Supporting inclusive finance – new guidelines for funders

Funders need to think of their role not as providers of missing services in the market but rather as facilitators, suggests new guidelines aimed at funders of financial inclusion.

By many standards, progress towards universal financial inclusion is impressive. The Global Findex measured a 'massive drop in the number of unbanked' from 2011 to 2014. Microfinance institutions have demonstrated that the poor are 'bankable' and new technology-driven business models bring financial services even to remote areas. Also, thanks to a fast growing body of research, we know much more today about the financial behaviour of the poor and the impact financial inclusion has (or not) on household income, consumption, enterprise activity and economic development. International funders, such as bilateral and multilateral development agencies, development financial institutions and also private foundations, have undisputedly contributed to this progress. However, much work remains to be done: there are still over 2 billion people without a basic account. 

When we look at international funding committed to financial inclusion, the numbers are also quite impressive. Commitments have increased continuously over the last years and reached $31 billion as of December 2013. Over 75 per cent of these commitments are destined to refinance the portfolios of financial service providers. Is this the most effective use of funding? Is this heavy focus on the supply side really addressing the constraints that hinder poor people from accessing and using financial services? Over the last year, CGAP engaged with over 40 international organisations to see how to improve the effectiveness of donor and investor efforts to promote financial inclusion globally. This extensive consultative process resulted in A market systems approach to financial inclusion – new guidelines for funders. The Guidelines aim to help funders design, manage and assess programmes that contribute to more inclusive financial services markets. They reflect a shift from an institution-building approach to promote inclusive finance, to one that is rooted in the complexities and realities of the broader market systems around pro-poor financial services. 

Applying a market systems approach to financial inclusion affects what funders do, who they work with, and how they support interventions on the ground. Funders need to think of themselves as market facilitators and reflect on how their interventions help address underlying constraints that prevent poor people from accessing and using financial services. Many constraints that appear to be either demand- or supply-side in nature have their roots in the supporting functions, rules, and norms that shape financial services markets. For example, financial service providers find it costly to evaluate clients’ risk profiles leading to an undersupply of financial services to the low-income market. Instead of subsidising financial service providers for serving poor clients, funders can help improve the accessibility of client data through the creation of credit information systems. 

Facilitating inclusive financial markets requires an in-depth understanding of incentives and relationships that shape the market system, an entrepreneurial instinct to seize opportunities for systemic change, strong skills to navigate the political economy, trust by local market actors and a long term commitment. Is this even possible for funders to do? 

It's definitely challenging. But many funders are already adapting their strategies, internal procedures, M&E, and above all, building their staff capacity to be better equipped for market development. Compared to other sectors in development, the financial inclusion community is still in the early stages of adopting a market systems approach, with a limited number of good practice examples to guide us. At CGAP, we are looking forward to further collaborating with its members and the broader development community to exchange experiences share knowledge on how to develop inclusive financial markets.

A market systems approach to financial inclusion – new guidelines for funders, by Deena Burjorjee and Barbara Scola is published by CGAP (the Consultative Group to Assist the Poor).

Barbara Scola works as a Financial Sector Specialist at CGAP where she focuses on developing guidance for funders and financial inclusion in the Arab world.