Picture this scene: hundreds of people cram into a financial service provider’s storefront, arriving seemingly out of nowhere, mobile phones in hand. They act excited, as if they are about to attend a dance party. Curious passersby stop to see what the buzz is about.

This technique, which organizers call a flash mob, is one innovative approach for generating sign-ups and interest in a new product aimed at underserved clients. The flash mob attracts people otherwise hard to reach to FINCA Pakistan’s mobile service, Sim Sim.

Creative approaches, powered digitally, are transforming the customer experience – hopefully for the better. Digital processes can dramatically increase convenience, speed and variety of the services available to the previously unserved. But digital products and processes succeed only with good design – and with the strategic use of human touch.

In our recent report, <a href="https://www.centerforfinancialinclusion.org/charting-the-customer-journey-in-the-digital-age">Charting the Customer Journey in the Digital Age</a> , Amin Khairy of the <a href="https://www.iif.com/">Institute of International Finance</a> and I explain how mainstream financial institutions create effective digital customer journeys for underserved clients. With support from <a href="https://www.metlife.com/corporate-responsibility/metlife-foundation/">MetLife Foundation</a> and CFI’s founding partner, <a href="https://www.credit-suisse.com/us/en.html">Credit Suisse</a>, this report explores how the three main phases of the customer journey evolve through digital transformation and provides examples of how innovative financial institutions are creatively addressing challenges for emerging customers. It’s the penultimate report from our two-year partnership, <a href="https://www.centerforfinancialinclusion.org/program_teams/mainstreaming-financial-inclusion">Mainstreaming Financial Inclusion: Best Practices</a>.

Creative Solutions to Digital Mainstreaming

Mainstreaming Financial Inclusion: Best Practices

Banks

Delivery Channels

Digital Financial Services

Financial Service Providers

Human Touch

Microfinance Institutions

Partnerships

Blog Post

<h1>Introduction</h1>
Financial services are going digital. Digitization will change the way financial institutions organize themselves to relate to their customers, and it will dramatically change how customers experience financial services. These changes will be especially profound for traditionally underserved customers who are the targets of financial inclusion efforts.

The good news is that digital delivery models make it possible—and profitable—for banks to serve many people who were previously excluded because their incomes were too low or their locations too remote to reach through high-touch models. The high operational costs associated with physical buildings and staffing only makes sense if the branches break even and provide a satisfactory return within an acceptable timeframe. Low-income customers with thin credit histories borrowing small amounts of money have long presented a challenge to the analog way of doing business. Thus, serving the underbanked customer segment through digital channels presents an opportunity—by lowering operational costs and increasing customer engagement—to transform financial inclusion into a sustainable business. Additionally, digitization allows thin-file customers to have their creditworthiness assessed through alternative scoring models that incorporate other types of behavioral records.

When done effectively, the returns to digital transformation can be significant. For example, DBS Bank, a financial services group in Asia named <a href="https://www.euromoney.com/article/b18k8wtzv7v23d/world39s-best-digital-bank-2018-dbs">“world’s best digital bank” by Euromoney in 2018</a>, has seen digitization contribute to rising shareholder value. DBS customers who process more than half their transactions remotely bring in more revenue than traditional customers. <a href="https://www.economist.com/finance-and-economics/2018/03/08/how-digitisation-is-paying-for-dbs">Two-thirds of DBS’s gross profit currently comes from digital customers</a>. A DBS staff member told us, “The cost-to-income ratio for digital customers is just 34 percent, compared to 55 percent for traditional customers. The return on equity from digital customers is, impressively, at 27 percent.” Numbers such as these make it attractive to reach new customer segments. But if the transition from face-to-face to digital is to succeed, financial institutions will need to understand and address the special characteristics of these segments and get the digital customer journey right—for both their own operations and the customers’ experience.
<h2>Walking vs. Flying</h2>
For customers, the difference between a traditional and a digitized customer journey can be as dramatic as the difference between walking and flying in an airplane. The traditional customer journey includes traveling to branches to talk with a customer service representative, assembling pages of paper documents to meet KYC requirements, and then waiting for days to receive decisions. With digitization, customers can discover and apply for products on their phones and receive funds into mobile wallets, all in a matter of minutes.
<blockquote>The difference between a traditional and digitized customer journey can be as dramatic as the difference between walking and flying in an airplane.</blockquote>
In order to produce such a streamlined journey, financial institutions must address technical and operational challenges and regulatory issues. And, as we discuss in this report, the journey they construct needs to work well for customers—especially when those customers are new to their services. Digitization can bring enormous gains in speed and convenience to customers, but it can also create gaps as it shifts from familiar, person-to-person interactions to interactions that take place on a digital device.

Charting the Customer Journey in the Digital Age

Institute of International Finance

MetLife Foundation

Report

<em>This post was <a href="https://www.findevgateway.org/blog/2019/may/microfinance-digital-world-seven-questions-future">originally published</a> on the FinDev Gateway blog.</em>

In the early 2000s, the microfinance sector was on a roll. It was accessing capital markets for growth, securing regulatory legitimacy, developing savings and insurance products in addition to credit, demonstrating social performance, and working on institutional transformation.

Then, in 2007, M-Pesa was born, and things started to change. The attention and support of the international financial inclusion sector shifted abruptly from credit for the poor to payment and delivery channel innovation. And the low operating costs of the new models attracted new players with enormous resources, from telcos to tech platforms and beyond.

Away from the spotlight, microfinance institutions (MFIs) continued to grow, thrive and serve hundreds of millions of people, using their familiar methods and feeling little need to adjust. But as 2020 approaches, the digital juggernaut has changed the world around them in ways they cannot ignore. At the recent Microfinance Network’s 25th anniversary meeting, the CEOs of leading MFIs urgently discussed how to respond.

Looking at the next 10 years, and reflecting on conversations at the meeting, I offer my own take on seven questions MFIs face.
<h2>1  Are fintechs going to take over the microfinance market?</h2>
In the 1990s, if you wanted to be a social entrepreneur, you founded an MFI. Today, you start a fintech. Accion has become one of the world’s leading investors in “fintech for financial inclusion”, with investments in nearly 50 companies offering such products as payment networks, remittances, small and medium enterprise (SME) credit, consumer credit, PayGo applications, customer advice, insurance, and data analytics.

At first, many fintechs were out to disrupt traditional financial institutions, like MFIs, but they continue to confront two fundamental problems: customer acquisition and raising capital. This requires many fintechs to pivot towards partnering with traditional institutions, and that offers a path to the future for many MFIs:fintech partnerships can help MFIs make the leap from traditional to digital.

However, MFIs need to prepare to work with fintechs. They need IT departments that can connect seamlessly to the technology fintechs bring. They need to develop a culture of experimentation, in contrast to an organizational identity wedded to traditional methods. And they need to recognize that fintechs, with limited financial resources, need to get to market quickly, or they need financial support from prospective partners. To take advantage of what fintechs have to offer, MFIs must not only ask what they need from fintechs, but also be prepared to offer what fintechs need from them.
<h2>2  Will MFIs join the shift to digital lending?</h2>
MFIs swear by their traditional underwriting methodologies, whether they involve group guarantees or individual repayment capacity assessment. These high-touch methods often yield repayment rates that other lenders only dream of. A key to success is that the methodology not only predicts the ability of a customer to repay, it actually increases motivation to repay, through peer pressure personal contact and the promise of continued access to credit.

In contrast, the algorithms generated through big data and machine learning lack most of the motivational aspects and are designed primarily to predict repayment. As a result, much of the algorithm-based lending we see today features high default rates, which in turn requires high interest rates.

