<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 in 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

South Asia

Sub-Saharan Africa

DFIs: COVID-19 and Financial Inclusion

Test of a Lifetime: COVID-19 and Financial Inclusion

Banks

Financial Service Providers

Challenges and Crises

Enabling Environment

Consumer Protection

Digital Credit

Credit

Digital Financial Services

Delivery Channels

Microfinance

Microfinance Institutions

MSME/SME Finance

Resilience

Financial Health

Responsible Investing

Impact Investing

Supply Chain Finance

Women

Underserved Groups

Blog Post

Earlier this year, as all of us were coming to grips with COVID-19, 14 leading microfinance organizations came together to form the <a href="https://www.centerforfinancialinclusion.org/bio/microfinance-coalition" target="_blank" rel="noopener noreferrer">Microfinance Coalition</a> to represent the voice of microfinance providers globally and take collective action. This group first introduced itself in May by way of a <a href="https://www.findevgateway.org/blog-series/call-action-how-donors-investors-and-policymakers-can-help-mfis-survive-covid-19" target="_blank" rel="noopener noreferrer">call to action blog series</a>, published here and on FinDev Gateway, that targeted key stakeholders on issues essential to micro, small and medium enterprises and the financial institutions that serve them, and there have already been some positive responses in the two months since.

After an introductory post, the <a href="https://centerforfinancialinclusion.org/microfinance-coalition-call-to-action-for-investors/" target="_blank" rel="noopener noreferrer">first call to action</a> was released with a focus on the investor community. Shortly thereafter, this call was answered by the group of nine microfinance investment vehicles (MIVs) (which has now expanded to ten) that had previously issued a <a href="http://www.e-mfp.eu/sites/default/files/news2020/2020-04-24 MIV Covid-19 coordination MoU.pdf" target="_blank" rel="noopener noreferrer">Memorandum of Understanding</a> as a part of their own response to COVID-19. This group began to engage with the Microfinance Coalition to identify opportunities for collaboration, and although this engagement is still in its early stages, tangible benefits are already starting to emerge.

Broadly speaking, these benefits fall into the following three categories:
<ol>
 	<li>Fostering increased transparency and trust</li>
 	<li>Identifying specific issues on which to collaborate</li>
 	<li>Amplifying our voice in engaging with other stakeholders</li>
</ol>
<h2>Increased Transparency and Trust</h2>
It’s important to recognize that while we’re all in this together, the situation is evolving rapidly, and visibility is limited. This can lead to misunderstandings and misperceptions that only serve to heighten the sense of risk. To counter this, open dialogue and information sharing are key, and that’s precisely what this engagement has allowed for. For example, a few members of the Coalition raised concerns about whether MFIs that proactively ask for handshake agreements or inquire about flexibility with covenants might compromise their ability to obtain new loans. The MIVs responded that to the contrary, MFIs that are transparent actually make it easier for the MIVs to work with them.

Another concern was whether sharing projections that include middle- or worst-case scenarios might backfire, and the MIVs maintained that information and thoughtful analysis provide much more assurance than the lack thereof.

Thanks to this dialogue, what has emerged is a venue for exchange that will help to facilitate an even more informed and coordinated response than would have been possible otherwise.
<h2>Collaborating on Specific Issues</h2>
Our initial conversations have already surfaced a number of items on which to collaborate, including the treatment of covenants, potential ways to de-risk lending, dealing with foreign exchange risk, and managing the legal costs for any restructurings that may become necessary. However, not surprisingly, one of the items that has gotten the most immediate attention is the need for a harmonized approach to the sharing of information, especially forward-looking information.

Given all the data collection efforts that are already afoot, there's a clear recognition that the reporting burden must be kept to a minimum, and that any additional information sharing must be uniquely additive. Hence, there is a preference for projections or a package of forward-looking metrics that can be anonymized and aggregated to shed light on the potential impact that COVID-19 might have on overall MFI portfolio quality, profitability and capital adequacy on a country-by-country basis. Among other things, such information could help to anticipate solvency challenges across markets as the crisis continues to unfold.
<blockquote>Projections or a package of forward-looking metrics that can be anonymized and aggregated are preferred.</blockquote>
These data-related discussions led to a recent session during which CGAP presented the findings of its first two waves of its <a href="https://www.cgap.org/pulse" target="_blank" rel="noopener noreferrer">Global Pulse Survey of Microfinance Institutions</a> to the Coalition and MIVs, which served the dual purpose of providing reactions to CGAP on the survey and helping to inform the approach to be taken by the Coalition and MIVs on these forward-looking indicators. This engagement with CGAP is set to continue, which will help the Coalition and MIVs further define which metrics to ultimately share with each other.
<h2>Engaging with Other Stakeholders</h2>
The third benefit is the ability to leverage this platform of cooperation with the MIVs to connect with other stakeholders who are also working on their own responses. As noted above, one issue that the Coalition and MIVs would like to address is how to deal with foreign exchange risk. Hedging costs have increased, and if loans that MFIs seek to reschedule are converted into hard currency loans, that brings additional exposure to the MFIs and, by extension, to their clients.

The poor are the ones who are most vulnerable to this pandemic, so it behooves us to find solutions that don’t let such risks flow through to them. The Coalition and MIVs believe that this is an area where other players, such as development finance institutions and <a href="https://www.tcxfund.com/" target="_blank" rel="noopener noreferrer">TCX</a> (a fund that helps to manage currency risk), could be instrumental. We aim to initiate conversations with them on potential mechanisms that could be put in place to address this issue.

Looking ahead, it seems clear that we are only in the very early stages of this pandemic. We need to be taking a much longer view to our cooperation. Rather than thinking of the effects of COVID-19 as coming in waves, it may be more appropriate to see them as a sea change that we need to adapt to for the long haul.
<blockquote>COVID-19's effects might be a sea change as opposed to coming in waves.</blockquote>
We're grateful for the engagement we have seen to date, and we are optimistic about what we can accomplish together. As mentioned in our call to action blog series, there are other stakeholders, such as donors and policymakers, that also have crucial roles to play, and CFI is looking forward to helping build bridges to overcome the new sets of challenges that this pandemic has put before us.


Microfinance Coalition, MIVs Team Up in Response to COVID-19

Microfinance Coalition

<em>This post was <a href="https://www.findevgateway.org/blog/2020/05/microfinance-coalition-call-action-investors">originally published</a> on FinDev Gateway.</em>

In our <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">introductory blog post</a>, we introduced the members of this coalition and highlighted their capabilities to reach the lowest income countries using both traditional approaches and digital channels. In this post, we want to focus on how investors can support microfinance institutions (MFIs) to respond to the needs of the base of the pyramid (BOP) during the pandemic.
<h2>Liquidity: The Most Immediate Constraint</h2>
As with other crises, the most critical and immediate issue that presents both short and long-term risks for our collective response is liquidity. Lockdown measures and shelter in place rules have had devastating effects on the types of businesses that are run by the BOP. This has meant that many are no longer able to make repayments. Furthermore, MFIs themselves have been restricted in their ability to collect loan payments from customers, reducing cash inflows and thus, the ability to disburse new loans. While government policies, such as moratoriums on loan repayments and forced rescheduling, are intended to protect consumers, they also contribute to the liquidity crunch of MFIs.

The longer businesses are shuttered, the greater the likelihood that the BOP will be unable to resume their businesses. Without income coming in, business owners must pay for essential living expenses like rent, food or medical care out of their limited savings. Over time, business owners will deplete these savings or sell off assets, reducing their ability to re-open their businesses without cash injections. Ultimately, a significant number of microfinance clients may default on their loans due to the crisis.
<blockquote>A significant number of microfinance clients may default on their loans due to the crisis.</blockquote>
While savings balances of small deposit holders remain stable or in some cases have even increased, there is lack of clarity as to how this will play out, and things might change quickly if people are unable to resume their income-earning activities again soon. Availing savings to those in need is a critical function that deposit-taking institutions play, and it is an essential aspect of preserving the trust of their clients. Should customers fear that these funds are not available, there is the risk of a run on financial institutions. Thus, liquidity to meet deposit obligations and to maintain capital adequacy ratios is critical for these institutions and for broader macro-stability.
<h2>Rapid Response Liquidity</h2>
To address these issues, most MFIs will need access to fast operational liquidity to cover near-term staff costs and to extend broader grace coverage and relief to clients. It is important to note, however, that borrowing to cover operational expenses is at best a short-term bridge to reopening, and ultimately puts institutions in an unsustainable position if lockdowns and operational impediments persist. Depending on the duration of the crisis, pressures on institutional liquidity may increase over time.
<h2>Near-term and Medium-term Debt</h2>
Beyond the immediate short-term needs, most MFIs depend heavily on debt as a source of funding for their loan portfolios. This creates two distinct sets of problems:
<ul>
 	<li>As risk capital flees less developed markets, institutions are finding it difficult to replace loans that are not being rolled over or extended. This means their ability to offer new loans to clients, or even accommodate existing clients with prolongations, will be constrained.</li>
 	<li>Because the funds needed to repay external loans coming due are trapped in their institutional portfolios, there is also a growing possibility of defaults among otherwise solvent institutions due to liquidity shortages which will further impair their ability to attract new funding.</li>
</ul>
Most financial inclusion-supportive lenders are already keenly aware of these constraints and are working to identify a common approach given the magnitude of the crisis. Because the duration of the crisis is likely to vary from country to country and is changing fluidly, lenders must remain flexible and support the conservative approaches that MFIs are taking to preserve their liquidity while meeting the needs of their existing customers. At a minimum, lenders should be prudent in the measures they take to reschedule or restructure their debt. Where feasible, lenders should avoid highly legalistic (and therefore expensive) restructuring approaches.

The ability of MFIs to continue to serve the BOP will be contingent on how flexible their lenders are with rollover and extension requests and with their willingness to extend or support additional funding once operations have resumed. Moreover, lenders should collectively commit to not penalize MFIs that have rescheduled or restructured debt in good faith in the current environment when they seek future financing. This issue does not appear to have been addressed in either the <a href="http://www.incofin.com/wp-content/uploads/2020-04-24-MIV-Covid-19-coordination-MoU.pdf" target="_blank" rel="noopener noreferrer">memorandum of understanding</a> or the <a href="https://7eab7e50-e834-461b-8539-7e8435e86338.filesusr.com/ugd/361833_613447b8d9e1422584dc4e48ba8f3603.pdf">pledge</a> that were recently issued by a number MIVs and other microfinance stakeholders.

In specific terms, the following facilities will likely be critical for both rollover funding and new funding:
<ul>
 	<li>Rapid-deployment debt facilities to cover funding gaps</li>
 	<li>Local currency facilities</li>
 	<li>Guarantee facilities to attract new lenders</li>
</ul>
<h2>Capital Investments and Subordinated Debt</h2>
For institutions with minimum capital requirements, it is highly likely that additional injections of capital will be needed for two main reasons:
<ol>
 	<li>Interest income will decline in the short-run due to limited operations and loan losses.</li>
 	<li>Even if portfolio quality does not decline dramatically in all cases, there will likely be increased delinquencies as well as a significant amount of loan restructuring to accommodate clients facing their own operating pressures, forcing MFIs to increase their provisioning.</li>
</ol>
These two factors will likely have a highly material impact on capital adequacy as institutions will be using cash to maintain operating capacity, while incurring losses. Should capital injections to rebuild capacity post-COVID not be possible, lenders and regulators will, at a minimum, need to grant waivers to allow institutions to continue operating without it. Over time, both rapid-deployment subordinated debt funds and equity investment funds will be critical.
<h2>All Investors Must Step Up</h2>
How investors respond during this pandemic will determine the extent to which MFIs are able to respond to the needs of their customers. Many investors have already stepped up and are setting important principles and agreements toward responsible collective action. See, for example, the <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> that was issued by the members of NpM (The Netherlands financial inclusion platform) and the previously mentioned memorandum of understanding signed by the group of nine MIVs.

We commend these organizations for taking collective actions, and call on all investors in inclusive finance to do their part. In particular, we ask that development finance institutions (DFIs), with their higher risk tolerance and longer-term horizons, support the sector in the ways that many MIVs and other social investors are unable to do.

&nbsp;

&nbsp;

Microfinance Coalition: Call to Action for Investors

Credit Provision

Default

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

HBS-Accion Program on Strategic Leadership in Inclusive Finance 2020

Citi Foundation

HBS-Accion Program on Strategic Leadership in Inclusive Finance

North America

United States

Fintechs

Event

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

Board Leadership for Impact Nairobi 2020 Workshop

Board Leadership for Impact Program

Kenya

Agricultural and Rural Finance

Customer Centricity

Education Finance

Energy Finance

Governance

Housing Finance

Risk Management

We are convening a select group of social enterprise leaders at the <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> (BLI) inaugural workshop taking place October 27-29, 2019, at the Fairview Hotel in Nairobi, Kenya.

BLI is dedicated to empowering corporate leaders in the social enterprise sector to achieve business growth and social impact. By focusing exclusively on executive leadership and reframing board effectiveness as a strategic imperative, BLI strengthens leadership and management to ensure these companies sustain business growth and drive social impact.

BLI is offered as a two-day interactive workshop where participants gather with faculty and facilitators for role play, simulations, discussions, and more. Workshops are augmented with a robust virtual portal where participants can access resources and videos, participate in discussions, and stay connected with hundreds of leaders in our global network. At this inaugural workshop, attendees will have the opportunity to engage with peers on issues critical to social enterprise growth and impact, including digital strategy and culture, data, partnerships and financial inclusion in the digital age.

Board Leadership for Impact Program Launch Workshop

Consumer Credit

Human Touch

Nano Loans

Neobanks

Partnerships

<strong>WASHINGTON, DC, August 27, 2019</strong> – The Center for Financial Inclusion at Accion (CFI) has launched an executive education program for financial service providers serving low-income communities in emerging markets. Through peer learning and exchange, the <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> will empower executives and board members to foster client centricity, lead digital transformation, sustain business growth and drive social impact. In partnership with the <a href="https://www.citigroup.com/citi/foundation/">Citi Foundation</a> and <a href="https://www.fmo.nl/">FMO</a>, the Dutch development bank, supporting program implementation and participant scholarships, the Board Leadership for Impact Program will offer multiple in-person workshops per year coupled with a robust virtual portal.

Derived from CFI’s five-year <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a>, which fostered the growth and development of more than 300 executives and board members of financial service providers serving more than 10 million clients in Africa, the Board Leadership for Impact Program will now expand to include early stage to mature companies offering financial services to underserved customers that operate in emerging markets around the world.

“Our experience with leadership development through peer exchange will inform our efforts through this new program to cultivate a community of leaders who have the skills and the network to help their organizations thrive,“ said <a href="/bio/deborah-drake">Deborah Drake</a>, Vice President, Center for Financial Inclusion at Accion. “Tackling challenges like achieving sustainable growth or pursuing digital transformation, particularly as a mission-driven organization, takes strategic leadership at the board level.”

Through role play, simulations and facilitated discussion, participants will gain new perspectives, skills, and knowledge on topics critical to social enterprise growth and impact, including risk management, board dynamics, digital transformation and inclusive digital finance. They will join an active community of alumni of the Center for Financial Inclusion at Accion’s <a href="https://www.centerforfinancialinclusion.org/get-involved#fellow-exec-ed">executive education programs</a>.

“By developing and strengthening leadership skills that drive business growth and social impact, our partnership with the Center for Financial Inclusion at Accion will help accelerate financial inclusion and economic progress around the world,” said Florencia Spangaro, Director of Programs, Citi Foundation.

“FMO is a proud partner of Accion for over a decade and we realize that creating a lasting impact starts in the board room. Strengthening the management of financial service providers and enterprises will help ensure business longevity and commitment to underserved customers,” said Gerbrich Salverda, Capacity Development Officer at FMO.
<p style="text-align: center;"><strong>###</strong></p>
<strong>About the Center for Financial Inclusion at Accion</strong>

The Center for Financial Inclusion at Accion (CFI) is an action-oriented think tank that engages and challenges the industry to better serve, protect, and empower clients. We develop insights, advocate on behalf of clients, and collaborate with stakeholders to achieve a comprehensive vision for financial inclusion. We are dedicated to enabling 3 billion people who are left out of – or poorly served by – the financial sector to improve their lives.
<a href="http://www.centerforfinancialinclusion.org/">www.centerforfinancialinclusion.org</a>
<a href="https://twitter.com/CFI_Accion">@CFI_Accion</a>
<p style="text-align: center;"><strong>###</strong></p>
MEDIA CONTACT

Center for Financial Inclusion at Accion
<a href="/bio/virginia-moore">Virginia Moore</a>
<a href="mailto:vmoore@accion.org">vmoore@accion.org</a>
+1 202.393.5113

The Center for Financial Inclusion at Accion Launches Executive Education Program for Financial Service Providers to Enable Business Growth and Social Impact

Informal Credit

Insurance Companies

Press Release

I was a 19-year-old college student when I first encountered Alex Counts, at the Global Microcredit Summit in New York City. Having just finished my first microfinance job, at Banco Solidario in Ecuador, I was understandably -- maybe overwhelmingly -- inspired, energetic, and hopeful. I wanted to build a career in microfinance, and I wanted to tell everyone about it.

Several years later, as I introduced him for <a href="https://grameenfoundation.org/">Grameen Foundation</a>’s Annual Microfinance Awards Dinner, hosted by my graduate school microfinance club, it would have been the easiest thing in the world for a legend like Alex to condescend to me, put me in my place, or tell me to talk less and listen more. But he treated me like an equal, and more important, an ally in pursuing a shared vision of a more equitable world. Even after more than three decades in the field, he hadn’t lost his passion or compassion. He wanted, more than anything, to encourage my enthusiasm, and share whatever insights might help me on my way.

That attitude permeates <a href="https://www.centerforfinancialinclusion.org/bio/alex-counts">Alex Counts</a>’ latest book, <a href="https://www.amazon.com/dp/1733914102?ref_=pe_3052080_397514860">Changing the World Without Losing Your Mind: Leadership Lessons from Three Decades of Social Entrepreneurship</a>. The book’s most noticeable trait is a desire to teach and encourage in the face of slow, difficult progress. The book, a 300-page combination of memoir, historical reference, and instruction manual for social impact work, skips from year to year and country to country, recounting anecdotes from the early days of the financial inclusion industry, and drawing out so many lessons that it’s hard to keep track.

These lessons, described with breathless passion and often illustrated with vivid examples, form the book’s backbone, dispensing wisdom on topics like effective fundraising, and the power of good storytelling to motivate and instruct others. He also spends considerable time acknowledging the mentors who helped him on his own journey, and relays the still-relevant ideas they developed decades ago. This theme of leveraging existing resources, in fact, shows up frequently in the book.
<blockquote>Even after more than three decades in the field, Alex hadn’t lost his passion or compassion.</blockquote>
“Addressing the chronic underutilization of existing solutions and resources became a theme of my life. I came to appreciate how Muhammad Yunus, Sam Daley-Harris, and other mentors of mine focused at least as much on activating overlooked systems, idle assets, and forgotten people as they did on innovation," Counts writes. "After all, aren’t the very poor people served by microfinance themselves underutilized resources that can be made productive if provided with economic opportunity in creative and respectful ways?”

One lesson that resonates for anyone who’s led a project team is the importance of staying aware of your own shortcomings, and being honest about them to your team. Some of the book’s most enjoyable moments come when Alex shares his vulnerability as a leader. In one story, he receives a lesson in humility from his lifelong mentor, Dr. Mohammad Yunus, during a respectful but stern feedback discussion in his early years in Bangladesh. In another, he acknowledges behaving like an “arrogant brat” during his time working for Sam Daley-Harris at RESULTS.

For those of us who’ve worked in the social impact field for a few years or more, Alex’s enthusiasm rekindles our own optimism and energy like a strong cup of coffee on a cold morning. It reconfirms our reasons for entering the field in the first place. As Alex puts it:

Book Review: “Changing the World Without Losing Your Mind: Leadership Lessons from Three Decades of Social Entrepreneurship”

<em>“Nearly every industry requires infrastructure to thrive, and this goes for the microfinance industry too. But the infrastructure that the global microfinance industry has constructed over the past two decades is looking a bit shaky today. Infrastructure investments are urgently needed to keep the industry sound and prepare it for the future.”</em>

With that introduction, CFI called for an investigation, to be followed by action, into the state of the information infrastructure that supports the microfinance sector. CFI subsequently conducted a study of three main microfinance information infrastructure elements. This study aimed to help microfinance stakeholders understand the business models of the information providers and allow the stakeholders to identify actions that might improve the sustainability of the information infrastructure. This report summarizes the findings of the study and puts forward action recommendations for consideration.

This investigation was led by Emmanuelle Javoy, who also prepared this summary with input from Elisabeth Rhyne. Thanks to the Microfinance Information eXchange, Microfinanza Rating, Microrate, Planet Rating and Microfinance Transparency for sharing their information. Thanks to Julie Harris for research input. Thanks to Mary Ellen Iskenderian, Gail Buyske, Jeffrey Binstock, Asad Mahmood and Daniel Rozas for input during advisory sessions. Thanks to Anne Hastings for management, oversight and advice. Thanks to Calmeadow and Moody’s for their financial support and to the Netherlands Platform for Inclusive Finance for hosting our convening of European stakeholders. FINCA International provided meeting space for the convening of stakeholders in Washington, D.C.

&nbsp;

The Microfinance Industry Needs an Infrastructure Fix: Summary of Findings and Recommendations

Report

What Happens to Microfinance Clients Who Default examines how default unfolds and affects microfinance clients in Peru, India, and Uganda – three very different countries that represent the global diversity of microfinance. Since default is a particularly important issue for client protection, the study was launched to explore how microfinance institutions (MFIs) treat clients who are unable to repay their loans. It was motivated by a lack of information on the client-facing actions MFIs take when a borrower moves into default.

The study confirms that the quality of treatment clients receive during collections depends importantly on good practices within individual financial institutions, but it also found that treatment depends even more on the local environment. Humane collections can happen when a country has good regulators, a credit bureau that works well, and a culture that upholds fulfillment of debt obligations. When these features are weak missing, lenders are pushed by the demands of the market into harsh practices.

Default is particularly challenging because it pits the lender’s need for institutional survival against the difficult circumstances of the defaulting customer. The intent of this study is to inspire MFIs to reconsider their treatment of clients in default, and specifically to define acceptable parameters for humane treatment of clients during the default process. Clients who are facing default may very well be in the most precarious financial position of their lives. Therefore, the obligation falls squarely on MFIs to handle these clients with care.

Smart Campaign researchers talked with managers and staff from microfinance institutions in Peru, India, and Uganda –markets with diverse legal systems, market conduct regulators, credit bureaus, and local actors. The research team dug deeply into three markets to challenge the notion that MFI responses to default are universal or standard.

The Smart Campaign recommends the following actions to improve client protection practices related to loan collections and default:
<ul>
 	<li>Regulators, donors, and banking associations should work together to ensure that quality credit reporting systems exist and cover base-of-the pyramid clients</li>
 	<li>Regulators should monitor and enforce market conduct norms for collections and reward financial institutions that perform well.</li>
 	<li>Lenders that use group-lending methods must take responsibility to ensure that intra-group dynamics do not result in abuse of struggling clients. Lenders and regulators should develop greater clarity on the use of restructuring and flexible debt relief.</li>
 	<li>Mediation and debt counseling mechanisms are needed that work for base-of- the-pyramid clients.</li>
</ul>
&nbsp;

&nbsp;

What Happens to Microfinance Clients Who Default?

The Smart Campaign

Ghana

India

Peru

Latin America and The Caribbean

Client Treatment

Alexandra Rizzi

Senior Director, Smart Campaign 

Deborah Drake

Vice President

Eric Noggle

Senior Research Director 

Mayada El-Zoghbi

Managing Director

Machal Karim

Ethan Loufield

Alexandra Fiorillo

Paul DiLeo

Danielle Piskadlo

Alexis Beggs Olsen

Rachel Morpeth

Anna Kanze

Ros Grady

Zambia

South Sudan

Zimbabwe

Mozambique

Nigeria

Uganda

Policy, Regulation and Government Initiatives

Trends

Social Performance

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

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

Navigating Challenges Is What Boards Are All About – Part 2: Vulnerability and Resilience

<em><img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="88" height="109" />The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program.</em>

Far from being “extraordinary and rare,” challenging environments are a “normal” part of business for financial service providers (FSPs) targeting low-income populations. We tend to think that external environment challenges are extraordinary events that cannot be predicted or are too varied and diverse to prepare for—and therefore are best confronted as they arise. What do currency devaluations, deteriorating security, political interference or regulatory upheavals have in common? Can we can plan for them all and prepare effective responses in advance? Do responses need to be tailored to each circumstance?

Through the <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellows program</a>, we have reviewed a wide sample of the external threats faced by the boards of FSPs in recent years in Africa and globally: economic fluctuations, currency devaluations, violence and instability, abruptly announced interest rate caps and capital requirements, natural disasters, terrorism—it’s a long and heterogeneous list.

<img class=" size-full wp-image-25776 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/31589334426_3111c44396_z.jpg" alt="31589334426_3111c44396_z" width="640" height="377" />

Despite this diversity, an engaged FSP – led by an active board – can often do quite a bit to shape and influence the operating environment or ready the institution to survive shocks. Preparing for and responding to crises, threats and opportunities is, in fact, a core responsibility of senior executives and board directors. Conversations with Africa Board Fellows demonstrate that boards <em>can</em> prepare by:
<ul>
 	<li>Anticipating and minimizing the likelihood of adverse external developments</li>
 	<li>Reducing the vulnerability of the institution to such shocks</li>
 	<li>Enhancing the resilience (ability to recover) of the institution to the situations it will inevitably face</li>
</ul>
We’ll tackle the first point on anticipating and minimizing shocks here. We’ll cover the last two points in our next post in this <a href="https://cfi-blog.org/tag/abf-blog-series/">series</a>.
<h3>Anticipating Challenges with an Ear to the Ground</h3>
<img class=" wp-image-25790 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/how-to-anticipate-changes-as-a-board-member.png" alt="how to anticipate changes as a board member" width="196" height="330" />The first step is to anticipate – and hence be prepared to mitigate – challenges. To do this, board directors must keep abreast of new entrants, potential disruptions, and promising opportunities in the marketplace. Directors cannot rely solely on management for this information. Instead, they should develop their own sources to supplement and confirm management’s view, such as by networking with industry observers and analysts–with management’s knowledge, of course. Locally based board members have an advantage in developing and maintaining such networks, which is one reason it is important to recruit qualified local directors. For example, finding and retaining qualified local directors has been a priority for FSSL South Sudan, given the ongoing political disturbances in the country that make it difficult to maintain continuity of leadership.
<p style="text-align: left">Talking frequently with FSP staff and clients is another way board directors can anticipate challenges. Frontline staff are in a position to report on competition, clients and local happenings. And it should go without saying – but always bears repeating – that clients can provide ground-level insight. Clients may reveal such things as their vulnerability to displacement in government raids on the informal sector or the inability to import goods. When ABF fellows from the Ivory Coast conducted client visits, these were some of the specific challenges about which they learned.</p>

<h3>Getting Ahead of Operating Challenges with Active Participation</h3>
While they can never control the external environment, board members can help shape it to some degree through the following:
<ul>
 	<li><strong><em>Create and participate in industry associations; promote and follow codes of conduct</em></strong>. Industry associations establish frameworks for fair practices and client protection and help facilitate self-regulation and compliance with governance and transparency requirements. An active industry association can also work closely with regulators and other government actors to help shape legislation, regulation and perceptions of the industry, which are all key features of the operating environment. Board directors should support and encourage management to devote time to nurturing strong associations – a medium term project – and engage directly with other FSP board directors to make this an industry priority. As one example, Barnabe Francois, CEO of Microcred Ivory Coast, <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/barnabe_francois_microcred.pdf">has been an active member of banking associations</a>, first in Madagascar and subsequently in Ivory Coast.</li>
 	<li><strong><em>Develop relationships with regulators and government officials. </em></strong>To reinforce the efforts of industry associations, FSP management can also cultivate relationships with government officials to advocate and educate them (and the media) on operating environment challenges. Board directors, particularly well-regarded locally-based directors, can greatly enhance the effectiveness of such engagement. Or, like MicroCred Zimbabwe, the FSP can appoint an experienced bank regulator to the board (perhaps, a retired official or someone who worked in another country) who understands how regulatory bodies work and can connect on a peer-to-peer basis with regulators.</li>
 	<li><strong><em>Build clients’ financial capability</em></strong>. An important aspect of an FSP’s risk management responsibilities is ensuring that clients use financial services responsibly and productively. Misunderstanding how financial services work can lead to multiple borrowing, or mismatched cash flows which often threaten clients’ ability to repay their loans. To ensure good value to clients and the long-term viability of the FSP, board directors should encourage management to include initiatives in strategic plans to help clients build their financial skills and practice good habits.</li>
</ul>
<ol>
 	<li style="list-style-type: none"></li>
</ol>
Such efforts can, over the medium term, reduce the likelihood that an FSP or the entire sector will face certain types of challenges and will help position providers to take advantage of new opportunities.

<em>Stay tuned for the next blog in this series</em><em>, which will highlight reducing an FSP’s vulnerability to external shocks, as well as enhancing resilience.</em>
<h4><strong><i><span style="margin: 0;font-family: 'Calibri', sans-serif"><span style="color: #000000">CFI is currently recruiting fellows for the next cohort of the </span><a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a><span style="color: #000000">. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.</span></span></i></strong></h4>
&nbsp;

&nbsp;

Navigating Challenges Is What Boards Are All About – Part 1: Anticipating Challenges

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

<img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="88" height="109" /><em>The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program.</em>

In recent years, some African countries have experienced slower economic growth and less stability in their currencies. This deterioration in macroeconomic conditions has presented challenges for financial service providers (FSPs) seeking to serve the base of the pyramid and improve financial inclusion. Some ways macroeconomic conditions impact FSPs include:
<ul>
 	<li>Higher operational expenses (e.g., imported IT equipment and software; office leases and technical services invoiced in foreign currency)</li>
 	<li>Increase in non-performing loans as small businesses have had fewer growth opportunities</li>
 	<li>Higher cost of funds (both deposits and debt)</li>
 	<li>Reduced access to debt from international and local providers</li>
 	<li>Decrease in revenue or tighter margins</li>
</ul>
We're talking to <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> (ABF) alumni to share their experiences dealing with deteriorating macroeconomic conditions.

ABF alumnus Deji Fisho, Board Member of Fortis Microfinance Bank in Nigeria, provides insights into the implications for FSPs on the 2016 decision by the Central Bank of Nigeria to allow the exchange rate for the Naira to be market driven.

<em>It affects a microfinance bank’s exposure to dollar loans. When the currency devalues, MFIs have to spend three times more Naira to keep money in dollars. But with the oil market crash, there weren’t even enough dollars coming in for repayments, so people have to go outside the bank to the black market to get dollars. In a currency devaluation situation like this, MFIs won’t have money to lend. The bigger banks borrow from the government and the smaller banks borrow from the bigger banks. So there is no trickle down to MFIs if the larger banks don’t have the cash.</em>

Learn more in <a title="Deji_Fisho_Fortis MF Bank" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/deji_fisho_fortis-mf-bank.pdf">Deji's full interview</a>.

ABF Fellow Nkosilathi Moyo, CEO of VisionFund in Zambia, comments on how currency devaluations impact clients:

<em>Some of our clients are traders, so they buy goods from Democratic Republic of Congo, South Africa and Tanzania. Devaluation meant that our clients had limited foreign currency to meet their business needs, resulting in default.</em>

<em>After the fluctuations, we revised our risk appetite statement to ensure that it is aligned with prevailing market conditions. For instance, the board made a decision that we should not contract any foreign currency denominated loans. Additionally, we reviewed our risk concentration to ensure we do not have too much focus on any one region or industry. For example, we are shifting some of our focus away from traders in the mine areas to smallholder farmers.</em>

Read more in <a title="Nkosilathi _Moyo_VisionFund_Final" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/nkosilathi-_moyo_visionfund_final.pdf">Nkosilathi's full interview</a>.

Regulators can sometimes respond to macroeconomic problems by imposing regulations designed to keep risks out of the financial sector. One response is to impose higher minimum capital requirements or higher reserve requirements. These may sometimes be imposed directly after a collapse of a similar type of financial entity due to a sudden bank run. Such restrictions can be debilitating for financial institutions, especially when they are imposed suddenly. Although meant to protect depositors, this type of regulation can push smaller FSPs out of the market.

In 2017, Mozambique recently faced challenges arising from multiple factors: political tensions and violent clashes, a debt scandal that resulted in the suspension of aid from key donors and endemic corruption. This affected macroeconomic variables, with a significant currency devaluation in 2016 and high inflation (15 percent) in 2017. These tough macroeconomic conditions led regulators to impose a higher minimum capital requirement on financial institutions. ABF Fellow Titos Macie, Socremo Board Chair, discusses the impact of that increase on the institution.

<em>The deteriorating macroeconomic fundamentals, along with the non-performance of two major banks (one liquidated and one placed under the central bank administration), caused the central bank to increase minimum capital requirements. Initially, the central bank had indicated that the new capitalization requirements would be 500 million meticais, an increase from MZM 70 million, so the board made plans to meet that requirement within three years by not paying out shareholder dividends [and using] share premium and retained earnings to capitalize the bank. When the official decree was actually issued by the central bank, the capitalization requirement was much higher: MZM 1.7 billion (US $26 million). Facing this requirement, the board had little room for maneuver. It took a decision to downgrade Socremo from a full commercial banking license to a micro bank license. Socremo can still do almost all financial services, except for forex business.</em>

<a title="Titos_Macie_Socremo" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/titos_macie_socremo.pdf">Titos' full interview</a> includes a discussion of the impact of currency devaluation on its clients. Accion discusses its recent investment in Socremo <a href="http://blogs.accion.org/features/plan-bring-small-businesses-in-mozambique-support/">here</a>.

Titos sums up how many FSPs operating in challenging macroeconomic and regulatory environments feel: <em>We are surviving and looking at a better future.</em>

<em><strong>CFI is currently recruiting fellows for the next cohort of the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship program</a>. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.</strong></em>

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Dialogue With Africa Board Fellows: Navigating Challenging Macroeconomic Environments

<em><img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="78" height="97" />The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program.</em>

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Few countries have escaped socio-political unrest, conflict or periods of crisis. As the consequences of such events can be severe for both financial service providers and their customers, it behooves every board and CEO to consider how they might prepare themselves to respond when the political environment around them deteriorates.

[caption id="attachment_25747" align="alignleft" width="169"]<img class=" size-full wp-image-25747 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/barnabe_francois-headshot-e1532552860511.png" alt="Barnabe_Francois Headshot" width="169" height="215" /> Barnabe Francois, ABF Fellow. Copyright Accion[/caption]

<a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> (ABF) alumnus Barnabe Francois, CEO of Microcred Ivory Coast, described a crisis his institution faced in early 2017 in which a range of events all struck at the same time:

<em>“In January 2017 former soldiers demanded money from the government and violence erupted. At the same time, there were strikes within the public administration that lingered for three weeks. The timing could not have been worse, since the government had recently kicked out as many as 500 of our customers who were selling on the streets. This affected us tremendously. We had been in the process of addressing issues related to repayment when the political unrest escalated.”</em>

The immediate effect was seen in Microcred’s portfolio at risk (PAR), which jumped from 3.8 percent in December 2016 to 5.1% in January 2017.Barnabe continues,<em> “Since then, we have struggled to get back to our target PAR of 3 percent. As for our clients, some of them are still facing problems. Many lost all their goods because they had to flee the area when the government kicked them off the streets. I should also mention that there were some who were not affected by the unrest, but took advantage of the situation by claiming they were impacted and refusing to pay.”</em>

The board was very concerned when this happened, and increased its attention to PAR targets. “<em>We had a high concentration of clients in one particular area. This prompted me to start an expansion plan and we have opened new branches in other areas in order to have a more diversified portfolio.” </em><a title="Barnabe_Francois_Microcred" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/barnabe_francois_microcred.pdf">Barnabe's full interview</a> goes into greater detail about lessons learned from ABF in navigating these challenges.

[caption id="attachment_25746" align="alignright" width="206"]<img class="alignnone size-full wp-image-25746" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/resi_janssen.png" alt="Resi Janssen Headshot" width="206" height="237" /> Resi Janssen, ABF Fellow. Copyright Accion[/caption]

ABF Fellow Resi Janssen, Board Chair of Finance, South Sudan Limited (FSSL) faced a more extreme situation due to political and economic chaos in South Sudan. Violence made it dangerous for many clients and staff, and at the same time South Sudan’s economy was hit with devaluation and inflation, making the currency nearly worthless. One predictable response was flight, as Resi explains:

<em>“In July 2016, some staff in one branch fled to Uganda and did not come back. Due to devaluation and inflation, the salaries of staff in terms of US dollars diminished some 25 times. We doubled the basic salary in January 2017, but this was still far from enough to earn a decent living…</em>

<em>Several clients lost properties. Businesses were looted (some tens, not hundreds). Because of the conflict, a few hundred clients fled to northern Uganda and DRC.”</em>

In her <a title="Resi_Janssen_FSSL" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/resi_janssen_fssl.pdf">full interview</a>, Resi offers the following concrete advice for MFI board members on how to support staff and clients during periods of unrest:
<ul>
 	<li>Make sure staff is safe.</li>
 	<li>Have a contingency plan, and make sure everyone is aware of the content. Staff need to know it.</li>
 	<li>Have as few costs as possible in foreign currency. Conflicts always cause devaluation.</li>
 	<li>Have as few expatriate staff as possible. They evacuate in times of crises and are too expensive.</li>
 	<li>Have offices in relatively safe areas, although “safe” can change quickly.</li>
 	<li>Have savings insurance.</li>
 	<li>Ensure some local board members who are committed, qualified, have authority to make decisions, and are not likely to go abroad.</li>
 	<li>Be in close contact with staff—at least weekly visits or calls with the CEO and monthly board meetings.</li>
</ul>
The services of financial institutions can be especially important for clients during difficult times. A wide range of financial services can support people at the base of the pyramid and small businesses to weather shocks from deteriorating economic conditions and social unrest. This underlines the need for financial institutions and their boards to anticipate and prepare to navigate challenging contexts. With the <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a>, we strive to strengthen the capacity of financial institutions at the executive level so they can do just that.

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Financial Institutions in Times of Political and Social Unrest: Thoughts from Africa Board Fellows

<em><img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="90" height="112" />The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program.</em>

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The mention of overheated credit markets sends chills up the spine of anyone who lived through the crises in Bosnia, Andhra Pradesh, Morocco, or Nicaragua, where market saturation played a prominent role. While regulators and investors have key responsibilities in avoiding these crises, boards of financial service providers (FSPs) must also steer their organizations carefully when more companies enter the space to compete for the same customers. And since portfolio at risk at 30 days (PAR30) is a lagging indicator in the earlier stages of a <a href="http://www.cgap.org/publications/regulatory-options-curb-debt-stress">credit market cycle</a>—growth and high liquidity mask debt stress for a time—boards have to be more creative about how to understand what is actually happening.

We spoke with two <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> alumni from Uganda, ECLOF Board Chairman Vincent Kaheeru and UGAFODE Board Member Olive Kabatalya, to capture their insights on governing in a competitive environment. “There are about 2,000 institutions [in Uganda] that could pass for microfinance institutions,” explained Vincent. “It’s quite a complicated market because there are both big and small players. Even the big banks target the smallest savers and borrowers.”

Based on their experience, Vincent and Olive offered other board members the following guidance:

[caption id="attachment_25725" align="alignright" width="300"]<img class="alignnone size-medium wp-image-25725" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/abf-fellow-olive-kabatalya-at-table.jpg?w=300" alt="ABF Fellow Olive Kabatalya sitting at table." width="300" height="214" /> ABF Fellow Olive Kabatalya (left). Copyright Accion.[/caption]
<h2><strong>Anticipate Where the Market Is Going</strong></h2>
“For any strategic response to be meaningful, the conversation between board and management needs to happen early in the credit market cycle,” warns Olive. “Keep studying market trends in any way possible. Pay attention to the media, newspapers, central bank announcements and other sector players. Financial sector studies like <a href="http://www.finmark.org.za/publications/">Finscope</a> are very informative. Look for reports from and talk to microfinance associations.”
<h2><strong>Meet Your Customers</strong></h2>
“Bring the customer closer to you and listen to him or her,” said Vincent. “You can’t serve them generally. It doesn’t work. Client visits were an idea we picked from the <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a>. We [the board] had done them occasionally, but we intensified the number of visits and changed the approach to make the visit more effective. When you visit customers, you understand the context of all that is going on. That helped me and my team.”

Olive added, “We are visiting clients to ensure that we are not just reading performance reports, which do not usually include anything to do with meeting the needs of the client.”
<h2><strong>Get Creative with Target Market and Product Differentiation</strong></h2>
[caption id="attachment_25726" align="alignleft" width="300"]<img class="alignnone size-medium wp-image-25726" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/abf-fellow-vincent-kaheeru-and-robert.jpg?w=300" alt="ABF Fellows Vincent Kaheeru and Robert Ongodia" width="300" height="214" /> ABF Fellows Vincent Kaheeru (right) With Robert Ongodia, Accion. Copyright Accion.[/caption]

“We have a situation of multiple borrowing,” explained Vincent. “Many people have three or four loans from different financial service providers. It burdens the clients. But I’m also aware that the target clientele is narrow. There are still many people at the bottom of the ladder who want to borrow. Lenders need to be more creative and develop products to bring more of the unserved ‘into the boat’…

We’re doing studies to be more responsive to the needs of our market. Everyone offers the common products. If we don’t differentiate, we’re the same. We’re looking at products that will appeal to the target market by helping the target market make money…

About half of our portfolio is urban and half is rural. Each carries different risks. In rural areas, we’re looking at agricultural value chains, helping the farmer bridge the gap between harvesting and processing; and [we look at] the market side, so farmers are not stranded with a crop and can fetch a good price. We’re also looking at microinsurance to protect our investment as well as [appeal to] the interest of the client in case of drought.”
<h2><strong>Pay Attention to Your Staff</strong></h2>
“We’ve had a challenge with our highest performing staff members being poached by bigger and better-paying microfinance organizations,” said Olive. “This has caused us to review staff benefits.”
<h2><strong>Ensure Effective Operational Controls</strong></h2>
In competitive environments, FSPs face all the risks of rapid growth, including a deterioration of operational controls, without actually growing. As loan officers become more desperate to achieve targets in a competitive space, shortcuts are taken and credit assessment becomes lax. Boards must ensure effective supervision as well as a robust system of checks and balances. “Although growth is what we really want, even as we thirst for growth, we need to be careful that we do not go down with the growth never to be seen again,” said Vincent.
<h2><strong>Improve Your Own Capacity to Manage Risk</strong></h2>
Olive and Vincent also both emphasized, and have exemplified, the importance of board members continually sharpening their own ability to manage risk. Vincent explained, “Things are changing. What worked yesterday won’t work tomorrow. As a board member, you have to keep reading, keep sharing experiences to stay on the cutting edge.”

For more details, read our complete interviews with <a title="Olive_Kabatalya_UGAFODE" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/olive_kabatalya_ugafode.pdf">Olive</a> and <a title="Vincent_Kaheeru_ECLOF" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/vincent_kaheeru_eclof.pdf">Vincent</a>.

<em><strong>CFI is currently recruiting fellows for the next cohort of the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship program</a>. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.</strong> </em>

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The Board’s Role When Competition Heats Up

<em>If digital financial services are so convenient and affordable, why are uptake and usage rates among individuals with lower incomes so low? Monique Cohen explores the mismatch between products and money management needs.</em>

<em>&gt; Posted by Monique Cohen</em>

<img class="alignright wp-image-24684" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/thumb_1b4e5caeaab54bb5bbbbf9384089e357.jpg" alt="" width="330" height="220" />This maxim governs much of our financial lives, rich or poor. Yet, we offer financial services to the unbanked and underbanked, largely ignoring it. The thinking around customer centrality as it affects financial services for the poor emphasizes appropriately responding to people’s needs and wants for financial services. But, as Kim Wilson <a href="https://cfi-blog.org/2015/07/21/the-supply-centricity-of-customer-centricity/">pointed out</a>, this is still not happening:

<em>We have an agenda, which is this: please be our customer, have your needs, express them so long as they are about digital payments or failing that, using a bank account – a lot – and preferably, digitally. Else, we don’t give a damn. We don’t care about your archaic methods… We desperately want and need you to modernize, to become just like us. Otherwise we have no justification for all the work we do and all the money we spend.</em>

Until now the perceived drivers of uptake of digital financial services (DFS) have been their assumed attributes of convenience, timeliness and affordability, relative to current formal and informal financial service offerings. However, with uptake and usage levels of only 30 percent for digital financial services, it is clear that this rationale falls short. Impediments to high usage continue to be overlooked.

What has to change if we wish to have more users move toward a ‘cash lite’ economy? What have we missed?

Financial products tend to be viewed through a lens of functionality. Timely access to credit can enable an entrepreneur to grow a business or meet regular financial obligations such as rent or school fees, especially when cash flow is variable. But for many poor customers, use of financial services is not about choosing Plan A, but about matching what is available to the need of the moment. These behaviors are not always optimal, neither for them nor for providers. Several years ago Equity Bank in Kenya noticed a high rate of usage of working capital loans for school fees. Similarly the encouragement to save is framed around the provision of access to savings tools, ignoring the stability and level of income needed to generate a surplus that can be put aside.

Ann Cotton, in response to financial service providers’ puzzlement with the lower-than-anticipated rates of adoption of financial products, <a href="https://www.theguardian.com/global-development/2015/feb/28/ann-cotton-educating-millions-within-africa-by-inspiring-sustainable-change">noted that</a>:

<em>I hear, “Why do poor people make such bad decisions?” But actually their decision-making can be far more complex than that of the better-off in many ways. They’re not financially illiterate, they’re constantly weighing up choices based on the reality of poverty.</em>

The decisions poor people make around money are complex. Theirs is a continual process of trade-offs involving the weighing of choices based on the reality of their poverty and a continual battle to stabilize and raise income while reducing vulnerability. The supply-side thinking around product design and delivery fails to reflect this complexity and ignores how the poor use financial services as money management tools. The consumer’s context is defined by an ever-changing panoply of wants, sources of revenue and the available portfolio of financial tools, formal, informal and semi-formal. Instead financial service providers address demand with a limited product range knowing that they are used for a broad array of purposes. Is it no surprise that there are mismatches between the providers’ offers and users’ needs?

The current interface between customer and provider is shaped by a structural bias in which the financial service provider knows best and expects that the customer will do as told. The formal financial services customer tends to be passive and dependent, does not exercise voice and choice and lacks protections. By contrast, in the informal financial sector users speak up and feel freer to let their demands be known. Moreover, DFS require people to leapfrog into digital financial services which combine unfamiliar technology and unwelcoming formal financial services. All present significant barriers to adoption. Surely it is time to revisit this paradigm, recognizing that the increased use of digital financial services means looking beyond the functional attributes of a product to the user’s broader money management strategies and the structural contexts in which they exercise their choices.

Moving forward calls for approaches that generate mutually satisfying results. Each party seeks value and cost advantages. The providers are looking for numbers, volume and value of transactions as potential customers transition into these new systems of financial service delivery. Touch points supported by appropriate provider incentives as well as patience, respect and simplicity of use should be priorities. For users, seeing value in digital financial services will come from learning by doing. Empowered customers will be encouraged to test financial innovations, determine how they can best use them, and share this information with their providers, friends and communities. Lastly, re-enter the regulator whose role may have to be redefined to ensure the new structures work for both sides. These are the essential elements of a new operational framework that promises that customer centrality will become a win-win proposition.

<em>Among her many affiliations,</em> <a href="https://www.bouldermicrofinance.org/boulder/EN/FACULTY/bio/8"><em>Monique Cohen</em></a><em> was involved with the Boulder Institute of Microfinance’s training program from its inception through 2016, including teaching courses for over 10 years.</em><em> An earlier version of this post was <a href="http://www.bouldermicrofinance.org/corner/en/i-need-cash-when-i">published</a> on the Faculty Corner of the Boulder Institute of Microfinance website, October 21, 2016.</em>

<em>Image credit: Accion</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2016/12/05/client-centricity-at-scale-the-brac-smart-certification-journey/">Client Centricity at Scale: The BRAC Smart Certification Story</a>

<a href="https://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/">Behavioral Approaches to Product Innovation at the Base of the Pyramid</a>

<a href="https://cfi-blog.org/2013/10/16/scarcity-why-having-too-little-means-so-much/" target="_blank" rel="noopener">Scarcity: Why Having Too Little Means So Much</a>

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I Need Cash WHEN I Need It, WHERE I Need It, HOW I Need It

The devastating effects of Hurricane Harvey colored headlines across the nation. Two weeks later, Houston, Texas <a href="http://www.khou.com/news/local/residents-still-wait-for-flood-water-to-recede-in-west-houston/472654690">remains</a> partially submerged. The resulting financial damage will likely exceed that of Hurricane Katrina, which struck the Louisiana coast in 2005. Harvey is taking Katrina’s title as the most catastrophic storm in America’s history. A <a href="http://www.politico.com/magazine/story/2017/08/28/climate-change-hurricane-harvey-215547">Politico</a> headline, however, poignantly suggests another message that perhaps we should all be taking away: “Harvey Is What Climate Change Looks Like.” Harvey is classified as a “<a href="https://www.washingtonpost.com/news/wonk/wp/2017/08/29/houston-is-experiencing-its-third-500-year-flood-in-3-years-how-is-that-possible/?utm_term=.67d747da65c6">500-year flood</a>,” meaning a flood of this magnitude has a 1-in-500 probability of occurring in any given year. Yet this is Houston’s third 500-year flood in three years. Harvey’s successor, Hurricane Irma, has also caused death and devastation, while heavy flooding in South Asia has resulted in the deaths of over <a href="https://www.theguardian.com/world/2017/aug/30/mumbai-paralysed-by-floods-as-india-and-region-hit-by-worst-monsoon-rains-in-years">1,200 people</a> across India, Bangladesh, and Nepal.

Economic activity generates greenhouse gases that impact climate change, and climate change, in turn, affects economic activity. In the case of Harvey, the South Texas Cotton and Grain Association has estimated <a href="https://www.texasagriculture.gov/NewsEvents/NewsEventsDetails/tabid/76/Article/4333/Texas-Department-of-Agriculture-Responds-to-Hurricane-Harvey.aspx">$150 million</a> in crop losses. As natural disasters continue to occur with increasing frequency, financial service providers (FSPs) must ask themselves: what economic ramifications should be anticipated, especially in rural communities, and what can be done to overcome these obstacles?

Some of the consequences of climate change include drought, reduced food security, flooding, fires, landslides, and crop failure. Accordingly, it’s the agriculture sector that suffers a large brunt of climate change’s effects. Although humans have little immediate control over extreme weather patterns, there are steps we can take to buttress our economic well-being while determining how to reduce greenhouse gas emissions over time. For example, by financing innovative agricultural techniques, such as drainage systems, drought-resistant seeds, crop rotation, and <a href="https://www.ecowatch.com/5-ways-vertical-farms-are-changing-the-way-we-grow-food-1882019986.html">vertical farming</a>, FSPs can encourage new methods that will allow the populations most vulnerable to climate change to continue to thrive.

FSPs no doubt have a plethora of challenges to navigate, including many that appear more direct and immediate – market competition, client satisfaction, institutional funding, political instability, and so forth. It would be easy to dismiss climate change as a factor that cannot be controlled. However organizations are recognizing that it is not something to be ignored, and have started to develop solutions. Let’s take a look at a few examples.

Asobancaria, the banking association in Colombia, launched an initiative in 2016 backed by the country’s government called <a href="http://www.asobancaria.com/protocolo-verde/">Protocolo Verde</a>, which, among its activities, uses “green bonds” to finance projects in the environmental sector. These include clean transportation, green buildings, bioenergy, and energy efficient resources. Elsewhere in the region, the Inter-American Development Bank implemented <a href="http://www.ecomicro.org/en-us/Home/About.aspx">EcoMicro</a>, a program that partners with financial institutions to help them provide green financial products to rural communities. Among its products, EcoMicro has designed loans for projects ranging from solar panels to smaller installments such as <a href="https://www.youtube.com/watch?v=JyvFE53IX6A">energy efficient refrigerators</a>.

The United Nations has adapted two programs that focus on green microfinance. The first program is the Microfinance for Ecosystem-based-Adaptation to Climate Change (<a href="https://www.dropbox.com/s/r4j66t8rwie0iwh/1.%20Microfinance%20for%20Ecosystem%20based%20Adaptation_Options%2C%20costs%20and%20benefits.pdf?dl=0">MEbA</a>), which is working to improve the resilience of agricultural workers and rural populations in Latin American and the Caribbean that are particularly susceptible to the impacts of climate change. In addition to developing new financing solutions for MFIs to offer to lessen these impacts, they are also working to detect knowledge gaps among MFIs and their clients.

The second UN program is called <a href="http://www.uncdf.org/en/cleanstart">CleanStart</a>, which finances clean energy and technical assistance in six nations across Africa and Asia. CleanStart co-invests in innovations from financial institutions, distributed energy service companies, and providers of financing for clean energy. Energy consumption is a major household expense in these regions; for example, a Ugandan household might spend <a href="https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=UG">$20 per month on energy</a>, a whopping 40 percent of the average monthly income. Furthermore, because women and girls still take on most of the domestic responsibilities, they are disproportionately affected by the health impacts of dirty energy. By investing in efficient, quality energy, CleanStart is able to reduce the expensive costs associated with nonrenewable energy, and also improve household productivity in impoverished communities.

Harvey is not a one-off occurrence. It is part of an alarming, growing trend. Landscapes are changing before our eyes. During California’s drought, I remember watching agricultural lands turn to desert in just a few short years of driving between UCLA and my home near the Bay Area. As the ramifications of climate change become increasingly visible, FSPs will have to not only improve the efficiency of their own practices, but also continue to develop innovative products and services that aim to mitigate their impacts. FSPs can have a powerful influence on these climate developments by supporting financial markets that encourage the creation of environmentally-friendly and sustainable services that will allow societies to prosper.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/01/27/the-green-digital-finance-alliance-launched-by-ant-financial-and-the-united-nations/">The Green Digital Finance Alliance Launched by Ant Financial and the United Nations</a>

<a href="https://cfi-blog.org/2016/11/11/combatting-pollution-in-delhi-with-clean-energy-financing/">Combating Pollution in Delhi with Clean Energy Financing</a>

<a href="https://cfi-blog.org/2016/11/29/what-to-consider-when-investing-in-green-microfinance/">What to Consider When Investing in “Green” Microfinance</a>

Houston, We Have a Problem: Financial Inclusion in a Harvey World

<em>&gt; Posted by Ira W. Lieberman, Todd A. Watkins, and Anna Kanze</em>

<img class="alignright wp-image-23576" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/05/eb-accion_march-2011_kiki-flavien_fisherman_72-1.jpg" alt="" width="330" height="220" />We’ve identified the problem: Microfinance is no longer sexy. It’s old news. It can’t deliver “impact,” and its effect on alleviating poverty was oversold and has underwhelmed. It’s well and good to offer working capital loans, but at the end of the day, the poor need education, health care, water for drinking and irrigation, roofs, and electricity together with a wide variety of financial services. It’s time for investors seeking real innovation to move on to the next big thing that will transform the lives of poor people and save our planet. Never mind microfinance’s decades-long track record of listening to the poor and underserved clients and effectively developing products and services based on their needs.

Of course, we issue these statements with considerable sarcasm. But, all joking aside, industry trends and shifting sentiments are presenting investors with a real question: Should they abandon the reliable and successful platforms and infrastructure that microfinance institutions (MFIs) have built? In turn, MFIs are saddled with the question of whether to stick to what they know best, or instead, to use their platforms to deliver expanded product offerings that increase access to other essential services.

These were among the questions regarding the future of microfinance addressed by 32 microfinance and impact investing participants and analysts from around the world who convened last month, hosted by <a href="http://cbe.lehigh.edu/martindale">Lehigh University’s Martindale Center</a>, and sponsored by the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat).

In those discussions, there was wide agreement that even as MFIs have commercialized and scaled, they've listened to their clients. MFIs have hard-earned advantages in accessing the poor, understanding their needs, and serving as distributors. The path forward is clear: a wider array of services is beneficial to clients, and product diversification remains the siren call of future growth and profitability.

But that widening diversification, while long anticipated, has for the most part been sluggish. Though product data is scarce, services beyond working capital loans and savings products remain a stubbornly small percent of portfolios of large MFIs – no more than 10 to 15 percent. Microinsurance also has enormous growth potential for MFIs, either in partnership or directly, to address the needs of the underserved: the demand is huge, as the vast majority of poor people still lacks access, and commercial insurers tend to be short of good delivery channels to reach most low-income informal sector markets. However, uptake of microinsurance still remains slow.

In short, the waves of diversification into multiple products notwithstanding, microfinance remains at core, credit. A key challenge for the industry, as the conversations at Lehigh highlighted, is that impact investors are gravitating to new opportunities well beyond financial services. They don’t necessarily see MFIs as key to impact investing, yet they struggle with scaling-up in other sectors (alternative energy is a notable exception), due to the lack of sustainable, i.e. investible, institutions. The opportunities are an appetizing smorgasbord: health care, education, affordable housing, solar energy, irrigation for small farmers, potable water, agricultural value chains, and so forth. But none of these match the financial intermediation skill sets of MFIs. What’s more, microfinance and the broader financial inclusion industry remain the largest target of impact investors, by assets under management, in annual investor surveys.

But can MFIs succeed as impact players outside of their core microlending and savings businesses? A few examples give hope.
<ul>
 	<li>Equity Bank in Kenya actively supports education, including through capital improvement and equipment loans for schools, handling payroll for teachers, and special savings accounts for paying school fees.</li>
 	<li>BRAC in Bangladesh offers a wide array of client services, run as separate businesses from their huge microfinance business. Among other services, BRAC operates thousands of primary schools for girls, a (stock-exchange listed) bank targeting small businesses, and advisory services for entrepreneurs.</li>
 	<li>Pro Mujer offers health care screening and other health care assistance, largely subsidized by their MFI operations.</li>
 	<li>Higher Education Finance Fund (HEFF), managed by OMTRIX, Inc. in Costa Rica, has financed MFIs throughout Central and South America to develop higher education loans for students. HEFF needed to provide significant technical assistance to its MFIs for product development and marketing to get education loans off the ground.</li>
 	<li>Caspian Impact Investment Advisers, a private impact fund manager focused on socially responsible businesses in India, helped develop the nascent affordable housing market in India by making investments in affordable housing providers as well as by supporting the microfinance institutions in their portfolio, like Equitas and Ujjivan, to expand into housing loans.</li>
 	<li>Pamiga Association, which provides technical assistance and financing to a network of 12 rural MFIs in East and West Africa, offers loans through its finance company to its network MFIs for solar energy and water for irrigation. Over the past few years, it has become clear that to do so successfully Pamiga will also need to offer financing to SMEs that can go the “last mile” and install, maintain, and offer installment payment systems (pay-go) to their clients.</li>
</ul>
There is clearly no one way to address product diversification. Subsidies, commonly seen as anathema to “investing”, may be necessary in the initial stages to incubate product offerings till they become sustainable. If investors and donors push to expand impact investing beyond alternative energy and microfinance, whether in education, health care, housing, or agricultural value chains, they will need viable institutions with adequate capacity to do so. A main lesson from microfinance is that targeted subsidies are a good way to build such institutional capacity. For those MFIs with the institutional capacity and financial sustainability to get there, targeted donor subsidies for technical assistance to build capacity for product diversification within the MFIs makes good sense. At the same time, there remains a need for like-minded investors to continue supporting successful microfinance business models because they have a proven track record and an unparalleled understanding of the needs of the poor and disenfranchised populations they serve.

The next post in this series will explore digital financial services.

<em>Dr. Ira Lieberman is President of LIPAM International. Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University</em>. <em>Anna Kanze is an Investment Manager at Grassroots Capital Management, PBC. </em>

<em>Also check out the other blogs in this series: </em><em>“</em><a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/"><em>Microfinance Is Dead; Long Live Microfinance!</em></a><em>” and “</em><a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/"><em>Time to Ditch Impact Investing’s Unproductive Self-Analysis</em></a><em>”</em>

<em>For video recordings of the Martindale Center event discussions,</em><em> </em><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR"><em>click here</em></a><em>.</em>

<em>Image credit: Accion</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2017/03/22/how-water-org-took-a-leap-of-faith-into-social-impact-investing/">How Water.org ‘Took a Leap of Faith’ into Social Impact Investing</a>

<a href="https://cfi-blog.org/2016/11/29/what-to-consider-when-investing-in-green-microfinance/">What to Consider When Investing in "Green" Microfinance</a>

&nbsp;

Can MFIs Deliver What Poor People Need?

Most foundations and development finance institutions have moved on from microfinance, in search of the leading edge of innovation and impact. They have concluded that their work is done now that leading microfinance institutions (MFIs) have definitively cracked the capital markets with healthy balance sheets and two large, heavily oversubscribed Indian IPOs just in the last year. Meanwhile, impact investors, particularly in the U.S., are divided on whether microfinance is, or ever was, an impact investment. In any case, they prefer to focus their attention on new “disruptive” business models. In impact industry publications, conferences and even terminology, microfinance is dead; yesterday’s solution at best.

Fortunately for people at the bottom of the pyramid (BOP), no one told microfinance that it has died. The robust IPOs and active trend of mergers and acquisitions indicate healthy commercial capital market interest. More importantly, the industry now has a central role in national financial systems all over the world, with hundreds of millions of clients, affected household members likely approaching one billion, and penetration into the majority of low-income communities in the world. The idea that the poor can constructively use and be sustainably provided with a comprehensive range of financial services—unthinkable 20 years ago—is no longer debated. Policymakers and mainstream financial institutions have recognized that a dynamic BOP finance sector fosters both equitable and sustainable development and the health of national financial systems and economies. And simply from an institutional standpoint, as David Roodman has noted, “From the point of development as industry building, support for microfinance has succeeded…in building microfinance institutions and industries that cater to poor people, create jobs, that enrich the national economic fabric.” It also bears mentioning that the poor people at heart of the industry are overwhelmingly female.

In the context of these mirror image appraisals, 32 microfinance and impact investing participants and analysts from around the world convened March 31 - April 1, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, and sponsored by the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat) to explore what role microfinance will play going forward. Overall, the group agreed that while dead to some, microfinance is alive and kicking on the ground and vigorously generating diverse business models and approaches to building economies and social value.

Around the world, microfinance is employing evolving models as it takes its place in the financial and economic development landscapes: mainstream commercial banks downscaling; specialized banks branching into SME lending, housing and other subsectors; mobile banking; agricultural finance; and microinsurance. And in nearly all countries, a substantial subset of MFIs are continuously experimenting on ways to blend commercial and social missions, building on sustainable financial foundations to diversify product offerings beyond microcredit to meet more of their clients’ varied needs.

As we will explore in subsequent blogs in this series, these various models challenge microfinance to revisit its role in creating social value for the client. The pursuit of scale and efficiency often—but certainly not always—implies “mission drift”. It also remains to be seen whether mission-led MFIs are the most effective means to build social value for poor clients in a world where mobile and digital technologies can reach the previously excluded at a fraction of the cost of traditional microfinance models and potentially deliver valuable information and education as a bonus.

More fundamentally, skepticism over the future of microfinance reflects doubts that today’s leading incumbent MFIs—once the disruptive innovators themselves—can ever generate disruptive forces of the magnitude needed to make meaningful progress towards achieving objectives as ambitious as the Sustainable Development Goals. Quite conceivably, the future lies with new models, like digital financial services, that reduce costs through substitutes for face-to-face interaction, reduce risk via data and algorithms, and increase outreach by saying yes to more potential clients with customized, individually-tailored product design and delivery.

The future of microfinance and the challenge for those who prioritize social value for clients is in taking advantage of the strengths of incumbent MFIs, particularly their proximity to clients: a four-decades-deep, hard-earned understanding of heterogeneous needs at the BOP. As donor and impact investor attention is captured by shiny new frontiers—health care, budget schools, smallholder agriculture, off-grid energy—MFIs that want to build on the value of this experience face two challenges.

First, those in the microfinance sector must convincingly deliver to impact investors the (often unwelcome) message that MFIs—professionally governed, managed and staffed, with reliable access to capital markets, diversified product offerings, and unique penetration at the BOP—offer the best available platform to design, test and in many cases deliver—directly or as orchestrator—products and services to create social value. Even where new channels or specialized institutions can be effective, as in the case of mobile money or housing finance, new entrants will need to learn how to fit narrow product expertise into the complex and sophisticated financial lives of poor people, much as microfinance needed to learn that clients need more than a three month group loan with weekly repayments.

Second, while the bulk of microfinance portfolios may be fully commercially sustainable and attractive to conventional investors, innovation and experimentation to reach the still-excluded continue to require patient, mission-aligned investors, grant subsidies or below-market financing—the model that fertilized microfinance to begin with. More than the success of microfinance on purely commercial terms, this central and essential role of subsidy—not for market distorting price reductions, but rather for innovation, infrastructure and capacity building—is the salient takeaway from microfinance for impact investing more broadly.

The fact that so many donors and impact investors view <em>microfinance as dead</em> undermines the ability of the industry to further strengthen through trial and error the robust business model that underlies its current success and stature—and inspires today’s exuberance for “impact investing”.  Microfinance is alive, well and firmly integrated into global mainstream capital markets. But to reclaim top rank status as a destination for impact investments, MFIs must redouble efforts to distinguish themselves by focusing on client outcomes and serve as the labs of innovation in product design and delivery to build social value.

