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“Refugee microfinance” is too risky, right? After all, refugees are more likely to default on their loan because they don’t have ties to the local community or profit-generating enterprises. They are likely to rejected by existing clients as “competition” or simply as outsiders. Refugees’ lack of collateral and their unstable legal status give them little incentive to develop a long-term relationship with the financial service provider (FSP). Right? Not necessarily. In fact, quite the opposite has been true for Al Majmoua, a Lebanese microfinance institution (MFI) serving Syrian, Pilipino, and Palestinian migrants and refugees (in addition to low-income Lebanese clients). A new publication by the Social Performance Task Force’s (SPTF), Serving Refugee Populations in Lebanon - Lessons Learned from a New Frontier,<1> demonstrates how Al Majmoua successfully incorporates refugees into its lending operations and non-financial services. Focused primarily on the subject of Syrian refugees, the case study details how Al Majmoua’s analyed refugee needs and the existing market opportunities before opening up to refugees, and the financial success of the model. The Syrian refugee portion of Al Majmoua’s portfolio has a portfolio at risk (PAR30) of 0.85%, compared to the MFI’s overall PAR30 of 0.72%. An insignificant difference, to say the least. Overall, the MFI recorded 60 cases of flight (0.11% of the portfolio) in 2015—a number inconsistent with public perception of the risks associated with refugee microfinance. In interviews with loan officers, the SPTF found that Al Majmoua staff saw no difference in entrepreneurship potential, nor in the performance, group collapse rate, or repayment rate of mixed groups (groups composed of Lebanese and Syrian clients) compared to Lebanese-only groups. This is not to say that refugees are easy to serve. They have unique needs and face greater barriers to entry into their host economy. However, Al Majmoua’s experience should be an encouragement to other FSPs and their funders. Here are a few of the key bits of wisdom gained from the MFI’s experience working with Syrians over the past few years: 1. Expect resistance by clients and staff. Al Majmoua staff were concerned that their portfolio quality would suffer. Angry clients perceived that Syrian immigrants were reducing the market-shares of Lebanese microentreprenuers. The MFI facilitated many open discussions—with the board, staff, clients, and refugees—about their concerns, stereotypes, and assumptions. This ongoing conversation has been an essential part of easing all parties into an inclusive business model. 2. Do the work upfront. Al Majmoua argues that an MFI doesn’t need a special product just for refugees—and in fact, such a delineation between refugees and “regular” clients is bad for business. Instead, the MFI engaged in detailed market research to get to know the refugee population: Where do they live? What are their income-generating activities? What barriers do they face that nationals do not? With this information, the MFI saw a clear way forward—loans made to groups with both Lebanese and Syrian women, combined with business training. The upfront investment to understand the needs of refugees, and the biases of staff and existing clients, allowed the MFI to determine who they could serve best, and how. 3. Non-financial services are a great entry point. Offering non-financial services can be a great entry point for refugees who are often socially isolated. Al Majmoua set up meeting centers where refugees and low-income national alike accessed all sorts of social, personal, and vocational trainings and support. More than anything else, these centers created trust between refugees and the financial institution, and helped integrate them into the broader community. 4. Consider product modifications. As mentioned previously, AL Majmoua found that relegating refugees to a separate product or program would have exacerbated tensions between refugees and Lebenese nationals. However, not all product terms will be appropriate for refugees. For example, finding national guarantors is harder for refugees, so an MFI might consider alternatives such as social vetting by (refugee) associations, places of worship, or relatives; evidence of stability like long-term rental contracts, children in school, spouse in formal job; and evidence of repayment capacity like remittance receipts, in place of of national guarantor. What the Al Majmoua case show us is that when outreach is done right, refugees can make excellent clients for FSPs. In fact, refugees may be the next frontier for financial inclusion. However, there is much work to do to generate interest in and knowledge on how to serve refugees successfully. In 2016, the SPTF, in partnership with the Livelihoods Unit of the United Nations High Commissioner for Refugees (UNHCR) will produce Global Guidelines for FSPs Serving Refugees. Based on these guidelines, the SPTF will also offer training materials for FSPs and technical assistance providers who wish to learn best practice for providing financial services to refugees. Our hope is that with greater knowledge and proof of successful practice, increasing numbers of FSPs will be willing to extend their services to refugees. What do you think? Are refugees too risky a market for financial service providers? Do you know of successful models for providing financial services to this target population? Want to know more? Listen to the SPTFs introductory webinar: Refugees- The Next Frontier in Financial Inclusion? Also available: the presentation notes and PowerPoint. Sign up to receive notifications of upcoming SPTF events and publication releases or contact info@sptf.info. <1> Lene Hansen, December 2015. author: Leah Wardle SPTF

This blog is a republication of a post from the MimosaIndex.org website. Since publishing the first MIMOSA report – on Cambodia – I’ve heard one persistent critique. We say that the market is saturated, yet none of the current indicators appear to support it: repayments are great, there’s no field evidence of widespread overindebtedness, and the major MFIs are all undergoing a process of Smart Certification. How can we assert that Cambodia is at risk of overindebtedness, let alone a credit crisis, when no other indicators seem to support it? These are important and reasonable questions. But here’s the rub – all the factors that point to a healthy market are either lagging indicators or are too vague or too poorly understood to be used as benchmarks. First, if there’s one thing I’ve learned over the years of studying credit bubbles – starting with my work in the US mortgage sector during 2001-2008, through Andhra Pradesh, Morocco, and others – it’s that delinquency should never be used an indicator of a bubble. Rising delinquency is an important warning signal, certainly – but what it signals is that the bubble has begun to burst. From there on, it’s all about crisis management. What MIMOSA seeks to do is to avoid getting to that stage in the first place. Read more > author: Daniel Rozas

This blog is a republication of a post from the MimosaIndex.org website. Since publishing the first MIMOSA report – on Cambodia – I’ve heard one persistent critique. We say that the market is saturated, yet none of the current indicators appear to support it: repayments are great, there’s no field evidence of widespread overindebtedness, and the major MFIs are all undergoing a process of Smart Certification. How can we assert that Cambodia is at risk of overindebtedness, let alone a credit crisis, when no other indicators seem to support it? These are important and reasonable questions. But here’s the rub – all the factors that point to a healthy market are either lagging indicators or are too vague or too poorly understood to be used as benchmarks. First, if there’s one thing I’ve learned over the years of studying credit bubbles – starting with my work in the US mortgage sector during 2001-2008, through Andhra Pradesh, Morocco, and others – it’s that delinquency should never be used an indicator of a bubble. Rising delinquency is an important warning signal, certainly – but what it signals is that the bubble has begun to burst. From there on, it’s all about crisis management. What MIMOSA seeks to do is to avoid getting to that stage in the first place. Read more > author: Daniel Rozas

When we use the word sustainability in financial inclusion terms, what does it mean? Does it stand for profit or a long-term perspective that looks beyond the next reporting deadline? Is it a code word for triple bottom line accounting – people, planet, profit? Or maybe sustaining financial services in the face of natural disaster or armed conflict? What about crisis avoidance – cooling overheating markets and preventing over-indebtedness? At this year’s European Microfinance Week (EMW) in Luxembourg, sustainability meant all those things and more. Titled Financial Inclusion for Sustainable Development, the conference featured multiple workshop streams reflecting the breadth and importance of the topic - with sessions on green microfinance; MIV governance; long-term risk planning; and new tools, such as MIMOSA, to assess market saturation. As e-MFP Chairwoman Anne Contreras stated: “it means financial sustainability – identifying overheated and underserved markets. It means encouraging funding for the sector with a long-term outlook, not short-term returns. It means new approaches to managing risk and expanding outreach through better understanding of client needs and developing tools to reach them effectively and affordably. It means driving social sustainability - protecting clients from shocks in difficult contexts and providing them with a suite of financial services for sustainable livelihoods. And of course it means environmental sustainability – through finance for clean energy products and improved agricultural practices. What they have in common is an emergent long-term thinking about the future of the Financial Inclusion sector, and of its clients.” Read more on the Microfinance Gateway author: e-MFP

Jordan Response Plan 2015. This plan is unfortunately underfunded by the emergency international agencies and should be complemented by a system which could guarantee the quality and security of the services provided. One of the main issues to be addressed remains the access of these refugees to financial services. The Syrian refugees and the underprivileged Jordanian people are receiving financial help from their relatives, from the government or from international organisations such as NGOs. However they remain deprived of access to proper financial services. Until now, informal channels are being preferred over formal ones and this situation increases the risk of money laundering and terrorism financing. Thus, regulation and supervision of digital payment has to be improved. PHB Development and CGAP have recently worked with GIZ in Jordan to design GIZ’s technical assistance plans to improve access to remittances and other financial services through digital solutions. This will benefit both the refugees in hosting communities and urban areas, but also the financially underserved Jordanians. The project is scheduled to start in January 2016 and to end in 2018, with a total contribution of up to 2.3 million euros by the German Federal Ministry for Economic Cooperation and Development (BMZ). There are three steps in this project execution: first, research was conducted this past spring; a second phase of assistance and dialogue which is running hand by hand with work on financial education; third, a pilot to support the setting up of the project over the long term. Jordan digital finance is now more regulated and secured Remittances and Mobile Transfer providers are a source of income for the host countries of Syrian refugees. The objective of digital finance is to offer a very comprehensive platform at “no cost”. Currently, fees paid are proportionally high (12%) and the Ministry of Finance has set a tax on mobile payment and this is one important barrier to the development of digital finance. As a result, money is either not remitted or remitted through insecure informal channels. For the assistance transfers, humanitarian organizations use two different digital payment schemes. UNHCR uses IRIS scanning recognition at ATMs, while World Food Program (WFP) and Care International use ATM Cards to disburse assistance cash. These two schemes are provided by innovative banks with a strong sense of their corporate social responsibility: Cairo Amman Bank (CAB) and Jordan Ahli Bank (JAB). They unfortunately open the prepaid accounts to UNHCR and WFP and not directly to the refugees, thus blocking the refugees’ capacities to receive (international) remittances. The refugees can only withdraw the full amount, limiting their capacities to manage their money and benefit from additional services. The international transfers with prepaid cards are not a priority for the CBJ. Therefore the project can start by facilitating the national payments to the Syrian refugees and the Jordanian hosting communities. Interviewing members from different relevant government bodies helped to understand the refugees and the underprivileged Jordanian people’s need for digital finance. Inside each of these ministries, there are also obvious applications for digital services. For example, the Ministry of Social Security wishes to make it possible for voluntary social security contributions and for benefit payments from the Ministry to be made electronically. There is a clear will from the Ministry of Planning and International Cooperation to respond to the Syrian crisis, with the Jordan Mobile Payment system. The CBJ (Central Bank of Jordan) is trusted and therefore, has an important role in leading the development and regulation of financial services. Thanks to the CBJ, national mobile payment has been opened in February 2014 with the Bank of Jordan (BoJ) launching JoMoPay, the Jordan Mobile Payment, which could benefit from some adjustments on the ground. The Visa prepaid cards are already being used in Jordan for many NGOs in refugees programs but it would first need to be implemented with a bank. They should be directly connected to JoMoPay. A first step could be the use of Mobile Wallets for clients to deposit money and receive money from families in Jordan. The influence of culture in the setting up of digital finance An alternative financial system becomes more and more urgent as cohabitation between refugees and Jordanian people brings new money flows. There are tensions between Jordanian hosting communities and Syrian refugees because of competition for income-generating opportunities. Unemployment in Jordan has increased from 14.5% to 22% between 2011 and 2014. There is a risk that, with the humanitarian aid scaling down, a large number of refugees enter into the labour market. The development of new economic activities make it necessary for both target groups to have access to reliable financial services. The cultural factor should be taken into account. In Syria, there is a strong culture of saving but refugees are not allowed to have a saving account. 75% of Jordan’s adult population does not have a bank account. None of the card systems suit the refugees because of their limited services. However, they are open to phone based financial services and a lot of them own a smartphone. Therefore they need to be taught about this channel. Moreover, the population is totally ignorant of digital finance. There is a real need to support the transition to financial inclusion and to educate the target populations to digital finance. A partnership with NGOs and the government could provide financial education to the target population. In May 2015, JoMoPay led an awareness campaign to talk about the Central Bank reputation as guarantor of the payment system security. In particular women could be the first target population because they head households and receive remittances. Last but not least, religious reasons such as those within Islamic finance need to be taken into account. author: Philippe Breul

