The eMFP Edition
Guest Editor's Note: A few months ago, we were chatting with Tim at a microfinance research conference in Paris and he floated the idea of the European Microfinance Platform team guest-editing the Weekly faiV. We jumped at the chance, of course. We’d like to quickly say thanks for the opportunity, and we hope it’s not the last time we get asked. Mainly because it gives us the chance to dig into some of the focus areas we think are interesting and played a big part in European Microfinance Week (EMW) last month.
--Gemma Cavaliere, Gabriela Erice, Sam Mendelson, and Dan Rozas
1. Trends: Futurism has always come more easily to technologists than policy wonks (probably because it’s easier). But big gatherings are a good chance to look ahead to how the whole inclusive finance ecosystem, getting more complex each year, will evolve. e-MFP’s annual survey of financial inclusion trends – the Financial Inclusion Compass 2019 – was launched during EMW2019, and tries to do just this. If there were a single theme to this paper, it’s the disconnect between, on the one hand, individual stakeholders with their own interests and objectives, and on the other a collective confusion, a ‘soul-searching’ of sorts, for financial inclusion’s purpose amidst the panoply of initiatives and indicators in a sector of now bewildering complexity.
Digital transformation of institutions ranked top, a theme that dominated last year’s European Microfinance Award (EMA) and EMW, with Graham Wright’s keynote call for MFIs to “Digitise or Die!” (and see also the FinDev webinar series on the subject). Client protection remains at the forefront, (second in the rankings, see point 4 below for more going on here) and client-side digital innovations, despite the ubiquitous hype, is only in third overall – and only 7th among practitioners, who actually have to implement FinTech for clients. Do they know something that consultants and investors do not? Among New Areas of Focus (which looks 5-10 years down the track), Agri-Finance is clearly top. The Rural and Agricultural Finance Learning Lab, Mastercard Foundation and ISF Advisors’ Pathways to Prosperity presents the current state-of-the-sector. It’s worth looking at. Finally, Social Performance and/or Impact Measurement is 5th out of 20 trends. There’s too much to choose from here. But the CGAP blog on impact and evidence digs into the subject from a whole range of angles. And check out Tim’s CDC paper [No quid pro quo!--Tim] from earlier this year on the impact of investing in financial systems. Good to see that financial regulators are also giving this the attention it needs.
Finally, finance for refugees and displaced populations generated a lot of comments in the Compass - and was the biggest jumper in the New Area of Focus rankings. It’s been a big part of EMW for the last few years; climate migration was the theme of the excellent conference opening keynote by Tim McDonnell, journalist and National Geographic Explorer, and there’s lots of recent data (here in a World Bank blog) showing refugee numbers at (modern) record levels. Migration of course is inextricably linked to labor conditions. Low paid and low quality work drives migration [maybe we should have more research on migration as a household finance strategy--Tim]. For more on the ‘World of Work’ in the coming century, see below.
2. Climate Change: There may be more evolution in climate change/climate finance than any other area of financial inclusion today. From our side, the European Microfinance Award 2019 on ‘Strengthening Climate Change Resilience’ wrapped up last month, with APA Insurance Ltd of Kenya chosen as the winner for insuring pastoralists against forage deterioration that result in livestock deaths due to droughts . Forage availability is determined by satellite data, via the Normalized Difference Vegetation Index (NDVI). A short video on the program can be seen here.
The severity of climate change and the increasing impact it has on the world’s most vulnerable hardly needs outlining here. Progress has been excruciatingly slow. But a new report by the Global Commission on Adaptation, headed by Bill Gates and former U.N. Secretary-General Ban Ki-moon, aims to change that. Released in September 2019, it mapped out a $1.8 trillion blueprint to ready the world to withstand intensifying climate impacts. The Commission launched the report in a dozen capitals, with the overarching goal of jolting governments and businesses into action.
A bunch of recent publications illustrate the overdue acceleration of responses. The Economist Intelligence Unit’s Climate Change Resilience Index is pretty stark reading. Africa will be hit the hardest by climate change according to the Index – with 4.7% real GDP loss by 2050 (well supported by the rankings in the ND-Gain index from Notre Dame Global Adaptation Initiative (ND-GAIN), which summarizes countries’ vulnerability to (and readiness for) climate change. The EIU index shows that institutional quality matters a lot in minimising the effects. The paper also presents three case studies that highlight the importance of both economic development and policy effectiveness to tackle climate change. It’s worth a (fairly frightening) read. So is AFI’s new paper “Inclusive green finance: a survey of the policy landscape”, which asks and answers why financial regulators are working on climate change, how they have been integrating climate change concerns in their national financial inclusion policies and other financial sector strategies, and how they are collaborating with national agencies or institutions. Blue Orchard has also just published "Rethinking Climate Finance" which points to a US$400 billion shortfall by 2030 in climate finance, just to keep global temperatures within the 1.5 Celsius limit. The authors advocate various blended-finance products to encourage private sector investment, which, their survey reveals, is woefully low considering how significantly those investors perceive climate change risk to their portfolios.
3. Work: Is there a moral obligation and even business logic for financial institutions to improve the situation of workers in developing countries? This question was at the center of one of the EMW plenaries this year, “Protecting the Working Poor in the 21st Century” marked by the 100th anniversary of the International Labour Organization. Here is a video on the ILO’s declaration on the future of work adopted this year, the official report and a website to have a look at future standards of sustainable and decent work.
The ‘World of Work’ has improved for most people in most places over the past century. But the rapid growth of low-wage employment in the factories and sweatshops of Asia and other parts of the world has created both financial opportunities and vulnerabilities for the workers and their households. Guy Stuart’s collection of data through financial diaries of garment sector workers in 2016-17 in Bangladesh, India and Cambodia shows that financial service providers can play a decisive role in improving the lives of workers in the ready-made garment sector - who also take on all kinds of occupational safety and health risks.
But as much as financial services can help, they can also undermine the cause of decent work. Microfinance can increase child labor, which was explored in a dedicated session of the EMW. One notable presentation was the RICHES project, which seeks to ensure that women-led enterprises can improve livelihoods responsibly without resorting to child labor or other harmful labor practices. This is a fundamental part of the ILO’s standard-setting role.
Most social protection benefits to date came through employers. Can the World of Work adapt the social contract between workers, employers and governments that is being disrupted by the new ‘gig’ economy? Who knows. But in the meantime we could all try to follow the example of SEWA, a trade union for self-employed women in India, which has been improving the working conditions of more than 1.5 million workers since 1972, promoting social justice and collective bargaining while also empowering women with access to financial services. Want to see some really empowered (and funny) SEWA super-women? You can do so here.
4. Client Protection and Responsibility: When it comes to client protection, Cambodia seems to be on everyone’s mind nowadays. For that, one could thank the Cambodian NGO LICADHO, which published a study showing that microfinance loans are causing poor Cambodian farmers to sell land and resort to other extreme measures to repay their loans. The report was widely covered by the global press. The sector has also responded: M-CRIL issued three advisories on the topic. Smart Campaign issued its statement. The gist of both is that the LICADHO study has serious methodological flaws, yet it raises important questions that should not be ignored. Indeed, Cambodia has been a focus of concern about overindebtedness since at least 2013, and with those concerns mounting, in 2018 the local microfinance association introduced a self-regulatory system - the Lender Guidelines (disclosure: Daniel Rozas, part of this project, is also part of the e-MFP team editing this FaiV) - to prevent the problem. Already well before the LICADHO report’s publication, research was underway to assess the Guidelines and propose further refinements. So stay tuned for more news, though whether good or bad, that remains to be seen.
Another “hot” area for client protection is Digital Financial Services (DFS). And there’s plenty to be worried about. Tim linked to the recent MSC study on DFS in Kenya last week. Check it out if you haven't yet. While on the topic, check out the detailed Smart Campaign Standards of Protection for Digital Credit laying out the 22 pages of actions a DFS provider should follow to ensure they’re properly protecting clients.
All this naturally leads to calls for stricter regulation. But wait. In the normal world where you can’t have a cake and eat it too, many regulations, even (and especially) well-intentioned ones, come at the expense of encroaching on the individual client’s agency. At least that was the premise of the EMW closing plenary. As the CFI’s Mayada El-Zoghby and the faiV’s Tim Ogden argued [because that's what we were assigned to argue, not necessarily because we believe it--Tim], why should we substitute the judgement of a far-away government or institutional official for the judgement of the client herself? But of course clients, living in poverty and with incomplete information, are too often asked to choose when they actually have no choice at all. That was the rejoinder of Kashf Foundation’s Roshaneh Zafar and CGAP’s Gerhard Coetzee. It’s must-watch microfinance TV. So when your mind starts to wander and you feel the growing need to scratch that Facebook itch, click this link instead.
5. Savings: We now know a bit about microcredit. We still know very little about microsavings. In large part, that’s also the impetus behind next year’s European Microfinance Award, which will be focused on savings. As with a number of prior award topics, the hope is that the process will take an old practice - one which, if not ignored, is assumed to be at least stodgy -- and breathe it new life.
For all that has changed in credit, innovation in savings has been comparatively sluggish. And yet there are so many surprising opportunities. One recent study by Bachas et. al. shows that recipients of government transfers who were given debit cards wound up increasing the amount of savings over time. Not only that, but the effect on savings was larger than most other efforts deployed in other studies, including financial education, reminders, lockboxes, savings groups, and others. An effort that wasn’t even meant to increase savings had more impact than actual efforts to increase savings...who knew?
Yet savings provide a remarkable canvas for understanding behavioral economics. Consider the lottery-linked savings account, regularly seen as an especially successful approach for mobilizing savings. A recent paper evaluates such a program in Mexico, finding strong effects on the opening of new accounts. So did another lotto-savings experiment, this time from Haiti. Indeed, prize-linked savings have been around for decades since the early days of microfinance - widely used by Bank Dagang Bali in the 1970s, then copied by Bank Rakyat Indonesia, and from there to institutions around the world. The pull of lottery was so strong that for a number of savers it trumped even the certainty of a 50% bonus payout in an experiment conducted in Thailand.
Studies and successes notwithstanding, reporting on savings requires a skeptical view of the numbers, particularly with respect to outreach. Though (mostly) harmless to clients and institutions, dormant accounts are a savings analyst’s scourge, measuring shadows and ghosts. And apparently none are immune; the most recent WSBI Scale2Save report finds 77% of African savings institution accounts have gone unused for past 12 months (the report contains plenty of other interesting data - check it out). Any attempt to understand savings from an institutional perspective must first cast out the dormant imposters, and the evaluators of the 2020 European Microfinance Award applications will keep this adage close to heart..
When asymmetric information becomes symmetric.
