Bridging the Humanitarian and Development Divide

Mayada El-Zoghbi
25 May 2017
Photo credit: Sujan Sarkar

At a recent Center for Global Development and IRC event celebrating the launch of their joint publication “Refugee Compacts: Addressing the Crisis of Protracted Displacement,” I was struck by the concluding remarks of IRC’s CEO, David Milliband, that one of the key actions necessary to bridge the humanitarian and development divide was to shift more humanitarian aid to cash. He noted IRC’s commitment to delivering 25 percent of its aid through cash by 2020, a significant increase from the current 6 percent for all humanitarian aid. This commitment mirrors other shifts in policy by leading humanitarian organizations, such as the 30 organizations that have signed up for the Grand Bargain. The Grand Bargain calls for increasing cash-based aid and for other important steps to improve the impact of humanitarian assistance.

The increasing use of cash is one important step in the right direction. Evidence shows that cash is more impactful on the lives of the poor than in-kind assistance, giving people with low incomes greater choice in their spending and improving the efficiency of the transfers themselves. The move to cash should be leveraged, but in and of itself it will not be sufficient to fully bridge the humanitarian development divide.

In CGAP’s latest paper, “The Role of Financial Services in Humanitarian Crisis,” we argue that embedding financial inclusion as a stated outcome in humanitarian aid will result in better results for poor people. We offer several important examples of how applying a financial inclusion lens to humanitarian aid can yield a win-win for all actors involved — aid agencies, countries and the impacted populations. Examples include:

Cash transfers as an entry to long-term access to financial services:

Today, most benefits of switching to cash accrue to aid agencies in the form of greater efficiency and reduced leakage. Since agencies typically give physical cash or vouchers to recipients, they are not encouraging people to open accounts. This is a missed opportunity for financial inclusion. By linking humanitarian payments to accounts, such as mobile money accounts, we can open up the channels for people to receive remittances through social networks and family when future needs arise. There is ample evidence, cited in the CGAP paper, that remittances help sustain people impacted by crisis and that countries where mobile money is already active see increased remittance flows during periods of crisis. Using humanitarian cash transfers as a mechanism to help poor people open and use accounts presents a compelling opportunity to link crisis response to people’s longer-term development needs.

Cash transfers as an opportunity to build payment infrastructure:

Humanitarian actors are using a growing number of out-of-the-box payment solutions (i.e., temporary digital solutions) to facilitate fast and efficient disbursement of cash transfers. While these initiatives are useful in that they allow for quick disbursement, they mostly focus on improving the disbursement process itself rather than the outcomes for the recipients or the country impacted by crisis. If aid agencies look for meaningful ways to leverage and extend the existing payment infrastructure in a country, the benefits of their humanitarian investments are likely to far exceed the short-term gains of a closed-loop system. First, expanding the infrastructure will enable connectivity for local communities. Second, this approach provides an opportunity for the private sector to participate in the crisis response process. Third, solutions that provide benefits for both displaced populations and host communities are likely to be more appealing to government actors, who are often managing tensions around limited resources between these two groups.

Using a financial inclusion lens is not always a quick win, but we know crises situations are increasingly longer term in nature and that adapting responses to longer-term approaches is commensurate with this new reality.

Beyond cash transfers, there is a growing need for humanitarian actors to integrate durable solutions for crisis-affected people to sustain their livelihoods. This is typically seen as the purview of development actors, but given the longer periods of displacement today, addressing people’s livelihoods is clearly another important nexus between humanitarian aid and development. Many aid agencies are already doing this. UNHCR is embedding the graduation approach as part of its Global Strategy for Livelihoods 2014–2018. NGOs like IRC  and Mercy Corps also focus heavily on integrating livelihoods programming into their work. While mainstream financial services actors have done some work in crisis markets, there is limited evidence regarding the impact of their work on crisis-affected people. The CGAP-World Bank Group paper identifies a need for more experimentation and evidence on how all types of financial services (credit, savings, insurance, and payments) can support the livelihoods of crisis-affected people. This will likely require more collaboration between traditional humanitarian practitioners and financial services organizations.

There is undoubtedly great momentum to strengthen the humanitarian and development nexus. We hope CGAP’s paper will be useful to practitioners, donors and policymakers as they look for ways they can contribute to this important effort.

Originally published on the CGAP website >>>

Photo credit: Sujan Sarkar

IFC and Monetary Authority of Singapore Collaborate to Advance FinTech Innovation in Asia

IFC and the Monetary Authority of Singapore (MAS)
23 May 2017

Singapore, May 23, 2017… IFC, a member of the World Bank Group and the Monetary Authority of Singapore (MAS) signed a memorandum of cooperation today, agreeing to work together to establish and develop the ASEAN Financial Innovation Network (AFIN). The network aims to facilitate broader adoption of financial technology (FinTech) innovation and development, and enhance economic integration within the ASEAN region.

Through AFIN, IFC and MAS plan to establish a regional network to help financial institutions, FinTech firms and regulators address issues of connectivity, local compliance and cross border compatibility. AFIN will also evaluate options to create an industry “sandbox” to provide a cloud-based testing environment through which banks and FinTech players can develop, test and refine digital finance and inclusion solutions.

Further to the 2016 Singapore FinTech Festival, this initiative has emerged from discussions between IFC, MAS and the ASEAN Bankers Association (ABA), and through their engagement with the broader financial and FinTech ecosystem in the region. This memorandum between MAS and IFC is the first step in an initiative which will also foresee ABA playing an important role in helping to expand access to financial services across the region.

The signing took place during “Banking at a Crossroads”, IFC’s Digital Finance Partners Meeting 2017 in Singapore, bringing together over 150 senior-level executives from leading financial institutions, technology companies and FinTech firms from around the globe. The meeting was hosted by IFC’s Financial Institutions Group and provided a platform for Singaporean, global and regional leaders to deliberate on innovations, challenges, opportunities and solutions in the digital finance industry.

Mr. Sopnendu Mohanty, Chief FinTech Officer, MAS, said, “We believe that innovation and digital technology can play a decisive role in enhancing financial access for a wider population. MAS is pleased to partner with IFC and further its discussions with ABA to help establish an industry sandbox infrastructure that promotes real-time collaboration and financial innovation. This industry sandbox will be a cloud-based marketplace for distribution of FinTech solutions to financial institutions located in multiple jurisdictions. We hope that this platform could also spur discussions amongst participating regulators on cross-border policy harmonisation across ASEAN.”

“The initiative builds on IFC’s efforts to deepen access to finance for underserved segments of the population, said Vivek Pathak, IFC’s Director for East Asia & the Pacific. “In today’s world it is feasible to reach these segments of the population at a fraction of the cost and at a speed that was not feasible earlier. New business models resulting from digital transformation of financial services and FinTech adoption in the region can create new markets that will lead to a higher level of prosperity. The end desired state is for financial institutions to be able to embrace innovation and collaboration more easily, and for innovations to spread more easily across the region. AFIN will enable banks, microfinance institutions, and other financial services providers to innovate across channels, products, and processes. Such innovation can unlock opportunities to better serve their clients, address unmet needs in their markets, and achieve sustainability through lower costs and more efficient service delivery.”

IFC has a long history of supporting the technology, telecommunications, and financial services sectors. FinTech is at the core of the growing interaction between those industries, with great potential to help countries overcome development challenges, by making widespread access to financial services possible. IFC has delivered 75 advisory projects in digital financial services worldwide, and has invested $400 million in close to 30 FinTech firms and digital financial services providers.

Adopted from MAS >>>

Fintechs and Banks: An Unequal Partnership

Charles Wendel
19 May 2017

Years ago I consulted with the legacy Wachovia Bank, headquartered in Winston Salem. Back then the bank-teamed credit and line bankers on each commercial loan, terming their working relationship an “equal partnership.” In fact, when you spoke with management offline, many admitted that the credit people were a bit more equal than line personnel. That situation reminds me of what is developing between Fintechs and banks; the nature and extent of their “partnership” appears to be dictated by a bank’s limited requirements and demands, not the Fintech’s capabilities or desires. The Fintechs (whether primarily lenders or software companies) may not view themselves as vendors, but their bank clients do.

