This post is adapted from the recently-released publication “<a href="http://www.centerforfinancialinclusion.org/storage/Inclusive_Insurance_Final_2018.01.06.pdf">Inclusive Insurance: Closing the Protection Gap for Emerging Customers</a>,” a joint-report from the Center for Financial Inclusion at Accion and the Institute of International Finance, in partnership with MetLife Foundation.

New technologies are dramatically changing the landscape for insurance around the world and enabling insurers to reach new mass market segments. New data sources and analytical tools are changing risk models by enabling new ways to create, capture, and analyze valuable information that can help insurers better calculate and manage the risk associated with customers. Machine learning applied to satellite imagery is changing agricultural and disaster insurance, allowing for more sophisticated claims management, even facilitating pre-loss payments that can help minimize the cost of a disaster before it is full-blown. The expansion of identity solutions and onboarding options is lowering operations costs and enhancing convenience. These innovations are helping the global insurance industry transform from a passive risk-transmission industry into an active risk mitigation and advisory partner for individuals, businesses, and governments.

The use of mobile phones to deliver insurance is no longer a novelty, but there is tremendous scope for growth. Mobile phone penetration in emerging markets is now 80 percent, making mobile devices excellent distribution channels. Mobile phones are convenient for enrollment, transmitting premiums and paying claims. Mobile phones have also been helpful for customer service, policy management, consumer education, and other vital functions.

While mobile insurance products have already broken important new ground, there is a much broader array of more recent innovations paving the way for growth. The joint CFI-IIF report found providers using technology to solve both front-end and back-end challenges. Here are some of the ways providers are addressing customer and business needs through technology.
<h3>Instant Enrollment</h3>
In many countries, advances in identification systems have made it possible to enroll customers instantly. Garrance Wattez-Richard, Head of Emerging Markets at AXA, notes, “National ID is changing everything in China and in India.” In Colombia, Margarita Henao Cabrera reports that customers can enroll in DaviPlata’s insurance in seconds by entering their national IDs into their mobile phones. Richard Leftley, CEO of MicroEnsure, notes that even basic questions such as the customer’s name, age, and other demographics can create a barrier to enrollment, so enrolling customers based only on phone numbers eliminates those barriers. “We don’t know anything about them until they make a claim, not even their name or age,” says Leftley. Depending on the market, automated enrollment mechanisms include internet-based products in China and point-of-sale devices among retailers in Latin America.
<h3>Technology-Enabled Claims Verification and Payouts</h3>
<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/daviplata.png"><img class="wp-image-24911 alignright" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/daviplata.png" alt="" width="465" height="507" /></a>

Since paying claims fast builds trust and adds customer value, Allianz is experimenting with payments that do not require customers to submit a claim—for instance, if the distribution partner reports that a customer has been in an accident. Parametric or index insurance using data from weather satellites enables automatic payments for farmers. Claims payouts and management are even being enhanced by drones. Drones allow access to isolated and dangerous areas after disasters to collect aerial data and assess loss through cutting-edge imagery analytics. Munich Re has been experimenting with the technology and has partnered with U.S.-based drone company PrecisionHawk. The two companies worked together in the aftermath of the April 2016 earthquake in Ecuador.
<h3>Back-Office Systems</h3>
Modernizing back-office IT systems helps bring down administrative costs, making low-premium products cheaper to manage. When AXA acquired MicroEnsure, its first investment was to improve legacy IT infrastructure. LeapFrog Investments also prioritizes IT with its microinsurance investments. To further reduce transaction costs, some experiments use blockchain technology, such as Consuelo, offered by the Mexican-based mobile platform Saldo.mx, in this case to facilitate microinsurance for Mexican migrant workers in the United States. By providing a universal and tamper-proof record of transactions, blockchain technology could reduce human error, fraud, data duplication, processing delays, and opaqueness—ultimately increasing efficiency and lowering operational and administrative costs for the insurance industry. (Though at a very high energy cost.)
<h3>Using New Data to Reappraise Risks</h3>
Historically, there has not been enough data to feed actuarial analysis that can inform a relevant product at a fair and attractive price for newer and lower income market segments. However, data has now become available on people who have a national ID or mobile phone number. Data analytics can then be effective at identifying prospective customers and their behavior patterns. Salmaan Jaffery of DIFC Authority looks forward to using artificial intelligence and machine learning in product development and risk assessment. With new data tools, the sector will look at risk differently. As Jaffery explains, “It may become apparent, through the analysis of behavioral and social data, that lower-income people may not be any greater risk than those with higher income profiles.”

For more on the uses of technology in inclusive insurance, including how it’s enabling integrated services for health insurance, read “<a href="http://www.centerforfinancialinclusion.org/storage/Inclusive_Insurance_Final_2018.01.06.pdf">Inclusive Insurance: Closing the Protection Gap for Emerging Customers</a>.”

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2018/01/08/inclusive-insurance-closing-the-protection-gap-for-emerging-customers/">Inclusive Insurance: Closing the Protection Gap for Emerging Customers</a>

<a href="https://cfi-blog.org/2017/04/13/making-microinsurance-work-in-bangladesh-three-takeaways/">Making Microinsurance Work in Bangladesh: Three Takeaways</a>

<a href="https://cfi-blog.org/2014/10/06/bundling-mhealth-info-and-microinsurance-to-improve-health-outcomes-in-kenya/">Bundling mHealth Info and Microinsurance to Improve Health Outcomes in Kenya</a>

&nbsp;

&nbsp;

How Technology Is Propelling Inclusive Insurance

MetLife Foundation

Innovation Spotlight

Agricultural and Rural Finance

Credit

Financial Technology

Inclusive insurance

Insurance

Insurance Companies

Insurtech

Blog Post

BRAC Uganda shares strategy and sustainability insights from its transition from an MFI to a bank.

By Emily Coppel and Isabel Whisson, BRAC


[caption id="attachment_24537" align="aligncenter" width="1024"]<img class="alignnone size-large wp-image-24537" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/11/awright_ug_006333-e1509999126706.jpg?w=2048" alt="Woman holds carton of eggs" width="1024" height="623" /> ©BRAC/Alison Wright[/caption]

BRAC Uganda Microfinance is pursuing a shift in its regulatory status that will allow it to broaden the landscape of financial services it provides to Uganda’s rural poor.

BRAC, the largest microfinance provider in Uganda, currently serves more than 200,000 predominantly rural, female clients, through more than 150 branches across nearly every district in the country. In the nine years since the microfinance company was established, BRAC has provided microloans to poor women (a basic loan ranges from US $55 - $1,400), and small enterprise loans for male and female business owners (from US $1,400 - $10,000). Its current portfolio is around US $45 million. This year, BRAC submitted its application to transform into a bank. In Uganda, it was a Tier 4 institution, a category for unregulated credit-only NGOs, and money lenders. After the transformation, BRAC will become a regulated Credit Institution, under Tier 2, allowing it to expand its suite of services for clients – most notably, to savings accounts.

The process of transitioning to a regulated institution in Uganda is a lengthy one, and requires the organization to strategically analyze its goals and pro-poor model. Much can be learned from this process that can inform others considering a similar transformation to expand services for clients. As with any significant change, the organization is already facing new challenges that must be carefully and creatively navigated so as not to alienate its customer base.

<h3><img class="alignright wp-image-24531" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/11/classification-of-financial-institutions-in-uganda.png?w=820" alt="Classification of Financial Institutions in Uganda Infographic" width="360" height="900" />Pursuing Mission-Aligned Regulation
</h3>
BRAC had been considering this transformation since 2012, but waited several years to initiate the process. “We wanted to wait until we were certain that the balance sheet was big enough, and the company profitable enough to absorb the added compliance costs of being a deposit taking entity without risking mission drift,” said Shameran Abed, BRAC’s Director of Microfinance and Targeting the Ultra Poor Programs. By 2015, BRAC leadership were confident that they could begin.

The decision to pursue Tier 2 Credit Institution status, as opposed to other tiers, was also strongly driven by its social mission of promoting financial inclusion for Uganda’s poor. After some analysis, ‘Tier 1’ and ‘Tier 3’ status posed several risks that could compromise BRAC’s pro-poor mission.

The initial thought was to transition to a Tier 3 Microfinance Deposit Taking Institution, but this entailed several drawbacks. With Tier 3 institutions, despite lower regulatory costs, the regulations restriction the largest shareholder to a maximum 30 percent ownership stake. BRAC leadership wanted to avoid a situation where other shareholders might come in and steer the company in a different direction. As a Tier 2 institution, BRAC can hold a 49 percent share and ensure that the bank sticks to its mission by partnering with like-minded stakeholders.

Problems also surfaced with Tier 1 Credit Institution status, which is suited to commercial banking and invites significant added regulation. In addition to other challenges, it would mean competing with traditional formal banking institutions, instead of serving the poor. “Tier 1 regulation was really high-end,” said Emmanuel Emaasit, Chief Operating Officer of BRAC Uganda Microfinance, “we would be treading a thin-line against mission drift under commercial banking. Our clients are poor, so we thought we can still serve them best in Tier 2.”

By staying true to its existing client base under Tier 2, BRAC can focus squarely on providing services that meet their specific needs, e.g. by exploring savings products and money transfer services. Finally, Tier 2 enables BRAC to call itself a ‘bank,’ which instills trust and legitimacy that will give clients confidence to save with the institution.
<h3>Cross-Subsidizing Products for the Poor</h3>
For customers interested in starting a savings account with the new institution, the opening balance is just US $1.50. Because of its low income client base, BRAC anticipates the majority of its savings accounts will be relatively small.

As a credit-only NGO, disbursing and collecting small loans from clients only required BRAC to have loan capital on hand. But transitioning to a regulated institution that collects savings will require the bank to meet a minimum standard for its deposit base. “Small savers will not give us a large enough deposit base,” said BRAC Uganda Microfinance CEO Jimmy Adiga. “So we opened a branch [in Uganda’s capital] to attract corporate clients who would have larger savings accounts.”

According to Adiga, these corporate savings accounts will have attractive interest and the lending function of the bank will only be for BRAC’s usual low-income client base. But what if these new corporate clients want to take out loans? The bank will put a loan ceiling in place to ensure that BRAC doesn’t drift from its mission of predominantly serving poor clients.
<h3>Ushering Digital Financial Services Into Rural Areas</h3>
Walking around Kampala, it would be hard to miss the pink “Mobile Money” signs at nearly every convenience store along the roadside. Mobile money is relatively new to Uganda, but about half of the country is using it. With neighboring Kenya seeing massive success of its M-PESA platform, Adiga explains that poor clients are primed for digital financial services. “For the poor, it creates convenience and access,” he said, “but it’s not affordable if we run on the existing platform.”

With this transition, BRAC Uganda plans to begin introducing mobile money to the rural poor in the next two or three years. Its goal again aligns closely with the mission of the international BRAC organization -- to expand financial inclusion and empower the poor. A <a href="http://www.microfinancegateway.org/sites/default/files/publication_files/new_jack_and_suri_paper_1.pdf">research report in </a><a href="http://www.microfinancegateway.org/sites/default/files/publication_files/new_jack_and_suri_paper_1.pdf">Science</a> looked at the impact of mobile money over six years and found that access to M-PESA enabled 2 percent of Kenyans to move out of poverty, with results particularly pronounced for women.
<h3>Square Peg in a Round Hole</h3>
Early challenges are beginning to surface. Many Tier 2 regulations were not designed with BRAC’s client base in mind. For example, using a signature to verify client identity is standard practice for other Tier 2 banks. But for BRAC clients, many of whom are illiterate, signatures are often inconsistent and unreliable. BRAC plans to explore biometric identification instead.

Furthermore, rules required by the central bank to increase accountability among borrowers make loans prohibitively expensive for BRAC’s low-income clients. Every borrower from a regulated institution is expected to register with the Credit Reference Bureau. This incurs an additional cost to customers, which, for BRAC’s clients, would challenge its value proposition. Determined not to let the transition push clients away, BRAC is exploring the possibility of cost-sharing with investors who also value high quality, accessible, financial services for the poor.

Pursuing a change in regulatory status can seem daunting for financial service providers that serve the poor – and for whom certain regulatory environments are often not suited. BRAC hopes that it can demonstrate – to regulators and other financial service providers alike – the critical role microfinance institutions can play in addressing the broad range of financial needs of people living in poverty.

For more on BRAC’s work in Africa, see <a href="http://globaldeliveryinitiative.org/library/case-studies/financial-inclusion-and-resilience-how-bracs-microfinance-program-recovered">this case study</a> on how BRAC responded to the Ebola crisis in West Africa.

Success, Growth and Regulation – BRAC Uganda’s Transition to a Bank and What It Means for Customers

Uganda

Microfinance Institutions

Policy, Regulation and Government Initiatives

<img class="aligncenter wp-image-24227" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/10/fi-week_cropped.png" alt="" width="616" height="273" />

<a href="http://www.financialinclusionweek.org/">Financial Inclusion Week 2017</a> is just over two weeks away. From October 30 – November 3, over 50 organizations will host online and in-person events across the globe, exploring the theme New Products, New Partnerships, New Potential.

We are excited to announce <a href="https://group.axa.com/">the AXA Group</a> is a <a href="http://financialinclusionweek.org/axa-sponsorship/">track partner</a> for the Week. The AXA Group, a world leader in financial protection, supports its individual and corporate customers at every stage of their lives, providing them with the products and services that meet their insurance, personal protection, savings and wealth management needs.

A full calendar of Financial Inclusion Week events will be launched on October 17th, but here is a quick preview:
<ul>
 	<li>AXA will host a fireside chat between <a href="https://group.axa.com/en/about-us/profile/garance-wattez-richard">Garance Wattez-Richard</a>, Head of AXA Emerging Customers and <a href="http://www.centerforfinancialinclusion.org/about/leadership/121-elisabeth-rhyne">Elisabeth Rhyne</a>, Managing Director of the Center for Financial Inclusion at Accion. The discussion will focus on how innovative products and partnerships are expanding access to insurance around the world.</li>
 	<li><a href="https://www.themix.org/">MIX</a> and <a href="https://oneacrefund.org/">One Acre Fund</a> will host a webinar to discuss how their recently-announced <a href="https://www.themix.org/news/mymix/supporting-smallholder-finance">smallholder finance product directory</a> will help close the information gap in smallholder agricultural finance. This will be an opportunity to learn how better information-sharing can catalyze growth and product development across the smallholder finance sector.</li>
 	<li><a href="https://www.habitat.org/">Habitat for Humanity</a>, <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>, and <a href="https://www.omidyar.com/">Omidyar Network</a> will host a session in Washington, D.C. titled Promoting Access to Finance for Affordable Housing. During the session, microfinance CEOs who, with the help of Habitat for Humanity’s <a href="https://www.habitat.org/impact/our-work/terwilliger-center-innovation-in-shelter/microbuild">MicroBuild Fund</a>, have led the way in developing housing finance products will share their stories.</li>
</ul>
It’s not too late for you or your organization to get involved. If you haven’t made plans for the Week yet, here are a few suggestions:

Host a conversation: You can organize a small internal or external conversation to discuss the theme New Products, New Partnerships, New Potential. The conversation will be promoted on the Financial Inclusion Week website as well as on social media. Following the event, the convening will get a dedicated page on the Financial Inclusion Week website to highlight key messages, photos, and other materials from the event.

