Corporate Governance for Financial Inclusion — Insights for Boards of Microfinance Institutions: Managing Current Issues, Crisis and Change

29 Mar 2018

IFC’s report, Corporate Governance for Financial Inclusion — Insights for Boards of Microfinance Institutions: Managing Current Issues, Crisis, and Change, reflects on 20 years of experience in the evolution of microfinance and its potential for digital transformation. Through a comprehensive analysis of a myriad of risks, challenges and opportunities facing the financial inclusion industry today, the report presents a renewed outlook for boards serving in institutions that are navigating through a rapidly changing world.

Based on interviews and first-hand experiences of IFC board directors globally, the report culls selected case studies and practical lessons learned. Attention is given to core areas of board responsibility, including: risk and crisis management; change management, such as institutional and digital transformation; the importance of the customer, including the potential role of investors in catalyzing private sector investments or new business models in responsible digital financial inclusionTo effectively guide their institutions, boards will need to deepen their traditional tools, refine existing or introduce new ones to achieve sustainable and prudent growth.

Specific risks outlined in the report include, among others: (1) reputational and operational risks due to fraud, weak agent network management, ineffective customer service and/or poor product uptake; (2) credit risks due to weak approval processes or collection procedures; (3) liquidity risks due to local currency devaluation, combined with related funding constraints; and (4) market risks due to weak or lack of regulations for digital finance and fintech services, or because of fragmented consumer protection and financial education frameworks. Boards play a vital role in mitigating risks, managing institutional crises, transforming institutions through the adoption of new business models, promoting responsible finance and ultimately bringing greater value to all stakeholders.

Today, the role of the board in financial institutions remains essential, if not more so to achieve financial inclusion. Globally, financial institutions are facing numerous challenges and opportunities brought about by changing market conditions, increasing competition, and evolving innovations in digital finance. These are fundamentally altering the way many do business and interact with their customers.

IFC’s role as private sector investor in emerging markets is more critical than before – together with the World Bank – in creating markets and opportunities towards Universal Financial Access by 2020 and broader Sustainable Development Goals. This requires a refreshed, forward thinking approach for industry collaboration between private sector, providers and public sector leaders to achieve a more dynamic and nimble response for today’s risks and opportunities.

For the full report, click here.

Safaricom M-PESA: Using Data Analytics to Improve Customer Service and Products

Susie Lonie and Oleksiy Anokhin
28 Mar 2018

Providing access to financial resources remains one of the main current goals of global international development. The simple provision of access to finance does not however necessarily change the market outlook for providers, nor does it resolve the constraints on customers. Service providers have to constantly improve the quality of the services they offer. Firms that manage by the three pillars of Responsible Finance should pay careful attention to fair and respectful treatment of clients, constantly updating transparent mechanisms for complaint resolution. This allows not only the creation of formal financial opportunities for the unbanked population, but also fully satisfy the needs of clients in terms of responsible customer service. The case of M-PESA in Kenya demonstrates how a data driven approach can successfully identify the most crucial gaps in services. Market players can develop necessary strategies to answer these challenges, significantly improving the quality of such services.

M-PESA was the pioneer of DFS at scale, and by 2016 had 20.7 million registered customers, a thirty-day active customer base of 16.6 million, and reported revenue of $450 million. When Safaricom launched the service in 2007, there were no templates or best practices; everything was designed from scratch. Continuous operational improvement was essential as the service grew. Uptake was unexpectedly high from the start, with over 2 million customers in the first year, beating forecasts by 500 percent. This huge demand forced the team to tackle capacity issues well before they had expected to do so. At this early stage in the product lifecycle, a bad customer experience could quickly erode customer confidence, so the operations team had to proactively anticipate scaling problems in both the technology and business processes. Data-driven metrics helped the team plan and guide operations appropriately. As uptake was unexpectedly high from the start, the number of calls to the customer service center was correspondingly much higher than anticipated, resulting in a high volume of unanswered calls. To improve call response levels and achieve their key performance indicators, the customer care team needed to make some changes. The problem was first tackled by recruiting additional staff, but recruitment alone could not keep pace with the increase in customer numbers. To identify bottlenecks and prioritize solutions, the team analyzed their data. PABX call data and issue resolution records were examined and some key findings were:

  • Length of call time: the average call was taking 4.5 minutes, around double the length of time budgeted.
  • Key issues for quick resolution: the two key call topics were forgotten PINs, and customers sending money to the wrong phone number; this covered 85 to 90 percent of the longer calls coming into the call center.

