Archive for: CGAP

Mobile banking is just one of the reasons India is a place to watch for innovations in financial inclusion. This short film profiles one such innovation, Eko, to see how businesses chasing the fortune at the base of the pyramid are serving the needs of poor customers in India.

Five years’ ago, Abhishek and Abhinav Sinha created a software program that allows migrant workers in cities across India to send money to their families using a cellphone. Now their company, Eko Financial Services Ltd., is working with two major banks, the State Bank of India and ICICI, India’s second largest bank, to offer financial services to poor and low income customers using local corner stores, pharmacies, and airtime resellers as agents. By harnessing the huge potential of domestic remittances as an anchor product, Eko hopes to tap a huge potential market in India, where three quarters of the 1.25 billion people live on less than $2 a day.

The challenge to make Eko a success isn’t the technology—it’s the business model. When you see the long queues at the banks it’s clear that the demand exists to make a profitable business based on tiny margins if the right business model and regulatory environment can be created. “It’s a volume game,” says Eko marketing executive Purva Gupta. “But at the same time we need a particular ecosystem for the Eko business to sustain and to grow.”

Agent networks are the main issue that mobile operators and banks need to get right if they are to turn branchless banking into a sustainable business. The Reserve Bank of India recently removed restrictions on agent exclusivity, so customers can now transact at customer service points of one bank even if their accounts are held at another bank. Such interoperability should mean greater efficiency and lower costs across the system.

In February, the Government of India released a task force report on a unified payments infrastructure linked to the biometric Aadhaar number that proposes electronic payments for government-to-people payments as a means to cut costs for the government and bring added convenience to welfare recipients.

These two important moves by the government suggest that new momentum around branchless banking will shape the financial inclusion agenda in India. Domestic remittances and government payments are driving the electronic money market. If these payments can be translated into banking that goes beyond basic bank accounts—offering savings, insurance, and loans—they will make a major impact on financial inclusion in India.

——– Jeanette Thomas is the Director of Communications at CGAP.

Over the past 15 years, the field that CGAP aspires to advance has broadened from the initial focus on microcredit to microfinance, to access-to-finance, and most recently financial inclusion.  This evolution happened for good reasons as practitioners, donors, academics, and policymakers learned more about the financial needs of poor families in the informal economy, and success and scale in the early endeavors resulted in important learning and new frontiers.  As a public good at these frontiers of a collective market development effort, CGAP continuously and purposefully influenced, shaped, and adapted to this evolution. Read the rest of this page »

Recent reports reveal that we’re making some progress in the fight against poverty, but there’s been little effect on the most challenging to reach—the ultra-poor.  While the number of people living in extreme poverty has declined so significantly that we’ve achieved one of the Millennium Development Goals (MDGs) years ahead of schedule, according to a report from the World Bank, the same report also reveals that at the current rate of progress there will still be approximately 1 billion people living below $1.25 per day in 2015, and the challenges faced by those 1 billion people are quite different depending on how far down the poverty spectrum you look.

For those closer to the $2 per day line, microfinance services offer a lifeline to help strengthen their economic activities. The challenge of fighting poverty among the poorest is far greater. These people are generally the most vulnerable and isolated, live on less than $1.25 per day, are food insecure and rely heavily on sporadic wage labor. For the ultra-poor to succeed, interventions must focus on stabilizing a volatile household economy before economic strengthening activities begin. Read the rest of this page »

Thanks to the launch of the Global Findex data set, based on nationally representative surveys of more than 150,000 adults in 148 economies, we have a fresh and robust answer to that question—approximately 2.5 billion adults lack a formal bank account. Most of these people are concentrated in developing economies.

Figure 1

  Read the rest of this page »

Some time ago, I was on a microfinance panel organized by USAID together with two respected industry leaders:  Shari Berenbach, Director of USAID’s Microenterprise Development Office, and Sam Daley-Harris, the out-going Director of the Microcredit Summit Campaign.  Somebody from the audience told me afterwards: “It was fascinating to hear three such different views” – and I suspect she was just polite enough not to say “totally disconnected.”