Daniel Rozas and David Roodman address financial inclusion metrics on Next Billion. Since it was published a few weeks ago, the 2014 Global Findex financial inclusion report has made a splash in media around the world. The headlines may have differed, but the articles all mention the key finding from the press release published by the World Bank: Massive Drop in Number of Unbanked. According to the Findex survey, which covered more than 150,000 people in 143 economies, the number of people with financial access grew from 51 percent to 62 percent between 2011 and 2014, a shift that reportedly represents a total of 700 million people worldwide. While we highly appreciate the survey and the light it shines on the state of financial inclusion across the world, we are concerned about the accuracy of this headline finding. The growth it suggests is almost certainly overstated. To illustrate this concern, we suggest an alternative news headline, also based on the survey findings: Number of Unbanked in U.S. and Eurozone Cut in Half. U.S. unbanked population drops from 12% to 6% in 2011-14; Eurozone cuts number of unbanked from 9 percent to 5 percent, according to report. If this headline seems removed from reality, that’s because it is. Read more on Next Billion author: e-MFP

The impact of the Andhra Pradesh microcredit crisis was so strong that it contributed significantly towards the global dip in microcredit outreach in 2011. The Andhra Pradesh microcredit crisis was largely started by reports in popular media that suicides were being exacerbated by microcredit lenders charging high interest rates and harassing borrowers. The resulting political instigation of non-reimbursements in some Indian States almost killed the sector. Our research on microfinance in India investigated the relation being drawn in the media between microfinance lending and suicides amongst borrowers. We recognized that the data on microfinance borrowers is limited to the formal microfinance sector, and specifically to those institutions who choose to disclose their data. The data on suicides is fuzzy, based on reports of the National Crime Records Bureau of India and by different countries across the world (as reported to the World Health Organization). Thus, we suggest, from the outset, that our conclusions and observations be taken with appropriate reserve. To appreciate the complexity of drawing correlations and associations, as an example, the average suicide rate in France is about 16 per 100,000 which compares unfavorably with India's suicide rate of 10 per 100,000.Such a simplistic investigation suggests that with higher microfinance proliferation in India than in France, the suicide rates are lower in countries with higher microfinance. However, this is clearly over-simplified. Drawing from the research of Emile Durkheim in the nineteenth century, we know that the poor are likely to be less suicide prone than the rich. Divorce, women's participation in the labor force, and migration to cities, all increase with economic development. These factors all play a role in increasing the propensity to commit suicide, perhaps due to a stronger isolation of individuals and the breaking of traditional support groups such as families. At the same time, research on the Japanese experience has shown that people who are over indebted or have taken guarantees from other people are more prone to committing suicides. Therefore, first, we checked if the 54 suicides reported by the media in October 2010 could be expected on average in a country the size of India with a billion people – where the average suicide rate is 10 per 100,000 inhabitants per year. After controlling for the population of Andhra Pradesh, an average family size of five individuals per household, each with three or four loans and the size of Self-Help Groups, we found that 54 suicides should theoretically not be the cause for unjust alert or be unilaterally blamed on an increased borrower stress due to microfinance. Our investigation of the time series data on suicides in India revealed a slightly significant positive correlation between microfinance penetration and male suicide rates, and a slightly negative correlation (not significant) with female suicide rates – but no relation between microfinance and total suicides. Generally, no causal relationship can be assumed from these correlations. The cross-sectional data of Indian States indicates a small positive correlation (not significant) between microfinance penetration and suicide rates. However, the correlation doubles and becomes significant when we consider total suicides with number of SHGs loans outstanding to banks. Again, no causation is suggested as both directions are plausible. Fourth, world-wide country-wise analysis indicates that there is no correlation between microfinance and male or female suicides, yet regression analysis of 31 countries very weakly indicates that microfinance penetration among the poor is a causal factor for increased suicides. Thus, all we can really say for now is that perhaps there is a (causal) relationship between microfinance penetration in the country and suicides. This could be due to hidden factors which depend on the economic development overall. What we take away from our research and this debate (and furor in the media) is to clarify what we can do to alleviate borrower stress. First, unbridled growth and a drive to increase outreach may have created an environment where each credit officer in India is serving twice as many people as credit officers globally, leading to loss of personalization. Fast growth rates also mean that a credit officer’s recruitment and training have to be rapid and may ignore softer skills required to cope with borrower stress. Second, there is enormous pressure on credit officers who are doing their best to please the bosses who demand full repayment rates. The human consideration therefore needs to extend to this employee and his fears and frustration when the borrower does not repay. Third, if the increase of microfinance proliferation does increases male suicides, is this impact different for women and men - possibly due to their changing roles in society? Changes in relationship roles indicated the need for social support groups for males to take in shocks now that the woman is busy and possibly even more successful. Although more field research is required, some of our policy recommendations are listed below: The need for self help or other social support groups for vulnerable individuals (especially men) to better cope with the changes in the family situation being ushered in through the economic and social empowerment of women given their access to microfinance. The need for MFIs to be allowed to take deposits from a broader client base, beyond their own borrowers, as it is the case with leading non-bank (NGO) MFIs in Bangladesh. This would then change the relationship at the grass roots between the collection officer and the client. It would no longer be one of dominance of the field officer, but also recognition that if he wants to fulfill his deposit mobilization targets, he is dependent on the same customer. The need to cap microfinance loans to some percentage of the expected earnings of the household for that period. Failing this, the caps can be on GNI per capital for that period. Thus, a four month loan should have a lower cap than a one year loan, which in turn can have a lower cap than a two year loan. The role of a strong pro-poor regulatory environment needs to be stressed. A conducive environment is important in allowing borrowers to succeed with their business, enabling people to repay and, in turn, to make MFIs successful. If upper caps on interest rates are introduced, these need to be sufficiently restrictive of loan-sharking, yet enabling MFIs to survive and grow. Ashta, Arvind, Khan, Saleh, & Otto, Philipp E. (2015). Does microfinance Cause or Reduce Suicides? Policy Recommendations for Reducing Borrower Stress. Strategic Change: Briefings in Entrepreneurial Finance, 24(2), 165–190. author: Arvind Ashta - Saleh Khan - Philipp Otto

