Kate McKee

This is the final post in the short series on microfinance in Russia. You can find the previous two posts here and here.

In the two previous blog posts on this topic, we wrote on the situation with exorbitant interest rates charged by a few Russian commercial lending companies calling themselves “microlenders” (though we prefer to label them “payday lenders”).  We also shared suggestions from the Russian MFI community to the Russian regulatory authorities, which have been favorably received.

Certainly, Russia is not alone facing this issue; there are many other countries struggling with the question whether it is possible to draw a meaningful line between “justifiable” and “exploitative” interest rates – in other words, trying to answer the question “how much is too much?” The question has enormous political as well as operational relevance.  In this final post of the series, we would like to explore the issue by going back to the basics of what can – and should – go into setting the price of a loan. Read the rest of this page »

A soon-to-be-published CGAP Focus Note asserts that “responsible finance” should become the new standard for delivery of financial services to poor people. Simply extending more access within the “white space” of underserved people and places is not enough. Microfinance clients should be able to count on products and practices that are transparent, fair and take reasonable care to avoid harm such as over-indebtedness. And likewise, we should expect the great majority of microfinance providers, funders and others that are double bottom line institutions to be able to measure the extent to which they’re benefiting their clients and to use this information to improve services.

So the definition we use for responsible finance has two main dimensions. The first — client protection — is an essential standard for all retail providers, no matter their legal type, profit orientation or mission. The second — social performance management – is relevant for all players with a social or development mission. And unless you are protecting your clients against potential harm, it’s hard to assert that you are doing good. Read the rest of this page »

Recently a colleague shared results of the follow-on (forthcoming) study that Dupas and Robinson did on their landmark 2009 RCT study on savings in Western Kenya. This is the one that found such impressive benefits to women informal-sector traders from access to savings accounts. The follow-on study probed two important questions that the original study could not fully answer: 1) what happens if you make it easy and virtually free to open an account? and 2) why will some people still not use the account?

In the original study only 57% of market women in the treatment group made at least one deposit within the first 6 months of opening. For the follow-up study the researchers enlisted two local deposit-taking institutions (a major commercial bank and a well-established but unregulated local “financial services association”) to make their account opening procedures as simple as possible. Then they went one step further and arranged to pay the account opening fees, so any study participant could join at no cost and with minimum hassle. With these enhancements, 62% of participants opened accounts. But only 18% of the overall study sample used them. Read the rest of this page »

“Acting responsibly is almost against human nature – we always seem to need external restraints.” At the recent Responsible Finance Forum, Alok Prasad (CEO of MFIN, the association of Indian commercial MFIs) offered a hard-hitting assessment of what went wrong in Andhra Pradesh, focusing on how investors contributed to the situation and what they can do to help avoid other “APs.” The room was full of institutional investors, DFIs, and fund managers, more than 40 of whom had just signed the “Principles for Investors in Inclusive Finance.”

Alok ticked off the ingredients in the “potent cocktail” of the crisis. First, five years of annual growth rates exceeding 70% led to troubling practices, client problems, and market-level distortions. The growth was fed by the second ingredient: money — plenty of money, including debt financing from Indian banks and equity from mostly foreign social and not-so-social investors. Add to that cocktail a political system that is highly sensitive about the poor and tends to be skeptical that private markets will help reduce their poverty. Finally, top it off with incentives for practitioners, politicians, and providers of capital to act in ways not always in the long-term interests of low-income clients.

The result? The aforementioned very fast sports car, hitting the gas and careening around tight curves while endangering passengers, pedestrians and the other cars on the road.

Alok urged investors to do their part now to build a financing “eco-system” that will produce more responsible behavior in India and elsewhere. He advocated investor action on six fronts:

• As foreign investors, you must be “engaged owners, not just sleeping partners.” The industry needs active governance, especially around the decisions that affect client welfare.
• Do your due diligence. You can’t just fly into India on Monday, review the CEO’s projections, meet some senior staff and fly home on Thursday. You need to ask hard questions and counsel the promoters. Seventy percent this year and 150% the next? No sector can sustain or manage this kind of growth.
• Insist on compliance with the industry code of conduct. It’s not enough for the network to say “come on, guys, let’s do the responsible thing.” Bank loan covenants should address this, and other investors have influence too.
• Get regular feedback from the networks. Is your MFI partner a member in good standing of MFIN? Maybe you should urge the networks to do annual certification.
• Really integrate social performance indicators into your investment decision making processes.

Alok closed with an observation that seems relevant far beyond AP: the outcome in the market will hinge on how the clients feel about their providers. There is much to be done by retail providers, to be sure.  But investors all the way up the value chain of microfinance funding also can do a lot to support a safe road to financial inclusion.

–Kate McKee and Alok Prasad

When hundreds of practitioners from around the world descend on Manila next month for the annual microinsurance conference, they’ll have a chance to observe firsthand a sector on the move. Sure, right now only 13.92 % of Filipinos have life insurance and penetration (premiums to GDP) is only 1.05%. But access is growing. And recent field research shows that once it is explained to them, low-income people say they want insurance and are willing to pay 20-30 pesos (US$.45-.$60) a week for it. As insurance providers begin to target the low-income market, they are offering a range of products: whole life; accident, burial and medical benefits plans; asset protection for microentrepreneurs hit by fire, lightning, flood, typhoon or earthquakes; and weather index crop insurance.

Over a hundred practitioners gathered in Manila on Friday, October 1 for a consultation on the new “Roadmap for Financial Literacy on Microinsurance,” an action plan prepared by a Technical Working Group comprised of all the key stakeholders from government, the microfinance and cooperative sectors and the insurance industry. This work has been supported by ambitious sector-building programs of the Asian Development Bank and GTZ that aim to institutionalize industry standards, develop products and carry out a nationwide microinsurance literacy and advocacy campaign.

The Roadmap is accompanied by a new “National Strategy and Regulatory Framework for Microinsurance” that aims to promote orderly growth in the sector while protecting consumers by requiring retail sellers of insurance policies to either register a Mutual Benefit Association (MBA) or team up with a regulated insurer. The focus is strictly on sustainable insurance provided by private providers, distributed by financial institutions who are close to the poor, and paid for by low-income people who see insurance as a good value proposition (referred to as “the paying poor”). The day before, the Financial Monetary Board had authorized mini-branches to widen financial access points, with microinsurance mentioned specifically as a permissible product.

The new rules are being rolled out through these road shows along with a broad financial literacy campaign. Itoy Almario (National Credit Council – Department of Finance), who has spearheaded the Roadmap process, pointed out that it is not just clients but also regulators and those in the industry who need a different mind-set – “Insurance is not just for the rich.”

One aspect of the whole process that stands out is the integration of client protection right from the beginning. Almario was quick to remind the audience that the current problem is not just misunderstanding of insurance by poorer Filipinos, but outright mistrust. Simple, plain-language contracts and claims settlement within 10 days would be a good starting point to building more trust. Consumer protection and client rights and benefits are central messages in the campaign.

This focus mirrors similar work in other countries and at the global level. For example, CGAP is commissioning a chapter for the forthcoming new version of the Micro-insurance Compendium (the first was co-published by the International Labor Organization and the Munich Re Foundation on nascent approaches to consumer protection regulation.  While we tend to fear that regulation will increase costs and price poor people out of the market, this may be a case where basic rules of the game actually build trust and hence help build the market, rather than stifling innovation. The Smart Campaign is working on guidelines that apply the core client protection principles to micro-insurance, and the MicroInsurance Network is launching a task force on how to promote transparency and fair treatment as the sector expands.

In the Philippines, it looks like the three essential ingredients of responsible finance – industry standards, access-friendly regulation, and financial capability initiatives – are coming together in the microinsurance sector.

–Kate McKee

A special session at the CGAP Annual Meeting explored the phenomenon of Greenfield banks and South-South replications in sub-Saharan Africa. A quick survey by CGAP found more than 20 greenfields in 14 countries. A panel comprised of Dr. James Mwangi (CEO of Equity Bank), John Tucker (UNCDF) and Matthias Adler (KfW) reflected on their different perspectives as replicator, donor, and public investor. Their experiences came from models in countries ranging from relatively nascent markets like Sierra Leone and Southern Sudan to more mature markets like Ghana and Uganda. Tucker and Adler explored the pros and cons of starting afresh vs. reforming an existing financial institution. The challenge of building long-term leadership and capacity was a recurring theme.

On the practitioner side, Mwangi made some pointed and candid observations, reflecting on Equity’s contrasting experience in Uganda, where it acquired a credit-only MFI and converted it into a savings-led bank, and Southern Sudan, where it started a Greenfield bank with UNCDF support.  In the former case, the bank has struggled to transform the institution and achieve profitability. In the latter, the bank achieved break-even in well under a year. What explained the differences? Mwangi highlighted the following:

• Culture: The soft factors are hard to replicate. It was difficult to instill “the Equity way” when the people who were still there in the institution had their own way already. One of Equity’s striking strengths is its brand but Equity found it hard to capitalize on this in a pre-existing player in a market new to them.
• Leadership and management: If key people stay on, any key adjustments can seem like personal critiques of the previous regime, especially if we’re talking about owner-managers.
• Capacity: In Uganda, Equity was trying to build their savings-based model on a credit-only organization. This was a very different and more demanding business model and the capacity just wasn’t there for rapid change.  And adjustments can’t be accomplished in a week – and they take longer for a savings- than credit-led provider.
• Talent: Mwangi described having to “pay with your shirt” for key staff by buying experienced bankers; good people demanded a premium to leave an institution with an established international brand in that market and for the uncertainty of a start-up.
• The “business environment:” This is a euphemism for the real problem noted by the Acting CEO for Equity-Uganda – fraud.  Because levels of customer fraud were so high, Equity couldn’t use one of its key success factors in Kenya: decentralization of authority and decision-making to the branches. Some of the key operational assumptions didn’t hold water. The business model needed major adjustments in the form of centralization and controls. Needless to say, this didn’t come cheap, with both one-off and ongoing expenses being higher than planned.
• Financial identity: Equity discovered the big advantage offered by national identity systems in Kenya which had to be worked around in Uganda with higher-cost methods like biometrics.
• What you promise to get the license: “The biggest challenge was expectations,” said Mwangi. Those responsible for granting the license did their homework on Equity and found that they were offering credit at 18% in Kenya. So that’s what they asked for in Uganda. While the acquired institution was profitable with an interest rate of 48%, it was pretty challenging to keep it so with an 18% interest rate and a whole lot of new costs.
• Legal and regulatory framework: We all know that issues like minimum capital requirements clearly affect the viability of the business model. But it’s not just the licensing requirements. Mwangi pointed out that the rules around specific products were quite different. Executive management was expected to have “four eyes” (e.g., a managing director and an executive director) for adequate controls, making it necessary to identify and prepare a second individual for this role. Tax regimes were really different . . . and unpredictable.

Mwangi stressed that these challenges can and must be overcome. We can and will make many business models – including greenfielding and South-South replication — work.  “Africa is rich in resources. What it needs to enhance wealth and pride is entrepreneurship, ownership, capacity and true empowerment.”

Once a year, CGAP’s membership and governance body, the Council of Governors, meets to set CGAP’s broad policies and strategic directions, provide inputs to our annual workplan and budget, and debrief one another on the latest trends in financial inclusion. That meeting is underway this week in Nairobi, Kenya. In addition to a special focus on microfinance in Africa and branchless banking, we’re hearing the latest thinking around responsible finance.

Earlier this week, New York Times columnist Tom Friedman suggested that the increasing interconnectedness of the economic, financial and environmental crises points to the need for new perspectives on ethics:

…in a world where our demand for Chinese-made sneakers produces pollution that melts South America’s glaciers, in a world where Greek tax-evasion can weaken the euro, threaten the stability of Spanish banks and tank the Dow, our values and ethical systems eventually have to be harmonized as much as our markets. To put it differently, as it becomes harder to shield yourself from the other guy’s irresponsibility, both he and you had better become more responsible.

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Many microfinance practitioners believe that it’s impractical to serve low-income savers. Their balances are too small, their transactions too frequent, and their needs simply too costly to serve. And if this is the case for adults with established livelihoods, how could it possibly make sense to serve low-income young people in the 12-18 age range?

That is one of two key questions to be answered through YouthSave, a five-year, four-country pilot program that was launched last week. (The other question is whether and how those young people and their families benefit from having access to an affordable savings account.) YouthSave will be carried out by a consortium consisting of Save the Children, CGAP, New America Foundation, the Center for Social Development at Washington University in St. Louis, and one financial institution and one research partner each in Ghana, Kenya, Colombia, and Nepal. YouthSave was funded by the MasterCard Foundation as part of its learning agenda for improving young people’s opportunities. You can learn more from the working paper on the current state of practice in youth savings unveiled at the launch.

CGAP’s main role in YouthSave is to help the partner financial institutions figure out whether it makes sense to serve young savers, and what the elements of the business case might be for different types of depositories. When the team set out over the past year to recruit partners, we were worried that there might be few takers.  Instead, we found that many financial institutions already had this goal on their radar screen and wanted to team up with YouthSave.  Why? It’s not just the money. The support they will receive is quite modest – a very modest amount of technical assistance and cost-share for experimenting with products and delivery channels. The financial institutions’ own investment will far exceed any start-up help they receive.

We found that they were motivated or encouraged by five potential business opportunities:

1) Numbers: The bank CEOs we engaged with see the imperative of figuring out how to tap this new market, which is huge and growing fast in many countries. (In her keynote at the launch, the MasterCard Foundation CEO Reeta Roy pointed out that in Africa, for example, the demographic pyramid is so pronounced that the continent will still be getting younger in 2030, long after all other regions have started to age!). At the macro level, this is the market of the future.  At the micro level, the head of a bank like the Caja Social Colombia was worried at how its customer base was aging.

2) Cost-effective customer acquisition and servicing: This is a huge question mark for the YouthSave partnership – will the financial institutions be able to manage the expense of acquiring young people as customers and servicing their accounts? Specifically, what will it take to attract this segment (we’ve been having an interesting debate within the consortium as to whether it’s the product or the sizzle that matters – perhaps fairly standard deposit products will work, and what is needed is more “sizzle” – targeted marketing and outreach that makes it attractive and even cool to have a savings account)? If current products will do, then financial institutions might look at this venture as a way to gain market share by drawing in a new segment rather than the complexity of truly new product development. Some partners are keenly interested in seeing if application of new technology can drive down the costs of acquisition and servicing.  Over the next five years, will we see branchless banking models begin to serve large numbers of savers as well as payments customers? Nobody knows, but it could make a huge difference to the business case.

3) Cross-selling: Forthcoming CGAP research documents indicate that serving small savers can be quite profitable for financial institutions, when we look at the “total client profitability” picture. Too often, microfinance practitioners have looked at this calculus in terms of average cost (net total cost of servicing the savings account), which is a clear money-loser.  When one looks at marginal cost (leaving out the fixed costs that the financial institution would have to cover anyway), the picture looks better.  But the real break-through comes when one looks at the revenue generated from the other financial services the customer uses (loans, fee-based payment services, and so on) – especially if you look at how the account and use of those other services grows over time. Our study found that these small savers generated several times their savings balance in profits for the financial institutions studies. No one knows what services young people will demand and what type of customers they will turn into over time.  It is highly likely that their patterns will differ from those of the adult customers studied in the CGAP research. But our partners are keenly interested in finding out. One wild card is whether as young people (who will need to open their account jointly with their guardians, in most of the YouthSave countries) save, will their mothers and fathers and other family members and friends also open accounts?  If so, then total client profitability could take on a whole new viral marketing dimension.

4) Loyalty and “stickiness”: Clearly this vision of potential profitability hinges on keeping savers once you attract them.  I don’t know about you, but I’ve banked with the same institution for decades.  Will YouthSave participants follow a similar pattern?

5) Image: The Caja Social in Colombia told us that their brand needed “freshening.” Serving young savers is not just about corporate social responsibility, although some financial institutions will see it in those terms. Others, however,  also will see an opportunity to invigorate their brand, demonstrate their future orientation, assert their plan to be a player in the market for a long time.

While our financial institution partners  think the business case is obvious, though not necessarily easy, none of these five possible dimensions have been tested or proven for youth savings accounts.  By the end of five years, through careful documentation and analysis, YouthSave hopes to be able to answer the question: “Is youth savings a ‘huh?’ or a ‘duh!’ for business-oriented financial services providers?” We’d love to hear your views: does any or all of this seem reasonable to you or completely far-fetched?  From your own perspectives and experience, how would you rank these dimensions in order of importance? What are others that you think we missed?

Guess how many lobbying firms are reputed to be working for the U.S. banking industry to block strong financial consumer protection regulations? Try 54 . . . well, actually 55 if you count the one whose role it is to coordinate all the others in their advocacy with the U.S. Congress.  And who’s fighting to ensure that consumer interests are represented in the legislative process? A coalition of over 200 citizen organizations called Americans for Financial Reform has come together to advocate for the consumer. They seek stronger financial consumer protection regulation, with an independent agency as the centerpiece. If created, this agency would be charged with ensuring fairness and transparency across diverse financial services and providers ranging from banks to mortgage brokers to payday lenders.

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I have to admit, I’m discouraged and maybe even disgusted by the latest developments in the U.S .to protect financial consumers (or not to protect them, as it turns out).

Yet when we look beyond the U.S. and the rest of the developed world, there is some encouraging news. Why is it we can’t take even modest measures here, where the “financial innovation” that spawned the global crisis all began, and other countries in the emerging market and developing world can? Discussions over the past few days at the World Bank’s annual finance forum touched often on the politics that shape the policies for regulatory reform of all types, including consumer protection. Speakers including Moises Naim (Foreign Policy magazine), Mercedes Araoz (Minister of Finance in Peru) and Niall Ferguson (author of The Ascent of Money: A Financial History of the World) made clear how hard it is to rewrite the rules of the financial game and what it will take to get real reforms.

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