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The Compass was conceived to be a way to leverage e-MFP’s multi-stakeholder membership and position in the inclusive finance community, while capturing too some of the dynamic debate from the workshops at the annual European Microfinance Week, giving a wide array of practitioners, investors, donors, academics and support service providers the opportunity to assess and describe the importance of various Trends, select and give opinions on New Areas of Focus, and provide open-comment qualitative input on the expected (and hoped-for) direction of financial inclusion progress. In this sense, says report author and e-MFP Financial Inclusion Specialist Sam Mendelson, the Compass is a “not a crystal ball as much as it is a ‘time capsule’ – freezing in time what people working in inclusive finance see as important in the years ahead, so the sector can go back from year to year and see where it was wrong, and where it was right”. The survey behind the Compass was conducted over the summer and was mixed-methodology, asking for scoring of particular trends, their importance and direction of progress, and ratings of selected future Areas of Focus. Finally, respondents were asked to give comments on a series of questions that looked at challenges, opportunities, medium-term forecasts, the relevant financial service providers of the future, a policy-making ‘wish list’, and longer-term hopes. 77 complete responses were received. A majority is based in European countries, and a plurality mainly focuses on Sub-Saharan Africa – with the rest spread among a global focus, South Asia and East Asia Pacific; MENA, Europe and Central Asia; and the Americas. A plurality of respondents works for a financial services provider, with consultants and support providers, funders, industry infrastructure organisations and academics or researchers making up most of the rest. There are various interesting results in the paper – both quantitative and qualitative. But the first question, asking respondents to score and comment on the importance of selected trends, yielded an interesting Top Five – illustrated in Figure 1. The scores – and the full list of trends – can be seen in Figure 2. In New Areas of Focus, Figure 3 shows that Agri-finance was the dominant choice, with over 75 percent of respondents choosing it as one of their top five options, and it made up 18 percent of all the votes cast among the 14 options – 50 percent more than the second-highest choice. After Agri-finance, SME finance, Climate Change Adaptation/Mitigation, Housing Microfinance and Energy all scored highly. Some areas scored extremely low, including Finance for the Elderly, Fair Trade, and education. Figure 3 New Areas of Focus Ranked Various themes emerged from the research, including: The FinTech revolution is a potential threat to end-clients and the sector overall, but is likewise an opportunity – for clients and for providers alike. These include reduced operational costs that can be passed on to clients, better communication, greater outreach, opportunities in education, and innovations in risk assessment. Client protection is seen as very important at the moment, and technology is the area most moving in the ‘right’ direction. Agri-finance is the area in which financial inclusion can cause, or respond to, the most significant developments. SME Finance, Climate Change, Housing and Energy finance are all areas that face disruption and innovation. Client protection, privacy, ensuring the value proposition of financial inclusion services, and preventing an erosion of the social focus of financial inclusion via a ‘race to the bottom’ in the face of new entrants, are all major challenges. The financial service providers of the medium- term future will primarily be a mix of cooperatives, NGOs and local commercial banks. There is room for a range of providers, and no single model will triumph. Improvement in quality and affordable (and perhaps mandatory) financial education is arguably the most important policy development that respondents would choose to implement if given the chance. In the longer term, there is a strong hope for universal financial inclusion within a sector that maintains client-centricity and social mission – keeping an eye on the rationale for, and unique responsibilities inherent in, serving low-income customers. The Platform’s hope is that the Compass will be a valuable teaching tool, and as it becomes an annual publication, will give useful insight into how perceptions change over time, and how the past can inform predictions of the future. Download the report here author: e-MFP

This post was originally published on MicroCapital Cambodia Microfinance Association (CMA), Incofin, MIMOSA, the Credit Bureau of Cambodia, and several other stakeholders have been developing the CMA Lending Guidelines, under which microfinance institutions (MFIs) are working together to prevent over-indebtedness in Cambodia. The project is funded by Incofin, PROPARCO, BIO, FMO and ADA. MicroCapital: How long have you been concerned about possible overheating in the Cambodian microfinance market? Kea Borann: Concerns of the market overheating started at least as early as 2015. Since then, the total outstanding portfolio of the industry has been growing at an average of 25 percent per year, even as the number of loans has remained unchanged at 2.3 million. This seems to mean that the same clients are taking on more debt when their loans are renewed. The average loan size grew from USD 1,691 to USD 3,003. Dina Pons: This phenomenon is coupled with another: While most loans had a tenor of 12 to 24 months in the past, we now see loan maturity as high as four or even five years. MC: What metrics do the Lending Guidelines measure? Daniel Rozas: It’s a mix of traditional indicators for measuring over-indebtedness, such as multiple borrowing and loan-to-income ratios, but we’ve also added metrics for measuring loan refinancing, that is to say taking out new (and usually larger) loans to refinance existing loans that have not yet matured. MC: What obstacles did you overcome to bring the partners together? DP: The first obstacle is related to differences of opinion on risk levels. Contrary to overheating microfinance markets in other parts of the world, Cambodia does not have high levels of multiple borrowing. Instead, it has a fast increase of average loan size vs GDP per capita. This is coupled with a noticeable increase of loan tenor. Some argue that the country’s annual GDP growth of 7 percent justifies extending the maturity of a loan in order to inject more cash into a business if the monthly installment remains the same. On the contrary, defenders of the Lending Guidelines argue that credit risk increases if the time required to repay a loan exceeds the time required to create the income required to repay the loan. Meanwhile, self-regulatory measures are very hard to implement because they are based on willingness to comply. While many MFIs understand the value of the Lending Guidelines, some fear that non-endorsing competitors will take advantage of the situation to grab market share in pursuit of short-term profits. MC: How are MFIs adjusting their processes to stay within the guidelines? KB: MFIs that have endorsed the Lending Guidelines are adapting their credit underwriting policies and enhancing their risk management practices. They are also putting more emphasis on helping their staff communicate better with clients about the risks of taking on too much debt, especially with longer tenors. In support of this, CMA has pro­duced a range of educational videos and press releases. The association has also has done a lot of advocacy with industry stakeholders to build their support for the Lending Guidelines. MC: What is the reaction from investors and regulators? DP: Both the National Bank of Cambodia (NBC) and the investor community – more than 24 microfinance investment vehicles and development finance institutions – have been very supportive of this initiative. When the Lending Guidelines were formally unveiled in December 2016, NBC and several lenders made public statements calling on MFIs to adopt them. Today, the Credit Bureau of Cambodia issues each MFI a monthly “dashboard” that shows its level of compliance with the key metrics of the Lending Guidelines. These dashboards are sent to NBC, and they are also used by a growing number of investors when conducting monitoring visits and discussing funding rollovers and increases. MC: What are the next steps? DR: In the near term, we’re focused on tightening monitoring to minimize the room for MFIs to “game” the system through practices that meet the technical requirements of the metrics, even as they violate the spirit of the Lending Guidelines. This is an inevitable part of performance metrics; whichever way you define them, clever individuals will try to find a way around them. In the longer term, we expect to expand the Lending Guidelines to cover other relevant lending practices, as well as bring outside parties – including commercial banks – into the framework. We also hope that NBC can play a more proactive role in helping “call out” financial services providers that are flouting the Lending Guidelines and putting clients at risk. This is critical to insuring that the Lending Guidelines remain a meaningful force in Cambodia over the long term. Kea Borann is Board Chair of the Cambodia Microfinance Association and the CEO of microfinance institution AMK. Dina Pons serves as the regional director for East Asia as well as impact manager for Incofin. Daniel Rozas is the co-founder of MIMOSA and Senior Microfinance Expert at e-MFP. Representatives of all three organizations will discuss the Lending Guidelines in much greater detail at European Microfinance Week. Photo: Brett Matthews author: MicroCapital team

First published in the 2018 Microfinance Barometer which e-MFP is proud to partner. Since the dawn of the commercialization of microfinance nearly two decades ago, investment in microfinance has been made on a widely-accepted premise: investors will receive a ‘market rate’ financial return, while pursuing a socially-motivated strategy. This premise is so widespread that it has taken on the allure of all groupthink – becoming an accepted truism, without necessarily being true. The double-bottom line – the equal focus on financial and social return – can be deceptive. The dilemma is that while financial return has a clear target, social return is more nebulous. What social return is really being promised? Is serving a certain segment of clients enough? Do additional products need to be offered? What about financial education? There are cases that call for difficult decisions and real choices. Consider: many social investors measure impact by the amount of money invested, even though their funds may often stand in competition with locally-raised deposits, which themselves are at least as socially beneficial as credit. By undermining their investee’s incentives to raise local deposits, well-meaning investment may lead to reduced – and even negative – social returns. Or consider interest rates. Large loans tend to have lower rates than small loans, often while generating higher profits. So an MFI that moves upmarket to serve wealthier customers will appear to deliver both higher financial return (bigger profits) and social return (lower interest rates). But this is specious: the ‘double’ return is achieved by shifting away from Bottom of the Pyramid population, the precise target population that the institution was set up to serve in the first place. A simplistic retort is to invert things – that only when investors are willing to lower their financial return targets can they be reassured of having achieved positive social return. This, too, is wrong. There are countless examples where even well-intended charity causes more harm than good. Picking the high-hanging fruit The truth is that ensuring social return is difficult. Delivering a true double bottom line is possible, but requires dealing with the complex uncertainties hidden behind that nebulous social return. What social mission is the institution trying to pursue, and is it actually succeeding in doing so? Who are its clients? Are the institution’s services truly offering what’s needed, and is the institution effective at separating cases where it does good, from those where it actually does nothing, and even causes harm? Despite these difficulties, recent efforts to analyse and evaluate the complexity of the double bottom line are encouraging. Unsurprisingly given its dual mission, the microfinance sector has in fact been at the forefront of developing real-world social return metrics, encapsulated by the work of the Social Performance Task Force’s SPI4 tool. Such tools have contributed to the emergence of a class of committed social investors that recognizes the true complexity and necessity of the double bottom line and has invested in and focused on measuring not only financial but also social ‘profitability’ in an empirical manner. The outcome of these efforts has been to show that financial and social returns can be complementary and mutually beneficial. Increased focus on Social Performance Management (SPM) can improve efficiencies, allow for lower margins, reduce staff turnover and deepen the organization’s understanding of its clients’ needs, giving it a competitive advantage that is difficult to duplicate. This can then support higher financial profitability. Meanwhile, a strong social focus may lead investors to new markets that others assume unprofitable. In many ways, a strong SPM focus is reminiscent of the 1950s-60s Japanese manufacturing revolution pioneered by W. Edwards Deming: investing in a metrics-driven system can yield long-lasting returns, in this case, both social and financial. Humility and incentives: Understanding why social impact matters Above all, social responsibility requires humility. Setting the goal of “outreach” without recognizing market capacity and realistic limits can lead to an excess of even well-designed products. Credit in particular has this risk: too much credit is often worse than no credit at all. Humility also comprises willingness to think about demand-driven and not just ‘we-know-best’ supply-driven solutions. But doing that requires serious, long-term investment in SPM capabilities that only committed social investors are willing to make. Beyond humility, from a behavioural perspective it is the incentives that matter. Investors that believe in an illusory automatic link between financial profitability and social impact are more likely to take social impact for granted. This pernicious syllogism – a. I am funding microfinance; b. microfinance is Good; therefore c. I am doing Good – has dominated the narrative since the industry’s beginning. But in reality, the experience of MFIs around the world shows that financial profitability is the easier threshold to clear; it is the Doing Good that is much the harder part. Ensuring social impact demands investment, attention, monitoring and evaluation and – sometimes – tradeoffs in financial return. That being said, the very fact the question is asked – not just in the Barometer, but in boardrooms industry-wide – illustrates how far we have come. Check out the other Microfinance Barometer articles here author: Daniel Rozas - Sam Mendelson

Atlas of Sustainable Development Goals is an even more massive endeavour, drawing on the Bank’s World Development Indicators (WDIs), a database of over 1,400 indicators for more than 220 economies, many going back over 50 years. The ‘SDG’s in the title are of course the Sustainable Development Goals - the post-2015 follow up to the Millennium Development Goals that served as the target-based development architecture for the past decade or so. The SDGs provide a variety of targets across different areas of human development to be achieved by 2030. This is the UN General Assembly-adopted “2030 Agenda for Sustainable Development”, which extends the MDGs but also makes key adjustments, incentivising collective action by all countries. There are 17 goals that make up the (often criticised) SDGs. It’s been widely observed that the delicate and lengthy process of negotiation and compromise that produced the SDGs ended up with no SDG that specifically addresses financial inclusion. Nevertheless, the explanatory materials that support the 17 SDGs (and their many sub-components) clearly acknowledge that greater access to financial services is a key enabler for many of them. How does FI fit within the SDGs? The role of financial inclusion in the SDGs is clear. Five of the 17 Goals mention financial inclusion, including No Poverty (SDG1), Zero Hunger (SDG2), Good Health and Well-Being (SDG3), Gender Equality (SDG5), and Decent Work and Economic Growth (SDG8). Financial inclusion can be the key tool that is uniquely effective in mitigating poverty, hunger, gender inequality, lack of access to education, and the like. Account ownership promotes gender equality. Agri-finance promotes investment in planting, technology and transportation that drives yields and security. Microinsurance protects vulnerable people from health shocks. Housing microfinance affects, well, probably everything. So financial inclusion is embedded into the SDGs. What does the latest SDG Atlas, within its vast array of development indicators and data sets, have to say about the progress being made in inclusion? Financial Inclusion in the SDG Atlas The Global Findex is a unique (if limited) repository of country-level, survey-based financial inclusion data. The SDG Atlas is complementary to this resource, drawing its findings from the WDIs – the primary World Bank collection of development indicators, compiled from officially recognised international sources. Updated quarterly, it claims to present the most current and accurate global development data available, and includes national, regional and global estimates. The 2018 Atlas uses two primary methods for classifying and aggregating countries and economies, by income and by region. Like with the Findex, the picture is mixed. We’ll look at a handful of selected SDG ‘targets’ that touch on financial inclusion. Access to finance for health care – savings, credit and in particular insurance – is a critical and growing part of the inclusion landscape. The Atlas data shows the precariousness of many poor families’ finances when it comes to health expenditure. Target 3.8 is to “achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all”. Yet in 2010, 800 million people spent over 10% of household budgets on healthcare, and 97 million were pushed into extreme poverty by health spending. Figure 1 shows absolute growth in those spending over 10%, and in those pushed below the $3.10 per day poverty line. The persistence of the gender gap in financial inclusion was a headline (and fairly depressing) outcome of the most recent Findex, and deeper analysis of this has been done in several other places, including an excellent CFI report. Gender differences are embedded in employment too. The WDIs, reported in the Atlas, also show that globally women are less likely to be employed than men, and that this gap is most pronounced in low-middle-income countries. Figure 2 shows male versus female employment levels by income level. In poor countries, the existential threat of grave poverty may compel men to tolerate their wives and daughters working; above this lowest income level, however, culture mores prevail, and lower-middle income female workforce participation is barely at 30%. Moreover, in all regions, fewer than half of firms are even partially owned by a woman. Yet it is in SDG 8 - Decent Work and Economic Growth – that the most financial inclusion-specific data emerges. Target 8.10 comprises the objective to “strengthen the capacity of domestic financial institutions to encourage and to expand access to banking, insurance and financial services for all”. Three years into the 15-year target timeframe, younger adults, women, the lower educated and the poorest continue to lag in account ownership. Nominal account ownership is increasing, driven both by specific government programs with no-frills accounts, and the cost reductions in outreach that FinTech offers to providers. Globally, 69% of adults now have an account with a financial institution or mobile money provider, showing some progress towards Target 8.10. However, Figure 4 below, which incorporates Findex survey data into the WDI results, reveals pernicious gaps in account ownership by income quartile, gender and education level in MENA and SSA in particular – although education level remains a strong determinant in all regions. Finally, target 8.5 is, by 2030 “ achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value”. The WDIs show the persistence of the problem of un(der)employment, especially for the young – a problem exacerbated by demographic changes, including reduced birth rates, increased longevity and, as a result, a smaller share of the population working at any one time. Figure 5 shows growing ‘working gaps’ over time between total and employed population in all income groups, with the strongest gradient in the lower middle income group, as this segment expands from 1.1 to 2.1 billion people over 1990-2016, and job creation struggles to keep pace. The SDG Atlas is an enormous project, much broader than the Global Findex with its focus on financial inclusion from primarily survey data. But there is some overlap where the SDGs touch – as they frequently do – on issues of financial exclusion, and the SDG Atlas, with its leveraging of a fantastically broad and deep array of data, offers a fascinating look at how international development is progressing against many different indicators. Despite its more general focus, it should be read alongside the Findex as a key resource in understanding the trends, progress and challenges in financial inclusion. author: Sam Mendelson

This post was originally published on MicroCapital Lucia Spaggiari: One difference is the language used. For instance, SME lenders speak of “sustainable performance” more than “social performance.” Beyond language, a key difference is scale. By definition, SME lending requires a larger balance sheet, and this means complying with prudential regulation and attracting investors expecting to earn (at least) market returns. Laura Foose: Based on investor demand expressed at the European Microfinance Platform (e-MFP) Investor Action Group meeting at European Microfinance Week 2016 and the March 2017 Social Performance Task Force (SPTF) Social Investors Working Group, we have been exploring how best to evaluate the environmental and social performance of SME finance institutions. We began by mapping the ESG frameworks of four development finance institutions (DFIs) and then surveyed our member microfinance investment vehicles to learn what indicators were most important to them. The high quality of the DFIs’ tools was very helpful in designing an evaluation framework that is feasible for our member funds’ smaller investments. MC: What types of social measures do you consider? LS: In SME lending, the concept of “social” encompasses a broader group of stakeholders: in addition to clients, the assessment needs to cover the employees of the SMEs financed as well as the communities in which the SMEs operate. Compared with the missions of microlenders, which often focus on the financial wellbeing of the client, SME lenders are more oriented toward economic growth and job creation. However, client protection indicators remain very relevant. They also happen to be similar to the indicators we use to measure how SME lenders treat their personnel. In general, the assessment framework of social performance management (SPM) for microfinance institutions – although we think in terms of sustainable performance management – remains applicable. This includes its structure of defining goals, aligning systems, benchmarking and making improvements. However, we must adjust for the different development goals of SME lenders and their broader scope of stakeholder groups. MC: What issues arise when considering environmental performance? LS: The bar for managing environmental performance is much higher for SME lenders than for microlenders. It requires the systematic use of assessment and improvement tools that are specific to each sector, geography, enterprise size and other contextual factors. MFIs often have no screening system at all, or they simply consult a list of excluded activities. Most MFIs that are moving into SME lending will need to acquire a significant amount of new expertise in this area. MC: How do these factors fit into the existing SPM ecosystem? LS: While the aspirations, operations and risks of SME lenders are different in some ways from those of microlenders, the SPTF Universal Standards and the Smart Campaign’s Client Protection Principles largely remain applicable if we adjust the bar, enlarge the scope and adapt some of the language. LF: The end goal of this work is to create a module for SME finance within the SPI4 tool which is in broad use by investors with their microfinance portfolios. As investors expand their portfolios into SME finance, this would allow them to continue using the same tool with which they have already developed familiarity and confidence. Lucia Spaggiari serves as the business development manager for MicroFinanza Rating and leads the e-MFP/SPTF project through which she drafted a framework for evaluating the social performance of SME finance. The final paper will be released during European Microfinance Week 2018. Laura Foose is the executive director of SPTF. author: MicroCapital team

Originally published by NextBillion 2017 Global Findex has generated much reflection on the state of financial inclusion – and plenty of analysis of the data, looking for the buried treasure of some new trend or pattern. This yields important insights. The Financial Inclusion Hype vs. Reality report by the Center for Financial Inclusion (CFI) is particularly worth reading for its in-depth and honest reflection of what Findex tells us. But when using Findex, there are important things to keep in mind. First, while the overall figures and trends are important, the numbers for any one country should be treated with caution. This is not because we mistrust the Findex team or their work. It’s simply the result of what Findex is – a set of surveys based on randomly selected (hopefully representative) population samples of more than 150,000 adults in over 140 economies. And surveys can – and often do – go wrong, particularly when they deal with difficult or personal subjects (like finance) or are conducted in countries undergoing political and economic turmoil. This reality forms the backdrop of our work at the Microfinance Index of Market Outreach and Saturation (MIMOSA) project, which since last year has been supported by a strategic partnership with e-MFP. A huge part of MIMOSA is collecting and comparing data – from credit bureaus, microfinance and banking associations, central banks, third-party surveys like Findex, and our own field surveys. We have now done this in 10 different countries. Certainly, 10 countries is not 140, and that’s where Findex continues to play a key role in this process – it’s the only resource that genuinely covers the world. But our work has given quite a different perspective on the financial inclusion trends Findex is highlighting. Let’s look at a few examples. ‘Shy Borrowers’ = Big Data Discrepancies In MIMOSA’s work, using data from a credit bureau in Peru in 2015, we found 26 percent of adults to be borrowers from formal institutions, such as banks, credit cooperatives and microfinance institutions (the measure of “credit penetration”). Meanwhile, in its findings on Peru, Findex reports these figures as 11.2 percent and 14.7 percent in 2014 and 2017 respectively. Similarly, in our 2018 Nicaragua report, relying on data from the central bank and the microfinance supervisory body, we calculate credit penetration of 18 percent, which increased significantly from 2014. Findex reports 11 percent credit penetration in the country, with a significant decrease since 2014. When a survey captures fewer borrowers than the number reported by the lenders, the survey is probably missing the “shy borrowers” – people who are reluctant to discuss their borrowing history with a stranger, whether on the phone or in person. The practice appears especially prevalent in some Latin American countries with active credit markets. For example, we have not done a MIMOSA report on Mexico, but the country’s 5.8 percent loan penetration rate reported by Findex is simply not believable, placing Mexico – well known for its very active and competitive credit markets – at the same level of credit penetration as countries with far less developed credit markets, like Mali. The problem is not limited to Latin America. In Morocco, our field survey in 2016 found high reluctance among people to even talk about credit, let alone acknowledge having borrowed themselves. Part of this is religious, following Islamic teachings that prohibit lending on interest, and part is cultural. But whatever the reason, the result is that Findex reports credit penetration in Morocco at 2.6 percent, among the very lowest in the world. Yet its credit bureau shows 10.1 percent of adults having active loans. And what about Bangladesh, the “cradle of microfinance”? Findex shows an inexplicable drop from 23.3 percent credit penetration in 2011 down to just 9.1 percent in 2017. Yet simply combining the current active loan portfolios of its three largest MFIs implies a credit penetration of nearly 20 percent, and that doesn’t include any other MFIs, banks or other formal lenders. Of course, individuals may hold multiple loans (and MIMOSA has developed a well-tested technique for estimating this practice in the absence of good data), but even the most generous allowance for multiple borrowing cannot account for such a large disparity in Bangladesh between Findex and lender data. The Fickle Nature of Survey-Based Data Under-reporting of credit by “shy borrowers” is one scenario where a survey like Findex can go wrong, but over-reporting is also possible. Our current work in Jordan identified approximately 560,000 recent MFI and bank borrowers in the country, representing 8.4 percent of the adult population. Findex reports 16.6 percent, implying about 1 million borrowers instead. Where do all these additional borrowers come from? At least part of the explanation comes from Findex’s sampling. In its methodology, Findex notes that 12 percent of the survey respondents were non-Jordanians. And yet, according to the 2015 census, non-Jordanians (migrants, refugees and others) make up 33 percent of the country’s population, and a recent survey in Jordan conducted by GIZ and BFC found that these households are seven times less likely to borrow from financial institutions than Jordanian citizens. Findex’s under-sampling of these non-citizen residents is one likely reason for the inflated level of credit penetration reported by the survey. The Deeper Value of Findex Does that mean that Findex should be ignored altogether? No. Indeed, there are some aspects of financial practices that can only be captured by surveys: reasons for not opening accounts, for example, or use of various informal financial products. Likewise, the CFI analysis does a wonderful job of capturing an element that is both notable and real – the growth in the number of bank accounts that go unused. That too, though, can be validated by hard (non-survey) data. Over the years we at MIMOSA have grown less reliant on Findex data, focusing increasingly on our own database of verified data from 10 countries and counting. Still, a large, multi-year dataset like Findex is invaluable, and will remain so even for the MIMOSA project. Until a better approach comes along, the only way to create a 140-country, multi-year dataset will be through a survey. But it’s important to use such survey data carefully, recognizing that it can contain significant departures from the truth – departures that themselves can often point to important factors, such as the presence of “shy borrowers” or widespread social discomfort with debt. The Global Findex is valuable not only in those countries where its data is right, but also when its findings produce the kinds of gaps and inconsistencies described above. In those cases, recognizing the gaps can spur further investigation towards what is ultimately the goal of all researchers: the truth. Image credit: Martin Fisch, via Flickr. author: Daniel Rozas

First published on NextBillion, 2 May 2018 This is a basic challenge facing investors seeking to “exit,” i.e. sell their equity stakes to a new buyer. The issue isn’t entirely new. It first emerged in the mid-2010s, when several microfinance investment vehicles (MIVs) were starting to reach the end of their ten-year terms, and were seeking to divest their assets. This issue was first addressed in the financial inclusion sector by a 2014 paper commissioned by CGAP and CFI, which first defined many of the key questions that socially responsible investors need to address when selling their equity stakes. With another four years of multiple exits under the sector’s belt, NpM, Netherlands Platform for Inclusive Finance, along with the Financial Inclusion Equity Council (FIEC) and the European Microfinance Platform (e-MFP) asked us to take a closer look at one particularly tricky part of the exit process - selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients. The result is Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits - a new paper that goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.” The research - an investor survey, several in-depth interviews and a workshop during European Microfinance Week - found a mix of approaches applied by different investors. But these nevertheless shared many common elements aimed at making sure that the buyer will honor and pursue the social mission of the institution being sold. We consolidated these elements into a “Conceptual Framework for Buyer Selection” – a flowchart representation (plus explanatory notes) of the steps and criteria inherent in responsible buyer selection in microfinance equity exits. However, there was an important dissenting view among some investors, which holds that the Do No Harm exclusionary criteria are insufficient for a social investor. After all, a commitment to a social mission is a positive one; it must do good, and not simply avoid doing harm. In effect, this view seeks to invert the process, first deciding whether the financial offer meets the selling investor’s pre-defined financial objectives, then considering its value to the institution’s social mission. That value need not be strictly mission-driven, nor is there any expectation that the ideal buyers are socially-motivated NGOs. Rather, the question is of organizational fit. Extending the medical analogy somewhat, we call this the Best Interests approach. We believe that this model, with its positive obligation on the seller(s), is better aligned with pursuing a social mission while delivering a reasonable financial return - which is at the core of the social investment value proposition. The Conceptual Framework for Buyer Selection consolidates the practices of different investors we spoke to, but also advocates an evaluation process which moves beyond Do No Harm towards Best Interests, while incorporating elements of both. It is structured so that questions are organized based on the type of transaction being contemplated: a minority or majority stake being sold, as part of a consortium of shareholders, or by a single investor. The framework is not designed to be - nor could it be - one-size-fits-all: Each exit is dependent on the investee’s mission and the context in which it operates, as well as the seller’s own objectives. The framework should be thought of as providing a rubric that each seller can expand upon themselves. It can be thought of as a three-stage process: Are there exclusionary factors which mean the potential buyer is manifestly unsuitable; and, if not, is there any reason to believe that regulatory approval for the purchase would be difficult or unlikely? If not, is the initial, indicative financial offer within a predefined range that is acceptable to the seller(s) based on the overall double-bottom line objectives of the fund? If so, how does the proposed buyer, and its strategic objectives for the MFI, align with the social mission and the other best interests of the MFI? We believe that the responsibility of finding the right buyer lies very much with those doing the selling. And if the sale means handing over control - a majority stake - this creates an even greater burden. As we argue in the conclusion, “A buyer selection practice which gives primacy to the financial offer and considers social mission and strategic value to the investee - the investee’s best interests - only to reject egregiously unsuitable buyers, fails to keep in mind that the best interests of the MFI and its clients is, for the investors who put funds into the MIV, arguably the primary reason for investing in the financial inclusion sector in the first place.” We hope this framework will serve as a resource for investors embarking on an equity sale. We hope it could also: help investors to brief external organizations that assist them in exit trajectories (investment banks, advisory firms, etc.); assist new categories of impact investors that have little experience in exits; and serve as a guide to potential buyers to help understand selection criteria and prevent interested (but unsuitable) buyers from wasting time on a futile due diligence process. We hope too that it will inspire further work on an issue which, as equity sales continue to grow, will only increase in importance. Photo by Braden Hopkins on Unsplash author: Daniel Rozas - Sam Mendelson

This blog first appeared on NextBillion April 18 Technology’s double-edged sword Surprisingly, this little axiom long pre-dates social media. In fact, it goes back at least as far as 1973, when artists Richard Serra and Carlota Fay Schoolman broadcast a short video entitled “Television Delivers People.” But whatever people have until now understood of their relationship with technology platforms such as Facebook and Google, there can be no doubt that the mood has turned. For all the Pollyanna-ish talk of liberation, efficiency and modernization, technology is increasingly seen as the proverbial double-edged sword – something not just from which to benefit, but also, as CFI’s Elisabeth Rhyne has argued just this week, from which to be protected. The protection of clients is central to financial inclusion (or, at least, it is when done well). Technology, too, becomes more and more embedded in how financial services can be offered to low-income and excluded client segments. Coming with it are the well-known opportunities to reduce costs, increase outreach, drive financial education and in particular help remote populations access information and tools to increase their income and protect themselves from shocks. The recent development of Social Performance Management frameworks in financial inclusion reflects that these vulnerable target populations, the same ones on the cusp of benefiting from the proliferation of financial technology solutions, need special protection. Cambridge Analytica, with its cynical exploitation of users’ data, may appear like some cartoon villain, but it is merely responding with a supply to meet a demand in a rapidly emerging market. For the user, protection from this, in one form or another, is necessary – and inevitable. And in the financial inclusion sector, ‘client protection’ must stand alongside ‘opportunity’ as we evaluate how financial service providers (FSPs) offer cutting-edge, technology-enabled services and solutions to their clients. This focus on opportunity and protection is the double-pronged theme that underpins the European Microfinance Award 2018 – on Financial Inclusion through Technology – that launched its call for applications on April 17. Technology as liberator The rationale for focusing on technology in this year’s award is clear. Everywhere you look in the financial inclusion sector, technology is at the forefront. Traditional microfinance is costly and human-intensive. The human touch can be important, especially for remote, vulnerable populations, but this translates into the high cost to the provider of delivering services, and, inevitably, a high cost to the client. Reducing costs while still providing the valuable products and services that clients actually need opens the door to an increasing range of technology-enabled solutions that are transforming financial inclusion. Within the sector, technology is a driver for facilitating communication, expanding enormously the access and exchange of information, and instantly interconnecting people and services beyond geographic, cultural and language boundaries. Relatively cheap, transformational technology solutions have been made available for a growing number of users worldwide, including the key segments of women, rural communities and the very poor. Mobile money is a growing alternative to cash. The reduced costs and increased access to the Internet, especially through smartphones, enables new ways for clients to borrow, save, insure themselves and their livelihoods, and send money. But reducing the human element of the microfinance model may threaten some of the safeguards that protect clients, while moving some of the client’s interaction with the institution into the digital realm may risk increased over-indebtedness, fraud, or misuse of data. The risks and opportunities alike will depend to some degree on the service provider, and the landscape of digital and technology-enabled financial service providers is extremely wide. Traditional NGOs, MFIs, cooperatives, commercial banks, local development banks, insurance companies, Mobile Network Operators (MNOs) and Money Transfer Organizations (MTOs) are just some of those implementing technology solutions in different ways and levels of sophistication. The European Microfinance Award 2018 Each year, we at the European Microfinance Platform (e-MFP) launch the European Microfinance Award, in conjunction with the Luxembourg Ministry of Foreign and European Affairs and the Inclusive Finance Network Luxembourg (InFiNe.lu). Besides the cash prizes of €100,000 for the winner and €10,000 for each other finalist, the press exposure and investment opportunities that come from being a semi-finalist, finalist or winner of the Award can be enormous. Now that the call for applications is open, all the details of eligibility and more about the scope, deadlines and timeline of the award can be found in the explanatory note on the Award website. To profile and catalyze replication of the most promising of the technology-enabled solutions, we invite application from FSPs that use technology innovations to expand outreach, broaden product offerings, improve the client experience and increase operating efficiency, all guided by an unwavering focus on socially responsible finance. We anticipate receiving applications profiling a fascinating array of solutions, from technology-enabled credit, savings or insurance products, delivered to clients via mobile operator network, USSD, e-wallet, internet, applications, credit/debit card, ATM or other digital channels or process, to domestic or international payment and transfer facilities, or delivery-side technology solutions that increase outreach and efficiency of the delivery of financial services. We hope to see examples of technology enabling non­-financial services as well, such as financial education for clients. In previous years, the award has covered themes as diverse as access to education, housing microfinance and microfinance in post-crisis contexts. In many ways, each of these focus a great deal on the opportunities – how to best increase access to quality education; how to sustainably provide support to clients who want to build or improve a home. This time, we have sought to be mindful not just of the opportunity, but the risks of technology. For this reason, while the pace of innovation is breakneck and the opportunities virtually limitless, we hope to see applications from providers who not only focus on the benefits of technology-enabled financial solutions, but also place the protection of the client, especially the most vulnerable among them, at the core of their programs. Eligibility for the Award Eligible applicants are organisations active in the financial inclusion sector who use technology-enabled solutions to increase outreach of quality financial services to financially excluded segments. The technology must focus on socially responsible finance for low income, vulnerable and excluded groups. At least one of the technology-enabled solutions the applicant has introduced must have been fully operational for a minimum of two years. Eligible institutions also have to be based and operate in a Least Developed Country, Low Income Country, Lower Middle Income Country or an Upper Middle Income Country as defined by the Development Assistance Committee (DAC) for ODA Recipients. Various types of organisations are eligible including MFIs (all legal forms), NGOs, cooperatives, commercial banks, local development banks, leasing firms, insurance companies, Fintech companies, mobile money providers, mobile network operators and mobile transfer organizations that provide financial services to retail clients. author: Sam Mendelson

in a workshop session at European Microfinance Week 2017, Financial Education (FE) is one of the pillars of financial inclusion. Without it, microfinance clients are not able to make informed and appropriate choices; they cannot compare the costs of financial products, understand the risks of failing to repay their own loans or of taking on someone else’s risk in cases of guarantees, or accurately assess how much credit, and what type, they actually need – if any. FE may be important, but there are key challenges to its provision. First, the link between offering FE and achieving positive impacts are not always direct and clear. Evaluation of the outcomes of FE shows impact to be inconsistent – a function of that impact’s sensitivity to the content and delivery of the education. Second, it is also unclear how, even if the content and delivery to achieve impact were standardised, financial education can be provided sustainably at scale. Provision of any type of training is costly. The Microfinance Centre, working with the ACCION fellowship program, has examined this issue and suggests that MFIs with a focus on customer-level outcomes would attract cheaper funding from social investors, and reap the benefits of more loyal customers and lower default rates. It remains to be studied if these incentives work for more than a limited selection of MFIs. Why? Because empirical tracking of customer-level outcomes is expensive. For the same reason, the ILO-approach of certifying FE trainers may have limited reach. This certification uses interactive learning and training materials, developed in collaboration with Microfinance Opportunities, Citigroup and Freedom for Hunger. While it ensures quality of FE training delivery, its cost might discourage MFIs from using those trainers. New research from Uganda suggests some progress is being made on these two issues of proving impact and reducing cost. German International Cooperation (GIZ) partnered with Uganda’s Mountain of the Moon University (MMU) and the German Institute for Economic Research (DIW Berlin) to compare the impact of more typical FE training formats and the ‘Financial Literacy Ring (FLIR)’ - which is highly interactive, requiring participants to complete exercises and solve hypothetical problems about financial planning, saving, investment, credit and choice of financial institutions. The FLIR is conducted at participants’ workplaces; the more traditional format resembles a classroom lecture: it provides the same content in the same amount of time, but does not incorporate learner activities. 1,291 market vendors, 80 percent of them women, were randomly allocated between the two training formats and a control group that received no training. The study findings are encouraging for FE providers and promoters, in line with more recent literature which reports modest but significant effects of FE interventions with varying characteristics (lengths, delivery setting, etc.) These findings include: FE training, even as short as two hours as provided in this treatment group, does positively affect financial literacy. The differences between the two training formats are not statistically significant. Financial literacy is measured by a scale comprising five surveys that assess respondents’ financial knowledge, considering both whether a question was answered correctly and its difficulty. The FLIR, but not the ‘traditional’ lecture-training format, has a positive impact on investment behaviour and on savings behaviour. FLIR participants increased their average investment by US$27.71 – more than double that of those receiving the ‘traditional’ training format. FLIR participants increased their net savings by US$42.75, a 38% increase over the baseline six month earlier. Though positive trends were seen, there were no statistically robust effects of either training model in terms of behavioural change in financial planning, borrowing and understanding financial institutions. The two models of FE provide a contrast between “active learning” and “traditional lecturing” within standardised lesson plans. The research finds that active learning has a clear positive impact on savings and investment outcomes, but weaker effects on debt-related outcomes. The outcomes suggest the active learning intervention is superior as it works via three mechanisms: increased financial literacy, self-control, and financial confidence, while lecturing only affects financial confidence. Whereas these findings do not directly address the second issue of sustainability, the opportunity to produce significant effects with a highly condensed format – just two hours training at the worksite of the customer – is encouraging: such an intervention can be efficiently integrated into the marketing campaign of any financial institution. The FLIR is comparable to the VisionFund approach, which has developed a set of very short training inputs that are delivered by its field staff as part of their usual routine of meeting groups. VisionFund combines visuals and stories with repetition. Like the FLIR, VisionFund’s approach draws on behavioural economic research. It is clear to those of us working directly in this field that FE works: it does have positive effects on financial literacy and savings and investment behaviour. However, FE is not a panacea, it is not a miracle cure, and its success depends very highly on the design of the intervention, and whether it draws on learning and behavioural theory. It seems obvious that a less learner-centred training format is less effective, and the research bears this out. However, the experiences shared here suggest that it is also less efficient. It is thus important for any MFI – or social investor – to ensure that the learner-centred concept is not watered down into a de facto traditional delivery in a short-sighted attempt at cost control, which misses the longer-term benefits of increased financial capability both for the institution as well as the clients. author: Oliver Schmidt

This latest Dialogue was written by e-MFP’s Sam Mendelson with support from Award consultants Katarzyna Pawlak and Ewa Bańkowska, and e-MFP’s Gabriela Erice and Daniel Rozas, and presents the housing programmes of the ten semi-finalists across several sections. Entitled Building New Foundations in Housing Microfinance , it looks at the innovations underway in what has for too long been a niche product, but which is growing in importance as MFIs respond to the fact that so many of their financial services are used for housing anyway. Now, they increasingly see the opportunity to innovate in providing a range of financial products and non-financial support to help clients improve their homes, addressing issues of safety, security, health and income-generation in the process. Building New Foundations in Housing Microfinance opens with ‘The Challenge of Housing’, and outlines the factors which have kept housing microfinance so relatively peripheral in the past, even in the face of immense demand, and provable positive impact on clients of access to finance for quality housing. The second section is on the European Microfinance Award itself, and outlines the selection process, the eligibility criteria, and the factors that the adjudicators would look to in evaluating the housing programmes of the applicants. The third section presents the three broad ways that the semi-finalists helped clients improve the quality of their housing: providing finance for housing (via housing microfinance loans, micro-mortgages, savings and insurance), providing support for housing (via Construction Technical Assistance, client, staff or builder training, or provision of legal support), and providing social benefits through housing (by improving clients’ security, health, safety and environment, through the vehicle of housing finance). Interspersed throughout these three categories of support, Building New Foundations in Housing Microfinance presents case studies of the ten semi-finalists and the innovation within each of their housing finance programmes. The final section of the Dialogue distils the innovations among the varied initiatives into seven factors for success, including: a genuine commitment to Technical Assistance; use of partnerships; flexibility in products; income-generation opportunities; new approaches to collateral; new approaches to calculating household income; and – especially in the case of the eventual winner, Cooperativa Tosepantomin of Mexico – a holistic, demand-driven and multi-tiered response that reflects the complexity of the challenges being addressed. Thanks from everyone at e-MFP to all the applicants, the members of the Pre-selection and Selection Committees and the High Jury who evaluated the applicants, and the consultants and e-MFP team who oversaw the Award process and this publication. And stay tuned for an upcoming multi-author book entitled Taking Shelter: Housing Finance at the Base of the Pyramid, which will build on the work in the Dialogue and provide a much-needed ‘deep dive’ into the housing microfinance landscape. author: e-MFP

Kashf was established in 1996 to provide microcredit facilities and other financial and non-financial services to poor households. It targets mostly women and aims at enhancing their incomes, savings, food security, and improving access to health and education. Kashf offers a range of products and services including microcredit, micro-insurance (health and life insurance), savings, financial education, business development services, and social advocacy interventions aiming at creating awareness about gender discrimination and social issues at the community level. Kashf’s outstanding achievement, however, is in the field of increasing access to education for children. Education in Pakistan faces immense challenges. With an average of 37 students per teacher, 18% of teachers absent every day, unsafe school environments, 58% of state schools without toilets, 64% without access to water, and 46% of Grade 5 students not able to read, it is evident that there is an endemic quality issue in Pakistani public education, mainly due to insufficient government investment in the sector. Kashf’s winning initiative was “Kashf School Sarmaya” or Kashf Education Finance Program (KEFP), a holistic credit facility providing access to finance to LCPS as well as capacity building and pedagogy training for teachers and school owners, and Training of Trainers on Financial Education for Youth. With this program, Kashf aims to support LCPS by helping them improve school infrastructure, teaching methods and school management skills. More information on the pedagogy and school owner training can be found on the 2016 Award page of e-MFP’s website. What’s happened since Kashf won the 2016 Award? Beyond the increase in programme outreach made possible by the Award prize, in order to better map the baseline data of the clients, Kashf revised its business appraisal forms for the program in 2017 to better gauge school clients’ profiles prior to disbursement. The two-page document assessment process of a school is now conducted more comprehensively, with data collected digitally via tablets. A revised process adds information on myriad other factors, such as grade level student enrolment and attendance, grade level fee acquisition, and lists of schools’ asset and quality and comprehensive details of loan utilisation. After the revision of the business appraisal process, Kashf Foundation has also conducted Training of Trainers of its existing field-based operational staff, the Business Development Officers (BDOs) responsible for loan mobilisation and disbursement. 1,210 BDOs received this training in 2017. KEFP has also addressed a significant challenge related to the supply of quality teachers faced by the sector through the provision of capacity building sessions for schoolteachers and school management. With on-the-ground experience of providing systemised financial education trainings to women entrepreneurs, Kashf had the model and expertise to conduct such trainings. To build on this, Kashf developed the Financial Education for Youth program with the goal of teaching basic financial and numeracy skills to students. Kashf Foundation has also developed an in-house monitoring tool called the Quality Monitoring Framework (QMF) to gather information on indicators related to school quality and progress in order to effectively map the impact of the interventions. Impact assessment results from the latest QMF conducted in 2017 show an increase in 68% of profits for around 77% of the schools, which has led to improved infrastructure, resource materials, healthcare facilities, teaching quality and school management. 34% of the school loans have been used for infrastructural improvements, 33% for furniture, 12% for stationery and resource material provision and around 8% for acquiring computer systems for students and the school administration. With respect to the indicators on education access, 71% of schools have observed an increase in their enrolment of around 28 students on average. On the quality side, 15% of schools have upgraded their first-aid facilities; 23% have developed libraries, which provide a more conducive environment for students to read and learn. Around 20% of schools have also understood the importance of better organising their classroom sessions and responded with the introduction of lesson plans and timetables. Kashf Foundation was an outstanding candidate for the 2016 European Microfinance Award. The evaluation teams were struck by the innovation and vision in Kashf’s program, and everyone at e-MFP was proud to be able to highlight their achievements as they went on to win the Award. We are thrilled too to be able to see the concrete improvements that have taken place in the last year, a clear result of the Award prize being productively invested, and the access to global expertise and support that Kashf has been offered on the back of its profile as a European Microfinance Award winner. We look forward to providing another follow-up down the track. For more information on the 2016 Award, see also the European Microfinance Award website author: e-MFP

The opening one was on the European Microfinance Award – this year on Housing – which gave representatives from the three finalists’ organisations the chance to present their programs. This kicked off with a keynote address from Sandra Prieto from Habitat for Humanity’s Terwilliger Center for Innovation in Shelter during which she laid out the key challenges in increasing access to affordable housing: lack of collateral, lack of guarantees, a relative lack of funding for housing finance, the need for Technical Assistance to help clients either build homes from scratch or expand or otherwise improve their homes, and the problem of land tenure. Despite these challenges, housing microfinance has massive potential for social impact and diversification of MFIs’ portfolios. The three Award finalists, Sandra said, have common elements: first, they all address not only access to housing, but also other housing-related social needs such as water, sanitation, health and energy; and they each put client needs at the centre of their interventions. Augusto Paz-Lopez Lizares-Quiñones from Peru’s Mibanco, focused on the ‘ecosystem’ approach of Mibanco’s housing initiatives and products. As he put it, Mibanco’s housing finance goes beyond products, but is seen as a business model which creates and leverages commercial alliances to address other needs such as sanitation. Frank van der Poll of The First MicroFinance Bank – Afghanistan emphasized the bank’s adaptation of its products to its rural clients, with seasonal re-payments (so as to accommodate harvest periods), and with a TA component which addresses earthquake resistance and water/sanitation needs of clients. And Álvaro Aguilar Ayon of Cooperativa Tosepantomin in Mexico said that Tosepantomin believes housing is key to improving the quality of life of its members – the cooperative’s core social mission. It offers services according to members’ needs, engaging cooperatives in various activities such as the production of bamboo (a local material used in the construction of the houses) and works according to a Sustainable Household model, thus collecting and using rainwater, solar energy and organic composting. Pursuing empowerment, the panellists said, “requires understanding women and their needs within the environment in which they live…and considering them not as individual clients, but…as members of households”. A deeper look at the data, they argued, demands a multi-dimensional and nuanced response, that goes far beyond just how many women can receive microcredit. There still is a long way to go. In some regions, very few women have access to credit or a bank account. Even when they do, it may be husbands who truly make financial decisions, making women’s access to finance a mirage. Anna said that MasterCard takes a systemic approach to women empowerment, determining what the gaps in the ecosystem are and how they can overcome these. They also determine how they can leverage technology to provide opportunities and innovative solutions. Bdour said that Microfund for Women defines women empowerment as requiring material, cognitive, perceptual and relational change. Of these four levels, financial services have not yet been successful in relational change. Bobbi of Grameen Foundation adds a fifth level to work on: structural change – the anthropological barriers that keep women from feeling empowered to be financial actors. Imran of Innovations for Poverty Action said that the current challenge for women empowerment is intra-household dynamics, and how to measure this. More details on the discussion in this intriguing session are covered by Bob Summers in MicroCapital. The third and final plenary of European Microfinance Week was the closing session: Microfinance: positioning ourselves for the next decade. Moderated by Paul DiLeo of Grassroots Capital Management, the panel included John Alex of Equitas Small Finance Bank, in India; Tim Ogden of the Financial Access Initiative; and Renée Chao-Béroff, of PAMIGA. How will the sector position itself in the next decade? Who will be the new providers? What client segment will be reached? How will technology enable outreach without compromising social mission? There is a need for investors that have objectives aligned with this task. Neither banks nor FinTechs nor profit-driven business models “cloaked in impact jargon” will tolerate the trial and error, costs and sub-optimal profits required to address the intractable challenges facing the poor in all its dimensions. FinTech remains the elephant in the room whenever these discussions reference ‘impact jargon’ or ‘lip service’. The challenge, as Tim said, is that while FinTech has provided great contributions to microfinance, digital finance in itself is not committed to high-quality services that have a social impact purpose. “FinTech’”, he said, “is no silver bullet.” (Or rather, it is, because the proverbial silver bullet is itself a myth). Renée argued that MFIs that see themselves as a means and not an end in impact value chain will be able to innovate, while the others will ‘miss the train’. John argued that reaching “massive demand” such as in India “will require specialisation and sychronisation of products”. Tim was relentlessly contrarian: “The microfinance movement began with group of institutions that cared about customers; the current digital providers expressly don’t…they care not about providing value but about extracting value”. But the increasing involvement of commercial banks “will be an amazing thing”, he said. It will mean that microfinance is really achieving its role of bringing the unbanked into the formal financial system. This, itself, will be about more than just extending access to microfinance clients. Or as Paul has since written after the plenary: “Eliminating poverty is hard and will require continuous innovation and openness to new products, business models and strategies. This will likely require new thinking about how microfinance can combine with other services to the poor to form an “ecosystem” of support rather than being seen as an end in itself”. See NextBillion's video recording of Friday's plenaries here author: Sam Mendelson