Today there are close to 700 million mobile money accounts registered worldwide — a number that, if it were a population, would rank as the world’s third-largest country. East Africa continues to lead in digital financial innovations as well as account usage, with two-thirds of the combined adult populations of Kenya, Rwanda, Tanzania, and Uganda actively using mobile money. With the proliferation of mobile financial services, particularly among underserved populations, it is vital that users be treated fairly and with dignity. In the momentum to define responsible digital finance and recognize providers of high-quality financial services, the industry must not forget the consumer.
<h1>Client Voices: Why We Listened</h1>
<a href="/about/what-we-do/the-smart-campaign/">The Smart Campaign</a>, a global initiative to create an environment in which financial services are delivered safely and responsibly to low-income clients, has long recognized that client perspectives are often underrepresented in consumer protection discussions. With the Client Voices Project, the Campaign questions whether the industry’s assumptions about what constitutes problematic treatment rightly reflect what clients themselves worry about.

The dual objectives of the project are to solicit input from low-income clients about what they consider good and bad treatment in their interactions with financial service providers and to assess the prevalence of consumer protection problems among these clients, using quantitative surveys. The project is designed to act as a catalyst for financial service providers, regulators, industry associations, consumer advocacy groups, and others to improve client protection in ways that are grounded in client feedback.
<h1>Major Findings</h1>
Based on a survey of over 1,200 people in three districts in Rwanda, this report delves into the experiences of individuals who use digital financial services (DFS), the main client protection issues they are concerned about, and the impact and prevalence of negative experiences. We find that mobile money enjoys a high degree of satisfaction and trust from clients in Rwanda, even though 40 percent of clients report being targeted by fraudulent schemes, which have become increasingly sophisticated.
<blockquote>Customers report wising up to scams and fraud, but with a continuous influx of new mobile money users and fraudsters who innovate quickly, the threat is real and constant. Fraud represents the greatest potential to damage customer trust and engagement with mobile money in Rwanda.</blockquote>
However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust. Client recourse mechanisms, for example, represent an important area for improvement: many clients shared that they feel helpless and unsure about what to do after realizing they have been duped. Additionally, for business models that rely more on the mobile interface than on human interaction, clients increasingly rely on agents for information and guidance. This presents an opportunity to provide better service, as well as a risk for poor client treatment.

We hope that providers, industry associations, support organizations, regulators, consumer protection advocates, and clients can benefit from these findings to create a stronger, more inclusive client protection ecosystem. We offer specific recommendations for many of these stakeholders.

Client Voices: Rwandans Speak on Digital Financial Services

Laterite Ltd

Mastercard Foundation

The Smart Campaign

Rwanda

Sub-Saharan Africa

Keeping Clients First

Agent Banking

Appropriate Product Design and Delivery

Client Treatment

Complaint Resolution

Consumer Protection

Credit

Credit Provision

Delivery Channels

Digital Credit

Digital Financial Services

Financial Service Providers

Mobile Banking

Payments

Privacy

Telcos

Underserved Groups

Report

Low-income women, especially minority women, continue to be the group most excluded from traditional financial systems in the United States. Many don’t have bank accounts or credit histories. These are major challenges – and reasons why we are sharing our insights with a view toward “getting inclusion right” for this vulnerable population right here in one of the wealthiest countries in the world.

Nearly <a href="https://www.fdic.gov/news/news/speeches/spmay2317.html">27 percent</a> of households in the United States, or 90 million people, are unbanked or underbanked—and many of these households are poor and led by women. Despite accounting for a growing share of new businesses, women receive only <a href="https://microbiz.org/wp-content/uploads/2014/07/21st-Century-Barriers-to-Womens-Entrepreneurship.pdf">4 percent</a> of all small business loans from conventional financial institutions.

These numbers have not improved much over recent years, and they are unlikely to change dramatically unless we give women, particularly those living in poverty, a chance. The deck is overwhelmingly stacked against them. To break out of this vicious cycle of poverty, women need tools to both save and borrow money, and to build their credit histories. Only then can they gain meaningful control over their lives and their futures.

Grameen America’s lending model does this by drawing on and building women’s social capital—an extremely valuable resource—to connect them to sources of financial capital.

Most financial institutions and traditional lenders require collateral. But this is a huge barrier for people with extremely limited resources. As a result, their ability to start or grow their businesses is severely curtailed. <a href="https://www.grameenamerica.org/">Grameen America</a> focuses on this population, women living below the poverty level, and our approach is different from that of traditional lenders.

We see immense value in women’s social capital. Our group-lending model is built not on traditional collateral, but rather on trust and a social contract that holds the members accountable to each other. There is joint responsibility. Moreover, the relationships the women form with each other and their shared values—and often their shared sense of identity—strengthens them individually. They have a sense of belonging, and because they are part of this social network, they have access to information that they wouldn’t have otherwise. They gain support and build greater confidence, along with stronger financial footing, through the group model.

This model itself is a form of social collateral. The women we serve may not be able to provide financial collateral, but they do have reputations within their communities. Their peers deem them responsible, disciplined, and reliable, and therefore they are accepted into the Grameen group. And by being a member of the group and getting and repaying their loans, their social capital grows as does their financial independence. They gain much by the solidarity they share, and by participating in the program, they are able to grow their businesses, save money, and ultimately break out of poverty.

Most banks believe that low-income women are among the riskiest borrowers. However, Grameen America has proven time and time again that this is not the case; we have served over 108,000 women over the last ten years, and they have maintained a repayment rate of over 99 percent. We have found that low-income women are highly dependable and trustworthy, and they can be highly effective entrepreneurs when given the opportunity. They are in fact one of the wisest investments we can make.

Aracely -- a member in Omaha, Nebraska -- recently said, “Other companies don’t believe in poor people, but Grameen does. They helped me start my business, changing my life in the process.” We have seen that when low-income women are entrusted with microloans and other financial services and support, they can start to build better lives for themselves—and building their social capital is crucial to achieving this.

Leveraging Social Capital to Expand Women’s Financial Opportunities

United States

Financial Inclusion Week

Women

Blog Post

In celebration of its 10th anniversary, the Center for Financial Inclusion at Accion asked 10 leaders in the financial inclusion community to set out their agenda for Getting Inclusion Right. The resulting essays and webinar series creates a roadmap to take financial inclusion into the next decade.

You are invited to join CFI on <a href="https://attendee.gotowebinar.com/register/5224822474483746561">Thursday, October 18, at 10 am EDT</a> for this second virtual event, featuring <a href="https://content.centerforfinancialinclusion.org/people/simone-di-castri/">Simone di Castri</a> and Ariadne Plaitakis of Bankable Frontier Associates (BFA) on getting policies right and <a href="https://www.linkedin.com/in/buhle-miranda-goslar-a0ba1830/">Buhle Goslar</a>, Chief Customer Officer of Jumo, on getting credit right.

You can listen to the <a href="https://www.centerforfinancialinclusion.org/webinar-getting-inclusion-right">first virtual event</a> of this series featuring Garance Wattez-Richard of AXA on getting insurance right and Elisabeth Rhyne, Managing Director of CFI, on getting inclusion right from the customer’s perspective. It was held September 18.

Over the coming weeks you will have a chance to read or hear from Tim Adams of the Institute of International Finance on why financial inclusion matters, Shameran Abed of BRAC on the digital divide, and Mark Pickens of Visa on payments. We will also look at the ecosystem with Chris Skinner of the Finanser, data privacy with Katharine Kemp of the University of New South Wales, and the role of investors with Jonathan Whittle of Quona Capital.

Together, these 10 leaders lay out a “true North” for the financial inclusion sector that is both visionary and practical as we work to create tangible benefits for the financially excluded and underserved.

Don’t miss your chance on October 18 to tune into this live conversation with these leading figures as they discuss and respond to your questions about key challenges and opportunities for getting policies and credit right—we look forward to having you <a href="https://attendee.gotowebinar.com/register/5224822474483746561">join us</a>!

You can keep up with 10th anniversary events, webinars, essays and blog posts on Twitter at #gettinginclusionright, on our website's <a href="https://www.centerforfinancialinclusion.org/series/getting-inclusion-right">series page</a>, or by searching "Getting Inclusion Right" in Google.

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Webinar: Getting Credit and Policies Right

Getting Inclusion Right

Enabling Environment

Fintechs

Policy, Regulation and Government Initiatives

Webinar

All over the world, small loans to individuals and very small businesses are increasingly made using digital channels, whether online, via a mobile device or through an agent. However, trust, confidence and responsible lending practices need to be in place to ensure this industry is successful and its customers are protected and empowered.

In <a href="storage/Responsible_Digital_Credit_FINAL_2018.07.18.pdf">Responsible Digital Credit</a>, CFI Fellow John Owens outlines the digital credit landscape and the risks customers face, and examines the best practices, standards and initiatives that exist or should be implemented to improve consumer protection in digital lending. Ultimately, John argues, it will take a village to ensure that digital credit clients are protected—including govenrments, regulators, industry players, advocates and consumers themsleves. He sees three key activities: 1) industry self-regulation, 2) certification of digital credit providers, and 3) directly empowering consumers, as key to the future of what responsible digital credit looks like.

This report is published jointly with the <a href="http://www.smartcampaign.org/">Smart Campaign</a> and was made possible by support from Mastercard Foundation and other partners.

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Responsible Digital Credit

CFI Research Fellows Program

Responsible Digital Finance

It’s the most wonderful time of the year! We are thrilled to announce that we are <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">now accepting proposals</a> for the 2018 cohort of CFI Fellows.

Building upon the impact of the <a href="http://bit.ly/CFI-Fellows">CFI Fellows Program</a> over the past three years, we’re looking for proposals from researchers and practitioners with demonstrated experience executing high-quality research projects from start to finish. Successful proposals will articulate a thoughtful and feasible response to one of the questions in our research agenda.

