This paper examines how COVID-era economic policy measures – specifically those addressing liquidity – are directly affecting low-income segments and the financial institutions that serve them. In particular, the paper reviews the liquidity needs of financial institutions serving low-income customers in light of COVID-19, provides examples of policy measures being taken around the world to address concerns over liquidity, and addresses how these measures are affecting the financial institutions that serve low-income customers in emerging markets, especially MFIs and other related non-bank financial institutions (NBFIs). This is the first in a series of policy papers on COVID-19 economic policy responses and their impact on low-income customers.

Preserving Liquidity: Policymaker Responses to COVID-19 and the Impact on Low-Income Customers

Bangladesh

South Asia

Egypt, Arab Rep.

Middle East and North Africa

India

Jordan

Morocco

Nigeria

Sub-Saharan Africa

Peru

Latin America and The Caribbean

Uganda

Zambia

Challenges and Crises

Enabling Environment

Policy, Regulation and Government Initiatives

Brief

&gt; Posted by Stephen Thomas, Director of Risk Management, Credit Suisse

<a href="http://microlinks.kdid.org/learning-marketplace/notes/note-morocco-developing-microfinance-sector" rel="attachment wp-att-8926"><img class="alignright wp-image-8926" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/12/moroccan-microfinance.jpg" width="300" /></a>Morocco has one of the most extensive and vibrant microfinance sectors in the Middle East/North Africa region, with roughly 800,000 clients and $60 million in outstanding loans. The country’s microfinance industry hasn’t always undergone steady growth. After years of early, strong growth in a relatively lightly regulated environment, Morocco’s microfinance industry underwent a period of crisis beginning around 2006. During this time default rates rose to worrisome levels and the financial soundness of a number of microfinance institutions became imperiled.

The country’s government moved swiftly, both over this period of time, and continuing to the present. It enacted a number of laws designed to improve industry regulation. In 2006, it formalized the country’s Central Bank’s regulatory authority over the industry through <a href="http://www.idlo.int/MF/DOCUMENTS/REGULATIONS/MOROCCO1.htm">Law No. 34-03</a>. The Bank then took a series of steps to effectively enforce the government’s laws and expand its oversight of the lending activities. These steps included enacting additional legislation, conducting on-site inspections, and, when necessary, intervening. In September 2009, additional regulatory requirements were issued through the <a href="http://www.bkam.ma/wps/wcm/connect/resources/file/eb744740e503015/Recueil%20des%20textes%20lgi%20et%20rgl%20de%20BAM%20V02-05-12.pdf?MOD=AJPERES" target="_blank">Directive on the Governance of Microfinance Associations</a>. The Directive provided further clarification of managerial obligations with regard to governance, internal controls, external audit, the management of credit, liquidity and operations risks, and transparency. Other government-led measures during these years following the 2006 crisis include enhancements to regulations regarding risk management practices and contract transparency, and formally defining industry client protection principles. Adopted in 2010, these client protection principles were outlined in the <a href="http://www.fnam.ma/article.php3?id_article=22">Microfinance Code of Ethics</a> and incorporate the concepts that are enumerated in the Smart Campaign’s <a href="http://smartcampaign.org/about-the-campaign/smart-microfinance-and-the-client-protection-principles" target="_blank">Client Protection Principles</a>.

As a result of these efforts, Morocco’s MFIs have since improved their lending practices, strengthened their finances, and the financial performance of the entire sector has improved greatly. The percentage of loans at risk has diminished from a high of 6.4 percent in 2009 to 4.3 percent in 2011, and the industry has returned to profitability. In addition, the implementation of industry-wide credit qualification and risk management procedures has greatly reduced instances of clients’ engaging in cross-borrowing beyond their ability to service their debts. The industry is once again experiencing growth at a sustainable rate.

What’s more, the principles of client protection have been incorporated into the operating policies of the market participants, and a culture of client protection is being effectively instilled within the industry.

As a Credit Suisse Virtual Volunteer for the Center for Financial Inclusion, I explored these issues, which you can learn about in greater detail at my newly published Client Protection Library profile, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/client-protection-library/415-client-protection-in-morocco">Client Protection in Morocco</a>. If you follow Morocco or the MF industry in northern Africa, we would love to hear your perspectives.

<img class=" wp-image-8922 alignleft" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/12/thomas_stephen.jpg" width="100" />Stephen Thomas is a Director of Risk Management at Credit Suisse.  His area of responsibility concerns portfolio market risk in the commodities markets in which the Bank is active.  Previous to his three years at Credit Suisse, Mr. Thomas has held a variety of positions in the petroleum industry, the merchant power industry, and the banking industry. He is a member of the Credit Suisse Microfinance Advocates.

Image Credit: <a href="http://microlinks.kdid.org/learning-marketplace/notes/note-morocco-developing-microfinance-sector" target="_blank">microlinks</a><a href="http://villagesconnected.wordpress.com/author/carolinespira/" target="_blank">
</a>

Have you read?