A recent déjà-vu moment reminded me of that conversation and the conclusion that I had come around to:  we weren’t that disconnected and probably had the same starting point, but we stressed three different directions of evolution from the original microcredit idea. These three directions are not mutually exclusive.  In fact, from a development perspective they are all required.  We just each stressed one dimension that seemed more plausible or comfortable – perhaps for a combination of reasons such as institutional mandates, philosophical beliefs, and pragmatic biases. Read the rest of this page »

The most rapidly obsolescing part of my book, Due Diligence, is chapter 6, which reviews the statistical evidence of the impact of microfinance on poverty. Since I put the text to bed, working papers have appeared that test microcredit in Mongolia and Bosnia & Herzegovina and microsavings in Malawi and Chile (though the latter is marked “do not cite or circulate”). There’s also the Morocco microcredit study, which I didn’t catch wind of until too late in the book production. Add all these to the trials of microcredit in India and the Philippines and of microsavings in Kenya—the one that initiated this wave of research in 2009—and we have five credit studies and three savings ones. Read the rest of this page »

A micro-borrower in the Philippines struggles to figure out which one of several loans is the least expensive—one comes with a flat charge, another a weekly interest rate, and still another a monthly rate with an upfront deduction. In Senegal, a recent survey of low-income consumers revealed that more than 99% of respondents were unaware of their right to standardized price information on the loan and deposit services they used. In Mexico, poorer consumers looking for a cheaper way to save, reported to CGAP losing 25%, 50%, or even their whole savings due to hidden fees on “low-balance” accounts they were not aware of until it was too late.

Consumer research supported by CGAP and others around the world is painting a similar picture – customers face many challenges in understanding the prices, terms and conditions of the financial services they use, and this lack of understanding carries very real economic consequences. Even if consumers are fortunate enough to have multiple options for loans, savings or payments services, many find it very difficult to “shop around” and identify the option that offers the best value-for-money.  Sometimes the problem is the opposite, when excessive fine print floods consumers with too much information and distracts them from the factors that are most important for their decisions—factors such as total finance charges. Read the rest of this page »

We believe that the key barrier to financial inclusion for the poor is one of design—of how financial products are created and positioned in the market, which consumers are targeted and how delivery channels are utilized. As a channel alone, mobile banking offers significant opportunities for banks and mobile operators to reach down-market. But the poor will only benefit from this channel if they can access appropriate and affordable products. This can only happen if providers in this sector approach the problem of financial inclusion like service designers, and look at the current experience of banking in poor communities.

In a country like Uganda, the typical experience for a villager of going to the bank usually starts with a long and often expensive journey to the nearest town center. Upon arrival, the villager will likely be made to wait in a long queue. Upon reaching the teller, he may be surprised to hear that his balance is lower than usual, and the teller is usually too busy to explain that a slew of fees have wiped out his balance. The villager would then withdraw the remainder of his cash, and he will not inform the teller that he has no plans to come back.  He knows that the closing fee would eat up the remainder of his balance. He leaves frustrated and wonders why he decided to open an account in the first place. Like customers everywhere, he advises his peers not to make the same mistake. Read the rest of this page »

 India is on a Financial Inclusion roll. In the last couple of months alone, the Government has decided on several policy and regulatory changes that have the potential to significantly accelerate financial access to the more than half of Indian households who remain financially excluded. In the meantime, the private sector continues with a range of promising experiments to better understand client needs and provide a broader range of services at lower costs.

In the budget for the new Indian fiscal year that started this week on April 1, the Ministry of Finance announced an accelerated shift of Government social transfer payments from cash or in-kind to direct deposits through the financial system.  The primary aim is to ensure more targeted and leakage-proof distribution of the more than $40 billion worth of subsidies, but from a financial inclusion perspective this provides for many poor families for the first time an access point to the formal system.  The Government is also shifting more of its pension and salary payments to electronic distribution. Read the rest of this page »

A few weeks back Bill Maurer (of IMTFI) and I wrote a short piece for the PYMNTS.com website’s end of year round-up of issues in the payment space. In it we predicted domestic payments in Africa was a neglected topic, likely to come up more often in the future. As evidence, we cited new Gallup data that showed that a month before the survey over 124 million people transacted in the 8 countries we analyzed, mainly in cash, indicating a large and underserved market (at that point we didn’t have all the data, we now find 134m in the 11 countries mentioned in this post).[1]

I believe that payments are an optimal gateway product for financially underserved households. Unlike credit, insurance, and savings, payments do not require trust by either party. Providers don’t have to screen clients either (as with savings) because anyone willing to sign up is profitable for providers. Payments are needed by a large number of households (over 50% of the adults in the 11 countries did one or more transactions in the past 30 days) and represent a significant pain point. Willingness to try and pay are high on the client side as well (out of all transactions, roughly 50% were in cash, many in person – highly inefficient ways to move money.)

Payments are a good way to get large numbers of previously unbanked people on the system in a hurry, without slowing down to figure out who is a good credit or insurance risk, who is going to save above a certain amount, or who to trust with hard earned savings money.  But which approach should we take in developing the market for payments services? There are different paths, and it looks like they are not all equal.

One of the things the data shows is just how different one market is from the next, both in the level of activity but also in the channels through which money is sent, reflecting the different options on supply from the financial sector in each country.[2] And it turns out that not all channels are equal when it comes to serving the poor. Besides revealing a wide diversity of markets, another interesting finding is that  even in the markets where banks have the  most outreach (evidenced by having a larger share of transfers) they are still not reaching the poor, whereas in Kenya, Uganda, and Tanzania, where mobile money systems are at scale or scaling up, a much higher percentage of mobile transfers are initiated by poor people.

 First, let’s look at how transaction volumes vary by country in the figure below. Kenya is clearly an outlier, with 46% of adults reporting sending a domestic remittance in the last 30 days. Then there is a group of reasonably active countries with 18-23% of adults report sending (Uganda, Sierra Leone, Tanzania, Botswana, Nigeria, South Africa) and a second group (Zambia, DRC, Rwanda, Mali) with roughly half that level of activity at 7-15%.

Now let’s look at how they move money.

Most of the time, people bring money in person. 21% of adults in the 11 countries had sent or carried money to someone else in the past 30 days and of those nearly 2/3rds (13 percentage points) had carried money in person in cash. Carrying cash is a common way to get money around and reflects the lack of better options for the poor as well as the non poor. It’s not clear how many of these trips were initiated just to carry money (a very costly way to move, given time and transport costs) versus how many were more opportunistic, bringing money along while traveling for some other reason. Opportunistic money sending can also be very inefficient since waiting for another reason to take a trip could imply a significant delay and extra risk of robbery.

In general, among those who said they sent money rather than carrying it in person, cash again was the most popular channel (43% of senders). About one-quarter (26%) of respondents transferred money through banks or financial institutions. Two in ten (21%) sent money by mobile phone and one in 10 (10%) used money transfer services such as Western Union.

Yet as the figure below shows, the usage of these channels also varied widely across the 11 countries. More than eight in 10 of those respondents who sent money domestically in Mali (89%), Rwanda (83%) and Sierra Leone (83%) used cash. While just 7% of Kenyans sent cash.                 

In fact, there appears to be roughly three types of markets. “Bank-led” payments markets (not to be confused with a bank-led regulatory model) have middle levels of activity and a significant bank presence. The Bank-led markets include South Africa and Botswana – 50% and 47% of senders respectively used banks – and to a lesser extent Nigeria – Nigeria has just over 50% of cash-based but also 44% using bank transfers. “Mobile-led” payments markets with middle to higher levels of activity, dominated by mobile transfers including Kenya  – over 90% of senders used mobile – Uganda (68%), and Tanzania (60%). And “limited” markets – those dominated by cash, and characterized by low levels of activity including DRC, Mali, and Rwanda.  Zambia probably belongs in this last group, in that it has some bank activity but there is also a nascent mobile presence and a strong over-the-counter presence implying Zambia is not purely cash, bank, or mobile based.[3]

So, to expand financial inclusion, which type of market should we steer toward – the bank-led or the mobile-led models?

 If our initial goal is leverage the power of payments-as-gateway (discussed above) to bring large numbers of poor people into the system, should we focus policies to expand the supply of bank-based services, or the supply of mobile-based? We can get a picture of what might happen if we grew mobile or banking sector by looking at those markets where either sector is already developed.[4]

In the mobile-led markets 21% of those sending mobile based remittances were poor people. Here poor is defined as the lowest two income quintiles. Hence, we would expect 40% if the poor were represented equal to their share in the population. In the three bank-led markets, only 8% of those sending bank-based remittances were poor. Thus if we were to grow the banking sectors in the more limited markets to the level of the bank-led markets, it seems likely the market would skew toward serving the rich much more than if we were to grow a vibrant mobile sector in each of these markets.

—— Jake Kendall is a Program Officer in the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation.