&gt; Posted by Jeffrey Riecke, Communications Associate, CFI

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Last week global leaders across industries gathered in the tiny mountain town of Davos, Switzerland for the <a href="http://www.weforum.org/" target="_blank">2015 World Economic Forum </a>(WEF). (Though you probably already knew that, given the annual event’s ever-swelling stature and press.) The WEF fosters strategic dialogues in the hopes of developing ideas, insights, and partnerships around the most pressing issues and transformations reshaping our world. This year’s WEF included sessions from Jack Ma of Alibaba on the future of commerce, German Chancellor Angela Merkel on global responsibilities in a digital age, IMF Director Christine Lagarde on global monetary policy, former Israeli President Shimon Peres on political affairs affecting the region, and Bill Gates on sustainable future development. Of course we were following the topic of financial inclusion, and the action that got underway made it a week worth noting. Here’s a snapshot of some of the financial inclusion happenings at Davos.

In the “Inclusive Growth in a Digital Age” session held on Wednesday, a panel, which included MasterCard CEO Ajay Banga, considered how our age of digitization can confront income and wealth inequality, support investments in education and work-based training, and address vulnerable employment. Among the points of discussion was mobile phone penetration leveraged for financial services access. A full video recording of the session is available, <a href="http://www.weforum.org/sessions/summary/inclusive-growth-digital-age">here</a>.

A session including Queen Maxima of the Netherlands, World Bank President Kim, and India’s Power and Coal Minister Piyush Goyal <a href="http://profit.ndtv.com/news/news/article-jan-dhan-yojana-turns-a-big-hit-in-davos-731259">recognized</a> the ambitious agenda set for in India’s new national financial inclusion strategy, Jan Dhan Yojana. Queen Maxima, who serves as the United Nations Secretary General’s Special Advocate for Inclusive Finance, expressed an interest in studying the scheme, while Minister Goyal offered to send officials to the World Bank to support the strategy’s replication in other areas of the world. The support follows <a href="http://profit.ndtv.com/news/industries/article-jan-dhan-scheme-11-5-crore-accounts-opened-says-finance-minsiter-730127">recent attention</a> on India’s inclusion efforts, as it was announced on Tuesday that the government of India was entered into the Guinness Book of World Records for most bank accounts opened in one week: roughly 18 million between August 23 and 29, 2014, as part of Jan Dhan Yojana. Since the financial inclusion strategy launched last August, 11.5 crore (115 million) accounts have been opened, reportedly covering 99 percent of Indian households.

Gender equality was highlighted at the WEF in several sessions. In a side interview with the Huffington Post, United Nations Foundation CEO Kathy Calvin discussed one issue affecting a range of topics, from financial inclusion to the right to work: proper birth records. Some women in developing countries don’t receive proper documentation when they’re born, making it hard for them to open bank accounts and secure employment, and hard for researchers and census takers to track their progress. It’s important and encouraging that gender parity was a focus at the WEF, but in the future this should extend to WEF participation, too. According to Quartz, only <a href="http://www.usatoday.com/story/money/business/2015/01/24/davos-world-economic-forum-wrap/22270761/">17 percent</a> of attendees this year were women.

Another side meeting, hosted by the Alliance for Financial Inclusion (AFI) President Alfred Hannig and Visa, introduced the <a href="http://www.afi-global.org/sites/default/files/publications/afi_gpf2014_ppe_fact_sheet.pdf">AFI Private-Public Dialogue model</a> to a group of private sector CEOs. The recently launched Private-Public Dialogue platform provides opportunities for dialogue between policymakers, regulators, the private sector, development partners, and other key players in financial inclusion. The exchange is to inform and facilitate coordinated actions to support AFI members in designing and implementing smart policy. Private sector participants for the platform will be selected this year.

A number of new financial inclusion-related initiatives were <a href="http://www.insurancejournal.com/news/international/2015/01/23/355027.htm">launched</a> at Davos. A microinsurance consortium and microinsurance venture incubator were announced by a group of global insurance companies and brokers. The companies in the consortium include American International Group, Aspen Insurance Holdings Limited, Hamilton Insurance Group, and Zurich Insurance Group. The incubator aims to launch 10 microinsurance ventures over the next 10 years for underserved clients in developing countries.

On Thursday, MasterCard and the African Development Bank (AfDB) <a href="http://allafrica.com/stories/201501220749.html">announced</a> a broad collaboration to develop solutions for expanding access and usage of digital financial services across the continent. The two organizations will work with African governments and local private companies to design and deliver affordable services for unbanked populations. The collaboration seeks to invest in a selected set of innovative financial services companies and solutions targeting inclusion barriers, build cohesive African financial systems at the country level, and share knowledge across stakeholder groups to support financial inclusion thought leadership.

Have you read?

<a href="http://cfi-blog.org/2014/11/12/cfi-and-the-mastercard-foundation-launch-the-accion-africa-board-fellowship-program/" target="_blank">CFI and The MasterCard Foundation Launch the Accion Africa Board Development Program</a>

<a href="http://cfi-blog.org/2014/09/23/chinas-microfinance-landscape-nonprofits-microcredit-companies-rural-financers-and-alibaba/" target="_blank">China's Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba</a>

<a href="http://cfi-blog.org/2014/11/03/domestic-violence-and-microfinance-what-is-our-role-as-financial-service-providers/" target="_blank">Domestic Violence and Microfinance: What Is Our Role as Financial Service Providers?</a>

Financial Inclusion and the World Economic Forum at Davos

Mastercard

Investors

Israel

Switzerland

Agent Banking

Digital Financial Services

Insurance

Mobile Banking

Blog Post

&gt; Posted by Andrew Fixler, Associate, CFI

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Inclusive financial services in Africa are blooming. Between the turn of the millennium and 2011, the number of African MFIs reporting to the MIX increased from 58 to 397. From 2000 to 2014, the gross loan portfolio expanded over tenfold to $6 billion. Between 2003 and 2009, the number of borrowers served by MFIs in Africa increased from 1.6 million to 8.5 million. These numbers represent the development of an economic development tool for economies with very small financial sectors. It is impressive progress for an undeveloped industry beset by sparse human capital, problematic governance, and minimal external commercial interest.

