term endeavor.

Building financial capability — that is, the knowledge, skills, attitudes, and behaviors needed to make sound financial decisions to support well-being — can take time and creativity. The ultimate goal is to equip all people with the skills to navigate financial services safely and effectively and allow them to accrue their benefits. For poor and rural communities, this can mean increasing resiliency and reducing exposure to economic shocks, improving income growth and investment, and promoting more sustainable and equitable development. And for women, in particular, the accrued benefits can mean navigating financial choices with confidence, seeing themselves — and being seen — as financial clients, and accessing and using technology with ease.

While overall progress has been made in advancing financial inclusion, progress for women continues to lag. Globally, <a href="https://globalfindex.worldbank.org/" target="_blank" rel="noopener noreferrer">male ownership is likely to be higher than female ownership of accounts</a>, with a gap of nearly 7 percent, which has persisted despite the overall rise in account ownership. The gender gap is much worse in some countries, where <a href="https://www.cgap.org/blog/how-social-norms-men-restrict-womens-financial-inclusion" target="_blank" rel="noopener noreferrer">social norms govern financial access and decision-making</a>. For instance, in Pakistan, while account ownership doubled since 2011, most of the growth was driven by accounts owned by men. Similarly, in Ethiopia, account ownership by men increased by roughly twice the size of the increase among women since 2014.

We must invest in building women’s financial capability to close this gap and make meaningful progress in women’s access to and usage of financial services. Doing so will require a deeper understanding of the economic and social constraints women face in accessing financial services. Yet existing tools for building financial capability have a mixed track record and there is scarce evidence on which approaches and delivery channels are likely to produce lasting impact.

This publication examines how best to share information, build capability, and enable lasting behavior change in a context in which women may have limited say in their own economic choices or require additional support or flexibility to overcome trust and care responsibilities. We examine the characteristics and success of existing approaches to building women’s financial capability and find a gap in programming that sufficiently accounts for women’s preferences, which are largely influenced by gendered social norms.

Readers of this report will come away with:
<ul>
 	<li>a stronger understanding of the role of gender norms that constrain women's financial capability</li>
 	<li>an overview of current women's financial capability initiatives, including classroom-based initiatives, technology-led financial education, and high-touch financial capability approaches</li>
 	<li>recommendations on how to ensure women are meaningfully and successfully engaged with financial services.</li>
</ul>

Building Women’s Financial Capability: A Path Toward Transformation

When financial sectors are buffeted by sudden and dramatic external shocks, regulators strive to implement targeted regulatory responses to mitigate negative impacts -- and the shocks made by the pandemic were no exception.

The aim of this policy report is to examine the types of regulatory flexibility adopted in response to the pandemic and provide early evidence on the impact of these measures.
<h3>The Purpose of This Report</h3>
Based on desk research and interviews and exchanges with regulators and financial service providers (FSPs), this paper aims for the following:
<ul>
 	<li>Describe the main types of regulatory flexibility adopted in developing and emerging economies as a response to the pandemic.</li>
 	<li>Provide preliminary evidence of how regulatory flexibility has impacted low-income financial consumers and micro and small enterprises (MSEs), as well as the FSPs that serve them.</li>
 	<li>Draw some emerging lessons for regulators seeking to better prepare for the future.</li>
</ul>
This is the third in a <a href="https://www.centerforfinancialinclusion.org/series/policy-responses-to-covid-19-their-impacts-on-low-income-customers" target="_blank" rel="noopener noreferrer">series of policy papers</a> that aims to analyze policy responses to COVID-19 to assess the impact of policies, both in the short- and long-term, on low-income customers of financial services and the financial service providers that work with them.

Regulatory Flexibility During the Pandemic: Emerging Lessons

As countries around the world grapple with the economic impact of the COVID-19 pandemic, governments have turned to supplemental cash transfers as a key policy instrument to offset the loss of income of their citizens.

This policy brief explores what national governments are doing to enable rapid payments to those without existing accounts. The swift measures governments took to speed up payments to citizens during the pandemic include:
<ul>
 	<li>Quick identification of eligible recipients</li>
 	<li>Simplification of customer due diligence for rapid account opening</li>
 	<li>Greater use of alternative channels such as mobile apps, post offices, and non-bank financial institutions (NBFIs) such as microfinance providers.</li>
</ul>
Each section of this brief includes country-specific examples and key takeaways. Efforts by 19 countries to facilitate cash transfers, both digital and non-digital, are discussed.

This publication is the second in a <a href="https://www.centerforfinancialinclusion.org/series/policy-responses-to-covid-19-their-impacts-on-low-income-customers">series</a> of policy briefs on COVID-19 economic policy responses and their impact on low-income customers.

Rapid Response for Social Payments During COVID-19

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<img class="alignright wp-image-24986" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/thumb_08961175df7c4694bc95b207ebf9a116.jpg" alt="" width="330" height="220" />

The following post was <a href="https://www.cgdev.org/blog/assessing-quality-regulations-improving-financial-inclusion-eight-latin-american-countries">originally published</a> on the Center for Global Development's blog and has been republished with permission.

The most recent <a href="http://www.worldbank.org/en/programs/globalfindex">World Bank</a> data on financial inclusion shows that by 2014, only 54 percent of the adult population in Latin America had an account at a financial institution. This compares to an average of 62 percent of adults worldwide and 70.5 percent for those countries with a similar level of income per capita (the region’s peers). In developed economies, 94 percent of adults have an account at a financial institution.

Many factors could be cited for the low ratios of financial inclusion in Latin America, but in a recent <a href="https://www.bbvaresearch.com/wp-content/uploads/2017/09/Regulatory-Practices-for-Financial-Inclusion-in-Latin-America-vf_mod.pdf">paper</a> published at BBVA Research, that also came as a CGD <a href="https://www.cgdev.org/sites/default/files/index-regulatory-practices-financial-inclusion-latin-america_0.pdf">working paper</a>, we focus on the potential role of financial regulation. We assessed and compared the quality of the policies and regulations that impinge on financial inclusion in eight Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay). Peru and Mexico came out on top, with what appear to be the best regulatory frameworks for promoting financial inclusion. But even in these top performers, there is room for improvement.


<h3>Identifying regulatory influences on financial inclusion</h3>
In our recent study, we identified three dimensions of regulatory practices and policies that can influence financial inclusion:
<ol>
 	<li>Enablers: regulatory practices that determine the overall quality of the financial environment where providers of financial services operate</li>
 	<li>Promoters: regulations that deal with specific types of market frictions and describe the rules of the game for the provision of specific financial products and services for low-income populations</li>
 	<li>Preventers: regulations that, often unintentionally, create obstacles for expanding the supply and demand for financial products and services</li>
</ol>
In total, we identified 11 regulatory practices across these three dimensions. The assessment of these policies relies on the construction of three indices of regulatory quality (one for each dimension), and 11 sub-indices (for the 11 regulatory practices that form these dimensions). Additionally, we constructed a non-regulatory sub-index for assessing governments’ efforts to promote financial literacy.

<img class="aligncenter wp-image-24980" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/table-cgd.png" alt="" width="616" height="237" />

To form each of the sub-indices, we assessed a number of variables selected on the basis of internationally accepted standards and a vast review of the existing literature. For each variable, we assigned scores in a range from 0 to 2 (where 2 represents the highest level of quality for the variable). For obvious reasons, it is not possible to go into the specifics of each variable and each sub-index here (the detailed explanation can be found in the <a href="https://www.bbvaresearch.com/en/publicaciones/an-index-of-regulatory-practices-for-financial-inclusion-in-latin-america/">study</a>). However, there are two novelties about the construction of the sub-indices that are worth highlighting.

First, in constructing the sub-indices, we recognize that there may be interactions between variables that affect their whole impact on inclusion. Let’s take, for example, the sub-indices of simplified accounts or electronic money. Should regulatory constraints on fees and commissions charged by financial institutions to their customers for owing or using these products be assessed as detrimental or favorable for financial inclusion? The answer, as reflected in our index, is “it depends.” Setting no restrictions on fees and commissions to open and manage simplified or e-money accounts is desirable if the quality of competition policies for the financial sector is satisfactory. In other words, the recommendation to let financial institutions determine fees freely depends on the ability to prevent the emergence of monopoly powers through robust competition policies. In terms of our index, this means that to assess the quality of some Promoter components (simplified accounts and electronic money) we need to recognize their interaction with an Enabler component (competition policies).

