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

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

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

Suddenly, This Summer

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

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

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

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

Lately it seems that everyone wants in on sustainable, responsible impact investing (SRI). Encapsulating a broad swath of investment styles, from environmental, social, and governance (ESG) screening to shareholder resolutions and community investing, SRI has become the darling of the social impact community.

In the U.S. alone, over one-fifth of professionally-managed funds (held by institutional investors, money managers, and community investment institutions), or a total of $8.7 trillion, consider ESG factors. This figure is up from $6.57 trillion in 2014 according to the U.S. Forum for Sustainable and Responsible Investment (USSIF)’s <a href="https://www.ussif.org/trends">2016 SRI Investing Trends Report</a>. A much smaller proportion is in impact investments. According to the Global Impact Investing Network’s <a href="https://thegiin.org/knowledge/publication/annualsurvey2017">2017 Annual Impact Investor Survey</a>, which polls 209 institutional investors making impact investments, capital invested in impact investments rose by 17 percent last year from $22 billion to $26 billion.

While SRI growth trends are impressive, USSIF claims that the total potential market for professionally-managed assets in the U.S. could be as much as $40.3 trillion, an indication that there is still a great deal of room for SRI investing to grow. Three trends are especially encouraging: investing and a wider variety of investment vehicles are becoming more accessible to more people, community focused investments are one of the fastest-growing segments, and millennials are nudging investment managers toward SRI.

Expanding access through new investment vehicles: With the expansion of investors who offer SRI investments to include foundations, public funds, venture capital, community development financial institutions (CDFI), money managers and institutional investors, there has also been an increase in the types of investment products on offer. Individuals’ desire for greater control over their investments and variety of choice has resulted in a growing online investment platform landscape. Offerings such as <a href="https://www.openinvest.co/">OpenInvest</a> and <a href="https://www.swellinvesting.com/homepage">Swell</a> are focused solely on impact investments, providing investors the choice of SRI products from exchange traded funds (ETFs), mutual funds, stocks, bonds, and index funds, and traditional platforms are beginning to offer their own impact investment products in order to compete. Many of these vehicles are open to individuals below the high net worth level.

Community impact investments are on the rise: It is an encouraging trend within SRI investing that community impact investments, which direct capital to underserved communities, are one of the fastest growing segments. (SRI investments held by institutional money managers is the other fast-growing category.) According to the USSIF, community investments by credit unions, CDFIs, and others doubled in just two years, from $64 billion in 2014 to $122 billion in 2016.

Community capital allows individuals and small business owners to appeal directly to potential funders for investment capital to pursue community-driven opportunities. <a href="https://investibule.co/">Investibule</a>, a B Corp that aggregates investment opportunities on a crowdfunding site, sees making these opportunities available for individual investors as a means to meet the growing interest in socially responsible investment while also plugging a funding gap for underserved communities and businesses.

One recent example is a partnership between the NAACP, YMCA, and Impact Shares (a nonprofit investment manager). In November 2017, the group <a href="http://www.naacp.org/latest/naacp-ywca-partner-impact-shares-investing-social-justice/">announced</a> the offering of two exchange traded funds (ETFs) in Chicago, one focused on investing in social justice and one focused on women. The Minority Empowerment ETF will invest in companies that empower minorities through their hiring and compensation practices, and the Women’s Empowerment ETF will invest in companies that promote the advancement of women and workplace equity.

Interest in sustainable investing is rising, especially among millennials: According to Morgan Stanley’s 2017 report, <a href="http://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-signals/pdf/Sustainable_Signals_Whitepaper.pdf">Sustainable Signals: New Data from the Individual Investor</a>, 75 percent of individual investors are interested in pursuing investments that “aim to achieve market-rate financial returns while pursuing positive social and/or environmental impact.” This interest is even higher among millennials, with 86 percent interested in sustainable investing, and women, with 84 percent interested in sustainable investing – as compared to 67 percent of men.  As millennials stand to inherit from aging baby boomer parents, more investment capital will be in their hands, and this transfer of wealth, given their interest in SRI, has the power to nudge more institutional investors into sustainable investing. For example, employers offering 401(k)s and other retirement savings plans will need to consider that, according to Morgan Stanley, 90 percent of millennials would be interested in choosing sustainable investment as part of their 401(k), if it was an option, as compared to 72 percent of the total individual investor population.

Yet, despite these favorable trends, two challenges slow the pace of its growth.

Continuing belief that impact comes at the expense of financial returns. A <a href="http://www.tandfonline.com/doi/pdf/10.1080/20430795.2015.1118917">2015 study</a> by Deutsche Asset &amp; Wealth Management and Hamburg University found that across 2000 empirical studies on ESG performance, 90 percent show a positive correlation between ESG and corporate financial performance. Yet many Americans still hold the perception that investing based on ESG impact comes at the expense of financial gain. Fifty-nine percent of millennials surveyed for Morgan Stanley’s report consider sustainable investing to involve a financial trade-off, and that makes funds hesitant to emphasize impact. The recent announcement of the Rise of the Rest Fund, a seed fund to invest in small businesses across the U.S. outside the pockets of NYC and Silicon Valley, was quick to point out that <a href="https://www.nytimes.com/2017/12/04/business/dealbook/midwest-start-ups.html">its purpose</a> is financial performance not impact.

How to measure and what’s most important? Measuring the impact of SRI investments is tricky. A framework which measures investments in a way that fully captures social results alongside financial performance is still developing. Investors care about both market rate returns and impact, but with some types of investments and investors higher returns are not always the primary goal. A more nuanced system of measurement is required, based on the investors’ individual investment priorities, that also accommodates the diversity of investment offerings and definitions of what constitutes SRI (e.g., impact investment, shareholder resolution, or ESG screen).

What next? The SRI field is still evolving, yet the acceleration of investments into SRI and the increased interest by both individuals and institutional investors are encouraging. Hopefully, SRI investors will continue to listen to what investees are asking: provide more ways for individuals to invest in a variety of products and platforms; invest in women, minorities, small businesses and communities; and combat perception biases through more rigorous investment objectives and measurement.

Have you read?

<a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/">Time to Ditch Impact Investing's Unproductive Self Analysis</a>

<a href="https://cfi-blog.org/2017/10/24/bridging-islamic-finance-and-impact-investing/">Bridging Islamic Finance and Impact Investing</a>

<a href="https://cfi-blog.org/2017/03/22/how-water-org-took-a-leap-of-faith-into-social-impact-investing/">How Water.org Took a "Leap of Faith" into Social Impact Investing</a>

&nbsp;

Impact Where? Socially Responsible Investing (SRI) in the U.S.

[caption id="attachment_23681" align="alignright" width="225"]<img class="wp-image-23681 size-medium" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/06/bhutan-photographers.jpg?w=225" alt="BEFIT photographers" width="225" height="300" /> BEFIT photographers. Photo Credit: Elisabeth Rhyne[/caption]

Imagine a country unlike any you have ever seen – a mountainous land without Starbucks, where pop stars sing praises of the king, and men wear skirts with knee socks. You might be tempted to relegate the country to the category of charming or exotic. But that would be a disservice to Bhutan, which presents itself as kind, intelligent and ready to participate in the modern world.

I attended the <a href="http://www.centerforfinancialinclusion.org/events-a-presentations/857-befit-international-financial-inclusion-summit">Bhutan Economic Forum for Innovative Transformation’s summit</a> on “Equitable Growth through Financial Inclusion” held last month in Thimphu, Bhutan’s capital city, and that provided me with an opportunity to hear in depth about its unique development philosophy – Gross National Happiness (GNH). Before we turn to the connections between GNH and financial health, here is some important context.Bhutan is a Buddhist constitutional monarchy. Each of those three concepts makes an essential contribution to its national character.

Buddhism permeates Bhutan’s cultural identity and shapes the government’s aim of creating a “just and harmonious society.” The Gross National Happiness concept is an attempt to incorporate Buddhist principles into governance.

Bhutan has an unusual monarchy. Unlike the legacy monarchies of other countries, Bhutan’s monarch is modern – just over 100 years old. It was established in 1907 with the First King, and is now led by the Fifth King. Bhutan seems to have been exceedingly lucky in its monarchs, with each king shaping the country in beneficial ways. And unlike the fading monarchies of Europe, the monarchy in Bhutan is central to the society. Our conference began with a tribute to the monarchy and expression of gratitude to the king. And the highlight for the foreign guests was a chance to talk with him.

