Financial Services for the Poor: Reflections on 2011

Our field made good progress last year. Building on the success and the experience to date, and learning from new challenges and insights, we started executing against a broader vision of financial inclusion: A vision that reaffirms the basic tenet that the right access to the right formal financial service helps households, microbusinesses, and the economy as a whole and a vision that recognizes that financial services are not an end in and of themselves but ultimately must improve household welfare. Access to formal financial services needs to give poor families a broader range of choices to build assets, smooth consumption, manage risks, and as a result make them better off than when they have to use the traditional, informal alternatives that are often limited, unreliable, and costly.

Against that broader vision, 2011 saw progress in five important areas.

1. Better understanding demand
Perhaps the most important insight from the local microcredit market crises of the previous years is that, as a field, we had likely over-estimated the demand for the type of small, short-term working capital loans that started the microcredit revolution. We did not understand the true nature of the demand, often because we simply did not know enough about our clients’ lives, their behaviors, their needs, and their means of managing their money, including their use of other services beyond microcredit. The classic loans for capital-constrained microentrepreneurs who earn a steep return on marginal capital and thus can repay the relatively high interest rates and reinvest to grow out of poverty remain important for many. But not every borrower is a microentrepreneur, and not every credit need is for short-term, high-margin activities.

As a field, our efforts to better understand clients gained momentum last year, with practitioners and researchers helping us to better analyze client needs and behaviors, donors and funders supporting this work. More needs to be done going forward to translate this better understanding into action, but we are on the right path.

2. Advancing the imperative of responsible delivery
Our field has embraced the imperative of responsible finance and last year accelerated its ongoing efforts. The Smart Campaign, which by mid-2011 had 2,200 signatories, began shifting from its focus of securing endorsements of the Client Protection Principles to implementing them at the country level. The Social Performance Task Force (SPTF), the industry standard-setter for social performance reporting and management, agreed on a core set of 11 reporting indicators that have been integrated into standard industry reporting captured by the Microfinance Information Exchange (MIX). Responsible finance has also become a bigger priority for investors in inclusive finance. More than 50 of them signed the Principles for Investment in Inclusive Finance (PIIF). These principles promote responsible investment, which aims for positive social, environmental, and governance impact and for a balance between long-term social and risk-adjusted financial returns that recognize the interests of clients, retail providers, and investors.

3. Capturing the opportunities from business model innovation
We are increasingly learning that the most promising business model innovations to meet these types of challenges are those that build on existing consumer patterns and leverage infrastructure that already exists or is developing in parallel—for example, retail outlets in Latin America or mobile phone networks in Africa, where most people today use mobile phones for day-to-day activities and transactions.

One important insight on the supply side is that provider economics are very different across products. These differential economics make it very unlikely that one set of providers can deliver the broader range of services that poor households and microbusinesses in the informal economy seek. What we need instead is an ecosystem made up of a variety of financial services providers that work together. Such an ecosystem needs, among other things, a large number of access points close to or within the community, a payment transaction infrastructure, and a smaller number of/a few well-regulated entities at the backend that can aggregate and manage financial risks.

Last year saw new exciting partnerships develop, and we need to continue our push to experiment and learn what works best. Reaching the 2.7 billion working age adults currently excluded from formal financial services will not happen without innovation and ingenuity.

4. Benefiting from enabling policies and regulation
Globally, our field benefited from strong political and regulatory interest and support. The G-20 made financial inclusion one of the key elements in its multi-year development agenda. The global financial services standard-setting bodies that give guidance to national-level policy makers, regulators, and supervisors identified for the first time financial exclusion as a critical risk that could destabilize a country’s economy and started incorporating the principle of proportionately into their work, thereby acknowledging the realities of low-income consumers and low-capacity countries.

At the national level, an increasing number of countries adopted national financial inclusion strategies. Governments in particular recognized the virtuous cycle that their own payment interactions with poor households in the informal economy could catalyze: a financial system that reaches all citizens enables more effective and efficient social welfare payments, for example, when those payments are made electronically. At the same time, government deposits into an easily accessible, general purpose account can bring poor families for the first time into the formal financial system and reduce traditional barriers to access. Recognizing this dual benefit, an increasing number of social payments schemes around the world shifted away from traditional to modern payment methods.

As a next step, we need to better understand how these novel approaches benefit consumers, so that they start using the new-found access to their best advantage, rather than withdrawing cash immediately out of mistrust of the system.

5. Deepening the consensus on the broader benefits of access to financial services
Lastly, progress over the past year also sharpened our understanding of the impact of our work. A growing body of empirical evidence shows that access to the right product at the right time helps households build assets, generate income, smooth consumption, and protect them from risks. An inclusive financial system allows for more effective and efficient welfare interventions. And at the macro level, deeper financial intermediation in an economy leads to more growth, and less inequality. Access to financial services is an important element for the success of an economy and the well-being of its citizens.

As a global public good, CGAP aims to generate and share practically relevant knowledge on how to advance access to financial services for the poor. Our work helping the community better understand clients’ needs and behaviors is a core input for product and business model innovations that are aimed at proving new concepts to reach more people, with a broader range of products, at lower costs. Our research and advice on best practice policies are helping policy makers create an environment in which financial access for the poor is appropriately supported. Most important, the CGAP system builds into its work direct and immediate peer learning among its members to ensure we remain collectively at the cutting edge.

Advancing access to financial services for the poor remains an important part of the development agenda. We are humbled to be part of this critical and growing endeavor. And we are grateful to our partners for their support and confidence in our work. We end the year building on what we have learned and renewed in our commitment to advance our mission in 2012.