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Message from the MFW4A Partnership Coordinator

12.01.2018David Ashiagbor

Dear Reader,

As we begin 2018, I would like to wish you all a happy and prosperous New Year on behalf of all of us at MFW4A.

2017 was a pivotal year for us. We began our transition to a more inclusive Partnership with the integration of African financial sector stakeholders into all levels of our platform.  This new phase also includes a revamped value proposition designed to deliver sharper outcomes.

Our work in 2017 strengthened MFW4A’s position as a leading and independent voice on financial sector development in Africa. Mobilising domestic capital for long term investment was a focus for us. We brought together African pension funds, regulators and development finance experts in Abidjan in November, to identify options and instruments to leverage Africa’s growing pension assets for investment in infrastructure, agriculture and affordable housing. A task force was established to follow up on the meeting’s recommendations, which will continue to guide our work in this area. 

A notable outcome in 2017, was the approval of a $3 million Line of Credit to the Union Trust Bank in Sierra Leone, by the African Development Bank (AfDB) in September 2017, following the Conference on Financial Sector Development in African States Facing Fragile Situations co-hosted by MFW4A in June 2016. Another was the resolution taken by Governors of African central banks and Senior officials of international financial institutions, to strengthen supervision and solution plans for Pan-African banks at the ‘’Cross-Border Banking and Regulatory Reforms in Africa‘’ conference, jointly organized with the International Monetary Fund (IMF) and the Basel Committee for Banking Supervision (BCBS) in Mauritius.

Our work in support of a strong and stable African financial sector will continue this year, with national and regional Financial Sector Dialogues in selected regions. These high-level events will provide a platform for African financial sector stakeholders to assess the progress of ongoing reforms in their respective regions and identify future priorities. We will also launch a new programme on Trade Finance to help fill existing knowledge and skills gaps through research, capacity building and advocacy efforts. A Long-term Finance initiative expected to lead to the establishment of a scoreboard that provides comparative indicators of the level of development of long-term finance markets in Africa, will also be launched, in collaboration with AfDB and GIZ.

We will continue to support efforts to develop and implement financial risk management solutions in the agricultural sector while promoting an enabling environment for digital finance. Other activities include research to support diaspora investments and remittances as well as capacity building programmes in our SME Finance and Housing Finance workstreams.

We look forward to your continued support and collaboration.

With our best wishes for a happy and prosperous 2018.

David Ashiagbor
MFW4A Partnership Coordinator


Natural Disaster Risk Pooling to Enhance Financial Access

08.01.2018Johannes Wissel, Financial Consultant

This blog is a summary of Johannes Wissel's Master's thesis on "International Economics and Development".

Limited financial access in times of natural disasters

In her blog of 5 June 2017 Sonja Kelly ascertains the low success of weather-indexed insurance and depicts the reasons why it is not working. She regrets that although these problems are not new, the industry has not managed to solve them.

In addition to insurance, Elodie Gouillat, Rodrigo Deiana and Arthur Minsat and Bella Bird in their blogs of 29 June 2017, 24 October 2017 and 19 December 2017 point out the limited access to finance particularly for low-income households and small enterprises.

Microfinance institutions (MFIs) fail to meet the demand of their clients, especially in times of a natural disaster. Despite the debate on the advantages and disadvantages of microfinance, financial access helps to strengthen the natural disaster resiliency of affected communities. MFIs are constrained in providing their services because in times of natural disasters they themselves lack financial access. They are generally not well diversified around the globe. A natural disaster leads to a widespread defaulting on credits in one region and consequently many credits of one MFI have to be written off. Without the access to external financial resources, this will hamper the MFI's capital ratio which is a key indicator of an MFI's solvency and subject to financial supervision. To avoid further risks, MFIs restrict their lending activities.

To improve an MFI's financial access, its natural disaster-related high unsystemic risks need to be transferred out of the region it mainly operates in. Financial investors follow the same principle by diversifying their wealth. However, the only existing opportunity for microfinancial actors to transfer their disaster risks, is looking for reinsurance or reinsurance-like solutions individually. The comparatively unknown market and a non-perfect competition in reinsurance induce an inefficient and costly risk transfer. MFIs usually do not make use of these possibilities.

