ESG frameworks provide standards and guidance for how companies should integrate the consideration of risks and opportunities arising from environmental, social, and governance factors into their practices at all levels. But could the implementation of the frameworks themselves become a source of risk or of opportunity for companies?

We set out to explore this question in a well-defined subset of companies: financial institutions operating in the ‘Global South’, that is, low- and middle-income countries. We engaged with leaders from 32 financial institutions, including banks, fintechs, and non-bank and microfinance institutions with a fairly even spread among them. They represented institutions of different scale—around two fifths were large with over a million current clients, one fifth were small with less than 50,000 clients, and the rest were in between. In a <a href="https://www.fmo.nl/southern-voice-in-esg" target="_blank" rel="noopener noreferrer">new report</a> called Southern Voice in ESG, we seek to provide some answers to this question.

<img class="aligncenter wp-image-45394 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/ESG-FIs.png" alt="" width="970" height="788" />
<h1><strong>Why Is This Question Even Relevant?</strong></h1>
The question about the potential implications of ESG frameworks is relevant because of the accelerating pace of adoption of ESG measures globally. In some places, ESG measures are known interchangeably as sustainability measures, although both terms are rather vague and ill defined. The pace has been driven by two channels—investors and regulators.

On the one hand, the proportion of institutional capital under some form of ESG mandate has continued to rise, especially in the Global North (high-income countries), so any entity seeking to raise capital there would likely be subject at least to questions. This would apply whether the capital is equity or debt, and especially if it comes from public development finance institutions who have by and large adopted ESG policies relating to their practices.

On the other hand, regulators have become an active channel for entrenching frameworks in domestic regulation, so that they are no longer voluntary but compulsory. While some Northern regulators have been especially outspoken on the issue, Southern regulators have increasingly paid attention. The <a href="https://www.sbfnetwork.org/" target="_blank" rel="noopener noreferrer">Sustainable Banking and Finance Network</a> now has 62 regulators from the global South at different stages of adopting the frameworks. And voluntary frameworks are becoming international standards: consultations on the <a href="https://www.ifrs.org/projects/work-plan/general-sustainability-related-disclosures/" target="_blank" rel="noopener noreferrer">new draft IFRS Sustainability standards S1 and S2</a> closed in July 2022, with the expectation that final standards in these areas may be issued in 2023. Regulators generally require regulated financial institutions as well as public companies to follow IFRS accounting standards, so the influence of standards like these is likely to be global.
<h1><strong>The Frameworks Will Have Material Implications</strong></h1>
Not surprisingly, our respondents already sensed the mounting pressures: almost 80 percent of the people with whom we spoke in the Global South expected that their depth and breadth of reporting would change in the next three years as a result of ESG pressures – in other words, that the frameworks would have a material impact. More than 70 percent said that it was ‘important or very important now’ to have capacity internally on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate for their needs at present – more than half reported ‘some but limited’ or no skills in this area. They aren’t alone – ESG skills are in high demand but are scarce globally, according to this <a href="https://podcasts.apple.com/us/podcast/esg-insider-a-podcast-from-s-p-global/id1475521006?i=1000578199477" target="_blank" rel="noopener noreferrer">recent podcast</a>.
<blockquote>"More than 70 percent said that it was ‘important or very important now’ to have capacity internally on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate."</blockquote>
<h1><strong>What Are the Potential Risks or Opportunities?</strong></h1>
The impact of the ESG frameworks is expected to be material in the next three years, and there is already a shortage of capacity to address them. How could the frameworks themselves be risks or opportunities? During our discussions, we saw the following risks and opportunities:

Potential risks:
<ul>
 	<li>Diversion of skills and focus</li>
 	<li>Costs to implement</li>
 	<li>Distraction from other national priorities</li>
 	<li>Constrained access to capital if not compliant</li>
 	<li>Changed nature of impact from organization’s mission</li>
 	<li>Strategic focus that is not aligned with institutional purpose</li>
 	<li>Rapid adoption may be only skin deep: i.e. “ESG-washing” if the approach is compliance driven</li>
</ul>
Opportunities identified:
<ul>
 	<li>Differentiation from competitors in capital raise</li>
 	<li>Differentiation on staffing</li>
 	<li>Implementing new ESRMs</li>
 	<li>Resourcing for new areas of capacity-building</li>
 	<li>Funding for new portfolio development</li>
</ul>
An issue of rising importance was the heightened emphasis on the ‘E’, with most associated indicators focusing on mitigation of climate risk. As one respondent put it, “The E has landed, the S is nowhere, and the G is hiding somewhere in the other two.” Most Southern financial institutions to which we spoke were ill prepared to report on climate risk measures, although they cared deeply about what some called ‘the S in the E’, that is, the adaptation and resilience indicators among vulnerable populations whom they served, many of whom live in the areas most exposed to the effects of climate change though their own carbon footprints are very small.
<h1><strong>Which Is It — Risk or Opportunity?</strong></h1>
So, what is the answer: are the emerging frameworks seen more as risks or as opportunities? Our sample indicated a mix of both. For example, when asked to indicate their level of agreement on a scale of 1 (fully agree) to 5 (fully disagree) with the statement: “ESG frameworks are on balance a positive force for our organization”, responses averaged 2.7, almost right in the neutral middle, with little difference between banks and non-banks. Responding to the statement “ESG frameworks encourage us to consider opportunities for value creation more than the need for compliance,” responses averaged a very similar 2.8. Similarly, “ESG frameworks create new reporting burdens which are disproportionate to the likely benefits” yielded an average of 3.1, right around the neutral midpoint. However, as one respondent told us, “Different frameworks may bring specific risks or opportunities, but overall, we see having an approach to sustainability is an imperative, not a choice.”
<h1><strong>ESG Voice in the South</strong></h1>
To date, most international ESG frameworks have been developed mainly under Northern leadership and pressure, reflecting the environmental and social priorities experienced there. This is quite different from earlier moves in areas of impact finance, like modern microfinance which was ‘born’ in the Global South and whose leading early practitioners like Grameen Bank’s Mohammed Yunus, BRAC’s Fazle Abed or Bancosol’s Pancho Otero were outspoken social entrepreneurs living and working there.

We sought to understand whether international ESG frameworks considered the needs and context of developing economies. The overall average score here reflected a range of views –with many neutral, perhaps because of lack of knowledge, but some strong divergence around this.

We asked all respondents to identify leading Southern voices with a distinct view on the issue, but received few suggestions. While there clearly is some Southern voice represented in most if not all of the major framework bodies like UNEP-FI or IFRS, there is less evidence at present of a distinctly Southern voice around these issues. However, as Southern-based financial institutions start to pay more attention to the issue of ESG framed in this way, new voices are likely to emerge with the interest and passion to engage locally, regionally, or internationally.

In the course of our discussions, we encountered the view that the impact of ESG frameworks may be less asymmetric by geography (i.e. whether based in the Global North or South) but by size of institution. Small and medium sized institutions have less capacity to hire new skills and absorb the resource costs than large ones, wherever they are based. A proportional approach to the introduction especially of compulsory frameworks is needed to ameliorate this risk.
<h1><strong>What to Do About It?</strong></h1>
Our aim at this stage was primarily to benchmark current reality as the basis of considering future actions. For example, almost half the respondents reported that they had no senior manager with a designated responsibility for sustainability, although one fifth already had placed someone in this role.

The possible strategic stance of a financial institution on this issue depends on how material the issue is, which will vary based on factors like client base, regulator attitude, extent of foreign funding, and the extent to which they believe ESG frameworks are locally influenceable. This will be a function of how much domestic regulators are influenced by international norms, and whether they are open to local adaptation.

Our findings point to several possible directions to mitigate risk and emphasize opportunities:
<ol>
 	<li><strong>Discussion and advocacy:</strong> While less than half of the institutions currently discussed ESG issues in the trade groups of which they are a part, almost double this number expressed interest in being part of discussions going forward. One positive example of <a href="https://fsdafrica.org/press-release/anca-announcement/" target="_blank" rel="noopener noreferrer">proactive engagement is the work of FSDA</a> supporting the piloting of Taskforce for Nature-Based Financial Disclosures, the next frontier within the ‘E’ of ESG, with a sample of large African FIs.</li>
 	<li><strong>Capacity building:</strong> There are many examples of courses being offered, in person and online, but most at present are developed by prominent Northern-based universities like Cambridge or Yale, or Northern professional bodies like the <a href="https://www.iema.net/" target="_blank" rel="noopener noreferrer">Institute of Environmental Management and Assessment</a>. There are opportunities to support regional offerings to spread awareness and knowledge.</li>
 	<li><strong>Technical support:</strong> Several institutions directly asked about technical support offerings. However, in a recent training session for Kenyan banks run, experts from UNEP-FI said that, due to the fast-moving pace in this area, many consultants may not have more knowledge than the bank staff themselves. Local technical support may need further capacity building to be helpful.</li>
</ol>
<h1><strong>Conclusion</strong></h1>
Southern financial institutions clearly believe that international ESG frameworks matter and that they will affect their activities in some way, negative and/or positive, in the next three to five years. As the numerous voluntary frameworks converge and start to harden into standards and even local regulation, it is important that Southern financial institutions have voice and can participate meaningfully at all levels: both shaping international frameworks and especially adapting them for regional and local implementations. The urgency of climate action for mitigation in large emitting nations risks provoking a ‘rush to regulate’ Southern financial institutions whose clients may not themselves be major emitters of CO2, though their livelihoods are highly vulnerable and in need of adaptation support. In the presence of conflicting priorities and constrained local resources, it will take time to regulate appropriately. However, supporting Southern financial institutions to adapt to these priorities over time will likely improve ESG outcomes for these institutions and for the many vulnerable clients they serve.

ESG Frameworks: Risks or opportunities for financial institutions?

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

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

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

Prior to the onset of COVID-19, very few of us would have foreseen a pandemic spreading so rapidly across the world, forcing governments to take actions like lockdowns and border closures. We have observed how these events found many essential services unprepared and resulted in businesses focusing on “response” and “recovery.” In many countries, the pandemic started as a health crisis, while in Sub-Saharan Africa it started as an <a href="https://www.worldbank.org/en/news/video/2020/04/21/africas-pulse-covid-19-coronavirus-causes-first-recession-in-25-years" target="_blank" rel="noopener noreferrer">economic one</a>, as closures happened quicker than the virus spread.

Despite the fact that many agricultural value chains are considered an essential service, agri-SMEs in Sub-Saharan Africa are still facing a <a href="https://www.raflearning.org/post/covid-19-emergency-briefing-agri-smes-operating-uncertain-financial-operational-and-supply" target="_blank" rel="noopener noreferrer">decline in demand</a> (particularly those providing farm inputs), <a href="https://csaf.org/wp-content/uploads/2020/07/CSAF_State_of_Sector_2020_Summary_FINAL.pdf" target="_blank" rel="noopener noreferrer">liquidity shortfalls</a>, harvesting and production problems due to labor shortages, <a href="https://csaf.org/wp-content/uploads/2020/07/CSAF_State_of_Sector_2020_FINAL.pdf" target="_blank" rel="noopener noreferrer">export and transportation delays due to lockdowns</a>, and cancelled international contracts. All these challenges are exacerbated by ongoing climate change-related shocks, like droughts, floods and <a href="https://www.nationalgeographic.com/science/2020/02/locust-plague-climate-science-east-africa/" target="_blank" rel="noopener noreferrer">locust plagues</a>. The resilience of agri-SMEs (small and medium-sized businesses that are formal and registered entities engaged in agricultural production) is being tested with these events.

While it is too early to estimate the full economic impact of COVID-19 on agri-SMEs, most lenders are taking steps to address the most pressing challenges faced by these agri-SMEs. Though it is prudent to move quickly to overcome these challenges, agri-SMEs would be better supported in the long run if lenders approach these problems through a systemic lens to understand the root of the challenges instead of focusing only on the symptoms of the overall shock.

Aside from the lack of infrastructure, agri-SMEs’ biggest challenge to growth is their limited access to finance and the regulatory burdens constraining this access. As will be discussed below, these challenges are deeper and more structurally embedded, and therefore require a long-term coordinated commitment to provide agri-SMEs access to capital.

This post highlights steps lenders are currently taking to help agri-SMEs weather the storm and suggests areas where they can expand their focus to support these businesses in being better prepared for future economic shocks.
<h2>Explore new options to mitigate risk and increase capital flow to agri-SMEs</h2>
Since the outbreak of the pandemic, most lenders have focused on serving existing clients by increasing their financing, restructuring loans, or deferring payments to meet their clients’ liquidity challenges. By doing so, lenders are also making sure their current portfolio is not at immediate risk.
<blockquote>It’s essential that lenders offer non-traditional options to mitigate risks and increase the flow of capital to agri-SMEs.</blockquote>
While lenders may be tempted to take a more conservative stance, those with sufficient capacity should be initiating even more new deals in order for agri-SMEs to keep goods and services flowing through the highly interdependent agricultural value chain. For instance, <a href="https://datastudio.google.com/u/0/reporting/0f453d56-7fef-4823-8cd2-b2bd02773603/page/TP9WB" target="_blank" rel="noopener noreferrer">72% of MSEs in Zambia</a> need working capital to continue and grow their business, and <a href="https://datastudio.google.com/u/0/reporting/0f453d56-7fef-4823-8cd2-b2bd02773603/page/TP9WB" target="_blank" rel="noopener noreferrer">61% are running on their savings</a>. COVID-19 is exacerbating the financing gap, and it’s essential that lenders offer non-traditional options to mitigate risks and increase the flow of capital to agri-SMEs.

Luckily, lenders have successful examples which they can use to build new and more innovative risk mitigation options. Credit guarantees, such as non-bank financial instruments that mitigate default risk for lenders in Sub-Saharan Africa, are a known practice. Between 2008 and 2015, AGRA worked with several partners to offer several guarantees to extend credit to many agriculture value chain actors in Africa, demonstrating the bankability and feasibility of investing in perceived risky agricultural businesses. Additionally, <a href="https://aceliafrica.org/" target="_blank" rel="noopener noreferrer">Aceli Africa</a> has developed a new market platform that aims to incentivize financial service providers to lend to agri-SMEs while also providing technical assistance to them.
<h2>Create new strategies to find and support agri-SMEs</h2>
Many agricultural lenders are reporting that servicing new clients has either stopped or dropped to low levels, not just because of risk concerns, but also because it is almost impossible to conduct thorough due diligence without on-site visits. Given that on-site visits may not be feasible in the near-future, lenders will want to design creative strategies and leverage data to support remote discovery of new agri-SMEs.
<blockquote>Promising agri-SMEs will become more visible to lenders by providing a common set of standard bankability metrics.</blockquote>
To this end, in early 2020, MIX and SCOPEinsight formed a partnership with the support of AGRA to help address the financing gap agri-SMEs face. Through this partnership, they are <a href="https://www.themix.org/news-blog/mix-and-scopeinsight-launch-partnership-with-agra" target="_blank" rel="noopener noreferrer">building bankability metrics</a> so that agricultural lenders can identify and pre-screen agri-SMEs. These metrics play an even more important role now due to COVID-19 disruptions, and they will feed into a portal which will bridge the information gap between agri-SMEs and lenders. As a result, promising agri-SMEs will become more visible to lenders by providing a common set of standard bankability metrics that lenders can use to reduce their costs to serve SMEs. By employing bankability metrics, lenders will be able to assess the potential for growth of agri-SMEs, which currently handle <a href="https://agrf.org/dealroom/wp-content/uploads/2020/07/AGRA-AGRF-Deal-Room-talk-by-Tom-Reardon-july20-2020-final-sent.pptx" target="_blank" rel="noopener noreferrer">680 million tons of food in Africa</a>.
<h2>Offer appropriate technical assistance to agri-SMEs</h2>
<blockquote>The key to this kind of support is that it offers business development assistance that is based on a high knowledge of the value chains and challenges.</blockquote>
Several of the lenders we spoke with are increasingly providing technical assistance to agri-SMEs, recognizing that in these extraordinary times, agri-SMEs are looking for direction. Lenders are offering guidance and training on financial management, crisis management, and operating a business with limited resources. After conducting a <a href="https://rootcapital.org/wp-content/uploads/2020/06/COVID-19-client-survey-report_JUNE-2020.pdf" target="_blank" rel="noopener noreferrer">survey on COVID-19's impact on 134 of its clients</a>, Root Capital decided to offer virtual technical support through its advisory team in four areas: crisis management, emergency operations, financial management and analysis, and digital data collection and analysis.

While technical assistance is not new and is already being offered to SMEs by many organizations, the key to this kind of support is that it offers business development assistance that is based on a high knowledge of the value chains and challenges, with the main goal to support agri-SMEs to grow and become bankable organizations. Helping agri-SMEs become more bankable, and thus more professionalized and visible to other lenders, can assist them to overcome barriers to financing and become more resilient and better equipped to face future risks and shocks.

