India’s fintech lending industry has grown rapidly since 2014, with the evolution of new models and approaches to lending. This rapid growth offers the potential for many upsides in the form of <a href="https://www.cgap.org/blog/indian-start-for-digital-credit" target="_blank" rel="noopener noreferrer">easier access to much needed credit and including hitherto excluded consumer segments</a> who may not have the ability to prove their ‘creditworthiness’. In India, as in other parts of the world, the growth in digital lending has been accompanied by a variety of risks. Some of these risks – such as over-indebtedness, poor market practices of aggressive marketing and collection, and pricing – have long been associated with lenders and need to be addressed as a market conduct issue. However, the digital nature of fintech lending poses several new risks that, combined with traditionally known risks, create an environment of poor consumer outcomes and mistrust of the industry.
<h1><strong>Fintech Risk Barometer Study</strong></h1>
While there has been extensive media coverage around several of the fintech lending risks, these cases tend to be anecdotal and do not provide a sense of which risks are highest priority as the industry evolves. To better understand the multitude of risks the Indian fintech lending industry faces, the <a href="https://faceofindia.org/" target="_blank" rel="noopener noreferrer">Fintech Association for Consumer Empowerment</a> (FACE) and CFI partnered to conduct a risk barometer study. The resulting <a href="https://www.centerforfinancialinclusion.org/fintech-lending-risk-barometer-2022-2023">fintech lending barometer report</a> is the first attempt at identifying how risks are perceived by various stakeholders associated with the fintech lending industry in India and is a crucial first step to documenting how risks evolve.

For fintech lenders, this report presents an opportunity to understand the landscape, identify the opportunities and dangers, and plan or correct their course of action. For regulators, supervisors, and policymakers, the survey findings signal what areas within the Indian fintech industry need to be more closely examined and addressed with urgency.

The fintech lending barometer study followed a mixed methods approach. First, a survey was used to gather initial perceptions of risks, which then was followed by a series of qualitative interviews with select respondents to further understand how emerging risks impact consumer lives. For each risk, the survey asked participants to rank 23 risks on a scale of 1-7, with one being the lowest severity risk and seven being the highest. The survey also captured comments and feedback from survey participants on these risks and the top three opportunities.

<em>Top 10 Risks Identified by Survey Respondents</em>

<img class="alignnone wp-image-45643" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/01/Screenshot-2023-01-13-at-2.02.11-PM.png" alt="" width="666" height="775" />

The top three risks identified were unscrupulous fintech lenders, rising cyber fraud and crime, and issues around data privacy. The report is being released at the <a href="https://inclusivefinanceindia.org/" target="_blank" rel="noopener noreferrer">Inclusive Finance India Forum 2023</a> and can be accessed <a href="https://www.centerforfinancialinclusion.org/fintech-lending-risk-barometer-2022-2023">here</a>.
<h1><strong>Consumer Protection Implications</strong></h1>
<blockquote class="pullquote--right">Industry associations have an inherent advantage in gathering early insights on consumer complaints and experiences from their members and in getting inputs on market trends.</blockquote>
Kate McKee, former senior policy advisor at CGAP, who pioneered thinking on consumer protection for inclusive finance, often referred to the three legs of the ‘<a href="https://www.mfw4a.org/sites/default/files/resources/Kate_McKee_english.pdf" target="_blank" rel="noopener noreferrer">consumer protection stool’</a> –  regulation, market monitoring and self-regulation, and building consumer awareness – where each of the three legs must be stable in order to responsibly and reliably provide for consumers. While the Reserve Bank of India has been proactive as a regulator in issuing guidelines on digital lending, there is a role to be played by industry associations like FACE and others in enabling market monitoring. Industry associations have an inherent advantage in gathering early insights on consumer complaints and experiences from their members and in getting inputs on market trends. For instance, they may hear about specific instances of fraud from their members which can erode the reputation of the industry in general. This provides associations with a unique opportunity to identify emerging risks and either escalate them to supervisors or establish responsible market conduct. This in turn can boost trust in businesses and offer long term value. For supervisors, this interaction with industry associations can help them stay abreast of market developments and assists with considerations for investing in appropriate suptech tools depending on the nature of risk identified.

A host of market monitoring tools exist and several are summarized in <a href="https://www.cgap.org/topics/collections/market-monitoring-tools" target="_blank" rel="noopener noreferrer">this toolkit</a> by CGAP. However, effective market conduct supervision depends on timely identification of market risks and reviewing how these risks evolve with market growth. CFI’s consumer protection strategy focuses on strengthening market conduct supervision by researching emerging risks and working with partners who can elevate these risks to supervisors. This partnership with FACE is a step towards this goal and offers insights for industry associations of digital lenders in other markets.

Matters of Urgency: Insights From a Fintech Risk Barometer Study

India has seen a rapid rise in fintech lending since 2014 and the industry continues to evolve with the launch of new models and approaches to lending. Yet, as the industry has scaled and diversified, so have the risks.

The Center for Financial Inclusion (CFI) and the Fintech Association for Consumer Empowerment (FACE) are pleased to partner on this risk barometer study that aims to create a systematic baseline of emerging risks in order to help observe how risks change as the industry matures. The study is part of a market monitoring exercise to understand the range of risks and how they are perceived by multiple stakeholders in the Indian fintech lending sector and this report intends to contribute to the fintech lending industry as it evolves to maturity, combining innovation, inclusion, and impact.

Fintech Lending Risk Barometer 2022-2023

This report and infographic examine data from the 250+ eligible fintech applicants from the fourth Inclusive Fintech 50 competition to better understand the state of early-stage fintechs. CFI analyzes all applications to identify trends and to find innovations with disruptive potential. The massive scale that is only possible with digitalization matters greatly to the financial inclusion agenda, and this year’s IF50 applicants are already collectively reaching 54 million people, many of whom were previously underserved, across 101 countries of operation. The fintechs are young and small now, but as we’ve seen in past years, they grow to reach millions more people and raise millions more in investment. However, despite this tremendous outreach and potential, there are also areas that require attention: funding and gender gaps, inconsistent practices around data privacy and consent, and limited data collection for outcomes management.

Insights from the 2022 Inclusive Fintech 50 Applicant Pool

About two dozen leaders of inclusive finance organizations, impact investors, and analysts from around the world convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the COVID-19 pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.

Participants included practitioners working, building, promoting, advocating, and leading commercial financial inclusion providers in Africa from a private sector perspective. As such, they are close to the reality of the people they are serving or invest in and their insights are anchored in the on-the-ground dynamics of the African market in the wake of COVID. Here is what they are telling us.
<h1><strong>Impact of COVID on African MFIs, Banks, and Clients</strong></h1>
<blockquote class="pullquote--right">Ongoing crises in Africa are not uniquely due to COVID-19, but rather are a conjunction of many crises during the last several years.</blockquote>
The CEOs of leading African inclusive financial services organizations participating at the Lehigh workshop uniformly agreed that ongoing crises in Africa are not uniquely due to COVID-19, but rather are a conjunction of many crises during the last several years. COVID, in fact, did not affect the continent much health-wise; instead, the impact came more from restrictions on domestic and cross-border mobility, which caused substantial economic downturns, especially in countries and regions dependent on imports and exports. At the same time, climate change effects such as droughts, floods, and ruined crops have created substantial <a href="https://www.fao.org/3/cb0258en/CB0258EN.pdf" target="_blank" rel="noopener noreferrer">threats to food security</a> and increased social unrest in many parts of Africa. Compounding the turmoil, security crises fueled by terrorism, refugees, and displaced populations (<a href="https://www.unrefugees.org/emergencies/sahel/" target="_blank" rel="noopener noreferrer">millions in the Sahelian countries</a>) have also significantly destabilized Sub-Saharan Africa.

Aiming to alleviate rapid <a href="https://www.ada-microfinance.org/sites/default/files/inline-files/Synthesis_Microfinance%20Clients%20Facing%20the%20COVID-19%20Crisis_EN_1.pdf" target="_blank" rel="noopener noreferrer">deterioration in household financial positions</a> during the pandemic, governments and central banks across Africa issued loan repayment moratoriums, which squeezed lenders’ liquidity, including mainstream commercial banks but especially microfinance institutions (MFIs). Nevertheless, even though the rate of late or restructured loan repayments from clients—the credit risk ratio—<a href="https://www.mf-rating.com/wp-content/uploads/2021/10/COVID-19-Impact-on-FSPs.pdf" target="_blank" rel="noopener noreferrer">increased everywhere</a>, debt write-offs among African MFIs have not been as bad as feared. Overall, the sector has shown <a href="https://www.suerf.org/suer-policy-brief/38105/africa-and-covid-19-can-the-financial-sector-stay-on-course-for-a-green-and-digital-future" target="_blank" rel="noopener noreferrer">substantial resilience in Africa</a>, although the situation remains tenuous; “seriously fragilized” is how one CEO at the workshop described it.

As for impacts on MFI clients, a stark distinction is apparent between urban and rural settings. Urban clients have suffered most due to lockdowns affecting micro and small enterprises. Many rural clients, by contrast, fell back into an agricultural self-subsistence economy during a season or two, as there were no markets to sell to. Low-income households in both settings saved as much as they could during the pandemic and reduced spending. Workshop participants at Lehigh uniformly agreed that African MFIs’ clients, especially the most vulnerable ones, were—perhaps more than ever—remarkably resilient and able to cope.
<h1><strong>Crisis Begets Opportunities</strong></h1>
As is often true in times of crises, opportunities appear. Workshop participants pointed out that in Africa, new opportunities for MFIs and lower-income clients came directly from constraints dictated by lockdowns. Logistical barriers <a href="https://cdn.odi.org/media/documents/Africa_trade_and_Covid19_the_supply_chain_dimension.pdf" target="_blank" rel="noopener noreferrer">hindered possibilities for exporting goods</a>, including agricultural products, and for importing things like fertilizer and animal feed. Trade in services plummeted as people stopped moving and spending, and tourism collapsed in countries like Kenya where incomes are especially dependent on spending by tourists.

However, from these difficulties, layered on top of effects from climate change, new behaviors are emerging in various parts of Africa. Some farmers have decided to shift to organic production practices like agroecology and raising chicken and pigs using only farm-produced feed and farm waste, saving on expensive imported inputs. Similarly, farmers unable to export have increased selling locally in neighboring towns, expanded direct selling along major roads, or began selling <a href="https://blogs.lse.ac.uk/africaatlse/2020/06/19/what-strategies-do-traders-use-food-survive-covid19-lockdown-kampala/" target="_blank" rel="noopener noreferrer">door-to-door</a> where possible. Others are leveraging <a href="http://www.xinhuanet.com/english/2020-05/27/c_139092514.htm" target="_blank" rel="noopener noreferrer">digital approaches</a>, including e-commerce platforms, social media, and mobile payments. In short, because of COVID restrictions, many farmers in Africa adopted organic, sustainable, and digital agriculture practices.
<blockquote>Because of COVID restrictions, many farmers in Africa adopted organic, sustainable, and digital agriculture practices.</blockquote>
Many people in Africa also changed their consumption habits, switching to local producers for vegetables, meats, and other staples. Circular economy trends <a href="https://www3.weforum.org/docs/WEF_Five_Big_Bets_for_the_Circular_Economy_in_Africa_2021.pdf" target="_blank" rel="noopener noreferrer">appeared in a wide range of sectors</a> – including agri-food, textiles, fashion, electronics – and also in packaging. Consumers are also <a href="https://www.africa.com/covid-19-increases-brand-sustainability-awareness-shifts-consumer-behaviour-in-sub-saharan-africa/" target="_blank" rel="noopener noreferrer">moving towards sustainable brands</a>, thanks both to heightened awareness of climate effects and to experiences in lockdowns. Surprisingly, the African response to COVID has been to adopt more sustainable norms and practices in agriculture and consumption – a fascinating resilience outcome.

Another substantial trend evident in these times of security crises and risks is <a href="http://cdn-odi-production.s3-website-eu-west-1.amazonaws.com/media/documents/ODI-YFLP-Youth-led_digital_innovation_and_resilience_during_Covid-19-13AugFinal.pdf" target="_blank" rel="noopener noreferrer">high rates of youth entrepreneurship</a>. This is occurring across the social spectrum –among youth from both rural and urban communities, as well as those with diplomas and those who did not finish school. Youth are choosing not to migrate and instead are staying put and creating non-traditional businesses and entering new types of apprenticeships, such as small enterprises in agriculture transforming crops or raw materials, and in <a href="https://www.forbes.com/sites/davidrvetter/2021/12/14/meet-the-african-green-entrepreneurs-showing-the-west-how-its-done/?sh=7b03d50551cb" target="_blank" rel="noopener noreferrer">green economy enterprises</a> such as renewable energy, recycling, utilizing waste, or addressing pollution. This trend is strongly supported by national and local governments, as well as by civil society and corporate social responsibility initiatives, which are promoting and funding incubators and seed capital investments, as well as—in collaboration with MFIs and banks—credit guarantee mechanisms, all aimed at fostering the startup and scaling phases of the young enterprises of Africa’s increasingly entrepreneurial youth.

Africa has the world’s largest population share of youth and the potential is enormous. Often discussed, enhancing youth entrepreneurship has unfortunately seemed a somewhat quixotic policy quest for decades in Africa. But remarkably, the consensus at the Lehigh workshop was that this time the initiatives seem to be working and helping fulfill the aspirations of many young people to be autonomous and contribute to their communities and local economies. Additionally, many African <a href="https://www.afdb.org/en/news-and-events/press-releases/lionesses-business-confidence-report-speaks-high-levels-resilience-africas-leading-women-entrepreneurs-despite-covid-19-49847" target="_blank" rel="noopener noreferrer">women entrepreneurs</a> have proven to be very resilient and are growing their businesses due to COVID.
<h1><strong>Acceleration of Digital Inclusive Finance in Response to COVID</strong></h1>
The <a href="https://www.centerforfinancialinclusion.org/digitally-reshaping-inclusive-financial-services-in-the-wake-of-covid-19">digital revolution in inclusive financial services</a> is unquestionably progressing quickly throughout Africa in the wake of COVID, including West and Francophone Africa and rural areas that have been neglected until recently.

While financial access in Africa remains low, mobile penetration is high, <a href="https://data.worldbank.org/indicator/IT.CEL.SETS.P2?locations=ZG" target="_blank" rel="noopener noreferrer">exceeding 90 percent</a>. Due to COVID restrictions on mobility, mobile phones have been indispensable not only for communication but also for domestic and international remittances. Facing limited access to markets coupled with security risks in using cash for transactions, farmers, cooperatives, and food processing companies accelerated their embrace of <a href="https://www.brookings.edu/blog/africa-in-focus/2021/08/16/digital-technology-and-african-smallholder-agriculture-implications-for-public-policy/" target="_blank" rel="noopener noreferrer">digital marketplace platforms</a>. Survey evidence suggests that most African micro and small enterprises did too which <a href="https://fbj.springeropen.com/articles/10.1186/s43093-022-00154-4" target="_blank" rel="noopener noreferrer">improved their financial resilience</a>. Banks and MFIs throughout Africa also are going digital and embracing “<a href="https://thecalabashnewspaper.com/afrimoney-gtbank-launch-bank-to-wallet-wallet-to-bank-promotion/" target="_blank" rel="noopener noreferrer">bank to wallet, and wallet to bank</a>” transactions and agency banking. Many banks and MFIs are teaming up to deliver financial services jointly or as agents to <a href="https://www.brookings.edu/blog/africa-in-focus/2021/12/14/mobile-financial-services-can-increase-impacts-of-microfinance-organizations-but-the-story-is-more-complicated-than-we-think/" target="_blank" rel="noopener noreferrer">deepen outreach to clients and improve cost efficiency</a> – for example by reducing the need to operate separate branches everywhere. Governments have also gone more digital by ramping up <a href="https://www.worldbank.org/en/results/2021/04/13/prioritizing-the-poorest-and-most-vulnerable-in-west-africa-togo-s-novissi-platform-for-social-protection-uses-machine-l" target="_blank" rel="noopener noreferrer">mobile money transfers from social protection programs</a> during COVID.

Moving beyond financial services, agricultural value chains are rapidly leveraging the high mobile penetration by also digitizing delivery services, distribution channels, electronic learning, and messaging at scale to reach out to remote populations (e.g., for health, financial education, agricultural practices, prices, weather warnings), enhancing inclusion and informed decision making.
<h1><strong>Financial Inclusion’s Green Future in Africa</strong></h1>
The African MFI leaders at the workshop reflected on how their clients fared through the pandemic and other recent crises. Uniformly, they agreed clients responded with <a href="https://www.centerforfinancialinclusion.org/does-financial-inclusion-boost-borrowers-resilience-three-lessons-from-the-pandemic">resilience</a>, innovative abilities to adapt, and incredible capacities to seize opportunities to not just recover but even advance. As such, African MFIs must follow the dynamics of their clients and deliver products and services that fit customers’ new needs. Client centricity is essential to meet client needs but is also a key element of client protection in light of <a href="https://www.cgap.org/sites/default/files/publications/slidedeck/2022_02_Slide_Deck_DFS_Consumer_Risks.pdf" target="_blank" rel="noopener noreferrer">heightened risks for digital finance consumers</a>.

Financial institutions also need to better understand the market intricacies and client opportunities in the green (micro)economy and develop financial products accordingly, partnering with those who can deliver services and technical advice to assist the transformation. Working towards an ecosystem approach to deliver <a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks">green inclusive financial services</a> in an efficient, secured, synergetic, and sustainable manner will be the way forward.
<blockquote class="pullquote--left">Working towards an ecosystem approach to deliver green inclusive financial services in an efficient, secured, synergetic, and sustainable manner will be the way forward.</blockquote>
Green inclusive finance ecosystem platforms will surely develop in Africa. However for that to happen, the impact investing sector and climate finance will need to collaborate, which would be a giant step forward as the two sectors have largely ignored the other for the last decade. Impact investors will need to learn how to invest in the green microeconomy as a mainstream target. In parallel, climate finance—so far largely directed elsewhere—will have to understand that unless communities, especially the most vulnerable among them, benefit significantly from environmental rehabilitation, preservation, and protection of biodiversity, sustainable development is not possible.

In Africa, impact investment remains an emerging sector, focused—rightly so—on financial inclusion and agriculture. Climate finance and green inclusive finance are at infant stages. Supporting, from the funding side, post-COVID initiatives from youth and local communities in climate adaptation, will be the next challenge and opportunity for Africa. And inclusive finance stakeholders should play significant roles in close partnership with others in that ecosystem.

The African inclusive finance leaders at the Lehigh workshop collectively sent a very positive and energetic message to their peers. During these crisis times, clients in Africa have shown high levels of resilience and of capacity to overcome. They have developed innovative strategies in the green economy. Financial institutions should accompany them by being client centric in product and service development, in using digital delivery channels, and in working as a collaborative ecosystem to manage new digital risks and protect customers. Africa is a vulnerable continent in the face of climate change, but it can be the most resilient one if we act together.

&nbsp;

<em>The authors were panelists at the Lehigh University workshop and this note is the result of workshop discussions and subsequent analysis. Participating leaders from African MFIs included Anne Marie Chidzero, Chief Investment Officer at FSD Africa Investements, Kimanthi Mutua, founder of KREP, the first microfinance institution in Africa to be transformed into a full-fledged commercial bank, now named SIDIAN Bank where Kimanthi has been CEO and remains a board member, and Pierrette Kouakou, Managing Director of FIN’ELLE in Cote D’Ivoire. Views expressed are the authors’ and not necessarily those of other participants.</em>

Post-COVID Crisis & Opportunity in African Inclusive Finance

COVID-19 created extraordinary challenges for Indian households, businesses, and the economy. Lockdowns triggered economic contractions vastly surpassing the initial trade shocks, travel restrictions, and other measures. Millions of people migrated from urban to rural areas. The downturn rapidly reduced working hours and raised unemployment. The consequences and survival tactics for households and businesses varied by sector and state, exacerbating existing disparities for low-income and rural households.

These were among the challenges discussed by about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of The Future of Microfinance by Brookings Institution Press in 2020.

This blog post is extracted from a <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Indian%20Financial%20Inclusion%20Sept%202022.pdf" target="_blank" rel="noopener noreferrer">more detailed Policy Brief</a>.
<h1><strong>Shock for Clients and MFIs </strong></h1>
The pandemic triggered new challenges for both clients and microfinance institutions (MFIs). <a href="https://www.dvara.com/research/wp-content/uploads/2020/06/COVID-19-Impact-on-Daily-Life-CIDL-Survey.pdf" target="_blank" rel="noopener noreferrer">Evidence</a> points to clients’ precipitous loss of income, depletion of meager savings, increasing indebtedness, and difficult coping strategies that risk pushing millions back into poverty. MFIs had to quickly adapt, which accelerated trends toward digitalization and virtual connectivity with clients. Households struggled to understand the implications of MFIs’ loan repayment moratoriums and confronted hard choices between daily needs, repaying loans, and conserving cash for an uncertain future.

Early in the outbreak, MFIs were hit hard. The microfinance model relies on frequent physical interaction with customers. Lockdowns brought operations to a standstill and repayments came under pressure, creating liquidity issues, particularly for non-bank (NBFC) MFIs.

The impact was stark:
<ul>
 	<li>Disbursements from April to June 2020 fell to Rs 61.9 billion (~$800 million) compared to where they had been pre-COVID at Rs 711.9 billion (~$9.2 billion).</li>
 	<li>Portfolio at risk (PAR) rose; PAR&gt;30 days peaked at 22 percent in June 2021 and has improved considerably since.</li>
 	<li>Unemployment jumped to 24 percent in 2021.</li>
 	<li><a href="https://mospi.gov.in/documents/213904/416359/3_Draft_press_note_Migration_PLFS_2020_21.docx1655189017846.pdf/c85c0fe3-6b5a-b704-7683-7db7acd9fa42" target="_blank" rel="noopener noreferrer">The Periodic Labour Force Survey from July 2020–June 2021</a> showed a migration rate of 48 percent among urban women in India and 23 percent among urban males, more than half of whom returned to their rural homes; possibly the country’s worst reverse migration.</li>
</ul>
<h1><strong>Policy Responses</strong></h1>
The public sector led crisis response, mitigating damage and helping relaunch the economy. Since 2020, both the Reserve Bank of India (RBI) and the Government of India have taken critical actions for microfinance clients and institutions.

RBI’s twin approach included liquidity injection and restructuring. RBI allowed lenders to offer moratoriums on loan repayments and directed maintaining an account’s status in credit bureau reporting while in moratorium to protect customers’ credit histories and access to credit in the future. The moratorium severely stressed NBFC-MFIs. A survey amongst Microfinance Institutions Network (MFIN) members in June 2021 found NBFC-MFIs had moratorium for approximately one-third of repayment installments—creating tremendous pressure to manage liquidity given that NBFC-MFIs rely on customer repayments to repay their own debt obligations. And with fixed salary and infrastructure costs, most MFIs have little leeway to quickly change operational costs.
<blockquote class="pullquote--right">Non-bank MFIs had moratorium for approximately 1/3 of repayment installments, creating tremendous pressure to manage liquidity.</blockquote>
Additionally, the RBI’s August 2020 "<a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&amp;Mode=0" target="_blank" rel="noopener noreferrer">Resolution Framework for COVID-19 Related Stress</a>" was a one-time resolution for loans not in default beyond 30 days. And later, RBI allowed lenders to restructure individual and small business loans. Both resolutions provided much-needed relief to microfinance customers.

For MFIs, RBI also launched special liquidity de-stressing schemes and relaxed loan provisioning requirements. The Ministry of Finance supplemented the efforts with partial credit guarantees, an “ex-gratia” scheme to pay the difference between compound and simple interest for six months for specified loan types, and the <a href="https://www.india.gov.in/spotlight/pm-street-vendors-atmanirbhar-nidhi-pm-svanidhi" target="_blank" rel="noopener noreferrer">PM Svanidhi scheme</a> of lending and credit guarantees to assist street vendors. However, while helpful, these measures could not fully relieve lenders’ liquidity challenges.

The situation improved in September 2020 as customers’ repayments resumed. In parallel, policymakers recognized the significance of microfinance for inclusive growth, giving a strong recovery signal to the market.

But the microfinance sector entered the 2021–2022 financial year facing an uncertain and unprecedented impact of COVID-19: a second wave of infections and partial lockdowns again hurt customers’ livelihoods and limited lenders’ operational mobility. The government developed <a href="https://www.ncgtc.in/en/products-n-services/cgsmfi" target="_blank" rel="noopener noreferrer">another credit guarantee scheme</a> for a yet broader array of MFIs, building on suggestions from MFIN, which worked closely with the Ministry of Finance.

The government also implemented additional fiscal measures, such as:
<h3><strong>Relief for households, including:</strong></h3>
<ul>
 	<li>In-kind (food and cooking gas) and cash transfers to senior citizens, widows, disabled, farmers, and women Jan Dhan Account holders (a national savings scheme for previously unbanked)</li>
 	<li>Insurance coverage for healthcare workers</li>
 	<li>Wage increases for those working under the <a href="https://nrega.nic.in/netnrega/mgnrega_new/NREGA_home.aspx" target="_blank" rel="noopener noreferrer">Mahatma Gandhi National Rural Employment Guarantee Act</a> and support for building and construction workers</li>
 	<li>Collateral-free loans to self-help groups</li>
 	<li>Reduced retirement fund contributions</li>
 	<li>Employment opportunities for migrant workers</li>
</ul>
<h3><strong>Relief for micro, small and medium enterprises (MSMEs), including:</strong></h3>
<ul>
 	<li>Collateral-free loans with a 100 percent guarantee</li>
 	<li>Subordinate debt for stressed MSMEs with partial guarantee</li>
 	<li>Partial guarantees for public sector banks on loans to NBFCs, housing finance companies, and MFIs</li>
 	<li>A fund of funds for equity infusion into MSMEs</li>
 	<li>Additional support to farmers via concessional credit</li>
</ul>
<h3><strong>Regulatory and compliance measures, including: </strong></h3>
<ul>
 	<li>Postponing tax-filing and other compliance deadlines</li>
 	<li>Reduced penalties for overdue goods and services tax filings</li>
 	<li>Modified government procurement rules</li>
 	<li>Faster clearing of MSME dues</li>
 	<li>Insolvency and bankruptcy code-related relaxations for MSMEs</li>
</ul>
The combination of these extraordinary fiscal and monetary measures, backed by the world’s largest vaccination program, helped the Indian economy mitigate the COVID meltdown. By March 2022, the microfinance industry showed clear signs of recovery: loan disbursements returning to pre-COVID levels; repayments above 95 percent; and no MFIs declaring default during the pandemic’s two years.
<h1><strong>Financial Institution Responses</strong></h1>
In parallel, lenders faced daunting challenges in managing ongoing connections with customers, continuing operations amidst re­strictions, ensuring employee safety, managing liquidity to cover operational costs and debt obligations, and adapting operations to accelerate the use of mobile phones and digital pay­ments. Lenders needed to balance ex­pectations among customers, employees, and investors, while continuously weighing multiple and rapidly changing variables around the unpredictable pandemic, lock­downs, and economic recovery.
<blockquote class="pullquote--right">While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing.</blockquote>
While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing. Customers found it difficult to understand how the moratorium would impact their repayments and costs and struggled to make informed choices. Restrictions on mobility and group meetings made explaining even harder for lenders. Customers also questioned—rightly so—the logic and ethics of accrued interest; they felt repayment delays were beyond their control, entirely attributable to the pandemic. Varied approaches amongst the lenders, for example about interest accrual, revising loan tenure, and installment amounts, and timing of interest collection during the moratorium, further confounded the issue. Lenders and MFIN made several efforts such as <a href="https://mfinindia.org/Resources/videos" target="_blank" rel="noopener noreferrer">audio-visuals</a>, direct calling to customers, awareness campaigns, and dedicated mobile apps catering to specific customer needs. Nevertheless, an found that one-fifth of respondents reported not fully understanding the moratorium. In any case, given customers’ uncertainty, lack of safety nets, and need to preserve cash for essential expenses, more than 90 percent opted for a moratorium.

