In this session, we spoke with our incoming CFI Research Fellows, Dan Kleinbaum and Larry Reed, who will be exploring research questions over the coming months that we think are especially important to the financial inclusion space today.
<ul>
 	<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>
 	<li>How can banks and other financial institutions provide a set of accounts and services for G2P recipients in a profitable way?</li>
</ul>

Webinar: Meet the 2019 CFI Research Fellows

<h2>Background &amp; Research Questions</h2>
More and more online credit providers have started to offer loans to not only consumers but also to SMEs around the world.

Outside of digital banking platforms, new alternative online and digital platforms that target consumers and small SMEs include:
<ul>
 	<li>Peer-to-peer (P2P) SME lenders</li>
 	<li>Online balance sheet lenders</li>
 	<li>Loan aggregator portals</li>
 	<li>Tech and e-commerce giants</li>
 	<li>Mobile data-based lending models</li>
</ul>
While the rise of alternative data-based lending has opened new and innovative credit opportunities for individuals and SMEs, these new technologies and providers also come with several consumer protection challenges. These can be categorized into seven main areas:
<ul>
 	<li>Data privacy and opt-in vs. opt-out challenges</li>
 	<li>Underwriting practices</li>
 	<li>Potential for exclusion of certain categories of clients</li>
 	<li>Cyber security and individual data protection</li>
 	<li>Clear and effective disclosure over pricing and terms</li>
 	<li>Customer recourse, complaint management and dispute resolution</li>
 	<li>Collection practices</li>
</ul>
To address these issues, both regulators and online lenders are analyzing various actions and standards to better protect online borrowers. In the U.S., the Department of Treasury, the Small Business Administration, the Federal Reserve Bank, and the Consumer Financial Protection Bureau have all started to focus on consumer protection issues related to online lending providers.

While online lenders targeting consumers are regulated to a certain extent by U.S. consumer financial protection practices, this is not the case for those targeting SMEs. To address some of these concerns, online and alternative lenders have started to develop consumer protection principles for small businesses under the <a href="http://www.responsiblefinance.com/code-of-ethics-and-best-practices/">Coalition for Responsible Business Finance (CRBF)</a>. In addition, they have supported a proactive <a href="http://www.responsiblebusinesslending.org/">Small Business Borrowers’ Bill of Rights</a> focused on transparent pricing and terms, non-abusive products, responsible underwriting, fair treatment from brokers, inclusive credit access, and fair collection practices, suggesting this can be done without adding undue burden or cost to this emerging industry. Other groups and alliances have also formed with various different competing versions of responsible online lending including the Innovate Lending Platform Association and its <a href="http://innovativelending.org/smart-box-model-disclosure-depth/">Smart Box Capital Comparison Tool</a>. In addition, the Online Lenders Alliance has also issued their <a href="http://onlinelendersalliance.org/wp-content/uploads/2016/04/Best-Practices-2016.pdf">Best Practice</a> guidelines.

Outside of the U.S., regulators and online lenders in jurisdictions like the U.K. and Singapore are proactively engaging with each other to discuss new consumer protection standards. Based on challenges within the growing P2P lending industry, Chinese regulators are now <a href="http://www.wsj.com/articles/chinas-online-lenders-face-peer-to-peer-pressure-1472123683">implementing strict guidelines</a> while Indonesia’s financial regulator is just releasing new c<a href="https://e27.co/level-playing-field-consumer-protection-to-be-the-center-of-upcoming-fintech-industry-guideline-indonesias-ojk-20160824/">onsumer protection guidelines</a> to address P2P lending practices. On the other hand, in most other markets, online lenders outside of the banks are lightly regulated or not regulated at all. International organizations like the World Bank, the Consultative Group to Assist the Poor (CGAP), the Alliance for Financial Inclusion (AFI), the G20, and groups like Consumer International have all proposed various consumer protection principles which apply to online lenders. While online lenders are still outside of most regulatory and supervisory frameworks in many emerging markets, there are proactive approaches and standards that can be proposed.
<h2>Overall Objective &amp; Hypotheses</h2>
Online lending for consumers and especially SMEs is highly relevant and important to expand access to finance and overall financial inclusion. However, trust, confidence and responsible lending practices need to be in place in order to ensure that this industry is able to continue to offer access to credit. Under a research grant from the Center for Financial Inclusion at Accion's <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program">Fellows Program</a>, this study will examine the various customer risks proposed by online lenders, what standards and practices are being proposed in some key jurisdictions, both by industry groups as well as regulators/policymakers, and what best practices can be recommended for setting consumer protection and risk mitigation standards for the emerging online financial services industry.
<h2>Study Design &amp; Methodological Approach</h2>
The research study design will follow a systematic review of literature on the topic of responsible online lending practices including research studies, guidelines, policy notes, as well as standards that are being used to address consumer protection and risk mitigation practices in online lending across various jurisdictions. The study will especially focus on online lending practices not only of supervised financial service providers but also of new financial service providers, which may be lightly regulated or not regulated at all. Interviews with financial consumer protection agencies/associations, regulators and online credit industry players from several key markets, as well as discussions with key researchers and thought leaders from this industry will also be conducted.

&nbsp;

What Does Responsible Online and Digital Credit Look Like?

&gt; Posted by Center Staff

“Despite its recent years of rapid growth, Islamic finance is still in its early stages of development,” the World Bank <a href="http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance">wrote</a> last year. Today in 2016, this is still the case, but this banking segment is certainly demonstrating advances that might suggest otherwise.

Today and tomorrow in Nairobi, delegates from 35 countries are convening to attend the <a href="http://www.alhudacibe.com/gimf2016/">Global Islamic Microfinance Forum</a>. The event, hosted by the AlHuda Centre for Islamic Banking and Economics, seeks to explore the latest developments and trends in the sector, catalyze innovation in the industry, and boost awareness on how Islamic finance can support social development and poverty alleviation. Once the forum concludes there will be a two-day workshop on how to develop, operate, and sustain Islamic microfinance institutions.

Islamic finance has grown at roughly <a href="http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance">10-12 percent annually</a> over the past decade. Between 2011 and 2014, Sharia-compliant financial assets rose from <a href="http://www.brecorder.com/money-a-banking/198/1138766/">US$ 1 trillion to 2.1 trillion</a>. In many Muslim countries, Islamic finance assets have been <a href="http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance">growing faster</a> than conventional banking assets. In non-Muslim-majority counties, Islamic finance has also seen substantial progress breaking ground in new countries and growing in already-established markets, including China, Kenya, Nigeria, Tanzania, South Africa, and the U.K. It’s estimated that there are over 1,500 organizations working in Islamic finance across 90 countries – 40 percent of which are non-Muslim-majority countries.

Islamic microfinance makes up a small slice of the Islamic finance pie, at roughly 1 percent. However, a report by TechNavio forecasts that Islamic microfinance will grow at a compound annual growth rate of about <a href="http://www.prnewswire.com/news-releases/global-islamic-microfinance-market-2014-2018-281593461.html">20 percent</a> between 2014 and 2018.

Globally it’s estimated that out of the 1.6 billion Muslims in the world, only <a href="http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance">14 percent</a> use banks, and that there are <a href="https://www.cgap.org/publications/trends-sharia-compliant-financial-inclusion">650 million Muslims</a> living on less than 2 dollars a day. Further advancing Islamic finance and Islamic microfinance, expanding formal banking options for those whose religion precludes them from conventional banking, would yield huge financial inclusion benefits.

One challenge <a href="http://www.cgap.org/news/innovation-islamic-microfinance">cited</a> as hindering the take-up of Islamic finance is lack of product diversity. More and more microfinance institutions have Sharia-compliant offerings, but they are largely limited to cost-plus-mark-up (non-interest-bearing) loans called murabaha. However, the widespread advent of fintech is also penetrating the Islamic finance realm.

At the Global Islamic Microfinance Forum, there will be awards given for the Best Technology Provider for Islamic Microfinance, and the Best Mobile Banking Product.

Last week, we saw what’s being <a href="https://www.crowdfundinsider.com/2016/11/92018-ethiskapital-claims-worlds-first-licensed-islamic-p2pcrowdfunding-platform/">touted</a> as the world’s first licensed Islamic P2P/crowdfunding platform, <a href="http://www.ethiskapital.com/">EthisKapital</a>. The platform received a license from the Securities Commission of Malaysia to offer P2P funding for real estate development projects and SMEs.