Banks are determining what they want from Fintechs and then asking them to deliver on specific requests rather than the broader “solutions” that many Fintechs would prefer to provide. Frankly, in doing so some banks may be losing a great opportunity to lever third-parties expertise. Nonetheless, banks appear to be increasingly set in what they want from Fintechs and how they will work with them.

The range of capabilities that a Fintech can provide includes origination software, marketing support, enhanced risk management and decision insights, and second-look lending for loan turndowns. Fintechs can transform a bank’s approach to small business lending and help to build its franchise with these customers. But, many banks are pursuing an incremental approach and are hesitant to move beyond fulfilling some basic, immediate needs. They are looking to solve a near-term problem, not develop a long-term third-party relationship…at least not initially. Banks with a limited focus may, for example, ask software-oriented Fintechs to provide a webform application versus the platform that they could provide and which could transform their business model.

At the same time, some of the same Fintech lenders that a few years ago said that they only would work with banks in a “deep” or “integrated” manner are now breaking up their offer into modules such as providing simply a digital origination capability or document capture. These Fintechs are willing to pivot from their initial strategy to get their foot in the door with a major bank with no guarantee of further business. Fintech lenders are now competing with the Fintech software companies that specialize in improving the origination process. At the same time more Fintech software companies are entering the fray.

In the last month I have spoken at or moderated panels at several conferences, including Lendit, CBA Live, and Source Media’s Retail Banking Conference. The focus has largely been on how to work with Fintechs, the current status of these efforts, and industry expectations. These meetings have provided the opportunity to speak with about 30 bankers, almost all of whom work for priority Fintech targets. Based upon those meetings and our client experience, we prepare this summary:

  • Some speakers state that 2017 is the year of bank partnerships, suggesting that multiple significant deals will be announced. While there certainly may be some big transactions, we think 2017 is the year that many banks finally realize that Fintechs provide them with value and begin to figure out how best to work with them. There will be small steps forward, but no tsunamis; slow analysis and decision making.
  • With little exception, banks see the need for a digital platform that will enhance the customer experience. Therefore, Step One for many banks focuses on providing customers with a digital experience and the cost reduction they can realize from a more streamlined and to the extent possible paperless process. Going beyond that first step, when Fintechs discuss referrals, lending algorithms and other innovations, some traditional bankers see risk and a methodology whose staying power has been untested by a downturn. Yellow warning lights start to flash.
  • At least for the moment most banks do not want integrated partnerships with third parties. While some banks see the upside in that type of relationship (not just reduced costs but potentially greater revenues for current and new customers), others want to take a slower approach. They see more business and personal risk in jumping into a marriage with a vendor rather than pursuing long-term dating. They are also willing to work with multiple vendors with different vendors each focusing on their strongest area.
  • – Despite the issues that can exist with internal IT groups, some larger banks are considering building a digital solution internally. These banks are often part of a large international group that has accomplished similar initiatives elsewhere in its footprint. Still other banks comment that they may work with a Fintech as a stopgap for a period of time until their internal group can develop the necessary software. Some Fintechs are marketing to these banks hoping for a near-term transaction, while the banks may be willing to take the longer term internal path.
  • Of course there are banks that see Fintechs as providing relationship value and are actively working with them to enhance their business model. These banks tend to be mature small business players and place strong internal emphasis on this segment, pursuing a growth strategy aimed both at serving current customers and extending their market penetration. While more banks should consider that level of commitment, in our view they will remain the exception with the majority of banks being highly selective in how they use vendors.
  • Consolidation within Fintechs will occur as some fail to generate sufficient loan volumes (most tie their revenues to loan generation) and private equity investors grow inpatient with the uncertain future. More on this topic next week.

These are still early days in the world of Fintechs working with banks. And, they can work together with great success for each party, but not without some substantial work on both sides. Next time we will write about the challenges banks are creating for Fintechs, how banks should evaluate their Fintech options, and the actions each should take to best work together. Fintechs may need to change their marketing and sales approach to work with banks while banks need to excel at due diligence and implementation management in order to pick the optimal partner or partners.

