Finding (and funding!) the Frontiers of Financial Inclusion

With alliterative flair, I wanted to build off of Satyarupa's great blog about the post Union Budget 2010-11 meeting of the minds in Delhi. One of the themes seemed to be the government's role as an enabler. Satyarupa wrote that during the conference she pondered the question, "If the government is enabling, then who is it really enabling?”

I've been thinking about this enabling function of public funds in the context of financial inclusion. A few weeks ago I came across testimony given at the US Congress on how best to leverage public funds to accelerate financial inclusion. Testimony from experts played along the idea that Elisabeth Rhyne of ACCION succintly put - namely that public funds should, “Find the frontier and help push it out.”

In India, the government created (in 2007? I think?) two massive public funds for financial inclusion, the Financial Inclusion Fund and the Financial Inclusion Technology Fund. FIF and FITF have huge corpus' - 500 crore apiece, that were even recently augmented by 100 crore each in the 2010-11 Budget. Funds will be distributed in a 40:40:20 ratio from the GoI, RBI and NABARD over 5 years, with disbursement contingent on usage of funds. Five years, twelve hundred crore to spend on the frontiers of financial inclusion.

Yet, I was surprised to see that to date, only a few projects had been funded by FIF and FITF. According to NABARD's Annual Report as of March 31st 2009, 30 crore had been spent (in total) by the two funds. Is this enough to enable financial inclusion? Here are the projects funded thus-far (looks like 9 total):

Projects Under FIF (copied and pasted from page 39 of NABARD's Annual Report)
• Trainers’ training programme on financial literacy in Kolkata.
• Pilot project to establish farmers’ service, village knowledge, mobile credit counselling centres, promote financial literacy and farmer education through mass media in South Malabar district of Kerala through South Malabar Gramin Bank.
• Pilot project for capacity building of 25 FC of West Tripura, South Tripura and North Tripura districts to function as business facilitators, generating new accounts and business for Tripura Gramin Bank.
• R&D project for ICT solution in 15 select RRB with support from World Bank and Technology provider.

Projects under FITF
• Smart card based pilot project in Tirunelveli district of Tamil Nadu, covering 500 SHG (6,000 customers) to help Pandyan Grama Bank and NGO in registering,
lending and micro-financing SHG.
• Project on smart cards in Medak, Mahbubnagar and Warangal districts of Andhra Pradesh to facilitate payments to the beneficiaries of NREGS and Social Security Pensioners, opening of ‘No Frill Accounts’ of other rural households by Andhra Pradesh Grameen Vikas Bank (APGVB). Services are being extended through Business Correspondent Model with the help of abiometric card and mobile device. This will cover 13 lakh beneficiaries in 1,115 villages.
• Pilot project to establish Financial Inclusion Hubs aiming a ‘e-branch’ facility offering multiple financial products & services in 10 PACS in Andhra Pradesh.
• Pilot for installing four ATMs, one in each district of Tripura by the Tripura Gramin Bank for technology upgradation to reach out to the excluded population.
• Impact study of 100% achievement under Financial Inclusion in Kanyakumari district

All of these sound pretty interesting though I'd never heard of any of them - which leads me to another dimension of government as enabler. In my opinion if the government wishes to enable financial inclusion through these funds, they should build awareness about what works and what doesn't work (and what they're actually funding). Take these 9 pilot projects for example - wouldn't it be great to have a platform to gauge progress on the initiatives and communicate best practices to other players in the market? Would it take that much money to build in some transparency to these initiatives, a fabulous website along with some monitoring and evaluation? (though the last pilot impact study seems to do just that)

What do you all think?

This is a test

How does microfinance play a role after a crisis?

Like everyone else, I've been glued to the television this past week where images of the devastation and horror in Haiti flash constantly. Even just this morning a powerful aftershock rumbled the capital of Port-au-Prince, a 6.1 magnitude, which thankfully wreaked little additional damage (what was left to damage?). Aid continues to pour in, though it seems as if the Mississippi River were being squeezed into a narrow rivulet, given the extensive damage to the country's infrastructure and ability to absorb assistance. This horrendous situation has gotten me thinking about the role of financial services and microfinance in a post-crisis environment, both in Haiti and beyond.

For a number of reasons, microfinance in Haiti had a presence prior to the earthquake and providers included FINCA International, Fonkoze and ACCION. According to Mix Market there were about 150,000 borrowers in Haiti and over 190,000 depositors (for a population around 10 million). How will these microfinance institutions function now? From my (very limited) experience, I wonder about a number of potential dynamics.

Existing NGOs and microfinance institutions on the ground will likely be a channel for both subsidized and non-subsidized capital in the coming weeks and months. After the tsunami in Sri Lanka in 2004, the existing non-governmental and governmental infrastructure were leveraged for short-term relief. This will likely create new programs and projects for the institutions, as well as a complete reorientation of country-goals for the short-run. I imagine a large percentage of the capital given to the organizations at first will be subsidized, meaning that they expect it to be given out as grants or cash-transfers with no expectation of repayment.

How will the microfinance institutions juggle and juxtapose their existing credit programs with these new grant-programs? When is it appropriate to persist in recovering loans? Additionally, a flock of other organizations, some microfinance-oriented and others not, are arriving in Haiti right now. Many of these will give directly to the people, with no expectation of repayment, for both productive and non-productive purposes. How long these newcomers will stay and how intensely they will improve the local economy is hard to answer. However, research by seasoned development practitioners shows that in the well-intentioned maelstorm of post-crisis recovery, assistance sometimes props up activities that distort the local economy and are un-viable in the long-run. Practitioners face the ethically charged question of when asset-transfer/subsidized aid should be transitioned into un-subsidized financial services. Of course, immediate assistance should not be post-poned because of these concerns, I simply raise them as they have circulated among the development community. And, because the microfinance sector in Haiti will be faced with these issues immediately. A few years ago I participated in a working group organized by the SEEP Network to create Minimum Standards for Economic Recovery after a Crisis. A group of 35 practitioners from 25 development organizations, including donors/practitioners/banks, worked through many of these thorny questions and created standards and practical guidelines based on decades of practice in post-conflict and post-disaster relief. A common thread running through the standards is a call for coordination, transparency and communication between the myriad of actors involved.

Finally, the issues raised questions for me in the Indian context, where crises both man-made and natural, are all-too-common. What really confuses me is how to define a crisis; for example flooding occurs every year in pockets of the sub-continent and always causes fatalities (Orissa was recently the victim of floods). Or what about in parts of the Northeast that have been chronically rife with security issues, or districts that are recovering from communal riots? What kinds of financial services are appropriate in these areas and who should coordinate the efforts?

Get by with a little help from your peers

Can your peers help you save more? For members of the informal sector, who don't have the benefit of direct deposit or formalized commitment mechanisms, peers may help.

I just finished reading the working paper, "Peers as a Savings Commitment Device: Evidence from a Field Experiment among Low-Income Micro-Entrepreneurs in Chile." It discusses results from a randomized field experiment that tests whether peers can act as a commitment device to help microfinance clients save more. The sample population for this experiment is a group of low-income entrepreneurs who are already clients of Fondo Esperanza (FE), a microfinance institution in Chile. Up until the study, FE only offered credit to its clients, per Chilean regulatory requirements.

The research team and FE connected with a local bank and then offered 196 groups of FE, roughly 2700 clients, a no frills savings account via FE at the bank. The research team randomly sub-divided the 196 groups into three categories. The first group received the option to open a no frills savings account, with a 0.3% real interest rate (average for Chile) (control group); the second received the option to open a no frills savings account with an accountability structure where peers monitor and act as a commitment device. Specifically the members, "have the option to publicly announce to the group their savings goal for the coming credit cycle (approximately 3 month), and their corresponding weekly savings goal. Subsequently, in each group meeting it will be discussed who complied with their own savings goal and who did not. Those who complied are asked to show a deposit slip to prove it and receive a sticker in a booklet. Those who collect enough stickers receive a diploma as a non-monetary award," (treatment #2). A third group of clients is offered the option to open a no frills savings account but the real interest rate is significantly higher than the normal account, 5.0% compared to 0.3% real interest rate (treatment #2). This second treatment was introduced to understand the effect of interest rate differentials, and to compare that impact with the impact of a peer commitment device.

The results (calculated via Intention to Treat), demonstrated that members of the peer-based commitment treatment make about three times more deposits and had an average account balance that was 65% higher than those in the control group. The effects were particularly profound for group members who has assessed themselves as better-than-average at reaching their goals; this group's average monthly balance was 2.9 times higher in the peer treatment than with a regular savings account.

As written by the authors, "These findings indicate that peer groups may be an important mechanism to help people overcome self-control problems, particularly in areas where formal commitment devices are not available, and that individuals benefit most from joining commitment-groups where their peers are slightly less apt than themselves at reaching the shared self-control objective."

They found that for the 5% real interest rate treatment group, the average account balance was 48% higher than those in the control group, but the difference was not statistically significant. They extrapolated from the findings of treatments #1 and #1 to state that the peer commitment device was equivalent to a 6.5% increase in interest rate.

I thought about this paper and its implications for the microfinance sector in India, where microfinance institutions do not typically offer savings. The self help group bank linkage programme, however might be a more relevant receptacle of learnings from this study, as savings precede borrowing. To my knowledge most SHGs have a prescribed amount that members must save in the initial months but after their first loan, it becomes a bit more arbitrary. I wonder how the dynamics of peer-commitment factor since they had had to save publicly at first.

Much of this is fairly intuitive to microfinance practitioners, who in effect leverage peer-commitment that is more formal than this experiment, for group repayment and group liability. Some research has shown that group repayment meetings, even when the loans are individual, still produces high repayment through peer-commitment and monitoring.

How do you think microfinance practitioners could leverage this research to improve practice?

CIRM and CMF To Host National Microinsurance Conference - December 10/11th

Contacts: Ms. Janani Akhilandeswari, Ms. Deepti KC     

Email: janani.akhilandeswari@ifmr.ac.in; deepti.kc@ifmr.ac.in

National Microinsurance Conference to be held on December 10-11^th in Delhi  

The UNDP is organizing a National Conference on the Status of Microinsurance in India, in collaboration with academic and policy centres- the Centre for Insurance and Risk Management (CIRM) and Centre for Micro Finance (CMF) at the Institute for Financial Management and Research (IFMR).  The conference is scheduled for December 10^th and 11^th 2009 at Essex Farms in New Delhi.

The conference is designed for insurance providers, regulators, researchers and other stakeholders. It will focus on product innovation, constraints to scale, supply/demand side challenges, and policy level issues in India. Panelists will, among other topics, discuss the role of government in extending micro-insurance, compare of the status of the Indian market with other countries, and share successes and challenges implementing various models and products. 

Delegates can register online at: http://ifmrundpmicroinsurancemeet.eventbrite.com/ ¹ 

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To register or if you’d like more information about the conference or the centres involved, please contact Ms. Janani Akhilandeswari or Ms. Deepti KC or visit the organization’s websites:http://ifmr.ac.in/cirm & http://ifmr.ac.in/cmf  

Debunking Myths about the Poor and Financial Services

Check out this excellent and thoughtful piece in the Wall Street Journal by our friends over at the IFMR Advocacy Unit, Suyash Rai and Sona Varma. The Wall Street Journal has certainly become quite the forum for debate/analysis of financial services for the poor!

Microfinance India Summit

Just a quick post to highlight the upcoming Microfinance India Summit in Delhi. This is one of the preeminent global events on microfinance, with a particular focus on India. It will be held from October 26-28th in Delhi at the Taj Palace Hotel. This event will also witness the release of the State of the Sector Report, which captures trends, events and news from the sector.

Check out their website for additional information.