EthisKapital is the result of a partnership between two Sharia-compliant crowdfunding platforms, EthisCrowd and Kapital Boost. EthisCrowd was <a href="http://www.crowdfundinsider.com/2016/10/90971-singapore-based-ethiscrowd-recognized-best-islamic-crowdfunding-platform/">recently named</a> the Best Islamic Crowdfunding Platform at the 6th Global Islamic Finance Awards in Jakarta. EthisCrowd has roughly 17,000 registered members who have invested in building around 5,000 houses for lower-income Indonesians.

Singapore-based <a href="http://www.kapitalboost.com">Kapital Boost</a> is a platform connecting SMEs in Southeast Asia to sources of capital.

In Indonesia, Allianz is piloting a Sharia-compliant mobile phone-based loan service called <a href="https://cfi-blog.org/2016/06/20/allianz-launches-sharia-compliant-mobile-loan-service/">Trust Network Finance</a> (TNF). Micro-enterprises receive funding, and in return TNF receives a minority stake in the business.

And this is just a sample of what’s been happening in the Islamic inclusive finance space. We will look forward to following future developments in this area. In Indonesia for example, which is the largest Muslim country by population, and where according to the Global Findex only 13 percent of adults have formal loans, there are <a href="http://www.indonesia-investments.com/news/todays-headlines/indonesia-is-the-3rd-largest-smartphone-market-in-the-asia-pacific/item6777">more smart phone subscribers</a> than in any Asian country aside from China and India with 55 million individuals.

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/2011/04/13/islamic-microfinance-the-poorest-of-the-poor-and-more-top-picks-of-the-microfinance-blogosphere-april-13-2011/" target="_blank" rel="noopener">Islamic Microfinance, the Poorest of the Poor, and More – Top Picks of the Microfinance Blogosphere – April 13, 2011</a>

<a href="https://cfi-blog.org/2014/03/31/asset-based-financing-and-flexible-repayment-schedules-to-better-serve-africas-smallholder-farmers/">Asset-Based Financing and Flexible Repayment Schedules to Better Serve Africa's Smallholder Farmers</a>

Islamic Microfinance Advances and Converges with Fintech

&gt; Posted by Jeffrey Riecke, Communications Specialist, CFI

<a href="https://www.zidisha.org/"><img class="aligncenter wp-image-21836" style="border:.5px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/lend-page.png" width="616" height="386" /></a>Are interest rates necessary for loans? What about strict repayment structures? Recently, a colleague emailed me about <a href="https://www.zidisha.org/">Zidisha</a>, an online lending platform that’s harnessing expanding internet penetration rates to offer lower-cost peer-to-peer loans. Zidisha adopts a handful of approaches that depart from how loans are typically served to the base of the economic pyramid, including in terms of interest rates and repayment structures. I wanted to learn more, so I reached out to Julia Kurnia, Founder and Director of Zidisha, for a quick conversation. The following is an edited version of our exchanges.

First off, I’d like to say congratulations on all of Zidisha’s success. I understand that in its six years, Zidisha has disbursed roughly $6 million in loans to 40,000 people. By way of background, maybe you could start by offering a quick description of Zidisha? 

Zidisha is a peer-to-peer (P2P) microloan crowdfunding platform that lets ordinary people like you and me send zero-interest microloans directly to lower-income people in developing countries.

What makes Zidisha unique is that we don’t work through local banks or other intermediaries. Instead, we target today’s generation of internet-capable microfinance borrowers, and connect them with the lenders directly. Borrowers post their own stories and loan proposals, and dialogue directly with their lenders via our website.

Eliminating local intermediaries allows us to provide loans at far lower cost to the borrower than traditional microloans. This amplifies the social impact of the loans, as borrowers keep the profits they generate instead of paying high interest rates to cover local banks’ operating expenses.

What was the inspiration for Zidisha?

About 10 years ago I spent a summer helping a nonprofit in Senegal raise microloan capital through Kiva, a crowdfunding platform for local microfinance organizations. Though Kiva lenders provided funding at zero-interest, we found that we would have had to charge the borrowers exorbitant interest to cover our operating costs.

It turns out we weren’t unique. Interest and fee rates of 30 - 40 percent are typical for microloans in developing countries, and even the zero-interest capital crowdfunded at Kiva is passed on to borrowers at average interest rates of over 30 percent. Most of this cost comes from brick-and-mortar offices, loan officers, and administrative staff, which are expensive relative to the small loan amounts. As a result, many of the world’s poorest people are paying the world’s highest costs for small business loans.

I then spent several years facilitating U.S. government grants to grassroots initiatives in Africa. During that time, internet access improved dramatically in even the poorest African countries. Cheap cybercafes became ubiquitous in urban areas, and a new generation of young adults who had grown up using Facebook was entering the working population. Back at my old nonprofit in Senegal, these internet-savvy individuals no longer needed to pay high loan administration costs for us to communicate with Kiva lenders on their behalf. They were capable of participating independently in a direct peer-to-peer lending marketplace. Zidisha was founded to give them the opportunity to do so.

After six years of learning and iterating on our lending model, we’ve been able to get the cost of loans to the borrower down to just 5 percent. We don’t have loan officers or any employees in borrower countries. Most of the cost is website development, money transfer fees, and automated SMS charges.

Although internet penetration is increasing rapidly, the concept of an online peer-to-peer lender must seem strange to many lower-income, unbanked individuals. What is Zidisha’s approach for attracting borrowers and how has this evolved over the years? 

We don’t do any marketing to prospective borrowers.  We’ve found that people who have never heard of Zidisha tend to dismiss us as a scam: the idea of getting money from the internet seems absurd, and our low fee rate makes the loans sound too good to be true.

When we begin lending in a new country, a local volunteer is usually needed to persuade the first 50 or so borrowers to sign up. After that, though, word of mouth takes off and is usually sufficient to drive continued growth without further outreach on our part.

Word of mouth growth has also helped us leverage the knowledge of existing borrowers to vet new applicants. A few years ago, we introduced a referral program whereby current borrowers in good standing may send a limited number of invites to trusted acquaintances. Those who join with an invite enjoy a higher starting credit limit. Over time, this encourages networks of responsible borrowers to grow and become dominant.

This is an interesting connection between referrals and credit risk. How is Zidisha able to forego interest rates? 

Limiting the net cash disbursed to unproven first-time borrowers is an important credit risk control mechanism for us. The default starting credit limit is very small - usually about $10 for applicants without an invite. Subsequent loans increase at a fixed rate, on the basis of prior loan amounts repaid on time.

If an applicant wishes to progress to larger loans more quickly and can afford it, he or she can opt to make a payment into a reserve fund in return for a higher starting credit limit. Though the net amount he or she receives from the first loan is still only $10, the second and subsequent loans increase based on the larger amount he or she repaid initially.

The amounts paid into the reserve fund are pooled and used to refund lenders when loans are not repaid on time. This makes it possible for lenders to preserve the value of their lending capital without charging interest.

Zidisha also has a unique approach to loan repayments. Can you describe this approach and the logic behind it? 

One of the most challenging problems for microfinance services is the need to balance repayment discipline with flexibility. Flexibility is important because most low-income people in developing countries don’t have salaried jobs, insurance, substantial savings, or other safety nets. Self-employment incomes tend to be erratic, and expensive health and other emergencies happen relatively frequently. An ethical microfinance service needs to accommodate this reality, rather than force people to choose between basic livelihood and repaying a scheduled loan installment. But too much flexibility rewards free riders, who can start a spiral of defaults that endangers the long-term viability of the lending program.

The repayment policy that has evolved at Zidisha requires strict adherence to due dates, but offers more flexibility on installment amounts than is typical of other lending programs. At the time of application each borrower chooses the installment amount he or she schedules to fall due each week.  If cash flow is disrupted during the course of the loan, the borrower may log into his or her account and adjust the installment amount to anything that is easily affordable, as long as it is not zero. As long as the installments are paid on time in the adjusted amounts, the borrower preserves the good on-time repayment record needed to access subsequent loans. The borrower may then increase the installment amount when financial conditions improve.

This policy allows borrowers to maintain their good track record and habit of repaying weekly, without materially affecting their finances during times of hardship. We’ve not seen borrowers abuse this flexibility by taking excessive time to repay. Most repay as quickly as they can afford, in order to access larger subsequent loans.

In a <a href="http://www.huffingtonpost.com/julia-kurnia/the-story-of-zidisha-dram_b_9580894.html">recent piece</a> you wrote for The Huffington Post, you described Zidisha as having “more in common with eBay than with Grameen Bank.” That said, do you see any lessons from Zidisha’s experiences that’re applicable for microfinance institutions and traditional brick-and-mortar financers? 

First, it’s important to note that Zidisha serves a niche market.  Most people in developing countries still do not use the internet, and couldn’t participate directly in an online lending platform.

That said, it’s a niche that is growing very quickly and will soon become dominant. In that respect, Zidisha is a bellwether of what may become mainstream in microfinance lending a decade or two from now. Traditional microlending institutions should be watching this trend and preparing to move more of their services online when market conditions allow. The more microlending services are decentralized to borrowers via technology like smartphones or computers, the more cost savings can be realized and passed on to borrowers in the form of lower interest rates.

Even microfinance institutions whose clients are not online can learn from Zidisha’s experience. For example, we’ve shown that it’s safe to offer borrowers more autonomy in designing and adjusting their repayment schedules. In general, we try to let the borrowers direct their loan investment and management as much as possible, while protecting the integrity and financial viability of our lending community. We’ve found that once basic fraud protections are in place, trusting people’s good judgment and honesty leads to responsible participation.

For more information, visit Zidisha’s <a href="https://www.zidisha.org/">website</a>.

Have you read?

<a href="https://cfi-blog.org/2015/04/24/fintech-for-fi2020-a-conversation-on-aligning-technology-and-partnerships-for-financial-inclusion/">FinTech for FI2020: A Conversation on Aligning Technology and Partnerships for Financial Inclusion</a>

<a href="https://cfi-blog.org/2014/12/15/four-barriers-and-four-solutions-to-financial-inclusion-through-payment-innovations/" target="_blank">Four Barriers – and Four Solutions – to Financial Inclusion Through Payment Innovations</a>

<a href="https://cfi-blog.org/2013/09/27/financially-included-through-crowdsourced-financing/" target="_blank">Financially Included Through Crowdsourced Financing?</a>

Zidisha’s Take on Peer-to-Peer Lending

Today, the global financial inclusion celebrity (and Prime Minister of India) Narendra Modi visits with United States President Barack Obama. The pair will discuss the deepening U.S.-India relationship, including progress on climate change and clean energy partnerships, security and defense cooperation, and economic growth priorities. As a reader of our blog, you’re likely aware of Prime Minister Modi and India’s commitment to advancing financial inclusion in the country. Indeed, at the close of 2015, we <a href="https://cfi-blog.org/2015/12/16/country-of-the-year-india/">named</a> India our Financial Inclusion Country of the Year. In honor of Prime Minister Modi’s visit today, we wanted to take a moment to spotlight some of the strides that India has taken to bank the unbanked. After a brief review of the broad initiatives, we identify some highlights from recent months.

In early 2014, and based on the leadership of its governor, Raghuram Rajan, the Reserve Bank of India (RBI) set the stage for progress with the <a href="https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf">report</a> of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (the “Nachiket Mor Committee” Report), which outlined a vision for financial inclusion in the country across areas including universal electronic bank accounts, ubiquitous access to payment services and deposit products, sufficient access to affordable formal credit, and universal access to a range of insurance and risk management products. After carefully considering the report, in 2015 the RBI implemented a number of its recommendations.

Last year Modi announced his flagship financial inclusion program, Pradhan Mantri Jan Dan Yojana (PMJDY), which has <a href="http://timesofindia.indiatimes.com/business/india-business/Jan-Dhan-covers-99-7-households/articleshow/45960195.cms">reportedly</a> succeeded in enabling all but every household in the country to have a bank account, in partnership with the Aadhaar national biometric identification scheme. Towards the end of 2015, <a href="http://www.oneindia.com/india/deposits-accounts-under-pmjdy-cross-rs-25k-cr-mark-1898447.html">according to the Finance Ministry</a>, 60 percent of the accounts opened under the program had been used and had a balance. The financial services under PMJDY include savings and deposits, remittances, credit, insurance, and pensions.

Also last year, for the first time since 2004, RBI granted new banking licenses. The RBI awarded universal bank licenses to two institutions, IDFC (an infrastructure-focused lender) and Bandhan (a microfinance institution). The RBI also introduced two new categories of banks with lower institutional requirements – “payment banks” and “small finance banks” – and awarded 11 payment bank licenses and 10 small finance bank licenses. A few months ago the RBI <a href="https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=36898">put forth draft guidelines</a> on licensing universal banks, further enabling the issue of future universal bank licenses.

The <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">Global Microscope 2015</a> identified India as a standout performer in enabling financial inclusion. It improved its year-on-year score more than any country. The Microscope measures the quality of the policy, regulation, and institution environment for financial inclusion.

And the progress continues. Here is a snapshot of recent activity:
<ul>
 	<li>The government <a href="http://nextbillion.net/news/viewpoint-unified-payment-interface-will-be-the-next-big-thing-in-mobile-banking-in-india/">launched</a> its Unified Payment Interface (UPI), a mobile phone-based payment system that allows users to send money to one another regardless of which bank they have. The system was created by the National Payments Corporation of India (NPCI), an umbrella organization under the RBI.</li>
 	<li>The Aadhaar system recently <a href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=1&amp;cad=rja&amp;uact=8&amp;ved=0ahUKEwihhP2o3ZTNAhWDQCYKHU4MBjoQFggcMAA&amp;url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2Farticles%2F2016-04-10%2Findia-s-audacious-plan-to-bring-digital-banking-to-1-2-billion-people&amp;usg=AFQjCNGZmqyVUsBgC8WT2nnCCtXwJxIMVQ&amp;sig2=zSGTJF3V7HDvdZxfqO1eTg&amp;bvm=bv.123664746,d.eWE">reached</a> its milestone of registering 1 billion people, encompassing more than 80 percent of the country’s population. Along with supporting UPI, the system authenticates identity as Indians obtain social services and also makes satisfying financial institutions’ Know-Your-Customer requirements for opening accounts much easier and faster.</li>
 	<li>The RBI <a href="https://rbidocs.rbi.org.in/rdocs/content/pdfs/CPERR280416.pdf">released</a> rules for public comment on peer to peer (P2P) lending. Just this year, 20 P2P online lending companies have been launched in India, <a href="http://www.livemint.com/Money/6KEmfQvVnCkUAeNCfGB9AM/Are-the-P2P-lending-platforms-for-you.html">according to data analytics company Tracxn</a>.</li>
 	<li>The fintech software and services market in India is worth approximately $8 billion at present and is forecasted to grow by 1.7 times by 2020, <a href="http://www.zdnet.com/article/india-emerging-as-fastest-growing-market-for-fintech-software-products/">according to a report by Nasscom</a>.</li>
 	<li>India Post, which already offers limited financial services, was <a href="http://nextbillion.net/news/india-post-to-open-payments-bank-with-650-branches/">granted approval</a> last week to become a payments bank. By September 2017, 650 branches will support payment services, expanding much needed financial access to semi-urban and rural areas.</li>
 	<li>The initial public offerings of Equitas Holdings Ltd. and Ujjivan Financial Services Ltd. <a href="https://cfi-blog.org/2016/05/04/equitas-ipo-forges-path-for-investing-in-inclusive-finance/">were very successful</a> and introduce a wide range of investors to the Indian financial inclusion sector.</li>
 	<li>The fourth quarter 2015 aggregate loan portfolio for the Indian microfinance industry <a href="http://profit.ndtv.com/news/market/article-microfinance-institution-gross-loan-portfolio-up-84-in-q4-industry-body-1407799">grew by 85 percent</a> as compared to the same quarter of the previous year. Some observers worry that at this rate a new crisis may be around the corner.</li>
 	<li>Prime Minister Modi <a href="http://nextbillion.net/news/indias-prime-minister-launches-stand-up-india-to-promote-financial-inclusion/">launched</a> the “Stand Up India” program to promote financial inclusion of women. The program aims to create 250,000 women entrepreneurs by tapping banks to offer a range of loans without collateral for setting up new enterprises.</li>
 	<li><a href="http://www.microfinancegateway.org/announcement/indian-housing-loan-company-wins-financial-inclusion-challenge-2016">Announced</a> last week, Swarna Pragati Housing Microfinance Co. won The Wall Street Journal’s competition on achievements in financial inclusion. The company adopts an innovative loan collateral system in its work with local village governments to recognize land ownership for people without formal titles and use the properties as loan guarantees.</li>
</ul>
This dynamism is taking place with the backdrop of a poorly performing mainstream financial sector. India’s banks are thinly capitalized, and at the same time they are holding an enormous portfolio of non-performing loans – $44 billion in such loans were declared in the last two quarters, <a href="http://www.economist.com/news/finance-and-economics/21699933-financial-sector-india-being-improved-rather-overhauled-bureaucrats">according to The Economist.</a> In other words, many of India’s banks are verging on insolvent, and it is likely that the tab will ultimately be picked up by the government budget. This is a distressingly recurring story in the Indian financial sector.  The Economist notes that up to $30 to $50 million in new capital will be required to shore up the public sector banks. These banks account for 70 percent of the sector’s loans and the overwhelming majority of its bad loans.

