Africa Finance Forum Blog

Compact with Africa: Linking Policy Reforms with Private Investment

07.12.2018Omowunmi Ladipo, Financial Advisor, Global Governance Practice - World Bank

This blog was orginally published on the World Bank website - Nasikiliza.

The G20, World Bank Group, International Monetary Fund, and African Development Bank are partnering in a new way to stimulate private investment in Africa

Highlights

  • The Compact with Africa brings together the G20, the World Bank Group, International Monetary Fund, and the African Development Bank to spark greater private investment in Africa
  • Compact countries are Benin, Côte d'Ivoire, Egypt, Ethiopia, Ghana, Guinea, Morocco, Rwanda, Senegal, Togo and Tunisia.
  • The first Compact Monitoring Report shows significant progress implementing macroeconomic reforms, with more work needed to improve business environments and deepen financing frameworks.

Over the past year, many of my colleagues in international development have been asking about the G20 Compact with Africa: What exactly is it? What’s in it for African countries? How is it different from what we’re already doing? How does it complement or further the World Bank Group’s ongoing work?

Their curiosity reflects a growing awareness of the role the private sector must play in helping Africa achieve its development goals. The G20, in addition to its high-profile summits and communiques, undertakes some really important work through several “tracks,” including the finance track consisting of G20 finance ministers and central bank governors. It was via the finance track that the Compact was launched in March 2017 under the German Presidency of the G20. It focuses on macro-financial issues that are foundational for enhancing infrastructure financing and for increasing private investment in developing countries.

The basic premise of the Compact is that macroeconomic stability, an investor-friendly business environment, and effective financial sector intermediation are necessary conditions to spur private investment. Through improvements under these three “pillars,” the Compact seeks to catalyze increased private sector investment in Compact countries and to strengthen links between G20 initiatives, international organizations, and African countries. Under the Compact:

African countries commit to identify needed improvements under the three Compact pillars and to undertake relevant reforms. Many are addressing issues such as domestic revenue mobilization, Doing Business reforms, and easing constraints to SME financing.

The “International Organizations”—the World Bank Group, International Monetary Fund, and African Development Bank—agree to coordinate more closely, step up technical assistance to implement the identified reforms and increase support for infrastructure project preparation.

G20 members commit to encouraging their investors and companies to invest in Compact countries.

Compact teams in each country are the glue holding all this together. They are led by the country representatives of the international organizations and include senior government officials from finance, trade, and investment ministries.

A reform matrix developed by each Compact team prioritizes reforms that Compact partners commit to collectively addressing through a multi-year approach.

During the Spring Meetings, the Bank Group presented the first Compact Monitoring Report to the G20 finance ministers. During this first year, Compact countries made significant progress implementing macroeconomic reforms, with more work needed on business reforms and financial sector deepening. They also have produced brochures making the case for private investment. The report urged Compact countries to undertake more focused diagnostics of sector-specific business constraints and to better prioritize needed reforms. We also recommended that the G20 work more intensively with their private sectors to generate interest about, and eventually investment in, Compact countries.

Three significant features of the Compact separate it from past practice:

  • It is a long-term initiative that reinforces the Bank Group’s Maximizing Finance for Development objectives. Typical Bank Group operations support countries through relatively short-duration investment or development policy operations. By encouraging a constant renewal of reform priorities as country circumstances evolve, the Compact’s open-ended approach makes it easier to sustain attention to institutional reforms over the decade and a half that research tells us is needed for sustainability. The reform matrix therefore offers the Bank Group an additional pathway to supporting reforms.
  • It provides for mutual accountability, continuous check-ins, monitoring, and transparency. Reform matrices are published on the Compact website. Virtual meetings of all the Compact teams and the G20 are held at least quarterly. And there is formal biannual monitoring. All this serves to build confidence about the investment readiness of Compact countries, even in smaller countries seldom mentioned in conversations about African investment.
  • It encompasses the entire continent. Africa initiatives have tended to segment the continent—Arab from Sub-Saharan, Francophone from Anglophone and so on. The Compact embraces Africa in a single initiative, creating conditions for multiple growth poles on the continent centered not just on South Africa in the south but also on countries like Morocco in the north. In this respect the Compact aligns with the ambitions of the recently announced African Continental Free Trade Area and the findings of De-fragmenting Africa that point to enormous opportunities for increased cross-border trade in Africa including in food products and basic manufactures—priority areas for several Compact countries.

The Compact with Africa underscores the idea that development is a joint effort with obligations, commitments, and contributions shared across developing countries, development organizations, and, increasingly, the private sector. In this it is consistent with the pathways now widely understood to be necessary to the achievement of both the Sustainable Development Goals and the Bank Group’s twin goals of eliminating extreme poverty and boosting shared prosperity.

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About the Author

Omowunmi Ladipo is an Advisor in the World Bank Group’s Governance Global Practice where she provides intellectual leadership and strategic policy advice to teams’ working to support improvements in governance arrangements in developing countries. Her special areas of focus are helping countries enhance domestic revenue mobilization and strengthen the effectiveness of their supreme audit institution. Since joining the World Bank Group in 1998, she has worked on public financial management, transparency and accountability issues in numerous countries. She is also a previous Country Manager for Rwanda leading the World Bank’s overall relationship and policy dialogue with the government and overseeing the implementation of the program that supported Rwanda’s Economic Development and Poverty Reduction Strategy. Prior to joining the World Bank Group, Omowunmi was a practicing Chartered Accountant, and partner, in a UK accountancy practice specializing in providing advisory services to clients in the SME sector.

Basel Standards and Developing Countries – a Difficult Relationship

24.11.2018T. Beck, F. Dafe, E. Jones & P. Knaack - Global Economic Governance Programme

The global prudential standards issued by the Basel Committee on Banking Supervision represent major efforts to increase the resilience of banking systems around the world and thus reduce the likelihood of another systemic financial crisis.  But most Basel standards are developed by and for Basel Committee members, representing major advanced and emerging economies only. Regulators in many low and lower middle-income countries are pressing ahead with the implementation of Basel II and III even though these standards are an imperfect match for the risk profile and level of development of their domestic banking systems.

Implementation of the first Basel standard is almost ubiquitous, and the newer two standards – Basel II and III – have found widespread acceptance beyond the perimeter of the Basel Committee. Data from Financial Stability Institute (2015) at the Bank of International Settlements show that 90 out of 100 surveyed non-member jurisdictions have implemented Basel II at least partially or are in the process of doing so. Moreover, 81 jurisdictions reported that they had taken steps towards the implementation of at least one component of Basel III.

Given that Basel standards are costly to implement and are an imperfect match for the risk profile and level of development of financial sectors in many developing countries, why have these countries adopted them? Our 3-year research project combines cross-country panel analysis and in-depth case studies of the political economy of the adoption of Basel II/III to provide important insights into the factors that explain why or why not regulators in developing countries adopt and implement international regulatory standards.

Reputation and Competition Concerns Drive Basel Implementation

Regulators in developing countries do not merely adopt Basel II/III because these standards provide the optimal technical solution to financial stability risks in their jurisdictions. Instead, we find that the following factors also drive the adoption of Basel II/III:

•    Signalling to international investors. Incumbent politicians may adopt Basel standards in order to signal sophistication to foreign investors. For example, in Ghana, Rwanda, and Kenya, politicians have advocated the implementation of Basel II and III, and other international financial standards, as part of a drive to establish financial hubs in their countries. However, adoption can be selective, as seen in the case of Kenya.  While the Central Bank of Kenya (CBK) has sought to improve the regulatory and supervisory framework and has looked to international standards as the basis for these reforms it has implemented the standard approach of Basel II while eschewing the advanced, internal-ratings based components. Similarly, liquidity requirements in Kenya are simpler than those of Basel III but arguably better tailored to the characteristics of the domestic banking system.

•    Reassuring host regulators. Banks headquartered in developing countries may endorse Basel II or III as part of an international expansion strategy, as they seek to reassure potential host regulators that they are well-regulated at home. We see this at work in Nigeria, where large domestic banks have strongly supported Basel II/III adoption at home as they seek to expand abroad. Their regulatory fervour has been met with concerns by regulators who fear that a rapid regulatory upgrade may put weaker local banks in jeopardy.

•    Facilitating home-host supervision. Adopting international standards can facilitate cross-border coordination between supervisors. In Vietnam, for example, regulators were keen to adopt Basel standards as their country opened up to foreign banks, to ensure they had a ‘common language’ to facilitate the supervision of the foreign banks operating in their jurisdiction.

•    Peer learning and peer pressure. Even while acknowledging the shortcomings of Basel II and III developing countries regulators often describe them as international ‘best practices’ or ‘the gold standard’ and there is strong peer pressure in international policy circles to adopt them. In the West African Economic and Monetary Union (WAEMU), for example, regulators at the supranational Banking Commission are planning an ambitious adoption of Basel II and III with the support and encouragement of technocratic peer networks and the IMF. Most domestic banks however have limited cross-border exposure and show little enthusiasm for the regulator-driven embrace of Basel standards.

•    Technical advice from the International Monetary Fund and the World Bank plays an important role in shaping the incentives for politicians and regulators in developing countries. While the Financial Stability Assessment Programs (FSAPs) are designed to merely evaluate the regulatory environment of client countries against a much more basic set of so-called Basel Core Principles, we find evidence that Fund and the Bank motivate regulators in developing countries to engage in Basel II and III adoption, in some cases with explicit recommendations.

Choosing the Optimal Approach: Options for regulators in developing countries

What steps can financial regulators in Low and Middle Income Countries (LMIC) take to harness the prudential, reputational and competitive benefits of global banking standards, while avoiding the implementation risks and challenges associated with wholesale adoption? Our research highlights several options for regulatory agencies in LMICs.  Here we focus on two that relate directly to the findings discussed above.

Identify incentives and distinguish between prudential, reputational, and competitive motives. In deciding whether, to what extent, and how to implement Basel II and III, regulators need to establish not only what is optimal from a technical perspective, but they also need to consider how important reputational and competitive concerns are for their jurisdiction. Our research shows that three groups of domestic stakeholders shape the degree of Basel standards adoption in developing countries: incumbent politicians, regulators, and the banking sector. The incentives of each group of stakeholders may or may not align. Incumbent politicians keen on the promotion of the country as a financial services hub for example may discount the costs that an off-the-shelf Basel adoption entails both for the regulatory authority and the banking sector. On the other side, internationally oriented domestic banks may push the government to embrace Basel II/III not out of prudential concerns but because they expect to reap reputational and competitive benefits, including vis-à-vis smaller domestic rivals.

Tailor Basel standards to national circumstances. Regulatory agencies outside the Basel Committee on Banking Supervision are not bound by its rules and not subject to peer review procedures. Regulators in the financial periphery can use this freedom to adapt global standards to meet domestic regulatory needs, as some but not all are already doing.

More information on the study insights are available on the GEG (Global economic Governance) Programme website.

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About the Authors

Thorsten Beck is Professor of Banking and Finance, Cass Business School; Florence Dafe is a Fellow in International Political Economy at the Department of International Relations at the London School of Economics; Emily Jones is Associate Professor of Public Policy, Blavatnik School of Government, University of Oxford; Peter Knaack is Senior Research Associate, Blavatnik School of Government, University of Oxford.

There is no such thing as impact, but only proof of impact (second part and end)

06.11.2018J-M. Severino, E. Nocquet, E. Debled & C. Bourrin - Investisseurs et Partenaires

The first part of this blog is available here.

II. How can impact intentionality be embedded in investment activities?

To help concretely embed impact intentionality in impact investing activities, we offer a matrix of three I’s: “Impact thesis and targets, indicators and incentives”, which are based on our experience and good practices observed among our peers.

Impact thesis and targets

Any intentional impact approach must entail a preliminary explanation of the common good issue being targeted and answer three main questions: What is the nature and extent of the social and/or environmental problem to be solved? What investing activities should be undertaken to address this issue? What are the expected effects on the target population? This general impact thesis can then be broken down into a set of specific impact objectives to be achieved through the investments and their main stakeholders (clients, employees, subcontractors, etc.).

These impact objectives need to be linked to the new Sustainable Development Goals, as a harmonized international standard. Their credibility, however, relies directly on the investments’ local context, which should be duly documented: as an example, if a job creation objective is fully relevant in some target areas and populations, it may not be in others.

Internally, the team will be united around precise and credible objectives. These goals will provide an objective, clear and measurable ("SMART") basis for selecting investment projects according to their expected impact and allow the team to monitor and evaluate the impact once the investments have been made.

Indicators

We act according to what we measure: to ensure a true impact-led investing strategy, key performance indicators ("KPIs") must be implemented to assess performance all along the impact value chain:

  • From resources committed to investing activity, namely inputs, such as capital invested, level of managerial support (in person-days, weeks..) or number of technical assistance missions organized;
  • To tangible results from the investing activity, namely outputs, such as the number of companies financed and supported, the leverage effect of the investment on other funding sources, the company profitability and growth;
  • To the main changes and effects on the target population at the investee stakeholder level, namely outcomes, such as the basic goods or services provided to local residents or the number of jobs created by investee companies, etc.

Going further would involve a scientific evaluation of impacts, as longer-term outcomes adjusted for what would have occurred anyway (without the investment, as an example). However, impact evaluation in its strictest sense remains a challenge for the impact investing industry, as explained in the next section.

It is also necessary to question the fund’s objectives at two levels:

  • At the portfolio level: which indicators or ratings are relevant and easy to collect for all investments?
  • At the level of each investment: can we define some key company-specific indicators? To go further, it may be appropriate to build an impact-based business plan, specifying impact targets to be achieved year after year or even a comprehensive logical framework, derived from philanthropy projects and development aid methods.

Depending on the objectives and the means available, several forms of evaluation can be considered, including regularly collecting impact metrics, defining practice ratings, and conducting field surveys, as detailed in the next section.

Incentives

An impact investing team’s commitment to impact performance can ultimately be reflected in financial incentive structures. In recent years, several impact funds have developed impact-based incentive structures, which tie "carried interest" or other kinds of team compensation, not only to financial objectives, but also to extra-financial ones. These pilot initiatives come from impact fund managers1 or some of their investors, such as the European Investment Fund, which makes this a pre-requisite for any funding and has developed a specific method.

In practice, these approaches can be complex to implement, especially for "open-ended" funds or for recent funds without an impact management track record. They can also be poorly viewed by some teams, who consider that impact motivation is in no way linked to compensation.

However, these systems include some valuable benefits: they promote a shared impact vision between investors and fund managers and enable impact management to become a key topic for monitoring and governance. They also enhance the reliability of impact measurement systems if combined with external audit mechanisms on target indicators. Finally, they pave the way for similar approaches in investee companies.

III. How to prove impact? 

To complete this overview, a final question remains: what do impact funds have at their disposal to fully carry out their impact objectives in practice? 

Human and organizational resources

Fund managers should be at the forefront when setting up and implementing an impact policy. This is particularly crucial for the investment team, which must fully take into account the impact objectives and ESG criteria when evaluating a deal. Specific and ongoing training on these issues is necessary. Many funds opt for a specifically dedicated team to the management and monitoring of the impact policy to coordinate the approach and share experience.

To go further in the implementation of the impact thesis, a mission-driven form of governance should be implemented. As an example, ad hoc impact committees can be formed to review the fund’s impact management policy and submit proposals with regards to various ESG and impact issues (strategy definition, performance analysis, etc.…). In addition, it is critical to ensure that the Investment Committee possesses impact management skills to challenge the investment projects on these dimensions. This approach has been adopted by I&P for its most recent funds. Finally, external audit mechanisms or certifications, such as GIIRS ratings2, will enhance the reliability and credibly of the impact management system.

Impact tools

A series of hands-on tools should be put in place to facilitate impact monitoring and evaluation. These tools are indeed useful throughout the entire investment process, including during the due diligence phase. Based on its core impact objectives, I&P has, for instance, developed an impact screening scorecard, which allows the team to assess the potential project impact on its key stakeholders (employees, clients, subcontractors) and make sure the project is aligned with the impact thesis of the fund. The scorecard lays the groundwork for further discussion on the project. Impact measurement tools are used to track the results of the portfolio during the investment period. These tools are based on a series of impact metrics, some common to all investees and some specific to each business.

After several years of impact measurement at I&P, we have noted that portfolio-wide aggregated impact indicators have refined our understanding of already well-known impacts, and also represent a powerful communication and goal-setting tool for new funds. They remain, however, insufficient to allow us to understand the complex realities of each partner company: for this we need to go out in the field and meet the company’s employees, customers, producers and distributors to get to know them better and identify actions for improvement. Such field studies are based on a multi-week field survey and provide valuable insight into a company's impacts on its stakeholders and environment.

Unfortunately, due to limited resources, these evaluations can only be conducted on a limited number of investments. These assessments are closer to more rigorous impact measurement and are instrumental to “improving” operations and promoting a culture of learning. However, they do not "prove" any impact in the scientific sense of the term: in the absence of "counterfactuals", the impacts observed on the ground cannot be attributed precisely to the investment made, and their duration, beyond the evaluation period, cannot be measured.

Each fund may develop their own tools, those best suited to their needs and impact objectives. What ultimately matters is how well team members – and investees – are able to understand and make use of/leverage these tools.

Communication and transparency

Last but not least, impact funds should openly communicate on their methodology and impact results, not only for the sake of transparency but also to share good practices among practitioners in the spirit of the sector itself. Without exposing its investees, a fund can communicate the aggregate impact figures collected annually, providing evidence of how these results have contributed to its impact objectives. It is equally important to present how these results were identified and how they have been attributed to the fund.

Let’s not forget here the importance of networking and peer-review: there is much to learn in observing how other funds are proceeding and in sharing what is working.

Conclusion

A famous French saying claims, “There is no such thing as love but only proof of love”.  We could say the same about impact investing.

True impact investment goes well beyond declarations of impact or lofty speeches. As impact investors explicitly aim to contribute to a public cause through the use of a market instrument, their methodological approach consists in first identifying this objective, getting organized and incentivized, and then accepting the consequences, in terms of financial profit (or lack thereof) associated with their objective. In some rare sectors, it is possible to combine high returns with an impact thesis. However, even in such cases, the legitimacy of an impact approach is rapidly weakening as the level of expected profitability is beginning to attract conventional investors. In practice, it is often necessary to make trade-offs between profit and impact. This is why a rigorous process of qualifying, measuring and evaluating results, as well as aligning interests, as presented in this paper, is essential for several reasons: to justify and legitimize the trade-offs between performance and impact that we have just highlighted, to outsource the societal-added value that is at the heart of the impact investing process, and to differentiate between “true” and “fake” impact investors... To present proof of impact is the only proof of true impact investing.

Bibliography

DCED, Juillet 2017, Attribution in Results Measurement: Rationale and Hurdles for Impact Investors
GIIN, 2017, Annual Impact Investor Survey
Novethic, Juillet 2017, Les investisseurs en quête d’impacts. Stratégies, innovations et défis
Issue Brief, GIIN, December 2011, Impact-based incentive structures

 

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1 Examples of impact-based incentive structures implemented in impact funds are included in this issue brief from the GIIN: https://thegiin.org/assets/documents/pub/impact-based-incentive-structures-aligning-fund-manager-comp.pdf

2 b-analytics.net/giirs-funds

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About the Authors

Jean-Michel Severino is the CEO of Investisseurs & Partenaires (I&P) since 2011. He previously held the position of Vice-President for East Asia at the World Bank (1996-2000) and Chief Executive Officer of the French Development Agency (AFD) from 2001 to 2010, therefore heading its private sector investment arm, PROPARCO. He served as a member of the UN General Secretary’s eminent persons’ panel on the post 2015 development agenda. He co-authored “Africa’s moment” and a book on African entrepreneurs with J. Hajdenberg.

Elodie Nocquet, ESG & Impact Director, joined I&P in 2009, where she previously held the position of investment officer. She designed and implemented I&P ESG & Impact management system in 2012, and is now responsible for ESG & impact on a full-time basis. She participated in industry initiatives such as the G8 impact investment task force and the Principles for Responsible Investment. She is trained to the CDC (UK) Toolkit on ESG for fund managers.

Emilie Debled, PR and Business Development Director, is in charge of I&P’s communication, advocacy, partnerships and fundraising. Prior to that, Emilie spent 10 years in major international communications and branding groups Publicis and Havas. Among her clients, Emilie advised leading European financial firms such as Amundi Asset Management, Natixis and African banking, and financial institutions such as BMCE Bank and CDG Group. She earned a Master in Marketing and Communication at EDHEC Business School.

Clémence Bourrin, PR & Communication Officer, joins the team in April 2015 as Communication and Public Relations Officer. She works on I&P’s advocacy and communication campaigns. Prior to this, Clémence notably worked on Fundraising and Communication issues at the World Fair Trade Organization Asia, an NGO specialized in Fair Trade in Southeast Asia. She graduated from a Master in International Development from Sciences Po Paris.

There is no such thing as impact, but only proof of impact (first part)

26.10.2018J-M. Severino, E. Nocquet, E. Debled & C. Bourrin - Investisseurs et Partenaires

I. The impact investment market is taking shape and gaining momentum...

The impact investment market is currently experiencing strong growth, fueled by the keen appetite of investors around the world and by the ever-increasing needs present on the ground. In 2018, 229 organizations took part in the Global Impact Investment Network (GIIN)'s seventh Annual Impact Investor Survey and reported having invested $35 billion into more than 11,000 deals in 2017 alone. Respondents also indicated they expected their business to grow by 8% in 2017, confirming the positive trend anticipated for this market. Many investors have indeed begun rethinking their approach to impact investment, adapting existing tools or creating specific instruments to this new form of financing. Some such examples include the Social Business facility fund created by Proparco, the private sector affiliate of the French Development Agency, and an "Impact Investment" envelope now managed by the European Investment Bank. Others, such as the European Commission and the World Bank, have built major impact investing vehicles from budgetary resources. These dedicated financing tools reflect a growing interest in impact investment on the part of development financial institutions (DFIs) and may be the first steps of large-scale deployment with private capital crowding-in.

Private funders are also showing a growing interest in impact investment. A large number of banking and insurance groups have created and now implement "funds of impact funds". This approach is not only part of their CSR policies, but also responds to a strong demand from subscribers and clients who wish to mobilize their savings for causes with a social and/or environmental impact. A particularly noteworthy initiative in terms of size and approach can be highlighted in this area: AXA Investment Managers, which is currently investing a €150 million fund of impact funds. The AXA IM team, composed of financial professionals and impact and specialized lawyers, is able to study with a cross-cutting approach all impact investment opportunities that may exist today on the market in all sectors and all geographies. Other leading French players, such as Natixis (Mirova) and Amundi are also involved moving in the same direction, with their own terms and conditions.

Along with this growing interest in and proliferation of “impact” initiatives, endless discussions in the world of impact investing are being had to try and define what "impact" is. In fact, it is very difficult to define it precisely because there are as many forms of "impact investment" as there are impact funds. Each impact team determines a cause of general interest to which it intends to contribute, defines an investment strategy to support a target - often under-served - and designs an impact measurement system adapted to its targeted issue. Finding a common framework for measuring impact has seemed to be the answer to these definition problems. But here too, each impact thesis has its own indicators and its own impact measurement system.

Impact Washing - A Threat to the Impact Industry

As impact investment has gained in popularity, the temptation has become ever greater for profit-oriented public or private funds to complete their investment thesis with a speech on their social impact. In some cases, companies declare themselves impact vehicles in order to optimize their chances of attracting investors.  These practices are known as “impact washing”. In the vast majority of cases, the impact speech consists of a presentation of the fund’s contribution to employment, growth, or a particular sector or theme. However, these are typically impacts that any well-managed company could generate. Well-managed companies indeed have positive net impacts on society and the economy: if this were not the case, there would be no legitimacy for the capitalist or liberal system. To qualify such effects as “impact investing” is misleading: it implies that there is no trade-off, in any case, between profit and impact - and therefore that investments with weak returns are simply bad investments. Defining a common framework is the key challenge that will be faced by the impact investment market and all of the actors that drive it. Making a clear distinction between serious, rigorous and resolutely oriented public interest initiatives and those which tint conventional or responsible investment strategies with the polish of impact is vital to the integrity and legitimacy of true impact investment.

We are at a critical stage in the development of the sector. In order to enable it to grow on sound and solid foundations, it is essential to provide it with common, concrete and measureable frameworks.

The Global Impact Investing Network (GIIN) defines impact investments as “investments made in companies, organizations, and funds with the intention of generating a social and environmental impact coupled with a financial return.”

Intentionality is at the heart of the definition of impact investing. However, intentionality is by definition of a declarative nature and does not necessarily translate into action. The purpose of this article is to provide a frame of reference for those who wish to make their intentionality more tangible, to adhere to the transparency and credibility of the sector as a whole and to make it more difficult to use the claim of impact investing as a trendy marketing strategy…

Our goal is to:

  • Enable a better understanding of the sector through an open and transparent approach
  • Share good practices and proven tools, promote their harmonization and increase the professionalization of actors
  • Mobilize additional funding towards impact funds by promoting better knowledge and ownership of backers.

II. How can impact intentionality be embedded in investment activities?

To help concretely embed impact intentionality in impact investing activities (See Annex 1), we offer a matrix of three I’s: “Impact thesis and targets, Indicators and Incentives”, which are based on our experience and good practices observed among our peers.

The second part of this article will provide more details on the best ways to integrate impact into investment projects, and how this impact can be proven.

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Investisseurs & Partenaires is an impact investment group dedicated to African Small and Medium Enterprises. Since its creation in 2002, I&P has invested in more than 90 companies, located in 16 African countries and operating in various sectors of activity (health, transport, microfinance…). These enterprises create local added value and long-term employment, and generate important social, environmental and governance impact. Created by Patrice Hoppenot in 2002 and headed by Jean-Michel Severino since 2011, the I&P team comprises about fifty collaborators in Paris and in its seven African offices in Burkina Faso, Cameroon, Côte d'Ivoire, Ghana, Madagascar, Niger and Senegal.

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About the Authors

Jean-Michel Severino is the CEO of Investisseurs & Partenaires (I&P) since 2011. He previously held the position of Vice-President for East Asia at the World Bank (1996-2000) and Chief Executive Officer of the French Development Agency (AFD) from 2001 to 2010, therefore heading its private sector investment arm, PROPARCO. He served as a member of the UN General Secretary’s eminent persons’ panel on the post 2015 development agenda. He co-authored “Africa’s moment” and a book on African entrepreneurs with J. Hajdenberg.

Elodie Nocquet, ESG & Impact Director, joined I&P in 2009, where she previously held the position of investment officer. She designed and implemented I&P ESG & Impact management system in 2012, and is now responsible for ESG & impact on a full-time basis. She participated in industry initiatives such as the G8 impact investment task force and the Principles for Responsible Investment. She is trained to the CDC (UK) Toolkit on ESG for fund managers.

Emilie Debled, PR and Business Development Director, is in charge of I&P’s communication, advocacy, partnerships and fundraising. Prior to that, Emilie spent 10 years in major international communications and branding groups Publicis and Havas. Among her clients, Emilie advised leading European financial firms such as Amundi Asset Management, Natixis and African banking, and financial institutions such as BMCE Bank and CDG Group. She earned a Master in Marketing and Communication at EDHEC Business School.

Clémence Bourrin, PR & Communication Officer, joins the team in April 2015 as Communication and Public Relations Officer. She works on I&P’s advocacy and communication campaigns. Prior to this, Clémence notably worked on Fundraising and Communication issues at the World Fair Trade Organization Asia, an NGO specialized in Fair Trade in Southeast Asia. She graduated from a Master in International Development from Sciences Po Paris.

In Kenya, Financial Inclusion Shifts from Access to Advanced Use

15.10.2018B. Cheronoh, Research Associate & N. Van de Halle, Program Manager - InterMedia

This blog was originally published on the CFI Website.

New data shows mobile money is increasingly becoming a gateway to more advanced financial services in Kenya.

Financial access in Kenya is already very high, especially when compared to other countries in Africa and Asia. In this setting, the momentum around expanding access has plateaued, but a new narrative is taking hold – around deepening engagement with financial services, more active use, and use of a wider range of more advanced services. Although there was no increase in the share of the population that holds a registered financial account, the 2016 Financial Inclusion Insights (FII) data shows that financial engagement is becoming more meaningful for those customers who are already included.

More specifically, in 2016 almost 7 in 10 Kenyan adults held a registered account with a formal financial institution. Mobile money continued to lead in terms of access and account registration (Figure 1). In fact, approximately 97 percent of those who had a financial account in 2016 had a mobile money account – sometimes in addition to a bank and/or microfinance account. While growth in the number of registered users plateaued, advanced use of a registered account increased in 2016 (Figure 2). Such advanced usage includes saving, borrowing, paying bills, and other activities beyond person-to-person (P2P) transfers and cash deposits and withdrawals. Savings was the most common advanced use case for both bank and mobile money accounts, followed by bill pay and receiving wages. These findings show that mobile money services can fill a range of needs beyond P2P payments.

                                              Figure 1: Click here

                                              Figure 2: Click here

As the FII team examined these high-level numbers and dug deeper into the 2016 data, we identified several other important takeaways regarding the evolution of financial inclusion in Kenya:

Mobile money continues to lead other services at providing financial access and use cases, and is increasingly becoming a gateway to more advanced services, such as savings and credit, provided by banks that are linked to mobile money accounts on the backend. In 2016, mobile money access among adult Kenyans was 81 percent while bank access was only 31 percent. Similarly, 67 percent of adults were registered mobile money account holders while only 28 percent held accounts registered directly with a bank. Easy accessibility to mobile money points-of-service (PoS) relative to banking PoS locations has likely contributed to the success of mobile money. Almost 62 percent of Kenyans surveyed said they live within a kilometer of mobile money agents, while only 31 percent and 14 percent of Kenyan adults were within a kilometer of a banking agent and a bank branch, respectively.

The landscape of providers and products is changing rapidly as banks make inroads towards attracting and retaining users through innovative mobile money platforms and partnerships. Over the last few years, banks in Kenya have resorted to innovative ways of expanding mobile-enabled financial services, including through two different models: partnerships with mobile network operators (MNOs), and running a Mobile Virtual Network Operator (MVNO), which allows them to offer all of their financial services through a mobile platform. These new models allowed services such as Equitel and KCB M-Pesa to attract active registered mobile money account users who have historically used other mobile money products, such as M-PESA and M-Shwari, and can now use those provided by their banks.

Mobile money adds value to users’ financial lives by providing a convenient credit resource and savings utility. Our annual survey found that use cases for mobile money ran the gamut from facilitating payments, particularly P2P, to supporting borrowing and saving activities. In fact, approximately eight in ten Kenyan adults were savers in 2016, and out of which 54 percent used mobile money as a mode of saving. Similarly, more than six in ten adults had borrowed money, and 26 percent of which used mobile money as a loan source, compared to only 12 percent for banks.

Despite these clear advantages and use cases, FII data indicates that some aspects of mobile money user experience could still be improved. In 2016, mobile money users’ most commonly cited challenges included service downtime and mobile money agents’ lack of cash flow.

Even with these developments, Kenyans continue to express a demand for greater access to credit and historically underserved populations continue to be excluded from formal financial services. Overall, levels of financial inclusion are lower among women, rural populations, and those living below the poverty line compared to their male, urban, and richer counterparts. The largest gap in active registered financial accounts (amounting to 27 percentage points) was between those above and those below the poverty line. This gap could in part be due to the fact that these populations have lower levels of mobile phone ownership and financial capabilities. For instance, FII data shows an almost 20 percent difference in advanced mobile phone use between those above and below the poverty line (90 percent versus 73 percent, respectively).

These gaps in Kenyans’ engagement with formal financial services could be reduced by programs that focus on providing Kenyans with identity cards. The number of Kenyan adults who held the necessary ID to open a financial account dropped from 91 percent in 2013 to 78 percent in 2016. Tellingly, not having the required state ID was the main reason cited in the FII Survey by men and women for not registering a mobile money account and the second most common reason for not registering a bank account. In April 2016, the government announced a plan to employ 1,200 additional registration clerks to help Kenyans acquire identity cards before the 2017 general election. It remains to be seen what effect targeting this barrier will have on the 2017 FII data.

Boosting financial literacy is necessary to ensure that newly financially included Kenyans are prepared to use financial services successfully. FII found that only 17 percent of Kenya’s adult population was financially literate in 2016. As financial products proliferate and become more complex, it is especially important that users and potential users have the skills they need to navigate their options and use services in a way that provides welfare benefits, rather than exposes them to consumer protection risks. It is worrisome for instance that according to the FII data almost one in five borrowers in Kenya did not know their interest rates, or the cost of their loans.

Even as Kenya continues to progress towards improved financial inclusion, driven by mobile money and deepening engagement with advanced services, more must be done to ensure these advances are truly inclusive and result in meaningful outcomes for all Kenyans. The FII team looks forward to seeing how programs targeting barriers, such as financial literacy and phone ownership, and how innovative partnerships between banks and MNOs may continue to impact the data in the coming years.

What recommendations for accelerating financial inclusion in Kenya do you derive from InterMedia’s Data Fiinder? We’d love to hear from you.

For more information regarding the FII team’s research in Kenya, read the 2016 Kenya Annual Report here, or contact Beatrice Cheronoh, Research Associate, Financial Inclusion Insights.

Financial Inclusion Insights is a research program funded by the Bill & Melinda Gates Foundation and designed to build meaningful knowledge about how the financial landscape is changing across eight countries (Bangladesh, India, Indonesia, Kenya, Nigeria, Pakistan, Tanzania and Uganda).

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About the Authors

Beatrice Cheronoh is a Research Associate in InterMedia and is based in Nairobi office. She currently assists with InterMedia's Financial Inclusion Insights (FII) survey in Kenya, as part of FII's multiyear research program in eight countries in Africa and Asia, conducted on behalf of the Bill &Melinda Gates Foundation. Her responsibilities include data management, data checks and conducting analysis with SPSS. She has experience in data processing and analysis, and a focus on socio-economic research. Beatrice is currently pursuing a Master of Science in Social Statistics from the University of Nairobi, and she earned her Bachelor of Science in Agricultural Education and Extension from the same university.

Nadia Van de Halle currently manages financial inclusion and consumer insights research and strategy for InterMedia, a global research firm with offices in Nairobi and Washington, DC. Previously, she managed Africa initiatives at Accion’s Center for Financial Inclusion. She has an expertise in consumer protection and standard setting for social impact and has a successful track record of fundraising and fieldwork in over ten countries. Nadia has a Masters in economics from Johns Hopkins University’s School of Advanced International Studies, BA in Political Science from the University of Pennsylvania.

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