You are on page 1of 533

Casual labor Harvest

Sale of livestock Remittance

School fees

House repairs Agricultural inputs Medical expense Loan repayment

The New
Microfinance
Handbook
On microfinance and The New Microfinance Handbook
“Financial services help to smooth cash flows, build assets, invest productively, and, importantly, man-
age risks. Increasing the outreach of financial services that are affordable and meet the varied needs of
poor women and men can contribute significantly to economic development and overall quality of life,
key objectives of practitioners and policy makers alike.”
—Maria Otero, former CEO, Accion International

“The journey from microfinance to financial inclusion began in earnest when we understood that cli-
ents need diverse services such as savings, payments, and insurance, as well as loans. The New
Microfinance Handbook reflects a lesson we learned many years ago—that sharing knowledge and best
practices is so important to help providers, policy makers, and others to continue to innovate, adapt,
and scale financial services in order to add real value to customers in a responsible way.”
—H.R.H. Princess Máxima of the Netherlands, The UN Secretary-General’s Special Advocate for
Inclusive Finance for Development (UNSGSA)

“The New Microfinance Handbook fills a critical gap in the current literature on financial inclusion. I am
particularly pleased with the explicit focus on consumers and their needs—this, together with the
onset of technology-based delivery models, has been the most important shift in the microfinance field
over the past 15 years. I am sure that by taking the financial ecosystem approach and compiling all the
current trends into one volume, this book will serve as a reference for the large and growing financial
inclusion community for years to come.”
—Brigit Helms, author of Access for All

“Financial services that support asset building, investment, and risk management are critical for people
of all ages in frontier and postconflict environments. In The New Microfinance Handbook, the authors
highlight the importance of understanding client needs and the need for a more inclusive financial
sector. This work provides an excellent resource for navigating a diverse and rapidly changing micro­
finance sector.”
—President Ellen Johnson Sirleaf, Liberia

“Poor people’s lives are complex; the goods, services and amenities that they need to escape from
poverty—­and the means by which they get them—are equally diverse. One-size-fits-all solutions are an
illusion. Our challenge as development policy makers, researchers, and practitioners in all fields—be
that in finance, agriculture, health or education—is to understand and respond to this complexity in
ways that help build diverse, resilient socioeconomic systems that are able to serve the needs of the
poor, sustainably and at scale.
“The New Microfinance Handbook reflects this challenge. It moves beyond the original Microfinance
Handbook’s focus on retail microfinance to deal with the imperative of understanding and strengthen-
ing the wider financial ecosystem, which is essential to making financial markets genuinely work
­better—inclusively and responsibly—for poor men and women. This shift has significant implications
for development agencies, requiring ‘smarter’ subsidies, different types of partners, and more facilita-
tive or catalytic interventions.”
—Robert Hitchens, Director, Springfield Centre, United Kingdom
The New
Microfinance
Handbook
A Financial Market System Perspective

Edited by Joanna Ledgerwood


with Julie Earne and Candace Nelson
© 2013 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington DC 20433
Telephone: 202-473-1000; Internet: www.worldbank.org

Some rights reserved

1 2 3 4 16 15 14 13

This work is a product of the staff of The World Bank and external contributors. Note that The World Bank does not necessarily own
each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained
in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you.

The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board
of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this
work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the
part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World
Bank, all of which are specifically reserved.

Rights and Permissions

This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0) http://creativecommons.org/licenses/
by/3.0. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for
commercial purposes, under the following conditions:

Attribution—Please cite the work as follows: Ledgerwood, Joanna, with Julie Earne and Candace Nelson, eds. 2013. The New
Microfinance Handbook: A Financial Market System Perspective. Washington, DC: World Bank. doi: 10.1596/978-0-8213-8927-0.
License: Creative Commons Attribution CC BY 3.0

Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation
was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable
for any content or error in this translation.

All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington,
DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org.

ISBN (paper): 978-0-8213-8927-0


ISBN (electronic): 978-0-8213-8928-7
DOI: 10.1596/978-0-8213-8927-0

Cover Image: Embroidery by Kaross Studio, Letsetele, South Africa. Used with permission from Gerhard Coetzee, who commis-
sioned the artwork. Non-English terms in the image and their translations are as follows: ABSA: Bank; KAART: Card game; LOBOLA:
Negotiated payment before a wedding; SAB: South African Breweries; STOKVELA: ROSCA (Rotating Savings and Credit
Association).

Cover design: Naylor Design

Library of Congress Cataloging-in-Publication Data


The new microfinance handbook : a financial market system perspective / edited by Joanna Ledgerwood, with Julie Earne and
Candace Nelson.
  p. cm.
 Includes bibliographical references
 ISBN 978-0-8213-8927-0 (alk. paper) — ISBN 978-0-8213-8928-7
 1. Microfinance. 2. Financial institutions. 3. Poor–Finance, Personal. I. Ledgerwood, Joanna. II. Earne, Julie. III. Nelson, Candace.
IV. World Bank.
 HG178.3.N48 2012
 332—dc23
2012035606
CONTENTS

Foreword xv
Preface xvii
Acknowledgments xix
About the Authors xxi
Abbreviations xxiii

Introduction 1

PART ONE.  UNDERSTANDING DEMAND AND THE


FINANCIAL ECOSYSTEM 13
Chapter 1. The Evolving Financial Landscape 15
Joanna Ledgerwood and Alan Gibson

Chapter 2. Clients 49
Stuart Rutherford, Daryl Collins, and Susan Johnson

Chapter 3. The Role of Government and Industry in


Financial Inclusion 71
Stefan Staschen and Candace Nelson

Chapter 4. The Role of Donors in Financial Inclusion 97


Mayada El-Zoghbi and Barbara Gähwiler

Chapter 5. Measuring Financial Inclusion and


Assessing Impact 113
Joanna Ledgerwood

Contents v
PART TWO.  FINANCIAL SERVICE PROVIDERS 147

Chapter 6. Community-Based Providers 149


Candace Nelson

Chapter 7.  Institutional Providers 171


Joanna Ledgerwood

PART THREE.  FINANCIAL SERVICES AND DELIVERY


CHANNELS 197
Chapter 8. Savings Services 199
Joanna Ledgerwood

Chapter 9. Credit 213


Joanna Ledgerwood and Julie Earne

Chapter 10. Agricultural Finance 231


Calvin Miller

Chapter 11. Insurance 249


Craig Churchill

Chapter 12. Payment Services and Delivery


Channels 271
Joyce Lehman and Joanna Ledgerwood

Chapter 13. Beyond Products: Building Integrated


Customer Experiences on Mobile Phones 299
Ignacio Mas

PART FOUR.  INSTITUTIONAL MANAGEMENT FOR


SCALE AND SUSTAINABILITY 319
Chapter 14. Monitoring and Managing Financial and
Social Performance 321
Joanna Ledgerwood, Geraldine O’Keeffe, and Ines Arevalo

Chapter 15. Governance and Managing Operations 351


Peter McConaghy

vi The New Microfinance Handbook


PART FIVE.  SUPPORTING FINANCIAL INCLUSION 377
Chapter 16. Funding 379
Julie Earne and Lisa Sherk

Chapter 17. Regulation 413


Kate Lauer and Stefan Staschen

Chapter 18. Infrastructure and Outsourced Support Services 437


Geraldine O’Keeffe, Julie Earne, Joakim Vincze, and Peter McConaghy

Chapter 19. Building Inclusive Financial Markets 459


David Ferrand

Index 479

Boxes
I.1 A Market This Big Needs Many Types of Providers  5
I.2 Latest Findings from Randomized Evaluations of Microfinance  6
1.1 From Microfinance to Financial Inclusion  17
1.2 Youth Financial Services: An Opportunity for the Future  18
1.3 Gambian Family Structure and Impact on Financial Behavior
and Demand  19
1.4 The Financial Service Needs of the Poor in Mexico  21
1.5 Reaching the Poorest: Lessons from the Graduation Model  22
1.6 Religion and Caste in India  23
1.7 The Embeddedness of Financial Service Use in Gender Norms
in Kenya  24
1.8 Understanding the Financial Market System  28
1.9 The Range of Providers in Sub-Saharan Africa  30
1.10 Savings-Led Financial Services in Bangladesh  31
1.11 Key Rules and Supporting Functions for Savings Services  33
1.12 Formal and Informal Rules  34
1.13 Understanding Informal Rules through Financial Landscapes  35
1.14 Potential of Mobile Banking  42
1.15 New Branchless Banking Business Models  43
2.1 Income Volatility, Week-by-Week and Year-by-Year  53
2.2 Cash Flow Management Given Volatile Seasonal Income  55
2.3 Ramna’s Top-Ups   56
2.4 Enayet’s Foot  57
2.5 Building a Home Little by Little  60

Contents vii
2.6 How MFI Loans Are Used in Bangladesh  62
2.7 Daisy’s ROSCA  65
3.1 Bank and Retail Network Partnership   73
3.2 Encouraging Stakeholders to Adopt New Rules  76
3.3 Policy for Microinsurance  76
3.4 Financial Capability Strategies  77
3.5 Financial Literacy in the Russian Federation  77
3.6 Financial Inclusion in Mexico  78
3.7 Financial Inclusion in India  80
3.8 Negotiating a Special Microfinance Law in Uganda:
The Outcome of Competing Interests  83
3.9 The Maya Declaration  84
3.10 The G-20 Principles for Financial Inclusion  85
3.11 SEEP’s Toolkit for Policy Advocacy  87
3.12 Battling Over-Indebtedness in Azerbaijan  90
3.13 Financial Education as Part of the Business Model  92
4.1 Shaping Intervention from an Understanding of the Market
System 105
4.2 Financial Sector Deepening Kenya (FSD Kenya)  106
5.1 Using Data to Increase Financial Inclusion  114
5.2 Evidence of Over-Indebtedness through Research  116
5.3 Microfinance Information eXchange  118
5.4 Savings Groups Information Exchange  120
5.5 Who Uses Landscape Supply Data?  121
5.6 Core Indicators of Global Findex  122
5.7 FinScope Surveys  123
5.8 Interpreting Financial Access Strands  125
5.9 Cash-In, Cash-Out: Financial Diaries in Malawi  127
5.10 Financial Landscapes in Kenya  129
5.11 Livelihood Landscape Studies  130
5.12 Measuring Outcomes of Facilitating Savings Groups  131
5.13 The Changing Focus of Impact Assessment  132
5.14 Participatory Rapid Assessment   135
5.15 The Difficulty of Proving Causation  137
6.1 Ghana’s Susu Collectors 152
6.2 Beyond Carrying Cash: Informal Money Transfer Systems  153
6.3 Rural ASCAs in India  155
6.4 Savings Groups and Other Activities  159
6.5 Paths to Savings Group Replication  160
6.6 Fee-for-Service: Variations on a Theme  161

viii The New Microfinance Handbook


6.7 Bank Linkages through Mobile Phones  162
6.8 Banks as Facilitators  163
6.9 Individuals as Facilitators  164
6.10 Self-Help Groups: A Holistic View  166
6.11 Financial Service Associations in Kenya  167
7.1 Reflections on Member-Owned Financial Service Provision   176
7.2 Transformation from an NGO to a Deposit-Taking Institution   179
7.3 NBFIs in India   180
7.4 Grupo Elektra and Banco Azteca in Mexico   181
7.5 Patrimonio Hoy: Housing Microfinance That Addresses Market
Opportunities   182
7.6 Rural and Community Banks in Ghana   183
7.7 Post Office Banks in India   184
7.8 Increased Financial Inclusion through Postal Savings Banks   185
7.9 Privatization: The Experience of Khan Bank in Mongolia   187
7.10 Bank Rakyat Indonesia   187
7.11 Subsidiary Model in Practice: ACCION-Ecobank Partnership   188
7.12 Microfinance Networks and Commercial MFIs   189
7.13 Linking Different Types of Institutions   191
7.14 Allianz in West Africa   193
7.15 Western Union and MoneyGram   194
8.1 Savings Patterns in India  201
8.2 Savings Constraints and Microenterprise Development: Evidence
from Kenya  202
8.3 Inspiring Trust  204
8.4 Savings Services—Not Only about Products  206
8.5 Saving for Education  208
8.6 Borrowing to Save  208
8.7 Nicaragua—Promoting Agriculture Savings  209
8.8 Grameen’s Deposit Pension Scheme (GPS)  210
9.1 Islamic Finance in Practice  216
9.2 The Flat-Rate Method  219
9.3 Declining Balance Method  220
9.4 Equating Declining Balance and Flat-Rate Methods  221
9.5 The Effect of a Change in Loan Fees and Loan Terms  223
9.6 Financing Education through Human Capital Contracts  225
9.7 Cow Leasing  226
9.8 Affordable Housing in Ghana   228
10.1 The DrumNet Project  238
10.2 Factoring to Support Agriculture  240

Contents ix
10.3 Warehouse Receipt Systems: Lessons from Niger  242
10.4 Crop Receivables  244
10.5 Heifer International  245
10.6 FONDECO: Microfinance Innovations along the Value Chain  246
11.1 Key Insurance Terms  251
11.2 AKAM’s Experience with Village-Based Health Microinsurance
in Pakistan  253
11.3 IFFCO-Tokio’s Bundled AD&D Coverage  255
11.4 Collaborating with a Utility Company in Colombia  257
11.5 Savings Completion Insurance Offered by TUW SKOK  262
11.6 Microfund for Women’s “Caregiver” Product  263
11.7 Public-Private Partnerships and Health Microinsurance in India  264
11.8 Index Insurance and Technology: The Case of Kilimo Salama,
Kenya 265
12.1 Trends in the Average Cost of Remittance Services  273
12.2 Mobile Money Innovations in Microinsurance in the Philippines  274
12.3 Mobile Money in Papua New Guinea  275
12.4 Glossary of Terms Related to Alternative Delivery Channels  276
12.5 Expanding Rural Finance in Sri Lanka  279
12.6 World Food Programme Card Pilot, 2009  281
12.7 Cardless ATM Transactions  281
12.8 Payment Terminals in the Russian Federation  282
12.9 Urwego Opportunity Bank’s Mobile Bank and Open
Sky System  283
12.10 M-PESA Reaching Scale with Mobile Money  285
12.11 Banking with a Mobile Phone: The Customer Experience  286
12.12 Third-Party Providers: New Business Models  289
12.13 bKash Ltd.  290
12.14 Branchless Banking in Brazil  291
12.15 From Payment Terminals to Multiple Services  292
12.16 Cost of Managing Agent Liquidity  293
13.1 IFMR Trust in India  303
13.2 What Are the Attributes of Success in Adjacent Sectors?  305
14.1 Performance Monitoring of Savings Groups  323
14.2 Software Application Controls  327
14.3 Universal Standards for Social Performance Management   341
14.4 Social Audit Tools   346
15.1 Board Consideration for NGO MFIs Transforming into
Regulated Institutions   353
15.2 Principles of Well-Designed Incentive Schemes   357

x The New Microfinance Handbook


15.3 Client-Focused Product Design in Practice   359
15.4 Microfinance Opportunities’ Listening to Clients Series   360
15.5 The Cost of Failure: Equity Bank’s Painful Lesson   361
15.6 IT Disaster Recovery and Business Continuity Management   370
15.7 Audits Performed by the Internal Audit Department   372
16.1 Glossary of Funding Terms  380
16.2 Institutional Investors in Microfinance  388
16.3 Commercial Bank Investment in Microfinance  389
16.4 Aggregating Data on MIVs  390
16.5 The Changing Character of Structured Funds  393
16.6 Funding Concentration   396
16.7 Subordinated Debt and Regulatory Capital  399
16.8 Bond Issuance in Financial Services for the Poor  400
16.9 Quantifying Foreign Exchange Risk for Currency Mismatch  401
16.10 Specialized Currency Funds  402
16.11 Microcredit Securitization  404
16.12 Access to Capital Markets  407
16.13 Responsible Investor Principles  408
16.14 Microfinance Institutional Rating versus Mainstream Credit
Ratings 409
16.15 Ratings for MIVs and Funds  410
17.1 Regulatory Impact Assessment  418
17.2 Examples of Tiered Approaches  420
17.3 Certain Prudential Requirements  421
17.4 Adjustments to Prudential Requirements to Accommodate
Microfinance Activities  423
17.5 Financially Inclusive Ecosystems  426
17.6 Making Insurance Markets Work for the Poor—Emerging Guidelines
for Microinsurance Policy, Regulation, and Supervision  428
18.1 Lighting Africa  438
18.2 IRnet for Credit Unions  440
18.3 Regional or National Switches   441
18.4 Payment Integrators  442
18.5 The Evolution of Credit Reporting in Ecuador  446
18.6 Modern Credit Databases: Transforming Low-Income Financial
Services in South Africa  447
18.7 India’s New Unique Identification System  449
18.8 Training Courses for Capacity Building  451
18.9 Making Microfinance Work: The ILO’s MFI Management Training
and Trainer Accreditation Program  452

Contents xi
18.10 Call Center at the First Microfinance Institution Syria  454
18.11 In Practice: Paraguay Financiera El Comercio  455

Figures
I.1 Financial Access Strands—Country Comparisons (July 2012)  4
1.1 Financial Service Needs for Different Livelihood Segments  20
1.2 Stylized View of the Financial Ecosystem  27
1.3 The Range of Financial Service Providers  29
B1.9.1 Number of Clients, Loans, and Deposit Accounts in Africa, by Type
of Provider  30
1.4 Market System Players and Facilitators  37
1.5 Evolution of Intervention Focus from Financial Institutions to
Financial Systems  39
B2.1.1 Revenues and Inventory Expenses of a South African Small
Businesswoman, Daily Cash Flows Aggregated Fortnightly  54
3.1 Financial Inclusion Strategies and Responsible Finance  80
3.2 Responsible Finance: A Multiple-Stakeholder Approach  86
4.1 The Role of Donors in Financial Market System
Development 98
4.2 Stylized View of the Financial Market System  100
4.3 The Purpose of Donor Commitments   102
5.1 FinScope Financial Access Strand: Definitions  124
5.2 FinScope Access Frontier  124
B5.8.1 Access Strand Analysis  125
B5.8.2 Service-by-Service Analysis  126
5.3 Logic Model Definitions  130
B5.15.1 The Spectrum of Evidence  137
6.1 The Range of Financial Service Providers  150
7.1 The Range of Financial Service Providers  172
8.1 How Savings Can Improve the Lives of the Poor   200
10.1 Using the Value Chain for Agricultural Financing  237
10.2 The Warehouse Receipts Financing System  241
12.1 Relationship between the Customer, the Agent, and a Bank in
Conducting a Mobile Banking Transaction  287
12.2 Monthly Costs in Dollars Associated with an Illustrative
Transaction Account  294
13.1 A Platform Perspective  307
13.2 Transactions in Space and Time  311
13.3 Channel Mix  316
14.1 The Social Performance Process, Indicators, and Assessment
Tools 343

xii The New Microfinance Handbook


15.1 Traditional Cost Allocation versus Activity-Based Costing   363
15.2 Relationship between Risk Management and Internal
Control   366
15.3 Components of Internal Control   367
16.1 Sources of Microfinance Funding  385
B16.4.1 Source of MIV Funding  391
B16.5.1 REGMIFA’s Structure and Flow of Funds  393
16.2 Three Main Stages in the Processing of Large Public Issues  406
19.1 Variation of Credit Provision with GNI per Capita  460
19.2 Variation of Formal Financial Inclusion with GNI per Capita  461
19.3 Financial Frontiers  469

Tables
1.1 Gender-BasedObstaclesinMicrofinanceandMicroenterprise 25
1.2 Illustrative Solutions to Household Financial Management
Needs 32
1.3 Key Characteristics of Facilitators and Providers in the Financial
Market System  38
3.1 Potential Barriers to Effective Consumer Protection through
Standards and Guidelines  91
4.1 Spectrum of Donors in Financial Inclusion and the Way
They Operate  99
5.1 Research Methods and Their Usefulness  139
5.2 Main Poverty Assessment Tools Available for Microfinance
Practitioners 140
6.1 Characteristics of Community-Based Financial Service Providers:
Indigenous Groups  151
6.2 Characteristics of Community-Based Financial Service Providers:
Facilitated Groups  157
7.1 Characteristics of Institutional Financial Service
Providers 173
11.1 Two Long-Term Insurance and Savings Products in India  261
B14.1.1 Key Indicators of Performance for Savings Group
Facilitation 323
14.1 Efficiency and Productivity Ratios (MFRS)  335
14.2 Profitability Ratios (MFRS)  336
14.3 Asset Quality (Portfolio Quality) Ratios (MFRS)  337
14.4 Capital Ratios (MFRS)  338
14.5 Liquidity Ratios (MFRS)  339
14.6 Balanced Performance Management  342
14.7 Indicators in the Social Performance Standard Report  344

Contents xiii
15.1 Roles and Responsibilities for Risk Management  365
16.1 Public and Private Funders  384
16.2 Holding Company Investment Examples  394
17.1 Regulatory Objectives for Microfinance  417
18.1 Implications of Telecommunications Connectivity for the
Provision of Branchless Financial Services  443

xiv The New Microfinance Handbook


FOREWORD

When first published in 1998, Joanna Ledgerwood’s Microfinance Handbook was


an indispensible guide for donors, policy makers, and practitioners who were
working to expand access of the poor to microfinance. In the intervening years, the
opportunities and pressures of commercialization have driven a reassessment of
what microfinance is and whom it should serve. Today, in addition to building the
capacity and ensuring the sustainability of institutions, the larger microfinance
community is taking a closer look at the diverse needs of clients, the broader finan-
cial ecosystem, and the transformational nature of technology. This reassessment
has become a regular fixture of global conversations about poverty alleviation. 
The New Microfinance Handbook, then, is timely. The microfinance sector now
reflects the multidisciplinary intersection of finance, technology, and develop-
ment, where new ideas are changing the art of what is possible. The actors reflect
this diverse ecosystem and include everything from mobile operators to microfi-
nance institutions to community networks. This book has brought an impressive
array of the field’s experts to an area of practice in constant change.
We are pleased that this book asks the hard questions about what people living in
poverty really need. This means moving the conversation beyond the walls of insti-
tutions and into the complex worlds of clients. The needs of a rural farmer are differ-
ent from those of an urban microbusiness owner. A young woman embarking on a
life after school has different priorities than a mother seeking to protect the assets of
her family. For microfinance to deliver on its original promises, we need to put the
needs of persons living in poverty at the center of this work.
It is time for us to take stock of what we have learned as we move forward. The
New Microfinance Handbook will play an important role, helping us to advance our
understanding about how financial services can serve the diverse needs of the
poor. 
Reeta Roy Tom Kessinger
President and CEO General Manager
The MasterCard Foundation Aga Khan Foundation

Foreword xv
PREFACE

Imagine a life without access to financial services: no deposit account, no debit card,
no fire insurance, no college savings plan, no home mortgage. Life would be an
incredibly stressful roller coaster ride, and most dreams would remain unfulfilled.
The day you get paid for work would be good, the other days rough. Any accident
would set your family back. Sending the kids to college? Too difficult. Buying a
house? Forget it. Nobody can pay for such needs out of cash accumulated under the
mattress. For us, life without access to financial services is unimaginable.
Yet according to 2011 data from the World Bank, an estimated 2.5 billion
working-age adults globally—more than half of the total adult population—have to
do exactly that. They live a life without access to the types of financial services we
take for granted. Of course, they cannot do without financial intermediation, so they
rely on age-old, informal mechanisms. They buy livestock as a form of savings; they
throw a village feast to cement local ties as insurance against a future family crisis;
they pawn jewelry to satisfy urgent liquidity needs; and they turn to a moneylender
for credit. These mechanisms are risky and often very expensive.
Increasingly robust empirical evidence demonstrates how appropriate finan-
cial services can help to improve household welfare and spur small enterprise
activity. Macro evidence also shows that economies with deeper financial inter-
mediation and better access to financial services grow faster and have less income
inequality. Policy makers and regulators worldwide recognize these connections.
They have made financial inclusion—where everyone has the choice to access and
use the financial services they need, delivered in a responsible fashion—a global
development priority.
A powerful vision of responsible financial market development is ­emerging—a
vision that aims to bank the other half of the global working-age adult population
by leveraging what we have learned from the microfinance story to date, using
advances in technology to spur product and business model innovation, and
encouraging new ways of thinking about how to create an enabling, risk-­
proportionate regulatory and supervisory environment.

Preface xvii
The New Microfinance Handbook reflects the current frontier of our collective
thinking and experience. It starts with the need to understand the demand side.
Poor households in the informal economy are producers and consumers. They
need access to the full range of financial services to generate income, build assets,
smooth consumption, and manage risks. The global financial inclusion agenda rec-
ognizes these broader needs. It also recognizes the importance of financial literacy
that builds consumer financial capabilities and of consumer protection regimes
that take into account the conditions and constraints of poor families in the infor-
mal economy.
The Handbook also takes a broad look at the diversity of providers required to
meet these needs and at the business model challenges of different products. The
original microcredit revolution found an ingenious way to overcome the previous
obstacle to providing credit for the poor. How do you manage credit risk and
repayments at the local level when working with a segment of the p ­ opulation that
has no traditional collateral? The breakthrough was the joint-­liability group loan—
social collateral to allow the poor to pledge for each other. But the business model
challenges are different for other financial services. For small-denomination sav-
ings and remittances, transaction costs must be ultralow; for insurance, risks must
be pooled and managed at an actuarially relevant scale; for pensions, micro contri-
butions must be invested in ways that ­generate adequate long-term returns.
Continued innovation in products and business models is needed so that we
can reach more people with a broader range of products at lower costs. No one
type of provider will be able to overcome the very different business model
­challenges of all products. What is needed instead is a variety of financial service
providers that come together in a local-market ecosystem that works for the poor
at the base of the economic pyramid.
Lastly, the Handbook takes a fresh look at the enabling infrastructure and
­regulatory environment. The infrastructure requirements range from a larger num-
ber of low-cost, physical access points in harder-to-reach geographic areas to
nationwide unique financial identities that facilitate consumer enrollment and pro-
tection. On the regulatory side, policy makers are recognizing that financial exclu-
sion poses a risk to political stability and impedes economic advancement, and they
are increasingly willing to balance the ultimately mutually reinforcing needs for
financial stability, financial integrity, and financial inclusion.
With a better understanding of demand, ongoing innovation in products and
business models to better meet that demand, and recognition of the need for a
protective and supportive enabling environment, I believe we have the knowledge
and the means to achieve full financial inclusion in our lifetime. Read on to learn
how this is already happening and what more is needed.

Tilman Ehrbeck
CEO
Consultative Group to Assist the Poor (CGAP)

xviii The New Microfinance Handbook


ACKNOWLEDGMENTS

The writing of this book has been a highly collaborative effort and there are many
people we wish to acknowledge and thank for their support and contributions.
First of all, our Advisory Committee, composed of David Ferrand, Steve Rasmussen,
Tom Austin, Ann Miles, and Benoit Destouches, provided sound guidance and
leadership for which we are very grateful. We also appreciate the significant effort
and expertise of the contributing authors, without whom this book would not
have been published: Ines Arevalo, Craig Churchill, Daryl Collins, Mayada
El-Zoghbi, David Ferrand, Barbara Gähwiler, Alan Gibson, Susan Johnson, Kate
Lauer, Joyce Lehman, Ignacio Mas, Peter McConaghy, Calvin Miller, Geraldine
O’Keeffe, Stuart Rutherford, Lisa Sherk, Stefan Staschen, and Joakim Vincze. In
addition, we are deeply grateful to Peter McConaghy, who conducted excellent
research and provided significant draft material for a majority of the chapters. We
also thank those who contributed to specific chapters, including Cheryl
Frankiewicz, Liz Case, Alyssa Jethani, Linda Jones, Emilio Hernandez, and Ruth
Dueck-Mbeba.
For their insightful feedback, we thank our peer reviewers of which there were
many: Elizabeth Berté, Anita Campion, Liz Case, Gerhard Coetzee, Monique
Cohen, Christoph Diehl, Thomas Engelhardt, Laura Foose, Cheryl Frankiewicz,
Martin Habel, Michel Hanouch, Tor Jansson, Susan Johnson, Kabir Kumar, Kate
Lauer, Joyce Lehman, Ignacio Mas, Janina Matuszeski, Sitara Merchant, Ann
Miles, Hanif Pabani, JR Rao, Steve Rasmussen, Rich Rosenberg, Adam Sorensen,
Ingrid Stokstad, Joakim Vincze, Leah Wardle, Martina Wiedmaier-Pfister, and
Kim Wilson. In particular we are extremely grateful to Bob Christen for reviewing
the initial draft of the book and suggesting a significant new direction that, at the
time, seemed like a very big task but was exactly what was needed; we appreciate
his honesty and guidance. We are indebted to Ruth Dueck-Mbeba, who reviewed
the entire book, providing excellent feedback and suggestions as well as a signifi-
cant portion of chapter 15.
We are very grateful to The MasterCard Foundation and the Aga Khan
Foundation for the support provided throughout the making of this book, in

Acknowledgments xix
­ articular Reeta Roy, Ann Miles, Ruth Dueck-Mbeba, David Myhre, Tom Kessinger,
p
Mike Bowles, Erin Markel, Sam Pickens, Helen Chen, Jayne Barlow, and especially
Tom Austin.
We greatly appreciate the efforts and patience of Paola Scalabrin for her persis-
tence in requesting this update, ensuring that the book was published, and her
patience and advice during the process. We thank Aziz Gökdemir for a brilliant job
managing the publication process and we extend our thanks to Elizabeth Forsyth
and David Anderson for their excellent editing, as well as to Nora Ridolfi for dili-
gently overseeing the printing of the book. Thank you as well to Ellie Mendez and
Alyssa Jethani for checking sources.
Joanna would like to thank Alan Gibson for sharing his deep knowledge and
experience of the market systems framework, David Ferrand for suggesting we use
the framework and his guidance in doing so, and Steve Rasmussen for his thought-
ful and generous support. She also thanks Alyssa Jethani for taking on much of
what needed to be done at the Aga Khan Foundation during the process of bring-
ing this book together, for her high level of productivity, and for being a wonderful
colleague. She is grateful to her family, especially Joakim, and her parents, for
their consistent support throughout. In particular, she thanks her father, Doug
Ledgerwood, for his guidance and advice during this project and always.
Julie is grateful for the encouragement and technical guidance from her col-
leagues at the International Finance Corporation, in particular Jean Philippe
Prosper for his strong support and endorsement of this book to the World Bank
publication committee; Tor Jansson for his numerous reviews of chapters; and
Barbara Sloboda and David Crush for always finding a solution. She would also like
to thank her many clients in Africa who have provided years of inspiration through
their hard work and success in some of the world’s frontier countries. Finally, Julie
thanks the many friends who have supported her work on this book with every-
thing from advice, shelter, and a friendly ear; and gives a special thanks to her
family for keeping her close despite how far away she lives.
Candace has deep appreciation for several long-term colleagues who have done
so much to cultivate and sustain her commitment to clients, including Paul Rippey,
Monique Cohen, Kathleen Stack, Jeffrey Ashe, and Jennefer Sebstad. Seasoned
professionals, they have inspired her with their intelligence, integrity, and passion.
As ever, Candace is grateful to SEEP’s Savings-led Financial Services Working
Group for its high degree of collaboration; she would especially like to thank the
authors of the SEEP publication, Savings Groups at the Frontier, from which she
drew extensively in writing chapter 6.
Joanna Ledgerwood
Julie Earne
Candace Nelson

xx The New Microfinance Handbook


ABOUT THE AUTHORS

Ines Arevalo is a consultant to the Aga Khan Agency for Microfinance. She holds
an MA in Development Economics (University of Sussex) and focuses on client
research and social performance management.
Craig Churchill is the head of the International Labour Organization’s Social
Finance Programme, which supports the use of productive and protective financial
services, particularly for excluded populations. He serves as the team leader of the
Microinsurance Innovation Facility and the chair of the Microinsurance Network.
Daryl Collins is a Director at Bankable Frontier Associates, a niche consulting
practice aimed at providing financial services to low-income people. She is also
co-author of Portfolios of the Poor.
Julie Earne is a Senior Microfinance Specialist at the International Finance
Corporation. She has worked extensively throughout Africa, investing in and
enabling financial sector development in frontier countries for more than 15 years.
Mayada El-Zoghbi is head of CGAP’s office in Paris. She manages CGAP’s support
to donors and investors as well as in the Middle East and North Africa Region. She
holds a Master of International Affairs from Columbia University.
David Ferrand is Director of Financial Sector Deepening Kenya, a multidonor
facility supporting market development. He holds a PhD from Durham University
and has worked in the financial inclusion field for 20 years.
Barbara Gähwiler is a microfinance expert at GIZ in Tunisia and previously
worked with CGAP’s donors and investors team. She holds a Master of International
Affairs from University of St. Gallen and Sciences Po, Paris.
Alan Gibson is a Director of the Springfield Centre. He has been influential in
developing the “making markets work for the poor” (M4P) approach and in sup-
porting its application in different spheres of development.
Susan Johnson is a Senior Lecturer in International Development at the
University of Bath. She has extensive research experience in the microfinance
field, in particular in impact assessment, gender, and the embeddedness of local
financial markets in social relations.

About the Authors xxi


Kate Lauer is a policy advisor to CGAP and a Senior Associate with Bankable
Frontier Associates. She has a JD from New York University and has written and
worked extensively on legal and policy issues related to financial inclusion.
Joanna Ledgerwood is Senior Advisor at the Aga Khan Foundation, leading its
financial inclusion initiatives in Africa and Central and South Asia. She is the
author of the Microfinance Handbook and Transforming Microfinance Institutions
with Victoria White.
Joyce Lehman is an independent consultant focusing on financial inclu-
sion. Previously Joyce was with the Bill & Melinda Gates Foundation, managing
projects to support mobile payment platforms in Bangladesh and Pakistan.
Ignacio Mas, an independent consultant, was Deputy Director of the Financial
Services for the Poor team at the Bill & Melinda Gates Foundation, and Business
Strategy Director at Vodafone Group.
Peter McConaghy is a Financial Sector Development Analyst in the Middle East
and North Africa Region at the World Bank, with a focus on expanding financial
inclusion in postrevolutionary countries through policy reform, provider down­
scaling, and demand-side research.
Calvin Miller is Senior Officer and Agribusiness and Finance Group Leader in the
AGS Division, Food and Agriculture Organization of the UN (FAO). He has exten-
sive experience in agricultural and value chain finance and investment in develop-
ing countries.
Candace Nelson is a trainer, facilitator, researcher, and writer with 30 years of expe-
rience supporting microfinance, specifically financial education and Savings Groups,
in Africa and Latin America. She is the editor of Savings Groups at the Frontier.
Geraldine O’Keeffe is the Chief Operating Officer of Software Group, an informa-
tion technology company focused on the provision of solutions to the financial
sector. She has over 12 years of experience working with technology for microfi-
nance, primarily in Africa.
Stuart Rutherford is a microfinance practitioner and researcher. He is the
founder of SafeSave, a Bangladeshi MFI, and cowrote two studies of  how poor
people manage money: The Poor and Their Money and Portfolios of the Poor. 
Lisa Sherk is an independent consultant based in Amsterdam. She specializes in
microfinance investment fund management, focusing on financial and social per-
formance assessments of microfinance institutions globally.
Stefan Staschen is an economist specializing in regulation of inclusive financial
sectors. He works as a consultant for CGAP, Bankable Frontier Associates, and
others. He holds a PhD from the London School of Economics.
Joakim Vincze is a consultant specializing in sustainable use of technology for
development, focusing on providing affordable broadband Internet to rural areas.
He holds an engineering degree and an MBA from the University of Western Ontario.

xxii The New Microfinance Handbook


ABBREVIATIONS

AFI Alliance for Financial Inclusion COSO Committee of Sponsoring


Organizations of the Treadway
AKAM Aga Khan Agency for
Commission
Microfinance
DFI development finance
ALM asset-liability management institution
AML anti-money-laundering EFT electronic fund transfer
APR annual percentage rate EIR effective interest rate
ASCA accumulating savings and credit FAS Financial Access Survey, IMF
association
FATF Financial Action Task Force
ATM automated teller machine
FinDex Global Financial Inclusion
B2P business-to-person database
BCBS Basel Committee on Banking FIU financial intelligence unit
Supervision
FSD Kenya Financial Sector Development
CAR capital adequacy requirement Kenya
CBS core banking system FSP financial service provider

CDD consumer due diligence G2P government-to-person

CDO collateralized debt obligation GDP gross domestic product

CFT combating the financing of GNI gross national income


terrorism GPRS general packet radio service
CGAP Consultative Group to Assist the GSM Global System for Mobile
Poor
IAIS International Association of
CLO collateralized loan obligation Insurance Supervisors

Abbreviations xxiii
ID identification PSP payment service provider
IMF International Monetary Fund RCT randomized control trial
IPO initial public offering RIA regulatory impact assessment
IT information technology ROSCA rotating savings and credit
association
IVR interactive voice response
RTGS real-time gross settlement
KfW Kreditanstalt für Wiederaufbau
SaaS software as a service
KYC Know Your Customer
SACCO savings and credit cooperative
MDB multilateral development bank
SAR Special Administrative Region
MDI microfinance deposit-taking
institution SAVIX Savings Groups Information
Exchange
Me2Me me-to-me (payment)
SEEP Small Enterprise Education and
MFI microfinance institution
Promotion
MFRS Microfinance Financial
SG Savings Group
Reporting Standards
SHG Self-Help Group
MII microfinance investment
intermediary SIM subscriber identity module
MIS management information system SMART specific, measurable, achievable,
realistic, and time-bound
MIV microfinance investment vehicle
SMS short messaging service
MIX Microfinance Information
eXchange SPV special purpose vehicle
MNO mobile network operator SRI socially responsible investing
NBFI non-bank financial institution STK SIM Tool Kit
NGO nongovernmental organization SWIFT Society for Worldwide Interbank
Financial Telecommunication
P2B person-to-business
TCP transmission control protocol
P2P person-to-person
USAID U.S. Agency for International
PAT poverty assessment tool
Development
PCG partial credit guarantee
USSD unstructured supplementary
PIN personal identification number services data
POS point-of-sale VPN virtual private network
PPI Progress out of Poverty Index WSBI World Savings Banks Institute
PRA participatory rapid assessment WOCCU World Council of Credit Unions

xxiv The New Microfinance Handbook


Introduction

Microfinance in 2013 widespread concern for “financial inclusion”5 is


directing attention to the broader “financial eco-
It has been 15 years since the original system” and how to make financial markets work
Microfinance Handbook (Ledgerwood 1998) was better for the poor. For example, a recent CGAP
written, and much has changed since then. Focus Note looks at the financial ecosystem
Microfinance is now a household term with within the context of the supply of financial ser-
frequent articles in the media about its growth, vices: “Different products present different risks
innovation, and impact. The industry has grown and delivery challenges, and it is unlikely that a
exponentially, in terms of both the number of cli- single class of service providers will effectively
ents as well as the number and type of providers provide all the products poor people need. A key
and products.1 The focus is no longer only on credit challenge is how to create the broader intercon-
for investment in microenterprises: Today there is nected ecosystem of market actors and infra-
broad awareness that poor people have many and structure needed for safe and efficient product
diverse financial service needs, which are typically delivery to the poor” (Ehrbeck et al. 2012, p. 1).
met by a variety of providers through multiple To this end, policy makers have begun to
financial services. We know this because data have address financial inclusion in their economic
much improved in the past 15 years,2 allowing us to agendas with the belief that access to financial
better understand barriers to access and use, and services improves the ability of consumers to
we are beginning to examine impact.3 access markets, which contributes to monetizing
Over the years, the discourse has shifted the values of products and services, enables risk
from  “microcredit” to “microfinance,”4 and now pooling, and allows value storage, thus affecting

Introduction 1
economic growth and the overall stability of the expected increase in financial inclusion resulting
system. from the gradual substitution of donor funding
Increasingly, best practice in microfinance is with private sector capital has yet to happen. The
responsible finance, defined as the delivery of retail majority of poor people remain outside the main-
financial services in a transparent, inclusive, and stream financial sector, and many MFIs continue
equitable fashion (BMZ, CGAP, and IFC 2011). to depend on subsidies.
Consumer protection and financial capability are Looking forward, it appears likely that tech-
now seen as important policy objectives, particu- nology will enable customer touch points to pro-
larly in a context of new providers, more sophisti- liferate among nontraditional service providers.
cated products, and technology-­enabled delivery The technology drivers of financial inclusion will
channels. Recent media attention to the significant come from innovations in mobile money, biomet-
profits made through initial public offerings of ric identity systems, smart phones, and wireless
microfinance banks6 have highlighted the need for broadband Internet access. At the same time,
transparent pricing and appropriate interest rates. however, much remains to be learned to effec-
Unlike 15 years ago, funding for microfinance tively increase outreach in a substantial way,
today is no longer the purview of donors alone. As including, for example, developing appropriate
of 2011 more than 100 microfinance investment regulatory frameworks for branchless banking
vehicles were managing close to US$7 billion models (Alexandre 2010). Further, it is vitally
(Symbiotics 2011), making private and quasi-­ important to better understand the social dimen-
private sector capital readily available. With the sions of how households manage financial
recognition that grant funding crowds out the resources, particularly in the informal sector, and
­private sector, responsible donors have shifted the role of technology to work within these social
from providing funds for loan capital and operat- dynamics (Johnson 2012).
ing subsidies to more of a facilitation role Thus, the well-documented and widely
­supporting the development of enabling environ- applauded achievements of microfinance are
ments, provision of information, and financial increasingly coupled with recognition of its lim-
infrastructure. itations and the need to take a more holistic view.
Although significant investments have been Concerns include the following:
made to reform regulatory systems to accommo-
• Outreach—In many countries outreach
date microfinance and transform microfinance
remains a small percentage of the population;
institutions (MFIs) into regulated institutions
only 41 percent of adults in developing econo-
complete with return-seeking investors, rela-
mies report having an account at a formal
tively few MFIs can absorb a significant amount
financial institution,8 8 percent report having
of capital. “However, the pool of investment-ready
originated a new loan from a formal financial
MFIs is small and is not expanding at the speed of
institution in the past 12 months, and 2 percent
the supply of equity investment. Indeed, 52 per-
report having personally paid for health insur-
cent of all foreign debt is channelled to only 25
ance (Demirgüç-Kunt and Klapper 2012);
MFIs, out of a total of 524 MFIs that receive for-
more than half the world’s adult population
eign debt finance. At the country level, foreign
does not use formal or semiformal services,
investment is, to a large degree, still focused on a
nearly all of whom live in Africa, Asia, and
small number of countries in LAC and ECA7 with
Latin America (Chaia et al. 2009).
only moderate levels of financial exclusion”
(Reille et al. 2011, p. 10). Given the concentration • Sustainability—Although figures are not pre-
of investment in relatively few institutions, the cise, many microfinance operations continue

2 The New Microfinance Handbook


to receive subsidies; commercial funding is might challenge this assumption, and are thus
highly concentrated in Latin America and beginning to invest much more in assessing
Eastern Europe, while most of the world’s impact, if we just look at access figures, how has
poor (less than US$2/day) live in Asia and microfinance fared? Despite several decades of
Africa (Wiesner and Quien 2010). Beyond significant investments in the sector, access to or
direct microfinance operations, many other usage of formal financial services remains low,
activities important in the microfinance sys- particularly in Sub-Saharan Africa (SSA) (see
tem (for example, training, product develop- figure I.1). Data from the World Bank Global
ment, and technical advice) are often Findex database (Demirgüç-Kunt and Klapper
subsidized. 2012) shows that in SSA only 13 percent of indi-
viduals aged 15 years and older saved at a finan-
• Impact—Recent research based on random- cial institution in the last 12 months, and only 5
ized controlled trials (RCTs) has found the percent received a loan from a financial institu-
impact of microcredit to be mixed. RCTs have tion. Such low usage does not, however, indicate
shown that increases in consumption and weak demand; at the same time, 19 percent saved
business investment do not always correlate in a savings club, and 40 percent received a loan
with measures of poverty reduction (O’Dell from family or friends in the past year. In South
2010). Furthermore, the distribution of gains Asia figures are similar, with 11 percent saving in
is uneven. The broader effect of microfinance a financial institution in the last 12 months and 9
on poverty is limited by low levels of usage percent receiving a loan from a financial institu-
and persistent barriers to inclusion (Johnson tion.10 And yet the massively popular Self-Help
and Arnold 2011). Group movement in India counted 97 million
households affected by March 31, 2010.11 But
At the heart of these concerns over the efficacy even this indication of participation is weak
of microfinance is a better understanding of how when compared to the potential market of the
the poor need and use financial services. Research 900 million households in India that live on less
(Collins et al. 2009; Demirgüç-Kunt and Klapper than US$2 a day (Chen et al. 2010).
2012) has revealed that the poor manage their One reason for low outreach is the traditional
financial lives with complex strategies that utilize microfinance business model itself, which is
multiple forms of savings, lending, and bartering based on generating revenue from primarily pro-
from a mix of formal and informal providers. ductive loans and other fee-based services to
Achieving financial inclusion for the poor thus cover costs. Yet in microfinance, costs are high,
cannot rely on MFIs alone; rather, it requires and the revenue base is relatively low. This is
improving the quality and frequency of services especially true for the rural poor whose limited
from a multitude of provider types and fully investment opportunities and capacity for debt
understanding client behavior and how it affects translate into lower revenue for MFIs and banks
financial service needs. who may lack the incentives, information, and
sometimes ability to mitigate perceived risks of
operating beyond urban markets or with very
Measuring Progress
poor clients. Thus it is important to focus on low-
At the time of the original Handbook, a broadly ering costs both for institutions to provide ser-
accepted assumption was that “increased vices and for clients to use them. And although
access” and a “willingness to pay” provided a technology will continue to push this frontier,
good proxy for impact.9 Although today we access figures alone may offer a misleading view

Introduction 3
Figure I.1  Financial Access Strandsa—Country Comparisons (July 2012)

RSA'11 63 5 5 27
Namibia'11 62 3 4 31
Swaziland'11 44 6 13 37
Botswana'09 41 18 8 33
Lesotho'11 38 23 20 19
Ghana'10 34 7 15 44
Nigeria'10 30 6 17 47
Zimbabwe'11 24 14 22 40
Kenya'09 23 18 26 33
Uganda'10 21 7 42 30
Malawi'08 19 7 19 55
Rwanda'08 14 7 26 53
Zambia'09 14 9 14 53
Tanzania'09 12 4 28 56
Mozambique'09 12 1 9 78
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Banked Other formal non-bank Informal only Excluded

Source: FinMark Trust.


Note: a. The formal sector is divided into a “banked” segment (the percentage of adults with a bank account), and a formal “other”
segment (the percentage of the adult population with a formal financial product, such as insurance or a microfinance loan, but no
bank account). Together, these two groups are defined as formally included. The informal sector comprises all the organizations that
provide financial services but are not legally registered to do this business, for example, savings clubs, burial societies, and money-
lenders. The informally serviced category in the access strand represents the percentage of adults with an informal product but with
no bank account or a product from another formal financial institution. It is necessary to add the informal segment to the formally
included segment to derive the percentage of the adult population that is financially served. Anyone who is not financially served is
financially excluded, which means they are not using financial products (formal or informal) to manage their financial lives; for exam-
ple, they may simply be using cash. See www.finscope.co.za.

of benefits; increased access and more choice do improvement in access does not develop in a
not automatically translate into effective client competitive manner, benefits may be restricted.
use. For example, the major growth in access for Clients with limited information and/or choices
saving services through the Mzansi account in may not be able to exert competitive pressure on
South Africa disguised a large number of dormant providers to improve services.
accounts, opened but often unused, because cli- Providers and other stakeholders need to take a
ents either found better options for their needs or more proactive approach that recognizes the diver-
were too poor to utilize the account.12 The path sity of barriers to access, the heterogeneity of
from uptake (that is, opening an account) to usage consumers, and the variety of financial service
­
is still an uncharted course. needs among various lower income segments and
Growth in access, especially if accompanied by underserved or excluded groups. Looking for major
access to more diverse services, may require cli- impact from a single product or institution type
ents with greater financial capabilities to ensure risks overlooking the inherent complexity of liveli-
effective usage and benefits. As in any market, if hoods and financial service needs (see box I.1).

4 The New Microfinance Handbook


Box I.1  A Market This Big Needs Many Types of Providers

Back in 1982, when Citi made its first loan to a ­ opulation is unbanked. This is too big a seg-
p
nongovernmental or­ganization (NGO), the mi- ment to cover with just one or two approaches
crofinance world was much simpler. There and institutional forms. We have the ultra-
were the few global networks, and we were ­poor and displaced people at one end of the
still using the term “micro­credit.” It was a scale, and the very eco­nomically active peo-
much more focused, smaller community. The ple who might even be employed on the other
industry has grown tremen­dously since then. end. Their needs are different.
From a few mil­ lion clients in the 1980s, I get concerned with some of the ar­
microfi­nance now reaches more than 190 guments that take place in microfi­nance to-
­million families. We have seen tre­mendous day. It seems like there is an underlying as-
growth in the size of microfinance organiza- sumption that there is only one type of
tions and the scale of their operations, but we microfinance client and that client should be
are also seeing that there is a price for grow- served by only one type of institution—when
ing too fast—in any industry. You can grow the opposite is true. There are many different
only so fast before burning out the staff, or client segments in micro­ finance, and MFIs
you cannot bring on well-trained new staff to would do better to focus on each segment to
keep up with your growth. develop the best business models to serve
Most of this growth has come from organi- those clients.
zations offering only one or two credit prod- In the next few years, the innovation needs
ucts. The demand, the need, and perhaps the to be in designing products that fit who clients
model lent itself to consistent growth be- are and what they want to become; we get
cause it stayed very focused. However, fast there by get­ ting to know the clients, their
growth of organizations using simi­lar models needs, their cash flows and their aspirations
and strategies in the same locations has led, much better.
in some cases, to multiple loans to the same Within this microfinance ecosystem, we
borrower and a breakdown of lending disci­ need some institutions to work with the very
pline. We see these issues in Andhra Pradesh difficult-to-reach and vulnerable communities,
in India where institutions’ client-base over- delivering social output of a very high calibre,
laps are putting a lot of pressure on and they cannot then be devoted just to
repayments. achieving scale and even full sus­ tainability.
How do you provide financial access to the Their objective may never be to become a
vast majority of the popula­tion? It will take ­finance company, yet they may use financial
more than NGOs and commercial banks—we tools as one of the enablers toward progress
need cooperatives, credit unions, and postal out of poverty along with health and educa­tion
savings banks. We need cell phone compa- training.
nies that can make loan payments. We see Even as one part of microfinance becomes
opportuni­ties for many different services and more commercial, we have to keep thinking
types of providers. about the many vulnerable, underserved,
In most of the countries where we work, compli­ cated communities that mainstream
anywhere from 60 to 80 per­ cent of the microfinance may not yet be able to reach.
Source: Bob Annibale of Citibank, writing in Reed (2011). Reprinted with permission.

Introduction 5
Redefining Objectives proposition (see box I.2). “While the language
changed with insights and expanded horizons,
At the time of writing the original Handbook, the the underlying fundamental idea has remained
predominant microfinance model was an NGO the same: Help poor families in the informal
MFI providing credit to microentrepreneurs for economy realize their economic potential and
investment in microenterprises. This model was give them the financial services means to manage
largely based on the belief that access to credit for their lives that most of us in the North take for
productive investment would support entrepre- granted” (Ehrbeck 2012).
neurship and economic development, empower Greater financial inclusion thus requires
women, and alleviate poverty by generating addressing constraints and taking advantage of
higher incomes and employment. However, opportunities in the financial ecosystem.
increasing evidence of the impact of microfi- Stakeholders are now beginning to focus on the
nance, particularly microcredit, indicates that it diversity of clients (geography, income levels,
has some effect on the expansion of business and livelihoods, gender, life-cycle) and their needs
increased profits, very little effect on women’s (growth, cash management, risk mitigation), as
empowerment, and virtually no effect on poverty well as the wide range of financial services (credit,
alleviation (O’Dell 2010). savings, payments, insurance), financial service
Fifteen years later, the shift to financially providers (informal, MFIs, cooperatives, banks,
inclusive systems, based in part on better under- insurance companies), and delivery channels
standing impact, appropriately broadens the (branches, agents, mobile phones) to meet these
objectives beyond economic development and needs. They are paying attention to the effective-
poverty alleviation to include the ability of poor ness (social performance/impact, transparency,
women and men to better manage risks, smooth and client protection) of financial services as well
income, invest in productive activities, and build as the knowledge and skills that clients need to
assets. These broader objectives demand more of use them (financial capabilities); the rules that
stakeholders in terms of better understanding cli- guide financial markets (regulations, standards,
ents and, in turn, delivering an improved value norms); the financial infrastructure (payment

Box I.2  Latest Findings from Randomized Evaluations of Microfinance

“The overall message from this body of work that allow it to view poor customers as individ-
is that poor people face various limits, and uals. Some of those individuals will leverage
their ability to capitalize on opportunities var- financial services to smooth consumption;
ies greatly. … [N]ot all borrowers want to some to manage risk; some to make invest-
grow a business. The variable results seen can ments they have the skill and resources to
be as much a function of borrower intent as profit from; some will do all of the above. With
borrower ability. A one-size-fits-all product will a view of serving all of these needs, microfi-
not bring benefit to the borrowers or profit to nance providers may evolve a new generation
the providers. Instead, the microfinance in- of improved services and products that reli-
dustry needs to continue to mature in ways ably and flexibly help poor people.”
Source: Bauchet et al. 2011.

6 The New Microfinance Handbook


systems and credit bureaus) required to support providers, students and academics, and consul-
well-functioning markets; and the information tants and trainers.
services necessary to inform all stakeholders to Although this book is in part an update of the
better improve the system. This book attempts original Handbook, the growth of the sector and
to address all of these issues with the objective to the complexity of the financial market system
promote financially inclusive ecosystems that have led to a perspective much broader than the
work better for the poor. previous “financial and institutional perspective.”
As a result, additional chapters have been added
to address issues more relevant than when the
About This Book
original Handbook was written. To reflect this
Given the importance of both understanding and complexity, we invited a number of experts to
appreciating the complexities of financial ser- write many of the new chapters. In addition,
vices for the poor, the New Microfinance Handbook given that this book does not go into as much
takes a different approach from its predecessor. detail as the previous book did, a list of key
In contrast to the “institutional” perspective resources at the end of each chapter provides
(supply side) of the original Handbook, this book readers additional information on specific topics.
considers first and foremost clients and their Finally, although the title still uses the term
needs (demand side) and how the market system microfinance, the book very much addresses the
can work better to meet these needs. It also wider financial ecosystem, moving beyond the
attempts to address the rules and supporting traditional meaning of microfinance to inclusive
functions required for financial markets to work financial systems.
well and serve ever greater numbers of poor con-
sumers. The result is a book that is less of a
Book Structure and Content
“how-to” guide but rather a description of the
financial market system and the functions within The New Microfinance Handbook loosely follows
it and how they work, or do not work, in serving the framework of the original Handbook and is
the needs of the poor. The objective is to provide organized into five parts:
a strategic guide to help assess the varied finan-
Part I: 
Understanding Demand and the
cial service needs of poor people, and to then pro-
Financial Ecosystem
pose how a diversified financial sector can address
these needs in an accessible and beneficial man- Part II: Financial Service Providers
ner. Ultimately it is hoped the book will contrib-
Part III: Financial Services and Delivery Channels
ute to greater access to and usage of financial
products and services that genuinely meet the Part IV: Institutional Management for Scale and
many needs of the poor through various sustain- Sustainability
able market-based financial service providers.
Part V: Supporting Financial Inclusion
The New Microfinance Handbook provides a
primer on financial services for the poor. It is Part I—Understanding Demand and the
written for a wide audience, including practi- Financial Ecosystem updates Part I of the original
tioners, facilitators, policy makers, regulators, Handbook and addresses big picture issues—the
investors, and donors working to improve the financial landscape, clients, and strategies to
financial system, but who are relatively new to achieve and measure financial inclusion. Given
the sector. It will also be useful for telecommu- the changing landscape of the financial services
nication companies and other support service sector, the book opens with Chapter 1—The

Introduction 7
Evolving Financial Landscape, written by Joanna Providers, written by Joanna Ledgerwood,
Ledgerwood and Alan Gibson, outlining three key describes financial service providers that are
influences in financial services for the poor that more formal in nature. This grouping includes a
are greatly affecting the way the sector is moving: wide variation of provider types, differing in the
a renewed focus on clients, acknowledgment of services they provide as well as their ownership
the wider financial ecosystem, and the potential structures, regulatory status, geographic focus,
of technology. Chapter 2—Clients builds on the target markets, and objectives, but are similar in
centrality of clients and financial management. that they have a more concrete structure than
Drawing from Portfolios of the Poor (Collins et al. providers in the informal sector and are thus
2009), authors Stuart Rutherford, Daryl Collins, referred to as institutions.
and Susan Johnson examine the financial service Parts I and II are the least technical parts of
needs of poor people and how these needs are the handbook; they require no formal back-
met. Chapter 3—The Role of Government and ground in microfinance or financial theory. They
Industry in Financial Inclusion, written by Stefan will be of most interest to donors, policy makers,
Staschen and Candace Nelson, addresses how key ­students, and those interested in understanding
players promote financial inclusion, from the role financial inclusion and the actors involved.
of government as policy maker and legislator, to Part III—Financial Services and Delivery
industry as it warms to responsible finance Channels expands on the original Handbook’s
through self-regulation and the need for coordi- ­discussion of savings and credit with new chap-
nation. Chapter 4—The Role of Donors in Financial ters on agricultural finance, insurance, and pay-
Inclusion, written by Mayada El-Zogbhi and ment services. It also addresses the many
Barbara Gähwiler, focuses on the changing role of alternative channels that are beginning to show
donors in microfinance and proposes ways to promise and includes a thought provoking chap-
facilitate the market to work better for the poor. ter on supporting the poor through financial plan-
Given that financial inclusion is on the agenda of ning tools. Chapter 8—Savings Services, written by
many policy makers, much attention has recently Joanna Ledgerwood, considers the various sav-
been invested in measuring it and assessing the ings products demanded by the poor and touches
impact of using financial services. Supply and on the institutional capacity required to offer
demand-side studies, impact assessment, and deposit services. Chapter 9—Credit, written by
other rigorous research are addressed by Joanna Joanna Ledgerwood and Julie Earne, looks at
Ledgerwood in Chapter 5—Measuring Financial pricing loans and types of credit products includ-
Inclusion and Assessing Impact. ing traditional working capital and fixed asset
Part II—Financial Service Providers updates loans, as well as newer products such as housing
the original chapter 4 (The Institution), adding loans and leasing. Chapter 10—Agricultural
an additional chapter to acknowledge the numer- Finance, written by Calvin Miller, acknowledges
ous and varied providers in the informal sector. the substantial need for financial services for peo-
Chapter 6—Community-Based Providers, written ple working in the agricultural sector (the vast
by Candace Nelson, describes indigenous infor- majority of the poor) and the ways in which finan-
mal providers, for example, moneylenders, cial products and delivery channels cater to meet
deposit collectors, rotating savings and credit these needs. Although in the original Handbook
associations and mutual aid groups such as burial insurance was only briefly mentioned, in this
societies, and other providers such as Self-Help ­edition, given the growing importance of micro-
Groups and Savings Groups that are facilitated insurance in financial inclusion and acknowledg-
by external agencies. Chapter 7—Institutional ment of the risk management needs of poor

8 The New Microfinance Handbook


women and men, Chapter 11—Insurance, written Part V—Supporting Financial Inclusion is new
by Craig Churchill, looks at the demand for micro- and includes four chapters that focus on the
insurance, product characteristics, and delivery roles and functions of various stakeholders sup-
mechanisms. Chapter 12—Payment Services and porting and promoting the overall financial eco-
Delivery Channels, written by Joyce Lehman and system. Chapter 16—Funding, written by Julie
Joanna Ledgerwood, describes transaction ser- Earne and Lisa Sherk, considers the significant
vices such as money transfers and payments as role investors play in providing capital to finan-
products in and of themselves, as well as the vari- cial service providers. Given the growth in the
ous channels for delivering financial services. In number and diversity of providers, Chapter 17—
particular, this chapter considers the different Regulation, written by Kate Lauer and Stefan
ways in which clients access services through Staschen, addresses the laws and regulatory
branchless touch points and the significant role frameworks in place to support proper oversight
played by agent networks. Chapter 13—Beyond and safety of the financial market system and the
Products, written by Ignacio Mas, proposes the various players. Chapter 18—Infrastructure, writ-
delivery of financial products as an integrated ten by Geraldine O’Keeffe, Julie Earne, Joakim
customer experience through mobile phones. Vincze, and Peter McConaghy, considers the sup-
Part III will be of most interest to practition- porting functions required for well-functioning
ers who are developing, modifying, or refining financial markets such as credit bureaus, deposit
their financial products, as well as donors or insurance, clearing and settlement systems, and
consultants who are evaluating financial ser- unique identification systems. Outsourced ser-
vices for the poor and want to better understand vices such as “software as a service,” training, and
financial products and services and ways to security are also described. Chapter 19—Building
deliver them. Inclusive Financial Markets, written by David
Part IV—Institutional Management for Scale Ferrand, uses the market system framework to
and Sustainability includes two chapters and pro- discuss the roles development agencies can and
vides an update of the original chapters on MFI should play to contribute to financial systems
management. Chapter 14—Monitoring and that work more effectively for the poor, high-
Managing Financial and Social Performance, lighting the different functions of market actors
­written by Joanna Ledgerwood, Geraldine (service providers with ongoing roles) and those
O’Keeffe, and Ines Arevalo, addresses core bank- facilitating the market (donors and other devel-
ing systems and financial and social performance opment agencies with a temporary role).
management. Chapter 15—Governance and Part V will be of most interest to those either
Managing Operations, written by Peter providing or supporting the development of
McConaghy, looks at various facets of institu- mesolevel functions in the financial ecosystem.
tional providers including governance, human
resource management, product management, and
risk management. Part IV is more technical than Notes
previous parts of the Handbook. Although specific
 1. Total numbers are difficult to find, but David
institutional performance is somewhat less
Roodman in “Due Diligence—An Impertinent
important given the client and financial system Enquiry into Microfinance” (2011, p. 67)
focus of this book, Part IV is included for the ben- estimates there were close to 180 million loans
efit of practitioners and/or funders interested in outstanding and 1.3 billion savings accounts at
the operations and performance of institutions “alternative financial institutions” in 2000 and
providing financial services to the poor. “microfinance has grown a lot since then.”