Another critical challenge was ensuring fair and respectful interaction with customers. Higher delinquencies, pressure for collections on the lenders' side, customer hardships, and confusion about loan information created stressful interactions. In an MFIN survey in March 2021, 9 percent of customers reported experiencing employee misbehavior within the previous six months related to loan recovery. Handling such tensions required a balanced approach combining transparency, patience, and empathy. This meant educating customers about the moratorium and implications of their choices and using objective criteria for assessing stressed customers.
<blockquote>Handling tensions between employees and customers required a balanced approach combining transparency, patience, and empathy.</blockquote>
Maintaining microfinance’s classic close and frequent interaction with customers while following COVID protocols re­quired new approaches. Lenders ex­tensively turned to live or automated phone calls. To ensure employ­ees interacted appropriately with customers, lend­ers organized special training on customer interac­tions and phone etiquette. MFIN also developed a learning video for field-level employees focusing on best-practice interactions considering COVID. For field interactions, lenders split groups and met smaller subgroups in larger open spaces. Further, many MFIs supported customers with emergency aid for health, food, and essential supplies. In parallel, at the employee level, MFIs added controls to monitor repayments, aiming to avoid misinformation, misbehavior, forced collections, and embezzlement by field-level employees.

Lenders also expanded mechanisms for informing customers and addressing queries and grievances, including <a href="https://mfinindia.org/ourwork/clientprotection" target="_blank" rel="noopener noreferrer">MFIN's Customer Grievance Redressal Mechanism (CGRM)</a>, which supports customers in resolving complaints. Both MFIN and member NBFC-MFIs leveraged the CGRM to take customer feedback, understand specific risks, and do topical surveys. The major reasons for complaints included insurance claims settlements, disputes with credit reports, and loan repayments or disbursements. MFIN then used these customer voices to design awareness videos to address common queries and concerns. Customers also have access to regulatory mechanisms and the RBI’s newly expanded <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&amp;Mode=0" target="_blank" rel="noopener noreferrer">Ombudsman program</a> for grievance escalation.
<h1><strong>Addressing Over-indebtedness</strong></h1>
Over the years, customer over-indebtedness has been a paramount challenge for the industry. Regulatory and industry standards set explicit norms to address indebtedness through caps on multiple lending and total level of customer indebtedness. However, the scale and prognosis of the problem are complex and imprecise. Guestimates of over-indebtedness in India vary from 2 to 25 percent. Measurement challenges include lack of evidence on income (due to assessment challenges), unknown actual indebtedness levels given informal and formal credit reporting that silos different types of lending, and high levels of loan repayments. <a href="https://www.dvara.com/research/wp-content/uploads/2017/01/When-is-Microcredit-Unsuitable-Guidelines-for-Lending.pdf" target="_blank" rel="noopener noreferrer">Research</a> and anecdotal evidence suggest low-income households take loans and adjust expenses to repay existing loans. Group liability can also mask customer repayment stress. As such, over-indebtedness remains a core issue, and brings reputational, political, regulatory, and credit risks to the industry, undermining trust in microcredit providers and increasing risks for customers.

Despite these challenges, in recent years, the industry in India has maintained satisfactory performance in meeting regulatory standards on indebtedness. Equifax data for March 2021, on over 60 million customers with active microcredit loans, showed that 70 percent had a relationship with only a single lender, and 74 percent had loans outstanding of Rs 50,000 or less (~$650).
<h1><strong>Conclusions</strong></h1>
Five overarching lessons can be taken from the COVID crisis in the Indian microfinance sector:
<ol>
 	<li><strong>Severe shock cannot be met by institutions on their own and requires both monetary and fiscal support to avoid systemic instability.</strong> Support was provided swiftly and decisively by the RBI and Government of India, working closely with self-regulatory organizations and microfinance lenders.</li>
 	<li><strong>Capacity</strong> <strong>building for MFI customers and employees is critical. </strong>Customers demonstrated tremendous adaptability to new conditions, including lockdowns, digital payments, and lenders’ new customer service approaches. However, lenders needed sustained efforts in capacity building for customers and employees to help them adjust.</li>
 	<li><strong>Customers maintained resilience to economic shocks.</strong> Microfinance clients’ activities are typically integral to community life, like selling vegetables, groceries, or other core consumption items, so they are less affected by macroeconomic shocks.</li>
 	<li><strong>Customers value MFIs that are dependable, support clients, and provide responsible financial services.</strong> During the crisis, customers worked carefully with microfinance providers to avoid triggering adverse repayment records that would jeopardize future access to financial services.</li>
 	<li><strong>MFIs and their investors need to set realistic expectations for institutional performance amid unprecedented crises</strong>. During the pandemic, institutions that were responsive to individual client situations balanced institutional needs with client realities through repayment delays, extending loan tenures, and providing new loans. Institutions in India that responded with empathy during the crisis have been rewarded with higher client retention, loyalty, and overall improved recovery post-pandemic.</li>
</ol>

Indian Financial Inclusion during COVID and Recovery: Public Policy to the Rescue

Throughout the COVID-19 pandemic, people, businesses, and governments across Asia were able to access a wide array of financial services, which proved to be a critical resource. Lockdowns accelerated the shift towards digital payments. Households relied on financial services to stay resilient, access their savings, pay bills, conduct their business, receive social payments, and pay government fees. Many financial institutions across Asia responded quickly to the socio-economic challenges facing their clients and their own institutional survival.

Perspectives and lessons learned from Asia, by far the largest regional market for inclusive financial services, were of central interest for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.

This blog post is excerpted from a more <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Perspectives%20from%20Asia%20Aug%202022_0.pdf" target="_blank" rel="noopener noreferrer">detailed policy brief</a>.
<h1><strong>Cross-regional Commonalities</strong></h1>
Clients demonstrated agility and resiliency. However, recovery is uneven across Asia and globally. Many households face greater vulnerability, with the World Bank estimating 50 million to 200 million people falling back into poverty of less than $2 per day. <a href="https://cdn.finca.org/wp-content/uploads/20220804185511/Profiling-the-Most-Vulnerable_Data-Summary.pdf" target="_blank" rel="noopener noreferrer">Research by FINCA International</a> shows that 50 percent of their clients skipped meals to cope.

Discussion among workshop participants identified several cross-cutting takeaways from the Asian financial institutions that successfully helped their clients weather the pandemic.

<strong>Product offerings that support consumers:</strong>
<ul>
 	<li>Financial service providers (FSPs) that focused on their clients and tailored solutions rebounded faster. This required dynamic leadership, team cohesion, quick decisions, and clear communications to adapt to fast-changing realities.</li>
 	<li>FSPs offering diverse ranges of services—especially payments, deposits, loans, and in some cases insurance—fared better.</li>
 	<li>Lockdowns accelerated digital financial services. Digital payments provided lifelines for buying and selling essential goods and services. In parallel, combining physical and digital outreach enabled FSPs to engage with clients, monitor lending and liquidity, and manage costs.</li>
 	<li>Despite predictions that households would deplete savings, in some countries deposit levels stabilized and even increased while remittances and government-to-person payments increased.</li>
 	<li>Embedded finance—e.g., lending for agricultural value chains, wholesale-retail businesses, consumer purchases, and elsewhere throughout the supply chain—is resilient and growing.</li>
</ul>
<strong>Managing funding:</strong>
<ul>
 	<li>Managing liquidity and avoiding over lending were critical for FSPs to stay solvent. Deposit-taking institutions proved more resilient, with deeper liquidity. Recognizing the threat, multiple central banks and governments provided liquidity measures across Asia and the Pacific.</li>
 	<li>International investors and lenders restructured funding and provided new lines of credit or equity infusions to their FSP partners in the region, easing liquidity constraints.</li>
</ul>
<strong>Role of government:</strong>
<ul>
 	<li>Across the region, central banks and governments played key roles. Successful interventions include liquidity programs for banks and clients, expanded government-to-person payments, consumer protection and data privacy measures, loan restructuring, and fraud prevention especially for the growing online lending sector.</li>
</ul>
<h1><strong>Perspectives from China</strong></h1>
Micro, small, and medium-sized enterprises (MSMEs), especially in services, were hit hardest by lockdowns in China, resulting in bankruptcies and job losses. The government supported MSMEs mainly via tax reduction and financial regulators directing Chinese banks to increase lending to MSMEs. According to the People’s Bank of China, as of May 2022, MSME lending grew <a href="https://www.tellerreport.com/business/2022-05-26-central-bank--promote-the-establishment-of-a-long-term-mechanism-for-financial-services-for-small-and-micro-enterprises-who-dare-to-lend--willing-to-lend--and-will-lend.BkxyEO2Dc.html" target="_blank" rel="noopener noreferrer">20 percent</a> year-on-year for 24 consecutive months from April 2020.

However, expansion by Chinese banks might have a devastating effect on traditional non-banking lenders to MSMEs, including microfinance institutions (MFIs). With non-bank lenders’ costs of funding (around <a href="http://www.pbc.gov.cn/en/3688006/index.html" target="_blank" rel="noopener noreferrer">6–7 percent annually</a>) higher than banks (averaging 5.24 percent in April 2022) they will struggle to compete and become more vulnerable to shocks. Already, many non-bank lenders are confronting governance issues and rising non-performing loans. As government policies on MSME lending ease with pandemic recovery, banks are expected to slash MSME lending.

Banks withdrawing and non-bank lenders being more vulnerable portends a looming credit crunch. Institutional reforms for struggling FSPs, including upgrading fintech capacity, will be crucial to maintain a competitive MSME financing market. In parallel, support could include subsidies directed towards MSMEs and their employees, and extending low cost on-lending from China's central bank for agricultural and MSME financing to non-banking financial institutions.

Recovering from the pandemic, China is well placed to continue impressive financial inclusion growth given rapid development of internet infrastructure, expanding use of big data, and widespread adoption of new credit risk models incorporating broader sets of factors in lending decisions. Combining online and offline client interaction can be a potent strategy to reach MSME clients, especially in remote or rural areas. Further, insurance could be expanded, as could value chain financing, given the growth of the agriculture sector and consumer food value chains.
<h1><strong>Perspectives from India</strong></h1>
In India, evidence points to precipitous loss of income, depletion of savings, increasing indebtedness, and difficult coping strategies that may bring millions back to poverty. The public sector led the crisis response; both the Reserve Bank of India (RBI) and the government undertook critical actions, mitigating damage to MFIs, their clients, and the economy. Examples include RBI’s swift injection of new liquidity, rules to restructure loans and ease provisioning requirements, and a moratorium on loan repayments and interest payments.

Even so, loan repayments faltered, creating liquidity issues, particularly for non-bank MFIs (NBFC-MFIs) that did not receive moratorium on their own loans from lenders. A survey of Microfinance Institutions Network (MFIN) members in June 2021 found that just over a third of NBFC-MFIs received moratoriums. In response, the RBI and other government entities issued new lines of credit, guarantee programs, and other financial support, often designed in close collaboration with finance sector organizations like MFIN.

Nonetheless, MFIs faced daunting, even existential, challenges: operating amidst lockdowns and sustaining connections with customers; ensuring employee safety; managing liquidity to cover operational costs and debt obligations; and accelerating use of mobile phones and digital payments. MFIs also combatted misinformation on social media and scaled-up mechanisms to respond to client queries and grievances. Many supported customers with emergency aid for health, food, and essential supplies.

By March 2022, as the crisis eased, the RBI opened a new chapter and revised regulations. Now, all entities doing microfinance lending­—whether bank or NBFC-MFI—will operate under similar regulation, a welcome shift from micro-rules to principles-based policy. Key pillars include a debt repayment threshold at 50 percent of client income, pricing deregulation, and enhanced client protection. Building on resilience demonstrated during the pandemic and efficiency from expanded digital processing, the sector is well positioned. MFIs currently serve approximately 60 million people; the estimated inclusive finance market across India is <a href="https://mfinindia.org/Resources/studyreport" target="_blank" rel="noopener noreferrer">221 million people</a>. The sector needs to expand responsibly in areas hitherto underserved due to earlier rigid price controls, launch innovative products, and demonstrate clear impact.
<h1><strong>Perspectives from Indonesia</strong></h1>
The range of inclusive FSPs in Indonesia is diverse and includes banks, rural banks, non-bank financial institutions (NBFI), cooperatives, and other community-based lenders; each segment operates under specialized laws and regulations. The sector is distinguished by following both conventional and Islamic-based principles (sharia).

Pandemic-induced increases in non-performing loans and in costs of loan reserves, exacerbated by depositors withdrawing funds for household needs and emergency spending, fueled dire shortages of cashflow and liquidity—particularly for smaller and rural institutions. Management and staff were deeply affected and risked their own safety in working and providing services to clients.

FSPs struggled to manage loan collections. In some cases, clients faced surprise late payment penalties, coercive collections, improper collateral seizure, and other behavior that put clients at risk. Women experienced greater challenges. Rising domestic and homeschooling responsibilities during the lockdowns meant less time for their businesses. Some MSMEs adopted new business models such online marketing and transactions and/or adding health-related products in high demand during the pandemic. However, many businesses failed and people migrated from cities back to home villages, seeking lower costs of living and job alternatives in the (less-affected) agricultural sector.

Of note, during the pandemic, cross-border online lending platforms increased activity in Indonesia, despite being illegal and unregulated. These platforms provide quick cash but charge very high prices, and many of the more serious consumer harassment cases have been tied to them. Belatedly, the national police started taking action to curb illegal online lenders.

In response to these challenges, the Indonesian government introduced low-income household safety nets including direct cash transfers, non-monetary grants and subsidies, new regulations on FSP loan rescheduling, and liquidity support for businesses via new or expanded credit programs. Helpful too, private lenders offered FSPs to reschedule loans and assistance in digitalizing loan origination and disbursement.

MFIs that are further advanced in digitalizing operations have been able to survive and grow and are well positioned to shift millions of MSMEs to online financial services, supply chains, and other services. The Ministry of Cooperatives and SMEs reports that <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">19.5 million MSEMs are already active online</a>; the government aims to have 30 million MSMEs <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">online by 2024</a>. Deepening digital operations would improve operational efficiency, client satisfaction, credit risk mitigation, and business profitability.
<h1><strong>Perspectives from the Pacific Island Countries</strong></h1>
Many Pacific Island countries were spared severe health effects of COVID-19. However, socio-economic effects were dramatic given plummeting tourism and other commerce. The region’s reliance on overseas migrant workers makes remittances and digital payments critical, and they became even more so during the pandemic. Tonga, Fiji, and Samoa lead the region in receiving remittances. In fact, <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">Tonga is the top recipient in the region</a>, with remittances close to 40 percent of GDP.

Yet, estimates suggest that only about 30 percent of adults across the region (excluding Fiji) have access to financial services. Hence, governments and private sector institutions have launched several initiatives to boost financial inclusion.

Core regional challenges include bank de-risking and the high cost of remittances. Even before the pandemic, many banks sought to lower risks by ceasing services to money transfer operators (MTOs) due to concerns about anti-money laundering and know-your-customer regulatory compliance. Multiple MTOs were forced to close. Service availability fell and costs to send money home rose. Across the Pacific region, <a href="https://blogs.worldbank.org/peoplemove/global-remittance-flows-2021-year-recovery-and-surprises" target="_blank" rel="noopener noreferrer">average fees exceed 10 percent</a> compared to 6.38 percent globally, a gap widened during the pandemic by further reduction in providers.

For several years, the World Bank and IFC have supported Pacific countries to strengthen regulatory frameworks and payment system infrastructures. For example, the <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">IFC supported Tonga Development Bank</a> to establish new digital remittances corridors with New Zealand and Australia, enabling Tongans to send money at a much lower cost of about 5 percent. The program now covers 95 percent of Tongan seasonal workers in New Zealand. The corridor between Australia and Tonga launched at a crucial time, in November 2020. As people under lockdown sought online solutions, usage surged, seeing a significant increase in financial inclusion.

Digital financial services will continue to grow in the Pacific countries, with central banks progressing in operationalizing the national electronic payment systems in Fiji, Samoa, Solomon Islands, and Vanuatu. In parallel and building on these efforts, commercial banks and telecom companies are offering new digital payment and remittance products. Households and small businesses in Pacific countries stand to benefit from national payment system reforms that will help modernize national and regional financial architecture, in turn driving inclusive economic development and making every day financial transactions easier.

Rebuilding After COVID: Financial Inclusion Across Asia

<span data-contrast="auto">COVID-19 has had outsized impact on global poverty, especially in Latin America where the shockwave from the pandemic generated major headwinds for the inclusive finance sector. How have the sector and its clients navigated the storm? What lessons can we draw from how inclusive finance providers, such as microfinance institutions, managed to maintain sustainability and foster resilience among their clients? How different among global regions have responses, impacts, and future focal challenges been, and why?</span>

<span data-contrast="auto">These were among the questions for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s </span><a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Martindale Center</span></a><span data-contrast="auto"> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of </span><a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">The Future of Microfinance</span></a><span data-contrast="auto"> by Brookings Institution Press in 2020.</span>
<h1><b><span data-contrast="auto">Focus, Focus, Focus on Clients and Staff</span></b></h1>
<span data-contrast="auto">A major part of the Lehigh workshop discussion, led by CEOs of three leading Latin American microfinance institutions (MFIs), focused on experiences of institutions in Latin America and the Caribbean (LAC). One of the central areas of agreement about lessons learned was that client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs. Lockdowns throughout the region were quite strict and prolonged (on average six-plus months). Not only were the respective economies badly hurt—with GNP drops of about 7 percent to 9 percent </span><a href="https://www.oecd.org/coronavirus/policy-responses/covid-19-in-latin-america-and-the-caribbean-regional-socio-economic-implications-and-policy-priorities-93a64fde/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">according to the OECD</span></a><span data-contrast="auto">—but also, probably more importantly, target clientele, who live day to day and need to go out to generate income, were particularly hard hit.</span>
<blockquote class="pullquote--left"><span data-contrast="auto">Client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs.</span></blockquote>
<span data-contrast="auto">Being client-centric during the worst of the pandemic meant being constantly in touch with clients and being flexible and able to adapt to changing needs. Further, participating leaders of Latin American MFIs uniformly agreed that beyond considering the needs of an organization’s external clients it was also equally important for MFIs to listen and adapt, internally, to the needs of their employees. Only through ensuring staff’s commitment and loyalty have MFIs in the LAC region been able to maintain adequate communication and contact with their clients through the pandemic. Given how the prevailing “high-touch” MFI operating methodologies heavily rely on proximity and constant follow-up with clients, regular and transparent client communications became critical under the crisis’ rapidly evolving enabling environments.</span>

<span data-contrast="auto">Workshop participants stressed the importance of MFIs remaining flexible and quickly reacting to changing circumstances, such as providing client-specific, case-by-case restructuring and/or increases in loan sizes, as well as seeking cost reduction through improved efficiency and productivity, notably increasing the use of digital tools wherever feasible. On the flip side, practices that practitioners agreed did not work well included: blanket or indiscriminate across-the-board restructuring and refinancing; generalized increases in loan amounts; and indiscriminate down-to-the-bone cost cutting.</span>
<h1><b><span data-contrast="auto">Crisis Management by MFIs and Clients</span></b></h1>
<span data-contrast="auto">It’s important to highlight factors that normally would have had a material negative impact on MFIs and their clients but, in the case of LAC, ended up having minimal effect. Specifically: liquidity. Because of people’s inability to leave their dwellings due to strict lockdowns, coupled with government sanctioned system-wide loan repayment moratoriums, microentrepreneurs were for the most part not repaying their loans. Under those circumstances, one might have anticipated that MFIs’ liquidity would rapidly deteriorate and reach crisis levels. However, MFIs largely managed to avoid liquidity issues through a combination of extended grace periods implemented by host country governments and international funders, coupled with enhanced liquidity management by the MFIs. As severe and long-lasting as the COVID crisis has been, most well-managed MFIs appear to have survived </span><a href="https://www.cgap.org/sites/default/files/datasets/2021_4_CGAP_Symbiotics_COVID_Briefing.pdf" target="_blank" rel="noopener noreferrer"><span data-contrast="none">relatively well</span></a><span data-contrast="auto">.</span>
<blockquote class="pullquote--right"><span data-contrast="auto">For the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”</span></blockquote>
<span data-contrast="auto">Beyond palliative measures implemented by governments and funders, and the rapid and seemingly appropriate responses of most organizations, it is important to note just how resilient microentrepreneurs are. Beyond the imperative need to “sink-or-swim” for those that live so precariously—and without taking away from how severe the COVID crisis was for low-income people across the globe—Lehigh workshop participants noted that microentrepreneurs, in fact, are always operating under duress. Workshop participants agreed that the target population lives in an essentially permanent state of crisis. Indeed, in most of the corresponding enabling environments, MFI clients deal daily with everchanging rules of the game, shifting regulations and market dynamics, violence and insecurity, and nature-related external shocks (such as, but not limited to, hurricanes, earthquakes, floods, droughts) that are being </span><a href="https://www.centerforfinancialinclusion.org/climate-change-adds-to-challenges-for-msmes-recovering-from-covid-three-takeaways-from-cfi-surveys"><span data-contrast="none">exacerbated by climate change</span></a><span data-contrast="auto">. Thus, for the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”</span>
<h1><b><span data-contrast="auto">Three Rs of Digitalization</span></b></h1>
<span data-contrast="auto">The need for and convenience of having available digital mechanisms through which MFIs could interact with their clients became very evident during the pandemic. Accordingly, digitalization efforts received a </span><a href="https://blogs.worldbank.org/latinamerica/rise-digital-financial-inclusion-during-covid-19-pandemic" target="_blank" rel="noopener noreferrer"><span data-contrast="none">renewed push</span></a><span data-contrast="auto"> throughout the LAC region. Overall, organizations that were ahead-of-the-curve in the digitalization process before the pandemic were able to better cope with the new challenges of interacting virtually with clients. Nevertheless, participants at the Lehigh workshop emphasized that for MFIs digitalization is not a silver bullet that will solve all their problems but is rather one more tool for which levels and speed of implementation need to be clearly defined based on an MFI’s resources.</span>
<blockquote><span data-contrast="auto">MFIs digitalization is not a silver bullet that will solve all their problems but is rather one more tool for which levels and speed of implementation need to be clearly defined.</span></blockquote>
<span data-contrast="auto">Specifically, any digitalization plan should take into account the three Rs: a) </span><b><span data-contrast="auto">Reason</span></b><span data-contrast="auto">—why is more digitalization needed (e.g., reduce costs, improve client services)?; b) </span><b><span data-contrast="auto">Resources</span></b><span data-contrast="auto">—what is available to the MFI not only in terms of financial resources to cover implementation expenses, but also in terms of human resources, local telecom infrastructure, etc.?; and c) </span><b><span data-contrast="auto">Return</span></b><span data-contrast="auto">—what are the expected returns from implementing the process? Further, given that only what is measured gets done, it is important to clearly define how each of the relevant variables (better service, lower costs, etc.) will get measured, reported, and assessed.</span>

<span data-contrast="auto">The Latin American MFIs participating at the Lehigh workshop prioritized distribution processes (e.g., data collection, disbursements, collections) over analytics, algorithms, or artificial intelligence (AI). Participating practitioners frequently mentioned current limitations of AI as an ongoing challenge; specifically that low levels of existing actuarial data limit the ability to build AI tools. Moreover, compounding that existing barrier, in the wake of the crisis, most pre-pandemic data trends became less dependable as elements to predict future behavior.</span>
<h1><b><span data-contrast="auto">Focus Forward</span></b></h1>
<span data-contrast="auto">The workshop highlighted several areas for the inclusive finance sector to focus on moving forward:</span>
<h4><b><span data-contrast="auto">1. Digitalization</span></b></h4>
<span data-contrast="auto">This is an area most providers of inclusive financial services need to work on and for which appropriate guidance and capacity building support at the industry level could have substantial benefits. (For more workshop takeaways on digitalization, see </span><a href="https://www.centerforfinancialinclusion.org/digitally-reshaping-inclusive-financial-services-in-the-wake-of-covid-19"><span data-contrast="none">previous blog in this CFI series</span></a><span data-contrast="auto">.)</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559740&quot;:276}">
</span>
<h4><b><span data-contrast="auto">2. Consolidation</span></b></h4>
<span data-contrast="auto">Expectations had been that a severe crisis, such as the one associated with the COVID pandemic, would precipitate </span><a href="https://www.jstor.org/stable/10.7864/j.ctvbnm3hx.12" target="_blank" rel="noopener noreferrer"><span data-contrast="none">industry consolidation</span></a><span data-contrast="auto">. Somewhat surprisingly, it appears that overall, this has not been the case. While it might be too early to come to definitive conclusions— circumstances could still change and regional or national variations may emerge—so far, the extreme duress of smaller and weaker MFIs that could have triggered consolidation processes has been less than anticipated. At most, the crisis might have accelerated consolidation trends in a small subset of places where such developments were already underway. </span>
<h4><b><span data-contrast="auto">3. Governance</span></b></h4>
<span data-contrast="auto">The MFIs that have been the most severely affected by the COVID crisis have common management and governance weaknesses. Thus, the topic of building strong governance practices surfaced as a key area where leaders and proponents of the financial inclusion sector would be well advised to concentrate their efforts.</span>
<h4><b><span data-contrast="auto">4. Subsidies</span></b></h4>
<span data-contrast="auto">The noticeable trend among international donors and aid agencies to diminish subsidized support for microfinance is probably appropriate given that, overall, the industry seems to have matured and continues to evolve in healthy directions in terms of financial sustainability and social impact. Moving forward, the substantial support provided to the microfinance industry—including technical assistance, direct funding, and soft resources—might not be as transformational as it was in the past. Nevertheless, while the sector’s self-sufficient maturity might be true overall, there are specific instances in which support is still justified, for example, support for remote and rural inclusion efforts, digitalization guidance and capacity building, governance, and specific focus on regions or countries affected by climate change or other exogenous shocks.</span>

&nbsp;

<i><span data-contrast="auto">Participants of the Lehigh University workshop included Mercedes Canalda, CEO, Banco Adopem, Dominican Republic, Edgardo Perez, CEO, Fundación Génesis Empresarial, Guatemala, and Ralph Guerra, CEO, Compartamos Financiera, Peru. This note represents the author’s views, not necessarily those of other participants.</span></i>

Client-Centricity Leads the Way in Latin American Inclusive Finance Reponses to COVID-19

Slow-Motion Extinction? Or Can Impact Investors Reinvigorate Pro-Poor Financial Inclusion?

<em>WASHINGTON, D.C., October 17, 2022 – </em>The Center for Financial Inclusion (CFI) announced today the fourth cohort of the global Inclusive Fintech 50 (IF50) competition, which recognizes 50 early-stage, inclusive fintechs that aim to advance financial inclusion. IF50 is sponsored by Visa, MetLife Foundation, and Jersey Overseas Aid &amp; Comic Relief, with support from Accion and IFC. The 2022 winners exemplify the power of fintech to reach underserved individuals and businesses with products and services designed to meet consumers’ needs, preferences, and resources.

The 2022 winners were selected from a pool of 257 eligible applicants with headquarters in 79 countries, with Sub-Saharan Africa representing 40 percent of candidates. The winning startups represent a range of product categories, including credit, digital financial infrastructure, insurance, savings and personal financial management, and payments and remittances. Credit remains the most common type of product offering, with 32 percent of applicants offering a credit solution. The digital financial services infrastructure category displayed the most growth, increasing from 16 percent of applicants in 2021 to 23 percent in 2022.

An independent panel of 35 expert judges with expertise in venture capital, technology, and financial services evaluated the applicants based on their inclusivity, innovation, traction, and scale potential.

The IF50 competition offers winning startup fintechs exposure among investors and media, and provides access to exclusive networking activities, the opportunity to pitch their innovations, and connections to expert support and training provided by IF50 sponsors and supporters. IF50 winners from the past three years have collectively increased their funding by $620 million in the year following their win. This year’s IF50 winners will also gain exposure during CFI’s <a href="https://financialinclusionweek.org/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a> event, running virtually October 17-20. Winners will be announced by category throughout the week, culminating in a global plenary session discussing insights from this year’s competition.

Visa, an IF50 sponsor, provides winners access to <a href="https://practicalmoneyskills.com/" target="_blank" rel="noopener noreferrer">Practical Money Skills</a> and <a href="https://www.practicalbusinessskills.com/resources/about" target="_blank" rel="noopener noreferrer">Practical Business Skills</a>, digital platforms created by Visa to empower individuals and micro and small businesses with financial and business knowledge needed to manage and grow. These tools, together with the networking and publicity that IF50 provides, serve as an invaluable opportunity for startups at the earliest stages of their journeys.

The winners are listed below by main operating region. Full profiles of the 2022 winning fintechs can be viewed at <a href="http://www.inclusivefintech50.com/2022-cohort" target="_blank" rel="noopener noreferrer">www.inclusivefintech50.com/2022-cohort</a>.
<h3></h3>
<h3><strong>East Asia &amp; the Pacific</strong></h3>
Brick

Digicro

LTS Ventures

Salary Hero

SentBe Inc.

wagely

&nbsp;
<h3><strong>Latin America &amp; the Caribbean</strong></h3>
AkinTec

Finaktiva

Imix Latam

Paisa

Prestamype

Quipu Bank

Sofi

Yapu Solutions

Zenda.la

<strong> </strong>
<h3><strong>Middle East and North Africa</strong></h3>
Cassbana

<strong> </strong>
<h3><strong>North America</strong></h3>
Kaoshi Network

Restart Financial

Sunny Day Fund

<strong> </strong>
<h3><strong>South Asia</strong></h3>
Aloi

ARTH

Bimaplan

KarmaLife

Probus

Revfin Services Private Limited

Vitto – Microfinance.AI

Yuva Pay

<strong> </strong>
<h3><strong>Sub-Saharan Africa</strong></h3>
BezoMoney

Boost

Crop2Cash

DMA Limited

Ensibuuko

FIC Exchange Plc (Financial Inclusion Centers)

FlexPay LLC

Flow Global

FX Kudi

Infibranches

Jamii.one

Joovlin

Lipa Later Limited

Malipo Circles Limited

MarketForce

Moja Ride

SATIS FINTECH SA

Shecluded

SuiTch SAS

Touch and Pay Technologies Inc

Ukheshe

Umoja Labs

Umojalands Private Limited

Inclusive Fintech 50 Announces the 2022 Winners

<span data-contrast="none">WASHINGTON, D.C., USA – The Center for Financial Inclusion (CFI) today announced the launch of the fourth annual Inclusive Fintech 50 (IF50) Competition, a global initiative that competitively selects 50 early-stage, inclusive fintechs with innovative business models that aim to advance financial inclusion.</span>

<span data-contrast="none">The theme of the 2022 IF50 competition is “Making Digitalization Count.” Rapid advances in the digital economy, further accelerated by COVID-19, are changing the financial services landscape and creating opportunities to drive further inclusion and impact for underserved populations. Early-stage, inclusive fintechs are leading the way by leveraging data and digital infrastructure to deliver valuable products and services to low-income consumers, especially women. </span><span data-contrast="auto">“As digitization rapidly increases, underserved individuals and businesses are at risk of being left behind. Visa’s purpose is to help create access and inclusion for all, and we are proud to support Inclusive Fintech 50 and the companies that help ensure everyone, everywhere is brought along the digital transformation journey,” said Beth Hurvitz, Global Head of Social Impact, Visa.</span>

<span data-contrast="none">Even with increasing attention to the promise of inclusive fintech, many early-stage fintech companies struggle to secure funding to help them grow. IF50 aims to address this gap by identifying the 50 most promising inclusive fintechs and providing them with visibility to attract investors and other support. Thanks in part to the visibility from IF50, past winners have jointly increased their funding by $620 million in the year following their win. “MetLife Foundation is committed to expanding economic opportunity in underserved and underrepresented communities,” said Tia Hodges, President and CEO of MetLife Foundation. “We are proud to support IF50, which helps to advance inclusion-minded fintechs that are focused on responsible and cost-effective digital solutions.”</span>

<span data-contrast="none">IF50 is sponsored by Visa, MetLife Foundation, and Jersey Overseas Aid &amp; Comic Relief, with support from Accion and IFC, and implemented by CFI. In its first three years, IF50 attracted over 1,000 eligible applicants from around the world. Applications are reviewed by an </span><a href="https://www.inclusivefintech50.com/2021-judging-panel" target="_blank" rel="noopener noreferrer"><span data-contrast="none">independent panel of judges</span></a><span data-contrast="none"> with expertise spanning financial technology, investment, and innovation. The selection of the 50 winners is based on four criteria: inclusivity, innovation, scale potential, and traction. “The rigorous selection process is a key tenet of IF50,” said Simon Boas of Jersey Overseas Aid. “The applicants go through several stages of vetting to select a truly innovative group of 50 winners with the potential to drive real impact.”</span>

<span data-contrast="none">In addition to visibility and credibility, IF50 2022 winners will have access to exclusive networking activities, the opportunity to pitch their innovations, and connections to expert support and training provided by our sponsors and supporters. In addition, winners will be invited to participate in CFI’s <a href="http://financialinclusionweek.org" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a>, an annual virtual event taking place October 17-20, where inclusive finance stakeholders gather to learn from one another and share key findings.</span>

<span data-contrast="none">Other benefits available to this year’s winners include access to </span><a href="https://practicalmoneyskills.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Practical Money Skills</span></a><span data-contrast="none"> and </span><a href="https://www.practicalbusinessskills.com/resources/about" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Practical Business Skills</span></a><span data-contrast="none">, digital platforms created by Visa to empower individuals and micro and small businesses with financial and business knowledge needed to manage and grow. Winners also have the opportunity to be connected to IF50 sponsors to accelerate their business and social impact.</span>

###
<h3>About IF50</h3>
<span class="TextRun SCXW268323741 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="none"><span class="NormalTextRun SCXW268323741 BCX0">Inclusive Fintech 50 identifies promising </span><span class="NormalTextRun ContextualSpellingAndGrammarErrorV2Themed SCXW268323741 BCX0">early-stage</span> <span class="NormalTextRun SpellingErrorV2Themed SCXW268323741 BCX0">fintechs</span><span class="NormalTextRun SCXW268323741 BCX0"> driving financial inclusion around the globe through a competitive process led by an independent panel of judges from venture capital, technology, and financial services. Applicants are assessed on the degree to which their target market includes underserved people or businesses, and whether their innovation offers a new value proposition, shows early-stage traction, and can have a noticeable impact on the more than 3 billion financially underserved people globally. Inclusive Fintech 50 is sponsored by Visa, MetLife Foundation, and Jersey Overseas Aid &amp; Comic Relief, with support from Accion and IFC. The initiative is managed by the Center for Financial Inclusion (CFI). Learn more at <a href="http://www.inclusivefintech50.com" target="_blank" rel="noopener noreferrer">www.inclusivefintech50.com</a>.</span></span>

Inclusive Fintech 50 Launches 2022 Competition to Recognize Fintech Startups Driving Inclusive Finance

Banks

Fintechs

Insurance Companies

Microfinance Institutions

Neobanks

Partnerships

Telcos

Sugandh Saxena

Jayshree Venkatesan

Renee Chao-Beroff

Todd A. Watkins

Jennifer Isern

Alok Misra

Enjiang Cheng

Iwan Nazirwan

Hang Nguyen

Alex Silva

Paul DiLeo

Ethan Loufield

Deborah Drake

Safeya Zeitoun

Evelyn Stark

Mayada El-Zoghbi

Loretta Michaels

Jacqueline Foelster

Henry Bruce

India

South Asia

Sub-Saharan Africa

East Asia and Pacific

Latin America and The Caribbean

Client Treatment

Consumer Protection

Enabling Environment

Financial Service Providers

Fraud

Privacy

Delivery Channels

Digital Financial Services

Policy, Regulation and Government Initiatives

Alternative Data

Credit

Data Analytics

Financial Technology

Insurance

Payments

Remittances

Challenges and Crises

Financial Health

Impact Investing

Resilience

Smallholder Farmers

Underserved Groups

Youth

Financial Inclusion Strategy

Financial Capability

Blog Post

Report

Press Release

Brief

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

<span class="TextRun SCXW16100441 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW16100441 BCX0">There has been a lot of talk in recent years about the promise of fintech to help advance financial inclusion. This has been especially true during the pandemic</span><span class="NormalTextRun SCXW16100441 BCX0">: </span><span class="NormalTextRun SCXW16100441 BCX0">acceleration</span><span class="NormalTextRun SCXW16100441 BCX0"> in</span><span class="NormalTextRun SCXW16100441 BCX0"> digital adoption</span><span class="NormalTextRun SCXW16100441 BCX0">, </span><span class="NormalTextRun SCXW16100441 BCX0">spurring</span> <span class="NormalTextRun SCXW16100441 BCX0">further growth in the inclusive fintech sector.</span> <span class="NormalTextRun SCXW16100441 BCX0">Much</span><span class="NormalTextRun SCXW16100441 BCX0"> of this growth</span><span class="NormalTextRun SCXW16100441 BCX0"> has tak</span><span class="NormalTextRun SCXW16100441 BCX0">en</span> <span class="NormalTextRun SCXW16100441 BCX0">place in Africa, where fintechs raised </span></span><a class="Hyperlink SCXW16100441 BCX0" href="https://thebigdeal.substack.com/" target="_blank" rel="noreferrer noopener"><span class="TextRun Underlined SCXW16100441 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW16100441 BCX0">$2.3 billion dollars in 2021, up from $830 million in 2020</span></span></a><span class="TextRun SCXW16100441 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW16100441 BCX0">, helping to catch up with funding levels in South Asia and Latin America.</span></span>
<blockquote class="pullquote--right">While inclusive fintechs are developing innovative ways to reach new customers, meaningful customer segments remain underserved.</blockquote>
<span class="TextRun SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW14958972 BCX0">With t</span><span class="NormalTextRun SCXW14958972 BCX0">his growth</span><span class="NormalTextRun SCXW14958972 BCX0">, there also is </span><span class="NormalTextRun SCXW14958972 BCX0">more data and insights</span><span class="NormalTextRun SCXW14958972 BCX0"> about </span><span class="NormalTextRun SCXW14958972 BCX0">fintechs and their customers</span><span class="NormalTextRun SCXW14958972 BCX0">. Last year, two reports, </span><span class="NormalTextRun SCXW14958972 BCX0">CFI</span><span class="NormalTextRun SCXW14958972 BCX0">’s </span></span><a class="Hyperlink SCXW14958972 BCX0" href="https://www.centerforfinancialinclusion.org/insights-from-the-2021-if50-applicant-pool" rel="noreferrer noopener"><span class="TextRun Underlined SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW14958972 BCX0">Inclusive Fintech 50: Driving Innovation in an Era of Uncertainty</span></span></a><span class="TextRun SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW14958972 BCX0"> and </span><span class="NormalTextRun SCXW14958972 BCX0">Catalyst Fund</span><span class="NormalTextRun SCXW14958972 BCX0">’s </span></span><a class="Hyperlink SCXW14958972 BCX0" href="https://bfaglobal.com/catalyst-fund/briter-catalyst-fund-state-of-the-fintech-industry-report/" target="_blank" rel="noreferrer noopener"><span class="TextRun Underlined SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW14958972 BCX0">State of Fintech in Emerging Markets </span></span></a><span class="TextRun SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW14958972 BCX0">(in collaboration with </span></span><a class="Hyperlink SCXW14958972 BCX0" href="https://briterbridges.com/" target="_blank" rel="noreferrer noopener"><span class="TextRun Underlined SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW14958972 BCX0" data-ccp-charstyle="Hyperlink">Briter</span><span class="NormalTextRun SCXW14958972 BCX0" data-ccp-charstyle="Hyperlink"> Bridges</span></span></a><span class="TextRun SCXW14958972 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW14958972 BCX0">)</span><span class="NormalTextRun SCXW14958972 BCX0">,</span><span class="NormalTextRun SCXW14958972 BCX0"> leveraged </span><span class="NormalTextRun SCXW14958972 BCX0">such</span><span class="NormalTextRun SCXW14958972 BCX0"> data to take stock of the industry’s progress. The reports </span><span class="NormalTextRun SCXW14958972 BCX0">arrived at</span><span class="NormalTextRun SCXW14958972 BCX0"> similar</span> <span class="NormalTextRun SCXW14958972 BCX0">conclusions:</span><span class="NormalTextRun SCXW14958972 BCX0"> while inclusive fintechs are continuing to develop innovative ways to </span><span class="NormalTextRun SCXW14958972 BCX0">reach</span><span class="NormalTextRun SCXW14958972 BCX0"> new customers</span><span class="NormalTextRun SCXW14958972 BCX0">, meaningful </span><span class="NormalTextRun SCXW14958972 BCX0">customer </span><span class="NormalTextRun SCXW14958972 BCX0">segments remain</span> <span class="NormalTextRun SCXW14958972 BCX0">underserved</span><span class="NormalTextRun SCXW14958972 BCX0"> and </span><span class="NormalTextRun SCXW14958972 BCX0">fintech </span><span class="NormalTextRun SCXW14958972 BCX0">funding </span><span class="NormalTextRun SCXW14958972 BCX0">remains</span><span class="NormalTextRun SCXW14958972 BCX0"> concentrated.</span></span>

<span class="TextRun SCXW61718765 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW61718765 BCX0">The truth is that we are</span> <span class="NormalTextRun SCXW61718765 BCX0">still </span><span class="NormalTextRun SCXW61718765 BCX0">in the early stages of bringing the power of fintech to bear on the challenges </span><span class="NormalTextRun SCXW61718765 BCX0">that low-income and vulnerable populations face. Advances have certainly been made, but </span><span class="NormalTextRun SCXW61718765 BCX0">the greatest gains</span> <span class="NormalTextRun SCXW61718765 BCX0">only </span><span class="NormalTextRun SCXW61718765 BCX0">can be realized through </span><span class="NormalTextRun SCXW61718765 BCX0">intentional and collective efforts</span><span class="NormalTextRun SCXW61718765 BCX0"> on the fintech frontier</span><span class="NormalTextRun SCXW61718765 BCX0">. This will </span><span class="NormalTextRun SCXW61718765 BCX0">help pave the way</span><span class="NormalTextRun SCXW61718765 BCX0"> for</span><span class="NormalTextRun SCXW61718765 BCX0"> strategies to turn these </span><span class="NormalTextRun SCXW61718765 BCX0">underserved</span><span class="NormalTextRun SCXW61718765 BCX0"> markets into opportunities</span><span class="NormalTextRun SCXW61718765 BCX0"> for growth</span><span class="NormalTextRun SCXW61718765 BCX0">.</span></span>
<h1><span class="TextRun SCXW90318181 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW90318181 BCX0" data-ccp-parastyle="heading 3">Outreach </span><span class="NormalTextRun SCXW90318181 BCX0" data-ccp-parastyle="heading 3">to </span><span class="NormalTextRun SCXW90318181 BCX0" data-ccp-parastyle="heading 3">Underserved </span><span class="NormalTextRun SCXW90318181 BCX0" data-ccp-parastyle="heading 3">People</span></span></h1>
<span data-contrast="auto">On the bright side, early-stage fintechs continue to proliferate. Last year, nearly 300 such fintechs applied to </span><a href="http://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Inclusive Fintech 50 (IF50)</span></a><span data-contrast="auto">, an annual competition to showcase early-stage fintechs driving financial inclusion around the world. Expert judges selected 50 winners from this applicant pool based on established criteria of inclusivity, innovation, scale potential, and traction.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559740&quot;:276}"> </span>

