Pequeño pero poderoso: CGAP y el futuro de la inclusión financiera (ENG)
After six years leading CGAP, it is time for me to move on. As many of CGAP’s partners know, I am leaving to take up a new role at the Bill & Melinda Gates Foundation focused on women’s economic empowerment — an exciting area that will allow me to apply the many lessons I’ve learned from 15 years in the inclusive finance space to an entirely new set of challenges.
I write this from just outside of Cape Town, as South Africa enters a new round of COVID-19 restrictions. This latest lockdown serves as a sobering reminder that we are nowhere near the end of this pandemic. For me, it also creates some space to reflect on the changes that have taken place in my six years at CGAP and, particularly, how the pandemic will shape the future for all of us.
So I’d like to take this opportunity, in my last CGAP leadership essay, to share some thoughts with you on the post-pandemic future of financial inclusion.
Let’s start with the damage this pandemic has had on the lives of the poor…
At the end of 2019, the world was experiencing the longest period of sustained growth and improvement in human welfare in history. From 1999 to 2019, the number of people living in extreme poverty worldwide fell by over a billion, and global growth prospects looked strong heading into the 2020s. But, as we all now know, there was trouble brewing in the form of a novel coronavirus.
I can remember being at a meeting in Paris in February of 2020, listening to a podcast about the impact of COVID-19 in Wuhan, and only then beginning to understand that it might have anything to do with my life. It turns out, my flight home from Paris was the last time I got on an airplane to cross an international border until I came to South Africa several weeks ago.
That tiny virus has changed the lives of every person on the planet in profound ways. And that impact will reverberate in emerging markets for many years to come.
We know that the COVID crisis is having a devastating impact on emerging markets and will likely continue to do so until the pandemic is fully under control, which may take several years. The World Bank’s latest estimate is that as many as 97 million people fell back into extreme poverty in 2020. This is an enormous setback. COVID-19 will wipe out five years of progress toward ending extreme poverty. Just to give you a sense of how severe this crisis is, take a look at the chart below. It shows an estimate from our colleagues in the Poverty Global Practice at the World Bank of the steady progress we have made in reducing extreme poverty since 1992. Each of the bars below the line represents the number of people who moved out of poverty that year. Numbers above the line are the people who fell back into poverty. Although the 2020 number in the chart below has been adjusted slightly downwards in the Bank’s most recent projections, 2020 still dwarfs any prior setbacks.
As is well documented by now, the impact of the pandemic is being felt disproportionately by women. Analysis by McKinsey, based on data from the United States and India, suggests that women were 1.8 times more likely than men to have lost a job due to the pandemic. And more recent analysis by the World Bank suggests that job recovery for women has been considerably slower than that for men. We are also seeing this pattern play out in small business. A survey by the World Bank found that women were significantly more likely than men to close a business as a result of the crisis. Latin America, South Asia and Sub-Saharan Africa all experienced both high levels of firm closure and significant gender gaps. There are many potential reasons for this, but high among them are women’s overrepresentation in sectors most affected by the crisis, disproportionate caregiving responsibilities, and social norms that prioritize men as breadwinners over women when work is scarce.
So what have we learned in the last year?
While 2020 was a year of tremendous setbacks, it has also been a year of valuable learning, which has seen an acceleration of trends we were witnessing prior to the pandemic. That learning will be important as we think about building back. I would group it into three broad areas.
First, financial inclusion really matters. People who lost work had to rely on savings, remittances or government payments to survive, and those financial tools provided a crucial lifeline to many families. One of the main government interventions in the last year was social welfare payments. The World Bank currently estimates that 215 countries implemented new social protection programs last year. In countries that have invested in inclusive financial systems, this task was made a lot easier. Take India: getting social payments to hundreds of millions of poor people would have been daunting in the best of circumstances, impossible during a pandemic. And yet, the Indian government got social payments, averaging around $20 per payment, to 428 million recipients of various COVID relief programs. Why? Because India invested in financial inclusion. India created the Aadhaar ID and made it universal, which facilitated access to accounts. It mandated that low-value accounts be made available to every household. And it built world-class electronic payments infrastructure. Because India increased its rate of financial inclusion from 35 to 80 percent between 2011 and 2017, it was able to mobilize to help hundreds of millions of people in a matter of months.
The second lesson is that we mustn’t take our old friends for granted. Microenterprises occupy a grey zone between households and enterprises, but they are an important source of livelihoods for poor households. The World Bank estimates that more than 70 percent of workers in emerging markets earn their living in the informal sector. The crisis has pummeled microenterprises, particularly those engaged in retail trade, tourism and leisure. That has, in turn, had an impact on the microfinance institutions that serve them.
Some of you may recall a blog I wrote with Tim Ogden at the outset of the crisis, raising concerns about the potential impact of the pandemic on the microfinance sector. Happily, the immediate crisis we foresaw was averted, thanks to timely interventions by regulators, investors and providers. But we are not out of the woods yet. CGAP has tracked the impact of the crisis on MFIs since the beginning and, while the picture is not yet completely clear, there are a few messages coming through in the data. We know that lending contracted sharply in the early days of the crisis and it has not yet fully recovered to pre-crisis rates, as MFIs hold on to liquidity in the face of heightened credit risk and suppressed customer demand. Forbearance measures introduced in many countries mean that we do not yet have a clear picture of asset quality. We know that credit risk ratios are up by 45 percent in a sample we are following – as you can see in the chart below, particular areas of concern are small and medium sized MFIs, as well as those operating in Sub-Saharan Africa.
And yet provisioning doesn’t match the data on credit risk, suggesting that there may be significant under-provisioning. And that is potentially building up problems for the future.
We are still a long way from this being over in most emerging markets. And the risks of scarring in the microfinance sector remain significant. But the risk horizon has shifted: I am no longer concerned about MFIs going down in a sudden crash, but rather that the industry will be hollowed out by a slow, sustained grinding away of capital bases, weakening institutions. There is a risk that when it is safe to build out lending portfolios again, MFIs will be constrained and lending will remain subdued, just when we need liquidity to get economies moving. Scarring in the microfinance sector could have a big impact on the livelihoods of poor people for a long time to come.
The last lesson is that it is quite clear that the future is digital. The world shifted massively online in March of 2020. We began to work, buy our groceries, entertain ourselves and stay in touch with friends and family online. The digital economy is now central to our lives.
That shift is taking place for many people in emerging markets too. More people are managing their finances online; buying and selling on e-commerce platforms and social media; and finding work through gig platforms, specializing in everything from food delivery to carpentry. Although we don’t know the overall scope of the gig economy in emerging markets, we believe it’s already substantial and growing rapidly, particularly in Asia. In a survey of gig workers in four of the most populous countries in the world, BCG found that as many as 1 in 3 workers use platforms to find work as a secondary source of income, with 12 percent of workers in China reporting that gig work is their primary source of income. And we are beginning to see financial services embedded into online services, with all the opportunities and risks that entails. This is the future of finance and work, all wrapped up into one.
Given all we have learned in the last year, how should we think about planning for the recovery?
We need to start by thinking about what poor people need to ride out this crisis and build back. In basic terms, CGAP is focused on three universal needs: people need to earn an income, they need to save or otherwise harness tools to protect against shocks, and they need to gain access to the kinds of essential services that allow them to deploy their labor more productively and build human capital. This guiding stars framework is the lens through which CGAP will be looking at all its work – and it is important because it forces us to remain firmly focused on the poor and their fundamental needs.
In following these guiding stars, I would suggest there are five areas where the financial inclusion community should focus its attention in the coming years.
First, we need to make sure that poor people are actually part of the digital economy. As the world shifts online, the risks of exclusion will grow for those without internet — exclusion not only from financial tools, but also from educational opportunities, markets and work. At the most basic level, people require access to four things to engage in the digital economy: a phone, a data plan, an account and a cash-in/cash-out point. Without access to these digital on-ramps, full participation in the digital economy will remain limited for the world’s poor. This means we need to keep working on account access, improving the capillarity of cash-in/cash-out networks and getting smartphones and data plans out to more people. It also means we need to reduce the persistent gender gap in access to both accounts and phones.
Second, we need pro-poor banks fit for the digital future. There is little doubt that MFIs play an important role in providing financial services for poor households and informal enterprises. The latest MIX data indicates that MFIs serve around 120 million low-income people globally and this is likely an undercount. But microfinance is an industry that has been slow to modernize and faces increasing digital-first competition. We are seeing the emergence of fully digital banks in a number of markets, like Tyme in South Africa or Nubank in Brazil. The extent to which they are reaching low income populations remains unclear, but this will be a space to watch. Ditto for merchant cash advance companies, which are essentially digitizing what MFIs do manually. MFIs will need to learn from these competitors or be pushed into increasingly marginalized market segments, which will limit their ability to scale and invest in improving services for their customers. The coming decade will tell us a lot about which kinds of banking institutions will be best positioned to serve the low-income segment.
Third, we need a better understanding of fintech and what it can do for the poor. The term “fintech” is used to describe a heterogeneous group of digital-first financial services providers. And it is certainly generating a lot of excitement and investment dollars. But what do we know about the extent to which fintechs are serving the poor, much less having an impact? Not very much, actually. A recent report by our colleagues at the Catalyst Fund tries to answer this question.
Based on a survey of 177 start-ups and 33 impact investors, here’s what we learned. Around $23 billion in funding has gone into fintech investments in Asia, Africa and Latin America in the last five years. But when you take a closer look at the data, it raises a couple of important questions. First, the funding is highly concentrated in just a handful of countries: ten markets account for almost all of those investment dollars. And the funding going to companies in Asia and Latin America is larger by an order of magnitude than that going into Africa – likely a reflection of low incomes and relatively fragmented markets. Second, although 35 percent of the surveyed companies stated an intent to reach the poor, only 5 percent said that more than 75 percent of their user base lives below the poverty line. About 70 percent reported that the poor made up less than 25 percent of their user base. While this data is imprecise, it suggests that fintech funding, while bountiful, has yet to make a meaningful difference for the poor. That is not to say that fintech won’t eventually play an important role, but for now the evidence simply isn’t there.
There are two kinds of fintech that do demonstrate strong evidence of reaching the poor and these are worthy of further examination. The off-grid and digital credit industries are perhaps the best examples we have of mature fintechs, and I think we can safely argue that both serve the poor in large numbers. Then the question becomes: Are those services adding value to poor people’s lives? And is access to that service making them better or worse off? In terms of CGAP’s three guiding stars — income generation, access to essential services and protecting basic standards of living — I would say that the off-grid sector stacks up pretty well. It facilitates access to electricity, which is clearly an essential service. And CGAP has demonstrated that these devices can be used as collateral for education loans and that the children of families who accessed those loans were more likely to stay in school. In addition, the industry has been attentive to the notion of safeguards; in fact, CGAP worked with GOGLA, the off-grid energy association, to help build a code of conduct for responsible lending, so it also stacks up well under our safeguards objective.
With digital credit, I think the jury is still out. A reasonable case can be made that short-term consumer credit is an important tool for resilience. If you need money in an emergency, digital credit is a fast and easy way to get it. But consumer credit is expensive and prone to abuse, and the digital credit industry has done less to build safeguards into its lending practices. As we move into an age where financial services are embedded into e-commerce, gig platforms and social media, funders will have to keep asking themselves these three basic questions: Does it serve the poor? Does it provide something they need? And is the service provided responsibly? Impact-oriented funders have an important role to play by engaging in the fintech space early and using their influence to encourage a stronger focus on both impact and responsible business practices. Funders may need to provide more patient capital to realize the promise of fintech for serving the poor. And they can also support skills development and the incubators and accelerators that help build entrepreneurial ecosystems.
Fourth, we need to continue building the digital infrastructure that makes it possible for providers to reach poor customers. There is little doubt that innovative providers are transforming markets. But their solutions depend on infrastructure — sometimes private, sometimes public — that is particularly important for reaching the poor. This kind of infrastructure is varied; it encompasses cash-in/cash-out networks, interoperable switches, APIs and potentially an emerging group of data aggregators. And while it is vitally important to the functioning of digital platforms, it is often overlooked. For example, cash-in/cash-out infrastructure underpins mobile money operations in Sub-Saharan Africa and, by extension, the fintechs that provide services over their platforms. Mobile money would literally not function without it, yet CICO networks are rarely mentioned in discussion of the digital economy. State-owned banks essentially play this role for many people in India and China. But there too, we all focus on PayTM, Alibaba and TenCent rather than the bank accounts that help make their business models work.
There is an important role for the public sector in promoting digital infrastructure and making sure it reaches the last mile — either as users of the system, regulators or sponsors. Today, this digital infrastructure is unevenly distributed. The system that got payments into the hands of poor Indians quickly — that doesn’t exist in most markets. We need to build this out in other countries, many of which don’t have the deep pools of tech talent that India has built over decades. We need to figure out how to expand infrastructure in rural areas so we can create viable on-ramps to the digital economy at the last mile. And we need to think about continuing to knit ecosystems together in a seamless manner that enables poor people to access digital services without having to open multiple accounts. Finally, we need to embrace emerging data infrastructures, which could have a transformational impact on poor people’s ability to access credit by giving them control over their own data and reducing the cost of managing it. This is going to be a huge lift. But I can think of few better targets for development assistance than building public good infrastructure that will serve an entire market in the same way UPI does in India.
We aren’t going to get to full financial inclusion without women. Mathematically, this is a pretty obvious point. But the bigger and more important point is that women have a vitally important role to play in economic growth and increasing household incomes.
Fifth, we need to focus on women. We aren’t going to get to full financial inclusion without women. Mathematically, this is a pretty obvious point. But the bigger and more important point is that women have a vitally important role to play in economic growth and increasing household incomes. There is a positive relationship between per capita GDP and gender equality in emerging markets. The pathways are complex and trying to establish a clear causal pathway across multiple markets is difficult. But we can take a look at one country, the United States, to see the potential for economic impact. Women’s participation in the labor force in the US grew from around 20 percent in the early part of the 20th century to 76 percent today. During that time, US GDP grew rapidly, driven by many factors, including population growth, technological change and productivity growth. Women entering the workforce contributed significantly to that growth. The Federal Reserve Board estimates that between 1948 and 1990, the rise in female labor force participation accounted for roughly half a percent of increase in real GDP per year. Further, the Fed estimates that since 1979, the majority of the rise in household incomes was a result of the increase in women’s participation in the economy outside of the home. So, we won’t get to full financial inclusion without women, but we also won’t maximize the benefits of economic growth in most emerging markets without it either.
It will come as no surprise that these themes will shape CGAP’s work program in the coming years. We have livelihoods teams looking at how financial services can help poor households generate income through micro and small enterprises, rural and agricultural work, and new platform-driven business models. We are looking at neobanks and fintechs to understand if they really do have the potential to serve the poor better than incumbent providers. At the same time, we are looking at ways that MFIs can digitize to improve their operations. We are looking at asset financing models that seek to bridge the digital divide, and resilience solutions that provide people with safety nets, such as government-to-person (G2P) payments and savings accounts. We are looking at data and the role it plays in emerging business models, but also ways we can free it up and empower customers with their own data. We are looking at market infrastructure, thinking about how we can get CICO points closer to marginalized customers. And we are looking at ways to make sure that customers are protected and providers incentivized to support better customer outcomes. In all of this, we look at the role of public policy — both in setting the rules of the game through regulation and supervision, but also in incentivizing collaboration and driving volumes through digital systems. And we are increasingly applying a gender lens to everything we do. Looking ahead, we will have new challenges and topics to cover, from conflict to climate change, and we will need to adapt to meet those challenges. We have made a lot of progress in developing a comprehensive toolkit of financial services for the world’s poor in the last 26 years, but we still have a long way to go to make sure those tools deliver better outcomes in poor people’s lives.
And finally, before I go…
I’d like to close with some brief reflections on my time at CGAP. When I first took on this position back in August of 2015, it seemed pretty clear to me that the financial inclusion world was moving toward a paradigm shift. But it wasn’t so clear what that new paradigm would be, although we correctly identified many of the trends that would shape it like the changing nature of work, migration, and climate change.
What the pandemic did was accelerate that paradigm shift. I see us as now being pretty solidly in the early days of a new model, where we focus less on signing people up for accounts and more on understanding what poor people need and then looking for ways finance and technology can help meet those needs.
I’d like to think that this new paradigm, where finance plays a supporting role in helping people to better manage their lives, will be with us for the next 10 years.
Beyond that, I offer you four lessons learned.
One: Beware of hype. The impact of technology on our lives is the single biggest change in our field, and it is transforming everything we do. CGAP was either lucky or smart enough to get in on digital transformation early and therefore has something to say about many of the innovations driving financial inclusion today. But more importantly, our roots in the microfinance movement mean that we remain firmly focused on what financial inclusion can do for poor people. It is easy to be seduced by technology and exciting new business models, but I have found that one increasingly has to work pretty hard to find the poor in some of the innovations being promoted under the banner of financial inclusion. CGAP plays an important role in testing the viability of innovative approaches while at the same time asking the hard questions about exactly how that innovation will benefit poor households. It is that balance between the embrace of the new and a healthy dose of skepticism about oversized claims of impact that makes CGAP so effective.
It is easy to be seduced by technology and exciting new business models, but I have found that one increasingly has to work pretty hard to find the poor in some of the innovations being promoted under the banner of financial inclusion.
Two: Serving the poor is hard, so manage expectations. At a time of rapid change, it can be easy to assume that an innovation will come along that will solve complex problems easily. But if there is one thing I have learned in my many years in this business, it is that there are no silver bullets. Unfortunately, this industry has a track record of looking for them: first with microfinance, then with mobile banking, now with digital finance and the platform economy. And, when we are inevitably disappointed that they don’t produce magical impacts, we discard them as though they are irrelevant. But the fact of the matter is this: each of these innovations has played an important role in building out an expanding toolkit of financial solutions that work better for the poor.
In that spirit, I’d like to focus for a moment on the role of microfinance, because it has fallen out of fashion in recent years, and I believe it is still a very relevant part of the inclusive finance toolkit. I think we need to take a step back and reconsider what we are asking the microfinance sector to do. MFIs support what would be considered sub-prime populations in developed markets. We expect commercial returns and responsible practices, but often fail to account for the fact that they operate in markets that routinely suffer from political and economic instability and have to contend with volatile forex risk and a lack of market infrastructure we take for granted. They are basically serving subprime customers in subprime markets. We can get excited about neobanks, but they are entering markets like South Africa and Brazil, not the DRC, Ethiopia, Lebanon and Bangladesh. And finally, at least until recently, we were expecting MFIs to “solve poverty” for us too.
I have argued before that we need to start thinking of MFIs in the same way we think of community development finance institutions in the United States — as financial institutions that play an important role in serving low-income and marginalized communities. Expectations should be around minimizing subsidy and maximizing reach and impact. Microfinance is a cost-effective development tool, offering commercial returns in some markets but requiring relatively modest subsidy under more difficult conditions. And we should invest in making MFIs better, using all we have learned in the digital space.
Three: There is immense power in public/private collaboration. While the private sector is generally a strong driver of innovation, the role of the public sector is no less important. In recent years, we have witnessed the kind of innovation that can happen when these sectors come together. The India Stack story is one good example of public/private collaboration transforming a market. Open banking is another, where regulators have opened up exciting opportunities to reinvent financial services by freeing up payments and data. The rapid progress we have made in recent years shows how powerful collaboration can be in expanding access to finance for all.
Finally, and perhaps most importantly: I’d like to call out the power of community. The CGAP community has played a powerful role in building inclusive finance for 26 years. One of the great pleasures of this job has been the many people I have met over the years who have told me how meaningful CGAP’s work has been to them and how our insights have helped shape their work. CGAP has always been at the leading edge of transformation in the inclusive finance sector, and we can do that because of our members and many partners, who help us to learn what works and what doesn’t and then embed those lessons into their own work. Together, we have influence far beyond CGAP’s relatively modest means. This is a powerful community that has been at the heart of tremendous change for many years. I have no doubt that this same community will rise to the challenges of the next 26 years too – addressing climate change, conflict, gender inequality and whatever else lies over the horizon.
I would like to thank the entire CGAP community for entrusting me for the last six years with leading this amazing organization. To paraphrase William Shakespeare, CGAP is small but mighty. I have been privileged and humbled by my experience here and hope that I have made a small contribution to improving financial inclusion for the world’s poor. I’ll continue to watch from afar in my new role as a member rather than the leader of this organization. I can’t wait to see what comes next.