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The story of inclusive banking

25.10.2016Prof. Hans Dieter Seibel, Professor Emeritus, Cologne University

First published in the European Microfinance Platform Autumn 2016 Newsletter

In 1963 I went to Nigeria to seek the indigenous roots of what I expected, alas, to become the leading industrial nation of Africa. In my interviews with workers about their saving behavior, I found that many saved in a saving club, called esusu in Yoruba. I learned that the esusu dates back to the 16th century when it was carried by Yoruba slaves to the Caribbean where it is still widespread.

This was my first encounter with informal finance: savings-led! Later in Liberia I came across similar indigenous cooperatives in all 17 ethnic groups, including savings and credit groups and working groups as well as similar community-based arrangements. In towns, rotating savings groups predominated; in villages where regular incomes were rare people formed credit funds (ASCAs), with small, mostly weekly equity contributions - without a gender bias. They survived the civil war and are now, half a century later, to be included in an IFAD project.

With the ASCAs in Liberia I felt at home: Urmitz is everywhere. Urmitz is my home village where, in 1889, some 15 villagers formed a self-help group. During the same year a credit cooperative law was enacted, the group joined the Raiffeisen movement, kept growing, and eventually, in 1934, came under the banking law: as a Raiffeisen bank.

This experience inspired me, from my new base in Princeton NJ, to submit a proposal to USAID to help build a grassroots financial system on indigenous foundations. Unfortunately, the proposal, in 1969, was a few years early; it was only in 1973 that USAID sponsored the Spring Review on Small Farmer Credit, a scathing report of targeted credit and credit-driven agricultural development banks (AgDBs).

From microcredit to the microfinance revolution

I then watched with astonishment the rise of the microcredit movement, entering into the void left by declining support to AgDBs. For the new credit NGOs suffered from similar flaws as the AgDBs: donor dependency, credit bias, lack of self-reliance and profitability, and the absence of appropriate regulation and supervision. And they added a gender bias.

Recognizing these deficiencies led to a paradigm change around 1990, the "microfinance revolution", in which two of the authors were involved (also in coining the new term, microfinance). This paradigm shift spurred the reform of existing, and the creation of savings-led new, MFIs, among them inclusive (micro) finance banks.

Two centuries of inclusive savings and cooperative banking: the German experience

This paradigm change has a long prehistory. Since the 17th century, Europe experienced tremendous increases in poverty, creating new displacements and upheavals: traditional safety nets broke down, mass poverty spread. In Germany, preceded by pawnshops, widows'- and orphans' funds, a new breed of local institutions began to evolve around 1800: savings funds (Sparkassen) placing the poor at the center: foremost as savers. The Sparkassen offered special incentives to the poor: free doorstep collection services and stimulus savings interest rates. Their numbers and funds increased rapidly, enabling them to extend their outreach and offer credit to "the industrious and enterprising", such as craftsmen. From early on, they thus were inclusive, with services to the poor, non-poor, and eventually SMEs and the city or district for community investments. Two centuries later, Sparkassen serve >40 million customers (50% of all residents of Germany), with €1.2 trillion in assets (2015).

A different history of microfinance started around 1850 with the development of self-help groups (SHGs) - savings and credit associations, owned and governed by their members. The first urban SHG was initiated by Schulze-Delitzsch in 1850, the first self-reliant rural SHG by Raiffeisen in 1864, soon organized in separate federations of respectively Volksbanken and Raiffeisenkassen (merged only in 1974). After 160 years of evolution, they now serve >30 million customers (including 18 million members), and €800 billion in assets (2015).

The savings and cooperative banks are two of three pillars of the German banking system, providing inclusive universal banking services to all segments of society, including MSMEs. Self-organized federations, central funds and auditing apexes, and appropriate regulation and supervision, have played crucial roles in their development. Government has been kept at bay. Ultimately, their strength lies in the mobilization of local savings for the local economy: the foundation of their crisis resilience.

What role for government in cooperative banking?

The case of India and Vietnam Since around 1900, the German credit cooperative model has spread around the world. In two of our case studies, India and Vietnam, we examine the role played by the state in that process. In 1904, the British Raj, inspired by Raiffeisen, introduced the Co-operative Credit Societies Act of India. By the mid-1920s, this had given rise to some 50,000 self-reliant credit cooperatives, backed by a network of cooperative banks. But ultimately, the Indian state governments played a destructive role: by taking over the operations of the cooperatives rather than providing a regulatory operating framework. By 2006, more than half of the 106,000 credit societies were insolvent, and more than one-quarter of the 1,112 cooperative banks reported losses. Reforms are struggling: of a sector which is too big to fail and too sick to heal.

Our contrasting story of Vietnam starts with the collapse, in the 1980s, of the socialist command economy and its cooperatives. In the early 1990s, the government launched a fresh credit cooperative initiative as part of a market economy, based on the Raiffeisen model. These People's Credit Funds (PCFs) have become one of the most impressive credit cooperative movements. PCFs are prudentially regulated and supervised by the central bank (SBV), which has not shied from enforcing compliance. They now profitably serve over four million clients (2014), having successfully weathered both the Asian financial crisis of 1997/98 and the global crisis of 2008. Most importantly, in contrast to India, the PCFs have not served as a tool of political favoritism. 

Two inclusive commercial banks: Centenary and BRI

Finally, I am presenting two full-fledged inclusive commercial banks, one from Africa and one from Asia. Both are the product of transformations. Centenary Bank in Uganda started in 1985 as a "trust fund" of the Catholic Church.

Century-old Bank Rakyat Indonesia (BRI) dates back to a member-owned Volksbank (bank rakyat) in the 1890s, later transformed into a government-owned national bank. In 1969 it was commissioned to set up a network of village units, disbursing subsidized agricultural credit, in addition to BRI's main banking business. Their performance declined rapidly, and by 1982, BRI faced a choice: reform or close the units.

Technical assistance played a crucial role in transformation of both. Centenary was assisted by the German Savings Banks Foundation (SBFIC) together with IPC. They provided a highly effective cashflow-based lending methodology and MIS, combined with incentives for staff and borrowers. As microsavings continued to grow, exceeding the lending capacity of microcredit, Centenary added SME lending. It now profitably serves 1.3 million customers (2012), calling itself "Uganda's leading Microfinance Commercial Bank".

BRI was assisted by the Harvard Institute for International Development (HIID) to transform the village units into microbanking units as of 1984. Their success has rested on two products, both with commercial rates of interest: voluntary savings with positive real returns and unlimited withdrawals; and general credit, open to all and available for any purpose. These two products have made the microbanking units the largest national microfinance network in the developing world, resilient to the crises of 1997/98 and 2008. BRI, an MSME bank, currently serves 53 million customers (2015) with by far the largest outreach of any bank across the Indonesian archipelago.

The two banks, in vastly different countries, have much in common: individual lending, opportunities for graduating to SME loans, and genuine inclusiveness, excluding no one. They may be indicative of the future of inclusive finance, pointing the way to a new stage of institutional development - similar perhaps to the evolution of savings and cooperative banking in Germany.

See From Microfinance to Inclusive Banking, by R.H. Schmidt, H.D. Seibel, and P. Thomes (Wiley-VCH 2016), http://eu.wiley.com/WileyCDA/WileyTitle/productCd-3527508023.html

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About the Author

Hans Dieter Seibel is a professor emeritus at Cologne University. He is specialized on microfinance and microbanking, linkages between informal and formal finance including digital linkages of SHGs with banks/MNOs, agricultural development bank reform, SME development, M&E, and sociocultural system research. In the 1980s, he designed the linkage banking program with GTZ, FAO and APRACA and was team leader of the first pilot project in Indonesia. In 1999-2001, he was Rural Finance Advisor at IFAD and author of its Rural Finance Policy. He also is a founding board member of the European Microfinance Platform (2006-2015).

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 4

11.10.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this fourth instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at the potential of digital finance to achieve broad financial sector development in countries facing fragile situations.

In case you missed it, you can read parts One, Two and Three.

What is Special about Digital Finance?

The number of individuals with mobile accounts in fragile countries is higher than the number of individuals with bank accounts. But what explains the rapid and broader adoption of digital finance in fragile countries?

Mr. Laurent Marie Kiba of Orange Senegal noted that two preconditions are needed for the rapid adoption of mobile finance. First, that the technology is available in fragile countries. Fourth generation wireless technology (4G) is available in Guinea Bissau. Second, mobile payment is no longer a project as populations have adopted it. Mobile operators recognize that mobile payment services are a branding tool and this helps strengthen the adoption of mobile financial products. Mr. Mathieu Soglonou of UNCDF stressed that mobile technology is a unique solution because it allows fast, large scale, secure transactions in a market environment and is a resilient technology.

Comparing mobile money with traditional brick-and-mortar banking, Ms. Aurélie Soulé of GSMA identified three benefits that mobile money offer in fragile countries. First, mobile money can be deployed rapidly because the associated capital expenditure is lower. Opening a branch can cost up to $400,000 and an ATM can cost $20,000 compared to no cost for a mobile agent. Second, proximity is high as the network of agents is in the community. And third, the security costs of moving money to branches, especially in countries with a sparse population, are not as relevant.

Going forward, solutions need to be developed to go beyond mobile money and offer a broad range of services akin to what a traditional branch would offer. Regulatory constraints such as those associated with KYC can be overcome with technology such as digital fingerprints. Crowdfunding solutions including with the diaspora and equity participation are options that should be considered.

Are the promises of digital finance exaggerated? Mr. Sasha Polverini of Gates Foundation noted that there is very little scale and less coverage in rural areas. He stressed that digital finance can be an effective solution for financial inclusion and development. Its success, however, depends on the nature of the crisis we are facing. Are we facing an economic crisis, a human crisis, a migrant crisis? What are the sources of fragility? The impact of digital financial services will depend on the answers to these questions. While many participants agreed with this observation, they noted that although the two can overlap, it was important to distinguish between financial sector development in fragile countries and financial inclusion in crisis situations.

Many participants asked about policies to reach the "last mile" of cashless transactions for the poorest. Panelists noted that we are still far from the true last mile although the acceptance of digital payments is progressing. It was noted that governments are big payers and having them adopt digital payment would be a big push. Mr. Kiba mentioned the experience of an oil company that managed to have 40 percent of purchases at its gas stations paid digitally. _________________________________________________________________

You can download all presentations on the conference website.

You can view a selection of photos here.

You can watch the conference in our YouTube channel here.

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 3

26.09.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this third instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference, including the role for governments, financial institutions and investors.

In case you missed it, you can read here Part 1 and Part 2.

What are governments doing to address the challenges of financial sector development?

Participants noted that macroeconomic stability is a precondition for financial sector development (FSD). Against this background, fragile countries have elaborated FSD strategies along with or including strategies for microfinance and financial inclusion. FSD strategies typically start by "cleaning up" the banking system to address nonperforming public banks. Bank resolution typically takes the form of public asset management companies ("good" vs. "bad" bank) and privatization. FSD strategies also aim at addressing the lack of product diversification by encouraging new activities such as leasing and supporting the development of capital markets. FSD strategies also focus on broadening access to credit, including through mobile finance.

The existence of an FSD strategy is not a guarantee of success however and participants discussed the importance of strategy implementation. In this regard, Mr. Koné (Government of Côte d'Ivoire) stressed the need to identify needs and formulate strategies, involve key stakeholders, and execute FSD strategies while leveraging strong leadership. As an example, a new financing lease law was passed in Côte d'Ivoire within 5 to 6 months from the time of the elaboration of the draft law to its passing in parliament.

What Role for financial institutions and investors?

Private sector participants stressed that they should be consulted and that they are too often ignored in spite of their impact. Mr. Koroma (Union Trust Bank) noted the role of banks in reducing employment and contributing to economic growth. For instance, opening a branch involves expensive decisions in terms of staffing, telecommunication and electricity infrastructure. Fragility can also be an opportunity for capacity building as for instance when local staff is trained by domestic firms and multinationals.

Many participants highlighted that the difficulties inherent to operating in a fragile environment can be managed. Mr. Lodugnon (Emerging Capital Markets) noted that for private equity firms and regional banks, a portfolio approach can help in reallocating capital in support of fragile countries when there is a shock (for instance after a Boko Haram attack in Chad or after the Ebola pandemic in Liberia). Similarly, Mr. Diarrasouba (Atlantic Business International) explained the very difficult operating environment in Côte d'Ivoire during the conflict. There were de facto two governments and banks, including the regional central bank's national agency, were being nationalized. ATMs were being attacked and banknotes in agencies needed to be stored outside the central bank agency. Bankers were not allowed to travel out of the country. He noted that in such a situation of "force majeure," regulators should be supportive to banks. This was for instance the case recently in Mali where the repatriation of banknotes from the north of the country to the south was facilitated by the regulator. In contrast, Mr. Diarrasouba noted that bank regulation remained unchanged during the Ivorian conflict although clients were accumulating government arrears and asset quality was deteriorating.

It was also noted that the private sector could play an important role in helping intermediate remittance flows to fragile countries.

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You can download all presentations on the conference website.

You can view a selection of photos here

You can watch the conference in our YouTube channel here.

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 2

05.09.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this second instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference.

In case you missed it, you can read the first part here.

Who are the stakeholders in fragile countries?

Ms. Anderson (Mercy Corps) stressed the need to better understand the nature of market participants in fragile countries. For instance, on the consumer side, people in fragile countries are typically more risk averse, invest less and if they do, they invest in safer activities. Related issues include understanding the consumers' negative coping mechanism: when faced with a shock, do they sell their assets or did they diversify their assets ex-ante? What financial products are appropriate and for whom? Even among fragile countries, situations differ. For instance, the usage of mobile money is very country specific and it is high in Somalia and lower in Central Africa. Agriculture and the informal sector were identified as being key to increasing financial inclusiveness in fragile countries. Similarly, non-resident citizens offer a potential for FSD through the remittances they send.

Domestic governments in fragile countries face a particularly difficult environment. Challenges to FSD include weak implementation, weak commitment to reform, high turnover of staff, and lack of data for diagnostics. As a result, governments and other stakeholders need to prioritize, sequence, and consider quick wins as well as measures to build long term capacity. Participants noted, however, that the particular context in which governments operate is important. For instance, governments in conflict countries face different constraints and policy options compared to those in transition countries.

Official development finance (ODF, which includes bilateral official development assistance and multilateral support) is particularly important in fragile countries where it typically exceeds foreign direct investment. In spite of its importance, many participants argued that procedures and processes to access ODF are particularly long and fastidious, and discourages banks from tapping multilateral institutions. Addressing such bottlenecks could support financial sector development in fragile countries. The timing of aid delivery was also questioned. For instance, aid is particularly valuable when there is a lack of liquidity in a crisis and nonperforming loans are higher. Ms. Anderson (Mercy Corps) noted that the high level of market distortion that humanitarian aid could bring in fragile countries when it crowds out existing financial institutions. Going forward, it will be important to identify ways in which ODF can play a stronger role in financial inclusion and how it can be leveraged to support FSD. For instance, the public sector and donors can partner with the private sector to help develop the financial sector and large infrastructure projects could be an important channel for such cofinancing.

Participants also noted that foreign governments should address the collateral damage on fragile countries from global financial regulation (Basel III and AML-CFT). Indeed, fragile countries are particularly exposed to actions by global banks to reduce the cost of regulatory compliance for instance through "derisking" activities (such as the closing of correspondent banks accounts).

Domestic financial regulators can play an important role in supporting financial sector development but at times limit the role that the financial sector can play through overly excessive regulation in the specific context of fragile countries.

Some participants stressed the need to view the financial sector as an ecosystem comprising many subsectors with different challenges (for instance banks, microfinance, leasing, housing finance, project finance, mobile finance, capital markets, and insurance). For instance, the development of micro insurance should consider the role of banks, insurance companies, and mobile operators as agents for insurance.

Mr. Sy (Brookings) noted that learning from successful developments in fragile countries was useful to help refine and prioritize stakeholders' strategies. For instance, while many stakeholders have prioritized institution building in fragile countries, it is a slow process. At the same time, digital inclusion has progressed at an unexpectedly rapid pace. As a result, policies should be balanced enough to continue the slow and long process of strengthening governance and at the same time capture the opportunities that digital financial solutions offer. At times, both policies can sustain each other. For instance, the provision of functional identification helps speed up the adoption of mobile payments and other digital solutions. At the extreme, having no phone but just a SIM card and proper identification could be enough to be financially included.

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You can download all the presentations on the conference website.

You can also view a selection of photos here.

 

 

Gravatar: Weselina Angelow, Winnie Omondi and Benson Wanyoike

Small data analytics in Kenya: A Case Study on understanding and driving usage

19.07.2016Weselina Angelow, Winnie Omondi and Benson Wanyoike

For the Kenya Post Office Savings Bank (KPOSB) and the WSBI Programme, a really powerful tool for better understanding the client journey was the analytical work we collaboratively started late 2014 with the aim to understanding reasons and finding solutions for people not using their account after a first initial deposit had been made.

Account dormancy is an industry-wide problem. It turned out to be bigger than expected, although at most WSBI's Programme partner banks, inactivity is less pronounced compared to the industry average rates for formal financial institutions[1].

Account inactivity rates 

2014

Industry average inactivity

WSBI Program partner inactivity

El Salvador    

58%

43%

Indonesia

62%

61%

Kenya

54%

45%

Morocco

46%

64%

 Tanzania

23%[2]

63%

Uganda

n/a

24%

A dormant account is a lost opportunity. Account dormancy or inactivity means different things to different groups of people. Irregular use and periods of inactivity are common patterns. Some clients use the account to save for a purpose, others may only access it in an emergency, and farmers save and withdraw alongside their crop cycles. It is crucial to provide multiple use options from the start and data analytics can help to classify usage and to tailor marketing messages. Therefore WSBI and KPOSB wanted to analyses and test how best to re-engage with the customer through an in-house built solution for data analytics and messaging.

Some of the questions needing answers:

What is a typical time gap between the first and the second transaction? Are our customer's savings and transaction patterns changing if nudged by messaging? Is there any hope that some of the accounts that have only seen an opening deposit may come live again? How frequent do customers require engagement?

Findings

Using a new fully enabled mobile banking product and after looking at activity within a sample of 3,500 accounts from May through August 2015 as a benchmark, we found that 79% of the accounts were inactive. Of these, 28% had zero balance. For a new mobile money product, these benchmarks fell far short of expectations. From May to August 2015, KPOSB sent inactive customers of the 3,500 sample "reengagement messages" to test whether this could increase their activity levels. Whilst some customers increased their savings balances, the messaging failed to produce the expected boost in activity rates. What we found was that in order for the messaging to work, the timespans between the first client contact and the following message shouldn't be too long (50 days instead of three months). This is because the majority of active users who transacted multiple times (more than 70%), would do their second transaction within 50 days of the first contacts made.

Small-data analytics work best for datasets not going beyond 300,000 transactions and are a simple segmentation tool for understanding people's transaction cycles and for identifying non-use. It is however not a silver bullet for massive take up in account activity. An in-house-built solution stands and falls with the insights into how macros can be built around the customer journey and how (seasonal) transaction gaps could be interpreted. Tracking and interpreting larger client numbers requires big data analytics, i.e. proper business intelligence tools. Subsequently nudging customer behaviour requires repeated client engagement and messaging. Therefore it looks more like an investment than an operating cost with an immediate pay-back. Investment costs into paying specialist FinTech firms for doing the interactive messaging business need to be looked at in this light. Purchasing segmentation tools externally is costly, even for mid-sized banks targeting the unserved poor. Donor support can really help here to operationalise client centricity.

As we look for comprehensive solutions to emerging dormancy, doing qualitative research with customers before engaging in quantitative analysis and sending out messages turns out to be absolutely essential.
 

About the Authors

Weselina Angelow is part of WSBI (World Savings and Retail Banking Institute)'s global efforts to providing an account for everyone and making a contribution to universal financial access. She manages the WSBI Programme for making small scale savings work, a Programme run with WSBI member banks worldwide.

Winnie Omondi is an Assistant Manager - Business Systems Support at Kenya Post Office Savings Bank (KPOSB) She has been actively involved with project work at Postbank with various local and international partners where she handles data extraction for onward analytics by these partners. Her focus is on deriving patterns of account usage and studying customer behavior over time.

Benson Wanyoike is a graduate in Marketing with nineteen [19] years' experience in fields related to Marketing & Sales, Customer Service, Microfinance and Management of Alternative Banking Channels. He has experience in capacity building in the above areas and has interacted with various stakeholders in managing customer relationships. He participated in the process of developing a customer service strategy for Postbank and the transformation of Postbank Kenya.

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[1] Activity for mobile money users is measured for at least 1 transaction within 90 days. Activity for savings account users at WSBI partner banks is measured for at least 1 transaction within 180 days. Industry average calculations: Worldbank Findex Estimate of Total Adults with an Account at a FFI - formal financial institution (total / depositing) and IMF FAS Estimate of Total Accounts, S. Peachey Proxy Method 2015.

[2] Tanzanian Banks were recently required to clean-out dormant accounts; WSBI partner bank data is based on figures prior to clean-out.

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