But why does CARE believe that banks should play this role? Some may ask: “Why are you concentrating on banks? Aren’t they the bad guys who mis-sell products and overcharge their customers, and are not at all interested in low income people? Shouldn’t you be encouraging the other players in financial inclusion, the micro-finance institutions the mobile money players, informal savings groups?” We’ll look at each of those in a moment, but let’s be clear that CARE thinks that we need to persuade banks to engage in formal financial inclusion because they are the institutions which can provide security, payments and access to credit; and they can invest in the technology, products and distribution networks which can achieve financial inclusion at the required scale in the short time period that we would like to see change. We know they are not doing enough at the moment: that is why we have worked with Accenture to figure out how they can do more. And we also know that just relying on the other types of players is not going to take us far enough, fast enough.
1. Informal savings groups are important but not enough on their own.
CARE is a leader in informal savings groups, with around five million members of our Village Savings and Loan Associations (VSLAs) in sub-Saharan Africa alone. However, our experience has been that many VSLA groups quickly need a more secure home for their growing savings than the metal box that the group starts with: we have learned that group members save around $58 each per annum. Multiply that by 25 members in a group and there is a large amount of cash to look after. So groups need access to a secure home for their savings. They also quite quickly develop a need for more sophisticated credit arrangements than they are able to just make among themselves. So the need for security and better credit arrangements both push groups towards the formal financial sector.
2. Mobile money provides some services but has limitations
CARE is an enthusiastic supporter of connecting those on low income to mobile money: it provides access to greater security and makes payments easier. We work with a number of mobile network operators to improve women’s access to financial services, for instance Tigo in Rwanda and Telenor in Pakistan.
It does however have its limitations: in almost all countries there is a cap on the amount that can be held in a mobile wallet, usually a fairly low amount. So again, groups will not be able to secure their savings through this route, and indeed people on low income who are developing micro-enterprises may find this cap a barrier even to their personal storage of cash. Also, mobile money operators cannot themselves provide access to credit. Take for instance the widely noted M-Shwari product in Kenya which provides “instant” access to credit via a mobile phone. The product is available via Safaricom as the mobile operator. However, M-Shwari is a bank account issued by Commercial Bank of Africa and subject to all the regulatory requirements of a bank account in Kenya. Essentially mobile operators, per se, cannot offer credit. Even if they wished to dispense with a banking partner, to offer credit they would themselves need to seek a banking licence. And CARE certainly supports the need for credit to be properly regulated.
3. Microfinance institutions do not always provide “pro-poor” solutions, and they do not have the necessary scale
Microfinance institutions (MFIs) are another area where we at CARE are enthusiastically engaged – our leading edge peer-to-peer lending platform Lendwithcare supports micro-finance providers in ten countries (indeed lenders can even support members of VSLA groups in Rwanda). However, there are two key issues in purely working with microfinance institutions as a route to financial inclusion.
The first issue is that financial inclusion should be savings-led: women especially need to be helped to save small sums to give them a means of dealing with the sudden dramatic reversals of fortune to which all people living in poverty are subject, and, even in good times, to smooth consumption and income. Micro-credit does have an important role to play in supporting pathways out of poverty, but as a support to starting or expanding micro-enterprises. As my colleague Ajaz Ahmed Khan has argued: “…as microfinance became more widespread, organisations with solely commercial objectives (including some who can best be described as ‘payday lenders’) became much more involved, and rather than promoting productive activities, they have often tended to fund ‘consumption’. Without doubt most microfinance nowadays is provided by the latter – so why would we expect them to ‘alleviate poverty’ or ‘increase women’s empowerment’?
The second, related, issue is that the “right types” of MFIs tend to be small and not heavily capitalised, so they are unlikely over the next few years to grow their services rapidly enough to meet the demand.
So CARE believes that the banks need to take up the slack
Bringing formal financial services across payments, savings and credit to women on the lowest levels of income requires large investments to strengthen and expand existing networks, to develop suitable products and to invest in financial literacy. To quote our forthcoming report banks “…have the capital, potentially the brands, some of the knowledge and many of the capabilities” to serve this market. Our research also shows that there is a major business opportunity for banks in doing so responsibly. We very much hope that they take up that opportunity.