Introducing a risk transfer innovation

Alternatively, MFIs can mitigate the unsystemic disaster risks by bearing them collectively. A certain extent of risks can be transferred out of a region by pooling the risks among microfinancial actors. Only a minimised remaining risk of the pool itself needs to be transferred to the global capital market, which is expected to save costs. Two decisive prerequisites are fulfilled that allow for a pooling of these risks among microfinancial actors. Firstly, natural disasters do not occur in every region of the world simultaneously. For example, the risk of El Niño floods in Peru is high between January and March and Vietnam might be affected in June and July. Secondly, the distribution of microfinancial actors among the world regions is relatively balanced.

GlobalAgRisk, a U.S.-based research and development company with linkages to the University of Kentucky, intends to implement such a risk pool in 2018. In one hypothetical example, they envisioned a 31%-reduction in funding needs to cover the risks of two microfinance networks by pooling their risks. The impact of a natural disaster on an MFI's portfolio has been modelled for different disaster types and severities based on historic data, in order to determine the extent of contributions that a pool-participating-MFI has to make and the required payouts it potentially receives. This facilitates an index-based risk pooling which enables a quick disaster response and eliminates potential mistrust problems between different participants. In GlobalAgRisk's concept, an affected MFI is projected to receive a credit payout in order to meet the rising demand for credit of its clients and a capital payout that the respective regulatory authorities classify as equity in order to restore the MFI's capital ratio.

In my thesis titled, “Natural Disaster Risk Management in Microfinance”, I evaluated GlobalAgRisk's concept and portrayed potential improvements to increase the concept's likelihood in achieving its aims and depicted certain constraints for the implementation of potential improvements. The full thesis can be found here.

Recommendations: Inclusion of insurance risks in the concept

One potential improvement is the inclusion of insurance risks in the concept. High costs are a common explanation why weather-indexed insurance does not reach scale (see e.g. Sonja Kelly's blog). Microinsurers make use of the outlined costly reinsurance possibilities. Thus, weather-indexed insurance can benefit from the cost advantages risk pooling offers.

If the risk pool contains both credit and insurance risks, its size and diversification are expected to grow and therefore realize additional cost advantages; for example, through lower fixed costs per participant and better prices for reinsuring the pool's remaining risk externally. Moreover, a higher market penetration of weather-indexed insurance improves credit access, because insured clients benefit from a higher creditworthiness.

Even reinsurers can benefit from pooling both risk types among microfinancial actors, by covering the remaining risks that the pool cannot bear by itself. As such, the extent of covered insurance risks decreases for the reinsurers in comparison to insuring full risks. However, the total reinsurance business might grow because reinsurers can incorporate credit risks in addition to insurance risks.

The consolidation of both risk types appears feasible because the pool's payout patterns are similar to those of microinsurers reinsurance. The contribution payment into the pool is equivalent to a reinsurance premium and a payout is triggered if an insurance taker suffers from a damage. The modelled impact of a natural disaster on an MFI's credit portfolio fits in the already prevalent weather-indexed insurance.

Further success factors

For a successful risk pooling, the basis risk that comes along with an index-based risk pooling should be minimised as much as possible. To achieve this, a compartmentalised model that considers the pivotal risk types (e.g. floods, storms, drought, earthquakes) is crucial.

If the risk pool operates as a for-profit company, the benefits of the concept might be endangered. In order to be attractive, the pool only needs to be slightly cheaper than the existing risk transfer possibilities and could charge much higher contributions from the participants than the payouts amount. Establishing the pool as a mutual or cooperative company eliminates these potential profit extractions. In case of profits, they can be returned to the participants. Insuring the pool's remaining risks minimises the danger of suffering from losses as a co-owner. If certain microfinancial actors are restricted because of their co-ownership possibilities, they can participate in the performance of the pool without being a formal co-owner.

Finally, some countries' legal frameworks might require that the pool acquires insurance licences in order to provide the capital payouts. To avoid the acquisition of numerous licences, fronting might be a way out. Insurance companies that already possess licences in the respective countries can insure the participants and pass the risks on to the pool.

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About the Author

Johannes Wissel recently graduated from Hochschule für Technik und Wirtschaft Berlin - University of Applied Sciences, with a Master's in International and Development Economics. He worked in sales management for Hannoversche Volksbank, a German Cooperative Bank. Prior to this, he worked with two international Christian organisations; Forum Wiedenest in Germany and Diguna in Kenya. Johannes is a licenced Corporate Bank Customer Consultant.

Innovation doesn't have to be disruptive

21.11.2017H. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG

In the previous blog, we looked at what technology meant in the context of innovation and problem-solving for rural customers. In this second of three blogs, we dig deeper into the idea of innovation and what it means for the Mastercard Foundation Fund for Rural Prosperity.

                     

It is clear that technology is changing the landscape of financial services in rural Africa. From the largest banks to the smallest fintechs, financial service providers are gearing up for a world in which finance is digital first and in which anyone with access to a mobile phone can also derive benefits from formal financial services.

The rapid uptake of mobile money in many countries has sowed the seed for a thousand new innovations that could further extend inclusive financial services. An outcome of this success has been that everybody in digital finance is looking for "the new M-Pesa", in the same way that elsewhere, entrepreneurs want to be "the Uber of..." An underlying assumption here is that change is generally linear until a special company comes along with an idea that creates non-linear change, which we often call disruption.

But when you map this idea on to the landscape of unbundling that financial services are currently going through, it is not so clear that disruption is what's needed. It used to be that a bank, or a microfinance institution, or an insurance company, would aim to provide a vertically integrated service to the customer, from initial acquisition to all aspects of relationship management and back end services. This is changing. Technology, and in particular the ability for different platforms to link with each other, opens up new opportunities for collaboration. Not everyone needs to develop the next big product or service - there may be much more value and impact for a fintech company to build a business- to-business solution that works at a specific pain point for a financial institution.

For example, the Fund is supporting a partnership between Juhudi Kilimo, an asset financing company, and the Entrepreneurial Finance Lab to develop a psychometric credit scoring tool for smallholder farmer borrowers with no or limited verifiable credit information. This is a tech-enabled solution for a specific challenge - how to estimate likelihood of repayment in a data-light environment - that could reduce costs and improve efficiency of Juhudi Kilimo's credit processes.

A similar partnership in the Fund portfolio is between First Access, a fintech company, and Esoko, an agricultural information and communications company. The two will develop a rural agricultural credit-scoring platform for lending institutions from disparate data sets, from soil and weather data to mobile phone usage and farmer profiles. The solution has the potential to impact a large number of farmers who do not have traditionally accepted banking histories.

These are great innovations, that could have a real impact on micro and small business finance, but they probably won't be putting other lenders out of business. And that's fine. Innovation can be highly effective without being disruptive.

There's nothing wrong with ambition, and there is certainly scope for massive changes in Africa's rural finance markets. But if you focus too hard on the next disruption you can lose sight of the great ideas that represent an evolution, not necessarily a revolution. At the Mastercard Foundation Fund for Rural Prosperity, we love big ideas. But the most important aspect of the big idea is the impact it has on the livelihoods of rural communities in Africa, not necessarily on how it disrupts the structure of the financial system.

So if you want to apply for support from the Fund, we're not so fussed about if you're the next big disruption to African financial markets. We want a credible plan that overcomes some of the many challenges of financing rural populations, and can have a real impact on the lives of people living in or close to poverty. We want ideas that work from the bottom up, which solve real problems. Maybe you'll be disruptive. If you're not, that's fine too.

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About the Authors

Howard Miller is a Senior Consultant with Nathan Associates London, and Principal, Nathan Associates India. He specializes in financial inclusion, challenge funds and the market systems approach to development. A trained economist, Howard has extensive experience in consultancy, public policy, and investment banking. Since joining Nathan Associates in 2011, he has worked on DFID financial sector development programs in Uganda, Mozambique, Bangladesh, and Rwanda, and on the FSD Africa Program. Before joining Nathan, Howard was a fellow at the Overseas Development Institute working on macroeconomic and financial sector policy for the Government of Uganda.

8 years ago, Grace Njoroge ventured into the corporate world under a graduate trainee program with one of the top regional banks in East Africa. She expected to be a classic banker but this according to her did not happen, at least not all of it. Her typical day involved riding a motorcycle to help micro-traders and assist small-holder farmers open savings account. In a surprising twist, she fell in love with the power simple financial products had to drastically change life and businesses potential for low-income clients. At KPMG IDAS, she works with donors and funders to support financial and non-financial institutions, to better serve the unbanked and under banked segments.

Emerging Trends in Digital Delivery of Agri-finance

11.10.2017H. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG

This is the first in a series of three blogs on the role of technology in the rural finance projects supported by The MasterCard Foundation Fund for Rural Prosperity (FRP). In this first blog, we explore the major trends in digital delivery that the FRP is seeing in its portfolio. In the second blog, we will dig deeper into how these technologies are being used to solve problems for the rural poor; and in the final blog of the series we will focus on what this means for the FRP and for rural development programmes more generally.

                      

Back in 2014 when we were designing the Fund for Rural Prosperity, we debated for a long time some of the terminology around the fund. One word that came up a lot was innovation. What do we mean by innovation? How do we define it, and how do we measure it?

Another word was solution. If we are talking about a financial solution for a smallholder farmer, then what is the problem? Innovation and solution are over-used words in financial inclusion, and in international development generally, and we wanted to make sure we were using them to actually mean something.

In the two years since the FRP was launched, with 11 rural finance projects up and running, it has become increasingly clear that we cannot talk about innovation and solutions for the rural poor without considering the role of technology. With 277 million registered mobile money accounts in Sub-Saharan Africa, a base level of digital finance penetration is often taken for granted, even in rural contexts, and bidders are getting more and more imaginative about how to build new structures on these digital foundations.

This, however, brings a new set of challenges. In his book "Geek Heresy", Kentaro Toyama uses a range of examples to illustrate the limitations of technology in development. Technology, he argues, can only improve on ideas, processes and institutions that are already well-designed. Apply technology to a bad system and you'll probably only make things worse. For technology to have a meaningful social impact, it needs to be used to amplify the skills and ambitions of people.

You can see Toyama's argument in some of the best examples of tech for development in recent years. M-Kopa (an FRP grantee), is such a compelling story not because its technology is so out of this world but because the technology solves specific problems for the consumer, and is delivered through an effective, well-designed mobile payment model. Technology wasn't the solution in and of itself, it was one key part of a clever business model.

We see similar trends across the FRP portfolio. These projects are using technology to not only deliver financial services, but also to solve some additional challenges in the lives of the rural poor. For example, in Ethiopia, Kifiya Financial Technology, a payment services provider, is working through large buyers (multipurpose co-operatives) to deepen market linkages in addition to acting as a rural agent for financial institutions.

In Ghana, Prepeez Technology Limited, a company focused on technology solutions for the agricultural sector, is using satellite imagery to cluster farmers into groups in order to manage risk and provide more relevant market and weather information. With the information gathered, farmers will then be eligible for agro-insurance and access other financial products.

Olam, a global agribusiness trader, is in Uganda offering input financing along with a digital platform to connect coffee farmers, and also provides information on best farming practices. Biopartenaire in Cote d'Ivoire, which specialize in sourcing cocoa beans from smallholder farmers, is looking to increase cocoa farmers' financial literacy through an app that also facilitates access to credit for the farmers.

In each of these cases, innovation doesn't mean disruption. It means a good idea, using new technology to overcome an important pain point in a system with high potential to improve outcomes for farmers. Technology is not just supporting financial inclusion; it is providing a service - information, networks, market linkages, cost savings, advice - that links financial inclusion to improved livelihoods. It is providing a solution.

In any innovation competition, you see a lot of business models that use amazing new technologies, with a high degree of innovation, to solve problems that nobody actually faces. This is innovation for innovation's sake. At the FRP, we're trying to keep the solution part front and center to ensure that the technological innovation is responding to a real challenge faced by rural African populations.

It is encouraging to see some of the great ideas coming through the Fund and how the innovation frontier is being meaningfully shifted with every group of applications. In the next blogs, we will look deeper into how those projects are impacting rural populations in Africa, and what we can learn for our future work.

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About the Authors

Howard Miller is a Senior Consultant with Nathan Associates London, and Principal, Nathan Associates India. He specializes in financial inclusion, challenge funds and the market systems approach to development. A trained economist, Howard has extensive experience in consultancy, public policy, and investment banking.Since joining Nathan Associates in 2011, he has worked on DFID financial sector development programs in Uganda, Mozambique, Bangladesh, and Rwanda, and on the FSD Africa Program. Before joining Nathan, Howard was a fellow at the Overseas Development Institute working on macroeconomic and financial sector policy for the Government of Uganda.

8 years ago, Grace Njoroge ventured into the corporate world under a graduate trainee program with one of the top regional banks in East Africa. She expected to be a classic banker but this according to her did not happen, at least not all of it. Her typical day involved riding a motorcycle to help micro-traders and assist small-holder farmers open savings account. In a surprising twist, she fell in love with the power simple financial products had to drastically change life and businesses potential for low-income clients. At KPMG IDAS, she works with donors and funders to support financial and non-financial institutions, to better serve the unbanked and under banked segments.

Weather-Indexed Insurance: Why Isn't It Working?

05.06.2017Sonja Kelly, Director of Research, Center for Financial Inclusion (CFI)

This post was originally posted on the CFI-Blog Website.

Weather-indexed insurance is brilliant. It's just not working.

It's brilliant because it solves one of the basic challenges of insurance: moral hazard. Under the principle of moral hazard, having insurance tends to make an individual's behavior riskier, increasing the likelihood that the product will be used. If I have fantastic health insurance, for example, I may be more likely to make riskier life decisions because I don't feel the financial effects of the consequences of those decisions quite so acutely. If insurance is tied to the weather, however, nothing an individual does (unless you believe in the efficacy of a rain dance) will "trigger" the insurance.

Weather-indexed insurance is not a new phenomenon. Over the last decade we've heard exciting stories about weather-indexed crop microinsurance and the lifeline it offers to farmers given our world's quickly-changing climate. Weather-indexed insurance was bundled with agricultural inputs like seeds or livestock, and the product was lauded as a way to increase the inclusion of poor people in insurance.

Amazing, right? So why, after a decade, aren't customers buying? In India, for example, only 5 percent of farmers have taken it up where available.

  • It's complicated. Insurance is incredibly complex to explain to a consumer. There are no easy examples for consumers to reference in their mental maps of products. The concept has no analogues in the local culture.
  • It costs a lot. Low-value insurance is very expensive for companies to offer, and weather-indexed insurance is no exception. While the weather-based trigger makes it cheap to determine when claims are valid, the product requires a critical mass of people to break even, and it is costly to acquire all of those customers.
  • And it's undervalued. At the same time, customers often under-value insurance. In experiments looking at whether insurance products are priced appropriately vis-à-vis customer perception, there is skepticism regarding the price of premiums for an intangible product. A number of years ago, some researchers discovered that even when subsidized so that insurance would yield an expected return of 181 percent, only half of households offered the product decided to purchase it.
  • Making an insurance claim is annoying, and recourse mechanisms are not great. Weather-indexed insurance targets individuals living in remote areas who might lack experience with insurance claims or formal financial services. Moreover, available weather data has been a limiting factor for the scope and accuracy of the services' automation. Recourse mechanisms are often a struggle with financial services for the base of the pyramid, and there have been documented incidences of similar issues in the weather-indexed insurance segment.
  • "Freemiums" can give insurance a bad rap. A "freemium" is an insurance product offered for free alongside another product that the customer is paying for. For example, rental car insurance comes with a credit card. Credit life insurance comes with a microloan. Health insurance comes with a mobile wallet. The problem is that customers often don't know they have the product, which can reduce the offering's credibility. The freemium approach has been met with success in some cases, but to achieve this, it's essential that customers have a strong awareness and understanding of the product.
  • Governments aren't really on board, even though the product would increase economic growth. Noteworthy exceptions to this are the governments of Canada, India, and the United States, which subsidize premiums by at least 50 percent. However, such involvement by many governments in Africa, for example, would likely not be affordable.

These results are not new. It's just that the industry has not found compelling solutions to these problems.

It's no wonder weather-indexed insurance for low-income populations continues to limp along, even though it is one of the financial sector's greatest inventions (in this blogger's opinion). The best way forward for weather-indexed insurance is either providing it for free (which is why Shawn Cole advocates so strongly for public-private partnerships) or bundling both the price and the service with existing financial products. And ensuring that individuals sufficiently understand the products and their benefits, and that the products work well - i.e. making a claim or a complaint is as seamless as possible.

But I'd love to be proven wrong-do you know an example of a weather-indexed insurance that's working?

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About the Author

Sonja Kelly conducts and facilitates financial inclusion research at CFI, directing the CFI Fellows Program, developing frameworks to understand critical concepts like financial health and financial capability, and facilitating the Global Microscope research. She serves as research lead on many topics related to financial inclusion. In her own research and work, Sonja focuses on regulation and policy, the role of banks in financial inclusion, and especially vulnerable populations. Sonja has a doctorate in international relations from American University, where her dissertation focused on financial inclusion policy and regulation. She has previously worked at the World Bank, the Consultative Group to Assist the Poor, and Opportunity International. Sonja is currently a member of the board of directors of People Reaching People, and has held volunteer positions as president of the Washington DC chapter of Women Advancing Microfinance, and as president of the steering committee for Northwest Chicago Young Life.

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