A decade ago (and thanks to the Fourth King), Bhutan’s monarchy became constitutional, making it a democracy, with lawmaking in the hands of an elected parliament led by a prime minister. That the current prime minister was formerly the leader of the opposition shows that elections are contested. The prime minister is leading a “brand Bhutan” project, which you can hear about in his <a href="https://www.ted.com/speakers/tshering_tobgay">TED talk</a> on Bhutan’s approach to climate change.

It takes this background to understand why Bhutan originated the concept of <a href="http://www.gnhcentrebhutan.org/what-is-gnh/the-story-of-gnh/">Gross National Happiness</a>. GNH combines deep Buddhist principles with today’s emphasis on evidence-based policy. Bhutan is very much in the 21st century. It seeks economic growth through a market economy, and it’s just as focused on metrics as any other government. The Bhutanese leaders recognized that economic growth has its downsides and that if the country’s aim is a just and harmonious society, Gross Domestic Product is at best incomplete and at worst misleading. So it set out to develop a framework to look at all the dimensions of national happiness.

[caption id="attachment_23679" align="alignleft" width="225"]<img class="wp-image-23679 size-medium" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/06/bhutan-rma-staff.jpg?w=225" alt="Bhutan Royal Monetary Authority staff" width="225" height="300" /> Bhutan Royal Monetary Authority staff. Photo Credit: Elisabeth Rhyne[/caption]

The GNH office within the government surveys the population and screens policy proposals with reference to nine domains: Living Standards, Education, Health, Environment, Community Vitality, Time-Use, Psychological Well-Being, Good Governance, and Cultural Resilience and Promotion. It is certain that when Bhutan develops a draft financial inclusion strategy, it will be subjected to GNH scrutiny. When trade-offs occur between economic growth and other values, growth does not necessarily prevail. Among the consequences of the GNH focus are Bhutan’s approach to tourism (limited and high-end, for maximum revenue with minimal environmental impact and disturbance to culture), environment (60 percent of the land area to remain perpetually forested), and health and education (free for all, funded by exports of hydropower to India).

This brings us to financial health, which I view as a bridge that links financial inclusion to Gross National Happiness. Just as GNH sets the well-being of people and society as the highest value to maximize, so financial health sets consumer well-being as the apex of financial inclusion—above the profits of financial service providers, which exist to promote consumer well-being, and above additional tax revenues made possible by formalization. Financial health, as the Center for Financial Services Innovation <a href="http://cfsinnovation.org/research/financial-health/">originally defined it</a> and as we affirmed in <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/807-beyond-financial-inclusion-financial-health-as-a-global-framework">our research in India and Kenya</a>, measures whether financial services are working as intended: supporting consumers’ day-to-day money management, protecting them against shocks and helping them achieve big goals. The financial health framework is exactly what we need to determine whether financial inclusion is contributing to GNH.

A financial health approach to financial inclusion would involve designing products specifically to promote financial health. In this approach, there is no assumption that formal services are a priori preferable to informal services. Among lower income people, especially in a country like Bhutan where so many people live in remote areas, most of their financial lives take place in the informal sector. Additionally, sometimes financial patterns have cultural significance. Bhutan operated as a barter economy well into the 20th century, and barter is still used in many rural areas. Who knows, maybe someone could think up an innovative service built on the existing culture around barter.

The financial health concept recognizes that the financial capability of consumers determines whether they will be able to use their financial services effectively. A financial health approach to financial inclusion therefore would set capability-building interventions alongside service provision as twin goals and would incorporate capacity-building elements directly into financial products. The wide disparities between urban and rural Bhutanese call for different approaches to capability building, in light of lower literacy in rural areas, as well as different financial services for people with agrarian versus urban livelihoods.

The financial health approach also helps solve the difficult challenge of measuring impact. If financial services are to have an impact on ultimate well-being, that impact will be demonstrated through the achievement of financial health, which is to say through using financial services to smooth day-to-day finances, reduce the impact of shocks and reach longer-term goals (especially through productive investments). So, instead of the frustration of trying to directly assess whether financial services are reducing poverty, the financial health framework examines the intermediate steps toward that ultimate goal. I can envision the GNH team in Bhutan incorporating a financial health perspective into their detailed GNH surveys.

Bhutan is just beginning its financial inclusion journey (stay tuned for another post on that). It will be interesting to see whether the Gross National Happiness development philosophy will lead the country toward a strategy that looks different from that of other countries.

&nbsp;

&nbsp;

Seeking Happiness and Financial Health in Bhutan

&gt; Posted by Hatem Mahbouli, Investment Officer, FMO
<h3><img class="alignright wp-image-20339" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/01/thumb_01ad8da11af2400e8149cc6dfd5aa258.jpg" alt="" width="325" height="214" />Social Impact Bonds</h3>
A lot has been said on social or development impact bonds (SIBs), and the instrument evidently has acquired enough vintage to be subjected to an insightful <a href="http://www.brookings.edu/research/reports/2015/07/social-impact-bonds-potential-limitations">review by the Brookings Institute</a> on the promises and limitations of its applications.

To give a short description, SIBs are not bonds (too late to change the name apparently), but sort of a public-private partnership, where investors are only repaid by the donors or government commissioners if and when pre-agreed social outcomes are achieved, transferring the risk of failure from <a href="http://www.socialfinance.org.uk/services/social-impact-bonds/">donors/government (outcome payers) to investors.</a>

SIBs can change perspectives where social issues move from being budget issues to business cases. The proposal is very appealing for impact investors as it offers new opportunities to deploy capital for social impact, with a strong focus on accountability and credible measurement of the achieved impact.
<h3>Applicability to the financial inclusion space</h3>
To date, very few SIBs have been launched in low income countries, despite many parties closely watching deployments elsewhere. Issues range from legal constraints to high transaction costs, but let’s assume for a moment that there is enough will, incentives, and capacity to overcome those limitations and launch a SIB in financial inclusion. What would this look like?

For a SIB to work, it needs to tackle what we call a “SIB friendly” issue or segment. You cannot apply it to any problem. The intervention – to put it very shortly – needs to be limited in time, have a specific scope, and an output (or outcome) that is relatively easy to measure and to value. Of course, for the whole structure to make sense, there needs to be an outcome payer who is willing to buy those outcomes, and an investor willing to take the risk.

Let’s look at the main outcomes donors seem keen on achieving in the financial inclusion space: financial literacy, access to suitable financial services for the poor (including savings), development of payment services and technologies and specific products, penetration in particularly underserved and complicated areas, access to financial services for a specific segment (youth, women, farmers, etc.), and access to finance for a specific purpose (e.g. clean energy), to name a few. Other efforts, like those related to governance and regulation seem trickier to implement in the SIB context, since they tend to be longer term and more difficult to directly correlate with specific outcome metrics.

To go a level deeper, a good spot to start, usually, is to look at existing performance/results-based contracts in the financial inclusion space. In fact, many SIBs result from tweaking a result-based contract to allow investors to step in and finance operations upfront. On this blog, there has been a <a href="http://cfi-blog.org/2014/09/10/pay-for-performance-operationalizing-the-embedded-education-model/">conversation</a> on outcome-based projects related to financial literacy. <a href="http://ieg.worldbank.org/Data/reports/chapters/appe_ifc_poverty.pdf">IFC’s Performance Based Grants Initiative (PBGI)</a> also seems to have disbursed to leasing and micro-lending related projects (we could not get more details at this stage).

For impact investors who are strongly involved in financial inclusion, such as FMO, the easiest way to try out this new instrument is to “plug” it into investments with our partner MFIs. Here we suggest a basic example of what might be a mix of a plain vanilla debt facility and a SIB component:
<ol>
 	<li>The investor discusses a debt facility at 5 percent/p.a. with an MFI in India.</li>
 	<li>The investor and the MFI partner agree with a donor to achieve a specific outcome. For the sake of discussion, let’s consider reaching 10,000 clients in a conflict area.</li>
 	<li>The investor would accept to allocate 50 percent of its loan to this high risk area without an increase in rate, accepting to delay the reward until the impact is achieved.</li>
 	<li>Once the 10,000 clients are reached, the donor pays for the outcome and transfers extra funding to the investor that accepted the transfer of risk upfront. The investor gets compensated for the extra impact it pushed for (“outcome dividend”). The donor only disburses once the results are reached.</li>
</ol>
<img class="aligncenter wp-image-20333" style="border: 0 solid #000000;margin-top: 3px;margin-bottom: 3px" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/01/figure.jpg" alt="" width="616" height="230" />SIBs present an attractive option for service providers that are looking for much coveted industry funding.

