<em>Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and Palestine – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

In the spring of 2018, Alaa Sisalem, the general manager of Vitas Palestine, was reviewing the materials prepared for an upcoming board meeting. In the first quarter of 2018, Vitas Palestine – part of <a href="https://www.vitasgroup.com/" target="_blank" rel="noopener noreferrer">Vitas Group</a>, a holding company that operates non-bank financial services companies in the Middle East and Eastern Europe – achieved 95 percent of projected portfolio growth while maintaining a PAR 30 (loans in arrears for over 30 days) of 2.1 percent. As Sisalem looked through the growth projections for the year, he glanced outside his window at the bustling streets of Ramallah. He thought about Vitas Palestine's clients and their ability to pay in the current economic conditions, and he realized that while the financials didn't show it yet, a major storm was coming.

A few weeks earlier, in April 2018, the salaries for about 38,000 civil servants in the Gaza Strip were delayed. The following month, the Palestinian Authority (PA) <a href="https://www.reuters.com/article/us-palestinians-gaza-salaries/anger-as-palestinian-authority-cuts-gaza-salaries-and-pays-late-idUSKBN1I41LM" target="_blank" rel="noopener noreferrer">cut staff salaries</a> by 20 percent. This marked the beginning of a crisis for Vitas Palestine. The civil servant salaries were unpaid or delayed multiple times, especially in Gaza, which took a toll on the local economy. Gaza's economy was already under severe stress because of movement restrictions brought about by the conflict between Hamas and Israel. Hamas gained control of Gaza in the 2006 elections, but the PA continued to administer payroll in the region, causing tensions between Hamas and the PA.<img class="alignright wp-image-40560" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-1-4-1024x678.png" alt="chart " width="400" height="265" />

Civil servant salaries significantly impact the Palestinian economy because of the low rates of private investment and a low labor force participation rate of <a href="https://databank.worldbank.org/Palestine---Labor-Force/id/ecae3350" target="_blank" rel="noopener noreferrer">44 percent</a>. The territory has one of the highest unemployment rates in the world, with a quarter of the working-age population unemployed. The situation is even more dire in Gaza, which accounted for 29 percent of Vitas' 2018 gross loan portfolio and has an unemployment rate close to <a href="https://databank.worldbank.org/Unemployment/id/2a6c0966" target="_blank" rel="noopener noreferrer">45 percent</a>. In Gaza, 37 percent of the employed individuals worked in the public sector, and therefore, interruptions to civil servant salaries tend to have a cascading effect on consumer spending and the local economy.

The West Bank economy is more diversified than Gaza, with <a href="http://www.pcbs.gov.ps/pcbs_2012/Publications.aspx" target="_blank" rel="noopener noreferrer">16 percent</a> of all employed individuals working in the public sector. Yet, there were concerns that the crisis would seep into the West Bank after the Israeli government passed a law in 2018 that allowed unilateral deductions from the tax revenues it transfers to the PA. The deductions are equivalent to the amount paid by the PA to families of Palestinians killed or put in jail due to the conflict with Israel (about $12 million per month). The tax revenues transferred from Israel represent more than 60 percent of PA's total revenues, and the deductions would further strain PA's budget.
<h2>The Board Moves to Head Off Crisis</h2>
Vitas Palestine began in the early years of the microfinance sector as a USAID project. The incorporation of Vitas Palestine as a for-profit company in 2014 made it easier for the company to borrow from local and international lenders. This ease of access to funding contributed to the rapid growth of Vitas' loan portfolio (see graph below).

<img class="wp-image-40561 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-2-2-1024x487.png" alt="bar graph" width="600" height="285" />

But when the Vitas Palestine's board met in May 2018, the region's worsening economic conditions dominated their discussion. Following the salary interruptions in early 2018, Vitas Palestine began to experience declining portfolio quality, with a 10 percent drop in the collection rate, resulting in a PAR 30 of 6 percent for the total portfolio in May, and a PAR 30 of 16 percent in Gaza. This was a significant increase from the December 2017 PAR 30 of 1.32 percent. Vitas Palestine had a strong debt to equity ratio of 1.81 at the end of 2017, but in 2018, the declining portfolio quality led to a breach of delinquency covenants.

The board and the management agreed that Vitas needed to prepare for further challenges due to the political instability. After deliberations with management, the Vitas board advised against aggressive growth targets and counseled the management to prioritize three areas: managing liquidity, improving portfolio quality, and controlling operational costs.
<blockquote class="pullquote--right">Managing liquidity, improving portfolio quality, and controlling operational costs were three priorities for the board.</blockquote>
Sisalem had been through numerous crises at the company, ever since CHF Ryada, Vitas Palestine's predecessor, disbursed its first housing loan in 1995. As Sisalem was formulating the plan of action to tackle the salary crisis, he knew from experience that maintaining strong relationships with clients, investors, and staff would be crucial to Vitas' survival. The management team at Vitas ensured open communication with its staff and investors. The management also recognized that the front-line staff plays an essential role in deepening client relationships and continued its investment in client relationship officer training to prepare staff to handle difficult conversations with clients.

In order to control operational costs, the management team performed a detailed analysis of its expenses and identified ways to optimize operations. Their analysis showed that there was sufficient liquidity to tackle the next six to nine months without exploring drastic measures to reduce costs. Further, the loan officers' incentives were based in part on portfolio quality, and the increase in PAR 30 during the crisis led to lower incentives paid by the company. This variable component of the compensation structure led to lower staffing expenses and aided the management efforts to lower costs.

Weathering the Storm II: A Case Study of Vitas Palestine

Just over one year ago, I joined the Center for Financial Inclusion (CFI), and what a year it has been. <a href="http://financialinclusionweek.org" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a> presents a great time for me to reflect on this past year and to share with you CFI’s plans for our next chapter. We are using Financial Inclusion Week to feature the work of so many of our partners. And we are also using the week to focus attention on the themes we have identified in our new strategy as the pillars for this week’s <a href="http://financialinclusionweek.org/event-calendar-2020" target="_blank" rel="noopener noreferrer">calendar of events</a>.

CFI emerged from the rubble of the financial crisis to spearhead the most pressing issue the inclusive finance field needed at the time: improved consumer protection. We are now well into our second decade and our industry is reeling from the ravages of the COVID-19 pandemic. It is perhaps the right time for CFI to reenergize its mandate and spearhead what we believe is needed to “build back better” as the saying goes. As tragic as the pandemic’s consequences have been and continue to be, it has at least laid undeniably bare the failures of the status quo and has created a heightened sense of urgency, for financial services to build back better.

CFI was founded at a particular moment when it was becoming more apparent that market forces alone would not ensure positive outcomes for financial inclusion, and that sustained intentionality would be necessary. The coronavirus pandemic has, at the September 2020 time of writing, infected more than 33 million people and killed nearly 1 million. Beyond the rapid and catastrophic spread of illness and death, the pandemic has devastated global economies. Millions of micro, small, and medium enterprises (MSMEs) around the world have seen revenues plummet and have suspended operations or gone out of business altogether. Hundreds of millions of families have lost jobs and incomes, and many of them live in countries where social safety-net protections are patchy at best. The pandemic also reversed, seemingly overnight, social and economic development gains that had taken decades to achieve: the World Bank estimates that 70 million people are at risk of falling back into poverty. Women and children have been among those most affected: children because schools around the world have been shuttered, and women because they are more likely than men to lose their jobs and to shoulder the responsibility of supervising and homeschooling children.

For CFI, the pandemic has reenergized our purpose. Financial services are critical to reducing low-income populations’ vulnerability and helping them to recover from this and other recurring crises in their lives. We believe we have a leadership role to play in this intensified global effort. We have more than a decade of recognized global leadership in understanding the financial needs and behaviors of low-income vulnerable populations. Complementing this demand-side expertise, our recent <a href="https://content.centerforfinancialinclusion.org/mix-and-cfi-announce-strategic-integration-to-drive-industry-knowledge-for-inclusive-finance/" target="_blank" rel="noopener noreferrer">integration</a> with MIX brings supply-side expertise to the table, as they have been studying and reporting about financial service providers for the past 20 years. These complementary strengths, combined with our history of thought leadership and our role as conveners, positions CFI to pursue an ambitious three-year strategy made all the more urgent in the context of the pandemic.
<blockquote>The pandemic has reenergized our purpose.</blockquote>
The strategic plan which will guide CFI’s work through 2024 focuses on four thematic areas. All of them, to significant degrees, have either been exacerbated by the pandemic or have been revealed by this crisis as urgent and under-attended priorities. The common thread among the themes is that progress in these areas is essential to ensuring that all people have the financial tools needed to improve their lives and to prosper.
<h2>Financial Services to Respond to the Risks of Climate Change</h2>
Just as the pandemic’s effects have been most severe on those who were already the most vulnerable, so too are the effects of climate change. Low- and moderate-income countries (LMICs) in the Global South are likely to experience longer, hotter heat waves and more extreme storms which in turn will create income loss, food insecurity, adverse health effects, and displacement that will hit already-vulnerable LMIC populations hardest.
<blockquote>Financial services are an indispensable tool to help prepare for climate-related shocks and recover.</blockquote>
CFI recognizes that climate change is ultimately an issue requiring long-term systemic changes to entrenched patterns of production and consumption. In the short term, however, financial services are an indispensable tool to help low-income vulnerable people prepare for climate-related shocks and recover from them when they happen. Our work in this theme will focus on understanding what those people need and the constraints they face, uncovering product innovations that can help, and then pilot testing such innovations and scaling-up lessons learned.
<h2>Women’s Financial Inclusion</h2>
Around the world, in many different geographies and socioeconomic contexts, women occupy a “last in, first out” position of vulnerability. The fall-out from the pandemic has made this abundantly clear. Whether it is a workplace where the more recently hired woman is let go before the more senior man, or a financial system that only prioritizes women’s needs when times are good, women’s economic inclusion is seen as a nice-to-have rather than a must-have. Women’s financial inclusion is powerfully shaped by broader societal norms, the unspoken assumptions and values governing men’s and women’s roles. CFI believes that efforts that focus solely on process fixes or product design will not succeed in women’s financial inclusion unless those efforts also seek to transform, rather than merely acknowledge, the underlying norms.