We welcome you to pick the event format that works best for you. That may be a larger event or a smaller conversation, occurring in-person, by conference call, or via webinar. The most important thing is that your event fulfills our common purpose of having conversations that are significant for advancing financial inclusion. We’ve developed <a href="http://financialinclusionweek.org/toolkit2017/">a full set of resources for planning and promoting your event</a>.

Integrate Financial Inclusion Week into planned events: If you already have an event planned during the week of October 30th, and it aligns with the Week’s theme, we would love to promote your event as part of Financial Inclusion Week and share your work with the FI Week community.

Join a webinar or watch live-streaming events: Stay tuned for a full calendar of events to be launched next week. There, you will find webinars and online events covering a wide range of topics. Register and fill out your calendar for Financial Inclusion Week.

Write a blog post or join the conversation on social media:  We encourage you to write a blog post focused on how new products and new partnerships are unlocking great potential for reaching and better serving underserved customer segments. You can post these on your own sites and/or reach out to us on potentially posting these on the CFI Blog. We also welcome you to join the conversation on Twitter and Facebook, with the hashtag #FinclusionWeek.

Explore the <a href="http://www.financialinclusionweek.org/">Financial inclusion Week website</a> for more information or reach out to Allyse McGrath at <a href="mailto:amcgrath@accion.org">amcgrath@accion.org</a> with any questions.

Have you read?

<a href="https://cfi-blog.org/2016/11/17/financial-inclusion-week-roundup-e-magazine-keeping-clients-first-in-a-digital-world/">Financial Inclusion Week Roundup E-Magazine: Keeping Clients First in a Digital World</a>

<a href="https://cfi-blog.org/2017/03/03/when-the-data-is-not-enough/">When the Data Is Not Enough</a>

<a href="https://cfi-blog.org/2014/03/31/asset-based-financing-and-flexible-repayment-schedules-to-better-serve-africas-smallholder-farmers/">Asset-Based Financing and Flexible Repayment Schedules to Better Serve Africa's Smallholder Farmers</a>

Have You Marked Your Calendars for Financial Inclusion Week 2017?

Mexico

Financial Inclusion Week

Agent Banking

Digital Financial Services

&gt; Posted by Brigitta Nyawira, Program Manager, Grameen Foundation

<a href="https://www.youtube.com/watch?v=3EjbTJF99aw"><img class="aligncenter wp-image-24199" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/10/grameen-foundation-screenshot.png" alt="" width="614" height="314" /></a>Alice is a smallholder farmer in Machakos, a semi-arid town east of Nairobi, where subsistence farming is prevalent. Most farmers in Machakos grow maize and other drought-resistant crops for domestic consumption and sell whatever little surplus they have at the gates of their farms and in local markets. Until recently, Alice struggled to make a decent living from her small plot of land and small grocery. She did not have the inputs required to increase her productivity, and her farming skills were basic at best, learned through season after season of trial and error. Farming was frustrating because it barely gave her enough money to feed her three children, take them to school, and pay hospital bills. But without capital and the requisite skills to expand her income sources, it was the only thing she could do.

Alice’s story is not uncommon. Smallholder farmers across Africa still face obstacles accessing suitable, affordable financial services. This is especially acute for women.

According to the Food and Agriculture Organization (FAO) of the United Nations, 80 percent of the arable land in Sub-Saharan Africa is managed by smallholder farmers, with women accounting for 50 percent of the agricultural labor force. In Kenya, where 75 percent of the population makes a living from agriculture (directly and indirectly) and the sector accounts for 24 percent of GDP, only 4 percent of the country’s total credit is channeled to agriculture. A fraction of that goes to women smallholder farmers.

Where credit is available, traditional lenders, who typically view smallholder farmers as being high risk, require a series of hard-to-meet pre-requisites in order to access credit. Smallholder farmers are commonly asked to produce a title deed to their land, or demonstrate financial stability that can only be verified through bank statements. Most will not meet these minimum requirements. This keeps smallholder famers in Kenya locked in a vicious cycle of poor inputs, low productivity and low income. It is particularly hard for women, who traditionally have not been allowed to own property, require their husbands’ consent to open a bank account, and have primarily worked at home or on the farm, making little or no money at all. Any money they would make would either be given to the husband, or channeled back to the home to cater for the needs of the household. Without collateral, savings or financial records, it has been nearly impossible for women in Kenya to access formal financial services.

To address these challenges and provide access to a suitable, affordable and accessible agricultural loan, Grameen Foundation and Musoni Kenya, a local microfinance institution that operates mainly in rural Kenya, collaborated to design Kilimo Booster. The loan product is tailored to the needs of smallholder farmers.

Unlike other loans, its flexible repayment terms correspond to farmers’ harvest cycles and cash flows. Equally important, funds are disbursed directly into farmers’ mobile money accounts no more than 72 hours after a loan is approved. Additional features also make Kilimo Booster especially convenient to women.
<h4>Groups Are Still Important</h4>
The Kilimo Booster loan utilizes the group methodology in which members co-guarantee each other for loans. This type of social collateral typically works well for women as they are already accustomed to the workings of informal savings and credit groups, and because it eliminates the need to prove financial stability through bank statements and traditional collateral.
<h4>Technology Extends Reach</h4>
Musoni Kenya’s operations are powered exclusively by mobile technology. Applications for Kilimo Booster are made via a digital field app and loan disbursements and repayments are made via mobile money technology. This is typically a welcomed feature among the women, who do not have to leave tending of the home and farm to travel to a Musoni branch in town for their loans to be processed. According to Alice, “Using the mobile phone is easy for us and it saves time. No one knows what you are doing, or if you have money, so it is also safe for us.”

Using digital technology, the loan application process has been simplified enough to accommodate everyone, regardless of their education levels. The loan officer visits the farmers in their homes, collects all the necessary information digitally, and once the loan is processed, the women can cash out at a mobile money agent, typically found within a 5 kilometer radius. Kenya’s mobile phone penetration, which stands at 90 percent (more than 75 percent of them are registered mobile money users), has provided an enabling environment for the uptake of digitally-enabled products such as Kilimo Booster.
<h4>Targeted Outreach</h4>
Since its roll-out in 2013, more than 17,000 Kilimo Booster loans have been disbursed, with women receiving 55 percent of the loans. To continually reach more women, Kilimo’s marketing activities are focused in rural areas, specifically in rural marketplaces, where the population of women is higher. In addition to financing, Grameen Foundation and Musoni offer farmers training on an ongoing basis, thus building their skill set and enabling them to take on and profitably utilize higher loan amounts.

Alice’s experience demonstrates how the right product can overcome the barriers to financing smallholder farmers. She has graduated from her first loan of US$200 to a loan of US$2,000, which she has used to expand her farming activities. She now grows vegetables and green grams, in addition to maize, and has also expanded into poultry, dairy goats, rabbits and guinea fowl. This has helped to smooth her income and create a stable agribusiness.

As she says in the video, “If I compare myself to people who are not with Musoni, they cannot do business the same way I do.”

Have you read?

<a href="https://cfi-blog.org/2017/07/19/how-women-help-women-gain-control-of-their-financial-lives/">How Women Help Women Gain Control of Their Financial Lives</a>

<a href="https://cfi-blog.org/2017/03/23/will-the-crowd-support-more-women-agents/">Will the Crowd Support More Women Agents?</a>

<a href="https://cfi-blog.org/2017/06/23/helping-women-control-their-financial-lives-through-digital-financial-services/">Helping Women Control Their Financial Lives through Digital Financial Services</a>

How Mobile Money Is Closing the Agricultural Finance Gap for Women in Kenya

Kenya

Mobile Banking

Women

&gt; Posted by Bruce MacDonald, Vice President, Communications and Operations, CFI

The following post was <a href="http://nextbillion.net/letter-from-mindanao-part-2-rural-banking-and-the-promise-of-cacao/">originally published</a> on NextBillion.

<img class="aligncenter wp-image-21374" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/05/first-valley-488.jpg" width="615" height="426" />In <a href="https://cfi-blog.org/2016/05/18/letter-from-mindanao-part-1-the-impact-of-asean-integration-on-banking-in-the-philippines/" target="_blank">part one of this post</a>, Bruce discussed the potential impact of ASEAN Integration on banks in the Philippines, informed by his recent visit to the country. In part two below, he continues exploring the challenges and opportunities facing one of these institutions, 1st Valley Bank in Cagayan de Oro, Mindanao. 

Though national bank liberalization has led commercial Philippine banks to acquire more rural and thrift banks, potentially increasing competition for 1st Valley, it has also provided the bank with a unique advantage. A 2013 amendment to the Rural Banking Act allowed foreign investment in Philippine banks which, in turn, permitted a new company called Bridge, led by American Paul Kocourek and Englishman Gus Poston, to invest in 1st Valley. Kocourek and Poston, both with deep regional banking experience, founded Bridge in order to help build a strong network of provincial Philippine banks committed to social impact. Identifying rural finance as the “missing component of inclusive banking,” their aim is to provide critical capital for growth, but also assistance in product design, risk management and more. 


Bridge came to market in March of 2013 with $24 million in funding, provided by microfinance investment vehicles such as Bamboo Finance and national development banks such as the German DEG and Dutch FMO. (Full disclosure: Accion is also an investor and operating partner in Bridge.) 1st Valley was Bridge’s first investment, and remains its crown jewel. “The growth opportunities in [1stValley’s] target markets are huge,” says Poston. “There are 1.3 million farms in the areas where 1st Valley operates, and the bank is only lending to 7,000 at the moment. To put it into perspective, Mindanao is about the size of Cambodia. There’s approximately $5 billion of microfinance lending in Cambodia. ‘Inclusive banking’ in Mindanao is smaller than a billion dollars.”

The Bridge investment has added substantial heft to the bank’s foundation and prospects, although no one underestimates the magnitude of the task ahead. While 1st Valley President and CEO Nicolas “Sonny” Lim lists bank liberalization and the threat of ASEAN integration among his concerns, Poston throws in a few more challenges. “Typhoons, land holding questions, security issues … we face specific barriers to lending in the Philippines,” he says. “1st Valley’s challenge is to continually improve its product offering, service quality and risk-management methodology so that it can reach more farmers and microfinance clients.”

Magic Beans

Bridge’s imprint can be seen and felt particularly in product development, helping to create tools such as new loans for poultry farmers and micro-insurance. But perhaps the most important new product is 1st Valley’s cacao loan.

Eighty to 90 percent of the world’s cacao (the raw ingredient in chocolate, cocoa butter and many other popular products) is produced by small, family-run farms – farms that must be no more than 15 to 20 degrees in latitude from the equator. Cacao, says Lim, can be grown in only 36 countries in the world – but it thrives in the soil and climate of the islands’ palm-shaded small holdings, and is productive within 18 to 24 months. That makes the Philippines ideally placed to help address a global cacao shortage that <a href="https://www.washingtonpost.com/news/wonk/wp/2014/11/15/the-worlds-biggest-chocolate-maker-says-were-running-out-of-chocolate/" target="_blank">some say will reach a million metric tons by 2020</a>. Since 1670 cacao has been a cash crop in the Philippines. By the 1980s, national production had reached 40,000 metric tons. By 2013, however, land reform and diseases had conspired to whittle that down to some 8,000 tons.

In response, the Department of Agriculture flagged cacao as a High Value Crop – a banner program created to help address food security, poverty alleviation and sustainable growth. Through the Philippine Cacao Challenge, the country committed to producing 100,000 metric tons by 2020, and has included cacao as part of its National Greening Program, an initiative to reforest the country. Mindanao, already delivering 90 percent of the country’s crop, was identified as ground zero.

A 1st Valley cacao loan provides borrowers up to 75,000 pesos ($1,600) over seven years. The bulk of the loan is delivered up-front, with two years’ grace given as the crop becomes established, initial installments reduced, and full installments required only during the last four years, as the plants become fully productive. To help ensure success, the bank partnered with Philippine agribusiness company Kennemer Foods International, which created a complete agricultural value chain for the smallholder farmer. This included seedlings, fertilizer, pest control, agronomy assistance and training – training not only for the growers, but also for bank staff. Farmers who follow their protocols, says Kennemer, will see their yields quadruple.

The support is typical – and timely. Mindanao is eight months into a widespread drought, the result of a powerful El Niño that has shaped Philippines weather for a year. Despite lower growth rates as a result, however, Poston reports that clients’ first cacao plantings are already producing pods.

He and Lim are forthright about the work ahead for 1st Valley:  improved risk management, expansion into electronic channels, growth across all loan products and term deposit accounts. Expectations for microfinance and SME lending, in particular, are high – 7 million pesos ($150,000) per month for the microfinance portfolio, for example, or 80 percent growth year on year. And addressing delinquency, with the total outstanding balance of loans past due for more than 30 days currently at nearly 10 percent, is paramount.

There’s work for Bangko Sentral ng Pilipinas (BSP), too. “The central bank still has a lot of problems to solve, especially in the rural banking industry,” Lim says. While the number of rural banks has declined by a third in recent years, to around 650, he estimates that only 200 are profitable and healthy.

As for ASEAN integration, Poston evinces little concern. “We have to be realistic about the difference between rural banking and commercial banking,” he says. “1st Valley is targeting hard-to-reach rural clients and providing them with microfinance, SME and agricultural loans, which require totally different skill sets from other forms of banking. I don’t think there will be a major foreign competitor operating in rural Mindanao. Even the local banks are reluctant to expand in these areas.”

Road Under Construction

[caption id="attachment_21376" align="alignright" width="330"]<img class="wp-image-21376" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/05/first-valley-626.jpg" width="330" height="220" /> Rice farmer and 13-year client of 1st Valley, Luz Hernando, Lala, Mindanao.[/caption]

To get a true feel for 1st Valley, one must leave Cagayan de Oro and get out to the country. For two days we made our way west along Mindanao’s northern coast road, stopping to visit branches and clients en route. We met Discy Santiago, a first-grade teacher at Iligan City Central School, who took out a salary loan to cover her sister’s medical expenses. In Lala, we met rice farmers such as Luz Hernando (pictured left), whose supervised credit helps ensure that her 2.5-hectare tenant farm is as productive as possible. The loan addresses every phase of the production cycle, from fertilizer and seed through to a guaranteed buyer (1stValley itself, if for any reason the farmer can’t sell their crops on the market – and at market price). “It’s like a family here,” Mimi Enad, the bank’s head of risk, told us.

The coast road itself is a work in progress. Pedestrians, motorbikes and cars wrangle and compete for space. Blind corners, high speeds, and games of “chicken” favor the nimble and strong of nerve. Cavernous potholes attest to the road’s importance; endless repaving projects emphasize the challenge. And every once in a while, for a brief second, comes a glimpse through the palms of the electric-blue Bohol Sea, like a travel poster advertising a reward for a job well done. Somewhere in there is a metaphor for 1st Valley.

The Philippines cast a long shadow in financial inclusion. To its credit go the earliest mobile money solutions, SmartMoney and GCash. The country perennially scores at the top of The Economist’s “Global Microscope” report, an annual assessment of enabling environments for financial inclusion. The BSP, among the most far-sighted, client-protection-friendly and highly regarded of central banks, keeps a sure hand on the levers of finance. It has always been a country to watch. And as Kocourek and Poston intended from the start, perhaps the Philippines is just the right place to address rural finance, that missing component of inclusive banking.

Image credits: Bruce MacDonald

Have you read?

<a href="https://cfi-blog.org/2016/05/18/letter-from-mindanao-part-1-the-impact-of-asean-integration-on-banking-in-the-philippines/">Letter from Mindanao, Part 1: The Impact of ASEAN Integration on Banking in the Philippines</a>

<a href="https://cfi-blog.org/2014/12/12/asias-top-country-on-financial-inclusion-policy-the-philippines-strengthens-its-microfinance-market/">Asia’s Top Country on Financial Inclusion Policy, the Philippines, Strengthens Its Microfinance Market</a>

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Letter from Mindanao, Part 2: Rural Banking and the Promise of Cacao

Philippines

&gt; Posted by Bruce MacDonald, Vice President, Communications and Operations, CFI

The following post was <a href="http://nextbillion.net/letter-from-mindanao-part-1-the-impact-of-asean-integration-on-banking-in-the-philippines/">originally published</a> on NextBillion.

<img class="aligncenter wp-image-21361" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/05/unspecified.jpg" width="615" height="410" />As 2016 New Year’s resolutions went, few matched the enthusiasm, ambition and fragility of the commitment made by the Association of Southeast Asian Nations (ASEAN). On Jan. 1, its 10-member countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – inaugurated the ASEAN Economic Community, a common market whose goal is to forge a prominent regional bloc to rival China and Japan, and bring economic well-being to its 625 million citizens.

Some 13 years in the making, the Community promises an increasingly free flow of services, investment, skilled labor and capital to a market that is now larger in terms of population than either North America or the European Union. Such a single market, its creators envision, will increase intra-ASEAN trade and justify greater spending on infrastructure. Currently, the six leading nations in the group (Indonesia, Malaysia, Thailand, Singapore, the Philippines and Vietnam, a.k.a., ASEAN-6) allocate an average of 26 percent of their GDP to investment, which any recent visitor to Manila or Jakarta might argue is nowhere nearly enough.

Where one stands on ASEAN integration depends, of course, on where one sits. On a recent visit to the Philippines, we posed the question to various people, including government and central bank officials, and bankers whose businesses will be impacted by the Community.

'Sweet Spot'

As 2016 neared, the Philippines government expressed confidence that the nation was ready for integration. The country’s 6.3 percent growth rate, the highest five-year average in the last four decades, puts the nation in a “sweet spot,” said Department of Trade &amp; Industry Secretary Gregory Domingo. Citing projections from HSBC and Goldman Sachs, Domingo predicted the Philippines would be the fifth-largest economy in Asia by mid-century, and the 14th largest in the world. He added, however, that prioritizing micro, small and medium enterprises (MSMEs) in the regional trade agenda was critical; Philippine MSMEs comprise 98 percent of all registered GDP.

The Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), was less sanguine. Under the ASEAN Banking Integration Framework, qualified ASEAN banks will be allowed to establish operations throughout the Community. Greater competition is a given. Regional integration would, for example, drop BDO Unibank, the Philippines’ largest bank as measured by assets, to the 19th spot in ASEAN. To help prepare banks to compete in a regional system, the BSP is adopting higher capital requirements, enhancing credit-risk management rules and raising governance standards, among other actions.

“It is imperative that you define and carve out your comparative advantage in our local market,” advised BSP Governor Amando Tetangco in a speech to Philippine bankers just before the Jan. 1 deadline. In case the message wasn’t clear, he added, “If you have not done so, you will need to make those tough decisions now to give yourselves time to execute your strategic goals.”

The ASEAN Way

Time, fortunately, appears to be on bankers’ side. Integration will be delayed, if not confounded, by an approach among ASEAN members that favors consensus-based decision-making and a policy of non-interference in the internal affairs of others – the “ASEAN way,” as it has come to be known. An absence of penalties for noncompliance and the lack of a powerful central bureaucracy add to the challenge.

Unlike the EU, ASEAN has no plans for a common currency, and cross-border travel is still limited. Trade liberalization is the only aspect of the Community’s vision that shows any significant progress. Nearly all of the items the top six countries have agreed to put on the <a href="http://www.asean.org/asean-economic-community/asean-free-trade-area-afta-council/">“inclusion list”</a> are free of tariffs. Nevertheless, countries such as Indonesia and the Philippines have held back many important agricultural and food-related products from the inclusion list, citing a food security rationale. Development gaps and infrastructure differences between and among ASEAN-6 and the less developed ASEAN-4 nations present have added obstacles. ASEAN financial integration, the Financial Times pronounced recently, is “embryonic.”

<img class="alignright wp-image-21362" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/05/dsc_2261.jpg" width="330" height="220" />Nicolas “Sonny” Lim (pictured right) did not exactly exude enthusiasm over the prospect of integration when we asked, but neither did he sound particularly concerned. It is, he says, just one factor he considers in his strategic planning. Lim is president and CEO of 1st Valley Bank in Cagayan de Oro, Mindanao. Rural and family-owned, medium-sized but growing, profitable but not without pressures, 1st Valley works on the front line of bringing ordinary citizens into the global economy. Founded in 1956 by Sonny’s father, Rosario, as the Rural Bank of Kapatagan Valley, it was created to serve the rice and corn farmers of the north-central provinces of Mindanao, the Philippines’ second-largest and southernmost island.

A rice farmer himself, the elder Lim understood his clients’ needs. The bank grew – not stupendously, but steadily – and eventually merged with the Rural Bank of Sinacaban in 2005 to become 1st Valley. With 60 to 70 percent of the Philippines’ rural population lacking a bank account, says Lim, and only a mere 6 percent of business growth in small, provincial businesses funded by bank lending, 1st Valley’s mission and market is to reach these businesses and households with support and economic prosperity. Today, 37 branches serve more than 70,000 clients, making it one of the Philippines’ largest rural banks.

Fully 61 percent of 1st Valley clients use loans for agriculture, typically rice and corn, and now, increasingly, cacao. Two loan types are offered: those secured by land or salary stream, and those that are unsupervised (uncollateralized). Salary loans of up to 525,000 pesos ($11,200), made mainly to government employees and teachers, account for 2.4 billion pesos ($51 million), or almost half of 1st Valley’s portfolio. Microfinance loans of up to 300,000 pesos ($6,400) comprise a small share of the bank’s portfolio, but serve as an important test bed for all its credit products. Small and medium enterprise (SME) lending, from 300,000 to 5 million pesos ($6,400 to $106,000), accounts for 10 percent of the portfolio and is growing at 30 to 40 percent per year, with plans to ramp it up even faster.

National bank liberalization has already led commercial Philippine banks to acquire more rural and thrift banks, potentially increasing competition for 1st Valley. The big banks see money, Lim says, particularly in salary loans. Christian-Muslim antagonism and Communist insurgency – the latest attack by the New People’s Army blared from Cagayan de Oro headlines the day we arrived – add spice to his planning challenges. For now, he explains, 1st Valley will focus on what it does best: agricultural and SME lending, and microfinance.

Image credits: Bruce MacDonald

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Letter from Mindanao, Part 1: The Impact of ASEAN Integration on Banking in the Philippines

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

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

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

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

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

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

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

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

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

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

Image credit: Accion

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

P2P Lending

Pensions and Retirement Saving

&gt; Posted by Andrew Fixler, Freelance Journalist

<a href="https://www.flickr.com/photos/38476503@N08/21760883046/"><img class="alignright wp-image-20783" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/03/21760883046_408ce22872_z.jpg?w=490" alt="" width="330" height="220" /></a>Consolidation and investment in coffee brands is reaching a fever pitch, according to Andrew Daday, Director of Coffee for <a href="https://www.stumptowncoffee.com/">Stumptown Roasters</a>. Coffee is the second-most traded commodity in the world, and the modal coffee farmer is a smallholder living near or below the poverty line, resulting in unique value chains in Latin America, East Africa, and Southeast Asia. These value chains are characterized by factors like the <a href="http://www.investopedia.com/university/commodities/commodities2.asp">commodity coffee markets</a>, agronomics, organization/associations of growers, government coffee marketing institutions, and the state of rural financial services. <a href="https://en.wikipedia.org/wiki/Specialty_coffee">Specialty coffee</a> is characterized by meeting particular quality standards. Specialty coffee production allows some farmers to escape the vicissitudes of the commodity coffee market and to capture value commensurate with their product’s quality and input costs. In the United States, <a href="http://www.scaa.org/?page=resources&amp;d=facts-and-figures">55 percent</a> of the 48 billion dollars of coffee retail value consumed falls into the specialty category – representing immense growth in recent decades. If bullishness ratifies the growth prospects for high-end coffee in the U.S. and abroad, it is worth looking into how scaling will manifest at the agricultural end of the value chain, because the relationships coffee farmers have with downstream firms impact their well-being in a number of ways, including via their access to financing.

Agriculture finance for smallholders can be an operationally-intensive, high-risk enterprise. However, financial institutions like the Netherlands’ Rabobank and Mexico’s Banorte <a href="http://www.fao.org/docrep/017/i0846e/i0846e.pdf">express</a> that agricultural credit is especially viable and profitable if “producers are well-integrated into a viable value chain.” Linking into a larger firm’s supply chain is a boon to small business growth in many contexts. Besides serving as a “<a href="https://nycfuture.org/pdf/Giving_Small_Firms_the_Business.pdf">springboard for growth</a>” for small businesses from increased market access, buyer-supplier linkages yield exposure to key industry information and data points along the value chain that contribute to better capital allocation and financial accessibility for qualified entrepreneurs. Linking with a value chain may also <a href="https://www.microlinks.org/good-practice-center/value-chain-wiki/value-chain-finance">enable</a> a transition from informal lending, which can rely overwhelmingly on local knowledge for underwriting, to the formal financial services sector.

Viability of financing increases when value chain linkages are stronger and are used as intangible collateral. While building relationships with farmers, buyers consider smallholder attributes similar to those examined by credit underwriters. This translates into easier screening of potential borrowers, disbursement and repayment of loans, and management of collateral and risk. A detailed understanding of the quality of value chain linkages can further assure lenders of farmers’ future revenue streams. Lead firms in the value chain depend on supplier quality and resilience, so they may actively play a role in facilitating outside financing, or in rarer cases directly finance their partners through product and receivables financing.

In specialty coffee, value chain integration is diligently forged. The <a href="http://www.scaa.org/chronicle/2012/02/14/direct-trade-the-questions-answers/">direct trade</a> model is defined by a transparent relationship between farmer and roaster starting with contract negotiation, and continuing through a long-term alignment of interest in the farm’s growth, stability, and sustainability. Scalability is built on a knowledge network supported by government coffee institutes and international coffee raters, like the Cup of Excellence or Coffee Analysts, as well as roasting companies. In different manifestations of specialty coffee trade, this network is tapped in order to scale the number of producers as demand grows. So as coffee consumption grows, and the market share of specialty coffee increases, more farmers will enter close relationships with international firms.

For example, Starbucks runs <a href="http://www.starbucks.com/responsibility/community/farmer-support/farmer-support-centers">Farmer Support Centers</a> to <a href="https://books.google.com/books?id=xRL32pfxl8gC&amp;pg=PA123&amp;lpg=PA123&amp;dq=starbucks+farmer+support+center+costa+rica+value+chain+finance&amp;source=bl&amp;ots=3SSBDQ0BaU&amp;sig=WCgKAGGOsmXCnfI795B-XKssiQg&amp;hl=en&amp;sa=X&amp;ved=0ahUKEwiygoKjmezKAhULMz4KHUGfDF4Q6AEIMzAD#v=onepage&amp;q=starbucks%20farmer%20support%20center%20costa%20rica%20value%20chain%20finance&amp;f=false">ensure</a> the company can meet growing demand. They administer an array of resources and support to growers, and bring new farmers into the company’s fold.

Specialty coffee allows farmers to recoup investments in increased quality by assuring that their produce will be processed and sold by a series of actors that will recognize the beans’ quality and distinctive identity. Additionally, the degree to which coffee farmers capture returns on their products’ distinct value attributes <a href="https://books.google.com/books?hl=en&amp;lr=&amp;id=mwpAO0J9ojgC&amp;oi=fnd&amp;pg=PR8&amp;dq=history+of+coffee+commodity&amp;ots=iESGIxaVI-&amp;sig=VwMnMFr3BYKA9h8D2KKy3G8Z55M#v=onepage&amp;q=history%20of%20coffee%20commodity&amp;f=false">determines a significant component of their market power</a>. Daday explained that <a href="https://en.wikipedia.org/wiki/Third_wave_of_coffee">third wave coffee roasters</a> (specialty coffee roasters which consider coffee more an artisanal foodstuff than commodity) buy beans from a single origin in shipping container-sized quantities, and at a premium price. This further entrenches a mutual dependence, and cements the negotiational potence of specialty coffee producers relative to their counterparts who sell coffee destined for the commodity market.

Beyond the rarified world of third wave coffee roasters, retailers are investing in their value chains, often with regard for the financial externalities this avails to their businesses and those of their partners. Starbucks’ Director of Coffee Sustainability and general manager of the Starbucks Agronomy Company notes in a <a href="http://www.fao.org/3/a-i0016e.pdf">2006 seminar</a> that sustainability and risk control are paramount in the company’s value chain. This might manifest in partnerships with impact investors who can finance growers with whom the coffee company hopes to build a long term relationship. Recently, Keurig Green Mountain, Coffee Cooperatives, Starbucks, and USAID partnered with Root Capital to target the Roya blight, a leaf rust endemic to Latin America which causes a <a href="http://www.fomin.org/en-us/Home/FOMINblog/Blogs/DetailsBlog/ArtMID/13858/ArticleID/2179/NoTitleLink.aspx">half billion dollars in losses</a> annually when left unmitigated. Their <a href="http://www.rootcapital.org/about-us/press-releases/usaid-keurig-green-mountain-cooperative-coffees-starbucks-and-root-capital">efforts</a> will allocate $23 million, including $15 million in investment capital, to technical assistance and farm-rehabilitation efforts. Part of the technical assistance includes advice on negotiating ongoing Roya prevention costs into contracts.

From coffee to cocoa to other crops, there are roughly 500 million smallholder farmers around the world. As lessons learned in supply chain sophistication and agriculture financing amass in the growing artisanal produce and mass market grocery industries alike, the prospects for entrepreneurial smallholders may significantly brighten.

Image credit: <a href="https://www.flickr.com/photos/38476503@N08/21760883046/">CIAT</a>

This post was modified from its original version on March 4, 2016.

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Coffee Connections: Improving Smallholder Inclusion through Value Chain Finance

Risk Management

Smallholder Farmers

Underwriting

Editor's Note: Eric Noggle worked at Microfinance Opportunities when this research was conducted and published.

In 2014, <a href="http://fsdzambia.org/">Financial Sector Deepening Zambia</a> and <a href="https://www.microfinanceopportunities.org/">Microfinance Opportunities</a> (MFO) began the Zambia Financial Diaries—a 52-week study of the financial lives of 352 low-income Zambians. The study included 92 smallholder farmers—individuals who own small plots of land on which they grew crops or tended livestock for sale and/or subsistence.

The Zambian smallholder farmers represent only a tiny fraction of the estimated 500 million smallholder households worldwide. Smallholder farmers are a large livelihood group and addressing their diverse needs—from crop diversification to market integration—is a strategic priority for the World Bank Group, country-level governments, and non-government organizations.

Understanding smallholder farmers’ income patterns is critical for designing financial services that meet their financial needs. The common perception of farmers’ income patterns is that they are lumpy and linked to agricultural cycles, but the income patterns identified in MFO’s Zambia Financial Diaries challenge this perception.
<h2>Income Patterns</h2>
<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-12.png"><img class="alignright wp-image-20735" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-12.png" alt="" width="350" height="88" /></a>The farmers in MFO’s study had lower and more variable incomes than respondents who earned the majority of their income from informal, off-farm sources (“informal workers”). The farmers had 4.3 income sources on average, often relying on casual labor or running informal shops to supplement their agricultural activities, while informal workers had 3.3 sources. Farmers’ average weekly earnings were low—only about $19 per week on average compared to $50 for informal workers (based on June 2015 exchange rates). The farmers also experienced more week-to-week income variation, as measured by the coefficient of variation (COV), than other respondents who work in the informal economy.

However, these data mask the diversity of smallholder farmers’ income patterns. The study found farmers who earned large sums frequently, while others had large and inconsistent windfalls. Lower-income farmers also had diverse patterns, with some earning small sums on a frequent basis while others went weeks between earning income.

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-23.png"><img class="aligncenter wp-image-20737" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-23.png" alt="" width="615" height="232" /></a>

MFO developed a simple market segmentation framework to understand the role of income patterns in financial service design better. The framework comprises two dimensions: average weekly income and week-to-week income variation as measured by the COV. We divided respondents into high- or low-income groups at the median of average weekly income and high- or low-variation groups at the median of the COV.

&nbsp;
<h2><a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-32.png"><img class="aligncenter wp-image-20738" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-32.png" alt="" width="615" height="299" /></a></h2>
<h2>Implications of Segmenting by Income Behavior</h2>
The segmentation framework demonstrates the diversity of smallholder farmers’ income patterns and their similarity to the income patterns of informal workers. This finding should encourage stakeholders to prioritize collecting information about consumers’ income patterns when designing financial services for the low-income market segment. The financial needs of a smallholder farmer with high, steady income are more similar to those of a micro-entrepreneur with the same income pattern than a smallholder farmer who irregularly earns small sums. Recognizing these inter-livelihood similarities can help stakeholders mitigate inefficiencies in the design, marketing, and delivery of financial services.

&nbsp;

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-41.png"><img class="aligncenter wp-image-20739" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/02/figure-41.png" alt="" width="615" height="232" /></a>

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Stakeholders focused specifically on smallholder farmers should consider the needs and opportunities that these income patterns suggest. For instance, a farmer with high income and high variation may benefit from interventions that allow the farmer to diversify on- and off-farm income sources. This diversification could lead to more consistent annual income. A farmer with high income and low variation may be best suited for interventions that support the expansion of farming activities through asset financing or linkages with local markets. Farmers with low-income and high variation may struggle to piece together the income necessary to purchase inputs during the planting season; thus, a layaway product might be beneficial for them. Cash transfers from government agencies or non-governmental organizations would help farmers with low-income and low variation pay basic on- and off-farm expenses that their meager earnings cannot cover.

Income patterns alone should not inform the design of financial services for smallholder farmers, but they are a critical component in the process. MFO’s hope is that this study and other research can help improve the efficacy of interventions meant to help this diverse group.

For more information on the research methodology and additional findings, please read the <a href="https://www.microfinanceopportunities.org/?p=2824">Zambia Financial Diaries Interim Report</a>.

Have you read?

<a href="http://cfi-blog.org/2014/09/10/pay-for-performance-operationalizing-the-embedded-education-model/">Pay-For-Performance: Operationalizing the Embedded Education Model</a>

<a href="http://cfi-blog.org/2014/06/11/climate-change-adaptation-for-smallholder-farmers/">Climate Change Adaptation for Smallholder Farmers</a>

<a href="http://cfi-blog.org/2013/11/01/what-is-financial-capability/">What Is "Financial Capability?"</a>

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Using Income Patterns to Segment Livelihood Groups: The Case of Smallholder Farmers

Zambia

Underserved Groups

&gt; Posted by Center Staff

<a href="http://newsfeed.financialinclusion2020.org/"><img class="aligncenter wp-image-18655" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/07/fi2020-issue-five.png" alt="fi2020 issue five" width="614" height="329" /></a>

Good afternoon! Freshly published is this week’s Financial Inclusion 2020 News Feed, sharing the big news in banking the unbanked. Among its stories are a new partnership between MetLife Foundation and Opportunity International to expand financing and skills training in rural China, the launch of a World Food Programme initiative that integrates climate risk reduction with financial services, and the release of the first annual Consumer Banking PACE Index, which gauges bank performance to consumer expectations. Here are a few more details:
<ul>
 	<li>MetLife Foundation and Opportunity International have embarked on a three-year partnership to support thousands of small businesses in rural China with financial services and business development training via banks, mobile vans, and rural service centers.</li>
 	<li>The World Food Programme launched the R4 Rural Resilience Initiative, which helps smallholder famers in Zambia navigate environmental demands using index-based agricultural insurance, improved natural resource management, credit, savings, and productive safety nets.</li>
 	<li>The new Consumer Banking PACE Index, drawing on input from over 9,000 consumers, examines bank performance in a handful of countries around the world to conclude that, among other findings, fair and transparent pricing falls below consumer expectations, and trust in banks remains an issue.</li>
</ul>
For more information on these and other stories, read the fifth issue of the FI2020 News Feed <a href="http://newsfeed.financialinclusion2020.org/">here</a>, and make sure to subscribe to the weekly online magazine by entering your email address in the right-hand menu so you can be notified when the latest issue comes out.

Have you come across a story or initiative you think we should cover? Email your ideas to us at <a href="mailto:ezuehlke@accion.org">ezuehlke@accion.org</a>.

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Rural Finance in China, Climate Risk Reduction, Meeting Consumer Expectations – the Latest FI2020 News Feed

Financial Inclusion 2020

Mapping the Invisible Market

Partnership for Responsible Financial Inclusion

The Smart Campaign

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

Anastasia Ngala has to make sure her crops can thrive with only two rains per year. “We have long rain and short rain. We plant for the short rains this November. I am happy when it rains because I sell my farm products and earn my income.” Missing one of these rains can mean ruin for Anastasia’s harvest and financial hardship for her family of nine. But farming is Anastasia’s way of life and her only source of income. When she learned about Accion Venture Lab portfolio company <a href="https://www.pula-advisors.com/">Pula</a>, she recognized the opportunity to further develop her agricultural skills while insulating herself from bad harvests.  

[caption id="attachment_18776" align="alignleft" width="500"]<img class=" wp-image-18776" src="https://content.accion.org/wp-content/uploads/2019/06/Kitui_0051-1024x684.jpg" alt="Pula employee Jacobeth Barno" width="500" height="334" /> Pula employee Jacobeth Barno[/caption]

Pula, a cutting-edge insurtech startup, focuses on providing crop insurance to traditionally underserved smallholder farmers. “It’s important to solve that sector because as soon as we support the smallholder farmer, we will directly be changing a lot of things in the dynamics of the economy,” says Pula employee Jacobeth Barno. As a Pula customer, Anastasia can access data-driven farming insights that boost her crop yields while also having the peace of mind that she will be compensated if the harvest fails. “When I planted without Pula, I took a risk that it was okay if I harvested or lacked yields. I was 50-50. But now, I am 99 percent assured by Pula,” she says.

The benefits of Anastasia’s relationship with Pula have been tangible. With the confidence of her Pula coverage, she has grown her farm from three to five acres and has encouraged her children to work with Pula. Anastasia has also become a vocal Pula advocate outside of her home. She urges her friends and neighbors to look into the benefits, “Some of my neighbors want to join the insurance because they have known about compensation and also want to get compensated.” Now, Anastasia has confidence that she can provide for her family and grow her farming capabilities to new levels.

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<img class="size-large wp-image-18779 alignnone" src="https://content.accion.org/wp-content/uploads/2019/06/Kitui_0037-1024x684.jpg" alt="Pula client Anastasia" width="1024" height="684" />

After seeing the benefits of crop insurance, Anastasia’s an advocate

Pula

Entrepreneur

Institutional Funder

Social Good

Accion Venture Lab

The real impact of financial inclusion

<a href="https://apolloagriculture.com/">Apollo Agriculture</a>, a young startup based in Kenya, has ambitious plans. The company supports smallholder farmers with a suite of offerings, ranging from customized packages of seed and fertilizer to technology-aided information on agricultural techniques and weather forecasts, to insurance products to provide a safety net in case of crop failures. <a href="https://www.accion.org/fintech-startup-revolutionizing-kenyan-agriculture">Accion Venture Lab was an early investor in the firm and continues to provide advisory support as it develops its growth plans</a>. 

One key element of the Apollo model, which makes it possible to grow so quickly, is partnering with local agricultural businesses to reach rural, remote customers. With operational and tech support from Apollo, they provide agricultural inputs and information to the farmers who have signed up for Apollo’s services. We recently spoke with some of these partners in the area around Nakuru.

<img class="wp-image-18259 size-large alignnone" src="https://content.accion.org/wp-content/uploads/2019/04/Kenya_Nakuru_0005-1024x684.jpg" alt="Charity Njeri" width="1024" height="684" />Charity Njeri sells farm supplies and also distributes Apollo’s seeds and fertilizers through her shop. Both she and the farmers use Apollo’s app to manage the transactions. “They send their farmers to us, we give the farmers their package, and then they sign on the app. As soon as the whole process is done, the money comes in immediately. They pay us before the farmer leaves the store,” she says. Not only does Charity appreciate getting her cut of the transaction, the new customers coming in to pick up their Apollo supplies also sometimes buy other items while at the store. “The Apollo farmers have become our farmers,” she says. 

<img class="wp-image-18260 size-large alignnone" src="https://content.accion.org/wp-content/uploads/2019/04/Nakuru_0009-1024x684.jpg" alt="Nancy Njeri" width="1024" height="684" />Nancy Njeri is a local agricultural dealer who sells crop and livestock supplies and has special training in treating animals. “Apollo visited me here at the shop, and we discussed how we can do business, and started working together. I found that it was a good deal,” she says. She uses Apollo’s app to process deliveries and transactions between the company and the farmers. “They have brought some new customers to us,” she says. “You try to guide them where to get effective advice and support. In turn, they benefit, especially when you treat their animals and they get healed. We advise them on crops, what to use at what time, and in return, they get good profit and come back.”

<img class="wp-image-18261 size-large alignnone" src="https://content.accion.org/wp-content/uploads/2019/04/Nakuru_0018-1024x684.jpg" alt="James Mwangi" width="1024" height="684" />James Mwangi, another local salesman, says of his relationship with Apollo, “Farmers benefit, I benefit, and Apollo benefits. Farmers get their products, and my business is growing dramatically.” Sounding as confident as Apollo itself about the company’s future, he says, “Apollo is the only serious company working with farmers, and trying to improve farming in this area. Other companies don’t pay the farmers much attention or give them loans. That’s how they are going to grow.”

As Apollo continues to expand its work with smallholder farmers, these partnerships that help <a href="https://www.accion.org/the-tech-touch-balance/">balance their high tech approach with local human interaction</a> will be key to their success.

Partnerships help this agricultural fintech startup cover more ground

Apollo Agriculture

Impact Investor

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

Today, India is the center of innovation in the global effort to create a financially inclusive world. India’s government, fintech sector, investors, and financial service providers are making remarkable progress: the country’s pro-financial inclusion policies and the growing use of <a href="https://www.gsma.com/newsroom/press-release/china-and-india-to-account-for-half-of-all-new-mobile-subscribers-added-by-2020/">mobile phones</a> have connected more people to inclusive financial services than ever before. According to the World Bank’s Global Findex, only 35 percent of India’s adults had access to an account in 2011. In 2017, 80 percent did. Access alone is just a start. It’s an important first step toward a world where everyone has the broad array of basic financial tools they need to help themselves.

I recently met with Accion staff, partners, and the clients who we serve in India to see the difference that inclusive financial services make and the ways that we can help more families and businesses there. By prioritizing the following four issues in India and working with local partners throughout the country, we aim to create a financial sector that works for everyone:
<h2>Inclusive fintech helps India’s micro, small, and medium enterprises thrive</h2>
India’s micro, small, and medium enterprises (MSMEs) employ roughly 120 million people, making them the second largest ‘sector’ in India’s economy by employment, following agriculture. But despite their importance, these businesses often struggle to obtain the financing they need to hire, expand, or purchase inventory.

[caption id="attachment_18098" align="alignleft" width="500"]<img class=" wp-image-18098" src="https://content.accion.org/wp-content/uploads/2019/04/India-Trends-Aye-Finance-1024x768.jpg" alt="" width="500" height="375" /> Visiting Accion partner Aye Finance in the Shadhara area of Delhi to see how Aye is creating opportunity for cluster-based clothing and shoemaker businesses.[/caption]

The Indian government is addressing this issue through its <a href="http://www.makeinindia.com/about">Make in India</a> program and by offering <a href="https://www.mudra.org.in/">MUDRA loans</a> to small businesses. Accion’s local partners are also supporting India’s MSMEs: <a href="https://www.accion.org/clients/aye-finance">Aye Finance</a> studies small business clusters like brass works and garment weavers to understand how these businesses work and their typical financial performance. This information helps Aye acquire, vet, and lend to underserved customers quickly: Aye has grown from a startup to serve more than 60,000 clients, most of whom would not have received formal credit from any other lender.

Likewise, Accion partner <a href="https://www.accion.org/these-women-leaders-show-that-balance-is-better-part-two">Northern Arc</a> lends to nearly 200 microfinance institutions and inclusive fintech startups that, in turn, help more than 30 million clients send their children to school, launch businesses, and more.
<h2>Financial services should work everywhere — not just major cities</h2>
In 2018, India had the world’s largest rural population: <a href="https://www.un.org/development/desa/publications/2018-revision-of-world-urbanization-prospects.html">893 million</a> people. In the past, it has been very challenging to reach rural communities and provide them with savings, credit, insurance, and payments. But financial services should work everywhere — not just in major cities.

That’s why we’re working with financial service providers to find new ways to help rural areas. For instance, Accion partner <a href="https://www.accion.org/instead-sending-people-bank-sub-k-brings-banking-people">Sub-K</a> uses a banking correspondent model to reach the last mile for extremely remote customers: correspondents are small shop owners and other retailers who work where financial service providers typically don’t. They can transfer money, take deposits, and accept documentation on behalf of a bank, ensuring that customers can use financial services anywhere. Sub-K has used this network and its relationships with third-party banks to provide more than 2.2 million rural customers with credit, savings, payments, and other financial services.

We also work with Dvara KGFS, which provides a wide range of wealth management services to meet more than 320,000 rural clients’ needs. It uses a combination of back-end technology and <a href="https://www.accion.org/does-human-touch-still-have-a-place-in-a-high-tech-world/">human touch</a> to reach out to clients and provide them with individual advice and assistance, no matter where they live or work.
<h2>Financial advisory services help build financial health</h2>
[caption id="attachment_18102" align="alignright" width="375"]<img class=" wp-image-18102" src="https://content.accion.org/wp-content/uploads/2019/04/India-Trends-B-768x1024.jpg" alt="" width="375" height="500" /> India is a global role model in digital innovation and inclusion.[/caption]

Financial advisory services help families plan ahead and develop the skills needed to develop their <a href="https://www.accion.org/topics/financial-health">financial health</a>. But these services typically aren’t affordable for underserved customers: it can cost too much to provide low-income people with personalized financial advice.

But by using technology, we can provide everyone with individual financial insights that promote their long-term financial health. Accion portfolio partner Fisdom assesses users’ information to deliver unique tax, investing, and savings recommendations that help customers make informed financial decisions. Fisdom also offers insurance and pension products to help its clients prepare for the future. Fisdom is reaching clients who have never invested before with initial investment amounts of just a few rupees.

Likewise, Accion’s <a href="https://www.accion.org/classroom-phone-new-digital-training-program-entrepreneurs">Dialogue on Business</a> program with Standard Chartered UK has trained thousands of entrepreneurs on business management skills. We’ve also worked with Axis Bank to offer our Money Plan program to 30,000 people, helping families budget and use financial services to reach their goals.
<h2>Insurtech protects the world’s most vulnerable people</h2>
In the past, it cost insurance providers too much to sell, collect payments for, and administer policies to the underserved. But without insurance, many families live one illness, injury, or natural disaster away from financial ruin.

Accion’s <a href="https://www.accion.org/how-can-we-bring-insurance-to-those-who-need-it-most">insurtech</a> partners are using technology to protect some of the world’s most vulnerable people. They’re also demonstrating that insurance has immediate value and application. For instance, our partner <a href="https://www.accion.org/four-innovations-making-insurtech-more-inclusive">Toffee Insurance</a> sells health, personal accident, and lifestyle policies targeted to specific customer needs, such as accident insurance for bicycle commuters or dengue or seasonal disease insurance. By making insurance affordable and relevant, Toffee provides the policies that help more people recover from hardships.
<h2>Looking ahead</h2>
Accion will continue contributing to India’s remarkable progress promoting financial inclusion. By prioritizing these four issues and working alongside our local partners, we’ll help more Indian families and businesses access, use, and benefit from the formal financial sector.

India, fintech, and new trends accelerating financial inclusion

Virginia Wanjiru Ndegwa, who lives near Nakuru, Kenya, isn’t afraid of hard work. At age 72, she’s raised ten children, is now looking after some of her grandchildren as well, and she’s still rising early every day to tend to the family farm. “Who will help you feed yourself if you don’t work? You have to sweat before you can eat. That’s what I do, that’s what suits me,” she says. 

Kenya-based <a href="https://apolloagriculture.com/">Apollo Agriculture</a> is a fintech startup that seeks to help hardworking, vulnerable smallholder farmers like Virginia with the challenges they face. Apollo, an Accion Venture Lab portfolio company, offers a suite of products, including customized packages of seed, fertilizer, advice, and insurance on credit — all enabled by advanced technological solutions like satellite data and digital communication.

When Virginia first met Apollo agents in her area, she was a little wary. “I told [them] I didn’t want to risk losing my farm! But we talked some more until I understood the product,” she says. Soon convinced, she enrolled. “I paid for the registration and like a boss, waited for the fertilizer delivery,” she says. Apollo provided both fertilizer and guidance on how to use it. Planting was delayed due to drought, but once the rains came, Virginia reaped an exceptional harvest. 

“Previously I would get eight to ten bags [of maize] per acre. This year I got around 23 bags,” she says. However, she explains, the selling price for the crop is low at the moment. “When prices are good, you can make money. But now prices are bad, and you are stuck with the crop,” she sighs. Knowing that this is a common problem for their smallholder farmers, Apollo is expanding into more profitable crops so customers are less affected by maize price volatility. Ever resourceful, Virginia’s thinking of how she might make some additional income as she waits to sell her maize. “Let’s do something else,” she says, chuckling. “We can have chickens, raise rabbits and the like.” 

Even though her hoped-for profits haven’t come through yet, Virginia’s still glad for the security Apollo gives her to weather unpredictable harvests and markets. “Farming with Apollo has improved my life. I barely had anything in my pocket,” she says. “Get us a proper market, and we shall farm!”

Helping smallholder farmers face challenges on multiple fronts

As part of the <a href="https://globalfindex.worldbank.org/">World Bank’s Global Findex</a> team, I’ve gotten to see firsthand how far we’ve come on financial inclusion in the past decade. In just a few years, there’s been real progress around the globe: more than 1 billion previously excluded people have opened an account, giving them in a foothold in the formal economy.

But we have so much more work to do. Around the world, 3 billion people are still left out of or poorly served by the formal economy. The adults who remain unbanked will be much harder to reach than those who we’ve recently included.

Reaching them won’t be easy, but after researching this problem for years and speaking with individual clients around the world, it’s clear that there are some immediate next steps we can take to extend financial services to more people and businesses:
<ul>
 	<li>Prioritize smallholder farmers. Sustainable agribusiness supply chains hold massive potential for expanding account ownership. Globally, <a href="https://globalfindex.worldbank.org/">235 million unbanked farmers</a> receive agricultural payments in cash, including 115 million women. In Ethiopia alone, creating a digital agricultural payments system could cut the share of unbanked adults by up to 60 percent. By paying farmers via formal accounts, we create an ‘onramp’ to a wider array of financial services, including credit and insurance.</li>
 	<li>Make payments more affordable. The development advocate in me yearns for cheaper ways to send remittances. Every year, <a href="https://www.weforum.org/agenda/2018/06/migrants-remittance-global-economic-force/">migrants send home more money</a> to emerging markets than what governments spend on development aid. That money provides vital support, but it would go even further if remittances weren’t as expensive as they are today. On average, international remittances cost just under <a href="https://remittanceprices.worldbank.org/sites/default/files/rpw_report_sept_2018.pdf">7 percent</a> of the total amount being sent. And it’s banks that typically charge the most, with fees as high as ten percent. My colleagues at the World Bank estimate that, if we were to reduce the costs of sending remittances by 5 percentage points, workers would save up to $16 billion every year — that’s money that could go to children’s tuition, better food, or launching businesses. Moreover, by making payments more affordable, we incentivize more formal account usage.</li>
 	<li>Emphasize financial health. We need to tailor financial products to customers’ financial health needs. Ultimately, we’d like everyone to access and use financial services to meet their life goals, like paying for school, purchasing a home, or starting a business. But financial services should help people in the moment and assist them in overcoming immediate, everyday problems. For instance, unexpected and unaffordable car repairs could prevent employees from getting to work, ultimately causing them to lose their job. The possibility of that expense keeps people up at night. Financial inclusion should lead to financial security and happier lives — and financial health is one of the ways that we can create and measure inclusive products and services. Financial health, like physical health, considers someone’s overall well-being. Where is their money going? Are they saving enough? Do they have the knowledge and skills to manage their expenses, endure shocks, and seize opportunities? Developers and financial service providers should ask and answer those questions as they design new products.</li>
 	<li>Use behavioral economics. It’s not enough to have an account. To create a financially inclusive world and achieve our development goals, it’s important for people to use their accounts. In India, the data also show that half of all accounts have never been used for a single deposit or withdrawal. Our challenge is to design appropriate and affordable financial services to meet people’s needs, and for clients to use them over the long-run. Behavioral economics is one way to get there. Behavioral tools — reminders, nudges, auto-deposits from mobile wallets and bank accounts, and auto-enrollment in digital payroll tools — can be used to build products that help people meet their financial goals and encourage usage over the long term.</li>
</ul>

Four ways we can empower financially underserved people and businesses

Financial Inclusion Practitioner

South Africa is a global hub for fintech innovation. Accion supports and advises South African innovators using technology to help entrepreneurs expand their businesses and families protect their homes around the world.

Fintech companies are, of course, technology-driven. The word “tech” is part of their name, after all! And yet, even fintechs usually include elements of human touch in their business models. For example, sales agents may help contact and enroll new customers, or support staffers may be available to help troubleshoot when problems arise.

In our recent paper, <a href="https://www.accion.org/the-tech-touch-balance/">“The Tech Touch Balance: How the Best Fintech Startups Integrate Digital and Human Interaction to Accelerate Financial Inclusion,”</a> we showcase several fintech startups in the Accion Venture Lab portfolio that are finding an optimal balance between tech and human interactions, making their offerings accessible, affordable, and attractive to their target customers. Two are located in Africa: Apollo Agriculture, and Lumkani.

Both companies are innovative in that they offer services that have not previously existed in the market. <a href="https://apolloagriculture.com/">Apollo</a>, based in Kenya, provides high-quality seeds and fertilizers for smallholder farmers. Apollo also provides guidance and information to the farmers so they can improve input yield and better respond to storms or droughts. The second Africa-based company profiled, <a href="https://lumkani.com/">Lumkani</a>, sells fire insurance to residents of informal settlements in South Africa. The insurance package includes an alarm that can detect a fire and then trigger an alert to residents and neighbors, so they have a chance to seek safety. And if a home does catch fire, the insurance payout helps policyholders replace damaged property. Since both Apollo and Lumkani offer products and services that customers are less familiar with, human interaction helps drive adoption and overall retention.

[caption id="attachment_17740" align="alignleft" width="500"]<img class="wp-image-17740" src="https://content.accion.org/wp-content/uploads/2019/02/Kenya_Nakuru_0034-1-1-1024x684.jpg" alt="Apollo agents in Nakuru, Kenya" width="500" height="334" /> Apollo Agriculture balances its high-tech model with field agents to serve smallholder farmers in Kenya.[/caption]

Apollo’s clients, smallholder farmers, are among the world’s most financially underserved populations. They also tend to be less digitally savvy, and many have had negative experiences with financial institutions in the past. At the same time, they are very interested in receiving help to boost their yields and incomes, so Apollo’s model is attractive.

Apollo primarily relies on tech to determine the creditworthiness of its customers: it employs a highly sophisticated, tech-driven underwriting process that leverages data collected from satellite imagery and the farmers themselves. All of Apollo’s loans are repaid through mobile money and require no human touch, which is convenient for farmers in remote, rural areas. Apollo also uses SMS to communicate with farmers for matters ranging from payment reminders to weather alerts.

On the other hand, Apollo field agents are an essential part of the customer journey, especially in the early stages, as they visit potential clients and answer questions. Agents are also available to go in person to handle challenges that can’t be managed through SMS. Call centers and automated Interactive Voice Response (IVR) systems are also part of Apollo’s tech-touch continuum.

In South Africa, mobile money systems are much less available than they are in Kenya, so they are not a good option for Lumkani clients to use to manage policy payments and payouts. Additionally, people in the informal settlements where Lumkani provides its services tend to be limited in both financial literacy and experience with technology, so they need information on what the insurance product is and how it works.

So Lumkani relies on agents — many of whom live in the same settlements — to do face-to-face sales pitches and enrollments. The agents, however, carry smartphones with an app for setting up the new accounts. Agents also collect cash payments in person but send SMS reminders to keep clients up to date. The fire detectors not only sound an alarm to warn people in the home when they sense heat nearby but also report back to Lumkani so that SMS alerts can be sent throughout the community. The company can then follow up with clients, both electronically and in person, to see if any fire damage occurred, and to begin the claims process if so. In combining tech and touch, Lumkani earns the trust of its clients while making the signup and payout processes faster and less expensive than many traditional insurance models.

For more examples of how fintech startups balance tech and touch as they develop their offerings, and general advice on these issues, read the full paper <a href="https://www.accion.org/the-tech-touch-balance">here</a>.

Two African startups where inclusive fintech comes with a human touch

Lumkani

Mastercard Foundation

Financial Service Provider

The tech touch balance

In the heart of Kampala, along the bustling Bombo Road, sits the headquarters of UGAFODE Microfinance Limited (MDI). UGAFODE is a small but progressive microfinance institution (MFI) focused on serving peri-urban and rural Uganda, mainly in the agricultural sector. Under the guidance of CEO Shafi Nambobi, who joined in May 2017, UGAFODE has made sweeping transformations. The institution has gone from a primarily manual operation with lengthy loan approval processes, to being a competitive tech-enabled institution with a focus on digital channels and serving microentrepreneurs and “last mile” clients in the Ugandan market.

We recently called Shafi, and even though it was 6 pm in Kampala and he was gathering his bags to head home, he took the time to share his insights on the strategies that have turned the company around. “UGAFODE has always upheld a client-centric focus, and the company maintained this approach while implementing their new strategies,” he said. One of the first changes was bolstering their call center, which has been instrumental in attracting both new and former clients. This has proven to be a key component in maintaining the balance between <a href="https://www.accion.org/the-tech-touch-balance/">digitization and human touch</a>, as it allows customers to engage with a real person without having to make long journeys from rural areas to bank branches.

Most of UGAFODE’s clients are farmers, working in crop and livestock production. More than 80 percent of their clients live in rural areas, and some are as far as 40 kilometers from the nearest UGAFODE branch. Clients often struggled to make the long trips out to the bank when all they needed were simple banking services. To bring banking services to the people, UGAFODE has incorporated more digital products into its business plan. These products include:
<ol>
 	<li>Digital field applications (DFAs), which allow remote approval of loans</li>
 	<li>UGAFODE mobile app, which allows customers to move cash from their mobile wallets to their savings accounts</li>
 	<li>Digital document management for digital verification</li>
 	<li>Digital delinquency management for timely follow up on late payments</li>
</ol>
These new channels have improved customer interaction with UGAFODE’s products, allowing microentrepreneurs to cut costs and time to travel to the bank and spend more time developing their businesses.

The company is also working to improve its loan processing and renewal system. UGAFODE reduced processing time from more than 21 days down to less than a week to ensure that their clients can get their funding when they need it. Another issue in their previous process was that their loan repayment system would automatically prevent clients with delayed payments from applying for another loan. Shafi knows that life can throw curve balls that prevent clients from making payments on time — a family member falls ill, a bicycle part needs to be replaced, a home needs repair. As such, the company changed this policy and adopted more flexible considerations for loan repayment timelines.

Shafi is excited to continue the turn around and watch the company grow, and sees many opportunities for the future. As UGAFODE continues to digitize and expand into rural areas, they expect to onboard more women — currently about 60 percent of their client base. Additionally, Shafi indicated that Uganda has become a home to more than <a href="https://www.unocha.org/southern-and-eastern-africa-rosea/uganda">1.4 million refugees</a> from nearby countries, including Somalia, South Sudan, Burundi, and the DRC. These refugees have been neglected and excluded from financial services, which they need to establish their livelihoods and send remittances to friends and family members. UGAFODE is currently seeking approval to include refugees in their outreach offering.

As UGAFODE continues to find ways to bring more underserved clients financial services that meet their needs, they know that staying customer-centric is crucial. “When we listen to our customers, we are able to make suggestions to the board of what needs to change, and create a better customer experience,” said Shafi. And as UGAFODE’s digital transformation has shown: keeping customer needs in mind is good for business and financial inclusion.

Going digital to serve customers in Uganda

Ugafode

Accion Global Investments

<a href="https://creative.gimletmedia.com/episode/who-gets-to-be-creditworthy/" target="_blank" rel="noopener"><img class="aligncenter wp-image-16417" src="https://content.accion.org/wp-content/uploads/2018/12/20181005_FFTB-ShowArt-1-1024x1024.png" alt="Fortune Favors the Bold" width="350" height="350" /></a>

<a href="https://creative.gimletmedia.com/shows/fortune-favors-the-bold/">Fortune Favors The Bold</a> is a podcast series from Mastercard and Gimlet Creative. In <a href="https://creative.gimletmedia.com/episode/who-gets-to-be-creditworthy/">this episode</a> on creditworthiness, <a href="https://www.accion.org/how-we-work/invest/accion-venture-lab/">Accion Venture Lab</a>'s <a href="https://www.accion.org/people/vikas-raj/">Vikas Raj</a> joins to talk about how innovators like our portfolio company Apollo Agriculture are using alternative data to bring financial services to more people.

Who gets to be creditworthy?

Mastercard

When people ask me why I’ve worked for one organization for nearly 15 years, I usually give an answer about how great Accion is. But there’s more to the story.


[caption id="" align="alignleft" width="503"]<img class="graf-image" src="https://cdn-images-1.medium.com/max/1080/1*kyDTTQfcq5T-9thcjnKlCg.jpeg" alt="Jose Amaya at 12, growing up in El Salvador" width="503" height="466" /> Me at 12, growing up in El Salvador[/caption]
I come from a very poor family in El Salvador. I was born in 1981, at the beginning of a bloody civil war that lasted 12 years. Some days we had no food to eat, and my mother (God rest her soul) would walk long miles searching for food, sometimes with no luck. On those days, everybody would go to bed hungry, hoping the next day would bring better luck.
The small village where we lived had about 30 huts. The land was owned by one of the 14 families in the oligarchy that controlled most of El Salvador. When the war broke out, many of these landowners fled the country, and the land became a communal space for all the people who lived on it. A governing body was formed, and everybody worked the land together.
Then reforms came, and the land was divided equally among all the co-op members. My family got about 10 acres and a cow.
As new landowners and cattle raisers, my family’s biggest challenge was obtaining money to work the land on our own. That’s when we found out about agricultural microfinance.


[caption id="" align="alignnone" width="640"]<img class="graf-image" src="https://cdn-images-1.medium.com/max/1080/1*Qu8hg-kW0AxIr3CrPaTPjg.png" alt="People from Jose's village planting maize. Agricultural microfinance brought opportunity to his village." width="640" height="320" /> People from my village planting maize.[/caption]
My uncle was the first one to start “working with the bank.” He took out small loans to buy fertilizers, pesticides, and to pay his laborers. With the help of a technical assistant, he was able to expand his crops beyond maize, sorghum, and beans. He planted rice, sesame, and other, more profitable products.
In a few short years, my uncle went from living in a hut to living in a brick house. Everyone wanted to emulate him, including my father. And although we never got to the point of building a nice brick house, my family became self-sustaining. Our cows multiplied, and we worked our own land instead of laboring for somebody else.
I came to the United States when I was 16, and dazzled by this big city called Boston, I almost forgot about my little village. I started taking English classes, and the teacher helped me enroll in high school. Then someone gave me an old desktop computer as a present, and it became my object of fascination. I took it apart and put it back together many times. After finishing high school, I went to a vocational school for computer science.
I worked at a dry cleaner while I studied. Soon after I graduated, I came across an internship opportunity on the Accion website. So I called. A kind lady answered the phone, and after a short conversation in Spanish, I was invited for an in-person interview.
I arrived a few minutes early for the interview. While I waited at the reception desk, I started looking at the objects on the walls. It all came back to me. The Latin American decorations all over the office brought me back to my friends and neighbors in the village I had left behind. I realized right then that Accion was unique.
I ended up getting the internship. That was 2004, and here I am, still amazed by this place, and highly optimistic that we are making a difference in the world.
When the occasional drudgery of a busy day gets to me, and I start questioning my purpose, I reflect back on my little village, I feel nostalgic, and then I find my groove again.
As our CEO Michael Schlein said in a recent meeting, “It's so rewarding to work for an organization where you can help make a <a href="http://www.accion.org/can-we-make-the-digital-revolution-work-for-everyone/">positive impact in people's lives</a>.” It means even more knowing that the lives we’re improving are people like my family and the neighbors in my village.

I know financial inclusion can change lives because it changed mine

Staff

Later this month, the World Bank will release the standard measurement on global progress toward financial inclusion: the <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/programs/globalfindex" rel="nofollow">Global Findex database</a>.
I expect that the Findex will verify what we in the financial inclusion movement have recently seen: hundreds of millions of adults now have access to formal bank accounts, representing remarkable progress. We should salute World Bank Group President Jim Yong Kim and acknowledge the Bank’s <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/financialinclusion/brief/achieving-universal-financial-access-by-2020" rel="nofollow">Universal Financial Access 2020</a>. Jim Kim’s leadership has helped to galvanize tremendous progress in financial access for so many who, until now, have been ignored.
But there’s much more work to do. Unfortunately, I also expect that the Findex will show that many of those with an account do not view it as useful or relevant.
Access alone is not inclusion. Instead, it is an important first step toward a truly financially inclusive world, where customers benefit from a variety of high-quality, affordable products and services; have sound financial education and capability; and trust their financial service providers to act responsibly.
When global leaders meet for the World Bank meetings, I hope they’ll focus on overcoming the barriers that still prevent us from reaching this vision. They should also commit to the most promising technologies and solutions that can create a financial system that works for everyone.

<h2 class="graf graf--h3">Barriers preventing financial inclusion</h2>
Digital financial services have already helped tens of millions — maybe even hundreds of millions — to benefit from the world’s formal economy.
But it’s increasingly clear that many of the financially underserved are also technologically underserved. The GSMA’s <a class="markup--anchor markup--p-anchor" href="https://www.gsma.com/mobileeconomy/wp-content/uploads/2018/02/The-Mobile-Economy-Global-2018.pdf" rel="nofollow">Mobile Economy 2018</a> reports that nearly 40 percent of the world’s 5 billion mobile subscribers have no internet access; most of the offline, live in the low- and middle-income countries that could benefit the most from digital financial services. Many mobile subscribers live outside of 3G or 4G signal range, which slows service or limits what they can do with their devices. Many unconnected users must contend with poor network performance, high connectivity and handset costs, poor digital literacy, or a lack of locally relevant content.
This caps fintech's impact: developers analyze internet usage to create tailored products; clients need consistent signals to engage with customer service personnel; both rely on strong mobile signals to do business remotely.
Other barriers exacerbate these technical challenges: many of the financially underserved are last-mile customers living in rural communities. Farmers and many small businesses are particularly difficult to reach.
Finally, women face particularly high barriers. Between 2011 and 2014, the World Bank found a persistent <a class="markup--anchor markup--p-anchor" href="http://datatopics.worldbank.org/financialinclusion/indv-characteristics/gender" rel="nofollow">seven-point percentage gender gap</a> in account ownership.

<h2 class="graf graf--h3">How we can create a financially inclusive world</h2>
Despite these challenges, I believe we can still create a financially inclusive world within our lifetimes. Inclusion is a mainstream message today, and more organizations have made inclusive finance part of their <a class="markup--anchor markup--p-anchor" href="https://www.mastercard.us/en-us/about-mastercard/corp-responsibility/social-sustainability/the-mastercard-labs-for-financial-inclusion.html" rel="nofollow">core business strategies</a>. Businesses beginning to address this problem should know that the greatest impact results when organizations work with the right partners and set concrete goals for promoting financial inclusion.
And although gaps remain in coverage, technology remains one of the great democratizers of the 21st century and will continue to help the financially underserved. Today, <a class="markup--anchor markup--p-anchor" href="https://www.linkedin.com/pulse/fintech-inclusion-2018-six-big-trends-were-watching-michael-schlein/">six trends</a> are driving financial inclusion:

<ol>
 	<li class="graf graf--p">Connectivity is expanding across the globe.</li>
 	<li class="graf graf--p">Data — and our ability to use it — is growing exponentially.</li>
 	<li class="graf graf--p">Customers are increasingly tech-savvy.</li>
 	<li class="graf graf--p">Costs are coming down, making it much more cost efficient to scale.</li>
 	<li class="graf graf--p">Banks and fintechs are finding new ways to partner.</li>
 	<li class="graf graf--p">Regulators are supportive.</li>
</ol>
These trends have helped fintech innovation flourish around the world. We need to make added investments in inclusive technology and the infrastructure supporting it, because, as impressive as fintech has been, we haven’t used it to its full potential. Going forward, we should create global platforms with hyper-local application. Developers should also prioritize cross-border and scalable innovation with common standards and interoperable platforms. Finally, organizers should emphasize test-and-learn approaches by working in regulatory sandboxes and innovation hubs.
Innovators can also use fintech to make the biggest impact by pursuing:
Insuretech: The total addressable market of uninsured adults stands at <a class="markup--anchor markup--p-anchor" href="https://www.linkedin.com/pulse/new-strategies-technologies-making-insurance-more-michael-schlein/?published=t">3.8 billion</a> people — and they are the most vulnerable. AllLife is the first company in the world to provide insurance to the ‘uninsurable’: those diagnosed with HIV/AIDS. Based in South Africa, AllLife uses algorithmic pricing, robo-underwriting, and behavioral economics to provide treatment programs; its treatment-centric, managed care approach is demonstrating how to work at scale in emerging markets.
Agritech: <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/agriculture/overview" rel="nofollow">Two-thirds</a> of the world’s working poor make their living in agriculture; anything we can do for farmers can drive significant economic and social progress. Pula uses satellite imagery and crop yield information to underwrite insurance, automate payouts for weather-related events, and help farmers afford better seeds and fertilizer.
Digital lending innovations: Small businesses face a <a class="markup--anchor markup--p-anchor" href="https://www.smefinanceforum.org/data-sites/msme-finance-gap" rel="nofollow">$5 trillion financing gap</a>. Inefficiencies in customer acquisition and analysis prevent lenders from making reliable lending decisions and entrepreneurs from getting the financing that they need. But new technologies and data sources can help small businesses: Mexico’s Konfio analyzes thousands of data points — including biographic information, financial history, electronic invoicing, and social media usage — to make lending decisions quickly and inexpensively.

<h2 class="graf graf--h3">Looking ahead</h2>
We should celebrate the great progress we’ve made even as we recognize where we have more work to do.
By focusing on disruptive new technologies, passing enabling regulations, and designing high-quality, affordable financial products and services that benefit users, we can ensure that every individual has the means to reach their economic potential. We can create a financially inclusive world.

Will fintech realize its potential for financial inclusion?

AllLife

Konfio

Venture Lab recognizes that support beyond capital is critical to seed stage fintech companies. Our portfolio engagement work is customized to the post-investment needs of our partner companies and includes business model refinement, sector expertise and access to networks, and strategic and operational support. To date, we have engaged in over 55 intensive, short-term projects with investee companies in core business areas. Recently, Reilly Kiernan and I traveled to Kenya to work with <a class="markup--anchor markup--p-anchor" href="https://apolloagriculture.com/">Apollo Agriculture</a>, one of our newest <a href="https://www.accion.org/content/venture-lab-portfolio">portfolio companies</a>.

<h3 class="graf graf--p">The Apollo Agriculture Model</h3>
Apollo Agriculture is a tech-enabled input financing solution for smallholder farmers that was founded in 2016 by <a class="markup--anchor markup--p-anchor" href="https://www.forbes.com/pictures/5a0494a74bbe6f37dda214bd/eli-pollak-28-l-earl-st-s/#3a4d1f9a1ad5">Eli Pollak and Earl St Sauver</a>, both former employees of the Climate Corporation, and Seth Silverman, former head of Kenya operations at One Acre Fund. The founders’ vision is to help smallholder farmers in emerging markets maximize their profits.
Apollo's model combines a new credit product with sophisticated analytics, remote sensing, and agronomic machine learning. Farmers can purchase high-quality farming inputs (like hybrid seeds and fertilizer) on credit with flexible repayment terms and post-harvest due dates. The offering also includes crop insurance and customer-centric, voice-based trainings developed by the Apollo team to help farmers learn best practices for tasks like planting, combating pests, and developing financial literacy.
Each farmer’s plot is GPS-mapped and satellite-tracked to provide up-to-date data on crop production and health.
Apollo kicked off its operations last year, staffing up a Nairobi-based office and serving maize farmers in the Nakuru region of Kenya. Apollo generates large volumes of data about each customer, which is processed using machine learning. Over time, this will enable the company to make better lending decisions and provide customized support for farmers, based on specific needs.

<h3 class="graf graf--p">Portfolio Engagement in Action</h3>
[caption id="" align="alignnone" width="1080"]<img class="graf-image" src="https://cdn-images-1.medium.com/max/1080/1*THIDonU0GxTE5O8OikzpGg.jpeg" alt="Interviewing farmers in Kenya" width="1080" height="810" /> Interviewing farmers in Kenya.[/caption]
In advance of next season’s harvest, Apollo is thinking hard about its growth strategy, and like most startups, juggling many complex moving pieces. Venture Lab’s portfolio engagement team has regular check-ins with our companies to discuss potential areas of support that we can provide. We are very intentional about the type of support we offer — more generalist and bespoke, with clear timelines and responsibilities — so we work together with portfolio companies to bridge any critical gaps or offer an extra set of hands without creating a void when a particular project ends.
During a recent check-in call, Apollo and the Venture Lab team discussed ways that we could support the end of its first pilot and start of its full program roll-out. Although the Apollo team is highly capable and experienced with customer surveys, they are also in the midst of recruiting key hires, fundraising, completing their pilot, identifying new markets, and more — all while staying as lean as possible to keep costs down.
So, to free up some of Apollo’s bandwidth and deepen our expertise, Venture Lab and Apollo agreed that Venture Lab could be most supportive to their current needs by helping with their pricing strategy, specifically with answering key questions:

<ul class="postList">
 	<li class="graf graf--li">What do the economic lives of smallholder farmers look like? How does this impact farmers’ ability to pay?</li>
 	<li class="graf graf--li">What are farmers’ current practices for financing inputs?</li>
 	<li class="graf graf--li">How do farmers value the Apollo product? What drives this value? How does this impact willingness to pay? What price can Apollo charge for the product?</li>
 	<li class="graf graf--li">What payment structures are most supportive of repayment for this population — incorporating an understanding of behavioral nudges and seasonality of cash flow?</li>
</ul>
We then spent two weeks in Kenya working closely with Eli Pollack and Operations Manager, Benjamin Njenga, to gather customer insights on the current Apollo package and pricing through focus groups and one-on-one conversations with a total of 84 individual farmers. This field engagement yielded several important insights and reflections about Apollo’s model and what it means to price a product for smallholder farmers:

<ul class="postList">
 	<li class="graf graf--li">Power of aligned incentives: Apollo only succeeds if its farmers succeed. The ability to drive higher yields and ensure higher incomes for farmers is necessarily tied to the likelihood of repayment. At Venture Lab, we look for models where financial inclusion is core to the product, and we see this in how Apollo’s pricing strategies are designed to help create value for farmers in addition to creating sustainable margins for themselves.</li>
 	<li class="graf graf--li">Understanding your customer: To design a product that meets farmers’ needs and to price it reasonably requires understanding farmers’ realities. For example, in the course of our work, we learned more about when farmers have cash (such as when harvesting shorter-term crops like beans) and recommended that Apollo design a milestone to encourage farmers to make loan payments at this point when they likely have some liquidity to do so. We also learned that though there are some common challenges for smallholders, there is no one-size-fits-all solution to financial inclusion for this customer group. Farmers vary along many dimensions (regions, business knowledge, access to incremental/recurring revenue, etc.). Understanding not just the big picture, but some of these key drivers of difference, is critical for models serving this population.</li>
 	<li class="graf graf--li">Using behavioral science: Apollo’s approach to encouraging repayments draws from behavioral science best practices, including using deposits as a commitment device and designing incentives to encourage repayment. Incorporating a better understanding of how customers make decisions and how to encourage behaviors will be critical for Apollo.</li>
</ul>
As farmers harvest their crops and repay their loans, Apollo will learn from the results of its first year and design a strategy for reaching even more farmers.

Checking in with the startup that’s revolutionizing Kenyan agriculture

Far from the bustling financial centers of the city, people in rural areas have long been underserved by traditional financial institutions. While this is a problem for all rural residents, the lack of access to financial services is particularly difficult for farmers since it bars them from growing their agricultural businesses. We talked to Jonathan Agwe of the <a class="markup--anchor markup--p-anchor" href="https://www.ifad.org/home" target="_blank" rel="noopener noreferrer">International Fund for Agricultural Development (IFAD)</a> to get his opinions on the challenges that rural clients face in accessing financial services, as well as the solutions to help reach them.
Mr. Agwe will be part of a panel discussing rural youth and agriculture during <a class="markup--anchor markup--p-anchor" href="http://www.e-mfp.eu/" target="_blank" rel="noopener noreferrer">European Microfinance Week</a>. From November 29 through December 1, professionals from dozens of countries will converge in Luxembourg to discuss the most recent innovations, trends, and opportunities in the inclusive finance sector. If you’re interested in attending, you can find more information <a class="markup--anchor markup--p-anchor" href="https://registration.european-microfinance-week.eu/ehome/index.php?eventid=279965&amp;" target="_blank" rel="noopener noreferrer">here</a>.
Q: What role do financial services play for farmers?
A: Although the question is short, it is also very challenging — challenging because farmers need financial services for both farm and non-farm use. If the question were specifically about agricultural finance, then the here answer would be more direct. Let’s answer the more generic financial services for farmers:
On the one hand, one needs to take a holistic look at the demand side by conducting a thorough demand analysis on the financial needs of the farmers (tripling up as economic investors, social entrepreneurs, and consumers) and then categorize such needs into:

<ul class="postList">
 	<li class="graf graf--li">consumption needs</li>
 	<li class="graf graf--li">investment needs</li>
 	<li class="graf graf--li">needs for inputs, including for technical services and hired labour</li>
 	<li class="graf graf--li">needs for running capital, as well as for other transaction costs</li>
 	<li class="graf graf--li">needs for assorted payments sent and/or received.</li>
</ul>
On the other hand, one needs to look at the supply side by unbundling financial services into:

<ul class="postList">
 	<li class="graf graf--li">financial products (loans, grants, savings/remittances)</li>
 	<li class="graf graf--li">non-financial products (financial literacy, capacity development/business development services, technology-enhanced delivery systems/digital financial services/assorted payment systems)</li>
</ul>
The next thing to do is to match the financial demands of the farmers with supply of tailored/appropriate/adapted financial services. Sometimes, tailoring or adaptation of existing traditional financial services to meet the needs of smallholder farmers is the real hurdle. So, the role financial services on the supply side play for farmers is to respond to the specific financial needs of the farmers.
Q: Where have you seen a gap in reaching rural populations?
A: Let me be more specific by narrowing the gap you are referring to, to ‘financial services gap’. With this refocusing then, one sees a gap in almost all of the supply-side traditional financial services listed above reaching rural populations. Such gaps exist due to several factors, some of which include but not limited to:

<ol class="postList">
 	<li class="graf graf--li">lack of the analyses listed above, thereby resulting in mismatches between the demand from rural populations and the supply of non-pro farmer/non-tailored/inappropriate financial tools and services);</li>
 	<li class="graf graf--li">not meeting the demand due to unaffordable pricing of financial services — unaffordable pricing caused partially by high transaction costs to reach breakeven catchment volumes of rural populations, as these populations:
<ul>
 	<li class="graf graf--li">are so hard to reach because of bad or non-exiting infrastructure networks (access roads, telecommunication, electricity),</li>
 	<li class="graf graf--li">are so geographically dispersed, and/or</li>
 	<li class="graf graf--li">are so heterogeneous with diverse and non-standardized demand and risk profiles.</li>
</ul>
</li>
</ol>
Q: To feed a growing population worldwide, we need farmers. But not enough young people are becoming farmers. How do we encourage young people to pursue careers in farming?
A: Feeding a growing population is important and we need farmers and more young people (for that matter) to get engaged, so that they would stay longer in the farming business. Currently, in the world with alternative opportunities in the urban and semi urban conglomerates that trigger and/or encourage rural youth outmigration, farming is the income-generating activity (IGA) of last resort for their livelihood enhancement. Farming is comparatively less rewarding economically; it is not so esthetical; and it is arduous and labor-intensive. To make young people take up farming as a career, it is necessary to remove all the challenges and barriers inherent in farming; transforming farming from a mainstay/livelihood activity into a profitable business. Sustainable profitability (void of subsidies, if possible) is the main incentive young people would be looking for in a career in farming.
Q: In a changing climate, how can we make sure agriculture remains a sustainable career and that smallholder farms have the tools they need to be resilient?
A: For us (I am not sure who in particular) to make sure smallholder agriculture remains a sustainable career, is really a far-fetched and unrealistic objective because talking sustainability means talking full cost recovery pricing for smallholder products. But we know smallholders are generally price takers as they hardly ever get involved in the price setting for their own products. So, for smallholder agriculture to be sustainable, they must fetch and receive and be paid full-cost recovery prices. For smallholders to have the tools needed to be resilient to climate change, they will need to get trained and certified in environmentally-friendly GAPs (good agricultural practices), which hopefully will reduce their production and production-associated risks. On the marketing side, such certified smallholders can get organized into groups to deliver their aggregated products under contractual arrangements to niche market opportunities offered by certification schemes, where they can negotiate reasonable full cost recovery prices to raise their returns — the ultimate incentive for smallholder farmers to stay and practice climate change resilience. But what would be the economies of scale of such niche market opportunities?
Q: What types of products (individual lending, input loans, etc.) have you seen making the most impact for smallholder farmers?
A: It is extremely difficult to answer this question with any reasonable degree of confidence because prioritizing financial demand needs vary for the heterogeneous community labelled smallholder farmers. However, what appears to have the most impact for smallholders across the board is business development services (BDSs). When smallholders have acquired skills that help them identify profitable business propositions, they usually generate business plans therefrom which would then naturally link them to all sorts of financing; potential financial service providers (if they are convinced), would consider the viable business propositions to be able to pay back any loan taken for that particular smallholder farm business. In some cases, especially in contract farming arrangements, verifiable viable smallholder business propositions have convinced lenders to wave collateral requirements. So, development of viable smallholder business plans makes the most impact on smallholder farmers.
Q: What do you see as the most promising innovations for reaching rural populations with financial services?
A: The most promising innovations would include but not limited to:

<ol class="postList">
 	<li class="graf graf--li">business development services, which of course is an innovation that does not sound like a financial service but is unavoidable for the success of financial services for rural populations;</li>
 	<li class="graf graf--li"> digital financial services;</li>
 	<li class="graf graf--li">contract farming, especially contract farming with certification for environmental-friendliness for climate change resilience.</li>
</ol>

Q&amp;A: Bridging the financial services gap for rural and agricultural customers

By Jacqueline van Hartley
Nicaragua has one of the lowest rates of financial inclusion in Latin America. Only <a class="markup--anchor markup--p-anchor" href="http://datatopics.worldbank.org/financialinclusion/country/nicaragua" target="_blank" rel="noopener noreferrer">1 in 5 adults</a> over the age of 15 have access to a formal bank account. Nearly a third of the population lives on <a class="markup--anchor markup--p-anchor" href="https://opportunity.org/what-we-do/where-we-work/nicaragua-facts-about-poverty" target="_blank" rel="noopener noreferrer">less than $2 a day</a>. Not surprisingly, microfinance is incredibly difficult in Nicaragua.
Accion’s partner <a class="markup--anchor markup--p-anchor" href="http://www.financierafama.com.ni/" target="_blank" rel="noopener noreferrer">Financiera FAMA</a> (FAMA) has proven that reaching customers responsibly in such a challenging environment is possible.
In 2008, the financial crisis sparked the “No Pago” movement, and protests erupted across the country. The movement was driven by some microfinance clients who had been <a class="markup--anchor markup--p-anchor" href="https://sptf.info/resources/outreach-to-regulators" target="_blank" rel="noopener noreferrer">hit hard by bad financial practices</a>, including hidden fees, forced saving, and high late payment charges.
While many players exited the market, FAMA adapted — returning to traditional microcredit in order to continue serving entrepreneurs responsibly when they needed it most. Since the “No Pago” movement, the Nicaraguan government has worked to strengthen the sector through a new regulator and supervisor. Through this time period, FAMA continued to perform remarkably well, reaching more borrowers in new areas when other banks were not.
FAMA has expanded financial access to microentrepreneurs for more than two decades. From its beginning in 1991 as a non-profit led by a group of Nicaraguan business leaders with the support of Accion, FAMA has grown to become one of the leading microfinance institutions in the country. Today, it serves 10 percent of Nicaragua’s total microfinance space with 58,000 clients — most of whom are women.
Even as FAMA celebrates its 25th anniversary as a microfinance institution dedicated to microentrepreneurs, it stays focused on the future. With <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/financiera-fama-closes-investment-round-to-expand-access-to-capital-for-the-underserved-in-nicaragua/" target="_blank" rel="noopener noreferrer">fresh funding from Accion</a> and two new investors, <a class="markup--anchor markup--p-anchor" href="https://www.fmo.nl/" target="_blank" rel="noopener noreferrer">FMO</a> and <a class="markup--anchor markup--p-anchor" href="https://www.triodos.com/en/about-triodos-bank/" target="_blank" rel="noopener noreferrer">Triodos</a>, FAMA will continue to innovate and adapt.
After a quarter of a century working together, we’re excited to continue our partnership because FAMA is:

<ul class="postList">
 	<li class="graf graf--li">Creating a social impact: FAMA reached customers with responsible loans despite a highly challenging regulatory environment. The company continues to do so today as one of the key players.</li>
 	<li class="graf graf--li">Filling a market need: With only 15 percent of adults in Nicaragua with formal bank accounts and a high percentage of rural population, there is a clear need for microloans at reasonable interest rates. FAMA lends to their clients at an average rate of 36.6%, slightly lower than the average of competing MFIs.</li>
 	<li class="graf graf--li">Showing an ability to innovate and adapt: FAMA performed well financially and continued to find ways to lend despite the “No Pago” crisis. FAMA is a great example of an institution that innovates in order to serve a market in need. They are looking ahead to create an agent network, build an online banking platform, offer e-wallet service, and provide financial education to its clients using newly injected capital.</li>
</ul>
FAMA’s next step? Reaching more rural communities. In a country where <a class="markup--anchor markup--p-anchor" href="https://openknowledge.worldbank.org/bitstream/handle/10986/9479/537960BRI0Clim10Box345626B01PUBLIC1.pdf?sequence=1" target="_blank" rel="noopener noreferrer">2 out of every 5 people</a> live in these rural areas, that expansion is crucial for financial inclusion. FAMA is building out its own agency network and an online banking platform to make sure more it can deliver financial services to more of the population.
As FAMA enters this next chapter, we look forward to watching it evolve and reach even more people with more services than ever before.

Bringing mobile money to Nicaraguan microfinance: FAMA

FAMA

Accion Global Advisory Solutions

In <a href="http://www.accion.org/asean-integration-banking-philippines/" target="_blank" rel="noopener">part one of this post</a>, Bruce MacDonald of the Center for Financial Inclusion at Accion discussed the potential impact of ASEAN Integration on banks in the Philippines, informed by his recent visit to the country. In part two below, he continues exploring the challenges and opportunities facing one of these institutions, 1st Valley Bank in Cagayan de Oro, Mindanao. 

Though national bank liberalization has led commercial Philippine banks to acquire more rural and thrift banks, potentially increasing competition for 1st Valley, it has also provided the bank with a unique advantage. A 2013 amendment to the Rural Banking Act allowed foreign investment in Philippine banks which, in turn, permitted a new company called Bridge, led by American Paul Kocourek and Englishman Gus Poston, to invest in 1st Valley. Kocourek and Poston, both with deep regional banking experience, founded Bridge in order to help build a strong network of provincial Philippine banks committed to social impact. Identifying rural finance as the “missing component of inclusive banking,” their aim is to provide critical capital for growth, but also assistance in product design, risk management and more. 


Bridge came to market in March of 2013 with $24 million in funding, provided by microfinance investment vehicles such as Bamboo Finance and national development banks such as the German DEG and Dutch FMO. (Full disclosure: Accion is also an investor and operating partner in Bridge.) 1st Valley was Bridge’s first investment and remains its crown jewel. “The growth opportunities in [1stValley’s] target markets are huge,” says Poston. “There are 1.3 million farms in the areas where 1st Valley operates, and the bank is only lending to 7,000 at the moment. To put it into perspective, Mindanao is about the size of Cambodia. There’s approximately $5 billion of microfinance lending in Cambodia. ‘Inclusive banking’ in Mindanao is smaller than a billion dollars.”

The Bridge investment has added substantial heft to the bank’s foundation and prospects, although no one underestimates the magnitude of the task ahead. While 1st Valley President and CEO Nicolas “Sonny” Lim lists bank liberalization and the threat of ASEAN integration among his concerns, Poston throws in a few more challenges. “Typhoons, landholding questions, security issues … we face specific barriers to lending in the Philippines,” he says. “1st Valley’s challenge is to continually improve its product offering, service quality, and risk-management methodology so that it can reach more farmers and microfinance clients.”
<h2>Magic beans</h2>
Bridge’s imprint can be seen and felt particularly in product development, helping to create tools such as new loans for poultry farmers and micro-insurance. But perhaps the most important new product is 1st Valley’s cacao loan.
<div id="impactspace-api">Eighty to 90 percent of the world’s cacao (the raw ingredient in chocolate, cocoa butter, and many other popular products) is produced by small, family-run farms — farms that must be no more than 15 to 20 degrees in latitude from the equator. Cacao, says Lim, can be grown in only 36 countries in the world — but it thrives in the soil and climate of the islands’ palm-shaded small holdings and is productive within 18 to 24 months. That makes the Philippines ideally placed to help address a global cacao shortage that <a href="https://www.washingtonpost.com/news/wonk/wp/2014/11/15/the-worlds-biggest-chocolate-maker-says-were-running-out-of-chocolate/" target="_blank" rel="noopener">some say will reach a million metric tons by 2020</a>. Since 1670, cacao has been a cash crop in the Philippines. By the 1980s, national production had reached 40,000 metric tons. By 2013, however, land reform and diseases had conspired to whittle that down to some 8,000 tons.</div>
In response, the Department of Agriculture flagged cacao as a high-value crop — a banner program created to help address food security, poverty alleviation, and sustainable growth. Through the Philippine Cacao Challenge, the country committed to producing 100,000 metric tons by 2020 and has included cacao as part of its National Greening Program, an initiative to reforest the country. Mindanao, already delivering 90 percent of the country’s crop, was identified as ground zero.

A 1st Valley cacao loan provides borrowers up to 75,000 pesos ($1,600) over seven years. The bulk of the loan is delivered up-front, with two years’ grace given as the crop becomes established, initial installments reduced, and full installments required only during the last four years, as the plants become fully productive. To help ensure success, the bank partnered with Philippine agribusiness company Kennemer Foods International, which created a complete agricultural value chain for the smallholder farmer. This included seedlings, fertilizer, pest control, agronomy assistance, and training — training not only for the growers but also for bank staff. Farmers who follow their protocols, says Kennemer, will see their yields quadruple.

The support is typical — and timely. Mindanao is eight months into a widespread drought, the result of a powerful El Niño that has shaped Philippines weather for a year. Despite resulting lower growth rates, Poston reports that clients’ first cacao plantings are already producing pods.

He and Lim are forthright about the work ahead for 1st Valley: improved risk management, expansion into electronic channels, growth across all loan products and term deposit accounts. Expectations for microfinance and SME lending, in particular, are high — 7 million pesos ($150,000) per month for the microfinance portfolio, for example, or 80 percent growth year on year. And addressing delinquency, with the total outstanding balance of loans past due for more than 30 days currently at nearly 10 percent, is paramount.

There’s work for Bangko Sentral ng Pilipinas (BSP), too. “The central bank still has a lot of problems to solve, especially in the rural banking industry,” Lim says. While the number of rural banks has declined by a third in recent years, to around 650, he estimates that only 200 are profitable and healthy.

As for ASEAN integration, Poston evinces little concern. “We have to be realistic about the difference between rural banking and commercial banking,” he says. “1st Valley is targeting hard-to-reach rural clients and providing them with microfinance, SME and agricultural loans, which require totally different skill sets from other forms of banking. I don’t think there will be a major foreign competitor operating in rural Mindanao. Even the local banks are reluctant to expand in these areas.”
<h2>Road under construction</h2>
To get a true feel for 1st Valley, one must leave Cagayan de Oro and get out to the country. For two days we made our way west along Mindanao’s northern coast road, stopping to visit branches and clients en route. We met Discy Santiago, a first-grade teacher at Iligan City Central School, who took out a salary loan to cover her sister’s medical expenses. In Lala, we met rice farmers such as Luz Hernando (pictured left), whose supervised credit helps ensure that her 2.5-hectare tenant farm is as productive as possible. The loan addresses every phase of the production cycle, from fertilizer and seed through to a guaranteed buyer (1stValley itself, if for any reason the farmer can’t sell their crops on the market — and at market price). “It’s like a family here,” Mimi Enad, the bank’s head of risk, told us.

The coast road itself is a work in progress. Pedestrians, motorbikes, and cars wrangle and compete for space. Blind corners, high speeds, and games of “chicken” favor the nimble and strong of nerve. Cavernous potholes attest to the road’s importance; endless repaving projects emphasize the challenge. And every once in a while, for a brief second, comes a glimpse through the palms of the electric-blue Bohol Sea, like a travel poster advertising a reward for a job well done. Somewhere in there is a metaphor for 1st Valley.

The Philippines cast a long shadow in financial inclusion. To its credit go the earliest mobile money solutions, SmartMoney and GCash. The country perennially scores at the top of The Economist’s “Global Microscope” report, an annual assessment of enabling environments for financial inclusion. The BSP, among the most far-sighted, client-protection-friendly and highly regarded of central banks, keeps a sure hand on the levers of finance. It has always been a country to watch. And as Kocourek and Poston intended from the start, perhaps the Philippines is just the right place to address rural finance, that missing component of inclusive banking.

Rural banking and the promise of cacao

1st Valley Bank

Center for Financial Inclusion

As 2016 New Year’s resolutions went, few matched the enthusiasm, ambition, and fragility of the commitment made by the Association of Southeast Asian Nations (ASEAN). On Jan. 1, its 10-member countries — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam — inaugurated the ASEAN Economic Community, a common market whose goal is to forge a prominent regional bloc to rival China and Japan, and bring economic well-being to its 625 million citizens.

Some 13 years in the making, the Community promises an increasingly free flow of services, investment, skilled labor and capital to a market that is now larger in terms of population than either North America or the European Union. Such a single market, its creators envision, will increase intra-ASEAN trade and justify greater spending on infrastructure. Currently, the six leading nations in the group (Indonesia, Malaysia, Thailand, Singapore, the Philippines and Vietnam, a.k.a., ASEAN-6) allocate an average of 26 percent of their GDP to investment, which any recent visitor to Manila or Jakarta might argue is nowhere nearly enough.

Where one stands on ASEAN integration depends, of course, on where one sits. On a recent visit to the Philippines, we posed the question to various people, including government and central bank officials, and bankers whose businesses will be impacted by the Community.
<h2>Sweet spot</h2>
As 2016 neared, the Philippines government expressed confidence that the nation was ready for integration. The country’s 6.3 percent growth rate, the highest five-year average in the last four decades, puts the nation in a “sweet spot,” said Department of Trade &amp; Industry Secretary Gregory Domingo. Citing projections from HSBC and Goldman Sachs, Domingo predicted the Philippines would be the fifth-largest economy in Asia by mid-century, and the 14th largest in the world. He added, however, that prioritizing micro, small and medium enterprises (MSMEs) in the regional trade agenda was critical; Philippine MSMEs comprise 98 percent of all registered GDP.

The Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), was less sanguine. Under the ASEAN Banking Integration Framework, qualified ASEAN banks will be allowed to establish operations throughout the Community. Greater competition is a given. Regional integration would, for example, drop BDO Unibank, the Philippines’ largest bank as measured by assets, to the 19th spot in ASEAN. To help prepare banks to compete in a regional system, the BSP is adopting higher capital requirements, enhancing credit-risk management rules and raising governance standards, among other actions.

“It is imperative that you define and carve out your comparative advantage in our local market,” advised BSP governor Amando Tetangco in a speech to Philippine bankers just before the Jan. 1 deadline. In case the message wasn’t clear, he added, “If you have not done so, you will need to make those tough decisions now to give yourselves time to execute your strategic goals.”

[caption id="attachment_6979" align="alignnone" width="500"]<img class="wp-image-6979 size-full" src="http://blogs.accion.org/wp-content/uploads/2016/06/ASEAN-Philippines-First-Valley-Accion-1B.jpg" alt="ASEAN, Philippines, First Valley, Accion" width="500" height="333" /> 1st Valley President and CEO, Attorney Nicolas (‘Sonny’) Lim[/caption]
<h2>The ASEAN way</h2>
Time, fortunately, appears to be on bankers’ side. Integration will be delayed, if not confounded, by an approach among ASEAN members that favors consensus-based decision-making and a policy of non-interference in the internal affairs of others – the “ASEAN way,” as it has come to be known. An absence of penalties for noncompliance and the lack of a powerful central bureaucracy add to the challenge.

Unlike the EU, ASEAN has no plans for a common currency, and cross-border travel is still limited. Trade liberalization is the only aspect of the Community’s vision that shows any significant progress. Nearly all of the items the top six countries have agreed to put on the “<a href="http://www.asean.org/asean-economic-community/asean-free-trade-area-afta-council/" target="_blank" rel="noopener">inclusion list</a>” are free of tariffs. Nevertheless, countries such as Indonesia and the Philippines have held back many important agricultural and food-related products from the inclusion list, citing a food security rationale. Development gaps and infrastructure differences between and among ASEAN-6 and the less developed ASEAN-4 nations present have added obstacles. ASEAN financial integration, the Financial Times pronounced recently, is “embryonic.”

Nicolas “Sonny” Lim (pictured left) did not exactly exude enthusiasm over the prospect of integration when we asked, but neither did he sound particularly concerned. It is, he says, just one factor he considers in his strategic planning. Lim is president and CEO of 1st Valley Bank in Cagayan de Oro, Mindanao. Rural and family-owned, medium-sized but growing, profitable but not without pressures, 1st Valley works on the front line of bringing ordinary citizens into the global economy. Founded in 1956 by Sonny’s father, Rosario, as the Rural Bank of Kapatagan Valley, it was created to serve the rice and corn farmers of the north-central provinces of Mindanao, the Philippines’ second-largest and southernmost island.

A rice farmer himself, the elder Lim understood his clients’ needs. The bank grew – not stupendously, but steadily – and eventually merged with the Rural Bank of Sinacaban in 2005 to become 1st Valley. With 60 to 70 percent of the Philippines’ rural population lacking a bank account, says Lim, and only a mere 6 percent of business growth in small, provincial businesses funded by bank lending, 1st Valley’s mission and market is to reach these businesses and households with support and economic prosperity. Today, 37 branches serve more than 70,000 clients, making it one of the Philippines’ largest rural banks.

Fully 61 percent of 1st Valley clients use loans for agriculture, typically rice and corn, and now, increasingly, cacao. Two loan types are offered: those secured by land or salary stream, and those that are unsupervised (uncollateralized). Salary loans of up to 525,000 pesos ($11,200), made mainly to government employees and teachers, account for 2.4 billion pesos ($51 million), or almost half of 1stValley’s portfolio. Microfinance loans of up to 300,000 pesos ($6,400) comprise a small share of the bank’s portfolio but serve as an important test bed for all its credit products. Small and medium enterprise (SME) lending, from 300,000 to 5 million pesos ($6,400 to $106,000), accounts for 10 percent of the portfolio and is growing at 30 to 40 percent per year, with plans to ramp it up even faster.

National bank liberalization has already led commercial Philippine banks to acquire more rural and thrift banks, potentially increasing competition for 1st Valley. The big banks see money, Lim says, particularly in salary loans. Christian-Muslim antagonism and Communist insurgency — the latest attack by the New People’s Army blared from Cagayan de Oro headlines the day we arrived – add spice to his planning challenges. For now, he explains, 1st Valley will focus on what it does best: agricultural and SME lending, and microfinance.

If you enjoyed this post, you can read <a href="http://www.accion.org/rural-banking-promise-cacao/" target="_blank" rel="noopener">part two</a>, where he continues exploring the challenges and opportunities facing one of these institutions, 1st Valley Bank in Cagayan de Oro, Mindanao. 

This post originally appeared on <a href="http://nextbillion.net/letter-from-mindanao-part-1-the-impact-of-asean-integration-on-banking-in-the-philippines/" target="_blank" rel="noopener">NextBillion</a>.

ASEAN integration's impact on Philippine banking

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

To start a business is to take a leap of faith. That’s what farmer Emma Guadarrama and her husband Genaro Acosta did five years ago when they decided to build two expensive greenhouses to grow organic tomatoes. They had heard that organic produce was in demand in the nearby Mexican town of Ixtapan de la Sal, where they sold their product every weekend during harvest season. They also knew that the town had some of the highest rates of birth defects in the country, because, according to Genaro, the flower nurseries in the area where so many young women worked used hazardous fertilizers and chemicals.

“If we can grow good produce without so many chemicals,” Genaro says, “we can really help the women and children in our community.”

It was a perfect plan. The only problem was that they didn’t know the first thing about organic farming.

Genaro took classes from a government-run agricultural program a few miles away. He learned a variety of methods for prepping the soil, which included using bone meal, egg shells, and animal blood. He also learned techniques for nurturing the roots of the tomato seedlings, which included a paste made from lentils. He even learned how to keep pests away with a mixture of coca cola, fabric softener, and milk.

Things were off to a good start, but then tragedy struck.

Just a few months after they’d planted their first tomato crop — which requires a significant amount of care and attention — a storm destroyed one of their greenhouses. The entire structure collapsed under heavy rain and wind, wiping out the entire harvest.

“When that happened,” Emma said. “I sat down, watched the wreckage, and just cried.”

But with the same resilience of any hardworking farmers, Emma and Genaro quickly sprang into action. They approached Accion partner CrediConfia for a loan. They had already borrowed from CrediConfia once, to build one of their greenhouses. The new capital helped them get back on their feet quickly.

<img class="alignnone size-large wp-image-6846" src="http://blogs.accion.org/wp-content/uploads/2016/04/organic_farming_Emma_Maria_Guadarrama_of_Mexico_client-of_CrediConfia_and_Accion-3-1024x683.jpg" alt="organic_farming_Emma_Maria_Guadarrama_of_Mexico_client of_CrediConfia_and_Accion 3" width="1024" height="683" />
Although they don’t have a formal savings account, every time they get a small surplus of profits, they invest it back into the business — anything from new tools for their tractor or the bees they need to pollinate the tomato plants.

Their customers are happy, Emma reports. “The ladies I supply at the market love my tomatoes. And they complain when I tell them our harvest is about to end. That’s why we’re busy building another greenhouse, so we can have rotating crops and a constant outflow of produce.”

As for Genaro, he’s been spreading the word about the benefits — both financial and environmental — of organic farming. He’s been teaching his techniques to neighboring farmers. Emma is looking forward to starting a course to learn how to make tomato shampoo, soap, and other tomato-scented products.

Sitting under the shade of a mango tree, Emma talks about the hardships of being a farmer. She recounts the recent damage to her kitchen roof, and how she had to cook on a wood fire outside while making the repairs to the building, which took a long time due to her lack of cash flow.

“We have made many sacrifices to have this business,” Emma says. “I don’t have big aspirations, but I want to meet my family’s needs.”

Emma and Genaro are not just meeting the needs of their family; they are sowing the seeds of a healthier community. With determination and small loans from CrediConfia, they’ll soon reap the fruits of their labor — well beyond their tomato greenhouses.

<img class="alignnone size-large wp-image-6847" src="http://blogs.accion.org/wp-content/uploads/2016/04/organic_farming_Emma_Maria_Guadarrama_of_Mexico_client-of_CrediConfia_and_Accion-1024x683.jpg" alt="organic_farming_Emma_Maria_Guadarrama_of_Mexico_client of_CrediConfia_and_Accion" width="1024" height="683" />

Making a difference with organic farming in Mexico

CrediConfia