Much of the excitement and growth in India’s financial inclusion sector is generated by the private sector. When Indian regulators move to allow the private sector to grow in a responsible manner, they see a multitude of initiatives like the ones we just listed. A reformer like Rajan must contend with the very real burden, including the strong political burden, that keeps financial sector policy shackled to the public sector behemoths.  When Prime Minister Modi and President Obama meet today, perhaps Mr. Obama can provide him with some lessons on stabilizing the mainstream financial sector, while Mr. Modi can bring some of the innovations in the financial inclusion sector to the attention of Mr. Obama.

Have you read?

<a href="https://cfi-blog.org/2015/12/16/country-of-the-year-india/">Country of the Year: India</a>

<a href="https://cfi-blog.org/2015/09/03/in-the-case-of-indias-pmjdy-considerations-for-avoiding-account-dormancy/">In the Case of India’s PMJDY, Considerations for Avoiding Account Dormancy</a>

<a href="https://cfi-blog.org/2015/08/14/mitigating-emerging-fraud-risks-in-indias-mobile-money-industry/">Mitigating Emerging Fraud Risks in India’s Mobile Money Industry</a>

Prime Minister Modi Goes to Washington

&gt; Posted by Saran Sidime, Operations Assistant, the Smart Campaign

<img class="alignright wp-image-21236" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/04/thumb_b16dd4e1ca264d1f808145b85aed7c8c.jpg" width="315" height="210" />Despite – or because of – economic growth, booming exports, and increased foreign investments in many African countries, income inequality on the continent, by many accounts, is increasing. As a region, sub-Saharan Africa has a <a href="http://www.brookings.edu/blogs/africa-in-focus/posts/2015/09/22-inequality-africa-sustainable-development-goals-bhorat">higher level of inequality</a> than the rest of the developing world. Globally, <a href="http://www.worldbank.org/en/region/afr/publication/poverty-rising-africa-poverty-report">seven of the top 10 countries</a> in terms of inequality are in Africa.

Contributing to the discrepancy is the lack of formal financial services within the region, according to <a href="http://app-cdn.acwupload.co.uk/wp-content/uploads/2016/03/APP_AR2014_EXTRACT2016_PRINT.pdf">Shaking up Finance and Banking in Africa</a>, a policy brief produced by the Africa Progress Panel, which draws its analysis from the <a href="http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Africa_Progress_Report_2014.PDF">2014 Africa Progress Report</a>. Only one in five Africans have any form of account at a formal financial institution. Like most parts of the world, the poor, rural dwellers, and women are particularly excluded. The strategic deployment of sustainable and inclusive finance is a vital ingredient to ensuring that Africa’s long-term growth encompasses all individuals equitably.

Between 1990 and 2012, the proportion of Africans who were poor fell from <a href="http://www.worldbank.org/en/region/afr/publication/poverty-rising-africa-poverty-report">56 percent to 43 percent</a>, according to the World Bank. However, when you account for population growth, the total number of individuals living in poverty increased. The most optimistic scenario, calculated by the World Bank, indicates that across this 22 year window, the number of Africans living in poverty increased from 280 million to 330 million. On the other side of the spectrum, Africa is now home to over <a href="http://www.theguardian.com/global-development/datablog/2015/jul/31/africa-wealth-report-2015-rich-get-richer-poverty-grows-and-inequality-deepens-new-world-wealth">160,000 people</a> whose personal fortunes exceed USD 1 million, which represents a doubling in the number of individuals of such wealth since the turn of the century.

Haroon Bhorat, Senior Fellow at Brookings’ Africa Growth Initiative described the problem, <a href="http://www.brookings.edu/blogs/africa-in-focus/posts/2015/09/22-inequality-africa-sustainable-development-goals-bhorat">saying</a>: “Simply put, income inequality is the thief of the poverty-reducing effect of growth.”

The agriculture sector is a key priority area for expanding financial inclusion to combat income inequality. Rural dwellers are the most financially excluded people on the continent. Overwhelmingly, farmers lack access to all formal financial products – credit, savings, and insurance. Farmers need to both insure themselves against environmental risks, and make investments in seeds and other productive inputs to boost their productivity. Without insurance, they have to invest their earnings into dealing with emergencies like poor harvests, droughts/floods, and illness, rather than investing in boosting productivity. Their lack of access to loans and savings make them unable to respond to market opportunities, like buying fertilizers, pest control, and new equipment.

A transformed financing environment will allow the continent to tap into the vast potential of its domestic resources. Supporting farmers associations and the integration of financial services access therein can bring a wealth of benefits, including: increased access to financing via transactions records kept within associations; increased market access; and increased access to informational services and skills-building opportunities. Inclusive finance can also yield less intuitive benefits that boost productivity systemically. Kofi Annan, Chair of the Africa Progress Panel, asserts the potential for pension funds to – along with their imperative role in supporting aging - finance energy proliferation. In Ghana, Mozambique, and Nigeria, for example, pension funds have allowed governments to tap into deeper pools of savings that exist to actively finance the energy sector. Annan said: “One of the greatest barriers to the transformation of the power sector is the low level of tax collection and the failure of governments to build credible tax systems. Domestic taxes can cover almost half the financing gap in Sub-Saharan Africa.”

Financial services also present huge opportunities for supporting education – one of the biggest factors to boosting equality. For every 100 African children that enter the school system, only four will make it to a tertiary institution. This is the lowest rate in the world. Savings and loans can offer families the support they need to ensure that their children are empowered to live productive lives.

The good news is that, along with the gradual expansion of traditional banking systems, peer-to-peer banking and mobile banking have increasingly taken root to further address the needs of those excluded from the financial system, democratize the financial playing field, and boost growth that benefits all. Among developing regions, mobile money is <a href="http://www.forbes.com/sites/danielrunde/2015/08/12/m-pesa-and-the-rise-of-the-global-mobile-money-market/#17edf1c723f5">most widespread</a> in sub-Saharan Africa, followed by Southeast Asia and Latin America. Constantinos Kypreos, Vice President &amp; Senior Credit Officer at Moody’s and co-author of the report <a href="https://www.moodys.com/research/Moodys-Africas-mobile-phone-banking-boom-to-support-economic-growth--PR_343501">Mobile Banking Supportive of Economic Growth and Banking Sector Prospects</a>, stated in an <a href="https://audioboom.com/boos/4160830-driving-financial-inclusion-for-sub-saharan-africa-constantinos-kypreos-of-moodysratings-on-mobilephonebanking">interview</a> that with time, mobile phone banking will boost economic growth and create opportunities for banks to expand across the continent.

Developing the financial sector is one of the most urgent challenges facing the region. As the governor of Ghana’s central bank put it, “An efficient financial sector provides the rudiments for income growth and job creation [and]…financial development contributes to the reduction of poverty and inequality.” The Shaking up Finance and Banking in Africa brief concludes that inclusive financial systems serve as the bridge that connects economic growth to the wellbeing of people. We at the Center for Financial Inclusion agree.

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2016/01/27/the-impact-investing-landscape-in-west-africa/">The Impact Investing Landscape in West Africa</a>

<a href="https://cfi-blog.org/2015/11/12/why-does-consumer-protection-lag-in-africa/">Why Does Consumer Protection Lag in Africa?</a>

<a href="https://cfi-blog.org/2015/03/11/miv-governance-the-case-of-africap/">MIV Governance: The Case of AfriCap</a>

Sustainable and Inclusive Finance Is Key to Africa’s (Equitable) Economic Transformation

<a href="http://cfi-blog.org/category/financial-inclusion-2020/"><img class="alignright wp-image-8777" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo1.jpg" alt="" width="321" height="71" /></a>The news is out. Ezubo is a Ponzi scheme. The lending company, a P2P platform in China, has bilked 900,000 private investors out of a stunning <a href="https://www.washingtonpost.com/world/asia_pacific/how-a-huge-chinese-ponzi-scheme-lured-investors/2016/02/08/fcbae776-ca9c-11e5-b9ab-26591104bb19_story.html">US$7.6 billion</a>. Ezubo is China’s largest ever online scam—but it is not alone. It is one of 2,612 P2P sites that bring lenders and borrowers together in China’s <a href="http://www.cnbc.com/2016/02/01/chinese-police-bust-76b-ponzi-scheme-at-p2p-lender-ezubao.html">$2.6 trillion</a> wealth management industry. Of those, the China Banking Regulatory Commission (CBRC) says that <a href="http://www.bloomberg.com/news/articles/2016-02-03/china-s-biggest-ponzi-scheme-shows-rot-in-internet-financing">more than 1,000</a> are “problematic.” We expressed concerns about this very P2P lending market in China in our <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a> released four months ago.