That said, once the initial set-up is in place, algorithm-based credit is so cheap to operate that its rise is inexorable. Just look at Kenya, where digital lending got an early start. There are over 6 million digital borrowers, and according to a draft study by MSC, nearly 9 out of every 10 loans in the entire system are digital. Algorithm-based lending is made possible by access to customer behavioral data, data analytic capacity and ability to reach customers digitally, all of which may be difficult for MFIs (another reason for partnering with fintechs).
<blockquote>MFIs may wish to explore hybrid models that combine tech and touch.</blockquote>
As they develop the capabilities that enable algorithm-based lending, MFIs may wish to explore hybrid models that combine tech and touch. They may find it possible to focus on market segments that are hard for digital lenders to reach. In all cases, they need to advocate for high standards of consumer protection to be enforced in their markets, to avoid being crowded out by predatory lending.
<h2>3  Can MFIs participate in the innovation happening in SME (small and medium enterprise) credit?</h2>
After decades of stagnation, SME credit is alight with innovation. This innovation is enabled by three economic structure changes that are moving previously informal businesses toward greater formality:
<ul>
 	<li><strong>Electronic invoicing</strong>: Across Latin America and other regions, governments are requiring SMEs to invoice electronically, mainly for taxation. Lenders like Konfio in Mexico use the resulting data trail as the basis for digital lending.</li>
 	<li><strong>Supply chain finance</strong>, led by the large companies that supply goods to local merchants or that purchase agricultural output, is emerging.</li>
 	<li><strong>Ecommerce</strong>, perhaps the biggest force, is connecting millions of SMEs to technology platforms.</li>
</ul>
Many MFIs have a ready advantage in connecting with these market opportunities as they already serve SME clients and are skilled at underwriting for at least the lower end of this segment. Going forward, they can develop lending methods that use electronic data trails. They can also partner with big distributors, agricultural buyers or ecommerce firms taking advantage of the fact that these platforms do not see lending as core to their business and often welcome partners with lenders.
<h2>4  Will insurance ever matter for MFI customers?</h2>
Most MFI clients who have so far received insurance coverage probably didn’t even know they had it, because the most common insurance product is credit life, integrated into their loans without them having to make a decision to purchase it. But innovation is finally coming to insurance for low income people.

For example, Accion’s Venture Lab has invested in several creative start-ups: Pula offers weather insurance together with seed purchases, thanks to a chip embedded in the seed bag; Toffee offers bite-sized insurance cover for specific, often short-term activities; and Lumkani packages fire insurance with fire prevention.

These and other insurance products upend conventional insurance wisdom in order to reach low income customers, by doing three things:
<ul>
 	<li>They reduce costs of sign-up by doing away with exclusions.</li>
 	<li>They reduce costs of claims payments by making them automatic.</li>
 	<li>Instead of insuring infrequent events, they build a culture of insurance by covering common problems.</li>
</ul>
These offers are facilitated by electronic distribution. MFIs can participate in this innovation, recognizing how important insurance can be for the financial health of their customers. Mitigating customer risks should be a good business strategy for MFIs, and at the same time, insurers still need good distribution and customer data partners.
<h2>5  Will consumers be adequately protected in a digital world?</h2>
We have to keep asking this question, as digital financial services bring new risks to consumers. Digital loans can be very easy to get, but also very expensive. In Kenya, where tiny digital loans are available via the phone, we get a good picture of the risks involved: 20 percent of customers in default, many digital loans used for sports betting, prices much higher than microfinance loans, and an enormous number of people added to the credit bureau blacklist.

Data protection is another rising risk: customers want assurance that their private data remains private, both as a fundamental right and because they are concerned about their exposure to hacking, fraud, and mistakes. As MFIs go digital, their exposure to cybersecurity risk rises.

Regulators are struggling to keep up with emerging risks, and MFIs can play an important role in ensuring that they meet high consumer protection standards and shaping high market conduct standards for other players.
<h2>6  How will payments and credit connect in 2020?</h2>
MFIs began with credit as a stand-alone product, but increasingly, digital payments are the gateway to credit because of the data payments produce, and this gives an enormous potential advantage to major payments platforms. These platforms already have massive customer bases that generate floods of data, which, properly analyzed, yield the insights needed to offer credit. The combination of payments and credit has the potential to be highly powerful. Major tech platforms could very well end up dominating lending, while smaller providers, such as MFIs, either remain very small or become dependent on the platforms.

The evolution of financial inclusion in Kenya shows how the future may unfold, with the market-dominating combination of M-Pesa payments with M-Shwari credit. Of the global big tech firms such as Amazon and Google, only Alibaba has moved into finance in a big way, but all the big techs are making moves. Ant Financial has become the lifeline for Chinese SMEs for both sales and working capital, and the model is spreading worldwide as Ant Financial invests across Asia.
<blockquote>Only Alibaba has moved into finance in a big way, but all the big techs are making moves.</blockquote>
This platform-dominated scenario is not present in most MFI markets yet, and it may not come to pass. But what is clear is the power and efficiency of payments data to inform credit decisions, suggesting that MFIs should be looking for ways to connect to and harness such data.
<h2>7  Is digital transformation feasible for traditional MFIs?</h2>
For MFIs to turn the challenges described here into opportunities, they must be willing to undergo digital transformation. In many cases, such as the MFIs that are members of the Microfinance Network, they are already moving along the digital journey, but few have completed that transformation. Many organizations have created digital tools for their loan officers, some have incorporated credit scoring tools into their underwriting processes, and many have switched to digital loan disbursements and repayments.

More fundamental digital transformation requires rethinking business models, including the role of the cadre of loan officers who constitute the backbone of the staff of most MFIs. This transformation entails difficult choices about retraining and employment, which need to be discussed more openly in the sector. Investments in data analytic capabilities are needed, and at the board level, expertise needs to be brought on to guide the transformation.

In conclusion, MFIs have the chance to use digital tools to pursue their missions in an increasingly digital world. If they haven’t started already, it’s high time to begin.

Microfinance in the Digital World: Seven Questions for the Future

From Beth's Desk

<span lang="ES-MX">Este webinar, presentado en conjunto por el CAF - Banco de Desarrollo de América Latina y el Centro para La Inclusión Financiera de Acción, expone los resultados del proyecto conjunto realizado por ambas instituciones (el primero de su tipo en la región) que buscó introducir a los actores que lideran el tema de educación financiera en Colombia, tanto de los sectores público, privado y no gubernamental, a metodologías de diseño de intervenciones más efectivas que incorporan conocimientos de la ciencia del comportamiento humano, y buscan no sólo transferir información financiera útil a las personas si no también mejorar sus comportamientos y hábitos financieros. Durante esta sesión virtual, Gabriela Zapata, Experta en temas de Inclusión Financiera, Diana Mejía, Especialista Senior en Desarrollo Productivo y Financiero de CAF (Banco de Desarrollo de América Latina) y Pablo Antón-Díaz, Gerente de Investigación del Centro Para la Inclusión Financiera de Acción, presentaron el reporte final de este proyecto que incluyó los resultados obtenidos y los principales obstáculos enfrentados. El panel concluyó con una presentación de recomendaciones y lecciones aprendidas para esfuerzos futuros de este tipo en Colombia, al igual que para otros países de la región interesados en realizar trabajos similares.</span>

Webinar: Expandiendo Capacidades Financieras en Colombia

Latin American Development Bank (CAF)

Colombia

Latin America and The Caribbean

Behavioral Insights

Financial Capability

Webinar

In July 2017, Colombia launched its National Economic and Financial Education Strategy, which established an action plan for promoting financial education in the country. The Intersectoral Commission for Economic and Financial Education, in charge of implementing the strategy, partnered with the Latin American Development Bank (CAF) and the Center for Financial Inclusion at Accion (CFI) to develop a training program to impart the latest financial education programming insights and best practices to those who would be implementing the national strategy.

This report describes our efforts to communicate behavioral economics best practices to policymakers and practitioners in Colombia, including case studies from Fundación Capital and Banco de la República. We also evaluate the success of our efforts, and make recommendations for further embedding behavioral insights into financial education programming.
<h1>Major Findings</h1>
<h5>WHAT DOES IT TAKE TO BUILD FINANCIA CAPABILITY?</h5>
<h2>Shifting the financial education paradigm in Colombia begins with understanding how to design behaviorally-focused interventions.</h2>
Financial education programs are delivered by financial service providers, government agencies, public schools and universities, research institutions, institutional donors and non-profit organizations throughout Colombia. The majority of these programs are delivered in classroom-based settings, town hall-style lectures, seminars or workshops and employ printed materials and videos to communicate information. These kinds of traditional financial education models are difficult to scale, expensive to implement and often struggle with low attendance and participation.
<blockquote>Traditional financial education models are difficult to scale, expensive to implement and often struggle with low engagement.</blockquote>
Information transfer alone does not adequately engage people in the type of active learning and practice that prompts
behavior change. There is a growing body of evidence showing that financial education interventions that incorporate behavioral economics principles are more likely to improve client’s money management skills than traditional interventions.
By hosting six two-day workshops between for a mix of stakeholders from the public, private, and non-profit sectors in Bogotá, we gave practitioners a holistic understanding of what is necessary to design behaviorally focused interventions. We also asked participants to think deeply about cognitive biases that impact the success of behavior change programs, including procrastination, social norms, limited attention span, predisposition to the present, loss aversion, and default options. We asked participants to identify how these biases affect their lives, underscoring the fact that cognitive biases are present in all of us, not just beneficiaries of social programs or financial product users.

This project gave us a valuable opportunity to put our own behaviorally-informed principles into practice in the development of the workshops. We aimed to make the workshops fun, social and customized to the target audience. We developed simple, memorable rules of thumb for making financial education workshops more effective. Additionally, we were able to leverage what seemed to be somewhat of a national "teachable moment" right at the start of the implementation phase of the National Financial Education Strategy of Colombia. Overall, we are satisfied with the high level of information retention that we found in our follow-up surveys, and we are convinced that this constitutes a very important step in the right direction.

Expanding Financial Capability in Colombia

Clay houses with tin roofs. The occasional moo of cows. Everything gave an impression of a world disconnected from modern technology in the village of Juranpur, Bangladesh.

BRAC’s credit officer Ismat Ara was about to start her day. She was surrounded by a group of women who came to pay their monthly installments and deposit savings. This setting, known at BRAC as a Village Organization (VO), has been central to microfinance since it began in Bangladesh in the early 1970s.

The group sat on a hand stitched bamboo mat under the shade of a mango tree in a client’s courtyard. As they exchanged polite greetings, Ismat Ara took out a smart tablet from her bag and began the collection process. A gap between technology and rural communities was bridged.

This deliberate change follows over 40 years of time-consuming manual installment and deposit collection by BRAC’s credit officers.

At the start of each month, credit officers went to their assigned VOs with their monthly collection sheet that contained installment balance and savings information of clients. On average, it took 5 to 7 minutes to manually insert data of each client, equaling to almost two hours spent on a VO consisting of 20-25 members just on collections. It usually took 4-5 minutes for accounts to enter the data for each client from the sheet. This process put immense pressure on accounts of branches nationwide that serves approximately 5.7 million borrowers.

Apart from the loss of time, there were five critical issues associated with this manual process. There were mistakes in calculation, torn pages or damage due to rain, and data duplication. A paper-based operating system at every layer of the field management not only cost monetarily, it also cost time, so BRAC looked to technology.

After months of development and field testing, software was developed in 2014, piloted systematically and officially launched in 2017, with additional features recommended from the pilot. Around 18,000 credit officers were provided classroom trainings on the interface along with branch and area managers. As with most new technologies, however, there was a learning curve.

“It took me about 4 months to be completely fluent with the tablet”, said Ismat Ara. “When I started, I doubled checked each input but still confused one member’s transaction to another. For the first few months, I used the collection sheet at the VO and then inserted the numbers into the tablet at the office and there were times when I posted one or two zeroes more than the original payment because I was not accustomed to the touch screen,” Ara said. “But I watched the instructional video in my tablet when I forgot anything.”

Completing the entire collection in a VO now takes about a 30-35 minutes for Ismat compared to 1.5-2 hours. She seamlessly scrolls through her tablet for clients’ names. She does not need a calculator anymore and each client’s ending balance acts as a password in order to insert her current installment, reducing the chance of mistakes. At the end of the day, the data in the tablet is synced with the branch accountants and everything is automatically updated, leaving no duplication.

The branch manager’s tablet has a few more add-ons. For example, Ismat’s manager Hossain Ali can see the activity of all four of his credit officers and all the VOs they are assigned to. He can also see each client’s transaction behavior and generate reports. Now he has to carry only one device when he travels to the field instead of a large file. The amount of errors have reduced drastically, while data management and informed decision-making has improved significantly. Whereas previously he stored large pile of papers to find past information, he can now do it with the click of a button, without double checking the numbers.

There are still areas to improve. A dashboard for branch and area managers is already under development. It will allow them to generate overview reports for an area, create realistic targets for loan disbursement and realization, measure achievements and generate collection summaries.

Operational efficiency also benefits clients. Now, they spend less time on a VO and return to work quickly. The facility is immensely convenient for clients with formal jobs living in urban and semi-urban areas. Clients can also see their total installment and outstanding loan amount without traveling to the branch. One of the greatest benefits of the smart tablet, however, will be for clients taking repeat loans. They would be able to see their savings and investment pattern from previous years. Their transaction records will also help staff to calculate credit scores and advise on loan amounts.

Collections using smart devices are not new in the global microfinance industry. The key to success for BRAC operating in a massive scale is the integration between major support units such as HR, monitoring, accounts, research and ICT. Similarly, the application must be user-friendly and client-centric.

For BRAC, the shift to tablets is a way of ensuring client centricity and building foundations to a more data driven decision making process. For the microfinance sector of Bangladesh, it is a positive precedent that digitization in microfinance is no longer an aspiration, but a practical prospect.

&nbsp;

&nbsp;

&nbsp;

BRAC’s Tablet Journey: Revolutionizing Microfinance Operations in Bangladesh

Bangladesh

<h1>Challenge</h1>
In emerging markets across Africa, microfinance institutions (MFIs) and other financial service providers (FSPs) play a critical role providing financial services to people who are unable to obtain traditional finance. Despite its important role, this sector in Africa faces enormous challenges. In 2013, our <a href="https://www.centerforfinancialinclusion.org/microfinance-banana-skins-2014-the-csfi-survey-of-microfinance-risk/">survey of African FSPs</a> revealed governance and risk management as the primary vulnerabilities in the sector. Weak governance and risky behavior also <a href="http://www.cgap.org/publications/growth-and-vulnerabilities-microfinance">played a role in microfinance crises</a> in Nicaragua, Morocco, Bosnia-Herzegovina, and Pakistan. CFI decided to commit to helping African FSPs focus on governance and risk—and not just individually, but at a sectoral level—to avoid this fate.
<h1>Navigating Obstacles</h1>
We quickly realized we would be starting nearly from scratch. The handful of existing governance resources on the market at the time comprised generic, one-off trainings or were geared to corporate participants. We knew that this kind of classroom-based, lecture-heavy, training was not an effective strategy for senior board members, whose time was valuable and who were often in positions of authority in other walks of life.

We wanted to create something meaningful and effective, tailor-made for FSPs, and delivered in a manner that would stick with participants so that they could lead their organizations and their industry to grow and prosper.

&nbsp;

Governance Peer Learning and Exchange Program Strengthens Financial Institutions in Africa

Mastercard Foundation

Africa Board Fellowship Program

Sub-Saharan Africa

Challenges and Crises

Governance

Risk Management

Trends

Case Study

<em><img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="88" height="109" />The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program.</em>

Far from being “extraordinary and rare,” challenging environments are a “normal” part of business for financial service providers (FSPs) targeting low-income populations. We tend to think that external environment challenges are extraordinary events that cannot be predicted or are too varied and diverse to prepare for—and therefore are best confronted as they arise. What do currency devaluations, deteriorating security, political interference or regulatory upheavals have in common? Can we can plan for them all and prepare effective responses in advance? Do responses need to be tailored to each circumstance?

Through the <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellows program</a>, we have reviewed a wide sample of the external threats faced by the boards of FSPs in recent years in Africa and globally: economic fluctuations, currency devaluations, violence and instability, abruptly announced interest rate caps and capital requirements, natural disasters, terrorism—it’s a long and heterogeneous list.

<img class=" size-full wp-image-25776 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/31589334426_3111c44396_z.jpg" alt="31589334426_3111c44396_z" width="640" height="377" />

Despite this diversity, an engaged FSP – led by an active board – can often do quite a bit to shape and influence the operating environment or ready the institution to survive shocks. Preparing for and responding to crises, threats and opportunities is, in fact, a core responsibility of senior executives and board directors. Conversations with Africa Board Fellows demonstrate that boards <em>can</em> prepare by:
<ul>
 	<li>Anticipating and minimizing the likelihood of adverse external developments</li>
 	<li>Reducing the vulnerability of the institution to such shocks</li>
 	<li>Enhancing the resilience (ability to recover) of the institution to the situations it will inevitably face</li>
</ul>
We’ll tackle the first point on anticipating and minimizing shocks here. We’ll cover the last two points in our next post in this <a href="https://cfi-blog.org/tag/abf-blog-series/">series</a>.
<h3>Anticipating Challenges with an Ear to the Ground</h3>
<img class=" wp-image-25790 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/how-to-anticipate-changes-as-a-board-member.png" alt="how to anticipate changes as a board member" width="196" height="330" />The first step is to anticipate – and hence be prepared to mitigate – challenges. To do this, board directors must keep abreast of new entrants, potential disruptions, and promising opportunities in the marketplace. Directors cannot rely solely on management for this information. Instead, they should develop their own sources to supplement and confirm management’s view, such as by networking with industry observers and analysts–with management’s knowledge, of course. Locally based board members have an advantage in developing and maintaining such networks, which is one reason it is important to recruit qualified local directors. For example, finding and retaining qualified local directors has been a priority for FSSL South Sudan, given the ongoing political disturbances in the country that make it difficult to maintain continuity of leadership.
<p style="text-align: left">Talking frequently with FSP staff and clients is another way board directors can anticipate challenges. Frontline staff are in a position to report on competition, clients and local happenings. And it should go without saying – but always bears repeating – that clients can provide ground-level insight. Clients may reveal such things as their vulnerability to displacement in government raids on the informal sector or the inability to import goods. When ABF fellows from the Ivory Coast conducted client visits, these were some of the specific challenges about which they learned.</p>

<h3>Getting Ahead of Operating Challenges with Active Participation</h3>
While they can never control the external environment, board members can help shape it to some degree through the following:
<ul>
 	<li><strong><em>Create and participate in industry associations; promote and follow codes of conduct</em></strong>. Industry associations establish frameworks for fair practices and client protection and help facilitate self-regulation and compliance with governance and transparency requirements. An active industry association can also work closely with regulators and other government actors to help shape legislation, regulation and perceptions of the industry, which are all key features of the operating environment. Board directors should support and encourage management to devote time to nurturing strong associations – a medium term project – and engage directly with other FSP board directors to make this an industry priority. As one example, Barnabe Francois, CEO of Microcred Ivory Coast, <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/barnabe_francois_microcred.pdf">has been an active member of banking associations</a>, first in Madagascar and subsequently in Ivory Coast.</li>
 	<li><strong><em>Develop relationships with regulators and government officials. </em></strong>To reinforce the efforts of industry associations, FSP management can also cultivate relationships with government officials to advocate and educate them (and the media) on operating environment challenges. Board directors, particularly well-regarded locally-based directors, can greatly enhance the effectiveness of such engagement. Or, like MicroCred Zimbabwe, the FSP can appoint an experienced bank regulator to the board (perhaps, a retired official or someone who worked in another country) who understands how regulatory bodies work and can connect on a peer-to-peer basis with regulators.</li>
 	<li><strong><em>Build clients’ financial capability</em></strong>. An important aspect of an FSP’s risk management responsibilities is ensuring that clients use financial services responsibly and productively. Misunderstanding how financial services work can lead to multiple borrowing, or mismatched cash flows which often threaten clients’ ability to repay their loans. To ensure good value to clients and the long-term viability of the FSP, board directors should encourage management to include initiatives in strategic plans to help clients build their financial skills and practice good habits.</li>
</ul>
<ol>
 	<li style="list-style-type: none"></li>
</ol>
Such efforts can, over the medium term, reduce the likelihood that an FSP or the entire sector will face certain types of challenges and will help position providers to take advantage of new opportunities.

<em>Stay tuned for the next blog in this series</em><em>, which will highlight reducing an FSP’s vulnerability to external shocks, as well as enhancing resilience.</em>
<h4><strong><i><span style="margin: 0;font-family: 'Calibri', sans-serif"><span style="color: #000000">CFI is currently recruiting fellows for the next cohort of the </span><a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a><span style="color: #000000">. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.</span></span></i></strong></h4>
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Navigating Challenges Is What Boards Are All About – Part 1: Anticipating Challenges

South Sudan

Zimbabwe

Africa Board Fellowship Spotlight

Enabling Environment

Microfinance

<img class=" wp-image-25789 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/30784872334_b499dfc281_m.jpg" alt="30784872334_b499dfc281_m" width="88" height="109" /><em>The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program.</em>

In recent years, some African countries have experienced slower economic growth and less stability in their currencies. This deterioration in macroeconomic conditions has presented challenges for financial service providers (FSPs) seeking to serve the base of the pyramid and improve financial inclusion. Some ways macroeconomic conditions impact FSPs include:
<ul>
 	<li>Higher operational expenses (e.g., imported IT equipment and software; office leases and technical services invoiced in foreign currency)</li>
 	<li>Increase in non-performing loans as small businesses have had fewer growth opportunities</li>
 	<li>Higher cost of funds (both deposits and debt)</li>
 	<li>Reduced access to debt from international and local providers</li>
 	<li>Decrease in revenue or tighter margins</li>
</ul>
We're talking to <a href="https://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> (ABF) alumni to share their experiences dealing with deteriorating macroeconomic conditions.

ABF alumnus Deji Fisho, Board Member of Fortis Microfinance Bank in Nigeria, provides insights into the implications for FSPs on the 2016 decision by the Central Bank of Nigeria to allow the exchange rate for the Naira to be market driven.

<em>It affects a microfinance bank’s exposure to dollar loans. When the currency devalues, MFIs have to spend three times more Naira to keep money in dollars. But with the oil market crash, there weren’t even enough dollars coming in for repayments, so people have to go outside the bank to the black market to get dollars. In a currency devaluation situation like this, MFIs won’t have money to lend. The bigger banks borrow from the government and the smaller banks borrow from the bigger banks. So there is no trickle down to MFIs if the larger banks don’t have the cash.</em>

Learn more in <a title="Deji_Fisho_Fortis MF Bank" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/deji_fisho_fortis-mf-bank.pdf">Deji's full interview</a>.

ABF Fellow Nkosilathi Moyo, CEO of VisionFund in Zambia, comments on how currency devaluations impact clients:

<em>Some of our clients are traders, so they buy goods from Democratic Republic of Congo, South Africa and Tanzania. Devaluation meant that our clients had limited foreign currency to meet their business needs, resulting in default.</em>

<em>After the fluctuations, we revised our risk appetite statement to ensure that it is aligned with prevailing market conditions. For instance, the board made a decision that we should not contract any foreign currency denominated loans. Additionally, we reviewed our risk concentration to ensure we do not have too much focus on any one region or industry. For example, we are shifting some of our focus away from traders in the mine areas to smallholder farmers.</em>

Read more in <a title="Nkosilathi _Moyo_VisionFund_Final" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/nkosilathi-_moyo_visionfund_final.pdf">Nkosilathi's full interview</a>.

Regulators can sometimes respond to macroeconomic problems by imposing regulations designed to keep risks out of the financial sector. One response is to impose higher minimum capital requirements or higher reserve requirements. These may sometimes be imposed directly after a collapse of a similar type of financial entity due to a sudden bank run. Such restrictions can be debilitating for financial institutions, especially when they are imposed suddenly. Although meant to protect depositors, this type of regulation can push smaller FSPs out of the market.

In 2017, Mozambique recently faced challenges arising from multiple factors: political tensions and violent clashes, a debt scandal that resulted in the suspension of aid from key donors and endemic corruption. This affected macroeconomic variables, with a significant currency devaluation in 2016 and high inflation (15 percent) in 2017. These tough macroeconomic conditions led regulators to impose a higher minimum capital requirement on financial institutions. ABF Fellow Titos Macie, Socremo Board Chair, discusses the impact of that increase on the institution.

<em>The deteriorating macroeconomic fundamentals, along with the non-performance of two major banks (one liquidated and one placed under the central bank administration), caused the central bank to increase minimum capital requirements. Initially, the central bank had indicated that the new capitalization requirements would be 500 million meticais, an increase from MZM 70 million, so the board made plans to meet that requirement within three years by not paying out shareholder dividends [and using] share premium and retained earnings to capitalize the bank. When the official decree was actually issued by the central bank, the capitalization requirement was much higher: MZM 1.7 billion (US $26 million). Facing this requirement, the board had little room for maneuver. It took a decision to downgrade Socremo from a full commercial banking license to a micro bank license. Socremo can still do almost all financial services, except for forex business.</em>

<a title="Titos_Macie_Socremo" href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/titos_macie_socremo.pdf">Titos' full interview</a> includes a discussion of the impact of currency devaluation on its clients. Accion discusses its recent investment in Socremo <a href="http://blogs.accion.org/features/plan-bring-small-businesses-in-mozambique-support/">here</a>.

Titos sums up how many FSPs operating in challenging macroeconomic and regulatory environments feel: <em>We are surviving and looking at a better future.</em>

<em><strong>CFI is currently recruiting fellows for the next cohort of the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship program</a>. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.</strong></em>

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&nbsp;

&nbsp;

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&nbsp;

Dialogue With Africa Board Fellows: Navigating Challenging Macroeconomic Environments

Mozambique

Nigeria

Zambia

Policy, Regulation and Government Initiatives

According to the <a href="https://globalfindex.worldbank.org/">Global Findex</a>, the percentage of adults in Mexico who are saving money at a formal institution plunged from 15 percent to 10 percent in just the past three years—despite financial inclusion strategies <a href="https://cfi-blog.org/2016/07/01/mexico-launches-comprehensive-financial-inclusion-strategy/">enacted by the government</a>. This steep decline in usage of savings accounts came as a surprise, and hit close to home for me as a Mexican. This <a href="https://cfi-blog.org/2018/06/18/is-financial-inclusion-stalling-the-2017-findex-results-raise-several-red-flags/">trend is a cause for concern</a>, and it’s also a call to action. At Accion, we took this as an opportunity to listen to the people we’d like to see benefit from financial services. With support of <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>, we wanted to understand why fewer people were saving in banks, what products and services people were using, and who was providing those services if it wasn’t formal institutions.

To get answers about what people in Mexico want from their financial service providers, I recently traveled home to Mexico City as part of a team of researchers. We listened to small merchants map out their entire financial lives—their motivations, goals and

[caption id="attachment_25738" align="alignright" width="286"]<img class="alignnone size-full wp-image-25738" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/mexico-fish-market-accion.jpg" alt="Man sells fish at a stall in an outdoor market" width="286" height="215" /> Fish market on San Gregario Street in Xochimilco, a southeastern municipality of Mexico City, one of the places we visited for our user research.[/caption]

aspirations, how they feel about various types of financial services, the strategies they use to stay financially healthy, and more.

Our biggest surprise? The individuals we talked with know about and can access a lot of financial products—they just aren’t using them. Lack of alignment between what low-income customers want and what financial products offer is a factor preventing further financial inclusion in Mexico.

All of the individuals we spoke to reported having access to microloans, consumer store credit, credit cards, and savings accounts. Financial access didn’t seem to be an issue for them — not even in the more rural areas we visited two hours outside the city. Even though our small, qualitative study may not be rigorous enough to extrapolate to the broader population, this finding seems to be consistent with national data. In Mexico, <a href="https://www.cnbv.gob.mx/Inclusi%C3%B3n/Documents/Reportes%20de%20IF/Reporte%20de%20Inclusion%20Financiera%208.pdf">86 percent of banking branches are located in urban areas</a>, so people close to the city are unlikely to deal with a shortage of services. What our interviews revealed is that a different issue is preventing further inclusion: lack of alignment between what low-income customers want and what current financial products offer. Most people we talked to dislike dealing with large commercial banks, and they continuously decline the offers for financial services they regularly receive, at their doorstep or in public places.

[caption id="attachment_25737" align="alignleft" width="275"]<img class="alignnone size-full wp-image-25737" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/07/mexico-azucena-mother-holding-baby.png" alt="Mother holding bay" width="275" height="366" /> Azucena is a former bank teller, however she prefers to save money at home. Alpuyeca, Morelos, Mexico, 2018.[/caption]

Many of the people we interviewed still prioritize saving cash at home, even if they also have a formal savings account.  For example, Azucena, a former teller at a large commercial bank branch, told us that despite her relationship with a bank, she and her husband still prefer to store cash informally. “We save at home, but we do so separately, using different lock boxes for different purposes,” she says.

Through our conversations with clients like Azucena, we discovered that informal alternatives like lock boxes continue to be more convenient for clients and preferable to formal options. Keeping cash at home is, after all, indispensable for unexpected emergencies. If your money is in a bank, you’d have the hassle of getting there and waiting. Plus, it may not be available 24/7, and you can run into issues if the ATM is offline or the pharmacist, mechanic, or whomever you’re turning to for help doesn’t take a debit card.

In many cases, the interviewees’ savings accounts had been opened for them by former employers to serve as payroll accounts or by the government for disbursement of benefits. These accounts were less “savings accounts” and more “distribution accounts” that were immediately turned into cash and saved at home. Because the savings aspect wasn’t used—in fact, was never emphasized—once they switched jobs or stopped receiving benefits, they let the accounts lapse.

Convenience may be a key issue, but it is not the only one. Feeling unsafe withdrawing money from a bank branch is also an issue because thieves wait where the money is—outside bank branches and near ATMs. The lack of trust our interviewees placed in financial institutions was often less about security and more about the unclear, high (real or perceived) maintenance fees banks charge on savings accounts.

Despite this perceived aversion to formal accounts, we found that people still continue to save and set high financial goals for themselves. In all the interviews we conducted, the number one financial goal was saving to access better opportunities: education of their children, a home for their family, or the chance of opening their own business. The demand is clearly there, and most of the people we talked to were indeed saving.

We heard from customers, and now we’re working with a mix of fintechs and financial service providers of all sizes to use those insights to create financial products that customers will want to use as key tools for their financial lives.  Stay tuned!

<em>This research was conducted by <a href="http://www.accion.org/">Accion</a>, the Center for Financial Inclusion at Accion, and <a href="http://www.dalbergdesign.com/">Dalberg Design</a> as part of our part of our <a href="/about/what-we-do/building-financial-capabilities-and-strengthening-institutions-through-customer-centered-innovations/">Building Financial Capabilities and Strengthening Institutions through Customer-Centered Innovations project</a>, supported by <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>.</em>

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Why Aren’t People Saving Money in Mexico?

Building Financial Capabilities and Strengthening Institutions Through Customer-Centered Innovations

Mexico

Financial Health

Saving

Adelina Dasso

Investment Officer

Alex Qian

John Fischer

Chief Investment Officer

Radhika Shroff

Deputy Chief Investment Officer

Robert Ongodia

Senior Director

Abhishek Agrawal

Alex Taylor

Dwijo Goswami

Kathleen Yaworsky

Prateek Shrivastava

China

East Asia and Pacific

Europe and Central Asia

India

Myanmar

South Asia

Agent Banking

Alternative Data

Credit Provision

Data Analytics

Digital Credit

Entrepreneurs of MSMEs

Financial Inclusion Strategy

Financial Technology

Fintechs

Impact Investing

MSME/SME Finance

Over-indebtedness

Responsible Investing

Underwriting

Underserved Groups

Article

Toolkits and Guides

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

Running a business is hard work, which makes the fruits of the labor all the sweeter. Most entrepreneurs do what they do not only for the challenge of it, or because they enjoy what they do, but also because they want to be able to support their families, boost their own standard of living, and perhaps even give back to the community around them. Accion partner Accion Microfinance Bank (Accion MfB) is one of the leading providers of financial services to micro, small, and medium enterprises (MSMEs) in Nigeria, with nearly 40,000 borrowers in 2017.

[caption id="attachment_19290" align="alignnone" width="700"]<img class="wp-image-19290" src="https://content.accion.org/wp-content/uploads/2019/07/Accion_Clients_0006-1-1024x683.jpg" alt="Emmanual with stacks of tires to sale" width="700" height="467" /> <em>Accion Microfinance Bank client Emmanual, a tire salesman, has seen his overall quality of life improve since he began working with the bank.</em>[/caption]

Accion MfB client Emmanual, a tire salesman, has seen his overall quality of life improve since he began working with the bank. As he puts it, “When I started with Accion, I was living in a room. But today, I live in a two-bedroom flat. When I started with Accion I was single, but now I’m getting married.” He’s also been able to help support members of his family with the money he’s earned. He says, “From this business, I finance my brother’s schooling, and sponsor my other brother. I also take care of my aged parents, who are proud of me. I’ve done a lot through this business.”

[caption id="attachment_16288" align="alignnone" width="700"]<img class="wp-image-16288" src="https://content.accion.org/wp-content/uploads/2018/11/Nigeria_Accion_Clients_0013-1024x683.jpg" alt="An Accion Microfinance Bank agent uses a tablet to support client Chief Akintunde" width="700" height="467" /> <em>Restaurateur Chief Akintunde talking with an employee of Accion Microfinance Bank.</em>[/caption]

Chief Akintunde, another client who’s a restaurateur, has begun to see a third-generation benefit from his business. “All of my children have settled down and now live in their own homes. I thank the Lord because now I have grandchildren who are attending private school,” he says. He’s also tried to help children in his community whose parents can’t afford tuition, explaining, “On one or two occasions, when I’ve seen a child roaming around instead of at school, I will pay for them to go to school, buy their uniform, bag, and books.”

[caption id="attachment_18234" align="alignnone" width="700"]<img class="wp-image-18234" src="https://content.accion.org/wp-content/uploads/2019/04/Accion_Clients_0010-1-1024x683.jpg" alt="Dr. Akinpelu smiles in the halls of his clinic" width="700" height="467" /> <em>Accion Microfinance Bank client Dr. Akinpelu gives back to his community.</em>[/caption]

Dr. Akinpelu, who operates a private hospital, describes himself as “a community man.” He says that sometimes he will provide free services to those who can’t pay. He’s thankful to Accion MfB for helping to make it all possible. As he says, “When Accion helps me improve my business, they improve my life.”

Three entrepreneurs on growing their businesses and helping others

Accion Microfinance Bank

Social Good

Accion Global Advisory Solutions

Accion Global Investments

The real impact of financial inclusion

It all started with paper. Sitting in front of a tall stack of giant white sheets of printing paper, Nigerian entrepreneur Moses recounts his early struggles to launch his own business. He tried borrowing money from his boss, but it wasn’t enough to get started. Then, in 2012, a friend told him about Accion Microfinance Bank, a longtime Accion partner that specializes in lending to Nigerian entrepreneurs.

“I got my first shop by collecting money from them,” he says. “I started with 150,000 naira (just over US$400). Now they give me up to 1.7 million (approximately US$4700). I used to be squatting with someone, now I have three shops,” he adds.

He hasn’t stopped there — he’s using his profits to expand into other business opportunities. “I have a car business where I buy and sell cars. I also have a house that I lease to tenants. I have property all over, thanks to Accion Microfinance Bank,” he says.

With the growing businesses, he’s also been able to invest in his own family. He’s since married, and he and his wife are raising two children — the older of whom has now started school. He’s helped one of his brothers finance real estate purchases of his own in their home village and paid for university tuition for two others.

He’s grateful for the role his bank has played in everything he’s done so far, and he looks forward to working with Accion Microfinance Bank for years to come. “God is really with them, and I pray he continues blessing them. I won’t leave them, because of how they have impacted my life,” he says.

From one small loan to three shops: One entrepreneur’s journey

Financial Inclusion Practitioner

At Accion, we’re focused on making sure technology transforms financial services in a way that works for everyone. So I was excited to join the conversation at <a href="http://www.e-mfp.eu/european-microfinance-week-2018/information">European Microfinance Week</a> on financial inclusion through technology from the investor perspective.

During the panel, I discussed Accion’s pioneering role investing in early- and growth-stage inclusive fintech companies, as well as how we’ve used our learnings from that work to help our microfinance partners integrate digital approaches. Through strategic digitization, microfinance institutions and banks can improve operational efficiencies, serve more customers with little to no formal credit histories, and increase their impact. We’re transferring successful models that we’ve helped develop in innovative markets and experimenting with bringing them to other parts of the world.
<h2><strong>Convergence of fintech and traditional finance</strong></h2>
One of our industry’s biggest issues in the provision of financial services is the cost of delivery — and the human intensity and limits of brick and mortar only models. Technology can help us solve this by reducing paperwork, human-driven analysis, and barriers to expansion. While earlier stage companies are often best poised to leverage technology because of their streamlined decision-making, entrepreneurial flexibility, lack of bureaucracy, and ability to experiment, microfinance institutions and banks can leverage technology to better serve clients. By reducing operating costs, they can pass savings along to clients in the form on lower interest rates on loans, especially for an institution’s highest quality customers. In market economies, this will happen as competition adopts similar efficiencies and institutions compete for clients. Technology can also improve customer experience by allowing institutions to expand their reach and capacity.

We’ve seen what traditional financial service providers around the world are capable of when they embrace digitization. Our long-time partner, <a href="https://www.bancosol.com.bo/">BancoSol</a> in Bolivia — which serves more than 650,000 savers, over 260,000 borrowers, and close to 190,000 microinsurance clients — is one of the largest microfinance institutions in the world.  The bank has maintained some of the lowest operating costs in the industry by digitizing its operations an effort that took a great deal of cultural change. <a href="https://www.accionmfb.com/">Accion Microfinance Bank Nigeria</a> took advantage of the country’s high mobile penetration and created a product that allows its clients to conduct essential banking services from their phones, driving increased access and usability.

While the potential for financial service providers to leverage technology is massive, there are still challenges. The cultural shift for traditional microfinance institutions from brick-and-mortar to digital isn’t always a smooth or comfortable change. The loan officer-client relationship that was successful for institutions in the past is still imperative for the future, and technology should be used strategically and selectively to automate processes, enable institutions to go deeper in the credit spectrum, and better serve clients.
<h2><strong>New platforms for financial services </strong></h2>
In addition to the digitization of traditional institutions, we’re also leveraging our knowledge to help build financial services platforms — business models that are driven by strategic partnerships between banks and underserved micro, small and medium-sized enterprises (MSMEs) to drive financial inclusion through technology and distribution networks. <a href="https://subk.co.in/">Sub-K</a>, a tech-enabled agent network in India, partners with multiple banks to bring financial services to rural villages across the country. They do this by equipping local entrepreneurs with handheld banking devices — in essence, turning mom-and-pop shops into mini bank branches. Sub-K serves over 2 million customers through its platform, bringing financial services to people where they live and work in remote rural India.

Platforms like Sub-K, which are already heavily invested in technology, face unique challenges. They must create an incredibly robust database to underwrite credit properly and maintain low levels of risk. Since their business models are often unproven, it can also be difficult for these companies to build a scalable network and find banks that are willing to partner with them.
<h2><strong>Investing in inclusive innovation</strong></h2>
Accion plays a unique role in the investing space, acting as both an investor and a nonprofit, where our mission to create a financially inclusive world always comes first. We know we won’t reach the 3 billion financially underserved people alone. So we invest in scalable and commercially sustainable business models to help prove their viability. Often, we go where others will not and help companies build demonstration models, ultimately catalyzing private investment and capital markets for investment.

We’ve seen this strategy work across our portfolio. Three years ago in India, we invested in the small startup <a href="http://www.ayefin.com/">Aye Finance</a> because of its industry-cluster approach to serving small businesses in Delhi and its vision of a data-driven approach to better serve entire industries of clients. The company has flourished in the past few years, and its latest investment round was led by CapitalG, an investment arm of Google.

Also in India, we’ve seen the growth of <a href="https://www.northernarc.com/">Northern Arc</a>, formerly IFMR Capital. Northern Arc has catalyzed over USD 7 billion in funding to companies that provide financing for affordable housing, MSMEs, agriculture, and commercial vehicles. By demonstrating the viability of their borrowers’ underlying client base, they’re opening up a brand new source of funding from commercial investors. Today the company is backed by Eight Roads Capital, an early backer of Alibaba, and Standard Chartered Private Equity. We’re excited to see companies like Aye and Northern Arc generating broader interest through their innovative approaches to financial inclusion.

By continuing to catalyze interest in disruptive business models, leveraging technology-driven platforms, and making sure traditional institutions can unlock the potential of digital transformation, we believe we can make a definitive difference in the world. We can cultivate a financial ecosystem that brings accessible and useful financial services to the people who need them most.

The investor perspective on driving financial inclusion through technology

Aye Finance

BancoSol

Northern Arc

Sub-K

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.

India is one of the fastest growing and most complex markets for inclusive finance, and there is a massive opportunity to extend financial services to the underserved. But the country has struggled in the past with unbridled growth of the microfinance sector leading to a crisis in debt stress, notably in <a href="https://www.huffingtonpost.com/elisabeth-rhyne/on-microfinance-whos-to-b_b_777911.html">Andhra Pradesh</a> in 2010.

Policymakers and networks of microfinance institutions actively responded to these crises and elevated consumer protection on the policy agenda. But it’s one thing for regulators to signal policy support for consumer protection. It’s quite another to tackle the nuts and bolts of implementing best practices, especially in a market as complex as India.

One of the scalable solutions to arise in India is the concept of microfinance networks as Self-Regulatory Organizations (SROs). Networks that have been designated by the Reserve Bank of India (RBI) as SRO networks are responsible for monitoring compliance of member microfinance institutions (MFIs) to the microfinance industry code of conduct and providing an effective grievance redressal mechanism between borrowers and member institutions. <a href="http://www.sa-dhan.net/">Sa-Dhan</a>, the largest organization of community banks in India, was designated an SRO in 2015. While Sa-Dhan had previously filled a quasi-regulatory role, this official designation expanded its mandate for monitoring and enforcement, in turn increasing its need for tools to identify and respond to risks at both the market and institution levels.
<div id="attachment_33139" class="wp-caption alignleft">

[caption id="attachment_33139" align="alignleft" width="500"]<img class="wp-image-33139" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/10/Sa-Dhan-tool-launch-photo-1024x714.jpg" alt="announcement-of-sadhan-monitoring-tool-group-photo" width="500" height="349" /> The Sa-Dhan monitoring tool was announced at a launch event during the Sa-Dhan Annual Conference in New Delhi in September 2018.[/caption]

</div>
Aiming to make a country-wide impact on the state of consumer protection in India, CFI’s Smart Campaign and Accion’s Global Advisory Services collaborated with Sa-Dhan to build a digital monitoring tool based on the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Smart Campaign’s global standards</a> for financial consumer protection and local regulatory guidelines. The tool is to be the vehicle through which Sa-Dhan collects the information it needs from its members to fulfill its supervisory role in maintaining compliance with the code of conduct. Accion’s advisory team led the digitization of the tool, building of the data warehouse, and the corresponding web platform. The tool was officially launched at <a href="https://www.accion.org/sa-dhan-the-smart-campaign-launch-ifc-backed-monitoring-tool-to-strengthen-consumer-protection">Sa-Dhan’s annual conference</a> with technical and financial support from the International Finance Corporation. Sa-Dhan’s members can now efficiently self-report data through the tool’s online interface, and Sa-Dhan can quantitatively assess market dynamics, especially areas of overindebtedness risk.

This new monitoring mechanism will help to instill consumer protection in Sa-Dhan’s nearly 200 member institutions and protect more than 30 million clients in India.

Across the microfinance sector, new examples of “regtech” and “suptech” are emerging. Just as technological transformation of microfinance institutions can scale their services to new clients, technology can help regulatory bodies meet their broadened responsibilities to oversee the proliferation of lenders. P. Satish, Executive Director of Sa-Dhan sees the new tool as an essential component for self-regulation because it will “help member MFIs with their data analytics and compliance measures, as well as reduce potential client distress.”

After the initial rollout and training workshops for microfinance institutions across the country, Sa-Dhan will put the tool into practice and will use the reports in consultation with the RBI to identify “hot spots” of overindebtedness or lack of compliance to the code of conduct. These reports will also help Sa-Dhan identify under-penetrated areas and help lenders to expand services.

India’s experimentation with self-regulation holds lessons for the world. Traditionally, self-regulation models have been met with skepticism, especially regarding how non-government networks can monitor and enforce compliance among members. The collaboration between the RBI and self-regulatory organizations in India give weight to the microfinance networks through a layered regulatory approach, and technology advances can build the capacity of networks like Sa-Dhan to access data from their members and oversee performance.

The Sa-Dhan monitoring tool can serve as a model for expanding consumer protection in other markets, especially those where there are concerns about rising debt stress. Better monitoring tools can serve as an early warning system and help provider networks or regulators head off crises before they spread.

This post was originally published on <a href="https://www.centerforfinancialinclusion.org/a-new-digital-monitoring-tool-in-india-could-boost-consumer-protection-capacity">the Center for Financial Inclusion at Accion blog</a>.

Increasing consumer protection for 30 million clients in India

The Smart Campaign

This toolkit is for analysis of the regulatory, technological, competitive, and collaborative opportunities, as well as demographic and cultural factors that will help drive the adoption of a financial institution's target channels.

Digital financial services toolkit: External analysis

Regulators

This template lays out the initial project planning phase and outlines objectives, budget, and roles and responsibilities, to ensure internal alignment and cross-departmental buy-in.

Digital financial services toolkit: Draft project charter

This toolkit helps financial institutions review the readiness of existing policies, technology, and business operations to support the channel methodology, outline required additions or changes to successfully launch the channel, and assess stakeholder buy-in and human resources capacity to support implementation and launch.

Digital financial services toolkit: Internal analysis

This toolkit aims to help microfinance institutions plan, pilot, roll-out, and operate digital delivery channels for financial services.

Digital financial services toolkit: Channels methodology

This toolkit facilitates assessment and diagnosis of existing digital channels and identifies how a proposed new channel will complement current offerings.

Digital financial services toolkit: Channel diagnosis framework

This template summarizes high-level results of the feasibility study (see separate template) and guides the recommendations to make “go/no go” and “how to go” decisions regarding a potential new channel deployment.

Digital financial services toolkit: Go/How-to-go decision tool

This template summarizes activities completed in the feasibility study phase of new digital financial system channel deployment or enhancement. This document can be used to present results and provide recommendations to senior management or the board.

Digital financial services toolkit: Overview of feasibility study findings

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

MetLife Foundation's longstanding partnership and philanthropic support of Accion’s work, and our joint public engagement efforts, have raised awareness of the opportunities and solutions to advance financial inclusion. Since 2013 MetLife Foundation's core focus has been to improve the financial health of low-income individuals across the globe. Together, we’ve helped underserved people around the world gain access to the tools they need to improve their lives.
<h5>EMPOWERING THE PEOPLE OF MYANMAR</h5>
Since 2015, MetLife Foundation has supported Accion’s partnership with Early Dawn Microfinance (DAWN) to provide entrepreneurs in Myanmar — especially women in rural areas — with microfinance services. When we began working with DAWN, it served 25,000 clients with less than $2 million in loans, and loan officers recorded clients’ activity entirely by hand, which could take up to four hours a day. As an investor and operating partner, Accion has worked with DAWN to reach new customer segments, improve and expand its product offerings, leverage new technologies and channels, and improve its operational efficiency. Today, that previous four hours of work takes just 20 minutes, giving loan officers more time to meet with and understand their clients. Now, DAWN is a premier institution that serves as a model for the country’s nascent microfinance industry, serving more than 160,000 clients with more than $30 million in loans.

MetLife Foundation and Accion: Seeking opportunities to advance financial inclusion

Institutional Funder

<p class="graf graf--p">500,000 people in India have been able to expand their businesses and support their families using savings accounts and loans from our partner <a class="markup--anchor markup--p-anchor" href="http://www.swadhaar.com/" target="_blank" rel="noopener noreferrer">Swadhaar</a>. That’s because Swadhaar has made it their mission to create a financial sector that works for everyone — building products and services to reach vulnerable and underserved people.</p>
<p class="graf graf--p">Swadhaar was one of our first partnerships in India, and we’ve been proud to stand by them as they’ve grown from 6,000 clients a decade ago to half a million today. Our <a class="markup--anchor markup--p-anchor" href="https://www.accion.org/content/microfinance-services" target="_blank" rel="noopener noreferrer">Global Advisory Solutions</a> team has provided Swadhaar with technical assistance as they’ve expanded geographically, launched financing products for small and medium businesses, and even started an agency banking partnership with co-investor <a class="markup--anchor markup--p-anchor" href="https://www.rblbank.com/" target="_blank" rel="noopener noreferrer">RBL Bank</a> in 2014 — one of the first of its kind in the country. Swadhaar serves as a ‘banking correspondent’ for RBL, responsible for sourcing clients, evaluating creditworthiness, and monitoring repayments for RBL while leveraging the bank’s balance sheet and infrastructure.</p>
<p class="graf graf--p">Swadhaar’s partnership with RBL Bank enables shops and other small businesses to bring banking services directly to people in underserved locations. This allows the program to reach people who don’t have access to local bank branches. Thanks to the success of this initiative, the relationship between these two companies continues to grow. RBL Bank has now <a class="markup--anchor markup--p-anchor" href="http://www.livemint.com/Companies/GktxaPtL260OlNCQN0bFxK/RBL-Bank-increases-stake-in-Swadhaar-to-60-holds-rights-to.html" target="_blank" rel="noopener noreferrer">increased its investment</a> in Swadhaar. With this move, RBL Bank will help the agency banking program scale across India and provide high-quality financial tools and services to still more customers.</p>
<p class="graf graf--p">With hundreds of millions of Indians left out of or poorly served by the formal financial sector, we hope that Swadhaar and RBL Bank’s growing partnership gives even more people the tools they need to build better lives.</p>

One step closer to giving all Indians the tools to build a better life

Swadhaar

Despite its astonishing progress in reducing poverty, China remains one of the nations with the greatest unmet needs for financial services. <a href="http://www.worldbank.org/en/programs/globalfindex">Some 234 million low-income Chinese — or about 21 percent of the total population—lack access to formal financial services</a>. One vital strategy for expanding financial access is to strengthen China’s microfinance industry so it can scale up. That, in turn, requires helping senior managers of microfinance institutions (MFIs) overcome the day-to-day business challenges that can slow down growth.

To build the sector’s expertise, Accion, with the support of MetLife Foundation and in partnership with the Chinese Association of Microfinance (CAM), launched the <a href="http://www.accion.org/mmlp-winter-china-microcredit-industry/">International Microfinance Management and Leadership Program</a> (MMLP) in December 2015. This program provides senior MFI managers training in effective strategies to address technical and operational issues in microfinance, and to extend better services to more people. <a href="http://www.accion.org/metlife-foundation-and-accion-reach-more-than-one-million-clients-through-training-program-for-chinas-microfinance-managers/">This month in Beijing, we celebrated the completion of MMLP’s second round of training</a>. In all, two cohorts have participated, totaling 73 mid- and senior-level managers from 34 Chinese MFIs, including market leaders like CreditEase, CFPA Microfinance, Hope Finance, Grassland Ltd., and Hanhua Credit Group.

The International Microfinance Management and Leadership Program was the first holistic, systematic microfinance management training and capacity-building initiative in China. Participants refined their leadership and management skills and developed sound technical knowledge in microfinance operations and human capital management. Over the course of several months, trainees attended in-classroom seminars and participated in monthly webinars, online discussions, and field visits to best-practice MFIs. This blended approach, combining classroom-based and experiential learning, helped participants retain information for longer, strengthened core skills, and put the lessons they learn into practice. This required a much longer commitment than the short, lecture-based trainings that are more commonly seen in China, and exposes the trainees to the more participatory teaching styles of Western institutions.

Graduates rated the program highly (with an average of 4.73 out of 5 in cohort 1, and 4.85 in cohort 2). Said Yang Tao, assistant general manager at CFPA Microfinance and cohort 1 participant, “The program’s courses really touch the pain points and needs of mid and senior managers in microfinance institutions. The content is very practical and relevant.” Another participant from cohort 2, Peng Honglang, senior manager at CreditEase, said, “The training is very comprehensive, guiding me through key points in strategic planning, human capital and operation management, and adoption of new technology, which will be very useful in my future work.”

The partner institutions behind MMLP brought complementary strengths to the project. Accion is a financial inclusion pioneer with 50 years of experience building 65 MFIs in 32 countries on four continents. The Chinese Association of Microfinance is the first member-based association in China’s microfinance sector, and advocates for the development of rural microfinance and public-interest MFIs.

Given the size of the financially excluded population in China, scaling financial inclusion in China translates to global impact. Combined, the first and second cohorts will impact more than one million MFI clients. CFPA Microfinance, China’s largest microfinance institution, is now poised to take over the MMLP, building on the achievements of the first two rounds of training to continue developing financial services for all.
<p class="graf graf--p"><em class="markup--em markup--p-em">By Dandan Wang and Yiran Lu for Accion. An earlier version of this post was published on the </em><a class="markup--anchor markup--p-anchor" href="http://partners.wsj.com/metlife/multipliers/articles/making-small-loans-on-a-bigger-scale-in-china/" target="_blank" rel="noopener noreferrer"><em class="markup--em markup--p-em">Wall Street Journal’s Multipliers of Prosperity</em></a><em class="markup--em markup--p-em">, in partnership with the MetLife Foundation.</em></p>

Making small loans on a bigger scale in China

While access to financial services has steadily increased, three billion people are underserved by the world’s financial sector, with limited or no access to quality savings, credit, insurance, and payments. This Accion Insights paper sets out to help providers begin to address these complex challenges by providing a case for change and outlining the initial strategic and tactical steps a financial service provider can take to first assess and then enhance its data capability. This guide breaks down the multiple components required for a financial service provider to strengthen its data capabilities, while referencing the growing number of specific use cases for data-driven innovations in fostering a financially inclusive world.

Accion’s Global Advisory Solutions team developed this report with the support of the Citi Foundation.

Unlocking the Promise of Big Data to Promote Financial Inclusion

Citi Foundation

<em>By Micaela McCandless </em>

I’m sitting in a conference room surrounded by CEOs and board members from microfinance banks throughout Latin America. There is tension in the room. Everyone is sitting forward in their chairs trying to absorb the words of a panel of representatives from fintech companies and fintech investment firms.

Many microfinance banks have worked tirelessly to build a client base, become sustainable, and create a positive impact in their community. It has been an expensive and long process. These same MFIs are now holding their breath, hoping someone doesn’t create a start-up that offers the same services via a mobile app for a minimal cost per customer. They are worried that a fintech company could have the same impact on the microfinance industry as Uber had on the taxi industry.
<h2>Limitations for MFIs</h2>
Many MFIs feel frustrated with the limitations they are facing when trying to compete with fintech firms. In many countries, fintech companies have greater flexibility for innovation because regulations written for banks do not apply to tech firms. Regulatory bodies can also be slow to react and create a more even playing field. Additionally, the classic microfinance methodology is costly because loans are small and require a lot of time from bank employees. In comparison, fintech companies can provide their service via a mobile application for a marginal cost per customer.

So, why won’t microfinance banks create an app for their clients?
<h2>Obstacles for MFIs to incorporate fintech</h2>
Incorporating new technology is very expensive: the technology must be designed, it must function with the existing software, all internal staff must be trained to use it, and it must be marketed. In some countries, like Nigeria, a bank may need to build branches before incorporating new technology to instill a sense of trust in the community because a history of fraud has created a culture of skepticism. And since technology advances so quickly, there is concern that by the time the bank has adopted an app, a newer, better, trendier tool will be available, and the bank will constantly struggle to stay relevant.
<h2>What can banks do?</h2>
According to the panel, MFIs have an advantage — they understand their client’s needs and therefore can make sure that their banking products meet those needs. Additionally, the bank can best support the client in staying financially healthy. Rather than competing with fintech companies, banks should look internally at the issues within their organization and see where fintech companies can make the bank more efficient. For example, consider data as a way to expand your client base, SMS to engage with customers, electronic money transfers, as well as incorporating tablets or cell phones for agents or branches to gather information remotely and send it directly to the main office.

Additionally, microfinance banks may want to consider creating incentives for innovation within their own company. As one panelist said, “there is someone sitting at a desk in your company who has ideas on ways to make your processes more efficient.” Provide incentives for them to share their ideas and explore ways to support their creations. Consider mentoring, investing in a start-up, or creating a start-up boot camp.
<h2>Following the lead of fintech companies</h2>
New fintech companies will continue to be invented. However, people continue to take into consideration the quality of customer service, the products offered, and the mission of the organization when choosing their bank. As long as microfinance organizations focus on their mission and the needs of their clients, while open to innovation and change, they will be able to compete in the market.

Adapting to disruption: MFIs consider fintech