Key Principles of Designing Financial Services
• It was pointed out that reliability is important for clients from the point of view of security as well as assurance that their requirements would be met
• Sandeep and Jitendra noted that convenience is becoming a major differentiator in competitive markets and that door step services are highly valued by clients. Peter also highlighted the importance of convenience by speaking about the importance of proximity and local participation.
• Ashish Bazaari of BGFL mentioned that in the context of individual lending the product features like amount of loan, repayment terms and frequency and tenure of the loan need to be flexible to suit client requirements
• It was observed that imparting flexibility should take into consideration the viability of doing so given the costs involved. Information Technology was mentioned as one enabler which could potentially impart flexibility to products while minimising the costs.
• It was noted that structure is especially important when clients are saving with a specific purpose and a suggestion was made to develop structured products suited to client cash flow.
• There was an opinion that structure and flexibility are not complementary and that attempting to balance both in the same product might be counterproductive. The response from the forum cited the Jijenge account at Equity Bank as an example and countered that it was indeed possible to balance these seemingly contrasting principles.
• Clemence Tatin Jaleran of CIRM mentioned that the key principles remain the same even for microinsurance, though the specific regional context would also have to be studied to arrive at an ideal balance of these key principles. Premasis built upon the need for flexibility in microinsurance and mentioned that client flexibility requirements need to be studied during product development. He mentioned savings-linked insurance and stressed the need for product positioning to be clear in the minds of the customer . . .
Read MoreKey Principles of Designing Financial Services
• Portfolios of the Poor suggests that the four key principles to designing financial services are reliability, convenience, flexibility and structure; the importance of each of these was discussed by Stuart Rutherford. Reliability refers to attributes which make the service on time, transparent and dependable. Convenience refers to characteristics that increase the usability of the service. Flexibility is the ability of the service to accommodate the changing needs of the poor. Structure refers to features which set up a routine and nudge the client to stick to it.
• Krishna stressed that reliability for a client in the service comes primarily from being able to trust the service provider to deliver on what it promises. Stuart agreed with Krishna that trust indeed was the key and it is essentially generated by repeatedly keeping to promises. Anup Singh quoted from his experience in the Philippines and pointed out that many a time physical appearance of the institution and other physical evidence which promotes transparency is a key factor in building trust. Madhavi discussed this in terms of client concerns about safety and security of savings.
• Anup equated convenience with the ease of performing transactions. For him, another aspect that contributed to convenience, especially in case of savings products, was liquidity.
• Larry Reed wondered what an ideal balance of structure and flexibility would look like. Stuart suggested that one way of getting this right was by offering separate products. It may also be balanced in the same product as done in the p9 trials in Bangladesh. Another way to do this might be the SafeSave model where a visit from the deposit collector creates a frequent opportunity rather than a regular obligation to pay.
• Ursula pointed out the cost aspect in deciding on the pricing and the product design and mentioned a need to manage flexibility with cost effectiveness so as to be competitive. Another aspect highlighted was the need to match flexibility of savings with tenure of credit so as to ensure an effective asset liability match.
Guy Stuart contributed further thoughts on gender . . .
Read MoreInnovations and financial services for the poor
David Cracknell of MicroSave wondered if there have been significant changes in how people manage their money over time, and made specific references to the impact of the Mzansi accounts in South Africa. Daryl Collins noted that Portfolios researchers revisited the original South African diary households in 2009, five years after the first financial diaries on these households, to see how they might have changed their financial behavior in light of both Mzansi and the broader Financial Sector Charter that required financial services to become physically closer to poor households. Daryl provided some of their key findings, including:
• A 22% increase in take up of new banking services – most were new accounts opened by people who already had accounts, but in rural areas, the number of unbanked adults was driven down from 42% of the sample to 21%.
• Higher saving as a percent of monthly income (i.e., the amount put aside from monthly income): about 19% of income in 2004 compared with 27% of income in 2009 (perhaps reflecting a real median increase in income per capita of 8%).
• Comparisons between 2004 and 2009 of the same sample of households showed: Much higher use of bank accounts, much higher accumulation of savings in bank accounts, and slightly higher balances held in bank accounts.
Daryl concluded that this data suggests that we must expect that often changes in financial behavior come in shifts in the financial portfolio and not a wholesale abandonment of a particular device or practice, and this is likely to happen fairly slowly over time, and directed readers to the www.finmark.org.za website for more information on the study.
Read MoreMechanisms to Manage Money – continued
• During the course of the research, it was seen that higher dependence on informal means was seen more in urban settings than rural in spite of higher and more regular incomes due to factors like mobility of clients, lack of secure tenure etc. The challenge is to figure out how to mitigate these risks so as to ensure supply of formal financial services to these customers.
• Informal mechanisms though used widely have a risk of monetary loss associated with them and in the past experience; the losses as a percentage of savings have been significantly high.
• Chris Linder wondered about the non-financial methods the poor use to manage risk and queried as to whether there were ways in which MFIs could package non-financial risk mitigation services to the clients along with financial services. Peter cited the experience of construction savings banks in Europe and mentioned that formal financial intermediaries may indeed have a role in providing linkages between the financial and non- financial sector.
• The presence of MFIs in the geographies studied varied widely. In South Africa they were absent, in India the presence was limited and in Bangladesh they were present in most of the respondent households. Even where they were present, they were seen as one among the many options available to clients rather than as ‘The’ financial service provider.
• Some respondents mentioned Post Office savings schemes as a formal savings option available to the poor. But as evidenced by the diary households, this option was suited to relatively better off clients than the poor though the accessibility was quite good especially in rural areas. The constraint was the lack of flexibility in the product and the inability to leverage it for short-term credit requirements.
Read MoreMechanisms to Manage Money
We started off the discussion by noting that in all three countries where the research for the book was done, the households interviewed were using a mix of formal, semiformal and informal tools and both saving and borrowing so as to manage their cash flows – though there were regional differences in the amount of usage of each depending on specific characteristics of the market. Anup Singh then shared his experience from the Philippines of the poor using multiple mechanisms to manage their money and remarked that these tools are used by them for “ensuring continuity (of business and life) and for hedging risks.”
Larry Reed directed the discussion to the relative merits of formal, semi-formal and informal financial tools. The forum noted that though there were several shortcomings in informal tools, they had a lot of insights to offer the formal sector and that the formal sector could improve upon product offerings of the informal sector.
Peter van Djik queried whether borrowings and savings are considered indistinguishable by the clients . . .
Read MoreWhen organised financial services reach people who have for generations used informal mechanisms to manage their money, one of the most important features they bring is reliability - ensuring, for example, that loans and savings withdrawals are disbursed in full and on the promised day, or that deposits and repayments are collected and recorded accurately. It matters because informal devices and services, despite their many virtues, are not always reliable. The problem with moneylenders, most poor people will tell you, is not so much that they charge high interest rates as that you can't depend on them to give you a loan in the first place. Savings clubs of one sort or another are a boon when they work well, but they don't always work well. Storing money with a neighbour keeps it out of the greedy hands of your husband, but when you need to get it back in an emergency the neighbour may not have the cash ready at that moment. Unfortunately, this is sometimes the case with MFIs as well. Nothing irritates me more than to hear MFI staff telling their clients, "sorry, can you come back next week?" When that happens, their services are no better than those that poor people can find for themselves in the informal sector.
But it’s an oversimplification to think that organised services are better than informal ones . . .
Read MoreM-PESA, a successful mobile payments service in Kenya, is already demonstrating how m-payments can successfully expand the range of financial options available to poor households. Earlier this month, the Gates Foundation took several microfinance experts to Kenya, including Bob Cull; FAI’s Dean Karlan and Jonathan Morduch; David Roodman; Stuart Rutherford and Dean Yang, to learn about M-PESA first hand.
And while we were there, M-PESA announced some big news: finally, M-PESA is connecting with banks in Kenya. And with a big bang too, as two big players in the financial inclusion scene in Kenya are joining forces: Safaricom (the mobile operator behind M-PESA) and Equity Bank are launching M-KESHO, a co-branded suite of financial products that will ride on the M-PESA transactional ‘rails.’ Three years ago, there were 2.5 million bank accounts in Kenya, out of a population of 39 million. Today, there are close to 8 million bank accounts (of which 4.5 million are with Equity Bank) plus a further 9.5 million M-PESA accounts. One third of M-PESA accounts are held by people that are otherwise unbanked, and this is the segment that the new product is targeting. Equity’s aggressive objective is to acquire 3 million M-KESHO customers by the end of this year.
In late April, the Central Bank of Kenya issued new agent banking regulations which for the first time allowed banks to engage a wide range of retail outlets for transaction handling (cash in & out) and product promotion (receiving account applications, though applications must be approved by a bank staff). This paved the way for banks to begin utilizing the M-PESA platform and associated network of M-PESA outlets as a channel.
Read MoreNicholas Kristof is catching a lot of flak these days for a recent column on what he calls an "ugly secret of global poverty." Citing conversations with people in Congo, as well as research by IPA Research Affiliates Abhijit Banerjee and Esther Duflo, Kristof explains that it is not necessarily true that the poor can't afford certain important purchases such as mosquito nets or school fees. Rather, funds that could have been spent on those crucial items are instead funnelled away to less than virtuous items such as alcohol, tobacco, or gambling.
But calling this tendency to spend money on small luxuries an "ugly secret of global poverty" is misleading. It's not only about global poverty. Everyone spends money on things they don't necessarily need, and could forego in order to save for bigger, important purchases. I, for one, would have around fifty more bucks a month in my savings account if I could kick my Diet Coke habit. (Ouch!) It's just that I'm fortunate enough to live in a space where that fifty bucks isn't the difference between whether or not I get a primary education, or a deadly malaria infection. I don't think it's that the poor are necessarily more susceptible to temptation than the rest of us. The poor just have less room for error.
Read MoreNever in history have the world’s rich been positioned to do so much for the world’s poor. The wealthiest 20 percent of the population has 72 percent of the world’s purchasing power, while the bottom 40 percent has a mere 4 percent. So why don’t we do more?
At FAI, we’ve been giving this a lot of thought lately. It’s a complicated question, and no one factor is to blame. For starters, we’ve been at the aid game for a long time, with disappointing results; clearly, no one really knows what works. What’s more, when accountability for results is limited, we lack incentive to fix inefficient programs. Then there’s the fact that we don’t want to create dependency via handouts. And finally, there’s the sheer size of the problem. When the need is so very large, how can we do anything more than scratch the surface? Sometimes it’s hard not to feel that our efforts are futile.
One popular suggestion has been to leave economic progress to the market. But while market-based solutions can be very effective, markets are not magic in and of themselves. Sometimes we need to deliberately direct market forces to the right places. This is what “social investing” does. And we think this is an idea whose time has come.
Read MoreThe Bill & Melinda Gates Foundation certainly thinks so. I’m going to be seeing for myself this week, when I join a foundation-sponsored visit to M-PESA, a rapidly-growing mobile payments service in Kenya. As Ignacio Mas and Daniel Radcliffe wrote as guest bloggers for us last week, at Gates they believe that M-PESA “is already demonstrating how m-payments can successfully expand the range of financial options available to poor households.” By all accounts, M-PESA has become a remarkably effective way to transfer money, but can it really deliver as a platform for full-service banking?
The potential for mobile phones to solve the problem of infrastructure for expanding financial access in poor and remote areas is tremendous. As Ignacio and Dan point out, mobile phone penetration in Africa, which was a mere 3 percent in 2002, is expected to reach 72 percent by 2014 – this on a continent where roughly 20 percent of the population has a bank account (see our recent global count). That part’s clear – and exciting . . .
Read MoreAt the Bill & Melinda Gates Foundation, we have long been believers in the power of mobile financial services to piggyback off of the telecommunication networks that are rapidly being built in developing countries. Mobile penetration in Africa has increased from 3 percent in 2002 to 48 percent today, and is expected to reach 72 percent by 2014. That is a powerful wave we must ride.
In recent years, banks, payment system providers, and mobile operators have begun experimenting with “branchless banking” models which reduce costs by taking small-value transactions out of banking halls and into local retail shops, where “agents,” such as airtime vendors, gas stations, and shopkeepers, register new accounts, accept client deposits, process transfers, and issue withdrawals. One form of branchless banking, called “mobile banking,” uses a client’s mobile phone to communicate transaction information back to the telecommunication provider or bank. This enables clients to send and receive electronic money wherever they have cell coverage. They need to visit a retail agent only for transactions that involve depositing or withdrawing cash.
M-PESA, a successful mobile payments service in Kenya, is already demonstrating how m-payments can successfully expand the range of financial options available to poor households.
Read MoreIf you only read one critique of the recent microfinance impact "statement," it should be Chris Dunford’s over at Freedom from Hunger. We’ve taken the liberty of excerpting our favorite parts for you and explaining why exactly we agree.
First, Chris says of Freedom From Hunger’s own experience with serious impact research: “The results…have validated some of our claims and failed to validate others. We are challenged to embrace the revealed weaknesses and to reflect with our practitioner partners and take action collectively to make important improvements in our products and services.”
We wholeheartedly agree that taking evaluation more seriously can help MFIs improve what they’re doing. We’ve pointed to BASIX as another good example of an organization that has used evaluations as a powerful force for constructive change in the way it offers financial services to the poor.
“The recent research studies in India and the Philippines seem to conform to best practices of credible impact research, so let’s accept the results for what they are, which are mostly positive and realistic.”
Yes. Microfinance is not the answer to ending poverty as we know it—nor should it be . . .
Read MoreAbout a year ago, two papers made waves in the microfinance community. They were the first randomized control trials (RCTs) of expanding access to credit, and neither found evidence for the kind of impacts most people had come to expect, fairly or not, from microfinance. The results were somewhat surprising, but the power of these studies—and the reason they got so much airtime—was in their methodological approach. As RCTs, they established (or failed to establish) causal connections between access to credit and outcomes like household income that other, less rigorous types of studies only suggest.
RCTs are increasingly used to study development programs. It’s the method of choice for researchers at 3ie, the World Bank Evaluation Facility, and JPAL, in addition to us and our IPA colleagues. They gained recognition last year, when JPAL’s Esther Duflo was awarded a prestigious MacArthur Fellowship for her work.
So why are RCTs different? And if they’re so powerful, why don’t we see more of them? A new FAI Framing Note by Jonathan Bauchet and Jonathan Morduch helps make sense of these questions.
Read MoreThe 2008 global financial crisis intensified conversations about consumer protection. The financial crisis showed us that overly-liberalized credit markets can lead to overlending by institutions and heavy debt burdens for borrowers. Not surprisingly, the buzz these days is about “responsible banking.”
But self-regulation may not be enough—and may not be appropriate. After all, these are the same banks and institutions that created the original problems. Regulators are thus determining their next steps.
There are always trade-offs in designing regulations, though, and this isn’t the obvious time to be adding extra burdens for already-burdened regulators. Nor is it clear that imposing extra costs on financial institutions won’t affect their ability to serve poorer and under-served communities. Our evidence to date suggests the opposite.
Read MoreThis month Frances Sinha is writing about lessons from her important new book, Microfinance Self-Help Groups in India: Living Up to Their Promise. Her first postintroduced the book. Today's post describes some of the most striking lessons.
The social promise of Self Help Groups (SHGs) lies in the potential of the group medium, and the potential of wider networks of such groups to provide an empowering community platform for their women members.
We used the data from 214 SHGs in four states of India to see: In how many groups has a member been elected to the village panchayat (local council)? How effective are such elected women members in village governance? How many groups have played a role to improve community decisions and action – on, for example, delivery and maintenance of services (schools, health care, roads, veterinary care) and on issues of social justice, especially those of concern to women (domestic violence, dowry, bigamy, treatment of widows)? How effective or successful have such actions been? And, when SHGs undertake group based enterprises, how viable are such enterprises?
Read MoreLast week, a group of leading microfinance organizations came out with a joint statement on measuring the impact of microfinance. It had Accion and Grameen, Unitus and Finca, Opportunity International, and Women’s World Banking. It had a commendable call to be “reasonable and measured in our claims for what microfinance can accomplish.” It realistically characterized microfinance as “but one mechanism in the toolkit of global poverty alleviation.”
But what this statement didn’t have was any real measure to back up its assertion that microfinance has a positive impact on poor customers. Instead it fell back on first-hand client accounts of microfinance in, as David Roodman wryly put it, what may be “the most filtered, unrepresentative collection of microfinance stories ever.”
In addition to Roodman, Rich Rosenberg at CGAP has also done a nice job of critiquing the mixed messages and misunderstandings in the statement.
The fact is that the next wave of impact evaluations are unlikely to show results that are radically different from the most recent studies from India and the Philippines. The industry advocates will have to face the music sooner or later . . .
Read More“Can magical microfinance eradicate poverty?” asks India’s Financial Express this week. Magical. Herein lies the problem that microfinance faces today. Recent researchhas revealed that microfinance might not be what we thought – or what many hoped it was. It turns out we still haven’t proven that microfinance eradicates poverty, improves health, education levels, women’s empowerment, or achieves any number of other development goals and dreams we had pinned on it. And maybe we never will.
But even if ultimately we find that microfinance doesn’t achieve these original objectives, this doesn’t mean it’s not achieving anything, and doesn’t add tremendous value to the lives of the world’s poor. Through the work of FAI and others, we’ve learned that increasing access to financial services might, for instance, allow poor people to do things like smooth out erratic income, prepare for emergencies, and plan for big ticket expenses like housing or weddings.
Of course it’s still early days . . .
Read MoreThis month Frances Sinha is writing about lessons from her important new book, Microfinance Self-Help Groups in India: Living Up to Their Promise. This post introduces the book.
In India, Self Help Groups or SHGs represent a unique approach to financial intermediation. The approach combines access to low-cost financial services with a process of self management and development for the women who join as members of an SHG. The SHGs are formed and supported usually by NGOs, or (increasingly) by Government agencies and sometimes directly by banks. SHGs are linked to banks first with a group deposit account, then for credit, which is disbursed to the group and in turn distributed to the members. There is a process of group formation and group leaders and members of trained on managing the savings and credit. Often too SHGs are linked to wider development or community programmes. SHGs are thus seen to confer many benefits, both economic and social, providing new and real opportunities for rural women that challenge the traditional barriers that women face. SHGs enable women to grow their savings and to access the credit which banks are increasingly willing (or directed) to lend. SHGs can also be community platforms from which women become active in village affairs, stand for local election or take action to address social or community issues (the abuse of women, alcohol, the dowry system, schools, local water supply).
SHG numbers have grown rapidly since 2000, across India first in the more developed south, now too in the north. The SHG ‘bank-linkage’ programme is the flagship microfinance programme of the National Bank for Agriculture and Rural Development (NABARD) which has actively supported the development of this programme since the early 1990s. For some time, NABARD’s website announced: Did you know: more than 400 women join the SHG movement in India every hour; an NGO joins our microfinance programme every day?
Read MoreStuart Rutherford is the author of The Poor and Their Money, and founder of SafeSave, a microfinance institution in Bangladesh.
I’ve just finished up an engagement at the Sa-Dhan National Microfinance Conference 2010 on 'Financial Inclusion and Responsible Microfinance', organized in collaboration with the Federation of Indian Chambers of Commerce and Industry (FICCI). Beyond my own panel (with economist Reetika Khera and Vijay Mahajan of BASIX), I had some time to take in some of the others.
I noted some good presentations on m-banking and the ‘business correspondence’ model for banks, including some very forward thinking by people in various parts of the government. My takeaway was that the banks may, at long last, be back in the game of providing basic services to the poor and very poor, and may even be pushing the MFIs onto the back foot. If the government/RBI tweak the regulations a bit more to make the business correspondence model more profitable (and it seems they may do that) we could see banks very quickly signing up clients through mobile phones or portable biometric point-of-service devices in the hands of village agents, and offering a service that really is "close at hand, frequent, flexible-but-disciplined, and above all reliable". I saw some of that at work in rural Uttar Pradesh, and was impressed. I noticed that some of the language used by several of the speakers was very close to lessons we put forth in Portfolios of the Poor, so directly or indirectly I think our views are becoming more and more mainstream in India.
Although the big MFIs in India are still stuck with a credit-only model (because most of them are not legally entitled to take deposits), much of the conference was about savings and payment systems – a big contrast to the situation a few years ago. . .
Read MoreIn October, David Roodman hit a nerve when he drew attention to the fact that Kiva’s lenders were investing in loans already issued by microfinance institutions, instead of directly lending to specific borrowers, as many Kiva lenders believed. Kiva’s not alone; MicroPlace also has an indirect funding model (as Roodman pointed out). And this isn’t necessarily a bad thing—provided institutions are transparent about it.
In fact, indirect lending is in many ways a smarter model. Microfinance institutions (MFIs) serve essential functions: they’re in the best position to know customers, determined the most favorable prospects, and allocate resources for the biggest impact.
Kiva works with microfinance institutions across the world, and the funds pass through Kiva to the MFIs. MicroPlace, which is owned by eBay and registered as a broker-dealer firm with the Securities and Exchange Commission (SEC), operates under a different model. Investors purchase securities, which in turn fund guarantees or loans for microfinance institutions. The MFIs benefit from having a local presence, and they are best equipped to handle regulatory hurdles. They can also offer assistance to borrowers in completing information and understanding the terms of the loans. Individual lenders like you and me are not in a particularly good position to assess who’s a truly worthy (or unworthy) borrower, and the indirect lending model eliminates obstacles that web-based peer-to-peer lending sites face.
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