This year’s research agenda reflects an exhaustive consultative process, and thanks to <a href="https://cfi-blog.org/2018/04/12/help-us-shape-our-fellows-program-research-agenda/">your help</a>, we’ll be selecting proposals that best address one of the following topics:
<ol>
 	<li>How do financial institutions use mass APIs, open APIs, custom APIs and bespoke partnerships to partner effectively with fintechs to reach the underserved? </li>
</ol>
Financial institutions of all sizes are finding that <a href="http://bit.ly/PartneringFintechs">partnerships with fin</a><a href="http://bit.ly/PartneringFintechs">techs</a> can help them reach underserved customer segments, and increasingly, these partnerships use APIs to create the necessary connections that enable data sharing between fintechs and financial institutions. However, it may be especially challenging for smaller financial institutions to benefit from such connections. How do recent efforts to create more accessible APIs function? Which models are working well? Research should include a comparison between mass APIs, API marketplaces, open APIs, bespoke APIs, and custom partnerships, recognizing that there are opportunities and challenges associated with each.
<ol start="2">
 	<li>How do electronic invoicing (e-invoicing) and other electronic filing mandates enable financial services providers to make better decisions about MSME lending? Have more MSMEs become financially included as a result of these efforts? </li>
</ol>
We’ve seen that e-invoicing is being mandated by governments across Latin America and in selected other countries as a tax compliance initiative (<a href="https://assets.kpmg.com/content/dam/kpmg/us/pdf/2017/10/mandate-for-e-invoicing-adoption-kpmg.pdf">KPMG, 2017</a>) and we expect that this practice may have spillover effects for financial inclusion. Through the collection and analysis of rich transaction data from micro, small and medium enterprises (MSMEs) that electronic invoicing provides, lenders are finding new ways of assessing this customer segment. This research will identify which providers are leveraging this data to improve their lending operations for MSMEs and through what means.
<ol start="3">
 	<li>How can employers in developing countries support the financial health of their employees?</li>
</ol>
Financial health is an increasingly important concept in the financial inclusion ecosystem, but we find that one often overlooked set of actors is employers. Employers have an important stake in the financial health of their employees, as financial challenges can create stress, absenteeism and other problems. This fellowship will explore the research on financial stress and employment to better articulate why employers in emerging markets should care about financial health, the interest of employers in active involvement, examples of good practice and/or tools or resources that employers need to get involved.
<ol start="4">
 	<li>What is the landscape of financial products and services designed to meet previously underserved consumers’ (physical) health needs? </li>
</ol>
This fellowship will review the current status of health finance initiatives in the developing world or in a region or set of countries. It will identify and analyze the key challenges that existing programs encounter, with reference to the most successful models.

If you are passionate about financial inclusion, can craft a high-quality research plan that demonstrates a thoughtful approach, and have relevant experience in producing impactful analytic work, we want you to submit a proposal or share this opportunity with a colleague.

For more information (or inspiration), visit <a href="http://bit.ly/CFI-Fellows">our website</a>, view the full <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">request for proposals</a>, or email <a href="mailto:tjohnson@accion.org?subject=Question%20About%20CFI%20Fellows%20Program%202018">Tess Johnson</a>. We can’t wait to see how you tackle these questions!

&nbsp;

&nbsp;

CFI Fellows Program Now Accepting Proposals

Financial Health

MSME/SME Finance

<span style="float: none;background-color: transparent;color: #333333;cursor: text;font-family: Georgia,'Times New Roman','Bitstream Charter',Times,serif;font-size: 16px;font-style: normal;font-variant: normal;font-weight: 400;letter-spacing: normal;text-align: left;text-decoration: none;text-indent: 0px">Despite the rise in mobile money in Africa, and globally, the gap between supply and demand for credit in the region remains. Surprisingly, in this milieu, start-ups are at risk of accelerating the pace of over-indebtedness in Africa. The number of start-ups reaching last mile clients is rising. The driver of this is fintechs taking advantage of a business opportunity, and the prospect that if you offer clients much-needed credit at a lower cost than the alternative, they will be better off.

But is this necessarily true? Are these start-ups offering solutions to the credit needs that many small and medium African businesses have, and are clients better off with these solutions? Or is the fintech digital credit hype attracting lenders that offer credit in the wrong places – and for the wrong reasons? What is needed to ensure that digital credit is provided responsibly, for the benefit of clients?
<h4>Start-ups are at risk of accelerating over-indebtedness by supplying credit to clients without conducting appropriate repayment capacity analysis.</h4>
Some estimate that digital technologies have cut the cost of providing financial services by 80-90 percent (<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">McKinsey Global Institute, 2016, PDF</a>). Africa is taking the lead in the rise of mobile technology, and the opportunities are promising. Start-ups in this space are making big strides. Those involved in digital credit either deliver digital credit directly or enable its delivery through downstream product servicing. The number of fintechs – startups offering these services – in Africa is growing daily (<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">Mesropyan, 2016</a>).

Technology well used offers opportunities not previously available. However, two key issues need to be recognized and addressed in order to generate long-term benefits for both clients and providers.
<ol>
 	<li>Provider and client interests must be aligned. If providers profit while clients are experiencing stress in repaying, defaults will catch up with the client or the institution, and the client will no longer be able to borrow. Aligning interests requires providers to think of client benefits as well as their own, from the start.</li>
 	<li>A well-designed loan should match the ability to repay. Well-designed loans are a blessing, for example, helping a small business; yet loans that do not consider clients’ capacity to repay sets them up for failure. Even if they repay in the short term – which is often why default rates stay low – it can be at the cost of extreme hardship, making it a poor predictor of over-indebtedness. It may take some time before the debt stress of clients affects providers.</li>
</ol>
<h3>"Instant": an Opportunity and a Risk for Consumers</h3>
A key attribute digital lenders advertise is speed of access. Where traditional loans could take weeks for approval, with many requirements, this is a plus from the perspective of clients. But the automation and speed raises concerns: are decisions made too quickly, and are risks adequately measured and mitigated, especially from the clients' perspective?

Other aspects of digital credit lead to <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">new risks</a> compared with analog lending: start-to-finish digitization; the move from high to low touch processes; small credit amounts that grow; short-term loans; reliance on alternative data analytics; and decentralized support workforces.
<h3>What Could Go Wrong?</h3>
With analog credit, prevention of over-indebtedness centered on adequate repayment capacity, and on growth not taking place at the expense of quality.

In the digital context, the following major categories of risk have been identified (Center for Financial Inclusion, 2017/2018. See References):
<ul>
 	<li>Limited – if any – debt capacity analysis</li>
 	<li>Products that do not match client needs</li>
 	<li>Lack of credit reporting</li>
 	<li>Automatic renewals</li>
 	<li>Aggressive sales and marketing</li>
 	<li>Disproportionate consequences of late payments that lead to a cycle of debt.</li>
</ul>
<h4>Algorithms are institution centric, not client centric. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting.</h4>
Alternative credit scoring methods – often using elaborate algorithms that predict the probability of repayment – help to include people who have thin credit files and who would otherwise have been excluded. However, these models are a poor replacement for the repayment capacity analysis previously conducted by lenders serving vulnerable excluded populations. While the algorithm may predict whether or not an institution will be repaid, it does not consider clients' situations and needs, and therefore, the sacrifices that clients might have to make in order to repay. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting. Algorithms are institution centric, not client centric. They are meant to learn over time, becoming refined and better predictors; yet they do so at the expense of early clients who enabled the algorithm to become better fine-tuned, as they have a higher probability of defaulting and suffer dire consequences (<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Ngigi, 2016</a>).

The promise of well-tuned algorithms saving costs and managing institutional risk is unfortunately skewing attention away from client risks. Over-indebtedness needs to be reframed from a client perspective: can clients afford the loan? Even if they can repay, what sacrifices are they making? Are they at risk of not being a client ever again in the future (which would hurt both the client and the provider)?
<h3>Mitigating Over-Indebtedness in a Digital World</h3>
Over-indebtedness is a multi-stakeholder issue, and is linked to the client protection issues summarized in the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>. Prevention of over-indebtedness is a particularly tricky one, in that it requires the concerted effort of a wide range of stakeholders.

Providers have a responsibility to ensure that their practices do not lead to an oversupply of credit to clients who are unable to meet their payment obligations, and digital lenders will need to adopt a more client-centric approach to understand the risks of over-indebtedness from a client perspective. Algorithms need to evolve to take this into account.

Digital lenders need to understand the risks of over-indebtedness from a client perspective, and algorithms need to evolve to take this into account. Regulation also must guide good practice for fintech digital lenders.

Because only one irresponsible lender is needed in terms of over-indebtedness to negatively affect clients, it is necessary that financial consumer protection regulation evolves to guide the practices of otherwise unscrupulous digital lenders.

Investors can, and should, use their leverage to encourage good practices by digital lenders, as they have for analog lenders. They can reward digital lenders who design and deliver appropriate products, are transparent about terms and conditions, explain to clients the risks of over-indebtedness, adopt fair and responsible practices during repayments, and help clients who cannot, but want to, repay.

Importantly, digital providers can leverage the same technology used to deliver products to educate and empower clients. Clients have rights and responsibilities. Informed consumers are better able to protect themselves and avoid becoming victims of predatory lenders.
<h3>Over-Indebtedness Is Multidimensional and Dynamic</h3>
In the interest of long-term mutual benefits for both providers and clients, providers need to move away from a uni-dimensional definition of over-indebtedness that overly emphasizes repayment as the proxy for whether or not a client is indebted, towards <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/201-over-indebtedness-of-microborrowers-in-ghana-an-empirical-study-from-a-customer-protection-perspective">client-focused definitions of over-indebtedness</a>.

Digital credit providers need to complement credit bureau data with disbursement and repayment data on digital loans so that a fuller financial picture can emerge for digital borrowers.

Over-indebtedness is not a steady state. As the lives of vulnerable clients evolve, so do their needs and challenges. A client who may have received a loan from a responsible lender in the past may suddenly not be in a position to repay. We need to develop ways to monitor whether clients are showing signs of financial stress. Responsible institutions should be able to identify this, and work with clients until it is resolved.

The role of responsible providers goes beyond providing loans to ensuring that clients are supported, if needed. <a href="https://www.microfinanceopportunities.org/">Microfinance Opportunities</a>, in collaboration with <a href="http://socialperformance.net/">Social Performance Solutions</a>, has been developing a stress assessment tool that enables providers to monitor whether borrowers are incurring stress after having received a loan. Such tools are extremely important to have a full picture of over-indebtedness, and a broader suite of tools needs to be available to responsible providers.
<h3>Fintech Protects Against Over-Indebtedness</h3>
Fintech digital credit providers need to unite and agree to collective measures to tackle the problem of over-indebtedness. This will entail defining responsible digital underwriting, leveraging technology, while learning from the past, expanding credit bureau reporting, and agreeing on common practices for the benefit of clients. Some fintechs are already taking the lead, and through the Smart Campaign’s <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, they are working together to define and implement responsible practice. The body of evidence around risks is growing. Now is the time to define the guidelines of good practice for fintech digital lenders and identify solutions that work for clients.

References

McKinsey Global Institute, “<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">Digital Finance for All: Powering Inclusive Growth in Emerging Economies</a>,” September 2016.

Elena Mesropyan, “<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">63 Companies Shaping Africa’s FinTech Ecosystem</a>,” Fintech Ranking, December 2016.

Alexandra Rizzi, Isabelle Barrès, Elisabeth Rhyne, “<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">Tiny Loans, Big Questions</a>,” Center for Financial Inclusion at Accion.

John Owens, “<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/783">Responsible Digital Credit</a>,” Center for Financial Inclusion at Accion. Forthcoming, 2018.

George Ngigi, “<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Pain of Kenyans Blacklisted for Amounts as Small Sh100</a>,” Business Daily Africa, September 2016.

&nbsp;

&nbsp;

&nbsp;

&nbsp;

Start-Ups and Digital Innovation: Are Fintechs in Africa Over-Indebting their Customers?

Customer Centricity

Over-indebtedness

This is the second in <a href="https://cfi-blog.org/tag/smart-100-blog-series/">a series of blog posts</a> exploring the impact of Smart Certification on the financial inclusion industry.

Smart Certification recently reached the milestone of 100 certified financial institutions, which collectively serve 42 million clients around the world. Among our lessons learned along the way: consumer protection starts with listening.

When the demonetization crisis struck India in 2016, many clients were left with currency that was no longer valid and had no means to repay their loans. They worried that their financial institutions would treat them harshly. Sulthana, who owns a small shop in India, had a different experience with <a href="http://smartcampaign.org/certification/certified-organizations/certified-profiles-ujjivan">Ujjivan</a>, a Smart-Certified small finance bank: “When demonetization happened…we told Ujjivan that we needed a few more days to repay it. They were very considerate and understanding, spoke politely and gave us a few more days [to repay the loan].”

While demonetization was a unique shock for clients and lenders in India, the empathy described by Sulthana reflects the importance that Ujjivan places on respectful communication and customer service. As it has done for many of the certified providers, the certification process helped Ujjivan formalize its client-centric approach. Ujjivan has established a separate service quality department with dedicated customer care representatives at all branches, with the responsibility of proactively seeking customer feedback and resolving complaints.

By promoting <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">principles</a> such as fair and respectful treatment of clients, transparency, and mechanisms for complaint resolution at financial institutions around the world, the Smart Certification program works to ensure that clients are heard and kept at the center of the financial inclusion industry. The Smart Campaign conducts research to determine what people really care about and identify risks that disproportionately affect low-income clients. Through projects like the <a href="http://smartcampaign.org/tools-a-resources/1089">Client Voice</a> and <a href="http://www.smartcampaign.org/tools-a-resources/1030">What Happens to Clients Who Default</a>, the Campaign studies what risks and challenges clients face as they gain access to fast-changing financial services. This knowledge informs the design of the Smart Certification standards and industry best practices for responsible financial inclusion.

In its Client Voice research to-date, the Smart Campaign asked clients in four countries (<a href="http://smartcampaign.org/tools-a-resources/1087">Peru</a>, <a href="http://smartcampaign.org/tools-a-resources/1076">Benin</a>, <a href="http://smartcampaign.org/tools-a-resources/1088">Georgia</a> and <a href="http://smartcampaign.org/tools-a-resources/1077">Pakistan</a>) to describe their experiences with financial providers. The results showed that clients shared similar complaints across geographies:
<ul>
 	<li>Clients had an inadequate understanding of the basic attributes of their products, such as loan terms and conditions.</li>
 	<li>Clients said they had unpleasant experiences with financial institution staff members, who often treated them poorly and with disrespect. One client from Pakistan said, “They don’t think that we can genuinely have problems… They don’t try to understand.”</li>
 	<li>Mechanisms for filing a complaint at the studied institutions were lacking.</li>
 	<li>Clients were making unreasonably large sacrifices to repay their loans. For instance, borrowers in Ghana reportedly skipped meals, sold their possessions, or took their children out of school when they were about to default. Clients who actually default are often pushed into taking more desperate measures, like some in Uganda who fled town or changed their names.</li>
</ul>
These findings demonstrate that when financial service providers do not prioritize client protection their customers can suffer, which jeopardizes the sustainability of their business. Smart Certification aims to mitigate client harms by listening to clients and supporting institutions to create good communication channels with their clients.

Hearing directly from clients provides information that enables policy makers and product designers to improve their offerings. The findings of the Client Voice research in Peru had a major impact on the Superintendency of Banking, Insurance and Private Pension Funds of Peru (SBS), the country’s primary financial regulator SBS, leading them to <a href="https://cfi-blog.org/2017/11/13/how-smart-campaign-research-is-influencing-client-protection-policy-in-peru/">adapt the market’s regulatory framework</a> to better meet the needs of clients:
<ul>
 	<li>Clients told us that they didn’t understand how credit bureaus or credit reporting worked; SBS worked with the credit bureau system to develop a simplified credit report that motivated users to look up their credit information.</li>
 	<li>We found that 40 percent of respondents in Peru didn’t understand their loan terms; SBS started testing ways to clarify the information on loan terms and conditions, and required insurance companies to explain the scope and characteristics of product coverage to potential clients.</li>
 	<li>A quarter of clients in Peru reported that microfinance providers discriminated against those of lower socioeconomic status. SBS implemented new regulations on market conduct, incorporating detailed responsibilities and obligations for financial institutions to improve their business practices and advance equal treatment of clients.</li>
</ul>
Smart Certification raises the client voice within financial institutions by promoting timely and responsive mechanisms for client complaints and problem resolution. In this way, clients’ concerns are better heard and institutions get the feedback they need to improve their products and services. Smart Certified institutions affirmed the benefits of this feedback loop <a href="http://smartcampaign.org/tools-a-resources/1149">in a recent survey</a> with 86 percent attesting that achieving certification helped them better understand client risks and allowed them to better serve their clients. This is sorely needed when access to financial services worldwide is growing, but <a href="https://qz.com/1260139/india-has-the-highest-number-of-inactive-bank-accounts-in-the-world/">usage is stagnant</a>.

Empathy matters. In the Smart Campaign’s direct conversations with clients, they tell us that they value transparent and respectful service above all else. Empathy and compassion for a borrower who is struggling to make a payment, like Ujjivan client Sulthana, go a long way in increasing client retention and loyalty. So as we celebrate what 100 Smart Certifications means for the industry, let’s not forget what it means to the clients the industry serves.

Have you read?

<a href="https://cfi-blog.org/2018/05/16/100-smart-certifications-a-milestone-for-responsible-financial-inclusion/">100 Smart Certifications - A Milestone for Responsible Financial Inclusion</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>

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Where Does Consumer Protection Begin? Start with Listening

Smart 100 Certifications

Default

Smart Certification

The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting views from participants in the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> (ABF).

Two experiences with interest rate caps – in Kenya and Zambia – demonstrate the power of political forces to shape financial inclusion policies and may hold lessons for MSME lenders in other countries.

In a recent unpublished study, the <a href="https://responsiblefinancialinclusion.org/">Partnership for Responsible Financial Inclusion</a> (formerly the Microfinance CEO Working Group) examined commonalities in the origins of interest rate caps in these two countries. In both cases, signs were clear that the general public was upset about the current state of loans and interest rates. Approaching elections increased the will among political leaders to make regulatory changes that would appeal to the public.

In Zambia, a populist president, Michael Sata, was the surprise victor in 2011’s elections. In his first days in office, Sata announced his priority of cutting the cost of credit for Zambians, a move in opposition to the country’s dominant banks. His remarks sent the domestic currency into a spiral. Inflation soared, and interest rates rose. These events helped create a sense of urgency for both consumers and legislators, propelling the caps through the legislative process. In 2012, Sata led the government in successfully passing his proposed law, which capped commercial banks’ loan interest rates at 18.25 percent.

In 2013, the interest rate caps were also imposed on microfinance lending. The maximum rate was set at 42 percent for a select group of microfinance institutions and 30 percent for other non-bank financial institutions. Following Sata’s death in 2014 and the election of his replacement, the interest rate caps were removed in 2015. The government’s approach in this area now focuses on pricing transparency.

Zambia’s interest rate caps were not particularly effective. To compensate for lower interest income, the banks began to charge more fees, keeping effective prices more or less the same for consumers. The caps did not create an effective solution, and ultimately banks, microfinance institutions and regulators agreed on ending the caps. Instead, strong regulations on pricing transparency were put into law.

A similar story has been unfolding in Kenya, which introduced an interest rate cap of 4 percent above the Central Bank of Kenya Policy Rate for regulated financial institutions in September 2016. The measure was viewed as a populist move. However, in the short time since the law’s enactment, signs <a href="http://africanbusinessmagazine.com/african-banker/kenya-interest-rate-cap-coming-off/">suggest</a> it is doing more harm than good to the overall economy, including the exclusion of “higher risk” borrowers like MSMEs, decreased levels of lending, and lower profits and stock values among banks. It seems the government is now looking to remove the caps given the impacts on the economy and financial services sector.

However, there have been some positive outcomes for the Kenyan financial inclusion industry – such as more innovations, especially in digital lending, because the banks are restricted in lending, creating an opening for non-bank lenders. Some Kenyan banks have also started to buy MFIs in order to lend through them in smaller amounts. The caps have caused banks to diversify their product offerings more – to insurance and leasing.

We interviewed two alumni of the CFI’s Africa Board Fellowship (ABF) to share their experiences about the politics and practice of interest rate caps.

<img class="wp-image-25583 alignright" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/jacqueline_musiitwa.png" alt="" width="387" height="500" />Jacqueline Musiitwa is the Executive Director of FSD Uganda and a board member of Microcred Zimbabwe and the Central Bank of the Republic of Zambia. 

ABF: Can you share your perspective on the decision to implement, and subsequently remove, the interest rate caps in Zambia?

Jacqueline Musiitwa: "The Zambian experience seems to be similar to Kenya’s case – a populist approach with the hopes of encouraging lending to the masses. Then, quickly learning that the opposite actually happens: interest rate caps cause banks to stop lending, and the people don’t benefit. The first thing the current governor of the Central Bank did in office was reverse the caps. Increasing lending was a top priority. The Central Bank also had conversations with banks at that time about keeping interest rates low. The Central Bank learned that rate cap regulation hasn’t worked well historically, so they wanted to figure out how to work together with banks to find a solution.

Stepping back, the question is: how do banks charge interest in a way that makes sense for the population being served? Some people are unbanked for fear of charges. The Central Bank in Zambia is looking at how to get banks outside their comfort zone to serve new clients. How can they create a system of mutual trust?

Ultimately, you take a few steps forward and then a few steps back. Public trust in banks has everything to do with the safety of savings. In Zambia, the numbers were going well in terms of signing clients up at non-banking financial institutions and then in December 2016, a bank closed for three months during which time shareholders injected money into it. Clients reacted with: ‘You see, this is why we are going to put our money under the pillow’. The bank is now back but now there is still a fear of depositing in banks, so it is hard to get people to increase savings.

Regulators wrestle with how to communicate market stability when there is even just one weak link. You saw it with banks in Kenya. Dubai, Imperial, and Chase banks all went down in Kenya, and the reaction was the same. People either don’t trust banks or move to the biggest banks. Zambia is pushing through a law for a deposit protection scheme."

The full interview with Musiitwa can be read <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/jacqueline_musiitwa_interview.pdf">here</a>.

<img class="alignleft wp-image-25584" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/ivan-mbowa.png" alt="" width="317" height="476" />ABF Alumni Ivan Mbowa, CEO of Umati Capital, offers a perspective on interest rate caps from his experience in Kenya.

ABF: Kenya’s government introduced an interest rate cap for banks, but not for non-bank financial institutions like Umati. How has Umati been affected?

Ivan Mbowa: "At Umati we’re seeing a lot more interest in our services. About half of our clients are new to formal finance. They could never get money from a bank in the first place. The other half are coming to us for additional financing, because they don’t have the collateral to get more from banks.

The funny thing is that the clients don’t always understand the nuances between a non-bank financial institution and a bank, so when they see our rates, the first impression is, ‘You guys are just flouting the law—it’s supposed to be capped.’ We have to explain that the cap doesn’t apply to Umati. A good outcome has been that there seems to be a lot more awareness and questioning from clients on, 'What is the cost of your product?'

It’s also been easier to make the argument that even if you can access bank credit, it’s good to be multibanked, so that the next time there’s a freeze or a crunch, you’re not fully exposed. Savvy clients understand that working with Umati can be a hedging mechanism."

The full interview with Mbowa can be read <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/ivan_mbowa_interview.pdf">here</a>.

In one more example, the West Africa Economic and Monetary Union (WAEMU) implemented more stringent caps in 2015, reducing the cap from 27 percent to 24 percent for MFIs and from 18 percent to 15 percent for banks. In the time before the new cap was implemented, the trend in bank interest rates had been downward, as a result of competition. According to reports from ABF Fellows on the ground, the lower caps did not have a very big impact on banks, especially considering all the fees they were generating. However, caps have inhibited lending to micro and small enterprises because, for the most part, banks were already limited in their lending to this customer segment. Private investors who are interested in serving micro and small enterprises have avoided the region, given that the caps lengthen the time to break even for a fledgling greenfield financial institution. Several studies indicated that many MFIs have been unable to achieve adequate scale and efficiency in their respective business environments to be profitable and sustainable.

Given the diverse outcomes interest rate caps can have, we’d love to hear more from our readers about their experiences with interest rate caps.

Have you read?

<a href="https://cfi-blog.org/2017/02/01/are-banks-the-future-of-banking-africa-board-fellows-deliberate/">Are Banks the Future of Banking? Africa Board Fellows Deliberate</a>

<a href="https://cfi-blog.org/2017/10/20/the-board-should-not-be-the-last-to-know-why-mfis-need-independent-internal-auditors/">The Board Should Not Be the Last to Know: Why MFIs Need Independent Internal Auditors</a>

<a href="https://cfi-blog.org/2017/10/04/how-can-microfinance-institutions-in-the-middle-east-and-north-africa-manage-risk-and-meet-client-demand-governance-is-key/">How Can Microfinance Institutions in the Middle East and North Africa Manage Risk and Meet Client Demand? Governance Is Key!</a>

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&nbsp;

The Politics (and Varied Experiences) of Interest Rate Caps

Regulators

Africa Board Fellowship Program

Partnership for Responsible Financial Inclusion

Kenya

Zambia

ABF Spotlight

Governance

Interest Rates

Microfinance Institutions

Risk Management

&gt; Posted by <a href="http://ifmrlead.org/anisha/">Anisha Singh</a> and <a href="http://ifmrlead.org/suraj-nair/">Suraj Nair</a>, Senior Research Associate and Research Manager, IFMR LEAD

Patel, 62, father of two, spends an hour learning how to use mobile money wallet A from his daughter. The interface, navigations and services offered are all quite new to him. The next day, he tries to pay for a taxi but finds the taxi provider only accepts mobile money wallet B. He’s quite confident he should be able to use wallet B as the knowledge of how to use A is still fresh in his mind. However, he struggles with navigating the new platform and is unable to locate certain payment options. He’s also apprehensive to try out different keys as he wants to be careful not to transfer money incorrectly. Giving up, Patel pays in cash and waits for his daughter to return home to teach him how to use mobile money wallet B.

In India, in both urban and rural settings, among men and women, this challenge is all too common, especially among older adults. <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">New research</a> from IFMR LEAD and J.P. Morgan finds that while digital literacy is a massive obstacle to financial inclusion, so is applying already gained skills to unfamiliar products; digital literacy does not necessarily transfer well from one platform to another.

<a href="http://businessworld.in/article/Digital-India-A-Stepping-Stone-Towards-Digital-Economy-Financial-Inclusion/20-02-2017-113183/">Ongoing efforts</a> toward increasing adoption are in vain without ensuring the usability of products and services. Usability centers on the product’s interface and how intuitive and convenient it is. Accordingly, supply-side efforts have focused on building interactive interfaces with the latest features to streamline and digitize everyday payment needs. On the other side of the coin, perhaps most important of all, is consumer digital and financial literacy. The Reserve Bank of India and the Indian Government have taken certain measures to enhance digital literacy, such as the National Digital Literacy Mission (NDLM), which provides digital literacy training to citizens across the country, and the National Centre for Financial Education (NCFE), which works to expand financial education in schools, workplaces, and the general population through awareness-building and trainings.

Despite these measures, Patel’s inability to successfully transfer digital skills between platforms is mirrored by many across the country today. This challenge is amplified when extended beyond mobile money wallets to between different types of digital applications.

A <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">recent pilot</a> aimed to assess transferability of skills for smart-phone owners with varying levels of mobile money usage. The pilot assessed transferability across age groups, gender, urbanicity (rural and urban) and levels of income volatility. Participants were provided extensive training on one mobile wallet (including on how to create an account, send money, collect money, and scan and pay), with the ability to freely navigate the application themselves, and then tested on their ability to perform core platform functions. Afterwards, participants were introduced to a new mobile money platform and asked to perform the same functions.
<h2>What did we find?</h2>
Building digital literacy skills by on-boarding users to one particular application is not adequate, the pilot uncovered. Participants in the 40+ age bracket, across gender, urbanicity, and income volatility levels found it difficult to transfer their knowledge from one digital platform to another. Participants in younger age brackets found it relatively easier, but still struggled with certain functionalities such as transferring money and scanning to pay. This has significant implications, not just for the individuals involved but also for the goal of a less-cash and digital India.
<h2>What should be done?</h2>
Digital literacy training initiatives, whether through common services centers, community gatherings, or other human touch agents, should consider imparting wider ICT skills rather than product or even device-based knowledge. Imparting digital literacy the way it is approached today for existing technologies such as mobile wallets runs the risk of losing effectiveness with the constant roll-out of newer features, technologies, and products. Additionally, training for older population segments should make more resources available to enhance their confidence and comfort with digital technologies, thus encouraging them to experiment with new features.

Of course, training requirements are easier to talk about than to implement, especially when considering a wide-ranging population such as that of India. All the more, service providers need to incorporate usability and digital literacy-building into product design. Training can be built into the product and customer experience. Whilst maintaining unique interfaces, each application can include short tutorials upon installation highlighting navigation patterns and features, as well as more detailed and accessible tutorials and FAQ sections. Ultimately, more digitally capable customers will mean more active customers.

Beyond the provider level, product development guidelines can be formulated to ensure basic transactional aspects are consistent across all mobile money and other digital application interfaces. In terms of standardization, whilst developing applications in regional languages is important, specific icons can be developed and used consistently across platforms to depict the basic transactions. This also helps to ensure that individuals with low literacy or who are unable to read in English can still navigate their way around and perform transactions successfully across different applications.

Finally, for all interventions, investments into understanding what consumers prefer and find easiest to use in terms of product design would go a long way.

For more details on this research and its findings, please visit the <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">IFMR LEAD website</a>.

Have you read?

<a href="https://cfi-blog.org/2017/12/18/how-successful-are-banking-agents-in-bringing-digital-financial-services-to-new-customers-in-india/">How Successful Are Banking Agents in Bringing Digital Financial Services to New Customers in India?</a>

<a href="https://cfi-blog.org/2017/11/27/whats-in-it-for-me-increasing-the-value-proposition-of-fintech-for-merchants-in-india/">What's In It For Me? Increasing the Value Proposition of Fintech for Merchants in India</a>

<a href="https://cfi-blog.org/2016/05/17/for-successful-financial-inclusion-in-india-build-customer-financial-capability/">For Successful Financial Inclusion in India, Build Customer Financial Capability</a>

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&nbsp;

The Flip Side of Digital: Are Customers “Interoperable”?

India

South Asia

In recent years, Peru has called for our attention not only for being at the top of the Global Microscope’s international country rankings for the <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">most conducive environment</a> for financial inclusion, but also for its historic collaborative effort to establish a <a href="https://cfi-blog.org/2017/01/30/modelo-peru-unique-model-unique-challenges-bright-future/">fully-interoperable nationwide digital payments platform</a> (Bim) to support the supply of financial services. But buckle up, there is more.

The country’s regulator, the Superintendency of Banking, Insurance and Private Pension Fund of Peru (SBS Peru), has taken client protection very seriously, and despite already having very robust systems (on grievance redress and dispute resolution, for example), it continues to lead with groundbreaking policy changes based on evidence and research to ensure that regulation is aligned with the needs and capabilities of the end client. The Smart Campaign is proud to have collaborated with the SBS on these policy changes.
<blockquote>“The risk is to regulate by anecdotes and not by evidence.” - Mariela Zaldivar, Deputy Superintendent, Insurance and Private Pension Fund of Peru (SBS Peru)</blockquote>
<a href="http://smartcampaign.org/tools-a-resources/1087">Client Voices</a> was a research project of the Smart Campaign that directly asked clients in four countries (Peru, Benin, Georgia and Pakistan) about their experiences with financial providers and what they thought constituted good and bad treatment. In Peru, the project was made possible through strong support from the SBS, which was involved from the very beginning, providing substantive inputs to all project phases. However, their engagement did not stop there. The SBS is also committed to implementing the client protection recommendations arising from the project.

Here is how the SBS turned the major findings of the research into an opportunity for policy improvement in the area of financial consumer protection.
<h2>Understanding Credit Bureaus and Credit Reporting</h2>
High-level finding – Client Voices found that clients did not understand how credit bureaus work, or the consequences of having a negative credit record. Clients seemed to be unaware that credit bureaus now keep positive as well as negative information. To combat these shortcomings, the SBS took the following steps:
<ul>
 	<li>Presenting credit histories as a potentially positive asset: Through their media campaign and financial education training programs, the SBS is raising awareness to help clients understand that they can build and invest in their credit histories through good repayment behavior. The credit bureau does not just offer negative outcomes or punishment for nonpayment. “Clients need to be aware that credit histories can result in positives like facilitating access to better interest rates,” says Mariela Zaldivar, Deputy Superintendent of SBS Peru.</li>
 	<li>Non-payment warning: In the country’s 2012 transparency regulation, the warning to clients about negative reporting in the credit bureau in the case of non-payment was suppressed. The new regulation on market conduct - published in August 2017 - has reestablished this warning for clients as a preventive measure. Now, clients receive this non-payment warning in their contract summary sheets, where most relevant terms and conditions of loans are explained.</li>
 	<li>
<div class="mceTemp"></div>
Simple and accessible credit report: In 2015, Peru’s credit bureau system developed a simplified credit report to motivate users to look up their credit information. Today, credit reports are accessible virtually (web or app) and there has been a media campaign to encourage people to use the report. Credit ratings are presented with an easy-to-understand red, yellow and green light coding, and legal jargon has been minimized. “In the past 30,000 reports were accessed every year. Since our recent changes, over 1.5 million reports are accessed per year,” states Mariela Zaldivar. For this development, the SBS was recognized with the Best Practices in Public Management Award organized by the non-profit <a href="http://www.premiobpg.pe/es/">Ciudadanos al Día</a>, which encourages efficient, successful and innovative public programs that benefit citizens.</li>
</ul>
<h2>Understanding Loans and Insurance Products</h2>
High-level finding - Approximately 40 percent of respondents in Peru did not fully understand their loan terms. Clients were especially confused about the insurance policies linked to their loans. They did not know what insurance products they currently had or how they worked. Overall, we estimated that about 30 percent of all clients in Peru were not aware that they even had insurance tied to their loans, let alone what the insurance covered. The SBS addressed these findings with the following:
<ul>
 	<li>Loan terms and conditions: In incorporating the results of the Client Voice report, the SBS started testing how to prioritize the information provided to clients in their contract summary sheets. The new regulation on market conduct reduced the potential items to be included in the summaries, from 12 to 7, in order to promote clarity and simplicity of the information. Moreover, the following items are published in a highlighted, salient way: 1) how much you pay, and 2) what happens if you do not pay on time. Contracts cannot be eliminated, but more client-centered summaries are being implemented.</li>
 	<li>Marketing of insurance: In 2017, a <a href="http://busquedas.elperuano.com.pe/normaslegales/aprueban-el-reglamento-de-comercializacion-de-productos-de-s-resolucion-no-1121-2017-1498132-1/">new regulation</a> for insurance commercialization was approved. Under this regulation, companies are required to explain the scope and characteristics of product coverage to potential clients. Providers are also required to have insurance agents, which are bank employees whose role is to be the link between institutions and insurance companies, to promote better coordination between them. The insurance agent is in charge of training the staff on insurance and is responsible for sales and post-sale services.</li>
</ul>
<h2>Market Conduct</h2>
High-level finding - Clients are generally satisfied with microfinance services in Peru. However, 26 percent of clients report that microfinance providers do not treat clients equally, discriminating against those of lower socioeconomic status. To advance equal treatment of clients, the SBS took action by:

Market conduct regulation: In order to strengthen the Consumer Protection in Financial Services System, earlier this year the SBS changed its legal regulatory framework on market conduct. It now incorporates new <a href="http://ima01.gestion.pe/doc/0/0/2/4/3/243991.pdf">detailed responsibilities and obligations for financial institutions to improve their business practices</a>. It outlines requirements for how financial providers interact with their clients in three main areas: 1) offering of products and services, 2) transparency of information, and 3) claims management. The attention-grabbing fact here is that the board of the institution is now held responsible for the interaction with the client throughout the lifecycle of the product. Positive and responsible interaction with the client becomes an institutional goal and must be clearly outlined in an annual work program, presented by a full-time market conduct officer, and approved by the board each year.

It has been exciting to witness how the SBS uses evidence to help it establish effective consumer protection policy in Peru. The Smart Campaign encourages actors in the financial inclusion sector, both policymakers and providers, to keep learning from research that reveals the voice of the client.

Learn more about Client Voices and its broad array of recommendations to advance consumer protection at <a href="http://smartcampaign.org/tools-a-resources/1075">the Smart Campaign website</a>.

Have you read?

<a href="https://cfi-blog.org/2016/02/22/borrowing-blind-in-peru-findings-from-the-client-voices-project/">Borrowing Blind in Peru: Findings from the Client Voices Project</a>

<a href="https://cfi-blog.org/2017/01/30/modelo-peru-unique-model-unique-challenges-bright-future/">Modelo Peru: Unique Model, Unique Challenges, Bright Future</a>

<a href="https://cfi-blog.org/2017/02/07/modelo-peru-whats-next-for-the-groundbreaking-mobile-money-platform/">Modelo Peru: What's Next for the Groundbreaking Mobile Money Platform?</a>

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How Smart Campaign Research Is Influencing Client Protection Policy in Peru

Peru

P2P Lending

Underwriting

Alexandra Rizzi

Ana Ruth Medina Arias

Christy Stickney

Danielle Piskadlo

Elisabeth Rhyne

Isabelle Barrès

Jeffrey Riecke

John Owens

Kai Hsu

Lizzy Bolze

Nadia van de Walle

Rajitha  Swaminathan

Robin Brazier

Sonja Kelly

Steve Waddell

Susy Cheston

Tess Johnson

China

Dominican Republic

Ecuador

Latin America and The Caribbean

North America

Uganda

Challenges and Crises

Entrepreneurs of MSMEs

Financial Technology

Fraud

Informal Credit

PayGo

Remittances

Transparency

Trends

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.

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.

The recent <a href="https://www.nbcnews.com/tech/security/massive-equifax-data-breach-could-impact-half-u-s-population-n799686">security breach of credit reporting agency Equifax</a> exposed birth dates, social security numbers and credit card information of up to 143 million consumers. The hackers will likely sell this personal information which could result in financial and medical identity left, and fraudulent credit card activity and tax reporting, along with a slew of other activities. Earlier this week <a href="https://www.nytimes.com/2017/09/26/business/equifax-ceo.html?mcubz=3">Equifax announced</a> their CEO, Richard Smith will be retiring and could walk away with $18 million in pension benefits. The Massachusetts Attorney General, Maura Healey <a href="http://www.npr.org/2017/09/14/550949718/after-equifax-data-breach-consumers-are-largely-on-their-own">called it</a> “the most brazen failure to protect consumer data we have ever seen.” As a result, the Federal Trade Commission, members of Congress and multiple states’ authorities are looking into criminal investigations. However, the burden of this breach will fall primarily on individual consumers to ensure they are protected, and only <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">10 percent</a> of the potential 143 million affected have even checked the Equifax site to see if their information was compromised. (You can check to see if you may have been impacted <a href="https://www.equifaxsecurity2017.com/am-i-impacted/">here</a>.)

The precautionary recommendations put forth have been to: 1. Check your credit score regularly (which can only be done for free once a year); 2. Freeze your credit; and 3. Purchase credit monitoring services. (Freezing your credit means establishing a “lock” that prevents opening new forms of credit in your name, while monitoring your credit is the process of periodically reviewing your credit reports for accuracy and changes that might be the result of fraudulent activity.) The irony of these suggestions is that you have to rely on the three major credit bureaus (Equifax, Experian and TransUnion) to perform these consumer protection activities. How can we know we are safe from fraud when our recourse requires trusting the entities that have been compromised? What’s more, why should we pay additional fees to correct the credit bureau’s mistake?

The Equifax breach affects consumers at all levels of the socioeconomic landscape, and unfortunately those with fewer financial resources and capability will be affected the most. Correcting identity theft can be a time consuming and financially burdensome endeavor. For many it is challenging to come up with emergency cash to cover legal fees to prove identity theft or restore credit, recover stolen assets and pay for additional credit monitoring services. And sadly, we haven’t seen strong consumer protection support on behalf of the credit bureaus and formal financial service providers in the wake of this breach -- support like educating the public about monitoring credit, providing more than one free credit report annually or offering free/discounted credit monitoring for more than one year. Thomas Hinton, CEO of the consumer advocacy non-profit American Consumer Council, <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">said</a> he “is deeply concerned that Equifax – and all credit reporting companies – are not doing enough in a timely manner to protect under-served consumers who have been victimized by this data breach and stand to suffer the most.”

Such massive security breaches erode the public’s trust in the financial system, particularly among the unbanked already skeptical of entering the formal financial fold. The <a href="http://www.usfinancialdiaries.org/issue">U.S. Financial Dairies</a> showed that many Americans don’t trust the financial system because of unexpected bank fees – like overdraft fees – and because banks provide little or no social support, which many people get with informal group lending and savings options.

This isn’t the first major data breach in U.S. history and it won’t be the last. Last year when Yahoo was in negotiations to be bought by Verizon, it came out that <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">1.5 billion</a> user accounts were compromised between 2013 and 2014. And we can’t forget the 2013 Target breach that compromised credit/debit card and contact information of up to <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">110 million</a> customers.

So, what can be done? How can anyone feel comfortable about the protection of personal information?

Financial service providers are looking to biometric data as a secure identification source for financial services. Over the past seven years, <a href="https://uidai.gov.in/about-uidai/about-uidai.html">the Unique Identification Authority of India (UIDAI)</a> has issued over <a href="https://uidai.gov.in/about-uidai/about-uidai.html">one billion</a> Unique Identification Numbers (UID), also known as Aadhaar numbers, which are verified and authenticated with biometric data via finger prints or iris scans. This identification system is a part of <a href="http://indiastack.org/about/">India Stack</a> that uses four distinct technology layers – including simplified payments addressing and interoperability – to provide digital financial services across governments and businesses in India.

The technology already exists to use finger print and facial scans to unlock our phones or log into personal banking apps, and there is even the potential of using <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">ear scans and heart beat identification</a> as biometric identification sources. But so far biometric identification is fairly unregulated, some consider the security to not yet be airtight and there are additional privacy concerns with using bodily identifiers. Hackers are already finding ways to spoof biometric identification. Recently, the security firm Vkansee was able to <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">break into Apple’s Touch ID system</a> with a small piece of play doh. But we will see rapid improvements in Apple’s security, particularly with the new iPhone X Face ID technology.

In the case of India’s Aadhaar scheme, there is robust opposition to the program, with concerns including the perceived ease of forging fingerprints, the program’s potentially inadequate digital security, and its ubiquity. Some opponents of the program believe that if the Aadhaar numbers are widely integrated and linked between previously-siloed databases, it expands the opportunity for citizen profiling and surveillance. In August, India’s Supreme Court <a href="https://www.theatlantic.com/technology/archive/2017/09/aadhaar-worlds-largest-biometric-database/538845/">issued a ruling</a> enshrining the fundamental right to privacy. The anti-Aadhaar movement in the country celebrated the ruling, asserting that the program is in conflict with this fundamental right. Soon the Supreme Court will indeed assess if Aadhaar does violate Indian citizen’s privacy rights.

Regardless of how our information is authenticated, it is becoming increasingly important for consumers to protect and regularly track their financial information. Consumers should be concerned about the potential threats and take appropriate action by checking their credit score and monitoring credit card activity. But we can also realize that, at least as of now, security breaches are mostly out of our hands.

Have you read?

<a href="https://cfi-blog.org/2017/05/01/how-secure-is-data-used-in-digital-credit/">How Secure Is Data Used in Digital Credit?</a>

<a href="https://cfi-blog.org/2017/05/05/demonetization-brought-out-the-best-in-indian-microfinance-clients/">Demonetization Brought Out the Best in Indian Microfinance Clients</a>

<a href="https://cfi-blog.org/2017/06/28/why-do-privacy-policies-matter-for-digital-credit/">Why Do Privacy Policies Matter for Digital Credit?</a>

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In the Wake of the Equifax Breach, Are Biometrics the Answer?

In this report, Christy Stickney, CFI Fellow and independent consultant, highlights the characteristics of owners of small and medium-sized enterprises (SMEs) whose businesses have overcome significant hurdles and grown from their micro size.

Christy has utilized qualitative research to identify and analyze clients of MFIs whose borrowing had increased significantly over time from the portfolios of three leading microfinance institutions in Latin America – MiBanco (Peru), Banco Solidario (Ecuador), and Banco ADOPEM (the Dominican Republic). As part of the research, Christy conducted 55 in-depth client interviews and consulted with institution staff. She identifies and describes in detail a select group of "growth entrepreneurs" (GEs) who operate higher growth businesses, have overcome significant growth hurdles, and express a clear vision for future business growth. Christy argues that this category of emerging SMEs holds great potential for future growth and job creation.

Christy also provides recommendations for financial institutions (including microfinance institutions [MFIs]), FinTech companies, governments, and other financial ecosystem actors to support growth and greater financial inclusion for emerging SMEs and growth entrepreneurs.

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Emerging SMEs—Secrets to Growth from Micro to Small Enterprise

Almost two years ago, the Smart Campaign surveyed financial service providers in Uganda as part of our study, <a href="http://www.smartcampaign.org/tools-a-resources/1030">What Happens to Microfinance Clients Who Default</a> (WHTCWD). In summarizing what they described, we did not mince words, reporting the environment as “Hobbesian” at the time. Providers in Uganda described default as a major issue of concern for them. Borrowers in arrears would skip town or change their name, behaviors enabled by the lack of government IDs and credit bureaus.

MFIs often adjusted for these thin credit envelopes and their high distrust of clients by meting out harsh, inflexible punishments on an immediate basis to those who missed a repayment. For instance, providers, suspecting customers of being at flight risk often seized collateral immediately after missed payments in ways that contrasted sharply with the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/certification-standards">Client Protection Standards</a> and best practices <a href="http://smartcampaign.org/storage/documents/20110916_SC_Principles_Guidance_Draft_Final.pdf">guidance</a>. Some providers explained that they had to act quickly because borrowers have multiple loans and if they didn’t seize the collateral quickly, another lender would swoop in, leaving them with nothing. Unfortunately, all of this was occurring in an environment of weak due process and slow legal enforcement, and we heard about instances where lenders were paying off local law enforcement, turning to local councils to pressure defaulters, and even getting clients thrown in jail.

We observed major gaps in the consumer protection regulatory frameworks and supervisory enforcement. At the time of the WHTCWD study, the Bank of Uganda only regulated commercial banks and a few leading MFIs, and its 2011 <a href="https://www.bou.or.ug/bou/bou-downloads/Financial_Literacy/Guidelines/2011/Jun/Consumer_Protection_Guidelines_June_2011.pdf">consumer protection guidelines</a> pertained only to larger deposit-taking providers. The roughly 2,000 NGO MFIs and savings and credit cooperative organizations (<a href="http://www.ucscu.co.ug/">SACCOs</a>) were effectively unregulated and registered as Tier IV institutions, which fell under the purview of the Ministry of Trade, Industry, and Cooperatives. SACCOs, often the only option for the rural poor, particularly in the underserved north, offer loans, including emergency loans, with interest, and savings, and are often additionally capitalized by government ministries and international NGOs for purposes of channeling money to support local development such as agricultural business (e.g. <a href="http://allafrica.com/stories/200710150295.html">Prosperity for All</a> project). These types of organizations represented a large share of microfinance debt and were described in our WHTCWD interviews as among the most frequent client mistreatment offenders.

In the time since WHTCWD, the media have continued to raise sector issues, and SACCO’s <a href="http://ugandaradionetwork.com/story/saccos-fail-to-meet-requirments-to-access-government-funds?utm_content=buffer8d2a8&amp;utm_medium=social&amp;utm_source=twitter.com&amp;utm_campaign=buffer">big losses and financial management issues</a> are <a href="http://www.newvision.co.ug/new_vision/news/1434800/saccos-advised-prioritize-unity">increasingly in the news</a>. For instance, news stories over the last year drew attention to SACCOs <a href="http://allafrica.com/stories/201608220661.html">with high profile fraud</a> and major losses for members in the Rakai and Sembabule districts. State Minister for Microfinance Haruna Kasolo recently <a href="http://www.newvision.co.ug/new_vision/news/1434800/saccos-advised-prioritize-unity#sthash.HmJDZOjW.dpuf">emphasized</a> the importance of SACCOs taking responsibility and staff working together to expose fraud and hold one another accountable.

Yet, the winds of change might be blowing in Uganda. After more than a decade of work, in July 2013 new regulation was passed pertaining specifically to Tier IV non-banking and micro deposit taking institutions (MDIs) including SACCOs, NGOs, and community groups. These laws place them under the control of a new Uganda Microfinance Regulatory Authority (UMRA). UMRA will license and supervise them, but the institutions will not be permitted to collect savings (as deposit taking institutions are in Tier III). Further, we read <a href="http://www.newvision.co.ug/new_vision/news/1433560/govt-close-errant-saccos#sthash.3i2Iih7v.dpuf">statements</a> in New Vision last week indicating that the government would be taking a harder line against SACCO misbehavior. Haruna Kyeyune warned SACCOs that they would be closed down if caught cheating clients.

At the same time, the national ID card system, launched in Uganda in the spring of 2014, is now in its second year of registration and could help improve client records with positive implications for the sector.

These developments all suggest that the environment for consumer protection at the low end of the Ugandan market is improving, thanks to commendable work to put regulations and systems in place. The foundation for better consumer protection is becoming stronger. We are eager to hear from those on the ground in Uganda on the differences these developments will make over time. For instance, will national IDs and affordable credit bureau reference checks lead to reduction in the risk of client flight and better institution-client relationships? What will this mean for financial service providers and their operational costs? We have heard concerns about the challenge the government will face in regulating and supervising 2,000 or so new institutions. We’ve also heard complaints that reporting will be burdensome and that the new requirements may lead to some sector consolidation. Finally, some of our partners also expressed the sense that it would be crucial to educate clients directly as well regarding these new Tier IV regulations. After all, SACCOs’ reputation among many clients is poor and one of UMRA’s goals is to improve the sector’s credibility and trust between providers and customers. Even Kyeyune in his announcement said that it will be important to educate citizens about the new Tier IV regulation for positive impacts to be assured.

Have you read?

<a href="https://cfi-blog.org/2015/02/09/taking-it-from-the-top-how-market-infrastructure-sets-the-rhythm-of-default-management/">Taking It From the Top - How Market Infrastructure Sets the Rhythem of Default Management</a>

<a href="https://cfi-blog.org/2015/02/02/two-sides-of-a-default-coin/">Two Sides of a Default Coin</a>

<a href="https://cfi-blog.org/2014/04/11/giving-microfinance-clients-a-voice/">Giving Microfinance Clients a Voice</a>

Changes Afoot for Uganda’s Tier IV Financial Institutions

&gt; Posted by a Nairobi-Based Consultant

Kenya and Nigeria are often heralded as two of the most dynamic economies in Africa. They could soon have something else in common: interest rate caps.

Banks in Kenya have urged President Uhuru Kenyatta to dismiss a <a href="http://www.businessdailyafrica.com/MPs-move-to-rein-in-bank-interest-rates-with-Bill/539552-3318034-item-0-102g1ui/index.html">new bill</a> which caps loan interest rates and provides for sanctions (fines and prison) directly to the CEOs of banks that fail to do so. This is not the first time such a proposal has come forward; the last one having come at a time the incumbent president was Minister for Finance. Should the President sign off on the bill it will become law, and lending rates will be capped at 400 basis points above the Central Bank discount rate which now stands at 10.5 percent.

Understandably, the prospect of such limits has caused anxiety amongst lenders. Through the Kenya Bankers Association, Kenya’s bankers immediately lodged appeals to the government arguing that capping interest rates is counterproductive and against the free market economy premises Kenya enjoys. We are yet to see how the financial markets react.

For their part, politicians are perturbed that banks have not done anything to reduce their lending rates in spite of the current low cost structures brought about by the benefits of disruption and instead have continued to reap “obscene” profits, seemingly insensitive to complaints from customers on the burden of high interest rates. The current average lending rates are about 18 percent although some borrowers pay as high as 24 percent and more for short-term as well as medium-term loans (and generally more for loans from online lenders and microfinance institutions).

Obviously, the timing is not innocent, but rather coincides with the elections coming in the next year. The President might be pressured to sign the bill to appease the lower customer segment, who are the majority voters.

One cause of public frustration over rates may stem from poor transparency, as many lenders disguise their prices to keep customers from recognizing what they are actually paying. Kenya’s consumer protections are not as well developed as they could be – as shown by Kenya’s poor scoring on this dimension in <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">the Global Microscope 2015</a>.

Kenya is not the only country to be actively contemplating interest rate caps. Similar proposals emerged in Nigeria a few months ago. In Nigeria the lending community strongly appealed to prevent the caps. The outcome is not yet clear. Rumors exist that the government in Nigeria has been considering reversing their proposal, but there is no formal feedback yet posted to this effect.

From the perspective of the participants in CFI’s <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship Program</a>, such as a former bank executive in Nigeria, caps are not conducive for business and indeed sometimes harm the very customers that governments are trying to protect.

Back in Kenya, we are yet to hear the clear stand of the Central Bank, and we expect that the President will not sign without listening to the Governor. On Wednesday, the Central Bank received a delegation of Kenyan banks led by the Kenya Bankers Association, <a href="http://kba.co.ke/images/stories/bankingMOU.pdf">committing</a> in a good will gesture to reduce interest rates as well as eliminate some non-interest rate charges. In response, the Central Bank <a href="https://www.centralbank.go.ke/images/docs/media/2016/PRESS_RELEASE_-_KBA_MOUfinal.pdf">stated</a>, “The CBK welcomes the move. It is a step in the right direction.”

On Friday, the Speaker of the National Assembly <a href="http://www.nation.co.ke/news/Uhuru-to-assent-or-reject-Bill-on-interest-rates-on-Monday/1056-3342706-be9ckiz/">announced</a> that the bill was being reviewed by the Attorney General and himself. It is expected that the Speaker will forward the bill to the President today. Once the President receives the bill, he has 14 days to accept or reject it.

It seems to me that we have not seen the last of interest rate caps and regulations in this industry, in Kenya and Nigeria – and indeed in Africa and elsewhere.

Have you read?

<a href="https://cfi-blog.org/2016/03/30/interest-rate-caps-in-nigeria-may-not-be-good-for-clients/">Interest Rate Caps in Nigeria May Not Be Good for Clients</a>

<a href="https://cfi-blog.org/2016/02/23/dla-piper-drafts-legal-framework-to-support-financial-inclusion/">DLA Piper Drafts Legal Framework to Support Financial Inclusion</a>

<a href="https://cfi-blog.org/2016/04/25/is-weak-governance-to-blame-for-bank-collapses-in-kenya/">Is Weak Governance to Blame for Bank Collapses in Kenya?</a>

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&nbsp;

Kenya Considers Interest Rate Caps

If you’re plugged into the world of online marketplace lending then you heard this week’s <a href="http://www.pymnts.com/news/alternative-financial-services/2016/lending-club-investigation-renaud-laplanche/">news</a> about Lending Club’s internal scandal which culminated in the resignation of its founder, chairman, and chief executive, Renaud Laplanche. Lending Club, a U.S.-based company, is the first billion dollar online lending marketplace, and Laplanche was viewed by many as the industry’s biggest advocate and one of its pioneers. Accordingly, industry participants and followers are wondering what Lending Club’s news means for the future of the company and the industry. Is this a sign that the promise of marketplace lending is too good to be true?

For dramatic pause, and context, a few facts on what happened. On Monday, after an internal review, Lending Club <a href="http://ir.lendingclub.com/file.aspx?IID=4213397&amp;FID=34233669">announced</a> that $22 million in subprime loans sold in March and April of this year to a single investor went against the investor’s expressed terms. Furthermore, certain staff members, including Laplanche, were aware that the loans did not meet the investor’s criteria, and during the review process there was less than full disclosure by staff including Laplanche, which the board deemed unacceptable.

The review also revealed that, in an unrelated matter, Laplanche failed to disclose personal interests he held in a third-party fund while Lending Club was considering an investment in the same fund. Lending Club conducted the review under the supervision of a sub-committee of its board of directors with the assistance of independent outside counsel and other advisors.

Laplanche and three other senior staff resigned or were fired. The company’s stock price slid dramatically, and investors <a href="http://www.marketwatch.com/story/goldman-jefferies-stopped-buying-lendingclub-loans-2016-05-10">Jeffries LLC and Goldman Sachs paused their purchase of loans from Lending Club</a> as they review the events. Jeffries, for example, had been looking to package roughly $150 million of Lending Club loans into bonds for investor sales in early May.

What does this mean? In the immediate aftermath of the announcement, industry players and commentators had mixed reactions. Some pointed to Lending Club’s falling stock prices and <a href="http://www.pymnts.com/news/alternative-financial-services/2016/lending-club-investigation-renaud-laplanche/">other signals</a> from marketplace lenders as evidence of industry weakness. Others are taking a more <a href="http://www.bloomberg.com/news/videos/2016-05-10/is-lendingclub-a-warning-on-peer-to-peer-lending">optimistic view</a>, asserting that as an emerging asset class, marketplace lending needs greater transparency as part of the process of reaching maturity.

Lending Club for its part, has managed to sustain impressive <a href="http://www.nbcnews.com/business/business-news/lendingclub-founder-s-surprise-exit-leaves-industry-lurch-n572066">year-on-year growth</a>. The company had $1 billion in loan originations in 2012, $7 billion in 2014, and at the end of the most recent quarter (ending March 31, 2016) it neared $18 billion. During this same quarter, Lending Club reported a  modest <a href="http://ir.lendingclub.com/file.aspx?IID=4213397&amp;FID=34233669">$4.1 million net profit</a>.

Looking to the future, marketplace lending is <a href="http://www.businessinsider.com/goldman-sachs-and-jefferies-stop-buying-lendingclub-loans-following-ceos-exit-2016-5">forecasted to grow immensely</a>. Lending Club started out in consumer loans and has since begun lending to small businesses and medical offices. It’s estimated that small businesses make up 99 percent of companies in the United States as well as 54 percent of total sales and 55 percent of all jobs. However, only half of small businesses with $100,000 to $1 million in annual revenue received at least a portion of the financing they applied for from conventional banks in 2015. Business Insider estimates that the volume of potential loans that are not made reached nearly $100 billion in the fourth quarter of 2015.

But of course, this forecasted growth is only as the good as growth in borrower and investor interest, and marketplace players’ abilities to sustainably match the two. While the models first started as peer-to-peer lenders, sourcing funds from individuals, they have for several years been dominated by institutional investors. Indeed, to sustain its volume of lending outfits like Lending Club need big investors. It is notable that the issues raised in this episode raised all relate to dealings with investors, not placement of funds with borrowers, so that aspect of the business model has not been challenged.

Some investors are <a href="http://www.bloomberg.com/news/videos/2016-05-10/is-lendingclub-a-warning-on-peer-to-peer-lending">already declaring</a> that the way Lending Club is handling the situation provides the assurance they need to continue trusting that the company’s operations, including their alternative credit-scoring methods, are sound. In a <a href="http://ir.lendingclub.com/file.aspx?IID=4213397&amp;FID=34233669">press release</a> Lending Club reported: “The Company took, and will continue to take, remediation steps to resolve the material weaknesses in internal control over financial reporting identified in the first quarter of 2016 -- one related to the sales of non-conforming loans and the other to the failure to disclose the personal investment interests -- and to restore the effectiveness of its disclosure controls and procedures.”

Notably, last month Lending Club <a href="http://blog.lendingclub.com/lending-club-partners-funding-circle-prosper-launch-marketplace-lending-association/">partnered</a> with Funding Circle, Prosper and other marketplace lenders to form the Marketplace Lenders Association, which seeks to promote responsible business practices and sound public policy to benefit borrowers and investors. The Association established Marketplace Lending Operating Standards, addressing transparency for investors, responsible lending, governance and controls, and risk management.

A day after Lending Club’s news broke, the U.S. Department of Treasury <a href="https://www.treasury.gov/press-center/press-releases/Pages/jl0452.aspx">released</a> a white paper on marketplace lending, which offers an overview of the evolving market landscape, acknowledges its risks and benefits, reviews stakeholder opinions, and provides policy recommendations.

It is hard to say at this point whether Lending Club’s scandal represents minor growing pains, significant company concerns, or issues that are widespread and threatening for the entire industry. Though regardless, it’s never a bad investment to instill strong internal controls and transparency, especially when strong – and sustainable – growth is planned.

Have you read?

<a href="https://cfi-blog.org/2015/09/15/insights-into-an-evolving-peer-to-peer-lending-industry-in-china/">Insights into an Evolving Peer-to-Peer Lending Industry in China</a>

<a href="https://cfi-blog.org/2013/09/27/financially-included-through-crowdsourced-financing/" target="_blank" rel="noopener">Financially Included Through Crowdsourced Financing?</a>

<a href="https://cfi-blog.org/2014/10/30/fueling-the-economic-engine-global-experiments-in-small-enterprise-lending/">Fueling the Economic Engine: Global Experiments in Small Enterprise Lending</a>

The Lending Club Scandal and What It Means for Marketplace Lending

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.

<a href="http://cfi-blog.org/category/financial-inclusion-2020/"><img class="alignright wp-image-8777" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo1.jpg" alt="" width="321" height="71" /></a>The news is out. Ezubo is a Ponzi scheme. The lending company, a P2P platform in China, has bilked 900,000 private investors out of a stunning <a href="https://www.washingtonpost.com/world/asia_pacific/how-a-huge-chinese-ponzi-scheme-lured-investors/2016/02/08/fcbae776-ca9c-11e5-b9ab-26591104bb19_story.html">US$7.6 billion</a>. Ezubo is China’s largest ever online scam—but it is not alone. It is one of 2,612 P2P sites that bring lenders and borrowers together in China’s <a href="http://www.cnbc.com/2016/02/01/chinese-police-bust-76b-ponzi-scheme-at-p2p-lender-ezubao.html">$2.6 trillion</a> wealth management industry. Of those, the China Banking Regulatory Commission (CBRC) says that <a href="http://www.bloomberg.com/news/articles/2016-02-03/china-s-biggest-ponzi-scheme-shows-rot-in-internet-financing">more than 1,000</a> are “problematic.” We expressed concerns about this very P2P lending market in China in our <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a> released four months ago.

But first, how could this happen with Ezubo? Ezubo had been in the vanguard of the hot e-finance market, and was <a href="http://www.cnbc.com/2016/02/03/investors-scared-of-china-stock-markets-were-lured-by-ezubo-ponzi-scheme.html">named</a> "online credit financial brand of the year" by China's National Business Daily in 2015. It was lauded on Chinese state television and received implicit endorsement from high government officials. It engaged in cross-border trading with Myanmar—something that would not seem possible without government oversight. China is supposed to be in a big campaign to root out corruption. Yet it seems there are just two possibilities: Chinese regulators either knew about the scam and kept silent, or they missed it altogether. Could Ezubo have duped or paid off every one of the local, provincial, and national authorities who had oversight?

That’s why people who were suddenly stripped of their wealth not only feel duped by Ezubo, they also feel duped by the government. After all, this is only the latest allegation of fraud against a market that has been enthusiastically championed by the government and only loosely regulated.

While we didn’t call out Ezubo by name, we did throw down a warning about the Chinese e-finance explosion in our <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a>, saying:

The Institute of International Finance reported in November 2014 on the particular challenges of exponential growth in financial services through e-finance in China. The report lauded the great promise of e-finance for improving financial inclusion, but <a href="https://www.iif.com/publication/research-note/chinese-internet-finance-explosive-growth-challenges-ahead">noted</a> concerns about consumer protection. In the midst of stratospheric growth of <a href="https://www.nri.com/~/media/PDF/global/opinion/lakyara/2014/lkr2014202.pdf">P2P lending</a>, China has seen many P2P lenders abruptly closing shop and vanishing. In 2014 alone, 275 P2P platforms in China failed. China has proposed regulations designed to crack down on platforms that are not sufficiently capitalized or are at higher risk of default. In the meantime, individual investors are at risk. In some of the most egregious cases, P2P fraudsters absconded with investors' money on the first day that they opened for business.

