The coronavirus pandemic has continued to ravage Western countries and is encroaching in a much more aggressive way into developing economies in Latin America, Africa, the Middle East and Asia. In developing countries where the vast majority of the labor force is in the informal economy (estimated at <a href="https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_627189/lang--en/index.htm">over 60 percent</a> worldwide), COVID-19 is revealing the limits of individual financial behaviors for coping with the pandemic. This raises questions: Which public policy measures should be prioritized to support resilience? What are the economic policies that are creating the underlying vulnerability and marginalization in the first place?
<blockquote>Which public policy measures should be prioritized to support resilience? What economic policies are creating underlying vulnerability and marginalization?</blockquote>
COVID-19 is revealing that no matter the degree of someone’s financial cushion in the form of savings or remittance networks, it is simply not sufficient to cover a loss of income. From a research perspective, no matter how much information we obtain on someone’s behaviors, attitudes and circumstances, we will not be able to have visibility into their vulnerability to shocks, as these issues only marginally contribute to someone’s resilience. To be better equipped to understand the impact of shocks such as COVID-19 on the lives of the BOP, we need to understand critical variables such as income, wealth and safety nets available to them. This means we need to adapt the financial health measurement tools that were previously developed to serve the narrower purpose of helping providers understand the financial health of their customers. These frameworks were tailored to the information that providers needed to know and the tools available to them to improve the resilience of their customers. Broader contextual variables, like safety nets, let alone income variables, were not part of the equation as FSPs do not have the mandate to address these larger policy issues.
<h2>Need to Ask Bigger Questions</h2>
But for many of us working in the inclusive finance space, our toolbox is bigger. Advocacy on public policy is squarely within our mandate and having the right information to inform this advocacy work should be integral to the types of research work we undertake. Demand-side research such as the <a href="https://globalfindex.worldbank.org/" target="_blank" rel="noopener noreferrer">Findex</a>, <a href="http://finmark.org.za/programmes/finscope/" target="_blank" rel="noopener noreferrer">Finscope</a>, financial diaries, and the new crop of financial health surveys, all reveal a similar story. They tell us that being poor is bad and poverty <a href="https://cenfri.org/news-and-events/webinar-the-impact-of-covid-19-on-financial-health" target="_blank" rel="noopener noreferrer">limits people’s resilience to shocks</a>. These demand-side tools don’t tell us much about the underlying causes of this lack of resilience. So, narrowing our research efforts only to demand-side data can be misleading. Too often actors draw the wrong inference from it: that people’s behaviors and attitudes are the reason for their poverty or vulnerability, even though this has long been <a href="https://www.dandc.eu/en/article/development-jargon-helping-people-help-themselves" target="_blank" rel="noopener noreferrer">discredited</a>. Focusing only on what providers can do is also too narrow in scope: the ideology that markets can solve all problems has also been pronounced dead by many economists, including the Nobel Laureate <a href="https://www.theguardian.com/business/2019/may/30/neoliberalism-must-be-pronouced-dead-and-buried-where-next" target="_blank" rel="noopener noreferrer">Joseph Stiglitz</a>.
<blockquote>The economic fallout of this pandemic can’t be solved through any individual choices or actions or a ready-made market solution.</blockquote>
The economic fallout of this pandemic can’t be solved through any individual choices or actions or a ready-made market solution. We need to ask bigger questions around why people are vulnerable to economic shocks in the first place and the role of the financial system in addressing this vulnerability. How are public policy, social safety nets, systemic discrimination or other underlying issues influencing people’s financial health circumstances? What would make people resilient and how should the financial system be set up to improve resilience and well-being for the BOP? There is really no amount of planning and sound financial management that would be sufficient under these circumstances. For systemic shocks like COVID-19, we need other research tools and a different body of evidence.
<h2>Creating Financial Protections for the BOP</h2>
We should be thinking about the systems that undergird the financial system and how to use it to create financial protections for the BOP. There are at least three priorities that COVID-19 has revealed for the inclusive finance field. I argue that these should be elevated in our collective research and evidence-gathering agendas.
<h3>1. Strengthening the ability to distribute payments</h3>
If nothing else, this pandemic has made it clear that countries with robust digital payment infrastructures can quickly get money out to people who are most in need. It is heartening that countries like <a href="https://www.ft.com/content/adc604f6-7999-11ea-bd25-7fd923850377?accessToken=zwAAAXF1NqZAkdOtxgT2eZkR6tO9JX_ZI4UDdw.MEYCIQCq8LPiLCFzDU973kkOf7P9UFkYEYGATGjkdNeE4ORSaAIhAMR64HuZniONRGR2qjVaFlZm78iaJRht2C1EKlVruFsQ&amp;sharetype=gift?token=5f6d3c51-58ac-46c1-a629-fc74a677c3b2" target="_blank" rel="noopener noreferrer">Togo</a> are taking action to get money into people’s hands using digital payments. Pakistan’s <a href="https://nation.com.pk/09-Apr-2020/payments-under-ehsaas-emergency-cash-programme-started" target="_blank" rel="noopener noreferrer">Ehsaas Emergency Cash Transfer Program</a> is able to disburse to over 12 million families hardest hit by COVID-19. <a href="https://centerforfinancialinclusion.org/mobile-money-in-times-of-crisis-an-unlikely-hero/" target="_blank" rel="noopener noreferrer">Jordan has taken impressive steps </a>to expedite reforming electronic customer due diligence, expanding the cash in cash out (CICO) networks and other reforms to use a digital channel to disburse aid. These cash transfers are not only a critical lifeline for those most impacted by COVID-19, they also serve as a demonstration of the importance of the financial system for crisis response and for economic recovery. The challenge will be for those countries that do not yet have robust digital infrastructures or where there are still many limitations to getting certain groups -- like women or the elderly -- to engage with these digital channels. The inclusive finance community should focus its problem-solving skills on answering:
<ul>
 	<li>What will it take to extend digital infrastructure quickly? How can donors and investors partner with policymakers to make this a priority?</li>
 	<li>What are quickly scalable, second-best solutions for cash distribution in markets without digital infrastructure? Can MFIs, postal networks, and other community groups serve this last mile distribution?</li>
</ul>
<h3>2. Improving financial protection through “safety net-like” insurance</h3>
Prior to COVID-19, the role of insurance in the inclusive finance field was perceived as good to have or a problem of the health sector, but not the primary focus of our field. The challenge of commercializing micro-insurance was the main obstacle limiting progress. COVID-19 reveals the clear inadequacy of our solution set to date. The concept of employer-backed private insurance in situations where millions of employees are losing their jobs (an estimated <a href="https://www.epi.org/blog/3-5-million-workers-likely-lost-their-employer-provided-health-insurance-in-the-past-two-weeks/" target="_blank" rel="noopener noreferrer">3.5 million in the US alone</a>) is fundamentally flawed; and this has always been the case in developing countries where the vast majority of the BOP has never had a formal employer in the first place, let alone employee-backed private insurance. We must start to see universal health insurance as part of the solution set for inclusive finance. And beyond health insurance, we should be looking for public-private solutions for other types of protections like unemployment insurance or disaster insurance. The inclusive finance community should be focusing on answering:
<ul>
 	<li>What are the private-public models that can be deployed to scale micro-insurance?</li>
 	<li>What are other ways we can reimagine safety nets to leverage private-sector insurers and balance the costs for policymakers and employers?</li>
</ul>
<h3>3. Linking food producers to the financial system</h3>
In <a href="https://larepublica-pe.cdn.ampproject.org/c/s/larepublica.pe/economia/2020/04/09/atender-la-emergencia-en-lo-rural-por-carolina-trivelli/?outputType=amp" target="_blank" rel="noopener noreferrer">La Republica</a> (in Spanish), Carolina Trivelli sounds the alarm bells on food security in Peru. Immediate demand reductions on one side of the value chain are having longer term effects on small producers who are at risk of not getting the seeds, fertilizer and other inputs they need to plant for the next season. A different but also compelling call to action comes from Maha Agriculture Public Co., Ltd., in Myanmar. In an effort to limit the spread of the virus, government policy is <a href="https://centerforfinancialinclusion.org/diary-of-a-myanmar-based-agri-focused-fsp-responding-to-the-covid-19-crisis/" target="_blank" rel="noopener noreferrer">inadvertently shutting down the financial services providers</a> who are financing critical food production cycles. Maintaining the flow of capital to farmers, regardless of the pandemic, is paramount for all of us if we want to see food at the grocery store in six months and not allow the effects of the pandemic to include food shortages and starvation. The questions that are priority for our collective attention include:
<ul>
 	<li>How can we ensure that money is flowing to food producers? How can we expand work on value chain finance in critical food commodity value chains? Is there specific data that can increase investment to value chain finance? Are there important actors, like buyers or distributors, with whom our community needs to engage?</li>
 	<li>What would it take to support the FSPs that serve agricultural producers? How can we ensure the business continuity of agricultural cooperatives or other financial service providers that serve the agricultural sector?</li>
</ul>
The complexity and gravity of the impact of COVID-19 are demanding that we not only respond immediately, but also reflect deeply on what we prioritize as a community in the future. Do you agree with the ideas put forward here? Let us know what you think.

COVID-19 Reveals the Limits of Individual Action and Market-Based Solutions

Test of a Lifetime: COVID-19 and Financial Inclusion

Agricultural and Rural Finance

Credit

Challenges and Crises

Enabling Environment

Financial Health

Health Insurance

Insurance

Policy, Regulation and Government Initiatives

Resilience

Blog Post

On the outskirts of Bismarck, North Dakota, is the Missouri River Correctional Center, locally known as “the Farm.” While unassuming from the outside, this small, minimum-security state prison is making huge strides to rehabilitate inmates and better prepare them to reenter society. From <a href="https://billingsgazette.com/news/state-and-regional/montana/puppies-help-inmates-do-time/article_fd2df909-b50d-505d-92e4-9de98f0ed0aa.html">training service dogs</a> to <a href="https://bismarcktribune.com/news/state-and-regional/focus-on-reform-north-dakota-uses-education-work-to-prepare/article_2d8fc7a3-0f28-5222-a1b9-f7b3b22a9be4.html">cleaning the local zoo</a> to <a href="https://www.kfyrtv.com/content/news/GABR-at-the-MRCC-508526311.html">participating in charity events</a>, the efforts seem to be working: North Dakota’s three-year recidivism rate is between 35 and 40 percent, compared to a national average of 68 percent.

The prison reform efforts in North Dakota are being led by Leann Bertsch, Director of the North Dakota Department of Corrections and Rehabilitation (DOCR). Bertsch began implementing extensive reform efforts following a 2015 trip to Norway to learn about the country’s incarceration system, which is often credited as being the most humane in the world. The biennial <a href="https://docr.nd.gov/sites/www/files/documents/Biennial Report Archive/Biannual Report 2015-2017.pdf">DOCR report</a> following the Norway visit listed several new program offerings across all five of North Dakota’s state prisons – including financial literacy training.