<span data-contrast="auto">IF50 applicants have shown a continuous drive to innovate, demonstrated by their broad range of product areas, with varied models, partnerships, and customer acquisition strategies. The fintechs also are finding diverse ways to reach underserved people, such as through the provision of in-person digital skills training, use of agents, and product offerings that can be accessed without a smartphone.</span>

<span data-contrast="auto">Applicants are also designing solutions to address challenges in areas that are fundamental to people’s livelihoods – including climate resilience, health, and support for micro and small enterprises. For example, IF50 2021 winner </span><a href="https://gotugende.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Tugende</span></a><span data-contrast="auto"> uses asset finance, technology, and a customer-centric model to help informal sector entrepreneurs in Africa grow their businesses and access value-added services such as medical insurance. Eighty percent of IF50 2021 applicants reported that their solutions helped customers access essential services during the pandemic, such as healthcare, government relief, and clean energy.</span>

&nbsp;

<img class="size-full wp-image-44679 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/06/Tugende-Snapshot-03-e1655994301976.png" alt="" width="1000" height="599" />

&nbsp;
<h1><span class="TextRun SCXW91963143 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW91963143 BCX0" data-ccp-parastyle="heading 3">Gaps in </span><span class="NormalTextRun SCXW91963143 BCX0" data-ccp-parastyle="heading 3">Inclusivity</span></span></h1>
<span data-contrast="auto">Despite this progress, significant gaps in customer outreach remain. For example, only 23 percent of fintechs in the Catalyst Fund sample reported that women constituted more than 50 percent of their customer base. Moreover, 38 percent of the IF50 2021 applicants do not disaggregate client data by gender.</span>

<span data-contrast="auto">Catalyst Fund and IF50 both also found that most inclusive fintechs do not focus mainly on low-income people. In the IF50 sample, 41 percent of applicants reported primarily targeting low-income customers. More than 70 percent of startups in the Catalyst Fund sample reported that fewer than 25 percent of their customers live under the poverty line, although poverty rates in the countries where these startups operate are closer to 35-45 percent.</span>

<span data-contrast="auto">The Catalyst Fund data also showed that as startups grow, they tend to move upmarket. Particularly for early-stage startups looking to raise capital, showing strong acquisition numbers is imperative, and middle- and higher-income customers tend to be </span><a href="https://medium.com/caribou-digital/what-are-the-limits-of-the-private-sector-in-serving-the-poor-3ee9a9a468fc" target="_blank" rel="noopener noreferrer"><span data-contrast="none">easier and cheaper</span></a><span data-contrast="auto"> to acquire.</span>
<h1><span class="NormalTextRun SCXW76352590 BCX0">Concentration</span><span class="NormalTextRun SCXW76352590 BCX0"> in Funding and Geographies</span></h1>
<span data-contrast="auto">The pressure to acquire more customers may be driven by the underlying scarcity of funding for early-stage fintechs. Although investment flows have grown dramatically in recent years, funding in emerging markets is concentrated among very few startups. Out of 101 Sub-Saharan African startups in the IF50 2021 sample, five accounted for 65 percent of the funding. In Latin America, five of 36 applicants received 83 percent of funding.</span>

<span data-contrast="auto">Not only is funding concentrated among a few startups, but those startups are also based in a select few countries. Sixty-four percent of total funding reported by IF50 2021 applicants went to fintechs based in five countries: Colombia, India, Mexico, Singapore, and the United States. In Latin America, four countries (Brazil, Mexico, Uruguay, and Colombia) accounted for over 99 percent of funding in the Catalyst Fund sample. Such geographic concentration particularly excludes countries with lower levels of financial inclusion. Of the 16 countries in the IF50 sample that received over $10 million, only three have financial inclusion levels below 40 percent. Similarly, <a href="https://qz.com/africa/2029505/everything-you-need-to-know-about-fintech-financing-in-africa/?utm_source=email&amp;utm_medium=africa-launch-list&amp;utm_content=017e81c9-90b4-11ec-8d42-724a485ab421" target="_blank" rel="noopener noreferrer">fintech funding in Africa is concentrated in Kenya, Nigeria, and South Africa</a> (</span><span data-contrast="none">87.9 percent</span><span data-contrast="auto">), all countries with higher levels of financial inclusion and/or more developed fintech ecosystems.</span>
<blockquote><span data-contrast="auto">Not only is funding concentrated among a few startups, but those startups are also based in a select few countries.</span></blockquote>
<span data-contrast="auto">Deals are also concentrated in certain types of products: those in payments, digital credit, and neo banks, and those that require a smartphone. In contrast, savings and insurance fintechs receive less funding, as do models that leverage USSD or lower-tech accessibility. IF50 data found that funding to fintechs offering services that require smartphones was about 3.5 times greater than those needing only a basic or feature phone. This may be because lower-tech models cost more to operate and users cannot bear higher-margin pricing.</span>

<span data-contrast="auto">Investment flows continue to favor men, and along all stages of growth, men founders raise more than women founders. According to 2021 IF50 data, women founders, on average, raised one-third the amount raised by men founders.</span>

&nbsp;

<img class="wp-image-44683 size-full aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/06/IF50-blog-post-stacked-graph-1-e1656002022248.png" alt="" width="1000" height="652" />

&nbsp;

<span class="TextRun SCXW94619091 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW94619091 BCX0">Overall, the data demonstrates that the majority of inclusive fintech startups, particularly those servic</span><span class="NormalTextRun SCXW94619091 BCX0">ing</span><span class="NormalTextRun SCXW94619091 BCX0"> more excluded segments</span><span class="NormalTextRun SCXW94619091 BCX0">, continue to find it difficult to access investment capital.  </span><span class="NormalTextRun SCXW94619091 BCX0">Being able to prove the business case </span><span class="NormalTextRun SCXW94619091 BCX0">of</span><span class="NormalTextRun SCXW94619091 BCX0"> untapped markets is difficult, but</span><span class="NormalTextRun SCXW94619091 BCX0"> Okapi Finance, an IF50 2021 winner</span><span class="NormalTextRun SCXW94619091 BCX0">,</span> <span class="NormalTextRun SCXW94619091 BCX0">aims to demonstrate the potential</span><span class="NormalTextRun SCXW94619091 BCX0"> by focusing on</span><span class="NormalTextRun SCXW94619091 BCX0"> women merchants in Africa’s informal sector.</span></span>

&nbsp;

<img class="aligncenter wp-image-44681" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/06/Okapi-snapshot-01.png" alt="" width="1000" height="599" />

&nbsp;
<h1><span class="TextRun SCXW108607299 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW108607299 BCX0">Lookin</span><span class="NormalTextRun SCXW108607299 BCX0">g Ahead</span></span></h1>
<span data-contrast="auto">While there are opportunities for early-stage fintechs to build commercially viable businesses that are truly inclusive, more effort is needed from the broader ecosystem to ensure that innovative solutions can take hold. Startups are continuing to emerge on the frontier, but they need access to the visibility, resources, expertise, and networks that support their growth into sustainable and impactful companies.</span>

<span data-contrast="auto">Supporters of digital financial inclusion can help by directing greater attention to innovative startups in overlooked markets. Competitions like IF50 and those organized by </span><a href="https://www.womensworldbanking.org/fintech-innovation-challenge-2021/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Women’s World Banking</span></a><span data-contrast="auto"> and the </span><a href="https://www.afi-global.org/newsroom/news/applications-open-for-the-2022-afi-inclusive-fintech-showcase/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Alliance for Financial Inclusion</span></a><span data-contrast="none">, and market insights provided by research organizations like Briter Bridges, </span><span data-contrast="auto">also help to raise awareness. Incubators and accelerators, such as </span><a href="https://bfaglobal.com/catalyst-fund/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Catalyst Fund</span></a><span data-contrast="auto">, can assist in de-risking less proven models and making them more market-ready via grant funding, mentorship, and other venture-building services. And finally, greater investment, particularly in the $250K to $1M range, can help to fuel early-stage ventures pioneering innovative solutions.</span>

<strong><span class="TextRun MacChromeBold SCXW136892565 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"><span class="NormalTextRun SCXW136892565 BCX0">The application period for t</span><span class="NormalTextRun SCXW136892565 BCX0">he</span><span class="NormalTextRun SCXW136892565 BCX0"> 2022</span> </span><a class="Hyperlink SCXW136892565 BCX0" href="https://www.inclusivefintech50.com/" target="_blank" rel="noreferrer noopener"><span class="TextRun Underlined MacChromeBold SCXW136892565 BCX0" lang="EN" xml:lang="EN" data-contrast="none"><span class="NormalTextRun SCXW136892565 BCX0" data-ccp-charstyle="Hyperlink">Inclusive Fintech 50</span></span></a><span class="TextRun MacChromeBold SCXW136892565 BCX0" lang="EN" xml:lang="EN" data-contrast="auto"> <span class="NormalTextRun SCXW136892565 BCX0">competition </span><span class="NormalTextRun SCXW136892565 BCX0">will open Monday, June 27</span><span class="NormalTextRun SCXW136892565 BCX0">, and inclusive fintech startups – especially those at the frontier – are strongly encouraged to apply</span><span class="NormalTextRun SCXW136892565 BCX0">. </span><span class="NormalTextRun SCXW136892565 BCX0">The 2022 theme is “Making Digitalization Count.” </span><span class="NormalTextRun SCXW136892565 BCX0">IF50 is</span> <span class="NormalTextRun SCXW136892565 BCX0">sponsor</span><span class="NormalTextRun SCXW136892565 BCX0">ed by</span><span class="NormalTextRun SCXW136892565 BCX0"> Visa, MetLife Foundation, and Jersey Overseas Aid &amp; Comic Relief</span><span class="NormalTextRun SCXW136892565 BCX0">.</span></span></strong>

Driving Inclusivity on the Fintech Frontier: Let’s Make It Count

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<span data-contrast="auto">The COVID-19 pandemic has emphasized the important role of financial services in helping low-income people manage uncertainty and economic shocks. Many low-income customers rely on microfinance institutions (MFIs) to provide those financial services; however, the pandemic has also sent many MFIs themselves into crisis and many continue to face serious solvency concerns. This publication provides considerations and options for MFIs facing the need for potential consolidation.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">This brief provides an illustrated overview of five consolidation options:</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="3" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1"><span data-contrast="auto">Asset Purchase</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></li>
 	<li data-leveltext="" data-font="Symbol" data-listid="3" aria-setsize="-1" data-aria-posinset="2" data-aria-level="1"><span data-contrast="auto">Share Purchase</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></li>
 	<li data-leveltext="" data-font="Symbol" data-listid="3" aria-setsize="-1" data-aria-posinset="3" data-aria-level="1"><span data-contrast="auto">Forward Merger</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></li>
 	<li data-leveltext="" data-font="Symbol" data-listid="3" aria-setsize="-1" data-aria-posinset="4" data-aria-level="1"><span data-contrast="auto">Triangular Merger</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></li>
 	<li data-leveltext="" data-font="Symbol" data-listid="3" aria-setsize="-1" data-aria-posinset="5" data-aria-level="1"><span data-contrast="auto">Reverse Triangular Merger</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></li>
</ul>
&nbsp;

</div>
<p class="p1"><em>This brief was conducted as part of CFI’s partnership with Mastercard’s Center for Inclusive Growth.</em></p>

</div>
</div>

Mergers and Acquisitions in Pandemic Recovery: What MFI Leadership Should Know

Growth of digital financial services has accelerated since the outbreak of COVID-19 as distancing measures forced customers to access financial services remotely. Fintechs have fueled this massive growth by using innovative delivery channels or business models to provide financial services to previously unserved or underserved customer segments.

In 2021, CFI conducted research to understand how early-stage fintechs and their customers coped during the pandemic. Most research on resilience focuses on either fintechs or customers but fails to account for their interplay. Based on this insight, CFI created the <a href="https://www.centerforfinancialinclusion.org/a-pact-to-promote-resilience">PACT framework</a>. PACT stands for Preparedness, Access, Capability, and Ties – four key dimensions that influence one another and contribute to the resilience of both fintechs and their customers.
<blockquote class="pullquote--right">Most research on resilience focuses on either fintechs or customers but fails to account for their interplay.</blockquote>
As part of our research in shaping the PACT framework, we spoke to investors to better understand issues of resilience considering COVID-19. Our conversations revealed that most inclusive fintechs survived the pandemic either by continuing existing business operations or adapting their business models to changing customer needs and to new external conditions, such as extensive lockdown measures. While we spoke with dozens of investors, we closely examined the investment processes of three impact-driven investors that fund fintechs working to expand financial inclusion and promote financial health. To do this deeper dive, CFI worked with a team at <a href="https://tameo.solutions/" target="_blank" rel="noopener noreferrer">Tameo Impact Fund Solutions</a> – an independent consulting firm providing services to impact funds, fund managers, and investors with the aim of promoting accountability and transparency in the impact investing industry.

Our conversations aimed to identify best practices for processes implemented throughout the investment cycle and which indicators should be monitored to support resilience. These discussions provided the basis for our analysis on how investors can help strengthen the resilience of both their investee companies and the fintech customers served.