This paragraph was part of our analysis of <a href="http://www.fi2020progressreport.org/client-protection/">Client Protection in the Digital Age</a>. In the FI2020 Progress Report, we said that technology has the potential to decrease fraud and increase protection—but that technology can also bring new dangers, including new kinds of fraud that can emerge when regulators have not caught up to the advances of financial technology. No matter what technology is involved, the bottom line is that customer protection policies need to develop alongside technology innovations.

In China today, the price of failing to do so is 900,000 people who have been robbed of their wealth—and 21 Ezubo executives who are now in custody. We’ll hope that client protection indeed catches up to the P2P platforms, lest another Ponzi is in the works.

Kudos to the sharp economists of the Institute of International Finance who first clued us in to the dangers of China’s e-finance market.

Financial Inclusion 2020 (<a href="http://www.centerforfinancialinclusion.org/fi2020" target="_blank" rel="noopener">FI2020</a>) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.

Have you read?

<a href="http://cfi-blog.org/2015/09/15/insights-into-an-evolving-peer-to-peer-lending-industry-in-china/">Insights into an Evolving Peer-to-Peer Lending Industry in China</a>

<a href="http://cfi-blog.org/2015/10/01/rating-progress-toward-financial-inclusion-on-a-scale-of-1-to-10/">Rating Progress on Financial Inclusion on a Scale of 1 to 10</a>

<a href="http://cfi-blog.org/2014/09/23/chinas-microfinance-landscape-nonprofits-microcredit-companies-rural-financers-and-alibaba/">China's Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba</a>

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Why We Aren’t Surprised that Ezubo, the P2P Lender in China, Is a Ponzi Scheme

Financial Inclusion 2020

Mapping the Invisible Market

<a href="http://www.fi2020progressreport.org/technology/"><img class="wp-image-19609 alignright" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/fi2020-tech-section.png" alt="" width="615" height="336" /></a>The following post draws observations from the just-released FI2020 Progress Report on Technology. See the full report to explore other topics.

Technology innovation is dramatically changing the financial services landscape—and quickly. No longer are simple 2G/SMS-based payments the talk of the financial inclusion community. Instead, a range of platforms and products and services promise that as we move into the future, the costs of providing services will be lower, and the base of the pyramid will be within reach for mainstream financial services providers.

The world in which these innovations are mainstreamed is one where the agent network concerns we have today will be gone. In the cash-lite or cash-free world that technology providers are seeking, there will, in fact, be few to no agents, as people will receive money electronically and spend it electronically without ever converting it to cash. When is the last time you went to a banking agent?

Consider the following innovations that allow important financial transactions to take place without a detour through cash. (For a more comprehensive list of innovations, see the FI2020 Progress Report on Technology.)

Low-Fee Remittances: In 2014, the global average cost for transferring remittances was 8 percent – a burden for low-income families who rely on remittance income. But this may soon change. Start-ups such as TransferWise, WorldRemit, and Azimo have mobile apps through which users can send remittances at fees as low as 1 percent. Companies like PayPal are increasing their global consumer base, and charge 3–4 percent on international transfers. Customers who were recently offered mobile cross-border remittances in West Africa <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/04/2015_MMU_Mobile-money-crosses-borders_New-remittance-models-in-West-Africa.pdf">responded by rapidly</a> adopting the service. Orange Money offered transfers between its own customers across Cote d’Ivoire, Mali, and Senegal, while MTN and Airtel created a bilateral agreement to serve the Cote d’Ivoire–Burkina Faso corridor. With the emergence of these competing business models, established players such as Western Union and MoneyGram have reduced their fees. Cornelis Heesbeen, CEO of Auxfin, a remittance service, <a href="http://www.remittancesgateway.org/index.php?option=com_kunena&amp;view=topic&amp;catid=9&amp;id=12&amp;Itemid=151">predicts</a> that by 2020 there will be no fees for remittances. The big question is how and when the remittance industry will shift from one in which most transactions start and end in cash at a banking agent, to one in which most transfers are account to account.

Pay-As-You-Go Utilities: Large up-front costs make solar home systems too expensive for off-grid, low-income customers, unless they get a loan. To sidestep the need for credit, some companies are using pay-as-you-go leasing technology on top of mobile payments. For example, with M-Kopa in Kenya and Mobisol in Tanzania and Kenya, customers pay daily-use fees via M-Pesa. If payment is not received, the company can turn off the system remotely through the embedded pay-as-you-go device. <a href="https://www.cgap.org/sites/default/files/DigitallyFinancedEnergy%20_FINAL.pdf">According to CGAP</a>, as of 2014 there were at least 25 companies selling solar systems with this technology in Africa, Asia, and Latin America. And the technology is being tested for other utilities, too.

P2P Lending: P2P lending services <a href="http://www.wsj.com/articles/peer-to-peer-lending-takes-off-in-china-1433320681">have taken off</a> and expanded rapidly, particularly in China, led by CreditEase, Lufax, China Rapid Finance, and DianRong. At the end of 2014 there were an estimated 1,575 P2P platforms operating in China, up from only 50 in 2011, and 103.6 billion yuan (US$16.7 billion) in outstanding loans issued via online platforms.

Online ROSCAs: An estimated 1.5 billion people globally participate in rotating savings and credit associations (ROSCAs). They provide a simple, informal method for people to save money and receive loans, although traditional ROSCAs can be unreliable and subject to management problems. <a href="http://kitty10.io/">Kitty10</a> is a mobile app that offers a possible remedy, allowing ROSCAs to manage their finances, maintain an electronic history of transactions, and easily make decisions (such as those dealing with loan amounts and repayment terms). It gives financial tips and can even build credit histories for members. <a href="https://www.margadarsi.com/index.jsp">Magadarsi</a> is an Indian chit fund that uses the Internet to support ROSCA-like operations. Magadarsi allows users to sign up online and pay savings and loan installments through online banking on its website. This allows for much larger scale in membership.

These innovations exemplify the impressive progress that technology has made in the last few years—and will continue to make from now to 2020, when the financial inclusion industry is striving to achieve financial inclusion globally. Truly, of all of the lenses through which we explored progress made toward financial inclusion for the FI2020 Progress Report, technology was the most promising, and we gave it the highest score on progress (7/10).

&nbsp;

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 on Financial Inclusion on a Scale of 1 to 10</a>

<a href="http://cfi-blog.org/2015/01/08/the-twelve-days-of-fintech/">The Twelve Days of Fintech</a>

<a href="http://cfi-blog.org/2015/04/24/fintech-for-fi2020-a-conversation-on-aligning-technology-and-partnerships-for-financial-inclusion/">Fintech for FI2020: A Conversation on Aligning Technology and Partnerships for Financial Inclusion</a>

&nbsp;

Toward an “Agent-Free” World

Financial Inclusion 2020 Progress Report

<a href="http://www.planetfinancechina.org/wp-content/uploads/2015/08/New-Insights-Into-An-Evolving-P2P-Lending-Industry_PositivePlanet2015.pdf"><img class="alignright wp-image-19379" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/09/positive-planet-report.png" alt="" width="250" height="353" /></a>Over the past five years, peer-to-peer lending (P2P) has grown rapidly. Now more commonly referred to as “marketplace lending” because of the large range of institutions, intermediaries, and non-“peer” parties involved, the industry is poised to continue its year-on-year triple-digit growth. The breakneck speed of P2P’s growth seems natural given the many advantages it offers. As an industry, focus has gradually moved from a community of individuals lending directly to other individuals (often within affinity groups), and has evolved into a powerful engine of technical efficiency. Today, P2P is viewed in many different ways: a <a href="http://cfi-blog.org/2014/12/05/the-role-of-peer-to-peer-lending-in-financial-inclusion/">potential agent of financial inclusion</a>; an innovation in big data analytics and credit risk evaluation; an efficient mechanism for loan matching without the often burdensome capital and regulatory requirements of banks; an innovative operational model leveraging the cost savings of online platforms; a new asset class for retail and institutional investors; and the list goes on.

Change has been slow to come, with many banks questioning the P2P model’s long-term relevance and P2P lenders failing to capture the public eye for many years, but big banks have recently begun to show their appetite for the more robust of the online lenders. Banks have made equity stakes in P2P businesses in the past, such as Barclays’ 49 percent investment in South Africa’s RainFin. However, 2015 seems to be the breakout year for P2P into mainstream finance. In June, Goldman Sachs announced plans to enter the consumer lending space through an online platform, akin to what <a href="https://www.lendingclub.com/">Lending Club</a> and <a href="https://www.prosper.com/">Prosper</a> offer in the U.S. Several days later, Morgan Stanley featured an <a href="http://www.morganstanley.com/ideas/p2p-marketplace-lending/">optimistic report</a> on P2P lending on its home page. In August, Standard Chartered led a $207 million C-round of funding for Chinese P2P company Dianrong.

Despite all of the change, the majority of articles published do not provide in-depth explanations of the specific mechanisms and trends (e.g. online vs. offline models or specific roles/risks of the various parties involved) that underlie this recent expansion. Rather, articles repeatedly focus on the growth potential of the industry, in some instances highlighting risks, but typically without deeper analysis. This is especially true of commentary on China, where data is difficult to find and as a result conflicting interpretations exist.

These discrepancies are also due, in part, to the fact that very few reports have gone deeper to pull back the curtain and examine the details of the P2P market. Moreover, few reports have tied detailed analysis of these various P2P trends together into the past, present, and future “story of P2P.” Without this type of in-depth analysis, it is hard to separate the hype from the facts and examine the underlying risks inherent in the industry, as well as future trends.

For the past six months, Positive Planet China has been collaborating with the Credit Suisse Microfinance Capacity Building Initiative to produce a piece of research, titled “New Insights Into an Evolving P2P Lending Industry: how shifts in roles and risk are shaping the industry.” Rather than being another desktop-only research report that simply summarizes the existing field, this paper is also based on numerous interviews with industry experts to dive into deeper layers of the P2P industry.

Included is a focused analysis of P2P in China that aims to clarify some of the confusion about this massive but opaque market, as well as a review of platforms with more socially-focused missions. Additionally, the paper provides context for the global industry, its current situation, and what to look for in the future. We hope that this report will provide a roadmap for regulators, consumers, industry players, and anyone else interested in understanding, evaluating, and driving the industry to further levels of development.

The full Positive Planet report can be read <a href="http://planetfinancechina.org/new-insights-into-an-evolving-p2p-lending-industry-how-shifts-in-roles-and-risk-are-shaping-the-industry/">here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/12/05/the-role-of-peer-to-peer-lending-in-financial-inclusion/">The Role of Peer-to-Peer Lending in Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/09/27/financially-included-through-crowdsourced-financing/" target="_blank" rel="noopener">Financially Included Through Crowdsourced Financing?</a>

<a href="http://cfi-blog.org/2015/01/08/the-twelve-days-of-fintech/">The Twelve Days of Fintech</a>

&nbsp;

Insights into an Evolving Peer-to-Peer Lending Industry in China

Credit Suisse