A second interesting feature is that the index incorporates an interaction between some of the regulatory practices and other forms of government intervention that can increase the potential of those regulations. Continuing with the example of simplified accounts and electronic money, in the study we considered that the regulation governing the provision of these products is of a better quality if the government promotes their usage by individuals and small companies through additional efforts (such as depositing government transfers to low-income populations in these accounts) than if it stays aside. Finally, the amplifying effect of policies to enhance financial literacy on regulatory practices classified as Promoters is another example of the interactions between regulations and governmental interventions.
<h3>Which countries have the best regulatory frameworks for financial inclusion in Latin America?</h3>
The map below summarizes the results of our index of regulatory practices for financial inclusion in eight Latin American countries. The numbers represent the values of the overall index and of each of the three sub-indices (each ranging from 0 to 2, as mentioned above).

[caption id="attachment_24978" align="aligncenter" width="615"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/rojas-suarez-pacheco-regulatory-figure1.png"><img class="wp-image-24978" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/rojas-suarez-pacheco-regulatory-figure1.png" alt="" width="615" /></a> (click to enlarge)[/caption]

As shown, all the countries have strengths and weaknesses in their regulatory frameworks. Peru appears to have the best regulatory framework, followed closely by Mexico. Obviously, some areas of Peruvian regulation could be enhanced, but in broad terms, the regulatory framework is robust and conducive to financial inclusion. Mexico, on the other hand, has more room to improve the quality of its regulatory framework, especially the regulations classified as Promoters. Still, the country might soon solve some of the deficiencies we identified in our study (for instance, the absence of a dedicated regulatory framework for electronic money). In fact, Mexico’s Congress is currently discussing a draft law that seeks to leverage the possibilities of financial technology (or fintech) to advance financial inclusion.

At the opposite end of the spectrum, Argentina and Brazil have the lowest scores. Both present very low scores along the Preventers dimension as there are various elements in their regulatory framework (from financial transaction taxes to directed lending by the state) that might run counter to financial inclusion objectives. Thus, in these countries major changes to the regulatory framework are needed to achieve sustainable progress in financial inclusion.

The rest of the countries obtain modest results that also tend to be explained by very low scores in the Preventers index but more solid results in the Enablers and Promoters indices. The case of Colombia stands out in this last group: although the country is strong in the Promoters index, the existence of a financial transaction tax, the imposition of ceilings on interest rates, and directed lending practices generate multiple distortions and explain why Colombia’s overall score lags behind Peru and Mexico.
<h3>Does regulatory quality alone explain the financial inclusion gap?</h3>
The answer to this question is “no.” As discussed in the CGD report <a href="https://www.cgdev.org/sites/default/files/CGD-financial-regulation-task-force-report-2016.pdf">Financial Regulations for Improving Financial Inclusion</a>, regulation is important for two main reasons: first, because the right regulatory framework is key to enable the private sector to adopt innovations in digital finance and encourage their use by low-income populations, and second, because policies to increase financial inclusion must be compatible with the traditional objectives of financial regulators. Thus, they should not undermine the stability and integrity of the financial system, while ensuring effective consumer protection.

It should not be a surprise, though, that regulation is not the only factor that determines a country’s success in advancing inclusion. Many other factors matter, including socioeconomic constraints, the macroeconomic environment, institutional quality, and specific characteristics of the financial system. In other words, having an enabling regulatory framework is a necessary but not sufficient condition for sustainable progress in financial inclusion. This is the conclusion of an econometric study in <a href="http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=40368033">Rojas-Suarez (2016)</a> that shows that in Latin America, institutional factors matter most in explaining the financial inclusion gap.

That said, an appropriate regulatory framework is essential for financial inclusion. Thus, by signaling areas of strength and weakness in the regulatory practices of individual countries, the <a href="https://www.bbvaresearch.com/en/publicaciones/an-index-of-regulatory-practices-for-financial-inclusion-in-latin-america/">index of regulatory practices for financial inclusion</a> is meant to support the efforts of policymakers in the region with a mandate to improve financial inclusion. Therefore, beyond the specific country scores, what is truly useful from this index is the opportunity it provides in motivating discussion among market participants, policymakers, and interested researchers, as it already has at the <a href="http://www.lacea.org/portal/index.php?option=com_content&amp;view=featured&amp;Itemid=101">Latin American and Caribbean Economic Association</a> meeting in Buenos Aires last November. Hopefully, these types of conversations will serve to guide regulatory reforms.

Liliana Rojas-Suarez is a senior fellow at the Center for Global Development.

Lucía Pacheco is an economist at BBVA Research.

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2017/11/13/how-smart-campaign-research-is-influencing-client-protection-policy-in-peru/">How Smart Campaign Research Is Influencing Client Protection Policy in Peru</a>

<a href="https://cfi-blog.org/2017/12/08/sadc-needs-a-regionally-accepted-digital-financial-id-and-it-is-feasible-to-contemplate/">SADC Needs a Regionally-Accepted Digital Financial ID - And It Is Feasible to Contemplate</a>

<a href="https://cfi-blog.org/2017/12/15/net-neutrality-ruling-could-block-your-bank/">Net Neutrality Ruling Could Block Your Bank</a>

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&nbsp;

Assessing the Quality of Regulations for Improving Financial Inclusion in Eight Latin American Countries

<ul>
 	<li><a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope"><img class="alignright wp-image-22299" style="border: .5px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/10/global-microscope.png" width="265" height="338" /></a>Latin America and the Caribbean (LAC) and East and South Asia have the most conducive environments for financial inclusion. India stands out for the most progress in the last three years and is now ranked third </li>
 	<li>Further policy changes are needed if financial inclusion is to play the role envisioned in the Sustainable Development Goals</li>
 	<li>The digitization of financial services is key to increasing access to finance</li>
</ul>
<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">The 2016 Global Microscope on Financial Inclusion</a> shows that essential policies for bringing financial services to low-income groups are now widespread in the developing world. Nine of the 12 financial inclusion indicators covered in the benchmarking index improved globally in 2016, building on gains which have been made during the last decade. Even so, many countries have not moved significantly beyond basic policies, and greater focus is needed if financial inclusion is to play the critical role envisioned in the Sustainable Development Goals (SDGs).

The Global Microscope is produced by The Economist Intelligence Unit (The EIU), with policy guidance and financial support from leading organisations in the field including the Center for Financial Inclusion at Accion. Now in its 10th year, the Microscope is the global standard for financial inclusion policy in developing economies.

Digitization of financial services holds great promise for improving access to finance. Overall, for the indicator on electronic payments, the average of countries' scores rose by a total of 14 points, or by 32 percent, between 2014 and 2016. This suggests widespread, positive action to create a regulatory environment more conducive to digital economic activity. Governments are also doing more to embed digitization by using it in their transfer payment programs. The Microscope report highlights examples of such transfer payments in Brazil, Mexico, Mongolia, and Uruguay.

India has shown particularly dramatic advances in its financial inclusion institutions and policies. It has, for example, set quantifiable goals for account opening for low-income families, with more than 200 million accounts opened, assisted by a national biometric identification program. The policy also emphasizes access to credit, insurance and pension facilities, as well as channeling all government benefit payments into individuals’ bank accounts to increase usage. India also has targets to provide alternative sources of access through bank branches, bank correspondents, ATMs, and satellite branches in villages of 2,000 or more residents. In addition, the Reserve Bank of India (RBI, the central bank) is working to facilitate digital money transfers through the launch of the Unified Payment Interface (UPI), and has issued guidelines to strengthen financial literacy.

Consistent with last year’s overall performance, Latin America and the Caribbean (LAC) and East and South Asia tie for the highest average overall scores by region, with LAC countries capturing four of the global top ten spots by rank. This year’s Microscope celebrates steady progress in countries that have continued to increase their commitment to financial inclusion, such as in India, Costa Rica, Honduras, and Egypt. These countries have made the biggest gains over the last three editions of the Microscope and have policies in place to continue this success.

For more, read the 2016 Global Microscope report <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">here</a>.

Have you read?