Our work in this area will accordingly include an intensive focus on research into successful norms-transformative initiatives, and how those might be scaled up. We will also work to improve the digital and financial capability of subsegments of women customers, and to influence the policy environment for women’s financial inclusion.
<h2>Data Risks and Opportunities</h2>
The pace of change created by the technology revolution is much faster than law, policy, or social mores can match. Although data privacy and protection regimes have begun to emerge, especially in wealthy countries, data by its nature is universal. To date, there is no universal framework setting forth who even owns personal data, much less governing how it can be used, by whom, and under which circumstances. The COVID-19 pandemic has provided a powerful illustration of both the risks and the opportunities of digitized data. The public health benefits of documenting and following diagnosed COVID-19 cases, and of tracing patients’ contacts, are obvious. But the risks to patients of stigmatizing, discrimination (whether of access to insurance, housing, employment, or otherwise), and other abuses are also very real.

Similarly, in financial services, data is the key that can unlock access to a full range of personalized, effective products that can help low-income people achieve their goals. The risk is that many LMICs have no effective consumer data protection regimes in place and that even where those exist, people with low levels of digital and financial sophistication may, in their eagerness to receive financial services, sign away their rights without even fully understanding them.
<blockquote>CFI will focus on means to bring transparency to data practices in DFS.</blockquote>
CFI’s work in this area will focus on means to bring transparency to the data practices of digital financial service (DFS) providers. We will also study how financial service providers use algorithms, which can be biased against already-underserved populations, in automated decision-making. We will monitor emerging frameworks around the world to document what does and does not work to advance financial inclusion while safeguarding data privacy, portability, and other consumer rights.
<h2>Consumer Protection in the Digital Economy</h2>
As the inclusive finance landscape evolves, so too must the approaches to consumer protection. Social platforms, ecommerce giants, fintechs, and pay-as-you-go providers are all relatively recent entrants into the field, and this means a multi-pronged approach is necessary to ensure safe practices are the norm. This is especially true since many of these business models fall beyond the scope of existing banking regulation. Consumer protection is an evergreen challenge, and one where CFI has long been active.
<blockquote>Consumer protection is an evergreen challenge.</blockquote>
We plan to devote intensive study to the practice of government-to-person (G2P) digital cash transfers, since these are often the on-ramp to digital financial services for low-income populations. We want to understand the risks that digitized G2P transfers present and how governments are mitigating those risks. We also want to document innovations around redress of grievances, financial capability-building add-on services, resolution of connectivity issues, and other relevant lessons learned.

In addition, CFI will partner with regulators and supervisors to test new technologies, such as chatbots or algorithmic audit tools, that can allow supervisors to be in direct dialogue with consumers, without consumer voices being mediated via the financial service providers. Such a dialogue can ultimately improve customers’ experience with financial services and democratize the financial sector by involving customers in the development of financial sector policies. To date, much of the recent work in regulatory technology (RegTech) and supervisory technology (SupTech) has prioritized the data reporting and compliance, but CFI believes its potential for advancing consumer protection has been underappreciated.
<h2>Conclusion</h2>
CFI developed its three-year strategic plan by weighing the needs of the inclusive finance industry against what we see as our own comparative advantages. We recognize that the four thematic priorities we intend to pursue are not an exhaustive list of everything that needs to happen to ensure positive outcomes for low-income people, and we also recognize that other individuals and organizations are doing excellent work in the areas we intend to pursue. We look forward to collaborating with all stakeholders who share the vision of a world where all people are able to equitably participate in the economy and are able to use financial tools to improve their lives and to prosper.

We hope you will participate in the rest of Financial Inclusion Week, which is packed with amazing speakers, events and activities. And, we want to hear from you. Please participate and tell us what you think about CFI’s thematic priorities.



Reflecting on the Past and Charting a New Direction

<a href="https://www.cdcgroup.com/en/" target="_blank" rel="noopener noreferrer">CDC Group</a>, the UK’s development finance institution, is one of the largest DFIs in the world. With nearly $6 billion invested in companies located mostly in Africa and South Asia, CDC is an impact investor that aims to drive development through commercial means.

CDC invests across a wide range of sectors but focuses on seven priority sectors that it has identified as having the greatest potential for development impact. Among these, the financial services sector currently represents a <a href="https://www.cdcgroup.com/our-impact/key-data#how-we-invest-in-sectors!" target="_blank" rel="noopener noreferrer">greater share of CDC’s portfolio</a> than any other sector.

As part of its exploration into how DFIs are responding to COVID-19, in particular with respect to the role of the financial sector, CFI connected with Machal Karim, an executive on CDC’s Development Impact team who focuses on financial services in developing countries.
<h2>For its COVID-19 response, CDC has laid out three areas of focus: ‘Preserve,’ ‘Strengthen’ and ‘Rebuild.’ Can you tell us more about those?</h2>
We prepared a briefing document with complete details that is available on our <a href="https://www.cdcgroup.com/en/covid-19-response/" target="_blank" rel="noopener noreferrer">COVID-19 response page</a>.
<blockquote>Our immediate priority has been to preserve the viability of our current portfolio of over 1,200 businesses that employ more than 800,000 people combined.</blockquote>
Our immediate priority has been to preserve the viability of our current portfolio of over 1,200 businesses that employ more than 800,000 people combined. This is particularly the case in those sectors most affected by COVID-19, where it’s been crucial to act to protect the positive environmental, economic, and social impact of these businesses. Our support has included providing working capital, technical assistance, and guidance to improve their resilience and protect jobs.

Our second area of focus is to strengthen the resilience of businesses by scaling up our response to the economic and health challenges of the crisis. On the economic side, we’re channeling much-needed liquidity to local banks to enable them to support their business customers. And to support those that have a direct role in combating the COVID-19 pandemic, we are assessing opportunities to invest in businesses providing healthcare or access to basic goods and services.

We’re now at a point where, alongside these more immediate actions, we’re thinking more about our third area of focus – to support economies to rebuild and recover once the worst effects of the pandemic have passed. As a DFI, our role to address the long-term challenges a crisis will bring – continuing to invest patient capital at a time when commercial investors pull back – is vital.
<h2>In terms of ‘Strengthen,’ CDC is looking to provide liquidity for local financial service providers. Have you identified opportunities for this type of support yet?</h2>
We’re giving priority to those who are in most urgent need of liquidity support. Over the last few months, we’ve committed just over $400 million to our program of systemic liquidity.

As an example, we’ve recently made an <a href="https://www.cdcgroup.com/en/news-insight/news/cdc-announces-additional-us75-million-trade-finance-deal-with-absa-as-part-of-covid-19-response/" target="_blank" rel="noopener noreferrer">additional $75 million commitment</a> to our existing trade finance facility with Absa Bank, an African financial services group. The pandemic has put significant pressure on African banks as international banks continue to withdraw from the continent.
<blockquote>What makes this facility particularly innovative is that it is aimed at boosting trade finance funding to some of Africa’s most vulnerable countries.</blockquote>
The investment will enable local banks to sustain the availability of trade finance, supporting supply chains during the crisis. And what makes this facility particularly innovative is that it is aimed at boosting trade finance funding to some of Africa’s most vulnerable countries and in sectors that are critical to serving people’s basic needs during the crisis – food and agriculture and health.
<h2>What about timeframes? What do you see as the medium-term needs beyond liquidity?</h2>
<blockquote>What we do know is that the crisis is shifting from an acute challenge to a chronic one, and this means that our role will be as a partner for the long-term.</blockquote>
CDC has identified various <a href="https://www.cdcgroup.com/en/news-insight/news/guidance-on-protecting-customers-during-covid-19/" target="_blank" rel="noopener noreferrer">short-term to longer-term risks and provided corresponding suggestions</a>, but we’re at a stage where it’s still very difficult to talk about timeframes. We still cannot predict what the ultimate impact will be. What we do know is that the crisis is shifting from an acute challenge to a chronic one, and this means that our role will be as a partner for the long-term, supporting businesses through the course of the pandemic and to rebuild sustainably.

In terms of needs beyond liquidity, our approach throughout has been to provide guidance for employers, investors, and financial institutions on issues ranging from <a href="https://www.cdcgroup.com/en/news-insight/insight/articles/how-can-investors-help-companies-protect-jobs-during-covid-19/?fl=true" target="_blank" rel="noopener noreferrer">job protection</a>, to <a href="https://www.cdcgroup.com/wp-content/uploads/2020/04/CDC-Group-Guidance-on-protecting-customers.pdf" target="_blank" rel="noopener noreferrer">customer protection</a>, to <a href="https://www.cdcgroup.com/en/news-insight/insight/articles/guidance-on-managing-a-remote-workforce-during-the-covid-19-pandemic/?fl=true" target="_blank" rel="noopener noreferrer">remote working</a>. As time has moved on, the nature of this guidance has evolved to include advice on <a href="https://www.cdcgroup.com/en/news-insight/insight/articles/returning-to-the-workplace-during-covid-19-labour-and-workforce-considerations/" target="_blank" rel="noopener noreferrer">returning to the workplace</a> and how to support women working from home with limited access to technology.

Another part of our approach has been to provide support to investee businesses through <a href="https://www.cdcgroup.com/en/covid-19-response-facilities/" target="_blank" rel="noopener noreferrer">our technical assistance facility, CDC Plus</a>. This has included one facility providing grants to businesses, so they can adapt or scale-up to form part of the response to the pandemic, and a second facility to support the development of guidance for companies on how to respond to the crisis.
<h2>Throughout the short and medium terms, CDC suggests businesses maximize their “digital footprint and channels” as much as possible. How are your investees working to accelerate digitization for consumers?</h2>
We’ve been supporting our investee businesses, including financial institutions, to proactively explore how they may want to pivot their current products or operations to better meet customer needs. Much of this has revolved around learning more about digital opportunities and maximizing their digital offerings so they can continue to operate under the changing environments and new types of customer interaction and behavior that the pandemic has brought about.