As we've <a href="https://www.centerforfinancialinclusion.org/are-financial-service-providers-gouging-inmates-in-the-u-s-prison-system">written</a> about in the past, financial services are critical for the nearly <a href="https://www.statista.com/statistics/203718/number-of-prisoners-in-the-us/">1.5 million inmates</a> in U.S. prisons to be able to make phone calls, send emails, and purchase toiletries and clothes. Financial literacy already a meager <a href="https://gflec.org/wp-content/uploads/2015/11/Finlit_paper_16_F2_singles.pdf">57 percent</a> in the United States. This figure is much lower among inmates, who often come from low-income backgrounds and experience financial stressors early on in life. The income levels of inmates prior to incarceration are, on average, <a href="https://www.prisonpolicy.org/reports/income.html">41 percent lower</a> than those who have never been incarcerated. A <a href="https://arktimes.com/news/arkansas-reporter/2014/06/19/new-ualr-survey-finds-a-lack-of-basic-financial-literacy-among-inmates">2014 study</a> found that incarcerated people were less likely to have ever had a checking account or credit card, and more than twice as likely to take out payday loans and three times as likely to pawn an item than their nonincarcerated counterparts. Basic understanding of how to manage personal finances and efficiently allocate earnings are <a href="https://www.sciencedaily.com/releases/2014/06/140618163924.htm">crucial components</a> of ensuring offenders do not turn back to crime in desperation.
<blockquote>Financial literacy is already a meager 57 percent in the United States. This figure is much lower among inmates.</blockquote>
In a <a href="https://files.eric.ed.gov/fulltext/EJ1043227.pdf">2013 study</a>, inmates cited several barriers to financial services that contribute to their financial illiteracy. These included high overdraft fees, checking account minimum balance requirements, and a general mistrust of banks, especially by those who have obtained their income illegally. Financial literacy educators often suggest avoiding commercial banks in favor of <a href="https://www.marketwatch.com/story/this-woman-teaches-personal-finance-to-prison-inmates-2018-07-29">joining a credit union</a>, and participating in <a href="https://www.cuinsight.com/empowering-inmates-through-financial-education-in-jails.html">Financial Reality Fairs</a> to game out real life financial scenarios.

While North Dakota has one of the lowest incarceration rates in the country, it isn't alone in its efforts to help inmates successfully reenter society. Two years ago in Pennsylvania, a consortium of state agencies began hosting Financial Reality Fairs to help reentrants learn basic banking and money management. In February 2017, the <a href="https://www.wandtv.com/news/life-after-prison-kewanee-life-skills-re-entry-center/article_9bdbda4e-19d7-527a-82c4-e8a6f66b5339.html">Kewanee Life Skills Re-Entry Center</a> opened in Illinois to help inmates reduce their susceptibility to recidivism through three phases of required programing – one of which is financial literacy.

Financial literacy programs focus on knowledge acquisition and skill development with the goal of helping inmates understand best practices in money management, like how to save money, build credit, and budget. Many may question the use of taxpayer dollars to fund training and education programs for those found guilty of a crime. However, the cost of keeping those people incarcerated is in fact much more expensive. Inmates who receive education are less likely to return to prison, and a <a href="https://www.rand.org/news/press/2013/08/22.html">RAND Corporation study</a> estimated that for every $1 invested in a prison education program, incarceration costs three years post-release were reduced by $4 to $5.

There’s lots of talk about reforming our prison system. As the founder of <a href="https://r3score.com/">R3 Score</a>, Teresa Hodge is one of the leaders in this fight. R3 Score helps individuals with criminal records find their footing through a three-pronged approach: financial literacy, inclusive entrepreneurship, and community engagement. The company’s fintech analysis tool aggregates data to de-risk people with criminal histories. This data is then turned into a score for decision makers – like potential employers – to improve access to opportunities for qualified individuals.

With nearly <a href="https://www.bop.gov/about/statistics/statistics_inmate_age.jsp">90 percent</a> of inmates of working age and <a href="https://www.prisonfellowship.org/resources/training-resources/family/ministry-basics/faqs-about-children-of-prisoners/#children_with_parent_in_prison">1 in 28 American children</a> with a parent behind bars, it is economically and socially critical that we support rehabilitation efforts to help offenders successfully reintegrate. While financial literacy alone may not be the leading cause of reduced recidivism rates, it can equip offenders with essential knowledge to support themselves upon release.

Financial Literacy for Convicted Felons: A Way to Lower Recidivism?

North America

United States

Financial Inclusion Strategy

For Financial Inclusion Week 2019, CFI sought out a small group of financial inclusion thought leaders to comment and take a position on this year’s theme, “Financial Inclusion: For What?” CFI Director of Communications Virginia Moore sat down with Bobbi Gray (Grameen Foundation), Till Bruett (DAI), and Shivani Siroya (Tala) to discuss the theme and evaluate our four proposed answers to it: financial health, sustainable development, equity, and the bottom line. They examine ways in which these answers complement or conflict with one another, and assess how the industry should measure its success, among other topics.

Financial Inclusion: For What? Podcast

Financial Inclusion Week 2019

Financial Technology

Payments

Saving

Underserved Groups

Women

Podcast

Mariel Cota and her three children were confronted with the prospect of starting from scratch after she left her abusive ex-husband. She had the skills to start a flower business, but as an immigrant she had limited credit history and couldn’t secure traditional financing. After taking part in an entrepreneurship training program and securing a business loan from Accion serving Southern California, Mariel was able to launch Flowers by Mariel. The capital and coaching offered through the entrepreneurship program enabled Mariel to improve her credit and build wealth for her family. In the process, Mariel has grown as a role model to other women in her community.
<h2>Why Digital Financial Coaching?</h2>
Mariel’s story is in line with those of similar entrepreneurs who benefit from the lending and business support services offered by <a href="https://us.accion.org/">Accion in the U.S</a>. A <a href="https://us.accion.org/impact-study/">multi-year evaluation</a> study published in 2018 indicated that on the whole, Accion-supported businesses are thriving based on indicators of business strength, and they experience significant improvements in feelings of financial stability in the years following their loan. However, the study also highlighted ongoing challenges our clients face – particularly related to financial health. For example, less than half of clients surveyed at the end of the study had taken steps to prepare for a financial emergency (45 percent) and most found finances to be a significant source of stress (58 percent). This research revealed that entrepreneurs who use Accion’s non-financial services (such as the entrepreneurship training program Mariel participated in) see great benefit to them. Yet, many clients don’t take advantage of these opportunities. This presented an opportunity to improve how we connect small business owners to resources that can help them reach their goals, on their own terms.
<blockquote>A multi-year Accion study highlighted financial health-related challenges clients face.</blockquote>
To address these challenges, Accion launched a pilot partnership with <a href="https://www.neighborhoodtrust.org/">Neighborhood Trust Financial Partners</a>, a nonprofit social enterprise and one of the nation’s leading providers of financial empowerment services, to offer personalized, technology-enabled financial coaching through their Trusted Advisor program. The program connects clients to a personal financial coach through video or phone sessions. Participants have access to a customized online portal as well as SMS and email reminders to stay on track with their financial action plan.
<h2>Why Women Entrepreneurs?</h2>
We had a surprising insight in implementing this program: the Neighborhood Trust offering was particularly popular among women entrepreneurs. The majority of Accion clients who attended sessions were women (57 percent), even though women only make up 44 percent of our U.S. loan portfolio. Interestingly, this insight parallels Google Analytics data that captures aggregate characteristics of website users who access Accion’s <a href="https://us.accion.org/resources/">online business resource library</a>.

Additionally, women appeared to engage more deeply in digital financial support services through Neighborhood Trust. Of those clients who attended more than one coaching session through the Neighborhood Trust program, 65 percent were women. Women also made up 62 percent of the Accion clients who used Neighborhood Trust’s online tools to track their goals. While the maximum number of sessions attended by a male client was three, female clients attended up to 11 sessions. Further, while men on average had approximately 8 interactions with their coaches (including texts, emails and coaching sessions), women had 11 interactions on average.
<blockquote>Women made up 62 percent of the Accion clients who used Neighborhood Trust’s online tools to track their goals.</blockquote>
What broader contextual factors might make resources delivered in a digital manner particularly valuable for women? First, we know that <a href="https://www.nbcnews.com/business/business-news/why-work-yourself-women-want-flexibility-men-want-control-n774311">flexibility is key motivator for women to pursue entrepreneurship</a> in the first place. This means that women value opportunities to pursue their goals on their own terms, in a manner that fits into their busy lives. And, this desire isn’t limited to women entrepreneurs. The <a href="http://www.learninghouse.com/wp-content/uploads/2017/09/OnlineCollegeStudents2015.pdf">majority of online college and graduate students are women</a> (70 percent and 72 percent, respectively, according to a 2015 survey), and many cite <a href="https://www.usnews.com/education/online-education/articles/2015/08/05/why-women-are-drawn-to-online-learning-in-higher-numbers-than-men">flexibility as a key factor</a> in their decision to pursue online learning opportunities.

Second, digital financial coaching appears to align with the ways that women already use technology in their daily lives, as well as their propensity to use online channels to connect with others. Nielsen data shows that <a href="https://www.nielsen.com/us/en/insights/article/2011/digital-and-very-social-american-women-and-technology-adoption/">women talk 28 percent more and text 14 percent more</a> than men every month, and they’re also heavier users of social features on their phones.

Finally, women entrepreneurs face unique financial challenges. For example, <a href="https://www.prnewswire.com/news-releases/women-are-more-likely-than-men-to-rely-on-personal-credit-to-finance-their-business-300870005.html">women rely more heavily on consumer credit to fund their businesses</a> than men. This translates to higher credit utilization rates and consumer trade counts, which can negatively impact a woman’s personal credit, and thus her ability to qualify for quality business financing options.
<blockquote>Women rely more heavily on consumer credit to fund their businesses than men.</blockquote>
<h2>What’s Next?</h2>
We were encouraged to learn that this service was valuable to the 149 business owners who took part in the pilot financial coaching offering through Neighborhood Trust. Over a period of six months, 47 percent of participants improved their credit scores, 49 percent reduced their total debt, and 52 percent of those who had an account in collections reduced the balance in collections. Participants reported taking a variety of concrete actions as a result of the coaching, including paying down credit card balances and setting up an emergency fund. The majority felt they had a more solid financial plan for their business after coaching and that the service helped them meet at least one business or personal financial goal.
<blockquote>The majority felt they had a more solid financial business plan after coaching.</blockquote>
As a result of this early success, we’re expanding upon the partnership with a second pilot round to test new strategies to encourage enrollment in financial coaching. We will continue to monitor the service’s value to women, and we will also offer digital resources that are particularly supportive to women (for example, by elevating the success stories of inspiring women entrepreneurs of color). We also encourage our peers who are invested in supporting women’s entrepreneurship to consider how they might integrate digital coaching and resources into their programming in order to better meet their needs.

The Promise of Digital Financial Coaching for Women Entrepreneurs in the U.S.