But first, how could this happen with Ezubo? Ezubo had been in the vanguard of the hot e-finance market, and was <a href="http://www.cnbc.com/2016/02/03/investors-scared-of-china-stock-markets-were-lured-by-ezubo-ponzi-scheme.html">named</a> "online credit financial brand of the year" by China's National Business Daily in 2015. It was lauded on Chinese state television and received implicit endorsement from high government officials. It engaged in cross-border trading with Myanmar—something that would not seem possible without government oversight. China is supposed to be in a big campaign to root out corruption. Yet it seems there are just two possibilities: Chinese regulators either knew about the scam and kept silent, or they missed it altogether. Could Ezubo have duped or paid off every one of the local, provincial, and national authorities who had oversight?

That’s why people who were suddenly stripped of their wealth not only feel duped by Ezubo, they also feel duped by the government. After all, this is only the latest allegation of fraud against a market that has been enthusiastically championed by the government and only loosely regulated.

While we didn’t call out Ezubo by name, we did throw down a warning about the Chinese e-finance explosion in our <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a>, saying:

The Institute of International Finance reported in November 2014 on the particular challenges of exponential growth in financial services through e-finance in China. The report lauded the great promise of e-finance for improving financial inclusion, but <a href="https://www.iif.com/publication/research-note/chinese-internet-finance-explosive-growth-challenges-ahead">noted</a> concerns about consumer protection. In the midst of stratospheric growth of <a href="https://www.nri.com/~/media/PDF/global/opinion/lakyara/2014/lkr2014202.pdf">P2P lending</a>, China has seen many P2P lenders abruptly closing shop and vanishing. In 2014 alone, 275 P2P platforms in China failed. China has proposed regulations designed to crack down on platforms that are not sufficiently capitalized or are at higher risk of default. In the meantime, individual investors are at risk. In some of the most egregious cases, P2P fraudsters absconded with investors' money on the first day that they opened for business.

This paragraph was part of our analysis of <a href="http://www.fi2020progressreport.org/client-protection/">Client Protection in the Digital Age</a>. In the FI2020 Progress Report, we said that technology has the potential to decrease fraud and increase protection—but that technology can also bring new dangers, including new kinds of fraud that can emerge when regulators have not caught up to the advances of financial technology. No matter what technology is involved, the bottom line is that customer protection policies need to develop alongside technology innovations.

In China today, the price of failing to do so is 900,000 people who have been robbed of their wealth—and 21 Ezubo executives who are now in custody. We’ll hope that client protection indeed catches up to the P2P platforms, lest another Ponzi is in the works.

Kudos to the sharp economists of the Institute of International Finance who first clued us in to the dangers of China’s e-finance market.

Financial Inclusion 2020 (<a href="http://www.centerforfinancialinclusion.org/fi2020" target="_blank" rel="noopener">FI2020</a>) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.

Have you read?

<a href="http://cfi-blog.org/2015/09/15/insights-into-an-evolving-peer-to-peer-lending-industry-in-china/">Insights into an Evolving Peer-to-Peer Lending Industry in China</a>

<a href="http://cfi-blog.org/2015/10/01/rating-progress-toward-financial-inclusion-on-a-scale-of-1-to-10/">Rating Progress on Financial Inclusion on a Scale of 1 to 10</a>

<a href="http://cfi-blog.org/2014/09/23/chinas-microfinance-landscape-nonprofits-microcredit-companies-rural-financers-and-alibaba/">China's Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba</a>

&nbsp;

Why We Aren’t Surprised that Ezubo, the P2P Lender in China, Is a Ponzi Scheme

<a href="http://www.fi2020progressreport.org/technology/"><img class="wp-image-19609 alignright" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/fi2020-tech-section.png" alt="" width="615" height="336" /></a>The following post draws observations from the just-released FI2020 Progress Report on Technology. See the full report to explore other topics.

Technology innovation is dramatically changing the financial services landscape—and quickly. No longer are simple 2G/SMS-based payments the talk of the financial inclusion community. Instead, a range of platforms and products and services promise that as we move into the future, the costs of providing services will be lower, and the base of the pyramid will be within reach for mainstream financial services providers.

The world in which these innovations are mainstreamed is one where the agent network concerns we have today will be gone. In the cash-lite or cash-free world that technology providers are seeking, there will, in fact, be few to no agents, as people will receive money electronically and spend it electronically without ever converting it to cash. When is the last time you went to a banking agent?

Consider the following innovations that allow important financial transactions to take place without a detour through cash. (For a more comprehensive list of innovations, see the FI2020 Progress Report on Technology.)

Low-Fee Remittances: In 2014, the global average cost for transferring remittances was 8 percent – a burden for low-income families who rely on remittance income. But this may soon change. Start-ups such as TransferWise, WorldRemit, and Azimo have mobile apps through which users can send remittances at fees as low as 1 percent. Companies like PayPal are increasing their global consumer base, and charge 3–4 percent on international transfers. Customers who were recently offered mobile cross-border remittances in West Africa <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/04/2015_MMU_Mobile-money-crosses-borders_New-remittance-models-in-West-Africa.pdf">responded by rapidly</a> adopting the service. Orange Money offered transfers between its own customers across Cote d’Ivoire, Mali, and Senegal, while MTN and Airtel created a bilateral agreement to serve the Cote d’Ivoire–Burkina Faso corridor. With the emergence of these competing business models, established players such as Western Union and MoneyGram have reduced their fees. Cornelis Heesbeen, CEO of Auxfin, a remittance service, <a href="http://www.remittancesgateway.org/index.php?option=com_kunena&amp;view=topic&amp;catid=9&amp;id=12&amp;Itemid=151">predicts</a> that by 2020 there will be no fees for remittances. The big question is how and when the remittance industry will shift from one in which most transactions start and end in cash at a banking agent, to one in which most transfers are account to account.

Pay-As-You-Go Utilities: Large up-front costs make solar home systems too expensive for off-grid, low-income customers, unless they get a loan. To sidestep the need for credit, some companies are using pay-as-you-go leasing technology on top of mobile payments. For example, with M-Kopa in Kenya and Mobisol in Tanzania and Kenya, customers pay daily-use fees via M-Pesa. If payment is not received, the company can turn off the system remotely through the embedded pay-as-you-go device. <a href="https://www.cgap.org/sites/default/files/DigitallyFinancedEnergy%20_FINAL.pdf">According to CGAP</a>, as of 2014 there were at least 25 companies selling solar systems with this technology in Africa, Asia, and Latin America. And the technology is being tested for other utilities, too.

P2P Lending: P2P lending services <a href="http://www.wsj.com/articles/peer-to-peer-lending-takes-off-in-china-1433320681">have taken off</a> and expanded rapidly, particularly in China, led by CreditEase, Lufax, China Rapid Finance, and DianRong. At the end of 2014 there were an estimated 1,575 P2P platforms operating in China, up from only 50 in 2011, and 103.6 billion yuan (US$16.7 billion) in outstanding loans issued via online platforms.

Online ROSCAs: An estimated 1.5 billion people globally participate in rotating savings and credit associations (ROSCAs). They provide a simple, informal method for people to save money and receive loans, although traditional ROSCAs can be unreliable and subject to management problems. <a href="http://kitty10.io/">Kitty10</a> is a mobile app that offers a possible remedy, allowing ROSCAs to manage their finances, maintain an electronic history of transactions, and easily make decisions (such as those dealing with loan amounts and repayment terms). It gives financial tips and can even build credit histories for members. <a href="https://www.margadarsi.com/index.jsp">Magadarsi</a> is an Indian chit fund that uses the Internet to support ROSCA-like operations. Magadarsi allows users to sign up online and pay savings and loan installments through online banking on its website. This allows for much larger scale in membership.

These innovations exemplify the impressive progress that technology has made in the last few years—and will continue to make from now to 2020, when the financial inclusion industry is striving to achieve financial inclusion globally. Truly, of all of the lenses through which we explored progress made toward financial inclusion for the FI2020 Progress Report, technology was the most promising, and we gave it the highest score on progress (7/10).

&nbsp;

Have you read?

<a href="http://cfi-blog.org/2015/10/01/rating-progress-toward-financial-inclusion-on-a-scale-of-1-to-10/">Rating Progress on Financial Inclusion on a Scale of 1 to 10</a>

<a href="http://cfi-blog.org/2015/01/08/the-twelve-days-of-fintech/">The Twelve Days of Fintech</a>

<a href="http://cfi-blog.org/2015/04/24/fintech-for-fi2020-a-conversation-on-aligning-technology-and-partnerships-for-financial-inclusion/">Fintech for FI2020: A Conversation on Aligning Technology and Partnerships for Financial Inclusion</a>

&nbsp;

Toward an “Agent-Free” World

<a href="http://www.planetfinancechina.org/wp-content/uploads/2015/08/New-Insights-Into-An-Evolving-P2P-Lending-Industry_PositivePlanet2015.pdf"><img class="alignright wp-image-19379" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/09/positive-planet-report.png" alt="" width="250" height="353" /></a>Over the past five years, peer-to-peer lending (P2P) has grown rapidly. Now more commonly referred to as “marketplace lending” because of the large range of institutions, intermediaries, and non-“peer” parties involved, the industry is poised to continue its year-on-year triple-digit growth. The breakneck speed of P2P’s growth seems natural given the many advantages it offers. As an industry, focus has gradually moved from a community of individuals lending directly to other individuals (often within affinity groups), and has evolved into a powerful engine of technical efficiency. Today, P2P is viewed in many different ways: a <a href="http://cfi-blog.org/2014/12/05/the-role-of-peer-to-peer-lending-in-financial-inclusion/">potential agent of financial inclusion</a>; an innovation in big data analytics and credit risk evaluation; an efficient mechanism for loan matching without the often burdensome capital and regulatory requirements of banks; an innovative operational model leveraging the cost savings of online platforms; a new asset class for retail and institutional investors; and the list goes on.

Change has been slow to come, with many banks questioning the P2P model’s long-term relevance and P2P lenders failing to capture the public eye for many years, but big banks have recently begun to show their appetite for the more robust of the online lenders. Banks have made equity stakes in P2P businesses in the past, such as Barclays’ 49 percent investment in South Africa’s RainFin. However, 2015 seems to be the breakout year for P2P into mainstream finance. In June, Goldman Sachs announced plans to enter the consumer lending space through an online platform, akin to what <a href="https://www.lendingclub.com/">Lending Club</a> and <a href="https://www.prosper.com/">Prosper</a> offer in the U.S. Several days later, Morgan Stanley featured an <a href="http://www.morganstanley.com/ideas/p2p-marketplace-lending/">optimistic report</a> on P2P lending on its home page. In August, Standard Chartered led a $207 million C-round of funding for Chinese P2P company Dianrong.

Despite all of the change, the majority of articles published do not provide in-depth explanations of the specific mechanisms and trends (e.g. online vs. offline models or specific roles/risks of the various parties involved) that underlie this recent expansion. Rather, articles repeatedly focus on the growth potential of the industry, in some instances highlighting risks, but typically without deeper analysis. This is especially true of commentary on China, where data is difficult to find and as a result conflicting interpretations exist.

These discrepancies are also due, in part, to the fact that very few reports have gone deeper to pull back the curtain and examine the details of the P2P market. Moreover, few reports have tied detailed analysis of these various P2P trends together into the past, present, and future “story of P2P.” Without this type of in-depth analysis, it is hard to separate the hype from the facts and examine the underlying risks inherent in the industry, as well as future trends.

For the past six months, Positive Planet China has been collaborating with the Credit Suisse Microfinance Capacity Building Initiative to produce a piece of research, titled “New Insights Into an Evolving P2P Lending Industry: how shifts in roles and risk are shaping the industry.” Rather than being another desktop-only research report that simply summarizes the existing field, this paper is also based on numerous interviews with industry experts to dive into deeper layers of the P2P industry.

Included is a focused analysis of P2P in China that aims to clarify some of the confusion about this massive but opaque market, as well as a review of platforms with more socially-focused missions. Additionally, the paper provides context for the global industry, its current situation, and what to look for in the future. We hope that this report will provide a roadmap for regulators, consumers, industry players, and anyone else interested in understanding, evaluating, and driving the industry to further levels of development.

The full Positive Planet report can be read <a href="http://planetfinancechina.org/new-insights-into-an-evolving-p2p-lending-industry-how-shifts-in-roles-and-risk-are-shaping-the-industry/">here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/12/05/the-role-of-peer-to-peer-lending-in-financial-inclusion/">The Role of Peer-to-Peer Lending in Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/09/27/financially-included-through-crowdsourced-financing/" target="_blank" rel="noopener">Financially Included Through Crowdsourced Financing?</a>

<a href="http://cfi-blog.org/2015/01/08/the-twelve-days-of-fintech/">The Twelve Days of Fintech</a>

&nbsp;

Insights into an Evolving Peer-to-Peer Lending Industry in China

&nbsp;

<a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/05/2015_GSMA_Mobile-financial-services-in-Latin-America-the-Caribbean.pdf"><img class="alignright wp-image-18582" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/07/gsma-lac.png" alt="" width="331" height="468" /></a>GSMA’s Mobile Money for the Unbanked (MMU) program recently released the report ‘<a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/05/2015_GSMA_Mobile-financial-services-in-Latin-America-the-Caribbean.pdf">Mobile Financial Services in Latin America &amp; the Caribbean</a>’, spotlighting the region’s booming mobile money activity. I talked with the report’s authors, Mireya Almazán and Jennifer Frydrych, to learn more about the project. The first half of our conversation follows. The second half of the conversation will be published in the coming days.
<h3>One of the headline messages of the new report is that the mobile money market in Latin America and the Caribbean (LAC) is the fastest growing of any region in terms of account ownership. How do the numbers look?</h3>
Collectively, the 37 mobile money services in the region account for roughly 15 million registered mobile money accounts and 6.2 million accounts that have been active within the past 90-days. Notably, LAC witnessed a 50 percent growth rate in the number of new registered mobile money accounts between December 2013 and 2014, making LAC the world’s fastest growing region in new accounts. LAC’s users are more active than the global average active customer rate (42 percent of all accounts are active, compared to 35 percent globally). Most encouragingly, there are now five deployments in LAC with over a million registered customers. Each of these deployments counts at least half a million 90-day active customers, and together they cover an extremely diverse set of markets.

The three markets that stand out in the region are Paraguay, Honduras, and El Salvador. These three markets all feature in the top 15 globally for mobile money account penetration (number of active mobile money accounts divided by total adult population).
<h3>To date, mobile money has largely been used for airtime top-ups and domestic money transfers (P2P). Is this what we’re seeing in the LAC region?</h3>
[caption id="attachment_18590" align="alignright" width="331"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2015/07/figure.png"><img class="wp-image-18590" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/07/figure.png?w=490" alt="" width="331" height="266" /></a> (click to enlarge)[/caption]

There are some important differences. Over a quarter of all transaction volumes (the volume of money transacted) in LAC were from ecosystem transactions with third parties—such as bill payments, bulk payments, and merchant payments—up from just 14 percent in September 2012. By comparison, in East Africa—home of the world’s most successful mobile money deployments in terms of uptake, volumes, and transactions—only 6 percent of all transaction volumes over the same period were considered ecosystem transactions. Ecosystem transactions are critical to realizing the full potential of mobile financial services, although they are traditionally the most difficult products to gain traction in a mobile money market.