Going forward, the uncertainty of this pandemic makes it unclear how the next season or harvest will affect agri-SMEs, who are <a href="https://www.raflearning.org/post/covid-19-emergency-briefing-agri-smes-operating-uncertain-financial-operational-and-supply" target="_blank" rel="noopener noreferrer">highly interdependent actors in an agricultural value chain</a> where one simple disruption in the flow of goods and services creates challenges for other actors. Along with prioritizing their existing clients, as they are currently doing, lenders could consider the crisis an opportunity to employ long-term strategies that can help agri-SMEs grow into resilient institutions. Coordinated responses and actions by lenders and other actors will play a critical role in ensuring that these businesses are strong enough to continue to feed the world in the face of new pandemics and other global challenges to come.

&nbsp;

From Crisis to Opportunity: How Can Lenders Help Build Resilient Agri-SMEs

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?

<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

Equity Investing

Initial Public Offering

Responsible Exit

Responsible Investing

Social Impact Metrics

Valuation

Deborah Drake

Consultant

Mayada El-Zoghbi

Managing Director

David Porteous

Jesse Fripp

Paul DiLeo

Jayshree Venkatesan

Safeya Zeitoun

Garrett Jaso

Machal Karim

Eda Dokle

Maha Khan

Carrie Ruh

Monica Brand Engel

Leah  Wardle

Laura Foose

Anne  Folan

Boubacar Diallo

Alex Kessler

Isabelle Barrès

Lizzy Bolze

Tess Johnson

Danielle Piskadlo

South Asia

Sub-Saharan Africa

Burkina Faso

North America

Governance

Policy, Regulation and Government Initiatives

Risk Management

Challenges and Crises

Enabling Environment

Financial Service Providers

Impact Investing

Financial Health

Fintechs

Resilience

Microfinance Institutions

Banks

Consumer Protection

Digital Credit

Digital Financial Services

Microfinance

MSME/SME Finance

Supply Chain Finance

Women

Agricultural and Rural Finance

Smallholder Farmers

Data Analytics

Financial Technology

Underserved Groups

Credit

Credit Provision

Delivery Channels

Blog Post

Event

Webinar

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

Are you interested in a career in impact investing? Join us for a speed networking event where you'll have the opportunity to chat one-on-one with professionals working in both the public and private sectors, representing organizations such as Accion Venture Lab, Accion Global Investments, MicroVest, OPIC, USAID, and Quona Capital.

Location:

<span class="ng-binding ng-scope">Center for Financial Inclusion at Accion
</span><span class="ng-binding ng-scope">1101 15th St NW, Suite 400
</span><span class="ng-binding ng-scope">Washington, DC 20005, USA </span>

Questions? Contact <a href="mailto:tjohnson@accion.org">Tess Johnson</a>.

&nbsp;

Breaking Into Impact Investing Speed Networking Event

This virtual industry dialogue will explore how innovative financing structures from different sectors help incentivize impact, and their potential applicability to financial inclusion. We'll explore specific examples of how innovative financing structures are being used to achieve concrete outcomes, including income share agreements, social impact incentive models, Good Jobs Good Business Toolkit, and the Women's Livelihood Bond.

<strong>Featuring:</strong>
<ul>
 	<li>Rashmi Khare, Director, Social Finance. Rashmi will discuss income share agreements,  an approach to align workforce development providers with recipients' positive economic outcomes.</li>
 	<li>Rory Tews, Programme Manager, Roots of Impact. Rory will explore the social impact incentive model – a funding instrument that rewards high-impact enterprises with premium payments for achieving social impact.</li>
 	<li>Kristy Henrich, Social Impact Analyst, Pacific Community Ventures. Kristy will advise on the Good Jobs Good Business toolkit which incentivizes quality jobs.</li>
 	<li>Anna Kanze, COO, Grassroots. Anna will share experiences from Aligning for Impact, an outcome-based financial incentive model for financial inclusion.</li>
 	<li>Natasha Garcha, Associate Director, Impact Investment Exchange (IIX). Natasha will discuss the Women’s Livelihood Bond</li>
 	<li>Danielle Piskadlo, Director, CFI will moderate and share experiences from Aligning for Impact</li>
</ul>
&nbsp;

Webinar: Innovative Financing Structures for Incentivizing Impact and Advancing Financial Inclusion