Financial Capability

Personal Financial Management

As part of a <a href="https://www.fulbright.org.au/current-scholars/">Fulbright Australia</a> scholarship, I have the privilege of making my way across Canada and the US, connecting with those working to improve the financial lives of vulnerable groups within their communities.

People aspire to well-being, and the financial aspect of achieving this, referred to as <a href="https://assetfunders.org/wp-content/uploads/CFSI_Consumer_Financial_Health_0415.pdf">financial health</a> (having day-to-day financial systems that build long-term resilience and opportunity), <a href="https://www.pwc.com/us/en/industries/private-company-services/library/financial-well-being-retirement-survey.html">financial wellness</a> (achieving financial stability and address the financial issues that cause them stress) or <a href="https://www.consumerfinance.gov/data-research/research-reports/financial-well-being/">financial well-being</a> (the ability to meet current financial needs, feel secure about their future, and are free to make choices to enjoy life) in different parts of the world, is a growing area of interest for researchers, policymakers and practitioners.

This article, the first in a series exploring how my learning journey can strengthen the well-being of low income Australians, focuses on financial well-being in Australia and four comparable countries. It’s based on research led primarily by Professor Elaine Kempson at the <a href="http://www.bristol.ac.uk/geography/research/pfrc/">Personal Finance Research Center</a>.
<blockquote>This article focuses on financial well-being in Australia and four comparable countries.</blockquote>
Her <a href="https://www.researchgate.net/project/Understanding-financial-well-being">work</a> links cross-country surveys conducted in <a href="https://www.bristol.ac.uk/media-library/sites/geography/pfrc/pfrc1705-financial-well-being-conceptual-model.pdf">Norway</a>, <a href="https://www.ccpc.ie/business/wp-content/uploads/sites/3/2018/12/Financial-Well-being-in-Ireland-Final-December-2018.pdf">Ireland</a>, <a href="https://www.canada.ca/en/financial-consumer-agency/programs/research/post-symposium-research-report-financial-well-being-canadians.html">Canada</a> and <a href="https://financialcapability.gov.au/files/anz-financial-wellbeing-summary-report-australia.pdf">Australia</a> and <a href="https://financialcapability.gov.au/files/anz-financial-wellbeing-summary-report-new-zealand.pdf">New Zealand</a> on financial well-being, which she defines as ‘being able to meet all one’s current commitments and needs comfortably, and having the financial resilience to maintain this in the future’. The selected countries are high-income, developed economies with virtually universal access to formal financial services except for Ireland, where 5 percent of the population doesn’t have an account. Generally, gender isn’t a barrier to access yet income is, as the poorest 20 percent of people are the most likely to be excluded, particularly those who are unemployed. Given similar levels of inclusion, this paper explores how these countries compare on financial well-being. What insights can be gleaned on what’s working globally, what’s not, and areas where Australia should prioritize the limited resources at hand?
<h2>Exploring Financial Well-being in Developed Economies</h2>
Kempson frames the research findings around three distinct components of financial well-being: meeting current commitments, being financially comfortable now, and having the financial resilience to maintain this in the future. At the national level, a country with high financial well-being is one where the population has the freedom and ability to fully participate in society and the economy. Despite similar levels of financial inclusion, <strong>Table 1</strong> reveals a considerable variance in overall financial well-being across these countries. (All tables in this post are from <a href="https://www.canada.ca/en/financial-consumer-agency/programs/research/post-symposium-research-report-financial-well-being-canadians.html">this report</a> from the Financial Consumer Agency of Canada).

Financial Well-Being: How Does Australia Measure Up?

Australia

East Asia and Pacific

Canada

Europe and Central Asia

Ireland

New Zealand

Norway

As I walked through Alaba International and Idumota markets on a recent trip to Lagos, I was in awe of the bustling scene. Not even the rainy season’s torrential downpours could silence the Afrobeat music thumping in the background as buyers and sellers jockeyed for a better deal. Alaba International and Idumota markets reign supreme in Lagos, offering all the goods one can imagine. Alaba International, on the southeastern edge of the city, bursts at the seams with satellite dishes imported from China, secondhand PlayStations shipped in from the UK, and other electronics. Idumota buzzes on Lagos Island, just south of the city center, and is a shopper’s delight replete with wax print hauled over from Ghana, locally produced Nollywood movies, and so much more.

Amidst the action in the markets, I interviewed 22 small business owners who are clients of <a href="https://www.accionmfb.com/">Accion Microfinance Bank</a> (AMfB) to learn more about their financial health and capability. This research will guide us as we develop a framework to help micro, small, and medium enterprises (MSMEs) better understand and achieve financial health. The framework is part of a project we’re undertaking with the support of the <a href="https://www.mastercardcenter.org/">Mastercard Center for Inclusive Growth</a> to increase the <a href="https://www.centerforfinancialinclusion.org/what-financial-health-means-for-small-business-owners">financial health and resilience of individuals and businesses</a> around the globe.

Through my conversations with business owners, I learned about what owners viewed as determinants of their success. We hypothesized that MSME financial health rests on three pillars — earning a profit, having access to capital to seize opportunities, and being resilient to economic shocks. The interviews suggest that our framework is on the right track. For instance, limited and slow access to working capital was commonly cited as a barrier to taking advantage of fleeting business opportunities. We also learned that resilience is not as much about cash-on-hand as it is about being able to quickly shift to other income-generating activities to fill an immediate need.

But arguably, the most eye-opening thing I learned from these interviews had to do with financial capability and the path to entrepreneurship, specifically how owners were able to get the know-how and capital to start their businesses. I had assumed that a commercial bank or <a href="http://www.iosrjournals.org/iosr-jbm/papers/Vol17-issue6/Version-2/J017626267.pdf"><em>esusu</em></a> — a rotating savings and credit association common in Nigeria — were the first two places that a budding entrepreneur would turn to raise seed funding. However, nearly all the merchants and traders I spoke with started their business with a lump sum they earned after spending several years as apprentices in their trade. This practice is part of the centuries-old Igbo apprenticeship model, <a href="https://pdfs.semanticscholar.org/c77a/7e79ec3fb7ce5c9eccdc72d181205251dfb2.pdf"><em>Imu-Ahia</em></a>.

The roots of Imu-Ahia date back to the European colonial era when the Igbo ethnic group native to southeastern Nigeria started to gain a reputation as highly-skilled traders and merchants. Today, the apprenticeship model has been widely adopted across the country. Most apprentices-to-be meet their “boss” — someone who is already well-established in a trade — through a family member or close contact. Reasons abound for why one might become an apprentice. Several entrepreneurs I spoke with decided at a young age that they wanted to be masters of a trade, so becoming an apprentice was always part of their plan. Others became an apprentice as a last resort, often after financial constraints forced them to put off academic or other pursuits.

During their tenure, which can range anywhere between three and seven years, apprentices observe and take notes on the tricks of the trade. They are assigned a variety of responsibilities, and eventually, they’re charged with promoting sales and store management. Although most apprentices aren’t paid, they are afforded accommodation, transportation costs, food, and clothing. Once the agreement — which can be either informal or formal — has been fulfilled, the newly anointed entrepreneurs are provided a lump sum to help them start their shop. One interviewee — a vendor of computer and phone accessories — was compensated with N800,000, the equivalent of approximately US$2,200, after spending five years as an apprentice. This is a decent payout considering he currently spends N350,000 (US $970) a year to rent his shop.

So what exactly does <em>Imu-Ahia</em> tell us about how these entrepreneurs perceive the determinants of their success? Many interviewees captured it perfectly when they shared advice for aspiring entrepreneurs: one must meticulously study and practice the skills needed to run a business before diving into it.

This advice resonates with our team at CFI because it positions financial capability — the knowledge, skills, attitudes, and behaviors necessary to make sound financial decisions — as <a href="https://www.centerforfinancialinclusion.org/four-reasons-focusing-on-financial-capability-is-good-business">an essential contributor to business success</a>. The apprenticeship model serves as a learning and testing ground for those who are set on eventually running their own shop, much in the <a href="https://guardian.ng/technology/apprenticeship-and-mentorship-the-key-to-technology-talent-development/">same way</a> that the modern-day business incubator serves as a testing ground for startups. By the time individuals “graduate” from the apprenticeship model, they will have developed the knowledge and skills to manage business revenues and expenses. They also have plans to take advantage of investment opportunities and experience observing how businesses respond to the ups and downs of the market.

I only interviewed former apprentices who found success in the business world, so there’s still more to learn. We need to do more to understand the relationship between financial capability and business outcomes, especially business failures. Nevertheless, these qualitative findings echo the findings of other research. The <a href="https://www.nber.org/chapters/c8222.pdf">National Bureau of Economic Research</a> conducted a fascinating study that showed the differences in the psychological profile of wage workers, own-account workers, and small and medium enterprise (SME) owners. It found that “ability, motivation, and a competitive attitude are very important in differentiating SME and microenterprise owners.” The World Bank launched a project to measure <a href="http://documents.worldbank.org/curated/en/884291527663849364/pdf/126687-18-6-2018-9-32-12-InvestigatingSMEFinancialCapabilitiesFINALWEB.pdf">financial capability of SMEs</a>. Their analysis showed a positive correlation between financial capability and a firm’s size and level of sales.

The striking thing about what we learned in Lagos is not so much that financial capability contributes to business success, it is how, in the Nigerian system such capability is learned: over a period of years, through experience, and under the watchful eye of a knowledgeable mentor.

Keep reading the <a href="https://www.centerforfinancialinclusion.org/blog">CFI Blog</a>, where we’ll share future findings as we conduct surveys around the world on MSME financial health!

What an Apprenticeship System May Reveal About the Financial Health of Small Business Owners in Nigeria

Mastercard Center for Inclusive Growth

Nigeria

Sub-Saharan Africa

MSME/SME Finance

This year’s Financial Inclusion Week is a chance for our industry to reflect on the purpose and impacts of our work as an industry. At CFI, we're observing trends that make us believe this an important time to reflect on these issues, which is why we’ve chosen the theme “Financial Inclusion: For What?”.

As we described throughout our <a href="https://www.centerforfinancialinclusion.org/program_teams/mainstreaming-financial-inclusion">Mainstreaming Financial Inclusion</a> series, the digital revolution is fundamentally altering how traditional financial service providers and innovative fintechs interact with each other and how they recruit, onboard, serve, and retain customers. The potential opportunities are limitless, but the move to digital also exposes low-income households to new and poorly understood risks.

Simultaneously, the scope of the financial inclusion industry has widened dramatically. Attention and investment once given almost entirely to microcredit is now being shared with cash transfer, savings, and insurance services, and these products are being offered through increasingly dynamic platforms. When used well, the financial ecosystem can be staggeringly important, delivering digital payments to health workers combating Ebola, facilitating life-saving G2P and P2P cash transfers, or providing working capital to small businesses at critical moments. When it works less well, we read about Kenyans racking up unpaid gambling debts financed through mobile money-delivered nano loans.

Financial Inclusion Week is an opportunity to explore this dynamism while reflecting and refocusing our goals as an industry. Why are those of us in this space engaging in this important work? How do our goals inform our perspective on these and other trends? What does it mean if we’re working to different or competing aims? How should we think about success, and what is necessary to ensure we achieve it?
<blockquote>During Financial Inclusion Week events, four possible answers to the question “Financial Inclusion: For What?” will be in focus.</blockquote>
From October 21 to 25, 2019, CFI and partner institutions will be hosting digital and in-person events to explore these questions, and we invite you to <a href="http://financialinclusionweek.org/get-involved">join the conversation</a>. During Financial Inclusion Week events, four possible answers to the question “Financial Inclusion: For What?” will be in focus. We’ll ask leading voices in the industry to debate the merits of these questions and articulate why these objectives should or shouldn’t be the guiding light of the industry.

Financial Inclusion: For What?

Consumer Protection

Financial Service Providers

Social Performance

The current focus on client outcomes – as demonstrated by the proliferation of frameworks describing financial health, well-being, or similar all-encompassing concepts – has renewed attention on how we achieve positive impact for clients. Currently, the behaviorists – those who believe an understanding of cognitive biases and deft application of behavioral insights in intervention design can lead to superior outcomes – rule the day. Meanwhile, financial education, traditionally seen as an enabler of better client outcomes, has become debatable, as research has shown that traditionally delivered education programs provide mixed results at best. Collectively, these trends are giving way to the narratives that client outcomes are achievable through behavioral interventions and that financial education is an ineffective relic of the past.
<blockquote>Current trends are giving way to narratives that client outcomes are achievable through behavioral interventions, and that financial education is an ineffective relic of the past.</blockquote>
This is a dangerous story. It positions the concept of education as an antagonist to behavioral insights rather than as a collaborator, and it presumes that behavioral interventions are superior to educational ones. This post aims to re-balance that narrative.

A quick point of order: financial education and financial literacy are often used interchangeably – in colloquial conversation this makes sense (“educated” and “literate” are synonyms, after all) but using them interchangeably confuses the delivery of education with its intended outcome (literate clients). I use the term financial education to refer to the process of teaching knowledge and skills and financial literacy as the state in which one possesses financial knowledge and skills.

A Fourth Era: Balancing Behavioral Interventions with Quality Education

Behavioral Insights

After months studying the drivers of financial health and mobile and internet usage in Eastern Europe, I was excited when our team finally landed in Serbia. During the hour-long taxi ride from Belgrade’s Nikola Tesla Airport to Novi Sad, we finalized our work plan for the coming days while catching glimpses of the countryside.

We came to Serbia to join our colleagues at the <a href="http://mfc.org.pl/">Microfinance Centre</a> (MFC) in conducting in-depth interviews with current and prospective customers of <a href="http://www.obs.rs/eng/">Opportunity Bank Serbia</a> and <a href="http://fiiw.pl/">Fundacja Innowacja i Wiedza</a> (Foundation for Innovation and Knowledge). We wanted to learn everything we could about the interviewees’ ambitions, challenges, attitudes, and technology use, so we can use these insights to design and develop a digital tool that will help clients understand and improve their financial health. This research is part of the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/building-financial-capabilities-and-strengthening-institutions-through-customer-centered-innovations/">Building Financial Capabilities &amp; Strengthening Institutions through Customer-Centered Innovations</a> project, supported by <a href="https://www.metlife.com/corporate-responsibility/metlife-foundation/">MetLife Foundation</a>.
<h2>Observations on Currency Usage</h2>
[caption id="attachment_35062" align="alignright" width="300"]<img class="size-medium wp-image-35062" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/05/novi-sad-taxi-300x218.jpg" alt="" width="300" height="218" /> <em>Taxis in Novi Sad, Serbia, often quote cab fares in euros.</em>[/caption]

As we pulled up to the hotel, I was perplexed when our driver, Božidar, quoted the cab fare in euros. Last time I checked, the dinar was the currency of Serbia, since it remains an EU candidate country. Yet Božidar wished to be paid in euros, as did many other local vendors. We discovered that our interviewees commonly use euros alongside dinars. One farmer said that she quickly deposits any payments made in euros, but she tends to use her dinars for everyday purchases or stash them at home for emergencies. A shop owner said the majority of her suppliers pay her in euros while she accepts payments from customers in both currencies.

The trend of “euroization” or “dollarization” — a foreign currency substituting or complementing the domestic one — is well studied. The graph below, from the Austrian central bank’s Euro Survey, shows that among its neighbors in central, eastern, and southeastern Europe, Serbia is the most euroized, with the highest proportion of all its cash and deposits held in the form of euros.

&nbsp;

Dinars vs. Euros: Financial Health and the Multiple Currency Dynamic

MetLife Foundation

Building Financial Capabilities and Strengthening Institutions Through Customer-Centered Innovations

Serbia

<em>This post originally appeared on the <a href="http://www.accion.org">Accion</a> website.</em>

Too often we hear questions from some of our financial service provider clients such as, “How can we gain market share and beat out our competition?” This isn’t inherently a bad question — it’s important to think strategically about competitors. But this question focuses only on the supply side. To get the full picture, an institution should also ask, “How can we better understand the challenges that our customers face, and how can we help them tackle these issues through our services?” While many financial service providers have made considerable strides in developing customer-centric products, most could be doing more to better understand their customers’ wants, needs, behaviors, and habits.

For these institutions that lag behind in customer centricity, it is not that they are unconcerned for their customers and only worried about the bottom line, but they often perceive this to be expensive and can be reluctant to invest in market research. Instead, they rely on anecdotal customer stories from their sales force. Unfortunately, this approach to the collection of customer information often leads these institutions to misunderstand the real problems their customers face. For instance, they may miss how technology is changing customers’ preferences for accessing information and the social groups they are part of.

[caption id="attachment_34130" align="alignright" width="550"]<img class="wp-image-34130 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/Screen-Shot-2019-01-17-at-11.39.01-AM.png" alt="" width="550" height="448" /> <strong>A workshop participant shares her prototype travel debit card with a potential user. This product would include a digital application geared to address millennials’ need for saving as well as financial and business coaching. </strong>[/caption]

Conventional market research methods rely on focus groups and expensive customer surveys, which don’t always deliver relevant insights. In contrast, a customer-centric design methodology focuses on listening to and observing people in their daily lives and works within market and technological constraints. One particular area of focus is product touch-points. A customer-centric approach regards each touch-point as an opportunity to surprise, delight, and deliver benefits to users. When done well, this approach provides experiences that resonate with the intended customers — driving their engagement and, ultimately, growth for the institution. With a customer-centric design methodology, rapid prototyping and real-world tests with customers are used to validate (or invalidate) early designs and improve the solution.

With the aim of teaching financial service providers how to apply Accion’s user-centric design methodology, we hosted a workshop in Queretaro, Mexico, with the support of MetLife Foundation. This 2-day workshop brought together ten financial institutions, including microfinance organizations, cooperatives, and fintechs, to learn our methodology for designing and developing user-centric products, based on a deep understanding of customers’ behavior, with a high potential for adoption. Participants learned how to reframe their business challenges from a customer-perspective, conduct efficient and useful user research, and use their understanding of their customers’ financial behaviors, capabilities, needs, and desires to conceive and prototype a new product.

After designing prototypes, the participants shared their ideas with potential users and engaged in a conversation about their lives, desires, and fears. By walking the users through each touch point in the proposed customer journey, the participants empathized with the customers’ thoughts, feelings and experiences at each moment. These conversations brought up questions about the usefulness and complexity of many of the products and forced participating institutions to adjust their concepts to make their prototype more customer-centric — ultimately promoting greater adoption and supporting the <a href="https://content.centerforfinancialinclusion.org/dollar-by-dollar-or-goat-by-goat-how-financial-health-translates-across-oceans/">financial health</a> of the customer. When financial service providers watched potential users struggle with digital tools or have trouble navigating through non-intuitive wireframe mock-ups, they gained insight in designing user-centered products. The providers told us this was the most influential part of the workshop.

[caption id="attachment_34131" align="alignleft" width="488"]<img class="size-full wp-image-34131" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/Screen-Shot-2019-01-17-at-11.39.21-AM.png" alt="" width="488" height="346" /> <strong>One bank conceptualized a flexible product that will address customer distress in paying their hospital bills. This bank visualizes the customer experience at every touch point with the bank. The visualized product allows the customer to customize their experience by choosing where to open their account, pick the date and portion of the bill they want to pay.</strong>[/caption]

Both traditional institutions and fintechs found the user-centric design methodology useful. While many fintechs claim to be more customer-centric than incumbent financial providers, several of the fintech participants admitted that they do not have a process to ensure that their existing products evolve to match the dynamic needs of their clients. Upon reflection, many found that their services were disconnected from client realities.

The workshop participants were eager to return to their institutions to share their new product prototypes. As one attendee put it, they were looking forward to using this methodology to, “not only help us to improve our products and services, but to create a more enriching experience for our customers.”

However, participants know that the path from prototyping customer-centric products to product deployment is not an easy one. Within an organization, a willingness to embrace change and focus on customers requires a shift in mindset. As one participant said, “it will be difficult to convince others to center their focus on our clients.”

Over the next two years, with the support of MetLife Foundation, Accion will continue working with select financial service providers to ensure that they are asking more strategic questions as they apply this user-centric design methodology to develop a product, service, or experience. And we will help the institutions tackle the challenge of internal alignment and cultural change, while ensuring that designs resonate with customers, use innovations in technology, and contribute to the financial health of the low-income population in Mexico.

To Help Customers, Ask the Right Questions

Mexico

Latin America and The Caribbean

Customer Centricity

Delivery Channels

Human Centered Design

Eric Noggle

Senior Research Director 

Mayada El-Zoghbi

Managing Director

Diana Mejia

Elisabeth Rhyne

Evelyn Stark

Gina Harman

Greta Bull

Jacqueline Foelster

Lauren  Rosenbaum

Pablo Anton-Diaz

Paul DiLeo

Priya  Punatar

Rachel Morpeth

Sonja Kelly

Tess Johnson

Vinita Godinho

Virginia Moore

Kenya

South Asia

Zambia

Access Usage Gap

Digital Credit

Digital Financial Services

Entrepreneurs of MSMEs

Fintechs

Governance

Microfinance

Microfinance Institutions

Mobile Banking

Trends

Report

Video

Webinar

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

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

When we ask about a household’s financial health, we want to know whether the family is currently managing well and on a positive track for the future. The concept revolves around three core elements: well-functioning day-to-day systems, resilience (the ability to weather shocks), and the pursuit of longer term goals.

CFI and many others in the financial inclusion space have been seeking fast, reliable and convenient ways to measure financial health. Measurement matters because it opens the door to diagnosis of financial problems and points the way toward financial fitness. It matters to policy makers who need to understand major economic and social forces creating or eroding financial health, to financial service providers as they craft products, and to individuals for whom financial health is a continual quest.

