Report

<h1>Major Findings</h1>
While technology opens the way to huge growth in the provision of financial services, it is expensive and complex, and contains risks of its own. Chief among these is the risk that providers will fail to understand it effectively and place themselves at risk. It could lead to irresponsible borrowing and debt difficulties as tech helps avail credit to more people. Technology may also attract providers who are more interested in commercial gain than in the social goals of financial inclusion, or those who are unable or unwilling to design products specifically for the excluded.

In addition to technology, the survey also identifies risks that are seen to be rising in this market. Chief among these is political risk, such as interference by government in the form of interest rate caps on loans, debt waivers and subsidized competition. The risk of bad debts is also seen to be growing as the problem of indebtedness among low income populations persists. Weakness in the governance and management of service suppliers continues to be a concern. The risk of crime, particularly fraud, cyber crime and money laundering, is a growing worry.   On a more positive note, risks that are seen to be receding include the state of the global economy thanks to growing signs of recovery, and the availability of funding for financial inclusion services, particularly in the form of impact investing.

Finance for All: Wedded to Fintech for Better or Worse

Citi Foundation

Finance for All (Banana Skins)

Financial Service Providers

Risk Management

Trends

What do industry leaders feel is the biggest risk facing their institutions in 2016? This question is the focus of the latest Banana Skins report for the financial inclusion sector, Financial Services for All: It’s All about Strategy. The report ranks the top perceived risks facing those providing financial services to un/under-served people in emerging markets. Produced by the Centre for the Study of Financial Innovation (CSFI), and sponsored by Citi and CFI, the study examines the rapidly changing and expanding financial inclusion landscape to better understand how providers view challenges like new technologies, new market entrants, client repayment capacity, and macro-economic risks.

This year’s report, the sixth in the <a href="programs-a-projects/investing-in-inclusive-finance/risk">series surveying risks facing the inclusive finance industry</a>, embraces a broader scope than previous editions, which focused exclusively on microfinance institutions. The new report reflects the advances in the provision of financial services to the base of the economic pyramid and encompasses both established providers and newer entrants like commercial banks, technology companies, and telephone and communication companies. A survey with respondents spanning practitioners, investors, regulators, and other industry stakeholders comprise the report’s findings. It’s important to note that in addition to the Banana Skins report series on inclusive finance, there is also a Banana skins report series on <a href="http://www.pwc.com/gx/en/industries/financial-services/insurance/2015-survey-report.html">insurance</a> and on <a href="http://www.pwc.com/gx/en/industries/financial-services/banking-capital-markets/publications/banking-banana-skins-2016.html">banking</a>.
<h2>Findings</h2>
The ability to design and implement a strategy was ranked as the top perceived risk. Risk management and change management were number two and three. Technology came in at risk number four, up sharply from previous surveys.

Many of the top perceived risks, like technology and change management, are different than those of years past, reflecting the challenges of surviving in a fast-changing industry. Others are more familiar, like quality of governance and regulation. Overindebtedness was <a href="https://cfi-blog.org/2014/07/14/2014-banana-skins-report-reveals-overindebtedness-as-biggest-concern-in-microfinance-industry/">ranked as the top risk</a> in the past two Banana Skins reports and it’s captured in the current report under “repayment capacity,” which comes in at risk number five.

Potentially the biggest takeaway from this year’s report is that nine out of the top 10 risks pertain to internal rather than external or market risks. These risks fall within the control of management and center on an organization’s capacity to maintain clear-sightedness and lead in a vibrant industry.

The global macro-economy was the only external risk that made the top 10, reflecting how global uncertainties can threaten markets, particularly through recession, commodity price volatility, and unstable currencies.

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Financial Services for All: It’s All About Strategy

The Centre for the Study of Financial Innovation's (CSFI) latest Microfinance Banana Skins report, <em>Facing Reality</em>, charts the risk perceptions of more than 300 practitioners and close observers of the microfinance scene in 70 countries. Two-thirds ranked overindebtedness as their top concern – a persistent issue given that it was also the top concern in the Banana Skins 2012 Survey.

The survey also reveals strong concern about the ability of microfinance providers to meet the strategic challenges facing the industry in areas such as client management, new products and technological change.

Although the extent to which micro-borrowers face repayment difficulties is not known, many respondents said the problem was growing and that it posed both a financial and a reputational risk to the industry.

Respondents' comments showed that overindebtedness is seen as a symptom of deeper weaknesses in the industry, for example in micro-lenders' governance and management, internal controls, and awareness of clients’ financial needs and capacities. Seven of the top 10 risks identified by the survey relate to the ability of microfinance institutions (MFIs) to manage a sound and growing business.

One of the main drivers of overindebtedness is seen to be competition (No. 3) which is alleged to be driving down lending and ethical standards in the micro-loan business. Although the risk of political interference in the industry is easing (down from No. 5 to No. 7), reflecting the cooling of controversy about the industry in countries such as India, respondents warned that it could rebound.

The other major area of concern flagged by the survey lies in strategic planning. With strategic risk at a high No. 6 position, respondents said that insufficient thought was being given by the industry to its future at a time when major changes were taking place in its market, through new entrants, technological innovation and calls for new products.

Many potential risk areas such as client relationships, products and technology management were seen as having little urgency, particularly by the industry itself. The Banana Skins report says this suggests that these risks are being underestimated "which is itself a risk". It adds that these are among the realities "which need to be faced" if the industry is to get to grips with its future.

Microfinance Banana Skins 2014 was prepared by CSFI, an independent London think tank, and was funded by the Citi Foundation and the Center for Financial Inclusion at Accion. The 80-page report provides a commentary on each of the 19 risks that are identified in the survey, and breaks down responses by type and region, providing detailed views of the concerns by geography and different classes of respondent.

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Microfinance Banana Skins 2014: Facing Reality–The CFSI Survey of Microfinance Risk

Each year, the Microfinance Banana Skins sets out to measure perceptions of risk in the industry. The 2012 survey highlights concerns about overindebtedness, which was ranked as a top risk by respondents in over half of participating countries. This is, without a doubt, a serious issue that presents both reputational and practical risks that go to the heart of the mission of microfinance: client welfare.

As the sponsors of this report, we are pleased to see the degree of self-awareness the 2012 Microfinance Banana Skins reflects among microfinance practitioners. Awareness of risk is, after all, a “precondition to coping,” as one survey respondent noted, and a first step in beginning to manage and move beyond the risk. Practitioners reported a fair degree of confidence in their overall preparedness and ability to handle the risks identified. Already we have seen awareness morphing into action through the responsible finance agenda, with initiatives such as the Smart Campaign and the Principles for Client Protection gaining traction around the world. However, the Banana Skins survey results do raise important questions about MFIs’ capacity to rise to the occasion, and in particular management and staff capacity to cope with the complexities of the new operating environment.

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Microfinance Banana Skins 2012: Staying Relevant–The CSFI Survey of Microfinance Risk

This report analyzes the results from a survey conducted on 533 respondents from 86 countries and multinational institutions.   The survey was intended to capture main concerns about the microfinance sector, a list of potential risks (banana skins), and the preparedness of institutions for potential risks.  Some of the major findings of the report state that fears about liquidity and interest rates have subsided, that regulators may perceive lack of transparency as a threat, and that risks can be global or local.

Overall, this survey reports that the immediate risks brought forth by the global economic crisis have receded. However, these risks have been replaced by larger concerns about the future of the microfinance industry.

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