<em>Paul DiLeo and Anna Kanze are Investment Managers at Grassroots Capital Management, PBC.  Todd Watkins is Director of the Martindale Center at Lehigh University. </em>

<em>For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.</em>

<em>Todd Watkins contributed to this post.
</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2016/12/07/can-social-missions-be-preserved-in-initial-public-offerings/">Can Social Missions Be Preserved in Initial Public Offerings?</a>

<a href="https://cfi-blog.org/2017/01/26/a-tale-of-four-ipos-is-public-investment-in-microfinance-becoming-ok-again/">A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?</a>

<a href="https://cfi-blog.org/2017/04/12/whos-responsible-for-responsible-impact-investing-exits/">Who's Responsible for 'Responsible' Impact Investing Exits?</a>

&nbsp;

Microfinance Is Dead; Long Live Microfinance!

<em>&gt; Posted by Alex Counts</em>

<img class="alignright wp-image-22582" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/12/thumb_0c6a18b0775a452b984dcc6a587d8577-1.jpg" width="330" height="220" />During my final years as President of <a href="http://www.grameenfoundation.org/">Grameen Foundation</a> and Co-Chair of the <a href="http://microfinanceceoworkinggroup.org/">Microfinance CEO Working Group</a> (MCWG), I advocated that two papers be written that I had neither the time nor the expertise to do justice to myself.

The first paper was a distillation of lessons for practice from recent studies on the impact of microcredit and microfinance. Many papers that set out to determine whether microfinance worked stumbled on important insights about how it could work better. Unfortunately, those discoveries were buried in papers that people barely read beyond summaries and extracts. A paper that presented these “lessons for practice” in a form that was accessible to busy practitioners could make a big impact, by removing friction from the maddeningly difficult process of using research to positively influence policy and practice.

The second paper I advocated for was one that made the case for how philanthropy and social/impact investing, and more broadly, subsidy, could play a positive role in the microfinance industry today. Such a paper would need to start with making the case that such social investments had <em>any role</em> to play, as the conventional wisdom was settling on the idea that it did not have any.

When Tim Ogden joined a MCWG meeting about four years ago, I was surprised when he responded positively to my plea for some researcher to agree to write the paper on lessons for practice. He later agreed to write it and I helped connect him with a source of funding, the <a href="http://linkedfoundation.org/">Linked Foundation</a>, an impressively flexible philanthropy based in Santa Barbara. I wrote a <a href="https://alexcountshaitibook.wordpress.com/2013/10/18/a-surprising-microfinance-researcher-and-possible-implications-for-haiti/">blog post</a> about how his openness to ideas from others and to this idea in particular was refreshing. In one of the amusing ironies of my relationship with him, Ogden ended up not writing a paper about “lessons for practice,” but instead the second one I was calling for <a href="http://www.financialaccess.org/publications-index/2016/ogdenmicrocredit">on the role of philanthropy and impact investing in microfinance</a> (though this paper does touch on the former topic). Fortunately, he has done an excellent job with the paper he ended up writing.

I will start with three quibbles. In an otherwise clear-eyed and accessible analysis of the research literature to date (including both RCTs and other methodologies), he fails to acknowledge the central weakness of the often-made argument that studies have proven that microfinance in general has modest (if any) positive impact on poverty. While the clients of the microfinance institutions being studied are randomized, the choices of the MFIs themselves have been anything but random. In fact, those choices were highly opportunistic and as a result, not especially representative of MFIs in general. The tendency to generalize these findings is actually on quite shaky ground. (For a more complete treatment of the research literature, see <a href="http://www.grameenfoundation.org/resource/measuring-impact-microfinance-looking-future">this Grameen Foundation report</a> by Professor Kathleen Odell, and for more on my critique on how current research has been characterized, see <a href="https://cfi-blog.org/2015/08/27/how-we-talk-about-microfinance-a-reply-to-dean-karlan/">this post</a> on the <a href="https://cfi-blog.org/">Center for Financial Inclusion blog</a>.)

Secondly, when he writes about smart subsidy, Ogden leaves off investments in industry infrastructure such as the <a href="http://microcreditsummit.org/">Microcredit Summit Campaign</a>, the <a href="https://www.themix.org/">MIX</a>, the <a href="http://sptf.info/">Social Performance Task Force</a>, the <a href="http://www.smartcampaign.org/">Smart Campaign</a>, and <a href="http://www.cerise-microfinance.org/">Cerise</a>, even though he notes their importance earlier in the paper. (So this may simply be an oversight on his part as he rushed to finish it.)

Lastly, his idea of microfinance failing the “eyeball test” (in terms of villages where microfinance was widely available having significantly improved over a reasonable period of time) suggests that he did not walk around rural Bangladesh in the early 1990s then repeat the exercise twenty years later.

Here are eight of the unique strengths of this paper:
<ol>
 	<li>He helpfully puts microfinance in a larger context by acknowledging the fact that it developed a uniquely powerful and global platform for social change. He notes that microcredit is the <em>only social innovation</em> to: (1) reach global scale, (2) build a complete industry infrastructure, (3) tap into commercial capital on multiple continents, and (4) “produce enough profit to generate actual controversy over the returns to social investments.” I have been making <a href="http://www.grameenfoundation.org/blog/reflections-latest-studies-microcredit#.WFMwtlMrLIU">similar points myself</a>, so it is good to have Ogden affirming them in his own way.</li>
</ol>
<ol start="2">
 	<li>The paper includes an excellent and accessible analysis of the research literature and also the current role and extent of subsidy in microfinance. He notes that subsidies remain widespread but generally small. He describes the counter-intuitive (and frankly ironic) reality where “for-profit [microfinance] institutions rely more heavily on subsidy than non-profit ones” – the apparent result of recent funding priorities and fads. He cites new <a href="http://documents.worldbank.org/curated/en/404501470669620154/The-microfinance-business-model-enduring-subsidy-and-modest-profit">research</a> showing the total average subsidy as $26 per borrower, and acknowledges that even this modest figure is inflated due to “the very high subsidies at some commercial institutions.”</li>
</ol>
<ol start="3">
 	<li>He points out that focusing almost entirely on the “average impact” on clients in research studies, which many industry players have done, distorts the findings and their meaning. In his words, “…concluding that microcredit ‘doesn’t work’ because the average impact is modest is wrong.” His point is that simple averages mask important distinctions within a distribution that can make the difference between something that shows great promise and something that does not. He makes the important related point that studying what is going right with the 10 percent of microcredit clients who are already benefitting significantly from current products – the ones on the extreme positive end of the benefit/harm distribution curve – can help us better target existing products and to develop better ones for everyone else. Furthermore, he notes that recent studies are attempting to measure the impact of <em>increased access to</em> microcredit, not the impact “when it is (or was) first introduced.”</li>
</ol>
<ol start="4">
 	<li>He persuasively makes the case that the current business models of microfinance – with their low subsidy and low profitability in many of the largest and most competitive markets – almost ensure that investment in innovation will be minimal. In other words, testing new approaches that build on important research findings will be limited without external support. Ironically, the flight of philanthropy and (to a lesser degree) social investment from microfinance – caused in part by the widespread misinterpretation of recent research – <em>would help ensure that research findings that could lead to improved practice and impact are not acted upon.</em></li>
</ol>
<ol start="5">
 	<li>He argues that social investment and philanthropy will be critical to spurring innovations in leveraging the global microfinance platform for greater sustained impact. Ogden writes, “Increasing the impact of microcredit will require new products, new operational procedures and perhaps even new business models. Testing these … will almost inevitably lead to higher default rates, higher operating costs and lower sustainability ratios in the short term. Social investors will need to adapt their mindset to drive innovation in microcredit.”</li>
</ol>
<ol start="6">
 	<li>He states what should be obvious to any observer of the industry but is rarely acknowledged: “Raising interest rates enough to generate surplus needed for risk-taking innovation is simply not in the cards for most microfinance institutions.”</li>
</ol>
<ol start="7">
 	<li>The paper argues that the significant opportunity is to leverage findings showing that targeting loans to those “most likely to achieve high returns” and to particular industries holds great promise, but is unlikely to be acted upon given the funding priorities of most donors and social investors.</li>
</ol>
<ol start="8">
 	<li>Another area ripe for social investment is product design. He notes that researchers found that building in grace periods for loan repayment increased positive impact but led to somewhat lower repayment rates, and as a result were cancelled by MFIs as their “social” investors were uncomfortable with the uptick in default rates (even though the product was still profitable). Truly patient capital can make it easier for MFIs and other lenders to absorb short-term losses that come from potentially high-impact experiments like this one.</li>
</ol>
Before this review grows longer than the paper itself, let me conclude with a simple observation. The conventional wisdom about two related subjects – the meaning and implications of microfinance research and the optimal role of subsidy – has been deeply flawed for a long time. Tim Ogden has brought some fresh thinking in an accessible format to these issues, and I applaud him for this contribution.

<em>To read Tim Ogden's paper, "The Case for Social Investment in Microcredit", <a href="http://www.financialaccess.org/publications-index/2016/ogdenmicrocredit">click here</a>.</em>

<em>Counts is the President of </em><a href="http://aif.org/"><em>American India Foundation</em></a><em>, the founder of Grameen Foundation, and a founding member of the Center for Financial Inclusion’s Advisory Council.</em>

<em>Image credit: Accion</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2015/06/09/considerations-for-the-pursuit-of-financial-inclusion/">Considerations for the Pursuit of Financial Inclusion – Beyond Account Access</a>

<a href="https://cfi-blog.org/2015/10/21/part-of-a-toolbox-angus-deaton-urges-reconsideration-of-the-role-of-rcts/">Part of a Toolbox: Angus Deaton Urges Reconsideration of the Role of RCTs</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

A Review of 'The Case for Social Investment in Microcredit' by Tim Ogden