Massive Drop in Number of Unbanked,” reads the headline. In just three years, the number of adults with a bank account has grown from 51% to 62% -- an increase of 700 million people. That’s a fantastic number! And that’s the problem. Fantastic is good for children’s bed-time stories. It’s a bit more concerning when it comes to survey data. What’s the story behind this incredible, utterly unprecedented growth? What happened in these past three years that might explain it? The authors don’t really say. One area they highlight in the report accompanying the data is the growth of mobile banking. This has been tremendous – 2% of adults globally report having a mobile money account in 2014 (no numbers available for 2011). Many of them are concentrated in countries in Sub-Saharan Africa that previously had much lower financial inclusion rates. This is a major story and something to celebrate. But it doesn’t explain the headline figure. Of those with mobile money accounts, roughly half are mobile-only users. In other words, mobile money could account for 1% of the 11% increase in financial access globally over the three years. That’s 60 million adults worldwide – well short of the 700 million in the headline. The unstated implication is that this growth came through traditional means, with accounts being opened at banks, cooperatives, post offices, microfinance institutions, and so forth. That’s where the fantastic turns into unbelievable. Traditional channels can certainly bring about broad change, but not in three short years. The growth isn’t limited to a handful of large countries. It’s truly global. There are 39 countries in all that have seen more than 10% growth in the share of adults holding accounts, including wealthy countries like Italy, Saudi Arabia, and United Arab Emirates. Even the United States, which had an 88% account penetration rate in 2011 managed to jump to nearly 94% in just three years. This must surely come as a surprise to those who follow financial access issues in the country, where according to a 2014 study by the Federal Deposit Insurance Corporation, the number of unbanked households held fairly steady at 8% during 2011-2013. What to make of this puzzle? I believe the issue lies not in the survey itself. Rather, the problem may stem from the change in the definition of an account holder. And no, it’s not the issue of adding mobile money. According to the metadata definitions in the Findex database, here is the 2011 definition for account at a financial institution<1>: “Denotes the percentage of respondents with an account (self or together with someone else) at a bank, credit union, another financial institution (e.g., cooperative, microfinance institution), or the post office (if applicable) including respondents who reported having a debit card (% age 15+).” And here is the definition for the same in 2014 (significant differences in italics): “Denotes the percentage of respondents who report having an account (by themselves or together with someone else) at a bank or another type of financial institution; having a debit card in their own name; receiving wages, government transfers, or payments for agricultural products into an account at a financial institution in the past 12 months; paying utility bills or school fees from an account at a financial institution in the past 12 months; or receiving wages or government transfers into a card in the past 12 months (% age 15+).” It appears that for 2014 respondents, there were several additional ways to count an account – ways that weren’t captured in 2011. A slight methodological change, but a crucial one. The latter measure may well be the more accurate one, but it’s problematic as a direct comparison with 2011. There is a wealth of data in the Findex database, shedding light on all kinds of trends in financial access, including borrowing, saving, us of informal services, and so on. The opportunities to learn and explore are vast, helping inform decisions for regulators, politicians, and private actors. The Findex team and its supporters deserve a great deal of credit for creating and maintaining this critical resource. However, the headline finding of a massive increase in number of accounts is difficult to explain as a reflection of a true global shift. Instead, it appears that a large part of this trend may be simply due to changes in the survey definitions. Celebrating the “massive drop in number of unbanked” may prove a little premature. <1> The two different years are denoted by and , e.g. wave 1 and wave 2 author: Daniel Rozas

abuzz with the implications of the “final word” study on microcredit impact. For many, including myself, this has been an opportunity to consider a trend that’s been taking place for several years now – from microfinance to financial inclusion. In my last blog, I touched upon the subject of metrics that this new shift requires. I would like to delve deeper. To use the definition of the Center for Financial Inclusion, “Financial inclusion means that a full suite of financial services is provided, with quality, to all who can use them, by a range of providers, to financially capable clients.” That encompasses many things, but perhaps more intuitively, financial inclusion means providing serving those who aren’t being served – whether they are too poor, too informal, or too remote. It’s a compelling goal. Yet the metrics we use to measure progress came from a time when microfinance meant making loans to the poor. They simply are not up to the task of measuring financial inclusion. Don’t get me wrong. There’s a lot of great data being created to measure financial inclusion. The Global Financial Inclusion Database (Findex) is a fantastic resource. So are the indicators being promoted by the Alliance for Financial Inclusion (see, for example, its Core Set of Financial Inclusion Indicators). The Banking Superintendency of Peru exemplifies the kind of data transparency needed to track financial inclusion. So does the MIX Finclusion Lab. There are many more that I still haven’t listed. Indeed, one could say there’s a wealth of financial inclusion data already in existence and still being created. Why would one need new metrics? The problem is that all of these indicators are from the market perspective. What share of the population has an account, how many saved or borrowed in the past year (and how frequently), how many live within 1km of a bank branch, and so on. All this is incredibly useful. But if you’re an MFI or an investor in one, that value becomes a bit academic. You need to know what YOUR efforts have contributed to this broader picture. So maybe you could turn to social metrics? Not so much. The Universal Standards for Social Performance Management (USSPM) focus largely on the process – how an institution pursues its social objectives. Similarly, a lot has been done to better define the target population or practice. Is an MFI seeking to serve women? Consider the Gender Performance Indicators. Targeting the poor? Consult the Progress out of Poverty Index. Focusing on environmentally sustainable