<a href="http://cfi-blog.org/2012/10/11/straight-talk-on-client-protection-whats-internal-audit-got-to-do-with-it/" target="_blank">Straight Talk on Client Protection - What's Internal Audit Got to Do with It?</a>

<a href="http://cfi-blog.org/2012/10/25/straight-talk-on-client-protection-monitoring-client-indebtedness/" target="_blank">Straight Talk on Client Protection - Monitoring Client Indebtedness</a>

<a href="http://cfi-blog.org/2012/10/18/straight-talk-on-client-protection-hiding-fees-when-quoting-interest-rates/" target="_blank">Straight Talk on Client Protection - Hiding Fees When  Quoting Interest Rates</a>

Instilling Client Protection in Moroccan Microfinance

Credit Suisse

Risk Management

Governance

Blog Post

Researched by: Stephen Thomas, Director of Risk Management at <a href="https://www.credit-suisse.com/us/en/" target="_blank" rel="noopener noreferrer">Credit Suisse</a>

Introduction                                    

The microfinance industry in Morocco enjoyed many years of strong growth in a relatively lightly regulated environment, and then it experienced a period of crisis during which loan default rates rose to worrisome levels and the financial soundness of a number of microfinance institutions (MFI’s) became imperiled. The regulatory authorities realized that microfinance lending, as it was being practiced, was too often harming the very people that it was intended to help. In response, the authorities with the support of the government have embarked on a well-targeted and ongoing campaign to restructure and regulate the industry in a way that will allow it to achieve sustainable positive growth over the long term. At the heart of this initiative are policies designed to promote client protection. Tangible progress has been realized in the past three years:
<ul>
 	<li>The legal framework has been updated and enhanced to allow for more effective regulation and oversight of the industry.</li>
 	<li>The MFI’s have improved their lending practices and strengthened their finances.</li>
 	<li>Measures have been put in place to advance the adherence to the principles of client protection.</li>
</ul>
While much has been achieved to date, there remains much more yet to be accomplished.

Background

Morocco has one of the most extensive and vibrant microfinance sectors in the MENA region; the other being in Egypt. Currently the Moroccan microfinance industry counts some 800,000 clients and the value of the outstanding loans is in the order of $460 million, according to 2011 statistics. There are 10 active MFI’s, listed in Table 1, of which the three largest, Al Amana, FONDEP and FBPMC, control over 80% of the market in terms of loan portfolio value. The activity is distributed throughout the country with the clientele being roughly 60% urban and 40% rural.

The MFI’s in Morocco were given a legal framework within which to operate through the <a href="http://www.idlo.int/MF/DOCUMENTS/REGULATIONS/MOROCCO1.htm" target="_blank" rel="noopener noreferrer">Law No. 18-97</a>, enacted in 1999. The sector experienced rapid and significant growth up to 2006 when problems began to surface. The rate of nonperforming loans, which had been very low historically, began rising noticeably over an extended period of time.  This prompted the Central Bank of Morocco, the Bank Al-Maghrib (<a title="Bank Al-Maghrib" href="http://www.bkam.ma/" target="_blank" rel="noopener noreferrer">www.bkam.ma</a>), to intervene into what had been up to that point a lightly regulated industry. The Bank’s initiatives included on-site inspections of the loan portfolios of the various lending agencies, the MFI’s. The principal finding was the existence of a significantly high level of cross-borrowings – approximately 40% of the borrowers had multiple accounts, i.e., outstanding loans with two or more MFI’s. There were no controls in place to prohibit or even limit such cross-borrowings with the results being that a growing number of borrowers had become over-indebted relative to their ability to repay their loans.

Over the next 3 years, the growth of the sector came to a halt, and the financial performance of the existing loan portfolios deteriorated. For example, by 2008 the level of loans at risk, i.e., greater than 30 days past due, had reached 5% as compared to the level of 0.5% in <a title="‘Risques et Protection des Consommateurs en Microfinance’ page 10" href="http://www.idlo.int/MF/Documents/Publications/58E.pdf" target="_blank" rel="noopener noreferrer">2004</a>. Nonetheless, over this period of time, and continuing to the present, the government has enacted a number of laws designed to improve the regulation of the sector. At the same time, the Central Bank has taken a series of steps to effectively enforce these laws and to expand its oversight of the lending activities in the market. As a result of these efforts, the financial performance of the microfinance sector has greatly improved in recent years as the percentage of loans at risk has diminished from a high of 6.4% in 2009 to 4.3% in <a title="Rapport Annuel sur le Contrôle, l’Activité et les Résultats des Etablissements de Crédit – Exercice 2011" href="http://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=3&amp;cad=rja&amp;ved=0CEYQFjAC&amp;url=http://www.bkam.ma/wps/wcm/connect/resources/file/eb0b3c0525abb7f/dsb-rapport-2011.pdf?MOD=AJPERES&amp;attachment=true&amp;ei=Gzm5UPHdOcmx0AHgrYCgAw&amp;usg=AFQjCNEe239PfjdF7VA-pJzIrWA9AEq5AQ&amp;sig2=nlacU8tYF9JIsXlsC5cQHQ" target="_blank" rel="noopener noreferrer">2011</a> and the industry has returned to profitability. In addition, the implementation of industry-wide credit qualification and risk management procedures has virtually eliminated instances of clients’ engaging in cross-borrowing beyond their ability to service their debts. The industry is once again experiencing growth at a sustainable rate. The principles of client protection have been incorporated into the operating policies of the market participants, and a culture of client protection is being effectively instilled within the industry.