<a href="https://cfi-blog.org/2015/12/04/global-microscope-2015-progress-on-the-financial-inclusion-front/">Global Microscope 2015: Progress on the Financial Inclusion Front</a>

<a href="https://cfi-blog.org/2014/11/10/the-global-microscope-2014-results-and-surprises/">The ‘2014 Global Microscope’: Results and Surprises</a>

<a href="https://cfi-blog.org/2013/10/03/global-microscope-finds-the-world-getting-more-microfinance-friendly/">Global Microscope Finds the World Getting More Microfinance-Friendly</a>

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2016 Global Microscope Highlights Gains in Financial Inclusion, Led by India; Digitization on the Rise

<img class="alignright wp-image-17492" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/03/plant-164500_1280.jpg?w=300" alt="" width="324" height="215" />With increasing regularity, I hear people talking about a new concept: deploying funds to earn profit while at the same time solving complex social and environmental problems, also known as impact investing. One article that stood out for me, and in fact prompted me to write this, is <a href="https://www.alumni.hbs.edu/stories/Pages/story-bulletin.aspx?num=4273">“Good Investments”</a> by Dan Morrell in the Harvard Business School Alumni Bulletin. At one point the author writes: “What impact investing really needs, all agree, are pioneers.”

Impact investing advocates can sometimes give the impression that they have “outsmarted poverty” (and other societal problems) by discovering the need for this profit-making approach, one that allows high net worth individuals to further increase their assets while also having (in the words of another impact investor quoted in the HBS article) a “fabulous social impact.”

Count me as someone who does not feel that what “impact investing” needs now are “pioneers” per se. Rather, it needs pragmatic, risk-taking, deeply curious, and disciplined people with access to funding who can work collaboratively to move an old idea forward, bearing in mind the lessons of the past and the opportunities of the present.

In fact, the actual pioneers of impact investing began laying the groundwork for this latest incarnation decades ago. Think of the <a href="https://www.missioninvestors.org/system/files/tools/history-of-pris-ford-foundation.pdf">Ford Foundation’s work</a> in the 1960s to establish, legitimize, and get U.S. government policy support for Program Related Investments, the “Philanthropy at Five [Percent]” movement in nineteenth century America and England, the Russell Sage Foundation’s financing of low-income housing in New York in the early 1900s, or, in more recent times, the <a href="http://www.calvertfoundation.org/">Calvert Foundation</a>, just to name a few.

Or simply consider the modern microfinance industry and how an ecosystem of financing mechanisms – including dozens of “microfinance investment vehicles” (MIVs) – grew up around it in the 1990s and 2000s. Even today, according to <a href="http://www.thegiin.org/cgi-bin/iowa/download?row=334&amp;field=gated_download_1;">an important study</a> by the Global Impact Investing Network (GIIN) and JPMorgan Social Finance, close to 40 percent of impact investments are in microfinance institutions (MFIs) or funds. Microfinance is the largest single sector for receiving impact investments, and is larger than its two closest competitors combined. Clearly there are strong linkages between microfinance and impact investing, and additional opportunities for sharing lessons.

It is important to remember that few if any social innovations besides microfinance have proven capable of reaching large scale and generating consistent profits – which should give people pause before they create a new impact investing “bubble.” Hopefully it will also prompt some new curiosity about what microfinance got right, and why.

It may seem uncharitable to find fault with a historical thinking among some advocates and practitioners of impact investing. Indeed, those involved in the field generally have noble intentions and some will end up making significant impact. The real danger in my mind is not failing to acknowledge earlier contributors, but rather in failing to learn from and apply their hard-earned lessons.

So here are six lessons that I take primarily out of my experience in microfinance during the last few decades.
<ol>
 	<li>Carefully manage expectations</li>
</ol>
During the mid-2000s, a small but influential number of microfinance investors and practitioners began to claim that eye-poppingly high returns and high social impact were possible and in fact, should be expected. This drove a kind of informal “bidding war” with microfinance practitioners and funds feeling that they needed to keep pace with claims related to impact and financial returns in order to compete for attention and funding. Irrational exuberance took hold, and those of us who argued for restraint and realism were dismissed, at least for a time. (Perhaps people like me should have argued with more conviction.) This dynamic hastened and made more painful the inevitable reckoning, and contributed to the backlash among a handful of governments and media outlets that began in late 2010 and that has only recently began to subside. Impact investing would do well to temper expectations related to investment pipelines and financial returns, and avoid falling into the trap of creating the expectation that most future deals will be as financially lucrative as the most profitable.
<ol start="2">
 	<li>Be rigorous with the social (or impact) bottom line, and don’t confuse outputs with outcomes</li>
</ol>
Up until recently, many microfinance practitioners and advocates, myself included, under-invested in monitoring and evaluation. Tools like the <a href="http://www.progressoutofpoverty.org/">Progress out of Poverty Index</a>, the <a href="http://hdr.undp.org/en/content/multidimensional-poverty-index-mpi">Multi-Dimensional Poverty Index</a>, and the <a href="http://www.sptf.info/spmstandards/universal-standards">Universal Standards for Social Performance Management</a> were available (the latter only in draft form until 2012), but were often forsaken in the rush to reach scale and increase profitability quickly. Instead, the lazy practice of conflating outputs – such as the number of loans disbursed or savings accounts opened – with outcomes (e.g., clients crossing the poverty line) and impact (e.g., clients crossing the poverty line compared to a control group of non-clients) became common. (In general, one should only equate outputs, which are essentially means to an end, with outcomes, which represent the end itself, if there is a deep evidence base – as in the case of vaccinations and improved public health – that the output consistently leads to better outcomes across multiple contexts.) This lack of rigor magnified the doubts about microfinance and prolonged the crises in several key markets. The <a href="http://www.thegiin.org/cgi-bin/iowa/investortools/reporting/index.html">IRIS standards</a> developed by the GIIN and its allies represent a step in the right direction, but there is a way to go to make this framework both meaningful and widely used. I believe the risk of substituting outputs or even less rigorous measures of the social bottom line for outcome-oriented results is a significant one for the impact investing community.
<ol start="3">
 	<li>Don’t ignore the socio-political context in the emerging markets receiving impact investments from abroad</li>
</ol>
While the idea of wealthy people making money while (hopefully) helping to solve societal problems plays well in London, New York, and San Francisco, it can be very controversial in some emerging markets such as India, where Gandhian asceticism still influences the debate about the ethical boundaries of doing business with the poor. In 2010, the CEO of the Indian MFI SKS publicly embraced the idea of earning substantial profits (and getting personally rich) through providing loans to the poor. This position, <a href="http://usatoday30.usatoday.com/money/books/reviews/2010-12-08-fistful-of-rice_N.htm">widely reported</a> in the press at the time, emboldened critics and contributed to the Indian government and civil society losing faith in microfinance for a number of years. This in turn ended up harming the entire sector and millions of the clients they had served. Greater modesty, humility, discretion, and honest acknowledgment of trade-offs (more on the latter below) would have served everyone better.

Bearing this in mind, impact investing should avoid triumphalist rhetoric that could embarrass local governments and NGOs with a mandate to address the issue that the investee is tackling (e.g., poverty), which could stoke resentment and attacks. Said another way, there will always be people ready to accuse impact investors and the executives at impact investees of greed, exploitation, and hypocrisy. At the risk of saying the obvious, it is wise to avoid giving them much material to work with.
<ol start="4">
 	<li>Avoid antagonizing adjacent industries</li>
</ol>
Microfinance practitioners and advocates, myself included, could have done a better job at building bridges with other humanitarian sectors (such as health care, water and sanitation, and refugee aid) so the people serving in these complementary areas did not feel threatened that their funding would dry up due to the attractiveness of microfinance, including its promise of paying for itself and returning profit to lenders and investors – promises that other sectors did not feel they could match due to inherent factors. I believe that the hostility that grew during the 1990s and 2000s from these communities harmed microfinance. Potential allies became skeptics, if not antagonists. In this context, I like the language on the GIIN’s website that distinguishes impact investing from grant-making, while acknowledging the value of each when done well.
<ol start="5">
 	<li>Acknowledge trade-offs</li>
</ol>
I believe that in general, there are real trade-offs between maximizing social impact and maximizing financial returns in microfinance. For a time, microfinance leaders expressed doubt this was true and belief that maximizing them both was possible. This led to a lot of wishful thinking and too little rigorous debate about how to make these trade-offs, whether at the level of managing the operations of an individual MFI or developing a balanced portfolio of MFI investees.

So I was concerned when I read in the GIIN/JPMorgan report that 60 percent of impact investors answered no to the question "Generally speaking, do you think a trade-off between financial returns and impact is necessary when making impact investments?” My answer: In general, of course there is! So the fact that 60 percent thought otherwise is concerning. (On the other hand, I was pleased to see that 40 percent did acknowledge trade-offs.)