AfriCap, which was the first private equity fund to invest exclusively in African microfinance institutions, and other microfinance investment vehicles (MIVs) funded by social investors have been a key growth factor through capitalizing MFIs and offering technical assistance and training. This interest is relatively new. The African MIV portfolio grew at an average annual rate of <a href="http://www.microrate.com/media/downloads/2013/11/MicroRate-The-State-of-Microfinance-Investment-2013.pdf">36 percent</a> between 2006 and 2013. This compares with an average growth of 38 percent for investments in the Latin America &amp; Caribbean region since 2006, and 8 percent in both the Middle East &amp; North Africa and South East Asia regions. The strong connection between MIV financing and microfinance sector growth was also noted in a World Bank paper, <a href="http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/09/15/000158349_20140915084416/Rendered/PDF/WPS7029.pdf">Benchmarking the Financial Performance, Growth, and Outreach of Greenfield Microfinance Institutions in Sub-Saharan Africa</a>. The paper, released in 2014, explains the relevance of greenfield MFIs to effecting financial inclusion in undeveloped financial markets. These institutions are financed in large part by equity and debt from development finance institutions, as well as a now-significant cohort of MIVs.

African MFIs are attracting palpable interest from investors with a double bottom line. At the most recent meeting of the Financial Inclusion Equity Council (<a href="http://fiecouncil.com/">FIEC</a>) in Zurich, social equity financers, many of whom represent the expanded cohort of Africa investors, noted that there is strong interest to invest in Africa, which is seen as ripe for social impact investment, with potentially “eye watering” multiples.

Of course, the risks vary widely by country, warranting a cautious attitude and deep consideration before money can be smartly invested (a point well noted by the FIEC meeting attendees), as shown by the cautionary lessons of some of AfriCap’s more aggressive deals. AfriCap merits recognition as a pioneering microfinance investment vehicle that helped demonstrate the dynamism and investment-worthiness of the African microfinance sector. Although fund performance did not meet the hopes of its protagonists (investors who stayed with the fund from inception until 2014 realized an internal rate of return (IRR) of 1 percent), AfriCap’s legacy as part of the “cracking” of the capital markets for the African microfinance industry is significant. AfriCap formed with a challenging mission: “to support the commercialization of the microfinance industry by bridging the transition from a sector traditionally funded by donors to a scenario where the leading MFIs were raising most of their funds from commercial sources.”

AfriCap set out to fulfill its mission by building the capacity of self-sustaining microfinance institutions. In the face of a shortage of trained finance professionals, it consciously sought to bring on and develop local management, to infuse startups and established institutions with capital, and to add value to investees through technical assistance. From its founding in 2001 through its 2014 wind-down, AfriCap made equity and debt investments in 21 African MFIs. Among AfriCap’s investments were both incredible successes and complete write-offs. Over half of all investments failed to recover their direct costs, due in part to gaps in AfriCap’s own governance mechanisms to mitigate the risks inherent in the fund’s mission. Although the ultimate IRR was relatively modest, the fund demonstrated that among the range of institutions in Africa, good investments could be found and nurtured.

A soon-to-be-released study by <a href="http://www.grassrootscap.com/" target="_blank">Grassroots Capital Management</a> focuses on the role governance played in the AfriCap fund’s successes and failures, while recounting the fund’s many challenges and its ultimate accomplishment. The pivotal role of the board in governance, and the board’s lead responsibility for such critical matters as strategy, risk control, and management selection and succession, feature prominently in the study.

The successful investments among AfriCap’s portfolio provide a lasting testament to the potential of African MFIs, and contributed both directly and indirectly to the tenfold increase in the total African microfinance portfolio quoted above. The fund’s impact extended beyond direct effects of its investments to the signals it sent on the investment-worthiness of African microfinance markets. By investing in diverse countries, rather than only traditional targets such as Kenya, South Africa, and Nigeria, AfriCap reached beyond the “low-hanging fruit”, and demonstrated the investment-worthiness of MFIs across many countries.

Altogether, AfriCap’s results illustrate the opportunity for success in African microfinance investing. The story of AfriCap also illustrates the inherent risks of financing a diverse range of institutions, from startups to well-established companies that, when not contended with, can lead to portfolio losses.

To learn more about AfriCap’s governance challenges, and current scholarship on governance best practices, stay tuned for the Grassroots AfriCap case study to be released later this month.

Have you read?

<a href="http://cfi-blog.org/2014/02/10/microfinance-equity-investing-different-context-similar-issues/" target="_blank">Microfinance Equity Investing: Different Context, Similar Issues</a>

<a href="http://cfi-blog.org/2014/08/08/growth-makes-governance-more-critical-in-sub-saharan-africa/" target="_blank">Growth Makes Governance More Critical in Sub-Saharan Africa</a>

<a href="http://cfi-blog.org/2014/12/09/rajans-revolution-and-modis-microfinance-mojo/" target="_blank">Rajan's Revolution and Modi's Microfinance Mojo</a>

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Financial Inclusion and the World Economic Forum at Davos

African Microfinance’s Dynamic Growth and the Story of AfriCap