Legal Framework

The Central Bank is the entity that is primarily responsible for regulating and supervising the microfinance industry throughout the country. Within the Bank, the ‘Office of Bank Supervision’, inside of the ‘Department of Oversight of Financial Institutions’, is the division that has direct supervisory responsibility. The Bank’s regulatory authority was initially formalized through <a href="http://www.idlo.int/MF/DOCUMENTS/REGULATIONS/558REG.pdf" target="_blank" rel="noopener noreferrer">Law No. 34-03</a>, enacted in 2006. Specifically, Articles 105-120 define the regulatory authority of the Central Bank.  Since then, it has been expanded and reinforced through a series of subsequent laws and regulatory orders.

The microfinance industry experienced very strong growth during the period 2005-07. By 2008, however, the Central Bank observed that the rate of nonperforming loans had been rising for some time and that the level of loans in default had reached a historically high rate of 5%. The Bank responded by tightening its regulation of the industry through legislation bolstered by on-site inspection and, when necessary, intervention. The most noteworthy of its actions was its role in facilitating the merger of the Fondation Zakoura with the Banque Populaire pour le Micro-Crédit (FBPMC) in May 2009. Zakoura was one of the two dominant MFI’s in Morocco and had experienced rapid growth in the years preceding 2009 but without effective risk management controls. By the fall of 2008, its portfolio at risk (&gt; 30 days) had reached an excessively high level of <a href="http://www.lavieeco.com/news/economie/fondation-bp-pour-le-microcredit-zakoura-histoire-d-un-sauvetage-13680.html" target="_blank" rel="noopener noreferrer">11.6%</a>  and its financial instability had become a threat to the entire microfinance sector. The Central Bank arranged the merger in order to avoid a crisis. Once this emergency action was completed, the Government and the Central Bank began the process of restructuring the regulatory environment of the industry in order to create a more sustainable model.

The new regulatory requirements were issued through the <a href="http://www.google.com/url?sa=t&amp;rct=j&amp;q=directive%20relative%20%C3%A0%20la%20gouvernance%20au%20sein%20des%20associations%20de%20micro-cr%C3%A9dit&amp;source=web&amp;cd=2&amp;sqi=2&amp;ved=0CDUQFjAB&amp;url=http://www.bkam.ma/wps/wcm/connect/resources/file/eb744740e503015/Recueil%20des%20textes%20lgi%20et%20rgl%20de%20BAM%20V02-05-12.pdf?MOD=AJPERES&amp;attachment=true&amp;ei=Zha-UMJsx-DSAY2EgIgG&amp;usg=AFQjCNG2080l0H1TxLuvrFTQ7YtfFLx7-g" target="_blank" rel="noopener noreferrer">‘Directive on the Governance of Microfinance Associations’</a>, enacted in September 2009. This law provides further clarification of the managerial obligations with regard to governance, internal controls, external audit, the management of credit, liquidity and operational risks, and transparency in the dissemination of information concerning each institution and its operating performance. The Central Bank instituted formalized reporting policies to which the MFI’s must comply. Furthermore, it has required the MFI’s to implement risk management policies and procedures to improve the management of their loan portfolios. Since 2006, the Central Bank has had in place a practice of making regular on-site visits to the various MFI’s for the purpose of observing the operating practices, evaluating governance and internal controls, assessing the quality of the loan portfolios and verifying the conformance to the regulatory framework. This has been strengthened and the Bank stands prepared to intervene in the operations of an MFI when deemed necessary. Such intervention may take the form of:
<ul>
 	<li>Dictating improvements in operating procedures</li>
 	<li>Requiring the write-off of impaired loans</li>
 	<li>Implementing transparency practices</li>
 	<li>Adhering to client protection guidelines</li>
</ul>
The Bank also makes it clear that a failure to comply with its directives may result in the suspension of operations or the revocation of the banking license.

Also in 2009, regulations were enacted requiring the MFI’s to classify all loans and declare the level of non-performing loans in their respective portfolios. <a title="Text of the Law in the Official Bulletin No. 5866, pages 1140-41" href="http://www.sgg.gov.ma/BO/bulletin/Fr/2009/BO_5752_Fr.pdf" target="_blank" rel="noopener noreferrer">Furthermore, they were thereafter required to maintain reserves sufficient to cover the potential loss exposures</a>.