Originally published on FIC Advisors’ website 

Russia Can Gain More from a Digital Transformation, says World Bank

World Bank Group
17 May 2017

Moscow, May 19, 2017− Russia is uniquely positioned to exploit advantages in the digital arena in order to promote economic growth and improve its business environment. Early reforms in Russia’s telecommunications sector enabled faster, more accessible and more affordable Internet connectivity for people and firms across the country, according to the recently published report Reaping Digital Dividends: Leveraging the Internet for Development in Europe and Central Asia.

More than 60% of firms in Russia have a website and more than 90% utilize email – one of the highest rates in the Europe and Central Asia region. Despite this high usage, however, the report points out that e-commerce activities constitute just 1.4% of Russia’s Gross Domestic Product (GDP), compared to 3% in Western Europe and the United States, and 5% in China. The low overall level of e-commerce activity is further hampered by a weak digital payment system: just one out of every five people has a credit or debit card, and only 37% of Russian firms use Internet banking.

For Russia to maximize the benefits of the Digital Age, the report argues that it is vital to improve the country’s education sector – matching today’s curricula with the jobs of tomorrow. The country has a unique opportunity now to lead the policy agenda in making jobs of the digital economy more inclusive and more productive.

“Further development of the digital economy in Russia is a unique opportunity to improve productivity growth and the necessary diversification of jobs and exports,” said Hans Timmer, World Bank Chief Economist for Europe and Central Asia. “Russia’s potential is huge, but to fully achieve this, providing access to digital technologies is not enough. It also requires changes in education, financial markets, labor markets, and competition policies.”

According to the report, existing inequalities in Russia could be further exacerbated, as unskilled workers are less likely than skilled ones to use the Internet to find a job or participate in professional networks. However, policies to facilitate tax and social contribution payments in the sharing economy could nudge workers out of the shadow economy and provide them with some employment protection. Improving competition may also help foster the adoption of ICT among firms in Russia.

Russia’s connectivity is important not only for its own economy, but also for improving the connectivity of landlocked countries in Central Asia. Reforms in the digital arena can help increase competition and efficiency in the market for Internet provision in Russia. In order to maximize the effectiveness of such reforms, the report argues that efficient sector regulations must also be introduced to fuel sustainable growth and increased usage of digital payment systems.

“Transition to the digital economy is clearly the next frontier for economic and social transformation in Russia and will require a major focus on strengthening the enabling environment in parallel with further development of digital infrastructure and platforms,” said Andras Horvai, World Bank Country Director and Resident Representative in Russia“Russia has a strong track record of achieving what it considers most important, as it recently demonstrated through broad improvements in its domestic business environment and introduction of digital services and electronic platforms that are making it easier for firms to register and operate. This creates ground for optimism for the future of digital economy in Russia.”

This press release was originally published on the World Bank Group’s website.

In Moscow
Marina Vasilieva
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Digital Credit’s Evolving Landscape: 3 Things You Need to Know

Maria Fernandez Vidal and Byoung-Hwa Hwang
02 May 2017

Alternative lending options have grown rapidly in developed markets over the last 10 years. Fintech companies have raised significant funding, especially in the last two or three years, and developing markets are quickly catching up.

Currently, the digital credit landscape in emerging markets includes 22 live deployments offering instant, fully automated and remote loans on a short-term and collateral-free basis (and there are many more deployments that partially meet these criteria). The majority can be found in Africa, particularly in Kenya. At least six deployments have scaled to more than 1 million users, and successful deployments can scale fast. M-Shwari in Kenya, for example, reached 12 million customers in just three years.

The growth of digital credit is likely to continue in emerging markets. In this blog, we share three things we think are key to understanding this increasingly important market.

Smartphones could change the digital credit market structure significantly

Many partnership structures have emerged for offering digital credit and are differentiated by who owns what part of the digital credit value chain. In developed markets, we often see a variety of players, from banks to fintechs, in different parts of the value chain. By contrast, mobile network operators (MNOs) have a dominant role in developing countries because they own key assets of the value chain, such as access points, payment accounts and data pools. They can acquire balance sheets as a commodity through partnerships or lending licenses.

The emergence of smartphones provides a new access point to customers through the internet or an app. This may shift the current supply-side structure towards more fintech-led models because it provides a low-cost channel to the customer and their data. App-based solutions like Branch in Kenya can score, underwrite and lend while leveraging MNOs’ mobile wallets for loan disbursements and repayments using a simple bill-pay function. In this model, it is the MNO’s services that become a commodity. For the customer, more tech-led models could translate into greater flexibility and choice. Technology, with smartphones as a key component, can help lower the barriers to entry and increase competition.

The opportunity could also emerge for banks to take a more prominent position (they are natural candidates given their historical leadership in the mainstream credit market) if they are able to innovate around their traditional operating model and scoring practices.

Digital credit is not replacing other formal lending

Digital credit is not competing with formal lending: it is complementing it. The microfinance industry may well be evolving into a more digital operating model, but existing digital credit services address a different need. The primary purpose of digital credit is to provide short-term liquidity to cash-strapped vulnerable households, while microfinance and bank loans typically provide longer-term investment capital for business or other long-term assets.

Research shows that this is how these services are being used. According to FinAccess 2016 household survey data in Kenya, mobile banks are the primary source of credit used for both day-to-day needs and for emergencies, followed closely by informal providers like shopkeepers, chamas and moneylenders. Banks and microfinance institutions, who typically offer longer-term loans, combined provide less than 10 percent for both of these types of needs.

What digital credit does compete with is informal lending. To understand why, imagine you are a smallholder farmer in Kenya. The Kenya financial diaries show that poor households’ median income fluctuates 54 percent from month to month, with the average household using 14 different financing tools. With an income of $2 a day, on a month when you are 50 percent below your average, you are $30 short and might not be able to cover your family’s essential needs. In this context, digital credit can be obtained instantly and offer a good value proposition, potentially being lower cost than a moneylender or more reliable than friends and family who may also be having a rough month themselves.

Comparing APRs can be misleading when it comes to digital credit

Pricing on traditional credit offers is evaluated by comparing APRs, with the loan carrying the lowest APR generally considered the best value. Because digital credit typically collects interest for such a short time only, however, the comparison between short-term digital credit and traditional longer-term loans through APRs is flawed and does not reflect the actual cost to the customer.

For a poor customer who needs to supplement a lower than average income this month, borrowing for a year could be a bad option. If he pays 10 percent to borrow $30 for a month (more than 200 percent APR), covering his liquidity need will cost him $3 dollars. If he instead borrows the $30 dollars for a year, at an APR of 20 percent, it would cost him $6. Even at an APR that is 10 times less, he would still be spending twice as much, so borrowing for the additional 11 months would not make sense for him; he would be better off with the short-term loan.

Of course, this will not always be the case. A shorter product could very well be more expensive when needs are recurring, but it will be the case sometimes. Having access to a broader set of financial tools empowers customers to choose the best option for each of their needs. Better matching the length of a loan with the length of the actual financial need can help customers spend less on interest, and the fact is that the planning horizon is often very short for low-income customers. Looking exclusively at APRs misses this point.

Now, you might be tempted to ask: Why can’t the customer borrow at 20 percent APR just for that month? With an annual loan, the provider risks losing $30 in the event of a default, but otherwise collects interest on the $30 dollars 12 times. With a monthly loan, the provider is still risking to lose $30 dollars, but collects interest only once. The annualized interest rate required to break even will be very different in both cases unless the probability of default is negligible. Total cost of capital will be lower for the monthly loan, but risk and operational costs will significantly outweigh this. Operational costs per loan need to be minimal for a short-term small loan to be viable, meaning that requests for collateral or in-person credit assessments are not available as risk management tools.

Going forward

Digital credit continues to grow and presents both new opportunities and challenges that will need to be addressed. Doing so effectively requires a shared understanding of the key elements of digital credit. We hope this blog contributes to a better understanding of this new market, which can be the starting point of an informed debate.

Originally published by Maria Fernandez Vidal and Byoung-Hwa Hwang from CGAP. Photo: CGAP, Ahsan-ul-Haque Helal

The Data Effects of Mobile Money in Uganda

Bram Peters and Dumisani Dube
01 May 2017

As you leave Kampala and its busy streets, you head into rural Uganda where you exchange small shops and boda-bodas for coffee, maize, goats and chickens. More than 80% of the population lives here, and agriculture and its large cohort of smallholder farmers account for 23% of Uganda’s GDP.

Gimei Robert is one of these smallholder farmers in the Northern Region of Uganda, farming coffee on his one-hectare plot. Like most coffee farmers in Uganda, his income is erratic. Despite his collateral (his plot of land) and his knowledge of cashflow management, he doesn’t have access to tools that could smooth his income over the year and open up investment opportunities. Only 10% of smallholder farmers have a bank account.

Banks are far away for farmers like Gimei and expensive to access. Not only in terms of transportation costs, but also loss of potential income whilst travelling. Furthermore, banks rarely offer farmers like Gimei additional services such as loans as they rarely meet their requirements. In the unlikely occasion they do, repayments are difficult to make as there are very few products designed with coffee farmers in Uganda in mind.

But this seems to be changing. From 2009 to 2013, access to formal financial services increased from 28% to 54%, largely attributed to mobile money services. Nearly three quarters of the population in Uganda has access to a mobile phone and this number is growing. Products like MoKash, a mobile savings and loan service offered by MTN Uganda, are targeting rural farmers to help them smooth consumption and use their money more productively by offering quick loans to adults like Gimei.

Mobile money in Uganda is showing its potential to reach new consumers and is having important knock-on effects for the financial services industry as a whole. The data captured through the mobile phone and mobile money is generating information on consumers that can be used to design and deliver financial services that both meet consumer needs and are viable for providers.

Mobile network operators (MNOs) can identify and verify customer information such as their name, gender and where they live, circumventing rigid know-your-customers (KYC) requirements and challenges with their national ID system. Financial information, such as the frequency of mobile data and airtime purchases, as well as mobile money transaction history, can be used by data experts to design features for savings and insurance products with consumers in mind, as well as credit scoring models for the many consumers not covered by the credit bureau. In Uganda, the current credit bureau coverage is only 6.6% and there is no credit registry, whereas the average coverage in sub-Saharan Africa is 7.6% for credit bureaus and 6.9% for credit registries.

But using this data effectively for financial inclusion is no easy task. It requires buy-in from different players and new skillsets to come together: those that can collect the data, those that can analyse the data and those that can translate it into financial services.

This week, i2i, UNCDF MM4P, Laboremus and FSD Uganda are coming together to take aim at this challenge through the DataHack4FI innovation competition in Uganda. The DataHack4FI competition brings together data enthusiasts, FinTech, FSPs and development organisations to crowdsource data-driven solutions for financial inclusion.

At the competition, FSPs and development organisations will challenge participants to come up with solutions using different datasets in Uganda to develop financial services that can leverage technology and mobile money platforms to give adults like Gimei the tools to unlock new opportunities.

The datasets for this competition will be provided by L-IFT and FSD Uganda. Going forward, we hope that this competition will kick-start partnerships between those with important sources of data such as FSPs and Fintech providers (e.g. mobile money) and data enthusiasts who can translate this data into insights on consumer behaviour and valuable financial services.

The competition kicks-off on March 31 at the Innovation Village in Kampala, Uganda. Competitors will be given access to datasets and asked to develop a prototype or concept with guidance from data scientists and technical mentors, to win a chance to represent Uganda in the finals of the DataHack4FI in Kigali, Rwanda.

Follow the competition live on twitter at #DataHack4FI

DataHack4FI innovation competition in Uganda is hosted by Laboremus in partnership with i2i, UNCDF MM4P and FSD Uganda, with additional datasets provided by Low-Income Financial Transformation (L-IFT) and additional support from The Innovation Village Uganda and GLADfarm Uganda.

Bram Peters is Technical Specialist in digital finance at UNCDF MM4P leading their working Uganda.

Dumisani Dube is a Research Associate at i2i, leading the DataHack4FI innovation competition in eight countries in Sub-Saharan Africa.

For more information, please contact

Bram Peters
Regional Technical Specialist, Digital Finance

This post was adopted from the UNCDF blog