In this blog post, we discuss inclusive fintechs’ investment process, how investors monitor and evaluate inclusive fintechs, and identify three actions that investors – and other stakeholders – should take to build resilience into their business models.
<h1>Investor Processes and How They Monitor and Evaluate Inclusive Fintechs</h1>
The three investment firms we spoke with invest at various stages in fintechs’ development – from seed stage to Series A. The firms’ investment processes can be broken down into four stages: prospecting, due diligence and investment decision, post-investment and monitoring, and exit.

All firms integrate impact management throughout their investment processes. The indicators monitored by the impact investors vary depending on the type of investment, but largely focus on <strong>growth metrics</strong> (e.g., number and volume of transactions, loans, accounts, etc.), and <strong>ability to reach target customers</strong> (e.g., number of customers/MSMEs served). Other indicators point to <strong>competitiveness</strong> (e.g., product diversity and pricing), and <strong>business risk and sustainability</strong> (e.g., proportion of non-performing loans, customer satisfaction, and profit metrics). Fintechs must be able to demonstrate clear impact objectives, and investors must be able to affirm these objectives through due diligence and monitoring.

The table below summarizes the four stages of the investment process and includes a few examples of indicators monitored.

Strengthening a PACT for Resilience: A Behind-the-Scenes Look at Investors

Fintechs have been successful by seeking out market gaps and providing customers with easier and better ways to lead their financial lives. In the past, growth and opportunity have been industry bywords. But two years into a global pandemic, another term is driving conversations in both fintech and inclusive finance: resilience.

Fintechs have proven their resilience by surviving the early months of the pandemic and reemerging smarter, with optimism intact, and ready to take on new growth opportunities. In response to COVID-19, many fintechs <a href="https://www.centerforfinancialinclusion.org/rapid-response-for-social-payments-during-covid-19">jumped on the opportunity to deliver government and humanitarian cash transfers</a>, which was also a key input to the resilience of millions of low-income households. The last two years saw millions of people turn to high-tech opportunities to improve their lives: gig work through platforms, digital government-to-person (G2P) payments, and digital commerce platforms. Aside from offering access to products, fintechs also provided information about health and education, which helped people cope with the health and economic shocks brought on by COVID-19.

Concerningly, this <a href="https://www2.deloitte.com/us/en/pages/financial-services/articles/beyond-covid-19-new-opportunities-for-fintech-companies.html" target="_blank" rel="noopener noreferrer">focus on resilience may be difficult to sustain</a>. Because of a rapid increase in fintech investments, there is a chance that fintech’s attention may be drawn away from resilience as they turn towards incentives to move upmarket in search of growth and profit.
<blockquote class="pullquote--right">Inclusive fintechs and impact investors must continue to consider the importance of resilience – both for the fintechs as well as their low-income clients.</blockquote>
CFI believes that mission-driven, inclusive fintechs can better serve their low-income customers and grow their businesses. However, to do so, inclusive fintechs and impact investors must continue to consider the importance of resilience – both for the fintechs as well as their low-income clients.
<h1>Introducing the PACT Framework for Resilience</h1>
To fill what we determined was a gap in our community’s ability to identify and analyze the shared dimensions of resilience, CFI – with support from <a href="https://www.comicrelief.com/partners/jersey-overseas-aid" target="_blank" rel="noopener noreferrer">Jersey Overseas Aid and Comic Relief</a> -- recently unveiled the <a href="https://www.centerforfinancialinclusion.org/a-pact-to-promote-resilience">PACT framework</a>. Adapted from <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2628707" target="_blank" rel="noopener noreferrer">academic</a> and other socio-economic development programs, the framework explains how both fintech resilience and customer resilience are driven by a combination of abilities and access to resources across four non-linear dimensions: Preparedness, Access, Capability, and Ties (Networks).

While researching and developing the PACT framework, CFI explored the COVID-19 experiences and responses of more than 20 winners of the <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50 (IF50) competition</a>. In addition to the IF50 winners, we spoke to investors, accelerators, and industry associations about how they approached inclusive fintech during lockdowns and the aftermath.
The dimensions of the PACT framework are outlined below along with calls to action for the inclusive finance community.
<h1>1   Preparedness</h1>
The pandemic has been a case study on the importance of planning and the consequences of not doing so, and many fintechs were unprepared for the initial shock. All stakeholders in inclusive finance and digital financial services should have in place business continuity plans that consider the risks and responses for both probable and unlikely internal and external events. The plan should outline responses to risks that hurt business – staff turnover, climate-related shocks, wars – and those that spur hard-to-manage growth, such as the pandemic-fueled social protection payments.

Many fintechs do not have comprehensive business continuity plans in place, but they should. It starts by understanding the relationship between fintechs and customer resilience – awareness donors and investors should have to help fintechs achieve both growth and preparedness.
<h1>2   Access</h1>
<p class="p1">Access does not equal impact. While we know that many low-income people accessed services during the pandemic, there is still no strong data available on impact. Additionally, there is a lack of data on the impact of access (or lack of access) to financing that enabled some fintechs to get through the pandemic more easily. Inclusive fintechs that had strong ties to accelerators and existing investor networks were able to arrange bridge funds or raise new capital. Others found themselves forced to drastically reduce their services, lay off staff, or change their business models – sometimes moving their business away from the low-income customers they sought to serve.</p>

<blockquote class="pullquote--left">Fintechs have a tremendous opportunity to collect data on customers’ ability to cope with and respond to shocks.</blockquote>
<p class="p1">Because of the many different services and business models of fintechs, impact measurement is complicated. But as data-producing and data-driven companies, fintechs have a tremendous opportunity to collect data on customers’ ability to cope with and respond to shocks (in addition to their saving, borrowing, and spending behavior). This data is not only useful for research and sharing with impact investors, but also provides valuable business information to inform product design and growth efforts.</p>

<h1>3   Capability</h1>
<p class="p1">Fintechs are known for being agile. Agility is also a characteristic of low-income people. Both are accustomed to pivoting quickly to find solutions to increase income and reduce expenses or adapt their skills to new work. In this framework, capability is focused on advice-seeking behavior, know-how, and the ability to respond quickly in terms of adversity.</p>
<p class="p1">In the last year, there have been <a href="https://www.youtube.com/watch?v=lcqVnqH9vHc&amp;list=PL30fMMRd3G_4BUL_Uib6BV-QGR9ipaZTC&amp;index=21" target="_blank" rel="noopener noreferrer">many anecdotes</a> that provide good reason to offer kudos to fintechs for their contributions to customer resilience – but without systematic data on how fintech capability can strengthen customer capability, it is difficult to build on these efforts or understand nuances that could drive greater impact. An investment in measurement and integrating data collection into the customer platform has the potential to be useful to fintechs, impact investors, and donors. We hope that fintechs’ data-driven approaches will soon extend to impact measurement as the sector grows.</p>

<h1>4   Ties</h1>
<p class="p1">The value of ties goes beyond personal and business relationships. Fintechs and their users have a unique opportunity to forge community bonds that are stronger than a simple customer-provider relationship.</p>
<p class="p1">The pandemic showed this. Many fintechs provided health and education information to their customers or helped their users classify their services as “essential,” so they could continue operating during government shutdowns. Current users, agents, and civil society organizations helped new fintech users sign up for and access government payments or gig platforms. Fintechs also found board members, investors, and accelerator colleagues who could pitch in to respond to the many issues the pandemic threw their way. Finding ties to measurement experts would be a useful next step.</p>

<blockquote>With a continued focus on resilience and using the PACT Framework as a guide, we can embed resilience in inclusive fintech to support their preparation for inevitable future storms.</blockquote>
<p class="p1">With a continued focus on resilience and using the PACT Framework as a guide, we can embed resilience in inclusive fintech to support their preparation for inevitable future storms. We can also improve customers’ preparedness and increase their capability to manage through adversity. The PACT framework is a first step towards understanding the interplay between fintech resilience and customer resilience – an area worthy of further investigation. Together we can help low-income households and businesses benefit from inclusive fintech.</p>
<p class="p1"><em>For more details and examples of these four points in practice, we encourage you to read the <a href="https://www.centerforfinancialinclusion.org/a-pact-to-promote-resilience">full publication</a>.</em></p>

For Inclusive Fintechs, Resilience Is Growth’s Much-Needed Companion

<span class="NormalTextRun SCXW205969893 BCX0">Platforms </span><span class="NormalTextRun SCXW205969893 BCX0">provide </span><span class="NormalTextRun SCXW205969893 BCX0">critical employment opportunities for many underserved populations and are increasingly interconnected with financial services. To advance financial inclusion and support development goals, </span><span class="NormalTextRun SCXW205969893 BCX0">however, </span><span class="NormalTextRun SCXW205969893 BCX0">platforms must focus on the unique digital, financial, and livelihood needs of micro and small enterprises. This </span><span class="NormalTextRun SCXW205969893 BCX0">publication</span> <span class="NormalTextRun SCXW205969893 BCX0">provides an overview</span><span class="NormalTextRun SCXW205969893 BCX0"> of the increasing interconnectedness of</span><span class="NormalTextRun SCXW205969893 BCX0"> platforms and financial service offerings, how platforms can push the frontiers of inclusive finance, how platforms support women, and what is needed from policymakers for platforms to serve broader development goals. </span><span class="NormalTextRun SCXW205969893 BCX0">The audience of this report includes</span><span class="NormalTextRun SCXW205969893 BCX0"> policymakers, platform leaders, donors, international development actors</span><span class="NormalTextRun SCXW205969893 BCX0">,</span><span class="NormalTextRun SCXW205969893 BCX0"> and anyone interested in the potential for financial services and/or platforms to improve livelihoods.</span>

Platforms, Livelihoods, and Inclusive Finance

Two years into the COVID-19 pandemic, the role of digital financial services in providing access to essential services is undeniable. Digital financial services have enabled governments and nonprofits to deliver timely social protection payments and aided families and friends of those in need to quickly share financial resources. The rise of platforms and small business fintechs allowed for new forms of commerce that have kept people employed and grown gig work opportunities, which helped customers in small villages and large cities alike to purchase goods needed for their households.
<blockquote class="pullquote--right">We need data, metrics, and measurement standards to better understand and move the needle on measuring resilience.</blockquote>
The role fintechs have played over the last two years is clear. We have data about the growth of fintechs during the pandemic, on how much capital they have attracted from investors, and many anecdotal stories about how individuals and firms using fintechs have experienced direct benefits from moving to digital solutions. But while there are many stories of the positive relationships between fintechs and their customers during the pandemic, we need data, metrics, and measurement standards to better understand and move the needle on measuring resilience.

With the support of <a href="https://www.accion.org/institutional_partnerships/jersey-overseas-aid-comic-relief">Jersey Overseas Aid and Comic Relief</a>, CFI conducted research to better understand fintechs, their resilience, and the impact they have on the livelihoods of low-income customers. CFI’s research on fintech resilience is the first attempt to set forth a framework and call to action to understand the interconnectedness between progress at the provider level and the implications for users. Through our research, we found that, by and large, fintechs are operationally resilient, although many early-stage fintechs did have to resort to layoffs and salary cuts, or to slowing growth plans. However, measuring resilience — whether at the level of financial institutions or customers, as well as how they influence each other — is at an early stage of research.
<blockquote>PACT measures resilience as a combination of abilities and access to resources across four dimensions: Preparedness, Access, Capability, and Ties (Networks).</blockquote>
To support our work in understanding how to measure and quantify fintech’s resilience and impact, CFI developed the PACT framework. This helps us analyze the resilience of both fintechs and low-income customers, and see where and how there are direct connections between the two. PACT measures resilience as a combination of abilities and access to resources across four dimensions: Preparedness, Access, Capability, and Ties (Networks). This framework can inform investors and donors who are looking to support low-income customers.

A PACT to Promote Resilience

Financial capability is the capacity to make and execute financial decisions that support one’s wellbeing and that fit within one’s lifestyle and environmental circumstances. Yet, how can financial service providers (FSPs) help their customers build financial capability, and how can they measure customers’ progress? CFI, in partnership with MetLife Foundation, launched a project in February 2018 to enhance financial customer engagement by building their capabilities. The project aims to develop and promote digital tools that FSPs can use to diagnose clients’ financial health, identify gaps, and develop actionable plans to improve financial well-being. To date, the project has partnered with two FSPs – <a href="https://grassfin.com/" target="_blank" rel="noopener noreferrer">Grassland Finance Limited</a> and <a href="https://fincakosovo.org/en/" target="_blank" rel="noopener noreferrer">FINCA Kosovo</a> – to design and deploy a minimum viable product (MVP) web application aimed to build financial capability using a customer-centric and behavioral-driven approach. This post shares initial learnings from the pilots.
<h2><strong>Background</strong></h2>
<h3><strong>Why Focus on Financial Capability? </strong></h3>
<a href="https://www.centerforfinancialinclusion.org/a-change-in-behavior-innovations-in-financial-capability-2">Financial capability building</a> equips people with the knowledge, skills, attitudes, and behaviors (KSABs) necessary to achieve their desired financial and personal outcomes. Knowledge is a person’s understanding of a subject, skills are the proficiencies a person has to apply to specific situations, attitudes are a person’s general perceptions of a subject, and behaviors are the actions that a person demonstrates.

Building customers’ financial capability is good for both the customer and the FSP. While the link between earnings and a non-financial service, such as financial capability building, might not be immediately obvious, <a href="https://www.fmo.nl/l/en/library/download/urn:uuid:f5a1783f-c435-4031-9d29-bba057663a06/ifc-fmo%2Bfinal_publication.pdf" target="_blank" rel="noopener noreferrer">evidence exists</a> that <a href="https://www.forbes.com/advisor/banking/banks-need-do-more-help-customers-become-financially-successful/" target="_blank" rel="noopener noreferrer">financially capable customers make for a financially sound portfolio</a>, barring macroeconomic volatility. Financially capable borrowers are more likely to repay their loan, thus boosting FSPs’ profitability by lowering the problem loan ratio. Additionally, financially capable customers are more likely to be eligible for loan renewals, and <a href="https://hbr.org/2014/10/the-value-of-keeping-the-right-customers" target="_blank" rel="noopener noreferrer">retaining customers costs less</a> than acquiring new ones.
<h3><strong>Why Develop an App? </strong></h3>
While many FSPs continue to focus on digital transformation, limitations in technology infrastructure and financial resources pose key barriers to digitalization. With these challenges in mind, CFI and MetLife created FinVenture, a mobile-compatible, browser-based web app. FinVenture aims to build customers’ financial capability by presenting users with a series of relevant activities to complete in return for rewards.

The MVP app was designed with the following goals:
<ol>
 	<li>maximize availability across devices</li>
 	<li>reduce steps required to access</li>
 	<li>allow for operation independent of an FSP’s existing IT infrastructure</li>
 	<li>minimize the risk of having complex technology be a distraction – a <a href="https://www.cgap.org/blog/pitfalls-mfi-digitization-getting-bogged-down-technology" target="_blank" rel="noopener noreferrer">common pitfall in digitalization</a>, and</li>
 	<li>allow ample room for iteration.</li>
</ol>
Finally, and importantly for customer engagement, FinVenture’s simple design and interface ensure that customers with basic digital literacy could engage with it.
<h2><strong>Lessons Learned</strong></h2>
The following three key takeaways have come out of our pilots with Grassland Finance Limited and FINCA Kosovo. These pilots are expected to run until June 2022. After that, an analysis of user engagement and feedback will be instrumental in determining the future of the FinVenture platform and our partners’ financial capability-building activities.
<h3><strong>Lesson 1: Build Activities Around “KSABs” </strong></h3>
If financial literacy interventions have taught us anything, it is that focusing solely on improving knowledge and skills, which traditionally relies on rote memorization and lecture-based learning, is not sufficient for improving financial outcomes. With this in mind, CFI used the four financial capability components -- the knowledge, skills, attitudes, and behaviors (KSABs) -- as the launching point to design a diverse set of activity types.

Following extensive user research, we determined a core set of activity types that offer variety while also prioritizing the need for simplicity and functionality. The table below illustrates how each activity type -- namely, quizzes based on articles and case studies, financial tracking tools, and surveys -- is expected to enhance a financial capability component.

<img class="wp-image-43850 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/01/Screen-Shot-2022-01-11-at-10.53.11-AM.png" alt="" width="894" height="711" />

<img class="wp-image-43853 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/01/Screen-Shot-2022-01-11-at-11.04.26-AM.png" alt="" width="420" height="592" />
<h3><strong>Lesson 2: Structure the App Content to Allow for Personalization</strong></h3>
To make the content as relevant as possible for each user, the FinVenture app encourages users to begin by completing an introductory activity to measure their baseline level of financial capability. The introductory activity primes users to reflect on their financial goals and create a personalized experience based on those goals. Users are then prompted to select up to three activities to complete at a time. This structure allows FSPs to leverage user engagement data to inform the design of products and services that can best help customers achieve their financial goals.

For many customers, the breadth of financial information available can be a deterrent from thinking meaningfully about their finances. Creating an organizing structure that is based on financial goals is one way to help overcome potential information overload. We identified core financial goals – namely money management, planning, resilience, and use of financial services – to shape the FinVenture modules.
<h3><img class=" wp-image-43859 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/01/Screen-Shot-2022-01-11-at-11.14.05-AM.png" alt="" width="399" height="813" /></h3>
<h3></h3>
<h3><strong>Lesson 3: Build Incentives to Keep Users Engaged</strong></h3>
To incentivize user engagement, FinVenture’s point system (FINWALLET) contributes to internal motivation while also providing institutions the option to offer material rewards. By allowing partners the ability to choose what rewards to give, the app can be customized to encourage user engagement. One of our pilot partners, Grassland, chose to integrate FinVenture into their <a href="https://tweb.grassfin.com/esg/#/" target="_blank" rel="noopener noreferrer">client education platform</a> and set up a rewards system in which clients can exchange FinVenture points for a variety of rewards, ranging from tangible gifts such as a reusable grocery bag to lump-sum discounts that can be applied to their loan installment payments.
<h2><strong>Considerations for Future App-Based Financial Capability Interventions </strong></h2>
Although the following features didn’t make the FinVenture MVP development due to resource and time constraints, they are worth mentioning for FSPs that are considering developing a financial capability-building app. These features draw from our user research, behavioral science best practices, and pilot partner suggestions.
<h3><strong>Peer Exchange</strong></h3>
One way to strengthen an app’s effectiveness in shifting attitudes would be to incorporate a peer exchange functionality – for example, users could share financial milestones achieved or personal finance hacks that have worked for them. Using <a href="https://blogs.worldbank.org/voices/using-social-media-change-norms-and-behaviors-scale" target="_blank" rel="noopener noreferrer">social media</a> and <a href="https://www.harvardbusiness.org/what-makes-storytelling-so-effective-for-learning/" target="_blank" rel="noopener noreferrer">storytelling</a> has proven to be effective for influencing attitudes and changing behaviors.
<h3><strong>Soliciting Customer Feedback to Inform Content</strong></h3>
Another way to increase user engagement would be to have customers identify where they need help. If an app provided initial recommendations of topics, these could be further refined based on users’ activity engagement and performance. In addition, the FSP can leverage its established feedback channels such as social media, focus groups, or email to take requests from customers. This added feature would allow customers to better chart their own course to improve their financial capability.
<h3><strong>Group Activities </strong></h3>
FSPs can leverage peer and social relationships to encourage financial capability-building behaviors by presenting users with a series of tasks as part of a team in return for rewards. This is worth exploring for users who share financial responsibility with other household members.
<h2>Conclusion</h2>
This project has begun to shed light on how FSPs can use a customer-centric and behaviorally-informed app to begin building customers’ financial capability. In addition to the financial benefits for FSPs that result from having financially capable clients, investing in the financial success of customers strengthens customer relationships and has the potential to further financial inclusion.

Improving Customer Financial Capability Through a Digital App: Lessons Learned from Pilots with Two FSPs

About a month ago, I participated in a webinar on the <a href="https://www.wri.org/research/state-climate-action-2021" target="_blank" rel="noopener noreferrer">State of the Climate Action Report</a> produced by the World Resource Institute. I was distressed by the magnitude of what needs to be done to delay the rapid warming of our planet which, unless halted, will soon make the world uninhabitable for the majority of people, and the speed of change necessary to reach some climate goals.

In particular, discussions related to diffusion theory – the non-linear progression of change when adopting new technologies typically depicted as an S-curve – were eye-openers. Adoption is expensive and limited to the few die-hard believers when a new technology is launched. But over time, as costs decline, there is an exponential growth in adoption, which eventually flattens out as adoption becomes universal. The adoption of electric vehicles is an apt case in point.
<p style="text-align: center;"><img class="alignnone wp-image-43700 size-full aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/12/Screen-Shot-2021-12-15-at-11.26.07-AM-e1639593107845.png" alt="" width="2282" height="1511" /><em>(Credit: <a class="c-link" tabindex="-1" href="https://www.business-planning-for-managers.com/Worpress/wp-content/uploads/2012/01/adoption_curve.jpg" target="_blank" rel="noopener noreferrer" data-stringify-link="https://www.business-planning-for-managers.com/Worpress/wp-content/uploads/2012/01/adoption_curve.jpg" data-sk="tooltip_parent" data-remove-tab-index="true">Investaura Ltd</a>.)</em></p>
However, diffusion theory seems to apply to more than just technological adoption. In fact, to me, it’s also an explanation of how change happens in society: for example, how certain songs become popular, public health practices are adopted, and languages evolve.
<blockquote class="pullquote--right">A clear shift is happening in inclusive finance that resembles the latter stages of the S-curve.</blockquote>
As I reflect on this past year and where we are in inclusive finance, it is evident that a clear shift is happening that resembles the latter stages of the S-curve. Perhaps “mainstreaming” is the appropriate nomenclature in this case. While in its early days, the inclusive finance space comprised a closed group of select stakeholders who believed that the financial system needed to go beyond serving corporations and high-net-worth individuals, today there is near-universal consensus that financial and all systems – be it transportation, food, or financial services – need to be inclusive.

I see four trends in inclusive finance that are symbolic of this shift:
<h2>1. Customer adoption of DFS is accelerating at an exponential pace.<strong>
</strong></h2>
Country-focused research initiatives by various agencies have reported a clear acceleration of the rate of adoption of digital financial services, which is often the first step in onboarding a customer to the formal financial system. We hope that the next edition of the <a href="https://globalfindex.worldbank.org/" target="_blank" rel="noopener noreferrer">Findex</a>, to be released in the first half of 2022, will provide representative and comparable data to substantiate this trend. The pandemic was a clear mobilizer, but government transfers of social payments using mobile money and other digital channels were pivotal in spurring the uptake of DFS among low-income marginalized communities.

GSMA’s <a href="https://www.gsma.com/sotir/" target="_blank" rel="noopener noreferrer">State of the Industry</a> report noted the marked global expansion of mobile money. There are now more than 1.2 billion registered mobile money accounts, with growth in 2020 twice as high as originally predicted. In other words, adoption is happening at an accelerated pace. Concurrently, the number of active users also increased exponentially. While it took a decade to reach the first 100 million active users, the next five years saw an increase to over 300 million active users – a milestone worth celebrating.
<h2>2. Large companies are adopting inclusive finance as a core business.</h2>
When Dan Schulman went to PayPal in 2014, he was one of the early adopters of financial inclusion, later announcing a shift to financial health in 2019 for PayPal’s overall vision. For most other large financial services companies, inclusive finance was at most a part of their corporate social responsibility (CSR) function.
<blockquote class="pullquote--left">Today, most financial services companies have inclusive finance as their core business.</blockquote>
Today, most financial services companies have inclusive finance as their core business. I recently met with AXA’s Emerging Customers team, a core business team solving real-life risks with creatively-structured insurance products designed, priced, and distributed in ways that directly meet the needs of low-income consumers. Garance Wattez-Richard, Head of AXA Emerging Customers, said, “it’s not about making the same products miniature, it’s about completely redesigning insurance for new population segments.”

Similarly, Mastercard’s core business is about serving small businesses everywhere. To achieve this lofty goal, they are structuring partnerships, testing new models, and solving pre-system-level problems through their institute, the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Center for Inclusive Growth</a>. But these partnerships go well beyond financial services companies. Corporations like Walmart, Cargill, Syngenta, and many others are re-imagining their value chains and embedding financial services in ways that allow them to reach previously excluded customers.
<h2>3. More startups are adopting inclusive finance as a core business.</h2>
It’s not just the large corporations. Inclusion is top of mind for early-stage fintechs, too. <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">The Inclusive Fintech 50</a> (IF50), an initiative implemented by CFI and sponsored by Visa, MetLife Foundation, and Comic Relief/Jersey Overseas Aid in partnership with IFC and Accion, was launched in 2019. Each year thousands of fintechs globally submit their data to be considered for the competition. Even as the process has become more rigorous each year, with requirements to provide evidence and substantiate approaches that reach underserved segments, the sheer number of early-stage fintechs that participate gives a glimpse of what’s <a href="https://bfaglobal.com/catalyst-fund/briter-catalyst-fund-state-of-the-fintech-industry-report/" target="_blank" rel="noopener noreferrer">happening in the broader fintech space</a>. The 2021 competition uncovered incredible fintechs providing an array of services to underserved populations, many of which directly supported low-income customers to survive and recover from the pandemic.

For instance, during the pandemic, the Mexican neo-bank <a href="https://bankaya.com.mx/" target="_blank" rel="noopener noreferrer">Bankaya</a> deployed agents at retail points such as supermarkets to educate potential customers on Bankaya's digital savings products. Within nine months of their launch, Bankaya reached over 132,000 customers, 52 percent of whom are women. Colombian fintech <a href="https://avista.co/" target="_blank" rel="noopener noreferrer">Avista</a> has been leveraging its AI-driven, internal credit scoring algorithm to provide credit to financially underserved pensioners. Others such as <a href="https://www.thriveagric.com/" target="_blank" rel="noopener noreferrer">ThriveAgric</a> in Nigeria and <a href="https://www.sasa.solutions/" target="_blank" rel="noopener noreferrer">SASA Solutions</a> in South Africa are helping smallholder farmers gain access to information and financial services via their platform, while <a href="https://gotugende.com/" target="_blank" rel="noopener noreferrer">Tugende</a> is providing asset financing and helping Ugandan micro-entrepreneurs build credit scores, digital profiles and avail other services like life insurance and safe riding training.
<h2>4. Even tangential businesses are staking claims to inclusive finance.</h2>
Perhaps not as clear-cut as the previously cited examples is the emergence of complex financial products, like cryptocurrencies, using inclusion as their <em>raison d’etre</em>. While these solutions may eventually solve an inclusion problem by allowing someone to transfer money between jurisdictions at relatively low rates, they still have a long way to go. Many of the reasons that prevent low-income people from joining the digital economy – lack of identification, limited access to smartphones, cost of data, to name a few – are not addressed by cryptocurrencies. Yet, these companies see it as important to support their work by adopting the language of inclusion.

&nbsp;
<h2><strong>Still Early on the Curve</strong></h2>
The diffusion of things that are good for people and society is undeniably desirable. A large number of people today are benefitting from increased access to financial services. But how do we guarantee the benefits received are improving the livelihoods of consumers? A decade of asking people to report on their practices and validating them through independent certifications has not done enough to diffuse good practices. We still see <a href="https://www.centerforfinancialinclusion.org/trust-of-data-usage-sources-and-decisioning-perspectives-from-rwandan-mobile-money-users">sub-standard practices</a> that are harmful to low-income clients, even among institutions that are thought to have sound policies.
<blockquote class="pullquote--right">If inclusion is everything, then it’s no longer anything.</blockquote>
We need to ensure that consumers are protected. We need to guarantee that financial services address consumers’ livelihood needs and do not create a vicious cycle of indebtedness or hide costs in a convoluted pricing model where consumers are unable to understand or compare services. We need to go beyond payments services and prioritize financial services that enable investments in livelihoods and create opportunities to increase income. We need transparency and more data that helps investors, researchers, and consumers differentiate the charlatans peddling snake oil from those offering quality services.

Perhaps one place to start is coming up with a new name. If inclusion is everything, then it’s no longer anything. What should the next chapter of inclusive finance be called? Send us your creative solutions, and together let’s start the work on the diffusion of positive impact together.

Diffusion Theory, the S-Curve, and Why We Need to Go Beyond Inclusion