In the mid-1990s, the then-nascent field focused on microcredit.  Social entrepreneurs in the developing world were pioneering new ways of providing credit to poor families in the informal economy.  The innovation of the social collateral allowed serving low-income segments that had been previously thought of as unbankable.  CGAP supported this early experimentation, provided for peer-learning opportunities, and advocated more broadly for a sustainable approach to the provision of financial services for the poor.

In the late 1990s, the industry focused on scaling up the initial microcredit success and on professionalizing the sector.  Many observers felt the focus of building institutions was necessary to prove that the poor could be served in a financially sustainable fashion at scale.  During the period, CGAP built consensus around good practice standards, created transparency and new data sources, such as The MIX information exchange, which was eventually spun off into an independent entity.

In the early 2000s, the field started recognizing the broader range of financial services needs of the poor and moved to speak and work more broadly on microfinance.  Many poor families in the informal economy are producers and consumers at the same time.  Their micro business activities and household needs are intermingled.  As producers, they need access to financial services to invest, generate income, and build assets.  As households, they need to smooth consumption in the face of irregular income and expense streams and manage risks.  The field started to work towards providing a broader range of required services, such as savings and insurance.  In this period, CGAP supported innovations by non-traditional players such as community-based organization to offer savings.  CGAP was a leader in working with commercial banks trying to down-scale and reach lower-income customer segments and launched its micro-insurance working group that eventually spun off into the microinsurance network.

While some expansion of the product range was achieved in the mid 2000s, it became increasingly clear that the cost of service for the typically very low ticket sizes of financial transaction of the poor was a major hurdle, in particular for remote areas. The field started to focus on the challenge of expanding lower-cost access-to-finance.  In particular the advent of the cell phone and technology-based solutions promised the possibility to significantly increase reach and lower delivery costs.  CGAP was an early leader in providing targeted support to business model innovations using technology and generating and disseminating new knowledge on branchless banking as a solution to the earlier, high-cost business model challenges.

In the late 2000s, the microcredit with its focus on short-term loans reached market saturation in a first set of high-growth markets and led to episodes of over-supply and over-indebtedness.  The narrower microfinance community realized the need to re-focus on clients and for consumer protection and financial literacy.  At the same time, global and national policymakers realized the importance of more inclusive financial system that reached larger parts its citizens.  This broadening of the aperture is captured by the more recent language around financial inclusion with more linkages to the mainstream financial system and mainstream players.  During this period, CGAP was a leader in helping the traditional microfinance sector develop a meaningful responsible finance agenda and was early in its support to global and national level policy-makers, for example in the G-20 context, as they turned their attention to building inclusive financial systems.

While the language changed with insights and expanded horizons, the underlying fundamental idea has remained the same:  Help poor families in the informal economy realize their economic potential and give them the financial services means to manage their lives that most of us in the North take for granted.

—– Tilman Ehrbeck is the CEO of CGAP. 

A Negros Women For Tomorrow (NWTF) business development officer demonstrates the features of a solar portable lighting device during a group meeting in Palawan, the Philippines.

Offering financial products that enable poor clients to purchase clean, low-carbon alternatives to kerosene, firewood and other conventional fuels is perhaps the most direct way in which microfinance can be mobilized to combat climate change and preserve ecological resources.

Of course, from the perspective of a client who lacks access to modern energy, the appeal of alternatives like small-scale solar charging devices and efficient cookstoves, is not, nor likely ever will be, about cutting carbon. Fortunately, it doesn’t have to be. Energy poor households and businesses aspire for access to solutions that save them money and time, deliver superior and higher levels of service, facilitate new forms of work and leisure, and maximize convenience. This means that clean energy end-user finance is rooted in the immediate needs and preferences of clients, and therefore driven by bottom-up consumer demands rather than top-down appeals to environmental stewardship.

For this reason a clearer business case for greater MFI engagement in clean energy finance is beginning to emerge, driven by high levels of transformation occurring in the rural clean energy sector. As this trend continues, the argument will only become stronger.

The rural clean energy sector continues to evolve, and diversify at a staggering rate, with quality, innovation and segmentation all rapidly increasing. Private sector participation is driving much of this change. For example, new iterations of solar charging devices enter the market each year. New form factors and non-lighting functions (like mobile phone charging using solar energy) are being incorporated so quickly that there is no longer even a consensus term for this category of product (formerly known as ‘solar lanterns’).

At the same time, conventional rural energy sources such as kerosene and firewood grow more expensive, price volatile and scarce over time, and, consequently, become greater sources of economic strain and insecurity for households and businesses.  The dynamic interaction between these two trends – clean energy getting better, conventional sources getting worse – will continue to build new demand. This has clear operational implications for MFIs that choose to engage: investments in client sensitization campaigns to ‘push’ environmental benefits will decline because, more and more, MFIs will be facilitating ownership of products that are high demand ‘pull’ products.

Energy will become too important for MFIs to ignore.

It’s important to underscore the dynamic between growing energy insecurity and portfolio risk when considering the future of clean energy finance. A managing director of a medium-sized MFI based in Nairobi that I recently interviewed explained how kerosene price shocks, like the one that gripped Kenya last spring, and escalations over the long-term will inevitably begin to constrain MFI growth and impact portfolio quality. Fixed income clients will increasingly be forced to choose between purchasing basic energy and other needs. Loan repayment will take a hit. For him, the business case for financing clean energy technologies that increase client security and savings is as much about risk mitigation as it is about portfolio development.

As the macro trends of global energy supply and pricing continue to squeeze low-income consumers the hardest, this strategic rationale will become more compelling, if not impossible to ignore. This development is important to bear in mind when considering the common argument against energy microfinance that loan sizes for small energy products are too insignificant to justify the transaction costs of administering them; or that loan terms for larger energy applications (such as solar home systems) are too long-term for MFIs to risk considering. As energy prices and volatility increase, whatever risks and costs are born by MFIs that finance alternative energy ownership, will be more than compensated for by greater client energy security and savings.

In the more immediate term, offering credit for popular energy products, such as solar charging devices, can help MFIs distinguish themselves in highly competitive markets by satisfying an unmet client need. An energy program manager of a large Filipino MFI that I recently spoke with emphasized the value that small, short-term loans for popular solar products have for improving client satisfaction and loyalty. In this sense, short-term energy loans can be considered part of a client retention strategy.

What has held clean energy microfinance back?

In the past decade, hundreds of MFIs, cooperatives and other financial service providers have experimented with clean energy end-user finance, but only a relatively small sample has advanced programs beyond the pilot stage and established permanent portfolios. The number of programs that have scaled to a level that is proportionate with true potential client demand can probably be counted on two hands, and many of these are found in markets where strong public subsidies and support schemes are also present.

What explains this track record? A number of factors, but the most important take away from the sector’s collective experience in energy to date is this. End-user finance solves the demand-side problem of consumers not having the cash to purchase clean energy products, but it does nothing to solve two separate and more fundamental supply-side challenges: distribution and after-sales service. Simply put, getting energy products into the hands of low income, ‘last mile’ consumers is hard; cultivating a local ecosystem that can service and replace those products is even harder.

And critically, introducing end-user finance before reliable distribution and after-sales service have been established is a formula for failure, and one that, unfortunately, that a number of MFIs have experienced.

Many MFIs that experimented early with energy lending were simply burned by unreliable, low-capacity product partners that delivered low quality devices and minimal, if any, after-sales service. Microfinance is based on a level of trust established between the institution and its clients. Today rural markets are flooded with cheap, sub-par energy products that spoil markets and undercut quality alternatives. It is difficult for consumers and MFIs to distinguish between what is good and what is bad. Energy lending programs that fail because of technical failure and mass defaults, not only reduce portfolio quality and squander resources and precious time, but also damage relationships between clients and the MFI.

In the past, a number of quality product suppliers and MFIs have explored potential partnerships and initiated pilots, but often the distribution and after-sales service gap could not be fully be bridged by either or both partners. These experiences have further contributed to the sense that energy and microfinance simply cannot mix. However, this perspective does not adequately take into account the dynamism, growth and change that have characterized the rural energy sector in recent years, and mistakes capacity limitations symptomatic of the sector’s youth for inherent, permanent limitations.

As energy product companies grow their capacity to penetrate last mile communities and embed after-sales service closer to end-users has increased as well. Many product companies are actively building networks of rural suppliers and retailers that double as retail and after-sales service agents. This strategy brings with it the potential for energy companies and microfinance institutions to converge in a new way.

As individual small business lending continues to grow, MFIs could support the development of the clean energy ecosystem by providing working capital loans to these local retailer-service agents. A number of MFIs have already begun supporting such entrepreneurs, and continue to refine the model in partnership with energy companies.

Finally, where energy product suppliers cannot bridge the divide, a new category of social enterprise that specializes in distributing and servicing products could come to play an important role in filling the need.  Project Dharma, Boond and Frontier Markets are three such companies already operating in India that distribute a variety of products, including solar lighting and efficient cookstoves.  Impact Energies integrates the entire ‘factory-to-village’ product supply chain, and partners directly with MFIs in Ghana to distribute solar LED lamps and micro-solar home systems to last mile clients.

There are many trends pointing to a more significant role for microfinance in advancing energy access in the near future. In this post I’ve focused a good deal on different transformations occurring in the clean energy sector that will help facilitate this convergence. However, this requires the sector as a whole to take an active role in exploring opportunities, and making a greater strategic commitment to embracing energy. While only a relatively small number of MFIs maintain energy lending portfolios today, their persistence and commitment to experimentation continues to give rise to new approaches and solutions that advance the practice as a whole.

This summer, with support from the Citi Foundation, Arc Finance will introduce a series of case studies that will document some of the important practices that have been developed and adapted over time as a result of their efforts.

—– Chris Neidl is the South Asia Project Manager for Arc Finance, a not-for-profit organization that advances energy access globally by building linkages between the microfinance and the rural energy sectors. Chris joined the Arc team in 2010 and now directs the organization’s South Asia portfolio. He is currently completing research for a Citi Foundation supported knowledge series that will document emerging practices in rural energy finance. Chris is based in Pune, Maharashtra, India.

Microlending has existed in Russia for 15 years but it was not until 2011 that special legislation came into force, providing for a clearer legal status of microlending MFIs. These institutions play an important role in the country, serving people who do not have access to bank loans.  Thus, last year about 70 percent of microloans were disbursed in small towns and rural areas; 60 percent of microborrowers were women and 10 percent – youth; and about 50 percent of all microloans were used to fund micro and small businesses.   The average annual interest rates charged by MFIs are about 28 percent per annum.

Just as the legal framework for MFIs was complete, a number of companies disbursing small short-term loans at very high interest rates (we’ll call them “payday loans” and the lenders “payday lenders” for convenience, although many borrowers are pensioners or self-employed) started registering as MFIs.  It should be noted that the appearance of the payday lending companies has not been brought about by the adoption of the new microfinance legislation.  Rather, they took advantage of the new legislation to gain a recognized legal status for their activities.  Though the share of payday loans is only about 15 percent of all microlending in Russia, their negative image has cast a dark shadow over the responsible microfinance sector. 

Since the Russian microfinance legislation has not been designed to account for specifics of payday lenders, the microfinance community led by the Russian Microfinance Center has suggested the following measures to separate this market from responsible microfinance and establish necessary protections for clients of payday lenders:

1. Payday lenders licensed as MFIs should be separated from the rest of the MFIs in the state register (lines of demarcation remain to be established – a challenge, of course, in many markets beyond Russia).
2. All payday lenders and MFIs should adhere to standardized disclosure requirements of the full loan costs.
3. Reporting to credit bureaus should be mandatory for all payday lenders and MFIs.
4. The regulators (the Russian Central Bank and Federal Financial Markets Service) should regularly publish average interest rates on retail credit products offered by banks, payday lenders, MFIs and credit cooperatives and establish that interest rates higher than 20 percent of the average are to be considered usurious (and labeled clearly as such, though not prohibited).
5. Payday lenders should be restricted in their ability to raise funding from individuals (something other MFIs are permitted to do under Russian law, but within limits).
6.  All MFIs should be members of self-regulated organizations, to reduce instances of unethical market conduct.

We believe that these measures will help inform and protect Russian borrowers, as well as foster a more responsible and transparent microfinance sector in Russia.  Presented to the regulatory authorities shortly after the Russian Post scandal, these measures are likely to be adopted soon.

The situation in Russia is not unique, and the next post in this series we will discuss what lessons can be drawn for other countries.

—– Mikhail Mamuta is the President of Russia Microfinance Center

“I would also like to urge the Minister of Treasury, in his capacity as Minister and as member of such Council, not to wait two or three years to conduct the financial inclusion surveys. … Every time the Minister receives financial information related to the country, there must be some financial inclusion data in it.”

We believe both policy making and private sector decision making is much improved when it is rooted in rigorous research and analysis. (In fact, rigor is one of the four values of The Bill & Melinda Gates Foundation). Better evidence can improve outcomes in a number of ways:

-          Put a spotlight on the problem of exclusion at both the global and national level;

-          Inform policymakers with data to support more effective policy making;

-          Enable donors (including ourselves), governments, and service providers to better target their activities and gauge their impacts over time;

-          Stimulate research into the barriers to financial inclusion and its relationship to macroeconomic growth, inequality, and poverty.

This understanding motivated our efforts to co-create the Global Findex, which we were very excited to see launch at the World Bank Spring Meetings.

Why the need for a new data set on financial inclusion?

Our initial landscaping in 2010 showed that, while there were a variety of data sources relevant to measuring financial inclusion, there were major gaps. In particular, the field lacked a dataset that measures access to financial services from the demand side across a broad number of countries, over time.  The Findex fills this gap. Some of its unique features include:

•  Surveys of over 1000 people in each of 148 countries (over 150,000 individuals surveyed worldwide, nearly every country covered, except those at war, civil strife, or tiny islands)
• Data on the individual respondents to identify the correlates of usage such as income, education, gender, and many other variables;
• Asking 20+ questions on savings, credit, payments, insurance product usage and behavior;
• Including questions to determine (i) active usage vs. simply owning an account (ii) whether the respondent is connected to payment system or not (iii) mode of access to convert cash to digital and vice versa (ATM, branch, agent, etc.) and (iv) using mobile phones to transfer money.
• Tracking over time is facilitated as the full questionnaire is repeated 3 times over 10 years, 2 questions on credit and bank accounts repeated every year and even quarterly in some countries within the next few years.

The Findex ”buzz” at the World Bank/International Monetary Fund Spring Meetings

The Findex generated a lot of interest and was cited prominently during the spring meetings. Outgoing World Bank President Zoellick’s remarks at the launch of Findex listed financial inclusion as a top priority, and drew attention to the size of the challenge of financial inclusion worldwide, with 78% of poor people not having access to an account. United Nations Secretary General’s Special Advocate for Inclusive Finance for Development,  HRH Princess Máxima of the Netherlands, described the importance of this data for use into the policy making process. A feature story on the Bank’s website includes remarks from Zoellick and Melinda Gates as well as a video short about the survey.

What does the Findex tell us?

The World Bank team, led by Leora Klapper and Asli Demirguc-Kunt, wrote an initial report which discusses a variety of important findings from the data, many of which were cited in various press articles. For example, an Economist piece focused on the fact that the poor are not well served by existing financial options but that there is much room for policy to improve the situation. An LA Times piece focused on the potential of mobile to close the inclusion gap. A Forbes piece highlighted the data showing that anti-money laundering rules hurt the poor. And CNN’s piece described how being unbanked is linked in inequalities.

We’d like to draw attention to two additional interesting data points:

First, 38 percent of account holders in Africa reported receiving payments or remittances with their savings account. Anecdotal evidence indicates that for many people, receiving money and then withdrawing it is the only thing they use their accounts for (i.e. not for saving). This is a wasted opportunity both for banks and for the cause of financial inclusion. These are clients who are already bank customers and are already visiting banks to get their money and yet are not benefiting from any deeper financial relationship than to use banks as a service to move cash. This shows the lack of value clients often perceive in banks existing product offerings and is an opportunity that both banks and policy makers should seek to leverage through better products tailored to the poor, and through designing G2P payment programs with the goal of financial inclusion in mind.

Second, the data show that some of the main barriers to financial inclusion are those imposed by financial regulations. Lack of documentation was cited by many as a central reason for not having an account; especially in countries which require more documentation as indicated in the graphic above (some countries require more than 4 documents to open an account which adds unnecessary cost and hassle and can exclude those who – like many poor people – have no formal identification.) This is a barrier that is already being fixed in some countries.

Mexico recently introduced a “tiered” approach (described in an earlier CGAP blog) and Pakistan recently removed the requirement to have a fingerprint and instead only requires the national ID card which almost all Pakistanis have. Similarly, Haiti introduced tiered KYC procedures which allow lower value accounts to have a lesser client identification requirement (in fact, the lowest level account requires no formal identification documentation at all.)

These new approaches to regulation as well as innovations from banks and mobile companies give the poor the kinds of products and services they value, and point the way forward in banking the 78 percent of the poor who are currently unbanked. The Findex will help us measure if—and how–we are getting there.

—– Jake Kendall is a Program Officer in the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation. Sheila Miller is an associate program officer with the Global Development Policy and Advocacy team at the Bill & Melinda Gates Foundation.

Over the past 18 months since the crisis began, stakeholders in the microfinance industry – policymakers, commercial banks, academic institutions, investors and MFIs – have debated and introspected, conducted studies, assessments and yatras, reaching out to clients and analyzing the issues and problems of the industry.  

In December 2011, M-CRIL released a report on the industry , the findings of which were amongst the topics discussed on 4 April 2012 at a Seminar on Risk in Indian Microfinance at the College of Agricultural Banking, in Pune, India.   The college is a training and research unit of the Reserve Bank of India (RBI), the country’s central bank.  The seminar took stock of the condition of MFIs in India since the AP intervention and the actual and potential future impact on the industry of the regulatory measures announced by the RBI over the past few months.  A number of issues emerged.  

In March 2010, banks provided 71.3% of the average Indian MFI’s funds and this is estimated to have risen to over 75% by October of that year.  While over 75% of MFI funds were invested in portfolio when the crisis broke in October, the decline in bank funding since then has meant that MFIs have had to shift their fund use increasingly into portfolio resulting in the deployment of 88% of funds in portfolio as early as March 2011.  In spite of this shift, overall portfolios have been declining and, by March 2012 were down to half the October 2010 level as shown by M-CRIL’s index (see graph 1).

 With banks now lending to MFIs at much higher interest rates than before (14-16% instead of 10-12%), and the limitation of the MFI onlending rate at 26% by the RBI,  MFIs now have much smaller margins to cover their operating costs and provisioning expenses. In this context, the M-CRIL Review shows that organizations with lower staff turnovers, implying better staff pay and working conditions have lower average operating costs. Also those with a higher proportion of women loan officers have lower operating costs. M-CRIL is planning some qualitative case studies to explore this aspect further.

At the risk seminar earlier this month, the main message was that MFIs are an integral part of the financial inclusion architecture and have a role to play in providing financial services to low income families.  Yet, due to the high growth of 2008-10 and the events surrounding the SKS IPO and the subsequent action of the AP government,  MFIs are perceived as being risky propositions for banks and investors.  Amongst the risks discussed were:

Leadership risk: One major perception of participants was that the problems of the industry stem largely from a failure of leadership with the wide range of financial sector risks having become subservient to individual egos and the pursuit of short term monetary gain.  There was concern that the lessons of the crisis have not been adequately learned and that some of the leading MFIs had not yet done enough to strengthen internal controls and inculcate a commitment to client protection in all aspects of their operations.

Reputational risk: The public perception that MFIs have experienced mission drift and do not have adequate social motivation has affected commercial bank lending to them.  All MFIs are painted with a single brush without consideration of the diverse performance and motivations of organizations in the industry.

Regulatory risk: The regulatory framework announced by the RBI so far has significant costs of compliance.  This includes the cost of (i) assessing borrower incomes to ensure that clients fall within the limits set by the RBI, (ii) verifying indebtedness levels through credit bureau checks, (iii) checking loan use to ensure that the money is actually invested in productive assets, and (iv) verifying compliance with codes of conduct through independent assessments.  

How does the MFI bear such costs with shrinking margins, and what are the features of compliance that are working and those which are impractical? For example, the regulation says that no family that has an outstanding loan of Rs 50,000 (US$1,000) should be provided with additional loans. How does the MFI monitor and capture this information when many loans are through informal sources including borrowings from friends and relatives of which there is no record?  The point was made that this regulatory approach entailed such a degree of micro-management that it could lead to the exclusion of measures such as varying prudential capital requirements based on degrees of geographical saturation in relation to levels of financial inclusion. 

An inverse relationship can be established between levels of inclusion in a region and the amount of capital required to under-pin lending in that region.  A more nuanced approach to various aspects of regulation would result in a more practical application of client protection than is possible at present.

Risk of developing a “herd mentality” or monoculture: The MFI industry has suffered from a culture that promoted the development of a single “plain vanilla” product and working in what became key hotspots leading to saturation of outreach and excessive lending to individual families. There is a need to develop a wider (if still limited) range of credit products along with the measures to introduce greater transparency, indicated above.

At the end of March 2011, the number of MFI borrower accounts was 20% higher than the previous year. This was considerably lower than the growth of 43% in 2009-10 but indicates the continuing demand for door-to door financial services amongst the poor. This graph shows that out of the total number of micro-credit accounts in India, MFIs have the second largest number, and three times more than those of the rural banks.  Only self help groups have facilitated more loans than MFIs. Thus MFI outreach is high and could play an important role in financial inclusion. At the seminar, where leading commercial banks, regulators and MFIs were present, another message was clear: the microfinance industry in India has learned many lessons from the past. To enhance its contribution to financial inclusion, restrictive regulation that limits its freedom to innovate needs to be modified to establish a broader framework that encourages MFIs to experiment and provide a wider range of services to low income clients in a reliable, responsible, and sustainable manner.

——- Sanjay Sinha is the Founder and Managing Director of Micro-Credit Ratings International (M-CRIL). Shweta Banerjee is an analyst at CGAP.

Just as the dust settled after a controversial entrance of new players in the Russian microfinance sector about a year ago – those claiming themselves to be “microfinance organizations”  and yet charging 730% interest per annum, another “innovative microfinance” product has totally shocked visitors of the Russian Post, as reflected in a multitude of blogs and in numerous media articles published in recent weeks.  Promotional booklets found in post offices in several major Russian cities were advertising microloans in the amounts starting from $100 that, if taken for one week, would cost 2772% p. a. (and a “special offer for low-income pensioners” – at 2598%).  The largest amount of 5000 rubles (about $167), for a one-month term, is offered at a “mere” 720%.

The public indignation is not just about the interest rates – though certainly all agree they are outrageous– but also has to do with the fact that the Russian Post is a government entity that administers disbursement of social and pension benefits and is considered a “social” establishment in the eyes of the Russian public.

Promotional booklet showing loan amounts (left column) and amounts to be repaid in 7, 15 and 30 days (3000 rubles are equal to about $100).

On February 6 the Russian Post published an official disclaimer explaining that it has nothing to do with these loan products but rather acts only as an agent for two commercial microfinance companies – Mini-Loan Express and Home Money; and it is the lender – not Russian Post – that is to blame for these controversial products.  (public records under Russia’s newly implemented microfinance law disclose that Mini-Loan Express is owned by an individual entrepreneur and a Cyprus-registered joint stock company; in a particularly ironic twist, Home Money is a member of one of the new “self-regulatory organizations” provided for under the law – voluntary for microfinance institutions – and one of the first to adopt a “Charter of Professional Ethics.”

Despite the explanation, the public has questioned the very ethics of the agreement signed between the Russian Post and these commercial companies, given that users of the Russian Post’s financial services (limited, until recently, to mostly government benefits, domestic money transfers and utility payments) are mostly low-income and financially illiterate people – many of them vulnerable pensioners —  who could easily believe that the services come from the government and could be trapped in debt.  A few days after the incident had gained publicity Arkadiy Dvorkovich, assistant to President Medvedev, Tweeted that he would “sort things out”.   But at this point it is not exactly clear what the government can do about it as the contracts of the “microlenders” with Russian Post are apparently enforceable, and the law in Russia does not prohibit lending activities, nor does it prescribe interest rate levels.  Instead, it looks like it will fall to the responsible microfinance community in Russia to make a statement about such market (mis)conduct.

In our next Friday’s blog post, we will let you know how the microfinance community responded to the situation and what recommendations were made to the regulatory and supervisory authorities.

—– Olga Tomilova is CGAP’s Regional Representative for Europe and Central Asia. Based in Moscow, Olga works as a microfinance specialist to deepen CGAP’s engagement in the ECA region on issues such as policy, technology and funding for microfinance.

There’s a lot to celebrate now that the Findex is here. So much so that it’s striking that it took so long to create a constituency for the efforts. Stanley Fischer had initiated the push in 2004 as head of the Advisors Group for the UN Year of Microcredit, and I joined Princess Maxima of the Netherlands in pushing the agenda forward in advisory roles with the UN in 2005. But it was the Bill and Melinda Gates Foundation’s support of the World Bank’s Development Economics Vice Presidency (DEC) in 2010 that ultimately got us here.

The Findex headline turns out to replicate an earlier count of the global financial gap: half the world is unbanked, about 2.5 billion adults, the same bottom line that came from aggregating a range of independent surveys from ten years ago. But even if the headline is familiar, the Findex delivers rich details.

A few years ago, Daryl Collins, Stuart Rutherford, and Orlanda Ruthven tackled the demand side by going deep rather than wide. In the research which came together as Portfolios of the Poor, about 250 households in three countries were interviewed intensively over the course of a year. While Portfolios boasts the sub-title “How the World’s Poor Live on $2 a Day,” it was always a mighty stretch to extrapolate from 250 households to 2.6 billion people living on under $2 a Day. While the Portfolios of the Poor research involved intense engagements (meetings with the families every two weeks), the Gallup survey on which the Findex draws involves one-time conversations, often by telephone. The compensation is that the Findex reports on over 150,000 people in 148 countries.   

So how do Portfolios of the Poor and the Findex line up, especially on informal finance?

First, there are some important areas of agreement. Two stand out for me. One is that informal savings mechanisms are important for savers, even among those who also have formal accounts. The informal mechanisms include savings clubs with neighbors and families, such as ROSCAs and ASCAs. In keeping with the spirit of the Portfolios research, roughly half of the Findex adults who saved using an informal mechanism also saved in a formal financial account. Those informal mechanisms turn out to be convenient and provide structure that help keep temptation at bay. On the other hand, they’re not as reliable as formal accounts.

What does this mean for policymakers? First, simply providing access to savings accounts won’t necessarily be enough to spur their active use. Second, as new work in behavioral economics shows (e.g., work on commitment savings contracts), success can be found by creating formal account mechanisms that adapt ideas from the informal. 

A second important place where Portfolios of the Poor and the Findex data line up is with informal borrowing. Here, the important shared take-away is the overwhelming importance of friends and family as a source of informal credit. The flip side of that is the relative lack of importance of informal lenders (at least relative to what’s suggested when reading the microfinance literature).

For years, microfinance rhetoric has wrongly equated informal credit with moneylenders charging exorbitant interest rates.  That equation is often deployed to justify the high interest rates charged by microcredit institutions (“Well, if they didn’t use microcredit, customers would have to pay the moneylender over 100% per year…”). The trouble with the argument is that going to the moneylender is not the only substitute for microcredit borrowing. Loans from family and friends are not only prevalent, but they usually come with no interest charges at all (though they may carry the costs of reciprocal obligations and the like). Portfolios of the Poor argues the case on the basis of data 250 households, and now the Findex shows a similar pattern for 150,000:

These data also help to make sense of the finding that microcredit customers do in fact care about interest rates.

Portfolios of the Poor and the Findex data most notably diverge when it comes to the intensity of financial activity. Portfolios showed extremely active borrowing and saving over the course of a year, much of it small scale and short term and almost all informal. That same level of intensity is not nearly as clear in the Findex data.  Demirgüç-Kunt and Klapper find regional average savings levels of 40% at best (this includes saving via informal savings mechanisms):  

Why don’t we see more saving? One reason is that the informal savings mechanisms are narrowly defined. The question on the survey only asked about setting aside money “using an informal savings club or a person outside the family.” The question is the right one to ask in order to get a precise answer to a precise question – and it’s much better than the alternative of getting an imprecise answer to an imprecise question. Still, we have to be careful in interpretation. A lot of people save by simply holding onto cash, either keeping it on their person or hiding it at home. Others save in ways that they might not think of as saving. Making a loan to a friend is one example (as the data show, those kinds of informal loans are quite common).

A second issue is that people evade questions and forget activities – or never know about their financial holdings in the first place. Dean Karlan and Jonathan Zinman find that there’s a lot of lying about (really expensive) consumer borrowing in South Africa. Daryl Collins finds that people under-report insurance and pensions (also in South Africa) but not saving or borrowing, often because they don’t know that their employer is facilitating insurance and pensions via paycheck deductions. Robert Cull and Kinnon Scott find that it matters who you ask and how you ask. Household heads turn out to do a much better job of reflecting the household’s financial activity than other adults. The Findex data, by contrast, asks questions of a randomly chosen adult, not necessarily the household head. Portfolios of the Poor shows that constructing the full story takes much more than a single interview.

The bottom line is that we can’t take all of the Findex data at face value. There’s likely a lot of under-counting, especially of informal mechanisms. Still, the Findex data show the broad shape of financial access for the first time using a unified approach. That’s a powerful start.

—— Jonathan Morduch is a Professor of Public Policy and Economics at the NYU Robert F. Wagner School of Public Service. He is also the Managing Director of the Financial Access Initiative, a consortium of leading development economists that aims to expand access to financial services for low-income individuals in developing countries through research, supported by the Bill and Melinda Gates Foundation.

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.

Several innovative programs for reaching this target population, including strategies developed by livelihood and microfinance organizations, have emerged over the past several years, many of which were discussed during a lively session at the Microcredit Summit in Valladolid, Spain, in November 2011. Among these are the initiatives from the CGAP-Ford Foundation Graduation Program, a global effort to understand how safety nets, livelihoods and microfinance can be sequenced to create pathways for the poorest out of extreme poverty, which have adapted a methodology developed by BRAC in Bangladesh. “The Graduation Model has the potential to pick up where microfinance has left off in helping households who are most in need,” writes Nathanael Goldberg, Senior Policy Director for Innovations for Poverty Action. Goldberg’s report, “Ultra Poor Graduation Pilots: Spanning the gap between charity and Microfinance,” provides a good introduction to the graduation projects and some interesting preliminary results.

Join us May 2^nd to 4^th for a Virtual Conference hosted by CGAP and the Microcredit Summit Campaign to discuss the Graduation pilot projects (10 are underway, or recently completed in 8 countries) and to consider the challenge of the sustainability of these efforts and how/whether the programs can reach the necessary scale.

—- Janet Heisey, Director of the Asia Program for Trickle Up oversees Trickle Up’s work in India, developing strategic plans and budgets and supporting program design, monitoring and evaluation and fundraising for the region. She also leads the organization’s initiative to integrate people with disabilities in the organization and programs. Janet has worked at Trickle Up since 1999. Previously she worked for the US office for Cambridge University, and a research center in Lima and Quito.

What percentage of women in South Asia have a formal account compared to those in Latin America? What are the most common self-reported barriers to financial inclusion among women and rural residents worldwide? To what degree has mobile money reached the unbanked in Sub-Saharan Africa?

Gender and rural gaps are persistent in all developing economies

With over 40 indicators, and the ability to differentiate each one by gender and rural or urban residence as well as age, education, and income, one can easily get lost in the nuance. But let’s start with the broad strokes. According to the data, in developing economies, 37% of women versus 46% of men are banked. 

The gender gap is larger in the developing world and larger still for adults living below the $2 per day poverty line, where women are 28 percent less likely than men to have a formal account. The gender gap persists across relative income groups within economies as well: in the developing world, there is a constant 6-9 percentage point gap in account penetration across within-economy income quintiles.

There are also wide variations in the gender gap across regions and economies. In several economies – like Slovenia, Thailand, and Uruguay – the gender gap in account penetration is essentially nonexistent, while in others – like Jordan, Pakistan, and Guatemala – women are only half as likely as men to have an account. On a regional level, women in South Asia and the Middle East and North Africa are the most excluded from the financial sector compared to their male counterparts.

Rural residents aren’t faring much better. In Sub-Saharan Africa, for example, adults in cities with 1 million or more inhabitants report a rate of account ownership more than double that of adults living in towns/villages with a population under 10,000. And in all developing regions adults living in cities are significantly more likely than those living in rural areas to have a formal account.

And why these gaps?
So why are these groups not participating in the formal financial sector as much as others? For decades, researchers and policymakers have wrestled with pinpointing the specific barriers to financial access facing women and rural residents.

The Global Findex allows us to see how women and rural residents assess their own financial exclusion. Most people interviewed cite “I don’t have enough money to use one,” as the top reason for not having an account (multiple responses were allowed). However, women without an account in the developing world are 6 percentage points more likely than men to say “because someone else in the family already has one.” In South Asia the gender gap in that response is 10 percentage points. This suggests widespread indirect account use among women and highlights the impact that lack of asset ownership may have on empowerment and self-employment opportunities.

Rural residents are more than three times as likely as urban residentsto cite distance to a bank as a barrier to account ownership. In all, 25 percent of rural residents without an account in developing economies say they don’t have an account in part because banks are “too far away.”

Community-based models

Beyond account penetration, the Global Findex reveals interesting patterns in how women and rural residents manage day-to-day financial transactions. In Sub-Saharan Africa, for example, 30 percent of women savers report using an informal community-based saving method (i.e. a ROSCA) and not a formal financial institution to save as compared to 20 percent of men.

Surprisingly, the data suggests that rural residents use short-term formal credit at a rate almost equal to that of their urban counterparts. Worldwide, 9 percent of adults report having originated a loan from a formal financial institution in the past 12 months, and there is no difference in this value between urban and rural residents. In fact, in many economies where community-based formal lending models (such as cooperatives, village banking, credit unions, etc) have been successful, the rate of formal borrowing is surprisingly high among rural residents. In Bangladesh, 25 percent or rural residents report formal borrowing, compared to 16 percent of those living in urban areas. An important caveat is that these loans might be of small value and maturities.

These two examples highlight the importance of both informal and formal community-based models in providing financial services to those that banks may find less profitable or accessible to target with financial products.

All policy discussions should be rooted in sound data and the ongoing debates in the world of financial inclusion – whether about the expansion of rural credit cooperatives, the regulation of mobile technology, or the spread of bank agents – are no exception.

The Global Findex database facilitates a deeper and more nuanced understanding of the financial behavior of women and rural residents worldwide. For example, the widespread use of community-savings clubs speaks to their popularity, but a downside is the risk of fraud and theft. The high use of these “semi-formal” products – where users commit to regular savings –might suggest a missed opportunity to provide safe, affordable financial products to adults without formal accounts. Our data suggests that a key to reducing the gap in financial inclusion is new products and technology, such as mobile banking, that can provide affordable and accessible banking services, particularly to women and rural poor.

The complete database, report, and survey in 15 languages are available at http://www.worldbank.org/globalfindex.

—— Leora Klapper is a Lead Economist in the Finance and Private Sector Research Team of the Development Research Group at the World Bank . Along with Asli Demirguc-Kunt she is the co-author of  “Measuring Financial Inclusion: The Global Findex Database.”

Figure 1

But there are important differences across economies. In high income economies account penetration is 89 percent, while in developing economies account penetration is only 41 percent (see Figure 1 for regional data).  Among those living below $2 per day, only 23 percent have a formal account. In developing economies, if you are wealthy (within the highest quintile in your country), you are more than twice as likely to have an account than if you are poor (within the lowest quintile in your country), on average.

However, there are even significant disparities in the prevalence of bank accounts among countries with similar financial depth (see Figure 2). Vietnam, for instance, has domestic credit to the private sector amounting to 125 percent of GDP, but only 21 percent of adults in the country report having a formal account. Conversely, the Czech Republic, with relatively modest financial depth (with domestic credit to the private sector at 56 percent of GDP), has relatively high account penetration (81 percent). This suggests that financial depth and financial inclusion are distinct dimen­sions of financial development—and that financial systems can become deep without delivering access for all.

Those without an account are deprived of a secure way to save and transfer money, both basic abilities that support multiple dimensions of human well being. Research like that reported in Portfolios of the Poor has shown us that the poor are often quite ingenious at overcoming this lack of access. While the stereotype may be of cash hidden under a mattress, the poor often manage a complex sets of financial relationships with their family, friends, and the wider community to manage risk, save for large purchases, and invest in their children or in small businesses.

Figure 2

There is a positive message from the Global Findex data. Public policy can tackle many of the barriers to access and thus pave the way improving financial access.  For example, regulation and promotional policies can help reduce the cost of opening an account, improve access in rural areas (e.g. through mobile money), and reduce unnecessary documentation requirements. Documentation requirements for opening an account may exclude workers in the rural or informal sector. In Sub-Saharan Africa, documentation requirements potentially reduce the share of adults with an account by up to 23 percentage points. Public policies can reverse that.  Our analysis shows that there is a significant relationship between subjective and objective measures of documentation requirements as a barrier to account use, even after accounting for GDP per capita (See Figure 3)

But how can we be sure which policies are most effective at achieving these goals? Well, the Global Findex data give us plenty of food for thought in this area. For instance, it seems likely that the widespread adoption of mobile money in Kenya has led to an increase in financial access that would not otherwise have been possible, with over 40 percent of Kenyan adults who used mobile money reporting that they do not have a formal bank account.

Figure 3

However, more robust answers to these types of questions will have to wait until three years from now, when the Global Findex will release a second tranche of data that will allow for analysis of longitudinal data around access to finance. In the meantime, you’ll find plenty of data to keep you busy forming hypotheses in the full report and the Global Findex database.

 —— Asli Demirgüç-Kunt is the Director of Development Policy in the World Bank’s Development Economics Vice Presidency (DEC) and the Chief Economist of Financial and Private Sector Development Network (FPD).