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

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

Mastercard Center for Inclusive Growth

Nigeria

Sub-Saharan Africa

Credit

Financial Capability

Financial Health

MSME/SME Finance

Resilience

Blog Post

As recently as 2011, more than <a href="https://globalfindex.worldbank.org/">2.5 billion adults globally</a> did not have a formal financial account. Since then, an astonishing 1.2 billion adults have obtained an account with a bank or mobile money service, representing great strides in escaping poverty and boosting prosperity. Progress has been most notable in <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/07/GSMA-Sub-Saharan-Africa-SOTIR-presentation.pdf">Sub-Saharan Africa</a>, where account ownership increased from 23 percent in 2011 to 43 percent in 2017. This great achievement can be attributed in large part to the incredible growth of mobile money.

Mobile money has emerged as the mainstay of financial inclusion in Sub-Saharan Africa. According to the latest <a href="https://globalfindex.worldbank.org/">Findex</a> report, the share of adults with a financial institution account (excluding mobile money) across Sub-Saharan Africa has risen by a modest four percentage points between 2014 and 2017, while the share with a mobile money account has grown twice as fast, increasing by nine percentage points. With 21 percent of adults in the region having a mobile money account, Sub-Saharan Africa is the global leader in the use of mobile money. This finding is confirmed by the GSMA’s own <a href="https://www.gsma.com/mobilemoneymetrics/">supply-side data on mobile money</a>, which shows that Sub-Saharan Africa <a href="https://www.gsma.com/mobilefordevelopment/africa/sub-saharan-africa-the-enduring-epicentre-of-mobile-money-part-1/">remains the epicenter</a> of mobile money.

What has underpinned this success? Regulation calibrated to enable low-cost services for the financially excluded has been crucial. In fact, we’ve found a clear correlation between countries in the region with high mobile money adoption rates and those with <a href="https://www.gsma.com/mobilefordevelopment/programme/mobile-money/introducing-the-mobile-money-regulatory-index-an-interactive-tool-to-measure-the-effectiveness-of-mobile-money-regulatory-frameworks/">more enabling regulatory environments</a>. Industry leaders in these markets adopted a myriad of strategies to drive adoption of mobile money services, but the successful strategies shared some fundamental business characteristics. The most foundational characteristic was investment in building a robust agent distribution network – a powerful model for extending the reach of financial services – which both disrupts and complements traditional “brick and mortar” banking. Mobile money agents across the region are more prevalent than any other channel, with approximately 60 agent outlets per 1,000 sq km, compared to only one bank branch and two ATMs in the same space.
<blockquote>Regulation calibrated to enable low-cost services for the financially excluded has been crucial.</blockquote>
Remarkably, and contrary to predictions, there has been a shift away from using cash toward digital payments. Across the region, people are increasingly using mobile money in diverse ways, extending beyond basic use cases such as person-to-person (P2P) transactions and airtime top ups. Today, millions of consumers are using mobile money in their daily activities: paying for children’s school fees, accessing loans to invest in their farming activities, saving for the financial future of their household, and mitigating financial risks and shocks. Innovative partnerships between mobile network operators and banks, MTOs, governments, and businesses have played a key role in digitizing payments and formalizing the economy across the region. Orange, for instance, has established partnerships with governments to offer a range of person-to-government (P2G) payments via mobile money across <a href="https://www.gsma.com/mobilefordevelopment/resources/championing-a-unified-digital-person-to-government-p2g-payments-strategy-lessons-from-orange-p2g-payments-in-africa/">five of its operations</a> in West and Central Africa (Senegal, Burkina Faso, Côte d’Ivoire, Cameroon and DRC). Another example is the partnership between PayPal and Safaricom, enabling users in Kenya to securely transfer funds between PayPal and M-Pesa.

Despite this progress, there is still a sizeable opportunity to further digitize the economy to drive efficiency and transparency, and to convert informal cash and non-financial assets into the formal financial system. This is where the shift towards a “<a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/02/Embracing-payments-as-a-platform-for-the-future-of-mobile-money.pdf">payments as a platform</a>” business model will have a demonstrable impact, not only in growing the ecosystem and incorporating more partners into the mobile money platform, but also in terms of deepening engagements with individuals and businesses. Industry-wide initiatives will also play a central role in driving the digitization of more complex use cases such as merchant payments and international remittances. <a href="https://www.gsma.com/mobilefordevelopment/uncategorized/unlocking-mobile-money-interoperability-and-merchant-payments-across-africa-through-mowali/">Mowali</a>, a joint venture between Orange Group and MTN Group to enable interoperable payments across the African continent, is a great example of industry collaboration enabling customers to seamlessly transact across borders.
<h2>Challenges Ahead</h2>
Sub-Saharan Africa has come a long way in the past decade, but there are still strides to be made in certain markers, and across the wider African continent. Africa’s three most populated countries, Nigeria, Ethiopia and Egypt – home to a combined adult population of over 242 million – have low rates of financial inclusion (below 40 percent) and limited availability of mobile money services. All three markets have had unfavorable conditions for mobile money uptake. We anticipate that recent reforms in these markets could spark a wave of adoption with the potential to unlock over 110 million new mobile money accounts in the next five years, offering a financial future to millions of previously financially excluded people.

Micro, small and medium-sized enterprises (MSMEs) play a major role in economic development across the region. According to the IFC, MSMEs account for roughly <a href="https://www.ifc.org/wps/wcm/connect/2c6289c3-df5e-4f90-b910-2a04e1000922/IFC+SME+Ventures+Final+low+res+30+Nov+2018.pdf?MOD=AJPERES&amp;CVID=mtQwg2S">90 percent of all businesses</a> across Sub-Saharan Africa, and contribute to 78 percent of the region’s employment. Despite this, financial institutions are not currently meeting the majority of MSMEs’ financial needs across the region. We see a huge opportunity for mobile money providers to bridge this gap and offer solutions that can help MSMEs with day-to-day management of their business and financing needs.
<blockquote>Mobile money providers can offer solutions to help MSMEs with day-to-day management of business and financing needs.</blockquote>
Over the course of the next decade, a dramatic rise in mobile internet usage and smartphone adoption is expected in Sub-Saharan Africa. This growth, alongside the shift to “payments as a platform” model, will empower millions of young entrepreneurs, innovators and small businesses to maximize new income generation opportunities and gain new skills. Increased access to financial services is a cornerstone of prosperity, and the future for financial inclusion in Sub-Saharan Africa holds much promise.

Learn more by checking out GSMA's <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/07/GSMA-Sub-Saharan-Africa-SOTIR-presentation.pdf">State of the Mobile Money Industry in Sub-Saharan Africa</a> presentation.

Sub-Saharan Africa Mobile Money: Diverse Use Cases, Enabling Environment Boost Adoption

Agent Banking

Delivery Channels

Enabling Environment

Mobile Banking

Payments

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

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

United States

Customer Centricity

Entrepreneurs of MSMEs

It’s the most wonderful time of the year! We are thrilled to announce that we are <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">now accepting proposals</a> for the 2018 cohort of CFI Fellows.

Building upon the impact of the <a href="http://bit.ly/CFI-Fellows">CFI Fellows Program</a> over the past three years, we’re looking for proposals from researchers and practitioners with demonstrated experience executing high-quality research projects from start to finish. Successful proposals will articulate a thoughtful and feasible response to one of the questions in our research agenda.

This year’s research agenda reflects an exhaustive consultative process, and thanks to <a href="https://cfi-blog.org/2018/04/12/help-us-shape-our-fellows-program-research-agenda/">your help</a>, we’ll be selecting proposals that best address one of the following topics:
<ol>
 	<li>How do financial institutions use mass APIs, open APIs, custom APIs and bespoke partnerships to partner effectively with fintechs to reach the underserved? </li>
</ol>
Financial institutions of all sizes are finding that <a href="http://bit.ly/PartneringFintechs">partnerships with fin</a><a href="http://bit.ly/PartneringFintechs">techs</a> can help them reach underserved customer segments, and increasingly, these partnerships use APIs to create the necessary connections that enable data sharing between fintechs and financial institutions. However, it may be especially challenging for smaller financial institutions to benefit from such connections. How do recent efforts to create more accessible APIs function? Which models are working well? Research should include a comparison between mass APIs, API marketplaces, open APIs, bespoke APIs, and custom partnerships, recognizing that there are opportunities and challenges associated with each.
<ol start="2">
 	<li>How do electronic invoicing (e-invoicing) and other electronic filing mandates enable financial services providers to make better decisions about MSME lending? Have more MSMEs become financially included as a result of these efforts? </li>
</ol>
We’ve seen that e-invoicing is being mandated by governments across Latin America and in selected other countries as a tax compliance initiative (<a href="https://assets.kpmg.com/content/dam/kpmg/us/pdf/2017/10/mandate-for-e-invoicing-adoption-kpmg.pdf">KPMG, 2017</a>) and we expect that this practice may have spillover effects for financial inclusion. Through the collection and analysis of rich transaction data from micro, small and medium enterprises (MSMEs) that electronic invoicing provides, lenders are finding new ways of assessing this customer segment. This research will identify which providers are leveraging this data to improve their lending operations for MSMEs and through what means.
<ol start="3">
 	<li>How can employers in developing countries support the financial health of their employees?</li>
</ol>
Financial health is an increasingly important concept in the financial inclusion ecosystem, but we find that one often overlooked set of actors is employers. Employers have an important stake in the financial health of their employees, as financial challenges can create stress, absenteeism and other problems. This fellowship will explore the research on financial stress and employment to better articulate why employers in emerging markets should care about financial health, the interest of employers in active involvement, examples of good practice and/or tools or resources that employers need to get involved.
<ol start="4">
 	<li>What is the landscape of financial products and services designed to meet previously underserved consumers’ (physical) health needs? </li>
</ol>
This fellowship will review the current status of health finance initiatives in the developing world or in a region or set of countries. It will identify and analyze the key challenges that existing programs encounter, with reference to the most successful models.

If you are passionate about financial inclusion, can craft a high-quality research plan that demonstrates a thoughtful approach, and have relevant experience in producing impactful analytic work, we want you to submit a proposal or share this opportunity with a colleague.

For more information (or inspiration), visit <a href="http://bit.ly/CFI-Fellows">our website</a>, view the full <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">request for proposals</a>, or email <a href="mailto:tjohnson@accion.org?subject=Question%20About%20CFI%20Fellows%20Program%202018">Tess Johnson</a>. We can’t wait to see how you tackle these questions!

&nbsp;

&nbsp;

CFI Fellows Program Now Accepting Proposals

CFI Research Fellows Program

Credit Provision

Digital Financial Services

Financial Service Providers

&gt; Posted by Anisha Singh, Senior Research Associate, IFMR LEAD

<img class="alignright wp-image-24670" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/11/thumb_72f989620eb54da896649a8461a443a6.jpg" alt="" width="515" height="343" />

Want to receive payments from customers? There’s an app for that. Want to make payments to suppliers? There’s an app for that. Customer wants to pay you one week from now? Scramble to take out diary and note down payment receivable. Customer is not contactable after one week? Oh well, that’s the end of that.

Among merchants in India, widespread awareness of available digital financial services options has not translated into usage of these services. The core challenge here is making digital platforms more inclusive and relevant to their daily lives. While India has made immense progress in transitioning to a less cash-reliant financial ecosystem, recent research concludes that the services on offer in the country do not directly address all relevant merchant pain points and thereby fall short of providing a compelling value proposition for them to make the switch from cash. This shortcoming hasn’t been for lack of trying. Researchers and providers have identified and rolled out various new value-added services that could help increase this value proposition. However, for merchants in India, there is still one key transaction type left unaddressed: how can informal arrangements, such as offering goods on credit, be included in digital services?
<h3>What’s at the heart of merchant transactions?</h3>
Recent research by IFMR LEAD in the space of digital finance for micro-merchants across urban and rural regions of four Indian states suggests that as many as 20 percent of micro-merchants use extensions of credit as their primary transaction method with suppliers as well as with customers. For the majority of merchants surveyed, over 20 percent of the value of their monthly transactions with suppliers and customers is on credit. Merchants typically extend credit to customers for up to two weeks and receive credit from suppliers for up to a month. Credit from suppliers tends to be more formal than credit to customers. Merchants often sign a promissory note while taking goods on credit from suppliers, whereas they deem a simple note in their inventory books sufficient for extending credit to customers.
<h3>What does an ideal digital product look like for merchants?</h3>
There is much excitement and openness among merchants to experiment with digital modes and include payment applications such as mobile wallets and QR codes into their daily business operations. However to make it worthwhile for merchants to transact digitally, it is necessary to build a holistic service that includes credit extension. We collected first-hand insights from merchants to understand their preferences and concerns regarding such a service:
<ul>
 	<li>On the supplier side, merchants were not in favor of direct debits from their accounts at a later date for goods received on credit. However, a majority noted the importance of a reminder service to make payments in the form of SMS messages or push notifications. Product provisions to record inventory purchased on credit, make standard monthly digital payments, and record signatures from suppliers for the verbal credit agreements were the next most preferred features.</li>
 	<li>‘Facebook’ for merchants: A significant proportion of merchants also indicated their preference for a networking platform wherein they can interact with their suppliers through personalized user accounts. By logging into their account, they would like to be able to see all their suppliers, open chat conversations with individual suppliers, and send them push notifications requesting additional stock or extension of credit terms and such.</li>
 	<li>On the consumer side, merchants are concerned with customers not paying them back and having no way to trace them. The majority of merchants stressed the value of a reminder service through SMS or push notifications to alert customers of their pending payments and allow them to make the transaction digitally without visiting the merchant..</li>
 	<li>Surprisingly, merchants did not express a need for an inventory management component to record goods given on credit and payments collected from customers. Merchants believed that a strong back-end system through inventory management with suppliers would sufficiently translate into better management of credit terms with customers.</li>
 	<li>Across the board, merchants stressed their requests for these features to come at a low cost with low transaction fees. Furthermore, they indicated that services should incorporate credit limits on the amounts that can be extended in supplier and customer interactions and the potential for credit limits to be monitored and enhanced based on transaction history.</li>
</ul>
With high awareness but low usage of digital platforms among merchants in India, exploring such value-added services for merchants is a must to ensure greater uptake and continued usage. However, to ensure sustainability of such products, it is equally imperative to explore ‘stickiness’ for customers and other players in the merchant ecosystem as well.

This post draws on IFMR LEAD’s work in collaboration with J.P. Morgan on '<a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">Digital Financial Inclusion and Consumer Capabilities in India</a>' and with the Mastercard Center for Inclusive Growth on '<a href="http://ifmrlead.org/the-evolving-financial-ecosystem-for-micro-merchants-in-india/">The Evolving Financial Ecosystem for Micro-Merchants in India</a>'.

Have you read?

<a href="https://cfi-blog.org/2017/07/10/how-a-human-touch-agent-can-make-a-difference-in-promoting-digital-financial-services/">How a Human Touch Agent Can Make a Difference in Promoting Digital Financial Services</a>

<a href="https://cfi-blog.org/2016/08/11/exploring-responsible-agent-management-in-india/">Exploring Responsible Agent Management in India</a>

<a href="https://cfi-blog.org/2016/09/12/digitizing-self-help-groups-in-india/">Digitizing Self-Help Groups in India</a>

&nbsp;

What’s in It for Me? Increasing the Value Proposition of Fintech for Merchants in India

India

South Asia

Financial Technology

&gt; Posted by Daniel Balson, Lead Specialist for Eurasia and MENA, the Smart Campaign

[caption id="attachment_23879" align="aligncenter" width="615"]<a href="https://www.flickr.com/photos/worldbank/4248402729/in/album-72157631291110788/"><img class="wp-image-23879" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/4248402729_409bc54767_b.jpg" alt="" width="615" height="409" /></a> Outside the Tosh Hovli Stone Palace of Khiva, an Uzbek lady practices her craft, knitting.[/caption]

At the Center for Financial Inclusion (CFI), we spend a lot of time thinking of ways economically marginalized people can gain access to the capital they need to lift themselves out of poverty. Through our work, we’ve repeatedly seen that, while talent is universal, opportunity is not. Large swathes of the population across the developing world have limited access to the formal financial system and are stuck managing money in ways that are often inconvenient, inefficient, and sometimes even involve humiliation and abuse.

Focusing on places where economically vulnerable people are at risk, however instructive, risks obscuring the fact that great divides exist across gender in many diverse geographies. In developed countries as in the developing nations, women lag behind men in indicators that measure entrepreneurship and economic empowerment. Their societies are poorer for it. In the U.K., women-led businesses are far less likely to secure financing; <a href="https://www.forbes.com/sites/davidprosser/2017/03/27/eight-stats-that-show-how-britain-fails-its-female-entrepreneurs/#4cbe7ae174bd">91 percent of investment</a> was directed to companies without even one female founder. In the U.S., women <a href="https://www.nytimes.com/2017/06/09/upshot/why-women-dont-see-themselves-as-entrepreneurs.html">make up half the labor force</a> but own just a third of all companies.

The reasons for these discrepancies are myriad. Women are often shut out of informal “old-boy networks” where entrepreneurs can find critical funding, support, and advice. Women are <a href="https://cfi-blog.org/2017/02/02/5141000-reasons-women-marched/">less likely than men</a> to have experienced role models who understand their challenges. Starting a business is a lonely endeavor and the absence of a mentor can make it even lonelier. As amply demonstrated by recent scandals in Silicon Valley, including at the ride-sharing app <a href="https://www.theguardian.com/technology/2017/jun/13/david-bonderman-resigns-uber-board-sexist-remark">Uber</a> and venture capital fund <a href="http://www.slate.com/blogs/the_slatest/2017/07/04/silicon_valley_investor_dave_mcclure_resigns_after_harassment_claims_i_m.html">500 Start-ups</a>, plain sexism and discrimination play a role as well. <a href="https://www.nytimes.com/2017/07/21/sunday-review/women-ceos-glass-ceiling.html?ref=opinion">A 2016 survey</a> that polled over 34,000 people found that women who angled for a promotion were 30 percent more likely to be labeled as "bossy," "intimidating," and "aggressive" as their male counterparts.

Across many countries where CFI works, women entrepreneurs must contend with these challenges as well as numerous others. Central Asia offers an instructive example. The region is steeped in a Soviet-era mythos of gender equality, where women are portrayed as having thrown off the veil and grabbed the factory lathe. The reality is quite different.

Throughout Central Asia, millions of men leave their families to search for economic opportunities abroad. In 2016, <a href="https://www.theguardian.com/world/2016/may/19/eastern-promises-migrant-workers-turning-backs-russia">some 2 million Uzbek men</a>, representing almost 13 percent of the country’s entire male population, were working in Russia. As a result, millions of women are left to raise children themselves while working to supplement meager remittances. Central Asian families are large and close knit, with Kyrgyz and Tajik women giving birth to <a href="http://www.un.org/en/development/desa/population/publications/pdf/fertility/world-fertility-patterns-2015.pdf">more than three children</a> on average. Younger women are also expected to care for elderly family members as they near the end of their lives. With no men to assist them, caregiving responsibilities add up quickly and women have little time and money to dedicate to entrepreneurship.

The women who manage to start a business of their own will face serious obstacles. Investors working in the region have told CFI that financial institutions often view female borrowers as riskier and less loyal clients than their male counterparts. Women face a higher rate of loan rejection though women generate a <a href="http://documents.worldbank.org/curated/en/479131468250293544/pdf/659310WP00PUBL065737B0Gender0Report.pdf">similar level of profit per unit of revenue</a> as men. Regional participants in the financial inclusion sector observe that, when data is held constant for capital and sector, there is no evidence that women-run businesses are less successful or that they generate a smaller return.

Female borrowers who are able to secure a loan face a very firm and very low glass ceiling; women borrow more often than men but at lower levels and thus face substantial difficulty evolving their small businesses to SME-level enterprises. While a bakery run by a man may soon grow to a catering company or a restaurant, women-owned shops will frequently remain small-scale sole proprietorships.

The difficulty Central Asian businesswomen have in reaching scale may be partially explained by how their household obligations incentivize a certain type of borrowing and spending. In October 2016, CFI research fellow Christy Stickney, developed a report entitled, <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/762">Emerging SMEs: Secrets to Growth from Micro to Small Enterprise</a>. The report used qualitative research to identify and analyze Latin American clients whose borrowing had increased significantly over time. Unlike their Central Asian counterparts, the women covered in Stickney’s report had no difficulty accessing credit and did not report facing discrimination from loan officers. Nonetheless, the report found that, like women in Central Asian, Latin American women do not feature prominently as lead owners or owner-managers of higher growth businesses. The reason for this seems to be that women’s investment strategies are more diverse than men. So, while women covered in the report actually tended to borrow more than men, they did so to invest in education opportunities for their children, support their elderly in-laws, and repair their homes rather than pour their capital into a single high-growth business model.

Family dynamics hinder female entrepreneurship in other ways. Most Central Asian financial institutions only accept fixed assets as collateral and, because such assets are registered only in the husband’s name, women are unable to secure collateralized debt while their husbands work abroad. In recent years, many men have returned home, pushed by Russia’s tightening immigration policies, collapsing ruble and softening economy. Yet their repatriation does little to liberate their wives’ entrepreneurial ambitions. One representative of a multilateral institution, who requested anonymity in order to speak frankly about the region’s challenges, told CFI that returning remittance men often fund their own businesses by cannibalizing credit originally allotted to their spouse.

Gender-based discrimination results not only in denial of financing but often in <a href="http://centralasiaprogram.org/blog/2016/02/17/the-marginalization-of-rural-women-entrepreneurs-in-tajikistan/">denial of land rights</a> and decision-making authority over its use. In rural Central Asia, where agriculture remains the primary economic activity, local farming collectives are chiefly responsible for allocating land plots and determining how they will be used. Women are frequently denied decision-making roles on these bodies and often lack the mechanisms necessary to make their voices, and their ideas, heard.

While these challenges are substantial, they are hardly insurmountable. In the second part of this series, we’ll consider how some programs are unleashing Central Asian women’s entrepreneurial spirit. We’ll look at how investors, financial institutions, government authorities, and other stakeholders can ensure that women receive equal access to capital and make capital markets work for them and their businesses. We’ll also explore steps financial service providers and regulators can take to ensure that women entering into the formal economy for the first time have their rights protected. Finally, we’ll consider whether any of these innovative strategies can offer insights on how best to address gender disparities in the U.S.

Image credit: <a href="https://www.flickr.com/photos/worldbank/4248402729/in/album-72157631291110788/">Brigitte Brefort / The World Bank</a>

Have you read?

<a href="https://cfi-blog.org/2016/04/20/g2p-and-gender-when-will-pakistani-women-be-able-to-withdraw-their-own-money/">G2P and Gender: When Will Pakistani Women Be Able to Withdraw Their Own Money?</a>

<a href="https://cfi-blog.org/2016/01/11/celebrating-women-leaders-profiles-of-financial-inclusion-pioneers/">Celebrating Women Leaders: Profiles of Financial Inclusion Pioneers</a>

<a href="https://cfi-blog.org/2017/02/24/why-women-in-smes-lean-out/">Why Women in SMEs Lean Out</a>

Gender-Based Financial Exclusion in Central Asia

Russian Federation

Uzbekistan

Women

The following post was <a href="http://blogs.accion.org/features/7-fintech-trends-to-watch-in-2018/">originally published</a> on the Accion blog.
We’re in the middle of a fintech boom that <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/trends-that-may-change-the-world-c00f4e500a8c" target="_blank" rel="noopener noreferrer">could change the world</a>. As a seed-stage investor in fintech for the underserved, Accion Venture Lab continues to see innovative startups increasing access to, reducing the cost of, or improving the quality of financial services for underserved individuals and small businesses around the world.
As we kick off a new year, we’re particularly excited about seven areas of startup-led innovation.

<h4>Digital neobanks</h4>
[caption id="attachment_24930" align="aligncenter" width="616"]<img class="wp-image-24930" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/appsm_mockup2.jpg" alt="" width="616" height="411" /> SmartMEI is a digital neobank serving small businesses in Brazil[/caption]
In the last few years, we’ve seen the emergence of a number of digital neobanks. Neobanks offer a user-friendly digital interface and a platform for financial services without maintaining their own banking licenses. With a focus on user experience and digital applications, neobanks stand to offer faster and better service to the underserved. Moving forward, neobanks will need to provide both a compelling product for a targeted customer segment and a suite of offerings that go beyond basic accounts or credit cards to retain customers and improve unit economics. Innovators in this space include <a class="markup--anchor markup--p-anchor" href="http://nowmoney.me/" target="_blank" rel="nofollow noopener noreferrer">NOW Money</a>, which offers migrant workers in the UAE a platform to more efficiently transfer remittances and access to other products and services over time, and <a class="markup--anchor markup--p-anchor" href="https://www.smartmei.com.br/" target="_blank" rel="nofollow noopener noreferrer">SmartMEI</a>, which offers small businesses in Brazil a free tax tool and access to a broader set of financial services.

<h4>Next gen small business finance solutions</h4>
Around the world, micro, small, and medium enterprises (MSMEs) struggle to access capital. Estimates suggest that <a class="markup--anchor markup--p-anchor" href="https://www.ifc.org/wps/wcm/connect/4d6e6400416896c09494b79e78015671/Closing+the+Credit+Gap+Report-FinalLatest.pdf?MOD=AJPERES" target="_blank" rel="nofollow noopener noreferrer">200 to 245 million formal and informal small businesses</a> either don’t have a loan or have one but are still constrained by their access to financing. Startups have been developing creative ways to acquire, underwrite, and fund these businesses. Some of the most innovative models today are embedding themselves into supply chains and working with a partner in that supply chain to identify MSMEs in need of financing and to obtain existing data that can support credit decision-making. These companies include <a class="markup--anchor markup--p-anchor" href="http://www.tiendapago.com/en/" target="_blank" rel="nofollow noopener noreferrer">Tienda Pago</a>, which partners with major consumer good distributors in Peru and Mexico to extend short-term working capital to small stores for inventory purchases, and <a class="markup--anchor markup--p-anchor" href="https://lidya.co/" target="_blank" rel="nofollow noopener noreferrer">Lidya</a>, which works through partners in Nigeria to provide invoice discounting and supply chain financing to small businesses.

<h4>Insurtech for the underserved</h4>
Low-income consumers in emerging markets need insurance products to manage and mitigate financial risks, but serving those customers poses significant challenges — from cost-effectively reaching and educating consumers, to accurately assessing and pricing risks, to efficiently managing claims. Startups can play a critical role in solving those challenges with products intended to address specific risks for underserved communities, new distribution channels to reach these populations, and new streams of data to more effectively assess and price risk. Insurtech innovators include <a class="markup--anchor markup--p-anchor" href="https://lumkani.com/" target="_blank" rel="nofollow noopener noreferrer">Lumkani</a>, which sells a low-cost heat detector bundled with insurance to households in South African informal settlements that protect against loss of life, shelter, and assets, and <a class="markup--anchor markup--p-anchor" href="https://togarantido.com.br/" target="_blank" rel="nofollow noopener noreferrer">Togarantido</a>, which serves as an online-based insurance broker focused on the underserved in Brazil.

<h4>Financial services for smallholder farmers</h4>
Smallholder farmers remain notoriously difficult to reach and are often considered high-risk clients since their incomes are tied to unpredictable harvests. An estimated <a class="markup--anchor markup--p-anchor" href="https://www.raflearning.org/post/inflection-point-unlocking-growth-era-farmer-finance" target="_blank" rel="nofollow noopener noreferrer">270 million smallholder farmers around the world face a financing gap of $170 billion</a>. Innovators addressing this need can provide real value — by helping farmers finance irrigation pumps, combat pests, or address climate risks. Startups in this space include <a class="markup--anchor markup--p-anchor" href="https://apolloagriculture.com/" target="_blank" rel="nofollow noopener noreferrer">Apollo Agriculture</a>, which leverages satellite imagery, data science, and mobile money to finance fertilizer and seeds needed to increase crop yields, and <a class="markup--anchor markup--p-anchor" href="https://www.pula-advisors.com/" target="_blank" rel="nofollow noopener noreferrer">Pula</a>, which works with large seed and fertilizer suppliers across Africa to bundle crop insurance in with product purchases.

<h4>Asset finance</h4>
[caption id="attachment_24931" align="aligncenter" width="615"]<img class="wp-image-24931" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/kn_pg_2016_25.jpg" alt="" width="615" height="410" /> The Paygo team at work on their smart meter for cooking gas[/caption]
Individuals and small businesses require financing for assets like medical equipment, smartphones, and solar home systems to increase efficiency and improve lives. One promising innovation in this space is pay-as-you-go financing, which allows consumers and business owners to make small upfront payments and regular “top-ups,” usually sent via mobile money. The model has already led to a rapid expansion in solar home systems across emerging markets. Other scalable models for asset financing leverage new distribution and payment approaches like layaway solutions, leasing models, and peer-to-peer transfers. <a class="markup--anchor markup--p-anchor" href="http://paygoenergy.org/" target="_blank" rel="nofollow noopener noreferrer">PayGo Energy</a> is a promising company in this space; its pay-as-you-go financing model enables low-income customers in Kenya to pre-pay for cleaner and more affordable cooking gas.

<h4>All-digital consumer lending</h4>
Recent years have seen digital consumer lenders emerge and scale by using simple apps to collect and analyze customer data to provide access to credit for underserved populations. The speed and accessibility of digital platforms enable credit access for consumers who are underserved by traditional lenders and who might otherwise be too costly to serve. Innovators could add value to the sector with new approaches to credit underwriting and consumer engagement that lower defaults and improve retention — two of the critical challenges to the app-based lending model. <a class="markup--anchor markup--p-anchor" href="http://smartcoin.co.in/" target="_blank" rel="nofollow noopener noreferrer">SmartCoin</a> offers new engagement tools alongside its mobile lending platform to better understand and serve its customers in India, and <a class="markup--anchor markup--p-anchor" href="https://www.tezfinancialservices.pk/" target="_blank" rel="nofollow noopener noreferrer">Tez</a> provides an all-digital banking platform with a full suite of products to low-income consumers in Pakistan.

<h4>Consumer financial health</h4>
In 2016, the Federal Reserve revealed a concerning statistic about financial health in the U.S.: 46 percent of Americans said they could not pull together <a class="markup--anchor markup--p-anchor" href="https://www.washingtonpost.com/news/wonk/wp/2016/05/25/the-shocking-number-of-americans-who-cant-cover-a-400-expense/?utm_term=.893f79e72c4c" target="_blank" rel="nofollow noopener noreferrer">$400 to cover an emergency</a>. Startups are providing solutions that help consumers manage their day-to-day financial lives and rebound from shocks. There is significant potential for innovators to leverage behavioral science to design new solutions such as clever nudges, useful automation, gamification, or bundling across different financial products. Innovators in this space include <a class="markup--anchor markup--p-anchor" href="https://www.lendstreet.com/" target="_blank" rel="nofollow noopener noreferrer">Lendstreet</a>, which focuses on financial health by providing U.S. consumers a platform to restructure and refinance their distressed debt and rebuild their credit, and <a class="markup--anchor markup--p-anchor" href="https://www.destacame.cl/" target="_blank" rel="nofollow noopener noreferrer">Destacame</a>, which empowers users in Mexico and Chile with control of their data to build their financial capabilities and access better financial products.
Each of these areas of startup-led innovation offers significant potential for both social impact for underserved consumers and financial profit in 2018. We’re excited to see what’s next.
Image credits: Accion

Have you read?

<a href="https://cfi-blog.org/2017/02/27/kopo-kopo-building-on-the-rails-of-mobile-money-in-kenya/">Kopo Kopo: Building on the Rails of Mobile Money in Kenya</a>

<a href="https://cfi-blog.org/2017/08/28/catalyst-fund-lessons-on-getting-early-stage-fintech-startups-investment-ready/">Cataylst Fund: Lessons on Getting Early-Stage Fintech Startups Investment-Ready</a>

<a href="https://cfi-blog.org/2017/07/31/how-financial-institutions-and-fintechs-are-partnering-for-inclusion-lessons-from-the-frontlines/">How Financial Institutions and Fintechs Are Partnering for Financial Inclusion: Lessons from the Frontlines</a>

&nbsp;

&nbsp;

&nbsp;

&nbsp;

&nbsp;

7 Fintech Trends to Watch in 2018

Apollo Agriculture

Lidya

Pula

Accion Venture Lab

Alternative Data

Fintechs

Impact Investing

Insurance

Insurtech

Neobanks

PayGo

Refugees and Migrants

Remittances

Smallholder Farmers

The views expressed in this post don't necessarily reflect those of CFI.

The Development Bank of Nigeria (DBN) was conceived in 2014 and this year it has come into fruition with the green light from the Federal Executive Council on April 5th. The only step standing in the way of disbursement of funds is the required approval from the National Assembly. With <a href="http://www.premiumtimesng.com/news/212461-nigeria-establishes-new-development-bank-1-3-billion.html">$1.3 billion</a> in its coffers, the new development bank aims to spur economic development by increasing access to finance for micro, small and medium-sized enterprises (MSMEs) through relatively lower interest rates compared to commercial banks, and relatively longer loan repayment periods.

The DBN will serve as a wholesale bank to microfinance banks (MfBs) which will in turn provide medium and long-term loans to MSMEs. It will provide loans to all sectors of the economy including manufacturing, the services sector, and other industries not currently served by existing development banks, thereby filling an important gap in the provision of finance to MSMEs.

A group of development banks are funding the DBN: the World Bank contributed $500 million, the African Development Bank with $450 million, German government-owned development bank KFW with $200 million, and $130 million from the French Development Agency. The bank’s goal for the first year of operation is to support 20,000 MSMEs.

Of course, MSMEs contribute significantly to national GDPs, whether it is a developed country like the United States, where they account for about <a href="https://www.oecd.org/unitedstates/united-states-improve-small-business-financing.pdf">50 percent of private sector employment</a> and create 46 percent of the private sector output, or a developing country like Nigeria where they are estimated to contribute 49 percent of the country’s GDP.

As invaluable as they are, however, access to funding for MSMEs has long been a global problem. In Nigeria, MSMEs receive only 5 percent of the country’s total bank lending. Challenges faced by Nigerian MSMEs, such as bias favoring large corporate borrowers and being regarded as high risk, highlight the need and importance of the creation of an MSME-focused development bank like the DBN. In Nigeria, MSMEs’ estimated unmet credit gap is <a href="http://www.worldbank.org/en/topic/financialsector/brief/smes-finance">50 to 60 percent.</a>

Despite the DBN’s potential to facilitate economic growth from the bottom-up and contribute to financial inclusion, it risks excluding certain essential stakeholders, according to Tiko Okoye, the CEO of <a href="http://smartcampaign.org/certification">Smart Certified</a> MfB <a href="http://www.smartcampaign.org/storage/documents/FORTIS0216_OUTPUT_SMART_FINAL_REPORT.pdf">Fortis Microfinance Bank</a>.  

<a href="https://www.thisdaylive.com/index.php/2017/04/10/why-cbns-n220bn-msmes-devt-fund-recorded-low-patronage/">Mr. Okoye warns</a> against the DBN following in the same footsteps as the MSMEs Development Fund set up in 2013 by the Central Bank of Nigeria (CBN), which, similar in mission, channeled funds through microfinance institutions for on-lending to target customers. Mr. Okoye says the fund “was not accessed that much by microfinance banks because of the conditions attached to accessing the funds.” Mr. Okoye further expressed his frustration with the imposed conditions of the MSMEs Development Fund: “You expect me to lend to the grassroots who have virtually no collateral. Then, why ask me for collateral? Where am I going to get collateral from?” Mr. Okoye cautions that like the CBN MSME fund, “If the DBN asks us to bring bank guarantees, many MfBs may not to be able to access it.”

Other threats to the efficacy of the initiative, as cited by Mr. Okoye, include large scale corruption, policy inconsistency, and the lack of any representation from the MSME or microfinance sector on the DBN board, which is entirely made up of <a href="http://www.premiumtimesng.com/business/business-news/227530-nigerian-govt-unveils-management-board-members-new-development-bank.html">representatives</a> from commercial banks and other financial organizations.

Despite his criticisms, Mr. Okoye welcomes the initiative for its potential to bring down the cost of lending for clients whose loan interest rates remain around <a href="https://www.microfinancegateway.org/sites/default/files/publication_files/loan-pricing-survey_giz_nigeria.pdf">100 percent.</a> This is great news for clients in Nigeria who, as it stands, are not subject to interest rate caps.

The appointment of Anthony Okpanachi, former Deputy Managing Director of Ecobank Nigeria Limited, to lead and manage the DBN was also <a href="https://guardian.ng/appointments/stakeholders-laud-okpanachis-appointment-as-md-of-development-bank/">lauded by stakeholders</a> given Okpanachi’s track record of furthering inclusive finance in the country.

Development economists Janine Thorne and Charlotte du Toit analyzed the factors that contribute to a successful development bank in their paper, “<a href="http://www.tandfonline.com/doi/pdf/10.1080/03768350903303183">Marco-Framework for Successful Development Banks</a>.” They found that six inter-dependent dimensions of a successful development bank include:
<ul>
 	<li>An enabling environment absent a weak economy, high levels of corruption, and a limited political will to foster good governance;</li>
 	<li>Strict regulation and supervision that renounces inherent conflict of interest of the State in both ownership and the supervision of the bank;</li>
 	<li>A clear mandate which ensures it is correctly positioned within the environment and avoids mission drift and mission shrink;</li>
 	<li>The quality of governance and management in terms of a competent board, effective internal management, and efficient performance management;</li>
 	<li>Financial stability in terms of successfully managing funds; and</li>
 	<li>Proper performance assessment.</li>
</ul>
One other avenue for strengthening the path forward for the DBN would be to introduce a business incubation system, which Mr. Okoye noted, can reduce the failure rates of businesses. In addition, he proposed the DBN collaborate with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) to help de-risk the sector by creating an SME credit guarantee scheme.

As exhibited by the practical advice already offered to the development bank from the MfB sector, having the voice of implicated stakeholders on the board of an initiative of this scale is crucial to its success. MfBs have traditionally been the vehicle through which the unbanked have been reached, and they’ve made significant strides in Nigeria increasing national financial inclusion rates and fostering economic development. The DBN should be a model for a vision of inclusion that it hopes to see within the Nigerian financial sector, as it would be in everyone’s best interest, including the bank itself.

Have you read?

<a href="https://cfi-blog.org/2016/03/30/interest-rate-caps-in-nigeria-may-not-be-good-for-clients/">Interest Rate Caps in Nigeria May Not Be Good for Clients</a>

<a href="https://cfi-blog.org/2016/02/26/disability-inclusion-progress-in-india-ecuador-nigeria-and-elsewhere/">Disability Inclusion Progress – in India, Ecuador, Nigeria, and Elsewhere</a>

<a href="https://cfi-blog.org/2015/08/13/the-hold-up-with-mobile-money-in-nigeria/">The Hold-Up with Mobile Money in Nigeria</a>

Development Bank of Nigeria: As Inclusive As It Promises?

Regulators

&gt; Posted by Bobbi Gray, Research Director, Grameen Foundation

[caption id="attachment_23392" align="aligncenter" width="615"]<img class="wp-image-23392" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/04/ffh_mexico_2008_ds_0188.jpg" alt="" width="615" height="410" /> We need to ensure products and services help family units, not just individuals, thrive.[/caption]

Writing in 1982, about Fred Astaire, Robert Thaves wrote "Sure he was great, but don't forget that <a href="https://en.wikipedia.org/wiki/Ginger_Rogers">Ginger Rogers</a> did everything he did, backwards…and in high heels." Since then, this quote about two legendary dancers has been used to celebrate the skills and talents of women and to demonstrate their ability to juggle complexity and pull it off gracefully.

At Grameen Foundation, we celebrate women for the potential they carry for ending poverty and hunger. In fact, some statistics suggest that if women farmers had the same resources as their male counterparts, the number of hungry people in the world could be reduced by 150 million. Beyond access to quality farm inputs, credit, and land, we also know that when women have equal access to education, health services, and business services they can thrive economically. Helping mothers be healthy before and during pregnancy also results in healthier children and more productive societies. Women are a key driving force against poverty.

But women carry a heavy burden. When both paid and unpaid work, such as household chores and caring for children, are taken into account, the <a href="https://unstats.un.org/unsd/gender/downloads/WorldsWomen2015_report.pdf">United Nations estimates</a> that women work longer hours than men—an average of 30 minutes a day longer in developed countries and 50 minutes in developing countries. A <a href="http://ow.ly/QAPp309Wltm">World Bank study</a> indicates that even if women farmers had improved access to agricultural resources, their farms may still face lower productivity than men’s, because of their more limited time for farm work and management. Likewise, Anne-Marie Slaughter, author of the book <a href="http://www.penguinrandomhouse.com/books/225053/unfinished-business-by-anne-marie-slaughter/9780812984972/">Unfinished Business</a>, highlights one of the greatest challenges for women as they strive to close the pay gap with men: the trade-offs they face balancing the care of their children with economic productivity.

With these challenges in mind, we have examined the facilitators of and challenges for success in business for micro-entrepreneurial women. In <a href="https://www.freedomfromhunger.org/sites/default/files/PositiveDeviant__WomenEntrepreneurs_Mexico.pdf">Mexico</a>, we found that the women who were the most successful at their small business had older children or had a workable arrangement that allowed them to care for their children and their business. In <a href="https://www.freedomfromhunger.org/when-dreamers-become-leaders-understanding-spectrum-needs-among-women-entrepreneurs-guatemala">Guatemala,</a> this reality was similar. (In 2016, Grameen Foundation and Freedom from Hunger integrated under the Grameen banner. The work described here originated with Freedom from Hunger, and continues now with Grameen Foundation.)

While a woman’s desire to be an entrepreneur and her vision for her business—whether it is a small farm or a kiosk—are key drivers for her success, so too is her ability to balance work and family responsibilities. The number and age of her children help determine the amount of time she can spend on building a business.

Christy Stickney, a <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/762">Center for Financial Inclusion Fellow</a>, equally found work-life balance to be an issue in the research she conducted in <a href="http://www.centerforfinancialinclusion.org/storage/documents/Emerging_SMEs_FINAL_Eng.pdf">Peru, Ecuador, and the Dominican Republic</a> among micro and small business entrepreneurs. She found women were less likely to be high-growth entrepreneurs and often chose lower-growth enterprises, or played a supporting role or were joint owners of high growth businesses in order to <a href="https://cfi-blog.org/2017/02/24/why-women-in-smes-lean-out/">balance priorities held at home</a>.

Being a mother of three young children, this “truth” about the world hits home for me fairly often. The bandwidth needed to be successful at work and successful at home is tremendous. While I think we would all agree that we’re working hard to provide equal footing for women, we also have to be careful that: 1) we don’t create expectations that women can and should alone carry this burden of lifting their families and communities out of poverty; and 2) we set realistic expectations for what women with complex family lives and responsibilities can achieve.

Some globally common barriers to productivity for women are not going to fundamentally change until there are shifts in thinking and action among women and men, and society in general when it comes to “unpaid” family and household work. As Slaughter writes, this requires conversations and policy changes at many levels to create an environment where a woman can be a successful income earner and mother/caregiver at the same time.

In Burkina Faso, we’re currently testing out gender dialogues that encourage men and women to discuss how to share household responsibilities so that women can be more productive economically, on the farm and off.  So far, we’ve seen hundreds of men and women, including community leaders, show up for these community conversations and actively participate. Over the next couple of years, we’ll assess how these gender dialogues affect the women clients and their families.

While many women—myself included—would like to be Supermoms, and in crazy moments even attempt it backwards and in high heels, this also leads to exhaustion and disappointment when we confront the limitations of our own circumstances.  It is time to shift this conversation from what women can do to lift their families from poverty to how the family unit can work together to build a better future for itself, its community, and future generations. This requires shifts in the way we design our products and services to not just focus on individual women within the family, but on families themselves—as a team that works stronger, together.

Image credit: Jim Cline for Freedom from Hunger

Have you read?

<a href="https://cfi-blog.org/2016/07/15/the-heart-and-science-of-client-assessment/">The Heart and Science of Client Assessment</a>

<a href="https://cfi-blog.org/2014/11/03/domestic-violence-and-microfinance-what-is-our-role-as-financial-service-providers/">Domestic Violence and Microfinance: What Is Our Role as Financial Service Providers?</a>

<a href="https://cfi-blog.org/2016/07/06/cash-or-credit-every-mothers-emergency-room-nightmare/">Cash or Credit? Every Mother's Emergency Room Nightmare</a>

Supermom and the Race to End Global Poverty

Accion is constantly inspired by small business owners we work with in the U.S., who have transformed their lives by starting, sustaining or growing a business. At the same time, we are increasingly aware of the importance of demonstrating through research the value of our investments in small business success (and the investments of government agencies, philanthropic organizations and corporations that make our work possible). In assessing this impact, we are confronted with the challenge of understanding the value of our services in helping entrepreneurs achieve a diversity of business and personal goals. Our research finds that while many small business owners in the U.S. are looking for growth, financial security and family financial health is sometimes just as important. These findings resonate with conclusions from recent <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/762">research</a> on Latin American small businesses by CFI Fellow Christy Stickney.

Through the Aspen Institute’s FIELD program and its microTracker initiative, we know that services provided by mission-based lenders lead to <a href="https://microtracker.org/explore/entrepreneur-data/">tangible outcomes</a> for U.S. small business owners one year after they receive a loan – including a 94 percent business survival rate, overall increase in average revenues and three jobs created or sustained on average per business. However, we have been limited in our study of the holistic, longer-term impacts of small business lending and business advising – particularly those impacts that cannot be captured through numbers alone. That’s why Accion and fellow mission-based lender <a href="http://www.opportunityfund.org/">Opportunity Fund</a> launched a first-of-its-kind, multi-year evaluation effort in 2015, which will inform the work of mission-based lenders across the country. This ongoing research is made possible through generous lead funding from the W.K. Kellogg Foundation and JPMorgan Chase &amp; Co., with additional support from S&amp;P Global.

In the first phase of research, we surveyed 571 Accion and Opportunity Fund borrowers, representing regionally-representative samples across 27 states, and completed in-depth interviews with 188 of them.

What We’ve Learned

<a href="http://us.accion.org/your-accion/small-business-lending-for-impact-advancing-insights-and-solutions">Preliminary findings</a> from this research indicate that our services have clear benefits to entrepreneurs. The majority said they had increased business sales (62 percent) and profit (55 percent) in the previous six months, and most said that their loans had a significant impact on these growth indicators. Out of the 76 percent of business owners with employees, about a third had hired additional workers in the previous six months. Nearly half of those who had hired more people said that their loan had a significant impact on their ability to do so. Entrepreneurs also had positive outlooks on the future: most projected increases in business sales (83 percent), business profit (81 percent), take-home pay (71 percent) and household savings (69 percent) over the next six months.

When asked to rate the impact of their loan on various aspects of their lives, business owners said that their loan has made the most impact on their confidence to achieve their goals and on their ability to improve their credit.  Many spoke of the discouraging effect of loan denials from traditional financial institutions, noting that an approval from Accion or Opportunity Fund helped them persevere. As one Chicago entrepreneur said, “Accion gave me hope to keep my dreams and goals alive and to continue on creating and giving back.”

A key theme that emerged in this research was the role that family plays in a small business owner’s personal goals. The top two personal goals for small business owners are related to family: “have more money to support my family” (91 percent) and “have more time to spend with my family” (83.5 percent). Entrepreneurs also spoke about their desire to create a legacy for their family – including making their children proud and handing down their business to them in the future.

Findings also suggest that entrepreneurs have diverse visions for the future of their businesses. For many entrepreneurs participating in the study, the desire for financial stability outweighed interests in business growth. About a third of participants had increased household savings in the previous six months and nearly 40 percent had increased their take-home pay.

<img class="aligncenter wp-image-23335" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/03/visions-for-the-future.jpg" alt="" width="615" height="274" />Most business owners (59 percent) said their loan helped them greatly in achieving their personal goals. For example, despite continuing to work long hours or have multiple jobs, many reported feeling more control and freedom as a result of their loan, affording more flexible schedules and greater autonomy in deciding how to balance work and family time.

<img class="aligncenter wp-image-23336" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/03/stability.jpg" alt="" width="615" height="354" />What This Means for Mission-Based Lending

Through these preliminary findings, we know that services provided by mission-based lenders like Accion and Opportunity Fund help small business owners gain the financial stability and confidence they need to achieve their goals. However, these findings also underscore the fact that access to capital is just one element of a small business owner’s journey toward greater financial health. Most participants said they are not well prepared for a financial emergency, despite increases in their revenue and improvements in their financial management practices. These findings echo recent <a href="https://www.jpmorganchase.com/corporate/institute/insight-cash-is-king.htm">research</a> from the JPMorgan Chase Institute, which found that the typical small business only has 27 days of a cash buffer before it would be impossible to cover any expenses, operational or otherwise.

Over the next year, we will examine the longer-term impact of small business lending through additional interviews and borrower surveys. We will also explore new questions that were raised in the initial phase of research, including the challenges small business owners face in preparing for financial emergencies. We hope that findings related to this research will encourage productive dialogue and exploration among our peers and those who are invested in our work. Together, we can advance solutions that enhance the impact of mission-based lenders on small business owners, their families and their communities.

<a href="http://us.accion.org/your-accion/small-business-lending-for-impact-advancing-insights-and-solutions">Join us</a>! Review the preliminary findings and sign up for updates on research insights, learning opportunities and the final report.

Have you read?

<a href="https://cfi-blog.org/2016/11/03/emerging-smes-secrets-to-growing-from-micro-to-small-enterprise/">Emerging SMEs: Secrets to from Micro to Small Enterprise</a>

<a href="https://cfi-blog.org/2016/05/02/in-the-united-states-gender-gaps-in-financial-literacy-and-pay-persist/">In the United States, Gender Gaps in Financial Literacy and Pay Persist</a>

<a href="https://cfi-blog.org/2017/03/06/a-u-s-agenda-for-global-financial-inclusion/">A U.S. Agenda for Global Financial Inclusion</a>

What Is the Impact of Mission-Based Lending?

Mayada El-Zoghbi

Managing Director

Amee Parbhoo

Apis Partners

Carmen Paraison

Christy Stickney

Gina Harman

Jacqueline Foelster

Jeffrey Riecke

Michiel Sallaets

Nadia van de Walle

Nika Naghavi

Tess Johnson

China

Colombia

Dominican Republic

Ecuador

Europe and Central Asia

Ghana

Guatemala

Indonesia

Iraq

Kenya

Latin America and The Caribbean

Mexico

Paraguay

Peru

Rwanda

Sierra Leone

Tanzania

Zambia

Zimbabwe

Aging and Older Adults

Agricultural and Rural Finance

Banks

Consumer Protection

Data Analytics

Financial Inclusion Strategy

Housing Finance

Microfinance

Microfinance Institutions

Pensions and Retirement Saving

Persons With Disabilities

Policy, Regulation and Government Initiatives

Risk Management

Saving

Social Performance

Trends

Underwriting

Underserved Groups

Youth

Report

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.

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

Daniel Balson

&gt; Posted by Christy Stickney, Independent Consultant and CFI Fellow

<img class="alignright wp-image-23125" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/02/thumb_e052eadfe602459e9329a3ca817a1913.jpg" width="330" height="220" />Say the words ‘women’ and ‘entrepreneurship’ together and donors and philanthropists will rush to give you money. It’s one of the hot topics in development today.

But where are the women in small and medium enterprises (SMEs)? In my study with the Center for Financial Inclusion, <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/762">Emerging SMEs: Secrets to Growth from Micro to Small Enterprise</a>, I asked this question, both directly and indirectly, as I met with entrepreneurs who had started microenterprises that grew to be SMEs, with the help of finance from microfinance banks in Peru, Ecuador and the Dominican Republic. I called these growth-oriented businesses emerging SMEs. These are my observations about women’s involvement with emerging SMEs.

Only a very small proportion of emerging SMEs are led by women. In my research only one of fourteen of the high growth enterprises identified in the study was led by a woman. Although the access-to-credit hurdle had been largely addressed within the study group, as evidenced by their extensive business borrowing, women were highly underrepresented as leaders of emerging SMEs.

Women tended to allow family responsibilities to shape their business roles and engagement levels. In particular, women entrepreneurs prioritized child-care responsibilities, as well as attending to ailing family members and aging parents.

Women were much more likely than men to diversify their economic ventures. Women tended not only to engage in multiple businesses, but also to invest in home improvements, rental properties, and the businesses and home-building endeavors of other family members. On the other hand, the emerging SMEs were characterized by single-focused dedication. Women’s business strategies appeared to aim toward creating value in family well-being and household equity and to reduce a family’s financial risk, benefitting both the family and the lending institution.

Women were very present as co-owners of emerging SMEs, occupying valuable support roles alongside male family members. In fact, the majority of high growth enterprises I encountered were jointly owned between an entrepreneur and his wife, or sister. In many cases the woman managed the business’s finances or handled customer relations while the man managed production. These roles align well with a woman’s need to be near the home, or attending to family responsibilities during certain hours of the day.

A few of the higher growth businesses had been started by women, and later transitioned to male leadership. In these cases, once the business reached a certain size, the owner’s husband or son joined her, and then carried the business forward into greater growth. One such example was that of Magda, who ran a small cafe just outside a university in Quito, Ecuador. When she was finally granted a coveted commercial site on the campus, her husband also joined her, providing much of the vision for the restaurant’s growth and future projections. “Siempre se necesita dos cabezas” (One always needs two minds.), he commented, referring to the virtues of their joint involvement in the business. Similarly, Francisco helped his wife set up a poultry-selling stand on a busy corner of their street in Guayaquil. However, once they moved off the street and into their own shop, which coincided with the arrival of their first child, he left his employment at a poultry farm to assume the leadership of their growing poultry-processing business.

Possibly, women entrepreneurs would feel greater freedom to engage more fully in growing their businesses if family care needs were being met by others. Such was the case of Esperanza, a small business owner who started a private school in her low-income neighborhood of Santo Domingo, in the Dominican Republic.  Esperanza was managing a staff of 12 teachers, and planning for an ambitious expansion of her school facilities. To support her, her mother ran the school cafeteria and cared for Esperanza’s two young kids.

So, what should we make of this? As women accommodate their business aspirations and involvement to their personal realities, do we also need to adjust? Should we recognize the value of the less dynamic businesses of women: to provide essential income to the family, allow women to make non-business contributions to family well-being and protect families against risk through diversification? Or do we push forward in ensuring that women entrepreneurs have the necessary institutional support to resolve their family care concerns, should they choose to pursue business growth?

Probably both!

We’d love to hear your thoughts. What do you think is the path forward?

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2016/07/14/rental-properties-a-popular-pension-plan-for-aging-entrepreneurs/">Rental Properties: A Popular Pension Plan for Aging Entrepreneurs?</a>

<a href="https://cfi-blog.org/2016/11/03/emerging-smes-secrets-to-growing-from-micro-to-small-enterprise/">Emerging SMEs: Secrets to Growing from Micro to Small Enterprise</a>

<a href="https://cfi-blog.org/2016/09/21/from-micro-to-small-business-whats-the-secret-sauce/">From Micro to Small Business: What’s the Secret Sauce?</a>

Why Women in SMEs Lean Out

&gt; Posted by Iftin Fatah, Investment Officer, Overseas Private Investment Corporation (OPIC)

<img class="alignright wp-image-23090" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/02/sewing.png" alt="sewing" width="305" height="241" />Limited access to credit in the developing world is often exacerbated by conflict, which presents a strong demand for microfinance. In Iraq, for example, only 11 percent of adults hold an account at a formal financial institution, according to the <a href="http://datatopics.worldbank.org/financialinclusion/country/iraq">2014 Global Findex</a>. The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, is helping to build a more inclusive financial sector in Iraq through its partnership with Vitas Iraq, a subsidiary of Global Communities, which is a non-profit development organization that partners with local stakeholders across a range of topic areas. Vitas Iraq established Al Tamweel Al Saree LLC (ATAS) as the financing vehicle to support expansion of its operations. In 2012, OPIC provided ATAS with a direct loan to enable the expansion of Vitas Iraq’s portfolio of loans to individuals and to micro, small and medium-sized enterprises (MSME), thereby expanding financial access in Iraq.

The loan, which supports inclusive economic growth in Iraq, also underscores OPIC’s commitment to investing in development in regions affected by conflict. About one-third of OPIC’s global portfolio is in conflict affected regions. By country, Iraq represents OPIC’s second-largest microfinance exposure. OPIC’s commitment to investment in conflict affected regions is based on the understanding that economic stability can help promote political stability. With the support of the OPIC loan, Vitas Iraq has contributed to different facets of Iraq’s economic growth. This includes an estimated 107,500 loans disbursed since 2012, including 26,500 to women and 61,560 to first-time borrowers.

Vitas Iraq lends to Iraqi individuals and small businesses who do not otherwise have access to sufficient capital. It is the largest microfinance institution (MFI) in the country, with a market share of nearly 40 percent and a network of 14 branch offices in 11 governorates across the country. The bulk of Vitas’ operations are in central and southern Iraq - areas that have been less directly impacted by conflict.

Performance and Social Impact

Vitas Iraq offers a wide array of financial products and services from individual loans tailored to MSMEs to home improvement, group, and youth lending. It provides loans up to $25,000 under flexible terms ranging between 8 and 24 months. As of December 2016, ATAS has a gross loan portfolio of $69.8 million which reflects an average annual growth rate of 12 percent since 2013. As of December 2016, Vitas Iraq has maintained PAR30 below 2 percent, despite the uncertain political, security and economic climate in Iraq.

Vitas Iraq and OPIC place a great emphasis on the importance of balancing financial and social impact. Both institutions have endorsed the Smart Campaign, a global effort to integrate client protection into MFIs’ due diligence, investee selection and loan covenants.

Client Focus

[caption id="attachment_23083" align="alignright" width="300"]<img class="wp-image-23083" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/02/houssam.jpg" alt="houssam" width="300" height="225" /> “With the support of Vitas Iraq, I was able to overcome the painful ordeal that befell me and provide my family with a decent life.” - Houssam[/caption]

Adaweya (pictured above) has been sewing curtains and clothing for several years at her home. Life hit her hard when her husband had an accident at work which left him disabled, leaving her as the sole breadwinner for the family. With the support of three Vitas Iraq business loans, she was able to expand her sewing business, increase her income, and provide education to her three daughters and treatment to her husband. The family was able to move to a better place where Adaweya became a member of a charity distributing clothes to orphans. She hopes to continue to expand her business to cover the whole city and other provinces.

At 26 years old, Houssam, received an incorrect diagnosis and medical treatment that led to complications and paralysis in both legs. Obtaining a loan from Vitas Iraq enabled Houssam to open up a spare parts shop. This was essential in helping Houssam provide a living for his family, as the sole breadwinner.

As these stories highlight, access to finance can be transformative, particularly in post-conflict countries such as Iraq. The work of Vitas Iraq has helped to build an inclusive financial sector in Iraq. Financial products as well as the offering of education and training of entrepreneurs to better manage their loans and business paths has proven impactful to Iraqis as they work to rebuild their society and revitalize their economy.

Have you read?

<a href="https://cfi-blog.org/2012/01/11/opic-supports-microenergy-credits-in-building-clean-energy-microfinance/">OPIC Supports MicroEnergy Credits in Building Clean Energy Microfinance</a>

<a href="https://cfi-blog.org/2016/09/30/power-of-partnerships-how-guaranteed-loans-to-microfinance-institutions-benefit-people-in-emerging-markets/">Power of Partnerships: How Guaranteed Loans to Microfinance Institutions Benefit People in Emerging Markets</a>

<a href="https://cfi-blog.org/2017/02/14/refugees-and-humanitarian-assistance-which-kind-of-aid-is-best/">Refugees and Humanitarian Assistance: Which Kind of Aid Is Best?</a>

Building an Inclusive Financial Sector in Iraq

<img class="aligncenter wp-image-22344" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/11/graphic.jpg" width="615" height="346" />After decades of directing financial services to micro-enterprise owners, many microfinance institutions are finding that some of these enterprises have grown and that they’re now serving an expanding number of small business owners. With increasing global attention being directed to small and medium-sized enterprises (SMEs), it is fitting to look more deeply at what can be learned from entrepreneurs whose businesses started as microenterprises, grew, and can now be classified as SMEs – with a substantial number of employees. More specifically: Who are these entrepreneurs? What kinds of businesses do they operate? What have been their growth patterns and hurdles? And how have they utilized financial services to further their growth aspirations?

These are the questions that guided my <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program">research fellowship</a> for the Center for Financial Inclusion. As part of my study I gathered institutional data and conducted in-depth interviews with clients of three leading microfinance institutions in Latin America: MiBanco, Banco ADOPEM, and Banco Solidario. The clients I focused on had all experienced significant loan size growth over several years.

As one might expect, the emergence of SMEs from microenterprises is disappointingly low within microfinance portfolios. Data I gathered suggests that these “emerging SMEs” represent less than 2 percent of the total clients of the institutions studied. Clearly, businesses arising out of contexts of poverty and marginalization face greater obstacles to growth, raising the question of how these ratios can be increased through targeted financial services, advising, or support.

Why do these entrepreneurs and their enterprises merit our attention – especially given that they represent such a small segment? They are extremely strategic for two reasons. First, these emerging SMEs are generating tangible benefits for their owners and their extended families, employees, and the local businesses from which they buy and sell, directly contributing to poverty alleviation within their lower-income communities. In addition, they show us how businesses can grow within marginalized settings, what qualities or characteristics contribute to growth, and what the common hurdles are that growing enterprises need to overcome.

Introducing “Growth Entrepreneurs”

“Growth Entrepreneurs”, as they are labeled in this study, were identified as those who operate high growth businesses, overcame significant growth hurdles, and express a clear vision for future business growth. More specifically, Growth Entrepreneurs may be identified as:
<ol>
 	<li>Visionaries – They express a clear vision of growth for their business.</li>
 	<li>Employers – They effectively involve non-family employees in their business.</li>
 	<li>Focused – They devote their time and resources to growing only one business.</li>
 	<li>Organized – They keep financial records and increase administration as their business grows.</li>
</ol>
By directing financial services and business development support to Growth Entrepreneurs, financial institutions, governments, investors and organizations supporting entrepreneurship development may strategically focus their efforts on a category of emerging SMEs that hold great potential for future growth and job creation.

Enterprise Growth Progression – Overcoming Hurdles

Enterprise growth does not necessarily follow a defined path or progression, but may best be described as a series of hurdles that must be overcome in order to reach higher stages of development. Through this study I’ve identified four common hurdles encountered as microenterprises progress into SMEs:
<ol>
 	<li>Acquisition of fixed assets: This common growth step involves larger purchases such as vehicles, machinery, equipment or furniture, and it becomes a hurdle when necessary financing is unavailable.</li>
</ol>
<ol start="2">
 	<li>Incorporation of non-family employees: An important growth step is reaching beyond the pool of family members to employ outsiders, and assuming the associated costs and risks. An entrepreneur’s will and capacity to manage employees is fundamental to overcoming this hurdle, along with financial and administrative systems that support this growth.</li>
</ol>
<ol start="3">
 	<li>Securing a strategic business site: While microenterprises often begin in small, informal and sometimes precarious locations, including street corners, informal markets and borrowed rooms of family residences, growth usually implies increasing space to accommodate additional inventory, equipment, employees, or customers. Improved security, visibility, and access for customers are further reasons for relocating to a more strategic, permanent, and safe site. This step requires a significantly larger investment than acquiring fixed assets, thereby presenting an even greater hurdle.</li>
</ol>
<ol start="4">
 	<li>Expansion to additional sites: Growing enterprises will often extend their physical presence to added locations to create access to new customers. This is a growth step that requires not only substantial capital to acquire and equip a new site, but also increased management and administrative capacities to effectively oversee multi-site operations.</li>
</ol>
Financial services and business development strategies that assist emerging SMEs in overcoming these critical hurdles are likely to contribute to higher rates of microenterprises transforming into SMEs, positively impacting poverty in the communities where these operate.

For more findings on Growth Entrepreneurs , read the new paper “<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/762">Emerging SMEs: Secrets to Growth from Micro to Small Enterprise</a>”. And stay tuned for upcoming blog posts on the role of women in these enterprises, and on Mercedes Canalda, Executive President of Banco ADOPEM discussing the pertinence of this study for her institution.  

Have you read?

<a href="https://cfi-blog.org/2016/07/14/rental-properties-a-popular-pension-plan-for-aging-entrepreneurs/">Rental Properties: A Popular Pension Plan for Aging Entrepreneurs?</a>

<a href="https://cfi-blog.org/2015/09/21/announcing-cfi-and-accions-research-fellows/">Announcing… CFI and Accion’s Research Fellows</a>

<a href="https://cfi-blog.org/2016/09/21/from-micro-to-small-business-whats-the-secret-sauce/">From Micro to Small Business: What's the Secret Sauce?</a>

&nbsp;

Emerging SMEs: Secrets to Growing from Micro to Small Enterprise

In this report, Christy Stickney, CFI Fellow and independent consultant, highlights the characteristics of owners of small and medium-sized enterprises (SMEs) whose businesses have overcome significant hurdles and grown from their micro size.

Christy has utilized qualitative research to identify and analyze clients of MFIs whose borrowing had increased significantly over time from the portfolios of three leading microfinance institutions in Latin America – MiBanco (Peru), Banco Solidario (Ecuador), and Banco ADOPEM (the Dominican Republic). As part of the research, Christy conducted 55 in-depth client interviews and consulted with institution staff. She identifies and describes in detail a select group of "growth entrepreneurs" (GEs) who operate higher growth businesses, have overcome significant growth hurdles, and express a clear vision for future business growth. Christy argues that this category of emerging SMEs holds great potential for future growth and job creation.

Christy also provides recommendations for financial institutions (including microfinance institutions [MFIs]), FinTech companies, governments, and other financial ecosystem actors to support growth and greater financial inclusion for emerging SMEs and growth entrepreneurs.

&nbsp;

&nbsp;

&nbsp;

Emerging SMEs—Secrets to Growth from Micro to Small Enterprise

&gt; Posted by Christy Stickney, Independent Consultant and CFI Fellow

<img class="alignright wp-image-22002" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/09/img_2679.jpg" width="340" height="255" />After decades of directing financial services to owners of micro-enterprises, many microfinance institutions are now finding themselves serving a growing population of small business owners.  Thus, with increasing global attention directed to small and medium enterprises (SMEs) and their potential contribution to economic growth, it seems fitting to look more deeply into microfinance portfolios, and discover what can be learned from entrepreneurs whose businesses have arisen out of poverty and marginalization into what can be classified as emerging SMEs. My <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-and-accion-research-fellows">recent research as a CFI Research Fellow</a> led me to delve deeply into the stories of entrepreneurs who have grown their businesses from micro-enterprises into SMEs.

As someone who has focused much of her career on pushing microfinance downward, towards smaller enterprises and those earning lower incomes, this focus on emerging SMEs both inspired and taught me a great deal. While the analysis of these stories is the focus of my report coming out next month, I’d like to share here two stories that inform our understanding of the nature, growth trajectories, and financial service usage of SMEs arising from within microfinance portfolios. They describe the experiences of two clients of Banco ADOPEM in the Dominican Republic – one of three microfinance banks I visited as part of this study. (All names have been changed to protect identities.) While these two stories may resemble the classic “client story” in that they show how people have moved up the economic ladder, pay attention to the markers of success – both financial and non-financial – that distinguish these clients from those that may have not grown.

Rising above the Floods

When the rivers rose and washed away their home and woodworking shop, built from scratch over 12 years of arduous labor, Laura, her husband, Miguel, and their three kids had to find a way to start all over. “Allí no se pudo sacar nada.” (We couldn´t salvage anything.)

Laura and Miguel had been borrowing from Banco ADOPEM for six years, and following the flood, they managed to piece together financing from ADOPEM and other sources to purchase property in a neighboring community of Santo Domingo. Gradually, they built a new home and much larger workshop.

As with many jointly-owned family enterprises, the effective division of labor between spouses is very evident in the woodworking shop. Miguel runs the workshop, having been raised working in his father´s own furniture shop, while Laura manages the administrative work, keeping the financial accounts and following up with customers. Their youngest daughter is studying to become a lawyer.

Now, 10 years after the flood, Laura and Miguel employ a team of seven workers in addition to Laura´s two older sons – employment for a total of 11 people. And Laura herself has recently returned to high school, with plans to pursue a university degree.

A Gift for Lost Savannah

“El mejor y más grande regalo para nuestra Republica es educar a nuestros niños y niñas” (The best and biggest gift for our country is to educate our boys and girls) – Quote painted on the front of the “Divine Angels Educational Center” in Santo Domingo.

Children’s chatter and laughter can be heard behind the high wall in front of Angelitos Divinos (Divine Angels), a small primary school in Sabana Perdida (literally Lost Savannah), a developing neighborhood of Santo Domingo. Angelitos Divinos is run by Esperanza, who started with a small after-school homework club for students struggling with learning disabilities. Esperanza was teaching at a public school when she and another teacher decided to offer afternoon tutorials in one of the rooms of her mother’s house. About five years later, she and four other teachers decided to launch their own school, transforming the remaining rooms of her mother’s house into classrooms. Esperanza resumed university studies when she launched her own school, and in 2007 she graduated with a degree in Educational Administration.

She and her staff of 12 now serve a total of 168 primary students. Esperanza’s mother runs the school cafeteria and helps care for Esperanza’s two young children, who are one and four years old. Her husband works in his own profession, as a press photographer. Esperanza attributes the success she’s had to the support she’s received from God and from her family, especially her mother, in addition to her “partners” – the teachers of Angelitos Divinos – and their commitment to quality education.

These stories are inspiring. But more important, they demonstrate patterns associated with microenterprises that grow to become small businesses. Here are a few of those patterns. For one thing, the change doesn’t happen overnight. It’s a long, incremental process requiring sustained effort. It helps to have a microfinance institution as an ally willing to support growth patiently, as well as an entrepreneur who knows how to leverage debt strategically.

From the first story, Laura expresses great appreciation for the financing received from Banco ADOPEM, particularly after the flood. She is also grateful for the financial education she received, which she says has helped her to watch out for unnecessary spending and avoid falling into over-indebtedness.

Laura and Miguel began borrowing from ADOPEM in 2000 with a loan of approximately $300. Last year they borrowed $6,700 to cover construction costs needed to build a second storey above their workshop, and the upstairs residence where they now live. Prior loans have been used to purchase lumber, woodworking machines and tools, and more recently the truck used to deliver finished products to their customers throughout the Dominican Republic.

Esperanza, around the time that she and the other teachers decided to launch their own school, began borrowing from Banco ADOPEM to help finance building classrooms in her mother’s house. She initially borrowed $600 in 2006, and has continued with a steady stream of loans since then, financing additional classrooms and improvements to the school infrastructure. Her last loan of approximately $7,800 allowed her to add office space, a library, and widen the playground.

Both of these stories also demonstrate the central challenge of finding the right space to do business.

For Laura and Miguel, their ability to grow has depended on rebuilding their home and workshop, and for the future, finding a prime location for sales. Laura and Miguel dream of building a store in a more commercial area of town to display their furniture and serve as a point for distribution and sales. They have their sights set on a piece of land not far from their home. As Laura says, all that´s needed is the financing.

For Esperanza’s school, increasing the student body requires building more classroom and playground space. Now Esperanza is eyeing the property next door, with plans to expand further and include courses in computer technology.  “Mi visión es grande.” (My vision is big.) These experiences point to the importance of financial tools to assist in the acquisition and improvement of business premises.

Finally, these microentrepreneurs, unlike many whose businesses do not grow, have clear visions for their businesses and are taking active steps towards their goals. All these observations – and many more to come in the full report – are important for helping financial institutions select tiny enterprises with growth potential and craft financial and other support to foster that growth.

The full report on this research will be released next month.  

Have you read?

<a href="https://cfi-blog.org/2016/07/14/rental-properties-a-popular-pension-plan-for-aging-entrepreneurs/">Rental Properties: A Popular Pension Plan for Aging Entrepreneurs?</a>

<a href="https://cfi-blog.org/2015/09/21/announcing-cfi-and-accions-research-fellows/">Announcing… CFI and Accion’s Research Fellows</a>

<a href="https://cfi-blog.org/2016/05/31/smes-speak-out-on-online-lending-if-you-build-the-website-they-will-come-but-they-might-be-a-little-confused/">SMEs Speak Out on Online Lending</a>

From Micro to Small Business: What’s the Secret Sauce?

&gt; Posted by Christy Stickney, Independent Consultant

<img class="alignright wp-image-21603" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/07/thumb_4663dca026224cdc9e1d988473581c36.jpg" width="330" height="220" />"Como tengo ya 57 años, ya no quiero más fuerte." (Since I’m already 57, I don’t want [to work] any harder.) – A market vendor in Lima, commenting on her vision for her business’ growth.

“Tengo tantos planes, pero ya me siento cansado."  (I have so many plans, but I already feel tired.)  --  A 42-year-old owner of a bakery in Guayaquil.

“Después de pagar todo y sacar las hijas de la escuela puedo descansar." (After paying off everything and getting my daughters through school I can rest.)  -- A 37-year-old paint store owner in Lima.

Entrepreneurs work hard—and when it comes to envisioning their older age they want to be able to have the luxury of slowing down. The above were common themes expressed by entrepreneurs in the three countries where I conducted my research as part of a <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-and-accion-research-fellows">CFI fellowship</a>. “I’m tired.”  “I never rest.”  “We don’t take time off.” These are sacrifices associated with running one’s own business, especially among those who have grown their firms from a truly micro size, rising up from poverty and informality into what could be labeled as a “small enterprise” or SME (typically classified as those employing between 5 and 250 workers).

Throughout the developing world, active saving for retirement and participation in formal financial services for older age, like pensions, are minimal. Entrepreneurs of micro-businesses and SMEs face even fewer options than the formally employed, as they tend to operate outside the scope of either private or state-sponsored pension plans. The intention of my research was to learn about the nature of the micro-to-SME entrepreneurs and their businesses, as well as their experiences in growing their enterprises, overcoming hurdles, and utilizing available resources to their benefit. The goal of the research is to inform how to tailor financial services, which are key to enterprise growth, to this client niche. However, in studying these entrepreneurs and their businesses, I also encountered a pervasive alternative being pursued for the financing of one’s later years...

But my first step to finding these entrepreneurs was to identify MFIs’ borrowers with steadily increasing business loan sizes, expecting to expose entrepreneurs with vibrant businesses that were poised for growth. However, the “growth entrepreneurs,” as I’ve named them, represent only about a quarter of the clients I interviewed in low-income neighborhoods of Lima, Quito, Guayaquil, and Santo Domingo. Among the remaining three quarters, there emerged many entrepreneurs that spoke of fatigue and of their desire to slow down and eventually stop working. Clearly, they had worked hard to build up their businesses from scratch, requiring long hours and few breaks. Most of them have raised a family, and along with growing their enterprises have put their kids through school, built a house, and even created jobs or homes for their adult children. Nevertheless, for many of them, their economic futures feel uncertain. Their cash savings are insignificant. As entrepreneurs, they have not invested in a pension, and the majority has not contributed to social security.

Thus, I was both surprised and relieved to discover that among the entrepreneurs that were slowing down, many had invested in rental units as a source of future income. Almost half of the clients interviewed had bought and built rental properties, and quite a few were using their loans to purchase land and build more rentals, repaying these with income from their relatively stable microenterprises. One example is Claude, a Haitian migrant living in Santo Domingo, who has slowly built his second story home and two rental apartments below through microfinance loans that he repays with the meager income from his door-to-door sales business. As in Claude’s case, apartments are often built above or below the microfinance client’s own residence, comprising incremental construction projects that may reach up to four or five stories. Other clients I visited had bought empty lots, after catching wind of a good deal, with future plans of developing these into rental spaces. Former homes and business sites were also rented as owners moved to better locations.

"Tengo que pensar en mi vejez, la enfermedad.... Pensar a tiempo." (I need to think about my [future] old age, and infirmities.... To think in time.) -- A small day-care owner in Santo Domingo, reflecting on her reasons for building rental apartments behind her home.

What I observed is that rental properties are not only an attractive investment strategy for successful microenterprise owners in the cities I visited; rental income has become the de facto pension for much of this population. Undoubtedly, steady urban growth is fueling domestic rental markets, making this a very profitable venture and relatively stable source of future income.

Through reflecting on these observations, which are but a corollary to my study focus, I’m left with more questions than answers.
<ul>
 	<li>How common is this strategy of investing in rental properties to finance retirement among microfinance clients in other contexts?</li>
 	<li>How can financial service providers and the broader microfinance industry better support clients in planning for retirement, whether investing in rentals or other options?</li>
 	<li>And what are lower-income clients’ other options for financing later life? How about offering them alternative investment products, micro-pensions, or specialized savings plans?</li>
</ul>
Perhaps these underscore a next frontier for not only aging micro-entrepreneurs, but also for the maturing microfinance institutions that have been serving them for the past several decades.

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2013/01/16/microfinance-as-a-tool-for-active-aging/" target="_blank">Microfinance as a Tool for Active Aging</a>

<a href="https://cfi-blog.org/2015/09/21/announcing-cfi-and-accions-research-fellows/">Announcing... CFI and Accion's Research Fellows</a>

<a href="https://cfi-blog.org/2014/09/16/the-opportunity-in-pensions-expanding-with-life-expectancy/">The Opportunity in Pensions Expanding With Life Expectancy</a>

Rental Properties: A Popular Pension Plan for Aging Entrepreneurs?

A few weeks ago we saw the <a href="http://www.allianz.co.id/pdf/tentang-kami/berita/press-release_allianz-indonesia-launches-unique-investment-program-to-support-micro-entrepreneur.pdf">launch</a> of a Sharia-compliant mobile phone-based loan service. The new service, called Trust Network Finance (TNF), was rolled out by Allianz in Indonesia. TNF reflects the big opportunities in Indonesia for mobile money and for Sharia-compliant services.

Although roughly 60 percent of Indonesians have a mobile phone, only <a href="http://www.wsj.com/articles/mobile-banking-struggles-to-gain-traction-in-indonesia-1437507127">3 percent</a> of the population is reportedly aware of mobile money. Indonesia has the world’s largest Muslim population, and Sharia-compliant finance has grown over the past few decades in the country; however by the end of 2016 Islamic financial institutions in Indonesia are only expected to hold <a href="http://www.indonesia-investments.com/news/todays-headlines/islamic-finance-in-indonesia-prospects-for-2016/item6202">5 percent</a> of the nation’s total banking assets.

Of the country’s roughly 250 million citizens, <a href="http://www.wsj.com/articles/mobile-banking-struggles-to-gain-traction-in-indonesia-1437507127">60 percent</a> are unbanked. It’s estimated that there are <a href="http://www.cgap.org/blog/smart-policy-why-islamic-banks-matter-indonesia">50 million</a> MSMEs in Indonesia, which make up about 97 percent of the country’s enterprises.

TNF is breaking ground in this space through a digital, cashless service that aims to empower micro-entrepreneurs. As its name suggest, trust is important. In keeping with Sharia-compliant finance practices, TNF does not charge interest rates or fees. Nor do borrowers provide any sort of collateral. Instead, in return for micro-enterprise funding, TNF receives a minority stake in the business.

TNF works with entrepreneurs through a <a href="http://www.allianz.co.id/image/tentang-kami/berita---gambar/release/handbooken.pdf">four-phase structure</a>. During the first phase, TNF invests in the micro-enterprise (between Rp. 1,000,000 and Rp. 2,000,000 – US $75-150) without taking any stake in the company. This phase functions as an opportunity for the entrepreneurs and TNF to get to know one another and for the business model to be put to the test.

During the second phase, TNF continues to offer support through increasing investment sizes, and a business coach is matched with each enterprise to offer support.

In phase three the enterprise is formalized – business coaches help the entrepreneurs obtain licenses and fulfill the requirements that correspond with such status, including capital requirements, formal bookkeeping, and tax payments. Formalizing helps the enterprises gain access to larger business loans, and TNF recommends enterprises to banks to access this capital. During phase three TNF receives a stake in the enterprise.

During phase four, along with the repayment of any outstanding loans, this stake is sold back to entrepreneurs or their business partners. This capital then goes towards supporting other TNF entrepreneurs.

TNF is operating as a 16 month pilot, making roughly 100 investments. The program is open to any kind of enterprise, so long as the business idea convinces the TNF committee it is worthy of funding.

Islamic finance in Indonesia has the potential to grow tremendously. Between 2008 and 2012, Islamic finance assets in Indonesia tripled, increasing by an average of <a href="http://www.cgap.org/blog/smart-policy-why-islamic-banks-matter-indonesia">31 percent</a> annually. The Masyarakat Ekonomi Syariah (Islamic Economic Society), a Jakarta-based non-profit organization, forecasts that Islamic finance assets in Indonesia will increase by <a href="http://www.indonesia-investments.com/news/todays-headlines/islamic-finance-in-indonesia-prospects-for-2016/item6202">15 percent</a> during 2016. And this growth might gain steam. Current regulations restrict foreign investors to owning a maximum of 40 percent of Islamic banks in Indonesia, but financial authorities are considering raising this ceiling.

We’ll look forward to following the roll-out of TNF in the months ahead. And if these Islamic finance forecasts are realized perhaps we’ll be seeing much more than a (promising) pilot in this Sharia-compliant mobile loan space very soon.

Have you read?

<a href="https://cfi-blog.org/2013/04/26/sharia-and-savings-islamic-microfinance/">Sharia and Savings: Islamic Microfinance</a>

<a href="https://cfi-blog.org/2016/02/17/bim-the-first-fully-interoperable-mobile-money-platform-now-live-in-peru/">BiM - The First Fully-Interoperable Mobile Money Platform: Now Live in Peru</a>

<a href="https://cfi-blog.org/2016/02/10/mobile-money-and-honduras-financial-inclusion-landscape/">Mobile Money and Honduras' Financial Inclusion Landscape</a>

Allianz Launches Sharia-Compliant Mobile Loan Service

<h4>"If you build the website, they will come – but they might be a little confused"</h4>
As my Accion <a href="http://blogs.accion.org/features/small-business-week-economic-growth/">colleague Lauren reminds us</a>, and as many politicians (whether New York hotel magnates or northeastern socialists) often emphasize, small and medium-sized businesses (SMEs) help ensure economic growth and spur job creation.  The <a href="http://www.forbes.com/forbes/welcome/#185355cd2c0b">challenges they face accessing credit</a> are an element of the U.S.’s financial inclusion story and important to anyone who cares about innovation, economic growth, equality, and employment.  When given the chance to express preferences and discuss their perceptions of the lending landscape, small businesses say that online lending improves their access to credit, as in <a href="https://www.newyorkfed.org/medialibrary/media/smallbusiness/2015/Report-SBCS-2015.pdf">this recent study by the Federal Reserve</a>.  But they also say that in order to enable small business owners to continue to grow their businesses and operate sustainably, these evolving online models must pay better attention to user preferences and actively embrace consumer protection standards such as transparency.  As one car dealership owner <a href="https://www.clevelandfed.org/newsroom and events/publications/special reports/sr 20150825 alternative lending through the eyes of mom and pop small business owners.aspx">noted in the Fed’s focus groups</a>, online lenders present their loans “in the most confusing way possible.” The websites are full of bright colors and testimonials from nice people, the owner added, but they don’t give applicants all the information they need.

There is no doubt that the rapid growth of online lending reflects its ability to address the huge credit gap for small and medium-sized enterprises.  Recent <a href="http://www.newyorkfed.org/smallbusiness/joint-small-business-credit-survey-2014.html">Federal Reserve data shows</a> that even as the economy continues to grow, small businesses in the United States struggle to find lenders. In fact, just over half of small businesses are denied a loan when they apply to banks, and microbusinesses and startups struggle the most.  As Ty Kiisel of Forbes notes, “In an absolute sense small business loans on the balance sheets of banks are down about 20 percent since the financial crisis, while loans to larger businesses have risen by about 4 percent over the same period.”  Even the companies that did receive funding noted that they received less than half of their requested.

SMEs struggle because they are viewed as riskier and less predictable that mainstream businesses.  They have higher failure rates, less cash flow, a hard time finding and retaining qualified staff, fewer assets for collateral, are sensitive to economic and personal swings, and are not required to report as much information.  Limited public information can make it difficult to assess their credit worthiness and check for red flags. Even growth stage firms reported that the main reason for not receiving a loan was insufficient credit history or collateral.  SME heterogeneity also makes it difficult for lenders to develop standards for evaluating repayment capacity and harder to standardize or bundle products.  After all, how easy is it to compare a dog walker and a phone app or a nail salon and a microbrewery?

The struggle to raise capital can cause clients to take risks with their personal finances in order to meet operating expenses or expand the business. In the recent Federal Reserve study, 63 percent of respondents reported holding debt in small amounts secured with personal assets and one in five growing firms used personal finances to finance their business.

Interestingly, as confirmed in the Federal Reserve’s research, a small but growing number of small businesses unable to obtain adequate traditional bank financing are turning to online lenders.  New entrants such as peer-to-peer platforms, cultivators of non-traditional data for loan decision making, or lender-agnostic marketplaces (e.g. Biz2Credit) are shaking up markets, and larger banks and their clients are paying attention. These new firms use advances in technology to achieve a competitive edge in terms of access (it is quick and easy to apply online wherever you are and whenever you want), fast turnaround (timing improves when your application goes through an algorithm), and data proxies to improve credit scoring for thin envelop clients (no more finding all your old tax returns).  While the majority of larger businesses still seek traditional loans or lines of credit from banks, it is telling that, given the short period of time that they’ve existed, almost a third of microbusinesses and small firms now apply to online lenders.

However this migration to online lenders doesn’t necessarily reflect satisfaction. The Federal Reserve’s study found that while small businesses like the simplicity of the online application process, they struggle with these providers. Seventy-five percent of businesses approved for a traditional bank loan report satisfaction, but only 15 percent of those using an online lending platform do.  Complaints include lack of transparency, unfavorable repayment terms, and high interest rates.  In <a href="https://www.clevelandfed.org/newsroom%20and%20events/publications/special%20reports/sr%2020150825%20alternative%20lending%20through%20the%20eyes%20of%20mom%20and%20pop%20small%20business%20owners.aspx">recent focus groups</a> convened by the Federal Reserve Bank of Cleveland and the Federal Reserve Board small business owners commented on how modern, visually pleasing websites containing what initially appeared to be clear terms actually hid the real, often high, cost of doing business, with hidden late fees and repayment penalties, poor communication on features and costs, and lenders demanding a cut of daily sales until repayment. They also voiced data privacy concerns and confusion over the actual loan amount. Meanwhile, regulators and others have noted that while in theory, expanding credit access is a good thing, it should not mean lowering underwriting criteria or accepting proxy data points.  After all, not all small businesses SHOULD get loans, and these critics are not convinced that these lenders harnessing fintech are effectively improving the imperfect science of defining which businesses are credit worthy.

Of course, traditional banks are still absolutely seen as important for SMEs.  The same Federal Reserve study found that, along with being a potential source of financing, small businesses go to bankers or lenders for advice (almost 75 percent of them) and the majority of those that borrow from banks report high satisfaction.  While banks can reassure themselves that they have satisfied clients, it is likely that the new players will challenge traditional banks to make changes and seek to build out their own similar services in the space.

How should regulators respond? Regulations have to balance quality of services with access to services and accommodation for innovation. For instance, <a href="http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf">some reports</a> note that regulation related to the capital levels banks are required to maintain has deterred banks from underwriting SME loans.  Similarly, community banks, often the likely option for a local small business, say they are burdened by staff time focused on compliance and oversight enforcement, which has hurt their return on assets.

At the same time, small business loans are not covered under consumer protection legislation or the Consumer Financial Protection Bureau. In that circumstance, as the Smart Campaign often asks, what about self-regulation and consumer advocacy?  A number of socially-motivated alternative lenders – including the Accion U.S. Network – have joined together to promote the <a href="http://us.accion.org/borrowers-rights">Borrowers Bill of Rights</a>, a set of principles for responsible small business lending that closely mirror the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> promoted by the Smart Campaign.  As the Borrowers Bill of Rights gains traction, perhaps it will begin to influence online lenders.

We look forward to hearing your thoughts.  Over all, as we saw in our own <a href="http://smartcampaign.org/tools-a-resources/1075">Client Voice study</a>, efforts like those from the Federal Reserve and others that allow small businesses to voice their views in their own words can reveal the full picture of the impact of financial services.  Perhaps, in our upcoming presidential debates, we will be surprised to see server discussions turn from Benghazi to online lending risks?  Ok, that’s unlikely….

&nbsp;

Have you read?

<a href="https://cfi-blog.org/2016/03/30/interest-rate-caps-in-nigeria-may-not-be-good-for-clients/">Interest Rate Caps in Nigeria May Not Be Good for Clients</a>

<a href="https://cfi-blog.org/2016/03/17/do-lenders-make-clear-the-risks-of-microfinance-loans/">Do Lenders Make Clear the Risks of Microfinance Loans?</a>

<a href="https://cfi-blog.org/2016/05/09/what-will-become-of-bank-branches-and-other-unexpected-fallout-from-digital-finance/">What Will Become of Bank Branches? And Other Unexpected Fallout from Digital Finance</a>

SMEs Speak Out on Online Lending