Introduction – Words from InFiNe.lu
After a selection process, InFiNe.lu awarded 1 scholarship to one of its member, Kaspar Wansleben, Executive Director of LMDF, to attend the 5 days Executive Program “Rethinking Financial Inclusion” organised by the Harvard Kennedy School for Government from 10-15 May 2015. In this blog, Kaspar Wansleben will tell us what are the main topics/issues on financial inclusion covered during the program.
Day 0 : Did you know…
This Blog covers the 5 day Rethinking Financial Inclusion programme organized by the Harvard Kennedy School of Government from 10 – 15 May 2015.
The Harvard Financial Inclusion Course is starting Sunday evening to discuss the big question of what we are after when we speak about financial inclusion. In preparation to the debate participants were encouraged to read a number of background papers. Here some key facts what I found interesting:
ACCION Center for Financial Inclusion : Financial Inclusion: What’s the vision ?
The CFI provides a definition of financial inclusion built around client needs: Every potential client should have access to quality financial services at affordable prices, mostly through private providers. This focuses the discours on demand, what is needed rather than what is it that we can offer. CFI sets itself the goal of full financial inclusion by 2020, a target which seems overly ambitious. A case study on what that would mean for Mexico, concludes that despite rapid expansion of consumer credit and technology such as mobile and agent banking, Mexico is unlikely to reach financial inclusion by 2020.It is interesting to note why. Whereas regulators (and a certain number of private enterprises I presume) are very excited about technology to bridge the gap to the excluded, reality – and barriers – are more complex. CFI concludes that “the financial inclusion challenge cannot be solved by delivery channels alone”, an important point to retain.
Measuring what we are after: The role of the G20 Financial Inclusion Indicators
The G20 agreed on the so-called “Basic Set” of data measuring financial inclusion. The indicators draw on three main data sources: The IMF Financial Access Survey (collected by national Central Banks), the World Bank’s Findex survey of clients and potential clients and the World Bank’s Enterprise Survey.
It attemps to measure three things: (1) access to financial services, (2) usage of these services and (3) the quality of the services. The third dimension is certainly hard to measure and is not yet fully reflected in the dataset attached. Click here to see some of the key data findings (derived mainly from the 2012 FINDEX, which means the survey took place in 2011 and does not reflect the latest dataset released some weeks ago).
In Latin America
Eastern Europe and Central Asia
India
Sub-Saharan Africa
Enough of a rapid walk through the current state of financial inclusion. More to come tomorrow on how a 51 strong group of leading academics, practitioners and regulators frame the issue and discuss alternative lending models.
Kaspar Wansleben, 10 May 2015
Day 1: Framing the issue and how technology looms large
Today, the group discussed how to frame the issue of financial inclusion noting three different levels: (1) access, (2) usage and (3) benefits. Whereas international definitions such as the one I wrote about yesterday focus very much on access (number of accounts created, population remaining without a bank account) or usage (how many transactions), we will ultimately have to assess success from the client’s perspective, i.e. which products have the largest impact for which group of users. The example of microfinance was used as a cautionary tale in not to lose sight of what we want to achieve and what the evidence tells us we are actually achieving. Financial inclusion will be a long journey with continuous innovations at the margin.
We then went back to basics. Financial intermediation is essentially about linking ideas to capital and the challenges faced in the process. Two key agency challenges arise: How to screen good ideas / entrepreneurs who are able, honest and willing to undertake projects and how to monitor the entrepreneur. The use of collateral and credit scoring by banks to address these issues has significant weaknesses particularly for financial inclusion. A more entrepreneurial, venture capital approach implies very high costly. Microfinance has brought innovation but at a price: Often microfinance provides loans to relatively safe and stable business at the detriment of more entrepreneurial ventures.
Technology may play an increasing role in closing the gap between ideas and capital. Managers of three fintech companies presented their models:
The day closed with a dinner with Karen Gordon Mills, former Administrator of the U.S. Small Business Administration sharing her view of the credit gap for SMEs in the USA. Interestingly technology featured large in her view of the current state of the market with banks having given up on loans below $250k, a niche filled up by Lending Club, Kabbage and the like.
Tomorrow we’ll look at behavioural insights and big data for financial inclusion, so tech is everywhere…
Kaspar Wansleben, 11 May 2015
Day 2: Insights from behavioural economics: Poverty makes you dumb
Today we looked closer at the perspective of the financially excluded. The key lecture was given by Sendhil Mullainathan , Harvard Economics Professor specialized on behavioural economics on the topic of the “Psychology of Scarcity”.
Mullainthanan’s theory is that poverty is a phenomenon of scarcity, mainly of financial resources. Poor people therefore worry about money constantly. This means that they take more care than rich people when spending it but it also means that worrying about money (as a proxy for the need to buy food, pay school fees, invest in the business, pay the money lender etc) occupies a large part of the brain.
Everybody has a certain bandwidth to think about matters and by having to set aside a lot of bandwidth to worry about money and associated needs, there is less bandwidth to think about other things. Numerous tests of cognitive capacity have shown that poor people fear worse than richer people in intelligence tests when they worry about money. Being poor makes you less intelligent! This means poor people are worse at decision making which then impacts their longer term prospects.
An interesting empirical proof of this – quite thought provoking – concept is the “sugar-famer” study. Sugar-farmers in India are relatively well off but receive income once per year after sugar cane harvest. There is always enough to eat well but cognitive tests just before and then after harvest show marked differences in cognitive capacity.
What does this mean for financial inclusion? For one thing it means that being poor means that you are bandwidth constraint. This means access to immediately needed financial products such as emergency loans should be as straight forward as possible. Studies have shown that if documentary requirements are simplified a little bit uptake increases a lot.
The other thing this tells us is that it is easy to talk about rational decision making and that it is not logical if “the poor” do this or that if you are analysing from the comfort of a well-paid position. It is something very different to be in the shoes of a poor person constantly pre-occupied about how to finance the important needs of tomorrow and the day after. There might even be a sensible business case for microfinance institutions to release a small direct advance to reduce the pressure and allow the micro-entrepreneur to dedicate bandwidth to the important question of longer term business prospects and the needs for micro-loans in his enterprise.
Today’s session was certainly thought-provoking, arguing that poverty is a condition which impacts the human ability to think and analyse. This in turn changes the way we should think about the design of financial services.
Kaspar Wansleben, 12 May 2015
Day 3 – Innovation and regulation
Today was very much the day to look at some of the interesting developments, particularly in the field of digital finance. Digital finance is concerned with identfying financial services for low-income people which offer much better value compared to handling cash.
Two different innovations were early movers in this field: Mobile banking and mobile money. Wizzit, a South African company started in 2004 in partnership with a small local bank to offer banking services to the unbanked, both through a mobile phone interface and a debit card. This model believes that by creating a new delivery channel you can bring basic financial services such as savings and transfers to low income people at low costs. An interesting approach yet the model failed to reach scale in South Africa with the company now focusing on other countries.
The second model is the mobile money approach. Pioneered by M-Pesa in Kenya, mobile money consists of “virtual currency” which can be stored, sent and received via a mobile phone. Most importantly Safaricom, the telecommunications company behind M-Pesa developed a vast agent and super-agent network where customers can exchange virtual currency against cash.
It is worth noting that Safaricom’s initial idea was to help microfinance institutions in loan disbursement and collection. After studying how clients use the system they realized that money transfer to friends and family was a much more promissing avenue. Today the average transfer covers a distance of 200km. Another use is to store money while moving around in dangerous areas. Small shop-keepers may convert their earnings into mobile money at the end of the day before they travel home to increase safety. Tavneer Suri is studying M-Pesa in Kenya in detail and her website has many interesting détails.
With many regulators in the room the discussion then focused on how to approach such innovations from a regulatory stand-point. Two positions emerged: A laissez-faire approach where you allow innovation to happen until it reaches significant scale and may become relevant to systemic risk or a much tighter regulation citing the fiduciary responsibility these actors have when handling, in one way or another, the money of the poor. There was no clear consensus on either but M-Pesa would not have prospered in a tighter regulatory environment. This may in part explain why, with 200 – 250 launches of mobile money each year around the globe only some 30 schemes have reaches more than 1 million clients.
The day ended with a cautionary tale. The latest financial household diaries conducted by Bankable Frontier Associates in Kenya revealed that despite M-Pesa and microfinance, households regularly face financial stress which should have been solved by the financial instruments we are all working for. So innovation is good but it needs to arrive where it is needed.
Kaspar Wansleben, 14 May 2015
Day 4 : Impact evaluation or the science of knowing when you are wrong
One key theme during the last days was impact evaluation. Two of the Harvard professors, Shawn Cole from Harvard Business School and Rohini Pande from the Kennedy School are board members of J-PAL, another two, Sendhil Mullainathan and Taveet Suri associated with the Innovations for Poverty Actions whose tag line is “More Evidence, Less Poverty” and finally Asim Khwaja’s extensive impact evaluation work.
This means that we were impregnated with the necessity for a rigorous framework consisting of the (i) the statement of the problem we want to address, (2) the solution design, (3) intermediate outcomes produced by the solutions leading to (4) the ultimate impact we are after as a solution to the initial problem.
The challenge in a complex world is to know whether your project, undertaken with scarce resources, does achieve what it wants to achieve. Social change does not happen in a laboratory which allows you to control the environment. Larger influences such as economic conditions, natural disasters or conflicts happen and may impact your projects significantly. Hence the need to formulate clearly what you are after and evaluate in a way that shows whether your model works or does not work.
An example given was a subsidy program to increase enrolment in primary schools in rural Kenya. In the past a number of approaches have been tested including free school meals, providing school uniforms or administrating de-worming medication. Impact studies were conducted to assess which of these strategies were the most efficient, ie would cost the least amount of money for an additional child in school. The de-worming proved – by a very far margin – to be the most effective method.
In microfinance we are becoming somewhat obsessed with “Randomized Control Trials” (RCTs), a very complex way to measure your impact by providing access to certain kind of financial services randomly to some clients while excluding others. This has shown that micro-credit does increase economic activities but, at least in the short term, does not increase incomes significantly. RCTs are costly because they are complex to execute. One must ensure that the group included (treatment group) and excluded (control group) are pretty similar. And one has to avoid spill-over effects when the separation between treatment group and control group is not as sharp as one would optimally like it to be (ie the neighbour who is part of the control group profits from the increased economic activity of a member of the treatment group). Because of their rigour but also because of the cost involved RCTs are often referred to as the “gold standard” in evaluation.
What is important to note that there are other methods out there which might be worth considering in a project which may not have included the budget for an RCT. There may even be situations where RCTs may not be appropriate, mostly since they require you to be in a position to randomly allow access to your project.
But what is an important intellectual consequence of the approach is to accept that you may have been wrong and that your theory of change, which sounds great on paper, may actually not be the solution to your problem. If we want to become more efficient in the drive to alleviate poverty we must learn from both success and failure. So impact evaluation is here to stay….
Kaspar Wansleben, 17 May 2015
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