Introduction 9
 2. For example, national-level FinMark Trust’s credibly) can be difficult and expensive.
FinScope surveys, www.finmark.org.za, and Addressing this dilemma, there is a school of
Global Findex databases, http://data.worldbank thinking that advocates certain ‘proxies’ for
.org/data-catalog/financial_inclusion. impact. Otero and Rhyne have summarized
 3. For example, see Financial Access Initiative recent microfinance history by saying that
(FAI), http://financialaccess.org; Abdul Latif there has been an important shift from
Jameel Poverty Action Lab (J-Pal), http:// focusing on the individual firm or client of
www.povertyactionlab.org/about-j-pal; and financial services to focusing on the
Innovations for Poverty Action (IPA), http:// institutions providing services. This financial
poverty-action.org. systems approach ‘necessarily relaxes its
 4. Microfinance as defined by CGAP in CGAP attention to “impact” in terms of measurable
Occasional Paper 15, “The New Moneylenders: enterprise growth and focuses instead on
Are the Poor Being Exploited by High measures of increased access to financial
Microcredit Interest Rates?” (Rosenberg et al. services’ (Otero and Rhyne 1994).”
2009), “usually refers to the provision of 10. Account at a formal financial institution
financial services to poor and low-income denotes the percentage of respondents with an
clients who have little or no access to account (self or together with someone else) at
conventional banks. The term is often used in a a bank, credit union, another financial
more specific sense, referring to institutions that institution (for example, cooperative or
use new techniques developed over the past 30 microfinance institution), or the post office (if
years to deliver microcredit—tiny loans—to applicable) including respondents who
informal microentrepreneurs. The range of reported having a debit card (Demirgüç-Kunt
services can include not only microcredit but and Klapper 2012).
also savings, insurance, and money transfers.” 11. www.shgportal.com.
 5. The ACCION Center for Financial Inclusion 12. E-mail exchange with Gerhard Coetzee, April
defines financial inclusion as “Full financial 4, 2012, and Bankable Frontiers Associates
inclusion is a state in which all people who (2009).
can use them have access to a full suite of
quality financial services, provided at
affordable prices in a convenient manner, and References
with dignity for the clients. Financial services Alexandre, Claire. 2010. “Policymakers Create
are delivered by a range of providers, Room for Experimentation with Banking
most of them private, and reach everyone beyond Branches.” Global Savings Forum, Bill &
who can use them, including disabled, Melinda Gates Foundation, Seattle, WA,
poor and rural populations” (www November.
.centerforfinancialinclusion.org). Bankable Frontier Associates. 2009. “The Mzansi
 6. See http://www.economist.com/node/ Bank Account Initiative in South Africa, Final
11376809 for information on the Compartamos Report.” Commissioned by FinMark Trust.
Banco IPO. Somerville, MA, March.
 7. Latin America and the Caribbean (LAC) and Bauchet, Jonathan, Cristobal Marshall, Laura
Europe Central Asia (ECA). Starita, Jeanette Thomas, and Anna Yalouris.
 8. Defined as “a bank, credit union, cooperative, 2011. “Latest Findings from Randomized
post office, or microfinance institution” Evaluations of Microfinance.” Access to Finance
(Demirgüç-Kunt and Klapper 2012). Forum, Reports by CGAP and Its Partners No. 2.
 9. In chapter 2 of the Microfinance Handbook CGAP, Washington, DC, December.
(Ledgerwood 1998, p. 49) Tom Dichter wrote, BMZ, CGAP, and IFC. 2011. “Advancing
“Doing impact analysis well (and therefore Responsible Finance for Greater Development

10 The New Microfinance Handbook


Impact: A Stock-Taking of Strategies and Johnson, Susan, and Steven Arnold. 2011.
Approaches among Development Agencies and “Financial Exclusion in Kenya: Examining the
Development Finance Institutions.” Changing Picture 2006–2009.” In Financial
Consultation draft, Responsible Finance Inclusion in Kenya: Survey Results and Analysis
Forum, Bonn and Washington, DC. from FinAccess 2009, ed. Steven Arnold et al.,
Chaia, Alberto, Aparna Dalal, Tony Goland, chapter 5. Nairobi: FSD Kenya and Central
Maria Jose Gonzalez, Jonathan Morduch, and Bank of Kenya.
Robert Schiff. 2009. “Half the World Is Ledgerwood, Joanna. 1998. Microfinance
Unbanked.” Financial Access Initiative Handbook: An Institutional and Financial
Framing Note. Financial Access Initiative, Perspective. Washington, DC:
New York. World Bank.
Chen, Gregory, Stephen Rasmussen, Xavier Reille, O’Dell, Kathleen. 2010 “Measuring the Impact of
and Daniel Rozas. 2010. “Indian Microfinance Microfinance: Taking Another Look.” Grameen
Goes Public: The SKS Initial Public Offering.” Foundation, Washington, DC.
CGAP Focus Note 65, CGAP, Washington, DC, Reed, Larry R. 2011. “The State of the Microcredit
September. Summit Report 2011.” Microcredit Summit
Collins, Daryl, Jonathan Morduch, Stuart Campaign, Washington, DC.
Rutherford, and Orlanda Ruthven. 2009. Reille, Xavier, Sarah Forster, and Daniel Rozas.
Portfolios of the Poor: How the World’s Poor 2011. “Foreign Capital Investment in
Live on $2 a Day. Princeton, NJ: Princeton Microfinance: Reassessing Financial and Social
University Press. Returns.” Focus Note 71, CGAP, Washington,
Demirgüç-Kunt, Aslı, Thorsten Beck, and Patrick DC, May.
Honohan Beck. 2007. “Finance for All? Policies Roodman, David. 2011. “Due Diligence—An
and Pitfalls in Expanding Access.” Policy Impertinent Enquiry into Microfinance.”
Research Report, World Bank, Washington, DC. Center for Global Development, Washington,
Demirgüç-Kunt, Aslı, and Leora Klapper. 2012. DC, December.
“Measuring Financial Inclusion: The Global Rosenberg, Rich, Adrian Gonzalez, and Sushma
Findex.” Policy Research Working Paper 6025, Narain. 2009. “The New Moneylenders: Are the
World Bank, Washington, DC. Poor Being Exploited by High Microcredit
Ehrbeck, Tilman. 2012. “More than Semantics: Interest Rates?” Occasional Paper 15, CGAP,
The Evolution from ‘Microcredit’ to ‘Financial Washington, DC, February.
Inclusion.’ CGAP Blog, May 16. Symbiotics. 2011. “Symbiotics 2011 MIV Survey
Ehrbeck, Tilman, Mark Pickens, and Michael Report: Market Data & Peer Group Analysis.”
Tarazi. 2012. “Financially Inclusive Ecosystems: Symbiotics, Geneva, August.
The Roles of Government Today.” Focus Note Wiesner, Sophie, and David Quien. 2010. “Can
76, CGAP, Washington, DC, February. ‘Bad’ Microfinance Practices Be the
Johnson, Susan. 2012. “What Does the Rapid Consequence of Too Much Funding Chasing
Uptake of Mobile Money Transfer in Kenya Too Few Microfinance Institutions?”
Really Mean For Financial Inclusion?” CGAP, Discussion paper I no. 2. ADA,
Washington, DC. Luxembourg, December.

Introduction 11
PART I

UNDERSTANDING
DEMAND AND THE
FINANCIAL ECOSYSTEM
CHAPTER 1

The Evolving Financial Landscape


Joanna Ledgerwood and Alan Gibson

Historically, the promise of poverty alleviation Many events have influenced the landscape for
through microcredit was tied primarily to one financial services for the poor, but three signifi-
product—the productive loan invested in a micro- cant “big picture” influences warrant discussion
enterprise—delivered primarily by one type of and are the subject of this opening chapter.
provider—a microfinance institution (MFI). Yet The first has been a shift from a narrow focus
reality belies the premise of this model: clients do on the institution and its performance to a much
not always use loans for productive purposes; broader focus on clients—understanding their
they have either limited capacity to use invest- behavior, financial service needs, and how various
ment credit or more pressing needs for products providers can better meet these needs. This
that support consumption or income smoothing. shift  has been brought on by the recognition—­
Today, there is broad recognition that access to supported by significantly better data and more
capital is only one of the inputs required for eco- robust research—that outreach and, perhaps
nomic development and poverty alleviation. more important, impact have not been as
Furthermore, there is wide acknowledgment that expected. This is also the result of a widening
the poor, like anyone, require and use a variety of view of microfinance. No longer limited to invest-
financial services for a variety of purposes. And ing in microenterprises, microfinance now
some of these services work better than others, encompasses all financial services and how to
for reasons we are just beginning to understand. provide them in a way that improves the quality
Since the original Microfinance Handbook was of life of poor women and men.
written, the field of microfinance has changed The second important shift, which greatly
substantially, particularly in the last few years. influences this book, has been from a narrow

The Evolving Financial Landscape 15


s­ upply-led view to a broader focus on the finan- Focusing on clients is a welcome and neces-
cial ecosystem. In addition to a renewed focus sary shift. However, the end game cannot simply
on consumers (demand), proponents of the be to develop new products or make adjustments
­“systems” approach acknowledge the variety of within institutions; an institutional response
providers and services, including the substantial alone is not enough. We need to understand con-
role of the informal sector. They also acknowl- sumer behavior and how it influences financial
edge the need for effective rules that govern the service needs and use. While the ultimate solu-
system and supporting functions such as credit tion may be a better product or service, an easier
bureaus or payment systems. The result has been way to access an account, or a lower-cost delivery
a much more holistic view of the sector and a option, to get there we need to appreciate the
more coordinated effort by government and nuances and contextual factors that affect how
industry to focus on increasing financial inclu- poor women and men behave and which financial
sion and, ultimately, making markets work better services are of most benefit to them, for what pur-
for the poor. pose, and why. For example, market research con-
The third shift has been the massive opportu- ducted with MFI clients in Bolivia indicates that
nity to expand outreach through new business clients identify respect as their greatest priority;
models based on branchless banking using tech- product attributes are important, but they are not
nology and agent networks. However, while the the most important consideration (Perdomo
opportunity seems vast, to date only a few branch- 2008).3 Clients want to preserve their dignity
less banking applications have reached significant when interacting with a financial institution, and
scale. At the time of writing, this area of tremen- they want to borrow without fear or humiliation.
dous promise requires a lot more work and test- To accomplish these goals, they need to under-
ing to understand and determine ways to take stand the services they use and the contracts they
advantage of the opportunities that technology sign, and providers need to value and invest in
presents. customer service. The solution is unlikely to be
This chapter considers each of these influ- simply new or more products.
ences and places the new landscape in context. It Understanding how consumer behavior trans-
will be of interest to readers seeking to under- lates into financial service needs requires under-
stand some of the major influences in microfi- standing the uniqueness and heterogeneity of
nance today. Each of the topics is introduced here clients and how life-cycle events, livelihoods,
and elaborated in more detail in various chapters geography, income levels, and gender influence
that follow. their behavior. The following section discusses
the characteristics that define and influence client
behavior and financial service needs, while chap-
Focus on Clients
ter 2 provides an overview of how clients use
Almost everywhere, people involved in microf- financial services based on findings from Portfolios
inance are talking about clients.1 As a result, of the Poor.4
the language of microfinance is changing.
Initially microcredit became microfinance with Age, Life-Cycle, and Family Structure
the recognition of the need for savings services; Financial needs and vulnerabilities change as
today policy makers and industry players use people move through the life-cycle—from
terms like inclusive finance, access to finance, dependence on family to independence and
financial ecosystems, and financial inclusion from school to work, marriage, family responsi-
(see box 1.1).2 bilities, and retirement. Sons migrate in search

16 The New Microfinance Handbook


Box 1.1  From Microfinance to Financial Inclusion

Financial inclusion is a multidimensional, pro- collection of loan payments collapsed in the


client concept, encompassing increased Indian state of Andhra Pradesh (Chen,
access, better products and services, bet- Rasmussen, and Reille 2010). These isolated
ter-informed and -equipped consumers, and crises serve as a warning that microcredit can
effective use of products and services. Putting cause trouble for clients. Over-indebtedness
this concept into practice requires more than can increase financial and social vulnerabil-
institutional expansion and portfolio growth, ity as borrowers take new loans to repay old
goals that drove early development of the ones or resort to extreme measures to
microfinance industry, when the original make their payments, including reducing
Handbook was written. Balancing clients’ their consumption of food and selling pro-
interests and providers’ viability, financial ductive ­assets. Such measures can lock bor-
inclusion incorporates effective policies, legis- rowers into a downward spiral with severe
lation, industry and consumer protection stan- consequences.
dards, and financial capability. At the same time, innovation is bringing
Several developments have converged to new customers and new service providers
refocus thinking about best practice in finan- into the market. Diversification of products
cial services for the poor. Commercialization and services has already resulted in more
of microfinance has raised concerns about choices for consumers. However, although
mission drift, eliciting calls for paying attention such diversity indicates a maturing industry,
to social performance and the “double bottom increased access and more choice do not
line,” which relies on strong financial perfor- automatically translate into effective use.
­
mance to fulfill a social mission. Further Simply opening an account does not mean
­concerns have emerged with regard to high that it will be used. Effective use is ham-
interest rates and private gains from public pered by asymmetries of information as well
offerings of MFI shares and the concentration as unsuitable product features or accessibil-
of investments in a small number of countries ity requirements (for example, minimum bal-
and institutions. Microfinance, as the “new ances, age restrictions, regular contributions,
asset class, may not be the newest emerging affordability, and distance to branch or cus-
market; relatively few MFIs can absorb a sig- tomer service point). This can lead to an
nificant amount of capital. ­imbalance of power between financial insti-
Furthermore, in some countries, client tutions and poor consumers, an imbalance
over-indebtedness is attributed in part to mar- that grows as inexperienced and ill-informed
ket saturation, with a narrow range of credit customers (for example, millions of unbanked
products and competition among MFIs push- owners of mobile phones who are potential
ing lenders to make increasingly risky loans mobile banking customers) choose among
and pursue harsh collection practices when increasingly sophisticated products without
repayment has faltered. In the first decade of recourse to adequate protective or grievance
the new century, delinquency rates rose dra- measures (Cohen and Nelson 2011).
matically in some countries, and, in 2010, the
Note: This box was contributed by Candace Nelson.

The Evolving Financial Landscape 17


of more income; young mothers manage child- acute vulnerabilities, including loss of produc-
birth expenses, health care, and nutrition; par- tivity due to deteriorating health, physical
ents struggle to educate their children. Widows immobility, and the loss of family support as
are threatened with loss of land and other assets children become independent and develop their
to their husbands’ relatives. Elderly clients face own financial commitments (Hatch 2011). These

Box 1.2  Youth Financial Services: An Opportunity for the Future

The 1.5 billion people between the ages of most cases, the scope of the products has
12 to 24 in the world today represent the larg- expanded to include interventions to provide
est number of youth ever on the planet. Of financial education, develop capacity, and
these, 85 percent, or 1.3 billion people, live in build youth skills, knowledge, and capital,
developing countries (World Bank 2011). including life skills training, workforce training
Although the “youth bulge” is declining in (such as vocational education), and mentoring
East Asia and Central Europe, the youth popu- and internship or apprenticeship programs.
lation is expected to grow in Sub-Saharan Community-managed finance models, includ-
Africa for the next 40 years. In 97 developing ing savings-led groups and rotating savings
countries, half of the population is 25 years of and credit associations (ROSCAs), have been
age or younger. Worldwide, 47 percent of the adapted for youth and have shown promise.
unemployed are youth. Most young people in Some preliminary evidence suggests that
developing countries do not have access to access to financial services has improved the
the financial services and education that ability of young people to manage their
would help them to be productive, engaging finances and plan for their own futures. These
citizens in their economies. results suggest that efforts are needed to
This explosion of youth constitutes an innovate and experiment with product design
immense challenge and opportunity for human as well as bundled packages of services that
development. Youth is an excellent time to integrate financial with nonfinancial services.
learn responsible habits and attitudes with Together, these offerings support the develop-
regard to saving, borrowing, spending, using ment of a better-informed and financially
insurance, and investing. Appropriate financial savvy generation.
services, tailored to the unique needs and Youth financial services remain a niche field
capabilities of youth, can help young ­people to within the larger financial services industry,
manage their finances better and potentially to driven mainly by a few donors, large interna-
start and expand microenterprises to support tional nongovernmental organizations (NGOs),
themselves and their families. and a few innovative providers. If we are to
However, age restrictions, identification meet the needs of this growing segment of
requirements, and relatively low profitability the population and ensure that they have the
of small deposit accounts or loans can make it skills and resources to be economically active
difficult for providers to meet the needs of citizens, we need to mainstream youth finan-
young people. This nascent field has seen cial services within the financial inclusion
much innovation in the past few years. In agenda—both nationally and globally.
Source: Nisha Singh, Small Enterprise Education and Promotion (SEEP) Network. Statistics are from http://www
.photius.com/rankings/population/median_age_total_2008_0.html, compiled from CIA 2008.

18 The New Microfinance Handbook


changes result in the need for different financial compound, often combining financial resources
services at different life-cycle stages. in order to meet daily needs or respond to emer-
Other life-cycle events, such as celebrations, gencies. Similarly, income is often shared among
religious ceremonies, or building a home, require the larger family. While saving may be difficult
lump sums that are often hard to accumulate for an individual, sharing income facilitates risk
without adequate financial services. Financial management in the absence of formal services
exclusion is strongly influenced by age, with (see box 1.3).
youth facing significant hurdles (Johnson and In many contexts, community elders control
Arnold 2011; see box 1.2). To be relevant, finan- assets and decide how they will be distributed
cial service providers must modify products, ser- throughout a given community. Thus an individu-
vices, and delivery channels to accommodate al’s ability to access services may depend on his or
differences in life-cycle and age. Providers can her social position relative to that of more senior
respond to differing needs by developing members in the community.
age-specific products, such as youth savings
accounts or pension funds. Livelihoods, Geography, and Income Levels
Family structure can also affect how financial The financial pressures of managing inconsistent
services are used. In many communities, the income to cover daily expenses, unexpected
concept of family extends well beyond spouses, emergencies, and life-cycle events weigh heavily
siblings, children, and grandparents. Cousins, on the poor. Although millions of people—from
distant relatives, and even neighbors are an the poorest of the poor to the economically active
integral part of a family. Polygamy further poor to small business operators to salaried
increases the size and complexity of the family ­workers—face similar pressures, their responses
structure. A large family may live together in one and need for financial services vary depending on

Box 1.3  Gambian Family Structure and Impact on Financial Behavior and
Demand

A remittance landscape study conducted in and keep money away from male family
The Gambia by Women’s World Banking members.
provides insight into how family structure
­ In addition to earnings from small-scale
affects the demand for financial services economic activities, women in The Gambia
(Orozco, Banthia, and Ashcroft 2011). Women also depend heavily on international remit-
often live in polygamist households and play tances to feed the family, send children to
central roles in managing the household school, and pay for food and clothes for reli-
budget. For many Gambian women, the gious events. In focus groups, many women
financial goals of purchasing land or building said that remittance-linked savings accounts
up savings often take a back seat to the would help them to meet their financial goals,
­day-to-day financial needs of the extended but because of the financial needs of their
­family. Women often save in informal com- extended family and the cost and time of get-
munity-based savings clubs called ososus ting to a bank, consistent use of a savings
because they are close at hand, c­ onvenient, account would be challenging.
Source: Banthia and McConaghy 2012.

The Evolving Financial Landscape 19


their livelihoods and where they live, which, in products to address a multitude of financial ser-
turn, affect their income level. vice needs.
Historically, microfinance has focused on Geography matters as well. For example, peo-
microentrepreneurs, with loan products designed ple living in rural areas likely earn income from
primarily for traders with daily or weekly cash agricultural activities that generate very different
flow and in need of short-term working capital. cash flows than traditional “microenterprises.”
However, by focusing on productive credit, Financial services for smallholder farmers need
microfinance providers may have missed serving to suit their cash flows and consider the produc-
the majority of the potential market. As demon- tion and marketing risks specific to a given crop
strated in figure 1.1, of the 1.6 billion working (see chapter 10). However, in general, it is more
poor, less than 500 million are microentrepre- expensive for providers to operate in rural areas,
neurs or salaried wage workers; the rest earn limiting clients’ choices and challenging provid-
their income, likely low and irregular, from ers to reach scale, particularly where population
farming, casual labor, fishing, and pastoral density is low, access to markets or supplies is
activities (Christen 2011). They, like anyone, limited, and infrastructure is undeveloped. Rural
need access to financial services to manage areas often have higher covariance risk due to the
their daily lives, and they need a variety of lack of a diversified economic base and the risk of

Figure 1.1  Financial Service Needs for Different Livelihood Segments

Livelihood segment sizing Financial service needs


(millions of people)

80m fishermen &


pastoralists Asset protection
100m unemployed
Payment and
180m micro–
transaction mechanisms
entrepreneurs

300m low Catastrophic health


wage salaried event protection
1.6 billion
working-age adults Start-up
living on less than 370m casual
laborers capital
US$2 a day

Consumption
smoothing
610m
small-holder Risk
farmers protection

Safe savings
Source: Wyman 2007.

20 The New Microfinance Handbook


crop failure or drought; in some rural areas, a his- Over the years, we have learned that the eco-
tory of poorly designed rural credit programs nomically active poor rather than the poorest of
(subsidized and/or directed credit, no savings the poor stand to benefit the most from access to
mobilization) can affect people’s perceptions of financial services (without other interventions).
financial services. “The majority of the world’s estimated 150 mil-
And while having a bank account may seem lion microcredit clients are thought to live just
more useful for an employee who receives regular below and, more often, just above the poverty
wages than for, say, a laborer who is paid in cash, line” (Hashemi and de Montesquiou 2011, 1).
farmers, wage earners, and laborers would all From the perspective of both the client and
benefit from having access to a safe place to save the provider, it is generally more expensive to
for lump-sum expenditures or respond to an transact in smaller amounts with greater fre-
emergency or new opportunity (see box 1.4). quency. For providers, smaller transaction
In addition to how consumers generate amounts also result in a smaller revenue base—
income, the amount of income affects their access for example, people with lower incomes gener-
to and need for financial services. To meet varying ally have lower savings balances, less capacity to
income levels, products and services need to have take on debt, and fewer opportunities to gener-
characteristics—minimum balances, eligibility ate income. Together, this makes it very difficult
criteria, fees, and benefits—appropriate to each to provide financial services to the extremely
level. poor.

Box 1.4  The Financial Service Needs of the Poor in Mexico

Although the need to save and borrow is common across all groups of people, the ability to save
and pay back debt is constrained by illiquidity. Ideally, financial services should help people to
create liquidity and increase their financial assets:
• Formal salaried workers who earn a stable income would value a portfolio of savings
products that provide options to save with different terms, returns, and liquidity features,
including simple savings products to help plan for both foreseen and unforeseen
­expenses and commitment savings to achieve longer-term goals. They would also value
having easy access to credit or savings for smoothing shortfalls and meeting emergency
needs and to transactional services for putting away money temporarily or transferring it
to others.
• Entrepreneurs who earn a variable income would value a portfolio of savings and credit
options that provide liquidity to respond to business opportunities and smooth out expenses
across business cycles.
• Seasonal or agricultural workers have the most irregular income, often insufficient in itself.
These households usually engage in multiple endeavors to supplement income and group
together in extended families to pool resources and share expenses. They would value sav-
ings services, insurance, and small loans for emergencies. Perhaps the most vulnerable, this
group would benefit the most from broader financial planning and literacy.
Source: Faz and Breloff 2012.

The Evolving Financial Landscape 21


For the extremely poor, cash or asset transfers, individuals may be ­systematically denied access
rather than microcredit, are often a better solu- because they are from a lower caste or a different
tion, at least initially. If possible, placing cash religion (see box 1.6).
transfers into a bank account appropriate for the Islamic finance is possibly the best-known
poor can also support financial inclusion (see example of religion influencing financial transac-
chapter 3). tions. Islamic finance is based on Islamic or sharia
While the majority of providers serve the law, but despite the term “law,” Islamic finance is
economically active poor, an innovative model based largely on cultural norms. According to
for providing financial services to the poorest Karim, Tarazi, and Reille (2008, 6), “Indeed,
in Bangladesh, developed by BRAC, is being sharia compliance in some societies may be less a
­replicated in countries around the world (see religious principle than a cultural one—and even
box 1.5). the less religiously observant may prefer sharia-­
compliant products.”
Ethnicity, Caste, and Religion A key overriding principle of Islamic finance is
Building and maintaining a level of trust in all the need to provide for the welfare of the commu-
circumstances can improve financial inclusion, nity by prohibiting practices considered unfair or
and it is particularly important when different exploitative. Fundamental to the provision of
ethnic or religious groups are involved. Caste, Islamic financial services is the inability to give or
while not solely an ethnic factor, can pose cul- receive a fixed, predetermined rate of return. This
tural barriers similar to ethnic differences. In principle is banned based on two sharia precepts:
countries where caste systems or religion are money has no intrinsic worth, and providers of
central to a community’s social organization, funding must share the business risk (Karim,

Box 1.5  Reaching the Poorest: Lessons from the Graduation Model

BRAC works in 70,000 rural villages and 2,000 small loans to accelerate livelihood develop-
urban slums in Bangladesh, providing microfi- ment. In less than 20 years, the program
nance, schooling, health care, legal services, reached 2.2 million households. In 2002 BRAC
and marketing facilities. Realizing that its fine-tuned its approach, both through better
microfinance programs were not reaching identification of the ultrapoor (defined as peo-
many of the poorest, in 1985 BRAC partnered ple who spend 80 percent of their total expen-
with the government of Bangladesh and the diture on food without attaining 80 percent of
World Food Program to add a graduation lad- their minimum caloric needs) and through a
der to an existing national safety net program set of more intensive, sequenced inputs.
that was providing the poorest households By 2010, BRAC had reached around
with a monthly allocation of food grain for a 300,000 ultrapoor households with this new
two-year period. The graduation model is built approach, termed Challenging the Frontiers of
on five core elements: targeting, consump- Poverty Reduction/Targeting the Ultra Poor.
tion support, savings, skills training and regu- BRAC estimates that more than 75 percent of
lar coaching, and asset transfers. BRAC these households are currently food secure
worked with beneficiaries, eventually adding and managing sustainable economic activities.
Source: Hashemi and de Montesquiou 2011.

22 The New Microfinance Handbook


Box 1.6  Religion and Caste in India

The caste system describes a stratification in provides indispensable conditions for capital
which social classes or subclasses of tradi- accumulation: “In India, religious affiliation
tional Hindu society are separated by distinc- can govern the creation and protection of rent,
tions of hereditary rank, profession, or wealth. the acquisition of skills and contacts, the
Different castes engage in different produc- rationing of finance, the establishment and
tive activities according to their historical defense of collective reputation, the circula-
connections. Skills are passed on through
­ tion of information, the norms that regulate
apprenticeships gained through social net- the inheritance and management of property,
works based on kin, caste, and locality. Caste and those that prescribe the subordination of
is least flexible where social disadvantage is women” (Harriss-White 2004). In addition,
most entrenched and poverty is most pro- religious groups provide insurance and last-­
found. Lower levels of technology are resort social security. Jains, for example, are
­relegated to lower castes—for instance, the often wealthy local merchants, moneylenders,
dalits have to carry heavy loads on their heads; and pawnbrokers who have indirect power
they cannot use wheelbarrows. Workers over the local rural economy through webs of
themselves may enforce caste stratification credit. The Muslim traders of Pallavaram, in
to protect their place in the labor market. contrast, are limited in their economic growth
Studies in India have found that religion by their lack of access to finance.
can supply a collective identity, which, in turn,
Source: Harriss-White 2004, as summarized on microLINKS.

Tarazi, and Reille 2008). While these principles targeting a programme towards women. It
reflect widely held beliefs, sharia-compliant reg- means recognising the position of women in
ulatory frameworks are just beginning to be relation to men as actors in society: in the con-
developed. text of husbands and families; local community
Religion and ethnicity can also affect the abil- and authority; and more broadly their position
ity of women to access services. For example, in in society at the national level as governed by
some cultures women are home-bound for reli- laws and custom. Then it is necessary to act to
gious reasons and unable to meet with providers support women to overcome the obstacles they
outside the home or to form groups with other face in these relationships which prevent them
women. Similarly, some cultures prohibit male from using financial services to achieve what
staff from visiting female clients. Gender-based they wish for themselves (Johnson 2000).
rules and norms can have a significant impact on
Women often lack control over cash manage-
both the financial service needs of women and
ment within their household and may be depen-
their ability to access and use services.
dent on their husband to access financial services.
Moreover, rules often prevent women from
Gender
­owning assets or participating in wage-earning
Recognizing gender issues in microfinance, as ­activities outside the household (see box 1.7). For
in any project intervention, means more than example, in Morocco, women’s mobility outside

The Evolving Financial Landscape 23


Box 1.7  The Embeddedness of Financial Service Use in Gender Norms in
Kenya

Research in the rural areas of central Kenya are less likely to use ROSCAs and more likely
indicates that the use of formal and infor- to use banks or SACCOs to manage lump
mal financial services is strongly influenced sums and hold them until needed or, if possi-
by gender relations (Johnson 2004). Men ble, take loans.
are much more likely to have accounts with Social differences also affect how men and
banks or savings and credit cooperatives women engage with financial services. For
(SACCOs), but women are much more example, men and women differ in their atti-
likely to use informal group-based systems, tudes toward the social consequences of fail-
especially ROSCAs. Men are also much ing to make a payment in a ROSCA. Women
more likely to use M-PESA—e-money pay- said that they would experience embarrass-
ment and transfer—services (Johnson and ment and shame if they were unable to pay
Arnold 2011). the contribution; they would view this as
It is necessary to understand how the divi- “spoiling” the group. Men said that they would
sion of labor and control of income in the not be ashamed of not paying, would not trust
household influences the type of financial ser- each other to make the system work, do not
vices that men and women need. While like the strictness of the rules, and realize that
women contribute important labor to agricul- little could be done if they did not pay.
tural activities, men usually control the activi- Consequently, in Kenya, women’s ROSCAs are
ties with the highest financial returns; women more successful than men’s ROSCAs.
likely control smaller income streams, which These differences reflect deeply rooted
enable them to pay for food and other house- gender norms. Women’s groups have a long
hold items needed on a regular basis. These history in Kikuyu society, and participation is
differences in income flows result in gender-­ considered an important social skill; groups
differentiated demand for financial services. socialize women in how they should act and
For women, ROSCAs are an ideal way of behave. Groups also enable women to pro-
­turning small but fairly regular incomes into a vide some of the household essentials.
larger amount over a period of weeks to pur- Additionally, since property, especially land,
chase goods such as household utensils, blan- tends to be under men’s control, to the extent
kets, or clothes. Moreover, the timing of these that land is used as collateral, men are more
needs is not especially critical. Men’s incomes able to borrow from banks than women.
are often larger and tend to be received in However, in Kenya men do not have exclusive
lump sums. Men are responsible for larger control of land, and the family must agree to
purchases, such as assets or farm inputs. its use as collateral. Women can refuse if they
They find it difficult to make regular contribu- think the loan may be misused. In addition,
tions to ROSCAs at levels that would produce men usually hold the licenses for the produc-
the size of payouts needed. Also, since some tion of cash crops (tea, coffee) and can open
of their expenditures have specific timing, an account with a crop-based savings and
many men in a ROSCA may require access to credit cooperative, while their wives are usu-
the payout at the same time. As a result, men ally simply a cosignatory.
Source: Susan Johnson, Centre for Development Studies, University of Bath.

24 The New Microfinance Handbook


Table 1.1  Gender-Based Obstacles in Microfinance and Microenterprise
Wider community or
Type of obstacle Individual Household national context
Financial Women lack access Men control cash income and Men are perceived as controllers
to banks or financial their expenditure patterns do of money and loans 
services in their own not support the household
right
Economic Women undertake Households are characterized
Women are underpaid for equal
activities that by gender division of labor,
work; women are locked in
produce low returns; unequal access and control of
low-paid jobs; stereotypes
women have a land, labor, and inputs, and
determine the appropriate roles for
heavy domestic unequal control of jointwomen in the economy; women
workload household produce and lack access to markets for inputs
income streams from thisand outputs if their mobility is
constrained due to social norms 
Social or cultural Women are not Women have a limited role in Banks and financial institutions do
literate or educated; household decision making; not view women as a potential
girls’ education is polygamy results in conflict, market; women’s mobility is
not prioritized  competition, and discrimina- constrained by social norms 
tion between wives; violence
toward women is common
Political or legal Women lack Women lack legal rights to Women’s legal rights to household
confidence to claim jointly owned household assets are not defined in law or
political and legal assets useful for collateral; women lack
rights political positions to establish
appropriate laws; women lack both
traditional and formal legal rights
to land
Source: Johnson n.d.

the home is restricted, and women’s work is often The Financial Ecosystem
associated with shame, as it reflects a man’s
inability to be the sole financial provider (Banthia While understanding the behavior and needs of
et al. 2011). clients is paramount, many stakeholders are also
Table 1.1 outlines the most prevalent gen- concerned with the wider financial ecosystem
der-based obstacles affecting financial service and how it affects financial inclusion (or exclu-
access and use. sion). Financial inclusion efforts focus on how the
Altogether, the need for and ability to use and supply of financial services (products and ser-
benefit from financial services depend to a great vices provided by sustainable institutions) can
extent on age and life-cycle income levels, cul- better meet demand; they also acknowledge the
tural context, and gender. The more we under- functions within the wider market system that
stand client characteristics and influences on support financial transactions.
their behavior, the better equipped we will be to The contents of this book are shaped by the
increase financial inclusion in a meaningful way. market system approach (see M4P Hub 2008).

The Evolving Financial Landscape 25


This approach provides a practical means of • Core. Transactions between providers and cli-
assessing consumer behavior, the demand for ents (supply and demand)
and supply of financial services, and the r­ules
• Rules. Informal and formal rules that shape
and functions that support transactions.
the behavior of market players, including
Whether financial service needs translate into
consumers
demand that is met by a financial service pro-
vider depends on many factors, including the • Supporting functions. The collection of func-
degree to which providers are sufficiently tions that provide information and services
informed to identify client needs, potential cli- supporting the development and expansion of
ents have information about providers, and trust the core.
exists between the two. Beyond this, a provider’s
ability to develop and offer an appropriate prod- Understanding financial market systems
uct is shaped by its capacity in relation to product involves breaking down each of these functions
development and delivery channels and by its into more detail to identify specific elements
incentives to improve them. For example, do reg- within them and the main players who are likely
ulations encourage the development and expan- to be directly engaged (see figure 1.2). Each set of
sion of services? Do the laws on collateral functions can be viewed in isolation, yet in prac-
requirements promote overall financial inclu- tice functions only have value when seen as inte-
sion? Can providers access funding to support gral parts of a wider ecosystem. By incorporating
growth? Do they have the right legal form and the interests and incentives of clients and other
networks to do so? Do credit bureaus exist, and key market players and the influence of rules and
are they effective? Does the accessible infrastruc- supporting functions with regard to financial ser-
ture promote overall financial inclusion? Equally vice provision, the market system framework
important, how do the attitudes and norms acknowledges that only by understanding the
among both consumers (for example, to loan entire system can we address the constraints to
repayment) and providers (for example, to risk and take advantage of the opportunities for
and reward) influence financial inclusion? increasing financial inclusion (see box 1.8).
This section describes the financial market
system, specifically the functions within it and The Core
the roles played by various market actors. A mar-
Offering a combination of the appropriate
ket system necessarily includes both private and
instruments and an understanding of how
public sector actors as well as civil society and,
these can be used practically within the con-
indeed, consumers themselves. Because the term
text of current livelihoods and existing social
market is often equated only with the private sec-
and cultural norms will enable and encourage
tor, the term ecosystem is used interchangeably
people to shift towards improved management
with market system in this book (see Ehrbeck,
of their finances. The heart of the market sys-
Pickens, and Tarazi 2012).
tems approach is to understand the demand
side and support customer-focused develop-
Functions of the Market System
ment and innovation driving the supply side.
There are three main sets of functions in a market
(FSD Kenya).
system, each carried out by various market play-
ers, including the private sector, government, For financial market systems to work more
NGOs, community groups, representative associ- inclusively and successfully, two characteristics
ations, and consumers. must be present. First, the number of transactions

26 The New Microfinance Handbook


Figure 1.2  Stylized View of the Financial Ecosystem

MARKET FUNCTIONS MARKET PLAYERS

SUPPORTING
FUNCTIONS
Clients
Information
Funding
Coordination Infrastructure
Private sector
Research
Technical
assistance
Capacity
develop- Advocacy Government
ment

Demand CORE Supply


Community groups

Representative associations

Formal Not-for-profit sector


rules Informal
rules

RULES

must increase; expanding the access frontier to discussions are provided in the chapters that
include previously excluded people is a key indi- follow.
cator of financial system development and an offi-
cial goal of many financial authorities. Second, Demand: Clients
products must accurately address the needs of As discussed in the previous section on clients,
clients, improving their lives or businesses.5 A poor households are in continual need of finan-
better-functioning core is therefore manifested in cial tools to improve their productivity and secure
more and better-quality transactions. The key the best possible consumption and investment
players in the core of the market are clients choices, all the while managing potential or exist-
(demand) and financial service providers (sup- ing risks. Understanding demand requires both
ply), connected to each other by products (sup- an understanding of the financial service needs of
ply). The following discussion provides a brief clients and, as well, their behavior with regard to
overview of demand and supply. More detailed existing financial services.

The Evolving Financial Landscape 27


Box 1.8  Understanding the Financial Market System

For any organization involved in financial demand; it involves the many other functions
market development—for-profit companies,
­ that influence transactions—attitudes and
NGOs, governments, investors, donors, and values, skills, product and organizational
other development practitioners—an under- ­devel­opment, regulations, and policies. These
standing of the financial market system is provide information, knowledge, and incen-
­
important when considering their objectives tives that determine behavior and practices
and roles. Building on a detailed understand- and shape relationships.
ing of market systems and a clear vision of the The players in the system thus extend well
future of financial inclusion, the market sys- beyond the “simple” duopoly of clients and
tems approach guides stakeholders to providers to include government, private sec-
address systemic constraints and bring about tor service providers, associations, and com-
large-scale, sustainable change. It is through munities. When the functions and players in
the development of inclusive and sustainable financial market systems work well, benefits
financial market systems that financial ser- follow. When they do not, consumers, espe-
vices will make a meaningful difference in the cially the poor, are likely to receive limited or
lives of poor people and promote economic temporary benefits. Sustaining the benefits of
growth. access depends on the stability of the finan-
The financial market systems framework cial system and its ongoing ability to provide
recognizes how different players fit within services and, indeed, ensure that people’s
the system, including their main functions and savings are not put at undue risk.
the relationships between them. Although the A functioning and inclusive financial market
central function in market systems is to pro- system, therefore, is characterized by strong
vide a space for transactions, the nature and and sustainable performance—demonstrated
efficiency of those transactions are shaped by by size and outreach (number of clients and
formal and informal rules and a range of sup- number and variety of providers), depth and
porting functions. While supply-side factors quality (poverty level and degree to which
(offering financial services) are crucial to mak- products meet client needs)—and the capac-
ing the financial system work better for the ity and competence of rules and supporting
poor, achieving this goal is more complicated functions, allowing the market to learn, adapt,
than a straightforward equation of supply and and develop in a sustainable manner.

Analyzing data from financial diaries collected 100 percent of their income. This reveals a remark-
across Bangladesh, India, and South Africa, able resourcefulness, but when transaction costs
Collins et al. (2009) suggests a much more com- don’t scale with transaction size, fragmenting
plex picture of demand than previously assumed: transactions over many informal instruments can
“The authors of the book, Portfolios of the Poor, be very costly. Therefore, they not only need
found that households used between eight and 10 financial tools, they need well-performing and
different types of mostly informal financial instru- cost-effective financial tools” (Kendall 2010, 1).
ments with very high turnovers—often 10 times The poor often prefer the informal sector on
the asset values through the year and more than most dimensions important to consumers (access,

28 The New Microfinance Handbook


flexibility, product features, and service quality). While financial service providers are often
However, informal financial mechanisms may characterized as formal, semiformal, or informal,
entail cost, inconvenience, embarrassment, and traditionally referring to their regulatory status,
sometimes depletion of the very social capital on we classify them as either community-based
which they are built. More needs to be under- (generally informal with no legal status) or insti-
stood about how the informal sector expands out- tutional (generally more formal and in some cases
reach, if and how those relying on the informal regulated).6
sector are underserved, and how the quality of Community-based providers include both
consumers’ lives could be improved as a result of individuals (such as friends and family, money-
access to formal financial services. Chapter 2 pro- lenders, shop owners, traders, and deposit
vides a more detailed discussion of demand and collectors) and groups, including indigenous
­
how we can learn from the informal sector and groups, such as ROSCAs and accumulating sav-
the behavior of clients. ings and credit associations (ASCAs), and facili-
tated groups trained by external agencies, such as
Supply: Providers Savings Groups (SGs) and Self-Help Groups
While most of the first microfinance institutions (SHGs). While more formal than ROSCAs, these
were established as NGOs, the sector has evolved facilitated groups are not considered to be “insti-
to include many types of providers. Specialized tutions,” as they, for the most part, are not legally
commercial banks providing a range of financial licensed as financial service providers, have few
services have proven that the poor are “bankable,” expenses, and provide services primarily within
while member-based community groups have the group itself (see chapter 6).
shown that financial services can be provided Institutional providers include member-owned
directly by the community on a sustainable basis. financial cooperatives and NGOs, which are nor-
Providers are discussed in detail in part II of this mally registered and possibly supervised, as well
book; an overview of the types of providers is as banks (private and public), deposit-taking
included here and illustrated in figure 1.3. MFIs, and non-bank financial institutions (NBFIs)

Figure 1.3  The Range of Financial Service Providers

Community-based providers Institutional providers

Community-based groups Registered institutions


Individuals Regulated institutions
ROSCAs, ASCAs Financial cooperatives
Moneylenders Deposit-taking MFIs
Burial societies SACCOs
Deposit collectors Savings and postal banks
Savings groups Suppliers, buyers
Pawnbrokers State banks
Self-help groups NGO MFIs
Traders Commercial microfinance banks
Financial service Mutual insurers
Shop owners Non-bank financial institutions
associations Money transfer companies
Friends, family Commercial insurers
CVECAs Mobile network operatorsa

Level of formalization

Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = caisses
villageoises d’épargne et de crédit autogérées; SACCOs = savings and credit cooperatives; NGO = nongovernmental organization;
MFIs = microfinance institutions.
a. Mobile network operators are regulated as communication companies; most are not licensed to provide financial services.

The Evolving Financial Landscape 29


such as insurance companies and leasing compa- operators (MNOs) can offer services conveniently
nies, which are normally regulated in some fash- in rural areas, although relatively few have
ion (see chapter 7). achieved scale (see box 1.9).
No single type of organization presents an While recent years have witnessed a consider-
optimal solution to reaching all market segments able increase in the commercial provision of
with all types of financial services. In remote rural microfinance and the emergence of publicly listed
areas, the low cost structure and proximity of microfinance companies, informal providers
user-owned and managed providers constitute remain the main source of financial services for
significant advantages over more structured the vast majority of the poor. For example,
MFIs or commercial banks. However, credit FinAccess data provide strong evidence that
unions and banks have the advantage of being Kenyan consumers use a portfolio of financial
able to offer a wider variety of products or a services. Of those using regulated formal services,
broader spectrum of terms and conditions and only 11 percent rely solely on a formal service, 31
may be more reliable than community-based pro- percent use a semiformal service, 13 percent use
viders. New entrants such as mobile network an informal service, and the remaining 45 percent

Box 1.9  The Range of Providers in Sub-Saharan Africa

In 2011 the Microfinance Information eXchange (MIX) compiled a data set on financial inclusion
for Sub-Saharan Africa. The data set brought together information from more than 60 distinct
industry resources along with hundreds of individual institutions, covering some 23,000 provid-
ers of financial services reaching low-income populations in Africa. Africa has a diverse land-
scape of financial service providers—of which specialized MFIs are an important part—but the
poor also access financial services through banks, credit unions and cooperatives, postal sav-
ings banks, SGs, and many other types of providers. Figure B1.9.1 shows the outreach of differ-
ent types of providers across Africa.

Figure B1.9.1  Number of Clients, Loans, and Deposit Accounts in Africa, by Type of
Provider

Provider type
Credit union/Cooperative
Mobile network operator
NBFI/NGO
Bank
Savings bank
Savings groups
Postal savings bank
0M 5M 10M 15M 20M0M 2M 4M 6M 0M 5M 10M 15M 20M

Number of clients Number of loans Number of deposit


accounts

Source: Linthorst and Gaul 2011.

30 The New Microfinance Handbook


use all three categories of services. Similarly, The main financial services include savings,
more than half of those who have a semiformal credit, payments, and insurance and are
provider as their most formal source of finance described in part III of this book.7 While finan-
also use an informal source. Furthermore, this cial products and services are generally defined
pattern of multiple service use has increased from by standard characteristics such as term, size,
2006 to 2009. In 2009, a mere 2.5 percent of price, returns, and eligibility, their appeal to con-
Kenyans relied solely on the regulated formal sec- sumers often depends on their reliability, acces-
tor (FSD Kenya FinAccess data for 2011). sibility, flexibility, safety, and affordability. For
example, products are accessible when provid-
Supply: Products ers explain product features so that clients
Clients benefit from having access to products understand the commitment they are making.
that match the way they live and conduct business Products are safe if they are well-structured and
and support them in addressing challenges. The meet client needs in a transparent way without
irregularity and limited size of cash flows mean doing harm. Increasingly, more flexible terms
that products that permit frequent, small, incre- and conditions are being offered, including the
mental transactions are more useful and conve- ability to repay loans early, receive increases in
nient than, for example, services that require a existing loans, and open savings accounts with
minimum transaction amount or take significant no minimum balance. Payment services, loans
time to access. Products provided directly in the for housing and education, or savings accounts
community are generally used frequently because specifically for youth, as well as more complex
they are accessible, convenient, and in close prox- products such as leasing and ­ insurance are
imity to where poor people live (see box 1.10). beginning to reach low-income populations.

Box 1.10  Savings-Led Financial Services in Bangladesh

SafeSave, one of the world’s first MFIs to walks to households in the neighborhood, pro-
offer basic money management services to viding services to individual clients. Clients
poor clients, takes a client-centered approach, may deposit as little as Tk 1 (US$0.015) when
acknowledging that the tiny incomes of poor the collector calls. Accounts with balances
people are often irregular and unreliable, forc- above Tk 1,000 (US$15) earn 6 percent inter-
ing them to use a complex set of financial est. Clients may withdraw up to Tk 500 per
management strategies. With minimal access day (US$7.50) at their doorstep or up to
to formal sector providers, they often save in Tk 5,000 per day (US$75) at the branch office.
the home, borrow from moneylenders, and Long-term savings products are offered as
participate in savings clubs—devices that are well as credit. All borrowers start with a credit
accessible, but not always reliable. SafeSave limit of Tk 5,000 (US$75), but loans are not
tries to provide the strengths of informal mandatory. A minimum passbook savings bal-
finance, while redressing its weaknesses. ance equal to one-third of the loan balance is
SafeSave offers savings and loan services required as collateral at all times. In March
to anyone living within walking distance of a 2010, for the first time, SafeSave’s savings
branch office. Six days a week, a collector portfolio surpassed its loan portfolio in value.
Source: SafeSave (http://www.safesave.org/).

The Evolving Financial Landscape 31


As services become more client-centered, prod- demand (the main financial service needs,
uct delivery is also developing through innova- including cash management, accumulating
tive channels (see chapter 12). lump sums, risk management, and money trans-
Table 1.2 provides a simple illustration sum- fers) and supply (how poor people meet those
marizing the core of the market system, that is, needs).

Table 1.2  Illustrative Solutions to Household Financial Management Needs


Financial man- Day-to-day cash Accumulating
agement needs management lump sums Coping with risk Transferring money
Default mecha- Carry cash Hide cash in a secret Reduce consumption; Deliver in person;
nism used by the place sell assets send by friend or
excluded family member
Benefits Zero fees; zero Zero fees; zero Requires no planning Cheap; possible
transaction costs; transaction costs; social benefits
fully liquid fully liquid
Costs High risk of Very high risk of Hardship; reduce Risk of theft or
expropriation; no loss; lack of savings potential future diversion; time-
ability to borrow discipline; too income consuming; slow
accessible; loss of
real value
Community- ROSCAs; shop ROSCAs; ASCAs ROSCAs; other Bus or minibus taxi
based mecha- credit community groups;
nisms typically moneylenders
used
Benefits Zero fees; very Zero fees; very low Highly flexible; Familiar mechanism;
low transaction transaction costs; very low transaction no access
costs; social savings discipline; costs; social sup- requirements
benefits investment returns ports; very rapid
(ASCAs) response
Costs Inflexible terms; risk Risk of loss; loss of Unpredictable Risky; slow; difficult
of loss; unpredict- privacy availability; potentially to access;
able; hidden costs high fees; high expensive
of shop credit contingent liability
Institutional Bank transaction Bank savings Insurance; emer- Mobile phone-based
mechanisms account account gency credit payment
typically used
Benefits Fully flexible; secure Secure (deposit Can cover extreme Lower risk; fast;
(deposit protection); protection); moves risks; no contingent easy to access;
facilitates pay- savings ”away from liability; risk cover can lower cost
ments; can lead to temptation”; can be defined
credit access lead to credit access
Costs High withdrawal High minimum High premiums or Account and
fees; day-to-day balances; day-to-day interest rates; subscriber identity
access difficult access difficult; low accessibility; long module (SIM) card
returns and unpredictable required
claims process
Source: David Ferrand, FSD Kenya.

32 The New Microfinance Handbook


Rules and Supporting Functions together create the de jure parameters that shape
Rules and supporting functions influence the behavior (of clients and providers). Informal
effectiveness of transactions (the core of the mar- rules are usually unwritten and are invariably
ket) and provide an enabling environment to more nebulous and ill-defined than formal rules;
allow markets to grow, adapt, and succeed in they manifest themselves in attitudes, behavioral
changing circumstances. Ensuring that they norms, social organizations, and common prac-
improve and increase transactions supports tices. These informal rules often drive incentives
financial inclusion. and behavior and determine the extent to which
Who establishes and enforces rules and who formal rules are adhered to (see box 1.12).
provides supporting functions differs by f­ unction. The key players in relation to formal rules are
Some functions, such as regulations, are appro- government organizations and industry associa-
priately considered a “public good”; the key play- tions. The increasing complexity of financial sys-
ers are the government and policy makers and, tems and new innovations within them—such as
on occasion, business associations. Others, such the emergence of mobile banking—pose new
as credit bureaus or rating agencies, are more challenges for rule makers in terms of not only
appropriately provided by private sector firms what rules should be, but who should make and
(see box 1.11).8 implement them.
Formal rules play a public or collective role in
Rules market systems, leveling the playing field for
A broad term used to define the rules of the providers and consumers. Formal rules affect
game,9 rules include formal rules (regulations clients by setting legal frameworks and industry
and standards) and informal rules (social con- standards that influence market access, the
ventions and cultural norms). Formal or infor- range of products, and the competitive land-
mal rules—the rules themselves and their scape, which, in turn, affect providers and their
enforcement—govern participation and behavior ability to serve their markets appropriately. For
in financial market systems and strongly influ- example, the legal ability to enforce contracts
ence financial market outcomes. Formal rules and register assets, the existence of a national
have a defined, written set of responsibilities identification system, or the protection of public
that are allocated to specific parties, which deposits are all critical parts of the “formal rule”

Box 1.11  Key Rules and Supporting Functions for Savings Services

• Rules. Prudential and supervisory regimes that balance increased access with stability and
depositor protection
• Operational and human resource development. A combination of training services and tech-
nical consultancy aimed at building provider capacity
• Payment systems. Requires collaboration between public and private players, enables orga-
nizations to take deposits and transfer funds
• Deposit insurance. Whether public or private sector–based, requires savings organizations to
agree on deposit requirements
Source: Glisovic, El-Zoghbi, and Foster 2011.

The Evolving Financial Landscape 33


Box 1.12  Formal and Informal Rules

Formal rules consist of the written laws, gov- ferent individuals based on a combination of
ernment policies, formal regulations, and social norms, culture, and historical factors.
industry standards that are formally docu- Any specific community tends to adopt such
mented and (sometimes) enforced. They are rules, codes of conduct, and regulations based
shaped and influenced by the informal rules of on a combination of norms associated with
the society or business community. In turn, different social institutions. Sometimes these
they influence how informal rules are informal rules fill an obvious gap in the formal
expressed in the performance of the market. legislation. Informal rules are often psycholog-
Informal rules are unwritten, tacit rules that ically internalized: not merely unwritten, but
define acceptable roles and activities for dif- beneath people’s conscious attention.
Source: microLINKS wiki 2010.

system. Formal rules are discussed in more capital, where systems and structures have been
detail in chapters 3, 17, and 19. developed to build trust and foster social and eco-
Informal rules are an integral part of local cul- nomic transactions beyond the family and kin
ture, value systems, and practices. By definition, group, it will be easier and less costly to build sus-
they are not the responsibility of one player. tainable systems for financial intermediation
Although particular individuals or organizations (Bennett 1997).
may exert considerable influence, informal rules Informal rules can contribute to the effective-
emerge organically and are the result of traditions ness of formal rules when the norm is compliance
and habits influenced by social institutions, such or when formal rules codify informal norms
as gender, religion, caste, tradition, inheritance already widely accepted (microLINKS wiki
rights, and landownership.10 For example, accord- 2010), such as Islamic finance principles now
ing to microLINKS wiki (2010), “Typically these being incorporated into regulatory frameworks.
gender norms are expressed through informal Informal rules may also emerge in response to
(and formal) rules that lead to discriminatory formal rules that do not work well for a particular
property and inheritance laws, for example, differ- group or do not exist. For example, a village leader
ent access to resources, and to restrictions on the can “vouch” for borrowers in the absence of a
tasks or places of work that women may occupy.” credit bureau or can verify property ownership in
Norms suggest a standard of conduct that the absence of a housing registry. Given that
­people believe they ought to follow to avoid sanc- informal rules reflect long-held beliefs and social
tioning (Coleman 1994). Social and cultural structures, they typically are difficult to change
norms surrounding attitudes toward money, (although some can be addressed by corrective
sharing, and authority can greatly influence the regulation or judicial decision).
type of financial services that are most useful in a Informal rules also influence the supply side
given community. Trust, for example, plays an of the market. They may be manifested in, for
integral role in the decision to use a particular example, industry norms in relation to innova-
financial service or adopt a set of financial behav- tion and risk, which, in turn, drive attitudes and
iors (Shipton 2007). In societies with high social practices to develop new products. And for

34 The New Microfinance Handbook


­ roviders of all sizes, the level of trust clients
p institutions do change and evolve in response to
have, as well as the norms regarding repayment new technologies or interaction with new cul-
of loans, is critical in determining the incentives tures. For example, mobile money may make it
for increased financial inclusion. For example, easier to transfer money from urban to rural
historical experience such as conflict or disaster areas, thus resulting in less reliance on commu-
can create social dynamics that persist for gen- nity solidarity to manage risks and deal with
erations, such as a lingering lack of trust, a lack emergencies.11 Understanding informal rules
of available resources, infrastructure, and oppor- provides insight into what will work within a
tunities, and overall difficulty in establishing particular community (see box 1.13).
relationships and creating solidarity in the com-
munity. Communities marked by significant eth- Supporting Functions
nic conflict may be less receptive initially to Supporting functions provide the resources,
peer-based group lending models that have his- information, and services that shape financial
torically worked very well in microfinance. market behavior and enable markets to grow,
Alternatively, a community where cash is less adapt, and succeed in changing circumstances.
prevalent than in-kind assets ­potentially requires Weak supporting functions (and inappropriate
unique financial services ­ outside traditional rules) leave markets vulnerable, lacking the
credit and savings products. ­necessary depth to be sustainable and fit into a
While some informal rules may appear changing world. The composition and nature of
unproductive, they serve an important purpose, supporting functions, and who provides them,
such as providing a social safety net. These rules vary from one context to another but are con-
might include shared access to income, common cerned generally with information and communi-
understanding of property, and rigid social cation, capacity building, coordination, resource
structures, as discussed earlier. However, social development, and innovation. All of these support

Box 1.13  Understanding Informal Rules through Financial Landscapes

The methodology (and metaphor) of financial landscapes seeks to examine the path through
which the poor access services in relation to the world around them, including, for example:
• Spatial. How distance and ease of travel in locating providers affect access to services, taking
into account settlement patterns and physical infrastructure
• Historical. How past policies and approaches have shaped existing service provision and
attitudes
• Sociocultural. How social and personal networks develop in response to limited access
• Economic. How patterns of income and expenditure shape the demand for services.
This type of research seeks not only to throw light on the specific situations of households
but also to examine how this affects financial service provision and access. In doing so, a more
complete picture should emerge of both the core and the “informal rules” that have shaped its
development.
Source: Bouman and Hospes 1994.

The Evolving Financial Landscape 35


the core function—the exchange between clients • Funding. Can take various forms, such as
(demand) and service providers (supply). equity or debt. The key players here are pri-
Because they differ from one context to vate investors, but in practice, especially for
another, there is no comprehensive list of sup- microfinance, a range of social investors are
porting functions. However, the following are active, often supported by donor funds, not
some of the main functional areas: usually seeking a commercial (or indeed any
financial) return.
• Capacity development. Concerned with devel-
oping capacity of various players including • Infrastructure. The range of technical and
policy makers and providers. It therefore may other support services required to enhance the
involve training services or other means by efficiency of the overall system. This could
which employees learn new skills. In more include credit bureaus, deposit insurance, and
established markets, capacity development for accounting services. The key players are likely
the industry as a whole may involve coordina- to be private sector companies and public reg-
tion among private and public players.12 ulatory authorities.
• Coordination. The capacity (within a market Supporting functions are described in more
system) to go beyond the limitations of detail in chapters 3, 5, 16, and 18.
­individual perspectives, understand the sys-
tem as a whole, and support its development. Implications of the Market System
This is a noncommercial, collective, public Framework: Providers and Facilitators
role and therefore is likely to be the domain of While all organizations engaged in financial
government or representative industry (and inclusion may agree that development of the sys-
perhaps consumer) associations. tem as a whole represents a worthy aim, they do
• Advocacy. Efforts to provide an appropriate not all have the same role or perspective.
voice in the financial market system, especially Organizations differ with respect to several fac-
for providers and consumers, and to ensure tors, for example, their legal status (for-profit
that their views contribute to public functions business, NGO, association, government), funding
such as regulations and standards. sources (grants, debt, equity, client-generated
revenues), scale, and motivations. However, per-
• Information. Refers loosely to the “informa- haps the most basic but useful distinction is
tion environment,” for example, in relation to between organizations that see themselves as
emerging trends and products (aimed at both market players with a continuing direct role
providers and consumers) and to more spe- within the market system and facilitators that see
cific information-based products and services. themselves as external actors with a mandate to
The key players include specialized service act as temporary catalysts in stimulating others in
companies and government or associations in the market (see figure 1.4). Knowing your place in
relation to public information on, for example, the financial services landscape is an important
standards and legal rights. step in determining what you should do and how
• Research. The provision of knowledge-based you should do it.
products or services related to, for example, • Market system players. Organizations or indi-
the demand and supply sides of the core, viduals with an active and continuing role
impact assessment and the implications of delivering functions in the financial eco­
wider trends. system. This includes providers of financial

36 The New Microfinance Handbook


Figure 1.4  Market System Players and Facilitators

FINANCIAL MARKET SYSTEM

SUPPORTING Private
FUNCTIONS sector

Government Facilitators

Community Seeking to
groups develop the
D CORE S
market system
Representative as external
associations catalyst
Not-for-
profit sector
RULES

Players
Specific roles within
the market system

s­ ervices, regulators, and other developers and function more effectively and inclusively.
enforcers of formal rules and providers of sup- Facilitation is therefore a public role (not com-
porting functions. These entities are part of mercial); it is temporary (not permanent) and
the system and envisage remaining part of it in requires understanding and capacity to inter-
the future. vene with appropriate and timely resources
(financial, human, and political). And while in
• Facilitators. External players, standing outside
the short to medium term, the role of the facil-
the system, whose role is to facilitate positive
itator may involve multiple activities—­
changes in the market system. Facilitators are
including direct roles in the market if
most often donors and development agencies
required—in the longer term, the strategic
that are funded by donors. (Investors who pro-
purpose of facilitation is, by definition, not to
vide debt or equity to providers are considered
have any continuing role in the market system.
to be market players, as they provide funding,
an important supporting function.) Grant Table 1.3 outlines the strategic differences
funding is used (or should be) to facilitate the between the two roles. In the long term, who
market and to develop the capacity of market should be a market player (that is, provide a prod-
players in the system. While facilitators work uct or service, public or private) and who should
in a variety of ways, their role is to use resources pay for those ­products or services? There is rela-
to address constraints, allowing the system to tively little disagreement about who should fulfill

The Evolving Financial Landscape 37


Table 1.3  Key Characteristics of Facilitators and Providers in the Financial Market System
Characteristic Facilitators Market players
Orientation and Broad. What is good for the market system Narrow. What is good for me and my clients
purpose as a whole? or stakeholders?
Long-term role No role in the longer term; facilitate others Continuing role with incentives and capacity
in the market system to grow
Activities Varies with market constraints identified, Consistent with long-term role; provision of
for example, technical, financial, organiza- services, either financial services in the core
tional, information assistance or supporting functions or formal rules
Skills, knowledge Strategic overview and (flexible) technical Narrow technical competence to fulfill
capacity to address constraints specific role
Funding Development agencies and donors Other players in the market, clients
(revenues from services), or government
(for public services)
Legal form Development mechanisms; donors, Appropriate to role; mainly private players
foundations, contractors, NGOs (formal and informal) for service provision
Cost base Appropriate for development agencies Appropriate for market system

some functions in the financial system. Financial Banking without Branches


service delivery is generally accepted as appropri-
ately provided by the private sector, while the The third significant influence on financial ser-
development of regulatory frameworks, for vices for the poor is the opportunity presented by
example, merits public subsidy. Historically how- technology to increase financial inclusion.13
ever, ambiguity over the nature of some functions Building on the previous discussion of the finan-
has provided justification for extensive donor cial ecosystem, this introduction to branchless
subsidy in microfinance. Donors that fund market banking focuses on the new market players—
players directly or themselves play market roles MNOs and agent networks—within the system
only have a valid rationale for participating in the and the emerging new business models that
short term (see chapter 4). result. Chapter 12 provides a more technical dis-
If the financial market system is to be truly cussion of each of the various transaction or
facilitated and a position reached where long-term access points—for example, mobile phones,
financial inclusion has been achieved and facilita- Internet, automated teller machines (ATMs)—
tion is no longer required, facilitators must figure and the development and management of an
out how to play a role without becoming a market agent network; it also includes a glossary of
player and how to implement their vision of how branchless banking terms.
the market system should function without them Cost and proximity drive the delivery of finan-
in the future (see chapter 19). Figure 1.5 illus­trates cial services. Historically, providing services in
the evolution of taking a financial system close proximity to clients entailed high costs for
approach rather than an institutional approach— both the provider and the client. However,
from (a) strengthening supply to (b) understand- financial service providers are increasingly find-
ing demand and from (c) building the core market ing innovative ways to integrate the delivery
to (d) developing the wider market system. of financial services into the everyday lives of cli-
ents. While community-based providers­are

38 The New Microfinance Handbook


Figure 1.5  Evolution of Intervention Focus from Financial Institutions to Financial Systems

(a) Strengthening
supply
SUPPORTING
FUNCTIONS
(b) Understanding
demand

(d) Developing the CORE


wider SUPPLY DEMAND
market system

RULES
(c) Building the
core market

Source: Rob Hitchins, The Springfield Centre.

already largely “branchless,” for institutional transfers to full-service banking, allowing depos-
providers, branchless banking is changing the its, withdrawals, and, if relevant, loan disburse-
way clients and providers interact and is poised ment and payments or even insurance premium
to lower the costs of delivery significantly and payments or payouts.
to reach financially excluded households that In providing an overview of branchless bank-
cannot be served profitably using conventional ing and the associated new business models, it is
branch-based approaches—especially in remote, helpful to define a few terms. Mobile money
sparsely populated areas and urban slums refers to a type of electronic money that can be
(CGAP 2011). transferred over a mobile phone. The issuer of
Banking without branches requires alterna- mobile money may (depending on the local law
tive access points for client transactions. These and the business model) be an MNO or a third
include self-serve solutions such as mobile party, including a bank (CGAP 2011). Mobile
phones or ATMs, staff-based transaction points banking is the use of a mobile phone to access
such as mobile branches that visit underserved financial ­services and execute financial transac-
areas on specific days, and third-party agents tions ­connected to a bank account. This covers
including retailers (or in some cases, MFIs) both transactional and nontransactional ser-
using card-reading point-of-sale (POS) devices, vices, such as viewing financial information on a
mobile phones, or Internet-connected computing mobile phone (Chatain et al. 2011). An agent is
devices. Branchless product offerings range from any third party acting on behalf of a bank or
individual money transfers and government cash other financial service provider (including an

The Evolving Financial Landscape 39


electronic money issuer or distributor) in its with reliable cash flow who can service clients
dealings with customers. Agents perform seeking to deposit, withdraw, or send funds to a
“cash-in” (the exchange of cash for electronic third party. Providers such as banks or MNOs
value) and “cash-out” (the exchange of elec- often establish agent networks through a range of
tronic value for cash) services. distribution networks, including airtime sellers,
shopkeepers, retailers, traders, petrol stations,
New Market Actors: A Wider Ecosystem post offices, or kiosks in markets. Agents charge
Branchless banking is primarily about the emer- transaction fees, but because they serve areas
gence of different kinds of businesses, often with where most institutional providers are unable to
new kinds of players, to deliver multiple financial reach, these fees are often lower than the cost of
services to a mass market through technology- traveling to a bank branch or using a traditional
enabled business models that operate very differ- money transfer company.
ently from more traditional financial service Agents can facilitate transactions via several
delivery models. Branchless banking services access devices, including a POS device, a mobile
require an ecosystem of players. For example, phone handset, a tablet, or a personal computer.
mobile banking, a subset of branchless banking, A client can deposit cash with an agent in one
requires partnerships between MNOs and banks location, and those same funds can be withdrawn
or other financial service providers and agents.14 immediately by another client at a different loca-
Mobile banking solutions “are hard to build tion.16 Agents must have an account at a bank that
because they require strong multiparty orches- has a secure, real-time transaction-processing
tration, in principle spanning several regulatory capability, either online using wireless or
domains, and the proposition is severely weak- Internet connectivity or offline using smartcards
ened if any one element of the solution is not capable of updating balances and recording
properly primed. Indeed, the commercial transactions (see chapter 12). A payments system
arrangements between the parties are what or network (see chapter 18) is needed that allows
holds the system together” (Mas 2008, 8). This the agent’s bank to account for and settle trans-
discussion focuses on agent networks and MNOs actions with all participating client banks.
as the two main new entrants to financial service Consumer protection safeguards are also
provision. required to minimize exposure of bank clients to
agent risk (Mas 2008).
Agent Networks Some providers use agents for more than sim-
While branchless banking channels offer clients ple transactions, such as providing account bal-
more convenience and access points, POS devices ances or notifying clients of payments coming
on their own cannot accept deposits; Internet and due, delivering credit products, and, if properly
mobile channels by themselves have no cash licensed, delivering insurance products. Based on
transaction capability; and mobile branches may a representative case in the Mexican market, as
not visit often enough to meet all the needs of cli- much as 20 percent of the transactions coming
ents.15 Thus these channels individually cannot into branches could be handled by agents (Mas
replace traditional channels altogether (Mas and Kumar 2008).
2008). This is where agents enter the picture. Depending on the regulatory environment,
An agent network is a group of retailers with sometimes MFIs can act as agents for larger
existing businesses or retail locations who (pri- commercial banks or for MNOs. This strategy
marily) provide cash-in, cash-out services. An allows microfinance customers to gain exposure
agent may be any retailer conveniently located to mobile banking and can also help MFIs to

40 The New Microfinance Handbook


­ifferentiate themselves from the competition
d New Business Models: Partnerships for
and bring enhanced liquidity to their branches Branchless Banking
(Kumar, McKay, and Rotman 2010). Developing partnerships between financial
Agents provide the customer interface. ­service providers and MNOs is not easy. A key
Therefore, when developing a network of agents, consideration when developing partnerships is
providers must address the operational chal- how flexible the service will be in terms of trans-
lenges in a way that fosters a positive and consis- mitting and receiving funds from clients with
tent customer experience that will create and other financial service providers or MNOs.
maintain trust in the system. Strategies for MNOs may partner with multiple financial insti-
enrolling, training, incentivizing, managing, and tutions, increasing the ability of clients to trans-
retaining agents are critical considerations for all act across financial institutions (interoperability),
providers that use agents to deliver financial but diminishing the unique added value for the
­services. Providers can hire and manage their financial partners (see chapter 12). At the same
own agents, or they can outsource this function time, banks and other providers that partner
(see chapter 12). with only one MNO restrict the use of the ser-
vice to clients of that MNO. Financial service
Mobile Network Operators providers must balance the need for universal,
Mobile network operators provide the ability to multi-MNO solutions with the practicality of
use mobile phones for financial services—either outsourcing more functions to a single MNO.
directly to consumers or on behalf of other finan- At the outset, it can be expensive to engage in
cial service providers, usually through an agent mobile banking; partners may be scarce and the
network. MNOs can provide money transfer and incentives to reach a broad mass of people may
payment services directly without being linked not be aligned between the necessary actors.
to another financial service provider (mobile Some providers, including MNOs, do not have
money), or they can partner with a bank or other the high market share that might translate into
provider to increase outreach both in terms of the volume of transactions needed for mobile
numbers as well as available products (mobile services to break even. Furthermore, adequate
banking) (Kumar, McKay, and Rotman 2010). back-office and transaction-switching capability
The role of MNOs in mobile banking can vary as well as sufficient internal controls are required,
from simply selling text-messaging services to which smaller providers may not have or not
providing a full-fledged parallel banking infra- have access to. To increase adoption rates, banks
structure (although it is still early in the process and others need to drive awareness of the service
to fully understand what this involves). Which and ensure strong branding. While mobile bank-
role(s) a bank or other financial service provider ing reduces the cost of service delivery and
wants the MNO to play depends on how much increases convenience for both providers and
it wants to integrate mobile banking services clients, significant efforts are required to allay
into its core business and its ability to implement security fears and natural resistance to new
technology-­based deployments.17 Customer technologies.
experience is determined directly by the tech- In addition, negotiations between the MNO
nology platform used and the ability to access and the financial service provider need to con-
cash-in, cash-out services (Mas and Kumar sider the customer service interface (for exam-
2008). These and other issues are still being ple, the MNO’s customer call center) and the
worked out, and expectations for the future are marketing and cross-selling of bank services
uncertain (see box 1.14). to  telephone customers. MNOs can use their

The Evolving Financial Landscape 41


Box 1.14  Potential of Mobile Banking

Mobile banking has great potential to reach other services. Mobile money has often fallen
vast numbers of low-income, unbanked peo- between the regulatory cracks, and MNOs in
ple at affordable prices with a wide range of several countries are offering mobile pay-
products to meet complex financial needs. Yet ments without being regulated as banks.
early experience suggests that, although the Simply put, MNOs are poorly positioned on
potential is strong, it is by no means guaran- their own to offer a broader range of products.
teed that mobile banking will deeply pene- Strategic partnerships with providers that bet-
trate low-income, unbanked segments with ter understand the financial landscape and
appropriately designed products. needs of the client are critical. For some
First, the very qualities that endowed MNOs, mobile payments do everything they
mobile network operators with a head start in want them to do: increase loyalty among
mobile money may work against their capac- voice clients and decrease the cost of distrib-
ity to field a more complex suite of products. uting airtime. In other words, they have no
The common mobile money product—a liq- motivation to do more unless they have
uid, electronic wallet with the capability to strong, strategic partners. Because financial
transfer money—is quite simple, akin to the services are not their core business, MNO
preexisting airtime wallet. However, MNOs owners and shareholders may not be inter-
know little about credit, savings, and insur- ested in investing in more services or
ance. They also lack regulatory room to offer partnerships.
Source: McKay and Pickens 2010.

extensive agent networks and retailers to pro- define the options for mobile banking, including
vide cash-in, c­ash-out services and to sign up regulatory restrictions on outsourcing cash-in,
customers for banking services. The MNO’s cash-out functions, know-your-customer (KYC)
brand can be leveraged to appeal more directly to obligations, and limits on mobile money transac-
clients with stronger a­ ffiliations to mobile phones tions. In fact, the maximum amount allowed for
and mobile brands than to banking. This may be transfers is generally relatively low, which may
particularly appealing for efforts to increase limit the use of this service. Other issues include
financial inclusion among youth. However, using data security and customer privacy regarding
the MNOs’ distribution and marketing channels e-banking, account issuance of non-banks, and
also has revenue implications: fees are split taxation.
among the MNO as a brand, the MNO as a trans- At the time of writing, various new technolo-
action channel provider, and the bank as finan- gy-enabled business models are emerging: those
cial intermediary. that provide money transfer services (mobile
And lastly, in many countries, regulation of money), those that link MNOs with bank services
MNOs by the banking authorities is not yet clear, (mobile banking), and agent banking being estab-
although this is beginning to change as new mod- lished by large retailers. Some of the more inter-
els emerge and the various stakeholders better esting ones are described in box 1.15, although
understand the systemic risks inherent in mobile time will tell which ones will reach significant
banking. Ultimately, significant regulatory factors scale and longevity.

42 The New Microfinance Handbook


Box 1.15  New Branchless Banking Business Models

Safaricom’s M-PESA: mobile money. Telenor and Tameer’s EasyPaisa (Pakistan).


Safaricom’s M-PESA is a transfer and ­payment The partnership between Telenor, an MNO,
service with close to 17 million customers in and Tameer Bank grew out of a strategic
Kenya, a country with 7 million bank accounts, ­alliance that started after Tameer Bank decided
most of which are considered active. The indi- to use mobile phone banking services to reach
vidual accounts only exist on the M-PESA plat- rural clients. Telenor had 18 million subscribers
form, not in bank accounts. Bank accounts in Pakistan, and Tameer Bank wanted to take
hold the float that backs the e-accounts one- advantage of Telenor’s prepaid card distribu-
to-one on a daily basis, which makes Safaricom tion network and to act as its cash-in, cash-out
a non-bank e-money issuer, though it is not agent. Tameer Bank had already decided to
licensed or regulated by the central bank or co-brand the new service—EasyPaisa—with
under e-money regulations (as of February the MNO in order to reach the millions of sub-
2012). In M-PESA’s case, the float is held by a scribers who had a strong affinity to Telenor
trust, not by Safaricom itself. M-PESA has a but were not bank clients. After realizing the
mixed-agent model. Some agents also sell air- advantages of having a bank license to facili-
time and are directly managed by Safaricom, tate mobile money, Telenor acquired a 51 per-
but most agents are managed by intermedi- cent share in Tameer Bank in November 2008.
ary companies under arrangements agreed In 2012, millions of people were using over-
with Safaricom. the-counter services of EasyPaisa agents on a
M-Kesho, Iko Pesa: mobile money and recurring basis, and more than 500,000 had
bank account links. In Kenya M-Kesho links mobile wallet accounts. With a network of
the M-PESA wallet offered by Safaricom with 12,000 agents, EasyPaisa was growing quickly.
a bank account offered by Equity Bank, allow- Tameer’s traditional core business (credit, sav-
ing customers to move money back and forth ings, insurance) is enhanced by EasyPaisa, as
between the M-PESA wallet and the bank Tameer holds the float from all EasyPaisa
account. Orange in Kenya has transitioned all account balances, adding liquidity and dramati-
of its Orange Money accounts into Equity cally reducing the cost of funds for its loan port-
Bank accounts (Iko Pesa), which they did tech- folio. Tameer pays all staff salaries via EasyPaisa;
nically by integrating the Orange Money plat- in the future, it could experiment with different
form with Equity’s core banking system. kinds of savings and other accounts, potentially
Rather than add a link to move money from an switching its good customers to receiving
M-PESA account to a bank account like and paying their loans via this mobile platform.
M-Kesho, the accounts of Iko Pesa are fully Telenor benefits from customer loyalty
integrated, making them one and the same. (reduced churn) and lower airtime distribution
Several banks and MNOs are establishing costs, all of which significantly enhance its core
partnerships of this kind. In West Africa, Airtel voice and text business. EasyPaisa illustrates
Money has established a link with Ecobank in the importance of understanding and manag-
Ghana and Burkina Faso. In Madagascar, ing partnerships in which the parties have their
Orange has partnered with a microfinance own core business but see advantages to join-
bank to offer interest-paying savings accounts ing forces for some things.
on Orange Money. It is not yet clear, however, Oxxo (Mexico): agent banking. Oxxo shows
how successful these models will be. how retail chains with their large retail
(continued next page)

The Evolving Financial Landscape 43


Box 1.15 (continued)
f­ootprint and relationship with customers Oxxo is already involved in financial
across income segments can play an impor- s­ervices and has sizable bill payment and
tant role in new technology-enabled finan- insurance businesses. It is negotiating with
cial service business models. Oxxo is the multiple banks to serve as a cash-in, cash-out
largest retail network in North America, with merchant for their bank accounts. It is also
more than 9,000 locations in Mexico. Oxxo offering its own branded electronic wallet in
claims to open a new store every eight partnership with one of the banks, which will
hours and serves 7.5 million people every be accessible to customers using both cards
day. It is 100 percent owned by FEMSA, the and mobile handsets. Oxxo’s main customer
largest beverage company in Latin America, base is unbanked, so its offer of financial ser-
which was originally set up to distribute vices is expected to significantly contribute to
beer. financial inclusion.
Source: Steve Rasmussen and Kabir Kumar, CGAP.

Branchless Banking and MFIs • Use mobile financial services to update or


MFIs, both regulated and NGOs, have generally replace practices related to the core business,
not played a critical role in branchless banking; for example, use mobile payments for loans
rather they have used the new technology to and insurance premiums
enhance customer service and reduce costs. For
• Act as an agent on behalf of a bank or an MNO.
example, as MFIs become licensed, they can join
the national payments system, gaining the use of Together, these three drivers—a focus on
ATMs and cards or POS devices to provide ser- understanding clients better; acknowledgment
vices through new channels. While some MFIs of the multiplayer, multifunction nature of the
are able to take advantage of opportunities made financial ecosystem; and the opportunities tech-
available through technology, many struggle, and nology presents—can support increased finan-
the expectations and hopes for what might have cial inclusion. The following chapters provide
been have not materialized at any scale. MFIs much more detail on each of these areas, describ-
require superior customer service skills, sophisti- ing the functions and roles within the financial
cated back-office systems, and strong leadership market system and how they can work better for
and technical skills to achieve the organizational the poor.
changes required, and many are simply not there
yet. However, MFIs and other smaller providers Notes
can engage in branchless banking in several ways  1. For example, see the Clients at the Centre
(Kumar, McKay, and Rotman 2010): Initiative of the Consultative Group to Assist
the Poor (CGAP) or the Center for Financial
• Use mobile phones (or personal digital assis- Inclusion of ACCION.
tants, notebooks, or any other technology) to  2. The Scottish government defines financial
collect data in the field inclusion as access for individuals to appropriate­

44 The New Microfinance Handbook


financial products and services. This includes but they are not addressed in this book
people having the skills, knowledge, and because poor populations use them so
understanding to make the best use of those infrequently.
products and services. Financial exclusion is  8. In practice, rules and supporting functions—
often a symptom of poverty as well as a cause. whatever their type—are often delivered or
See http://www.scotland.gov.uk/ subsidized directly by development agencies.
Publications/2005/01/20544/50280. Sustainability analysis in microfinance has
 3. Findings are based on focus group discussions historically focused on providers at the core
with 64 clients from regulated and unregu- and the extent to which their operations are
lated MFIs and 20 in-depth interviews with financed from operational revenues, rather
members of the Debtors Association, the than extending to the wider market system as
Superintendencia de Bancos, and MFI staff in a whole. Yet if the objective is to develop
El Alto, La Paz, Santa Cruz, and Montero, functioning, sustainable market systems,
Bolivia. sustainability analysis needs to be equally
 4. Portfolios of the Poor is a seminal work comprehensive, extending beyond the core to
synthesizing research findings from financial include supporting functions.
diary studies in Bangladesh, India, and South  9. The concept of rules of the game is central in
Africa (Collins et al. 2009). institutional economics. See chapter 19 for
 5. This has become an issue of some controversy, further discussion.
with some believing that the microfinance 10. According to microLINKS wiki (2010), “Social
industry as a whole—led by donor funding— institutions are complex, enduring structures
has developed a supply-side/product-push or mechanisms of social order (and coopera-
character that emphasizes credit rather than tion) that govern customs and recurring
other services, especially savings, increasing behavior patterns important to a society. They
personal debt without bringing commensurate are usually identified with a social purpose
benefits. (e.g., mitigating conflict, validating an elite).
 6. There are, of course, exceptions. Some large Enduring institutions such as gender, race or
cooperatives operate very much like regulated ethnicity, class, and religion help to shape
financial institutions, while some rural banks individuals’ beliefs and expectations. Social
are tiny and somewhat informal, despite being institutions exist because they serve a purpose,
subject to formal regulation. Furthermore, the which is often to protect the power or
degree of formality or legal form does not privilege of particular groups.”
always equate with sustainability. Some 11. Although mobile money still relies upon, and
state-owned banks may rely heavily on indeed may be successful because of, social
subsidies, while most commercial banks are institutions. See Susan Johnson’s blog where
financially independent. And while Savings she states, “These interpersonal transfers
Groups can have very formal operating operate within social networks that involve
procedures and are generally sustainable and relationships of ‘give and take’ that can operate
independent of any external assistance in the over long periods of time and in which
long term, some externally facilitated groups resource transfers may be given in one form,
such as Self-Help Groups and Financial Service for example, cash, and returned in another, for
Associations are designed to use outsiders on a example, support with resources of many
medium- to longer-term basis, and most NGO different kinds or social connections to a job
MFIs continue to rely on donor subsidies. and so on. Hence mobile money transfer has
 7. Other products such as foreign exchange or brought a range of financial transactions that
bonds are also available in the formal sector, involve a reciprocal dimension.” http://

The Evolving Financial Landscape 45


technology.cgap.org/2012/04/19/what-does-the- and The Gambia: Understanding the Supply
rapid-uptake-of-mobile-money-transfer-in- and Demand of Remittances between Spain and
kenya-really-mean-for-financial-inclusion/. The Gambia and Its Impact on Financial
12. Financial literacy or education could be Service Access. New York: Women’s World
included within this function—or as a separate Banking.
category—for the demand side of the market. Bennett, Lynn. 1997. “A Systems Approach to
13. This section draws on various CGAP focus Social and Financial Intermediation with the
notes, including Mas and Kumar (2008); Mas Poor.” Paper presented at the Banking with the
(2008); Kumar, McKay, and Rotman (2010); Poor Network and World Bank Asia regional
and McKay and Pickens (2010). conference “Sustainable Banking with the
Poor,” Bangkok, November 3–7.
14. The exception is that, if a bank wants to
launch its own direct mobile payments system, Bold, Chris, David Porteous, and Sarah Rotman.
it only needs regular data services from an 2012. “Social Cash Transfers and Financial
MNO and could therefore launch without any Inclusion: Evidence from Four Countries.”
real partnership. It would just require normal Focus Note 77, CGAP, Washington, DC,
use of the mobile phone network. February.
15. This section is adapted from Flaming, McKay, Bouman, F. J. A., and Otto Hospes. 1994. Financial
and Pickens 2011 and Lehman 2010. Landscapes Reconstructed: The Fine Art of
Mapping Development. Boulder: Westview
16. While POS devices provide access to bank
Press.
accounts as well, how quickly the funds can be
accessed will depend on clearing arrange- *CGAP (Consultative Group to Assist the Poor).
ments between the institutions. 2011. “Global Standard-Setting Bodies and
Financial Inclusion for the Poor—Toward
17. At a minimum, banks or other providers need Proportionate Standards and Guidance.”
to buy wireless connectivity from the MNO. White Paper prepared on behalf of the G-20’s
The next step is to seek access to the memory Global Partnership for Financial Inclusion,
in the subscriber identity module (SIM) to use CGAP, Washington, DC, October.
the encryption keys and phone service menu,
CGAP and World Bank. 2010. Financial Access
which they get from an MNO. A more involved
2010: The State of Financial Inclusion through
role would be for the MNO to manage the
the Crisis. Washington, DC: CGAP and World
entire communications between the client and
Bank.
the back-office server of the bank. The bank
could even have the MNO host and run the Chatain, Pierre-Laruent, Andrew Zerzan, Wameek
core banking system. In such a case, while the Noor, Najah Dannaoui, and Louis de Koker. 2011.
bank owns the accounts, the MNO operates “Protecting Mobile Money against Financial
the system. Crimes.” World Bank, Washington, DC.
*Chen, Greg, Stephen Rasmussen, and Xavier
Reille. 2010. “Growth and Vulnerabilities in
References and Further Reading Microfinance.” Focus Note 61, CGAP,
* Key works for further reading. Washington, DC. http://www.cgap.org/gm/
Banthia, Anjali, Janiece Greene, Celina Kawas, document-1.9.42393/FN61.pdf.
Elizabeth Lynch, and Julie Slama. 2011. Christen, Robert Peck. 2011. “What Does Focusing
Solutions for Financial Inclusion: Serving Rural on the Client Really Mean?” CGAP Blog,
Women. New York: Women’s World Banking. CGAP, Washington, DC.
Banthia, Anjali, and Peter McConaghy. 2012. CIA (Central Intelligence Agency). 2008. CIA
Remittances and Access to Finance in Spain World Factbook 2008. Washington, DC: CIA.

46 The New Microfinance Handbook


*Cohen, Monique. n.d. “The Emerging Market-Led Needs.” Workshop paper commissioned for
Microfinance Agenda.” MicroSave Briefing the 2011 Global Microcredit Summit,
Note 25, MicroSave Kenya. Valladolid, Spain, November 14–17.
Cohen, Monique, and Candace Nelson. 2011. Hudon, M. 2008. “Norms and Values of the
“Financial Literacy: A Step for Clients towards Various Microfinance Institutions.” CEB
Financial Inclusion.” Workshop paper Working Paper 08/006, Centre Emile
commissioned for the 2011 Global Microcredit Bernheim, Brussels, February.
Summit, Valladolid, Spain, November 14–17. *Johnson, Susan. n.d. “Gender and Microfinance:
Coleman, J. C. 1990, 1994. Foundations of Social Guidelines for Good Practice.” http://www
Theory. Cambridge, MA: Harvard University .gdrc.org/icm/wind/gendersjonson.html.
Press. ———. 2000. “Gender Impact Assessment in
*Collins, Daryl, Jonathan Morduch, Stuart Microfinance and Microenterprise:
Rutherford, and Orlanda Ruthven. 2009. Why and How?” Development in Practice 10
Portfolios of the Poor. Princeton: Princeton (1): 89–93.
University Press. ———. 2004. “Gender Norms in Financial Markets:
*Demirgüç-Kunt, Aslı, and Leora Klapper. 2012. Evidence from Kenya.” World Development
“Measuring Financial Inclusion: The Global 32 (8): 1355–74.
Findex.” Policy Research Working Paper 6025, ———. 2011. “Understanding Kenya’s Financial
World Bank, Washington, DC. Landscape: The Missing Social Dimension.”
*Ehrbeck, Tilman, Mark Pickens, and Michael FSD News 17 (August): 2.
Tarazi. 2012. “Financially Inclusive *Johnson, S., and S. Arnold. 2011. “Financial
Ecosystems: The Roles of Government Today.” Exclusion in Kenya: Examining the Changing
Focus Note 76, CGAP, Washington, DC, Picture 2006–2009.” In Financial Inclusion in
February. Kenya: Survey Results and Analysis from
Faz, Xavier, and Paul Breloff. 2012. “A Structured FinAccess 2009, 88–117. Nairobi: FSD Kenya
Approach to Understanding the Financial and Central Bank of Kenya.
Service Needs of the Poor in Mexico.” CGAP *Karim, Nimrah, Michael Tarazi, and Xavier
Brief, CGAP, Washington, DC, May. Reille. 2008. “Islamic Microfinance: An
*Flaming, Mark, Claudia McKay, and Mark Pickens. Emerging Market Niche.” Focus Note 49,
2011. “Agent Management Toolkit: Building a CGAP, Washington, DC.
Viable Network of Branchless Banking Agents *Kendall, Jake. 2010. “Improving People’s Lives
(Technical Guide).” CGAP, Washington, DC. through Savings.” Global Savings Forum,
*Glisovic, Jasmina, and Mayada El-Zoghbi with November. http://www.gatesfoundation.org/
Sarah Foster. 2011. “Advancing Savings financialservicesforthepoor/Documents/
Services: Resource Guide for Funders.” CGAP, improving-lives.pdf.
Washington, DC. *Kumar, Kabir, Claudia McKay, and Sarah Rotman.
Harriss-White, B. 2004. “India’s Socially 2010. “Microfinance and Mobile Banking: The
Regulated Economy.” Indian Journal of Labour Story So Far.” Focus Note 62, CGAP,
Economics 47 (1). Washington, DC, July.
*Hashemi, Syed M., and Aude de Montesquiou. Ledgerwood, Joanna. 1998. Microfinance
2011. “Reaching the Poorest: Lessons from the Handbook. Washington, DC: World Bank.
Graduation Model.” Focus Note 69, CGAP, *Lehman, Joyce. 2010. “Operational Challenges of
Washington, DC, March. Agent Banking Systems.” Brief written for the
Hatch, John. 2011. “When Clients Grow Old: The Global Savings Forum, Bill and Melinda Gates
Importance of Age in Addressing Client Foundation, Seattle, November.

The Evolving Financial Landscape 47


Linthorst, Audrey, and Scott Gaul. 2011. “What Do Orozco, Manuel, Anjali Banthia, and Mariama
We Need to Know about Financial Inclusion in Ashcroft. 2011. “A Country Profile on The
Africa?” SEEP Network, Washington, DC. Gambia: The Marketplace and Financial
*M4P Hub. 2008. “A Synthesis for Making Markets Access.” Women’s World Banking, New York.
Work for the Poor (M4P) Approach.” http:// Perdomo, Maria. 2008. “Consumer Protection: A
www.m4phub.org/resource-finder/result Client Perspective.” Research note prepared
.aspx?k=m4p%20synthesis&t=0&c=0&s=0. for Microfinance Opportunities and Freedom
*Mas, Ignacio. 2008. “Being Able to Make (Small) from Hunger.
Deposits and Payments, Anywhere.” Focus Pickens, Mark. 2011. “Which Way? Mobile Money
Note 45, Washington, DC, CGAP. and Branchless Banking in 2011.” CGAP
———. 2010. “Savings for the Poor: Banking on Technology Blog, CGAP, Washington, DC,
Mobile Phones.” World Economics 11 (4). March 9.
*Mas, Ignacio, and Kabir Kumar. 2008. “Banking *Porteous, D. 2005. “The Access Frontier as an
on Mobiles: Why, How, for Whom?” Focus Approach and Tool in Making Markets Work
Note 48, CGAP, Washington, DC. for the Poor.” http://bankablefrontier.com/
Mas, Ignacio, and Dan Radcliffe. 2010. “Mobile assets/pdfs/access-frontier-as-tool.pdf.
Payments Go Viral: M-PESA in Kenya.” Rankin, Katharine N. 2002. “Social Capital,
http://papers.ssrn.com/sol3/papers Microfinance, and the Politics of
.cfm?abstract_id=1593388. Development.” Feminist Economics 8 (1): 1–24.
*McKay, Claudia, and Mark Pickens. 2010. Rotman, Sarah. 2010. “An Alternative to M-PESA?
“Branchless Banking 2010: Who’s Served? At Orange and Equity Bank Launch Iko PESA.”
What Price? What’s Next?” Focus Note 66, CGAP Technology Blog, CGAP, Washington,
CGAP, Washington, DC. DC, December 6.
microLINKS wiki. 2010. “Informal Regulations Shipton, Parker. 2007. The Nature of Entrustment:
under BEE.” Value Chain Framework wiki Intimacy, Exchange, and the Sacred in Africa.
page. http://apps.develebridge.net/amap/ New Haven: Yale University Press.
index.php/Informal_Regulations_under_BEE. World Bank. 2011. World Development Report 2011:
———. n.d. “Social Institutions Comprising Conflict, Security, and Development.
Informal Regulations.” http://microlinks.kdid Washington, DC: World Bank.
.org/good-practice-center/value-chain-wiki/ Wyman, Oliver. 2007. “Sizing and Segmenting
social-institutions-comprising-informal- Financial Needs of the World’s Poor.” Bill and
regulations. Melinda Gates Foundation, Seattle.

48 The New Microfinance Handbook


CHAPTER 2

Clients
Stuart Rutherford, Daryl Collins, and Susan Johnson

No matter how it is measured, the number of unbanked poor—dwarf the number of clients
people without access to financial services is already served by microfinance, estimated at 190
very large indeed. In 1976, when Muhammad million at the end of 2009 (Microcredit
Yunus in Bangladesh started the experiment that Campaign Summit 2011).
led to the Grameen Bank, he focused on the very In chapter 1, “The Evolving Financial
poor. As microfinance grew, it attracted the “eco- Landscape,” we discussed who the poor are, how
nomically active poor,” people who might be they differ, and how various influences such as
expected to take loans to run a small business, life-cycle stages, geography, livelihoods, and
for example. More recently with the drive for informal rules and norms, such as gender, affect
“financial inclusion,” attention has turned to the their access to financial services. This chapter
“unbanked” poor—poor people not using formal examines financial services from the point of
financial services of any sort (including microfi- view of poor people. It looks at the kinds of tools
nance, sometimes referred to as “semiformal” that the poor need to manage their money,
services). Just over half of the world’s adult pop- shows why they need them, and assesses the
ulation is unbanked, most of them poor: In extent to which they already have access to
Africa, four out of five adults are unbanked, and them. It describes the key characteristics of
in South Asia, three out of five (Chaia et al. 2009). good quality pro-poor formal financial tools and
In rich countries, by contrast, fewer than one in shows how and why the poor, the extremely
ten adults lacks a formal means to save or to bor- poor, and the unbanked poor might use and ben-
row (Chaia et al. 2009).1 All these numbers—of efit from such services if they were more widely
the extremely poor, the moderately poor, and the available.

Clients 49
The Poor and Financial Services: their money management needs are presented,
Diverse Needs and Common beginning with the most basic question of all:
Problems Why do poor people need financial tools in the
first place? To answer that question, we need to
The poor, as broadly defined in the opening para- move into the villages and slums and find out
graph, make up half or more of the world’s popu- more about how poor people manage their money.
lation, and although they are somewhat clustered
regionally, above all in Africa and Asia, in all other
The “Financial Portfolios”
respects they are diverse. It follows that their
of the Poor
financial behavior is similarly diverse. The bor-
rowing and saving patterns of an agricultural Finance is the intersection of money and time.
day-laboring household are not the same as those Looking at one element in the absence of the
of a farmer, let alone those of a household that other tells less than half the story. One-off surveys
depends on a small shop or workshop in an urban that focus on the finances of poor households may
slum, or on low-paid wage jobs in a factory, or on identify which savings institutions are used or
domestic service. Even where livelihoods are sim- what types of loans are outstanding, but say little
ilar, innate differences between households will or nothing about how the timing of cash flows is
generate different financial patterns, according to managed to accumulate savings or repay loans. To
the age, the gender, and the health of the house- see how poor households try to reconcile con-
hold members. Research shows that women and strained incomes with expenditure needs, and
men tend to have different attitudes toward how financial tools, no matter how crude, are
household resources and their allocation, includ- employed to achieve that end, we need to look at
ing financial resources.2 At an individual level, their household finances as a totality, as a portfo-
personality counts: Some people are more cau- lio of tools, each with its particular cash flow. To
tious than others and may therefore be more understand how and why poor households
averse to loans and more ready to save. Conversely, choose and use their financial tools, we need to
there are overarching cultural traditions—for observe how these portfolios change over time:
example, the preference for certain types of “What has been missing is a close look at how
­savings-and-loan clubs among the ethnic Chinese portfolios function: not just how well the pieces
or among the slum dwellers of Nairobi—that give work, but how well they work together. Focusing
a distinctive shape to the financial behavior of on how gives new insight into the day-to-day
whole groups of people. The degree of monetiza- nature of poverty and yields concrete ideas for
tion of a country’s or of a district’s economy will creating better solutions for it” (Collins et al.
affect the scope for financial intermediation. And, 2009, p. 14).
last, a household’s financial service needs change For the book Portfolios of the Poor, the authors
over time with life-cycle events: for example, as conducted year-long “financial diaries” in urban
the children are educated and leave home and and rural sites in Bangladesh, India, and
productive activities in the household decline. South Africa, to better understand this three-
Nevertheless, poverty presents poor people dimensional view of household finances. These
with a number of financial management prob- were not “diaries” that the households them-
lems that cut across differences in traditions, live- selves kept, but reports from interviews carried
lihoods, and household composition. These out by trained investigators, speaking the local
commonalities are the subject of this chapter. language, on a frequent and regular basis through-
Here general observations about poor people and out a full year.3 The investigators recorded as full

50 The New Microfinance Handbook


an account as possible of income and expendi- take, almost always require large sums of money if
ture, and focused especially closely on financial they are to be coped with successfully. The poor’s
flows—flows in and out of savings and loan tools. need for ways to save and to borrow—their need
At the same time, they probed for an understand- for financial services—is greater than the needs of
ing of how circumstances, preferences, and aspi- the nonpoor: not in monetary value, of course, but
rations shaped the financial decisions the in intensity. Being able to take a dollar from a
households made. From these “diaries” it was bank, or borrow it from a helpful neighbor, may
often possible to construct not just the balance allow a mother to take her child to the clinic and
sheets of the household accounts but also—and have her conjunctivitis cleared up; not being able
much more revealing—cash flow statements to do so may lead to her daughter going blind in
showing the activity that lay behind the balance later life. Managing money well is an essential life
sheets, all set in the context of the particular skill that most poor people take very seriously.
household’s circumstances. Altogether, data for To manage their money, the households that
about 250 households were gathered, supple- took part in the “diaries” research pushed and
mented by a further 50 households from pulled more money through informal tools than
Bangladesh collected in a subsequent and slightly through formal savings, loan, or insurance
modified “diary” exercise.4 accounts at banks, insurance companies, or
microfinance institutions (MFIs). This was true
Active Money Managers even where banks were near at hand (as in South
The “diary” research revealed that poor people Africa) or where MFIs had already reached the
use financial tools intensely. At first this finding slum or the village (as in the Bangladesh case).
seems counterintuitive. It is easy to suppose that This can be partly understood from the “supply
very small incomes lead to a “hand-to-mouth” side.” Banks are mostly set up to serve corporate
existence in which income is consumed as soon clients and wealthier individuals and were never
as it arrives and there is no need and no scope for designed to cater to the needs of the poor. MFIs
intermediation and thus no need for the financial are built to serve the poor, but so far at least, they
tools that make it possible. This turns out not to have focused most sharply on one particular
be the case. The poor, rather, tend to be intensive financial service they believe will help poor peo-
money managers, constantly seeking ways to set a ple to climb out of poverty—the short-term loan
bit of money aside or to borrow. This is not in spite for small-business investment. Investing in a
of incomes being small, but precisely because they business may indeed provide the potential to
are small. Small incomes are often unreliable and increase incomes, but it is rarely the financial ser-
irregular, so there is an ever-present need to make vice in greatest demand. Many MFIs and other
sure there is enough money to put food on the service providers now recognize this and are
table every day and not just on those days when beginning to offer a broader range of products tai-
money comes in. Small incomes, even if they lored to the poor, but most of these services are
arrive regularly, also mean that large-scale but relatively new and have yet to reach large num-
unavoidable expenditures—for marriage, educa- bers of clients.
tion, homemaking, and festivals, for bicycles, If we look at the “demand side” and see things
fridges, fans, televisions, and mobile phones, and from the point of view of poor households it is
for business and bribes and so on—can almost easier to understand why they rely most often on
never be found from current income, and so must informal devices and services. They need ways to
be saved or borrowed, or both. The same applies build sums of money: small sums to keep the
to emergencies, which, no matter what form they household fed and clothed, and bigger amounts

Clients 51
for life-cycle expenses of all kinds and for emer- includes the financing of productive activities,
gencies. Because such sums can be built only by such as setting up and stocking small businesses,
capturing money squeezed from already very or buying assets for self-employment, such as
small cash flows, they need tools that help them rickshaws.
do exactly that—set aside a little money each day
or each week or month that can be used to build Cash Flow Management and Income
savings or to repay loans. Such tools need to be Smoothing
close at hand, and flexible enough to catch as When the World Bank says that a percentage of
many deposits and repayments as possible. The the world’s population lives on US$2 a day, it
financial diaries revealed that saving at home, means that the average monthly income, multi-
often in very small values, is the most common plied by 12 and divided by 365, comes to US$2. But
and frequent kind of transaction carried out by most people who live on low incomes do not actu-
poor householders as they seek to protect money ally receive US$2 each and every day. Many poor
from many competing demands. Then comes people derive their income from one or several
­borrowing and lending small sums in the village informal activities that produce income sporadi-
or slum, among family and friends, and often cally. An Indian slum dweller may pull a rickshaw
interest free. To build larger sums, poor people most days, but not on days when he cannot find
typically save through savings groups of various one to hire, or it is raining heavily, or he is too ill,
sorts (some of them very sophisticated) or use or the streets are blocked by a demonstration.
larger-scale informal borrowing, often from mon- Meanwhile his wife has a low-grade job in a gar-
eylenders and usually with interest. ments factory where, in theory, she gets paid
monthly, but in practice she can never be sure
when her floor supervisor is going to get around
Understanding the Poor’s Financial
to paying her, or how much he is going to hold
Service Needs
back for how long.
Research exercises such as the financial diaries Income irregularity and unreliability make up
reveal the complexity of money management one leg of a “triple whammy” of financial handi-
among the poor and the intimate way in which it caps faced by the poor. The other legs are low
shapes and is shaped by the circumstances of incomes and the lack of adequate financial tools.
individuals and their households. Nevertheless, The effect of all three working together and rein-
the research also provides an opportunity to look forcing each other is reflected most sharply in the
at the financial lives of poor people in aggregate, poor’s struggle to manage life on a day-to-day
and when that is done, dominant themes emerge basis. If income really did come in at a reliable
that respond to the set of most pressing financial US$2 a day, not only would planning expendi-
needs faced by all poor people. One of these is tures be much easier, but the poor might also be
short-term cash flow management to deal with offered better financial services by lenders or
day-to-day life—what economists might call “con- deposit collectors who would know their clients
sumption smoothing.” Another is the problem of could save or repay at least a small amount every
how to deal with emergencies when they arise, or day. But with US$8 coming in one day and then
“risk management.” A third is how poor house- nothing for a week, just putting food on the table
holds struggle to assemble the large sums of each day becomes a logistical problem that needs
money they need to take care of major life-cycle help from financial tools if it is to be solved.
events and to build up household assets. For some Widening the timescale reveals an extra layer
households, an important part of this last ­category of seasonal problems. Farmers or traders whose

52 The New Microfinance Handbook


income is “lumpy,” arriving with the harvest or a handful of grain into a “reserve” bag each time
with the good trading months when festivals they cook a meal. They borrow and lend, close by
occur, can face two intertwined cash flow man- in their slum or village, both small sums of money
agement problems. First, they have to find a way and small amounts of rice, kerosene, salt, and
to retain liquidity throughout the year, perhaps by soap. The disadvantages of one financial tool lead
keeping back most of the harvest and then selling to the use of another, sometimes in a chain. For
it in smaller amounts from time to time. Second, example, because saving money in the home is so
they have to make sure the money raised by such hard when there are so many requests for help or
sales is stored somewhere where it can be called for loans from family and neighbors, demands for
on for daily expenditure without being eroded by candies or a drink by children and husbands, or
the many other demands they face. Boxes 2.1 and the temptations offered by peddlers, people often
2.2 illustrate this with two households from the use “moneyguards”—other trusted people in their
financial diaries studies. extended family or neighborhood with whom
It is not surprising, then, that the financial dia- they can keep a little money out of harm’s way.
ries showed that day-to-day money management, Because moneyguards are not always reliable—
both in towns and in villages, is the most intensive they may not have the money on hand the day it is
part of the poor’s money management efforts. needed—the poor end up borrowing from other
Almost everywhere housewives keep a little neighbors (often interest free if the sum is small),
money back each time they shop, but they also put or buying goods on credit at the local shop, or

Box 2.1  Income Volatility, Week-by-Week and Year-by-Year

Pumza lives in Langa, a township near Cape her inflows of cash, that is, the cash revenues
Town, South Africa. She supports herself and that Pumza receives as well as the collections
four children by selling sheep intestines that she makes from clients who bought from her
she grills on the side of the street. Every day on credit. The lighter, solid line shows her
she buys and cooks intestines and sells business outflows of cash, that is, inventory
them to passersby. “This can be a fairly prof- purchases and business expenses, such as
itable business, and indeed Pumza makes a wood to cook the sheep intestines. Both lines
profit averaging about US$95 per month. A are quite volatile, but most importantly, they
government-provided child support grant of do not always move in step. Sometimes busi-
US$25 a month supplements this income, ness does not go well, and Pumza does not
so Pumza’s five-person family lives on a earn enough revenue to buy stock for the next
monthly income of about US$120. These fig- day. In the time we knew her this happened
ures show that Pumza is not among the twice—indicated by the arrows in the chart.
poorest of households, but they do not reveal She could have sold her old stock, but cus-
the fluctuations in cash flow that Pumza tomers prefer fresh meat and might choose to
experiences in her business life.” go to one of the other several sheep intestine
Figure B2.1.1 shows these cash flows on a sellers in the area. If she’s lucky, these times
fortnightly basis. The dark, solid line shows coincide with the receipt of her child grant,
(continued next page)

Clients 53
Box 2.1  (continued)

which helps tide her over, but on the two of US$30. In this way, she was able to fund
occasions when we observed this problem, her first cash flow shortfall in figure B2.1.1.
she was not lucky in this way. However, dur- Unhappily her savings club failed her during
ing May, she and a group of three other sheep the next shortfall, because one of the club
intestine sellers had formed a savings club. members failed to pay in. Pumza ended up
From Monday to Thursday, they each paid in going to the moneylender, where she paid an
US$7.70 and took turns getting the entire pot interest rate of 30 percent per month.

Figure B2.1.1  Revenues and Inventory Expenses of a South African


Small Businesswoman, Daily Cash Flows Aggregated Fortnightly
(Twice Monthly)
US$ converted from South African rand at US$1 = R 6.5, market rates

120

100 Used moneylender loan


Used savings
club payout
80
US$

60

40

20

0
04

04
4

04

4
4

4
4

04

00
00

00

00
00

20

20
20
20

,2
,2

,2

,2
,2

1,

1,
1,
,

21
21

21

21
21

21

r2

r2
t2

r
ch

il

e
ay

ly

us

be

be
e
pr

Ju

ob
ar

Ju

ug

em

em
A
M

ct
A

O
pt

ov
Se

Revenues plus credit collections


Inventory purchases and expenses

Source: Collins et al. 2009, p. 41.

Source: Collins et al. 2009, p. 42 and passim, with permission from Princeton Press.

54 The New Microfinance Handbook


Box 2.2  Cash Flow Management Given Volatile Seasonal Income

Sita, a widow, farmed a little land in northern During the household’s eight-month-long
India. Two of her sons lived with her, and as “low season” it sometimes fell to less than
well as helping on the land, they took casual half of that.
laboring work. Nevertheless, 60 percent of Astonishingly, Sita and her sons still man-
their income was earned in just four months, aged to save enough grain and cash, at home,
from June to September, and in the year to ensure that they could eat throughout the
that we tracked their lives, bad weather year. To get hold of a larger sum they mort-
meant that that income was especially low. gaged land to borrow from a grain trader for
Averaged over the year, total household whom one of the sons worked, and repaid
income was just under US$30 per month, or that debt by deducting a little at a time from
about 32 cents for each member of the his wage. In these ways, over the year they
household (about US$1.20 per person per saved and repaid about US$63, almost a fifth
day when adjusted for purchasing power). of their total income.

going into rent arrears. Then, when the rent financial tools to average annual income varied
arrears have built to the point where the landlord between about 75 percent and 175 percent in
begins to threaten eviction, they borrow larger India, a similar amount in Bangladesh, and a figure
sums, with interest, from a moneylender. To repay somewhat higher in South Africa (Collins et al.
the moneylender, saving efforts have to be 2009, pp. 31–33). This is because much day-to-day
redoubled, or assets have to be sold off. But selling management involves short-term, rapidly revolv-
off assets—for example, selling roof sheets to ing exchanges of cash. Many of the smallest loans
repay a creditor—simply creates another essential from neighbors were repaid in a matter of days.
item that requires the poor to save. No wonder “Big flows and small balances” is a good general
households in the financial diaries told the description of poor-owned portfolios, and they
researchers that “All this keeps us awake at night,” are matched in the experiences of MFIs that have
or confided that “I hate having to borrow money a track record of offering unusually convenient
from other people—but there is no life without passbook savings to poor communities. When
money, so we just have to do it.” examining the accounts at BURO, an MFI in
But although day-to-day money management Bangladesh, researchers found that the annual
is where the majority of financial services are flow through the passbook savings product was
used, this does not show up much in the balance four and a half times the value of the year-end
sheets of the poor. Year-end balances of most savings balance (Rutherford et al. 2001). Poor
“diary” households revealed rather low levels of people need to save short term to form small sums
household savings and of local borrowing and that can be withdrawn to cope with everyday life.
lending. It is only when cash flows are examined Saving, for the poor, is a verb before it is a noun:
that this intensity of use can be seen. Typically a something you do rather than something you pos-
household’s annual financial cash flow was many sess. More often than not, saving is a way of cop-
times the value of their financial assets and liabil- ing with small and unreliable incomes rather than
ities. The ratio of cash pushed and pulled through a way of building capital.

Clients 55
A reliable lender of small loans can also help to for the borrower or built into the price of the
smooth income, as box 2.3 shows. loan). Lacking formal insurance, most poor peo-
ple must look for other ways to anticipate risk and
Dealing with Emergencies and to deal with emergencies when they occur.
Anticipating Risk Poor households are peculiarly vulnerable to
When emergencies strike, poor people, like every- emergencies. Many live in fragile ecosystems:
one else, need large amounts of capital if they are Pushed to the margins by poverty, they are closer
to have a chance of fending off the worst effects of than others to seas that breed cyclones or rivers
the event. In wealthy countries, and among the that flood, or farmland prone to drought. Close to
better-off in poorer ones, insurance is available to one-fifth of the burden of disease in developing
provide that capital, in the right amount at the countries can be attributed to environmental
right time. Insurance is a fast-growing and excit- risk—with unsafe water, poor sanitation, and poor
ing part of microfinance, but it has reached hygiene as leading risk factors causing premature
few poor households so far (though many deaths (World Bank 2005). The poor may live in
microlenders do provide insurance against debt if provisional slums with uncertain legal status
a borrower dies holding a loan, either as an option where they can be pushed out by landlords or

Box 2.3  Ramna’s Top-Ups

One of several innovations that Grameen in a tea stall. Ramna was in charge of keeping
Bank introduced in 2002 in an effort to make the home ticking and making sure everyone
its products less rigid was the loan “top-up.” was fed. She found Grameen’s top-up sys-
Under this provision, borrowers may top-up tem useful. Every six months she got a use-
their loans to the original disbursed value fully large lump sum that helped her keep the
once they are about halfway through the household stable. The researchers saw her
annual repayment schedule. In effect, they spend these sums on stocks of rice, manag-
can take smaller loans every six months ing her father-in-law’s funeral, buying medi-
rather than a bigger loan once a year. Ramna cines for her husband, and paying for school
and her husband provide a good example of fees and books and clothes. Once she simply
Grameen clients who benefited from the top lodged her loan top-up with a moneyguard
up loan. They were getting on in age, neighbor until she needed to take it back to
unskilled, uneducated, and unlikely to run pay off a private loan that became due. On
any kind of business, but they still had two another day she was found keeping back
sons at home whose schooling they desper- some of her top-up in a locked box at home
ately wanted to continue. Their income came because she knew that a “down” period was
from whatever casual employment or coming and she would need an extra source
self-employment Ramna’s husband could from which to make the regular weekly
find: During the three years that their finan- Grameen loan repayment—behavior that
cial life was tracked, he did farm labor, col- indicated the value she placed on getting her
lected crabs from the sea nearby, and worked biannual infusions of useful capital.

56 The New Microfinance Handbook


governments at short notice, or suffer from fires ceremonies, many of them related to the
ignored by the municipality. Unable to buy suit- HIV/AIDS pandemic.
able drugs or quality feed, their animals die How did they cope when these crises struck?
younger and produce less than those of wealthier Often they did not: The illness was never properly
farmers. Cooking over an open flame near homes cured, the home or the job was lost for good, and
built of bamboo walling or straw roofs, they expe- the cousin was given only the most basic of buri-
rience a higher risk of destructive fires. That same als. The question then becomes, How did they try
wood smoke damages lungs and eyes, an example to cope? When disaster strikes, people pull in
of how health problems start more often and whatever resources they can reach. Assets may be
are cured less easily among the poor than among sold or, in the case of precious metals, pawned. If
the population in general. there is time for the deal, any land in the house-
In Bangladesh, half of the households studied hold’s ownership may be mortgaged out. Savings
in the diaries project suffered serious financial may be exhausted. Social networks are called on
disruption from ill health during the study year, for gifts in kind or in money, and for interest-free
and in India the figure was two in five. One in five or low-cost loans. Nonessential spending is fore-
of the Bangladesh households lost a home during gone. Without access to insurance services poor
the year, and four out of five of the South African people use whatever financial tools they have
households had to contribute to expensive funeral available to them to manage risk (see box 2.4).

Box 2.4  Enayet’s Foot

Enayet worked on building sites with his factory, money she had planned to use for her
father in a slum in Dhaka, Bangladesh. When marriage. But the sum they raised was still far
he was about 17, his parents realized he was from enough, and faced with a “no fee no
becoming dependent on drugs. They remon- treatment” ultimatum from the doctors,
strated with him, and Enayet ran away from Enayet’s father went to better-off people in
home and lived on the streets of Chittagong, the neighborhood—a retired teacher with a
a port city several hundred kilometers away. pension, a shopkeeper, and a small-time
His father drew down their meager savings pawnbroker—to take loans on interest of 10
and gave up working to search for his son. He percent a month. Later, in the time of the
found him, but only because Enayet got into a financial diary research, Enayet was back
brawl and broke his leg. He had no money to home, walking with a crutch. The expensive
treat the injury, and it worsened: Eventually loans had not been repaid, and very little inter-
he contacted his father when he could bear est had been given. Enayet’s mother suffered
the pain no longer. Back in Dhaka, Enayet’s verbal abuse from one of the lenders and did
family gave up almost everything to have him her best to ignore it. Almost certainly, the
admitted to the hospital. They sold their furni- debt will not be repaid; from time to time
ture, their jewelry, and their bicycle. They got Enayet or his father will make token interest
loans from extended family. Enayet’s younger payments, hoping that eventually the principal
sister withdrew her savings from a club run by will be forgiven or forgotten.
women working on her floor in a garments

Clients 57
Nevertheless, when a particular risk is espe- Building Bigger Sums for Life-Cycle Events,
cially expensive, or has an unusually high likeli- Assets, and Businesses
hood of happening, poor households may try to The constant threat of emergencies requires
buy protection from it, using formal insurance or households to find large sums of money quickly.
informal substitutes. Such is the case in South But they are by no means the only reason why
Africa of funeral insurance, where many poor poor households need to build large sums. All of
households anticipate having to pay out for funer- us, including the poor, need to be frequent big
als and invest in devices specifically designed to spenders, to deal with life’s big events—annual
deal with this event. Many of the “diary” house- festivals, ceremonies to celebrate birth, marriage
holds belonged to an informal burial society into and death, costs for education and home building,
which they pay monthly premiums and in return and assets to make life better, such as fans and
receive financial benefits to help cover the high televisions. Some will also want to build large
costs of burials. Some of the same households also sums to establish a new business or expand an
paid into formal funeral insurance policies.5 existing one, or to invest in a large asset for
Many households used both the informal and self-employment, such as owning one’s own rick-
the formal schemes, so the financial diaries shaw rather than hiring one on a daily basis, or
authors were able to compare how well they buying or leasing-in more land to farm. Others
worked. Within an overall financial portfolio of will migrate to find work, in the big city or over-
8 to 12 financial instruments, South African dia- seas, and will need to finance these often costly
ries households usually had at least one burial journeys. How do they go about building these
society and one formal funeral insurance policy. bigger sums?
These households spent, on average, 3 percent of We have seen that most of the financial tools
gross monthly income in total on all of their used by poor people are informal. But informal
funeral cover instruments. sector finance is not geared to handling large
On pure economic terms, formal funeral insur- sums of money over protracted periods of time. It
ance has about the same value as informal burial is not safe to hold large amounts of savings at
insurance:6 Formal funeral insurance tends to home, or in a savings club, because the longer
cost more on average per month than informal these savings have to be kept, and the greater
burial insurance, but it also pays out more. their value, the greater the risk of loss or theft or
Looking beyond economics, burial societies have misuse. Similarly, even the greediest money-
the advantage of providing a great deal of physical lender is not willing to lend large sums to the poor
assistance and moral support around the time of because large loans need lengthy repayment peri-
the funeral. Fellow members take on a signifi- ods, and the longer the loan is held the greater
cant role in preparing and serving the feast dur- grows the risk of default.
ing the burial, often providing the cookware and So, even though these kinds of large expendi-
eating utensils. However, burial societies can be ture can usually be anticipated, rather than being
quite unreliable. Evidence suggests that close to needed suddenly, poor people nevertheless find
10 percent of them run out of money (FinMark themselves building up sums piecemeal, just as
Trust 2003). Therefore, although many poor they do when faced with an emergency. It is not
households may continue to belong to burial soci- unusual for a big asset to be bought with a mix of
eties for the social benefits they provide, formal savings, loans, gifts from family, and the proceeds
insurance providers have a clear contribution to from the sale or mortgaging of other assets. The
make in this market by continuing to offer good piecemeal approach also characterizes the way
value products with reliable service. that savings for large-scale expenditures are

58 The New Microfinance Handbook


assembled. Certain items, notably gold jewelry, or a large compound (in the case of South Africa).
roof sheets (and bricks and cement blocks and In the urban areas renting a home was more com-
lengths of timber), and, in many households, mon. In some cases, such as in some slums in
livestock, are used as long-term stores of value, Dhaka, Bangladesh, families owed the physical
and although the terms of most informal finan- structure of a simple timber-and tin-sheet one-
cial tools are short, they can be used to finance room home and perched it rent free on land
these savings-in-kind. ROSCAs are particularly owned officially by the government or some other
good at this. institutional landlord. In South Africa some of the
ROSCAs, short for rotating savings and credit diaries households owned a permanent brick
associations, are savings clubs in which members home, although others with shaky tenure in the
pay regularly into a pot that is taken in its entirety urban areas could simultaneously be building a
by one of their number in rotation and are com- home in the rural areas.
mon around the world. Pumza, the sheep-intestine Financing the ownership of a home, then, was
seller featured in box 2.1, was in a four-member a challenge being faced by only a minority of the
daily ROSCA, and Enayet’s sister, mentioned in diary households—but where that was the case,
box 2.4, belonged to a much bigger monthly the challenge was considerable, and the solution
ROSCA run by fellow workers at her garments to it required huge self-discipline, as the case of
factory. ROSCAs are often deliberately designed Jonas and Mimimi, from South Africa, shows
to make it easier to obtain expensive items. In the (box 2.5). Although many MFIs and other provid-
Philippines, for example, rural school teachers ers are beginning to offer housing loans or
use ROSCAs to help furnish their homes after ­contractual savings products to invest in a home,
marriage: They persuade their colleagues to join a these tools were not available to this couple.
ROSCA and use the proceeds to buy sofas and Therefore, like many others around the world,
chairs. they did their home building in a piecemeal
Where MFIs have become common, as in fashion.
much of South Asia, the short terms that charac- Much of what is observed about the financing
terize their lending (mostly about one year) lead of domestic assets is also true of productive assets.
to similar uses of the sums loaned. To the conster- They too are often acquired through a range of
nation (and sometimes disapproval) of MFI field sources including gifts, asset sales, remittances
officers, MFI clients may take a loan ostensibly from family members working in the big city or
for business investment and use it to buy gold overseas, and savings and loans. The savings may
jewelry. From the clients’ point of view, buying have been held until needed in lower-value items
such a store of savings is as legitimate a use for a acquired through saving or borrowing short term
loan as any other, especially when other opportu- in the informal sector.
nities to save (or invest) are so scarce.7 The piece Once again, community-based devices such as
of jewelry may serve as decoration until called on the ROSCA, with its simple and flexible formula,
to help finance something on a much larger scale, can be a powerful way of assembling cash for
such as the wedding of the young woman whose working assets. In Vietnam fishing communities
neck it adorns. have used “auction ROSCAs” (ROSCAs in which
In all three countries in the financial diaries the order in which the lump sum is taken is deter-
studies, most of the rural sample owned their mined not by lottery but by bidding for it at each
home and the parcel of land on which it stood, draw) to raise money for boats and equipment. So
often through inheritance. The better-off also had high is the demand for capital that club members
land to farm (in the case of India and Bangladesh) sometimes forego as much as 50 percent of the

Clients 59
Box 2.5  Building a Home Little by Little

Jonas and Mimimi, a married couple who run a shebeen (township bar) in Langa near Cape
Town, have an impressive capacity to save. Mimimi’s profits from the shebeen business are
about US$324 per month, while Jonas works as a gardener and is paid US$185 per month, for
a total monthly household income of US$509. Compared with other diaries households in
Langa, which have an average monthly income of US$425, they are doing quite well. Mimimi
typically manages to send about US$31 per month to her relatives in a rural area of the Eastern
Cape. Their children live there with Mimimi’s mother, and she sends money every month to pay
for their food and school fees as well as to contribute to a home they are building there. She then
manages to stretch about US$87 for their living expenses every month. A typical monthly
budget is detailed below.
Mimimi’s typical monthly budget (US$) 509
Source of funds
  Business profits 324
  Regular wages 185
Uses of funds 486
  Cell phone 6
 Cigarettes 3
 Electricity 16
 Food 49
  Money sent to Eastern Cape 31
  Transport to shopping 1
  Transport to work 13
  Savings clubs 367
Net savings in bank 23
Jonas and Mimimi’s most important savings devices are two informal savings clubs. Together,
they save about US$367 with these clubs. A total of US$3,065 was paid out from one of them
during the research year, and it was all used to build the house in the Eastern Cape. The other
club paid out US$725 a few months later. From this payout, they spent the majority on a
Christmas feast and Christmas presents when they went to the Eastern Cape for the holidays.
But that still left about US$260 to buy cement for the floors and to buy doors for the house.
In the end, between the two savings clubs and the money they retained from Jonas’s salary
in a bank account, this young couple built up about US$4,000 in savings (not counting the money
sent to the Eastern Cape every month). Of this, 12 percent was spent on Christmas, 6 percent
was retained in the bank, and 82 percent was used to build the Eastern Cape house. The way
they saved to build the house and the proportion of savings that went toward the house is similar
to that of many other households in South Africa.a
Note: a. See “Housing and the Finances of the Poor” at www.financialdiaries.com for more details regarding how
financial diaries households acquired housing.

60 The New Microfinance Handbook


sum in bidding for it. In Bangladesh rickshaw of default—the shame and maybe a bit of rough
drivers run “rickshaw ROSCAs” to build a big treatment at the hands of other members—but,
enough sum to buy their own rickshaws. At some more importantly, because the inability to keep
gathering place, often the garage where their up the repayment schedule is a very good indica-
hired rickshaws are parked overnight, each rick- tor that one’s financial position is not strong
shaw driver in the club sets aside a fixed contribu- enough to maintain the asset once it is acquired.
tion from his daily earnings, and when there is Many rickshaw drivers who struggle to meet
enough in the kitty to buy a rickshaw it is decided ROSCA dues or repay MFI loans used to buy a
by lottery which member of the club is to receive rickshaw end up having to sell their machine,
it. By a clever twist, which illustrates well the almost always at a big discount, because they lack
sophistication that often characterizes ROSCAs, the means to bring financial stability to other
after a club member has received his rickshaw he aspects of their life.
puts in double the usual amount each day: He can That leads to an important observation: All
afford it because now he does not have to pay rent poor households need financial tools to handle
for a rickshaw. This has the effect of accelerating their basic needs—day-to-day consumption
the ROSCA so that the next rickshaw purchase smoothing, dealing with emergencies, and build-
comes along sooner, reducing the length of time ing sums to pay for life’s big occasions. If those
that members’ investments are at risk. A few men basic needs are not being at least partially met,
have used these clubs so successfully that they lending to poor people exclusively for productive
have acquired fleets of rickshaws, and then grad- investment may not be wise. At best, the loans
uated to motorized rickshaws. meant for business will be diverted to the more
Note, however, that not every Dhaka rickshaw basic needs. At worst the loan will go into a busi-
driver wants to own his own rickshaw. Costs and ness that will prove short lived or loss making in
risks are associated with owning such assets. the face of other financial demands made on the
A rickshaw needs maintenance. It needs to be borrower.
stored somewhere safely at night. It has to be pro- In the case of Bangladesh, one of the world’s
tected from confiscation by police officers run- most mature microfinance markets, MFI lenders
ning extortion rackets. Not every poor rickshaw have by and large learned to turn a blind eye to the
driver can manage these tasks, so many prefer not fact that many poor clients use their MFI loans
to try. It is not only because they cannot afford primarily or even exclusively for nonproductive
them—or do not have access to the right financial purposes—even though some of these MFIs con-
products at the opportune time—that poor people tinue to insist in public that loans are given only
own few productive assets or invest in few pro- for microenterprise investment. A set of financial
ductive activities: Other aspects of their poverty diaries carried out to examine how informal
may make it unprofitably hard to benefit from devices and MFI services fit into the financial
investment. lives of the rural poor in Bangladesh sheds light
Nor does every self-employed person want to on this: Productive investment is only one of a
join a dedicated ROSCA of this sort, again for rea- range of uses that people borrow from MFIs for,
sons to do with the financial facts of his or her life. as box 2.6 shows.
The pressure to keep up with the payment sched- Other evidence suggests that business owners
ule is severe, and if one cannot be sure that one’s can benefit from small, flexible cash infusions in
cash flow will allow one to pay on time every time, a cash flow crunch, but that they may not lead to
it may be better to avoid the commitment. This is business growth. Financial diaries done with a
not just because of the immediate consequences modest sample of small business owners in

Clients 61
Box 2.6  How MFI Loans Are Used in Bangladesh

Out of a total of 237 microfinance loans care- more than a timber hut with a few dollars’
fully tracked through repeated visits to bor- worth of stock. Then one finds only a handful
rowers of Bangladeshi MFIs over a three-year of households with a more than nominally
period, just under half were used to stock productive business: perhaps a couple of fam-
retail or trading businesses, or to finance ilies running rice mills, and someone success-
small-scale production, or to buy or maintain fully recycling garment-factory waste into
assets of one sort or another. One in ten loans stuffing for mattresses.a Most of the other
were on-lent to subborrowers outside the villagers are agricultural day laborers or are
household (neighbors and relatives), and a self-employed service workers, pushing rick-
similar number were used to pay down exist- shaws or ferrying boats or loading trucks in
ing debt (including, sometimes, debt from the neighboring market or selling tea from a
other MFIs). The remainder were used for microstall. The small number of better-off
consumption or for a mix of uses. Half of farmers, with landholdings big enough to pro-
these MFI loans, then, by number and roughly duce more rice than the family can eat, are
by value, were used for what could broadly be mostly not MFI clients because they dislike
called “income-generating activities.” But this having to attend weekly meetings and find the
does not mean that half of the borrowers loans too small for their needs: They may also
used their loans in this way, because a small have access to formal finance, particularly if
number of commercially active borrowers they have land they can pledge. Putting this
took bigger loans and took them more fre- into numbers, the study found that 14 percent
quently from more than one MFI. Imagine a of the MFI borrowers were responsible for
small Bangladesh village: Just a few house- taking two-thirds of all MFI loans used for
holds are running shops that are anything businesses.
Note: a. This was the situation in one village where these diary studies were undertaken.

South Africa8 showed that business owners were people to borrow to establish and expand
able to start operating with fairly small sums of businesses.
upfront capital. However, to keep their business Most MFIs began with the primary purpose of
in operation, they need frequent fresh infusions providing loans to the poor to start or expand a
of capital. Rarely did these business owners small business, but the early hope that every poor
dream of expanding their business, or imagine person can become a successful entrepreneur is
that they would make more money if they did. now giving way to an understanding that enter-
They were rather more concerned about just prise lending is best when targeted at clients
keeping it going, to provide a stable, if small, selected for their aptitude for business and their
source of income. stable domestic finances. As a result, the
Enterprise borrowing, then, is not for every- enterprise-investment side of microfinance is
­
one. Nevertheless, a good proportion of MFI gradually moving away from loans with weekly
­borrowers—at least one in seven in the sample repayment schedules that may not match the cash
from Bangladesh described in box 2.6—respond flow patterns of small business, and toward loans
well to the microcredit dream of enabling poor given to and tailored for individuals rather than

62 The New Microfinance Handbook


group-based borrowers. This should leave room “Moneyguards”—people trusted to hold money
for group-based saving and borrowing for the non- safely on one’s behalf—are common. They may be
entrepreneurial poor to adapt better to their wide neighbors, relatives, or employers. Often the
range of nonbusiness money-management needs. transactions take place in both directions: The
diary research found several households that
both take in and put out money in this way, at the
How Good Are the Financial
same time.9 Moneyguarding is closely related to
Tools Used by the Poor?
casual interest-free borrowing and lending among
So far this chapter has provided numerous exam- kin or neighbors. Sometimes it is hard to tell them
ples of how poor people choose and use their apart: In Bangladesh diary households might say
financial tools. In this section we step back to they had “put” some money that week with a
review the overall quality of these services and neighbor, and they would give vague answers
devices. Understanding better the strengths and when asked to specify whether this was a loan or
weaknesses of the present set of tools should help a savings deposit or a repayment on a loan.
to structure thinking about how microfinance Nothing better illustrates the complex ways in
might, in the future, add more value to the finan- which a community’s aggregate cash savings flow
cial lives of the poor. back and forth between its members. This ambi-
guity is, like much in the informal sector, a
Convenient, Frequent, and Flexible—But strength and a weakness: It enables a good deal of
Not Always Reliable interaction to take place, but at low levels of reli-
The most convenient tools of money manage- ability that in turn place limits on the values and
ment are ones that can be organized by the users durations of this kind of intermediation.
themselves, without the need to interact with Where greater certainty or larger sums are
others, without the need to travel, available at any needed, a price is usually demanded. Village or
time of the day or night, and at little or no cost. It slum moneylenders who lend as a business ask
is not surprising then that the financial diary for interest, and many who lend merely to fulfill
research found almost every poor household family or social obligations do likewise. The
held—or tried to hold—savings at home. But this interest is often at a high rate, either to compen-
level of convenience and flexibility comes with sate for the evident risk of lending to very poor
obvious drawbacks: It is just too easy to take back people (in the case of professional lenders) or, in
these savings, so only those with exceptionally the case of those lending as an obligation, to help
strong willpower (and there are such people) are limit the amount of money being lent. There is
able to build or keep large sums at home. Security more on the social aspects of this kind of lending
is another obvious weakness of home savings: below.
They are vulnerable to theft or misuse, or to One way to borrow free of social entangle-
being lost in floods or storms, and at the very least ments is to use a pawnbroker. The limitation here
they will lose value to inflation. Self-help home is that poor people rarely hold much in the way of
saving, then, illustrates the trade-off very com- pawnable goods, so very large sums cannot usu-
monly found in informal finance—between con- ally be obtained by this route. The mortgaging of
venience on the one hand, and low reliability, land has other disadvantages: The land mort-
short-termism, and insecurity on the other. gaged may have been the household’s main
One way to mitigate these drawbacks is to income source, and the larger sums that can be
form a financial relationship with somebody else. had from mortgaging land often prove very

Clients 63
­ ifficult, if not impossible, to repay, so the land is
d discipline. Saving within a bigger group, as in a
in effect lost for good. ROSCA or an ASCA10 (accumulating savings and
MFIs have been much better able than banks credit association, described in chapter 6,
to approximate the convenience of informal “Community-Based Providers”), offers much
finance. They have done this in various ways. more discipline, relying on the power of group
First, they got physically close to their clients, by pressure and sanctions to keep the transactions
holding meetings right in the village or slum. flowing regularly. Many poor people are well
Soon, they settled on a form of lending in which aware of the flip side of informal finance’s flexibil-
repayments were made easy by being small and ity and convenience—its lack of discipline—and
frequent—often weekly, at the meeting, some- this helps to explain the popularity of devices like
times even daily, through itinerant collectors. It the ROSCA. Researchers have also suggested that
was this level of convenience and frequency— when people are distracted by the problems of
rather than anything to do with microenterprise poverty, and have to juggle several income flows
development, or “group solidarity”—that led to from different sources and deal with the individ-
microcredit’s extreme popularity in its early days. ual cash flows of numerous financial tools, they
Provided that their household cash flows were can lose sight of their longer-term financial posi-
strong enough to come up with a small weekly tion.11 By joining a group such as a ROSCA poor
toll, people could borrow for whatever purpose people may inject enough regularity into their
was most pressing at the time. Later, when some financial lives to help them plan for and meet
of the disadvantages of a credit-only regime ­longer-term goals.
became apparent (such as the risk of overindebt- In earlier sections we have seen how ROSCAs
edness), MFIs, where regulators allowed them to, help their members build sums that can be used to
introduced passbook savings that could be depos- meet emergencies or acquire assets. ROSCAs can
ited into or withdrawn from at will, at the village fail, but as well as offering a disciplined environ-
or slum meeting. Nevertheless, most general ment that encourages regular saving, they have
lending to the poor by MFIs (as opposed to their other advantages. One is that because they never
lending to microenterprises) is short term and require cash to be stored (at each meeting the
therefore of low value relative to incomes: A typi- money goes straight to that meeting’s taker) there
cal loan may have a term of 11 months and be is no risk of the treasurer dipping into the fund.
worth the equivalent of two or three months’ Another is that the combined eyes of all the mem-
household income. This is very useful for con- bers ensure that transactions will be more than
sumption smoothing (as shown by Ramna’s usually transparent and verifiable. These virtues
behavior described in box 2.3) but not for the big- offset the moderate risk of the ROSCA going
ger sums that all households need from time to wrong because a member simply fails to pay in
time. To accumulate big sums, with most MFIs, after he or she has taken his or her turn at the
borrowers still need to build a series of modest lump sum. Other features of ROSCAs make them
sums through successive rounds of borrowing, suitable for poor people: They require no book-
and find their own ways of storing their value— keeping, so the illiterate are rarely confused by
most commonly by holding them in nonfinancial more literate members of the group. They are
assets such as jewelry or livestock. without cost: Money goes straight from the
depositors to the taker in what must be the
Disciplined—But Only in the Short Term world’s swiftest and cheapest form of financial
Saving on your own is hard. Saving with a money- intermediation. And they are close at hand and
guard helps impose some distance but not enough convenient: People set up ROSCAs right where

64 The New Microfinance Handbook


they live or work and hold meetings at times that credit union to become a permanent formal
suit them. Box 2.7 illustrates several of these institution, providing the members with ongo-
ROSCA features. ing services and, crucially, enough security to
Poor people find it easier to form larger sums allow members to build up large deposits over
through ROSCAs than they do through saving at the long term, or pay steadily into insurance or
home or saving with partners such as money- pension policies. What has stopped this admi-
guards. Nevertheless, really big sums—enough to rable system from becoming the obvious first
buy a home or business outright or fund a pension choice for poor people around the world is that
annuity—cannot usually be formed through the degree of formal organization needed to
ROSCAs because, like all informal schemes, keep a credit union stable requires levels of
ROSCAs become riskier the longer they run, the education and financial sophistication that are
more members they have, and the bigger the simply not available in most of the world’s
amounts transacted. ROSCAs are time bound: As poorer village and slums.
soon as every member has received the “prize” Credit unions are inventions of the nine-
once, it comes automatically to an end, although teenth century. More recently, nongovernmental
the members are, of course, free to start another organizations (NGOs) have taken up the basic
cycle and accumulate another modest sum. idea of the savings club and used it to work with
ROSCAs illustrate another typical informal- poor people on a range of development issues,
finance trade-off—security versus longevity and not just finance. The largest endeavor of this
volume. kind is India’s Self-Help Group (SHG) move-
The group-based approach to financial ser- ment, which counts its members in millions.
vices to the poor has been taken up by outsid- SHGs are basic savings clubs linked to formal
ers in various ways. The oldest and most banks, which recognize them as legal entities
impressive is the credit union movement, now and lend to them at favorable rates. More recent
found throughout the world.12 Credit unions still is the Savings Groups movement,13 which
take the basic idea behind all ROSCAs and has been building steadily over the last 20 years
ASCAs—the idea of a group of people coming and follows a rather different course. The NGOs
together voluntarily to pool their savings—and that promote savings groups prefer to tackle the
submit it to enough ­formalization to allow the weaknesses of savings clubs, especially problems

Box 2.7  Daisy’s ROSCA

Enayet’s sister’s saving club (see box 2.4 about one of the women, in a fixed order ­decided by
Enayet) was a ROSCA (she called it a lotteri lottery on the first day of the ROSCA, took the
shomiti). Daisy earned 1,500 taka a month whole 5,100 taka, a sum equivalent to two or
(about US$25 at the market rate). In a meeting three months’ salary. When Enayet was admit-
that took place each monthly payday, when ted to the hospital, Daisy’s turn to take the
she and 16 other women on her floor con- money was still a long way off, but, in return
ducted their ROSCA, they each contributed for a modest tip, she was able to get another
300 taka from their wages, and each month member to swap turns with her.

Clients 65
of poor governance, by training members in the the social relationships in which people are
use of improved practices. Because these savings engaged may be complex, involving labor
groups are standalone entities not linked to exchange and land rental as well as money. In
banks or other institutions, they are seen as par- such contexts “moneylenders” may act as patrons
ticularly suitable to remote and sparsely popu- who assist their “clients,” and this remains true
lated areas. even when such help could result in cycles of debt
Microcredit MFIs, as is well known, of course, that are ultimately damaging to the long-term
lend through groups. But MFI groups in the welfare of the borrower. In these cases, with few
fastest-growing microcredit traditions, such as
­ competing options, poor people often prefer to
that based on the work of Grameen Bank, are not retain such avenues of access to resources than to
mutual entities that own or share their own group avoid them.
funds, but simply groups of retail customers Another way in which the informal sector
brought together by the MFI to reduce service operates through social relationships is in the
delivery costs. ways people assist each other, especially family
and friends. Poor people may help their friends
Social Embeddedness—A Strength and relatives in ways that are quite open-ended. If
and a Weakness a child needs school fees and parents cannot pro-
The discipline that ROSCAs offer is in part a vide, another relative—or even a friend—may
result of the social relationships they embody: help. Such assistance creates a debt that takes the
Being a member of the group creates an obliga- form of a future obligation to reciprocate. It may
tion to contribute or to be shamed in front of the not be reciprocated in cash, or in school fees, but
group.14 However, this discipline is often tem- in a completely different form such as labor, lend-
pered by flexibility in the way in which the ing animals, or taking care of a child. It is a form of
ROSCA responds to clients’ needs. The essential saving with others that is not directly financial
feature of the group is that it represents a source and in which the return is unknown at the time,
of liquidity that members can access one way or but is indeed an obligation. In this way debts are
other. This can involve direct negotiation at a not to be avoided: They create relationships of
group meeting to obtain the payout because of a reciprocity that can be drawn on in the future. In
pressing need, shock, or emergency, or members the case of Enayet (see box 2.4) the loans his par-
can negotiate directly with each other to change ents took were never repaid in full and were on
the order in which the payout is received (as in the way to being “forgiven”—but public disap-
Daisy’s case; see box 2.7) or borrow the payout proval and comment ensures that the borrowers
from the member who did receive it. Groups cannot forget that the obligation represented by
organize themselves in many ways, and they vary the unpaid debt continues.
in how flexible they are prepared to be, but the The social relationships in which informal
key feature is that by jointly creating a source of financial services are embedded are both one of
liquidity, members have a right to make claims on their greatest strengths as well as their greatest
that resource and to be listened to by other mem- weakness. For those who are able to manage
bers, either formally at the club meeting or at its “negotiability” successfully they offer flexibility
margins. This feature can be referred to as and responsiveness for risk management in par-
“negotiability.” ticular, but also for productive investment and
Although the mechanism differs, this negotia- asset building. However, such relationships are
bility is also a feature of moneylending. not open to all, and the poorest people are less
Moneylending is often seen as exploitative, but able to engage with them because they are less

66 The New Microfinance Handbook


able to reciprocate, although they may also be the enabling them to transact frequently, through
recipients of assistance from time to time. out-of-branch banking of the sort seen in
weekly village or slum meetings or in mobile-
Creating Better Financial Services phone banking, will remain vital. Breaking
for the Poor the formation of sums down into small bite-
size pieces, as in Grameen- or village bank–
The picture this chapter has painted of the cur-
style weekly savings and repayments or via
rent state of financial services for poor people has
daily collection agents, will still be essential.
numerous implications for microfinance. They
Above all, the MFI’s superior level of reliabil-
are overwhelmingly positive. Taken together,
ity and transparency, relative to much infor-
they suggest that microfinance enjoys big oppor-
mal finance, needs to be retained and
tunities to grow in both quality and quantity:
strengthened.
• First, the picture implies a very high demand • Fifth, it shows where microfinance will have
from poor people for financial services. This is to improve and extend its products and deliv-
seen in the intensity with which poor house- ery systems. Two very important goals are
holds use whatever financial tools they have at finding ways to introduce greater flexibility
hand. into loan terms and repayment schedules
(while still offering discipline) and finding
• Second, it implies that this high level of
ways of enabling the poor to engage in much
demand is by no means fully met, neither in
longer-term intermediation, through long-
volume nor in quality. This is seen in the fail-
term commitment savings plans (including
ure of the existing, largely informal, tools to
insurance and pension plans) and loan terms
satisfy in full the financial needs of the poor, in
longer than the six months to one year com-
the low levels of reliability that characterize
mon to much microlending at present.
much informal intermediation, and in the still
very modest numbers of poor people reached • Sixth, it suggests that the demand by poor peo-
by MFIs and other formal providers. ple for financial services may be quite similar
across regions and districts, which implies
• Third, it implies that a great deal of the demand
that although microfinance practitioners will
from poor people is not for the products and
need to modify their work to suit each loca-
services that the microfinance industry has
tion, a core set of needs is present that can be
emphasized during its first three decades. In
met by broadly similar products. This is seen
particular, the demand for savings (including
in the remarkable congruence of behaviors
insurance) may outstrip the demand for loans;
observed in the two South Asian nations and in
the demand for general-purpose loans may
South Africa—countries that have very differ-
outstrip the demand for loans for micro-­
ent histories, cultures, and levels of economic
business investment; and the demand for long-
and financial development.
term saving, borrowing, and insurance
instruments is at least a strong as the demand
A key challenge for formal service providers
for short-term savings and loans.
has been the struggle to get close enough to the
• Fourth, it implies that much of the methodol- poor to compete with the proximity and fre-
ogy that microfinance has already developed quency of informal tools. Informal tools are cer-
will be relevant to meeting this demand. tain to keep their advantage in this respect, and it
Techniques for getting close to clients and would be foolish to think that formal services will

Clients 67
entirely replace them. But by finding ways to con- school fees, for example—can be met. This range
tact their clients where they are, in the village or of plans can be offered, more reliably, by a formal
slum, and doing so as often as they can, through provider that is in regular frequent contact with
regular weekly or daily routines, or via cell phones its clients.
and bank agents, formal services should be able to These challenges are well worth formal pro-
gain a much bigger share of the everyday financial viders tackling. Informal finance, where poor
intermediation of the poor than they have at pres- people conduct most of their financial lives, can
ent. Recent innovations that will help them do suffer from low reliability and an inability to offer
this include mobile-phone banking and legisla- long terms to create large-value sums. These are
tion to allow banks to operate through agents— major deficiencies, and formal services can and
either peripatetic as in India’s recent “banking should offer something better. Reliability, in the
correspondent” provisions or as a supplemental sense of ensuring that agreed contracts are hon-
business for local shops, as in Brazil. ored, is fundamental. The poor live in environ-
Another challenge for formal providers is to ments that are continuously changing; most have
make products more flexible, to respond better to neither cash flows, nor living arrangements, nor
the irregular cash flows of poor clients. Here environmental and social conditions that are
again there is cause for optimism: Worries about static or reliable. Bringing more reliability into
internal control, and a sensible concern to keep financial tools will provide a significant boost to
things simple, caused early microcredit pioneers the ability of the poor to plan and envision a
to begin with rigid payment schedules, such as future beyond the short term. This requires ser-
the strict weekly repayments of Grameen-style vices that are offered in a timely manner and
microlending. But with experience and the astute under clear conditions, with terms that are
use of technology they are now able to offer “pass- upheld and with opportunities to easily ask
book” savings—savings accounts where the client ­questions and seek redress.
can deposit or withdraw as much as he or she A minimum “menu” of financial services for all
likes at any time—and flexible loan repayments, at poor clients in the second decade of the twenty-
least for modest value loans. first century would ideally include passbook
Because they are permanent institutions, it is ­savings and flexible small-scale loans (for short-
much easier for MFIs and other formal providers to-­medium-term money management), medium-­
to offer long-term intermediation. Formal com- term loans (such as up to three years) with
mitment savings plans for the poor (which structured repayments suited to whatever is
include endowment and other forms of insur- known about the client’s household cash flow,
ance, and pension plans) will be a huge growth and medium-to-long-term commitment savings.
area for microfinance. They offer the discipline As techniques for doing so evolve, providers
that poor people so often seek when they use should aim to add pensions, and insurance cover,
group-based devices such as ROSCAs but add starting with the risks that are easiest to calculate,
value by having much longer terms, allowing such as life insurance, but aiming eventually at
much larger sums to be formed. They can also the more difficult ones, above all health and agri-
offer a “one-stop shop” for such services. In East culture. To carefully selected segments of clients,
Africa it is common for people to take member- providers should also learn how to offer longer-
ship in several ROSCAs at once, each with its term loans for productive investments tailored to
own term, frequency, and value, so that the user business cash flow, and for big life-enhancing
can ensure that different spending needs— investments (in homes, household goods, and
weekly consumption, quarterly rents, or annual education) tailored to repayment capacity shown

68 The New Microfinance Handbook


to exist by the transaction records of successive 10. For descriptions of some of the most common
loans. There is nothing in the history of microfi- forms these clubs take, see Rutherford
nance to suggest that offering these services to a (2009).
majority of the world’s poorest households can- 11. For a view of how the realities of poverty affect
not be achieved in this decade. financial decision making among low-income
people, see Bertrand et al. (2004).
12. See, for example, http://www.woccu.org.
Notes
13. See http://savingsgroups.com and http://
 1. http://financialaccess.org/sites/default/ savings-revolution.org.
files/110109%20HalfUnbanked_0.pdf. 14. This section was contributed by Susan
 2. Susan Johnson, “Gender and Microfinance: Johnson, Centre for Development Studies,
Guidelines for Good Practice,” http://www University of Bath.
.gdrc.org/icm/wind/gendersjonson.html.
 3. Details on how the households were selected
and how the fieldwork was executed can be References
found in Appendix I of Collins et al. (2009).
 4. These diaries ran for three years rather than Bertrand, Marianne, Sendhil Mullainathan, and
12 months, but with monthly interviews rather Eldar Shafir. 2004. “A Behavioral Economics
than biweekly. The objective was to under- View of Poverty.” American Economic Review
stand how households used MFI services 94 (2): 419–23.
rather than how they manage money generally. Chaia, Alberto, Aparna Dalal, Tony Goland,
 5. For more analysis on how well both types of Maria Jose Gonzalez, Jonathan Morduch,
funeral insurance helps cover the event of and Robert Schiff. 2009. “Half the World Is
death in poor households, see Collins and Unbanked.” Financial Access Initiative
Leibbrandt (2007). Framing Note, Financial Access Initiative,
New York.
 6. See Daryl Collins, “Focus Note: Financial
Decisions and Funeral Costs,” http://www Cohen, Monique. 2012. The Emerging Market-Led
.financialdiaries.com/Funerals_and_ Microfinance Agenda. PoP Briefing Note 25,
Financing.pdf. MicroSave, Lucknow.
 7. For more on “borrowing to save” see Jonathan Collins, Daryl, and Murray Leibbrandt. 2007. “The
Morduch, “Borrowing to Save: Perspectives Financial Impact of HIV/AIDS on Poor
from Portfolios of the Poor,” http:// Households in South Africa.” AIDS 21
financialaccess.org/sites/default/files/FAI_ (suppl. 7): S75–S81.
Borrowing_to_Save_0.pdf. Collins, Daryl, Jonathan Morduch, Stuart
 8. Bankable Frontier Associates, “Small Business Rutherford, and Orlanda Ruthven. 2009.
Financial Diaries: Report of Findings and Portfolios of the Poor: How the World’s Poor
Lessons Learned,” http://www.bankablefrontier Live on $2 a Day. Princeton: Princeton
.com/assets/pdfs/Small-Bus-Fin-Diaries_Pilot- University Press.
Study.pdf. FinMark Trust. 2003. FinScope Survey South
 9. In Uganda a MicroSave team found two Africa. Johannesburg: FinMark Trust.
women who always “kept” a few dollars of Genesis Analytics. 2005. “A Regulatory Review of
each other’s money. They explained that by Informal and Formal Funeral Insurance
doing so they could resist their husbands when Markets in South Africa.” www.finmark.org.za.
they asked for cash, by saying “Oh, no, you Helms, Brigit. 2006. Access for All: Building
can’t have that money—it belongs to the lady Inclusive Financial Systems. Washington, DC:
next door” (Rutherford 1999, p. 23). Consultative Group to Assist the Poor.

Clients 69
Kuyasa Fund. 2005. Kuyasa Fund: Community- ———. 2010e. “The ‘Triple-Whammy’ of Poverty:
Based Lending. Marshalltown, South Africa: Lessons from Portfolios of the Poor: How the
FinMark Trust. World’s Poor Live on $2 a Day.” PoP Briefing
Microcredit Summit Campaign. 2011. “The State Note 1, MicroSave, Lucknow.
of the Microcredit Summit Campaign Report Rutherford, Stuart. 1999. “Savings and the Poor:
2011.” Microcredit Summit Campaign, The Methods, Use and Impact of Savings by the
Washington, DC. Poor of East Africa.” MicroSave, Lucknow.
MicroSave. 2010a. “Borrowing to Save: Rutherford, Stuart, with Sukhwinder Arora. 2009
Perspectives from Portfolios of the Poor.” PoP The Poor and Their Money. Rugby: Practical
Briefing Note 3, MicroSave, Lucknow. Publishing.
———. 2010b. “Grameen II and Portfolios of the Rutherford, Stuart, with S. K. Sinha and Shyra
Poor.” PoP Briefing Note 7, MicroSave, Aktar. 2001. Buro Tangail Product Development
Lucknow. Review. Dhaka and London: BURO and DFID.
———. 2010c. “How Do the Poor Deal with Risk?” World Bank. 2005. Environment Matters: Annual
PoP Briefing Note 3, MicroSave, Lucknow. Review. Washington, DC: World Bank.
———. 2010d. “Living on $2 a Day.” PoP Briefing Wright, Graham A. N. 2005. “Designing Savings
Note 1, MicroSave, Lucknow. and Loan Products.” MicroSave, Lucknow.

70 The New Microfinance Handbook


CHAPTER 3

The Role of Government and


Industry in Financial Inclusion
Stefan Staschen and Candace Nelson

Tailoring a country’s financial system to enable from infrastructure to legally mandated outreach
financial markets to work better for the poor targets. Industry players are rallying around codes
involves the combined efforts of public and private of conduct intended to increase transparency and
players. It is relatively recent, and commendable, fair treatment of consumers and are defining per-
that both government and the financial services formance in financial, social, and environmental
industry acknowledge the importance of increas- terms. Both spheres share the responsibility for
ing financial inclusion. But financial inclusion is “responsible” finance, building financial inclusion
not simply about numbers or attracting more cli- on a foundation of consumer protection.
ents to the range of providers. “Responsible” This chapter outlines the role of government
financial inclusion increases access to financial (through its policies, regulation, and other sup-
services in ways that are safe for consumers, port for a stable financial sector) and industry
enabling their participation informed by knowl- (through standards and guidelines) in promoting
edge and choice. Increasingly shared by public and financial inclusion, as both separate and some-
private actors, this vision requires coordinated times overlapping arenas of activity. In addition, it
efforts from both. Governments are investing recognizes coordination and advocacy as impor-
authority in policies and rules that shape behavior tant functions within the market system. This
in market systems; their imprint is wide-ranging, chapter provides a high-level perspective on the

Contributions to this chapter were made by Kate Lauer.

The Role of Government and Industry in Financial Inclusion 71


roles of government and industry, largely related more awareness of the reasons why market forces
to formal rules that help to shape the financial will not—without an appropriate enabling envi-
market system;1 more detailed information on the ronment, infrastructure support, and adequate
specifics of regulation is provided in chapter 17. It consumer protection and financial capability—
will be of interest to policy makers, industry asso- achieve the goal of improving financial inclusion.
ciations, financial service providers, and other Policy making is a complex process bringing
stakeholders seeking to understand the enabling together various actors who use a multitude of
environment for financial services. tools and strategies to promote financial inclu-
sion. Policy decisions influence where resources
are allocated and how priorities are established
The Role of Government in within political, economic, and social institutions.
Financial Inclusion Policies are designed to guide decision makers
and to achieve an intended purpose. They typi-
Microfinance is now seen as an integral part of cally outline general principles, but they do not
an inclusive financial system. As a result, finan- carry the force of law.2
cial inclusion has become an important policy Policy makers recognize the potential for eco-
goal that complements the traditional pillars nomic growth and poverty alleviation through
of monetary and financial stability, as well as the development of a more inclusive financial ser-
other regulatory objectives such as consumer vices sector. In doing so, they also acknowledge
protection (Hannig and Jansen 2010). three primary barriers to financial inclusion:
• Supply-side barriers such as transaction costs,
Government as Rule Maker
the inability to track an individual’s financial
Governments have increasingly embraced finan-
history, and lack of knowledge about how to
cial inclusion as one of their policy objectives.
serve poorer customers
Data from the Financial Access 2010 Survey
(CGAP 2011) show that in 90 percent of econo- • Demand-side barriers that restrict the capacity
mies, at least some aspect of the financial inclu- of individuals to access available services and
sion agenda is under the purview of the main products, including socioeconomic and cultural
financial regulator. Furthermore, “As rule makers, factors, lack of formal identification systems,
governments determine not only what efforts and low levels of financial literacy (AFI 2010)
may be undertaken to promote financial inclu-
• Poor regulatory frameworks, including con-
sion, but also by whom, how, and when. In addi-
sumer protection mechanisms that hinder the
tion to prudential and consumer protection rule
quantity and quality of financial products and
making, governments can enable innovative
services.
financial inclusion business models, including
permitting the entry of new actors into the finan- The main participants in developing formal
cial service sector” (Ehrbeck, Pickens, and Tarazi rules include the legislature (typically the parlia-
2012, 6). Rather than provide financial services ment), the government unit (the relevant ministry
directly, the government’s role is to maintain mac- and government bureaucracy), and the regulator
roeconomic stability and provide appropriate reg- (the central bank or regulatory authority). A legis-
ulatory and supervisory frameworks (see Duflos lative process in microfinance normally starts
and Imboden 2004). And while the assumption with a mostly technical discussion among the
still holds that the private sector plays the central experts and the regulator,3 but eventually depends
role in providing financial services, there is much on the support of the legislature to implement

72 The New Microfinance Handbook


legal changes. Educating lawmakers about the to reduce the risk of serving them, a deposit
rationale and objectives of proposed rules early insurance system protects clients against loss of
on can help to overcome any potential resistance savings, and a land registry system facilitates
and create a joint understanding of what is needed access to loans using land as collateral.
to achieve an enabling environment for financial Nonfinancial infrastructure also has a bearing
services for the poor. on financial inclusion. For example, roads for trav-
eling to the nearest service point, electricity for
Infrastructure Support recharging mobile phones or running real-time
The government has traditionally played a strong communication systems between remote areas,
role in ensuring that infrastructure is in place and agents, and head offices, and national identification
providing oversight. The front-end infrastructure systems all promote access to financial markets. In
includes client access points, such as post offices, all these areas, the government plays a crucial role,
automated teller machines, point-of-sale devices, either as provider or as regulator and promoter.
and retail agents, all of which are subject to
­specific rules and regulations. The back-end infra- Promoting Savings through Government
structure includes automated clearinghouses, Payments
real-time gross settlement systems, retail pay- The government can potentially play an impor-
ment switches, and cash distribution networks tant role in promoting savings and catalyzing vol-
(see chapter 18). Not least because of the growing umes by moving its social transfers, wages, and
importance of branchless banking models, the pension payments onto electronic channels and
payment system infrastructure has received a lot ensuring that these channels are linked to easily
of attention, as it constitutes the rails for the accessible, basic transaction accounts. Its policy
cost-effective provision of financial services. If the with regard to social safety nets and govern-
government (for example, the central bank) does ment-to-person (G2P) payments can thus have an
not run these systems, at least it nurtures them important impact on the viability of innovative
and sets the general rules of operations. delivery channels and draw more clients into the
In addition to service delivery infrastructure, formal financial sector. Both the government and
several other supporting functions should be the poor benefit as G2P payments can often be
considered in the government’s domain for finan- delivered at substantially lower cost and with less
cial inclusion. For example, credit bureaus allow “leakage” if they are delivered electronically
clients to build a credit history and help providers (Pickens, Porteous, and Rotman 2009; see box 3.1).

Box 3.1  Bank and Retail Network Partnership

The Mexican government is leveraging public harnessing its public infrastructure to pursue
infrastructure for savings and G2P payment this goal. In areas with no financial services, it
delivery. The 2010 Budget Law crafted by the is attempting to reach people by linking a net-
Ministry of Finance stipulates that all govern- work of 23,000 community-owned stores
ment payments (primarily administered by the with its conditional cash transfer program
Ministry of Social Development) must be deliv- (Oportunidades) and the savings services of a
ered electronically by 2012. The government is state-run bank.
Source: Almazan 2010.

The Role of Government and Industry in Financial Inclusion 73


Consumer Protection For countries characterized as “low-access
In an environment of increasingly complex finan- environments” (where levels of financial access
cial products and services, effective consumer and financial literacy are low and regulators face
protection is important for the overall sustainabil- significant capacity constraints), the Consultative
ity of the financial market system.4 Participation Group to Assist the Poor (CGAP) recommends
in the formal financial sector must pose fewer that the government agenda for consumer pro-
risks for vulnerable, low-income p ­ eople who have tection pursue three basic goals: transparency,
little experience with formal finance and low lev- fair treatment, and effective recourse (Chien
els of financial literacy and capability. 2012; Brix and McKee 2010).5
Governments have an important role in pro- Transparency covers broad disclosure of rele-
viding the legal and enforcement muscle to ensure vant product terms and conditions, including
that financial institutions do not undermine con- pricing, fees, and default provisions. When such
sumer protection by intentionally capitalizing on disclosure rules require all providers of the same
their advantages in information, knowledge, and type of product to use standardized formulas as
power. Effective consumer protection legislation, well as plain language to communicate relevant
applied equitably across providers, can facilitate charges, consumers are better able to compare
comparison shopping and healthy competition, products. Disclosure requirements are consid-
leading to improved products and practices. ered more market friendly and effective at reduc-
Despite limited regulatory and supervisory capac- ing costs to the borrower than mandated interest
ity and challenges in enforcing legal contracts in rate ceilings (Brix and McKee 2010).
the countries where microfinance is needed most, Transparency targets two interrelated
governments can ensure that providers disclose ­objectives—­increased consumer comprehension,
prices and other characteristics of credit products ­allowing consumers to understand and choose
in a consistent manner using agreed terminology appropriate products, and increased market
and definitions; and they can set rules for client ­competition, stimulated as consumers engage in
privacy, out-of-court redress mechanisms, or rig- comparison shopping. Disclosure regulations
orous safety of data storage and transmission to should govern both content provided to the con-
protect customer funds and information (AFI sumer and how it is communicated for effective
2011). Some examples of consumer protection comprehension. Disclosure of the various cost
regulations include the following: components and other product terms can be
overwhelming to consumers and counterproduc-
• The National Bank of Cambodia requires that tive to the objective of enhancing their compre-
microfinance institutions (MFIs) state their hension. For example, creditors in Armenia are
interest on a declining balance rather than a required to advise customers orally regarding
flat-rate basis. terms, costs, risks, and obligations associated
• South Africa’s sweeping National Credit Act with a service. A standardized summary sheet of
addresses over-indebtedness and reckless lend- product costs and terms used by all providers is
ing by defining these terms under the law. It sets one of the most useful tools for ensuring that con-
clear rules governing disclosures, credit report- sumers have information they can understand
ing, and advertising, among other practices. and compare. Standardized forms are also easier
for providers, particularly smaller and less sophis-
• Indonesian regulators require regulated pro- ticated ones, as they save time and resources by
viders to have written procedures and a formal not having to develop their own disclosure forms
complaints unit. to meet regulatory requirements (Chien 2012).

74 The New Microfinance Handbook


The perspective of the individual consumer is financial institutions not only handle complaints,
critical to tailoring disclosure regulations. Loan but also often handle questions and can play a
pricing provides a good example. Because nominal role in facilitating consumer comprehension of
interest rates do not reflect the total cost of a loan, disclosed information. Sometimes the regulatory
regulations should mandate that pricing be agency takes responsibility for this function, and
expressed using one or more of the following sometimes it assigns the role to an industry asso-
­methods: (1) total financial cost of credit, (2) repay- ciation, ombudsman, or other entity. Rules gov-
ment schedules, and (3) annual percentage rate erning these processes should specify all aspects
(APR) or effective interest rate (EIR; see chapter 9). of customer complaints, including the method of
While the use of APRs and EIRs allows for greater submission, location, and time frame for resolu-
comparability, total loan cost and the amount and tion. Providers need to display such information
frequency of repayment may be easier for low-­ clearly and communicate it directly to clients.
income consumers to comprehend. Limited data While these three goals—transparency, fair
suggest that borrowers tend to focus on the amount treatment, and recourse—are basic to protecting
of the installment payment rather than the interest consumers, it may not be feasible or practical to
rate, because their main concern is whether their address all of them at once. An incremental
cash flow will cover loan payments (Chien 2012). approach to developing a set of disclosure poli-
For example, policy makers in Peru and Ghana cies and regulations may be necessary, taking into
standardize the calculation of APR or EIR with consideration compliance costs for industry and
regulators specifically to address the capacity con- supervisory capacity of government. A starting
straints of smaller, less formal institutions. Allowing point might be to tackle the most critical yet
for the monthly presentation of APRs or EIRs is ­discrete transparency issues in a given context.
another practical option introduced in the At an intermediary level, governments can target
Philippines. Monthly APRs or EIRs may be more broader consumer comprehension. Finally, regu-
appropriate for loans of less than a year and more lators can reinforce market competition by
comprehensible to consumers (Chien 2012). requiring broad dissemination of comparable
Fair treatment covers ethical staff behavior, the metrics for total costs (such as APRs and EIRs)
sale of appropriate products, and acceptable mar- and other key terms through advertising and
keting and reasonable collections practices. Rules media channels, allowing market forces to apply
governing truth in advertising support transpar- pressure on providers. Extensive dissemination
ency through disclosure. Codes of ethics guard of new disclosure requirements, coupled with
against overly aggressive responses to delinquency. sufficient time for implementation, can help to
Zero tolerance of delinquency, a cornerstone of reduce the industry’s costs of compliance.
institutional performance, can result in abusive Consumer testing can be used to refine disclosure
collections with adverse effects on poor house- rules at each stage and build a stronger disclosure
holds. In India, Ghana, and elsewhere, r­ egulators regime over time (Chien 2012; see box 3.2).
have established rules governing fair debt collec- However, even where provided for by law,
tion and prohibiting intimidation and coercion. broad application and enforcement of consumer
Effective recourse is necessary for consumer protection regulations can be difficult to achieve
trust in the formal financial system; when things in practice. Challenges include consistent appli-
go wrong, consumers need to know they have a cation of rules and coordination among multiple
way to communicate their complaints and regulators where supervisory authority is
resolve their issues. Consumer recourse mecha- divided. Microinsurance provides a good exam-
nisms such as specialized help desks within ple of this (see box 3.3).

The Role of Government and Industry in Financial Inclusion 75


Box 3.2  Encouraging Stakeholders to Adopt New Rules

The success of the disclosure regime in Peru Financial institutions in Peru are required to
can be attributed in part to the extensive resolve all questions related to the content of
efforts of the Superintendency of Banking and a contract before it is signed. In addition, they
Insurance. Regulators spent two years dis- must designate customer service personnel
cussing disclosure rules with the industry, to consult with clients on the scope of stan-
addressing issues of compliance costs, and dardized contracts. Such an approach shifts
developing providers’ familiarity with formulas the burden of achieving comprehension onto
for calculating EIRs. In addition, a large cam- the provider, but should not be viewed as a
paign was launched to educate consumers on substitute for clear instructions on what and
EIRs and to ensure they understood the new how information is disclosed.
disclosure rules.
Source: Chien 2012.

Box 3.3  Policy for Microinsurance

Policy makers need to understand the insur- microinsurance. Government can consider
ance needs of low-income households and treating microinsurance products differently
ensure that policies facilitate the market-based than commercial products for tax purposes.
provision of microinsurance. They can engage Increasingly, central banks and finance minis-
the insurance industry and other actors—such tries have become engaged in promoting finan-
as unregulated insurers and networks—in cial literacy, as low levels of information and
a dialogue on microinsurance and involve trust are probably the biggest barrier to uptake
them in educating the market and promoting of insurance among low-income populations.
Source: Martina Wiedmaier-Pfister.

Building Financial Capability exercise them. These include the right to under-
Although historically governments may have stand product choices, often offered by competing
focused on limiting harmful credit products providers, and the right to choose the services that
through interest rate caps and debt forgiveness, are best for them.6 Consumers need to develop
the focus has shifted toward the need to empower relationships with financial service providers on
financial service users, to inform them, and to give the basis of knowledge and choice as opposed to
them tools to protect their rights (CGAP 2010). fear. Ill-informed consumers and unsupervised
CGAP identifies consumer financial capability, providers can undermine the impact of financial
government regulation, and industry codes of inclusion efforts; this risk is especially high in a
conduct as the three principal consumer protec- context of rapid, often technology-driven, change
tion strategies (McKee, Lahaye, and Koning 2011). in the financial service marketplace. Given the
Consumers need to know their rights in order to asymmetries in knowledge, as well as access to

76 The New Microfinance Handbook


information and skills between providers and Financial capability is the ability to apply
consumers, governments can help to meet
­ that knowledge, to make informed decisions,
the c­ hallenges—educational, regulatory, and and to take effective actions regarding the cur-
financial—­­­of empowering consumers to use finan- rent and future management of money. It
cial services effectively and participate in their includes the ability to save, borrow, and spend
own protection. However, with limited ­experience wisely, to generate more stable cash flows, and
in addressing this need, government strategies to to manage the challenges associated with
support responsible finance are key to learning costly life-cycle events (see box 3.5). Challenges
what works (see box 3.4). of money management are never static, and
Three overlapping terms are used in relation neither are the solutions, especially given the
to the concept of consumer financial capability: unpredictable and seasonal incomes that
financial literacy, capability, and education. are  common among the poor. Financial capa-
Financial literacy is the ability to understand bility is an evolving state of competency
basic information about financial products and subject to ever-changing personal and eco-
­
services. nomic circumstances.

Box 3.4  Financial Capability Strategies

A Ghanaian government survey in 2007 strategy for financial literacy and consumer
revealed a low level of knowledge of financial protection in the microfinance sector was
institutions, services, and products among adopted that addressed three pillars of finan-
adults. As a result, the government launched a cial capability: knowing, understanding, and
financial literacy program in 2008 to create changing behavior. The strategy featured edu-
awareness and build trust between consum- cation materials describing key products and a
ers and service providers. In 2009, a national road show that toured rural areas.
Source: AFI 2011.

Box 3.5  Financial Literacy in the Russian Federation

In Russia, research was conducted to study having more unspent income at the end of the
the consequences of greater financial literacy month and higher spending capacity. The rela-
on the use of financial products and financial tionship between financial literacy and the
planning. The study found that financial liter- availability of unspent income was even more
acy was positively related to participation in evident during the recent financial crisis, sug-
financial markets and negatively related to the gesting that better financial literacy may better
use of informal sources of borrowing. equip individuals to deal with macroeconomic
Individuals with higher rates of financial liter- shocks.
acy were significantly more likely to report
Source: Klapper, Lusardi, and Panos 2012.

The Role of Government and Industry in Financial Inclusion 77


Financial education is a key tool, coupled with other stakeholders for achieving an inclusive
experience using financial services, to build finan- financial sector. It also raises awareness of and
cial literacy and capability. It introduces people to secures commitment to sound practices and estab-
good money management practices with respect lishes the means for communication and coordi-
to earning, spending, saving, borrowing, and nation around implementation to avoid gaps or
investing. Its power lies in its potential to be rele- duplication of efforts (Porter 2011). In 2010, 45
vant to anyone and everyone, from the person percent of the countries participating in the
who contemplates moving savings from under the Financial Access 2010 Survey had a dedicated
mattress to a Savings Group to the saver who tries strategy document for promoting financial inclu-
to compare account features between competing sion (see box 3.6). Regulators in countries with a
banks. Serving multiple, interrelated purposes, financial inclusion strategy also have, on average,
financial education promotes personal financial more financial inclusion topics under their pur-
management, product uptake and use, and con- view and more resources and staff working on
sumer awareness and protection. these matters (CGAP 2010).
Matching the content of financial education to Financial inclusion strategies are developed
the target group is essential to making it relevant. through a consultative process among the key
Target groups for financial education can be stakeholders in financial inclusion (government,
defined by age, gender, employment status, or regulators, the industry, and consumer associa-
relationship to a specific financial product. For tions) and approved by a government body. They
example, financial education targeted to youth is typically include a diagnostic of the current state
likely to focus on negotiating with parents about of the sector to ensure “evidence-based policy
spending money, the value of saving, and planning making,” policy objectives, strategies, and an
for the future. action plan for implementation (Duflos and
Finally, to ensure financially capable consum- Glisovic-Mézières 2008). Financial inclusion
ers, financial education must be integrated with strategies need to consider existing capacity as
hands-on experience; consumers need to choose well as the need for reform and capacity building
and use financial products and services if they are (Porter 2011).
to understand their full benefits. An important element is the process itself:
bringing a diverse range of actors to the same
Financial Inclusion Strategies table whose only common denominator may be
A financial inclusion strategy clearly defines and their potential to affect the financial ecosystem
aligns a shared vision among policy makers and and getting them to agree on a shared vision for

Box 3.6  Financial Inclusion in Mexico

Under its National Development Plan for ­ ifferent services and were subject to ­different
d
2007–12, the Mexican government reformed regulations than traditional banks. The plan
banking laws to permit nontraditional entities also facilitated the transition of small savings
such as banking agents to operate in rural and credit organizations into regulated deposit-
areas. Niche banks were allowed to offer taking entities.
Source: AFI 2011.

78 The New Microfinance Handbook


the sector. The action plan for implementation to come to a common understanding on how to
needs to consider all elements of the ­financial reach this goal.
market system: the core (clients and providers National strategies that focus on responsible
and the products they exchange) and the rules financial inclusion, as opposed to simply access to
(formal and informal) and supporting functions finance, might lead to significantly greater bene-
(infrastructure, funding, and information). Only a fits for households and service providers alike.
combined effort of all stakeholders is likely to While many financial inclusion strategies may
have a significant impact on the overall goal of not focus on consumer protection and financial
making markets work for the poor. capability, they should (see figure 3.1).
While financial inclusion strategies have the
potential to lead to better structured and more Legal Mandates
evidence-based policy-making processes, they Some countries use quantitative financial inclu-
have suffered from several shortcomings (drawn sion targets or specific product offerings man-
on CGAP research summarized in Duflos 2011): dated by law as tools to promote the provision
of financial services to underserved populations
• Many strategies are driven by donors. Govern­
or geographic areas. These financial inclusion
ment must have strong interest in and owner-
mandates can be seen as a complement to other
ship of the process and the outcome.
financial regulations and incentives (for exam-
• The outcome can only be as good as the analysis. ple, tax advantages for providers to reach
At times, the diagnostic does not include all poorer segments of the population). Mandates
relevant actors and institutions; the analysis appear to be a simple and effective tool for
should be conducted by a team of experts with achieving financial inclusion targets; assuming
a diverse set of skills and be updated regularly. that enforcing compliance is possible, prede-
fined targets can be reached (for example,
• The common vision does not sufficiently consider everybody has access to certain products or all
the local context. This is particularly the case if districts are served by at least one branch).
the document is drafted by an international However, in practice this might not always be
consultant without much involvement of local the case.
actors. Priority sector lending targets are the best-
known example of financial inclusion targets.
• The strategy is not disseminated widely or
Priority sector lending usually requires a certain
updated regularly. The success of implementa-
percentage of a provider’s loan portfolio to be
tion depends on broad dissemination, a clear
dedicated to sectors such as agriculture, micro
allocation of rules, sufficient funding, and the
and small businesses, housing, or microfinance.
setting of realistic targets; the strategy should
Basic or “no frills” bank accounts, designed for
be a “living document.”
low-income clients with low or no fees, are
The extent to which financial inclusion strat- another example of financial inclusion man-
egies have improved access to finance is difficult dates; in some countries (including Belgium and
to know, as we do not know how the sector France in the European Union, Indonesia, and
would have developed without a strategy. What Mexico) banks are required by law to offer basic
we do know is that financial inclusion strategies, accounts (see box 3.7).
if taken seriously, are a powerful instrument for Expert opinions about the usefulness of legal
convening stakeholders who have a potential mandates are divided. Opponents give the follow-
impact on financial inclusion and helping them ing reasons:

The Role of Government and Industry in Financial Inclusion 79


Figure 3.1  Financial Inclusion Strategies and Responsible Finance

‘Responsible’ financial inclusion that raises financial capability in line with financial access leads to:
• Stronger positive impacts at level of individual, firm, economy, financialsector
• Lower risk (for individuals, financial institutions, and the financial sector)
• Improved uptake of new technology

FINANCIAL INCLUSION COMBINED WITH


FINANCIAL INCLUSION
FINANCIAL LITERACY, CONSUMER PROTECTION

Examples of how households/firms can benefit Examples of how households/firms can benefit

• MICROINSURANCE: Reduces exposure to potential • MICROINSURANCE: Understand the risks covered,


losses to enable business growth cost compared to the potential benefit, select product
• BASIC BANK ACCOUNTS: Low income household • BASIC BANK ACCOUNTS: Select a bank account that
access through a mobile phone or ATMs meets its needs, manage fees and debt levels
• REGULATORY REFORMS: Innovation by financial • REGULATORY REFORMS: Harmonization of
institutions to serve lower income clients regulation to capability levels and objectives of
education programs

Financial inclusion

Responsible finance

Source: Tata and Pearce 2012.

Box 3.7  Financial Inclusion in India

India’s government has a long tradition of pro- In a parallel initiative, in 2010 the govern-
moting financial inclusion. For more than 40 ment and the central bank set goals to provide
years, the central bank, the Reserve Bank of by 2015 all 600,000 villages in India with a
India, has been operating priority sector lend- banking outlet (either by a branch or a retail
ing mandating a portion of banks’ loan portfo- agent, in India known as a business corre-
lios to be in the agriculture sector and to small spondent), with stipulated annual targets
and micro enterprises. In 2005, it required along the way. While these targets were not
banks to offer basic no-frills accounts with no, specified by law, the Reserve Bank of India
or very low, minimum balances and affordable requires all banks to report progress regularly
charges. However, use of these accounts has and closely monitors their achievements.
been very low. In 2011, banks were advised to It is still too early to say how successful the
provide at a minimum four products: (a) a sav- implementation of these ambitious goals will
ings or overdraft account, (b) a remittance be. Some banks have risen to the challenge
product for electronic transfer of government and opened numerous new outlets (mostly
benefits and other remittances, (c) a pure business correspondents). Others have com-
savings product (ideally a recurring-deposit plained that the financial inclusion targets hurt
scheme), and (d) entrepreneurial credit. their profits.

80 The New Microfinance Handbook


• In a market economy, it is assumed that pro- Standards for supervision are largely set by inter-
viders know best how to serve the market. It is national financial standard-setting bodies; they
also assumed that a decision not to offer a cer- reflect national and global experience with differ-
tain product is informed by economic factors. ent types of institutions and the risks and benefits
If mandated to do so, providers will incur of different activities. While standards represent
losses that have to be recovered elsewhere. formal rules, they are typically “soft law”; there is
no technical means of enforcing them, although
• Targets can be achieved at lowest cost if they there may be consequences (in terms of reputation
focus on those providers that are best posi- and pricing) for failure to comply with them. In
tioned to contribute to their achievement.7 some cases, the threat of these consequences can
• On a more practical level, it is difficult to set up have significant impact on the actions of a govern-
rules in a way that does not encourage regula- ment or its regulator.
tory avoidance (for example, providers choos- Global standard-setting bodies set standards
ing a different legal form, moving to another and provide guidance for the regulators of finan-
jurisdiction, or bending the rules). cial institutions. Due to the historical emphasis
on setting standards for existing institutions and
• The achievement of targets has to be moni- their clients and the supervision of such institu-
tored, and an effective enforcement mecha- tions, many standards have not yet considered the
nism, including penalties for nonachievement, issues of particular relevance to providing the
has to be established, which requires additional poor with financial services. Moreover, these
resources. standards may inhibit new approaches, including
technical and nontechnical innovations, and new
Proponents, however, argue that mandates
products and services that the poor need.
to explore new markets are needed to counter
However, the global standard setters have begun
the complacency of financial institutions. When
to consider how existing standards might need to
mandates are imposed (if applied to all so that no
be revised in order to facilitate financial inclusion.
individual provider’s competitive position is com-
This effort requires understanding the risks of
promised), financial institutions will do their best
financial exclusion as well as the changing risks
to comply with the targets at the lowest cost and
and benefits of increased financial inclusion. In
eventually may even be able to cover their costs. In
addition, attention is required to understand the
some cases (South Africa and Germany), the mere
situation of poor countries with high levels of
threat of a legal mandate prohibiting commercial
financial exclusion and weak supervisory capac-
banks from refusing any customer the opportu-
ity (both staffing and experience) and to adjust
nity to open a bank account was sufficient to lead
standards accordingly (CGAP 2011).
the banking industry, of its own accord, to offer
Of the various standard-setting bodies, the
basic accounts to everybody.8 The ultimate deci-
three most relevant to financial services for the
sion whether to mandate financial inclusion in
poor are the Basel Committee on Banking
law depends on the specific context of a country.
Supervision (BCBS), the Financial Action Task
Force (FATF), and the International Association
Global Standards and Standard-Setting of Insurance Supervisors (IAIS).
Bodies The BCBS formulates standards and guide-
The term “standards” encompasses many things in lines for the supervision of banks and other
the financial sector.9 Standards may be general or deposit-taking institutions and is best known for
specific, and they may be national or international. its international standards on capital adequacy

The Role of Government and Industry in Financial Inclusion 81


and its Core Principles for Effective Banking and higher borrowing costs, among other conse-
Supervision (known as the Basel Core Principles). quences (Isern and de Koker 2009).
In December 2011, the BCBS proposed revised The IAIS is a broad-based forum composed of
principles intended to address the postcrisis les- insurance regulators and supervisors from some
sons for promoting sound supervisory systems. 190 jurisdictions in almost 140 countries. Its
These proposed principles are significant for the stated mission is to promote effective and glob-
prominence given to the principle of proportion- ally consistent regulation and supervision of the
ality (see chapter 16). In 2010 the BCBS issued insurance industry in order to develop and main-
guidelines on applying the Basel Core Principles tain fair, safe, and stable insurance markets for
to microfinance activities of depository institu- the benefit and protection of policyholders. The
tions. The guidelines highlight the importance of IAIS issues standards and guidance material
a proportionate (risk-based) approach as well as (including Issues in Regulation and Supervision of
the key differences between a microloan portfolio Microinsurance; IAIS 2007) and has recently
and a commercial loan portfolio. The key differ- revised its Insurance Core Principles to incorpo-
ences include (a) the particularities of the rate the principle of proportionality. Specifically,
labor-intensive microlending methodology, (b) the Insurance Core Principles state, “Supervisors
the licensing requirements, which should reflect need to tailor certain supervisory requirements
different risks than those of commercial banks, and actions in accordance with the nature, scale,
(c) the particular provisioning and reserve and complexity of individual insurers. In this
requirements that should be applied to micro- regard, supervisors should have the flexibility to
loans, and (d) the need for different liquidity tailor supervisory requirements and actions so
requirements (BCBS 2010). that they are commensurate with the risks posed
The FATF is the global standard-setting body by individual insurers as well as the potential
for anti-money-laundering and combating the risks posed by insurers to the insurance section
financing of terrorism (AML/CFT) rules. It is or the financial system as a whole” (IAIS 2011,
organized as a task force–style body with 34 para. 8).
member countries and two regional organizations
(the European Commission and the Gulf
Coordination and Advocacy
Cooperation Council).10 The FATF recommenda-
tions articulating standards for national regimes An important element of policy and rule mak-
on AML/CFT have recently been revised to incor- ing for financial inclusion is the interaction of
porate a risk-based approach that is critical to various stakeholders and how those interac-
financial inclusion efforts (FATF 2012). For exam- tions shape policy outcomes. The development
ple, under the revised recommendations, a mobile and implementation of formal rules are not a
money account with strict transaction limits does one-off event; rules need to be revised regularly
not require the same customer due diligence rules in light of experience and learning. As with
as a current account with no limits. Specifically, every other part of the financial market system,
FATF recommendations outline the measures the process of how rules are developed and who
that countries, financial institutions, and related is involved needs to be understood and sup-
businesses should institute. While the recom- ported in a way that encourages pro-poor regu-
mendations are not legally binding, countries that lation (Gibson 2010).
do not adhere to them run the risk of being con- How rules develop depends on the level of
sidered a haven for illicit transactions or criminal accountability and responsiveness among rule
activity. This can result in international sanctions makers to the advocacy “voice” of different

82 The New Microfinance Handbook


interest groups and the wider political economy poor is a key element in designing and imple-
around financial regulation. This means that menting effective financial inclusion reforms and
coordinating bodies, such as the G-20 Global policies (see box 3.8). This is particularly impor-
Partnership for Financial Inclusion, and advo- tant as new partnerships develop between pro-
cacy groups, such as associations of providers or viders, including banks and mobile network
consumer groups, are important players in rela- operators, or as retailers and agents become
tion to the rules regarding financial services. involved in the delivery of financial services. A
Each group has its own motivation and objec- lack of coordination can increase risks such as
tives, which may or may not always result in improper sequencing of regulatory changes or
what is best for the ultimate beneficiary of poli- regulatory changes in one sector that undermine
cies, the wider public.11 efforts in other areas (AFI 2010).

Coordination Alliance for Financial Inclusion


Coordination of policy makers and various stake- More and more policy makers and representative
holders interested in financial services for the bodies are beginning to coordinate formally with

Box 3.8  Negotiating a Special Microfinance Law in Uganda:


The Outcome of Competing Interests
In 2003 Uganda passed a special law for the contrary, MFIs knew about microfinance
microfinance deposit-taking institutions. A and increasingly learned about financial regula-
detailed analysis of the process leading to the tion; donor projects at the time were led by
adoption of this law and the role of participat- knowledgeable microfinance “champions.”
ing interest groups can explain why the law Policy makers (the government and the
has generally been regarded as a success, parliament) also had a strong interest in the
despite its bias toward overregulation (which topic of microfinance, viewing it as a way to
occurs at the expense of improving access to gain political capital, but knew much less
financial services) and weak emphasis on about the rationale for and objectives of regu-
consumer protection. lating it. They could easily have derailed the
The interest groups with the strongest process, but donors, MFIs, and the Bank of
influence on the outcome were the central Uganda prevented that. Finally, clients had the
bank (Bank of Uganda), donor agencies, and most to gain from adoption of the law because
the most mature MFIs in the country (which they would acquire better access to financial
planned to apply for a license under the new services (savings, in particular). However, their
law). All three groups had the highest level of voice was hardly heard in the process. The
knowledge about what an enabling legal absence of client consultation and the conser-
framework for microfinance should look like: vative approach taken by the regulator explain
The Bank of Uganda knew about financial reg- why the new regime has not been as success-
ulation and acquired increasing knowledge ful in increasing access as hoped and is rela-
about microfinance, but was biased toward tively weak on consumer protection.
overregulation (as regulators typically are); on

The Role of Government and Industry in Financial Inclusion 83


one another to influence financial inclusion. For at all levels of policy development … Dialogue
example, as of 2012, government institutions from between policy makers and the industry is
78 countries had joined the global Alliance for also a powerful tool for deciphering and
Financial Inclusion (AFI), a network of financial ­mitigating risks that help to create regula-
policy makers that promotes peer learning and tion and foster innovations in access (AFI
the implementation of effective policies that 2010).
advance the goal of financial inclusion:
A good example of coordination efforts is the
A global policy response based on leader- Maya Declaration initiated by AFI to commit pol-
ship from developing countries, closer icy makers to prioritize financial inclusion (see
international cooperation, and strong and box 3.9).
coordinated partnerships between relevant Other coordination and advocacy efforts
public and private sector stakeholders at include the G-20 Global Partnership for
national and international levels could be Financial Inclusion and the Responsible Finance
the most effective way to support countries Forum.

Box 3.9  The Maya Declaration


Launched under the auspices of the Alliance for Financial Inclusion (AFI), the Maya Declaration
is the first global set of measurable commitments, spearheaded by developing- and emerging-­
country governments, to unlock the economic and social potential of the 2.5 billion poorest
people through greater financial inclusion. In the declaration, members recognize the key role
that financial inclusion policy plays in enhancing stability and integrity, its role in fighting poverty,
and its essential contribution toward inclusive economic growth. The Maya Declaration raises
the profile of financial inclusion and provides public visibility to ensure that policy makers are
held accountable for their commitment. Among AFI members, 24 have made specific national
commitments to financial inclusion. For example,
• Central Bank of Brazil pledged to launch a National Partnership for Financial Inclusion.
• Bank of Tanzania pledged to raise its level of financial access to 50 percent of its population
by 2015 through mobile banking.
• Mexico’s Comisión Nacional Bancaria y de Valores committed to establishing banking agents
or branches in every municipality of the country by 2014.
• Reserve Bank of Malawi pledged to introduce agent banking in 2012.
• National Bank of Rwanda set a target of 80 percent financial inclusion by 2017.
• Peru’s Superintendency of Banks and Insurance pledged to enact a new law regulating
electronic money within the next year.
In support of the Maya Declaration, AFI is establishing a peer review mechanism, serving as
a policy clearinghouse for peer-reviewed solutions, and providing subject matter expertise to
help members to implement commitments. It will award grants to support knowledge exchange,
develop financial inclusion strategies, and provide advocacy tools to help institutions win the
support of key partners needed for implementation.
Source: http://www.afi-global.org/gpf/maya-declaration.

84 The New Microfinance Handbook


Global Partnership for Financial Inclusion reference for policy makers and other stakehold-
In 2010 the G-20 recognized financial inclusion ers seeking to promote increased financial inclu-
as a key pillar of the global development agenda sion (see box 3.10).
and created the Global Partnership for Financial
Inclusion as an implementing body open to G-20 Responsible Finance Forum
countries, non-G-20 countries, and other rele- The Responsible Finance Forum is an interinsti-
vant stakeholders (Ehrbeck, Pickens, and Tarazi tutional community of practice for exchanging
2012). The G-20 principles for innovative finan- knowledge and building consensus on responsible
cial inclusion play an increasing role as a point of finance. It was created to support participating

Box 3.10  The G-20 Principles for Financial Inclusion


At its first summit in June 2010, the G-20 identified a set of principles that reflect conditions
conducive to spurring innovation for financial inclusion while protecting financial stability and
consumers:
• Leadership. Cultivate a broad-based government commitment to financial inclusion to help to
alleviate poverty
• Diversity. Implement policy approaches that promote competition, provide market-based
incentives for delivering sustainable financial access, and promote the use of a broad range
of affordable services (savings, credit, payments and transfers, insurance) as well as a diver-
sity of service providers
• Innovation. Promote technological and institutional innovation as a means to expand financial
system access and use, including by addressing infrastructure weaknesses
• Protection. Encourage a comprehensive approach to consumer protection that recognizes
the roles of government, providers, and consumers
• Empowerment. Develop financial literacy and financial capability
• Cooperation. Create an institutional environment with clear lines of accountability and coor-
dination within government and encourage partnerships and direct consultation across gov-
ernment, business, and other stakeholders
• Knowledge. Use improved data to make evidence-based policy, measure progress, and con-
sider an incremental “test and learn” approach acceptable to both regulators and service
providers
• Proportionality. Build a policy and regulatory framework that is proportionate with the risks
and benefits involved in such innovative products and services and based on an understand-
ing of the gaps and barriers in existing regulation
• Framework. Consider the following in the regulatory framework, reflecting international
standards, national circumstances, and support for a competitive landscape: an appro-
priate, flexible, risk-based AML/CFT regime; conditions for the use of agents as a cus-
tomer interface; a clear regulatory regime for electronically stored value; and
­market-based incentives to achieve the long-term goal of broad interoperability and
interconnection.
Source: G-20 Information Centre (http://www.g20.utoronto.ca/2010/to-principles.html).

The Role of Government and Industry in Financial Inclusion 85


institutions, including development agencies and generally developed on the basis of member
development finance institutions, in sharing needs, internal capacities, and the external politi-
knowledge and information on development cal environment. For example, regional or interna-
efforts and potential collaborations, to build on tional associations, whose membership typically
responsible finance frameworks and foster broad- comprises national-level networks and providers
based dialogue and facilitate convergence of from multiple countries, engage in policy in a
views, and to support coordinated action. The more indirect manner. Regional associations often
Responsible Finance Forum considers issues publish information on industry practices or
related to consumer protection regulation, indus- lobby market players on issues affecting their
try action, and financial capability, with an empha- members across countries and markets. By doing
sis on more transparent, inclusive, and equitable so, they facilitate the work of local association
financial sectors (Responsible Finance Forum representatives.
2012; see figure 3.2). National associations can influence policy
more directly by engaging with local authorities
Advocacy who can pursue direct changes to various laws or
Industry networks or associations often take a secondary legislation (for example, regulations
central role in advocating the interests of provid- and guidelines). They can pursue specific actions
ers. As associations are formed on the premise of that advance an advocacy strategy—letter writing,
common interests, they can effectively communi- publicity campaigns, or direct lobbying with pol-
cate members’ shared concerns about a particular icy makers—to communicate or publicize their
issue. The activities that constitute advocacy are support for change on a particular issue. Industry

Figure 3.2  Responsible Finance: A Multiple-Stakeholder Approach

1. Consumer protection (regulations): A regulatory framework for financial


consumer protection, at both national and international levels
2. Responsible providers: Voluntary commitments, practices, standards, and
Areas of initiatives in the financial sector (individually and at industry level,
action nationally and internationally)
3. Financial capability: Interventions aimed to build and enhance financial
capability of financial institutions clients – the consumers of financial
products and services

Consumers-
Providers of financial Regulators (central
individuals and
Key services – banks, banks, financial
businesses – and
stakeholders MFIs, NBFIs, others – regulators, consumer
advocacy
and their associations protection agencies)
organizations

Cross-cutting Financial markets stability, poverty reduction, access to finance, job creation and
issues SME development, health and education, sustainable development

Source: Responsible Finance Forum 2011.

86 The New Microfinance Handbook


associations often provide policy advocacy as a their divergent interests pose a challenge to col-
service to members. If implemented effectively, lective action. Although consumer associations
advocacy can strengthen the voice of providers try to overcome both of these challenges, they are
and their associations and thus help to design not yet widespread in microfinance. More effec-
rules that are tailored to their specific needs (see tive representation occurs through the intersec-
box 3.11). tion of client and provider interests. While the
While clients should be the main beneficiaries interests of providers and clients are not identical
of financial inclusion efforts, their voice is rarely (for example, they differ with regard to product
heard; often, they lack the technical expertise to pricing), the fact that providers depend on the
lobby effectively for their interests. In addition, satisfaction of their clients creates substantial

Box 3.11  SEEP’s Toolkit for Policy Advocacy


The Small Enterprise Education and Promotion (SEEP) Network connects microenterprise prac-
titioners from around the world in efforts to develop practical guidance that supports their com-
mon vision of creating a sustainable income in every household. The SEEP Network has an
advocacy planning model that seeks to develop the capacity of advocacy within microfinance.
The following are the most common forms of advocacy it promotes:
• Engagement is a gradual process of relationship building. It is not focused on a particular
policy goal, but rather on the development of greater familiarity, trust, and mutual under-
standing. Associations can engage stakeholders through invitations to association-sponsored
events, educational opportunities, and formal and informal meetings.
• Facilitation and consultation are based on working with policy makers and affected stakehold-
ers to create opportunities for action. Facilitation involves creating opportunities for direct
contact with decision makers to promote dialogue and build awareness through conferences,
workshops, field trips, and meetings. Facilitation may also involve creating strategies for
policy creation more directly. Consultation with a diverse base of members and a broad range
of stakeholders is required to increase the contri­bution of individuals and organizations, while
engendering greater overall participation in policy-related discussions.
• One of the most significant contributions advocates can make to policy reform is through
the dissemination of high-quality research and information. Association members have a
direct understanding of the concerns of affected populations. By promoting credible and
well-documented information on the sector, associations can build legitimacy as a repre-
sentative voice. Examples include industry assessments, benchmarking reports, market
studies, and focused policy investigations.
In its most direct form, advocacy is about promoting concrete solutions to problems.
Advocates can promote the reform of existing laws and the creation of new ones, oppose legis-
lative initiatives considered damaging to the sector, and promote changes to the implementation
of existing policies and regulation. By lobbying decision makers as well as stakeholders who can
influence them, advocates can directly affect policy outcomes.
Source: D’Onofrio 2010. SEEP Network, http://networks.seepnetwork.org/ppt-newhtml/Policy_Advocacy_
mar2010_web.en_.pdf.

The Role of Government and Industry in Financial Inclusion 87


overlap. Furthermore, because clients constitute can be challenging: There is typically no legal
an important voting bloc, policy makers should be consequence for failure to comply, and influential
motivated to consider their current and potential financial institutions may use their power to dis-
interests. courage the self-regulatory body (for example, a
microfinance association) from taking action.
Without enforcement, such standards can only
The Role of Industry in Financial
exert a weak influence.
Inclusion
CGAP has developed numerous guidelines
Financial inclusion calls for better outreach, for the industry based on consensus from vari-
appropriate products and services, and consumer ous stakeholders, including, for example,
trust. Responsible finance emphasizes value, “Microfinance Investment Vehicle Disclosure
respect, and protection of the consumer (McKee, Guidelines”; “Good Practice Guidelines for
Lahaye, and Koning 2011). Efforts by providers to Funders of Microfinance”; “Regulation and
encourage responsible finance influence institu- Supervision Consensus Guidelines”; “Infor­
tional behavior, market access, the range of prod- mation Systems Implementation Guidelines”;
ucts and services on offer, and the competitive “Disclosure Guidelines for Financial Reporting
landscape, all of which have an impact on the by Microfinance Insitutions”; “The Role of
functioning of the market and the suitability of Funders in Responsible Finance”; “Due Diligence
financial services. Given that financial services Guidelines for the Review of Microcredit
for the poor are most prevalent in countries with Loan Portfolios”; “Developing Deposit Services
limited supervisory capacity, often providers may for the Poor”; and “Definitions of Selected
need to take the lead in promoting responsible Financial Terms, Ratios, and Adjustments for
finance. Microfinance.”12
Other industry representative bodies such as
Industry Standards and Guidelines the Social Performance Task Force, the Smart
Standards of practice and codes of conduct that Campaign on Client Protection Principles, and
financial service providers and other market Microfinance Transparency have all launched
actors abide by can contribute to financial inclu- initiatives and advocacy campaigns.
sion and help to build the industry’s commitment
to consumer protection. In recent years, multilat- The Social Performance Task Force
eral agencies have promulgated many initiatives The Social Performance Task Force, with more
to provide guidelines and principles, and the than 1,000 members in 2011, represents the pri-
titles of their documents define the targeted mary stakeholders in financial services for the
areas: the “United Nations Principles for poor: practitioners, donors and investors, indus-
Investors in Inclusive Finance,” the “World Bank try associations, technical assistance providers,
Draft Guidelines for Consumer Financial rating agencies, and academics. It defines social
Protection,” and the “Organisation for Economic performance as the “effective translation of a
Co-operation and Development (OECD) microfinance organization’s mission into prac-
Principles and Good Practices for Financial tice in line with commonly accepted social val-
Awareness and Education.” Often these are living ues.”13 Its mission is to promote standards by
documents, open to review and revision as mem- which providers can manage the double (and,
bers respond to issues raised by stakeholders and for some, triple) bottom line that is at the core of
better understand what is missing or inadequate providing financial services to the poor. Seeking
in the standards or codes. However, enforcement to ensure that services focus on clients, the

88 The New Microfinance Handbook


Social Performance Task Force promotes the process to determine that clients have the
following: capacity to repay without becoming over-
indebted. In addition, providers will implement
• Efforts to serve increasing numbers of poorer
and monitor internal systems that support the
and more excluded people sustainably
prevention of over-indebtedness and will foster
• Systematic assessment of the target popula- efforts to improve market-level credit risk man-
tion’s specific needs to improve the relevance agement (such as sharing credit information).
and quality of services
• Transparency. Providers will communicate clear,
• Benefits for microfinance clients, their fami- sufficient, and timely information in a manner
lies, and communities, including increased and language that clients can understand so that
social capital, assets, income, and access to they can make informed decisions. The need for
services; reduced vulnerability; and fulfill- transparent information on pricing, terms, and
ment of basic needs conditions of products is highlighted.

• Social responsibility of the provider toward • Responsible pricing. Pricing, terms, and condi-
its clients, employees, and the community it tions will be set in a way that is affordable to
serves.14 clients, while allowing financial institutions to
be sustainable. Providers will strive to provide
Tools covering a wide range of purposes sup-
positive real returns on deposits.
port the measurement and achievement of strong
social performance (see chapter 14). • Fair and respectful treatment of clients.
Financial service providers and their agents
The Smart Campaign will treat their clients fairly and respectfully.
Under the broader umbrella of social performance They will not discriminate. Providers will
management, the Smart Campaign, initiated in ensure adequate safeguards to detect and cor-
2009 by the Center for Financial Inclusion at rect corruption as well as aggressive or abusive
ACCION International, advocates consumer pro- treatment by their staff and agents, particu-
tection principles and has recruited hundreds of larly during the loan sales and debt collection
organizations and individuals to endorse them. processes.
The shift from assumed to explicit articulation of • Privacy of client data. The privacy of individual
consumer protection measures followed debates client data will be respected in accordance
about pricing and profits in microfinance, as well with the laws and regulations of individual
as the emerging crises related to over-indebtedness jurisdictions. Such data will only be used for
and abusive practices. The Smart Campaign has the purposes specified at the time the informa-
advanced seven consumer protection principles:15 tion is collected or as permitted by law, unless
• Appropriate product design and delivery. otherwise agreed with the client.
Providers will take adequate care to design • Mechanisms for complaint resolution. Providers
products and delivery channels in such a way will have in place timely and responsive
that they do not cause clients harm. Products mechanisms for handling complaints and
and delivery channels will be designed taking resolving problems for their clients and will
client characteristics into account. use these mechanisms both to resolve individ-
• Prevention of over-indebtedness. Providers will ual problems and to improve their products
take adequate care in all phases of their credit and services.

The Role of Government and Industry in Financial Inclusion 89


Of the seven principles, over-indebtedness and are not always measured accurately or reported
transparency receive the most attention. Efforts to and remain widely misunderstood. Consequently,
prevent over-indebtedness have included more the need for the industry to improve the disclo-
careful assessments of client debt capacity, staff sure of interest rates and the standardization
incentive schemes focused on portfolio quality, and communication of costs is a priority.
and attempts to identify or limit the number of MicroFinance Transparency (MFTransparency)
loans a client carries from multiple lenders (see is a global initiative committed to promoting
box 3.12). In addition, lenders have found that pricing transparency in the microfinance sector.
the policies developed for markets with minimal The organization aims to achieve its mission in
competition need to be adjusted for more mature the following ways: data collection, standardiza-
markets with multiple providers (Rozas 2011). tion, and dissemination; training and capacity
The Smart Campaign conducts a global cam- building for financial institutions; development
paign to garner support for these principles. It of educational materials; and consulting with
also promotes activities that help providers to regulators and policy makers on price disclosure
move from endorsement to implementation, legislation.17
including developing numerous tools for assess- Microloans often have higher interest rates
ment, training, and client protection and educa- than mainstream commercial loans because they
tion (Rozas 2011).16 are more expensive to make and manage. This
Both the Social Performance Task Force and challenge has driven many providers to quote
the Smart Campaign also work with microfinance prices that are significantly lower than the effec-
rating agencies and investors to achieve align- tive prices. Once providers in a specific market
ment between their rating frameworks or due dil- begin to employ confusing product pricing, it
igence processes and consumer protection becomes very difficult for any single provider to
principles. maintain transparent pricing. Standardized forms
of disclosure can help to address this problem.
MicroFinance Transparency
Pricing is central to the debates regarding profits Compliance
and the broader social responsibility of financial Industry associations and individual financial
service providers. The true prices of microloans providers have an important role to play in

Box 3.12  Battling Over-Indebtedness in Azerbaijan

In addition to serious internal efforts to avoid loan to another MFI’s client commits to pay-
over-indebtedness among its own clients, ing off the client’s existing loan. Thus if a
AccessBank has been spearheading a cam- lender wishes to issue a US$3,000 loan to a
paign to reduce over-indebtedness at the client who already has US$5,000 outstand-
sector level. Collaborating with the Azerbaijan ing with another lender, that new lender
Microfinance Association, AccessBank has would have to issue a US$8,000 loan, part of
promoted a “one-client, one-lender” strat- which would go to pay off the client’s out-
egy, in which a lender seeking to provide a standing debt.
Source: Rozas 2011.

90 The New Microfinance Handbook


promoting responsible finance through stan- intended to benefit both financial service provid-
dards. However, industry standards rely on com- ers and their clients and pricing transparency
pliance with self-imposed codes of conduct and initiatives are intended to benefit clients, the
explicit rejection of strong incentives for decep- asymmetries between what providers endorse
tive behavior. Furthermore, membership of and what clients understand have the potential
industry associations rarely comprises all rele- to undermine those efforts. Identifying the pri-
vant providers, which limits the scope of protec- orities of consumers and providers highlights
tion and may place compliant providers at a potential barriers to translating principles of
competitive disadvantage (Chien 2012). For responsible finance into effective practice, as sig-
example, although the consumer protection nificant distance separates clients from financial
principles advanced by the Smart Campaign are institutions (see table 3.1).

Table 3.1  Potential Barriers to Effective Consumer Protection through Standards and Guidelines
Target group and barrier Details
Clients
Low literacy Illiterate clients cannot read published lists of consumer protection
principles and client rights. They may have trouble filing complaints.
High priority assigned to accessing Fear of not getting a loan often drives client behavior, serving as a
loans deterrent to asking for product information or raising issues of
unethical behavior.
Lack of knowledge Clients often do not know their rights or what constitutes a
violation. Violations are not limited to cases of borrower versus
lender. In Bolivia, in focus group discussions, group lending
members reported the use of abusive debt collection practices—
intended to shame defaulters—that violated members’ rights.
Clients often do not understand the products on offer. At a basic
level, many do not understand that interest is charged as a
percentage of the loan; few can evaluate the difference in interest
cost calculated using a flat rate or declining balance.
Financial institutions
Overestimation of consumer Institutional investments in product development have not been
knowledge matched by investments in client education about new offerings.
Potential conflict with profitability Efficiency requirements and financial incentives can undermine
staff motivation to spend enough time with clients to ensure that
they understand the products they may purchase. Institutions have
a bigger vested interest in product-specific marketing than in
education that will enable customers to compare products across
lenders. Transparent presentation of rates and fees could be a
disadvantage if not done uniformly and universally by all lenders in
the same market.
Implementation of consumer Implementing new codes can be costly, involving revisions to
protection principles human resource systems, new mechanisms for customer feedback
and complaints, and monitoring of compliance by providers in
multiple countries (for example, by an MFI network)
Source: Nelson 2009.

The Role of Government and Industry in Financial Inclusion 91


Box 3.13  Financial Education as Part of the Business Model

Over a period of just three years, the Kenyan clips, comic strips, and interactive work-
financial market experienced significant sheets, delivered by professional trainers.
growth, exposing many previously unbanked Training was supported by interactive coach-
clients to an increasingly complex array of ing sessions with loan officers. An impact
products. Without adequate information to evaluation, using a quasi-experimental design,
make informed decisions about these prod- revealed improvements in specific indicators
ucts, clients were often confused and vulner- of knowledge and behavior among the treat-
able to exploitation. Faulu Kenya believed that ment group. Most significantly, portfolio at
inappropriate use of financial services was risk was lower in the four pilot treatment
leading to over-indebtedness and default. branches than in the nontreatment branch.
Clients lacked information on how best to use Training for staff was initially planned to
credit and how to make decisions about how facilitate client recruitment. Yet, with the
much and when to borrow (or not) and from inclusion of financial education as part of
where. In 2009 Faulu Kenya embarked on a staff curriculum, the results were much
financial education project Elewa Pesa greater. Staff became more knowledgeable
(Understand Your Money), co-funded with the and better equipped to answer clients’ ques-
Financial Education Fund. Faulu’s objective tions and more engaged in coaching and
was to equip nearly 50,000 clients at 26 advising them; they even began saving more
branches with the necessary financial knowl- themselves.
edge and skills to facilitate prudent money Finding that financial education has bene-
management, premised on the belief that fits both for the client and for the institution,
educated people are better clients. Financial Faulu has incorporated financial education in
education was provided through a one-time its loan orientation training and as a key indica-
training workshop complemented by video tor of performance.
Source: Alyna Wyatt, Financial Education Fund; Jacqueline Nyaga, Faulu Kenya.

The barriers noted in table 3.1 highlight the Notes


need to understand the perspectives of both
 1. As discussed in chapter 1, formal rules are
­providers and consumers. They also indicate
generally the purview of government or
another role for industry in consumer industry stakeholders. They include primary
protection­— ­developing the financial capability legislation (also referred to as laws), whether
of consumers. By having direct contact with statutory (that is, passed by the legislature) or
consumers, some providers are actively choos- established by the judiciary; secondary
ing to invest in building their clients’ financial legislation (which may be entitled regulations,
capacity. Financial education is relatively new, guidelines, or circulars) issued by a government
with initial efforts emerging only after 2000, agency or executive body pursuant to a law;
but many institutions have embraced it,18 as and other legal proclamations imposed on
illustrated by the case of Faulu Kenya, an MFI financial service providers and other players
supporting the financial system. Formal rules
(see box 3.13).

92 The New Microfinance Handbook


also encompass consumer protection Frontier Associates (2009); http://mg.co.za/
­guidelines and global standards and principles article/2012-02-17-mzansi-accounts-reach-
that guide the actions of regulators and dead-end.
supervisors as well as industry standards,  9. This section was contributed by Kate Lauer.
nonstatutory codes of conduct, and other
10. www.fatf-gafi.org.
principles that guide the actions of financial
service providers, even though they may not be 11. For an example of an interest group analysis in
legally enforceable. microfinance regulation, see Staschen (2010,
ch. 7).
 2. In some cases, market actors can be just as
12. See www.CGAP.org.
concerned about public statements (such as
policies) by the regulator as about legal 13. http://sptf.info/hp-what-is-sp.
provisions. 14. http://sptf.info/.
 3. And in many cases with donors playing a key 15. www.smartcampaign.com.
role. 16. See http://www.smartcampaign.org/
 4. This section draws on Brix and McKee (2010); tools-a-resources.
Chien (2012). 17. Contributed by Alexandra Fiorillo.
 5. CGAP is a significant provider of information 18. Microfinance Opportunities, an early
and coordination in financial services for the champion of financial education in developing
poor. An industry coordinating body housed at countries, reports that between May 2006 and
the World Bank, CGAP focuses on “policy and December 2011, 469 organizations ­participated
research representing more than 30 development in financial education training-of-­trainers
agencies and private foundations who share a workshops. It also reports outreach to more
common mission to alleviate poverty. CGAP than 40 million end users through a
provides market intelligence, promotes combination of direct financial education
standards, develops innovative solutions, and training and delivery of financial education
offers advisory services to governments, financial messages via mass media.
service providers, donors, and investors.” See
www.cgap.org.
 6. Consumer protection is often discussed in References and Further Reading
terms of the rights and responsibilities of both
providers and clients. Clients need to develop * Key works for further reading.
the capability to assess product offerings; to do AFI (Alliance for Financial Inclusion). 2010.
this, they have the right to ask questions about “Consumer Protection: Leveling the Playing
products, and providers have the ­responsibility Field in Financial Inclusion.” Bangkok,
to respond respectfully. Thailand: Alliance for Financial Inclusion.
 7. This would argue for setting up a market for *———. 2011. “G-20 Principles for Innovative
tradable “priority sector lending certificates,” Financial Inclusion.” http://www.afi-global
as the Rajan Committee argued for the case of .org/library/publications/g20-principles-
India. See Planning Commission, India innovative-financial-inclusion.
(2009). Almazan, Mireya. 2010. “Beyond Enablement:
 8. South Africa shows that such a self-commitment Harnessing Government Assets and Needs.”
by the industry can lead to the opening of many Global Savings Forum, Bill and Melinda Gates
new accounts (7 million accounts within four Foundation, Seattle.
years, bringing the banked population to 20 *Bankable Frontier Associates. 2009. “The Mzansi
million by the end of 2008). The banks now Bank Account Initiative in South Africa.”
offer low-cost bank accounts. See Bankable FinMark Trust.

The Role of Government and Industry in Financial Inclusion 93


*BCBS (Basel Committee on Banking Supervision). Objectives and Regulatory Options.” Focus
2010. “Microfinance Activities and the Core Note 64, CGAP, Washington, DC.
Principles for Effective Banking Supervision— D’Onofrio, S. 2010. “Policy Advocacy: A Toolkit
Final Document.” BCBS, Basel, August. http:// for Microfinance Associations.” SEEP
www.bis.org/publ/bcbs175.htm. Network, Washington, DC. http://networks
———. 2011. “Core Principles for Effective Banking .seepnetwork.org/ppt-newhtml/Policy_
Supervision: Consultative Document.” BCBS, Advocacy_mar2010_web.en_.pdf.
Basel, December. http://www.bis.org/publ/ *Duflos, E. 2011. “National Strategies for Financial
bcbs129.htm. Inclusion: Lessons Learned.” Unpublished
Bester, H., D. Chamberlain, L. de Koker, C. presentation.
Hougaard, R. Short, A. Smith, and R. Walker. *Duflos, E., and J. Glisovic-Mézières. 2008.
2008. “Implementing FATF Standards in “National Microfinance Strategies.” CGAP
Developing Countries and Financial Inclusion: Brief, CGAP, Washington, DC.
Findings and Guidelines.” The FIRST Initiative, *Duflos, E., and K. Imboden. 2004. “The Role of
World Bank, Washington, DC. Governments in Microfinance.” Donor Brief 19,
*Brix, Laura, and Katharine McKee. 2010. CGAP, Washington, DC.
“Consumer Protection Regulation in Low- EDA Rural Systems and M-CRIL (Micro-Credit
Access Environments: Opportunities to Ratings International). 2011. “Of Interest Rates,
Promote Responsible Finance.” Focus Note 60, Margin Caps, and Poverty Lending: How the
CGAP, Washington, DC, February. RBI Policy Will Affect Access to Microcredit by
*CGAP (Consultative Group to Assist the Poor). Low-Income Clients.” M-CRIL, Gurgaon.
2010. “Investors Implementing the Client *Ehrbeck, T., M. Pickens, and Michael Tarazi.
Protection Principles.” CGAP, Washington, DC. 2012. “Financially Inclusive Ecosystems: The
*———. 2011. “Global Standard-Setting Bodies and Roles of Government Today.” Focus Note 76,
Financial Inclusion for the Poor: Toward CGAP, Washington, DC.
Proportionate Standards and Guidance.” White *FATF (Financial Action Task Force). 2012.
paper prepared on behalf of the G-20’s Global International Standards on Combating Money
Partnership for Financial Inclusion. CGAP, Laundering and the Financing of Terrorism and
Washington, DC, October. http://www.gpfi Proliferation: The FATF Recommendations.
.org/sites/default/files/documents/CGAP.pdf. Paris: FATF, February.
Chatain, P.-L., R. Hernandéz-Coss, K. Borowik, Gibson, Alan. 2010. “The Financial Market
and A. Zerzan. 2008. “Integrity in Mobile Systems Framework.” Unpublished draft.
Phone Financial Services: Measures for *Hannig, A., and S. Jansen. 2010. “Financial
Mitigating Risks from Money Laundering and Inclusion and Financial Stability: Current Policy
Terrorist Financing.” Working Paper 146, World Issues.” ADBI Working Paper 259, Asian
Bank, Washington, DC. Development Bank Institute, Tokyo.
*Chien, Jennifer. 2012. “Designing Disclosure *Helms, Brigit, and Xavier Reille. 2004. “Interest
Regimes for Responsible Financial Inclusion.” Rate Ceilings and Microfinance: The Story So
Focus Note 78, CGAP, Washington, DC, March. Far.” Occasional Paper 9, CGAP, Washington,
Cohen, Monique, and Candace Nelson. 2011. DC, September.
“Financial Literacy: A Step for Clients towards *IAIS (International Association of Insurance
Financial Inclusion.” Workshop paper commis- Supervisors). 2007. Issues in Regulation and
sion for the 2011 Global Microcredit Summit, Supervision of Microinsurance. Basel: BIS.
Valladolid, Spain, November 14–17. *———. 2011. Insurance Core Principles, Standards,
*Dias, D., and K. McKee. 2010. “Protecting Guidance, and Assessment Methodology. Basel:
Branchless Banking Consumers: Policy BIS, October.

94 The New Microfinance Handbook


*Isern, J., and L. de Koker. 2009. “AML/CFT: *Planning Commission, India. 2009. A Hundred
Strengthening Financial Inclusion and Integrity.” Small Steps: Report of the Committee on
Focus Note 56, CGAP, Washington, DC. Financial Sector Reforms. New Delhi: Sage.
http://www.cgap.org/gm/document-1.9.37862/ *Porter, Beth. 2011. “National Strategies: Where
FN56.pdf. Do They Get Us? A Roadmap for Financial
Klapper, Leora, Annamaria Lusardi, and Georgios A. Inclusion.” Workshop paper commissioned for
Panos. 2012. “Financial Literacy and the Financial the 2011 Global Microcredit Summit,
Crisis.” Policy Research Working Paper 5980, Valladolid, Spain, November 14–17.
World Bank, Washington, DC, February. *Porteous, D., and B. Helms. 2005. “Protecting
MasterCard Foundation, Microfinance Microfinance Borrowers.” Focus Note 27,
Opportunities, and Genesis Analytics. 2011. CGAP, Washington, DC.
“Taking Stock: Financial Education Initiatives *Responsible Finance Forum. 2011. “Advancing
for the Poor.” MasterCard Foundation, Toronto. Responsible Finance for Greater Development
*McKee, Katherine, Estelle Lahaye, and Antonique Impact.” Consultation draft, BMZ, CGAP, and
Koning. 2011. “Responsible Finance: Putting IFC, Washington, DC, and Berlin.
Principles to Work.” Focus Note 73, CGAP, ———. 2012. “Global Mapping 2012: Progress in
Washington, DC, September. Responsible Financial Inclusion, Terms of
*Morduch, J. 2005. “Smart Subsidy in Reference—July 2012.” BMZ, CGAP, and IFC,
Microfinance.” ADB: Finance for the Poor 6 (4). Washington, DC, and Berlin.
Nelson, Candace. 2009. “Consumer Protection: A Rozas, Daniel. 2011. “Implementing Client
Client Perspective.” Brief, Microfinance Protection in Microfinance: The State of the
Opportunities, Washington, DC. Practice, 2011.” Center for Financial Inclusion,
———. 2010. “Financial Education for All Ages.” Washington, DC.
Innovations 5 (2): 83–86. *Staschen, S. 2010. Regulatory Impact Assessment
Nelson, Candace, and Angela Wambugu. 2008. in Microfinance: A Theoretical Framework and
Financial Education in Kenya: Scoping Exercise Its Application to Uganda. Berlin:
Report. Nairobi: FSD Kenya. Wissenschaftlicher Verlag Berlin.
*Pickens, M., D. Porteous, and S. Rotman. 2009. *Tata, Gaiv, and Douglas Pearce. 2012. “Catalyzing
“Banking the Poor via G2P Payments.” Focus Financial Inclusion through National
Note 58, CGAP, Washington, DC. Strategies.” CGAP, Washington, DC, March 5.

The Role of Government and Industry in Financial Inclusion 95


CHAPTER 4

The Role of Donors in Financial


Inclusion
Mayada El-Zoghbi and Barbara Gähwiler

Financial inclusion is the state in which all indi- financial inclusion, what part of the financial sys-
viduals and businesses have the choice to access tem needs donor support, how donors can sup-
and the ability to use a range of appropriate finan- port the attainment of full financial inclusion, and
cial services, responsibly provided by institutions the tools they have to do this (figure 4.1).
permitted to offer such services. As described in
chapter 1, demand and supply of financial ser-
Donors That Support Financial
vices meet in a broader financial ecosystem that
Inclusion
includes supporting functions and rules. Donors
aiming for financial inclusion, as an end in itself In this chapter we use the term donors to mean
or as a means toward economic development or entities that have an explicit mission to support
poverty alleviation, can help make the financial development goals. A spectrum exists of these
ecosystem work better and be more inclusive. actors in terms of their ownership, where they
Chapter 1 makes an important distinction raise their resources, and how they operate in the
between actors within the market system and market. Some donors are structured as state-
organizations that are outside the system. For the owned agencies, whereas others are private foun-
most part, donors are outside the system, but they dations. Some donors raise their funding from
may enter the system temporarily to provide a public resources such as federal or state govern-
catalytic role in market development. This chap- ment resources (that is, taxes). Donors may also
ter will discuss who the donors are that support raise their resources from private donations.

The Role of Donors in Financial Inclusion 97


Figure 4.1  The Role of Donors in Financial Market System Development

FINANCIAL MARKET SYSTEM OUTSIDE THE


MARKET
SUPPORTING
FUNCTIONS
Private
sector

Government
Facilitators
Community
Demand CORE Supply groups Seeking to
develop the
Representative market system

Donors
associations as external
catalyst
Not-for-
profit
sector
RULES
Players

Specific roles
within the market
system

Source: Adapted from Alan Gibson, The Springfield Centre.

Some donors are highly concessional, whereas guarantee. DFIs should therefore enter markets
others try to mimic private investors. Regardless only temporarily to play a catalytic role by
of where they sit along this spectrum of behavior, “crowding in” other market actors such as the
the fundamental role of donors in financial inclu- local capital markets, banks, or depositors. If DFIs
sion is to provide catalytic support to market become permanent actors within a market, their
development (table 4.1). stay defeats the purpose of their market catalytic
It is important to point out here that develop- role.
ment finance institutions (DFIs) are a distinct cat- Although many international nongovernmen-
egory of development agency. They often see tal organizations (NGOs), such as World Vision
themselves as market actors (inside the market) and CARE, raise significant amounts of private
and try to mimic the behavior of private investors. donations that they either allocate to partners on
Although they may temporarily play the role of a the ground or use for their own development
market actor, their existence, mandate, and legal work, we do not classify NGOs as donors. The
status entrust upon them the same catalytic mar- majority of NGOs rely on donor funding through
ket development role that “traditional” donors either grants or cooperative agreements. How­
have. DFIs are part of the public system of devel- ever, among NGOs a large spectrum is seen of
opment assistance and are able to raise money in how they operate, with some acting like donors,
capital markets benefiting from an implied state others serving as facilitators, and others entering

98 The New Microfinance Handbook


Table 4.1  Spectrum of Donors in Financial Inclusion and the Way They Operate
Concessional
Type of donor Examples Source of funding vs. commercial Ownership
Foundations Bill & Melinda Gates Foundation Private donations Concessional Private
Michael & Susan Dell Foundation
MasterCard Foundation
Bilateral donors USAID (United States) Public government Concessional Public
DFID (United Kingdom) funding
GIZ (Germany)
SIDA (Sweden)
Multilaterals UN agencies (IFAD, UNCDF) Bilateral donors Concessional Public
European Commission (member states)
World Bank Capital markets
Regional banks African Development Bank Bilateral donors Mixed Public
Asian Development Bank (member states)
Capital markets
Development IFC Bilateral donors Mostly Public
finance KfW (Germany) Public government commercial
institutions funding (some
Proparco (France) concessional)
Capital markets

the market and delivering retail or support ser- unbalanced or unfair when the level of informa-
vices directly. This chapter will not focus on the tion between parties engaging in an exchange is
role of international NGOs, only noting where skewed.
they may overlap with donors, facilitators, or With regard to the market for financial ser-
market actors. vices, information asymmetry is a common mal-
function in the market whereby suppliers do not
Where Is Catalytic Funding Needed? have sufficient knowledge about certain segments
Areas within a market system that may need cata- of clients (demand) or clients do not have suffi-
lytic support from donors tend to fall into three cient knowledge and information to make
categories: information, capacity, and incentives. informed choices among suppliers.
Solutions to the problem of information in a
Information market can include changing the rules, for exam-
Markets are a mechanism for exchange. For ple, mandating disclosure about interest rates;
exchange to occur between parties, whether this within the supporting functions, for example,
exchange is monetized or merely traded, certain establishing a private credit bureau with data on
information is required about the item being transaction histories of all income groups; or
exchanged, about the entities engaged in the within the core itself, for example, making infor-
exchange, and about the terms of the exchange mation available to suppliers about the nature
itself. Markets can yield outcomes that may seem and quantity of demand among specific market

The Role of Donors in Financial Inclusion 99


segments that may be excluded from current vices to reach the poor. The capacity of represen-
exchange. tative associations may be too weak to advocate
for the regulatory reforms needed.
Capacity Solutions to capacity problems go beyond
As described in chapter 1, the financial market delivering capacity outright, but require working
system is made up of many actors (figure 4.2). with those in the market who can deliver capac-
These actors are at the core but are also deliver- ity development. It requires strengthening their
ing supporting functions and setting rules and ability to deliver long-term support on capacity
norms. The capacity of certain actors within this development for the market as a whole. Many
system may be holding back the development of actors within the local market may be able to
the system as a whole. For example, the capacity fill this role, such as private consulting firms,
of the government may be a major constraint in universities, trade associations, and training
­
allowing for enabling regulation for financial ser- centers.

Figure 4.2  Stylized View of the Financial Market System

MARKET FUNCTIONS MARKET PLAYERS

SUPPORTING
FUNCTIONS
Clients
Information
Funding
Coordination Infrastructure
Private sector
Research
Technical
assistance
Capacity
develop- Advocacy Government
ment

Demand CORE Supply


Community groups

Representative associations

Formal Not-for-profit sector


rules Informal
rules

RULES

Source: Alan Gibson, The Springfield Centre.

100 The New Microfinance Handbook


In some instances, the local market may be too above dealing with regulation, bankers may have
small for a viable entity to deliver capacity devel- very deep and strong relations with their tradi-
opment on a sustainable basis; searching for tional clientele: corporate clients and high net-
regional or even global solutions may be the pre- worth individuals. Creating a new incentive
ferred mechanism to ensure long-term delivery of system for financial service providers to serve
capacity development. low-income clients may be threatening to a regu-
latory system that is comfortable with the exist-
Incentives ing level of risk inherent in serving the upper
Incentives, whether material or immaterial, guide echelons of society.
choices and behavior. Incentives can be explicit
in that they are offered as a reward for accom­ Is Current Donor Funding Catalytic?
plishing certain goals or targets. They may also be Over the last 30 years, we have seen considerable
implicit in the sense that the system as a whole progress toward financial inclusion in many
may reward certain behavior or choices. Incen­ countries. The picture will continue to evolve
tives can be both positive and negative. It is because of the dynamic nature of financial ser-
important to fully understand and acknowledge vices markets. Markets experience the entry of
the incentives of actors to operate and deliver ser- new providers and supporting market actors and
vices on an ongoing basis; that is, donor subsidies perhaps the exit of others. Demand evolves, and
must be designed to work to ensure long-term new approaches and products emerge to meet cli-
incentives exist to continue to deliver the service ents’ needs. As markets grow and become more
after the subsidies end. sophisticated, the risks and returns for different
A financial system may be plagued by negative market actors change as well. Donors need to
incentives that reduce the likelihood of actors respond to these changes as they work to support
within the system to think about or deliver ser- the development of inclusive financial markets.
vices to the poor. For example, the regulatory sys- If we look at current donor commitments, data
tem may incentivize the banking system to serve on where funding is allocated raise many ques-
corporate clients at the neglect of other potential tions as to whether donor funding is used in a cat-
market segments. A donor’s intervention may be alytic way and allocated where it can most add
to work with regulators to change the rules that value.
create the negative incentives for the banking
system. Majority of Donor Funding Used for On-lending
In many markets, financial service providers Depending on the constraints and opportunities
have limited information on poor clients. Often in a given market, donor interventions might be
they need both information and incentives to needed at different levels in the market system,
adapt their products and services to meet these including at the core via funding for retail finan-
market segments. Donor guarantees can be struc- cial service providers. Without thorough market
tured in a way so that the negative incentives for assessments, we can therefore not make judg-
financial service providers to serve this segment ments on whether donor funding is used in a cat-
are reduced. alytic way. However, the amount of global donor
Solutions to address problems of incentives commitments still allocated to retail financial ser-
require strong awareness and understanding of vice providers for the purpose of on-lending to
the political economy in a country. Ultimately, microfinance clients, a role that should be pro-
modifying incentives often confronts entrenched vided by funders within the market system, raises
power dynamics within a society. In the example questions. Over the last 20 years, growing investor

The Role of Donors in Financial Inclusion 101


interest in microfinance as an alternative asset allocation of funding seems unbalanced and out of
class has led to the emergence of more than 100 touch with a catalytic approach to market devel-
specialized microfinance investment vehicles that opment. On the contrary, the easy availability of
channel funding from institutional and individual donor funding can create disincentives for the
investors, as well as from DFIs, to microfinance development or expansion of savings services and
institutions (MFIs). The cumulative assets of undermines the borrowing institutions’ financial
those vehicles are estimated at US$6.8 billion discipline. Too much funding can push MFIs to
(Symbiotics 2011). In addition to foreign private embark on unsustainably steep growth paths,
investments, mostly channeled through these which has led to repayment crises in some coun-
microfinance investment vehicles, microfinance tries (CGAP 2010a).
institutions increasingly have access to funding
from local commercial banks or client deposits as Donor Funding Concentrated on Few
a funding source. Despite the availability of fund- Institutions
ing from actors within the market system, 86 per- Among donors, development finance institutions
cent of donor commitments are still used for are the main providers of funding to MFIs. For
on-lending, according to a survey with the 20 young MFIs or those in nascent markets, DFIs
largest donors and investors (Gähwiler and Nègre can play a market development role by catalyzing
2011).1 Capacity building at the market infrastruc- private investment. Private sector investors are
ture level (supporting functions) and the policy more likely to lend to MFIs that have received
level (rules) account for only 2 percent of total funding from a DFI. Once an MFI has established
commitments each (figure 4.3). Although it is dif- relationships with private investors, DFIs’ con-
ficult to draw any conclusions only by looking at tinued investment arguably adds less value. In
committed amounts of a subset of donors, this theory, DFIs should then move on and focus on
less developed markets or riskier institutions
with promising market development potential
Figure 4.3  The Purpose of Donor Commitments (for example, innovative business models or
underserved client groups). However, as of
December 2009, more than 40 percent of loans
2%
provided by DFIs are concentrated on 15 profit-
2%
able MFIs, all of which receive funding from pri-
Capacity vate sources (CGAP 2010b).
On-lending
building
86%
14%
10% Geographical Concentration of Donor Funding
A CGAP survey conducted in 2010 with more
than 60 donors found that donors supported
projects in at least 122 different countries (CGAP
On-lending 2010b). Out of the funding that can be allocated
Capacity building at the policy level to one single country (regional and global proj-
Capacity building at the market ects excluded), 15 countries received more than
infrastructure level 50 percent of total commitments. Among the
Retail capacity building
countries receiving the highest donor commit-
ments are some of today’s most developed micro-
Source: Gähwiler and Nègre 2011.
Note: Percentage of total commitments as of December 2010, finance markets, such as India, Bangladesh,
data from 18 public donors and one private investor. Bosnia and Herzegovina, Morocco, and Kenya,

102 The New Microfinance Handbook


where a variety of financial institutions offer r­egulation, payments systems, credit reporting,
a range of financial services to poor and low-­ and a host of other subspecialties, the donors that
income households, and the level of financial are making funding decisions have less and less
access to accounts with a formal financial institu- knowledge about the areas in which the field
tion is higher than regional averages (Demirgüç- needs donor funding.
Kunt and Klapper 2012). Today, local funding Shrinking aid budgets are also demanding that
sources or foreign private investment are avail- donors demonstrate their effectiveness through
able in these countries, implying the success of clear results. Calls for value for money are com-
the catalytic approach that many donors have had. monplace in the media and in parliaments. For
Nevertheless, microfinance institutions in these some sectors, it is easier to measure the impact of
countries continue to receive significant amounts specific interventions; for example, in the health
of donor funding. On the one hand, concentration sector, one finds decades of experience and data
of funding is considered a positive element in the on measuring the number of children immunized
broader aid effectiveness literature because it or the incidence of malaria infection. For private
enables countries to have sufficient resources to and financial sector development, where donors
address a particular issue.2 On the other hand, are trying to support market development,
to develop markets, the role of donor funding is to demonstrating results is challenging, and estab-
leverage private investment, and as such a decline lishing attribution is even more so.
in donor funding should be seen over time. Thus a These very real constraints challenge donors
concentration of donor funding in any set of coun- to consider the models for channeling the right
tries for an extended period of time is worth fur- technical know-how, funding amounts, and over-
ther exploration because it could signal “crowding sight without unduly distorting markets. We see
out” as opposed to “crowding in.” two alternative options for donors that aim to
achieve catalytic market development with lim-
ited market distortions: (1) act as a facilitator or
Donor Efforts to Support Financial
(2) fund a facilitator.
Inclusion
Different donors are equipped with a different
Internal incentives within some donor agencies set of funding instruments, which will be dis-
run counter to many of the traits needed to sup- cussed in greater length later in the chapter. In
port catalytic market development. Internal sys- understanding roles, however, it is important to
tems often reward disbursements of large know that roles will be closely aligned with
amounts of funding, creating a bias toward mar- instruments. For example, bilateral agencies tend
kets and recipients of funding that can absorb to have grants as their main instrument, whereas
large amounts easily. More challenging obstacles multilateral agencies such as the World Bank or
for financial inclusion that may require small, International Fund for Agricultural Development
long-term, and patient funding are too often work primarily through loans to governments,
ignored. The trend in most donor agencies is to but may also have mechanisms to offer grants for
support larger projects in fewer countries. technical assistance. DFIs mostly provide debt,
To keep overhead costs low, donors are slash- but increasingly are also able to use equity invest-
ing staffing budgets, and the predominant staffing ments, and some agencies, such as the Interna­
model is now one where generalists oversee large tional Finance Corporation, also have significant
projects in a variety of fields and disciplines. This grant funding used for building market infra-
means that even as the field of financial inclusion structure or technical support to investees. A few
requires increasingly specialist knowledge in agencies rely primarily on guarantees, such as the

The Role of Donors in Financial Inclusion 103


Overseas Private Investment Corporation and the standard recipe can be followed. There is no
Development Credit Authority, both part of the blueprint that facilitators can take from one
U.S. government. country and apply to the next. However, every
The use of the funding instrument should be financial market can be viewed within the over-
aligned with the type of facilitation that is needed all framework—and its multifunction and multi-
rather than requiring the market to adapt to the player character—even if the detailed,
instrument offered by the donor agency. For constituent elements vary. Although it is not a
example, a donor that has only loans to govern- precise or formulaic model, it is an aid to strate-
ment as its main instrument should be careful in gic analysis and decision making (see box 4.1).
how it intervenes in the private sector develop- The market development process is necessar-
ment arena more generally and in inclusive finan- ily dynamic, and whether a given type of inter-
cial systems development more specifically. vention is appropriate depends strongly on the
Ultimately, many of the actors engaged in the market’s stage of development. Although no
delivery of financial services are from the private global definition is available of what it means to
sector and thus an ability to work directly with be a nascent market, we can assume that it is one
private institutions is first and foremost. where access and usage of financial services are
Nonetheless, many aspects of the financial mar- low, where the enabling environment is not con-
ket system are public goods where government ducive, and where little existing market infra-
leadership is warranted. Thus donors with loans structure is in place. At the other extreme, we can
to governments as their main instruments should assume that mature markets are where these
focus primarily on their influencing role with things exist. In between are found many other
government on policy issues and in supporting market development stages. The role of the facili-
public goods within the financial system. They tator will be quite different depending on this
should not force their instrument—loans to gov- market development spectrum.
ernment—as a way to finance the private sector. In nascent or “frontier” markets, facilitators
may need to support basic retail level capacity
Act as a Facilitator (the supply side of the “core”). Although MFIs
Provided that donors have the capacity to operate and other providers may have demonstrated their
at the country level, they may be able to fill the success elsewhere, local actors in a nascent mar-
role of facilitator directly. This role requires that ket would not necessarily have any information or
the donor understands the constraints and oppor- share this knowledge. Thus, facilitators may need
tunities in a given market and has the capacity to address this market deficiency. Because basic
and flexibility to respond to the specific needs. market infrastructure and the regulatory environ-
Chapter 1 noted that market development ment are also likely underdeveloped, significant
facilitation must start with a mapping of the room exists for facilitators to intervene.
financial landscape and then an identification of The role of facilitator becomes much more
the opportunities within the market where facil- nuanced in a mature market. In these markets, we
itation will lead to expanded usage of financial already find market actors that are functioning as
services. This very important understanding of well as many entrenched ways of doing business.
the market and what is needed is at the heart of Additionally, in these markets, facilitators may
facilitation. Because everything starts with the need to bring in disruptive technology or business
condition of the market and the opportunities models that threaten the existence of existing
that lie within that unique market means that no market actors. Identifying the opportunities to

104 The New Microfinance Handbook


Box 4.1  Shaping Intervention from an Understanding of the Market
System

The FinMark Trust’s approach to the development of transaction banking services in South Africa
was distinctive from the outset. Faced with the challenge of how to improve access (in the core
of the market), FinMark sought to identify the underlying causes of poor access in the support-
ing functions and rules in the financial market system; that is, it took a systemic perspective to
analysis and intervention to facilitate change. Although a conventional approach might have
­emphasized engaging directly with providers—with financial and technical assistance—in prac-
tice, FinMark identified a number of priority constraint areas (see figure below):
• Rules—Numerous weaknesses in relation to, for example, consumer credit, and problem-
atic capital requirements for new providers.
• Informal rules—A prevailing culture that did not understand or emphasize low-income con-
sumers (the “unbanked”) or consider how to innovate new services.
• Coordination—Little constructive dialogue between stakeholders in relation to the low a­ ccess
problem and how to address it.
• Information—An absence of detailed, analytical data on the low-income market as a
whole, including its size, perceptions of services and providers, current use of money, and
needs.

SUPPORTING
FUNCTIONS
Coordination
Information

Reduced
conventional focus Priorities
Demand CORE Supply Main focus: facilitating
systemic change

Formal Informal

RULES

These constraints formed an agenda for action for the industry as a whole and for FinMark
specifically. Its interventions focused on these as underlying causes—in rules and supporting
functions—to bring about change in the core of the market and contribute to a substantial ­increase
in access from 2003 to 2010.
Source: Alan Gibson, The Springfield Centre.

The Role of Donors in Financial Inclusion 105


push the frontier becomes the most critical step Fund a Facilitator
for a facilitator to make. Facilitators may also Although relatively few examples of this model
need to directly confront political and influential are found, we see it as an emerging approach that
actors that form the status quo. has the potential to ease the internal constraints
Facilitators’ ultimate objective is to get the donors face while delivering catalytic market
market to work without their support. This support at the country level. In this role, donors
means that their support to any one actor in the fully outsource their funding to a facilitator at the
market is de facto a temporary one. Because the country level. One example of this is the Financial
risk of overextending a stay is so acute, facilita- Sector Deepening Trust in Kenya funded by
tors should be extremely careful to structure DFID, the World Bank, the Swedish International
funding mechanisms in a way that is time bound. Development Agency, the Gates Foundation,
The litmus test of whether a facilitator is doing Agence Française de Développement, and the
the right thing is to ask “what will this look like government of Kenya (see box 4.2).
in ‘X’ years.” If the facilitator will still be required This outsourced model allows donors to place
to deliver a specific function in the market, then a large amount of funding, thus easing disburse-
this is a sign that the facilitator is not interven- ment pressure, into an entity that can then take its
ing appropriately. The areas on which the facili- time to understand the local market, identify
tator will focus should change over time as the which interventions can unleash market poten-
market develops and new opportunities arise. tial, and help to build capacity among market
To ensure that an intervention is “time bound,” actors to fulfill their long-term role of service
facilitators must build in a convincing exit strat- delivery. This model allows multiple funders to
egy in all of their interventions in the market pool their resources and support a joint facilita-
(see chapter 19). tor, which is a good way to harmonize funding

Box 4.2  Financial Sector Deepening Kenya (FSD Kenya)

FSD Kenya started as a DFID project in 2001 mittee (PIC). The PIC comprises nominees
but was transformed into a multidonor trust in from supporting donors as well as indepen-
2005. The creation of this independent trust dent experts. A specialist technical team is
was motivated by the desire to strengthen responsible for developing and delivering FSD
effectiveness by permitting a closer, more flex- Kenya’s strategy and managing its market
ible, and responsive engagement with market making investments. As the market has devel-
actors as well as to improve efficiency by pool- oped in Kenya the depth of expertise in this
ing donor funds within a single special-purpose team has expanded, with the emphasis shift-
vehicle. Fiduciary oversight is provided by a ing from funding to guiding market actors
firm of professional trustees (currently the through research and technical assistance. For
international accounting firm KPMG), and pol- FSD Kenya to function effectively as a market
icy guidance and strategic direction are the facilitator, its core donors fund a single com-
responsibility of the program investment com- mon approach, set out in its strategy paper.
Source: FSD Kenya 2012, private communication.

106 The New Microfinance Handbook


and increase donor coordination in a country. The required of donors to ensure they minimize mar-
structure of this entity can be similar to FSD ket distortions.
Kenya, an independent trust, or it can be a project, DFIs, some multilateral agencies, and regional
an international NGO, or another structure that development banks all may have internal incen-
can fulfill this facilitation function. tives that make outsourcing their funding to a
Multiple facilitators can be working in any one facilitator difficult. Nonetheless, these donors
market, each focusing on areas of core compe- have an important influence on governments and
tence, as long as complementarity and a common significant funding levels and must prioritize
vision on how to support market development are coordination if they want to remain catalytic.
found. An example could be a facilitator that Coordination is the perennial development
focuses on only capacity development. problem, and there are not many examples of suc-
The distinguishing characteristic of a facilita- cess. Nonetheless, this fact does not alleviate the
tor is that it operates at the country level. The burden of working toward possible solutions to
level of market knowledge that is needed pre- improve the ways donors interact and comple-
cludes actors at the global level from fulfilling this ment one another at the country level.
role. Nonetheless, facilitators can be aided in their
role by global actors who share and disseminate
Donor Funding Instruments
knowledge from elsewhere, helping to inject and
cross-breed ideas in different markets. The ways in which donor funding is delivered will
The key to ensuring that such an entity is able have a profound impact on its effectiveness.3 In
to take on the role of facilitator, without the inher- using donor funding to develop the market one
ent internal weaknesses of donors, lies in a few necessarily finds an acute risk that the resources
key design considerations. Such entities must be provided could displace market-based activity.
able to take risks, invest in innovations with small Even a relatively small subsidy can distort incen-
grants, have a long-term perspective, and demon- tives by changing expectations. Perhaps one of the
strate their influence on the market through both more obvious illustrations of this is in the subsidy
direct and indirect means. We will explain below of interest rates, which can lead borrowers across
how facilitators intervene in the market to be the market to expect lower rates.4 Using the right
catalytic. tools can mitigate this risk. Nevertheless, regard-
Donor funding to a facilitator would need to be less of which tool is used, there is no substitute for
structured as a medium- to long-term project; maintaining a strong awareness of how the market
however, the funding provided by this facilitator is developing and ensuring that the extra-market
to the market would need to be able to offer many support provided by facilitation is withdrawn
small, short-term funding agreements. when market actors are able to take over.

Coordination with Other Facilitators Technical Assistance


In light of political pressures and internal incen- Much know-how is about tacit knowledge, which
tives, some donors will not be able to outsource cannot be readily generated and transferred out-
their funding decisions to a facilitator. Donors side the circumstances in which it is generated.
that continue to fund interventions directly must For example, although classroom learning can play
work closely with other facilitator(s) at the local a useful role, the successful management of soli-
level for access to the market knowledge that is darity groups is learned by credit officers through
required to identify market-enhancing interven- actually doing it. Working with specific organiza-
tions. This is the minimum level of responsibility tions to generate key aspects of know-how is often

The Role of Donors in Financial Inclusion 107


essential. However, wherever possible the aim grants are increasingly relevant for building
should be to find channels to disseminate this market infrastructure and supporting policy and
knowledge to other players, both to increase regulatory reforms, particularly when we begin
impact and to minimize the risk of t­ ilting the play- to think beyond microcredit.
ing field in favor of the institutions receiving Challenge funds provide a valuable way to use
support. grants, particularly for encouraging the private
sector to innovate to reach the poor. The terms of a
Grants challenge fund are set up transparently in advance,
Grants are commonly used to support the devel- seeking applications for grants on a competitive
opment of microfinance. On the positive side, basis to undertake initiatives with specified end
grants can be used to deliver a time-limited nudge objectives. Applicants propose how they want to
to the market. Beyond the requirement to use the use the grants and compete for a limited pool of
grant for the agreed purpose and usually rela- resources. Often the terms require that those
tively modest reporting requirements, grants do applying for awards match the grant resources
not convey any reciprocal obligations to the donor sought with their own funds and show in their
on the part of the recipient. applications how the development will be sus-
However, perhaps more than any other tool tained after the award funding has been exhausted.
used, grants carry the risk of distorting markets This structuring helps mitigate some of the com-
and incentives. Grants can be used as a simply mon problems associated with grants. Challenge
bottom-line subsidy—enabling the survival of an funds can be especially helpful in encouraging
activity or business where there is no real busi- innovation by offering a simple way to share the
ness case or, worse, providing an advantage to one inherent risks, with open competition defusing
player over another. It is not uncommon to see the risk of unfairly favoring some players.
loss-making, inefficient MFIs continue for very Grants may also be essential for research-
long periods simply by acquiring a sequence of related work, whether impact studies to under-
donor grants. Unlike an equity investment, a grant stand the effects of interventions on clients or
does not necessarily (and rarely does) tie the data collection on market segments and client
donor into a long-term relationship with the demand. Although, in the long term, markets
supported institution. This has the potential to should be able to deliver this kind of information
weaken governance if there is no real owner of without donor assistance, donors may be needed
the capital value created in the MFI business. The to build the capacity of the research institutions
role of ownership is critical within a market econ- or demonstrate to private actors that this infor-
omy for providing a long-term incentive frame- mation is useful for their business. It sometimes
work for management to use scarce capital seems surprising how frequently existing market
resources efficiently. players (or those in a linked market) are simply
One encounters very limited circumstances unaware of the potential in a market. Financial
in which grants to build retail institutions sector research can be an important first step in
remain relevant in the current financial inclu- creating greater awareness in the industry and
sion landscape. In some nascent markets, such helping to guide players toward opportunities to
as postconflict countries, the use of grants to expand inclusion. The FinScope surveys, pio-
help kick-start an industry may still be relevant. neered by the FinMark Trust in South Africa
Grants may also be relevant to help institutions (and now used across Africa and in some parts of
extend outreach in difficult-to-reach market Asia), have been very successful in this respect,
segments, such as remote rural areas. However, helping commercial banks in seeing entirely new

108 The New Microfinance Handbook


areas of the market. This type of research can be which might involve defining new processes,
argued to have the key characteristics of a sec- deploying new technology, or training credit offi-
toral public good,5 which is likely to be under- cers and risk management departments. The risk
provided without external support. Therefore a is that without a clear development plan, the
strong case can be made for its financing by institution will simply revert to its earlier prac-
donors in the short term. Ultimately informa- tices once the guarantee is removed.
tion providers should also seek to be viable
commercially. Equity and Quasi Equity
Providing risk capital using equity or quasi-equity
Guarantees instruments can be valuable in supporting the
Guarantees are very commonly used by govern- development of retail (or other) institutions and
ment and donors in supporting financial mar- avoiding some of the problems with grants relat-
kets. Many different forms of guarantee are used, ing to market distortion discussed earlier. If creat-
but the core concept is the agreement to provide ing substantial new organizational capacity,
financial resources in the future contingent on whether at the retail or market infrastructure
specified conditions. Probably the most com- level, is essential to achieving progress, then
monly seen form is a simple guarantee to repay investing by way of equity is often preferable. An
part or all of a loan (or more often a portfolio of objection is sometimes raised that a new institu-
loans) should the borrower default. A major tion may be loss making in the early years of its
attraction to the providers is that funding is often development. This can easily be overcome by sim-
not required up-front and a diversified portfolio ply rolling up the projected losses into the overall
of guarantees offers the prospect of consider­ level of equity investment required. Many busi-
able leverage. USAID’s Development Credit nesses are commercially financed in which inves-
Authority, a well-established and managed pro- tors do not expect to break even for several years.
gram, has been able to build a strong portfolio Equity as a form of financing has important
leveraging the earmarked resources 28 times. A advantages over other instruments in relation to
guarantee can be used to help cautious institu- governance and creating appropriate incentives
tions enter new markets where they lack knowl- for managers (McKee 2012). It also potentially
edge and proven techniques to manage credit mitigates the problem of market distortion and
risk. The premise of their effective use to support can be more efficient allowing the eventual return
market developments is that institutions will of capital to the market facilitator where success-
learn through the process and change as a result. fully invested. However, use of investment instru-
For this to be credible one must have both suffi- ments carries substantially higher transaction
cient incentives and realistic potential for the costs, requiring careful structuring at the outset
institutions receiving the guarantee to change. and ongoing management of the investment. The
Simply reducing or eliminating the risk will not skills to undertake this effectively may not be
necessarily achieve this. To be effective the insti- possessed by many broad-based market facilita-
tution receiving the guarantee must generally tion organizations. Specialist impact investing
bear part of the risk. Equal sharing often proves a funds that have the capacity and local presence
good starting point. However, if behavior change required are better placed to manage a portfolio
is to occur, it may be necessary to ensure that a of equity investments and play an active role in
realistic plan is in place for this to happen. the governance of institutions they invest in.
Typically this will require developing new Planning for exit may also be problematic,
approaches to measuring and controlling risk, especially where capital markets are thin. Quasi

The Role of Donors in Financial Inclusion 109


equity (various forms of debt with equity-like their relationships with governments and/or con-
characteristics) is one way to address this diffi- ditions specified in lending agreements, funders
culty if it is possible to credibly structure a repay- can influence the use of the funds by the govern-
ment. A long-term engagement will nevertheless ments. However, loans to governments are not
typically be required because the capital repaid adapted to provide support for private sector
will need to be replaced—through either new actors, and the funder has little control of how
investment capital or retaining earnings. projects are managed and implemented.
The danger faced in using investment instru-
ments is that a market facilitator investing in a
company crosses the line to become, in effect, a Conclusion
player. A risk exists of displacing commercial cap- Donors have played an important role in much of
ital, especially where the investment funds used the progress achieved in inclusive finance. The
derive from a concessional source. In the long large number of private funds that serve the
term the aim should be to see concessional capital financial needs of MFIs are a testament to this
(or capital with an explicit or implicit state guar- success. This role in helping to “crowd in” private
antee, as is the case with DFIs) replaced by com- capital was arguably the market weakness that
mercial sources. It should also be noted that needed correcting in the past. Today it is far less
considerable heterogeneity exists in the sources common to identify a weak domestic funding
of commercial capital. The objectives of investors market as the overarching problem that requires
vary considerably. On a purely commercial level catalytic donor assistance.
investors will have differing appetites for risk, Donors must thus respond and focus their
minimum returns, and time horizons. Beyond attention on ways they can remain catalytic in
this there is growing interest in looking at the building financial markets that serve the poor.
social and environmental impact of investment, This chapter presented ways in which donors can
which is clearly highly relevant to inclusive try to do this by working through or with facilita-
finance. The availability of long-term social tors or behaving themselves like facilitators at the
investment provides an opportunity for earlier local market level. In all cases a facilitator on the
exit by the market facilitator. ground with market knowledge is key to making
this role a success. Because one finds few donors
Loans to Governments who structure their support in this way today and
Loans to governments are an instrument typically because of the real internal challenges in being
used by multilateral organizations, regional devel­ catalytic, much still can be done to realign inter-
opment banks, and some bilateral agencies. nal incentives within funding agencies to mini-
Overall, they represent about 25 percent of total mize negative market distortions. Much also can
donor commitments for financial inclusion. Loans be learned in practice to improve how donors can
to governments can have maturities of 11 years or fulfill this catalytic role.
more, which makes them a good tool for long-term
support, but bears the risk of subsidizing functions
that the local government or the market could take Notes
over. Loans to governments can be used for several  1. The largest 20 donors and investors include
purposes, including budget support, on-lending to 10 DFIs, three multilaterals, three bilateral
retail financial services providers via wholesale donors, two regional development banks, one
financial institutions, or strengthening the market private foundation, and one private
infrastructure and ­policy environment. Through institutional investor.

110 The New Microfinance Handbook


 2. See, for example, work by Bill Easterly and ———. 2010b. “Growth and Vulnerabilities in
Tobias Pfutze (2008), which uses level of Microfinance.” Focus Note 61, CGAP,
fragmentation as one of the criteria to rank Washington, DC.
donor effectiveness. Demirgüç-Kunt, Aslı, and Leora Klapper. 2012,
 3. This section was originally drafted by David “Measuring Financial Inclusion: The Global
Ferrand. Findex.” Policy Research Working Paper 3628,
 4. This is one reason why price subsidies should World Bank, Washington, DC.
usually be avoided. Price-based signaling is a Easterly, William, and Tobias Pfutze. 2008.
key mechanism in effective market operation, “Where Does the Money Go? Best and Worst
and a supply-side subsidy can disrupt the Practices in Foreign Aid.” Journal of Economic
signaling. Furthermore, given that in the Perspectives 22 (2): 29–52.
financial services market one rarely finds a El-Zoghbi, Mayada, Barbara Gähwiler, and Kate
public policy case or the resources to support Lauer. 2011. “Cross-border Funding in
universal subsidies, targeting is the norm. Microfinance.” Focus Note, CGAP, Washington,
Practically these often prove difficult to deliver DC, April.
cost-effectively and to control the potential for FSD Kenya. 2005. “Policies and Procedures.”
rent seeking created. Financial Sector Deepening Project, Nairobi,
 5. Research data of this kind are certainly Kenya.
nonrival, and the nature of the type of Gähwiler, Barbara, and Alice Nègre. 2011. “Trends
information is such that it rapidly becomes in Cross-border Funding.” Brief, CGAP,
nonexcludable (because it is difficult to keep Washington, DC, December.
the results private).
McKee, Katherine. 2012. “Voting the Double
Bottom Line: Active Governance by
Microfinance Equity Investors.” Focus Note 79,
References and Further Reading CGAP, Washington, DC.
CGAP (Consultative Group to Assist the Poor). Symbiotics. 2011. “Symbiotics 2011 MIV Survey
2010a. “2010 CGAP Funder Survey.” CGAP, Report: Market Data & Peer Group Analysis.”
Washington, DC. Symbiotics, Geneva, August.

The Role of Donors in Financial Inclusion 111


CHAPTER 5

Measuring Financial Inclusion


and Assessing Impact
Joanna Ledgerwood

To make financial markets work better for the inclusion and the importance of continuing to
poor, it is valuable to understand what is taking invest in achieving it.
place in the core of the financial market This chapter focuses on measuring and moni­
system—what services are provided by whom, toring financial inclusion—that is, supply and
to whom, and how—and what is the impact. demand—and on assessing outcomes leading to
Measuring financial inclusion helps us to impact. In doing so, it provides an overview of
understand which segments of the population tools to measure and monitor financial inclusion
lack what types of financial services, why they and to conduct research. It seeks to inform stake­
lack access, and which financial services they holders, including development agencies, regula­
use. Monitoring financial inclusion allows us tors, and providers, who are increasingly
to determine if inclusion is improving over modifying policies, services, delivery channels,
time and to compare countries within peer and outreach models, to capitalize on insights
groups. Assessing impact helps us to under­ provided by databases and research findings.
stand the quality of services—convenience, These modifications can occur either at the macro
affordability, safety, dignity—and, ultimately, level, initiated by governments and regulators, or
the long-­ term outcomes of using financial at micro levels, affecting financial service struc­
services. This provides a much better under­ tures within communities and financial service
standing of the value of increased financial providers themselves (see box 5.1).

Contributions to this chapter were made by Ines Arevalo and Alyssa Jethani.

Measuring Financial Inclusion and Assessing Impact 113


Box 5.1  Using Data to Increase Financial Inclusion

Better data can increase awareness of the bank’s decision to allow Safaricom to launch
problem of financial exclusion and motivate pol- the M-PESA platform, an e-money transfer
icy makers to enact market-expanding reforms. and payment system. M-PESA now reaches
Data can also give the private sector the infor- 55 percent of all Kenyan adults. After the first
mation it needs to expand and develop new FinScope data for Zambia were released in
products and can stimulate new research into 2005, several institutions reported being moti-
the drivers and impacts of financial inclusion. vated to launch new ventures. Barclays
At the Alliance for Financial Inclusion’s 2009 reopened some of its rural branches, Zambia
Global Policy Forum in Nairobi, Gerald Nyoma, National Commercial Bank launched a mobile
director of the Central Bank of Kenya, credited banking venture, and Dunavant, a cotton com-
the first FinAccess survey in 2006, which pany, created a mobile payment linkage for
showed that only 14 percent of Kenya’s popu- 150,000 of its growers. Similar reports have
lation had access to banking services, with come from policy makers and market players
having a significant influence on the central in other countries.
Source: Kendall 2010.

Measuring Financial Inclusion it is necessary to determine the current state of


the financial market and to identify population
Financial inclusion refers to people and busi­ segments that are excluded from it. Measurement
nesses having access to appropriate and afford­ also indicates the frequency of services accessed
able financial services. Defining financial from various types of providers and allows for
inclusion may also include factors such as prox­ comparisons between countries or regions and
imity (being within a 20-kilometer range of an among poverty levels within an area. This
access point, for example, a bank branch, auto­ enables stakeholders to be better informed and
mated teller machine [ATM], microfinance insti­ to respond with appropriate policies and regula­
tution [MFI], or agent) or choice (having access tions. According to the Global Partnership for
to multiple providers with varied and relevant Financial Inclusion (2011), “A comprehensive set
products and services) and being financially of financial inclusion indicators should serve
capable of understanding the available choices three purposes: i) to inform financial inclusion
and how best to use them. However, increased policy making both domestically and interna­
access and choice of financial services do not tionally; ii) to provide a basis for measuring the
always translate into increased use. In addition to current state of financial inclusion on a global
studies that measure access, studies that attempt scale and at country level; and iii) to provide a
to understand the use and quality of services, and basis for monitoring and evaluation of financial
ultimately their impact, are also important. inclusion policies and targets, both domestically
As discussed in chapters 3 and 4, the govern­ and internationally.”
ment, industry, and others, including develop­ Measuring financial inclusion is not a straight­
ment agencies, have a role to play in expanding forward exercise, however. Financial inclusion
financial inclusion. In order to achieve this goal, has to be clearly defined according to the needs of

114 The New Microfinance Handbook


the country. The Alliance for Financial Inclusion Measuring access and usage requires assessing
(AFI) puts forth four dimensions of financial both the supply of and the demand for financial
inclusion—access, usage, quality, and welfare, services. Supply-side studies and databases such
each requiring increasingly complex data collec­ as Financial Access 20101 or Microfinance
tion and analysis—and proposes indicators for Information eXchange (MIX)2 use aggregate data
each (AFI 2010a, 2010b). to understand the total outreach and perfor­
mance of various types of providers and to enable
• Access refers to the ability to use financial
comparative analyses over time. Demand-side
services, taking into consideration physical
­
surveys such as FinScope3 or Findex4 seek
proximity, affordability, and eligibility. Under­
detailed information about what and how finan­
standing levels of access may require insight
cial services are used at the individual, household,
and analysis of potential barriers to access.
or community level.
Indicators include number or percentage of
Demand-side research offers richer informa­
people who access a certain type of service
tion than supply-side research and provides new
(credit, savings, payments, insurance) from
avenues for analyzing how the poor manage their
whom (formal or informal provider), client
financial lives, highlighting the multifaceted
touch points within a certain distance, and
nature of financial management. It normally
poverty levels.
requires household surveys and therefore is more
• Usage refers to the actual use of financial ser­ costly and thus less frequent. Furthermore,
vices and products. Determining usage looks demand-side information can be susceptible to
at the regularity, frequency, and patterns of use sampling bias and omissions by respondents,
over time, including the combination of ser­ making it less comparable over time or across
vices. Indicators include frequency of use or countries (Global Partnership for Financial
percentage of active accounts. Inclusion 2011). Supply-side data can be collected
more frequently and allow for comparisons; how­
• Quality considers the attributes or relevance of
ever, such information often only includes formal
the financial service or product to consumer
and regulated providers, which can miss a signifi­
needs. Quality is determined by the nature and
cant portion of what is taking place in the finan­
depth of the relationship between the financial
cial market system. Demand-side research, in
service provider and the consumer, including
contrast, can provide insight on the value and
the choices available, the financial capabilities
vibrancy of the informal sector, highlighting the
of the consumer, and how those capabilities
flexibility and innovations inherent in family, kin­
affect the experience. Indicators include the
ship, and community-based financial services.
financial capability of consumers, choice of
services and providers within a reasonable
Supply-Side Research
­distance, and frequency of complaints.
Supply-side research collects and aggregates data
• Welfare, the most difficult outcome to mea­ on number of providers, services used (primarily
sure, focuses on the impact that financial credit and savings accounts and sometimes pay­
­services have on the welfare of consumers, ments and insurance products), and access points
including changes in consumption, business (for example, bank branches and ATMs) and may
productivity, and quality of life. Indicators also collect data on volume and costs. Supply-side
include increased savings, increased consump­ data are generally gathered by regulators, other
tion, and increased decision making in the government bodies, or development agencies
household. (such as the financial access studies conducted by

Measuring Financial Inclusion and Assessing Impact 115


the World Bank) or are self-reported by providers demographic outreach of financial services in
to global databases such as MIX. Supply-side data about 160 countries.
are, for the most part, publicly available and gen­ “Financial Access 2010 is the second in a series
erally accessible online. Supply-side data indicate of annual reports by CGAP and the World Bank to
the scale and trending of activities of financial monitor statistics for financial access around the
service providers, allowing insight into the world and to inform the policy debate. The series
growth, depth, and scale of outreach. Databases was launched in response to the growing interest
also provide a valuable source of secondary data in financial inclusion among policy makers and
to support impact assessments and understand the development community. The first report,
key outcomes and may help to uncover pressing Financial Access 2009, introduced statistics on the
issues in the industry, for example, over-­ use of financial services in 139 economies and
indebtedness, improper pricing, or poor financial mapped a broad range of policies and initiatives
and social performance of providers—and some­ supporting financial inclusion. Building on the
times consumer abuse (see box 5.2).5 previous year’s data, Financial Access 2010
reviews survey responses from 142 economies,
Global Supply Surveys updates statistics on the use of financial services,
Two relevant global supply surveys (sometimes and analyzes changes that took place in 2009—a
referred to as landscape supply data) are (i) the turbulent year for the financial sector” (CGAP
Financial Access 2009 and 2010 of the and World Bank 2010). Financial Access 2010
Consultative Group to Assist the Poor (CGAP) ­contributes to efforts to measure financial access
and the World Bank Group, which gathers data at the country level worldwide, to develop a con­
from financial regulators in about 150 countries, sistent database, and to present the data in a
and (ii) the Financial Access Survey (FAS) of the coherent manner for future analyses.
International Monetary Fund (IMF), which The IMF conducts the Financial Access
reports on key indicators of geographic and Survey annually and makes the data available to

Box 5.2  Evidence of Over-Indebtedness through Research

Over-indebtedness has become a cause for with the growing levels of default. The evi-
concern and a new focus of research and dence to date is not clear-cut. The high levels
data collection. Strong competition in some of default in Bosnia in the late 2000s are
markets and the expectation of excessive proof of too much debt and a lack of financial
returns on the part of some investors have capability to manage the credit. By contrast,
led to predatory lending, with rising levels of in Ghana many possess the financial capabil-
portfolios at risk. Explanations for these ity to juggle multiple loans, even when the
behaviors are many, including the absence of personal cost is high. What has not changed
credit bureaus, limited due diligence by lend- is that over-indebtedness has long been an
ers, or the assumption that clients assume attribute of poverty and that a life of perpetual
more debt than they can manage. Multiple shocks without protection keeps many stuck
loans from an array of lenders are associated in the vicious cycle of poverty.
Source: Monique Cohen, Microfinance Opportunities.

116 The New Microfinance Handbook


the public through an online database. The FAS forming country-level aggregates and are prone
database disseminates key indicators of geo­ to multiple counting (Global Partnership for
graphic and demographic outreach of financial Financial Inclusion 2011). Also, generally no
services as well as the underlying data. It mea­ information is provided on income levels or liveli­
sures outreach by bank branch networks and hood segments of those accessing services
ATMs as well as the availability of three key (Kendall 2010).
financial instruments: deposits, loans, and insur­
ance. New data on outstanding deposits and National Supply Surveys
loans of households were added for the 2011 FAS. Regulators and others are beginning to measure
The database helps policy makers and research­ financial inclusion at the national level.
ers to understand the determinants and implica­ According to AFI (2011), “More and more, pol­
tions of financial access and usage. The financial icy makers are recognizing the importance of
access indicators can help researchers and evidence-based policy making and the critical
authorities to identify knowledge gaps, to devise role data play in the policy-making process,
appropriate policies for broadening financial from design and implementation to monitoring
access, and to monitor the effectiveness of poli­ and evaluation. With rigorous, objective, and
cies over time (IMF 2011). reliable data, policy makers can accurately
About 140 countries participated in the 2011 diagnose the state of financial inclusion, judi­
FAS, and the FAS website now contains annual ciously set targets, identify existing barriers,
data for about 160 respondents covering a seven- craft effective polices, and monitor and assess
year period (2004–10), including data for all G-20 policy impact.”
countries. When determining how to measure financial
Global supply surveys provide useful country-­ inclusion at the country level, the first step is to
level data. As many are conducted annually, these define financial inclusion—that is, what providers
data can indicate progress toward increasing and which services are considered financially
financial inclusion. However, most supply-side inclusive.7 The next is to define the data needs, to
surveys rely primarily on information from regu­ look at the information available from secondary
lators or regulated financial institutions, which sources (on both supply and demand), and then to
effectively excludes unregulated (or nonformal) determine how to obtain missing data. Options
providers. Use of services from other providers— include enhancing an existing survey or creating
for example, nongovernmental organization a new one (AFI 2010a).
(NGO) MFIs, cooperatives, Savings Groups (SGs), In an attempt to create a consistent set of
and the informal sector as a whole—is not indicators that are defined in the same manner
counted.6 The resulting picture is distorted, par­ and therefore can be tracked in national surveys
ticularly in Africa, where only five countries—the and compared across countries, AFI’s Financial
Comoros, Ethiopia, Madagascar, Mauritius, and Inclusion Data Working Group developed a
Rwanda—report data on credit outreach to the “core set” of indicators for use by regulators at
FAS (Linthorst and Gaul 2011). the country level. The AFI core set of indicators
In addition, because the data track accounts provides a framework to guide country-level
rather than individuals, there is potential for dou­ data collection and to support policy making by
ble counting. Furthermore, the general lack of creating a standard for what to measure and how
financial identity in many developing countries (AFI 2011).8
weakens the reliability of supply-side data on The core set is a list of five quantitative
usage; users cannot be uniquely identified in indicators that measure the most basic and

Measuring Financial Inclusion and Assessing Impact 117


fundamental aspects of financial inclusion: remains a key challenge. Global databases and
access and usage: provider networks are helping to fill this gap.
In addition to supply-side surveys conducted
• Access indicators include the number of access
at the global and national (or regional) levels,
points per 10,000 adults at the national level
supply-side data are also collected through
­
and segmented by: type and by relevant admin­
self-reported databases such as MIX, the Savings
istrative units; the percentage of administra­
Groups Information Exchange (SAVIX), the
tive units with at least one access point; and
Microcredit Summit, the World Council of Credit
the percentage of total population living in
Unions (WOCCU), and the World Savings Banks
administrative units with at least one access
Institute, among others.
point.
MIX is a global, web-based platform for
• Usage indicators include the percentage of information on microfinance. It provides infor­
adults with at least one type of regulated mation on MFIs worldwide, public and private
deposit account and the percentage of adults funds that invest in microfinance, MFI net­
with at least one type of regulated credit works, raters and external evaluators, advisory
account. The following proxies may be used firms, and governmental and regulatory agen­
where data for usage indicators are not cies. Institutions self-report to MIX, with data
available: number of deposit accounts per
­ checked by in-house analysts. While MIX col­
10,000 adults and number of loan accounts lects data on nonregulated entities, the informa­
per 10,000 adults. tion requested is geared more toward sustainable
institutions with the capacity to report pre­
It does not measure quality and welfare, which scribed indicators on a consistent basis.
require more qualitative studies.9 Consequently, the majority of smaller MFIs,
savings and credit cooperatives (SACCOs), and
Global Databases others do not participate. However, the MIX
While surveys continue to provide information database covers an estimated 85 percent of clients
useful for establishing scale, expanding sup­ served by specialized microfinance providers
ply-side data to include nonregulated providers (see box 5.3).

Box 5.3  Microfinance Information eXchange

Committed to strengthening financial inclu- the information for comparability. Its pub-
sion and the microfinance sector by promot- lished data track development of the industry,
ing transparency, MIX provides information on both for its operators and for those supporting
the performance of MFIs, funders, networks, it through funding, policy, or analysis. Its
and service providers serving low-income primary data platform, MIX Market, has
­
clients. delivered MFI profiles and annual standard
­
Incorporated in 2002, MIX collects and performance reports since 2002. Between
reviews financial, operational, product, client, 2002 and 2012, its public database has grown
and social performance data, standardizing from covering just over 100 MFIs to more than
(continued next page)

118 The New Microfinance Handbook


Box 5.3  (continued)

2,000 providers around the world. Its platform Active partners include the Small
data include benchmarks and comparative Enterprise Education and Promotion (SEEP)
analysis, along with quarterly results. In addi- Network for developing financial reporting
tion, MIX publishes annual regional updates standards and the Social Performance Task
and topical analysis of the sector through the Force for measuring MFI social performance.
long-standing MicroBanking Bulletin. In addition, MIX encourages local microfi-
The data available on MIX Market has nance associations to embed these reporting
evolved with the industry. In the early years, standards in local markets and connects asso-
data focused on outreach and financial perfor- ciations with a global network of analysts
mance as the sector sought to understand the working with MFIs to collect, standardize,
dynamics of building sustainable institutions. analyze, and disseminate data on MFI perfor-
As funding sources and products diversified, mance. More than 30 associations have joined
MIX’s data evolved to capture information on the network.
the nature and terms of MFI funding as well Since 2011, MIX has published country
as the growing array of credit and deposit briefings, quarterly updates on market devel-
products. In recent years, a renewed focus on opments, and market forecasts for major
understanding the social mission and results microfinance markets. These additional tools
of the sector led MIX to work with industry and analysis are available through paid
peers to standardize, collect, and analyze data subscriptions.
on MFI social performance. 
Source: Blaine Stephens, MIX; www.mixmarket.org.

The SAVIX is a centralized reporting system the mission of promoting transparent pricing in
that provides transparent, standardized data on the microfinance industry.12
SGs (see chapter 6). Data are collected and sub­ The World Council of Credit Unions, the
mitted on a quarterly basis (see box 5.4). global trade association and development agency
The Microcredit Summit database contains for financial cooperatives, promotes the develop­
information on more providers than other data­ ment of financial cooperatives worldwide and
bases but only collects information on the num­ advocates for improved laws and regulations. It
ber of borrowers (totaling 137.5 million in 2010), maintains a database on its members, providing
the number of “poorest” borrowers, and profit­ information annually on the number of credit
ability.10 Summary information is published unions (by country), total members, savings bal­
annually.11 ances, loan balances, reserves, and total assets.13
Microfinance Transparency is an NGO estab­ The World Savings Banks Institute represents
lished to promote pricing transparency of provid­ savings and socially committed retail banks or
ers. It maintains a database with microfinance associations. It maintains a database for savings
interest rate data for individual country markets and postal banks that globally tracks total assets,
and publishes the information as a series of inter­ loans, deposits, capital adequacy, outlets, employ­
active tables and graphs. The database supports ees, and customers annually.14

Measuring Financial Inclusion and Assessing Impact 119


Box 5.4  Savings Groups Information Exchange

SAVIX is an online reporting system that pro- 22 countries were reporting to SAVIX on a vol-
vides transparent and standardized data on untary basis and uploading quarterly program
the performance of SGs and the agencies that data to the website.
promote them. In 2012 it collected and vali- SAVIX enables users to conduct compara-
dated financial and operational data from more tive, trend, and geographic analysis with a
than 80,000 SGs representing over 1.8 million choice of filters and metrics. Informed deci-
members in all regions of the developing sion making improves program planning and
world. Metrics include measures of outreach management, and SAVIX seeks to facilitate
(for example, number of groups), membership analysis, develop norms, and improve the per-
data (for example, percentage of women formance of institutions that promote SGs.
members), portfolio indicators (for example, The site also provides donors and facilitating
value of loans outstanding), and performance agencies with industry benchmarks and analy-
ratios (for example, annualized return on sis that support planning and investments
assets). As of mid-2012, 142 projects in across the sector.
Source: David Panetta, Aga Khan Foundation; www.thesavix.org.

For the most part, these databases collect (RCTs), and focus group discussions, for exam­
information on outreach and financial perfor­ ple. Demand-side research may identify unmet
mance used by various stakeholders (see box 5.5). demand as well as reasons why the uptake of
However, some databases have recently begun to services offered (supply) may be lower than
collect nonfinancial information. Since 2005, the anticipated. Researchers may also analyze
industrywide Social Performance Task Force has structural deficiencies in markets that prevent
developed ways to measure social performance the poor from accessing financial services and
(see chapter 14), creating 22 social performance explore the opportunities for increased finan­
indicators to assess how an MFI aligns its systems cial inclusion.
to its mission and measures its social perfor­ Demand-side research often begins with client
mance. MIX began collecting information on behavior, attempting to assess transaction vol­
these social performance indicators in 2009, with umes at the individual and household levels and
212 MFIs reporting. SAVIX is considering adding identify links between use and quality of services.
social performance indicators once they are This is in contrast to institutionally driven
established for SGs. information-­gathering techniques that focus on
provider performance as a metric for financial
Demand-Side Research access.
Demand-side research seeks detailed informa­ Overall, demand-side research considers how
tion about how financial services are used and poor households use financial services and who is
from what providers. It can be carried out at the excluded, sometimes also looking at the nature of
individual, household, or community level and household cash flow and how money is spent.
uses a variety of tools, including national sur­ Examples of demand-side studies include the
veys, panel studies, randomized control trials World Bank’s Access to Finance, Living Standards

120 The New Microfinance Handbook


Box 5.5  Who Uses Landscape Supply Data?

Knowledge is power only if it is used produc- into a new market or a new product. What
tively. Who uses the data collected so pains- types of competition might they encounter?
takingly by hundreds of organizations? And Which populations are most underserved? A
who should be using the information? subnational view on the data—especially at a
So far, much activity on financial inclusion branch or district level—can be valuable in
has taken place in the high-level policy sphere. addressing such questions.
Regulators and policy makers use data on Networks also use and potentially contrib-
financial inclusion to develop policy and to ute to landscape data. Landscape data can
monitor progress. For instance, the Superinten­ give members the big picture and place their
dency of Banking and Insurance in Peru uses activities in context, whether the network
benchmarks on financial inclusion to measure itself has a broad or a narrow focus for mem-
progress in reaching underserved areas. bership. Networks can also use landscape
However, MFIs can also use landscape data to data to highlight gaps or opportunities for
support business planning when expanding donors and investors.
Source: Linthorst and Gaul 2011.

Measurement Study, Global Findex, and FinScope helping policy makers and others to understand
databases—the latter two being the most relevant. the behaviors and constraints regarding consum­
Most financial diaries studies also conduct ers’ access to and use of financial services. Key
demand-side research. characteristics include cross-country compatibil­
ity, availability of demographic covariates, and
Global Findex regular measurement of the entire set of coun­
The Global Financial Inclusion (Findex) database tries over time (Demirgüç-Kunt and Klapper
is a detailed demand-side survey covering 150,000 2012). Findex provides a baseline for benchmark­
individuals in 148 economies, measuring how ing financial inclusion and tracking progress over
adults use financial services. According to time, leading to the identification of priorities
Demirgüç-Kunt and Klapper (2012), “The Global (see box 5.6): “One of the most fascinating parts of
Findex fills a major gap in the financial inclusion the results are people’s answers to obstacles they
data landscape and is the first public database of face in getting access to finance, which range
demand-side indicators that consistently mea­ from too expensive, document requirements,
sures individuals’ usage of financial products and too far to travel” (Latortue 2012).
across countries and over time. Covering a range
of topics, the Global Findex can be used to track FinScope
global financial inclusion policies and facilitate a FinMark Trust is an independent trust based
deeper and more nuanced understanding of how in South Africa that seeks to extend financial
adults around the world save, borrow, and make access by strengthening the market system. In
payments.” 2003 FinMark Trust launched FinScope, a
Findex provides demand-side data by gender, consumer survey that seeks to understand
age, education, geography, and income levels, consumer demand with regard to access

Measuring Financial Inclusion and Assessing Impact 121


Box 5.6  Core Indicators of Global Findex

The core set of Global Findex indicators addresses five dimensions of individual use of financial
services: accounts, savings, borrowing, payment patterns, and insurance. Use of financial ser-
vices refers to how different groups (poor, youth, and women) use financial products. Financial
inclusion also refers to how easily individuals can access available financial services and prod-
ucts from formal institutions (defined as institutions that are authorized or licensed to offer finan-
cial services and that may or may not be actively supervised). The demand-side data provided by
Global Findex complement existing supply-side data collected by the IMF’s Financial Access
Survey and the AFI’s core set of financial inclusion indicators.
The following core set of indicators and subindicators of financial inclusion is based on the
Global Findex database:

• Use of bank accounts. Percentage of adults with an account at a formal financial institution
(such as a bank, credit union, post office, or MFI that is registered with the government and
possibly regulated), purpose of accounts (personal or business), frequency of transactions
(deposits and withdrawals), percentage of adults with an active account at a formal financial
institution, and mode of access (such as ATM, bank branch, retail store, or bank agent)
• Savings. Percentage of adults who saved within the past 12 months using a formal financial
institution (such as a bank, credit union, post office, or MFI), percentage of adults who
saved within the past 12 months using an informal savings club or a person outside the
family, and percentage of adults who otherwise saved (for example, in their home) within
the past 12 months
• Borrowing. Percentage of adults who borrowed within the past 12 months from a formal
financial institution such as a bank, credit union, post office, or MFI (a flow measure), per-
centage of adults who borrowed within the past 12 months from an informal source (includ-
ing family and friends), and percentage of adults with an outstanding loan to purchase a
home or an apartment (a stock measure)
• Payments. Percentage of adults who used a formal account to receive wages or government
payments within the past 12 months, percentage of adults who used a formal account to
receive or send money to family members living elsewhere within the past 12 months, and
percentage of adults who used a mobile phone to pay bills or send or receive money within
the past 12 months (not collected in high-income countries)
• Insurance. Percentage of adults who personally purchased private health insurance and per-
centage of adults who worked in farming, forestry, or fishing and personally paid for crop,
rainfall, or livestock insurance.
Source: Demirgüç-Kunt and Klapper 2012.

to transactions, savings, credit, and insurance their income and manage their financial lives. The
from both formal and informal providers. sample covers the entire adult population, rich and
FinScope, an initiative of FinMark Trust, poor, urban and rural, in order to create a seg­
"is a nationally representative study of consum­ mentation, or continuum, of the entire market
ers’ perceptions of financial services and issues, and to lend perspective to the various market
which creates insight into how consumers source segments." 15

122 The New Microfinance Handbook


Primarily a demand side-survey, FinScope also i­nformal, and financially excluded) and enables
integrates supply-side information, leading to a comparison of levels of financial i­nclusion across
more holistic understanding of usage. FinScope countries and market segments (see figure 5.1).
data sets can be used to inform policies, commer­ Once the “formally unserved” is identified
cial strategies, and product development as well through the FinScope survey, the FinScope
as development agendas (see box 5.7). Donors ­livelihoods framework is applied to assess the
have traditionally financed the surveys, although individual and factors that affect usage of finan­
costs in some countries are partially recovered by cial services, leading to a better understanding
a syndication process whereby stakeholders of the interventions required to increase finan­
(often commercial but also public) purchase cial inclusion, specifically the needs of consum­
access to the final results. ers.16 The result is the access frontier, which
FinScope data are used to create three key provides an estimate of the percentage of people
access indicators including the financial access who are unserved but could be financially
strand, the access frontier, and the financial access included over time. This serves to identify both
landscape. The financial access strand provides potential new market opportunities as well as
detailed analysis of the financial market based on specific development needs to increase financial
customers’ level of financial access (formal, inclusion (see figure 5.2).

Box 5.7  FinScope Surveys

The FinScope survey information supports private and public sector initiatives to improve the
policy environment and stimulate commercial innovation. For example,
• Bank Windhoek in Namibia used FinScope to develop its low-income savings product called
EasySave.
• In South Africa, the Financial Services Board has used FinScope to improve consumer finan-
cial literacy. According to the board, “The FinScope surveys have played a major role in iden-
tifying consumer financial education needs by following consumer financial behaviour over
time and in making valuable information available to others for their consumer financial edu-
cation programmes.” The National Treasury in South Africa also used FinScope data to sup-
port the development of a policy of financial inclusion to feed into government processes for
wide-ranging social security reform.
• According to African Life Assurance Zambia, “From the time we started using FinScope, we
have been able to develop a funeral insurance policy for the informal market ... and by under-
standing the current coping mechanisms and the recurrent costs of such mechanisms used
by the informal sector, we have been able to determine an affordable price.”
• ABSA, South Africa’s largest retail bank, stated, “Until FinScope there was no single source
of information that provided us with an in-depth understanding of the life styles of different
segments of South Africa’s population … [FinScope] really gave us that edge in terms of
getting such an insight that we could really develop a customer value proposition for the
mass market.”
Source: http://www.finscope.co.za/new/pages/About-FinScope/Using-FinScope.aspx?randomID=d2e9237a-4bf9-
4272-92ec-8c82443013ea&linkPath=2&lID=2_2; Makanjee 2009.

Measuring Financial Inclusion and Assessing Impact 123


Figure 5.1 FinScope Financial Access Strand: Definitions

The percentage of adults who are banked. The percentage of adults who are formally served
Adults using commercial bank products. but who are not banked. Adults using financial
May also be using informal products. services from providers which are not banks,
such as microfinance institutions or insurance
companies. May also be using informal products.

Banked Other formal

Formally included Informally served Financially excluded

The percentage of adults who are not formally The percentage of adults who are excluded/
served but who are informally served unserved. Adults using no financial services
(informal only). Adults using informal financial to manage their financial lives —neither
products or mechanisms only, such as savings formal nor informal—and depend only on
clubs or burial societies. family/friends for borrowing or saving at home.

Source: Adapted from FinScope, “From Data to Action Brochure,” http://www.finscope.co.za/new/scriptlibrary/getfile.aspx?file


name=FS workshop 2011_brochureFNL.pdf&file=../module_data/71e3e62d-1eeb-412e-893b-970e98f6a3fa/downloads/03bcf1fe-
0fd2-40de-95f4-ffb73c12f1f0.file.

Figure 5.2 FinScope Access Frontier

Current Market
frontier potential

Already use Have access but Could have access Unlikely to ever
do not use but do not have access

Current market Enablement Development Redistribution

Source: FinScope, n.d.

The financial access landscape provides fur- savings, credit, insurance or remittance financial
ther information on access to specific products by products or services.
creating a diagram with five axes, illustrating the While the access strand is a key comparative
percentage of adults who have used transactional, measure to see how access has changed over time,

124 The New Microfinance Handbook


it is less successful in accounting for the use of sector of certain geographic areas, such as the
multiple products and services. For example, research reported in Collins et al. (2009) and
individuals who use both formal and informal summarized in chapter 2.
services are only counted as formally included Financial diaries use detailed micro-level
(see box 5.8). consumer data to paint a complex, realistic pic­
ture of the financial lives of the poor. Data are
Financial Diaries gathered on income, consumption, savings,
Financial diaries also assess demand, albeit of a lending, and investment over an extended
(usually) much smaller group (and thus unlikely period of time (usually one year). A team of
to be statistically representative at the national local field workers, trained and supported by
level) because of the costs involved. Primarily the research organization, visits every partici­
longitudinal surveys, financial diaries are used to pating household each week or fortnight and
understand consumer behavior in the financial asks members to recount all resources that

Box 5.8  Interpreting Financial Access Strands

The top-line findings for the access strands from the FinAccess Kenya 2009 survey show that
the proportion of individuals included in the formal sector increased from 18.9 percent in 2006
to 22.6 percent in 2009 and that the proportion using “formal other” services (such as SACCOs,
MFIs, and money transfer services) increased dramatically from 7.5 to 17.9 percent, while those
using the informal sector (mainly informal financial groups such as rotating savings and credit
associations, ROSCAs) declined from 35.2 to 26.8 percent. Hence services included in the “for-
mal other” category increased, while informal services declined (see figure B5.8.1).
Figure B5.8.1  Access Strand Analysis

2006 2009
100%

38.4% 32.7%

26.8%
35.2%
17.9%
7.5%
18.9% 22.6%
0%
Excluded Informal Formal other Formal

Source: FSD Kenya and Central Bank of Kenya 2009.


(continued next page)

Measuring Financial Inclusion and Assessing Impact 125


Box 5.8  (continued)

However, the access strand classifies a person according to the “most formal” service used.
A service-by-service analysis presents some contrasting points. Figure B5.8.2 disaggregates the
“formal other” category and shows a fall in the use of SACCOs, a small increase in the use of
MFIs, and a large increase in the use of M-PESA. The data also suggest an increase in the use
of services in the informal sector (ROSCAs, ASCAs, buyers, hire-purchase, local shops, informal
moneylenders). Although the use of formal sector services rose, so did the use of informal sec-
tor services. This is not apparent in figure B5.8.1, which does not count the use of informal
services once a person uses a more formal service (moves up the continuum).
Figure B5.8.2  Service-by-Service Analysis

35

30
% of adult population

25

20

15

10

0
y

ed

FI

nd
et

ho
SC

SC
CC

M
er

ie
ci

ls
RO

fr
SA

st
so

ca
gi

or
g

re

Lo
in

ily
A
ild

m
ES
bu

Fa
-P
or

M
nk
Ba

2006 2009

Source: FSD Kenya and Central Bank of Kenya 2009.

Thus the access strand approach needs to be used carefully. First, increased use of “formal”
sector services does not necessarily mean that the use of “other formal” or “informal” services
has declined. Second, it is very important to know how services in these studies are classified. In
Kenya, M-PESA is classified as “formal other,” which implies a significant increase in financial inclu-
sion. However, M-PESA does not intermediate funds in the way that SACCOs and MFIs do, and
research suggests that many use it simply as a cash-in, cash-out mechanism. Hence being included
in the category “formal other” via M-PESA use alone does not signal the same quality of inclusion
as having access to a SACCO or an MFI and may result in misleading classifications of inclusion.
Source: Susan Johnson, Centre for Development Studies, University of Bath.

126 The New Microfinance Handbook


entered or left the household or business over financial service providers.17 To identify strate­
the prior period (week or fortnight). Financial gies for improving access, financial landscape
diaries enable researchers to examine the studies focus on the needs of consumers. They
dynamics of financial behavior by capturing do not have a bias toward any institutional form
transactions data in near “real time” and to of provision; they use a supply-side survey
examine data in sequence, providing a view (providers and products) and a demand-side
inside the “black box” of the household budget survey (clients) to understand demand for and
(MFO 2010). use of both formal and informal providers as
Financial diaries can also be used to test a well as the enabling environment. They also
new product or delivery channel for a specific may examine the rules and supporting func­
financial service provider to better understand tions needed to develop financial markets and
its target market, such as the work carried out by expand inclusion of the poor. Based on this
the Opportunity International Bank of Malawi understanding, they propose interventions to
(see box 5.9). increase appropriate access.  Most often, land­
scape studies are conducted in smaller geo­
Financial Landscape Studies graphic areas rather than nationally and
Financial landscape studies combine demand- sometimes in more than one location for com­
and supply-side data to document what finan­ parative purposes. Financial landscape studies
cial services are available (both formal and also may focus on one type of institution or ser­
informal) and how they are used, including vice innovation, placing it in the context of
consumer preferences and changes over time, local competition to examine how these inter­
drawing on data from both consumers and actions dampen or multiply its impact.

Box 5.9  Cash-In, Cash-Out: Financial Diaries in Malawi

Using financial diaries, Microfinance The study determined that the mean
Opportunities (MFO) undertook research to number of weekly transactions per house-
explore the extent to which the introduction of hold was 19. Cash exchanges between indi-
a mobile “bank-on-wheels” serving rural loca- viduals were ubiquitous, largely from men to
tions in central Malawi provided value in areas women, suggesting gender-based depen-
without branch offices of the Opportunity dency on cash gifts and a pervasive informal
International Bank of Malawi (OIBM). MFO safety net among family and friends. Savings
collected transaction data (all inflows and out- transactions dominated bank use. Although
flows, including use of financial services) from the mobile van was popular initially, OIBM
just under 200 low-income households, half of services rarely replaced informal finance
whom were OIBM clients using the mobile and use of the van dropped off markedly. Yet
bank, for 18 months over 2008–09. The sample the OIBM van added value for women cli-
was mostly a mix of poor farmers and micro- ents; furthermore, the analysis of aggregate
entrepreneurs. Eight field workers interviewed transaction data helped the OIBM to under-
participants at the van stops and recorded stand client behavior and develop better
their financial transactions once a week. products.
Source: Stuart, Ferguson, and Cohen 2011.

Measuring Financial Inclusion and Assessing Impact 127


Financial landscape studies seek to answer the assessment tools), livelihood types, gender, and
following questions: age segmentation. Data are analyzed for descrip­
tive patterns, and regression analysis is used to
• Supply. What is the landscape of financial ser­ ­establish key socioeconomic, demographic, and
vice supply? Who are the providers of financial geographic factors determining access and use,
services? What are the key products offered by including consumer preferences and changes over
existing providers? What are the key charac­ time. In addition to the surveys, a comprehensive
teristics of different types of providers (for desk review of secondary sources covering finan­
example, prices, volumes, market share, struc­ cial service outreach data (for example, FinScope
ture of products offered)? What are the limita­ studies, if available) is generally included.
tions of providers reaching the poor? The financial landscape approach provides
• Access. What are the level and type of access to insight into the behavior of consumers and their
financial services? What are the key barriers, use of financial services and allows results to be
opportunities, and constraints to accessing contextualized within local profiles of provision—
financial services? What interventions can be for example, understanding the nature of local
considered to improve access and improve providers and how they fit into the market sys­
livelihoods in the proposed regions? tem. Combining quantitative and qualitative data
allows much deeper insight into consumer pref­
• Use. What financial products and services do erences and strategies and greater understanding
the poor use? Which providers do the poor of their engagement with the market (see box
use? Are these providers in the formal or infor­ 5.10). Financial landscape studies begin to look at
mal sector or both? To what extent do the poor the quality aspect of financial inclusion as defined
use various financial services? Would the poor by AFI.
use certain products or services that they do Financial landscape studies also examine the
not have access to? Do the characteristics of wider environment and supporting functions at
demand provide programming insights? local and national levels. Information is gathered
through in-depth interviews with key informants
• Rules and supporting functions. What rules (for­
(including policy makers, regulators, clients, pri­
mal, informal) and supporting functions (for
vate sector providers, and donors). Rules and reg­
example, infrastructure, funding) do or do not
ulations, infrastructure and delivery channels,
exist in the market? For example, do weak sup­
information, and funding are all examined; sec­
porting functions constrain access? What role
ondary research is used to support information
does the government play, and do opportunities
obtained from the interviews.
exist to improve it? Is there sufficient telecom­
Sometimes financial landscape studies are
munications and physical infrastructure to
supplemented with further research carried out
benefit from innovative delivery channels?
through financial diaries, for example, or liveli­
On the supply side, as many providers as pos­ hood landscape studies (see box 5.11).
sible are interviewed to establish what products
and services they offer, prices and volumes
Monitoring and Evaluation
(accounts, savings, and loans), and competition
and dynamics of their business. On the demand In addition to supply and demand research,
side, a one-time access and use survey is carried monitoring outcomes and evaluating impact are
out on a random sample to map existing pat­ important to understanding financial inclusion.
terns of use against poverty levels (using poverty In particular, they help to assess quality and

128 The New Microfinance Handbook


Box 5.10  Financial Landscapes in Kenya

Landscape research maps the supply and demand sides of financial service provision—both
formal and informal—and seeks to understand the patterns of use and the reasons for them.
Financial Sector Development (FSD) Kenya commissioned a landscape research study in
2010–11 to examine what was occurring in smaller towns and their rural environs. The goal
was to understand to what extent and in what ways the dynamic changes in the market evi-
dent at the national level were being experienced in specific contexts and by people whom the
financial sector finds it hard to reach (because of both low incomes and rural context).
The research was conducted in three towns chosen to reflect different poverty profiles.
A supply-side survey collected data from banks, SACCOs, MFIs, and informal groups on prod-
uct profiles, number of clients, volume of savings and loans, competition, and local market
context. On the demand side, questionnaires were completed with small samples (20 house-
holds and multiple users in each household where possible) in each town and in two rural
sites at different distances from the town, yielding an overall sample of 337 individuals in
194 households across the three sites. The surveys were followed by in-depth qualitative
­interviews with 148 individuals.
Supply-side data were compiled to develop a profile of service provision and products and
provide insight into competition dynamics. The analysis involved probit regressions to ­understand
socioeconomic characteristics most associated with the use of particular services (for example,
employment type, poverty level, age, gender, marital status, and distance) and analysis of
qualitative data to identify the reasons people gave for their service use and preferences.
The results revealed the following:
• Bank accounts and SACCOs are used to manage payments more than to make voluntary
savings.
• Financial groups are used extensively because they offer structure but also flexibility and
liquidity—in particular, easy access to loans of sizes that individuals need on a frequent basis
rather than the much larger loans offered by formal providers.
• Mobile money services are used extensively because they allow access to liquidity through
social networks but are not used for saving beyond an emergency reserve.
Source: Susan Johnson, Centre for Development Studies, University of Bath.

welfare, the last two dimensions of financial Generally four main components are included
inclusion as defined by AFI. in monitoring and evaluation—inputs, activities,
Monitoring involves the regular collection of outputs, and outcomes. Inputs are the basic
data, generally quantitative, while evaluation resources used, activities are the set of actions
involves periodic or one-time in-depth analysis of taken, outputs are the deliverables, and out­
performance against objectives and anticipated comes are the net result of the outputs over time.
outcomes. Impact assessment attempts to deter­ Long-term outcomes are sometimes referred to
mine if there is a change in consumer welfare and, as impacts. These can all be viewed within a
if so, what the change is and if it can be attributed logic model (see figure 5.3).
to the use of financial services (or an intervention The logic model (also known as the theory of
seeking to enhance financial inclusion). change or results chain) links the results that we

Measuring Financial Inclusion and Assessing Impact 129


Box 5.11  Livelihood Landscape Studies

Livelihood landscape studies are similarly qual- Special attention is paid to understanding the
itative in orientation and employ the same composite livelihood strategies that individuals
methods as financial landscape studies, but pursue (for example, small business, plus
with a focus on the livelihood strategies of the farming, plus support from family), how the
target population, including the range of occu- pieces fit together, and the reasons for com-
pations and perceived advantages and disad- bining them. These studies also attempt to
vantages of each. Livelihood landscape studies understand differentiated access to livelihood
move beyond occupation to encompass the strategies and the factors that boost or inhibit
full range of activities that contribute to the access to financial services—for example,
subsistence of individuals and households. class, gender, or ethnicity.
Source: Microfinance Opportunities.

Figure 5.3  Logic Model Definitions

Long-term outcomes – Change of state: includes factors beyond


what program can achieve on its own; program contribution

Decreasing control and increasing time


Medium-term outcomes – Change in behavior or practice; highest
level for program accountability; measured at end of program

Short-term outcomes – Change in skills, awareness, access, or


ability, measured during program; often intangible

Outputs – Completed activities

Activities – Actions taken or work performed

Inputs – Financial, human, material, and information resources

Source: Aga Khan Foundation 2011.

would like to see with the activities and inputs client welfare, help funders to understand the
that are in place (see box 5.12).18 impact of their investments, and, coupled with
measuring financial inclusion, help policy makers
Assessing Impact to adjust policies and make budget allocation
Impact assessments evaluate long-term outcomes. decisions. Academics use impact assessments to
They help providers to understand the effect answer rigorous academic questions regarding
of their services (both positive and negative) on the role and function of financial services in the

130 The New Microfinance Handbook


Box 5.12  Measuring Outcomes of Facilitating Savings Groups

Facilitators of SGs generally anticipate outcomes in multiple domains that take hold within the
first two years of group participation and deepen with time. The five domains of outcomes are
as follows:
1. Stronger economic capacity. Asset accumulation, consumption smoothing, income-
generating investment, income, management of finances, savings
2. Increased social capital. Solidarity (with other members), collective activities taken on by
members, increase in leadership roles taken on by members in the community
3. Increased self-empowerment. Increased self-confidence, greater decision-making power in
the household
4. Greater food security. Increased food consumption or more varied diet
5. Other. Changes due to targeted activities, such as increased specific knowledge or changes
in behavior.
Source: Gash 2012.

lives of the poor. With the increased interest in assets, power, or decision making at the house­
and emphasis on financial inclusion, stakeholders’ hold level. For example, if credit or crop insur­
interest has moved beyond increasing the number ance is concentrated on more profitable but risky
of account holders to understanding if consumers cash crops mostly controlled by men, it is impor­
are benefiting from financial services and if those tant to assess the potential welfare effects of shift­
are provided using fair and prudent practices. ing resources away from crops that are controlled
Traditional impact assessment measures the largely by women (Copestake 2004).
developmental outcomes intended (and unin­ Historically, impact assessment was often con­
tended) by the use of financial services; it tries to ducted to determine if a particular provider’s ser­
identify links between product use and client vices or delivery were having any impact on its
welfare.19 Impacts can be economic, sociopoliti­ clients. The purpose was to improve their prod­
cal, or cultural. Economic impacts include broad ucts and services based on findings from the
changes in economic growth—for example, move­ assessments. While there are benefits to this
ments from a barter to a monetized economy approach, the following section provides a
(particularly in rural settings), business expan­ broader discussion on impact assessment and
sion or transformation of enterprises, net gains in research methodologies, some of which may not
income within subsectors of the informal econ­ be used extensively by individual providers (for
omy, or a reduction in the vulnerability of poor example, RCTs; see box 5.13).
people through consumption smoothing and risk
management. Sociopolitical impact could include
Research
changes in policies that enhance the business
environment or improvements in human devel­ Generally all research begins with an over­
opment indicators within a region (such as arching question that guides the focus, meth­
changes in nutrition or educational outcomes). odologies, and tools used to carry out the
Cultural impact may include redistribution of research. The research question may be in the

Measuring Financial Inclusion and Assessing Impact 131


Box 5.13  The Changing Focus of Impact Assessment

The audience for microfinance impact assess- The need for cash to smooth consumption
ments is diverse. The original stakeholder and provide working capital trumps all.
group—providers, donors, and academics— Thus the tension persists between credi-
has expanded to include investors, policy bility born of research rigor and useful infor-
makers, and regulators. Yet despite stake- mation. The ongoing, rapid evolution of the
holder diversity, the reasons to invest in industry has fed the need to prove impact.
impact assessment have not changed that Rigorous approaches to research are seen as
much. Proving impact was, and still is, needed essential to generating credible results, and,
to justify the allocation of public and private consequently, interest in conducting RCTs
resources. However, impact assessments has exploded. An important pool of knowl-
can also play a role in market research because edge has thus been generated, albeit one that
client data can help providers to improve their seems disconnected from the dynamics of
products and services. These two agendas the industry or institutional practicalities of
form the prove-improve continuum that delivering services.
guides the design and use of assessment. Despite several recognized “good” and
For those seeking to prove impact, the credible studies, the industry still has much
methodological challenges of causality, selec- progress to make. While it is no longer a
tion bias, and fungibility of money persist. In ­single-product industry focused exclusively on
the mid-1990s, these difficulties led some to working capital loans, the bulk of impact
reject impact assessment, arguing that those assessments still addresses the effects of
who want to prove the causal relationship microcredit. Recognition of market segmenta-
between microcredit and poverty alleviation tion and product differentiation has yet to
face an uphill battle. Instead, they proposed spawn products and services that respond to
easier, more practical proxies. Early advocates clients’ changing life-cycle requirements.
of commercialization, for example, argued Broader impact assessment and financial
that repeat loans are a good indicator of the inclusion studies are needed.
positive value that borrowers ascribe to micro- What has perhaps changed is how impact
credit and can serve as a reasonable proxy for assessment findings have played out in the
difficult-to-obtain impact data. In the interven- public arena. As the audience has grown, this
ing years, both arguments have shown their information has, in some countries, become
weaknesses, the welfare effects of access to more politicized, and the results of the new cri-
credit have proven marginal, and repeat bor- tiques have been co-opted by politicians to the
rowing reflects the scarcity of capital available detriment of providers and their clients. The
to low-income populations more than the microfinance crisis in India between 2009 and
appropriateness of the products they use. 2011 reflected this misalignment of interests.
Source: Monique Cohen, Microfinance Opportunities.

form of a hypothesis, which is a proposed will lead to a lower incidence of theft (Nelson
explanation for a phenomenon or a presumed n.d.). A hypothesis can be confirmed, denied,
correlation between cause and effect—for or proposed for further investigation via qual­
example, the provision of payment services itative or quantitative research. A research

132 The New Microfinance Handbook


question can also be open ended. For example, • Sensitive. Capable of demonstrating changes
research can be conducted (or commissioned) and capturing change in the outcome of inter­
by an investor to assess the financial landscape est (national per capita income is unlikely
in an area to determine constraints and opportu­ to be sensitive to the effects of a single
nities for funding, by a donor to determine the intervention)
impact of a particular intervention, or by a pro­
• Timely. Possible to collect relatively quickly
vider to better understand the needs of their cli­
ents or potential clients. • Cost-effective. Worth the cost to collect, pro­
cess, and analyze
Indicator Selection
• Ethical. Acceptable to those providing the
Indicators are specific data that are linked to
information.
objectives and hypotheses (if applicable). These
indicators allow defined changes to be measured Indicators help researchers to measure what
or analyzed, help to develop an understanding of they believe to be affected; however, if the focus
whether the hypotheses are correct, and highlight is only on measuring indicators, the research
other unexpected changes or processes. Indicators may miss unintended or unanticipated impacts,
need to relate closely to the changes that an orga­ both positive and negative. Ideally research
nization or researcher hopes to observe. Wider efforts track indicators for consistency and
impacts—those beyond the immediate financial accountability and pose a broader set of ques­
and social benefits for the individual or house­ tions for understanding wider or unanticipated
hold—are difficult to identify and assess. Since impacts.
many of the wider changes examined are difficult
to measure directly, proxies are often used instead. Research Approaches
In addition to being SMART (specific, measur­ The overall approach taken to proving the
able, achievable, realistic, and time-bound), indi­ research hypothesis or answering the research
cators ideally have the following characteristics question is influenced by the research objectives,
(Dunn, Kalaitzandonakes, and Valdivia 1996): the quality of information required, the interests
of various stakeholders, and the research bud­
• Valid. Measure what they are intended to mea­ get.20 Many decisions need to be made about the
sure and capture effects due to the interven­ scope of the study, including size (number of
tion rather than external factors individuals, households), time frame (a one-time
survey or a longitudinal study), unit of study
• Reliable. Verifiable and objective, so that, if
(transactions, individuals, households, or enter­
measured at different times or places or with
prises), and geographic coverage (local, national,
different people, the conclusions will be the
regional, or global).
same
Choices also include whether the research
• Relevant. Directly linked to the objectives of should be an ongoing process of collecting infor­
the intervention mation for a period of time (such as financial
diaries), a one-off survey, or a survey with two or
• Technically feasible. Capable of being assessed
more rounds, such as baseline or endline, that is
and measured
repeated after a period of time; whether the
• Usable. Understandable and ideally providing research will study the financial sector as a
useful information to assess performance and whole or will focus on an individual provider or
inform decision making a particular product (or potential product);

Measuring Financial Inclusion and Assessing Impact 133


whether it will look at demand or supply or the Quantitative Research
overall financial landscape; and who will carry Quantitative research collects data to create gener­
out the research. A key decision is the balance alizable results from a sample of the population of
between qualitative and quantitative approaches interest. It measures the reactions of many subjects
or a combination of the two. Combining differ­ to a set of predetermined questions. The process of
ent tools can increase the credibility and useful­ measurement is central to quantitative research
ness of the research, but adds complexity and because it provides the fundamental connection
cost. between empirical observation and mathematical
expression of quantitative relationships. Thus
Qualitative Research sampling (choosing which persons, households, or
Qualitative research is undertaken to gain an enterprises) must be random and large enough to
understanding of human behavior and the rea­ represent the population adequately. Properly
sons for it. Qualitative methods investigate the designed quantitative studies can provide reliable
why and how of decision making, not just the results because of the statistical validity of the find­
what, where, and when. Qualitative methods ings and the lack of bias in the sampling methodol­
capture what people have to say in their own ogy. But these approaches are not as flexible as
words and describe their experiences in depth. qualitative methods, so they are best suited when
Qualitative research helps us to discover what there is some idea of the situation on the ground.
we do not know we do not know because it is Quantitative research commonly uses
flexible and adaptable, which allows us to fol­ ­surveys—predesigned and pretested question­
low up on interesting, unanticipated findings. naires administered in formal interviews. Surveys
Hence, qualitative research uses small, focused contain questions with a limited set of answers so
samples, whereas quantitative research uses that the results can be quantified, compared, and
large samples. Sampling is generally purpo­ analyzed statistically. Because quantitative
sive—that is, respondents are chosen because research is associated with statistical analysis of
they have specific characteristics and can pro­ responses from a large number of clients, it is con­
vide information on the specific focus of the sidered a more “scientific” approach than qualita­
research. The type of information the researcher tive methods. Quantitative methods allow
is looking for will determine the type of individ­ researchers to determine how extensive a phe­
uals chosen, the time spent with each individ­ nomenon is and if it exists with statistical cer­
ual or group, and the size of the sample. In cases tainty, but they are less able to measure unforeseen
of very small samples, selecting “informa­ impacts or phenomenon.
tion-rich” clients to interview is critical (Patton Quantitative research methodologies can be
1990). nonexperimental, quasi-experimental, or exper­
Qualitative research is generally carried out imental. Nonexperimental studies look at the
using individual in-depth interviews, focus group differences in behavior between different peo­
discussions, or participant observation. These ple and relate the degree of access to variations
interviews and discussions can form the basis in outcomes. Quasi-experimental and experi­
for case studies, which assess the needs, condi­ mental studies look at what changes take place
tions, opportunities, and limitations of a small over time between a treatment group (who
number of individuals. Participatory rapid accesses services) and a control group (who does
assessment (PRA) expands on the traditional not access the service and who, otherwise, is
focus group discussion, making it particularly believed to be identical to the treatment group).
interactive (see box 5.14). Baseline and follow-up surveys are conducted

134 The New Microfinance Handbook


Box 5.14  Participatory Rapid Assessment

PRAs are derived from classic sociological and anthropological approaches in that they involve
the use of semistructured interviews with key informants, participant observation, and the
methodological principles of triangulation and open-endedness. However, compared to tradi-
tional approaches, PRA techniques are more interactive. Workshop activities engage respon-
dents by using drawings, stories, and theater, encouraging them to identify significant changes
that have occurred in their lives as a result of access to financial services. PRAs use the following
techniques:
• Social mapping and modeling drawn by participants, indicating which institutions and struc-
tures of their community are important in their lives
• Seasonality maps or calendars, allowing communities to show how various phenomena in
their lives vary over the course of a year
• Daily time-use analysis to track how participants use their time, allowing participants and
researchers to obtain a sense of responsibilities, challenges, and opportunities for structuring
interventions
• Participatory linkage diagrams, showing chains of causality
• Venn diagrams, showing the relative importance of different institutions or individuals in the
community
• Wealth ranking
• Product attribute ranking
• Life-cycle needs analysis
• Cash mobility mapping, providing an understanding of where the community goes to
acquire or spend cash (markets, wage labor, cooperatives) and leading into a discussion of
supply and demand.
Source: Ledgerwood 1998.

with both groups, and results are compared to the use of a financial service should affect both
show what happened as a result of using the populations equally, so any difference in how
financial services and what happened in the these populations change over time can be
absence of using them. attributed to the effects of the financial services
Quasi-experimental studies are nonrandom­ being studied.
ized, while experimental methods, or RCTs, ran­ No one method is perfect, however, because
domly assign groups or individuals to treatment various methodological challenges are inherent
or control groups. While no one can ever know in research:
what would have happened to a specific individ­
ual had they not participated in an intervention, • Attribution. The difficulty of attributing
a random control group forms a counterfactual changes to a specific activity (access to or use
(what would have happened in the absence of of financial services), given the complexity of
whatever is being studied) for the group of indi­ environments shaped by an array of factors,
viduals or households who use the service or including economic forces, social and cultural
receive the benefit. Changes that are not due to norms, and the political climate

Measuring Financial Inclusion and Assessing Impact 135


• Fungibility. The exchange or substitution of control and treatment groups are selected ran­
one thing for another—in this case, fungibility domly, the households in those groups should be
means that money can be used for many pur­ equivalent, on average, on all observable (for
poses, with changes in intention occurring example, education levels) and unobservable
quickly. Assessing the impact of borrowing for (for example, an individual’s entrepreneurial
a business, for example, assumes that the bor­ skills, organizational ability, or access to social
rower used the loan capital for the business networks) characteristics (Bauchet and Morduch
and that the borrower did not just reduce his 2010). Randomized designs make it possible to
or her borrowing from other sources (that is, uncover the net impact of the intervention, free
substitution) of selection bias.22
However, experimental methods only esti­
• Selection bias. The systematic differences in
mate the average impact of accessing services or
characteristics of people self-selecting to
other interventions. They do not provide an
participate in an intervention or access a finan­
understanding of the median impact, and in prac­
cial service and whether these characteristics
tice they say little about the distribution of
make them more likely to benefit from use of
impacts. For example, if access makes one person
the service (Gash 2012)
much better off and all others a little worse off, an
• Causality. The relationship between an event RCT might conclude that the average impact is
(the cause) and a second event (the effect), positive if the positive impact for that one person
where the second event is understood to be a is large enough to offset the sum of negative
consequence of the first. The difficulty of iso­ impacts for everyone else (Bauchet and Morduch
lating a variable causal impact is commonly 2010). That said, if the sample is large enough,
referred to as a causality bias. data can be disaggregated into subcategories to
While these challenges have persisted see the impact on certain groups.
through decades of social research, some new Furthermore, spillovers (or leakage) can
techniques are being used to address, in particu­ occur when randomiz­ing at the individual level,
lar, issues of sampling bias and causality. Overall, for example, when someone transfers from the
nonexperimental and quasi-experimental designs treatment group to the control group or vice
are generally considered better at showing associ­ versa (leakage) or when mem­bers of the control
ation or correlation than at proving causation group are inadvertently affected by the treat­
(Gash 2012). By randomly assigning people to ment. This could happen, for example, when a
treatment and control groups (experimental borrower gives part of her loan to a friend in the
design), RCTs attempt to overcome the causality control group or when a client receiving train­
bias; since the selection bias is removed, it is pos­ ing shares some of the lessons with someone
sible to attribute the impact to use of the service not assigned to the training (Bauchet and
(see box 5.15). Morduch 2010).
RCTs are very good at providing an estimate of
Randomized Control Trials impact, but the results may be difficult to general­
At the time of writing, randomized control trials ize to other settings. This means they may have
are relatively new in microfinance and thus are high internal validity (estimates are credible on
described in more detail here.21 In addition to their own terms), but not external validity (con­
overcoming selection biases, RCTs are one of the clusions are applicable to a wider range of situa­
few methods (if not the only method) that can tions). For example, when conducting RCTs,
account for unobservable factors. Because the researchers are sometimes forced to use a

136 The New Microfinance Handbook


Box 5.15  The Difficulty of Proving Causation

One significant issue to consider is the ability of a study design to prove causation or eliminate
outside factors that could otherwise explain the results. A useful way to think about the link
between methodologies and their ability to prove causation is to consider where the methodol-
ogy would fall on a spectrum, as shown in figure B5.15.1. The farther the methodology is to the
right-side arrow, the better it proves causality, and the farther it is to the left-side arrow, the less
it proves causality and only shows association (or correlation). In general, the more rigorous the
method, the more likely that cause can be attributed to the intervention.

Figure B5.15.1  The Spectrum of Evidence

ASSOCIATION CAUSALITY

Field experience, anecdotes


Interviews, case studies
Client surveys
Quasi-experimental with nonrandomized
comparison group
Randomized control trials

Source: Gash 2012; provided by Kathleen Odell, Brennan School of Business, Dominican University.

Quasi-experimental and nonexperimental studies indicate where impact may lie and help to
identify important questions that can be answered more confidently with experimental studies.
They are more flexible in terms of identifying unanticipated impacts and can sometimes more
easily incorporate the context of the situation. Their results can also hint at the “why” of results
that are not explained otherwise. The longer-term nonexperimental studies give us an idea of
additional impacts that may emerge as participants use services for longer than the one- to
three-year span of some RCTs. On a practical level, quasi-experimental and nonexperimental
studies can be less expensive and easier to implement. Quasi- and nonexperimental studies, or
even monitoring systems, can be used to check for similar results elsewhere. In essence, all
three designs complement each other by filling in gaps and triangulating data.
Source: Gash 2012.

­onstandard population, making the results


n intermediate outcomes and considering other
less valid externally. While nonrandomized contexts to which the conclusions would apply
approaches may collect data on larger geographic (or conduct multiple studies in different contexts).
areas or diversified populations, thus having RCTs are sometimes considered unethical
fewer problems with external validity, the because they require that a portion of the popula­
internal validity of these methods is often far less tion does not receive access to the intervention
satisfactory. To reduce external validity prob­ being evaluated. Furthermore, the choice of who
lems, well-designed RCTs try to understand the does or does not receive the intervention cannot
“why” of impacts by gathering information on be made based on who needs it the most or who

Measuring Financial Inclusion and Assessing Impact 137


deserves it the most. However, sometimes ran­ phenomenon and to verify something as more
domly selecting participants can be “fairer” than likely to be true and not due to just one or a few
other selection mecha­nisms when, for example, respondents who could be biased. Similarly, sec­
funding is too limited to serve everyone who is ondary sources and desk reviews of existing find­
eligible. In this case, publicly randomizing who ings can supplement primary research.
benefits and who does not can improve fairness Table 5.1 summarizes the various research
(Bauchet and Morduch 2010). methods and their usefulness.

Mixed Methods
Poverty Assessment Tools
A combination of quantitative and qualitative
methodologies often provides more comprehen­ Poverty assessment tools (or calibrated income
sive findings than one approach alone. Mixed proxy tools) are used to determine the poverty
methods can be carried out simultaneously, using levels of groups or individuals being studied.23
different research teams or mixed methods in one While most often associated with social perfor­
study. For example, combining quantitative mance monitoring, they are discussed here
household surveys to track changes with qualita­ because they are often used in various research
tive focus group discussions and key informant efforts (for example, financial landscape studies
interviews expands the understanding of contex­ or impact assessments) to assess the level of pov­
tual factors and may lead to unexpected ideas. erty of a group being studied. They allow
A mixed approach can also be sequential. researchers (or providers or others) to estimate
Qualitative work can inform what questions the rate of poverty incidence in a population
should be measured with quantitative work or (or their clients) without having to measure
explore unusual findings from quantitative stud­ income or consumption directly through time-
ies. Different studies can build on one another in consuming household budget surveys.
expected or unexpected ways. For example, qual­ Poverty assessment tools include short, coun­
itative studies indicate that SG members seem to try-specific surveys with indicators that have
increase their saving rates from the first to the been identified as the best predictors of whether a
second cycle because, by the end of the first cycle, given set of households is very poor, according to
members have come to trust the model, under­ the legislative definition of extreme poverty
standing that they are able both to save and to applicable to the country in question. Once the
earn profits on their savings. However, comple­ gathered data are entered into a template, soft­
mentary quantitative data show that this increase ware can estimate the share of households living
in saving from the first to the second cycle is much below the applicable poverty line. The construc­
stronger for the first group in the village than for tion of the tool relies on a set of indicators that are
later groups in the same village. Having learned correlated most strongly with poverty in the
from the experiences of the first group, later nationally representative expenditure surveys.
groups understand better how the model works Each tool is meant to be administered by mini­
and tend to start out with higher saving rates and mally trained staff in 20 minutes or less.
thus do not experience as great an increase Table 5.2 presents an overview of poverty
(Cojocaru and Matuszeski 2011). assessment tools commonly used in microfinance
All research benefits from triangulation— to measure absolute and relative poverty. Absolute
that is, checking data with respondents and measures classify people as poor or nonpoor in
cross-checking the information with others to relation to a defined poverty line (national or
confirm different points of view of the same international, like purchasing power parity of

138 The New Microfinance Handbook


Table 5.1  Research Methods and Their Usefulness
Measuring Financial Inclusion and Assessing Impact

Method Application Advantages Disadvantages Usefulness

Randomized control Uses structured Regarded as the Difficult to design and administer if the Useful for measuring the effects of
trials (RCTs) comparing surveys to measure most rigorous treatment group is self-selecting (that is, specific innovations where
treatment and control variables and changes statistical method; buying a service). In the case of a self- randomization is possible and for
groups attributable to the avoids “selection selecting treatment group, encouragement measuring the impact variables of
steps in a bias” because the design can be used, which allows anyone to interest (for example, specific
presuggested chain of treatment and take up the treatment, but randomly products or services such as
results when samples control groups are assigns the encouragement. Study savings accounts, weather
are sufficiently large identical on average questions cannot be changed mid-study insurance)
Quasi-experimental Uses structured More approximate in Easier to implement than RCTs; results are Similar to RCTs, useful for
research comparing surveys to measure that the control similar, but control group is not a perfect investigating specific interventions
before and after changes attributable to groups method is counterfactual because it is not randomly and where the sample is
characteristics in a step in the results not an exact control selected. The costs of the survey design, sufficiently large but, for
treatment and control chain; could be useful implementation, and analysis are identical operational reasons, RCTs are
groups (before-after for pilot projects for RCTs and for nonrandom control not feasible
with control group; groups. Careful design and measurement
also control variables are needed to ensure accuracy. Not valid
before-after studies) when the control group is significantly
different from the treatment group,
especially with regard to underlying
trends in both groups
Participatory Used where the Might be the only Might be subjective, open to bias Useful for understanding access to
approaches (for change in behavior way to show and use of financial services at the
example, focus might have been attribution; can local level; complements RCTs in
groups) caused by different uncover understanding causal pathways
factors unanticipated
impacts
Opinions of key Might be used when Low cost Might be influenced by interviewer; open Especially useful for understanding
informants and expert the key change is to subjective interpretation processes of policy change and
interviews driven by one person where causes of market changes
(for example, policy are being established (for example,
change) demonstration effects) and are
necessary for assessing
development of rules and
supporting functions
Case studies analyzing Used where qualitative Low cost; can be a Might not represent the universe of Very useful at all stages of logic
changes in behavior understanding is good indication of beneficiaries; can be time-consuming; model or results chain and
and performance needed to interpret attribution, if well might be influenced by interviewers especially important for
quantitative data designed and understanding changing patterns of
executed use by clients
139

Source: Johnson 2009.


Table 5.2  Main Poverty Assessment Tools Available for Microfinance Practitioners
140

Tool Purpose Description Implementation Pros Cons

Grameen Estimates the % of poor Country-specific poverty Scorecard can be Good balance of ease of Makes no urban-rural
Foundation clients, based on one or scorecard with 10 questions applied to a sample of use and accuracy; can be distinction;b not
Progress out of two poverty lines and (socioeconomic indicators clients or to the entire used for targeting and available for all
Poverty Index the probability of an that correlate with poverty); client base; for assessing changes in countries; validity of
(PPI) individual falling below indicators are derived from implemented by field poverty levels; a results indicators changes
the poverty line; large-scale nationally staff and can be used can be compared across over time
measures absolute representative surveys before, during, or after regions
poverty service delivery
USAID poverty Estimates the % of poor Country-specific poverty Scorecard can be Good balance of Data cannot be
assessment tool clients, based on one or scorecard of 16–33 questions applied to a sample of accuracy and ease of disaggregated and are
(USAID PAT) two poverty lines; (socioeconomic indicators clients or to the entire use; results can be not available for all
provides an absolute that correlate with poverty); clientele; implemented compared across countries; validity of
measure of poverty indicators are derived from preferably after clients countries and regions indicators changes
large nationally join the program over time
representative surveys
FINCA client Broad client assessment; A 130-question survey Surveys a sample of Provides a Relies on clients’ recall
assessment tool allows classification of divided in sections: clients, interviewed comprehensive of past expenditures to
(FCAT) the population according demographic and loan at periodic intervals assessment of clients’ measure poverty levels,
to different poverty lines, information, household well-being and a fair which is prone to
based on expenditure characteristics, expenditures, amount of information measurement errors
data; provides an assets, access to facilities that can be used for
absolute measure of (water, electricity, health management
poverty care), business types, and
client satisfaction and exit
CGAP poverty Assesses the poverty Questionnaire includes a Surveys a sample of Uses multidimensional Lengthy survey;
assessment tool levels of MFI clients range of indicators (adapted 200 clients and 300 definition of poverty demanding of technical
(CGAP PAT) compared to nonclients to local context): nonclients; input (highly qualified
within the operational demographic characteristics; implemented by staff) that does not
The New Microfinance Handbook

area of an MFI, based on housing quality; assets (type, external consultants build internal capacity
a multidimensional number, and value); for future in-house
index; provides a relative educational level and replication
measure of poverty; can occupation of family
use secondary data to members; food security and
put relative measures vulnerability; household
into a regional, national, expenditures on clothing
or even international and footwear (poverty
context benchmark)
Measuring Financial Inclusion and Assessing Impact

Housing index Identifies poor Uses a simple index that is MFI staff visit the Easy to verify; can be Limited definition of
households in relation to adapted to the local communities and used for targeting, poverty; accuracy
the community where conditions, in terms of apply the index to monitoring, and depends on the actual
they live, based on the housing conditions identify potential assessment link between poverty
structure and conditions clients; applied before status and housing
of their dwelling; or after service conditions
provides a relative delivery
measure of poverty
Means test Assesses the level of Uses household surveys Short interviews Combines simple Indicators may or may
poverty of households with a small number of easily conducted by field indicators with short not be closely linked to
based on a composite verifiable indicators; includes staff with all potential survey and standard poverty; accuracy is
index; provides a relative asset ownership (land, clients; applied before scoring system, unknown
measure of poverty livestock, radio, television), or after service simplifying
sociodemographic delivery implementation; good
characteristics, and others for targeting, monitoring,
and assessing
Participatory Identifies the poor in a Involves mapping the Participatory appraisal Provides a rich picture of Requires staff with
wealth ranking community, based on community, ranking carried out in the livelihood strategies, strong participatory
community perceptions individuals by level of wealth, community; facilitated nature, and causes of facilitation skills;
of wealth (measures triangulating results, and by experts and MFI poverty; can be highly accuracy is unknown
relative poverty) classifying individuals staff before or after correlated with national
the program; 100–500 poverty lines
households
Source: Ines Arevalo, consultant to the Aga Khan Agency for Microfinance drawing from Social Performance Task Force (2009); CGAP (2003); IFAD (2006); Simanowitz,
Nkuna, and Kasim (2000); SEEP Network (2008); www.progressoutofpoverty.org; www.povertytools.org; http://www.microfinancegateway.org/p/site/m/template.rc/
1.11.48260/1.26.9234/
a. Does not establish causality.
b. While the urban-rural indicator has been tested for power of prediction, it has never been included in a PPI. It was found that adding a rural-urban indicator did not
improve the PPI accuracy as much as other indicators that are also correlated with the geographic location of the household (including ownership of agricultural land, type
of dwelling, access to electricity). Geographic variation has also been accounted for by adjusting the poverty line that is used to construct the scorecard to the cost of
living in different regions of a country (Grameen Foundation 2008, 13; personal communication with Mark Schreiner).
141
US$1.25 a day). Relative measures classify people robust relationship be expected. In general,
in relation to other people of the same community this over-simplification of the definition of pov­
or geographic area. Absolute measures allow erty leads to less accurate assessments. Other
comparisons across providers, countries, and so tools rely on a wider set of indicators (for exam­
forth and are useful for impact assessment (Zeller ple, participatory wealth ranking), but these are
2004). In general, tools that measure absolute derived subjectively, which means that the rate
poverty perform better at the aggregate level— of poverty cannot be compared across regions.
that is, they are more accurate when they mea­ An important caveat applying to most tools
sure the rate of poverty in a group of people and included in table 5.2 is their validity over time.
not the poverty status of an individual. If the pur­ As the underlying relationship between the set
pose is to target beneficiaries, relative measures of indicators and poverty changes, the accuracy
are a better alternative. However, the Progress of the tool is reduced. This means that tools need
out of Poverty Index (PPI) of the Grameen to be updated (more recent national surveys
Foundation, unlike the poverty assessment tool need to be conducted in the case of PPI and PAT
(PAT) of the USAID or the client assessment tool or the participatory wealth ranking exercise
(FCAT) of the Foundation for International needs to be conducted again) and extra effort
Community Assistance (FINCA), which all made to allow inference of conclusions from the
­measure absolute poverty, can also be used for application of the tools to different points in
targeting because of the methodology used to time.
derive the indicators.
None of the tools included in the table uses
income as an indicator of well-being, as con­
Notes
sumption is generally considered a better indica­  1. http://www.cgap.org/p/site/c/template
tor of welfare than income and is preferred as a .rc/1.26.14235/.
poverty measurement.24 Of the tools presented in  2. www.theMIX.org.
table 5.2, two attempt to measure expenditure as  3. www.finscope.co.za.
well (FCAT and CGAP PAT). However, large  4. http://data.worldbank.org/data-catalog/
samples and advanced techniques that do not rely financial_inclusion.
on recall over large periods of time are required to  5. For example, see http://www.themix.org/
reduce the error in estimations. To overcome this publications/microbanking-bulletin/2012/
issue, most tools use indicators that are correlated 02/over-indebtedness-and-investment-
with poverty, such as household characteristics, microfinance.
dwelling structure, ownership of assets, human  6. Regulated financial service providers are
capital, and access to service facilities (Zeller required to report to central banks, but their
2004). reporting is not standardized across countries.
The two tools whose set of indicators has The reporting of unregulated providers can be
the strongest correlation with poverty are the especially complicated. Credit unions often
report to their own apex body. Mobile money
Grameen Foundation’s PPI and USAID’s PAT,
providers are governed by specific legislation
as they derive the final set of indicators from
and thus may or may not be captured in
large nationally representative income and reports from regulators. Further, there is no
expenditure household surveys. Other tools systematic method for tracking outreach and
such as a housing index rely on a single indica­ contribution to financial inclusion of NGOs
tor to predict poverty; only when there is a very and non-bank financial institutions (Linthorst
strong correlation with that one indicator can a and Gaul 2011).

142 The New Microfinance Handbook


 7. AFI defines three levels of “formal” providers, US$1 or less per day. Profitability is measured
each with implications for regulatory as “operating self-sufficiency,” which is income
reporting: (a) registered institutions, such as divided by cash costs for a given period, with
cooperatives or loan companies, that offer no standardization of loan loss provisioning
financial services but are not required to and no adjustments for the effects of subsidies.
provide information to a regulator, Operating self-sufficiency is self-reported by
(b) institutions, such as remittance agents, the MFIs, unverified, and not reported
that are authorized (or licensed) to offer publicly, although the Microcredit Summit
financial services but are not actively independently verifies MFIs’ reported number
supervised and have limited or no reporting of borrowers, where possible.
obligations, and (c) institutions that are 11. http://www.microcreditsummit.org.
authorized and directly supervised on an
12. http://www.mftransparency.org/.
ongoing basis. This is the most restrictive
definition, but is also the level at which 13. http://www.woccu.org/memberserv/
financial regulators have the most influence. intlcusystem.
 8. The Global Partnership for Financial 14. http://www.wsbi.org/.
Inclusion subgroup is proposing G-20 basic 15. www.finscope.co.za.
financial indicators built on the AFI core 16. FinScope brochure, “From Data to Action,”
set of indicators (Ardic, Chen, and http://www.finscope.co.za/new/scriptlibrary/
Latortue 2012). getfile.aspx?filename=FS workshop 2011_
 9. Administrative unit is defined by each country brochureFNL.pdf&file=../module_data/
and could, for example, refer to municipality, 71e3e62d-1eeb-412e-893b-970e98f6a3fa/
township, county, or other (depending on the downloads/03bcf1fe-0fd2-40de-95f4-ffb73c
country). Access points are defined as 12f1f0.file.
regulated access points where cash-in 17. This methodology was developed for financial
(including deposits) and cash-out transactions services by Susan Johnson, University of
can be performed. This would include Bath.
traditional bank branches and other offices of 18. The logic model, combined with the plan to
regulated entities (such as MFIs) that perform assess progress toward expected outcomes, is
these functions. Depending on the type of often expressed in a log frame analysis or a
transactions permitted, this could include performance monitoring framework.
agents of regulated entities and ATMs (only
19. Transactions-level analysis, for example, can
those that perform cash-in as well as cash-out
isolate unusually large household expenses
transactions). Regulated entities are entities
and study the transaction patterns
that are prudentially regulated and
surrounding them. When looking at the value
supervised. Since regulations vary by country,
and frequency of transactions, it is possible to
a country should disclose which types of
identify previously unseen trends and
financial institutions are included in the
opportunities to design and deliver improved
calculation (for example, banks, cooperatives,
financial services.
MFIs). Adults refer to the population 15 years
of age and older; if a different age is used 20. This section draws from Nelson (n.d.).
because of country-specific definitions, a 21. This section was contributed by Alyssa
country should disclose the age threshold Jethani and is summarized from Bauchet and
used. See AFI (2011). Morduch (2010).
10. “Poorest” borrowers are defined as individuals 22. Some variations of quasi-experimental
among the lowest half of individuals living research can approximate experimental
below the national poverty line or living on methods, such as regression discontinuity

Measuring Financial Inclusion and Assessing Impact 143


design, which relies on an arbitrary cutoff or Aga Khan Foundation. 2011. “Monitoring,
rule to produce two populations that are Evaluation, and Learning Plan.” Internal
essentially similar except that only one has document, Aga Khan Foundation, Geneva.
access to or has used the service; natural *Ardic, Oya Pinar, Gregory Chen, and Alexia
experiment, which is an RCT that occurs Latortue. 2012. “Financial Access 2011: An
without any intent to create a research Overview of the Supply-Side Data Landscape.”
situation; and encouragement design, which is Access to Finance Forum Reports by CGAP and
a form of RCT that can be used when it is Its Partners 5, CGAP and IFC, Washington, DC,
illegal or unethical to deny a service to May.
participants. Here, the randomization pertains *Bauchet, J., and J. Morduch. 2010. “An
to who gets extra “encouragement” to take up Introduction to Impact Evaluations with
a service that everyone is free to join (Janina Randomized Designs.” Financial Access
Matuszeski). Initiative, New York, March.
23. This section was contributed by Ines Arevalo, CGAP (Consultative Group to Assist the Poor.)
consultant to the Aga Khan Agency for 2003. “Microfinance Poverty Assessment
Microfinance. Tool.” Technical Tools Series 5, CGAP,
24. Income is widely believed to be inappropri­ Washington, DC.
ate as a welfare indicator because, first, it CGAP and World Bank. 2009. Financial Access
does not capture emergency coping strategies 2009: Measuring Access to Financial Services
(for example, borrowing, selling assets, and around the World. Washington, DC: CGAP and
consumption smoothing) and, second, it is World Bank.
prone to large measurement errors—in
———. 2010. Financial Access 2010: The State of
economies with large informal markets,
Financial Inclusion through the Crisis.
people might find it difficult to recall their
Washington, DC: CGAP.
earnings or might be unwilling to report
parts of their income (Haughton and *Chaia, Alberto, Aparna Dalal, Tony Goland, Maria
Khandker 2009). Jose Gonzalez, Jonathan Morduch, and Robert
Schiff. 2009. “Half the World Is Unbanked:
Financial Access Initiative Framing Note.”
Report, Financial Access Initiative, New York.
References and Further Reading Cojocaru, Laura, and Janina Matuszeski. 2011.
* Key works for further reading. “The Evolution of Savings Groups: An Analysis
*AFI (Alliance for Financial Inclusion). 2010a. of Data from Oxfam America’s Savings for
“Financial Inclusion Measurement for Change Program in Mali.” Draft, Oxfam
Regulators: Survey Design and America, Boston, November.
Implementation.” Policy paper, Data Working *Collins, Daryl, Jonathan Morduch, Stuart
Group, AFI, Bangkok. Rutherford, and Orlanda Ruthven. 2009.
———. 2010b. “Financial Inclusion Measurement Portfolios of the Poor: How the World’s Poor
for Regulators.” PowerPoint presentation, AFI, Live on 2 Dollars a Day. Princeton, NJ:
Kuala Lumpur. http://www.afi-global.org/sites/ Princeton University Press.
default/files/fidwg_measurementoverview_ *Copestake, J. 2004. “Impact Assessment of
porteous_0.pdf. Microfinance Using Qualitative Data:
———. 2011. “Measuring Financial Inclusion: Core Communicating between Social Scientists and
Set of Financial Inclusion Indicators.” Data Practitioners Using the QUIP.” Journal of
Working Group, AFI, Bangkok. http://www International Development 16 (3): 355–67.
.afi-global.org/sites/default/files/afi%20 *———. 2011. “Microfinance Impact and Innovation
fidwg%20report.pdf. Conference 2010: Heralding a New Era of

144 The New Microfinance Handbook


Microfinance Innovation and Research?” IFAD (International Fund for Agricultural
Enterprise Development and Microfinance 22: Development). 2006. “Assessing and Managing
17–29. Social Performance in Microfinance.” IFAD,
Copestake, J., S. Johnson, and K. Wright. 2002. Rome.
“Impact Assessment of Microfinance: Towards IMF (International Monetary Fund). 2011. “IMF
a New Protocol for Collection and Analysis of Releases 2011 Financial Access Survey Data.”
Qualitative Data.” Working Paper 23746, Press release 11/274, IMF, Washington, DC,
Imp-Act, University of Sussex. July 11.
*Demirgüç-Kunt, Aslı, and Leora Klapper. 2012. Johnson, Susan. 2009. “Quantifying Achievements
“Measuring Financial Inclusion: The Global in Private Sector Development.” Centre for
Findex.” Policy Research Working Paper 6025, Development Studies, University of Bath.
World Bank, Washington, DC. Karlan, Dean S. 2001. “Microfinance Impact
Dunn, Elizabeth, Nicholas Kalaitzandonakes, and Assessments: The Perils of Using New
Corinne Valdivia. 1996. “Risks and the Impact Members as a Control Group.” Journal of
of Microenterprise Services.” USAID, Microfinance 2 (3): 75–85.
Washington, DC, June. Karlan, Dean, Nathanael Goldberg, and James.
Duvendack, M., R. Palmer-Jones, J. G. Copestake, Copestake. 2009. “Randomized Control Trials
L. Hooper, Y. Loke, and N. Rao. 2011. “What Is Are the Best Way to Measure Impact of
the Evidence of the Impact of Microfinance on Microfinance Programmes and Improve
the Well-Being of Poor People?” EPPI-Centre, Microfinance Product Designs.” Enterprise
Social Science Research Unit, Institute of Development and Microfinance 20 (3):
Education, University of London. 167–76.
*FSD Kenya and Central Bank of Kenya. 2009. *Kendall, Jake. 2010. “The Measurement
“Results of the FinAccess National Survey: Challenge.” Paper presented at the Global
Dynamics of Kenya’s Changing Financial Savings Forum, November. http://www
Landscape.” FSD Kenya, Nairobi. .gatesfoundation.org/financialservicesforthe­
*Gash, Megan. 2012. “Pathways to Change.” In poor/Documents/measurement-challenge.pdf.
Savings Groups at the Frontier, ed. Candace Latortue, Alexia. 2012. “What Really Works for
Nelson. Bourton on Dunsmore, U.K.: Practical Clients.” Part of the (virtual) conference
Action. “Financial Inclusion: What Really Works for
*Global Partnership for Financial Inclusion. 2011. Clients?” CGAP, Washington, DC.
“Financial Inclusion Data: Assessing the Ledgerwood, Joanna. 1998. Microfinance
Landscape and Country-Level Target Handbook: An Institutional and Financial
Approaches.” Discussion paper, IFC, Perspective. Washington, DC: World Bank.
Washington, DC. *Linthorst, Audrey, and Scott Gaul. 2011.
*Grameen Foundation. 2008. Progress Out of “What Do We Need to Know about Financial
Poverty Index™. PPI Pilot Training. Participant Inclusion in Africa?” SEEP Network,
Guide. Washington, DC: Grameen Foundation. Washington, DC.
Haughton, Jonathan, and Shahidur R. Khandker. Makanjee, Maya. 2009. “Financial Inclusion in
2009. “Inequality Measures.” In Handbook on Africa.” PowerPoint presentation at AFI Global
Poverty and Inequality, 101–20. Washington, Policy Forum, September 14. http://www
DC: World Bank. .afi-global.org/sites/default/files/GPF_Maya_
*Hulme, D. 2000. “Impact Assessment Makanjee.pdf.
Methodologies for Microfinance: Theory, *MFO (Microfinance Opportunities). 2010.
Experience, and Better Practice.” World “Financial Diaries as a Tool for Consumer
Development 28 (1): 79–98. Research.” MFO, Washington, DC.

Measuring Financial Inclusion and Assessing Impact 145


MIX (Microfinance Information eXchange). 2010. Identifying the Poorest Families.” http://www
“Social Performance Indicators.” Report, MIX, .microcreditsummit.org/papers/povertypa­
Washington, DC, January 11. perH.pdf.
*Nelson, Candace, ed. n.d. “Learning from Clients: *Social Performance Task Force. 2009. “Poverty
Assessment Tools for Microfinance Targeting and Measurement Tools in
Practitioners.” SEEP Network, Washington, DC. Microfinance.” SPTF User Reviews, vols. 8–9.
Patton, Michael Quinn. 1990. Qualitative CGAP, Washington, DC, October.
Evaluation and Research Methods. 2d ed. Stuart, Guy, Michael Ferguson, and Monique
Newbury Park, CA: Sage Publications. Cohen. 2010. “Managing Vulnerability: Using
Schreiner, M. 2010. “Seven Extremely Simple Financial Diaries to Inform Innovative
Poverty Scorecards.” Enterprise Development Products for the Poor.” Report, Microfinance
and Microfinance 21 (2): 118–36. Opportunities, Washington, DC, January.
SEEP (Small Enterprise Education and ———. 2011. “Cash In, Cash Out: Financial
Promotion) Network. 2008. “Social Transactions and Access to Finance in Malawi.”
Performance Map.” Social Performance Microfinance Opportunities, Washington, DC,
Working Group, SEEP Network, January.
Washington, DC. World Bank. 2011a. “Household Financial Access:
Simanowitz, Anton. 2000. “Making Impact Using Surveys to Understand Household
Assessment More Participatory.” Working Financial Access: The Research Agenda.”
Paper 2, Imp-Act, University of Sussex, June. World Bank, Washington, DC.
———. 2004. “Issues in Designing Effective ———. 2011b. “Living Standards Measurement
Microfinance Impact Assessment Systems.” Study.” World Bank, Washington, DC.
Working Paper 8, Imp-Act, University of Zeller, M. 2004. “Review of Poverty Assessment
Sussex, January. Tools.” Report submitted to IRIS and USAID as
Simanowitz, Anton, Ben Nkuna, and Sukor Kasim. part of the Developing Poverty Assessment
2000. “Overcoming the Obstacles of Tools project.

146 The New Microfinance Handbook


PART II

FINANCIAL SERVICE
PROVIDERS
CHAPTER 6

Community-Based Providers
Candace Nelson

“There are many devices for turning small savings Informal financial services tend to be flexible,
into usefully large lump sums—the main money-­ convenient, and close to where the poor live; how-
management task of the poor. Most of it is done in ever, they may not always be available when or in
the informal sector” (Rutherford 2009). People the amounts needed. As discussed in chapter  1,
often borrow from or save with a friend or a rela- informal financial service providers are referred
tive to help smooth cash flow, take advantage of to as community-based providers (see figure 6.1).
an opportunity, prepare for a life-cycle event, or Community-based providers offer flexible ser-
address an emergency. Informal groups, formed vices that can accommodate uncertain cash flows
for the purposes of mutual aid or savings and and provide discipline to encourage r­ egular sav-
credit, are also common. An early analysis of ings and loan payments. One of the greatest
the Global Financial Inclusion (Global Findex) ­benefits of community-based providers is acces-
database 2012 reports, “Community-based sav- sibility, determined by both proximity and prod-
ings methods such as savings clubs are widely uct features (for example, minimal administra­tive
used in some parts of the world but most com- procedures, no collateral requirements, low trans-
monly in Sub-Saharan Africa. Among those who action costs, flexible terms) that suit the needs of
reported any savings activity in the past 12 months, poor women and men. However, limited product
48 percent reported using community-­based sav- offerings and potential unreliability are some of
ings methods”; of these, 34 percent reported hav- their disadvantages. Somewhat more so than
ing saved using only a community savings club institutional providers (discussed in chapter  7),
(that is, not in addition to a formal account) community-based providers are vulnerable to
(Demirgüç-Kunt and Klapper 2012). collapse or fraud, whether because of corruption,

Community-Based Providers 149


Figure 6.1  The Range of Financial Service Providers

Community-based providers Institutional providers

Community-based groups
Individuals Indigenous groups: Registered institutions Regulated institutions
Moneylenders ROSCAs, ASCAs Financial cooperatives Deposit-taking MFIs
Deposit collectors Burial societies SACCOs Savings and postal banks
Pawnbrokers Facilitated groups: Suppliers, buyers State banks
Traders CVECAs NGO MFIs Commercial microfinance banks
Shop owners Savings groups Mutual insurers Non-bank financial institutions
Friends, Family Self-help groups Money transfer companies Commercial insurers
Financial service associations Mobile network operatorsa

Level of formalization

Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = caisses
villageoises d’épargne et de crédit autogérées; SACCOs = savings and credit cooperatives.
a. Mobile network operators are regulated as communication companies; most are not licensed to provide financial services.

lack of discipline, or collective shocks—for exam- type of expense, such as a funeral). Group
ple, a natural disaster or a bad harvest (Robinson members determine the rules that govern the
2001). Borrowing from family and friends can also group.
be associated with stigma or loss of dignity, espe- Facilitated providers are groups (not individu-
cially if borrowers become dependent on others als) that receive external training or assistance,
or over-indebted (Ruthven 2002). typically provided by nongovernmental organiza-
Informal or community-based financial ser- tions (NGOs) or government, to develop and
vice providers can be divided into two broad implement a process for saving and lending. Many
­categories: indigenous and facilitated. forms of facilitated groups have been introduced
Indigenous providers, both individuals and over the years, but perhaps the largest, most well-
groups, emerge within communities with no known are India’s Self-Help Groups (SHGs).
external input or training. Individual providers Most facilitated groups follow a set of procedures
such as moneylenders generally offer basic designed to help them to save regularly, pool their
credit services using their own capital. As local savings, and make loans. Some operate solely
­residents, they offer convenience and a rapid within their community; others federate, borrow
response. Indigenous groups are different; from banks to on-lend to their members, and take
their most common goal is to combine small on other development activities in addition to
sums into bigger ones, the purpose of which financial services. Despite their diversity, facili-
varies with the type of group. A rotating savings tated groups serve people who typically may not
and credit association (ROSCA) pools money to have access to other financial services. They have
circulate among the members in turn, while a a relationship with an external facilitator (often
mutual aid society pools member contributions time-bound) that introduces an approach or
to have funds available to respond to unex- model with procedures and systems to guide their
pected or emergency expenses (often a specific financial activities.

150 The New Microfinance Handbook


Indigenous Providers loans (Demirgüç-Kunt and Klapper 2012). In addi-
tion to personal relations, individual community-­
Individual indigenous providers include money- based providers such as moneylenders or shop
lenders, deposit collectors, informal traders, pawn- owners are common and operate either as licensed
brokers, store owners, and informal money transfer providers or completely informally.
providers. Some traders, processors, and input As part of the local community, moneylenders
­suppliers also operate informally, while others are are not only easily accessible to borrowers, but
more formal in nature (and thus are discussed often have personal relationships that enable
briefly in chapter 7 as well). Indigenous groups them to evaluate the borrower’s repayment
include ROSCAs, accumulating savings and credit capacity. These factors allow for fast transactions
associations (ASCAs), and burial societies. Table 6.1 in locations convenient to the client. However,
summarizes their key characteristics. moneylenders can be very expensive. For exam-
ple, in many countries a standard loan from a
Individual Providers moneylender is a “5/6 loan”—that is, for every
Family and friends are the most common providers five units borrowed, six must be repaid. This
of financial services in the informal sector in all amounts to a periodic (daily, weekly, monthly)
developing-economy regions, but especially in interest rate of more than 20 percent (Helms
Sub-Saharan Africa, where 29 percent of adults 2006). Individuals are often willing to pay high
report friends and family as their only source of prices in exchange for receiving cash quickly and

Table 6.1  Characteristics of Community-Based Financial Service Providers: Indigenous Groups


Individual Community-based groups
(money lenders, deposit Money transfer (ROSCAs, ASCAs,
Characteristic collectors, traders) (hawala systems) burial societies)
Legal form No formal legal form; No formal legal form, May be registered with
adhere to local customs; adhere to local customs; local authorities or
sometimes registered sometimes registered community leaders
Regulation and Typically not regulated; Not regulated Not regulated
oversight sometimes local oversight
or registration
Ownership Owner operated Owner operated Member owned
Governance Self-governing Self-governing Self-governing; sometimes
an elected committee
Target market Poor and very poor needing Poor and very poor needing Poor and very poor needing
credit or a place to save quick and accessible small amounts of credit and
transfer services a safe place to save
frequently
Products Basic credit and savings; Informal money transfer No capital costs; user fees
contractual savings with across geographic to cover operating costs
some collectors distances and profits
Funding Own capital; interest and No capital costs; user fees Member contributions or
fees collected to cover to cover operating costs savings; sometimes external
operating costs and profits and profits borrowing; interest and fees
(no operating costs)

Community-Based Providers 151


c­ onveniently, particularly in an emergency when basis, while money guards generally expect
there are no other options. ­clients to come to them (see box 6.1). Collection
Pawnbrokers are also characterized by a high normally occurs over a specified period of time,
volume of small advances made for a relatively after which the depositor’s savings are returned
short period. In contrast to most moneylenders, net of fees. Fees are charged either as a percent-
pawnbrokers take physical possession of collat- age of the amount deposited or as a flat fee per
eral when lending. In some countries this deposit. Research shows that the amount
practice has become more formalized, with
­ charged is similar to the total cost, direct and
rules, standards, and registration required. Loan indirect, of depositing directly with a bank or
amounts are normally significantly smaller in saving in real assets (Ashraf, Karlan, and Yin
value than the collateral pledged. Given the 2006). Clients may use deposit collectors for
necessary processing, valuing, and storing of
­ various reasons, including convenience, lack of
collateral, a pawnbroker’s transaction costs may connectivity, or cultural restrictions. Deposit
seem high given the small amounts borrowed. collectors provide structure to accumulate sav-
These transaction costs, however, are partly off- ings, offering both safety and discipline. Saving
set by the fact that the pawnbroker does not take with a deposit collector is not without risk, how-
time to evaluate the borrower or monitor the ever, as clients may not be able to access funds
loan (Skully 1994). Loans are made strictly on when needed or the collector may disappear
the basis of collateral, which can be sold to with their savings.
recover the loan amount (most pawnbrokers Shop owners sometimes hold cash they receive
also operate a retail store to sell goods that are from clients who want it out of the house; they
not collected). also often provide credit to trusted clients who
Deposit collectors or money guards—people take goods “on credit” and pay for them at a later
who collect and store savings—are common- date.
place in the developing world. They offer a con- Especially in agriculturally dependent rural
venient way to put cash safely out of reach areas, traders may be important sources of infor-
without having to spend money and time on mal credit for farmers. For example, credit may
travel. Deposit collectors travel to their clients, be extended to purchase raw materials with the
visiting their homes or businesses to collect a promise that they will sell the product back to the
predetermined amount on a daily or weekly trader.

Box 6.1  Ghana’s Susu Collectors

Ghana is home to a large number of susu col- basis. The susu club is a variation on this col-
lectors in the informal sector who go door to lection system, wherein members go to a
door collecting savings for a fee, mostly from designated place on a scheduled day of the
female market vendors and microentrepre- week to deposit their savings with the susu
neurs. Susu collectors have an average of collector, who uses the group format to ser-
150–200 clients and collect deposits at vice a much larger number of clients.
homes within the village on a daily or weekly
Source: Gallardo 2001.

152 The New Microfinance Handbook


While credit and savings are the most because they are discreet and involve little to no
c­ommon services associated with individual paperwork. They are also more accessible, espe-
providers in the informal sector, money transfer cially for those without documentation in the
providers—individuals specializing in transfer- sending country, and may seem more trust-
ring money from one person to another—offer a worthy because they are underpinned by per-
fast, usually safe, and cost-effective way to trans- sonal relationships (see box 6.2).
fer funds domestically and internationally. Individual providers in the informal sector
Informal fund transfer systems vary in structure offer advantages associated with operating inside
and complexity. Hand carrying cash, usually by the community, including accessibility, conve-
migrants who are often family or friends, is the nience, small transactions, and familiarity. They
most basic system and especially common in provide direct cash-in, cash-out services, with all
situations of seasonal or circular migration,
­ transactions taking place on a personal basis usu-
when migrants frequently return to their homes. ally right in the village. This makes transaction
Internationally, cash is physically transferred by costs relatively low, although the price of ser-
couriers; domestically, it is transferred by bus vices is normally quite high. As individual pro-
companies and taxi drivers (Isern, Deshpande, viders are often the only option available, the
and Van Doom 2005). Many senders and poor are forced to accept both their costs and
receivers prefer informal transfer mechanisms risks, including theft and fraud. Association with

Box 6.2  Beyond Carrying Cash: Informal Money Transfer Systems

More sophisticated informal systems exist the payment to the beneficiary upon sub-
under different names around the world, mission of the code.
­including hundi (South Asia), fei-chen (China), After the transfer, hawaladars settle
hui kwan (Hong Kong SAR, China), padala accounts through payment in cash or in
­
(the Philippines), phei kwan (Thailand), and goods and services. They are remunerated by
hawala (the Middle East). Many of these systems,­ senders through a fee or an exchange rate
such as those common in African mineral- spread. Hawaladars often exploit fluctuations
exporting countries like Angola, evolved as in demand for different currencies, which
mechanisms for financing trade and transfer- ­enables them to offer customers better rates
ring net funds against the movement of than those offered by banks (most of which
goods. only conduct transactions at authorized rates
The hawala system used in the greater of exchange). Since many hawaladars are also
Middle East is representative of how such involved in ­businesses where money trans-
systems work. Typically, a migrant makes a fers are necessary, such as commodity
payment to an agent (hawaladar) in the coun- trading, transfer services fit well into their
­
try where he works and lives, and the ­existing activities. Remittances and business
­hawaladar provides a code to authenticate transfers are processed through the same
the transaction. The hawaladar asks his bank accounts, incurring few, if any, additional
counterpart at the receiving end to make operational costs.
Source: Isern, Deshpande, and Van Doom 2005.

Community-Based Providers 153


illegal a­ ctivities is also a risk, even though most tontines (West Africa), chit funds (India), kibati
people are not aware that they are taking place. (Tanzania), stockvel (South Africa), and esusu
Informal providers require minimal documenta- (Nigeria). ROSCAs are the simplest form of finan-
tion and, by definition, are not regulated. cial intermediation: several people form a group
and contribute an agreed amount on a regular
Indigenous Groups basis. At each meeting (or round), the money is
Member-owned community groups have proven collected, and the total is given to one member on
effective in providing basic financial services, a rotating basis. When the last member has
especially in remote areas or urban slums char- received the lump sum, the group can choose to
acterized by inadequate infrastructure and low start a new cycle or disband.
savings and debt capacity. They provide mem- Easy to form and manage, ROSCAs are com-
bers mutual encouragement to save and to use mon in many countries. A study by the Institute
money wisely, as well as an economic safety net for Financial Management and Research in India
to protect them in the event of sudden hardship. estimates that the registered chit fund industry
In so doing, they promote savings discipline, could be as large as 10–50 percent of all lending to
build social capital, increase assets, and decrease priority sectors; the unregistered chit fund mar-
household vulnerability to financial and other ket could be as large as 15 times the registered
shocks. market (Linder 2010).
Poor women and men find these groups easily ROSCAs are structured to allow for financial
accessible because they are local and offer few services overseen entirely by group members.
barriers to entry. Members know each other and Since all members contribute the same amount at
learn to rely on each other to achieve financial each meeting, each individual member accesses
goals together that would be unattainable alone. the same sum of money at some point during the
A common goal of community-based financial life of the ROSCA for use at her discretion.1
groups is accessing a lump sum of money, either Transactions take place only during regularly
through saving or borrowing, where embedded scheduled meetings (often monthly) and are typ-
social relations reinforce repayment. Some ically witnessed by every member. In addition,
groups establish social funds to help members in since no money is retained by the group, often no
times of crisis. This experience of managing records are required (other than possibly the list
funds together and using their collective strength of who is to receive the funds when), and there is
both to enhance household finances and to help no need to safeguard funds. The system further
friends in need builds solidarity within groups— reduces risk to members because it is time
one important reason why people often maintain limited—­typically lasting no more than 12 months.
their membership in community-based groups This mitigates potential losses should a member
even after they have gained access to formal take the funds early and stop contributing. These
financial services. characteristics make the system transparent,
There are three predominant types of indige- flexible, and simple, providing a financial service
nous groups: ROSCAs, ASCAs, and informal well suited to poor communities with low literacy
microinsurers. rates. At the same time, many people who are
better-­off financially also join ROSCAs, both to
Rotating Savings and Credit Associations save for a specific purpose and to take advantage
ROSCAs exist in developing countries around the of the social capital that develops. While ROSCAs
world and are known locally by many names: typically attract more women than men, mixed
merry-go-rounds (Kenya), tandas (Mexico), ROSCAs also exist.

154 The New Microfinance Handbook


However, a ROSCA’s simplicity is counterbal- save regularly, but the combined contributions
anced by risk and lack of flexibility: are not distributed at each meeting; instead, sav-
ings are pooled for the purpose of lending to
• All ROSCA members receive the same amount
members. While all members save, not everyone
of money in a predetermined order. Each must
borrows. Members borrow only when needed, in
wait her turn regardless of need, and there is
amounts that they and the rest of the members
no flexibility to contribute more or less than
are confident will be repaid.
the agreed amount.
Since members do not all transact in the same
• The fund does not grow in value, as no loans way, ASCAs are more complex than ROSCAs.
are made and no interest is paid. Members may borrow different amounts on
different dates for different periods. Interest
­
• Those who are last in line risk not receiving ­payments provide a return on savings that is
their payout if the group disbands. When a shared fairly among the group. ASCAs may be
ROSCA collapses, members who have not yet “time-bound,” with members saving, borrowing,
received their proceeds have no recourse. and repaying for a predetermined amount of
As a result of these limitations, informal sec- time, usually 6–12 months. However, given the
ondary markets may be created, whereby one diversity of indigenous ASCAs, the cycle can
member pays a premium to another member to vary in length, with some choosing to operate
switch turns. These premiums sometimes indefinitely (see box 6.3). Depending on the time
exceed 50 percent or more of the value of the frame and the simplicity of their structure,
proceeds. ASCAs can operate without keeping any records
by periodically dividing the accumulated funds
Accumulating Savings and Credit Associations equally. However, more complicated ASCAs
While still indigenous, an ASCA is a more flexible require bookkeeping, particularly those that
and more complex group savings mechanism deal in large amounts or operate for long periods
than a ROSCA. Like a ROSCA, group members of time.

Box 6.3  Rural ASCAs in India

In northern India, the good ASCA leaders • They take top-up contributions, often
and bookkeepers are known in the commu- Rs100 per share, during start-up.
nity, so setting up a new ASCA involves little • During lean seasons members can defer
more than identifying reliable members contributions by converting the required
with a shared need for financial services. savings amount into short-term loans of up
Further­more, ASCAs have adopted several to two months.
measures to address the seasonality of rural • They are much stricter about loan repay-
cash flows: ment at the end of the cycle (usually
­another surplus season) than they are in
• They start operations during surplus
the middle.
seasons.
Source: Abhijit and Matthews 2009.

Community-Based Providers 155


Informal Microinsurers offer an important service at the community
The third category of community-based financial level. The risk of fraud is potentially high, how-
service providers focuses on the provision of ever, as leaders may abscond with the accumu-
insurance. Community-based organizations that lated funds (Churchill and Frankiewicz 2006).
provide insurance are owned and managed by Stretcher clubs are indigenous community
their members. Their closeness to the market groups, often found in rural areas, that address
enables them to design and market products more health emergencies. Members contribute small
easily and effectively, yet they are disadvantaged amounts weekly or monthly, as determined by
by their small size and scope of operations. They club rules and the structure of the group. When
normally only operate in a limited geographic a member falls ill and needs to be transported to
area, creating a high risk that the same misfortune medical care, the costs of transport and other
will befall a large number of clients at the same ancillary fees associated with medical care are
time (covariance risk). The resulting simultane- covered. In a few cases, members are literally
ous claims can deplete the organization’s fund or carried on stretchers to the appropriate health
substantially reduce individual payments. By def- center, but the club normally provides cash to
inition, they are unlicensed and therefore cannot cover other relevant costs. Stretcher clubs are
obtain reinsurance (see chapter 11). Some managed within the community, with leaders
community-­ based microinsurers create federa- determining formation, rules, contributions, and
tions with others, which can improve oversight benefits.
and management, but this is not common.
According to Roth, McCord, and Liber
Facilitated Groups
(2007, 24), “There are numerous [types] of infor-
mal insurers throughout the poorest 100 coun- In many parts of the world, indigenous ROSCAs,
tries, covering tens of millions of low-income ASCAs, and informal insurance schemes have
people through hundreds of thousands of tiny been enhanced through facilitation (training and
informal groups.” Two of the most common are capacity-building support), often provided by
burial societies and stretcher clubs. nongovernmental organizations (NGOs) or other
Burial societies assist members during bereave- external agencies. Training supports improved
ment. They can consist of a few households or governance, recordkeeping, security, and, some-
several thousand people from different neighbor- times, access to additional services. Examples of
hoods in a large city. A burial society is managed facilitated groups in the informal sector include
at the community level; members draw up a con- Savings Groups (SGs), SHGs, and community
stitution specifying operations, contributions, associations (see table 6.2).
participation, and benefits policies. Members SGs are essentially “time-bound distributing”
make their payments monthly or weekly and— ASCAs. They have grown significantly since their
similar to commercial insurance—do not receive emergence in Africa in the early 1990s. SHGs are
benefits if their payments are not up to date. In generally not time-bound and are most often
the event of death, benefits are paid to the mem- linked to banks for access to wholesale loans.
ber’s family to cover funeral costs. Certain burial They exist in various forms in many countries,
societies lend out the money they collect in but are most common in India. Less prevalent but
order to generate additional resources. Burial more formalized groups include Financial Service
societies offer financing in times of great eco- Associations (FSAs) and caisses villageoises
nomic and personal uncertainty and, as such, d’épargne et de crédit autogérées (CVECAs). While

156 The New Microfinance Handbook


Table 6.2  Characteristics of Community-Based Financial Service Providers: Facilitated Groups
Community
associations
Characteristic SGs SHGs (FSAs, CVECAs)
Legal form May be registered with local May be registered with local Registered with a
authorities or community authorities or community central authority
leaders leaders
Governance Self-governing via an elected Self-governing via an Self-governing via an
committee elected committee elected committee
Target market Poor and very poor, requiring Poor and very poor, Poor and often rural
small amounts of credit and requiring credit and a safe
a safe place to save place to save
frequently
Products Basic savings and credit; Basic savings and credit; Basic savings and
often insurance; sometimes sometimes nonfinancial credit products
nonfinancial services services
Management Self-managed with initial Often outsourced to literate Ongoing external
and reporting technical assistance from members of the community support provided for
a facilitating agency or to an SHG federation a fee
Funding Member savings Member savings and often Member savings and
external credit sometimes external
credit
Sustainability: Groups independent after Need minimum of three Varied sustainability
overall 9–18 months years to function and independence
independence independently; often
federations provide
ongoing support

still community-based, they are larger and behave associated with costly life-cycle events. Regular
more like financial cooperatives, remaining rela- meetings keep financial management at the front
tively informal. They generally rely on ongoing of members’ minds, leading them to think criti-
external management, unlike other community- cally about their fiscal behavior. In short, they
based groups, where the facilitation process nor- learn by doing in a relatively safe and reliable
mally ends (although SHGs may also require environment. Yet some advocates believe that
ongoing assistance). facilitated financial groups can do more to
By offering financial services to members, improve members’ financial capabilities and
many of whom have had limited access to sav- thereby increase financial inclusion. Offering
ings and loans, these facilitated groups support financial education to group members is a proac-
financial inclusion. In the process, they also tive strategy that can enhance the benefits of
build members’ financial capability. Through facilitated groups. Financial education intro-
participation in groups, members have an oppor- duces people to good money management prac-
tunity to save and borrow, to generate more sta- tices with respect to earning, spending, saving,
ble cash flows, and to manage the challenges borrowing, and investing. Thus there is a ­natural

Community-Based Providers 157


fit between the experiential learning linked to 12-month cycles. Members develop their own
group participation and the content of financial rules for meeting frequency (usually weekly, but
education. Financial education can help to sometimes fortnightly or monthly), savings
achieve the following: requirements, and loan terms. In some variants of
Savings Groups, every member saves the same
• Increase members’ knowledge of how to man-
amount, which the group can decide to vary dur-
age money, especially as they have access to
ing the cycle to reflect the seasonality of the local
small loans and lump sums that were not avail-
economy. In other variants, members save
able to them prior to joining the group
through the purchase of shares; the share price is
• Enable members to plan for future expenses decided by the group and cannot be changed dur-
ing the cycle. At each meeting, every member has
• Allow members to compare products, an espe- the opportunity to buy one or more shares, usu-
cially critical skill for those who use their ally to a maximum of five. Their pooled savings
group experience to gain access to formal (the loan fund) are lent to members, with loan
microfinance institutions (MFIs) and banks size often limited to a maximum multiple of sav-
• Help members to understand the costs and ings, often three times. The circulation of capital
benefits of the various forms of mobile money earns interest for the loan fund.
and electronic wallets to which they will At the end of every cycle, the accumulated sav-
increasingly have access (Ledgerwood and ings and earnings are shared among the members
Jethani 2012). according to a formula chosen by the group. The
“share-out” gives members access to lump sums
for investment or other purposes. This end-of-
Savings Groups
cycle distribution simplifies accounting and
Savings Groups began in Niger in the 1990s to
serves as an “action audit,” providing members
improve on traditional ROSCAs. They are now
immediate verification that their savings are
facilitated by numerous international and local
intact and that the process is profitable. After
NGOs, which mobilize groups, train members,
each annual share-out, groups begin another
and supervise their operations for a limited time.2
cycle of saving and borrowing. At this time, mem-
These facilitating agencies introduce governance
bers can leave and new members can join. They
and recordkeeping systems designed to ensure
can make changes, such as adjusting the share
effective self-management. The methodology
price, and may decide to make an exceptional
promotes democratic participation with clear
contribution (that is, a one-off contribution that
and transparent procedures that foster members’
exceeds the normal limit for share purchase) to
trust in the group as a safe place to save and bor-
recapitalize the loan fund. As groups mature, sav-
row. Minimal risk, maximum transparency, a
ings can easily exceed tens of thousands of
profitable structure for saving, access to small
dollars.
loans, and an annual lump sum of capital are the
Groups elect officers annually, including posi-
hallmarks of the SG methodology. Most SGs are in
tions specifically to handle money and hold keys.
Africa, but they are beginning to spread to Asia
A treasurer or recordkeeper records member sav-
and Latin America.3
ings and loans in passbooks, a central ledger, or
both, often with a symbol to accommodate illiter-
Savings Group Methodology ate or innumerate members. Some groups use
Groups are composed of 15 to 25 self-selected memory-based systems that require no paper
individuals and generally operate in nine- to records at all.

158 The New Microfinance Handbook


Security and transparency are essential to suc- fund is set at a level that covers the minimum
cess. Most SGs, but not all, keep their records and emergency needs of the group members and gen-
any extra cash in a strongbox—typically locked erally is not intended to grow.
with keys that are kept by separate group mem-
bers who open the box only during meetings and Role of Facilitating Agencies
in front of all the members present—the only time Facilitating agencies organize SGs and carefully
that group funds are handled. Multiple locks and train and supervise them during their first cycle.
multiple elected key holders minimize the risk Facilitators are trainers, not service providers.
that records or money will be tampered with They do not manage the group’s activities and
between meetings. Members report that they never touch its money or manage its recordkeep-
trust the group because they see what happens to ing. Facilitators train the groups intensively at
their money and receive it all back at the end of start-up, after which they simply supervise proce-
the cycle. dures and routine operations as the group con-
Many SGs also have an insurance fund (often ducts its business. The frequency of visits
referred to as a social fund) that serves a variety of diminishes as the groups demonstrate their abil-
emergency and social purposes according to rules ity to run organized, disciplined meetings and
set by the group. Groups set their own policies for maintain accurate records. Facilitating agencies
the social fund, notably how it is capitalized and are funded by donors and do not generate any rev-
the terms of disbursement (for example, as a grant enue from the group. While SGs are sustainable in
or no-interest loan). The insurance fund is sepa- and of themselves, facilitating agencies may con-
rate from the loan fund, and normally all mem- tinue to provide groups with other development
bers contribute the same amount. The insurance interventions (see box 6.4).

Box 6.4  Savings Groups and Other Activities

SGs are ultimately created to provide ­financial a­ ctivity truly benefit members and constitute
services. However, where launched, they an ­appropriate role for the NGO to play, or is
have grown, through external facilitation and it a way for the NGO to attract additional
spontaneous replication, into a visible net- funding?). Will it undermine the indepen-
­
work of rural groups that increasingly serve dence of Savings Groups? Additional costs,
as a platform for other development (non- ongoing ­dependency on external service pro-
financial) services. They are natural vehicles viders, diversion of group funds to the “ex-
for initiatives ranging from agricultural pro- tra” service(s), and spreading of group re-
duction and crop marketing to training in sources (members’ time, energy, focus, and
­business skills, literacy, and health. Yet the funds) too thinly are risks that practitioners
addition of nonfinancial services to SGs is must consider. Furthermore, with limited
not straightforward. It is important to resources, facilitating agencies face the
­
determine whether the “add-on” is truly
­ ­difficult choice b
­ etween strengthening exist-
driven by demand and to examine the ing Savings Groups with additional program-
­incentives for adding it (that is, does the ming or creating new ones.
Source: Ashe and Nelson 2012; Rippey and Fowler 2011.

Community-Based Providers 159


Facilitating agencies have assumed the respon- through community-based trainers (CBTs), also
sibility for tracking SG performance using a known as village agents or replicating agents—
standardized management information system
­ individual members whom the facilitator trains
(see chapter 13). In addition, they report to the to operate independently. Eventually, the paid
Savings Groups Information Exchange (SAVIX), facilitator shifts to a more supervisory role and
an online database that provides transparent and CBTs are paid directly by the community, either
standardized data on SG performance and out- through cash, shares, or in kind (such as free labor
reach (see chapter 5). during planting season). This fee-for-service
model is taking hold in many variations across
Savings Group Sustainability and multiple SG programs. It significantly reduces
Replication facilitation costs and establishes a market-based
Sustainability and simplicity are key strengths of system for communities to promote new groups
this model, enabling self-management and spon- and support existing ones after the facilitating
taneous group replication. After an initial training agency leaves (see box 6.6).
period, SGs manage themselves; early research While fee-for-service seems like the next log-
indicates that most groups continue to operate ical step from a market development perspec-
indefinitely. Furthermore, members introduce tive, it is not yet clear whether the market for
the model to others, leading to the multiplication training services will be sufficient in the longer
of groups; an investment in one group often term to support local trainers. If replication is
results in the formation of two or three others robust, the most cost-effective option for sup-
(Anyango et al. 2007; see box 6.5). porting the emergence of SGs may be to invest in
Most facilitating agencies build into their building a critical mass of them and to rely on a
methodology a system of purposeful replication combination of spontaneous fee-for-service and

Box 6.5  Paths to Savings Group Replication

Field research in Kenya found that SGs replicate “spontaneously” without any external facilita-
tion in the following ways:
• Fission of large groups. As groups add members, they get unwieldy and sometimes split into
two or more groups.
• Splinter groups. Members object to some aspect of their group and start a new one.
• Social entrepreneurs. Dynamic group members form additional groups, usually as a civic
service, but sometimes for a fee.
• ROSCA upgrading. An SG member introduces the approach to her ROSCA or another group.
• Natal village. Women who move to their husband’s village visit their families back home and
introduce the SG model.
• Inspired by. Neighbors carefully observe meetings and copy the procedures.
• Clusters. Groups often meet at the same time and in the same place, forming a cluster of
groups. The visibility and dynamism of clusters attract new members, encouraging the
formation of new groups.
Source: Rippey and O’Dell 2010; Digital Divide Data 2011.

160 The New Microfinance Handbook


Box 6.6  Fee-for-Service: Variations on a Theme

In India, the Aga Khan Foundation initially which they work are prepared from the begin-
­operated its SG program through local partner ning for the eventuality that they will assume
NGOs using paid staff. However, as the pro- responsibility for paying the private service
gram matured, the local partners began using provider.
CBTs to ensure continued expansion and sus- In western Kenya CARE piloted the use of
tainability. CBTs are remunerated at a rate of independent contractors—both individual entre­­
Rs 1 per member per meeting and are paid preneurs and faith-based organizations—
exclusively by members of the groups they ­that contracted their own CBTs to mobi­lize
mobilize and train. The funds are deposited in and train SGs in return for a fee per successful
a separate bag held in the cash box and may group trained. The pilot dramatically reduced
be withdrawn by the CBT at any meeting. the cost per member trained, and the critical
In Kenya, Uganda, and Tanzania, Catholic mass of SGs created under the project has
Relief Services has built a private commer- raised their visibility, whereby communities
cial system for training and supporting SGs. are slowly agreeing to pay the trainers to help
It hires field agents who spend one year them to establish their own groups. Further
learning to perform their duties. After a rigorous demand for CBT services comes from exist-
certification process, these agents become ing groups seeking intermittent assistance
­private service providers. The communities in even after graduation.
Source: David Panetta, Aga Khan Foundation; Ferrand 2011.

voluntary replication to spur group expansion lockbox, at significant risk.4 However, the need
(Ferrand 2011). for formal savings vehicles to manage liquidity
may exist throughout the cycle; according to
Financial Linkages SAVIX, in the first quarter of 2012, globally,
Although advocates of SGs have championed loans outstanding represented only 53.2 percent
their simplicity—locally based, accessible, of total performing assets of SGs, indicating that
transparent, autonomous financial service pro- there may be significant excess liquidity.5
viders that are free of debt obligations to exter- Innovations are emerging that will enable SGs
nal lenders—as groups mature, access to formal to deposit excess liquidity through members’
financial services may be important. SGs do mobile phones (see box 6.7).
not, nor are they designed to, meet all the finan- While SGs have been linked to other financial
cial needs of their members, and some of their service providers for savings, credit, payments,
limitations can be addressed by linking to for- and, in some cases, insurance products, the wis-
mal financial service providers. Among the dom and benefits of doing so are still debated.6
most urgent needs is the ability to store cash Advocates suggest that such financial linkages
assets safely; this arises primarily near the end put Savings Groups one step higher on the ladder
of a cycle, when all loans are due in anticipation to formal financial inclusion, while others are
of the share-out. At this time, groups have been concerned about elite capture, loss of autonomy,
known to hold thousands of dollars in their and group sustainability, arguing that SGs are

Community-Based Providers 161


Box 6.7  Bank Linkages through Mobile Phones

A partnership between CARE, Equity Bank, and allows groups the same type of secure mobile
Orange allows CARE Savings Groups in Kenya access.
to open an Equity Bank account (pamoja) and The second feature, which was in the final
deposit cash into an interest-bearing group stage of testing in 2012, is that all group mem-
savings account without visiting a physical bers can register their cell phones enabling
branch. This is made possible by the extensive them to receive a text message announcing
network of Equity Bank and Orange agents any transaction made to the group account.
throughout Kenya. This assures them that no one has tampered
To ensure account security, CARE, Orange, with the group’s resources between
and Equity Bank developed a first-of-its-kind meetings.
security verification system that requires Equity Bank’s pamoja savings account of-
three members to provide personal identifica- fers a safe place to save, a 2.5 percent annual
tion numbers for every transaction—the elec- interest rate, no account maintenance or
tronic equivalent of the three-padlock metal deposit fees, and minimal withdrawal fees.
­
lockbox that prevents any one person from SGs have 24-hour access to their accounts us-
accessing the group’s cash. Although individu- ing the Eazzy 24/7 mobile phone platform.
als have accessed bank accounts with mobile Using the same system, Equity will soon offer
phones before, this is the first system that loans to SGs.
Source: CARE 2012; www.savings-revolution.org.

financial service providers in their own right and Self-Help Groups


should be left alone. These debates center on the Initiated in India in the 1980s, SHGs are groups of
following questions: 10–20 people—the vast majority of whom are
women and marginal farmers or landless
• Should linkages be created for the purposes of
agricultural laborers—who save and borrow
­
savings, credit, or both?
together. They are facilitated by a diverse set of
• Should the focus be on linking individual external organizations that include NGOs, farm-
members only to formal financial institutions ers clubs, government agencies, and even banks
or on linking the whole group? (see box 6.8). These facilitators are collectively
referred to as self-help promotional institutions.
• Is there a way to preserve the original group Initially, SHGs function much like indigenous
and its characteristics, while simultaneously ASCAs; members save regularly and use pooled
fostering new relationships with other savings for loans. However, within a relatively
providers? short amount of time (six to eight months), most
• What are the roles and responsibilities of the access credit from banks. In fact, they are essen-
facilitating agency in financial literacy and tially credit driven; they save primarily as a pre-
consumer protection as it fosters formal requisite for a bank loan. They also serve as a
linkages? community platform from which women become

162 The New Microfinance Handbook


Box 6.8  Banks as Facilitators

In a program of the Oriental Bank of Commerce loans to cover the costs of funds, support
in India, the only role of the bank’s Rudrapur services, and overhead. Individual “facilitators”
branch is to service SHGs. The branch’s two provide day-to-day transaction and bookkeep-
officers oversee about 1,000 five-member ing services directly to groups. Each facilitator
SHGs and perform most support functions. is contracted by about 200 SHGs and is paid
The bank charges groups 11 percent a year on 1 percent of each group’s outstanding loans.
Source: Isern et al. 2007.

active in village affairs, stand for local election, tribes. Self-Help Groups are often single-caste
or take action to address social or community groups. A study of 214 SHGs in four states found
issues, such as the abuse of women, alcohol, the that two-thirds of the groups sampled are single
dowry system, schools, and local water supply caste, reflecting both the practical advantages of
(Sinha et al. 2010). neighborhood proximity and the greater ease of
Self-Help Groups have achieved impressive organizing people by affinity (EDA Rural Systems
outreach—by 2010, nearly 7 million groups and APMAS 2006). The formation of SHGs—in
were serving more than 80 million members, which villages and with whom—is influenced by
making them the dominant form of microfi- the targeting policies of the self-help promotional
nance in India and perhaps the world. Although institutions. Some target only poor areas and poor
pioneered by NGOs, the SHG model was taken people, some have a softer target of some poor
to scale by the National Bank for Agriculture people, and some pursue a community-inclusive
and Rural Development (NABARD), a govern- approach (EDA Rural Systems and APMAS 2006).
ment wholesale lender, through its flagship
Self-Help Group Bank Linkage Program, intro- Self-Help Group Methodology
duced in 1992 (Lee 2010).7 The potential for Members join SHGs both to save (at least initially)
this relationship was catalyzed by govern- and to access loans. During the initial months,
ment-mandated, priority sector lending for members focus on building the group fund to
banks (40 percent of all bank credit must be increase the amount available for internal lending
lent to borrowers from priority sectors such as and, more important, to become eligible for larger,
agriculture, microenterprises, and low-­income external loans. Once the group has saved the
populations). Banks, most of which are govern- amount that the bank requires to access whole-
ment owned, maintain an active presence in sale loans, members often stop saving with the
densely populated rural areas, facilitating group (Isern et al. 2007).
access by rural clients.8 Since launching the An SHG typically qualifies for a bank loan
program, NABARD has lent billions of dollars after it has deposited savings with the bank for a
to hundreds of banks to on-lend to SHGs, sig- minimum of six months. Banks make one loan to
nificantly expanding their number. the group, which on-lends to members. Initial
SHG membership is open to all and covers all loans usually start at Rs 10,000 (about US$186
social groups, including scheduled castes and as of October 2012), with repayment within six

Community-Based Providers 163


months to one year. Banks charge SHGs 8–10 Self-Help Group Formation and
percent interest, and groups typically charge Technical Assistance
members 24 percent. Subsequent loans can be Self-help promotional institutions train, moni-
larger and longer term (three to five years). tor, and support SHGs and often help with
Loan size is normally based on a ratio of the recordkeeping. Most are funded by government
group’s savings on deposit, and the average is 4:1; banks to carry out this role, which varies greatly
however, this ratio varies from 1:1 to as high as by institution; some are committed to grass-
20:1 (Isern et al. 2007; EDA Rural Systems and roots social mobilization and change, while oth-
APMAS 2006; Srinivasan 2010). ers are more narrowly focused on establishing
Because members’ savings are used as a permanent financial services at the village level.
guarantee against funds borrowed from the Their diversity is reflected in the activities they
bank, they have limited access to them. Generally, offer. In addition to training and facilitating
SHGs “roll over” or retain some earnings at the bank linkages, they may offer services related to
end of the cycle. That they do not “cash out” reproductive health, conflict resolution, school
entirely allows them to have longer loan terms, construction, sanitation, watershed manage-
but requires more sophisticated bookkeeping ment, and social initiatives to advance the dis-
(Lee 2010). The fact that they are not time- enfranchised (for example, advocating for the
bound also distinguishes them from other types rights of lower castes, against child marriage,
of ASCAs. Yet with millions of SHGs, diversity is and for educating female child laborers).9
a given; some SHGs do cash out on a regular Similar to participation in an SG, participation
basis, and many do not take external loans. An in an SHG sometimes leads to employment, as
estimated 25 to 30 percent of SHGs are not individuals can also serve as facilitators for other
linked to a bank (Lee 2010). groups (see box 6.9).

Box 6.9  Individuals as Facilitators

Sudesh is a “promoting individual” who works manager said that he needed a few groups,
directly with more than 30 SHGs, most of so I gave him a few [in exchange for Rs 800
which she has “given” to a local bank manager for each SHG]; then DRDA [the District
or a government program to contribute to their Rural Development Agency] needed some
targets: groups, so I gave them some [also for Rs
800 for each SHG]. Now, DRDA’s targets
I was leader of a group under the govern-
are achieved, so they don’t need any more
ment’s program. The staff asked me to
groups, and the banker needs SHGs from
form a few more groups in my village . . .
time to time. I still have eight groups. I
Since then, I have promoted more than
charge each group Rs 20 a month for writ-
30 groups in neighboring villages. This is
ing the records, which gives me a good
my main job, since I am working with all
income.
these groups at the same time. The bank
Source: EDA Rural Systems and APMAS 2006.

164 The New Microfinance Handbook


In addition to forming SHGs, some promo- technical assistance (such as help with bookkeep-
tional institutions contribute grants or revolving ing), and the lender often maintains a dedicated
funds to member savings for internal lending staff for assisting SHGs.
(EDA Rural Systems and APMAS 2006). Although
most do not intermediate loan funds from the Challenges
bank to the group, they can be instrumental in Well-managed SHGs can be profitable in their
establishing the linkage; on average, SHGs rely on quest to bring financial services to the poor and
their assistance for three years before being able marginalized. Their promotional costs compare
to operate independently. favorably with those of other approaches to
The government has encouraged SHGs to microfinance (Isern et al. 2007). Yet few are well
federate into larger organizations to ease the
­ managed, and many perform poorly. Their
withdrawal of promotional institutions from their recordkeeping systems are complex, partly due
financial and nonfinancial roles. Such federations to the exigencies of external loans and partly due
can also support banks that wish to on-lend to to the fact that most carry on their financial
SHGs by serving as an intermediary and provid- activity from year to year without stopping peri-
ing a single point of contact. In this role, some odically to distribute funds. Without full cash-
federations intermediate funds, borrowing from out, SHGs need to have some level of transactional
banks to on-lend to member groups (Srinivasan analysis to keep track of different terms and pay-
2010). They also build capacity, monitor perfor- ments, arrears (sometimes exceeding one year),
mance, and provide policy guidance. and the complexity of liquidity and risk manage-
Although several state governments actively ment (Lee 2010). The number of records, and the
promote and fund SHG federations (there are amount of work to maintain them, prompts many
1,100 in Andhra Pradesh, 12,000 in Tamil Nadu, to rely on their promotional institution or feder-
and 7,800 in Orissa) with the expectation that ation to keep their records. One specialized sup-
banks will provide them with loans for on-­ port institution for SHGs—the Andhra Pradesh
lending, federations face significant financial Mahila Abhivruddhi Society—reported in 2002
and, especially, organizational challenges that the records of only 15 percent of SHGs were
(Srinivasan 2010; Lee 2010). Furthermore, some good, while the records of nearly 40 percent of
question their added value, given that India has SHGs in Andhra Pradesh were grossly neglected
the largest network of bank branches in the or nonexistent (Isern et al. 2007). Furthermore,
world, and most villages are close to some type since external loans are linked to savings, SHGs
of branch. Some have suggested that the ratio- have a strong incentive to overstate their savings
nale for federating may be more social than and understate their losses (Matthews and Devi
financial. Federating affords groups more visibil- 2010). Researchers have called recordkeeping
ity and gives them experience with public inter- the “dark side of Self-Help Groups” (EDA Rural
actions. Yet to achieve either financial or social Systems and APMAS 2006).
goals, SHG federations require better gover- Other issues challenging the performance of
nance, staffing, and organizational processes and SHGs include high default of intragroup loans
systems (Sinha et al. 2010). (the repayment rates on internal loans within
Thus SHGs receive organizational, opera- groups are reportedly as low as 35 to 40 percent)
tional, and financial support from multiple and the equal distribution of bank loans among
sources. The facilitating agency (NGO, govern- members, with those who receive more than they
ment, or bank) usually employs a field agent to are able to invest lending the excess to others
train and monitor the group, the federation offers (Srinivasan 2010).

Community-Based Providers 165


However, the Indian SHG model remains financial service needs of the rural poor. In addi-
unique for its sheer size and outreach to the poor; tion to providing access to credit, they are the entry
SHGs are the link between individuals and rural point for many social activities (see box 6.10).
regional banks, commercial banks, and coopera-
tives. Although community based, they illustrate Other Facilitated Groups
how the government, formal banks, and organized There have been dozens of other models for
poor clients can work together to respond to the community-based groups whose purpose is to

Box 6.10  Self-Help Groups: A Holistic View

Several key factors, rooted in India’s banking large-scale employment guarantee scheme
policies, explain how SHGs have flourished, delivers payments through them; social
engaging more than 70 million people. First, campaigns by local leaders use them as
the Reserve Bank of India mandates that their organizational base; and politicians of
banks must have 40 percent of their portfolios all parties and ideologies woo them in an
in a “priority sector,” and SHGs are one of the effort to influence opinion and win elec-
­
options for meeting these requirements. tions. From the top levels of government
Second, a NABARD directive in 1993 ­allowed policy and planning through to the local pan-
informal, unregistered SHGs to be treated as chayat (village government), SHGs have
“legal persons,” enabling banks to open ­become one of the most visible platforms
­accounts and transact business with them. for women’s development and empower-
Overall, approximately 70 percent of SHGs ment; they are a household name for public
are linked to a bank for loans, and more than and development programs alike.
16 percent of all bank lending to priority sec-  SHGs represent a counterpoint in the
tors is done through them. ­microfinance world—a model that is owned
As one of India’s national flagship pro- and managed by the members themselves,
grams, SHGs are a key government strategy encompassing a large set of small, decentral-
for offering financial services to unbanked ized, informal cooperative organizations,
communities and expanding financial inclu- enabled, actively supported, promoted, and
­
sion, particularly directed toward women. resourced by the state, with women as its
Perhaps more important, they are increas- central focus. However, the realization of this
ingly used to deliver many other develop- vision varies significantly: Some civil society
ment schemes and programs. As a organizations and women’s initiatives empha-
­result, they have become much more than size “self-help” and empowerment; others
informal financial groups. Many are engaged focus on a more minimalist financial inclusion
collectively in common livelihoods, market- numbers game, with greater emphasis on
ing, and procurement activities. Health and delivering loans. Capacity and performance
­
nutrition workers use them to deliver ser- vary vastly. While the SHG model is relatively
vices; SHGs often double as the local simple, its implementation has evolved in
­water management committee; schemes complex ways, and the groups have become
for low-cost housing, pensions, and group important institutions for social, political, and
insurance are delivered through them; a economic participation.
Source: Anuj Jain, Coady Institute.

166 The New Microfinance Handbook


facilitate saving and lending for groups who expe- Membership requires a purchase of shares, which
rience barriers (for example, distance, cost, trust) can be sold to other members but not withdrawn.
to accessing more formal providers. Some are very FSAs are governed by a general assembly of share-
small, limiting participation to 20–30 members; holders, which elects a board of directors and an
others federate small groups in order to serve audit committee. Their legal form also varies from
hundreds. Two examples are Financial Service country to country. In some countries they are not
Associations (FSAs) and CVECAs (self-managed registered at all, while in others they are regis-
village savings and credit banks) in Africa. tered with the relevant government ministry as
community-based organizations or cooperatives.
Financial Service Associations The original goal—to become self-reliant fol-
Introduced in Benin in 1997 with support from the lowing initial training and oversight—has been
International Fund for Agricultural Development, compromised by poor management and weak
FSAs are member-owned and -operated institu- governance. Managers often lack the basic
tions at the village level. With external technical capacity and experience needed to manage a
support, they have been replicated in several financial institution; the absence of a clear sepa-
countries—­Guinea, Mauritania, Kenya, Uganda, ration of responsibilities between management
and Sierra Leone—producing variations to the and governance has led to problems such as
model. Some leverage their equity base, built from ­disbursing loans to friends, relatives, or influen-
member shares, with loans from commercial banks tial board members who may not feel obliged to
(Helms 2006). In Sierra Leone, some offer long- repay them. To counter these challenges, most
term credit and group approaches to m ­ arketing FSAs have management contracts under which
goods and produce (IFAD 2010). Membership can an external service company is hired to help to
include groups and institutions, such as savings manage the operations (see box 6.11). Others,
clubs, schools, churches, and health clinics. They particularly in Uganda, have transformed into
range in size from 300 to 10,000 members. financial cooperatives.

Box 6.11  Financial Service Associations in Kenya

In Kenya, the K-Rep Development Agency KFS also assists with market research and
(KDA) promotes FSAs; from 1997 until 2007, 77 product development, strategic planning,
associations with a total of 34,000 members business development, branding, and mar-
were established in 17 districts—including the keting. The aim is to achieve sustainable
far north, where agro-ecological conditions are management and oversight. Marked improve-
very challenging, livelihoods are predominantly ment in performance has led to increased
livestock based, and population densities community confidence in and use of FSAs. In
are low. With support from the Financial 2012 the KFS network included 44 FSAs,
Sector Deepening Project, the KDA regis- totaling approximately 122,000 members.
tered K-Rep Fedha Services (KFS), a ­limited FSD Kenya estimates that there are an addi-
liability company, to provide both manage- tional 80,000 members in 40 associations
ment services and supervision to the associ- outside of the KFS network.
ations for a fee. In addition to training, the
Source: FSD Kenya 2007; communication with Felistus Mbole, Financial Sector Deepening Project, June 2012.

Community-Based Providers 167


CVECAs  3. As of May 2012, SGs globally counted more than
CVECAs are member-based organizations with 6 million members. http://savingsgroups.com.
an emphasis on remote rural areas. Originally  4. Steps for managing this risk include dividing
promoted by the French-based Centre Interna­ up the group funds among members until the
tional de Développement et de Recher­che, they share-out date or storing them in a govern-
grew out of an interest in improving the tradi- ment office.
tional model of cooperatives in West Africa.  5. This result is based only on SGs that are
CVECAS are member-based microfinance inter- currently trained and monitored by facilitating
agencies. Over time, the level of loan activity
mediaries facilitated by external technical sup-
varies significantly depending on local market
port. They are designed to operate in rural areas
opportunities and access to other financial
with clients who are primarily subsistence service providers. At the same time, in a
­farmers, with minimal nonfarm income. While research sample tracking 332 groups in
most CVECAs have fewer than 250 members, 33 projects, loans as a percentage of outstanding
they achieve flexibility and economies of scale assets were significantly higher, at 81 percent.
by networking together into regional federations  6. This section draws from Ledgerwood and
(Chao-Béroff n.d.). CVECAs were first devel- Jethani (2012).
oped in the Dogon region of Mali in the late  7. The growth of SHGs has been most robust
1980s and have been replicated in other coun- in the south; more than 50 percent of such
tries in Africa (Cameroon, The Gambia), adapt- groups in the NABARD program are found in
ing the original model to suit the local the state of Andhra Pradesh, where
environment. In The Gambia, they are known as 72 percent of households belong to one.
village savings and credit associations. Their pri- Here, the State Credit Plan allocated
mary role is to provide safe and easy access to 24 percent of credit for lending to SHGs,
possibly the highest level of support
savings, offering both current accounts and term
available to any type of community-based
deposits, as well as loans. Some of these groups
group in the country. As much as 65 percent
also take on external credit, distorting the sav- of the total loan exposure of some branches
ings incentives and creating another set of chal- was to SHGs (Srinivasan 2010).
lenges around repayment, ownership, and  8. In a study of 214 SHGs in nine districts
vitality of the groups. Many also suffer from in India, the average distance to a bank was
weak governance, a common issue for many 3.5 kilometers (EDA Rural Systems and
financial service providers (Secka 2011). APMAS 2006).
 9. A study of 214 SHGs found that 62 percent
were engaged by their promotional institution
Notes in a “microfinance plus development” model;
in Andhra Pradesh, the proportion rose
 1. Many ROSCAs form expressly to help
to 90 percent (EDA Rural Systems and
members to purchase the same item—for
APMAS 2006).
example, mattresses, cookware, solar lamps,
or iron roofing sheets.
 2. At the time of writing, well-known interna- References and Further Reading
tional NGOs including CARE, Catholic Relief
Services, Oxfam America, Freedom from * Key works for further reading.
Hunger, the Aga Khan Foundation, Plan Abhijit, Sharma, and Brett Hudson Matthews.
International, and World Vision were 2009. “Village Financial Systems in Northeast
facilitating SGs. India.” Focus Note 21, MicroSave India, July.

168 The New Microfinance Handbook


Anyango, Ezra, Ezekiel Esipisu, Lydia Opoku, Ferrand, David. 2011. “Keynote Paper 1:
Susan Johnson, Markku Malkamaki, and Chris Strengthening Financial Service Markets.”
Musoke. 2007. “Village Savings and Loan PowerPoint presentation at M4P Hub conference
Associations: Experience from Zanzibar.” Small “Developing Market Systems: Seizing the
Enterprise Development Journal 18 (1): 11–24. Opportunity for the Poor,” Brighton, U.K.,
*Ashe, Jeffrey, and Candace Nelson. 2012. November 7–9. http://www
“Introduction.” In Savings Groups at the .m4phub.org/userfiles/file/David%20
Frontier, ed. Candace Nelson. Washington, DC: Ferrand%20Empress.pdf.
SEEP Network, November. FSD (Financial Sector Deepening) Kenya. 2007.
Ashraf, Nava, Dean Karlan, and Wesley Yin. 2006. Annual Report. Nairobi: FSD Kenya.
“Deposit Collectors.” Advances in Economic Gallardo, Joselito. 2001. “A Framework for
Analysis and Policy 6 (2): Article 5. http://www Regulating Microfinance Institutions: The
.bepress.com/bejeap/advances/vol6/iss2/art5. Experience in Ghana and the Philippines.”
Ballem, A., and R. Kumar. 2010. “Savings Financial Sector Development Department,
Mobilisation in SHGs: Opportunities and World Bank, Washington, DC, November.
Challenges.” Focus Note 44, MicroSave India. Helms, Brigit. 2006. “Access for All: Building
http://www.microfinancegateway.org/gm/ Inclusive Financial Systems.” CGAP,
document-1.1.6347/IFN_44_Savings_ Washington, DC.
Mobilisation_in_SHGs.pdf.
Helms, Brigit, and Douglas Pearce. 2001.
CARE. 2012. “CARE, Equity Bank, and Orange “Financial Service Associations: The Story So
Launch Partnership to Connect Community Far.” CGAP, Washington, DC.
Savings Groups to Banks Using Mobile Phones.”
Press release, CARE, Nairobi, March 16. IFAD (International Fund for Agricultural
Development). 2010. “FIDAction in West
Chao-Béroff, René. n.d. “Cooperatives and and Central Africa.” IFAD Newsletter
Community-Based Financial Systems.” 18 (October).
CGAP, Washington, DC. http://www.cgap
.org/gm/document-1.9.2310/africaday_ Isern, Jennifer, Rani Deshpande, and Judith Van
Theme4.pdf. Doom. 2005. “Crafting a Money Transfers
Strategy: Guidance for Pro-Poor Financial
*Churchill, Craig, and Cheryl Frankiewicz. 2006.
Service Providers.” Occasional Paper 10, CGAP,
Making Microfinance Work: Managing for
Washington, DC.
Improved Performance. Geneva: International
Labour Organization. *Isern, Jennifer, L. B. Prakash, Syed Hashemi,
Robert Christen, and Gautam Ivatury. 2007.
*Demirgüç-Kunt, Aslı, and Leora Klapper.
“Sustainability of Self-Help Groups: Two
2012. “Measuring Financial Inclusion: The
Analyses.” Occasional Paper 12, CGAP,
Global Findex Database.” Policy Research
Washington, DC.
Working Paper 6025, World Bank,
Washington, DC. Johnson, S., M. Malkamaki, and K. Wanjau. 2005.
Digital Divide Data. 2011. “Results of Study of “Tackling the ‘Frontiers’ of Microfinance in
Post-Project Replication of Groups in COSALO Kenya: The Role for Decentralized Services.”
I.” FSD Kenya, Nairobi. Decentralised Financial Services, Kenya.
*EDA Rural Systems and APMAS (Anhdra Pradesh *Ledgerwood, Joanna, and Alyssa Jethani. 2012.
Mahila Abhivruddhi Society). 2006. “Self-Help “Savings Groups and Financial Inclusion.” In
Groups in India: A Study of the Lights and Savings Groups at the Frontier, ed. Candace
Shades.” EDA and APMAS, Gurgaon and Nelson. Washington, DC: SEEP Network.
Hyderabad. http://www.edarural.com/ Lee, Nanci. 2010. “Community-Based Financial
documents/SHG-Study/Executive-Summary.pdf. Services: African Savings Groups vs. Indian

Community-Based Providers 169


Self-Help Groups.” Unpublished report, Aga World’s 100 Poorest Countries. Appleton, WI:
Khan Foundation. MicroInsurance Centre.
Linder, Chris, with contributions from Denny *Rutherford, Stuart, with Sukhwinder Arora. 2009.
George. 2010. “Who Says You Can’t Do The Poor and Their Money. Updated version.
MicroSavings in India? Part 1: Community- Bourton on Dunsmore, U.K.: Practical Action
Based/Owned.” Focus Note 45, MicroSave Publishing.
India, July. Ruthven, O. 2002. “Money Mosaics: Financial
Matthews, Brett H., and Trivikrama Devi. 2010. Choice and Strategy in a West Delhi Squatter
“SHGs Should Balance or Break.” Focus Settlement.” Journal of International
Note 19, MicroSave India. Development 14: 249–71.
*Rippey, P., and B. Fowler. 2011. “Beyond Financial Secka, Ndegene. 2011. “Economic Challenges
Services: A Synthesis of Studies on the Impending Gambian Entrepreneurship.”
Integration of Savings Groups and Other Today—The Gambia’s Quality Newspaper,
Development Activities.” Aga Khan February 1. http://microfinanceafrica.net/tag/
Foundation. www.akdn.org/publications/2011_ visaca/.
akf_beyond_financial_services.pdf. *Sinha, Frances, Ajay Tankha, K. Raja Reddy, and
Rippey, Paul, and Marcia O’Dell. 2010. “The Malcolm Harper. 2010. Microfinance Self-Help
Permanence and Value of Savings Groups in Groups in India: Living Up to Their Promise?
CARE Kenya’s COSAMO Programme.” Savings London: Practical Action Publishing.
Groups Learning Initiative, Aga Kahn Skully, Michael T. 1994. “The Development of the
Foundation. Pawnshop Industry in East Asia.” http://library
Robinson, Marguerite. 2001. The Microfinance .wur.nl/way/catalogue/documents/FLR21.pdf.
Revolution: Sustainable Finance for the Poor. *Srinivasan, N. 2010. Microfinance India: State of
Washington, DC: World Bank. the Sector Report 2010. New Delhi: ACCESS
*Roth, Jim, Michael McCord, and Dominic Liber. Development Services and Sage Publications
2007. The Landscape of Microinsurance in the India.

170 The New Microfinance Handbook


CHAPTER 7

Institutional Providers
Joanna Ledgerwood

Chapter 1 provides an overview of the types of financial services to poor women and men include
financial service providers within the core of the nongovernmental organization (NGO) microfi-
financial ecosystem. Chapter 6 focuses on nance institutions (MFIs), financial cooperatives,
­community-based providers that operate primar- formal commercial microfinance banks, special-
ily in the informal sector. This chapter focuses on ized MFIs and other non-bank financial institu-
institutional providers—those that are more for- tions (NBFIs) such as insurance and leasing
mal in nature; that is, they generally have brick companies, as well as payment service providers.
and mortar branches (but not always), incur They can be found on the right side of figure 7.1.
operating expenses, generate revenue, maintain These institutions differ in their organiza-
financial accounts (including producing financial tional structure and governance, the types of
statements), and are usually registered and often products and services offered, their legal form,
regulated. and the associated supervision by authorities.
A financial institution is a collection of Although they may lack the flexibility and prox-
assets—human, financial, and other—combined imity of community-based providers, they often
to perform activities such as granting loans, can offer a broader variety of products and ser-
underwriting insurance, or mobilizing deposits. vices. The types of financial products and services
Projects are not institutions—institutions serve that a provider offers are influenced by its legal
a permanent function within the core of a mar- structure and related regulation (if applicable),
ket system. Financial institutions that provide capacity, mandate, and target market. Most, but

Contributions to this chapter were made by Julie Earne and Peter McConaghy.

Institutional Providers 171


Figure 7.1  The Range of Financial Service Providers

Community-based providers Institutional providers

Community-based groups Registered institutions


Individuals Regulated institutions
ROSCAs, ASCAs Financial cooperatives
Moneylenders Deposit-taking MFIs
Burial societies SACCOs
Deposit collectors Savings and postal banks
Savings groups Suppliers, buyers
Pawnbrokers State banks
Self-help groups NGO MFIs
Traders Commercial microfinance banks
Financial service Mutual insurers
Shop owners Non-bank financial institutions
associations Money transfer companies
Friends, family Commercial insurers
CVECAs Mobile network operatorsa

Level of formalization

Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = caisses
villageoises d’épargne et de crédit autogérées; SACCOs = savings and credit cooperatives.
a. Mobile network operators are regulated as communication companies; most are not licensed to provide financial services.

not all, financial service providers provide while microfinance banks tend to take a few years
credit—either to their members, as with financial to break even because they need to invest in infra-
cooperatives, or to the public at-large, as with structure and develop their market. To date,
banks and NGOs. Most nonregulated institutions microinsurance providers have found it very diffi-
and even some regulated NBFIs (finance compa- cult to reach sustainability.
nies, insurance companies) are generally not This chapter discusses the types of institutions
allowed to mobilize and intermediate savings that provide financial services to poor women
from the public. However, financial cooperatives and men. Institutional management issues, such
can normally intermediate deposits within their as human resource management, product devel-
membership. Although some banks, MFIs, and opment, social performance monitoring, and
cooperatives sell insurance, this product is largely financial reporting and risk management, are dis-
restricted to insurance companies, as is insurance cussed in chapters 14 and 15.
underwriting. In some countries, banks, regu-
lated MFIs, and some mobile network operators,
Characteristics of Financial
in addition to institutions licensed as money
Institutions
transfer companies, provide payment services
and other transaction accounts. Institutional pro- A financial institution’s structure is determined
viders generally require more sophisticated oper- by its legal form, its ownership and governance
ations than informal providers, which often mean structure, the degree to which it is supervised by
professional staff and relatively more complex the state, and the types of clients it serves. These,
systems. The financial sustainability and inde- in turn, influence an institution’s product offer-
pendence of different providers vary primarily in ing, financial management, reporting needs,
relation to time and, in some cases, objectives. funding sources, and overall financial sustainabil-
NGO MFIs and transforming MFIs take time to ity and independence. Table 7.1 summarizes the
reach sustainability, depending on their target key characteristics of institutional financial ser-
market, support provided, and overall mission, vice providers.

172 The New Microfinance Handbook


Table 7.1  Characteristics of Institutional Financial Service Providers
Institutional Providers

Regulation Management Sustainability


Type of and and and
provider Legal form oversight Ownership Governance Client type Products reporting Funding independence

Financial Registered Credit unions Owned by Board of A range of Basic savings Professionally Equity Medium to high
cooperatives with central may be members directors or clients, and credit, managed to provided depending on
authority regulated; management depending although varying from member capacity of
oversight by committee on members inherently degrees; contributions; management
specialized elected by savings led report to deposits and and governing
body members supervisory some body
authorities external debt
NGO MFIs Registered Not No owners, Board of Poor, Traditionally Professionally Grants and Low to medium
and as an NGO, regulated; strong directors, “unbanked” credit led; managed to debt from (high costs and
multipurpose not-for-profit may be ownership appointed by clients; for multipurpose varying development lack of
NGOs institution, or subject to characteristics founders and multipurpose NGOs degrees; may institutions, separation of
company government among funders NGOs, generally add need to report foundations, activities can
limited by oversight founders and various financial to registration socially delay or prevent
guarantee board target clients services to body responsible sustainability of
and other investors, or financial
beneficiaries activities aggregators activities)
Deposit- Licensed as Regulated Mostly private Board of Unserved or Credit, Professionally Mix of equity Varied, costs to
taking MFIs a bank or and shareholders; directors underserved savings, managed; and debt transform can
other form as supervised some appointed by individuals or insurance, report to financing be high;
per by central development shareholders micro or payment central bank from both ongoing costs
regulatory bank, banks as small services; or supervisory private and of regulatory
requirements ministry, or a initial businesses terms may be authority public requirements
specialized shareholders modified for sources, can be high
body client needs deposits
NBFIs: credit Licensed as Regulated by Mix of public Board of Clients vary Range from Professionally Mix of equity Medium to high;
companies, an NBFI or central bank and private directors depending credit only, managed; and debt initial support
insurance modified or specialized shareholders; appointed by on type of leasing, report to financing may be required
companies, financial body or by sometimes shareholders products (for insurance; supervisory from both depending on
leasing institution one or more other financial example, normally not authority private and target market
companies (determined government institutions or credit or able to public
by country- units other insurance) intermediate sources
specific legal companies deposits
charter)

(continued next page)


173
174

Table 7.1  (continued)


Regulation Management Sustainability
Type of and and and
provider Legal form oversight Ownership Governance Client type Products reporting Funding independence

Suppliers, Registered Credit Varies; can be Varies Rural Basic credit Little formal Funding from High
wholesale as a services owner farmers embedded in structure, working sustainability
buyers, company generally not operated or purchases provider capital; may
processors under regulated part of larger driven have debt
primary company
business
Rural, Licensed as Regulated by Shareholders, Board of Broad target Primarily Professionally Equity and Medium to high
savings or a bank central bank government directors group: poor savings; wide managed to debt
postal banks or specialized and/or private appointed by and nonpoor; distribution varying financing,
body or by shareholders generally network degrees; generally
one or more rural leveraged for report to from public
government payment regulators sources and
units services savings
State banks Licensed Normally Shareholders, Board of General Varied; some Professionally Public Varied; medium
with the regulated generally directors population; offer a full managed, but funding; debt (benefits from
central and government, appointed, government variety of may be largely public subsidies
authorities; supervised some private influenced by sometimes financial politically sourced from in certain cases
incorporated by the government mandates services, influenced; deposits due to often
as either a central bank poor or rural others focus normally rural distribution
parastatal or focus on agriculture report to network)
shareholding lending regulators
company
Commercial Licensed as Regulated Private Board of Commercial Credit, Professionally Equity and High; with
microfinance a commercial and shareholders directors micro, small, savings, managed; debt from greenfields,
banks bank supervised and some appointed by and medium payments, report to institutional some initial
by central development shareholders enterprise sometimes central bank investors; support
The New Microfinance Handbook

bank banks clients, insurance deposits required, then


urban, fewer independent
poor clients
Money Licensed as Regulated by Private Board of Poor and Transfers and Professionally Private Generally high
transfer a money local financial shareholders directors nonpoor; payments managed funders sustainability
companies transfer services appointed by rural and between due to user fee
provider authorities shareholders urban people, structure
government,
businesses
Note: MFI = microfinance institution; NBFI = non-bank financial institution; NGO = nongovernmental organization.
Financial Cooperatives weathered the storm relatively well because local
deposits proved a much more stable source of
Financial cooperatives are member-owned finan- funds than external investments (Christen and
cial service providers, also called savings and Mas 2009).
credit cooperatives (SACCOs), savings and loan Financial cooperatives are essentially a for-
associations, credit unions, or building societies (a malized version of a large accumulating savings
special form of cooperative that mobilizes mem- and credit association (ASCA) that is legally regis-
ber savings to finance housing). Financial cooper- tered (see chapter 6). They vary in size from very
atives are organized and operated according to small (dozens of members) to very large (thou-
basic cooperative principles: There are no exter- sands of members). They are subject to the coun-
nal shareholders; the members are the owners; try’s laws and pay taxes if required. Cooperatives
each member has the right to one vote. Members are usually governed by a volunteer board of
of financial cooperatives are usually affiliated directors elected by and from the membership. In
through geography, employment, or religion. To smaller cooperatives, management may also be
become a member, each person is required to pur- voluntary. As with the microfinance sector, gover-
chase a share and is generally restricted in the nance is one of the greatest challenges facing the
number of shares he or she can own. The share cooperative sector.
purchase value is set by the cooperative and is the Cooperatives, particularly smaller ones, may
same for all members, although it can change focus on rural markets, facilitating access to both
over time. In addition to holding shares redeem- savings and credit services and circulating
able at par, members may deposit money with the resources within a community. With both wealthy
cooperative or borrow from it. Although financial and poor members depositing funds, excess
cooperatives traditionally provided simple sav- liquidity of one household can provide credit for
ings and credit products, many are introducing a another. However, cooperatives can be subject to
greater variety of products, such as contractual power imbalances, with elected board members
savings and housing loans; if properly licensed, or management taking advantage of their position
they sometimes provide money transfer or pay- to borrow excessively or extend credit to their
ment services and insurance (Branch 2005). supporters (see box 7.1).
Well-managed cooperatives often provide Individual financial cooperatives often choose
loans at lower interest rates than MFIs. If profit- to be affiliated with an apex institution, which
able, they either reinvest excess earnings in the represents the cooperative at the national level,
cooperative or return them to members in the provides training and technical assistance to affil-
form of dividends, usually based on their average iated cooperatives, acts as a central deposit and
savings balances or share ownership. These mea- interlending facility (central financing facility),
sures sometimes translate to more affordable and, in some cases, channels resources from
loans for members or higher returns on savings external donors to the national cooperative sys-
than are available from other institutional provid- tem. Being a member of an apex institution can
ers (WOCCU 2011). also mean that individual cooperatives benefit
Member savings and shares, the primary fund- from economies of scale for purchasing or other
ing mechanism for cooperatives, constitute a sta- services. Affiliation involves purchasing share
ble and relatively low-cost funding of funds from capital and paying annual dues to the national
which loans are made. During the 2008 financial or regional apex institution. Membership pro-
crisis, for example, local financial cooperatives vides the right to vote on national leadership and

Institutional Providers 175


Box 7.1  Reflections on Member-Owned Financial Service Provision

Member-owned and -managed financial ser- system to their own advantage (Johnson
vice providers offer several features that 2004). This arises from a more general set of
appeal to poor people. First, their survival “principal-agent problems” in which the inves-
depends on the degree to which they tors in the organization or the shareholders
respond to their members’ need for financial (the principals) elect a board or committee (the
services. Second, a high degree of client agents) to represent their interests (fiduciary
ownership and participation is present: responsibility). But when these organizations
Users have a direct influence in determining become large and monitoring the performance
the financial services provided, including the of the board becomes more difficult, the board
interest rates charged. (However, flexible may tend to protect its own interests and
terms and conditions require more detailed those of management rather than those of
reports to monitor performance and hence shareholders and the organization as a whole.
higher levels of management skill and stron- This results in the all-too-familiar situation of
ger governance mechanisms.) People assist escalating costs and bad loans to board mem-
one another and offer social support, and bers, which become particularly problematic
when a member has a genuine repayment when board members are net borrowers
problem, the member can appeal for more whose savings cannot cover the loan losses.
time to repay (Johnson 2004). This flexibility These problems are compounded in poorer
means that members are not as frightened areas where people are less well educated
of taking loans from these systems as they and poorly equipped to understand and moni-
would be from other systems; and unlike tor management. Where these systems are
in MFI group-solidarity systems, members most successful, it is often because board
are not forced to make repayments on the members are skilled, such as retired civil
defaulter’s behalf. servants and professionals, and sufficiently
However, the very nature of these advan- concerned about the well-being of the orga-
tages leads to the problems facing user-owned nization. Members often trust community
systems. The element of “negotiability” leaders more than unfamiliar staff at another
allows powerful individuals to manipulate the institution.
Source: Johnson, Malkamaki, and Wanjau 2005.

policies and to participate in nationally sponsored have the requisite skills to supervise financial
services and programs. intermediaries. This general lack of financial
As institutions that intermediate member sav- oversight coupled with weak governance can
ings, larger cooperatives are normally supervised. compromise the safety and soundness of
The level and structure of supervision varies sig- ­financial cooperatives, which is especially prob-
nificantly from country to country (see chapter 17). lematic when poor people’s savings are at risk.
In many countries, the authorities charged with Although many still struggle with poor manage-
overseeing cooperatives of all kinds—agricultural, ment, financial cooperatives are significant
marketing, transport, and others—also supervise ­providers of financial services in many develop-
financial cooperatives. These entities may not ing countries.

176 The New Microfinance Handbook


NGO MFIs save and borrow, providing a guarantee for each
other’s loans; see chapter 9). Although some
Nongovernmental organizations are nonprofit NGOs require compulsory savings, they cannot be
organizations that provide social and economic legally intermediated (that is, on-lent to another
services, which may include health or education client). Many NGOs have broadened their prod-
or microfinance, among other services. They dif- uct offerings in an effort to enhance access to
fer from financial cooperatives or community- financial services, offering credit for uses other
based groups in that they are not member owned than productive investment, such as housing or
and managed. NGOs are a diverse group, includ- education.
ing large multipurpose organizations such as The funding structure of NGO MFIs varies.
BRAC in Bangladesh, international NGOs such as Traditional NGO MFIs are generally funded by a
ACCION or Opportunity International that have mix of grants, debt, and accumulated equity, how-
fostered a network of local NGOs, and small inde- ever, with the professionalization of and demand
pendent local organizations. for sustainability among NGO MFIs, revenue
The level of formality of NGOs varies signifi- from daily operations is expected to cover overall
cantly, depending on the mission, funding, and costs and provide capital for growth, while grants
vision of the organization. NGOs are typically reg- are increasingly spent on technical assistance and
istered under national laws, which permit a range product and channel development. The equity of
of activities and determine the tax treatment of NGO MFIs includes grants provided by donors
incoming donor money and revenue generated for loan capital and retained earnings (excess rev-
from operations. NGO MFIs have no owners. enue over expenses). NGOs often have fairly
Rather, they have boards with members appointed weak leverage (the amount of debt relative to
by the founders or funders, which are the func- equity) because their lack of formality can limit
tional equivalent of shareholders. NGO boards their ability to borrow commercially, although
are responsible for overseeing the collective they are increasingly accessing various kinds of
activities of the NGO and providing input on stra- debt. Where traditionally they were required by
tegic activities. NGO governance structures are funders to hold cash collateral or pledge their
generally not suited for bearing fiduciary respon- loan portfolio as collateral, well-performing
sibility because board members do not represent NGOs are able to borrow with guarantees and
shareholders or member-owners with money at lower or no physical collateral requirements.
stake. NGO MFIs may receive oversight from a Debt for NGOs is largely in the form of term
government body or international network, but loans; however, a few NGO MFIs have been able
they are typically not regulated or supervised by a to issue bonds supported by partial credit guaran-
country’s central bank or financial system regula- tees (see chapter 16).
tory authorities. NGO MFIs benefit from less onerous report-
As financial service providers, NGO MFIs are ing requirements and less formalized structures
limited in the services they can provide (for than regulated institutions and thus may be able
instance, only credit); some may also operate as to operate more informally in response to client
agents for a bank or insurance company. They tra- needs; however, management is often weak, par-
ditionally offer a standard microenterprise loan ticularly as the NGO expands, which may lead to
for investment in productive activities, either to difficulty maintaining stability and growth. NGO
individuals or to groups, often using peer guaran- MFIs were early, if not the first, providers of
tees, group solidarity, or village banking methods microfinance in areas underserved by formal
(between 5 and 30 neighbors meet regularly to financial institutions. Over the years, however,

Institutional Providers 177


NGOs have become less prominent in microfi- retained through earnings and deposits, as well as
nance largely because of their inability to provide various forms of debt. Deposit-taking MFIs are
savings services and difficulty covering their costs often able to borrow from a broad range of lend-
and funding growth. Although thousands of mul- ers as well as the capital markets. The ability of a
tipurpose NGOs offer microcredit, they serve a deposit-taking MFI to borrow is determined by
relatively small number of clients. Given these its performance.
limitations, some NGO MFIs become regulated Deposit-taking MFIs are a form of NBFI,
institutions. Larger multipurpose NGOs may spin which can be an interim step to obtaining a
off their financial services to a separate entity bank license or an end in and of itself. As with
(ideally self-sustaining), while other activities other shareholding institutions, deposit-taking
continue to require subsidies. MFIs need to balance the need for shareholder
value and returns with the need to serve poor
women and men. Furthermore, if transforming
Deposit-Taking MFIs
from a nonprofit organization with no owners
Deposit-taking MFIs have the institutional struc- into a for-profit company with return-seeking
ture and regulatory approval required to mobilize shareholders, a tremendous amount of work
and intermediate deposits. They may be licensed and strong leadership is required. The cultural
and regulated as banks or operate under a special changes—from frontline staff, to all levels of
category for deposit-taking MFIs created by the management, to the board—are very difficult to
regulatory authorities. For example, the Bank of manage and require substantial commitment
Uganda created a special “tier 3” category of and involvement of the board and senior man-
financial institutions, called micro-deposit-taking agement. Transformation takes money, strong
institutions, that intermediate deposits but do not visionary leadership, institutional ownership,
qualify as banks. These institutions have lower and time (see box 7.2).
minimum capital requirements and cannot pro-
vide all the services banks can. The ability of an
Other Non-Bank Financial
MFI to accept deposits contributes to financial
Institutions
inclusion by providing clients with a secure place
to save. By facilitating savings, these institutions In addition to specialist deposit-taking MFIs,
better respond to client needs and can expand which are generally not licensed as banks, other
services to nonborrowers. NBFIs are beginning to increase their depth of
Deposit-taking MFIs can be set up as green- outreach to poor women and men. NBFIs include
field institutions or be transformed from an NGO insurance companies (discussed in a separate
MFI into an institution licensed and regulated by section below), leasing companies, specialist
the central bank. Accepting deposits provides credit companies such as finance companies,
both a much valued service and an important consumer credit companies, and others. NBFIs
resource base with which to fund loans. Accepting are restricted by law in the range of services they
deposits also enhances the MFI’s sustainability can offer and the financial infrastructure they
and places it in a better position to access com- can access. NBFIs cannot normally intermediate
mercial sources of funding to fuel growth and deposits (unless specifically licensed to do so)
expand outreach. Given their regulated status, and may not be allowed to participate in pay-
deposit-taking MFIs are usually shareholding ment and settlement systems (see chapter 18).
institutions, with a mix of funding sources, From a legal and regulatory perspective, it is
including equity raised from shareholders and often easier to obtain a license to operate as an

178 The New Microfinance Handbook


Box 7.2  Transformation from an NGO to a Deposit-Taking Institution

Many NGOs have taken different routes over Numerous institutional incentives are
the past decade, with some of the larger and associated with becoming a deposit-taking
more professional organizations transforming institution. Client satisfaction is improved
into deposit-taking institutions. The transfor- when the range of products is broad; and
mation process is difficult and has proven to deposits offer a stable base of local currency
be extremely time-consuming and expensive. funding. In addition, rigorous reporting to a
Thus it is not for the majority of NGO MFIs. regulator facilitates increased transparency
Assuming that the proper regulatory frame- and increased access to diversified investors
work is in place, an NGO MFI must modify its and funding sources. There are trade-offs,
governance structure, develop savings prod- however. Many institutions target large depos-
ucts, and design new operating processes its, which are generally less expensive to
and procedures. These processes include mobilize but can be less stable than small
both front-office operations—those that inter- local deposits and may undermine the original
face with clients—as well as back-office oper- purpose of transforming; however, mobilizing
ations, including accounting, reporting, and only small deposits generally entails high
treasury. In addition, upgrading infrastructure costs and therefore is not feasible. Some
such as banking halls and vaults to comply institutions struggle for years to implement
with banking regulations, developing manage- appropriate information systems to facilitate
ment information services capable of accepting deposits, and many underestimate
reporting to regulators, and capturing data
­ competition in the formal sector. In addition,
associated with savings products are all formal reporting to investors, regulators, and a
­crucial activities for a successful transforma- board of directors is substantially greater for
tion. Furthermore, MFIs must hire and train deposit-taking institutions. Many MFIs find it
new staff for savings products, and they often difficult to keep up with the volume of report-
hire new senior management with experience ing and level of detail required of regulated
managing a regulated institution. financial institutions.
Source: Ledgerwood and White 2006.

NBFI than as a bank, because minimum capital are licensed and regulated by the banking
requirements are lower and because there is less authorities and are generally privately owned.
systemic risk as there is no (for the most part) Although most leasing companies do not focus
intermediation of deposits. on the poor (there are few microleasing compa-
nies), many types of providers are beginning to
Leasing Companies add leasing products. Because the lease is
Leasing companies and hire-purchase compa- granted based on cash flow with the asset itself
nies finance fixed assets such as equipment or as security, leasing provides entrepreneurs with
heavy-duty vehicles and mostly provide credit financial resources to start a business on a lim-
under financial lease contracts. Under a leasing ited budget or to increase productivity through
model, the leasing company retains ownership of new capital investments. Leasing requires pro-
the leased asset, which is generally used as col- cesses and systems that accommodate asset
lateral for the transaction. Leasing companies ownership and residual value, specific taxation,

Institutional Providers 179


and accounting and legal requirements. Leasing credit is their first experience and first access to
products are discussed in chapter 9. the financial system. Customers build up a credit
history, start saving, and start using the financial
Finance and Consumer Credit Companies system. Consumer finance stimulates the penetra-
Finance companies or financiers are NBFIs that tion of financial services in society, and a well-
provide small, short-term loans, which are fre- developed consumer finance delivery system
quently unsecured and used to purchase con- leads to a better overall financial structure (banks
sumer durable goods and services. Finance and non-banks), better competition, and more
companies are often associated with consumer access to credit for all income groups and, last but
credit and installment contracts. They are nor- not least, at better credit terms” (FMO 2006).
mally not allowed to mobilize savings; however, Asset finance companies, which were espe-
their activities vary by their charters, and excep- cially popular in North America in the 1950s, have
tions are found. For example, some may be able to been replaced largely by finance divisions of large
mobilize time deposits, but not demand deposits retail chains, but they can help the working poor
(see box 7.3). to buy household assets such as furniture and
Organizations that provide consumer credit appliances. This financing is similar both to leas-
include specialized consumer finance companies, ing, where the purchaser is able to use the asset
payday lenders, supplier credit, and retail stores. during the lease agreement, and to consumer
For example, some large retail outlets are applying financing, where the retailer sells on “lay away”
for licenses to provide financial services, such as and the purchaser pays a certain amount periodi-
Grupo Elektra in Mexico (see box 7.4). Some pro- cally until he or she owns the asset. However,
vide short- to medium-term consumer loans to financing costs can be quite high.
employees that are repaid through payroll deduc-
tions. Similar to MFIs, consumer credit compa- Suppliers and Buyers
nies often serve low-income households and Private companies such as input suppliers,
microentrepreneurs, and they are becoming more ­buyers, wholesalers, exporters, and processors
and more significant in many emerging and devel- sometimes provide financial services, primarily
oping markets: “For most customers, consumer credit, to low-income markets. Supplier credit is

Box 7.3  NBFIs in India

Many MFIs in India operate as for-profit NBFIs. and cannot issue checks, and (3) deposit insur-
Under Indian law, an NBFI is a company regis- ance facilities are not available. NBFIs regis-
tered under the Company’s Act of 1956 and tered with the central authorities are classified
engaged in the business of loans and advances as an asset finance company, an investment
and the acquisition of shares, stocks, bonds, company, or a loan company. An asset finance
debentures, and securities issued by the gov- company, the most common type of NBFI, is
ernment or a local authority. a financial institution whose principal business
Banks differ from NBFIs: (1) NBFIs cannot is the financing of physical assets such as
accept demand deposits, (2) they are not a automobiles, tractors, lathe machines, or gen-
part of the payment and settlement system erators to support productive activities.
Source: India Microfinance Editorial Team 2009.

180 The New Microfinance Handbook


Box 7.4  Grupo Elektra and Banco Azteca in Mexico

In March 2002 one of Mexico’s largest retail- which were previously issued by Elektrafin,
ers for electronics and household goods, the financing unit of Grupo Elektra’s retail
Grupo Elektra, received a banking license. In stores. These loans averaged US$250.
October 2002 it launched Banco Azteca, open- Although tied to merchandise, they could be
ing 815 branches in all Grupo Elektra stores. used for business purposes such as the pur-
From the outset, Banco Azteca targeted chase of a new sewing machine or a refrigera-
low- and middle-income customers, histori- tor that could be used to start or sustain a
cally underserved by the traditional banking microbusiness. In 2003 Azteca started offer-
industry. Azteca began offering savings ing US$500 consumer loans not tied to mer-
accounts that could be opened with as little chandise. These amounts were comparable in
as US$5. Within the first month, 157,000 size to loans offered by several microfinance
accounts were opened, increasing to 250,000 organizations, which in 2002 amounted to
accounts by the end of December 2002. At its about US$360 on average. Toward the end of
opening in October 2002, Banco Azteca also 2003, Azteca also expanded into the mort-
took over the issuance of installment loans, gage and insurance business.
Source: Bruhn and Love 2009.

­ rovided by input suppliers and wholesalers, who


p back to the supplier. Value chain finance is dis-
provide in-kind credit or cash in return for either cussed in detail in chapter 10.
installment payments over a period of time or a Private companies that provide credit are nor-
lump-sum payment at the end of the term. For mally not regulated or supervised by banking
example, seed suppliers may provide seeds to authorities because they generally do not pose
farmers during the planting season with the systemic risk (and may not be licensed at all to
expectation that the seeds will be paid for at the provide financial services). Although volumes are
time of harvest. Financing costs are built into not tracked, private companies often provide a
the price of seeds. substantial amount of credit, particularly in rural
Credit provided by input suppliers and buyers areas.
is often embedded in another transaction and In addition to supplier credit, other private
therefore is not provided without it. Credit is built companies embed financial services within their
into existing business relationships through a normal business operations. For example,
value chain. A value chain is a path that a product Patrimonio Hoy provides financial services to
follows from raw material to consumer, from increase access to housing (see box 7.5).
input supplier to producers, and through various
actors who take ownership of the product before
Banks
it arrives at its final condition and location (Jones
and Miller 2010). The fact that actors are within Many types of banks are engaged in microfinance,
the same value chain provides incentivized lend- including rural banks, postal and savings banks,
ing by input suppliers, processors, wholesalers, state banks, and commercial banks. Banks are
and others to, for example, guarantee the sale of normally licensed and regulated by the central
inputs or commit producers to sell the product bank or other government agency or ministry,

Institutional Providers 181


Box 7.5 Patrimonio Hoy: Housing Microfinance That Addresses Market
Opportunities

CEMEX, a Mexican cement manufacturer Participants in Patrimonio Hoy pay about


with a US$15 billion market capitalization, US$14 a week for 70 weeks and receive
developed an innovative corporate social consultations with CEMEX architects and
responsibility program called Patrimonio Hoy scheduled deliveries of materials that coin-
(Patrimony Today). The program aims to cide with the building phases. Prices on all
reduce the Mexican housing deficit—which building materials are kept stable for the life
has left more than 20 million people with of the project, which shields consumers
inadequate shelter—while stimulating con-
­ from sudden price hikes and supply short-
sumer demand for housing materials in the ages that are common in free markets.
low-income urban slums of Mexico. And if needed, participants can store their
For more than a year, CEMEX employees materials in a secure CEMEX facility.
and consultants immersed themselves in the Participants found the program enabled
urban slum of Mesa Colorada in the state of them to build homes more cheaply and
Jalisco, where they conducted a series of learn- three times faster than they could on their
ing experiments and in-depth interviews. They own.
discovered that a significant barrier to building From 2000 to 2011, Patrimonio Hoy pro-
homes was the inability to save enough money vided affordable solutions to more than 1.3
to purchase the required materials. The families million people throughout Latin America and
explained that committing to long-term projects enabled more than 265,000 families—251,000
was difficult because employment in the area in Mexico and 15,000 in other countries—to
was unstable. Moreover, even when they tried build their own homes. Patrimonio Hoy oper-
to purchase construction materials, Patrimonio ates through more than 100 centers in
Hoy participants had nowhere to store them. Mexico, Colombia, Costa Rica, Nicaragua, and
Theft is common in such impoverished neigh- the Dominican Republic. Of these 100 offices,
borhoods, and weather conditions often spoil 85 are in Mexico and 93 are completely
the products before they can be used. self-sustaining.
Source: Segal, Chu, and Herrero 2006.

which ensures that the term “bank” is reserved owned, member owned, or privately owned and
for certain types of financial institutions. Although are normally licensed and supervised by the bank-
microfinance banks share features of standard ing authorities. They are relatively small institu-
commercial or retail banks, lending and outreach tions, but large enough to support professional
are targeted to customers not normally reached management and staff. They are normally
by traditional formal financial institutions. restricted to a certain geographic area and may be
limited in the products they can offer. They gener-
Rural and Community Banks ally provide products similar to commercial banks,
Rural and community banks operate in rural areas, including short- and long-term savings products
providing primarily savings services and agricul- (sometimes with overdraft facilities) and invest-
tural loans, reflecting the main economic activity ment and consumption loans, often focused on
in rural areas. Rural banks can be government agriculture and trading. Rural banks may also be

182 The New Microfinance Handbook


licensed to provide money transfers and pay- services, some rural banks are also allowed to dis-
ments. Given their small size, rural banks are tribute microinsurance (BSP 2011).
often part of an association or apex institution
and may benefit from technical support includ- Savings Banks
ing, for example, capacity building, fund mobili- Savings banks are regulated financial institutions
zation, and treasury management. In Ghana the with a retail focus that extends across broad geo-
Association of Rural Banks also performs impor- graphic areas. In Europe and North America, sav-
tant supervisory functions delegated to it by the ings banks originated as early as the eighteenth
Bank of Ghana (see box 7.6). century, with the objective of providing easily
Rural and community banks exist predomi- accessible savings services to a broad range of
nantly in Indonesia, Ghana, Nigeria, India, China, populations.
and the Philippines. In these countries rural banks The universe of savings banks is very diverse;
were often established as part of rural develop- no “prototype” savings or socially committed
ment strategies implemented by national govern- retail bank exists.1 However, most savings banks
ments. For example, in Indonesia rural banks were set up to reach clients who are not served by
were established during the 1960s in an effort to commercial banks. Typically their objective is not
foster the growth of financial services. Rural banks to maximize profit (Christen, Rosenberg, and
in Indonesia are largely owned by provincial gov- Jayadeva 2004).
ernments and used to support regional economic Savings banks are regulated by the banking
policies. In India regional rural banks have a man- authorities and are both publicly and privately
date to improve access to financial services, owned. They often have a broad decentralized
including savings, in underserved, primarily rural, distribution network, providing local and
areas and are heavily involved in credit-linked regional outreach. Research conducted by the
programs to Self-Help Groups (Linder 2010a, World Savings Banks Institute in 2006 showed
2010b). The Philippines has both rural banks, that savings banks hold three-quarters of the
which are owned and organized by individuals 1.4 billion accessible accounts provided by
living in a given community, and cooperative rural double-bottom-line financial institutions (De
banks, which are owned and organized by cooper- Noose 2007).2 Furthermore, data from 2000 to
atives and other farmer associations. In the 2003 show that non-postal savings banks rep-
Philippines, in addition to savings and credit resent close to 20 percent of total banking

Box 7.6  Rural and Community Banks in Ghana

As a network, rural and community banks are and 680,000 borrowers. Although the service
the largest providers of formal financial ser- delivery of the network has been strong, its
vices in Ghana’s rural areas. By the end of financial performance has been mixed. The
2008, Ghana had 127 rural and community profitability and net worth of the network have
banks, with 584 service outlets, representing grown, but the financial performance of some
about half of the total banking outlets in the members has been poor, and a small number
country, reaching about 2.8 million depositors are insolvent.
Source: Nair and Fissha 2010.

Institutional Providers 183


assets (Christen, Rosenberg, and Jayadeva directly by the postal bank, if licensed to interme-
2004). Because of their large branch networks, diate deposits, or on behalf of a commercial bank
in many countries, such as Kenya and Chile, that partners with the post office acting as an
the geographic proximity of ­ savings banks agent. Postal banks are ­ primarily wholly or
enables greater access than some other types majority owned by governments directly or
­
of providers. As well, savings banks offer prod- through government-owned and -managed post
uct terms that make them accessible; their offices. They are normally supervised by a special-
standard passbook savings account has low ized unit of the central bank or by a separate gov-
minimum balance requirements and low or no ernment agency altogether (Christen, Rosenberg,
fees. Finally, savings banks can also contribute and Jayadeva 2004).
to developing financial capabilities because, in In 2010 post offices worldwide had an exten-
addition to introducing financial services to sive retail distribution network with more than
many unbanked individuals, they often provide 660,000 points of sale, above twice the number of
financial education programs. For example, in commercial bank branches; many of these are
Thailand the Govern­ment Savings Bank has a located in periurban, rural, or remote areas, pre-
school-based savings program in which stu- senting immense opportunities to offer entry-
dents create a savings bank in their class and level banking services to the public (WSBI 2010;
acquire the basic principles of personal finan- see box 7.8).
cial management (De Noose 2007).
State Banks
Postal Savings Banks State banks include agriculture banks, develop-
A large proportion of savings banks are postal sav- ment banks, postal banks (discussed above), and,
ings banks, often established by governments in some cases, even commercial state banks. The
originating from the postal network. In addition to primary institutional feature is that they are
their core postal activity—collecting and distribut- owned and controlled primarily by the govern-
ing mail and parcels—postal branch networks can ment and, as such, are considered public or semi-
provide financial services. Postal financial services public entities. State banks often have a large
traditionally include payment and money trans- number of savers and extensive branch networks.
fers as well as savings services, generally in small In line with their ownership structure, they are
amounts (see box 7.7). In some countries services funded largely by investment of public funds as
also include credit or insurance products, either well as deposits.

Box 7.7  Post Office Banks in India

Of the 155,000 post office branches in India for Rs 3.4 trillion in deposits (more than US$75.6
reported in March 2008, more than 98 percent billion, 42.9 percent of what banks held). Even
offer some type of savings services. The post more encouraging for financial inclusion is that,
office controlled 174.7 million savings accounts unlike banks, 89.8 percent of all post offices are
(or 40.7 percent of what banks held), accounting located in rural areas.
Source: Linder 2010a.

184 The New Microfinance Handbook


Box 7.8  Increased Financial Inclusion through Postal Savings Banks

The large branch and agency networks of payment systems, thus leveraging the postal
postal banks offer valuable channels for inter- banks’ networks. The Kenya Post Office
national and domestic money transfers. Savings Bank has partnered with Citibank and
Using a postal bank’s network, the govern- Stanbic Bank to do this. The network could
ment and other institutions can pay salaries also provide valuable outlets and agencies for
and pensions and individuals can pay school insurance products, as insurance companies
fees and transfer allowances to pupils in increasingly examine the low-income mass
remote areas that are not being served by market and develop products for it. However,
commercial banks. For example, in Kenya the challenges of successful linkages and
about 55 percent of the allowances for uni- strategic alliances should not be understated;
versity students in public universities and to date, few examples have reached signifi-
50 percent of government pensions are paid cant scale.
through the Kenya Post Office Savings Bank As postal banks start the process of reengi-
(Robinson and Anyango 2003). Postal banks neering themselves and their business, the
often attract young people and students— threat of brand confusion with the post office
either as parents seek to open a low-cost will grow in importance. The Kenya Post Office
bank account for their children or as govern- Savings Bank suffered damage to its reputa-
ments seek to pay student allowances across tion as a result of being confused with the post
the country. office and its poor service quality. Postal banks
Significant opportunities exist for postal often also suffer from serious overstaffing,
banks to become profitable, modern, partly as a result of their manual operations
­client-responsive organizations. Postal banks and past politicization of appointments. This
have large networks of branches, giving them phenomenon means that, at some levels,
a comparative advantage over commercial postal banks not only have too many staff, but
banks and creating the potential for offering also do not have the appropriate skills to man-
e-banking solutions. The postal bank networks age cash balances and the treasury, with the
also have a comparative advantage over shops result that savers must often travel to larger
or other agent locations. They are permitted to centers to withdraw cash. Furthermore, most
accept deposits and utility bill payments, are postal banks are required by their enabling acts
used to handling remittances and manage or laws to invest mainly in government instru-
money, and in many cases have greater liquid- ments. Often state corporations cannot
ity than shops with limited turnover. Indeed, in borrow without the approval of the share-
­
some countries, the central bank authorities holder—the government—which guarantees
do not permit shops or others to offer even a the amount borrowed. This can result in bud-
basic withdrawal service. Strategic alliances getary constraints. Fluctuating interest rates
with other banks can allow postal banks to on treasury bills have meant significant vari-
offer withdrawal and deposit services through ances in annual profits and in the capacity to
point-of-sale devices or mobile phone–based carry out major projects.
Source: Wright, Koigi, and Kihwele 2006.

Institutional Providers 185


Many government-owned banks are estab- to close or restructure state-owned financial
lished to serve the agriculture sector. Their pri- institutions (ADB 2007; see box 7.9).
mary activities include extending credit and However, not all state banks suffer from gover-
savings services to promote small-scale farming nance and management problems and fail to
production, co