practices? See the Green Index. Still, none of these have much to say about financial inclusion. Consider the kind of data you may have as a fund manager. Most likely, you know the number of loan clients, though rarely disaggregated by type (size, maturity). You probably know the number of savings accounts, though have little idea how many are active, and know even less about the nature of that activity (frequency of use, average deposit/withdrawal amount). When it comes to insurance, in most cases you might know whether the institution offers such services, in some cases you may know the number policies issued, and in even fewer cases, this might be disaggregated by product. Rarely, if ever, would you know the coverage amounts, renewal rates or payout ratios. For transfer and payment services, information is more sparse still, often comprising little more than a checkbox of whether or not an institution offers such services, but little on actual usage levels, let alone frequency and amounts. And finally, when you try to look at the MFI holistically – how many people does it actually serve? – often there is simply no way to tell. The above is just for a single institution. Few, if any, portfolio managers would be able to discuss financial inclusion outreach across their portfolio – despite having it as their mission. The types of usage indicators developed at the market level, like Findex, are largely absent at the institutional level. The need seems clear. But is there capacity to meet it? What about indicator fatigue? How would such metrics fit in a space already crowded by seemingly endless indexes and indicators? And is it reasonable to ask MFIs to produce yet more metrics? The problem of indicator fatigue is overblown. We live in an age of data. Setting objectives comes with the expectation that we will have metrics to show how we have reached them. And despite the apparent crowding, few institutions are likely to use more than a handful of these different sets of metrics – a basic set for core reporting, with added modules depending on specific goals of the institution. So what about the reporting capacity of the MFIs? It’s not as hard as it seems. Nearly all of the missing metrics can be derived from data that’s already being captured by the institutions’ IT systems. Few, if any, entail gathering new data in the field. Yes, it would involve more reporting by the MFIs, but this is part and parcel of the financial sector, which is among the most data intensive segments of the economy. And for those MFIs too small to have appropriate reporting systems, reporting can be voluntary or simplified. After all, their impact on overall outreach is likewise small. The core task is to develop clear standards and incorporate the new metrics into the various reporting channels used in the sector, including MIX Market. The challenge is real, but hardly insurmountable. I admit, the title of this post is misleading. The biggest gap in financial inclusion isn’t metrics – it’s the lack of financial services available to the poor. But closing that gap will be harder if we can’t measure our progress. author: Daniel Rozas

UPDATE 13/02: I just came across a 2009 journal article by Susan Johnson by the same title. Had not been aware of it previously. The verdict is out. Final publication of six randomly-controlled studies (RCTs) has drawn a pretty thick line under the words of David Roodman: the average impact of microcredit on poverty is about zero. The notion that microfinance lifts the poor out of poverty is officially dead. Now, the caveats. The studies evaluated microcredit only – not savings or payments or insurance. Nor did they cover so-called microfinance-plus programs, which provide training, health care or other interventions, along with credit. It’s quite possible that these or other specialized branches of microfinance practice do raise the living standards of the poor. But, if I may be so bold, even the best of these initiatives are probably less effective than we might have supposed. This is good news. We in the microfinance community could use some humility. We’re financiers, not doctors, scientists, or teachers. To think that we can alter the lives of millions is hubris. That doesn’t mean that the value or even the existence of microfinance should now be called into question. Not everything that is valuable is life-changing. Marginal improvements are just as important. And microfinance – not just credit – can marginally improve the difficult lives of the poor. I am 100% confident that you the reader rely on a multitude of financial services for any number of needs. Life would be far more difficult without them. That the majority of the 2+ billion unbanked will eventually join the financial system is inevitable. The question is how soon and under what circumstances. We could just wait for economic development to take its course, and as incomes rise, banks will find their customers. What would be the cost of that wait? First, it would mean forgoing useful financial services to hundreds of millions for decades to come. That’s a real cost to them. Sure, they can continue to rely on the informal financial services – the ROSCAs, moneylenders, pawnbrokers, susu collectors, and the finances that flow between friends and family. Some of these are better than others, and all are better than nothing at all. Certainly, we should not ignore these informal systems, least of all because they give us a better understanding of how to serve the poor. But to think that we cannot improve on informal finance is to romanticize the lives of the poor. It sustains strengthens families and sustains communities! Perhaps. But people don’t seem to think so – as soon as people have the money to go to a bank, an insurance company, or a pension fund, they nearly always do. It’s nice to have a social network to help out when hard times come to pass, but mostly we seem to prefer to keep our friendships and finances separate. Second, over the past few years, the microfinance sector has made real strides in developing mechanisms to protect clients from harm. On its own, the banking system would never undertake such initiatives. However, client protection is increasingly becoming adopted by regulators as a core operating principle and this is a development for which the microfinance sector can legitimately take credit. This work is ongoing, and much work remains to be done to make sure these regulations apply to clients in all microfinance markets, and not just a select few. What’s left is the question of outreach, of reducing that 2 billion unbanked without waiting for them to become rich enough to do it on their own. This shouldn’t be just a game of numbers. The way microfinance currently operates, closing that gap would mean 2 billion loans. Or maybe 2 billion savings accounts and a smaller number of loans. We can measure the numbers, but what’s missing is the quality of the services we provide. Protecting clients isn’t nearly enough if the only choices given are cookie-cutter loans tailored for high-turnover businesses. And it’s here that we’ve barely begun. We have very little currently that enables MFIs to measure both the quantity and diversity of services provided. If financial inclusion is a stated goal, it’s not enough for an MFI to simply count the number of clients. For that matter, the foundation of all microfinance data – the MIX – doesn’t even allow tracking clients. You could check the number of active borrowers, or number of savings accounts, but without any idea whether these represent the same people or not. And unlike loans, many savings accounts are mere shadows, sitting empty, dormant or both. This is only scratching the surface. Who can answer how many insurance policies have been issued by MFIs worldwide, and how many of those are currently active? How many money transfers (and by how many people) have been done in the past year? And these are just the most top-level metrics. Remember those cookie-cutter loans? If we’re to measure diverse offers, we should be able to answer some more basic questions: what share of loans are issued with a term of less than 6 months? More than 2 years? How many savings accounts are in fact dormant? What is the average turnover (deposits + withdrawals) for savings accounts? What is the average payout ratio on insurance contracts? Answering any of these questions currently requires sitting down with an MFI’s data management staff and asking them to generate a special report – and that’s assuming the IT system even supports this type of analysis. We’re still far removed from the day where these questions could be answered at the country-level, let alone globally. Yet that is ultimately what’s needed. Today, the microfinance sector is embarking on an important journey. We leave behind earlier shibboleths of eliminating poverty, as we adopt new goals of better and broader financial inclusion. But this important goal requires a parallel change in the standards and metrics that will tell us how well we are doing. We can’t expand financial inclusion without being able to measure it. author: Daniel Rozas

Overindebtedness is like the unwelcome spectre at the feast. Amidst robust and exciting discussions about technology, product development, distribution innovations, client protection and rural finance at a conference like European Microfinance Week, overindebtedness is always there – hovering. It’s the underlying trigger of market crises. It’s what outsiders who’ve read a few alarmist headlines think about microfinance. And yet again, this year’s Banana Skins survey of industry risk (co-authored by e-MFP’s Daniel Rozas and me) found it to be by some margin the greatest perceived risk to the industry according to expert respondents from around the world. It’s only right then that the Day Two plenary session should bring together industry leaders from the key markets of Bangladesh, Morocco and Mexico to discuss how the spectre of overindebtedness has emerged, and in some cases been addressed, in their countries. Daniel Rozas moderated the Plenary session, entitled “Managing Overindebtedness: Speaking from Experience”, alongside Shameran Abed, Fernando Fernandez, and Youssef Bencheqroun. Shameran Abed needs little introduction, as the Director of the Microfinance Program at of Bangladesh’s BRAC – one of the largest MFIs, and the largest NGO-MFI, in the world. As a series of papers produced by CGAP have detailed, Bangladesh is the case of the cautionary tale averted. In 2007-08, there were several signs of market overheating, but a rare example of prudent self-regulation took place. A few of the largest MFIs – BRAC among them – took active measures to slow their growth. As Shameran points out, Bangladesh is a unique market in some key respects, among them that, as the first mature microfinance market, it was grown from NGOs rather than foreign-funded commercial entities, especially from the 1970s to the early 2000s. Huge growth began early that decade as commercial investment began to pour in, but by 2007 real issues were emerging. Already endemic multiple lending/borrowing was worsening. The staff-client interface was increasingly strained – in part a result of growing pressure to reach targets. The Bangladeshi model, with its genesis in joint liability group lending but which had transitioned to individual lending but still within a group model, had changed. Groups became less cohesive, and institutions like BRAC less able to rely on groups to provide feedback on individual borrowers’ status, indebtedness and creditworthiness. As Shameran tells it, an iterative series of discussions took place, and a consensus developed, within and between key large institutions, that asset quality would deteriorate without growth of 30-40 per cent per annum being actively slowed. The dominance of NGOs in Bangladeshi microfinance was a boon: the social roots of the industry and concern for client welcome made it easier to get Boards on board, so much so that they acquiesced in actions which led to BRAC not only slowing, but contracting – from 2900 to 2200 branches in 2009, and from 6 to 4.5 million active borrowers. Slowing growth was part of it, but not all. Shameran says they were all well aware of multiple borrowing, and the risks it could pose. But why was it commonplace? Was it that the loans weren’t big enough to be useful – sending clients to other MFIs for what they need? Interestingly, no – the problem was timing. Clients need a couple of hundred dollars now, and know that they’ll need a couple of hundred in a couple of months, and perhaps a hundred a month after that – the consequence of seasonalities and predictable calendar events for which credit was necessary. What they didn’t particularly want or need, in this case, is five hundreds dollars right now. The rigid 12-month loans were inappropriate to their needs, so they would spread them out so were getting the credit they needed when they needed it. Moreover, clients – like institutions – are conscious of spreading risk. They borrow from multiple organisations so that if their relationship with one were to sour, they’d retain access to credit from another. BRAC adapted, with more flexible loan terms, refinancing and rescheduling options, top-up loans, and emergency loans. And while it wasn’t BRAC alone, its actions – along with those of its competitors – helped avert a crisis. Morocco wasn’t quite so fortunate (or prescient). Youssef Bencheqroun is Director General of Al Amana. As many will know, Morocco was one of the countries, with Bosnia, Pakistan and Nicaragua, which suffered market crises in 2007-2009 – followed by AP/India a year after. Youssef attributes several factors to what happened. Three large organisations dominate microcredit in Morocco. Following a period of “infancy and growth” (which saw 50-100 per cent per annum industry growth in the years up to 2007, couple with 99 per cent reported repayment rates and sub-five per cent PAR-30), the absence of credit bureaus; a cultural Muslim scepticism or misunderstanding of concepts of debt, interest and obligation; consolidation; reach into very remote and high risk areas; and the collapse of the second largest MFI in the country, caused a perfect storm. The regulatory authorities were ‘frightened’, which led to the absorption of the collapsing MFI by the third largest – a subsidiary of a commercial bank. But not before some belated, self-regulation took place. The three dominant organisations set up a de facto credit bureau – pooling their client data each week. Growth slowed from 35 to 10 per cent – what Youssef calls an “incompressible figure”. Action was taken to stem overindebtedness. Strict limits were imposed on renewing loans to some clients. More mainstream tests for credit-worthiness were imported from mainstream commercial finance. And the Central Bank, not before time, set up credit bureaus – which now give institutions “a 360 degree view of reality”. The actions meant the industry weathered the storm, but not without considerable costs. The problem, Youssef thinks, is that the organisations in the country lacked the ‘DNA’ to manage risk. The price that’s been paid is the difficulty in encouraging healthy, manageable growth. “Rate of growth depends on risk appetite or aversion; clients love us, but the current environment isn’t supportive to microfinance, meaning it’s difficult to get beyond ten per cent growth.” Public opinion turned against microfinance in Morocco, and has not rebounded. And the industry needs public support to be able to develop, says Youssef in conclusion. Daniel points out that it’s easy to conflate overindebtedness and multiple borrowing (something he and I know well from reading the responses to and writing the Banana Skins survey) but they’re distinct. Multiple borrowing and repayment risk can be driven by many factors, only one of which is overindebtedness. Likewise, clients can become overindebtedness for various reasons – only one of which is borrowing from multiple institutions at the same time. Multiple borrowing, as he pointed out with some startling charts, is perhaps most endemic in Mexico. Fernando Fernandez heads up Pro Mujer in Mexico, the first MFI to get certification by the Smart Campaign. According to recent data from Finca, the percentage of microfinance clients in Mexico with more than four concurrent loans is more than double that seen in Bosnia in 2009, Morocco in 2008 or Andhra Pradesh in 2010. If this data is representative of the industry in that country as a whole (and it’s not clear it if is), Mexico’s microfinance industry could be on the brink of collapse. Mexico is as unique as Bangladesh – but for very different reasons, to do with context. In 1995 a financial crisis decimated the banking system. For the following several years, financial services in Mexico was dominated by five international banks. It wasn’t until the 2000s that credit markets were properly re-activated, and the Mexican government went, as they say, “all in” – deciding to create and promote credit entities providing housing, mortgage and car loans. Consumer credit exploded – led by the (in)famous Compartamos Banco, whose 2007 IPO, the first in the global industry, on the back of three-digit interest rates, caused widespread concern among more socially-focused observers. This is all-important, Fernando says, because it shows that Mexico wasn’t led by a tradition vision of financial inclusion microfinance – small loans, ostensibly for microenterprises, with the goal of financial inclusion. The focus instead was very commercial: profit maximisation through consumption lending. Provide debt, and do it as profitably as possible. This model naturally has high returns, but it is important to question, he says, why interest rates don’t in reality go down – as competition ought to mandate. This wasn’t the private sector left untrammelled which caused this, either. On the contrary, it was seven years before the spate of market crises, that the government approved the operation of specialised banks to fill the gaps in the internationally-dominated market, three of which offered consumer credit for household goods, in all states of Mexico, and which followed Compartamos’ lead. Inclusion isn’t a priority. Providing credit to the base of the pyramid, however, is. It has been, within those parameters, a massive success, with 30 million such clients within five years. But the number of people marginalised by the system is growing too, says Fernando. The search for profits and the appetite for risk are so high that some have been left out of the market – genuinely financially excluded from a system that has commoditised credit, with no focus on client protection. Today, the authorities in Mexico are wise to this, but it’s not clear what can or will be done. What’s also not clear is how widespread overindebtedness is. The representativeness and replicability of the Finca data isn’t clear. It’s not clear, Fernando says, whether overindebtedness is limited to individual consumer loans, or has contaminated ‘productive microcredit’. It’s not clear if it’s localised to certain over-concentrated regions. These are ‘grey zones’, and more research will be needed to understand it. There is an opportunity here, too. “This can perhaps be a signal that time has come to improve efficiency; we are vey inefficient in granting credit, the machinery that operates on the market is inefficient and price of products pay for the inefficiency, with high social cost and therefore high social risk”. But the market leaders, for the most part, are not like the social visionaries in some other markets, and the commercial focus “allows us to say is doing deep financial inclusion, when that isn’t always true”. Pro Mujer is unusual in this hyper-commercial market – the first to pursue and get Smart Campaign certification, and an organisation which, he argues, is trying to figure how not just what is profitable but who do we want to serve an why. Women in the poorest segments are Fernando’s priority. But there is a long way to go in Mexico. For the most part, MFIs follow the logic of the mass market, consumer lending competitors: quick returns and low-hanging fruit, with little interest in the complex and expensive job of training clients. Instead, the mindset is to let someone else do that, and “we’ll get them on their third or fourth loan”. But microfinance still makes up only less than one per cent of the financial services sector as a whole. Which means nobody sees it as an existential threat. The risk, Fernando says, is social, and reputational. Fernando believes something echoed by Shameran, Youssef and Dan – that overindebtedness is managed, mitigated or averted when institutions go back to basics. Think long-term. Recognise that they are in the business of relationships with clients, and not transactions. Institutions need to set limits. Strengthen these relationships. Collaborate with competitors. Diversify and adapt demand-driven product offerings. Be there when clients need them. Invest. And be mindful and vigilant with respect to the warning signs of overindebtedness. The problem is that not all industry leaders are like these three men. It’s the others out there who will need to follow suit. author: Sam Mendelson

Opening Session of European Microfinance Weeks Asks if Financial Inclusion, Stability and Client Protection can Co-Exist Financial Inclusion has long since become the dominant discourse in providing financial services to under-served populations – something which used to be called ‘microfinance’, and before that just plain ‘microcredit’. Inclusion (or ‘Inclusive Finance’, as is voguish) means different things to different stakeholders, but “the provision of quality financial services to those previously excluded from the financial services sector” is probably acceptable to most. But is it costly? Or rather, is the key “quality” element something that is irreconcilable with commercial goals, because of the burdens its provision places on institutions, or the adverse affect it can have on market stability? Put another way, is client protection, in all its forms, in opposition to financial inclusion (in that it prevents vulnerable populations being reached), and can market stability be possible if attention and resources are devoted to client protection at the expense of growth, profitability and scale? “Balancing Financial Inclusion, Market Stability and Client Protection” was the topic for the kick-off plenary at EMW2014. After an introduction by Scott Brown, CEO of Vision Fund and part of the Microfinance CEO Working Group (eight CEOs of international MFIs, covering 45 million clients in 70 countries, and working for advocacy, and industry and institutional strengthening), Antonique Koning from CGAP kicked off a wide-ranging panel debate. Antonique heads up CGAP’s workstream on customer empowerment, balancing, as she put it, “financial inclusion (I), financial stability (S), financial integrity (I), and financial consumer protection (P) (collectively I-SIP)”. Narda Sotomayor represents SBS Peru, the country’s Superintendency – the banking regulator. From a financially excluded background herself, she returned from overseas doctoral study to lead research on changes in regulation, and the impact it has on institutions and clients. Armenuhi Mkrtchyan represents the Armenian Central Bank. As she tells it, for ten years, they set up the infrastructure that could be envisioned to strengthen the supply side of the microfinance market. Credit bureaus, deposit insurance, joint regulatory bodies. “Everything to make investors feel secure”, she says. But in 2006, she and her colleagues realised that this just wasn't enough to achieve “deep inclusion”. Why? Because the customers don’t understand finance, and credit in particular. This meant strengthening the demand side through consumer protection and financial education. Kim Wilson is a Lecturer in International Business and Human Security at the Fletcher School at Tufts University in the US. As a teenager, she says, she was “a child of credit”, working summer holidays for her retailer father to repossess furniture and appliances from defaulting customers. Ten years ago, she found herself as Director of the Global Microfinance Unit at Catholic Relief Services. “We didn’t have any impact assessment or smart understanding of what we were affecting – just lots of hunches, lots of problems among 35 programs, some of which were fully functional but some were plainly non sustainable NGOs. What she came to feel, she says, was that they were clashing against what they were actually supposed to be doing, because it’s difficult to see all the consequences of every action. Microenterprises were serving as fronts for money laundering, for example. So she left that position, “hid” at university, and was approached by Gates Foundation to launch the Fletcher leadership course – two matriculators of which are Armenuhi Mkrtchyan and Narda Sotomayor, alongside her today. So, a central banker, a regulator and a practitioner/academic: a range of experience in how to find the products, mechanisms and regulation to maximise market stability, reach excluded populations, and ensure those clients are adequately protected. What does the audience think, asked Antonique Koning, who moved on to put three statements up for a show of hands and discussion. “There is no trade-off between financial education and financial stability” was the first – with the audience roughly split 50:50. The question is an unusual one – maybe “It is possible to reconcile provision of financial education and market stability” would've yielded richer responses. One audience member argued in favour of the original statement, arguing that investment in education ultimately pays off in stability. The second statement up for discussion was this: “By definition, financial inclusion implies consumer protection”. The trouble here (and the explanation for the audience’s reluctance to commit either way) is that there’s a disconnect between theory and practice. Perhaps most people in the audience agreed with one member, who said that, yes, genuine inclusion needs to incorporate consumer protection, because otherwise all we’re talking about is financial access; inclusion has to mean more. “Financial inclusion means quality financial services, and they cannot be quality if consumers aren’t protected”, goes the argument. But in practice, consumer protection isn’t given the attention it needs in promoting inclusion – although no doubt this is generally improving. The third statement garnered an almost unanimous response, because it’s virtually axiomatic: “Financial education is an essential part of consumer protection”. This is so clear it hardly bears analysis. So, it’s clear that protection, inclusion and stability aren’t ‘zero-sum’. There are synergies to be found. Narda’s focus at SBS Peru is primarily market stability. This means, in practice, “generating the incentives such that financial institutions can develop their own consumer protection initiatives”. Put another way, creating the environment where it’s in the institution’s interest to protect, rather than exploit, the customer. Consumer protection, she says, comes mainly through transparency. A consumer who is well informed about a financial product’s characteristics, including the terms and the risks is in better position to make good decisions, manage risks and understand and meet his or her own obligations. “This is win-win for the client, the institution, and the sector”, she says. For Armenuhi, synergy comes a different route. “In policy, this balance, or synergy, comes about because when people are excluded, this poses threats to financial stability and integrity”. What is financial integrity? Absence of money laundering is one factor, reduced flows in opaque, shadow banking channels. To what extent this is an issue peculiar to certain markets like Armenia, or something that is inherent in all developing markets, was left undiscussed. Caps on interest rates, whether by design or accident, dominated the rest of the session. All the speakers are opposed to caps – as were, from the questions, almost all the audience. After all, when policy makers want to cap rates and do it effectively, they need to have the knowledge of what the caps should be. “Nobody can do this better than the market”, argued Armenuhi. Narla cited her home country of Peru, which went through a well-intentioned experiment in interest rate caps last decade, but with “totally unexpected results”…we ended up damaging those people we wanted to benefit – those in the bottom quartile”. Higher socio-economic segments benefitted, she said, because cheaper credit gives incentives to corruption (and presumably higher socio-economic segments benefit more from corruption). Moreover, market stability mandates sustainability, which means institutions need to be able to cover all their costs. Binding rates are anathema to this. Ultimately, a market with fair competition should take care of it, and push rates down. Kim cited interest rate caps in certain US states, especially on payday lenders. “Credit is heroin”, and people get into a dependency on usurious credit. But she defended caps in this case, because payday lenders (as they do in the UK as well) charge 3 or even 4-digit interest rates – orders of magnitude above their costs, and the caps in place were still high enough that anyone could sustain a business by charging within those limits. Intervening always has its costs. Armenuhi says that in the long term, they’ve found that in Armenia, setting rates is more costly than subsidising vulnerable groups. Narda points to how Peru has now reached its position as the highest rated microfinance market (as recently re-affirmed in the 2014 EIU MicroScope). But policy-makers must remain vigilant. As banks downscale, MFIs are motivated to go and find harder-to-reach markets, and their portfolios change as new, previous excluded people are brought in. A credit portfolio can deteriorate quickly unless the methodology is still appropriate for the new customers, she says. “The process of lending isn't static; it’s very dynamic – and creating a close relationship with demand side is very important.” “Go downmarket, but adapt – or risk destabilising and affecting customers”. Kim finished with a positive story – a morality tale for how to find this elusive balance: “A few years ago, I was in Tajikistan, and kept coming across these ‘ExpressPay” kiosks, where people pay their utility bills and other things. Then, I found out that the network had been closed down. I met the CEO. The regulator had shut him down, but said the following: ‘ if you work with me to meet our requirements, in three months you’ll be licensed, you can re-open, and you’ll even be able to store funds’. True to form, three months later, ExpressPay reopened, fully licensed to take payments and also to hold funds – providing a range of new business opportunities to the company, and services to the customers.” “ExpressPay reopened because there was a great regulator at the Central bank, who understood the key elements of stability, protection and inclusion, and knew that with some adaptation and buy-in from the CEO, all three could be achieved. The lesson is that regulators are human beings too”. author: Sam Mendelson