In short, it is about raising the bar for social outcomes, through upfront funding, while the donor money will only be dispensed when the outcome is achieved.

SIBs stimulate ideas of outcome-based finance, which will help parties involved be accountable on the actual social impact of their endeavors. For instance, an investor can agree on a set of social outcomes with an MFI and will only renew the facility if those outcomes are reached.

Of course, in theory, a stand-alone SIB should be feasible but we are more confident a pilot is easier to implement when mixed with existing relationships and processes.
<h3>Scalability and sustainability</h3>
Switching focus to the ultimate impact is not sufficient though, and the question of sustainability and scalability of such structures is often raised. However, we do believe that starting to think of the right structures and how to make the first pilots successful is a prerequisite to any long-term sustainability or scalability discussion.

We urge donors and service providers to start interacting more with investors of MFIs, as they might be willing to advance the capital, accept the transfer of risk, and channel more funding toward the strengthening of the sector. We strongly believe that SIB structures – whether standalone or “SIB inspired” – will help align the interests among the investor, the financial institution, the technical advisor, and the outcome payer, resulting in increased efficiency, innovation, greater impact, and no free riding. We are happy to continue the conversations toward such a goal.

Have you read?

<a href="http://cfi-blog.org/2015/08/05/an-agile-approach-to-impact-measurement/">An Agile Approach to Impact Investing</a>

<a href="http://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/">Four Challenges for Impact Investing</a>

<a href="http://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

&nbsp;

Social Impact Bonds and Financial Inclusion

<h4>Apis Partners and Accion Frontier Investments Group publish an operational framework for measuring impact in inclusive financial services investing</h4>
&gt; Posted by Apis Partners and Accion Frontier Investments Group

<img class="alignright wp-image-18893" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/08/thumb_543799baa3454ee9a681654d25f8bb02.jpg" alt="" width="340" height="227" />

A key aspect of investing for social impact is being able to effectively measure impact, which has always been <a href="http://hbswk.hbs.edu/item/6401.html">challenging</a>. Whilst there have been several well-informed attempts to create uniform standards to address this challenge (such as <a href="https://iris.thegiin.org/">IRIS</a> and <a href="http://b-analytics.net/giirs-ratings">GIIRS Ratings</a>), these have largely been intended to compare impact investments across multiple industries. This can be a valuable exercise for multi-sector fund managers, but the approach invariably leads to a trade-off: using the same scale to measure impact across a number of diverse industries leads to a lowest common denominator analysis. These standards seek to measure impact across industry sectors, but they do not provide information about the nature of social change created within each industry. At the other end of the spectrum, several fund managers have developed bespoke systems to measure the impact of their own portfolios. These systems have been tailored for <a href="https://iris.thegiin.org/microinsurance-metrics">insurance at the base of the pyramid</a> or <a href="http://www.progressoutofpoverty.org/">poverty alleviation progress</a>, and they do a good job of accomplishing those goals. Unfortunately though, they are often too specialized to allow for any comparison across impact managers.

Therefore, the most optimal approach to impact measurement is that which: (1) surfaces the specific nature of impact created in a sector, (2) remains broad enough to allow for some objective comparison across managers, (3) but does not seek to compare the incomparable. Such an approach only seems possible when impact measurement is focused on specific industries.

It is with this approach that <a href="http://www.apis.pe">Apis Partners</a> and <a href="http://www.accion.org/frontier">Accion Frontier Investments Group</a> have chosen to operate. Apis and Accion are fund managers investing specifically in inclusive and innovative financial services for the un- and under-banked. Like other impact focused investors, we have a dedicated mission to provide social as well as financial return on investments, which requires the measurement of social impact in a real, quantifiable way.

We therefore set out to create a framework that would allow us to capture the unique aspects of impact in inclusive financial services investing in the broadest sense; we sought the optimal approach as described above. To do so, we surfaced the important values in financial services impact investing and compared these to the key performance indicators (KPIs) that are historically used to track company progress within these areas. This gave rise to three core categories which we think any fund manager investing in inclusive financial services can use to measure impact.

So what does this look like? <a href="http://apis.pe/wp-content/uploads/2015/08/Apis-Accion-FS-Impact-Measurement-Framework.pdf">Apis and Accion’s Financial Services Impact Measurement Framework</a> has three overarching pillars: ‘Access’, ‘Quality’ and ‘Markets’ (also summarized in Table 2 of a recent JP Morgan report on <a href="http://www.jpmorganchase.com/corporate/Corporate-Responsibility/document/impact-assessment-in-practice-2015.pdf">Impact Assessment in Practice</a>):
<ul>
	<li>Access is focused on the large population that currently does not have access to formal financial services. Here the company’s client base is identified, as are the distribution channels serving them and levels of outreach.</li>
	<li>Quality is informed by the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Smart Campaign's Client Protection Principles</a> and is defined as appropriateness and effectiveness of product fit. Sample KPIs here include product affordability, processing times, or complaints ratios.</li>
	<li>Markets references the development of the financial sector, innovation, local talent and business model scalability. Measuring a company’s indirect, market impact is especially difficult (and has been the subject of recent <a href="http://www.ssireview.org/blog/entry/on_innovators_and_pinballs">publications</a>), though our framework does offer suggestions for measurable KPIs, e.g. influx of new capital, new product offerings or a measure of job creation.</li>
</ul>
The framework was designed not to be prescriptive around the specific qualitative and quantitative metrics, “Impact KPIs” (IKPIs), to be measured, but rather to offer flexibility with these. We expect that each portfolio company will have differing emphases in each of the framework’s pillars, and this highlights the importance of consistently tailoring metrics to match the business model and impact thesis of each portfolio company - the companies we are investing in are different from each other, and their impact metrics should reflect that. This of course means that real thought is required to decide which IKPIs are the right ones to measure progress.

There is also value in using some consistent metrics for all companies in a fund (e.g. jobs created or countries of operation) to allow for portfolio-level measurement. In all cases though, we will try to leverage the data a company already collects and tightly integrate impact measurement into overall reporting, on the conviction that financial, operational and social performance can be mutually reinforcing.

So, what now? We’re taking an <a href="https://hbr.org/2013/05/why-the-lean-start-up-changes-everything/ar/1">agile approach</a>: we want to use the framework, test it out, evaluate the results and make it better before we scale. In version 1.0, we plan to select a limited number of IKPIs per pillar, per portfolio company and measure impact through those metrics. Whilst we expect companies from different financial services sub-verticals to have different metrics, we hope this framework provides for a consistent approach to measuring impact in terms of enhancing Access, improving Quality and expanding Markets. We are going to give this system a try, and we invite other financial services investors to try this framework with us. We’ll report back in a few months to share our progress and learnings, though we welcome your feedback before then.

Image credit: Accion

Have you read?

<a href="http://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank">Four Challenges for Impact Investing</a>

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

<a href="http://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>

An Agile Approach to Impact Measurement

&gt; Posted by Karin Malmberg, PIIF Manager, PRI

<img class="alignright size-medium wp-image-16990" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/01/calculator-385506_640.jpg?w=300" alt="" width="300" height="177" />How do institutional investors in inclusive finance ensure that their investee institutions manage their social as well as financial performance? How do these investors contribute to the sustainable growth of the industry? And, perhaps most importantly how do they ensure that end clients are fairly treated and adequately protected?

The <a href="http://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Report-on-Progress_in-Inclusive-Finance_2014.pdf">Report on Progress in Inclusive Finance 2014</a> by the Principles for Investors in Inclusive Finance (PIIF) Initiative addresses these questions, analyzing data submitted by inclusive finance investors on their responsible investment practices.

The results are encouraging. Fund managers and other investors investing directly into retail institutions look at responsible finance issues at the selection stage of the investment process. For example, 94 percent measure and include the social performance of retail institutions alongside financial criteria when making investment decisions, and 90 percent include client protection measures in their investment policies.

However, these figures drop when we look at improving performance in these areas. The <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles" target="_blank">Client Protection Principles</a> are universally accepted among investors but fewer encourage implementation by retail institutions. For instance, 63 percent systematically include client protection in covenants in loan agreements or in shareholder agreements. Fewer than half incentivize investee retail institutions to track social performance. Additionally, few investors encourage their investees to take part in collaborative industry initiatives, with the exception of the Smart Campaign.

The path from microcredit to full financial inclusion is another area for improvement. While the majority say that they support the provision of services beyond microcredit, only 50 percent collect data on whether voluntary savings products are provided by investee retail institutions, and 33 percent on whether voluntary insurance products are provided.

The governance of retail institutions was highlighted recently by the Center for Financial Inclusion and The MasterCard Foundation as they launched the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf" target="_blank">Africa Board Fellowship program</a> for board members and CEOs of microfinance institutions. This, too, is an area where investors have a role to play. The PIIF data shows that 85 percent assess the board composition of investee retail institutions at the pre-investment stage, and 73 percent assess board compensation. These figures drop at the post-investment stage however.

For more detail on investors approaches to these areas and others, such as fair treatment and transparency, download the full report <a href="http://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Report-on-Progress_in-Inclusive-Finance_2014.pdf">here</a>.

We invite investors and other stakeholders to use this report and the individual <a href="http://www.unpri.org/areas-of-work/implementation-support/piif/piif-signatories/">Transparency Reports</a> which detail the responses of each participating investor, to learn about what their clients, intermediaries, and peers are doing.

We also encourage more investors to use the <a href="http://www.unpri.org/piif">PIIF</a> and accompanying reporting framework and assessment to evaluate their own practices and demonstrate their progress to the industry.

The <a href="http://www.unpri.org/piif">Principles for Investors in Inclusive Finance (PIIF)</a> were developed by investors and provide guidance on how to address these questions. The PIIF were launched in 2011 and currently have 50 signatories including pension funds, insurance companies, development finance institutions, foundations, and fund managers. The PIIF are hosted and managed by the <a href="http://www.unpri.org" target="_blank">Principles for Responsible Investment (PRI) Initiative</a>.

Have you read?

<a href="http://cfi-blog.org/2014/06/18/impact-investing-landscape-trends-to-watch/" target="_blank">Impact Investing Landscape: Trends to Watch</a>

<a href="http://cfi-blog.org/2014/02/11/the-business-case-for-investing-in-financial-inclusion/" target="_blank">The Business Case for Investing in Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/02/10/microfinance-equity-investing-different-context-similar-issues/" target="_blank">Microfinance Equity Investing: Different Context, Similar Issues</a>

How Responsible Are Investors in Inclusive Finance?

&gt; Posted by Ignacio Mas, Independent Consultant

[getty src="167671003?et=uR2y4Uk5Q2Z9t8lgfgxKaw&amp;sig=zEY5giLvqM5m_YrmFNuKfc3Ja45XtZg8JCUoiXm5rEg=" width="594" height="376"]

I guess it happens in all human endeavors; we sometimes get carried away wishing things were the way we think they ought to be. Let me provide three cautionary observations relating to financial inclusion: about how we measure it, how we talk about it, and how we assess it. The point is not to dampen enthusiasm about the possibilities, but to reflect on our progress in a more realistic way.

Industry Showcases and the Numbers Game

Through numerous industry conferences and blogs, certain players get put up as shining examples for the industry to follow. M-Shwari is perhaps the latest one, I guess because it delivers large customer numbers to an industry that is still largely focused on coverage rather than usage, and it represents the kind of telco-bank partnership that many have been fantasizing about.

M-Shwari may indeed be every bit the financial inclusion success that it is made out to be, but how is one supposed to judge that, based on the sparse numbers that have been released? This is pretty much <a href="https://www.linkedin.com/groups/MShwari-PAR-credit-blacklists-lessons-4416977.S.5875716438848729089">all we know</a>: as of March 2014, 6.8 million registered customers, of which 3.6 million were active, collectively had $46 million in deposits and $14 million in loans outstanding; 15 percent of loan requests were approved, and 2.7 percent of loans were non-performing. Now, is the savings balance total the result of each of the 3.6 million active customers squirreling away $13 for a rainy (more like drizzly) day ($46m ÷ 3.6m = $13), or is it more likely that most of the savings comes from fewer than 100,000 busy traders who are saving $500 ($46m ÷ $500 = 92,000) in order to create more transactional head-room for their linked M-Pesa account? We just don´t know. But then, how can we have an opinion on M-Shwari's efficacy as a financial exclusion buster?

We must refrain from unduly extolling cases on which we have not been invited to know enough. We need to look beyond average balances, which are typically highly skewed by large balances at the very top of the distribution. Donors, policymakers, and pundits must start asking for customer distributions before parading any savings effort as a success.

Digitization of Payments and the Journey to Cash-Lite

What do we mean when we talk about digitization of G2P payments? Most government payments have for a long time been digitized, at least at source. No ministry holds a huge cash stash to pay pensions and welfare benefits. Now the trend is to pay these directly into beneficiaries' digital accounts, rather than to intermediary entities for onward distribution of the cash. But when beneficiaries are paid digitally, the practice pretty much universally is for them to withdraw the money in cash immediately and in full at local shops acting as agents, who have the thankless task of procuring the cash. So, in what sense has the payment been digitized? The same amount of cash is still involved, it just got to beneficiaries through a different channel. All we've done is outsource last mile cash distribution to retail outlets, via a financial service provider.

This is not to say there is no net benefit: account-based G2P payments are much less prone to corruption, and bank agents may be closer to where beneficiaries live than the old government cash distribution points. But people's money is for the most part no more electronic than it was before. And by the way, this is true as much for P2P as for G2P payments, and in Kenya as much as everywhere else.

Moreover, because most electronic accounts are largely empty, users do not have a natural preference for paying electronically at the corner store, so local electronic acceptance by local merchants does not take off. Contrary to frequent commentary, digitization of payments is therefore not leading to a cash-lite world. We are confusing the digitization of payments (how money moves around) with the <a href="http://community.businessfightspoverty.org/profiles/blogs/ignacio-mas-intensifying-mobile-money-usage">digitization of money</a> (how money is held).

Impact Evaluation and Silver Bullets

Few would argue that there are any silver bullets—understood as simple solutions to complicated problems—in development. We know that progress occurs from the interplay of various forces and interventions—access to education, information, markets, finance, infrastructure, legal and physical security, etc.—and that none of these individually stands a chance to transform lives. The impacts of finance happen mostly through indirect channels, through a process not unlike multiple particle collisions. So when we insist on measuring the impact of financial inclusion programs by carefully isolating single treatments/collisions, aren't we secretly wishing to find a silver bullet?

While I understand intellectually the need to conduct impact evaluation, how realistic is it to expect to find sustained, systematic impact from narrowly defined and precisely controlled financial interventions? How much mileage will we get from building ever-more precise Hadron Supercolliders in the social sciences?

I'm just sayin'...

Image credit: <a href="http://www.afi-global.org/policy-areas/other-financial-inclusion-policies" target="_blank" rel="noopener">IPA</a>

<img src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/04/picture-174-1340397583.png" alt="" width="80" height="80" />

Ignacio Mas is an independent consultant. You can learn more about his work <a href="http://www.ignaciomas.com/" target="_blank" rel="noopener">here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/03/20/microfinance-and-savings-outreach-what-are-we-measuring/">Microfinance and Savings Outreach: What Are We Measuring?</a>

<a href="http://cfi-blog.org/2013/04/10/measuring-and-missing-financial-inclusion/" target="_blank" rel="noopener">Measuring (and Missing) Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/06/20/electronic-g2p-for-the-poor-does-electronic-social-protection-need-better-consumer-protection/" target="_blank" rel="noopener">Electronic G2P for the Poor: Does Electronic Social Protection Need Better Consumer Protection?</a>

Reality Check: Three Ways We Hype Up Financial Inclusion Breakthroughs

Eric Noggle

Senior Research Director 

Mayada El-Zoghbi

Managing Director

Monica Brand Engel

Leah  Wardle

Laura Foose

Anne  Folan

Deborah Drake

Danielle Piskadlo

Amanda Epting

Elisabeth Rhyne

Apis Partners

Karin Malmberg

Joseph Smolen

North America

United States

Bhutan

Kenya

Impact Investing

Responsible Investing