We’re not necessarily looking at a copy/paste scenario of East Africa’s P2P success, as the figure shows.
<h3>What are the factors driving expansion?</h3>
Three factors that may be contributing to the growth include:
<ol>
 	<li>Offer of products tailored to use cases that meet customer needs: For example, in El Salvador—one of the most densely populated countries in the region—Tigo Money is gaining traction through bill payments and international remittances. Bill payments are relevant for much of the adult population, and international remittances constitute <a href="http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38842219">18 percent</a> of El Salvador’s GDP. Identifying customer painpoints in each market is critical to drive services enrollment and usage.</li>
 	<li>Greater investment from mobile money providers: Setting up a mobile money service is extremely hard work, even for mobile operators that already have high penetration rates on voice and data services. As the <a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2014/11/2014_Mobile-money-profitability-A-digital-ecosystem-to-drive-healthy-margins.pdf">GSMA’s profitability research</a> indicates, operators will incur heavy losses in the early years to acquire customers and build a distribution network, and will need to invest in the service for roughly three years before breaking even. We’re beginning to see more patient capital flow to the sector.</li>
 	<li>A gradual regulatory shift to allow non-banks to offer e-money: While LAC is <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2014/11/eiu_global_microscope_2014.pdf">ranked as the lowest</a> region in the world when it comes to regulation of e-money, considerable progress has been made in recent years. Four LAC markets adopted enabling regulatory frameworks between 2012 and 2015. Greater regulatory clarity has contributed to the growth of e-money services, though there’s still a long way to go.</li>
</ol>
<h3>The report highlights that LAC hosts a greater diversity of mobile money business models than any other region. What are the models we’ve seen take root in LAC, and what’s influencing these approaches?</h3>
Given the diversity of markets in the region, there is no one-size fits all commercial model for mobile money in LAC. At one end of the spectrum are models akin to those in East Africa, where a mobile operator assumes most of the functions in the value chain (e.g. Tigo in Central and South America, Digicel in the Caribbean). At the other end of the spectrum, banks drive mobile money schemes and, in some cases, have even invested in mobile virtual network operators (MVNOs) to one day offer mobile financial services independently of mobile operators (e.g. Bancolombia). Finally, new entities dedicated to mobile payments, including joint ventures between mobile operators and financial institutions or payment processing companies, are an alternative approach to mobile money in the region (e.g. Transfer, a joint venture between América Móvil and Citibank in Mexico; and MFS, a joint venture between Telefónica and MasterCard in Brazil).

The paper divides the region into two different market archetype categories. Type I markets—the poorest countries in the region with relatively low banking penetration rates, such as Bolivia, El Salvador, Guatemala, Honduras, and Paraguay—are characterized by mobile operators taking the lead in launching mobile money services to fill a banking infrastructure gap. Mobile money deployments in these markets tend to resemble those that have been successful in East Africa.

Type II markets—relatively wealthier LAC markets with robust banking sectors, such as Brazil, Mexico, and Panama—have produced a range of integrated partnership models involving operators, financial institutions, retail chains, and others. Banks and retailers are deeply rooted in these economies and are strong contenders to become mobile financial services leaders in their respective markets. Companion cards (stores of value and payment cards to accompany mobile phone use) are common, as well as integration with existing banking infrastructure.
<h3>Peru and Ecuador have unique mobile money set-ups. Could you tell us about these models?</h3>
In Peru, based on an initiative of the Association of Banks (ASBANC), a group of banks, non-bank financial institutions, and e-money issuers are preparing to launch an open and interoperable e-money platform, with a unified value proposition for consumers. To facilitate the implementation and future administration, these partners have created a new company, Pagos Digitales Peruanos (PDP) S.A. For cash-in and out, PDP will leverage Peru’s existing network of banking agents, in addition to building more service points. Merchants and agents will be fully interoperable, and the goal is to reach about 20,000 shared agents. PDP is fully financed by its partners, who mobilized an initial investment of US$10 million. The project manager has shared that PDP expects to reach five million Peruvians within five years of launching. PDP expects to go live very soon in 2015. Once launched, this multi-tenant interoperable financial industry-led scheme would be a world first.

The Ecuadorian approach to mobile financial services is government-led. The Central Bank of Ecuador (CBE) established itself as the sole e-money issuer in the country. Customers in Ecuador will now be able to open an e-money account at the CBE. Distribution, however, will be a collaborative effort of the public and private sector. CBE will contract with banks, financial cooperatives, credit unions, payment networks, and local mobile operators to build agent networks. This emerging e-money model in Ecuador demonstrates the complex interplay between commercial and government interests.

Have you read?

<a href="http://cfi-blog.org/2015/03/05/the-state-of-mobile-financial-services-an-interview-with-gsmas-jennifer-frydrych/">The State of Mobile Financial Services: An Interview with GSMA's Jennifer Frydrych</a>

<a href="http://cfi-blog.org/2014/09/22/adopting-digital-financial-services-in-guatemala/">Adopting Digital Financial Services in Guatemala</a>

<a href="http://cfi-blog.org/2015/04/30/aging-in-latin-america-and-the-caribbean-challenge-meets-opportunity/">Aging in Latin America and the Caribbean: Challenge Meets Opportunity</a>

Surging Forward: Latin America’s Mobile Money Market

Elisabeth Rhyne

Eric Noggle

Larry Reed

Dan Kleinbaum

John Owens

Saran Sidime

Susy Cheston

Sonja Kelly

Kai Hsu

Jenny  Frydrych

Mireya  Almazan

Indonesia

Malaysia

India

China

Latin America and The Caribbean

Bangladesh

Guyana

Sri Lanka

Thailand

Colombia

Dominican Republic

Ghana

Guatemala

Mexico

Nigeria

Paraguay

Peru

Tanzania

United States

Zambia

Digital Financial Services

Financial Capability

Financial Service Providers

Fintechs

P2P Lending

Telcos

Agent Banking

Alternative Data

Consumer Protection

Digital Credit

Mobile Banking

Privacy

Responsible Digital Finance

Crowdfunding

Policy, Regulation and Government Initiatives

Trends

Agricultural and Rural Finance

Pensions and Retirement Saving

Credit Provision

Fraud

Payments

Credit

Delivery Channels

Enabling Environment

Financial Technology

Informal Credit

PayGo

Remittances

Aging and Older Adults

Banks

Financial Inclusion Strategy

Housing Finance

Impact Investing

Microfinance

Persons With Disabilities

Risk Management

Saving

Social Performance

Women

Youth

Webinar

Blog Post

Jeffrey Riecke

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.

China’s economy has experienced tremendous growth in recent years, with a booming micro, small, and medium enterprise (MSME) market. There are over 50 million MSMEs in China that collectively account for over 60% of China’s GDP and over 50% of the government’s tax income. These businesses create 80% of total employment in China’s urban areas.

Despite China’s overall economic growth, the need to foster full financial inclusion is still imperative. In 2010, 38 million MSMEs lacked access to formal financial services, forcing them to borrow informally from friends, family, and moneylenders.

&gt; Posted by Joshua Goldstein, Principal Director for Economic Citizenship &amp; Disability Inclusion, CFI

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Last June, in my hotel room in Delhi, I read in the Sunday edition of the <a href="http://timesofindia.indiatimes.com/home/stoi/deep-focus/Now-hiring-White-girls/articleshow/36580075.cms">Times of India</a> that hiring white girls to work wedding parties is the new status symbol in Bangalore. Though this might sound surprising, alabaster skin as the ideal of beauty (and the status that goes with it) is neither new to nor specific to India. This is not a trivial matter but a deadly serious business.

One need only look at skin whitening products, like Unilever's “Fair and Lovely”, which are great sellers in the beauty product category in India, Bangladesh, and Thailand—indeed, in 30 countries around the world. The Unilever Sri Lanka website <a href="http://www.unilever.com.lk/">reads</a>: “Today, 250 million consumers across the globe strongly connect with Fair and Lovely as a brand that stands for the belief that beauty empowers a woman to change her destiny.”

I first think of a close Indian-American friend, now living in India, who believes that the woman he married was only still in the market when he met her because her skin was too dark to merit matrimonial consideration-- in spite of her beauty. Lucky for him. Or another colleague from an upper-class Indian family who told me that as a little girl her mother had her use “Fair and Lovely” and that today as a young woman in her twenties her mother will say to her reproachfully when she goes home: “you are looking a little dark”. On the <a href="http://timesofindia.indiatimes.com/classifieds/764057.cms">matrimonial page</a> in the Times of India, just scanning, I see, over and over again, parents advertising “fair, slim girl”, “fair and handsome boy”,  or “wheat-colored girl”.

Women who choose skin whitening products are not doing so because they are silly or vain, but because they are trying to advance their matrimonial prospects in order to optimize the survival and success of their offspring. So rather than condemn them, we need to change society so that the evolutionary strategy to become as white as possible no longer conveys an advantage.

Discrimination based on skin color has a deep and terrible history around the globe, not least in my own country, the United States of America. While much progress has been made all over the world in civil rights, which has sharply reduced official discrimination, it is clear that the culture of discrimination is much harder to eradicate. The question arises: what should microfinance institutions do? How much responsibility do they have to combat the scourge of racism? Overtly, most microfinance institutions prohibit discrimination on the basis of race, religion, or ethnic identity, and the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> promoted by the Smart Campaign enshrine that standard. However, inevitably, staff attitudes and behavior (not excluding senior managers) reflect the culture in which the institution operates.