Risk management practices have likewise been significantly enhanced. For example, the MFI’s are required to implement a formal process to verify, i.e., fact check, the information submitted in each loan application. A key element in the realization of an effective nation-wide risk management policy has been the creation, in 2009, of the ‘Centralized Risk Repository’, "La Centrale des Risques", by the Central Bank. This Risk Repository fulfills the role of a credit bureau. <a title="Text of the Law in the Official Bulletin No. 5866, pages 1588-90" href="http://www.sgg.gov.ma/BO/bulletin/Fr/2010/BO_5866_Fr.pdf" target="_blank" rel="noopener noreferrer">The MFI’s are obligated to submit to the Repository the relevant information on all existing and prospective clients</a>. Consulting the facility before approving new loans has allowed the MFI’s to significantly improve their management of credit risk. The Repository has also given the Central Bank the ability to monitor and manage the risks within the microfinance industry at all levels, e.g., cross-borrowings, over-indebtedness, loans in arrears, etc.

For policy-makers, protecting the microfinance industry from credit abuses and maintaining its financial stability are critical elements to assuring the protection of clients. One of the tools employed to prevent the proliferation of cross-borrowings and to improve credit quality has been the sharing of client and loan information among the MFI’s. This has proved to be an effective policy in resolving the problem; however, it does raise the question as to the protection of confidential client information. To address this concern, the government enacted <a title="Text of the Law in the Official Bulletin No. 5714, pages 345-56" href="http://www.sgg.gov.ma/BO/bulletin/Fr/2009/BO_5714_FR.pdf" target="_blank" rel="noopener noreferrer">Law No. 09-08</a> which provides a series of legal protections of confidential and personal information in all matters financial and otherwise. The MFI’s have formally incorporated this concept into their business practices.  Nonetheless, the effective protection of client privacy will require ongoing oversight on the part of the Central Bank.

Another major area of interest in the effort to improve client protection has been the initiative to provide true transparency in loan pricing. Originally, the law gave the Central Bank the authority to impose an interest rate cap on microfinance loans; however, no such cap was ever enacted as it has never been deemed to be necessary. On the other hand, there have never been restrictions on fees and other costs that could be imposed within the terms of the loan contract; nor were there any requirements regarding the declaration or explanation of such terms. As a result, the market developed complex pricing strategies that very often left the client unaware, or confused about the total cost of the loan. Now, however, the regulations require that certain standards of transparency be met with regard to the terms of each and every contract. The contractual obligations must be clearly stated and understandable to the client. The principle of transparency, as it is being enforced by the Central Bank, covers the full disclosure of all costs involved in the lending relationship and the requirement that the loan documentation be complete and understandable to the client. The Bank’s concern is that borrowers have a thorough understanding of the full costs of their respective loans and that the MFI’s maintain a high standard of service by adhering to the principles of client protection and by dealing in good faith.

The principles of client protection have been formally defined in the <a href="http://www.fnam.ma/article.php3?id_article=22">‘Microfinance Code of Ethics’</a>, adopted in 2010. The Code incorporates the concepts that are enumerated in the Smart Campaign’s <a href="http://www.smartcampaign.org/about-the-campaign/smart-microfinance-and-the-client-protection-principles" target="_blank" rel="noopener noreferrer">‘Client Protection Principles’</a>. The Central Bank was instrumental in motivating the industry as a whole to collaborate on the creation and implementation of the Code. Although it does not have the force of law, it is intended to serve primarily to induce the MFI’s to incorporate the concept of client protection into their business philosophy. Significant progress has been made in this regard as the MFI’s have adapted their business practices to conform to the stated principles.

The Code also includes a clause that obliges the parties of any non-criminal dispute to seek resolution through arbitration. To facilitate this dispute resolution, the government has created a network of local tribunes called "tribunaux de proximité" whose mission is to provide rapid resolution of complaints while applying the precepts of the Code of Ethics and respecting the dignity of the plaintiffs. These tribunes are proving to be more efficient than the traditional court system, and their success is furthering the cause of client protection.

Microfinance Institutions

There are twelve active MFI’s in Morocco. The ten that report to Mix Market are listed in Table
I.  The remaining two are Tawana and Microcrédit du Nord

<a href="http://www.mixmarket.org/mfi/country/Morocco/" target="_blank" rel="noopener noreferrer"><img src="storage/Morocco_Table_1.jpg" alt="Morocco_Table_1" width="677" height="332" /></a>

Networks

The principal Moroccan microfinance network is the Fédération Nationale des Associations de Microcrédit, FNAM, (<a href="http://www.fnam.ma/" target="_blank" rel="noopener noreferrer">www.fnam.ma</a>). Its membership includes all twelve Moroccan MFI’s. FNAM has played a leading role in enlisting all of the MFI’s to incorporate the Code of Ethics into their operating practices and to make significant progress toward providing transparency in their lending procedures and product pricing.

Sanabel is also active throughout the MENA region and has an ongoing campaign to improve the performance of the microfinance industry and, in particular, to promote adoption and implementation of the <a href="http://www.sanabelnetwork.org/UserFiles/file/Publications/Transparency%20Publications/2011%20MENA%20Regional%20Snapshot_EN.pdf" target="_blank" rel="noopener noreferrer">Client Protection Principles</a>.

Conclusion

Morocco has achieved significant progress in stabilizing the microfinance industry and in implementing regulations that will promote client protection. The cooperation among the regulatory authorities, the IMF’s and the NGO’s active in the country has created an environment favorable to the future development of the industry. Yet much remains to be done. One important initiative on the horizon concerns a regulatory initiative to standardize the interest rate practices across the industry and to establish specific requirements to be met in terms of business transparency with respect to the clients.

<a title="Client Protection Library" href="publications-a-resources/client-protection-library" target="_parent" rel="noopener noreferrer">Back to Client Protection Library</a>

Client Protection in Morocco

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Report

Mayada El-Zoghbi

Managing Director

Loretta Michaels

Hema Bansal

Gloria Grandolini

Jeffrey Riecke

Stephen Thomas

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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.

&gt; Posted by Center Staff

<a href="http://bit.ly/CPPjourneyEn"><img class="aligncenter wp-image-23116" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/02/time-line.png" width="614" height="295" /></a>

What’s better than blog posts? As a blogger, I’m inclined to assert that nothing is in fact better than blog posts. Alas, with self-awareness, I think we can all agree that interactive websites are cool. And that interactive websites about client protection in microfinance are especially cool!

Created by Nathalie Assouline of Alia Développement, a new interactive website offers users a media-rich experience for learning about the development of the microfinance industries in Cambodia and Morocco, with a special focus on client protection.

Users navigate dynamic world maps and timelines, embedded with information about market size, specific market players, financial inclusion, regulation, funding, and more. The site also includes a trove of video interviews, showcasing clients and financial institution staff talking about how they see client protection.

A number of <a href="http://smartcampaign.org/certification/all-about-certification">Smart Certified</a> financial institutions are featured in videos discussing their client protection practices, including:
<ul>
 	<li>KREDIT Microfinance (Cambodia)</li>
 	<li>ATTAWFIQ Microfinance (Morocco)</li>
 	<li>Al Amana (Morocco)</li>
 	<li>Hattha Kaksekar Limited (HKL) (Cambodia)</li>
 	<li>LOLC Micro Credit Ltd. (Cambodia)</li>
 	<li>Sathapana Bank (Cambodia)</li>
 	<li>Amret Microfinance (Cambodia)</li>
</ul>
Hosted on the Smart Campaign website, the interactive microsite is provided in English and French, accessible <a href="http://bit.ly/CPPjourneyEn">here</a> and <a href="http://bit.ly/CPPjourneyFR">here</a>.

Have you read?

<a href="https://cfi-blog.org/2016/12/05/client-centricity-at-scale-the-brac-smart-certification-journey/">Client-Centricity at Scale: The BRAC Smart Certification Journey</a>

<a href="https://cfi-blog.org/2016/09/28/fintechprotects-prioritizing-responsible-agent-management-at-oxigen/">#FintechProtects: Prioritizing Responsible Agent Management at Oxigen</a>

<a href="https://cfi-blog.org/2015/03/26/smart-certification-kashf-foundation-takes-the-lead-in-pakistan/">Smart Certification: Kashf Foundation Takes the Lead in Pakistan</a>

New Interactive Website: Exploring the Client Protection Journey in Cambodia and Morocco

&gt; Posted by Gloria Grandolini, Senior Director, Finance and Markets Global Practice, the World Bank Group

<a href="http://www.fi2020week.org/">FI2020 Week</a><a href="http://www.fi2020week.org/"><img class="alignright wp-image-19409" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/09/fi2020-week-logo.png" alt="" width="350" height="141" /></a> is a global conversation on the key actions needed to advance financial inclusion, grounded in the findings of the recently launched FI2020 Progress Report. From November 2-6, 2015, stakeholders around the world are participating in more than 30 events and sharing their voices over social media, with #FI2020.

Despite <a href="http://www.worldbank.org/en/programs/globalfindex">significant progress</a> and the increased technical and financial resources devoted to financial inclusion, 2 billion people worldwide still lack access to regulated financial services.

As I read the <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a> and cast my vote on how the world is doing on the five aspects of financial inclusion the FI2020 report covers, I’m reminded of the recent <a href="http://www.afi-global.org/global-policy-forum/2015">Global Policy Forum of the Alliance for Financial Inclusion</a> (AFI), where I had rich discussions with AFI members regarding how to meet challenges to expanding access to financial services.

The successes and obstacles which AFI members shared echo many of the points identified in the FI2020 Progress report as shaping the future of financial inclusion.

These hurdles can be distilled into five main challenges:

Financial literacy and capability. Countries must develop financial capability programs to ensure people can make sound financial decisions, select financial products which best fit their needs, and know how to use related channels, such as ATMs or mobile banking. Recent World Bank Group Financial Capability Surveys in <a href="http://documents.worldbank.org/curated/en/2014/12/23974005/enhancing-financial-capability-inclusion-morocco-demand-side-assessment">Morocco</a> and <a href="http://documents.worldbank.org/curated/en/2014/08/20151823/enhancing-financial-capability-inclusion-mozambique-demand-side-assessment">Mozambique</a>, and studies on remittance services among migrants in France and Italy, show that a lack of awareness prevents people from using suitable financial products and services. Behavioral insights are leading to more effective – and lower cost – financial literacy efforts, which can improve uptake of new accounts and increase savings, including through tailored SMS texts.

Valid identification documents. Providing people with a valid ID is essential to enabling access to financial services. Without valid and accessible IDs, it’s not possible to shift large payment flows like social benefit transfers and wages into transaction accounts. The process to obtain a valid proof of ID and to open an account needs to be streamlined. In countries where ID documents are not sufficiently robust and easy to authenticate as required by Know-Our-Customer requirements, financial inclusion efforts haven’t made as many inroads.

Financial consumer protection and regulation. For mobile money and other e-money products to safely expand financial access, strengthened regulatory frameworks and oversight are needed. <a href="http://documents.worldbank.org/curated/en/2014/06/20272197/digital-identity-toolkit-guide-stakeholders-africa">Secure and reliable platforms</a> to protect data privacy and funds can promote confidence in using electronic payments. It’s also important to treat new customers fairly, adequately disclose key product information, and establish safety and reliability standards to allow customers to make informed choices about products they select.

<a href="https://www.flickr.com/photos/10816734@N03/2689582039/"><img class="alignright wp-image-19913" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/11/2689582039_fcfd86ab5f_z.jpg" alt="" width="350" height="224" /></a>Women and the rural poor. <a href="http://www.worldbank.org/en/programs/globalfindex">Women in developing countries are 20 percent less</a> likely than men to have an account and 17 percent less likely to have borrowed from a formal financial institution in the past year. Financial institutions need to adapt financial products to suit <a href="http://www.theguardian.com/visa-partner-zone/2015/jun/11/world-bank-group-unbanked-women-global-findex">women’s needs</a>. This effort can range from providing women with valid proof of ID and enabling them to independently open an account, to enhancing their ability to make basic financial decisions. The <a href="http://documents.worldbank.org/curated/en/2014/12/23974005/enhancing-financial-capability-inclusion-morocco-demand-side-assessment">2014 World Bank Group Financial Capability Survey in Morocco</a> showed that women and people living in rural areas score significantly lower on various financial capability metrics (budgeting, coping with unforeseen events, etc.) compared to men and the urban population. Overall, they tend to be less educated or less likely to be formally employed.

Usefulness. Opening a transaction account is the first step, not the end goal. Transaction accounts must be useful and serve as a gateway to other financial products such as savings, credit, and insurance. Some <a href="http://www.worldbank.org/en/programs/globalfindex">355 million adults</a> in developing countries who report having an account still remit money in cash or over-the-counter. Governments and the private sector can play a key role in accelerating usage by depositing wages into accounts versus paying cash. For example, India’s <a href="http://www.pmjdy.gov.in/">Pradhan Mantri Jan-Dhan Yojana</a> (PMJDY) initiative is shifting benefits, including for the LGP-fuel subsidies, into transaction accounts on a large scale, and has reportedly opened more than 180 million accounts.

In the last two years, the World Bank Group has committed more than <a href="http://www.worldbank.org/en/news/infographic/2015/09/03/getting-to-universal-financial-access-2020">$8 billion in financial support</a> for expanding financial access and inclusion, and for developing enabling regulatory frameworks and financial infrastructure.

This past spring, the <a href="http://www.worldbank.org/en/topic/financialinclusion/brief/ufa2020-building-coalition-of-partners">World Bank Group and a number of public and private-sector stakeholders</a> committed to reaching the remaining unbanked people in the next five years through the <a href="http://www.worldbank.org/en/topic/financialinclusion/brief/achieving-universal-financial-access-by-2020">Universal Financial Access 2020 (UFA2020) initiative.</a> The World Bank Group support alone is projected to enable 1 billion adults to gain access to a transaction account. The UFA2020 initiative focuses on 25 countries where 73 percent of the world’s unbanked population lives. However, we are eager to work with all countries where we can add value as a technical partner or provide critical financial support.

At the global level, the World Bank Group and the <a href="https://www.bis.org/cpmi/">Committee of Payments and Market Infrastructures</a> (CPMI) of the Bank for International Settlements (BIS) have analyzed these challenges in the <a href="https://consultations.worldbank.org/consultation/payment-aspects-financial-inclusion">consultative report on Payment Aspects of Financial Inclusion</a>, which is open for comments until December 7, 2015.

The report examines what elements of retail payments are critical to financial inclusion and how improving the payments infrastructure and services could accelerate access to and use of transaction accounts.

Once finalized, the report will suggest key actions countries should take to advance access to transaction accounts.

These actions will be crucial to making financial inclusion a reality.

<a href="http://www.worldbank.org/en/about/people/gloria-m-grandolini">Gloria Grandolini</a> is senior director of the Finance and Markets Global Practice at the World Bank Group. Follow @WBG_Finance on Twitter and use #FinAccess2020 to read about the World Bank Group’s work on <a href="http://www.worldbank.org/en/topic/financialinclusion">Financial Inclusion</a>.

Image credit: <a href="https://www.flickr.com/photos/10816734@N03/2689582039/">Curt Carnemark / World Bank</a>

Have you read?

<a href="http://cfi-blog.org/2015/10/01/rating-progress-toward-financial-inclusion-on-a-scale-of-1-to-10/">Rating Progress toward Financial Inclusion on a Scale of 1 to 10</a>

<a href="http://cfi-blog.org/2015/10/08/why-we-gave-consumer-protection-a-5/">Why We Gave Consumer Protection a 5</a>

<a href="http://cfi-blog.org/2015/10/07/addressing-customer-needs-off-to-the-data-mines/">Addressing Customer Needs? Off to the Data Mines</a>

Tackling Five Challenges to Accelerate Financial Inclusion

&gt; Posted by Center Staff

<a href="https://www.flickr.com/photos/gatesfoundation/5791349306/"><img class="aligncenter wp-image-17882" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/04/5791349306_801bd87a6e_b.jpg" alt="" width="610" height="406" /></a>Unless you’re with one of the few organizations working to combat youth financial exclusion, you probably don’t hear much about the issue. A few weeks ago, the world celebrated <a href="http://cfi-blog.org/2015/03/13/the-global-movement-to-bank-one-of-the-worlds-most-underserved-segments/">Global Money Week</a>, which is gaining encouraging participation and engagement. Sadly, aside from this annual blitz of activity, there isn’t much in the airwaves on expanding financial access to this hugely underserved client segment. According to the Global Findex, in higher-income countries, 42 percent of youth save in financial institutions. The next highest regions are East Asia &amp; Pacific and sub-Saharan Africa, where this rate is 19 and 9 percent respectively. During our youth, financial services and financial education help us save for the future, form good money management behaviors, and navigate life transitions like getting an education and starting a family.

The MasterCard Foundation, as spotlighted in a recently released report, has been quietly busy these past seven years working to address this shortcoming. Since 2008, the Foundation in partnership with six organizations has worked with over 30 financial services providers and non-profits to expand youth access to banking services. The new report, <a href="http://www.mastercardfdn.org/what-we-are-learning/publications/youth-financial-inclusion">Financial Services for Young People: Prospects and Challenges</a>, reviews the MasterCard Foundation’s youth financial inclusion projects for insights and learning to inform future industry efforts.

Across the projects, clients’ target age range was 12 to 19 years old. The work included urban and rural areas, formal providers and informal community groups. Most of the projects were in sub-Saharan Africa, but also in Ecuador, Nepal, Colombia, and Morocco. In sub-Saharan Africa, where financial inclusion is especially low, there are 370 million people between the ages of 15 and 24.The projects tested a range of approaches, most based on savings, as opposed to credit. Project activities included market research, product development and testing, the delivery of financial education, the scaling of services offerings, building life skills, and other support. To date, as part of the projects, 762,100 young people have received financial education and life skills instruction, and 720,100 have opened new savings accounts.

As for the findings? Here is a handful of project takeaways, based on the four questions explored in the report:

Do young people need financial services? The demand for youth financial services is clear. Along with the impressive number of young people who participated in the projects, it’s estimated that, across sub-Saharan Africa, young people hold $2.2 billion in savings accounts, with the lower-income clients in this group accounting for almost half of this figure. Like other client segments, even when young people don’t have access to formal financial services, they save their money, borrow funds to meet needs, launch income-generating activities, and plan for the future. The project found that if younger people perceive products offer value and fair pricing, they are eager to learn about financial services and willing to pay for them.

Does financial access benefit young people? Project findings indicate that better savings and budgeting activities emerge with access to either formal or informal savings services. Other benefits include reduced costs of transactions, greater perceived safety of transactions, and “halo” or secondary benefits like enhanced confidence, access to opportunities, and an orientation toward the future.

What do we know about the business case for providing financial services to young people? Low transaction amounts and account balances make it costly for financial services providers catering to younger clients. However, in urban markets where competition will likely drive down costs, children and youth will likely become increasingly viable client segments in the future. Encouraging frequent account usage, product cross-selling to families and friends, and technology-enabled business models can improve the business model for providers. Additional support from donors and governments may be needed to help extend service offerings to particularly excluded youth in hard-to-reach areas.

How do we create regulatory and policy environments for the greater financial inclusion of young people? Proof of identify, address, and age are often barriers to access for youth clients. The report finds that the costs of complying with Know Your Customer and anti-money laundering regulations, and reporting requirements, are onerous for providers. Stakeholder groups, including regulators, national policy-makers, and services providers, need to coordinate to ensure that young people who open accounts are protected, and barriers to access are lowered.

For additional findings, including next steps to advance youth inclusion, read the report, <a href="http://www.mastercardfdn.org/what-we-are-learning/publications/youth-financial-inclusion">Financial Services for Young People: Prospects and Challenges</a>.

Image credit: <a href="https://www.flickr.com/photos/gatesfoundation/5791349306/" target="_blank" rel="noopener">Gates Foundation</a>

Have you read?

<a href="http://cfi-blog.org/2014/10/17/credit-suisse-sponsored-event-focuses-on-financial-capability-and-the-policy-and-business-case-for-youth-financial-inclusion/">Credit Suisse-Sponsored Event Focuses on Financial Capability and the Policy and Business Case for Youth Financial Inclusion</a>

<a href="http://cfi-blog.org/2015/03/13/the-global-movement-to-bank-one-of-the-worlds-most-underserved-segments/" target="_blank" rel="noopener">The Global Movement to Bank One of the World's Most Underserved Segments</a>

<a href="http://cfi-blog.org/2013/11/18/riding-financial-inclusion-disruption-are-youth-savers-the-surfers-or-the-wave/">Riding Financial Inclusion Disruption: Are Youth Savers the Surfers or the Wave?</a>

Financial Services for Young People: Prospects and Challenges

&gt; Posted by the Microfinance CEO Working Group

The following post was <a href="http://microfinanceceoworkinggroup.org/?p=1095" target="_blank">originally published</a> on the Microfinance CEO Working Group blog.

<a href="http://microfinanceceoworkinggroup.org/"><img class="alignright wp-image-15821 size-medium" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2014/08/mcwg-logo.png?w=300" alt="" width="300" height="59" /></a>The <a href="https://www.aeaweb.org/articles.php?doi=10.1257/app.7.1">American Economic Journal</a> has published an issue dedicated to six new studies measuring the impact of microcredit. Through a series of randomized control trials (RCTs), researchers have identified some of the effects of expanded access to microcredit on borrowers and communities in Bosnia, Ethiopia, India, Mexico, Mongolia, and Morocco.

The researchers reported evidence of positive impacts of microcredit on occupational choice, business scale, consumption choice, female decision power, and improved risk management, but did not report clear evidence of reduction in poverty or substantial improvements in living standards. “These results,” conclude the authors, “suggest that although microcredit may not be transformative in the sense of lifting people or communities out of poverty, it does afford people more freedom in their choices… and the possibility of being self-reliant.”

As microfinance practitioners, we acknowledge and appreciate the importance of such research and study the data carefully. Such studies play an important role in helping to measure our efforts and guiding us in improving our practices. They lead us to examine our work carefully, refine our theories of change, and set expectations for how that change might occur. They lead us to cast a critical eye toward the products and services we develop.

Many microfinance institutions believe that microcredit, especially when combined with additional financial products like savings and insurance as well as non-financial services like health care, can have significant impacts on the lives of the poor and pursue such impacts as part of their organizational missions. These six studies do not address the impact of many other promising non-credit microfinance activities, although a number of other studies do. “MFIs now increasingly focus on savings, not just credit,” the authors note, “and the evidence from randomized evaluations of micro-savings is quite promising.”

Impact studies and their methodologies will continue to be debated both within and without the industry. Wise practitioners will use the data from RCTs, financial diaries, and traditional forms of market research to become more innovative, responsive, client-centered, and dedicated to developing high-quality products and services, especially products beyond microcredit.

Intuitively, the principles of microfinance make sense: better financial services facilitate economic activity, particularly where those services aren’t reliable or never existed. But, intuition alone isn’t enough, whether for individual donors, corporate foundations, government agencies or investors – indeed, for anyone who seeks to effect social change with their support. Data like these complement our intuition and compel us to maintain our commitment to upholding our organizations to the highest standards.

Have you read?

<a href="http://cfi-blog.org/2014/08/19/on-the-pathway-to-responsible-microfinance-an-update-on-the-microfinance-ceo-working-groups-progress/" target="_blank">On the Pathway to Responsible Microfinance: An Update on the Microfinance CEO Working Group's Progress</a>

<a href="http://cfi-blog.org/2014/05/19/new-microfinance-ceo-working-group-papers-examine-causes-and-potential-remedies-for-over-indebtedness/" target="_blank">New Microfinance CEO Working Group Papers Examine Causes and Potential Remedies for Over-Indebtedness</a>

<a href="http://cfi-blog.org/2014/04/09/microfinance-does-health-care/" target="_blank">Microfinance Does Health Care</a>

Measuring the Impact of Microcredit – Six New Studies

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

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

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.

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

Set to Grow in 2015: Islamic Microfinance