Attracting investors who do not appreciate the trade-offs can lead to a wave of disinvestments later on. Such capital flight can in turn be destabilizing to a sector trying to manage at least two bottom lines, if not three. Grameen Foundation’s <a href="http://www.grameenfoundation.org/what-we-do/financial-services/impact-investing/impact-measurement">MOTIV scoring tool</a> is one of several that rigorously score financial and social returns within a context of acknowledging trade-offs. Tools like this should be in wider use as a way of realistically evaluating investments and educating investors about trade-offs and other critical issues.
<ol start="6">
 	<li>Don’t forget the importance of local finance</li>
</ol>
Tapping into foreign sources of debt and equity capital for growth can be valuable for a social enterprise like an MFI, in part because it confers prestige and cache. But there are risks. While most foreign investors in social enterprises are well-intentioned, as a group they tend to follow fads and be a bit capricious. More important, foreign investors are easy to pillory in the local press as profit-extracting neo-colonialists. For these and other reasons, I believe it is dangerous to rely on these sources of capital and, as a result, under-invest in developing local sources of finance. In general, local sources tend to be more stable during times of crisis, and are also more politically palatable in some markets (especially when it involves equity and when the investors are earning substantial returns).

Over-reliance on foreign debt, which sometimes comes with significant foreign exchange risk, played a role in many MFIs delaying the hard but necessary work of mobilizing deposits and developing relationships with local wholesale lenders and investors. This reality is one of the reasons Grameen Foundation worked so hard, with support from the Bill and Melinda Gates Foundation, at helping three trend-setting MFIs develop robust savings offerings in the late 2000s, and it is why we set up a $31 million loan guarantee program in 2006 that was used to catalyze more than $225 million in local currency transactions benefiting qualified MFIs.

One potential area that U.S.-based impact investors could focus on is cultivating their peers in countries such as India, Brazil, South Africa, and China. They could emerge as the equivalents of the local banks that came to play such an important role in financing portfolio growth of MFIs around the world.

* * *

One of the reasons that <a href="http://www.amazon.com/Social-Entrepreneurship-Everyone-Needs-Know%C2%AE/dp/0195396332">Social Entrepreneurship: What Everyone Needs to Know</a> and <a href="http://www.amazon.com/Due-Diligence-Impertinent-Inquiry-Microfinance/dp/1933286482/ref=sr_1_1?s=books&amp;ie=UTF8&amp;qid=1424592008&amp;sr=1-1&amp;keywords=due+diligence%2C+roodman">Due Diligence: An Impertinent Inquiry Into Microfinance</a> are two of my favorite recent books is that they do a great job of putting their subjects – social entrepreneurship and microfinance, respectively – into historical perspective. Both of these movements, it turns out, have origins that go back centuries.

In fact, when you take a historical view, impact investing is getting some important things right. It is gradually developing its own ecosystem, standards, models, consulting firms, media following, and loose network of constructive skeptics. (The Omidyar Network published an excellent paper on the evolution of this ecosystem titled <a href="https://www.omidyar.com/sites/default/files/file_archive/insights/Priming%20the%20Pump_Omidyar%20Network_Sept_2012.pdf">“Priming the Pump.”</a>) In this way as well, impact investing is following in the footsteps of the microfinance movement, as the latter built its own ecosystem and set standards in the 1990s and 2000s (though was late in addressing the issue of consumer protection, which it has belatedly though effectively addressed recently).

One especially useful <a href="http://www.mitpressjournals.org/doi/abs/10.1162/itgg.2007.2.1-2.159#.VOipOvnF9hw">article</a> that could benefit the impact investing community was written by Susan Davis and Vinod Khosla analyzing the track record of the Microcredit Summit Campaign during its first decade. (The promising start and strong commitment to learning demonstrated by the impact investing fund <a href="http://khoslaimpact.com/">Khosla Impact</a> may reflect, at least in part, the fact that the man behind it thought long and hard about relevant past efforts.) Jed Emerson and Anthony Bugg-Levin’s book <a href="http://www.amazon.com/Impact-Investing-Transforming-Making-Difference/dp/0470907215">Impact Investing</a> is also a balanced treatment that recognizes past efforts, going as far back as the Quakers in the 1600s.

In fact, consciously or not, some of the leading impact investors are already building on the achievements of microfinance by, in the words of Mark Straub of Khosla Impact, trying to address “the challenges of building last mile distribution, the ways of developing processes to automate and scale, [and incorporating] the notions of social collateral and trust which allowed microfinance to work.”

When I was considering writing this article, I asked my mentor Wayne Silby, an early leader in social investing, whether it was a good idea. Initially, he discouraged me from writing anything that might be considered critical about all the excitement about impact investing. “The Buddhist in me doesn't mind who wants to take credit” for helping lay the groundwork for social or impact investing, he wrote. In general, he was excited about all the energy around this latest wave of social investing, and in particular hoped that young people would get more involved. But when I brought up the point about thinking historically potentially leading to better decisions by a new generation of socially-minded investors, he encouraged me to write it.

So let us forge ahead, aggressively using the new brand of “impact investing” if it helps bring in new resources, people and ideas. But as we do so, let’s acknowledge earlier incarnations and leaders and also draw from what they learned, so that we can humbly contribute to addressing some of the world’s pressing problems in the most effective ways possible.

Alex Counts is President and CEO of <a href="http://www.gfusa.org/">Grameen Foundation</a>, and serves on the Advisory Board of the <a href="http://www.centerforfinancialinclusion.org/">Center for Financial Inclusion</a>. 

Have you read?

<a href="http://cfi-blog.org/2012/09/05/alex-counts-on-karlan-and-appels-more-than-good-intentions/" target="_blank" rel="noopener noreferrer">Alex Counts on Karlan and Appel’s “More Than Good Intentions”</a>

<a href="http://cfi-blog.org/2013/10/17/microfinance-ceos-make-six-major-commitments-at-2013-partnerships-against-poverty-summit/" target="_blank" rel="noopener noreferrer">Microfinance CEOs Make Six Major Commitments at 2013 Partnerships Against Poverty Summit</a>

<a href="http://cfi-blog.org/2013/11/07/alex-counts-what-i-learned-at-the-fi2020-global-forum/" target="_blank" rel="noopener noreferrer">Alex Counts: What I Learned at the FI2020 Global Forum</a>

&nbsp;

&nbsp;

What Impact Investors Could Learn from Microfinance

<h4>The most exciting trends and startups in inclusive finance this year</h4>
&gt; Posted by Vikas Raj, Director of Investments, Accion Venture Lab

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There has been a lot of buzz in the financial technology (FinTech) space over the last several months, with a <a href="http://www.bloomberg.com/news/2014-12-10/lendingclub-poised-for-cash-infusion-of-its-own-to-fund-growth.html">high-profile IPO, several more apparently on the way</a>, and more and more venture funding flowing into FinTech startups. Bold ideas for financial services innovation are getting more visibility - just this month, Australian Wealth Index (AWI) listed the <a href="http://fintechinnovators.com/about-awi" target="_blank">50 Best FinTech Innovators</a>, and CFI’s Elisabeth Rhyne <a href="http://cfi-blog.org/2015/01/08/the-twelve-days-of-fintech/#more-16946" target="_blank">conveniently categorized</a> the list so it’s easy to see at a glance where the innovations are.
At <a href="https://www.accion.org/venturelab">Venture Lab</a>, we found the AWI list interesting but also felt it missed something significant: namely, that one of the biggest opportunities for FinTech is figuring out new solutions to include the billions of lower-income people who are today excluded from formal financial services. And it’s not charity that compels us to reach these customers – it’s good business. These customers represent a big market. In fact, they’re such a significant part of any emerging market’s customer base that any global providers with dreams of international expansion must cater to them if they want to succeed. 
It’s a particularly exciting time because the traditional bottlenecks to reaching these customers – the need for high-touch models and small value transactions, the need for cost-effective means of education and engagement – are exactly the kind of barriers that technological advances can help tackle. As Elisabeth Rhyne <a href="http://cfi-blog.org/2015/01/08/the-twelve-days-of-fintech/#more-16946" target="_blank">laid out</a> in her challenge recently, what about the “top 50 financial inclusion innovators?” What about the new business models and technologies that are impacting the underserved? 
At Venture Lab, we are focused on investing in businesses that are innovating in big ways to get consumers and small businesses a wider range of financial products and services, and therefore giving them the tools they need to manage and improve their lives. The breadth of this challenge is so large, and the ways to chip away at it so varied, that we don’t think it makes a lot of sense to try to force rank the “best” financial inclusion companies.
Instead, we lay out below some of the key groundbreaking trends we see in the financial inclusion space right now, and some of the seed stage companies that are leading the charge. This is by no means an exhaustive list – of trends, and especially not of companies. However, from our seat as seed stage investors, these are some of the most exciting things happening in financial inclusion right now.
Digital Remittances – Companies are figuring out new ways to send money across international borders, dramatically improving the value proposition to senders and recipients, using mobile wallets to get money directly into recipients’ pockets and cryptocurrencies to execute transactions faster and cheaper.
<ul>
	<li>Coins.ph (the Philippines) – A Bitcoin mobile wallet that cuts transaction costs for Filipinos working abroad and sending money home. Also offers direct ATM withdrawal via partnerships with banks as well as merchant integration for e-commerce.</li>
	<li class="List_0020Paragraph">SimbaPay (U.K.) – Mobile app that allows Kenyans abroad to deposit money into Kenyan bank accounts instantly.</li>
	<li class="List_0020Paragraph">Send WAVE (Kenya) – Cuts transaction costs for Kenyans via software that automates remittances, only charging a foreign exchange rate fee. Users can instantly send funds via a mobile application.</li>
	<li class="List_0020Paragraph">Hellobit (San Francisco) – Uses Bitcoin to cut transaction costs for remittances by allowing anyone with a mobile phone to act as Bitcoin exchanger or delivery agent.</li>
	<li class="List_0020Paragraph">BitPesa (Kenya) – Uses Bitcoin to cut transactions costs for Kenyans working abroad and sending money home.</li>
	<li class="List_0020Paragraph">Volabit (Mexico) - Uses a Bitcoin backend for consumers to send money, shop online, and invest in Bitcoins via peer to peer lending.</li>
</ul>
Marketplace Lending 2.0 – With the Lending Club IPO starting 2015 off with a bang, we expect businesses that build online platforms that stand between borrowers and lenders to continue to be a core innovation area in 2015, particularly as new business models leverage motivated alternative capital sources to serve specific customers sets (small business, customers working through credit issues) with more relevant products.
<ul>
	<li>LendStreet (U.S.) – Using marketplace lending capital to allow distressed borrowers to refinance their debt and rebuild their lives.</li>
	<li class="List_0020Paragraph">StreetShares (U.S.) – Connecting small businesses to marketplace lending-sourced capital, with a focus on veteran-owned businesses and investors.</li>
	<li class="List_0020Paragraph">Bolstr (U.S.) – Expansion capital for small businesses with a focus on community support – revenue share-based repayments.</li>
	<li class="List_0020Paragraph">Intoo (Brazil) – Receivables financing for small and medium-sized businesses through FIDCs and other alternative financers.</li>
</ul>
New Data for Credit Scoring – We are more excited than ever about companies that identify and exploit new or never-before-used data pools to enhance lenders’ decision-making and allow them to expand their loan books downmarket.
<ul>
	<li>First Access (East Africa) – Leveraging cell phone data to more reliably gauge credit risk for borrowers in informal markets.</li>
	<li class="List_0020Paragraph">Destacame (Chile) – Uses individuals’ utilities and cell phone data to create and manage alternative credit scores and influence current credit scoring models.</li>
	<li class="List_0020Paragraph">AIRE (U.K.) - Alternative credit score for consumers who have no existing credit data.</li>
	<li class="List_0020Paragraph">Kopo Kopo (East Africa) – Using mobile money merchant data to provide financing to merchants that fits within their cash flow cycles.</li>
</ul>
eCommerce Merchant Lending – This could be seen as a sub-set of the category above, but we are particularly excited about companies that partner with existing eCommerce sites to gather crucial data and provide loans and other financial services to online merchants.
<ul>
	<li>Lendingkart (India) – Partnering with India’s eCommerce players to provide unsecured term loans to online merchants.</li>
	<li class="List_0020Paragraph">Mr Presta (South America) – Partnering with the largest eCommerce players in Mexico and Argentina to lend to small and medium-sized online businesses.</li>
	<li class="List_0020Paragraph">NeoGrowth (India) – Financing via online partners based around merchant cash advance.</li>
</ul>
Customer Engagement – Finally, we love the new breed of companies that are allowing lenders, and others, to better engage with their customers by helping them to better understand products and giving them core insights about customer behavior and risk. These companies run the gamut between financial literacy and credit enhancement tools, but they are connected by their core innovation around bringing customers into the financial system by engaging directly in new ways.
<ul>
	<li>Juntos (Global) – Mobile-based personal finance tools for cash-based households.</li>
	<li class="List_0020Paragraph">Revolution Credit (U.S.) – Online courses and videos that allow consumers to increase financial IQ and access better financial products.</li>
</ul>
This is hardly a complete inventory of all the cool stuff happening, but certainly enough to get excited about.
Have you read?

<a href="http://cfi-blog.org/2014/10/30/fueling-the-economic-engine-global-experiments-in-small-enterprise-lending/" target="_blank">Fueling the Economic Engine: Global Experiments in Small Enterprise Lending</a>

<a href="http://cfi-blog.org/2014/12/05/the-role-of-peer-to-peer-lending-in-financial-inclusion/" target="_blank">The Role of Peer-to-Peer Lending in Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/11/05/accion-venture-lab-responds-to-the-great-competition-and-innovation-deficit/" target="_blank">Accion Venture Lab Responds to 'The Great Competition and Innovation Deficit'</a>

Financial Inclusion Trends and Innovators – 2015

&gt; Posted by Jeffrey Riecke, Communications Associate, CFI

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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 Verónica Trujillo Tejada, Consultant, MIF/ Inter-American Development Bank

Building up a regulatory framework for the development of a microfinance market is a complex task. It requires taking into account a broad variety of topics as well as country specific needs and features. There are some internationally-applicable recommendations for the design of microfinance regulatory frameworks (<a href="http://www.cgap.org/publications/guide-regulation-and-supervision-microfinance">CGAP 2012</a>, <a href="http://publications.iadb.org/bitstream/handle/11319/4898/Gu%C3%ADa%20de%20Principios%20para%20una%20Efectiva%20Regulaci%C3%B3n%20y%20Supervisi%C3%B3n%20de%20las%20Operaciones%20de%20Microfinanzas.pdf?sequence=1">ASBA 2010</a>, and <a href="http://www.bis.org/publ/bcbs175.pdf">Basel 2010</a>) but little is known about how different countries have implemented their guidelines or what the effects are of these rules in each market.

In the recently released paper “<a href="http://www.degruyter.com/view/j/bejeap.2014.14.issue-4/bejeap-2013-0145/bejeap-2013-0145.xml">Microfinance Regulation and Market Development in Latin America</a>,” published by the B.E. Journal of Economic Analysis &amp; Policy, we analyze the relationship between microfinance regulatory frameworks in 17 Latin American countries and the corresponding markets’ levels of development.

One way to characterize microfinance regulations is as either general or specific rules. The general rules are devoted to regulating typical financial system issues, while the specific rules target microfinance products or institutions. Two other regulation classifications are protection rules and promotion rules. Protection rules have the goal of preserving financial system stability or protecting the financial consumer, and promotion rules aim to favor the development of microfinance services or institutions by softening the restrictiveness of the overall regulatory framework.

We find a wide variety of regulatory designs in the Latin American region. Countries such as Chile and Uruguay, for example, stand out for their lack of microfinance specific rules; though their employment of general and protection rules give their regulatory frameworks a base upon which they could build microfinance specific regulation. Other countries such as Honduras, Brazil, and Argentina have included specific or promotion rules in their regulatory frameworks, however either their level of implementation of general and protection rules is below the average of the countries examined in the report, or their frameworks have addressed microcredit but not through the specific criteria the report analyzes.

The analysis between microfinance regulatory frameworks and the level of development of the corresponding markets - which incorporated the size of the microcredit portfolio, number of clients, operative and financial efficiency of institutions, among other variables - enabled us to draw the following conclusions:
<ol>
	<li>All four types of regulation rules – general, specific, protection, and promotion – are significantly and positively correlated with bigger microfinance markets.</li>
	<li>Rules specific for microfinance are related to better MFI financial and operational performance, and better market data.</li>
	<li>Both general and protection rules are significantly and positively correlated with better developed microfinance markets - specifically in terms of profitability, operational efficiency, and portfolio quality.</li>
	<li>The implementation of both specific and promotion rules shows a positive and significant correlation with bigger informal, rural, and microenterprises sectors.</li>
</ol>
So, which would be the elements to consider when designing regulatory frameworks to contribute to the development of a microfinance market?

Of course there is no one formula to apply across countries, as markets and contexts differ. And more analysis (as well as more industry data) is required. However the report indicates that analyzing whether a financial system’s regulation includes ample general and protection rules is crucial for the better development of the microfinance market, preserving stability and the well-being of its clients. Introducing specific rules on microfinance services and institutions, considering the particular features of microfinance activities, could very well support institutional solvency and the employment of adequate risk management procedures. And promotion rules should be considered as a mechanism to favor market development. Regulators must be open to evaluating new actors, technologies, and methodologies for the provision of microfinance services, considering the possibility of granting them individualized treatment - in some cases lowering the usual standards for a short period of time.

To learn more about the analysis and to access the full report, <a href="http://www.degruyter.com/view/j/bejeap.ahead-of-print/bejeap-2013-0145/bejeap-2013-0145.xml?format=INT">click here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/07/01/rbi-accords-sro-status-to-mfin-client-protection-in-india-is-strengthened/" target="_blank">RBI Accords SRO Status to MFIN, Client Protection in India is Strengthened</a>

<a href="http://cfi-blog.org/2014/05/22/fostering-responsible-finance-in-myanmars-infant-industry/" target="_blank">Fostering Responsible Finance in Myanmar's Infant Industry</a>

<a href="http://cfi-blog.org/2014/06/05/diagnostic-review-of-consumer-protection-in-pakistans-financial-sector/" target="_blank">Diagnostic Review of Consumer Protection in Pakistan's Financial Sector</a>

What Kinds of Regulation Promote the Development of Microfinance Markets?

&gt; Posted by Sonja E. Kelly, Fellow, CFI

<a href="https://www.flickr.com/photos/80487073@N00/5264924289/"><img class="alignright wp-image-15383" style="border:0 solid #ffffff" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/07/5264924289_30d7db9323_b.jpg?w=490" alt="" width="280" height="187" /></a>We are in full World Cup fervor in the Accion offices around the world, with jerseys making appearances at global staff meetings, water cooler conversations centering on surprise advancements (and eliminations), and a high incidence of lingering trips to the conference room screen to check scores in between meetings and deadlines. You could say things are getting a little heated as the group of teams still in the running gets smaller.

There have been a few attempts to use this global competition as an opportunity to better understand our world. The Wall Street Journal published a “<a href="http://graphicsweb.wsj.com/documents/WORLDCUPTOEE/#/?lang=en" target="_blank">World Cup of Everything Else</a>,” where countries can be matched up on categories from the hottest weather to the biggest eaters of seafood, and Dean Karlan produced a <a href="http://www.nytimes.com/2014/06/26/upshot/why-you-should-root-for-nigeria-or-brazil-mexico-or-ghana.html?hp&amp;action=click&amp;pgtype=Homepage&amp;module=second-column-region&amp;region=top-news&amp;WT.nav=top-news&amp;_r=0" target="_blank">set of predictions</a> based on population, poverty level, and interest in soccer to assess which country would experience the greatest increase in happiness with a World Cup victory (spoiler: Nigeria would have had the most aggregate happiness if it had won the tournament).

But what if the World Cup were a competition based on financial inclusion indicators? If we were to create a bracket where the country with the highest level of financial inclusion advanced, the European countries would all advance, which in my opinion wouldn’t be very interesting.

What if, however, we use the World Cup system to see where the highest number of financially excluded people are? We crunched the numbers to show you, of the countries that made it to Brazil for the competition, who would “win” the title of “highest number of financially excluded people.” Basing winners on the countries with the largest number of people without a formal bank account, we noticed a few surprises.


[caption id="attachment_15374" align="aligncenter" width="610"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2014/07/world-cup-of-exclusion-6-30-14.pdf" target="_blank"><img class="wp-image-15374" style="border:0 solid #ffffff;margin-top:7px;margin-bottom:7px" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/07/world-cup-of-exclusion.png" alt="" width="610" height="383" /></a> Click on the bracket to enlarge it.[/caption]

Using the <a href="http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTFINRES/EXTGLOBALFIN/0,,contentMDK:23147627~pagePK:64168176~piPK:64168140~theSitePK:8519639,00.html" target="_blank">Global Findex data</a> on exclusion rates (measured by the percent of the population that reports not having an account) and <a href="http://esa.un.org/wpp/" target="_blank">UN population data</a>, we calculated the size, in number of people, of the excluded population within World Cup contender countries, beginning with the original FIFA groups. Not surprisingly, countries with large populations tend to be the “winners” in their groups.

Nigeria emerges as the final winner, with Brazil, Mexico, and the U.S. following closely behind. We often think of exclusion as being a low and middle income country problem, but as the advancement of high income countries in the brackets show us, exclusion is everyone’s problem—countries like the United States are no exception.

The bracket system doesn’t return the “top four” countries to the final (Russia, for example, would have made it farther) – after all advancing in a tournament depends on who you play. This exercise does, however, cause us to think about impact and global focus. Where are the highest numbers of excluded people, and how can financial inclusion efforts have the highest impact on access? Conversely, where are the countries where financial inclusion issues are not necessarily focused on access but rather on quality of engagement and quality of services? Which of these countries are the most active in conversations on financial inclusion, and will such conversations translate into a significant decrease in exclusion over time?

Part of what makes the World Cup so much fun is that it’s one of the few times when most of the world comes together, participating in and focusing on one thing. For me, it’s also one of the few times when I focus my attention on particular countries – ones that for whatever reason have stayed off my radar. Has it gotten you to think differently about the world, and about financial inclusion more specifically?

Image credit: <a href="https://www.flickr.com/photos/80487073@N00/5264924289/" target="_blank">Alobos Life</a>

Have you read?

<a href="http://cfi-blog.org/2013/10/03/global-microscope-finds-the-world-getting-more-microfinance-friendly/" target="_blank">Global Microscope Finds World Getting More Microfinance-Friendly</a>

<a href="http://cfi-blog.org/2013/11/04/bob-annibale-on-global-trends-and-converging-key-players/" target="_blank">Bob Annibale: On Global Trends and Converging Key Players</a>

<a href="http://cfi-blog.org/2013/03/28/adventurers-unite-voyaging-through-data-in-our-mapping-the-invisible-market-website/" target="_blank">Adventurers, Unite: Voyaging Through Data in Our Mapping the Invisible Market Website</a>

The World Cup of Financial Exclusion

Julia Arnold

Jayshree Venkatesan

Denise Dias

Loretta Michaels

Liliana Rojas

Lucia Pacheco

Alex Counts

Juan Blanco

Somen Saha

Sonja Kelly

Isobel Coleman

Laura Galindo

Bangladesh

Brazil

Cambodia

Chile

Colombia

East Asia and Pacific

Egypt, Arab Rep.

Europe and Central Asia

Ghana

Kenya

Latin America and The Caribbean

Malawi

Mexico

Middle East and North Africa

Mozambique

Pakistan

Philippines

South Africa

South Asia

Spain

Sub-Saharan Africa

Tanzania

Bolivia

India

Nigeria

Peru

Sri Lanka

Ecuador

Jordan

Madagascar

Morocco

Myanmar

Thailand

Timor-Leste

Togo

Zimbabwe

Argentina

Uruguay

Mongolia

China

Dominican Republic

Guatemala

Paraguay

United Kingdom

United States

Zambia

Afghanistan

Australia

Azerbaijan

Indonesia

Libya

Malaysia

Sudan

Tunisia

Yemen, Rep.

Honduras

Russian Federation

Consumer Protection

Digital Financial Services

Financial Capability

Financial Health

Partnerships

Personal Financial Management

Resilience

Responsible Product Design and Delivery

Tech-Touch Balance

Underserved Groups

Women

Challenges and Crises

Enabling Environment

Microfinance Institutions

Policy, Regulation and Government Initiatives

Small Business Owners

Digital Payments

Mobile Banking

Fintech

Financial Inclusion Strategy

Credit

Impact Investing

Microfinance

Agent Banking

Blockchain

Fintechs

Remittances

Risk Management

Savings

Youth

Report

Blog Post

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.

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.

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.

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.

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.

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.

Jeffrey Riecke

In our <a href="http://www.centerforfinancialinclusion.org/fi2020/mapping-the-invisible-market/growing-income-growing-inclusion">recent paper on income growth and financial services</a>, Elisabeth Rhyne and I argued that as people’s incomes rise, so does demand. Soon after we published the paper, <a href="http://www.bbc.co.uk/news/world-latin-america-23145803">protests began in Brazil</a>. Many are citing this social movement as the result of increased economic growth and prosperity. When we look closely at those protesting, we see that the majority of the protesters may not even be middle class. Instead many, if not most, are in the “vulnerable class,” with incomes between approximately $4 and $10 per day.

Last week, the Center for Global Development wrote a blog post that highlights the findings from their forthcoming paper on the growing vulnerable class in Brazil. Nancy Birdsall holds that this vulnerable class is demanding more and better public services such as infrastructure, education, and health, consistent with our own hypothesis linking income growth and demand.

<img class="alignright" src="http://www.cgdev.org/sites/default/files/brazil%20blog%201.jpg" alt="" width="225" height="336" />The Center for Development blog post begins:

“Sorry for the nuisance: we are changing Brazil,” reads the sign carried by a young woman marching down the streets of São Paolo on June 17.

So who is this “we” she refers to? Fellow protestors, certainly. But “we” might also refer to the large, frustrated group of “strugglers” in Brazil—those who are no longer poor—but have income still too low to be part of Brazil’s new middle class. In a revolution of rising expectations they are demanding a better government. Their demands put Brazil’s still-young democracy (the military withdrew less than 30 years ago) at a crossroads. If their evolving needs and demands are met, they will have acted as agents of inclusive growth and change in their society. If their problems are neglected and they lack sufficient schooling, skills, and opportunities, they could become a restive underclass, and likely supporters of populism and civil strife.

On paper, the past two decades have brought significant improvements for Brazilians: Supported by <a href="http://www.imf.org/external/np/sec/pn/2012/pn1284.htm">good macroeconomics</a>, median household income has more than doubled while <a href="http://www.cgdev.org/publication/declining-inequality-latin-america-some-economics-some-politics-working-paper-251">income inequality has decreased</a>. Brazilian President Dilma Rousseff <a href="http://pressroom.ipc-undp.org/brazilian-president-dilma-rousseff-emphasizes-poverty-reduction-in-her-opening-speech-at-the-un-general-assembly/">likes to point out</a> that the country has lifted millions of people out of poverty and into <a href="http://www.cgdev.org/publication/note-middle-class-latin-america-working-paper-303">the “middle class</a>.”



But now it seems this is not enough. For nearly three weeks, Brazil has experienced the <a href="http://www.bbc.co.uk/news/in-pictures-22951123">biggest nationwide street protests</a> since the early 1990s, when a frustrated society demanded the <a href="http://www.nytimes.com/1992/09/20/world/huge-rally-demands-brazil-chief-s-impeachment.html">impeachment of then-president Collor de Mello</a>. Back in 1992, the reason for the national public outrage was a large corruption scandal and chronically high inflation that eventually turned into hyperinflation. Two decades later, as<a href="http://www.economist.com/news/americas/21579857-bubbling-anger-about-high-prices-corruption-and-poor-public-services-boils-over?zid=305&amp;ah=417bd5664dc76da5d98af4f7a640fd8a">commentators</a> <a href="http://www.guardian.co.uk/commentisfree/2013/jun/22/brazilian-protesters">point</a> <a href="http://www.ft.com/intl/cms/s/0/5e79204e-da5a-11e2-a237-00144feab7de.html">out</a>, there is no shortage of reasons why some <a href="http://www.reuters.com/article/2013/06/21/us-brazil-protests-idUSBRE95J15020130621">1 million or so Brazilians</a> have taken to the streets: corruption, high rates of crime, rising consumer prices, resentment about big public spending on the upcoming soccer World Cup, and—perhaps most importantly—the low quality of public services in infrastructure, health and education.

Read more on the <a href="http://www.cgdev.org/blog/brazil-another-revolution-rising-expectations-0">Center for Global Development’s blog.</a>

Image credit: <a href="http://www.flickr.com/photos/beraldoleal/">Beraldo Leal</a>/CC

Have you read?

<a href="http://cfi-blog.org/2011/08/11/brazil%E2%80%99s-central-bank-calls-for-changes-to-boost-financial-inclusion/">Brazil's Central Bank Calls for Changes to Boost Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/06/18/growing-incomes-a-potential-catalyst-for-the-next-wave-of-financial-inclusion/">Growing Incomes -- A Potential Catalyst for the Next Wave of Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/06/11/global-movement-into-the-vulnerable-class-and-what-it-means-for-financial-inclusion/">Global Movement into the Vulnerable Class, and What it Means for Financial Inclusion</a>

Fighting for Inclusion in an Expectant Brazil

&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

<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>

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 Democracy in Development, Coleman's CFR blog.

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.

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><a href="http://janchipchase.com/2010/08/mobile-money-afghanistan/" target="_blank" rel="noopener">
</a>

Have you read?

<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

&gt; Posted by Sergio Guzmán and Sonja E. Kelly, Smart Campaign Lead Specialist and Fellow, CFI

<a href="https://openknowledge.worldbank.org/bitstream/handle/10986/11858/9780821396346.pdf?sequence=5" target="_blank" rel="attachment wp-att-9761"><img class="alignright wp-image-9761" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/02/vulnerable-photo.jpg" width="250" /></a>Some call them the lower middle class, some call them assets-poor, some refer to them as the 4-10s for their earning average of <a href="http://blogs.cgdev.org/globaldevelopment/2012/11/indias-4-10s-the-new-not-poor-not-middle-class-and-its-implications.php" target="_blank">$4 to $10 per day</a>. In <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/11858/9780821396346.pdf?sequence=5" target="_blank">a publication released this year</a>, the World Bank called this group the “vulnerable class,” bridging the gap between a class they refer to as “poor” and the class traditionally known as the “middle class.” Two of the lead authors on the publication, Dr. Augusto de la Torre and Dr. Julián Messina, presented their findings at a recent event at the Inter-American Dialogue, a forum for research and conversation centered on Latin America.

The authors distinguish between two economic strata. The first is the vulnerable class, which is above the poverty line, but is still in danger of losing their discretionary income. The second is the middle class, which is firmly above the poverty line, and is unlikely to lose their discretionary income. The vulnerable class is defined by a narrow dollar range—only $4 to $10 per day. Despite this narrow income definition, in the last decade this class has grown to now contain the highest proportion of the Latin American population when compared to other economic classes. (The same phenomenon is appearing in other regions, as well, although that is a story for another day.) The graph below comes directly from the authors’ presentation (for more on the report’s methodology, see the publication <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/11858/9780821396346.pdf?sequence=5" target="_blank">here</a>).
At the event (you can watch a webcast <a href="http://www.thedialogue.org/page.cfm?pageID=32&amp;pubID=3214&amp;s" target="_blank">here</a>) the authors mentioned that the shift of the population from poor into vulnerable correlates with several factors: economic growth in countries like Mexico and Brazil, increased educational opportunities for the poor, increased female participation in the labor force, improvements in public health, and the implementation of conditional cash transfer (CCT) systems, among others. The authors are careful to define these connections as correlations rather than attributing causes.
In Latin America, many people have been making the climb toward prosperity a one-way trip. More people move from poor to vulnerable to middle class, than in the other direction.
In the financial services realm, one of the relationships highlighted by the report was between class movement and conditional cash transfers. CCTs are the beginning of a social safety net. They assist people to transition from the poor to the vulnerable class but have little effect in moving people into the middle income class. Contrast this with the role microfinance often ascribes to itself. Many microfinance practitioners, especially in Latin America, have argued that the most effective role of microfinance is to assist the working poor (vulnerable), i.e., those just above the level of people at whom CCTs are aimed.
<a href="http://www.thedialogue.org/uploads/Economics_and_Trade/MobilityandMiddleClass_Jan24_2013.pdf" target="_blank"><img class="aligncenter wp-image-9767" style="margin-top:15px;margin-bottom:15px" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/02/vulnerable-graph1.jpg" width="500" /></a>The authors suggest that when people have made the transition from vulnerable to middle class they tend to adopt more consumerist behaviors – engaging in what the authors described as “removing themselves from the social contract” by shifting from public to privately provided service alternatives (education, electrical utilities, security, etc.). Such a shift in spending patterns means that rather than saving more money as they move up the economic ladder, people in Latin America increase their spending.
The act of defining this vulnerable group is changing the way we think about financial inclusion. As we think about knowing our customers, we need to understand the motivations, choices, and challenges facing the growing number of not-quite poor, not-quite middle class populations in Latin America and beyond.

Image credit: <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/11858/9780821396346.pdf?sequence=5" target="_blank">The World Bank</a>

Have you read?

<a href="http://cfi-blog.org/2012/11/20/extending-oportunidades-a-look-into-mexicos-model-conditional-cash-transfer-program/" target="_blank">Extending Oportunidades: A Look into Mexico's Model Conditional Cash Transfer Program</a>

<a href="http://cfi-blog.org/2012/04/26/the-financial-behavior-of-rural-residents-in-latin-america/" target="_blank">The Financial Behavior of Rural Residents in Latin America</a>

<a href="http://cfi-blog.org/2010/07/28/productivity-in-latin-america-so-many-questions/" target="_blank">Productivity in Latin America: So Many Questions</a>

The New Vulnerable Class in Latin America

&gt; Posted by Sonja E. Kelly, Fellow, CFI

<a href="http://www.hatchcollaborative.com/2012/07/10/lets-have-coffee/" target="_blank" rel="attachment wp-att-9345"><img class="alignright size-medium wp-image-9345" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/01/van-houtte-coffee-date_emag_article_large.jpeg?w=300" width="300" height="200" /></a>We’ve talked in this blog about on-ramps to financial inclusion—the services that get new people into formal financial services, build trust between clients and providers, and establish new financial habits in the lives of individuals. Here’s one example, for one group of potential new customers.

Payroll loans in Latin America were recently called “the coffee date” of financial inclusion by <a href="http://online.wsj.com/article/SB10001424127887323689604578222130866020660.html" target="_blank">The Wall Street Journal</a> because they’re a relatively low-risk way to let both parties—the client and the financial institution—decide how and whether to continue the relationship.

Payroll loans are disbursed by a bank to a consumer and then automatically repaid through deductions from an individual’s paycheck. Such loans are a natural fit in a formal employment setting, especially if payroll is handled through direct deposit in a bank.

Payroll loans are a convenient way to take advantage of an institutional structure in which employees already have a bank account. They yield a much higher repayment rate than credit cards. They allow individuals to establish a credit history with a small principle and small transactions. It is no wonder that payroll loans increased 16.5 percent last year in Brazil to become an $88 billion market, and 32 percent in Mexico to become a $9 billion market.

At the Center, our vision of financial inclusion includes convenience, choice, and affordability. Here’s where we see payroll loans as perhaps a good on-ramp, but not necessarily a final destination. While payroll loans are convenient because they use the same institution through which clients are already receiving paychecks, they rarely offer a choice of lender. The system does not foster a competitive marketplace for consumers. Banks may have a greater incentive to court employers than individuals. This incentive structure may bring up questions of consumer protection. Does the bank have the best interest of the consumer or the employer in mind?

Another question concerns affordability. Since payroll loans have a higher repayment rate than credit cards (97 percent vs. 95 percent), one might expect them to carry a lower interest rate. In Mexico, however, payroll loans and credit card rates, at about 35 percent per annum, are roughly equivalent.

Even the best coffee dates are seldom the basis for a long-term relationship, so the real question is whether employees whose first experience with credit is through payroll loans actually do build a credit history that they can use to access more services over time.

And as a final note, while we can celebrate the existence of an on-ramp for people with formal sector employment, it is also true that <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/300" target="_blank">in Mexico, over 60 percent of all households operate in the informal sector</a>, beyond the reach of payroll loans. Is anyone asking those folks out for coffee?

Image Credit: <a href="http://www.hatchcollaborative.com/2012/07/10/lets-have-coffee/" target="_blank">Hatch Collaborative</a>

Have you read?

<a href="http://cfi-blog.org/2012/12/12/are-e-payments-a-boost-or-bane-to-fi2020/" target="_blank">Are E-Payments a Boost or Bane to FI2020?</a>

<a href="http://cfi-blog.org/2012/11/07/seven-trends-to-watch-in-the-march-to-achieve-full-financial-inclusion-for-all/" target="_blank">Seven Trends to Watch in the March to Full Financial Inclusion for All</a>

<a href="http://cfi-blog.org/2011/01/11/access-to-finance-as-a-network-infrastructure-problem/" target="_blank">Access to Finance as a Network Infrastructure Problem</a>

Payroll Loans: The “Coffee Date” of Financial Services

&gt;Posted by Laura Galindo
One of the Smart Campaign’s major focuses is to provide institutions with a <a href="http://www.smartcampaign.org/component/taxonomy/term/list/37/12" target="_blank">set of tools</a> they can use to help them strengthen transparent, respectful and prudent financial services to all their clients. The Campaign currently offers tools <img class="alignright size-thumbnail wp-image-5103" title="Smart Campaign" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/01/smart-campaign2.jpg?w=150" alt="" width="150" height="88" />in English, French and Spanish--all available on the <a href="http://www.smartcampaign.org/tools-a-resources" target="_blank">Campaign website</a>. Today, we are we are excited to announce the release of the <a href="http://www.smartcampaign.org/tools-a-resources/41" target="_blank">first batch of tools in Portuguese</a>, made possible with support from the <a href="http://www.iadb.org/en/resources-for-businesses/multilateral-investment-fund,5763.html" target="_blank">Multilateral Investment Fund</a>. Brazil accounts for an important part of the 700 MFIs that exist in Latin America and the Caribbean which together serve approximately 12.5 million clients. According to the<a href="http://issuu.com/idb_publications/docs/global_microscope_2011?mode=window&amp;viewMode=singlePage" target="_blank"> Global Microscope on the Microfinance Business Environment 2011</a>, Brazil is “amongst the best countries in the region for its innovation in agent banking, and has also benefited from strong financial inclusion programmes and reforms in recent years.” With the development and translation of more and more tools into Portuguese, we look forward to focusing and strengthening Client Protection practices in this growing region.
Here is a quick synopsis of some of the newly translated tools and how to get started:
The <a href="http://smartcampaign.org/tools-a-resources/496" target="_blank">Collection Guidelines for Financial Service Provider</a>s tool addresses collections policies, practices, manuals, and training of field staff. For each of these topics, an institution can compare “good practice” with its own practice, and identify areas for improvement. With this information, institutions can also develop an action plan addressing weaknesses. The <a href="http://smartcampaign.org/tools-a-resources/507" target="_blank">Client Welcome Kit</a> is another tool which refers to the set of documents that help new clients understand their full financial obligations, what they can expect from the institution, and what to do if they experience problems along the way. Now, when MFIs need help with individual lending operations to integrate good client protection practices at the intersection points throughout the credit process, the <a href="http://smartcampaign.org/tools-a-resources/100" target="_blank">Smart Lending: Client Protection in the Individual Lending Process</a> tool can be used.
Are you ready to begin? The <a href="http://smartcampaign.org/tools-a-resources/41" target="_blank">Getting Started Questionnaire</a> helps microfinance institutions investigate client protection practices within their organization. Once an institution has received an introduction to the work of the Campaign and the Client Protection Principles through our <a href="www.smartcampaign.org" target="_blank">website</a>, answering this questionnaire is the next step. We encourage our Brazilian<a href="http://smartcampaign.org/about-the-campaign/campaign-endorsers" target="_blank"> endorsers </a>to take the lead on this important process. Bem-vindo!
Have you read?
<a href="http://cfi-blog.org/2012/05/14/the-new-client-education-resource-library-tools-for-the-microfinance-industry/" target="_blank">The New Client Education Resource Library: Tools for the Microfinance Industry</a>
<a href="http://cfi-blog.org/2012/04/23/the-smart-campaign-publishes-example-codes-of-ethics-from-mfis-around-the-world/" target="_blank">The Smart Campaign Publishes Example ‘Codes of Ethics’ from MFIs around the World</a>

Ferramentas Smart, agora em Português!

Client Protection in Brazil