We continue to support our investees through various channels, including our technical assistance facility, to explore these opportunities and step up their activities as economies open up.
<h2>Consumer protection remains an important topic for CDC. How have consumer protection challenges shifted in the COVID era?</h2>
<blockquote>Consumer protection risks have become particularly heightened due to the pandemic.</blockquote>
We recognized that financial institutions and their customers would come under particular stress as a result of COVID-19. Consumer protection risks have become particularly heightened due to the pandemic, as financial institutions have had to balance the immediate stress on liquidity with the need to sustain support to their customers and abide by regulatory requirements.

Early on, we ensured that the financial institutions we’re invested in had the support they needed to make decisions and manage risks while protecting customers, such as by issuing this <a href="https://assets.cdcgroup.com/wp-content/uploads/2020/04/09165635/CDC-Group-Guidance-on-protecting-customers_9-April-2020.pdf" target="_blank" rel="noopener noreferrer">guidance document</a>. Mindful of the many stresses on employment, liquidity and cashflows, we urged our financial institution partners to continue to consider the needs of, and risks to, customers through the crisis.
<h2>How has this crisis shifted the perception of inclusive finance, if at all?</h2>
<blockquote>Now more than ever, support to financial systems is critical for economic recovery, particularly for the most vulnerable.</blockquote>
Now more than ever, support to financial systems is critical for economic recovery, particularly for the most vulnerable. Our work to provide systemic liquidity has been a concrete channel of support to the market, with an explicit focus on supporting the most vulnerable first and ensuring their liquidity needs are managed.

When we start to recover, it will be vital to remember all segments of the market to ensure that the most vulnerable and excluded groups are not left behind. It will also be important to continue to support financial institutions in reaching those customers that have historically been perceived as higher risk and harder to reach, as they are also the most vulnerable.
<h2>CDC’s head of Africa has argued that the banking sector is where DFI support is most crucial, but that private capital will be required in the longer term. Does CDC structure any direct support to MSMEs or does everything flow via the banking sector?</h2>
<blockquote>We know that our most effective way for getting capital to SMEs is through partners, rather than investing directly.</blockquote>
A key part of our <a href="https://www.cdcgroup.com/wp-content/uploads/2020/05/Financial-Institutions_11.pdf" target="_blank" rel="noopener noreferrer">Financial Institutions' Strategy</a> is to help intermediaries serve SMEs because SMEs are the growth engines of the economy in our geographies. We know that our most effective way of getting capital to this size of business is through partners, rather than investing directly.

This includes investing in non-bank financial companies so that alternatives to traditional bank financing become available to SMEs, as well as supporting microfinance institutions looking to extend their lending to SMEs. It also includes working with our bank investees to increase the finance they provide to SMEs. This can mean funding work to develop products and operations better suited to SME clients. And it can mean entering into risk-sharing agreements, which reduce banks’ capital cost of lending to SMEs, or trade finance agreements to bridge the ‘trade finance gap’ and support trade undertaken by local businesses. Finally, it includes investing through funds to reach SMEs with different types of capital.

That’s why an important part of our response has been focused on working with our investee financial institutions, so that we can quickly help them to increase the credit available in our markets. For example, by expanding our pre-existing trade finance programs, we can inject liquidity quickly and accurately, and ensure that domestic supply chains keep operating, which in turn supports SMEs within those markets.
<h2>Has CDC coordinated with other DFIs on its COVID-19 response? What’s been the nature of this inter-DFI coordination, and what more can be done?</h2>
DFIs came together very early on to find ways to collaborate in response to the pandemic. The <a href="https://www.cdcgroup.com/en/news-insight/news/development-finance-institutions-join-forces-to-respond-to-covid-19-in-developing-countries/" target="_blank" rel="noopener noreferrer">DFI Alliance</a>, involving organizations from 16 OECD countries, has been working together to bring liquidity to the market, support companies impacted by the virus, and promote new investment.

CDC has been working with both bilateral and multilateral DFIs. There are various working groups underway coordinating on areas ranging from technical assistance funding, to our approach to certain sectors, to supporting the liquidity of investment funds.

We’ve also been collaborating on how to support the rebuilding of businesses and economies in a way that is more inclusive. For example, alongside our peers, we <a href="https://www.cdcgroup.com/en/news-insight/news/2x-challenge-and-gender-finance-collaborative-response-to-the-covid-19-pandemic/" target="_blank" rel="noopener noreferrer">called for a gender-sensitive approach</a> among investors in both immediate responses and longer-term recovery solutions.
<blockquote>We will continue to stand firm to play our role at a time when commercial investors are pulling back.</blockquote>
We feel proud of what we’ve been able to achieve so far and recognize there is a lot more to do as the pandemic shifts from an acute to a chronic challenge. Our approach of providing much-needed liquidity through financial intermediaries is very likely to continue to be needed in the coming years. We will continue to stand firm to play our role at a time when commercial investors are pulling back, so that in the long-term, businesses and economies are able to successfully rebuild.

DFIs, Financial Inclusion and the COVID-19 Response: A Q&A with Machal Karim of CDC

Many have compared the steps required to overcome COVID-19 with those taken in previous economic crises or <a href="https://centerforfinancialinclusion.org/pandemics-and-natural-disasters-what-can-we-learn-from-past-disasters-to-help-with-todays-pandemic/" target="_blank" rel="noopener noreferrer">natural disasters</a>, whereby the situation follows a similar pattern consisting of three stages: triage, stabilize, recover. While there is some applicability to the current COVID-19 pandemic, it implies a sequence and limited duration that may not truly characterize the nature of the challenges we now face. The reality is that COVID-19 is a more persistent phenomenon that may continue to ebb and flow for some time before it is fully under control.

Given the more entrenched and global nature of this crisis, it is likely that the consequences will be more varied and run deeper than what we have seen in past crises. To help get a sense of what these consequences may be for those who are most vulnerable, we asked a few members of CFI’s <a href="https://www.centerforfinancialinclusion.org/people/advisory-council" target="_blank" rel="noopener noreferrer">Advisory Council</a> to share some brief thoughts on what they see as the biggest implications of COVID-19 and the ways in which the inclusive finance sector can address them.
<h2>Camilla Nestor, Adjunct Professor at Columbia University</h2>
From my perspective, one of the biggest implications of COVID-19 is on food security for countries and populations that were already vulnerable. Before COVID-19, the world’s estimated 500 million smallholder farmers were one of the most financially underserved segments, with an estimated <a href="https://www.raflearning.org/post/covid-19-emergency-briefing-agri-smes-operating-uncertain-financial-operational-and-supply" target="_blank" rel="noopener noreferrer">$100 billion lending gap</a> in Africa alone.

As a result of COVID-19, smallholder farmers are dealing with significant volatility in demand for both cash crops and food crops, challenges securing the necessary inputs, and limits on accessing markets. On top of this, they are also facing reductions in access to already-scarce capital. If unaddressed, this lack of capital will directly impact their ability to produce food. We see that commercial lenders are pulling back on lending to agriculture; <a href="https://csaf.org/wp-content/uploads/2020/07/CSAF_State_of_Sector_2020_Summary_FINAL.pdf" target="_blank" rel="noopener noreferrer">cross-border social lending</a> is flat; and supply chain financing is at risk – for example, in a recent <a href="https://www.afap-partnership.org/covid-19-impact-assessment-on-the-agrismes-and-farming-communities-of-ghana-malawi-mozambique-tanzania-and-uganda/" target="_blank" rel="noopener noreferrer">survey</a> of 5 markets in Africa, farmers noted reduced access to both supplier credit and trade credit since the onset of the pandemic.
<blockquote>With smallholder farming contributing up to 80% of the food supplies in some regions, there is significant risk to food security at both a household level and a national level.</blockquote>
With smallholder farming contributing <a href="https://www.ifad.org/documents/38714170/40706188/Smallholders+can+feed+the+world_e.pdf/460ca6c2-7621-40d8-9f79-a56f6f8fa75e" target="_blank" rel="noopener noreferrer">up to 80%</a> of the food supplies in some regions, there is significant risk to food security at both a household level and a national level. This is an opportunity for the financial inclusion community and agricultural finance experts to come together to develop short-term and longer-term mechanisms to ensure that financing flows to this critical segment.
<h2>Mark Pickens, Senior Director of Social Impact at Visa</h2>
We need to step up for small and micro businesses as they are the backbone of the global economy. Unless they remain resilient and grow, most economies are going to suffer because small businesses typically account for half of all jobs and GDP. The challenge is even greater with women-owned small businesses, which face many challenges, including lack of access to capital.
<blockquote>Key factors to building resiliency will include how small and micro businesses digitize payments, access other financial services, and skill-up to operate in an increasingly digital economy.</blockquote>
Key factors to building resiliency will include how small and micro businesses digitize payments, access other financial services, and skill-up to operate in an increasingly digital economy. Earlier this year the Visa Foundation announced $210 million to help small businesses. Visa also launched online toolkits via Small Business Hubs in 20 countries, expanded our Practical Business Skills portal for a greater geographic reach, and committed to digitally enable 50 million small businesses as we collectively recover from the COVID-19 pandemic.
<h2>Joanna Ledgerwood, Independent Consultant</h2>
It has been well-documented that the COVID-19 crisis has disproportionately affected women and girls. In most countries, social norms dictate that women bear primary responsibility for feeding and caring for their families and managing the household. With children not able to attend school and sick family members needing care, women have increased responsibilities, exacerbating an already heavy workload. The result is women have less time for paid work, and because of the pandemic, less access to informal financial services such as savings groups or local shop credit to help them through.
<blockquote>This pandemic provides an opportunity to proactively promote women’s empowerment.</blockquote>
However, this pandemic provides an opportunity to proactively promote women’s empowerment and advance household food security. Understanding how women and men are impacted differently by the pandemic, as well as the risks, constraints and hardships women face and their specific needs, requires the collection and analysis of sex-disaggregated data. This data can help to design appropriate programs and policies and inform financial products and delivery channels to effectively reach women.

For example, providing digital cash transfers directly to women increases their chances of receiving and controlling money to meet household needs, which in turn is likely to lead to greater bargaining power at home. The use of sex-disaggregated data can help to design programs that mitigate unintended consequences of cash transfers such as increased domestic violence. In addition, G2P programs that take gender biases into account can enhance women’s resilience to future economic shocks and can influence change to social norms over the long-term. Now is the time to ensure that women’s increased responsibilities and reduced ability to earn income will not further widen the gender gap in financial inclusion that existed long before this pandemic.
<h2>David Ferrand, Independent Consultant</h2>
Much depends, I think, on factors beyond financial inclusion. The indications remain rather positive that the health impact on Africa will be relatively bearable, notwithstanding the tragic loss of life. But we still don’t know yet the eventual economic cost to Africa, either in absolute terms or in how it will be distributed. There is a very real concern that the recovery from the crisis could see the micro and smaller scale business sectors re-emerging significantly disadvantaged relative to larger scale. And many people who have lost their livelihoods in the crisis may end up in long-term poverty traps.
<blockquote>Only governments have the balance sheets necessary to bear the risks involved.</blockquote>
There are financial sector providers positioned to play a pivotal role in restoring liquidity to communities and investing in rebuilding. But it would be unrealistic to expect that financial sector players can do this alone. There needs to be a new partnership between the financial sector, communities, and governments. Only governments have the balance sheets necessary to bear the risks involved – but they need help from across the financial system in providing the support where it is needed.

Over the longer term, there is also a need for genuine innovation in developing solutions to deal with the human and economic losses. Digital transformation has extraordinary potential, both now and in the future, to change our societies and ultimately lead to ever greater economic, social and cultural integration of countries and the world. The best-case scenario is that the COVID-19 crisis could lead to our harnessing digital finance to empower the rebuilding and development of local communities. But this is going to require bold, swift and pragmatic action.

Implications of COVID-19 for the Most Vulnerable: A Snapshot of Views from CFI’s Advisory Council

In the <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/12272/9780821389270.pdf?sequence=6" target="_blank" rel="noopener noreferrer">New Microfinance Handbook</a> (2013), Mayada El-Zoghbi and Barbara Gähwiler wrote about how donor funding to the microfinance sector was concentrated in a small number of institutions in a handful of countries, and that this called into question the catalytic nature of donor funding.

“Internal systems often reward disbursements of large amounts of funding, creating a bias toward markets and recipients of funding that can absorb large amounts easily,” they wrote. “More challenging obstacles for financial inclusion that may require small, long-term, and patient funding are too often ignored.” To illustrate the point, they used data from the 2010 <a href="https://www.cgap.org/topics/collections/international-funding" target="_blank" rel="noopener noreferrer">CGAP Funder Survey</a> demonstrating that more than 50 percent of all single-country donor commitments went to just 15 countries, including some of the more developed microfinance markets like India, Bangladesh, and Kenya.

A decade on from that first attempt by CGAP to map funding flows for financial inclusion, we know a lot more about the potentially catalytic role of donor funding, thanks in part to the widespread adoption of the <a href="https://www.cgap.org/research/publication/new-funder-guidelines-market-systems-approach-financial-inclusion" target="_blank" rel="noopener noreferrer">market systems approach</a>. We’ve also seen big <a href="https://www.centerforfinancialinclusion.org/how-the-development-sector-is-channeling-money-to-digital-financial-services" target="_blank" rel="noopener noreferrer">shifts in the financial inclusion sector driven by technology</a>, and the emergence of digital financial services (DFS) and fintech as areas for funders seeking development impact.

Over the past eight years, MIX, a unit within CFI, has partnered with CGAP to track the evolving landscape of financing for financial inclusion and this year spearheaded an analysis of funding flowing specifically to DFS – the first of its kind in the industry. This <a href="https://centerforfinancialinclusion.org/how-the-development-sector-is-channeling-money-to-digital-financial-services/" target="_blank" rel="noopener noreferrer">recently published analysis</a> suggests that funding for DFS may be following similar patterns to the growth of microfinance such that there's a concentration of funding in a relatively small number of countries, which also tend to be relatively financially included (and high-income).

In fact, the 15 countries that receive the most funding for DFS account not just for half but for three-fourths of total development spending (as of the end of 2018). This includes a number of middle-income countries, like China, Brazil, and India, as well countries like Kenya and Bangladesh that are low-income but have relatively established financial ecosystems. While the digital revolution is held up as an opportunity to expand financial access to those currently unserved, we find that funding to countries with already high levels of financial inclusion is 2.5 times as much as the funding to the least financially included countries.
<blockquote>Funding to countries with already high levels of financial inclusion is 2.5 times as much as the funding to the least financially included countries.</blockquote>
Microfinance went through this. As the concentration problem arose, funders recognized the need not just to support existing markets and institutions but to develop ecosystems for new players to emerge. They shifted to supporting regulations for non-bank entities to lend to financially excluded people and businesses (for example, new legal statuses, like the NBFC MFIs in India). These regulatory changes allowed for hundreds of new institutions to be established and microfinance to spread into new markets, attract capital, experiment, and expand the reach and range of services. Funders also supported the proof of concept of new business models and product innovations for new, specialized microfinance institutions.
<h2>A Debate Over the Additionality of Development Funding</h2>
There is a buzz around fintech that development funders seem to find hard to resist. As Greta Bull wrote in <a href="https://www.cgap.org/blog/great-expectations-fintech-and-poor" target="_blank" rel="noopener noreferrer">her essay on fintech in 2019</a>, “Anything with a technology tag gets funding and attention, whether it is solving a real problem or not.” Our new data shows that, while a few years ago funders were supporting the digital growth of a range of institutions – banks, MFIs, mobile money providers, and fintechs – in the past two years, 100 percent of DFS funding to financial institutions has gone to fintechs. Are development funders providing the risk capital needed to build new investment-ready inclusive businesses? Maybe. But we have also seen large equity investments in fintech companies that have already raised significant money from impact investors and commercial venture capitalists. This raises the question: where exactly is the additionality of this development money?
<blockquote>We have seen large equity investments in fintech companies that have already raised significant money.</blockquote>
Again, maybe we can look at microfinance for some suggestions on where to go. Funders to microfinance came to the realization that they may not be the best entities to invest in MFIs. This led to the development of the Microfinance Investment Vehicles (MIVs), which pooled investments from public and private funders and provided the expertise and the necessary structure to respond to <a href="https://centerforfinancialinclusion.org/microfinance-coalition-mivs-team-up-in-response-to-covid-19/" target="_blank" rel="noopener noreferrer">specific needs</a> of the microfinance sector. As of last year, almost $17 billion was deployed by these specialized fund managers, according to a <a href="https://symbioticsgroup.com/wp-content/uploads/2020/02/symbiotics-symbiotics-2019-miv-survey.pdf" target="_blank" rel="noopener noreferrer">survey by Symbiotics</a>.
<h2>Conclusion</h2>
The DFS sector is still young, and it is good that these debates are already happening. Ideally, funding to financial inclusion should be built around detailed theories of changes that address market failures and are catalytic in nature. This might mean rejecting a big investment in a high profile fintech in favor of small, long-term, and patient funding. The hope for funders must be that, in ten years’ time, when we’re looking back at how funders supported the growth of financial inclusion in a period shaped by technology and global crises, that funding was shown to be additional, pro-poor, and instructive for how to go about effectively supporting the next big thing.

Have We Been Here Before?

The recent acceleration in digital remittances bears out the truth of that old adage: necessity is the mother of invention. The inefficiencies are obvious in the dominant cash in, cash out over-the-counter model for formal remittances. End-to-end digitization has long been recognized as the solution to drive down costs and drive up scale. But it’s easier said than done, and the shift to digital has been slow – until COVID-19 hit. The title of a recent Forbes magazine article on the trend, “<a href="https://www.forbes.com/sites/danielwebber/2020/05/28/how-money-transfer-companies-squeezed-four-years-of-digital-growth-into-just-two-months/#6d10135ca7b6" target="_blank" rel="noopener noreferrer">How Money Transfer Companies Squeezed Four Years of Digital Growth Into Just Two Months</a>,” says it all. And with remittances accounting for significant shares of receiving countries’ GDP, there’s a lot at stake in keeping them flowing despite the job losses, mobility restrictions, and other pandemic-related challenges.

In the months since COVID-19 was declared a pandemic, the migration and remittance team at <a href="https://www.uncdf.org/article/5606/covid-19-changing-the-landscape-for-migrants-and-remittances" target="_blank" rel="noopener noreferrer">UNCDF</a> has been busy gathering and analyzing survey data and sifting through applications to support scaling for digital innovations.

CFI recently caught up with two members of this team: Dr. Robin Gravesteijn and Arunjay Katakam. Gravesteijn leads UNCDF’s data analytics and research work on migration and remittances. A veteran of mobile money and payments, Katakam recently joined UNCDF as a consultant leading the team’s product innovation and learning efforts.
<h3>How has the pandemic affected migrant groups?</h3>
<strong>RG</strong>: There are three core issues. The first is limited access to remittance services in sending and receiving countries. The CEO of MoneyGram, for example, <a href="https://www.stripes.com/news/us/lockdown-disrupts-a-part-of-finance-that-hasn-t-gone-digital-1.629307" target="_blank" rel="noopener noreferrer">recently stated</a> that approximately 40 percent of its locations were closed, and even more were operating on a restricted schedule. Shelter-in-place orders have affected people and businesses in virtually every country. This may improve now that some countries are opening up, but they need to open up on both sending and receiving sides.

The second part is the loss of earnings by migrants. Migrants are sometimes stuck in their host countries, they often have little social protection, and they may be excluded from COVID support packages even where those are available. In crisis situations, migrants are often the first to lose their jobs, particularly those in low-skilled, low job-security or undocumented situations.

The third part is remittances flows. There are about 60 countries where remittance flows account for more than 5 percent of GDP. In Nepal, for instance, remittance flows <a href="https://fred.stlouisfed.org/series/DDOI11NPA156NWDB" target="_blank" rel="noopener noreferrer">exceed 25 percent of GDP</a>.
<blockquote>Access to services, loss of earnings and remittance flow amounts are three core issues during COVID-19.</blockquote>
<strong>AK</strong>: Before the COVID-19 outbreak, official global remittance flows were on the rise, reaching a record $550 billion, exceeding global direct investments. With the pandemic, the World Bank predicts <a href="https://www.worldbank.org/en/news/press-release/2020/04/22/world-bank-predicts-sharpest-decline-of-remittances-in-recent-history" target="_blank" rel="noopener noreferrer">remittances will fall by 20 percent</a>. This loss of income is a serious blow not only to receiving-country economies but to migrants’ families: in many cases, they rely on those remittances to meet basic needs for food, shelter, and healthcare.
<h3>Seventy-six percent of respondents in your <a href="https://www.uncdf.org/article/5606/covid-19-changing-the-landscape-for-migrants-and-remittances" target="_blank" rel="noopener noreferrer">survey of CEOs of remittance providers</a> noted that limited access due to lockdowns was a challenge faced by migrants. Are you seeing a change in access now that countries and services are reopening?</h3>
<strong>RG</strong>: We’re already seeing the impact on cash-based and agent-led remittances due to the shift to digital. From our survey, we understand that for the majority of remittance service providers (RSPs), reinforcing remittances through mobile wallets and online banking has been crucial. Sixty-four percent of the responding RSPs said they will scale or pilot digital channels. And for example, Western Union and MoneyGram have taken significant steps in this regard. Moneygram’s digital remittance growth <a href="https://www.mobilepaymentstoday.com/news/moneygram-doubles-digital-remittances-in-june/" target="_blank" rel="noopener noreferrer">more than doubled</a> in June; World Remit has seen a 150 percent growth in new customer activations in the months of March and April 2020. Digital-only services like Remitly and Azimo have reported month-over-month doubling in new-customer acquisitions. Before COVID, Vodafone MPAiSA Fiji did 6,500 transactions – almost $1 million dollars – per month. That’s increased to 22,000 transactions per month and $3.1 million in volume.
<h3>What aspects of the digital ecosystem do you see as the most pressing for digital adoption? What should be the priority for remittance service providers and policymakers?</h3>
<strong>RG</strong>: Although digital solutions are growing, they’re only recently becoming available in developing countries, so regulators need to promote the termination of remittances in digital channels by promoting partnerships and interoperability. Other policy priorities might include a tiered system for rules regarding AML/CFT (anti-money laundering/countering the financing of terrorism) so that we don’t subject, say, a housekeeper or a taxi driver sending $50 back home to the same level of scrutiny as someone sending $50,000. Electronic Know-Your-Customer (e-KYC) policies would also help; e-KYC would make it easier and faster for migrants to open digital accounts and conduct transactions.

On the provider side, one key is investing in product design so that digital remittance services are accessible and convenient for migrants, and so they can trust the service. Digital remittances are faster, cheaper, and more transparent than cash-based or agent-led solutions. They’re also less sensitive to lockdowns. But none of that matters until the actual prospective users understand the advantages and trust the system enough to move beyond the tried and true. The product design must inspire confidence, not only confirming that the sender’s transaction went through, but also so that the recipient confirms quickly and says, “I can see the money.”
<blockquote>Product design must inspire confidence and confirm transactions quickly to gain users' trust.</blockquote>
Another very important product design priority is gender responsiveness: women are the majority of both senders and receivers in many countries, so marketing and user experience design should be gender aware.

Providers also need to embrace digital and financial literacy efforts. This goes beyond traditional marketing toward a broader based effort to ensure that the shift to digital economies leaves no one behind. Digital and financial literacy means that customers understand what’s available, know what’s beneficial to them, feel confident using it, and have access and everything else necessary to actually do so. Achieving that fully is both a demand- and a supply-side issue.
<h3>UNCDF recently put out a<a href="https://mm4p.uncdf.org/article/5660/request-for-applications-inclusive-digital-solutions-to-support-migrants-and-remittances" target="_blank" rel="noopener noreferrer"> request for applications</a> to “support partners in the development or expansion of digital remittance channels, strengthening digital use-cases, and developing products or services that strengthen the financial resilience of migrants and their families.” Can you tell us about the applicants who will partner with UNCDF? What would you like to see them achieve?</h3>
<strong>AK</strong>: We received 66 applications, with 44 going to the second round. The application quality is excellent. Ones that stand out include a remittance-linked product for low-income migrant women, a superapp for migrants, and those that explore alternative revenue models. There are also several applications targeting Senegal, Ethiopia, Nepal, Bangladesh and Myanmar, where innovation is needed most.

Also, as migration trends are moving intra-regional – more than 60 percent of migrants from ASEAN and Africa are moving within those regions – we also requested applications with an impact on regional mobility and portability of financial services.
<h3>You mentioned at the end of this <a href="https://eur03.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.uncdf.org%2Farticle%2F5611%2Fmigrant-remittances-in-the-times-of-covid-19-insights-from-remittance-service-providers&amp;data=02%7C01%7Camil.aneja%40uncdf.org%7C57b7072152e546c6ea8f08d816e196d6%7Cb3e5db5e2944483799f57488ace54319%7C0%7C0%7C637284505440972584&amp;sdata=DA7DZAlzMZEGeo%2F35fVJmHozBBqv%2FknJ0StKxlqrng4%3D&amp;reserved=0" target="_blank" rel="noopener noreferrer">post</a> that innovative ideas and approaches are desperately needed to keep the remittances lifeline flowing. In addition to your applicants, what are some of the best examples of innovation you've seen over the past few months?</h3>
<strong>AK</strong>: AXA and Merchant Trade, who have provided health insurance for migrants, are a great example. Another is AXA and Western Union, who have <a href="https://www.axa.com/en/press/press-releases/axa-and-western-union-to-collaborate-to-provide-inclusive-insurance" target="_blank" rel="noopener noreferrer">joined forces</a> to offer insurance products. These two large companies have a big customer base and global footprint, so their involvement has impact.

Governments have also proactively taken steps to improve the flow of remittances. Pakistan has waived a tax on cash withdrawals of remittances received into bank accounts. It has also lowered the transfer fees on in-bound remittances of between $100 and $200, and stepped in to reduce the lag time between when money hits the bank and when that money is available to the customer. Bangladesh also took steps in July 2019 to provide 2 percent incentives on remittances sent directly to bank accounts. The ceiling on these deposits had been $1,500, now, in light of the crisis, it’s $5,000.
<h3>Another way to ease the burden for migrants is lowering transaction costs. How can RSPs lower transaction costs during these challenging times and remain solvent? Which actors need to step in and how?</h3>
<strong>RG</strong>: There’s the immediate issue and the longer range one. In the immediate term, definitely, the pandemic has put huge pressure on RSPs. They’re hardly the only sector affected, of course: we’ve all watched as retailers declare bankruptcy and entire industries lose almost all their revenue. Our survey has shown that half the RSPs will be in financial trouble if the crisis goes beyond six months. Where countries are designing policy responses based on “essential business” designations, certainly it would help if RSPs were recognized as the essential businesses they are, considering the low-income and vulnerable populations they serve. In the longer term, since 2009, there has been the <a href="https://sdgs.un.org/goals/goal10" target="_blank" rel="noopener noreferrer">SDG target of reducing transaction costs of remittances</a> from 10 percent to 3 percent by 2030. One important step to achieve this is to facilitate market competition; another is to pick up the pace of digitization. Those issues are related.
<blockquote>Half of RSPs will be in financial trouble if the crisis goes beyond six months.</blockquote>
<strong>AK</strong>: Transaction costs for migrants – globally, on average – were 8.7 percent in 2010, 7.7 percent in 2015, and 6.8 percent in the first quarter of 2020. The key to lowering these costs is, again, digitization.

There hasn’t been investment in driving that adoption, which requires a lot of financial education, incentives and behavior changes. Recently, a lot of investment has been made, and due to pandemic-related movement restrictions and changing circumstances, adoption has been greater. The two biggest providers – Western Union and MoneyGram -- have <a href="https://www.forbes.com/sites/danielwebber/2020/05/28/how-money-transfer-companies-squeezed-four-years-of-digital-growth-into-just-two-months/#609bf6e5a7b6" target="_blank" rel="noopener noreferrer">squeezed in four years of growth</a> of adoption of digital channels into just two months. We expect this growth to continue and drive transaction costs lower.
<h3>The request for applications sought “products supporting the financial resilience and well-being of migrants and their families – microinsurance, micropension, microcredit for access to education, energy, health, water, and livelihood purposes.” What’s the interplay between inclusive financial services and remittance solutions? How do they support one another?</h3>
<strong>AK</strong>: On the recipient side, adding services beyond remittances is critical. In credit, this means moving from asset-based lending to cash-flow-based lending, where RSPs can see what the remittance flows are and make decisions on emergency loans. Remittance providers are well-positioned to do that. In savings, you can’t provide a remittances-linked savings account if the remittance transfer is cash-based. You need digitized products to allow people to save some portion of an inbound remittance. If it’s cash-based, and they withdraw the whole remittance and take it as cash, they’re not going to put some back in as savings, even in the unlikely event that that is even an option. They need a digital account where they can withdraw, as cash, only what they need right away and leave the rest as savings.
<blockquote>You can’t provide a remittances-linked savings account if the remittance transfer is cash-based.</blockquote>
Insurance is another example. A Ghanaian taxi driver in Washington, D.C., might need to pay for a funeral back home. Once he does that, the taxi driver is not left with much, yet as the breadwinner, he is expected to provide when there is a funeral. If he can take out a funeral policy, that would help.

Also, many sending countries have pension plans: employers are mandated to contribute to them, even if the migrant does not. The migrants are often not even aware. If migrants get access to those, they can remit it home when they leave for good.

<strong>RG</strong>: These examples illustrate why remittances are valuable for <a href="https://www.un.org/en/observances/remittances-day/SDGs" target="_blank" rel="noopener noreferrer">a variety of SDGs</a>. They supplement incomes for households, but they’re often used to pay medical expenses for health, tuition for education, business and enterprise growth, not to mention the gender equality and empowerment component.

Remittances and Financial Inclusion: “Sending Money Home” in the COVID Era

Development funders are increasingly embracing the potential of digital financial services (DFS) to promote financial inclusion. As these funders – bilaterals, multilaterals, development finance institutions and private foundations – continue to look for ways to respond to emerging crises and opportunities, the support for digital finance and the ecosystem around it is increasing in prominence. However, until now, we have not had a systematic way of understanding how much funding was committed to DFS and where it was going.

In order to create an evidence base and understanding of where and how funds flow to DFS, we developed a unique and innovative methodology to identify, classify and measure the funding flows going to DFS. This project aims to help the inclusive finance sector better coordinate, fill gaps, and identify new pathways for funding the sustainable development of digital financial services for financial inclusion. This report highlights four key findings gleaned from an early analysis to test and refine this methodology. The findings can provide funders with information to guide their approaches to supporting the development of reliable and effective DFS systems for the benefit of low-income populations around the world.

How the Development Sector Is Channeling Money to Digital Financial Services

<h1>Why Consumer Rights and Responsibilities?</h1>
The <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> provide a common framework for financial service providers (FSPs), policymakers, and clients to better understand and discuss consumer protection issues. While much of the Center for Financial Inclusion’s (CFI) work with the financial inclusion industry has focused on providers and regulators, there is a third crucial constituency: clients.

Client awareness and capability is a critical component of effective financial consumer protection. Clients have the right to demand fair treatment and lodge complaints with government authorities, but these rights mean little if they don’t know what constitutes lawful treatment or how to access complaints channels. Similarly, clients play a role in protecting themselves by practicing behaviors to maintain their privacy and safety. While FSPs can institute protective processes and regulators can craft policy safeguards, improving client awareness of their rights and responsibilities helps consumers play their part to support a sustainable financial system.

This report provides lessons learned from initiatives in Ghana, Uganda, and Benin to raise consumer protection awareness among clients through multimedia campaigns, digital tools and other outreach strategies. It covers country-specific consumer protection issues and the individualized campaigns to address these issues. We also offer five key takeaways to help inform future client protection and empowerment awareness building activities.

Clients Deserve to Know: Using Radio to Educate and Empower Consumers in Africa

APIs are often viewed as potential solutions for traditional financial institutions, particularly small and midsize banks, to partner with upstart financial technology companies (fintechs) to offer innovate products, especially to low-income customers. In practice, however, d<span data-contrast="auto">ue to the maturity of the fintech market, </span><span data-contrast="auto">fear of losing competitive advantage, and a variety of strategic errors in planning for and developing APIs, smaller banks and </span><span data-contrast="auto">fintechs</span><span data-contrast="auto"> do not often succeed in deploying API solutions for inclusive finance. </span><span data-ccp-props="{&quot;134233279&quot;:true,&quot;335551550&quot;:6,&quot;335551620&quot;:6}"> </span>

In this report, based on<span class="TextRun BCX2 SCXW4216040" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW4216040"> nearly two dozen interviews with leaders at fintech companies, small and midsize banks, and large financial institutions,</span></span> CFI Fellow <a href="/bio/dan-kleinbaum">Dan Kleinbaum</a>, <span class="TextRun BCX2 SCXW71634487" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW71634487">examines the extent to which APIs are meeting their potential to facilitate bank and fintech partnerships that advance financial inclusion</span></span>. Dan breaks down what API integrations between banks and fintechs look like and how typical deployments work. Finally, he offers four recommendations for how to improve <span class="TextRun BCX2 SCXW235310262" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW235310262">API deployments between banks and </span></span><span class="TextRun BCX2 SCXW235310262" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="SpellingError BCX2 SCXW235310262">fintechs</span></span><span class="TextRun BCX2 SCXW235310262" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW235310262"> to deliver financial services to underserved communities.</span></span>
<h2>A Typology of APIs</h2>
It is useful for leaders at financial institutions to understand the types of APIs common in financial services. For examples, in API aggregator and platform models shown below, a third-party provides APIs on behalf of financial institutions to institutional customers (e.g., fintechs) in its network. The aggregator or platform may also provide sales, marketing, onboarding and other services. We also explore open and private API models in the report.
<h3>API Aggregator and Platform Models</h3>
<img class="size-large wp-image-37835" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/03/CFI55_API_deployments_FINAL-fig05_graphic-LOGO-1024x596.jpg" alt="API Aggregator and Platform Models" width="1024" height="596" />

API Deployments in Inclusive Finance

In January, I joined Caribou Digital’s immersive <a href="https://www.cariboudigital.net/live-learning/">Live Learning</a> program in Indonesia. The program included visits to all the major digital players in the country including ride hailing, e-commerce, digital payments, peer-to-peer platforms and digital value chain actors. One of the most interesting parts of the program was talking to the merchants, producers and gig workers who are using the new digital economy to make a living. Many of these digital platforms that are driving this new economy rely on a ubiquitous digital payment system that’s enabling transactions to take place between micro-merchants and gig workers and the buyers of their products and services. Ride and e-commerce platforms are not only serving as an important driver to bring people into the formal financial system, they’re creating new and more lucrative opportunities for work for millions of merchants, producers and service workers.

In the West, the rise of the gig economy and the platforms that enabler it has been viewed by some as contributing to the <a href="https://qz.com/1556194/the-gig-economy-is-quietly-undermining-a-century-of-worker-protections/">deterioration of stable jobs and an erosion of worker protections</a>. While the gig economy is recognized for offering workers flexibility and a chance to be their own bosses, there’s evidence that remuneration has not lived up to what many of the gig platforms promise, and workers are <a href="https://www.apc.org/en/blog/inside-digital-society-gig-economy">working longer hours for less</a>.
<blockquote>Most emerging economies never had the secure jobs that the gig economy is purportedly displacing.</blockquote>
This narrative in the West does not appear to translate to emerging economies, at least not what was evident from the market in Indonesia. For one thing, most emerging economies never had the secure jobs that the gig economy is purportedly displacing. Instead, the digital platforms are enabling a certain formalization of informal work that has thus far remained inferior to formal jobs. The new digital platforms are contributing to standardizing and organizing a set of workers who had previously been left to fend for themselves.

There are three important contributions that platforms are making toward the lives of merchants and gig workers in Indonesia:
<h2>1 Investing in Skills</h2>
It was striking to see the type of investment that many of the platforms in Indonesia are making in training the merchants or the gig workers on their platforms. For example, Indonesia’s main e-commerce platforms, <a href="https://en.wikipedia.org/wiki/Tokopedia">Tokopedia</a> and <a href="https://www.crunchbase.com/organization/bukalapak#section-overview">Bukalapak</a>, both offer many learning opportunities for their merchants including in person events and video streaming “tips” that cover topics such as taking appealing pictures of their products and getting halal certification to expand the appeal of their products among religious Muslim customers.
<h2>2 Putting in Place Social Protections</h2>
<a href="https://en.wikipedia.org/wiki/Gojek">Gojek</a>, one of Indonesia’s super apps that began in ride hailing but has expanded to other lifestyle services, currently offers a form of social protection to its drivers, something they call Swadaya. The rationale for the company is that this improves the loyalty of its drivers in a fiercely competitive market. The benefits to the drivers are clear: health insurance and unemployment benefits if they fall ill.
<h2>3 Facilitating Access to Financial Services</h2>
Nearly all the platforms are layering multiple financial services for their merchants and gig workers. Digital credit, insurance, and investment products such as e-gold and mutual funds are all currently available in the market. This is enabling merchants and gig workers to grow their businesses and to have access to financial services that improve their resilience to shocks.

Financial Inclusion and Future Jobs: What the Market in Indonesia Tells Us

Eric Noggle

Senior Research Director 

Isabelle Barrès

Former Vice President and Campaign Director, Smart Campaign

Mayada El-Zoghbi

Managing Director

Shradha Modi

Machal Karim

Camilla Nestor

Mark Pickens

Joanna Ledgerwood

David Ferrand

Howard Miller

Arunjay Katakam

Robin  Gravesteijn

Malacci Ohrt

Alexandra Rizzi

Alex Kessler

Dan Kleinbaum

Jessica  Galimberti

Niamh  Barry

Tillman Bruett

Elisabeth Rhyne

Middle East and North Africa

West Bank and Gaza

South Asia

Sub-Saharan Africa

Benin

Ghana

Uganda

East Asia and Pacific

Indonesia

North America

United States

Kenya

Challenges and Crises

Consumer Protection

Credit

Customer Centricity

Delivery Channels

Digital Financial Services

Enabling Environment

Governance

Microfinance

Policy, Regulation and Government Initiatives

Financial Inclusion Strategy

Human Touch

Responsible Digital Finance

Transparency

Trends

Underserved Groups

Women

Banks

Digital Credit

Microfinance Institutions

MSME/SME Finance

Resilience

Responsible Investing

Supply Chain Finance

Agricultural and Rural Finance

Smallholder Farmers

Financial Service Providers

Fintechs

Financial Capability

Partnerships

Payments

Personal Financial Management

Remittances

Data Analytics

Financial Technology

Client Treatment

Complaint Resolution

Fraud

Privacy

Product Pricing

Telcos

Education Finance

Energy Finance

Housing Finance

Risk Management

Human Centered Design

Mobile Banking

PayGo

Credit Provision

Default

Interest Rates

Nano Loans

Over-indebtedness

Brief

Blog Post

Report

Event

Webinar

The <a href="/about/what-we-do/hbs-accion-program-on-strategic-leadership-in-inclusive-finance">HBS-Accion Program on Strategic Leadership in Inclusive Finance</a> is the first executive education program of its kind to provide high-level management and leadership training to those shaping the microfinance industry, including CEOs of leading microfinance institutions and executives of mainstream banks entering the microfinance market.
<div class="sc-htpNat hKaJAO"><article class="text-block__article sc-TOsTZ dUoRvJ">
<h2>Dates</h2>
The 2020 HBS-Accion Program on Strategic Leadership in Inclusive Finance, originally scheduled to take place March 29 to April 3, has been postponed indefinitely due to growing concerns and travel restrictions across the globe related to Covid-19. Please contact <a href="mailto:mlongwell@accion.org">Maddy Longwell</a> if you are affected by this cancellation.
<h2>Deadlines</h2>
The application period is now closed. Applicants will be notified of their acceptance in February.
<h2>Fees</h2>
The program costs <strong>$8,850 USD</strong> including tuition, fees, housing and meals. Attendees will need to pay in full to be considered accepted into the program. Airfare is the responsibility of the attendee.
<h2>Scholarships</h2>
The <a href="https://www.citigroup.com/citi/foundation/">Citi Foundation</a> provides a limited number of partial scholarships to participants who otherwise cannot attend because of the cost. Please note that we are unable to offer scholarships to all applicants who apply. If you would like to apply for a scholarship, please indicate so in the application.
<h2>Questions</h2>
For additional questions, contact the Admissions Committee at <a href="mailto:hbsaccion@accion.org">hbsaccion@accion.org</a>. For questions about the 2020 cohort, please contact <a href="mailto:mlongwell@accion.org">Maddy Longwell</a>.

</article></div>

HBS-Accion Program on Strategic Leadership in Inclusive Finance 2020

In this webinar we discuss how the regulatory landscape is shifting with the advent of digital financial services, the challenges policymakers are facing, and the ways that the <a href="/handbook-on-consumer-protection-for-inclusive-finance">Handbook on Consumer Protection for Inclusive Finance</a> can help regulators and the entire inclusive finance industry to strengthen consumer protection frameworks.

Webinar: Handbook on Consumer Protection for Inclusive Finance

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.

<div class="sc-htpNat keAZAq">
<div class="sc-gisBJw iCFDng sc-bwzfXH doQVok">
<div class="sc-htpNat bBOJNH">
<p class="text-block__article sc-kjoXOD hLBZML">The <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> (BLI) is dedicated to empowering corporate leaders in the social enterprise sector to <strong>achieve business growth and social impact</strong>. By focusing exclusively on executive leadership and reframing board effectiveness as a strategic imperative, BLI strengthens leadership and management to ensure these companies sustain business growth and drive social impact.</p>

<h3 class="text-block__article sc-kjoXOD hLBZML">Join a select group of social enterprise leaders at the BLI Nairobi 2020 Workshop,  February 23-25, 2020, at the Fairview Hotel in Nairobi, Kenya.</h3>
BLI is offered as a two-day interactive workshop where participants gather with faculty and facilitators for role play, simulations, discussions, and more. Workshops are augmented with a robust virtual portal where participants can access resources and videos, participate in discussions, and stay connected with hundreds of leaders in our global network. Attendees will have the opportunity to engage with peers on issues critical to social enterprise growth and impact, including digital strategy and culture, data, partnerships and financial inclusion in the digital age.
<h3><strong>Pricing</strong></h3>
The BLI Nairobi 2020 Workshop tuition is <strong>$2,500 USD</strong>, excluding airfare and lodging. Discounts, group rates and partial scholarships are available:
<ul>
 	<li><strong>Early Bird Rate - $2,250 USD</strong> (10% discount). Available to all registrants through December 31, 2019.</li>
 	<li><strong>Group Registration Rate - $2,250 USD</strong> per person for groups of two or more (10% discount per person).</li>
 	<li><strong>Limited partial scholarships</strong> will be considered on a case-by-case basis. You can request scholarship consideration during the registration process.</li>
</ul>
<h2>Registration is now closed.</h2>
<h3>Questions</h3>
Learn more about the <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> and <a href="mailto:gjaso@accion.org">contact us</a> if you have questions or need more information.

</div>
</div>
</div>

Board Leadership for Impact Nairobi 2020 Workshop

In 2017, The Mastercard Foundation’s <a href="https://www.financedigitalafrica.org/">Partnership for Finance in a Digital Africa</a> (FiDA) embarked on a journey to answer the question: “What’s the impact of digital finance on low-income clients?” The complexity of this question was clear. Digital finance is not “<a href="https://www.financedigitalafrica.org/blog/2018/12/four-things-to-be-aware-of-in-the-search-for-digital-finance-impact/">one thing</a>,” it’s dozens of products, designed and delivered in various ways, to various client segments, in various markets. A single study cannot answer this question.

To <a href="https://www.financedigitalafrica.org/snapshots/15/2018/">encourage</a> a dialogue on impact, FiDA developed the <a href="https://www.financedigitalafrica.org/evidence-gap-map/">Digital Finance Evidence Gap Map</a> (EGM) in 2017 to aggregate impact insights and place them in dialogue with each other. At its simplest level, the EGM charts the landscape of impact evidence – be it positive, negative, or null – for a set of digital finance products, plotted against a set of client outcomes. Its interactive design and filters enable users to scan for evidence for questions as specific as <em>"Does X product, designed with Y features, delivered in Z ways, to clients in A market lead to B outcomes?"</em>

This year marks the third year of updating the EGM. While the first edition contained 40 studies, two years on, the EGM has almost doubled to include 75 studies. Each year, as studies amass, we inch closer to understanding the impact of various digital finance products on low-income users.

This Financial Inclusion Week, we wanted to share findings from our updated EGM, and share insights on how digital financial services have [and have not] improved financial health and how equitable these impacts have been.
<h2>The 3rd Edition EGM: What to Expect</h2>
The updated EGM includes 75 studies that test 81 digital finance products and interventions from 26 different countries. There are 14 digital finance products and 32 design and delivery mechanisms with various counts of evidence.
<h3>Geography</h3>
Although the EGM represents 26 countries, Kenya accounts for nearly one-third of the studies (30 percent), and the East African region accounts for over half (53 percent) of the impact literature. Because geographical context is a significant variable, we must consider social, economic, and cultural differences before we apply learnings from East Africa to other regions.

After Access, What’s the Impact of Digital Finance on Clients?

When planning UNCDF’s third global conference on digital finance in 2017, I half-jokingly proposed the theme be <a href="https://www.uncdf.org/article/4162/dfs4what---building-inclusive-digital-economies">#DFS4What</a>, which ultimately did become the 2018 conference’s focus when we convened in Dakar. The title encapsulated something we had been seeing across our work in Africa and Asia: in least developed countries, the benefits to the majority of the population of having digital accounts, particularly amongst the rural and poor, simply did not outweigh the costs. While we often attribute financial exclusion to policies, business models, product design and practices, we saw in our own data in <a href="https://www.cgap.org/blog/making-digital-payments-work-low-income-farmers">Uganda</a> and other countries that the financially excluded chose to remain financially excluded because a digital account wasn’t better than cash, and it did not solve a very real and immediate need or desire for clients. It’s difficult to move beyond the 35 to 40 percent of the population actively using digital finance accounts unless we could make digital finance more relevant for people’s daily lives.
<blockquote>It’s difficult to move beyond the 35 to 40 percent of the population actively using digital finance accounts unless we could make digital finance more relevant for people’s daily lives.</blockquote>
At the same time, the benefits to developing economies of going digital are considerable. As <a href="https://www.gsmaintelligence.com/research/?file=b9a6e6202ee1d5f787cfebb95d3639c5&amp;download">GSMA has quantified</a>, in 2018, mobile technologies and services generated $3.9 trillion of economic value (4.6 percent of GDP) globally, a contribution that will reach $4.8 trillion (4.8 percent of GDP) by 2023. In 2016, McKinsey estimated that digital finance could contribute 5 to 10 percent to a developing economies’ GDP over a decade.

It also has development benefits. The United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, UNCDF, the Better than Cash Alliance and the World Bank <a href="https://www.unsgsa.org/files/1615/3738/5820/SDG_Compendium_Digital_Financial_Inclusion_September_2018.pdf">highlighted</a> the many ways in which digital financial inclusion was igniting progress toward the SDGs.

The financial inclusion community faces a conundrum. How do we promote digital finance as something that we believe is good for development even though it may not necessarily be of great (or any) benefit for many of the world’s poor in the short and medium term?

In discussions with colleagues over the past few years, some ideas and approaches have come up that are worth considering.
<h2>1. Make it useful.</h2>
PayGo solar has shown us how a very specific use case that solves a very real need can drive digital financial inclusion. A CGAP brief three years ago pointed out how 30 to 50 percent of PAYG (pay-as-you-go) solar customers in East Africa <a href="https://www.cgap.org/sites/default/files/Brief-Digitally-Financed-Energy-Mar-2016.pdf">opened a mobile wallet</a> in order to purchase a digitally-financed energy solution. These PayGo models are ideal for small assets and services, from clean water to cook stoves to riding on <a href="https://safeboda.com/ug/">safe bodas</a>. Focusing on what digital finance is for rather than on why digital finance is important is key to reaching low income populations.
<h2>2. Make it fun.</h2>
As <a href="https://www.economist.com/leaders/2019/06/08/the-second-half-of-humanity-is-joining-the-internet"><em>The Economist</em> recently pointed out</a>, recent migrants to the digital world spend most of their time chatting with friends and streaming videos for which they happily pay. So it’s important to remember its not only about what people need (or what the development community thinks they need), it’s about what they want. I’m not suggesting that we should ignore the dangers, such as digital credit being used for betting, but we be open to the idea that the drivers of digital financial inclusion may be for social or entertainment purposes, such as downloading music and <a href="https://www.ft.com/content/74e9c2a0-1792-11e8-9376-4a6390addb44">red envelopes</a> for the lunar festival.
<h2>3. Make it lucrative.</h2>
Creating an affordable merchant acceptance network for digital payments has long been seen as the elusive magic elixir for digital financial inclusion. But it may be e-commerce, or more appropriately “<a href="https://www.investopedia.com/terms/m/mobile-commerce.asp">m-commerce</a>,” that drives usage before merchants do. E-commerce in the Asia Pacific region generated over <a href="https://www.telecomreviewasia.com/index.php/news/featured-articles/1640-in-with-the-new-how-fintech-and-e-commerce-are-driving-innovation-in-asia">$900 billion in total revenue</a> in 2017 and as Alibaba has demonstrated with Alipay, e-commerce can drive much greater access to a range of financial services. Last year, Facebook reported that it had over <a href="https://www.cnet.com/news/facebook-marketplace-is-used-in-70-countries-by-800-million-people-monthly/">800 million users in over 70 countries</a> for its Marketplace platform. In places like Myanmar, cash on delivery is the way most users on Marketplace close a deal. While the fate of Libra still hangs in the balance, other companies like Grab have moved into free digital accounts to support their ride hailing and other m-commerce offerings.
<h2>4. Make it free.</h2>
This is a counterintuitive counter proposal to the previous suggestion. The user-pays model of digital finance has always been problematic: to many low-income users, it’s a psychological and, in some cases, financial barrier. Alipay and GrabPay do not charge users directly. They make money on their core business. So too does Telesom Zaad in Somalia, which makes up the cost of managing its mobile money service through the increase in mobile and data sales. Digital finance provides so many positive externalities, efficiencies and cost savings for businesses and governments alike that there is a strong argument to move to a “freemium” model for customers for basic accounts and payments and instead let large corporate, NGO and government users bear the costs.
<h2>5. Make it easier.</h2>
The JAM trinity of India, combining identification, real-time payments, and basic accounts is a great example of how government innovation is building a backbone for businesses of all types to provide and use digital finance. The next challenge for regulators and the industry alike is to create a simple way for m-commerce firms to embed payment options to on-line and in-person payments. Interoperability is not enough. There is a need for better interfaces between m-commerce sites and payment apps and for simple, standard rules of the game and pricing so that anyone who follows and plays by the rules can be part of the digital economy.

&nbsp;

The advent of fintech is making digital finance happen in new ways and by new actors, which are making it useful to people in ways that go well beyond our traditional understanding of financial inclusion. We now see how digital financial inclusion is increasingly being driven by the lure of the broader digital economy in all of it chaos.

This comes at a time when the global financial sector – indeed monetary systems themselves – are in a state of flux. In my work as Secretariat Director of the United Nations Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals, we conducted a landscape study to look at <a href="https://digitalfinancingtaskforce.org/wp-content/uploads/2019/07/DFET-White-Paper-Final-08-17-afa.pdf">how the changes in finance due to digitalization were impacting sustainable development</a>. What we noted is that beyond digital retail finance and fintech, innovations in global finance are also beginning to have positive impacts on development and financial inclusion. Payments is a clear example, with new, cheaper money transfer services like Remitly and Transferwise making cross border payments cheaper, faster and more secure. Insurance is another, with global insurers deploying increasingly sophisticated index insurance models that are being used to provide small farmers in Africa with crop insurance.
<blockquote>Innovations in global finance are also beginning to have positive impacts on development and financial inclusion.</blockquote>
&nbsp;

Which brings me to my last suggestion:
<h2>6. Make it global.</h2>
It’s easy to get bogged down in all of the barriers to reaching the next 1.7 billion unbanked through digital finance. From connectivity to cybersecurity, the challenges are considerable. Digital finance might be a just small part of many larger developmental, environmental and business opportunities. Digital finance is key to solving energy challenges – and taking advantage of the clean energy opportunity. It is vital for the booming ride hailing and food delivery sectors around the world – sectors which hire a number of poorer members of society, if not sustainably, at least temporarily. It is critical to boosting tax collection and reducing “leakages” in government payments. In short, we have allies, a lot of them around the world, all of whom stand to benefit from digital payments. Our challenge is harnessing them and finding ways to work together to accelerate access to digital finance.

These six suggestions might go a long way toward boosting digital financial inclusion, and, in doing so, boost development and build the digital economy. Do you have any suggestions to add? Share in the comments below!

DFS for Development: 6 Ideas to Reach the Next 1.7 Billion

Digital credit has emerged as a new and profitable service offering that has great potential to increase financial inclusion. Yet, if not carefully managed, digital credit also runs the risk of excluding, over-charging, and over-extending customers.

Seven years since the first digital credit product launched, the market in Kenya has grown exponentially and hosts a diverse ecosystem with more than 50 supply-side actors. The phenomenal expansion of digital credit in Kenya serves as a test-bed for the product and offers lessons for digital credit suppliers and regulators around the world.

SPTF and the Smart Campaign commissioned MicroSave Consulting (MSC) to study the dynamics of the digital credit sector on both demand and supply sides. The output of the study was a <a href="https://content.centerforfinancialinclusion.org/making-credit-truly-responsible-webinar/">comprehensive report on the current state of digital credit in Kenya</a>. It looked at the evolving challenges in digital credit and made recommendations for a more responsible and customer-centric delivery of the product.

With participation from Smart Campaign Senior Director Alexandra Rizzi, this webinar:
<ul>
 	<li>Helps participants understand the digital credit landscape in Kenya</li>
 	<li>Assesses the progress and challenges around making digital credit responsible and inclusive</li>
 	<li>Recommends steps towards a more responsible delivery of digital credit</li>
</ul>

Making Digital Credit Truly Responsible Webinar

All is not well in the country that pioneered mobile credit. A new <a href="/making-digital-credit-truly-responsible">report on digital credit in Kenya</a> from <a href="https://www.microsave.net/">MSC</a>, commissioned by <a href="/about/what-we-do/the-smart-campaign">the Smart Campaign</a> and the <a href="https://sptf.info/">SPTF</a>, shows that with continued dramatic growth rates, the sector also experiences cripplingly high default and delinquency, enabled by poor business practices and weaknesses in both the credit reporting infrastructure and regulatory jurisdiction.

Most notably, the report reveals very high rates of delinquency and default. Among active digital loans, more than a quarter are non-performing. About 2.2 million Kenyans are said to have delinquent loans. In some cases, liberal use of refinancing and rescheduling hides this level of delinquency in lender portfolios. At the same time, the report points out that about half of these non-performing loans are for amounts less than $10. These findings are broadly consistent with results cited by CGAP in 2016, which found that 50 percent of digital borrowers in Kenya repaid their loans late, and 12 percent defaulted.
<blockquote>Despite continued growth of digital credit in Kenya, high delinquency, default and interest rates persist in the market and credit bureaus haven't yet caught up with the digital age.</blockquote>
The report also details shortcomings in credit reporting, given that many digital lenders neither consult nor report to the credit reporting bureau as fully or regularly as they should. The credit reporting bureaus were clearly set up for a pre-mobile era, which suffer from issues related to inclusion of all types of lenders, frequency of uploading data (monthly, when daily is more relevant for today’s short term loans), and ease of connection among all the players in the credit reporting ecosystem. As a result, many lenders are not consistently using credit bureaus—neither ensuring that the information is updated and correct, nor fully consulting it prior to lending.

Pricing is also an issue. The market leader, M-Shwari, which accounts for about two-thirds of all digital loans, charges an annual percentage rate (APR) of 90 percent. The low-price option provided by Kenya Commercial Bank is a fairly reasonable 44 percent APR, but the high end of the price range includes providers charging APRs well into the hundreds. Granted that these are small, short term loans where interest payments are not expected to be sustained for an entire year. Nevertheless, the promise of digital to bring down prices does is not yet in sight.

Other issues noted in the report include non-transparency regarding portfolio quality, identity theft, misuse of client data, multiple borrowing and loan bicycling by clients, and client use of loan proceeds for sports betting.

The picture that emerges suggests that the still-exploding market of very small, “nano” loans needs to be brought into more orderly operation. Consumers and providers are operating in risky ways. The current state of the market is not beneficial for either.
<blockquote>Raising the bar for blacklisting customers and public awareness about defaulting on loans are among our recommendations for improving digital credit.</blockquote>
One issue specific to this nano-loan market concerns the reporting of very small non-performing loans to credit bureaus, with negative consequences, such as curtailing of access to credit, for hundreds of thousands of borrowers. MSC, the Smart Campaign and SPTF recommend that regulations be put in place such that delinquencies and defaults among loans below some fixed amount not be reported to the credit bureau (whether US$2, $5 or $10 – the report actually recommends a cutoff of 5% of the monthly per capita GDP). It also recommends that the government launch a public awareness campaign about how credit bureaus work and the consequences of default so consumers will better understand the risks involved in borrowing.

The regulators, credit reporting agencies and lenders in Kenya are aware of these concerns and working to improve the situation. A new association of digital lenders (Digital Lenders Association of Kenya) has been formed to create consumer protection standards and the central bank is exploring ways to upgrade the credit reporting ecosystem. The Smart Campaign recommends that both lenders and regulators consider adopting the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> and <a href="https://www.smartcampaign.org/tools-a-resources/1210-handbook-on-consumer-protection-for-financial-inclusion">model regulations</a> covering issues ranging from transparency, to the fair use of algorithms, to protection of customer data.

Kenya’s unprecedented dynamism in mobile money, digital credit and financial inclusion is envied across the world. If authorities and providers can bring the participants in these sectors into a better-functioning marketplace, Kenya will benefit greatly from the innovation the country continues to spawn.

Red Flags in Kenya’s Nano-Credit Market

<span class="hotkey-layer ">Digital credit has emerged as a new and profitable service offering that has a great potential to increase financial inclusion. Yet, if it is not carefully managed, digital credit runs a great risk to exclude, over-charge, and create over-indebtedness.</span>

<span class="hotkey-layer ">During the first half of 2019, The Smart Campaign and the Social Performance Task Force (SPTF) commissioned Microsave Consulting (MSC) to study the current state of digital credit in Kenya and formulated recommendations for how to make digital credit delivery safer and more customer-centric. We propose that </span>regulations be put in place such that delinquencies and defaults among loans below some fixed amount not be reported to the credit bureau so as not to unduly burden consumers. We also call for increased public awareness campaigns about how credit bureaus work and the consequences of default so consumers will better understand the risks involved in borrowing.

More generally, the Smart Campaign recommends that both lenders and regulators consider adopting the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> and <a href="https://www.smartcampaign.org/tools-a-resources/1210-handbook-on-consumer-protection-for-financial-inclusion">model regulations</a> covering issues ranging from transparency, to the fair use of algorithms, to protection of customer data.

Making Digital Credit Truly Responsible