More than Semantics: From “Microcredit” to “Financial Inclusion

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

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.