So far, our conversations about financial health have focused on individuals and households, and we now have a number of measurement frameworks available, such as CFSI’s eight-indicator “<a href="https://s3.amazonaws.com/cfsi-innovation-files/wp-content/uploads/2017/01/28024714/Eight-Ways-to-Measure-Financial-Health_Exec.-Summary.pdf">Spend, Save, Borrow, Plan</a>”  for the U.S., or the <a href="https://www.centerforfinancialinclusion.org/beyond-financial-inclusion-financial-health-as-a-global-framework">six indicators</a> CFI developed with CFSI and Dalberg to adapt the concept to the developing world.

A few people have begun looking at a new question: What does financial health mean for small businesses? They have begun to develop frameworks for business which are quite similar to those developed for individuals. For example, both contain indicators on timely payment of financial obligations, manageable debt burdens, and forward planning. This should come as no surprise, because implicit in the financial health concept is the question of whether an economic entity has “healthy” income and cash flow statements and a sound balance sheet. In essence, the frameworks for assessing financial health for any economic entity highlight selected financial statement indicators that correspond to the concepts of daily systems, resilience and pursuit of goals.

But what if the person, family and small business function as a single economic entity, as is true for many of those Accion and the financial inclusion sector serve? Among the millions of micro-entrepreneurs around the world, family and business can be nearly indistinguishable. A shopkeeper employs her teenagers to work behind the counter, where they do their homework between customers; a farmer divides his crop between commercial sales and the family table. In a more developed economy, such as the U.S., the entities are more likely to be distinct, but even so, transactions between them can be very significant, as anyone knows who has calculated the percentage of their home or automobile used for a business on their tax return.

Some of these interactions contribute to financial health, while others detract. Either way, it is likely that the interactions have an outsize influence on financial health, such that looking at the financial health of the household without understanding the financial health of the business (or vice versa) will not yield an accurate picture of either.

Our next challenge is to figure out how to measure financial health of the combined entity, while taking these interactions into account. Believing that it is important for business success to secure the personal financial health of the business owner, <a href="https://s3.amazonaws.com/cfsi-innovation-files-2018/wp-content/uploads/2018/07/18202224/CFSI_JPMC_Report_CP.pdf">CFSI has begun</a> to examine these interactions in the U.S.

Let’s look at the ways business and household may connect:
<ul>
 	<li>Personal investment to start the business. In the U.S., as elsewhere, personal savings are overwhelmingly the main source of start-up capital. (Household contributes to business.)Business net worth is a major asset for the owner. (Business contributes to household.)</li>
 	<li>Business pays “salary” of owner. (Business contributes to household.)</li>
 	<li>Family members work in the business. (Contributions go both ways if family members are paid.)</li>
 	<li>Savings from the business can be used to cover household emergencies – and vice versa. (Contributions could go either way.)</li>
 	<li>Business supplies household benefits, or relies on household for benefits, including health insurance, pension, etc. (Contributions could go either way.)</li>
</ul>
Many of these interactions could be considered healthy, while others are less so. For example, risks for small business owners are seriously concentrated when both capital investment and daily income depend on the same business. No wonder people often prefer salaried employment! As another example, use of family savings to cover business emergency expenses may be a warning sign of financial stress – even though it could also be a smart coping mechanism.

These are lines of inquiry CFI’s research will investigate, thanks to support from the <a href="https://www.mastercardcenter.org/">Mastercard Center for Inclusive Growth</a>. In the context of low income business owners, especially in developing countries, there are some factors that require special attention. They include income volatility, a low absolute level of income or profit, and the existence of multiple income sources in the household. Seeking to define a measurement framework that adequately incorporates the business-household nexus, we will conduct primary research in a couple of countries during the next six months without becoming unwieldy.

Over the years, microlenders have long recognized the interdependence of business and household, and financial educators have given out a lot of advice about separating household and business finances, but there have been few attempts to look specifically at these connections. With this research, we will gain deeper insight into how business-family interdependence shapes the prospects of the business and the well-being of the people who depend on it.

What Financial Health Means for Small Business Owners

For the second part of our Financial Inclusion Week 2018 podcast series, Tess Johnson, research associate at the Center for Financial Inclusion at Accion, sat down with Accion in the U.S. CEO Gina Harman for a conversation highlighting the domestic U.S. perspective on getting inclusion right. Accion in the U.S. collaborates with all four Accion U.S.-based lending organizations to reach entrepreneurs on the ground and online with the latest innovations in mission-based small business lending.

Podcast: Getting Inclusion Right Podcast with Gina Harman

Financial Inclusion Week

<em>La versión en español de esta entrada será publicada mañana, 31/10.</em>

In most countries there are well-defined metrics on the access, use and quality of financial products and services. Fewer assessments are available, however, on how they impact people's financial well-being. For this reason, CAF–Development Bank of Latin America ─ together with Sebastian Cardenas of the Financial Superintendence of Colombia, Paola Cuadros of the Central Bank of Colombia, and Catalina Estrada of the Universidad de los Andes ─ has worked on a study that provides a first assessment of financial well-being in Latin America, based on the <a href="https://www.consumerfinance.gov/data-research/research-reports/financial-well-being-scale/">Consumer Financial Protection Bureau’s</a> (CFPB) research and the results of the <a href="http://scioteca.caf.com/handle/123456789/1086">financial capabilities surveys</a> carried out in seven countries of the region: Argentina, Bolivia, Chile, Colombia, Ecuador, Paraguay, and Peru. In addition, the study evaluates the determinants of financial well-being in each of these countries.

The CFPB defines financial well-being as a state of being in which a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow them to enjoy life. The CAF surveys, in comparison, inquire about people’s financial capabilities, which we define as the combined set of knowledge, skills, attitudes and behaviors in relation to financial issues. Although the formulation of these survey questions is not identical to that of the CFPB, we’ve identified survey questions that best fit the elements of financial well-being as raised by the CFPB.

The following table shows the elements of financial well-being as proposed by the CFPB and CAF survey questions that align with that definition:

<img class="aligncenter wp-image-33283" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/10/Screen-Shot-2018-10-30-at-1.10.39-PM.png" alt="" width="642" height="501" />

The financial well-being scores proposed in the study measure the ability of people to fully meet current and ongoing financial obligations, feel secure in their financial future and be able to make choices that allow them to enjoy life, according to CFPB’s definition. The country analysis shows that top scores were found in Chile (66) and Colombia (63), followed by Bolivia (59) and Peru (58), and lastly Ecuador (57), Paraguay (56) and Argentina (55). These results suggest that Chile and Colombia are faring relatively well in the sub-region conformed by these seven countries. By contrast, Paraguay, Ecuador and Argentina are facing greater financial challenges.

<img class="aligncenter wp-image-33284" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/10/Screen-Shot-2018-10-30-at-1.38.01-PM.png" alt="" width="670" height="493" />

We find that this index provides greater insight into financial well-being beyond traditional measures of financial inclusion─that is, even when a person belongs to a group that is relatively disadvantaged (for example, those with lower income and education levels), there may be compensating factors or strategies that offer other opportunities for these individuals to increase their financial well-being, such as savings, planning ahead or being part of safety networks (family, community, etc.).

Second, differences in average financial well-being are largely based on savings behavior, rather than borrowing behavior. This suggests that not having or not using formal products to save may be more harmful to one’s financial well-being than not having access to formal credit.

Third, individuals with higher levels of financial knowledge and financial skills have greater financial well-being on average.
Fourth, there are key variables that help explain an individual’s financial well-being, such as previous experience with the formal financial sector, comparison shopping between financial institutions before acquiring a new financial product, and personal participation or involvement in the financial decisions of the household.

This research suggests the following two opportunities to improve financial well-being through financial education and inclusion programs:
<ol>
 	<li><strong>Embedding attitudes and behaviors</strong> – including saving, comparison shopping between different financial institutions before acquiring a new financial product, and personal participation or involvement in the financial decisions of the household – within financial education and inclusion programs could have a significant impact on individuals’ financial well-being.</li>
 	<li><strong>Financial knowledge is important for financial well-being</strong>. Thus, it is imperative that public and private institutions implement programs that effectively promote financial capability through interventions that aim to change behavior with teachable moments, learning by doing, nudges and reminders, heuristics, gamification, personalization, and socialization, according to <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/financial-capability">CFI's recommendations on financial capability</a>.</li>
</ol>
Ultimately, we believe more research is needed to understand the drivers of financial well-being in order to better design (and implement) financial education and inclusion programs across Latin America.

&nbsp;

Measuring Financial Well-Being in Latin America: A New Tool Tested

<img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="88" height="109" /><em>The following is part of an Africa Board Fellowship </em><a href="/series/abf-spotlight/">blog series</a><em> spotlighting the experiences of participants and reflections from industry experts.</em>

In the previous blog in this series, we reframed external challenges as a “normal” part of doing business for financial service providers (FSPs) targeting the base of the pyramid. And based on insights from Africa Board Fellows, we looked at <a href="http://cfi-blog.org/2018/08/09/navigating-challenges-is-what-boards-are-all-about-part-1-anticipating-challenges/">specific ways board members can anticipate and even shape the challenging aspects of their operating environment</a>. However, while most boards have more potential for external influence than they often exercise, there are always external factors that cannot be controlled. Boards must also continually focus on reducing the FSP’s vulnerability and enhancing its resilience<img class=" wp-image-25794 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/31479737602_1ed7a2ba32_k.jpg" alt="31479737602_1ed7a2ba32_k" width="638" height="93" />
<h2>Reducing Vulnerability</h2>
Beyond external awareness and efforts to shape the operating environment, boards can direct their institutions to take internal steps to minimize exposure to external shocks and increase the FSP’s ability to withstand changes in the operating environment. These steps aim to secure adequate financial cushions and human resources to cope with shocks.
<ul>
 	<li><strong>Strategic Planning</strong>: As part of strategic planning<strong>, </strong>the board should review external factors, including client demand, current and future market penetration of its own institution and competitors, and market saturation by area. The strategic plan should include multiple scenarios (e.g., conservative, base case, and optimistic) as well as short, medium and long-term targets. The plan should be reviewed and revised on a regular basis.</li>
 	<li><strong>Capital Adequacy</strong>: Board members bear ultimate responsibility for ensuring that the institution’s capital and liquidity are adequate to surmount whatever disruptions can reasonably be anticipated, and – just as important – ensuring that management takes quick action to cut costs if capital starts eroding. Improvement in the economic environment is often just around the corner, but it can remain around the corner just long enough for the institution to become insolvent and fail. For regulated institutions, regulators set minimum capital adequacy and liquidity ratios, but this does not absolve directors from the responsibility to determine whether additional capital and liquidity would be prudent. Directors can work with management to evaluate how capital and liquidity will be affected in various scenarios.</li>
 	<li><strong>Asset–Liability Management</strong>: Like any financial institution, FSPs are exposed to balance sheet mismatches, such as currency mismatches when borrowing in dollars or euros. While avoiding hard currency loans may not always be feasible, CEOs and board members should scrutinize foreign currency exposure carefully and limit it to levels that the institution can absorb if currency devaluation does occur. To prepare for currency fluctuations, Vision Fund Zambia’s board instituted a policy against foreign currency denominated borrowing, as CEO Nkosilathi Moyo describes in <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/nkosilathi-_moyo_visionfund_final.pdf">this interview</a>. Passing foreign exchange risk on to clients by denominating loans in foreign currency is usually not an effective risk management technique, as most clients are even less able to absorb such risk than the FSP lender.</li>
 	<li><strong>Staff Training and Incentives</strong>: As part of their fundamental responsibility for the viability of their institution, directors must closely scrutinize how management proposes to train and incentivize staff to ensure that they support strong operational procedures that appropriately retain and encourage staff. Staff knowledge and loyalty can be essential in a crisis situation.</li>
</ul>
<h2>Enhancing Resilience</h2>
[caption id="attachment_25799" align="alignright" width="226"]<img class="alignnone size-full wp-image-25799" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/paul-dileo.jpg" alt="Paul DiLeo" width="226" height="250" /> Paul DiLeo[/caption]

Inevitably, with all the best efforts and preparation, some external events cannot be avoided. But this doesn’t mean they cannot be planned for, even if they may take very different forms. Boards can be better prepared to recover from shocks if they take the following steps:
<ul>
 	<li><strong>Board Composition and Training</strong>: Board self-evaluations should be performed on at least an annual basis to ensure the right skills are represented and to identify gaps. Any areas of improvement should be addressed by training, bringing in experts, and field visits to other institutions that have successfully dealt with relevant challenges and opportunities. Proactively taking these steps can help directors be more prepared for the unexpected.</li>
 	<li><strong>Executive Committee of the Board</strong>: The ability to act quickly can be crucial to responding successfully to external shocks. Many boards have directors in far-flung locations, and it may be hard to assemble a quorum. Even when formal decisions are not required, the CEO and senior management will benefit from the counsel and insights of board members. Many boards designate a small executive committee, usually drawn from in-country directors, authorized to take decisions and provide counsel to management between meetings of the full board.\</li>
 	<li><strong>Disaster Planning and Recovery</strong>: Board directors should ensure that contingency plans addressing a variety of common challenges are prepared and kept up to date. These will cover matters ranging from “phone trees” indicating who calls who to confirm staff safety and whereabouts in the event of a natural disaster or security threat, to secure offsite data backup and recovery to succession planning in the event of loss of a key manager. As Resi Janssen of FFSL South Sudan <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/resi_janssen_fssl.pdf">notes</a>, the first priority in a serious crisis is to ensure that staff are safe.</li>
</ul>
FSPs operate in dynamic environments where challenges and opportunities are constantly changing. Board directors with a good understanding of the institution’s strengths and weaknesses and a grasp on the operating environment play a crucial role in helping shape the environment over the medium term, and ensuring that the FSP and its management are resilient and prepared.

<strong>CFI is currently recruiting fellows for the next cohort of the <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a>. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.</strong>

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Navigating Challenges Is What Boards Are All About – Part 2: Vulnerability and Resilience

Africa Board Fellowship Program

Africa Board Fellowship Spotlight

<em>This post was originally published on the <a href="http://www.cgap.org/blog/financial-inclusion-glass-half-empty-or-half-full-pt-2">CGAP Blog</a> and is re-published here with permission.</em>

As I stated in my <a href="http://cfi-blog.org/2018/08/09/financial-inclusion-is-the-glass-half-empty-or-half-full-part-1/">previous blog</a> on the debate over the latest <a href="https://globalfindex.worldbank.org/">Findex</a>, we continue to make important progress toward the goal of universal financial access. Progress is uneven and the timeline uncertain, but we have a pretty clear idea of what to do. Unfortunately, the picture is less clear on the important question of usage, and CFI is right to raise high dormancy rates as a concern in its report, “<a href="https://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/996-financial-inclusion-hype-vs-reality">Financial Inclusion: Hype vs Reality</a>.” As with the access data, however, disaggregating the figures on account usage reveals differences across countries that offer more encouraging signals than the aggregated figures, albeit with one very important caveat.

Findex shows we still have a lot of work to do on usage: 25 percent of account holders in the developing world haven’t used their accounts for a single deposit or withdrawal in the past year (as shorthand, I will refer to these as dormant accounts). Part of the challenge in the Findex data, however, is that backsliding or slow progress in a few big markets is drowning out progress in the rest of the world. The primary reason is India, which is skewing the account dormancy figures significantly because of its large population and extraordinarily high levels of inactivity — at 48 percent of account holders in 2017. If we take India out of the equation, the percentage of inactive account holders in the developing world comes down from 25 to 16 percent.

If, however, we look at the change in dormancy rates for individual countries, rather than the aggregate, a more nuanced picture emerges. Findex collected data on dormant account holders for 87 low- and middle-income countries in 2014 and 2017. Of these countries, 46 saw their dormancy rates go down by an unweighted average of 14 percentage points, 12 saw their dormancy rates go up by an average of 10 percentage points, and 29 had no discernable change (as the difference was within the 3.5 percent margin of error in either direction).

<img class="size-full wp-image-32066 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/gretabullchangesininactivityrates-1.png" alt="" width="632" height="318" />

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But here’s where the caveat comes in. Findex’s dormancy and usage numbers are not quite what they seem. To ensure greater accuracy in capturing mobile money accounts, respondents are not asked if they have a mobile money account; they are asked if they have used a mobile money account in the past year. In other words, Findex counts only active mobile money accounts. For financial institution accounts, respondents are asked if they have an account and then whether they have used it in the past year, so a clear distinction can be made between active and inactive accounts (see the Findex glossary for details). The net effect is to understate the number of account holders added in Sub-Saharan Africa and to overstate the activity rates for these accounts.

Given the prevalence of mobile money in Sub-Saharan Africa, this has a significant impact on Findex’s activity rates for the region. A back-of-the-envelope exercise using GSMA’s supply-side data (which correlate closely with those of Findex), helps illuminate the degree to which this affects Africa’s dormancy data. According to GSMA, there were 338 million registered mobile money accounts in Sub-Saharan Africa in 2017. If we add these accounts to the 195 million financial institution accounts from Findex, we can infer that there are roughly 533 million registered accounts in the region (the number of account holders will be lower because of people holding both mobile money and financial institution accounts, which Findex accounts for). This means that roughly 232 million accounts have been added since the last Findex, not the 72 million that you would get from doing the math with the Findex data.

That’s potentially good news, but with this increase in number of accounts comes an increase in the overall inactivity rate in Africa. Roughly 64 percent (216 million) of the mobile money accounts reported by GSMA were considered inactive. If we combine the GSMA and Findex data on inactivity, the 2017 dormancy rate in Sub-Saharan Africa shifts from 13 percent of account holders (in Findex) to 49 percent of accounts (combining the two data sets). This adjusted dormancy rate is now roughly equivalent to dormancy rates in India and represents a significant increase from the inferred rate in 2014 of 41 percent (again, based on accounts, not account holders). This adds approximately 129 million dormant accounts back into the global total, raising our developing country dormancy rate sharply back in the direction of the 25 percent mark.

<img class="size-full wp-image-32067 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/greta-bull-financial-accounts-dormancy-rates-1.png" alt="" width="629" height="255" />

The point of this exercise is not to provide an exact estimate of dormancy rates in Africa, but to demonstrate that we have a pretty serious usage challenge and that it is concentrated in India and Sub-Saharan Africa, where the denominator of new accounts has grown the most. Not coincidentally, they are also the two regions with the highest rates of extreme poverty. India increased access to accounts from 53 to 80 percent of adults from 2014 to 2017, adding 290 million account holders. In Africa, we have inferred that 232 million accounts were added in the same period. If the Africa data are normalized for inactivity, then India and Africa together would account for roughly 77 percent of all people accounts added between 2014 and 2017. But a large portion of them are inactive. It seems intuitive that, with the addition of accounts at this pace, there might be a delay between opening an account and using it, but we will have to wait until the next Findex to properly test this assumption.

CFI is right to point out dormancy as a problem, but it missed a big part of the challenge in its analysis: high dormancy in Sub-Saharan Africa, which barely registers in Findex, and the fact that mobile money accounts are measured differently means it is difficult to compare inactivity rates across regions. But I am not sure this means we should ignore the registered account numbers entirely, as CFI suggests. They are important because they show progress in giving people access to accounts. But activity rates matter, too, and the clear challenge now is to stimulate usage of those accounts in Africa and South Asia. This is a more complex undertaking because it involves behavior changes for new account holders and the testing of different value propositions for providers — and both of these challenges take time to address. But there are hints about how this can be done. GSMA, in its latest <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2018/05/GSMA_2017_State_of_the_Industry_Report_on_Mobile_Money_Full_Report.pdf">State of the Industry Report on Mobile Money</a>, focused on four factors that are closely associated with high activity rates: a robust agent network, enabling mobile money regulation, a digital account-based model and providers serving as integrated platforms for the wider payments ecosystem. It provides the example of MTN in Ghana, where activity rates went from 7 percent in June 2012 to 73 percent in June 2017. Understanding the factors that created the change at MTN in Ghana will provide valuable insights into what it will take to move inactivity rates, which have been stubbornly sticky in the mobile money industry since 2011.

Beyond overall account dormancy, the CFI report raises interesting questions about important use cases that deserve brief examination — savings, credit and payments.

On savings, it is disappointing that the number of survey respondents in developing countries who reported saving in the past year came down from 53 percent in 2014 to 43 percent in 2017. Unfortunately, Findex doesn’t tell us why this might be happening. While customers not perceiving the value of their accounts is one possible explanation, factors like inflation, the availability of alternatives, economic stagnation or other disruptions could be affecting the amount of money people are able to save. What is encouraging is that more of those who did save used a financial institution: this figure grew from 42 percent in 2014 to 47 percent in 2017.

On credit, I am more sanguine for a couple of reasons. First, we can’t draw any real conclusions from the Findex data. For developing countries, the number of respondents who reported borrowing in the previous year dropped from 47 to 44 percent, which is just outside the margin of error for the sample size and not a particularly strong signal. And Findex may or may not capture data on credit provided via mobile money accounts, depending on whether people consider this a loan, so it is potentially missing some digital credit borrowing. But more to the point, credit is a financial product where more isn’t necessarily better. The main constraint to accessing credit shouldn’t be whether someone has an account. It should be whether they can afford it.

Digital payments are the real story in Findex, and it is no surprise that this number is going up. Many accounts in places like India and Africa were established expressly to facilitate payments. In the developing world, the proportion of respondents who reported sending or receiving a digital payment in the past year went from 32 to 44 percent, and this growth was consistent across all markets. It makes sense. Just think about the way you use your bank account: you might save, and you may or may not have a loan for a house or a car, but you almost certainly make regular payments from your account. A mobile or low-value bank account in many ways mimics a current account. It is a store of value from which payments can be sent and received. You don’t expect to get a return on it, but you might use it to help establish a credit rating.