Focusing in on microfinance, here are a couple of examples, if any are needed, that such prejudice continues. A <a href="http://www.cedla.uva.nl/50_publications/pdf/revista/96(2014)April-ERLACS/96(2014)April-(C.S.Hossein)-ERLACS-ISSN-0924-0608.pdf">case study</a> from Caroline Shenaz Hossein of York University on microfinance in Guyana uncovered biases among branch managers and staff that limit access to microfinance for eligible entrepreneurs. The case study covered nearly 100 individuals and focused on Albouystown, a slum of Georgetown. The research suggested that race, class, and gender prejudices were pervasive. Micro-lenders, most of whom were Indo-Guyanese, openly admitted to a lending bias against Afro-Buyanese hucksters (informal traders and vendors).

These exclusionary behaviors appear to apply to donors in the microfinance sector as well. A <a href="http://riped.utcc.ac.th/wp-content/uploads/2012/03/Dr_Jessica_Pan_30_March_2012.pdf">study</a> from Kiva showed – to no fault of Kiva’s – biases in the charitable microfinance lending practiced on their site. The study demonstrated that lenders on the large peer-to-peer lending platform appear to favor more attractive, lighter-skinned, and less obese borrowers, with all other factors equal.

Through my purely anecdotal observations of MFI operations in Latin America, I have noticed that lighter-skinned people often make up the higher echelons of management in microfinance institutions. (I hope one of my readers can either provide some substantiation of this claim or cite examples that show how wrong I am—which would please me to no end.)

In any case, MFIs do not seem to be an exception to the racial prejudice that pervades the societies in which they operate. Hardly surprising but something they should become more conscious of and try to remedy.

International development professionals and microfinance practitioners have too often had blinders on when it has come to bearing witness to, and struggling against, the blatant and subtle discrimination based on skin color that is a defining, oppressive reality in many of the countries where we work. This sobering reality needs to infuse our consciousness or we may be unintentional accessories to further injustice.

Have you read?

<a href="http://cfi-blog.org/2013/02/12/the-difficult-crawl-towards-non-discrimination-financial-and-otherwise/" target="_blank">The Difficult Crawl Towards Non-Discrimination - Financial and Otherwise</a>

<a href="http://cfi-blog.org/2013/08/19/two-possible-futures-for-persons-with-disabilities/" target="_blank">Two Possible Futures for Persons With Disabilities</a>

<a href="http://cfi-blog.org/2014/06/04/for-vulnerable-groups-and-minorities-naming-is-title-to-ones-identity/" target="_blank">For Vulnerable Groups and Minorities, Naming Is Claim to One's Identity</a>

Racism Is Endemic. What Role for Microfinance?

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

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.

&gt; Posted by Jeffrey Riecke, Communications Associate, CFI

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Albeit a relative newcomer to microfinance, China’s market has grown rapidly in recent years. In 2012 the country had 6,000 microcredit providers, but only 25 percent had been in operation for more than three years. Today the number of providers is a few thousand higher, spanning nonprofit institutions, government programs, microcredit companies, commercial banks, rural credit cooperatives and banks, village and township banks, and P2P lenders. Even Alibaba, China’s internet giant, is involved. It has offered loans to over 230,000 micro-entrepreneurs through its AliFinance arm, launched in 2011.

Earlier this year Accion’s Training and Capacity-Building team conducted a comprehensive assessment to determine the training and knowledge-sharing needs of the microfinance providers sustainably serving the poor in China. The assessment was carried out in partnership with the China Microfinance Institution Association, the China Association of Microfinance, and the PBC School of Finance Tsinghua, with support from the MetLife Foundation. As part of the assessment, the team compiled a landscape of the country’s microfinance institutions. Offering a snapshot of the state of the market and the challenges that lie ahead, here are some of its findings.

Nonprofit Financial Institutions

This category includes non-government organizations (NGOs), government programs, quasi-government organizations, social enterprises, and rural development associations. Among those the team identified few have reached sustainability. Of the 50 NGOs, for instance, fewer than 10 met the team’s criteria for sustainably serving the poor: at least 600 clients; an average loan size of RMB 300,000 (~US$49,000) or less; and at least three years in operation. Of course there are some success stories, including the NGO China Foundation for Poverty Alleviation (<a href="http://www.cfpamf.org.cn/">CFPA</a>), which operates nationwide.

Microcredit Companies

According to the People’s Bank of China (PBC), the central bank, the number of microcredit companies (MCCs) in the country totals 8,217. Approximately 10 percent of these meet the team’s specifications for sustainably serving the BoP. The majority of MCCs target financing for SMEs, not for individuals. To advance financial inclusion, incentives for MCCs to offer less-profitable microlending need to be integrated. One barrier MCCs face to improving their services to microfinance clients is low access to credit reporting information held by the PBC.

Commercial Banks

China has five large commercial banks (four of which are state owned), 12 joint-stock commercial banks, 144 city commercial banks, and 337 rural commercial banks. Disaggregated data was not available for determining the proportion offering microfinance. However, the team’s research indicates that there are likely fewer than 10 doing so. Similar to MCCs, most commercial banks focus on SME lending. Challenges to these institutions serving the base of the pyramid include mixed support for microlending from senior management, unfamiliarity with microfinance lending methodologies, and difficulty innovating due to a lack of autonomy from parent banks.

Rural Finance – VTBs, RCCs and PSBCs

Village and Township Banks (VTBs), Rural Credit Cooperatives (RCCs), and the Postal Savings Bank of China (PSBCs) provide large-scale financial services in China. There are about 2,000 country-level RCCs, 147 rural cooperative banks, 800 VTBs, and 39,000 frontline branches for the PSBC. Until recently, RCCs provided the majority of financial services outside cities. With its expansion branch network, PSBCs service about 2.2 million microcredit clients with an average outstanding loan size of RMB 54,000 (US$8,800). The main products offered by PSBCs are agricultural loans, women’s loans, re-employment loans, and loans with informal collateral. Challenges facing these rural institutions include a lack of microfinance expertise and reluctance to try new methodologies.

P2P Lending

The P2P lending market in China crossed the RMB 80 billion mark (US$13 billion) in 2013, according to Forbes. The explosion of activity reflects the growth of e-commerce in the country. The advances haven’t been without missteps and complications, however. Of the 1,000 P2P lending providers in China, 58 went bankrupt in the first quarter of 2013.

Alibaba

Quickly becoming a household name around the world, Alibaba’s virtual marketplace ecosystem connecting customers and entrepreneurs with products, payments, financing, and each other has made products less expensive and more available and has reduced the startup and operational costs for businesses. Alibaba’s Taobao Market, the largest C2C marketplace in China, boasts over 8 million vendors, with the vast majority small and micro-sized enterprises. Alibaba tracks the incidence of “Taobao Villages,” where nearly all the households are using the marketplace in some capacity.

To help the Taobao Marketplace vendors grow their businesses, Alibaba offers loans through the AliFinance platform. To date, AliFinance has provided loans to over 230,000 clients with an accumulated loan portfolio exceeding 80 billion RMB (US$13 billion) and an average loan size of 23-30,000 RMB (US$3,500 to $5,000). The platform employs an alternative credit scoring methodology based on the client’s activity on TaoBao and other Alibaba platforms.

The payment service used on Alibaba platforms, which hosted over 300 million registered users at the end of 2013, is called AliPay. Predominantly used for online transactions and growing for mobile, AliPay is connected to over 100 banks in China as well as major global payment providers like Visa and Western Union. The platform can be used to pay for goods and services, utilities, airtime, investment products, microloans, and donations to nonprofits, among other purposes.

Have you read?

<a href="http://cfi-blog.org/2014/01/07/ratings-to-loosen-the-regulatory-noose-on-chinas-microcredit-companies/" target="_blank" rel="noopener">Ratings to Loosen the Regulatory Noose on China's Microcredit Companies</a>

<a href="http://cfi-blog.org/2013/02/25/designing-financial-services-for-chinas-marginalized/" target="_blank" rel="noopener">Designing Financial Services for China's Marginalized</a>

<a href="http://cfi-blog.org/2014/06/12/selling-sheep-on-instagram-and-sending-virtual-gifts-to-karaoke-singers-in-the-new-mobile-internet-economy/" target="_blank" rel="noopener">Selling Sheep on Instagram and Sending Virtual Gifts to Karaoke Singers in the New Mobile Internet Economy</a>

&nbsp;

China’s Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba