<p style="font-weight: 400;">Artificial intelligence (AI) enables innovations in digital finance that can boost efficiency, cut costs, and expand consumer reach. AI provides scalable ways to determine the creditworthiness of individuals and businesses that historically lacked identification, collateral, and credit history. And by automating processes, AI can enable higher volumes of low-value transactions that make harder-to-reach segments more viable customers. However, while AI presents tremendous opportunities, deploying AI also comes with significant risks – one being inequitable outcomes for marginalized consumers, especially women. When applied at scale, the harms caused by AI counter the financial inclusion goals of many impact investors and their portfolio companies. While impact investors are well positioned to take a proactive role in supporting companies in building and deploying equitable AI systems in inclusive finance services, they often do not have the tools required to assess and evaluate the fairness of algorithms. Recognizing this gap, the Center for Financial Inclusion (CFI) developed a practical guide for impact investors to help them identify harmful AI gender bias.</p>
<p style="font-weight: 400;">The <em>Investing in Equitable AI for Inclusive Finance: A Risk Management Guide for Impact Investors</em> gives an overview of the use cases of AI in inclusive finance and some of the drivers of harmful AI bias towards women. It also presents a snapshot of the state of practice in bias identification and mitigation and then provides a user-friendly checklist with an actionable set of questions to help impact investors understand the use of AI among their investee companies.</p>
<p style="font-weight: 400;">The accompanying brief, <em>Prompts for Equitable Artificial Intelligence in Inclusive Finance: Strengthening the Industry</em> <em>Conversation,</em> presents some of the key challenges with building accountability and transparency for AI in inclusive finance and discusses how CFI’s new guide can help raise awareness around the risks and costs of gender bias in AI. The brief also offers opportunities to strengthen the industry conversation on equitable AI, including advancing research, supporting consumer advocacy and journalism, and operationalizing data rights for consumers.</p>
<p style="font-weight: 400;"><em>This work is the result of USAID’s <a href="https://www.usaid.gov/innovation/competitions/equitable-ai-challenge" target="_blank" rel="noopener noreferrer">Equitable AI Challenge</a>. Implemented by DAI’s Digital Frontiers, the challenge aimed to identify innovative approaches to address artificial intelligence inequitable outcomes. The Equitable AI Challenge asked for proposals that critically consider holistic and creative approaches to identify and address gender biases in AI systems within global development contexts. This work is the result of CFI’s winning proposal.</em></p>

Equitable AI for Inclusive Finance

<span data-contrast="auto">Over the last few years, the pandemic-induced transformation of the global economy has fueled a rapid expansion of the fintech sector. This evolution has revealed the potential of fintech to eliminate geographical and physical barriers and enable consumers and providers to gain unprecedented access to information, creating a more efficient, inclusive global financial system.</span>

<span data-contrast="auto">Nonetheless, the fintech expansion in low- and middle-income markets faces numerous challenges, and several unanswered questions linger. Will the fintech sector maintain its momentum? How will it evolve in a post-pandemic world? What unforeseen challenges await? These queries spotlight the intriguing unknowns within the sector.</span>
<blockquote class="pullquote--right"><span data-contrast="auto">While inclusive fintechs have expressed their commitment to continue serving low-income and vulnerable segments, their ability to sustain that commitment depends on funding. </span></blockquote>
<span data-contrast="auto">Earlier this year, we interviewed 12 winners of the </span><a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Inclusive Fintech 50</span></a><span data-contrast="auto"> (IF50) competition and six fintech investors to assess their performance amidst numerous macroeconomic challenges like rising interest rates, decreased food supply, and large price gains. In June 2023, we published the findings of these conversations in a recent report, </span><a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/06/IF50-2019-2022-Report.pdf"><span data-contrast="none">Inclusive Fintech Funding in Times of Uncertainty</span></a><span data-contrast="auto">, which underscored the commitment of inclusive fintechs to serve low-income individuals. To ensure success, these companies are bolstering their emphasis on core business principles, prioritizing customer needs, and actively working toward substantial revenues and profits.</span>

<span data-contrast="auto">While inclusive fintechs have expressed their commitment to continue serving low-income and vulnerable segments, their ability to sustain that commitment depends on funding. To better understand the fintech funding landscape, we analyzed funding data provided by </span><a href="http://www.briterbridges.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Briter Bridges</span></a><span data-contrast="auto"> from different periods, regions, and market segments. Nearly 75 percent of the fintechs in this dataset have raised capital up to Series B deals. Our analysis focused on four regions: Latin America &amp; the Caribbean, the Middle East &amp; North Africa, Sub-Saharan Africa, and South Asia. From South Asia, Briter Bridges only collected data for India. From the Briter Bridges data, we examined funding deals from January 2015 to February 2023 and identified four key trends in fintech funding. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h1><b><span data-contrast="auto">1. Fintech funding is slowing down globally.</span></b></h1>
<span data-contrast="auto">Since 2015, fintech funding has consistently trended upward – both in terms of the number of deals and total deal volume – with a minor slowdown in 2020 during the COVID-19 pandemic and a significant surge in 2021. Notably, the number of overall deals increased from 484 in 2020 to 851 in 2021, while the total deal volume rose by 96 percent – from USD $5.3 billion in 2020 to $10.4 billion in 2021.</span>

<span data-contrast="auto">Among the regions, South Asia (representing data only from India) experienced the highest increase in total deal volume since 2015, followed by Latin America &amp; the Caribbean, the Middle East &amp; North Africa, and Sub-Saharan Africa. The surge across all regions indicates a promising industry landscape and highlights investors’ interest in fintech across geographies.</span>

[caption id="attachment_46199" align="aligncenter" width="1239"]<img class="wp-image-46199 " src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/07/Screenshot-2023-07-24-at-1.21.01-PM.png" alt="" width="1239" height="640" /> <em>Source: Briter Bridges data for fintech deals from 2015 to 2022, excluding mega-deals over $100M.</em>[/caption]

&nbsp;

However, in 2022, the growth in both deal volume and the number of deals was more modest, with a 10 percent increase in deal volume and a 2 percent increase in the number of deals. The number of deals declined or remained stagnant in India, the Middle East &amp; North Africa, and Latin America &amp; the Caribbean, while it increased in Sub-Saharan Africa.

Then, in January and February 2023, the sector witnessed a significant 54 percent decrease in overall deal volume compared to the same period in 2022. Of the four regions, the Middle East &amp; North Africa was the only region to see an increase in overall deal volume during this period, with all others declining.

By Q3 2022, industry stakeholders began experiencing a ‘<a href="https://bfsi.economictimes.indiatimes.com/news/fintech/how-cold-is-the-fintech-funding-winter-when-will-the-crisis-end/96054281#:~:text=1%29%20What%20is%20the%20FinTech%20funding%20winter%3F%20Funding,FinTech%20startups%20particularly%20are%20facing%20this%20funding%20winter." target="_blank" rel="noopener noreferrer">fintech funding winter,</a>’ a term that references the current state of declining funding opportunities and company valuations across the fintech sector. Since then, there has been a <a href="https://www.cbinsights.com/research/report/fintech-trends-q2-2023/" target="_blank" rel="noopener noreferrer">noticeable decrease in funding and deals</a> within the global fintech ecosystem during Q2 2023, reaching the lowest level since 2017. In Africa, there was a significant <a href="https://thebigdeal.substack.com/p/winter" target="_blank" rel="noopener noreferrer">37 percent year-on-year decline</a> in total transaction value for African start-ups between June 2022 and July 2023 compared to the same corresponding period in the prior year.
<h1><strong>2. Funding remains geographically concentrated with a regional disparity in deal sizes.</strong></h1>
We also observed significant variation in the median deal sizes across different regions. In 2022, the median deal size in Sub-Saharan Africa was $1 million, reflecting the prevalence of very early-stage fintechs. In contrast, the median deal size in 2022 was $6.5 million for fintechs in Latin America &amp; the Caribbean region and $6.4 million in South Asia. This difference illustrates how regions have distinct funding dynamics and growth trajectories.

Looking at trends over the past four years, we see that from 2020 to 2021, the median deal size remained unchanged in South Asia while increasing in the other three regions. From 2021 to 2022, the median deal size increased across all regions except the Middle East &amp; North Africa, which stayed constant.

[caption id="attachment_46200" align="aligncenter" width="1276"]<img class="wp-image-46200 " src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/07/Screenshot-2023-07-24-at-1.22.14-PM.png" alt="" width="1276" height="554" /> <em>Source: Briter Bridges data for fintech deals from 2019 to 2022, excluding mega-deals over $100M.</em>[/caption]

&nbsp;

In the dynamic world of fintech funding, four countries – India, Brazil, Israel, and Mexico – received 80 percent of the overall funding in recent years. India leads with a total funding volume of $22 billion between 2015 and 2023, showcasing its thriving fintech ecosystem and investors’ support. Brazil and Israel both secured $4.5 billion in total funding volume, with Mexico attracting $3.7 billion. Funding to Brazil, Israel, and Mexico captured a considerable share of their region’s funding (40 percent, 65 percent, and 32, respectively).

Examining the period from 2020 to 2022, we see that the total deal volume increased in all four countries in 2021. However, in 2022, the total deal volume increased in India and Mexico but declined in Brazil and Israel.
<blockquote>Limited access to formal financial services, combined with rapid digitization in recent years and favorable regulatory frameworks, all contribute to these four countries attracting the majority of regional fintech funding.</blockquote>
Two factors have driven access to funding in these countries. First, consumer demand and unmet needs revealed significant market potential. Second, a conducive enabling environment in the form of regulations and policies encouraged innovation by financial service providers and adoption by consumers. Limited access to formal financial services, particularly credit for low-income individuals and MSMEs, combined with rapid digitization in recent years and favorable regulatory frameworks, all contribute to these four countries attracting the majority of regional fintech funding. For example, in India, <a href="https://www.bain.com/insights/india-fintech-report-2022-sailing-through-turbulent-tides/" target="_blank" rel="noopener noreferrer">initiatives</a> like the Jan Dhan-Aadhaar-Mobile (JAM) trinity, the Unified Payments Interface (UPI), and updated regulations and policies accelerated digital adoption during the pandemic. Rapid digitization has benefited emerging fintech players, boosting digital financial solutions and driving financial inclusion.

[caption id="attachment_46196" align="aligncenter" width="1101"]<img class="wp-image-46196 " src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/07/Screenshot-2023-07-24-at-1.12.02-PM.png" alt="" width="1101" height="505" /> <em>Source: Briter Bridges data for fintech deals from 2020 to 2022, excluding mega-deals over $100M.</em>[/caption]

&nbsp;

While no African countries made it to the list of the top four countries with the largest funding in recent years, Nigeria stood out with the highest deal volume among African countries. It received a modest accounting for 40 percent of the region’s overall funding.
<h1>3. <strong>Regional variations in the demand for financial products influence funding distribution.</strong></h1>
The distribution of funding by fintech product categories has shifted over time. Historically, credit products received the bulk of the funding within the fintech sector. Insurance, which typically receives lower levels of funding, surged in 2020 as the pandemic <a href="https://www.bcg.com/industries/insurance/the-strategic-role-of-insurtechs-post-covid-19" target="_blank" rel="noopener noreferrer">accelerated the demand for digital transformation</a>. Insurance fintechs that were able to innovatively leverage digital and analytics became more attractive to investors. Additionally, we observed an increase in the share between 2018 and 2021, although this category declined in 2022. There is also an upward trend in the popularity of personal financial management products (PFM), as <a href="https://www.businessinsider.com/personal-finance-management-market" target="_blank" rel="noopener noreferrer">more fintechs and digital banks begin offering PFM products or PFM features</a>.

[caption id="attachment_46201" align="aligncenter" width="1197"]<img class="wp-image-46201 " src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/07/Screenshot-2023-07-24-at-1.23.55-PM.png" alt="" width="1197" height="661" /> <em>Source: Briter Bridges data for fintech deals from 2015 to 2022, excluding mega-deals over $100M.</em>[/caption]

&nbsp;

Looking at the breakdown of regional fintech funding by product category, we see the importance of catering to the unique financial demands of specific markets. For example, funding for credit fintechs dominates overall fintech funding in South Asia and Latin America &amp; the Caribbean, while the Middle East &amp; North Africa focuses on DFS infrastructure and PFM, and Sub-Saharan Africa prioritizes payments and remittances. Despite the ways in which insurance can enhance the resilience of low-income households, insurance products continue to receive minimal investor attention across all regions. Insurance products are typically offered as part of a product bundle and continue to be <a href="https://static1.squarespace.com/static/5bede261f2e6b1e5ead0a0ba/t/6399ed1a42246a3d457d56cd/1671032094317/IF50+2022+Insights+Deck.pdf" target="_blank" rel="noopener noreferrer">difficult to market and sell</a>.
<h1>4. The funding gap for small deals could contribute to the ‘death valley curve’.</h1>
Looking at the past deals of the top 20 investors, we see a discrepancy among different types of funders’ investment strategies and risk appetites. Accelerators and incubators have a higher number of deals, but their median deal size remains relatively modest – often below $500,000. On the other hand, private equity, venture capital, and impact investing funds have median deal sizes ranging from $7 to $20 million, reflecting their substantial investment capacity.

We also see a dip in the number of deals targeted for early-stage fintechs – in the amount of $501,000 – $1 million – by any investor type. In 2020, despite an overall increase of more than 70 percent in the number of total deals that year, the proportion of deals within the $501,000 – $1 million range was only 8 percent. The proportion of deals conducted for this size bracket has remained consistently between 7 to 9 percent over the past 4 years, likely contributing to the ‘<a href="https://hbr.org/2022/04/an-entrepreneurs-guide-to-surviving-the-death-valley-curve" target="_blank" rel="noopener noreferrer">death valley curve<u>’</u></a> experienced by start-ups.

[caption id="attachment_46198" align="aligncenter" width="702"]<img class=" wp-image-46198" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/07/IF50-blog-post-graph5.png" alt="" width="702" height="440" /> Source: Briter Bridges data for fintech deals from 2015 to 2022, excluding mega-deals over $100M.[/caption]
<h1><strong>Winter is Here</strong></h1>
While global trends indicate that we are living in a fintech funding winter, not all hope is lost. The fintech sector continues to be an area of significant opportunity and innovation, attracting attention from investors globally. Recent funding trends highlight the dynamic nature of fintech investments, as fluctuations in deal volume, regional preferences, and investor interests impact the funding fintechs receive. In addition, because fintech funding responds to specific characteristics of national economies and factors that create an enabling environment – such as the speed of digitalization, level of innovation, regulatory frameworks, and funding gaps for low-income populations – it is useful to observe trends in the fintech industry to understand the market demand and needs for various financial solutions in different markets.

Fintech investors and other stakeholders should adopt a balanced perspective, draw upon the lessons learned from past successes and failures, and continue supporting inclusive fintechs that offer products to low-income households. By doing so, they can effectively guide inclusive fintechs toward sustained growth and impactful outcomes.

Exploring Fintech Funding Dynamics in Recent Years

The Intersection of Financial Inclusion and Gender during the COVID-19 Pandemic: Insights from Impact Investing

<div class="page" title="Page 3">
<div class="layoutArea">
<div class="column">

Over the last ten years, catalytic capital — investment capital that is patient, risk-tolerant, concessionary, and adaptable — has played an increasingly important role in filling the gaps left by the rapidly expanding and diversifying field of impact investing and serves to attract more conventional investors to sectors with high development potential. While we do not know the volume of catalytic capital investments in inclusive finance, we know that investments in inclusive finance continue to be a top category of growth.

</div>
This report focuses on the role of catalytic capital in the digital credit industry and highlights the limitations of a framework that does not consider broader market-level consequences of such investments. The rapid growth of digital credit has resulted in an influx of investment but also created significant concerns over consumer protection, and the supervisory capacity of local regulators has failed to keep pace with the risks. The report draws lessons from how digital credit markets have evolved and highlights guardrails needed at the market level to ensure that growth is responsible, impactful, and leads to inclusive market development.

</div>
</div>

The Role of Catalytic Capital in Digital Markets: Successes, Pitfalls, and Lessons Learned

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

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

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

Microfinance began in its early days as a novel approach to economic development with a focus on making loans to low-income customers using social collateral. No longer niche, microfinance has reached millions of customers around the world and helped demonstrate that low-income people are, in fact, bankable. Fast forward to today, when microfinance is now but a subset of a diverse range of financial service providers targeting low-income customers.

How did we get here and what happens next for microfinance? CFI recently sat down with one of the editors of a new book that seeks to answer that question.

Paul DiLeo, Managing Director of Grassroots Capital Management and former faculty member of CFI’s <a href="https://centerforfinancialinclusion.org/board-leadership-for-impact-program-overview/" target="_blank" rel="noopener noreferrer">governance training</a> programs in Africa, coedited “<a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a>,” with Ira Lieberman, Todd Watkins and Anna Kanze. The book was born out of a workshop at Lehigh University and includes contributions from more than twenty leading authorities in the field. Together, they tell the important story of how microfinance developed and how it has met the needs of hundreds of millions of people. They also set forth answering questions about how it can continue to meet those needs.
<h3>Why did you publish this book?</h3>
<strong>PD</strong>: The coeditors and I felt that, somewhat paradoxically, as microfinance has consolidated its position to be an integral component of national financial systems around the world, its visibility has diminished. Its success -- and setbacks -- hold important lessons for the broader financial inclusion and impact investing communities at a time when market-based solutions to pressing social and environmental challenges are receiving so much attention. The microfinance experience can be useful in helping these initiatives achieve timely success and avoid pitfalls. Also, while not a consideration when the bulk of the book was written, it also offers some guidance on the essential value we have to preserve as microfinance navigates the pandemic.
<h3>Looking back on microfinance’s history, what are some of the key milestones or accomplishments?</h3>
<strong>PD</strong>: In the early days, microfinance started to demonstrate that poor people didn’t pose an insurmountable credit risk; they were not unbankable and they were not uncreditworthy. From there, the industry moved to prove that the institutions serving microfinance clients can operate sustainably and that they aren’t preponderantly dependent on subsidized or concessional financing. Further, the funding going into the microfinance industry began to evolve to a broader range of financing – from grants and heavily subsidized capital, to purely commercial capital. From there, microfinance institutions (MFIs) began taking on more of the substance of financial institutions from a regulatory, supervisory, and governance standpoint.

What’s interesting is how microfinance has become less of a “headline topic.” In other words, microfinance is now part of the mainstream landscape just like every other sort of subcategory of financial institutions. Microfinance is no longer this idiosyncratic oddity that people can write “whoever imagined this” articles about.
<blockquote class="pullquote--right">Microfinance is no longer this idiosyncratic oddity that people can write “whoever imagined this” articles about.</blockquote>
However, there is a downside. Microfinance was never intended to become “mainstream.” It was always intended to be distinctive from everything else in conventional financial services.
<h3>I’m sure if I asked you in January, your answer would be much different, but how would you describe the chapter of microfinance we're in now?</h3>
<strong>PD</strong>: I think this chapter poses the question of whether microfinance can preserve its essential differentiation: does it retain its priority commitment and distinctive character to continue to serve poor people? Some institutions do it more efficiently, do it more profitably, achieve greater scale, so there's nothing distinctive about microfinance in those dimensions. What distinguishes microfinance is the priority to develop products and services along with the ability to find ways of reaching and innovating for their clients.

Microfinance derives a substantial proportion of its value through relationships that accrue to the client rather than being captured and maximized for the benefit of the financial intermediary. This isn’t a new concept, but the current situation resulting from COVID is going to put this topic in focus because inevitably you're going to see a lot of mergers. We’ll have to keep an eye on the character of the fewer institutions that survive.
<h3>On the topic of consolidation, the book mentions how, in competitive markets, like Peru or India, consolidation is much faster than in less saturated markets. Do you see COVID accelerating consolidation, and if so, in which markets?</h3>
<strong>PD</strong>: Consolidation in the microfinance industry has always been a challenge because in many markets there are many smaller institutions that do not see the benefit, or feel pressure to achieve economies of scale. I think what may be different now, as opposed to previous crises, is that decapitalization is going to be faster and more severe, and the impact is affecting all institutions to a significant degree at the same time.

The wild card is what the regulatory authorities will do because in many of the less competitive markets a lot of these institutions may not be subject to strict regulatory capital requirements, which allow institutions to operate with relatively low levels of capital, or even negative net worth, while they wait and see if a brighter day comes. If regulators do not move to force consolidation, you could see the typical resistance to consolidation and, as a result, a lot of these institutions will continue to fight for survival. Whether consolidation is forced by regulators or not, funders could force consolidation, since they are the ones providing life support. Hopefully, the industry will keep in mind the importance of preserving what is distinctive about microfinance, rather than just trying to create the most profitable and efficient institutions.
<h3>The book mentions how many players in the space “have gone on to other endeavors like financial inclusion, which is closely related to microfinance, but not quite the same thing.” Do you think there’s still enough interest and, more importantly, enough capital to reinvest in microfinance?</h3>
<strong>PD</strong>: Unfortunately, some of the legacy investors in microfinance have declared victory and moved on because, from their perspective, microfinance is well established and has relatively good access to capital markets based on a solid business model developed through experimentation and trial and error over many years.

In one sense, there's nothing wrong with these investors that ostensibly have a development objective moving on to support new models. However, in pursuing their mandates to address social and economic issues, they shouldn’t just move on to the next bright, shiny object in financial inclusion. They should continue to support and guide a proven model like microfinance as it scales to preserve social missions and achieve appreciable benefit to target populations.
<blockquote class="pullquote--left">Investors shouldn’t just move on to the next bright, shiny object in financial inclusion.</blockquote>
It’s a shame that many of these investors have essentially ceded responsibility for preserving what they played a large part in creating. Instead of saying “it’s not our role anymore,” those funders can recommit and play an outsized role in preserving the character and integrity of microfinance. Just because you have succeeded in developing and nurturing a business model like microfinance, doesn't mean your responsibilities are over.
<h3>From a governance perspective, what are some considerations microfinance investors and executives should keep in mind as the industry continues to grapple with COVID-19?</h3>
<strong>PD:</strong> It’s important to re-emphasize that leaders in management and boards need to look at both the financial stabilization of their institution and the implications for clients to determine their response.

For example, accelerating the shift to more digital channels may be an obvious response to COVID, but we need to ensure that we aren’t leaving certain client segments – rural, illiterate, older, women – behind.

We may feel pressure to quickly achieve pre-COVID levels of profitability, but this urge should be resisted if it means abandoning certain clients, products or research that are core to our social mission.
<h3>There’s a chapter written on the need to refocus on the client. Do you think the industry has moved away from focusing on customer centricity to something like product development?</h3>
<strong>PD:</strong> The book has a line that states most MFIs understand the poor, which helps them better serve the poor; however, we must make a distinction between the product and the client. There's a lot of outfits that understand the poor very well, like lotteries, gambling casinos, and payday lenders. They can devise products that extract as much value as possible from the poor. The issue here is not just understanding the poor: it’s about what institutions do with that knowledge, the objective of learning about their vulnerabilities, and what they need.

MFIs have a huge amount of knowledge about the poor. MFIs understand the economic systems in which they operate as well as how the communities work and the characteristics of their value chains. That said, we must ensure we retain those strengths because if we move towards a more transactional relationship, we lose our ability to create meaningful value for customers and, instead, prioritize maximizing value extraction.
<h3>Do you have any recommendations to ensure the upcoming consolidation period is both responsible and maintains the ethos of client centricity?</h3>
<strong>PD:</strong> In our current context, I think one of the strengths of microfinance as a mature, established sector is that it has a diverse funder and shareholder base. Hopefully, these investors will recognize the crucial and, in many cases, unique role that microfinance can play in helping poorer, informal clients and communities weather the crisis. But for this to happen, legacy investors – the DFIs, philanthropies, social investors – who may have been diluted to low levels need to step up. MFIs exist to create value for their clients in a sustainable way, and legacy investors need to speak up and ensure that this character defines the way that the industry moves forward from COVID.

What Is the Future of Microfinance? Q and A with Paul DiLeo

Fintech startups have leveraged technology to lower transaction costs and reach underserved populations. These technologies can <a href="https://www.worldbank.org/en/results/2013/04/01/banking-on-women-extending-womens-access-to-financial-services" target="_blank" rel="noopener noreferrer">expand</a> financial services to women, who are often <a href="https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/bridging+the+gender+gap+in+access+to+finance" target="_blank" rel="noopener noreferrer">excluded</a> from formal financial services. The COVID-19 pandemic makes it even more critical to address gender equity, as <a href="https://www.womensworldbanking.org/insights-and-impact/building-resilience-how-to-ensure-women-are-not-left-behind-as-a-result-of-covid-19/" target="_blank" rel="noopener noreferrer">evidence</a> indicates women have been disproportionately impacted by the economic impacts of the virus. While fintechs can play an important role in designing accessible and meaningful solutions for marginalized populations, they can also run the risk of exacerbating the digital divide, including the mobile <a href="https://www.gsma.com/mobilefordevelopment/resources/mobile-gender-gap-report-2019/" target="_blank" rel="noopener noreferrer">gender gap</a>.

This two-part blog post explores data from <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> and <a href="https://www.themix.org/publications/fintech-benchmarks-report" target="_blank" rel="noopener noreferrer">Results of the Fintech Benchmarks Proof-of-Concept</a> to shed light on current gender disparities in the fintech industry – both at the management level and in their customer base. We provide initial insights and recommendations for investors and fintechs on overcoming some of these challenges. We hope the research community digs deeper into the disparities we highlight to understand the nuanced and sometimes intertwined barriers that female founders face, as well as how fintechs can serve the needs and preferences of female clients.

Two key insights emerge from the data focusing on early-stage fintechs:
<ul>
 	<li>Female-led fintechs face unique challenges when raising funds, but when they do, they demonstrate greater revenue generating potential compared to fintechs without women in leadership positions.</li>
 	<li>Perhaps not surprisingly, there is a gender gap in the customer base served by fintechs, and there is significant room for them to grow by addressing this gap.</li>
</ul>
In this first post, we will focus on the first point. Below are five broad observations.
<h2>1. Women are underrepresented among fintech CEOs and founders.</h2>
Female-founded companies are traditionally underrepresented in venture capital funding, and the fintech industry is no exception. In 2019, companies with a female CEO <a href="https://www.allraise.org/assets/pitchbook_all_raise_2019_all_in_women_in_the_vc_ecosystem.pdf" target="_blank" rel="noopener noreferrer">represented 11 percent of all venture capital deals</a> made globally (this increases to 20 percent if a female founder is included). However, only 7 percent of fintech VC deals had a woman in a CEO position.
<blockquote>Women are particularly underrepresented in fintechs founded in certain regions.</blockquote>
The 2019 Inclusive Fintech 50 data present a similar trend: 19 percent of the 400 applicants are female led, as defined by at least one female founder or executive. Women are particularly underrepresented in fintechs founded in certain regions – Middle East and North Africa (MENA) has the lowest share of female-led fintechs (only 8 percent), while Latin America and Caribbean and Sub-Saharan Africa stand marginally better at 15 percent and 11 percent, respectively. Furthermore, the data does not examine founders by country of origin, and female founders from developing countries may face unique barriers. As one female fintech founder from Sub-Saharan Africa explained: “A lot of the funding goes to foreign male founders. That’s one of the biggest challenges.”

<img class="aligncenter size-full wp-image-39748" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/Number-of-female-fintech-leaders-region.png" alt="graph" width="887" height="641" />

It’s important to put this data in the broader context of women’s representation in the workforce. Financial services have long been <a href="https://www.ftadviser.com/opinion/2019/12/04/financial-services-15-year-gender-diversity-failure/" target="_blank" rel="noopener noreferrer">dominated by men</a>. There is a misconception and unconscious bias that women do “better” in roles like HR, marketing and implementation versus strategy and innovation. For instance, according the <a href="http://www3.weforum.org/docs/WEF_GGGR_2020.pdf" target="_blank" rel="noopener noreferrer">World Economic Forum</a>, women make up about 26 percent of workers in data and AI roles, 15 percent in engineering roles and 12 percent in cloud computing roles, compared to 40 percent in marketing, 37 percent in sales, and 35 percent in product development.

It’s also no secret that women – particularly women of color – are underrepresented in educational programs, like MBAs, that can provide them a stepping stone into the financial services industry. While 2019 saw an increase in the number of female MBA applicants, socio-cultural values and norms can influence a woman’s ability and decision to attend higher educational programs. Programs like <a href="https://girlswhocode.com/">Girls who Code</a> and <a href="https://girlsintech.org/">Girls in Tech</a> are working towards eliminating the gender gap in technology and recruiting/encouraging young women to enter the tech industry.
<h2>2. Female-led fintechs generate higher revenues than those without women in leadership positions.</h2>
The 2019 Inclusive Fintech 50 data did not survey fintechs on revenue per customer, but preliminary evidence from the Fintech Benchmarks Proof-of-Concept reveals that female-led fintechs generate higher revenues. Among the sample of 45 fintechs, female-led ones had nearly three times the revenue per customer of non-female-led fintechs, but also three times the cost per customer. This year’s Inclusive Fintech 50 data will examine whether this trend holds true in a larger sample.
<blockquote>Among the sample of 45 fintechs, female-led ones had nearly three times the revenue per customer.</blockquote>
These findings add to the evidence of the strong relative performance of female-led fintechs, and are consistent with research across sectors demonstrating the revenue potential of female-led companies. For example, <a href="https://www.bcg.com/publications/2018/why-women-owned-startups-are-better-bet.aspx" target="_blank" rel="noopener noreferrer">research from BCG</a> finds that female-founded startups generate 10 percent higher revenue than their male peers over a five-year period. Similarly, a study of 3,000 top global companies by Credit Suisse shows that female leadership is associated with <a href="https://www.wgea.gov.au/sites/default/files/documents/csri-gender-3000.pdf" target="_blank" rel="noopener noreferrer">higher profitability and superior financial returns</a>.
<h2>3. Female-led fintechs are able to raise funds at similar rates to their counterparts, but disparities persist in certain regions, namely, those with wide financial inclusion gender gaps.</h2>
The BCG study also revealed that female-founded startups raise less than half of what male-founded startups raise. A Harvard Business Review piece <a href="https://hbr.org/2017/06/male-and-female-entrepreneurs-get-asked-different-questions-by-vcs-and-it-affects-how-much-funding-they-get" target="_blank" rel="noopener noreferrer">echoes</a> the same conclusion – female founders are asked more challenging and skeptical questions during pitches, which leads to lower funding. This practice may be traced back to the stereotypes women face of not being the “right fit” for the role/sector.
<blockquote>Female-led inclusive fintechs raise 24 percent more than non-female-led startups.</blockquote>
The data from Inclusive Fintech 50 presents a more optimistic picture. At the median, female-led inclusive fintechs raise 24 percent more than non-female-led startups. This trend is largely driven by funding in formal investment rounds, echoing research in the U.S. from the <a href="https://startupsusa.org/women-founded-venture-backed-startups/#main-findings" target="_blank" rel="noopener noreferrer">Center for American Entrepreneurship</a> that once a female-founded startup is funded, it receives similar funding to male-founded startups in additional fundraising rounds.

<img class="aligncenter wp-image-39735 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/meadian-annual-amount-raised-by-female-fintech-leaders-1.png" alt="" width="899" height="654" />

However, we again see that there are stark differences across geographies. The median female-led fintech raises approximately three-fourths as much as non-female-led fintechs in Latin America, two-thirds as much in East Asia and Pacific, and nearly one-third as much in South Asia. In Sub-Saharan Africa and North America, female-led fintechs raise more at the median than non-female-led fintechs, though they raise 74 percent as much in Sub-Saharan Africa when measuring the average rather than the median, as noted in this <a href="https://www.themix.org/publications/measuring-funding-flows-for-digital-financial-inclusion" target="_blank" rel="noopener noreferrer">white paper</a>. In Europe and Central Asia, there is no observed gap in funding.

Perhaps it is not surprising that these regions also have a large gender gap in broader financial inclusion. For instance, the <a href="https://www.gsma.com/mobilefordevelopment/blog/the-promise-of-mobile-money-for-further-advancing-womens-financial-inclusion/#_ftn2" target="_blank" rel="noopener noreferrer">gender gap in mobile money usage</a> is 25 percent in Latin America, 21 percent in East Asia and Pacific, and 75 percent in South Asia. In these regions, the same <a href="https://blogs.worldbank.org/voices/gender-gap-financial-inclusion-three-ways-shrink-it" target="_blank" rel="noopener noreferrer">regulations and social norms</a> that prevent women from opening bank accounts may also provide additional hurdles for female entrepreneurship in a male-dominated industry.
<h2>4. Female-led fintechs have less funds available to get started, but receive a boost from angel investors.</h2>
During the initial stage, female-led fintechs have less capacity to invest personal funds into their ventures than non-female-led fintechs – they can put in only 19 percent of what a non-female-led fintech does (see figure below). As a result, many female founders and CEOs can fail to make it to formal funding rounds, thereby reducing the number of female-led fintechs from the start.

<img class="aligncenter wp-image-39736 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/median-annual-amount-raised-female-led-fintech-BY-FUNDING-STAGE.png" alt="graph" width="891" height="647" />

These findings are consistent with a <a href="https://www.goldmansachs.com/citizenship/10000women/news-and-events/10kw-progress-report/progress-report-full.pdf" target="_blank" rel="noopener noreferrer">study by Goldman Sachs</a> that found that female entrepreneurs in emerging markets often do not seek external financing due to challenges of navigating the process or perceptions of likelihood of success.

Female-led fintechs have performed particularly well with angel investors. Another recent <a href="https://www.tandfonline.com/doi/abs/10.1080/13691066.2020.1747692" target="_blank" rel="noopener noreferrer">study</a> found that female entrepreneurs have greater success receiving funding from angel funders than from early-stage and late-stage VCs. The Inclusive Fintech 50 data show a similar trend, with the median female-led fintech raising 80 percent more than non-female-led fintechs at the angel investor stage.
<h2>5. The network effect is weaker for female-led fintechs.</h2>
Fintechs that are “networked” – part of a fintech hub, incubator, accelerator, or award – raise <a href="https://www.themix.org/publications/measuring-funding-flows-for-digital-financial-inclusion" target="_blank" rel="noopener noreferrer">more funding than non-networked fintechs</a>. However, female-led fintechs managed to raise only 8 percent more if they were networked. Meanwhile non-female-led fintechs raised 43 percent more if they were networked. This trend is consistent with a report which found that <a href="https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/venture+capital/vc-resources/vc-gender-financing" target="_blank" rel="noopener noreferrer">accelerators widen the equity financing gap</a>, with male-led startups experiencing a 2.6 times increase in funding raised post-acceleration relative to female-led startups.
<blockquote>Female-led fintechs managed to raise only 8 percent more if they were networked.</blockquote>
Additionally, a study that employed network analysis to <a href="https://endeavor.org/content/uploads/2015/06/Fostering-Productive-Entrepreneurship-Communities.pdf" target="_blank" rel="noopener noreferrer">assess the collective impact of entrepreneurship communities</a> found that start-ups that received experience, mentorship, or investment from an entrepreneur who has led a company to scale were approximately two times more likely to achieve top performance. It would be prudent to explore further what this means for female entrepreneurs who may face barriers accessing entrepreneurship communities that may be male-dominated.

<img class="aligncenter wp-image-39737 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/networked-multiplier-of-female-led-fintechs.png" alt="graph" width="845" height="614" />
<h2>Recommendations</h2>
<h3>For Investors</h3>
<ul>
 	<li>Investors have the potential to address this underrepresentation by investing in more female-led, early-stage fintechs, particularly in regions such as Asia and Latin America. Investors can not only seek out fintechs with strong programs that support female leadership, but also screen out those that do not. As described above, there is evidence that female-led fintechs produce higher revenues.</li>
 	<li>In order to address funding disparities for female-led fintechs in early stages, investors can adopt gender lens investing, particularly when providing grant funding. This will build upon work done by DFS Lab, Flourish Ventures, FinEquity, and Women’s World Banking, who have sponsored a female-focused fintech competition.</li>
 	<li>Incubators and accelerators can also support early-stage, female-led fintechs by actively recruiting female startups and supporting them in raising funding and also assessing whether their programs themselves are female-friendly.</li>
 	<li>Gender-diverse hiring practices and implicit bias training are vital for investors and incubators/accelerators to reach these goals. Moreover, while we were not able to distinguish between women of color founders and white women, evidence on the institutional barriers and discrimination that people of color face likely apply to the fintech space. Implicit bias trainings play an important role in raising awareness on lending practices.</li>
</ul>
<h3>For Researchers</h3>
<ul>
 	<li>Research organizations can provide valuable evidence to build a case for investment in female-led fintechs and the nuanced barriers that female-led fintechs face. Building upon work by organizations such as Women’s World Banking, researchers can demonstrate that female-led fintechs produce strong financial returns while also making unique contributions to financial inclusion.</li>
 	<li>Additional research is needed to examine the challenges faced by female fintech founders. Inclusive Fintech 50 data sheds light onto funding amounts received by female fintechs, but it does not address potential disparities in the likelihood of receiving funds, or other discrimination that female founders -- particularly women of color -- may face.</li>
</ul>
Be on the lookout for the next post, when we will discuss how fintechs may be able to close the gender gap in financial inclusion for their users.

Including Women in “Inclusive Fintech”

As we navigate the choppy waters of the COVID-19 crisis, various groups within the investor community, including microfinance investment vehicles (MIVs), development finance institutions (DFIs), banks and other private funders, have pledged to coordinate and collaborate their responses in support of microfinance institutions (MFIs) who have been deeply impacted by the crisis. But what does that mean in practice?

We have seen multiple efforts happening simultaneously over the past month. For example, nine MIVs recently signed a <a href="https://www.covid-finclusion.org/investors" target="_blank" rel="noopener noreferrer">memorandum of understanding</a> outlining a coordinated response to COVID-19, particularly with respect to debt refinancing. The Netherlands platform for inclusive finance, <a href="https://www.inclusivefinanceplatform.nl/news/npm-members-issue-investor-statement/" target="_blank" rel="noopener noreferrer">NpM</a>, also came out with an <a href="https://www.inclusivefinanceplatform.nl/wp-content/uploads/2020/04/COVID-19-MS-V3-1.pdf" target="_blank" rel="noopener noreferrer">investor statement</a> on COVID-19, and a group of stakeholders led by Grameen Crédit Agricole Foundation signed a common pledge of key principles to protect microfinance institutions and their clients affected by the COVID-19 crisis. A <a href="https://centerforfinancialinclusion.org/covid-19-threatens-the-microfinance-sector-and-the-livelihoods-of-those-we-serve-building-a-coalition-for-collective-action/" target="_blank" rel="noopener noreferrer">recently announced</a> initiative of 14 organizations, the Microfinance Coalition, issued <a href="https://www.centerforfinancialinclusion.org/series/microfinance-coalition" target="_blank" rel="noopener noreferrer">a series of blog posts</a> calling on donors, investors and policymakers to support the microfinance sector. And the Global Impact Investing Network (GIIN) recently established the <a href="https://thegiin.org/r3coalition">R3Coalition</a> of impact investors and foundations which will mobilize and coordinate impact investors to fill financing gaps and quickly deploy capital to high-impact investment opportunities.

These initiatives are certainly commendable, but it is nevertheless concerning that many may have overlapping objectives and activities that draw on valuable financial and human resources which could be put to work on a coordinated response effort. In a recent CGAP investor coordination call, a participant poll found that many participants have been on 50 to 100 coordination calls in the past several weeks.
<h2>Too Many Cooks in the Kitchen?</h2>
The COVID-19 crisis is so vast and the impact so devastating that good intentions are leading to a plethora of responses. The result, however unintentional, is that we now have too many cooks in the kitchen, creating a somewhat frenzied and chaotic environment which may be slowing down our collective effectiveness and response.
<blockquote>We need a “master chef,” a central coordinating body for information, data sharing and aligning microfinance investor constituencies.</blockquote>
I would argue that there is a need for a “master chef,” a central coordinating body that serves not only as a forum for information and data sharing but also works to align the multiple microfinance investor constituencies in their response to the crisis, both in the immediate and longer term. CGAP is already stepping in to fill this role by gathering representatives from the investor constituencies (debt and equity, public and private), each with their own priorities but united in their commitment to supporting MFIs and their clients. This is not the time to test out a multitude of recipes; we need a global effort to agree on a basic framework for action that can be adapted to the individual context of the MFI.

The need for a global framework would not deter from initiatives that require specific local, regional or country responses. For example, the recent coordination in <a href="https://www.thehindu.com/business/sbi-to-extend-loan-moratorium-to-nbfcs/article31520920.ece">India</a> was effective at lobbying to extend the <a href="https://www.livemint.com/industry/banking/sbi-to-extend-moratorium-to-nbfcs-and-microlenders-11588774331563.html">moratorium instituted by the Reserve Bank of India</a> to non-bank financial companies and not just the banking sector. As so many investors work globally, a coordinated approach will facilitate alignment and expedite action that can then be adapted to specific contexts around the world. Having a central coordinating body will help ensure that the ingredients in the basic recipe (i.e. a response framework) are added and combined in the right order and quantity to optimize the outcome for each market context.

Given the complexity of the investor response to COVID-19, CGAP may prefer to focus its attention on the DFI and donor constituencies, many of whom are CGAP members. Indeed, that is a much-needed role as the DFIs and donors are critical to the response to ensure the survival and resilience of microfinance institutions now and in the long run. But at the same time, it is important to remember that the DFIs are also major shareholders in MIVs, so ongoing alignment among all the investor constituencies will lead to better outcomes for investors, MFIs and their clients.
<h2>The Recipe: Immediate Needs for the Investor Response</h2>
A central coordinating body will be essential to helping the stakeholders focus on the appropriate steps at each stage of the COVID-19 response. The immediate stage focuses on understanding the needs of specific MFIs, especially their liquidity requirements, and potential actions, such as debt moratoriums on loans to clients as well as debt obligations coming due. The medium-term period would require a shift away from liquidity toward a focus on capital adequacy, capital calls, and inevitably, mergers and liquidations. In the longer term, the focus will be on the future state of the microfinance industry, how operating models will evolve and whether investors’ strategies will shift to respond to their renewed perception of risks.

During this immediate phase, the first step is for the coordinating body to delegate responsibilities through a series of working groups. CGAP recently called a meeting of investors and proposed the creation of three technical working groups, each focusing on one or more priority issues. This type of delegated responsibility is the only way we can address the myriad of issues that the microfinance sector is confronted with today. A coordinating body is essential to the effectiveness of such working groups.
<blockquote>Working groups and data collection/analysis are two critical needs.</blockquote>
The second critical need is data. How long can MFIs survive under lockdown? Can additional liquidity extend this period? Data collection and analysis are paramount at this stage and coordination of those efforts is critical to avoid duplication of effort and a reporting burden to the MFIs. A data technical group will ensure that stakeholders know which data is being collected by what party and for what purpose. Also, very important is what data - analyzed or not - will be made public and when. Harmonizing data collection and reducing the reporting burden with a standardized template are important goals, but knowledge sharing among stakeholders may be the first line of action.
<h2>Time is of the Essence</h2>
The inclusive finance sector consists of many different players, requiring an ecosystem response with clear roles and responsibilities. A central coordinating body equipped with the infrastructure to establish clear delegated responsibilities to subgroups will be the only way we can efficiently and collectively step up to the needs of the sector. CGAP has taken the first steps to take on the central coordinating role and many others, including CFI, have stepped up to take on delegated responsibilities. We are slowly but surely moving in the right direction but need to move even faster if we are to avoid distracting, confusing and expensive duplication of effort.

How Should Investors Coordinate When Time is of the Essence?

Alexandra (Alex) Rizzi

Lucciana Alvarez Ruiz

Eda Dokle

Chantelle Macey

Jacob Tate

Sophia Sunderji

Jayshree Venkatesan

Renee Chao-Beroff

Todd A. Watkins

Paul DiLeo

Safeya Zeitoun

Garrett Jaso

Deborah Drake

Maha Khan

Carrie Ruh

Monica Brand Engel

Leah  Wardle

Laura Foose

Anne  Folan

Boubacar Diallo

Alex Kessler

Isabelle Barrès

Lizzy Bolze

Latin America and The Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Burkina Faso

North America

Alternative Data

Digital Financial Services

Fintech

Impact Investing

Underserved Groups

Women

Fintechs

Challenges and Crises

Enabling Environment

Consumer Protection

Credit

Responsible Digital Finance

Financial Health

Microfinance Institutions

Resilience

Smallholder Farmers

Youth

Governance

Risk Management

Equity Investing

Policy, Regulation and Government Initiatives

Toolkits and Guides

Blog Post

Report

Event

<h3>You’ve been working towards financial inclusion for the majority of your career: as a loan officer, through to Accion, and now with Quona. Why is financial inclusion so important to you?</h3>
<strong>MBE</strong>: Financial inclusion resonates with me because it’s a powerful lever for change that works on both micro and macro levels. I grew up living in both “developing” and “developed” contexts, so the notion that innovation and markets have the power to influence people’s daily lives and economic systems became evident to me from an early age.

One of my mentors used to say, “We can't be patient with poverty.” He instilled in me the idea that markets work much more quickly than governments or foundations.

I also fundamentally believe that to address a problem as massive as global poverty, we need to mobilize a resource that’s also plentiful: the world’s capital markets. Financial inclusion is about harnessing the power of these markets and putting them in the hands of everyday individuals and entrepreneurs.
<blockquote>Financial inclusion is about harnessing the power of markets &amp; putting them in the hands of everyday individuals and entrepreneurs.</blockquote>
On the micro-level, financial inclusion is one of the most powerful mechanisms to change peoples’ daily quality of life. Innovations like mobile money have had an incredible impact on the lives of people all over the world. Rather than walking 20 kilometers to pay a bill and taking children out of school to watch the livestock, farmers in Kenya can now pay by entering codes on their cell phones. This has a huge impact on the farmers’ productivity, and it was only made possible within the past 10 years. Democratizing access to financial services to previously underserved populations has shifted the way people can expand their businesses and grow their household income.
<h3>The number of impact-driven investors, many of whom have a much broader focus on impact than Quona does, has increased globally. To what extent you think Quona’s narrow focus on financial inclusion has either accelerated or impeded success, both at a fund level and a company level?</h3>
<strong>MBE</strong>: When we created <a href="https://quona.com/">Quona,</a> we were in an era of industry building, when the “impact investing” moniker had just been developed. It was early, and it involved a lot of well-intentioned people launching funds. It quickly became clear to us that we wanted to be a point of light in this field and have our social and financial performance demonstrate how profit and purpose can be mutually reinforcing.

The decision to focus Quona on fintech specifically within financial inclusion was quite deliberate, informed by over a decade of experience seeing microfinance be successful. Traditional financial services had hit a wall. We needed new approaches that balanced tech-and-touch in a more nuanced way so that we could achieve our goal of radically improving both access and quality of financial services to the underserved.

Coinciding with the early growth of impact investing – and the realization that fintech for financial inclusion should be our focus – were enormous concurrent technological and demographic trends that made it the perfect time to launch a fintech fund. First, you had the proliferation of mobile phones and smartphones in emerging markets, which put the power of a computer in the hands of an underserved person. Second, you had the expansion of internet access and 4G more globally, which allowed social media to take off and enable business models, like software as a service, and other cloud-based models, which dramatically changed the cost structure and what I call the “physics of business.” The third key trend is that the data created by this digital footprint and this massive demographic trend of emerging market consumers using this technology generated a tremendous data base of information to be mined for understanding, underwriting, and communicating with consumers.

All of a sudden, we had the power of analytics that could help reduce the cost of launching and running these business models, and also open new doors about the types of customers that could be acquired and served. These trends converged when we were deciding to launch our fund, and they have been key to our financial success and in our ability to invest in companies that are changing the game of financial services to include populations that were previously underserved at scale.

In terms of the impact that focusing on financially underserved populations has on our investees, there’s a big difference between a great idea, a good business, and a smart investment. As investors, we're looking for the latter – smart investments – which requires ticking some different boxes.

In order to be a good investment, a company obviously needs to have a great business, great unit economics, and a compelling value proposition. But beyond that, a good investment requires the "defensibility" that technology innovation can bring and an enormous addressable market to earn the kind of risk-adjusted returns we're looking for. That's where focusing on inclusion is such a powerful proposition. The types of problems our investees are solving are basic, daily problems.

Consider fintechs doing small business lending in emerging markets. They’ve seen traditional banks and microfinance institutions fail to offer loans to small businesses profitably, because the cost to acquire customers is too expensive, or the cost to underwrite is too difficult. These fintechs focusing on underserved populations are leveraging their tech, information flows, total addressable market and lack of competition to become good businesses and more compelling for investors like us than the fintechs focusing on the top 1 to 10 percent of the population.

On top of having an enormous total addressable market, a good investment also needs to have a certain level of customer-centricity to have long-term success. The quality of services or products -- i.e. how accessible, usable, expensive, etc. -- that a fintech is offering is important to us, both from a returns perspective and from a financial inclusion perspective.
<h3>One of Quona’s driving investment themes is “profit meets purpose.” Are there any tradeoffs there?</h3>
<strong>MBE</strong>: We are lucky to work in a sector where there's a lot of mutual reinforcement. Because we work where addressable markets are so large and critical, that leads us to places that are the most underserved or where quality suffers.

That said, there are tensions. Sometimes there are short-term decisions made that might seem like a company or investee is drifting from its mission in favor of profit. An example is on pricing and which segments a company serves. Most of Quona’s portfolio companies do not exclusively serve low-income segments. Many of them have a mix of customers that are predominantly low or lower income and predominantly underserved, as well as a percentage of middle or high-income customers.

Serving a broad spectrum of customers might mean, in the short term, that some of their resources are focused on folks that are not highly underserved, but that's important for a few reasons. One is, it avoids concentration risk -- if they were focused on a specific segment it would make them vulnerable to competition or price margin erosion. Two, it allows them to provide the full range of services or products, so as their previously underserved customers evolve financially, they have appropriate services to grow with them.
<blockquote>Serving a broad spectrum of customers is important.</blockquote>
There are many benefits -- both social and financial -- of not exclusively focusing on the lowest income segments. In the short term, there's this resource allocation question, you can call it a “tradeoff,” but it’s a multiplicity of factors of companies having to answer business questions like:
<ul>
 	<li>How do I make sure that I have a robust financial performance and ongoing defensibility?</li>
 	<li>How do I make sure I have a cushion to deal with macroeconomic factors and the inevitable dips that happen in emerging markets?</li>
 	<li>How do I make sure I can grow with my customers?</li>
</ul>
None of these questions have a clear answer in terms of what that means for customer breakdown, but it does require consideration. Our firm shies away from setting specific, time-bound outputs, because we’ve seen unintended consequences with targets, like establishing a target of reducing the number of unbanked consumers, only to achieve our goal of millions of dormant bank accounts. We also understand that the businesses our companies run and the markets in which they operate are complex, require nuanced appreciation of multiple factors impact outcomes.
<h3>How should we measure success in financial inclusion?</h3>
<strong>MBE</strong>: I'm a big believer in measuring, so I love what I see in impact investing, where there are greater calls for rigor in measurement, and a desire to build performance monitoring systems as comprehensive as what we have for operational and financial metrics. Measuring and evaluating are a core part of Quona’s DNA. We’re proudly nerdy in that way.
<blockquote>Measuring and evaluating are a core part of Quona’s DNA. We’re proudly nerdy in that way.</blockquote>
The way we think about success is along three dimensions:
<ul>
 	<li><strong>Access</strong>: How do you get more underserved people in the mainstream and provide them access to a suite of financial services?</li>
 	<li><strong>Quality</strong>: Affordability, accessibility, convenience, usage, etc. This is important to us because just focusing on access or targets can lead quality, usage and (ultimately) retention to suffer.</li>
 	<li><strong>Markets</strong>: From increasing capital flows to markets where the capital stack is thin, to making market rates more competitive, to giving small businesses more leverage, what is the indirect impact that our companies are having on their markets?</li>
</ul>

Focusing on the Underserved, Serving the Bottom Line: a Q & A With Monica Brand Engel

Triodos Investment Management will host a webinar with top experts from Latin America, East and Southeast Asia, Eastern Europe, Caucasus and Central Asia, Africa &amp; Middle East. During the webinar Dirk Elsen, Director Emerging Markets at Triodos Investment Management, together with regional experts will explore trends, developments, challenges, evolution and relevance of financial inclusion in different parts of the world.
<h3>Moderator:</h3>
Dirk Elson - Director Emerging Markets at Triodos IM. He oversees the management of a range of investment activities focused on the further development of inclusive financial services. He joined Triodos IM in 2012 and prior to that, he served as Chief Executive of SNV, an international development organisation implementing advisory, advocacy and knowledge brokering work in 36 countries across four continents. Dirk Elsen also worked at Shell, the World Bank and ABN AMRO. He currently serves on several boards.
<h3>Regional experts:</h3>
Alejandro Solis, CFA - Regional Manager for Latin America at Triodos IM. Before joining Triodos IM, Alejandro worked for two years as an Investment Officer for Symbiotics Group, a Swiss investment company that offers debt financing to financial institutions worldwide. Prior to that, he worked as associate for Barclays Bank’s Investment Banking Group in London, U.K and at Banco de Credito del Peru in Lima, Peru. Alejandro holds an MBA degree from The University of Chicago Booth School of Business.

Fadoua Boudiba - Senior Investment Officer at Triodos IM, Africa and MENA region. She has more than 12 years of experience in the inclusive finance sector and development finance. She is part of Enda Tamweel board, one of the leading MFIs in the MENA Region. Prior to joining Triodos, Fadoua worked at Incofin Investment Management in Belgium, IFC on Technical Assistance based in Cairo, Citibank and Euroclear.

Mirjam Janssen - Regional Manager of Asia at Triodos IM. Mirjam leads the development of the Asia investment strategy, manages a team of investment officers, and is a voting member in the Regional and Global Investment Committees. She is a shareholder representative at Tenger Finance Group (XacBank) in Mongolia. Prior to joining Triodos IM, Mirjam worked in a wide range of positions at ABN Amro Bank.

Rosanna Sarkeyeva - Regional Manager of Eastern Europe, Caucasus and Central Asia at Triodos IM. Rosanna is a Board Member at JSC Kompanion (Kyrgyzstan) and shareholder representative at MFO KMF (Kazakhstan), where at both Triodos holds equity stakes. She holds MA in Banking and PhD in Economics, both from the University of Reading (UK).

Webinar: Trends in Financial Inclusion: Regional Perspectives From a Global Investor

Malcolm Gladwell, who popularized the term in his 2002 book, defines a "tipping point" as “the moment of critical mass, the threshold, the boiling point.” It’s the point, said Gladwell, when ideas, messages and behaviors that were once the exclusive province of early adopters suddenly tip and become the norm.

We at <a href="https://sptf.info/">SPTF</a> have been daring to wonder whether the work we’ve been doing for the past 15 years might just have reached that kind of tipping point. Because – suddenly, this summer –some significant developments are providing encouraging signals. In mid-June, the <em>Financial Times</em> launched a new weekly feature called <a href="https://www.ft.com/moral-money">Moral Money</a>. Other than the pleasing alliteration, it might have seemed an odd choice for a name. People who read the <em>Financial Times</em> might not seem the most natural audience for moralism. And yet, all the advertising space in Moral Money for the year was sold out before the first issue hit the streets, and subscriptions have far outpaced the <em>Fiancial Times'</em> projections. This is according to the formidable <a href="https://www.ft.com/gillian-tett">Gillian Tett</a>, chairman of the <em>Financial Times’</em> editorial board, who is driving the Moral Money project. Suffice it to say, the Financial Times has not delegated its ESG coverage to some cub reporter.

Then in late July, the <em>New York Times</em> ran a feature story about Jamie Gamble, a retired corporate lawyer whose firm’s client roster included virtually every major company in the United States—among them Facebook, Google, General Motors, and JP Morgan Chase. To be sure, it’s not unusual for the <em>New York Times</em> to cover the doings of the powerful. Mr. Gamble’s message, however, was quite unusual: he had become convinced that the CEOs of his client companies were not only incentivized but <a href="https://www.nytimes.com/2019/07/29/business/dealbook/corporate-governance-reform-ethics.html"><em>legally obligated</em> to act like sociopaths</a>, that is, people who care, single mindedly, about themselves, or in the corporate case, about shareholders. Once the Cult of the Shareholder took off in the 1980s, it became the CEOs’ obligation to maximize shareholder profit and ignore any other consideration for other stakeholders.

Gamble’s proposal is this: that every company incorporate a set of ethical rules into their bylaws. Those rules might embrace effects on the environment and future generations as well as effects on relationships with employees, local communities, customers, and suppliers. This seemingly innocuous step could have far-reaching consequences. Whatever the rules a given company sets for itself, once they are in place, “Any shareholder could sue the board of directors for violating the ethical rules — just as any shareholder can today sue the board of directors for violating the maximize rule,” he said. Mr. Gamble reports that his ideas so far have received a fair hearing and thoughtful responses from his former colleagues.

Then finally, in mid-August, came perhaps the loudest signal of all. The 181 members of the Business Roundtable, which includes some of the most powerful figures in corporate America, announced that it will henceforth <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">commit</a> to balancing the interests of shareholders with those of everybody else. That announcement unleashed a flood of coverage and commentary – it was the <a href="https://www.economist.com/briefing/2019/08/22/big-business-is-beginning-to-accept-broader-social-responsibilities">cover story</a> of <em>The Economist</em> the week after it came out—and reactions ranged from fawning to <a href="https://www.fastcompany.com/90393303/dont-believe-the-business-roundtable-has-changed-until-its-ceos-actions-match-their-words">cynical</a>.

From where we sit, the significance of the Business Roundtable announcement is the fact that it’s a collective statement. That element of collective action is the one that makes all the difference because it tackles the so-called “prisoner’s dilemma” that keeps the world trapped in the short-term, quarterly-profit-driven mentality. While it’s in everyone’s collective interest to take the long view, it is to no single player’s individual advantage to be the one who goes first and suffers a few quarters, or years, looking like an underperformer relative to his benchmark. The <em>only </em>way out of the prisoner’s dilemma was for everyone to hold hands and jump at the same time – exactly what (we hope) this announcement signals.

Now of course comes the hard part. Let’s assume for the sake of the argument that everyone is sincere, that now the Business Roundtable members, Mr. Gamble’s former clients, the Moral Money-reading masters of the universe – that all of them are committed to no longer behaving like sociopaths. Where will they go to find out how, concretely, they should rethink their bylaws? Their operating procedures? Assuming they succeed in embracing and internalizing a radically different worldview, <em>how do they operationalize it</em>?

This is the work SPTF has been doing with colleagues for 15 years now. It took 15 years (12 years to build trust and awareness, 3 years to write) but we do actually have a roadmap, the <a href="https://sptf.info/images/USSPM_EnglishManual_v2.1_2019.pdf">Universal Standards for Responsible Inclusive Finance</a>, that guides companies through the journey of walking the talk.

SPTF was created to be the voice of ethics, responsibility, and impact for what was then called the microfinance industry. At SPTF’s inception in 2005, these were fringe concepts. So we spent much of our time simply talking about the importance of a double bottom line and trying not to position ourselves as the sad-eyed conscience of the industry. Partly that was a strategic (and aesthetic) decision: no one wants to be that person, or listen to that person. But mostly it was practical. Our messages were: Don’t let the perfect be the enemy of the good. Start where you can, and do what you’re able, but <em>get started</em>, and be real.
<blockquote>Start where you can, and do what you’re able, but <em>get started</em>, and be real.</blockquote>
As the trust grew and the messages took hold, social performance management took off. SPTF and our partners and colleagues developed standards for balanced performance management, tools for executing best practice, and a global community of people willing to share their successes and failures. The experiences and the tools have proven relevant to other sectors, and have turned the inclusive finance sector into something of a model for other ESG investment classes.

Our sector is home to literally hundreds of financial service providers who have decided that profit is not their sole purpose. Without fuss or fanfare, these businesses are balancing growth with quality customer service and customer protection, protecting their employees’ rights, measuring the social outcomes of their work, and holding their leadership accountable for social metrics – behaviors laid out in the Universal Standards and encouraged by our global community of practice (see "Balance Social and Financial Performance" – from SPTF's <a href="https://sptf.info/images/sptf-guidance-note-issue-5-guiding-your-board-on-spm-final.pdf">Guidance for Board of Directors</a> – below).

&nbsp;

Suddenly, This Summer

Fintech investment and growth are occurring in relatively limited areas and for a handful of high-profile companies. Enabling regulatory environments and well-informed investment flows are prerequisites to realizing the potential of fintech to achieve scale and impact. On October 23<sup>rd</sup>, as part of SAM 2019, <a href="/bio/boubacar-diallo">Boubacar Diallo</a>, Senior Africa Advisor, Smart Campaign, will present on a panel entitled <em>Fueling Fintech: Regulations and Investment for Scale and Impact</em>.

Key Questions
<ul>
 	<li>What examples do we have of successful legislation and investment environments to promote fintech development, and how can other markets replicate these successes to pave the way to more diverse and durable growth of digital financial services?</li>
 	<li>How can investors better evaluate investments with regard to the SDGs?</li>
</ul>
<a href="https://www.ada-microfinance.org/en/presentation-sam-2019">African Microfinance Week</a>/Semaine Africaine de la Microfinance (SAM 2019) is a biennial conference dedicated to the development of financial inclusion in Africa. The <a href="/about/what-we-do/the-smart-campaign/">Smart Campaign</a> will participate in this year’s conference, taking place October 21-25, 2019 in Ouagadougou, Burkina Faso, on the theme “Pathways Toward Impact: African Inclusive Finance for the Sustainable Development Goals.”

More details to come. Hope you can join us.

African Microfinance Week (SAM 2019)

Smart Campaign team members <a href="/bio/isabelle-barres">Isabelle Barres</a> and <a href="/bio/alex-taylor">Alex Taylor</a> will lead a lunch session on Wednesday, April 3, 2019 to share the <a href="/help-us-shape-standards-for-responsible-digital-lending">draft digital lending standards</a> and discuss the future of Smart Certification for digital credit providers.

On Thursday, April 4, 2019, Isabelle Barres will present on a panel entitled <em>Evolving Practices for Responsible Digital Financial Services</em>.

Panel Description:

Regulations and supervisory frameworks in DFS are often nascent or fragmented, with industry associations evolving to help DFS players to mitigate DFS risks. This session will highlight the latest industry practices, along with innovators that have adapted their business to manage new risks, while scaling digital financial services. Examples by product and business models may include: payments, mobile, solar energy, digital identity, among others. What are the latest movements in responsible digital inclusion and how can signatories and investors apply evolving practices today?

Responsible Finance for Digital Inclusion: Investing for Impact

<a href="/bio/deborah-drake">Deborah Drake</a> will be discussing the forthcoming “Governance Guidelines for Innovative Companies Serving the Base of the Pyramid,” a collaboration between FMO and CFI (originally published 2005, revised in 2019). We look forward to receiving input on this draft at/following this event.

13th Annual DFI Corporate Governance Conference

The impact investing world is an exciting place to be. Investors’ hopes of doing good and doing well are alive and well. As impact investing matures, veterans in the field are asking how to focus resources. Should we seek high returns in order to attract mainstream investors, or maintain a clear social bottom line, even if returns fall below the market average? Which direction should our unique blend of development and capitalism take?

Two recent articles attempt to answer this question: one is a <a href="https://ssir.org/articles/entry/almost_everything_you_know_about_impact_investing_is_wrong">longer essay in Stanford Social Innovation Review</a> – by <a href="https://www.poverty-action.org/people/wendy-abt">Wendy Abt</a> – the other an <a href="https://www.ft.com/content/b6c893d4-f48e-11e8-9623-d7f9881e729f">interview with Elizabeth Littlefield in the Financial Times</a>. Both these accomplished women are well positioned to reflect on and shape the future of impact investing.

Abt is the founder of <a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=51828662">WPA, Inc.</a>, an investment advisory firm, and former deputy assistant of USAID. Littlefield was the director of CGAP before becoming president of the Overseas Private Investment Corporation, which has shaped her current role as Senior Counselor of the <a href="https://www.albrightstonebridge.com/team/elizabeth-l-littlefield">Albright Stonebridge Group</a>.

There is a lot to agree on in both articles, but I have some reservations about them as well.
<h2>Abt: Market Returns, Better Measurement, Bigger Players, and a Different Investment Paradigm</h2>
Abt is right that greater clarity is needed regarding impact investing’s key principles and practices.

She contrasts two investing paradigms that come from mainstream investing but are often applied in impact investing. The first is venture capital (and incubators), an approach that prioritizes rapid growth and a clear exit strategy for investors. The problem here is that fast growth and clear exits can be incompatible with attention to social impact. Abt prefers an approach that more closely resembles project finance. While the analogy may not be exactly appropriate, project finance takes a longer-term perspective and considers complementary investments by other players.

She also points out that too many impact investors surrender to concessionary business models before they even join the fight for market returns. They offer a plethora of rationales to justify concessionary returns, arguing, for example, that subsidies are necessary because impact-oriented businesses take a long time to become financially self-sustaining. Many social enterprise business models need to start off with concessionary funding (subsidies) because the timeline for revenue generation is unclear: these are, after all, new operating models tackling social problems that big business has not taken on. Often however, this concessionary capital becomes “permanent” because the goal of moving towards financial sustainability takes a back seat to other priorities. So I agree that impact investors should expect their investees to move towards sustainability and profitability, and that requires clearly negotiated timelines and diligent oversight.

However, Abt makes some assertions that I disagree with.

Abt insists that the purpose of impact investing is to solve major social problems – like income inequality or global warming – by attracting non-concessionary capital into a competitive marketplace. I’m not on board with several parts of that claim. Impact investors should not have to carry the weight of building more competitive markets, and do not have to aim exclusively at non-concessionary capital sources. These are grand aims, but often they are too much to ask of investors wishing to use their own capital in socially positive ways.

As a result of her focus on non-concessionary capital, the only source of below-market capital Abt is willing to entertain is government, on the grounds that if impact investors do not anchor themselves to market returns, they risk serious misallocation of resources. I disagree. In fact, many impact investors, especially foundations, prioritize social return over market returns especially if their money can be used in a catalytic way to create a business with a social good. Why should they not be considered legitimate investors?
<blockquote>Many impact investors prioritize social return over market returns, especially if their money can be used in a catalytic way to create a business with a social good.</blockquote>
Because Abt’s vision is all about major social problems, she defers to the biggest corporations in a way I find a bit troubling. She asserts that only large regional and global companies, not small ventures, can make a difference in the complex sectors most critical to the poor, namely infrastructure, health, agriculture and logistics. She states, “impact investors are noticing the advantages that global and large regional firms have over smaller firms in low-income and fragile countries.” She cites successes of Carlos Slim in Mexico, Aliko Dangote in Nigeria, and Jack Ma in China.

It may be true that behemoths have advantages, but it’s simplistic and unrealistic to apply that thinking wholesale. It sends a message that impact investing is all about co-investing with or exiting to Alibaba or Dangote, who were themselves small disruptors at one time. But do the behemoths value social impact? What should happen in countries where big companies don’t invest? It’s true that the goal of many a small innovator is to sell to a global company – and that proves my point: impact investing is needed precisely for these smaller firms to innovate and test their ideas before large multinationals will give them a second glance.
<h2>Littlefield: Market Returns Not Necessary?</h2>
I put myself more in Littlefield’s camp, agreeing with her assertion that the impact investment sector should accommodate all investors, whether large or small, institutional or individual, philanthropic or commercial. Millennials are demanding investment opportunities, and not all are looking for above market rates of return. The “investment experience” is important along with social and financial returns. Research suggests that the demand for sustainability is <a href="https://www.inc.com/melanie-curtin/73-percent-of-millennials-are-willing-to-spend-more-money-on-this-1-type-of-product.html">firmly entrenched in mainstream millennial attitudes toward money</a>. As these millennials gain seniority in the business world, they won’t hesitate to advocate investment decisions that promote sustainability above traditional market returns, and data-driven decision making will help shape these investment decisions, even if it means their money grows more slowly. Many millennial investors are willing to experiment and refine. Time, of course, is on their side.

Moreover, a below-market return doesn’t mean a loss. Investors who prioritize social returns are also looking for the investee to grow and become profitable. With this in mind, I agree with Littlefield that the universe of impact investors has to be broadened, which is why I appreciate her wider definition of “impact investor” vis a vis Abt. There is no one type of impact investor, so there is no single approach or type of funding that will ensure success.
<blockquote>the universe of impact investors has to be broadened.</blockquote>
Abt’s search for a big business fix is not realistic. Yes, there is a lot to say for economies of scale, access to cheap capital and the big data that big players bring, but can we trust these companies to care for small impact investment projects, especially in cases of global economic headwinds? Will they let them fall by the wayside when they need to make revenue projections for a particular quarter? To succeed, the impact investment sector will need a broad and diverse community of investors. As we move forward, millennials will drive this diversification.

<em>If you’ve read this article, chances are you have a lot on your mind regarding the impact investing and how it affects financial inclusion. We’d like to hear from you! Please write your opinions in the comments below and let the world know what you think.</em>

The Future of Impact Investing: CFI’s Take on Dueling Views

The Financial Inclusion Equity Council (FIEC) is the first membership organization to bring together the leading private entities that make equity investments in financial inclusion throughout the developing world.

This year's convening will be hosted by FIEC member Citi Inclusive Finance.

<a href="https://www.centerforfinancialinclusion.org/about/what-we-do/fiec/">Learn more</a> about FIEC.

Financial Inclusion Equity Council (FIEC) Annual Meeting