Payments seem to me to be a foundational product, especially for people with very little money, who may not have enough to save consistently and may not be creditworthy. Comparing payments usage in developing countries to high-income OECD countries puts this issue in perspective. In high-income OECD countries, 92 percent of respondents reported making or receiving a digital payment in the past year. The figure for low income countries was only 26 percent, a gap of 66 percentage points. The usage gaps between OECD countries and low-income countries was less pronounced for both savings and credit (45 and 49 percentage points, respectively). This is primarily because credit and savings products were not as widely used in rich countries as payments: only 56 percent of account holders reported saving in a financial institution in the past year, and only 20 percent borrowed from a financial institution (although this rose to 57 percent when credit cards were counted). The concept of “universal usage” is best applied to payments services rather than the other financial services where customers’ needs are more varied.

<img class="size-full wp-image-32068 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/greta-bull-usage-gap-oecd-and-low-income-1.png" alt="" width="617" height="365" />

For me, the jury is still out on usage. We have seen massive growth in accounts in the past three years, but dormancy rates have remained stubbornly steady, particularly in markets with rapid account growth. The trick will now be to activate all of those newly opened accounts, and we will have to wait until the 2020 Findex (and perhaps beyond) to understand whether we are simply dealing with a time lag or whether we have a bigger problem on account usage. What I would expect to see is a gradual improvement in activity rates for accounts in India and Sub-Saharan Africa, and payments will be key to that story. Payments are a gateway use case. Over time, they can create a foundation for other use cases to emerge through improved data on customer activity and by creating trust in formal financial services.

But we should not necessarily expect to see other use cases grow in proportion to payments, not least because it takes time to build data trails and the level of trust required for more habitual use of financial services. Nor should we expect it to happen quickly. Financial inclusion, as opposed to just financial access, is and has always been a long-term endeavor.

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Financial Inclusion: Is the Glass Half Empty or Half Full? (Part 2)

Global Findex

According to the <a href="https://globalfindex.worldbank.org/">Global Findex</a>, the percentage of adults in Mexico who are saving money at a formal institution plunged from 15 percent to 10 percent in just the past three years—despite financial inclusion strategies <a href="https://cfi-blog.org/2016/07/01/mexico-launches-comprehensive-financial-inclusion-strategy/">enacted by the government</a>. This steep decline in usage of savings accounts came as a surprise, and hit close to home for me as a Mexican. This <a href="https://cfi-blog.org/2018/06/18/is-financial-inclusion-stalling-the-2017-findex-results-raise-several-red-flags/">trend is a cause for concern</a>, and it’s also a call to action. At Accion, we took this as an opportunity to listen to the people we’d like to see benefit from financial services. With support of <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>, we wanted to understand why fewer people were saving in banks, what products and services people were using, and who was providing those services if it wasn’t formal institutions.

To get answers about what people in Mexico want from their financial service providers, I recently traveled home to Mexico City as part of a team of researchers. We listened to small merchants map out their entire financial lives—their motivations, goals and

[caption id="attachment_25738" align="alignright" width="286"]<img class="alignnone size-full wp-image-25738" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/mexico-fish-market-accion.jpg" alt="Man sells fish at a stall in an outdoor market" width="286" height="215" /> Fish market on San Gregario Street in Xochimilco, a southeastern municipality of Mexico City, one of the places we visited for our user research.[/caption]

aspirations, how they feel about various types of financial services, the strategies they use to stay financially healthy, and more.

Our biggest surprise? The individuals we talked with know about and can access a lot of financial products—they just aren’t using them. Lack of alignment between what low-income customers want and what financial products offer is a factor preventing further financial inclusion in Mexico.

All of the individuals we spoke to reported having access to microloans, consumer store credit, credit cards, and savings accounts. Financial access didn’t seem to be an issue for them — not even in the more rural areas we visited two hours outside the city. Even though our small, qualitative study may not be rigorous enough to extrapolate to the broader population, this finding seems to be consistent with national data. In Mexico, <a href="https://www.cnbv.gob.mx/Inclusi%C3%B3n/Documents/Reportes%20de%20IF/Reporte%20de%20Inclusion%20Financiera%208.pdf">86 percent of banking branches are located in urban areas</a>, so people close to the city are unlikely to deal with a shortage of services. What our interviews revealed is that a different issue is preventing further inclusion: lack of alignment between what low-income customers want and what current financial products offer. Most people we talked to dislike dealing with large commercial banks, and they continuously decline the offers for financial services they regularly receive, at their doorstep or in public places.

[caption id="attachment_25737" align="alignleft" width="275"]<img class="alignnone size-full wp-image-25737" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/mexico-azucena-mother-holding-baby.png" alt="Mother holding bay" width="275" height="366" /> Azucena is a former bank teller, however she prefers to save money at home. Alpuyeca, Morelos, Mexico, 2018.[/caption]

Many of the people we interviewed still prioritize saving cash at home, even if they also have a formal savings account.  For example, Azucena, a former teller at a large commercial bank branch, told us that despite her relationship with a bank, she and her husband still prefer to store cash informally. “We save at home, but we do so separately, using different lock boxes for different purposes,” she says.

Through our conversations with clients like Azucena, we discovered that informal alternatives like lock boxes continue to be more convenient for clients and preferable to formal options. Keeping cash at home is, after all, indispensable for unexpected emergencies. If your money is in a bank, you’d have the hassle of getting there and waiting. Plus, it may not be available 24/7, and you can run into issues if the ATM is offline or the pharmacist, mechanic, or whomever you’re turning to for help doesn’t take a debit card.

In many cases, the interviewees’ savings accounts had been opened for them by former employers to serve as payroll accounts or by the government for disbursement of benefits. These accounts were less “savings accounts” and more “distribution accounts” that were immediately turned into cash and saved at home. Because the savings aspect wasn’t used—in fact, was never emphasized—once they switched jobs or stopped receiving benefits, they let the accounts lapse.

Convenience may be a key issue, but it is not the only one. Feeling unsafe withdrawing money from a bank branch is also an issue because thieves wait where the money is—outside bank branches and near ATMs. The lack of trust our interviewees placed in financial institutions was often less about security and more about the unclear, high (real or perceived) maintenance fees banks charge on savings accounts.

Despite this perceived aversion to formal accounts, we found that people still continue to save and set high financial goals for themselves. In all the interviews we conducted, the number one financial goal was saving to access better opportunities: education of their children, a home for their family, or the chance of opening their own business. The demand is clearly there, and most of the people we talked to were indeed saving.

We heard from customers, and now we’re working with a mix of fintechs and financial service providers of all sizes to use those insights to create financial products that customers will want to use as key tools for their financial lives.  Stay tuned!

<em>This research was conducted by <a href="http://www.accion.org/">Accion</a>, the Center for Financial Inclusion at Accion, and <a href="http://www.dalbergdesign.com/">Dalberg Design</a> as part of our part of our <a href="/about/what-we-do/building-financial-capabilities-and-strengthening-institutions-through-customer-centered-innovations/">Building Financial Capabilities and Strengthening Institutions through Customer-Centered Innovations project</a>, supported by <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>.</em>

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Why Aren’t People Saving Money in Mexico?

This blog from <a href="https://us.accion.org/">Accion in the U.S.</a> was originally posted on <a href="https://nextbillion.net/impact-of-small-business-lending/">NextBillion</a> and is re-published here with permission.

<em>By Gina Harman, CEO, Accion in the U.S., and Liz Urrutia, CEO, Opportunity International</em>

The field of microfinance arose to address a pressing problem in emerging markets: Billions of people around the globe were shut out of, or poorly served by, the financial sector. But while microfinance institutions grew rapidly around the globe, so too did economic inequality in developed countries. It was within this context that organizations like <a href="http://us.accion.org/" target="_blank" rel="noopener">Accion in the U.S.</a> and <a href="http://opportunityfund.org/" target="_blank" rel="noopener">Opportunity Fund</a> adapted the microlending model to the United States more than two decades ago, expanding access to economic opportunity for entrepreneurs who lacked the financing and resources they needed to start or grow their businesses. In the ensuing years, the mission-based lending industry has continued to expand its services across the country – <a href="https://ofn.org/sites/default/files/OFN_20_Years_Opportunity_Finance_Report.pdf" target="_blank" rel="noopener">even in times of economic recession</a>.
<h2>From Financial Inclusion to Financial Health</h2>
In the early days, progress toward our mission could be measured by portfolio numbers, such as number of loans disbursed and amount of capital deployed, as well as by evaluating how many of our clients were from traditionally underserved populations, such as people of color, women and low- to moderate-income individuals. However, we also understood that gaining access to financial services is only meaningful if that access places an individual on a path to greater financial stability and improved quality of life. In short, financial inclusion does not necessarily enable financial health.

Over time, with support from the <a href="https://microtracker.org/assets/documents/entrepreneurtracker-overview.pdf" target="_blank" rel="noopener">Aspen Institute’s EntrepreneurTracker</a> initiative, our organizations have been able to evaluate borrower outcomes such as business survival, revenue growth and job creation in the years following loan disbursement. Still, we knew that these numbers alone didn’t tell the full story. That’s why we kicked off a <a href="https://us.accion.org/impact-study/" target="_blank" rel="noopener">multi-year, mixed methods study</a> in 2015 to more fully understand the impact of our lending and advising services over a longer time horizon. This research, conducted by Harder+Company Community Research, was made possible through lead funding from the W.K. Kellogg Foundation and JPMorgan Chase &amp; Co., with additional support from S&amp;P Global.
<h2>How Are Our Clients Faring?</h2>
The results of this research revealed that, by and large, the entrepreneurs we serve are thriving, even two to three years after receiving their loan. Most businesses in the study increased sales (60 percent) and profit (57 percent). Forty percent of borrowers added employees during the study period, and entrepreneurs with employees significantly increased benefits provided to those employees. What’s more, the majority of study participants specifically attributed progress toward their business and personal goals to the services they received from Accion or Opportunity Fund.

This study also provided unprecedented insight into the emotional benefits of mission-based small business lending. At the end of the study, 63 percent of participants expressed that support from their lender had “a lot” of positive impact on their confidence. In follow-up interviews, entrepreneurs discussed the demoralizing effect of previous loan rejections, sharing that the approval from Accion or Opportunity Fund was a sign that someone believed in them. As one participant put it: “The biggest thing has been the confidence that I’ve gained in myself. I’m really proud of it.”

But the report also highlighted some ongoing challenges – among them, the fact that financial health remains a key need among the business owners we serve. For example, the majority of clients surveyed at the end of the study had not taken steps to prepare for a financial emergency (55 percent) and found finances to be a significant source of stress (58 percent). This was a statistically significant improvement from the beginning of the study, when only 36 percent of participants had prepared for a financial emergency and 71 percent reported significant anxiety about finances. Nevertheless, though these findings indicate that our clients are on the path to greater financial stability, they remain vulnerable to financial shocks.
<h2>Defining Success on Entrepreneurs' Terms</h2>
The multifaceted nature of the study findings illuminates the limitations of a “one-size-fits-all” definition of impact. For instance, as the mission-based lending field moves beyond measures of inclusion to focus on borrower outcomes, traditional metrics like revenue growth and job creation don’t necessarily align with entrepreneurs’ own definitions of success. That’s why the research employed a technique called cluster analysis, which revealed five distinct typologies of entrepreneurs, each with unique goals, challenges and successes.

For example, the <i>Focused and Growing</i> group (44 percent of the sample) sought to grow, and succeeded. By the end of the study, they had all moved into their businesses full-time, had successfully used their loans to expand their businesses, and were experiencing increased sales and profits.

In comparison, the <i>Stable and Strategic </i>group (12 percent of the sample) juggled multiple sources of income while carefully planning for long-term, safe business growth. They increased their financial stability over the study period, and they also reported increased quality of life.

For the <i>Off Balance and Seasonal</i> group (9 percent of the sample), unexpected hardships and seasonal cash flow meant that their main priority was keeping their business afloat. In follow-up interviews they expressed an appreciation for the tailored support and guidance they received from their lender to help them weather financial challenges.

Borrowers in the <em>Retrenching</em> group (19 percent of the sample), were most likely to have used their loan to start a new business. While most experienced business growth over the study period, very few reported taking a salary from the business. Nevertheless, they remained confident about their financial future at the end of the study and reported a significant decrease in financial stress.

For those in the Slowly Growing and Optimistic group (17 percent of the sample), key goals for business ownership included fulfilling a specific dream or becoming their own boss. Although the majority experienced increases in sales, most were not able to increase savings, and some had even drained their savings over the study period. Many of these entrepreneurs operated highly specialized businesses with unpredictable cash flows, and were looking for opportunities to diversify their offerings.

With the completion of this research, we have gained invaluable insights into the impact of our services – as defined by our clients. As our organizations look to expand access to high quality, transparent and affordable financial services, it will be crucial to continue to refine our definitions of success, and to iterate and design new products and services to best align with their needs.

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&nbsp;

Beyond Inclusion: How Mission-Based Small Business Lenders in the U.S. Are Evolving Their Definition of Impact

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.

<i>This post originally appeared on the <a href="https://nextbillion.net/does-greater-inclusion-lead-to-financial-health/">NextBillion Blog</a> and is re-posted here with permission.
</i>
What conditions create physical health? We know more now than we ever have—working out, eating lots of vegetables and limiting alcohol intake seem to be healthy decisions. But there is no one agreed-upon set of conditions for physical health and wellness. Rather, there is a body of literature that provides clues about different aspects of health. For instance, nutrition literature makes it clear that broccoli is a better food choice than bacon, and data shows us that doing yoga is healthier than watching TV.

In the same way, the new <a href="http://news.gallup.com/reports/233399/gallup-global-financial-health-study-2018.aspx" target="_blank" rel="noopener">Gallup Global Financial Health Study</a> gives us additional language and data to understand more about what drives different aspects of financial health. No single perspective on financial health constitutes a definitive “theory of everything,” but the new Gallup data contributes significantly to our understanding of how to make financial inclusion work for customers. This dataset comes at the perfect time—right on the heels of the <a href="https://globalfindex.worldbank.org/" target="_blank" rel="noopener">Global Findex</a> launch—and with it, we can start to ask ourselves with humility if financial inclusion is leading to financial health.
<h3>An Unprecedented Look at Personal Finance</h3>
First, some background about the Gallup survey. The financial inclusion field has benefited greatly from excellent surveying and reporting, from <a href="http://financialdiaries.com/about" target="_blank" rel="noopener">financial diaries projects</a> in <a href="http://www.usfinancialdiaries.org/about/" target="_blank" rel="noopener">multiple countries</a> to huge global databases such as the World Bank’s Global Financial Index, or Findex, which gathers and analyzes sex- and age-disaggregated data on account ownership, transaction patterns, account dormancy and much more. MetLife Foundation, in partnership with Rockefeller Philanthropy Advisors, wanted to know even more: the first-hand perspectives of individuals’ financial situations as they experience them.

So MetLife Foundation partnered with Gallup, one of the global leaders in polling and surveys, to get a deeper understanding on several points: how financially secure people are (or are not), the predictors of financial insecurity, and the degree to which people perceive that they have control over their financial lives. Gallup surveyed more than 15,000 people in 10 very different countries, across a range of economies, between January and March 2018 to take an unprecedented look at personal finance and how people perceive their situation.

To gauge <em>financial security</em>, the Gallup pollsters asked two simple questions: first, how long respondents could cover their basic needs (through savings or by selling assets) if they lost their income; and second, whether making repayments against debts does or does not make it difficult for them to pay for other things they need. We recognize of course that financial security is a complex and contextual phenomenon: A person with the same level of income and assets might be financially secure in one country but insecure in another, depending on available social protection safety net services and a host of other variables. Gallup chose those two simple but powerful questions in order to maintain comparability across 10 survey countries (Bangladesh, Chile, Colombia, Greece, Japan, Kenya, South Korea, United Kingdom, United States and Vietnam) that had been chosen for their diversity.

<em>Financial control</em> is the extent to which people perceive that they are in control of and can influence their financial situation. In the Gallup survey, financial control levels are measured as the percentage of respondents who gave a positive response to at least eight out of the 10 dimensions below.<strong> </strong>
<h3><b>Dimensions of Financial Control</b></h3>
<ol>
 	<li>Do you think that no matter what you do, your financial situation will stay the same?*</li>
 	<li>Do you think that you can overcome any financial problem that you might face?</li>
 	<li>When you spend money on something you don’t need, do you usually regret the decision later?*</li>
 	<li>Have you tried to save money in the past, but been unable to do so?*</li>
 	<li>Do you avoid thinking about how you are going to pay for things in the future?*</li>
 	<li>Do you think you will EVER be able to pay back all the money you owe?</li>
 	<li>Do you enjoy planning what you are going to do with your money in the future?</li>
 	<li>Are you satisfied with how much input you have in financial decisions in your household?</li>
 	<li>If you had a financial emergency today, such as a medical emergency, do you think you would be able to find the money to pay for it?</li>
 	<li>Do you have people in your life who can help you financially if you ever need it?</li>
</ol>
*Reverse-scored item.

Finally, to derive predictors of financial insecurity, the Gallup survey cross-tabulated self-reported financial insecurity with demographic data (age, sex, education level, marital status) and with the self-reported degree of perceived financial control to see what patterns might emerge. To dig into all of these indicators (and others), see the full dataset <a href="http://news.gallup.com/reports/233399/gallup-global-financial-health-study-2018.aspx" target="_blank" rel="noopener">here</a>.

In an initial analysis full of surprises, two of the biggest were these: The relationship between account ownership and perceived financial control is weak at best. (See Figure 1). And especially in the emerging markets—places where the financial inclusion community has focused the most attention—people’s access to financial services appears to have little correlation with financial security. (See Figure 2)

In Kenya, for example, 82 percent of people have an account, but only 9 percent are financially secure. And in Bangladesh, 50 percent of people are financially included (that is, have an account), but just 7 percent are financially secure. Even in the United States, which also spends significant philanthropic and government funds to increase financial health, only 33 percent are secure despite the fact that 93 percent have an account.

<em>Figure 1: Account Ownership and Perceived Financial Control</em>

<img class=" size-full wp-image-25662 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/06/figure-1-acct-ownership-and-percd-control.jpeg" alt="Graph of account ownership and perceieved financial control." width="720" height="540" />

<em>Figure 2: Account Ownership and Financial Security</em>

<img class=" size-full wp-image-25663 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/06/fig-2-account-ownership-and-financial-security.jpeg" alt="Graph of Account Ownership and Financial Security" width="720" height="540" />
<h4><span style="color: #ff6600"> </span></h4>
<h3>The Implications for the Financial Inclusion Agenda</h3>
So, does this mean we should give up on financial inclusion? No. This research is a point-in-time assessment and would benefit from being repeated across a wider set of countries and over a longer period, to see how trends in account ownership and financial control and security relate. In addition, account ownership does seem to make clients happy – in response to the survey’s question, “Overall, do you think that using the services of a bank or other financial institution improves your life?” most account owners (bank and mobile) responded positively. That might mean that they appreciate saving time by avoiding queuing to pay simple bills, or by sending or receiving money quickly to and from loved ones.

But though these benefits can be useful, they are not the ultimate goal of financial inclusion. Worse, these findings could also mean that it’s easier to borrow or spend for frivolous things or to lay bets on sports games, which would likely do little to increase feelings of control, and would certainly not boost financial security.

Further, financial inclusion has always been an overly simplistic term. Virtually all definitions of financial inclusion stress the importance of low-income people using a full suite of financial tools that enable them to manage daily cash flows, save and plan for the short and long term, take advantage of opportunities, and protect against risk. Inclusion and account ownership are just the tip of the spear and perhaps have been too much the focus in the field to date.

The balancing act in this field has always been between two related goals. On the one hand, there’s the need to identify the most efficient way to reach the largest possible number of low-income people. And on the other hand, there’s the need to make those products as useful and custom-tailored as possible, enabling clients to grow their businesses, improve their ability to send their children to school, obtain timely medical care, or otherwise respond effectively to their individual life circumstances.

Although much necessary work has been done to walk back the previous over-hyping of microcredit as a silver bullet for poverty alleviation, it seems unwise to over-correct and limit our focus to inclusion, without keeping in mind the intended outcomes. Perhaps it’s time for those of us working in this field to expand our views beyond basic financial tools and to expand or renew our focus on the quality of those tools and the outcomes they enable. Our current nomenclature is not clear or reflective of our shared goals.
<h3>What Comes Next?</h3>
MetLife Foundation requested that Gallup make the dataset publicly available. Gallup has enthusiastically encouraged researchers to use the data and share the results. The Center for Financial Inclusion team is planning to dig through these 15,000 survey responses and produce a brief later this summer, to highlight what the data says about the relationship between financial services use, attitudes toward these services, and financial health. For this deep dive, the subjective nature of the survey—which focuses on perceptions rather than empirical data—presents challenges but also an opportunity to understand the client perspective.

For MetLife Foundation, we want to make sure that our efforts remain ultimately focused on the point of it all: building the capacity of more people around the world to live financially healthy lives. As with physical health, the thinking about financial health is evolving: Different ideas and assumptions from our field will certainly join the food pyramid and other examples of discarded conventional wisdom in the archives of outdated theories. Our job is to continue learning and supporting others to keep doing their best work, too.

This data on financial control and security offers the industry one lens into financial health and wellness—in the same way the Apple Watch might provide a different behavioral nudge toward fitness than the Fitbit or Garmin. With all of these different approaches, we can build an inclusive world that works better to enable positive financial outcomes for end-users. We’re excited to see how this data adds to and catalyzes this conversation on financial health, and we look forward to seeing where these new observations take our industry.

Download the Gallup dataset <a href="http://news.gallup.com/reports/233399/gallup-global-financial-health-study-2018.aspx" target="_blank" rel="noopener">here</a>.

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Does Greater Inclusion Lead to Financial Health? New Research Raises Pointed Questions for the Industry