The analysis allowed bottlenecks to be identified, passing key insights into operations. It also highlighted the unexpectedly high incidence of some difficulties that customers were experiencing, namely erroneously sending money and forgetting their PINs. Managing against the Unanswered Calls KPI therefore delivered broader operational benefits. Using the analytic results, operations implemented a resolution strategy. Firstly, by understanding lengthy versus short problem types, difficult issues could quickly be identified and passed to a back-office team for resolution. This reduced customer waiting times and freed up the call center representatives, allowing more customers to be processed per day. Secondly, operations and product development teams worked to reduce times across all call types. This was achieved by improving technical infrastructure and the M-PESA user interface, mitigating the problems that caused lengthy calls. The combination of initiatives reduced the Call Length KPI and number of Unanswered Calls KPI, shifting both to acceptable levels despite customer numbers continuing to grow beyond forecast levels. Thirdly, this assisted in prioritization of interventions and refining consumer education activities to manage recurring issues such as pin activations.

The M-PESA case is an excellent example how data analytics solutions can be successfully used to provide significant improvements in customer service and create an opportunity for service providers to enhance the quality of their offerings and address the most urgent needs of customers. Developing a better complaint resolution system, the company both creates a responsible approach to finance by treating the customers efficiently and respectfully, and builds its reputation by providing a better service in an increasingly competitive market. Both the DFS provider and the customer benefit from such approach in a long-term perspective.

Adapted from a case study presented in the Data Analytics and Digital Financial Services Handbook (June, 2017), this post was co-authored by Susie Lonie and Oleksiy Anokhin, IFC-Mastercard Foundation Partnership for Financial Inclusion, for the Responsible Finance Forum Blog.




The rapidly changing landscape of digital lending

Priya Punatar
26 Mar 2018

Taking stock of the top seven emerging digital lending models

Last year, Amazon grabbed headlines by giving $1 billion in small-business loans to over 20,000 merchants in the United States, Japan, and the U.K. Their near real-time data on sellers’ businesses and access to customer reviews allow Amazon to evaluate customers and manage the risk of lending to small merchants. WeChat also made waves when it entered the game in 2015. As China’s largest social network, it’s been able to deploy more than US$14.7 billion in funds in just two short years. Like Amazon, WeChat benefits from access to data and the ability to offer convenience and efficiency for the customer — it only takes 0.3 seconds to approve a loan application.

These tech giants have joined a host of other players in a continually evolving digital lending ecosystem. Other prominent digital lenders include Konfío in Mexico and Kenya-based Kopo Kopo. Each platform in this space leverages technology to offer loans that are faster, more cost-efficient, and more straightforward for the customer.

Digital lending is proving to be a potent force for reaching people who haven’t been able to access financial services in the past. Innovative products can overcome the challenges of geography, reduce transaction costs, and increase transparency. But distinct market structures, regulatory environments, and customer needs have led to a wide variety of digital lending models that are each tackling financial inclusion in different ways.

When we evaluated the current state of play, we identified seven primary digital lending models:

  • Online lenders. These lenders offer full end-to-end digital lending products online or via mobile applications. In this model, customer acquisition, loan distribution, and customer engagement are entirely digital. This process is specially designed with no need for face-to-face contact or even for customers to phone a call center. Fintech companies like LidyaBranch, and Tala are online lenders that help entrepreneurs access funding in emerging markets, including Nigeria, Kenya, and the Philippines.
  • P2P platforms. P2P platforms are purely digital platforms that match a borrower with an institutional or individual lender and facilitate the digital transaction. The platform typically plays an ongoing central role in the relationship between these parties. In this model, P2P lenders like CreditEase and KwikCash often design the product, score the borrower, and may support repayment and collection processes.
  • E-commerce and social platforms. These platforms include the likes of Amazon and WeChat. These are digital platforms where credit is not their core business, but they leverage their digital distribution, strong brand, and rich customer data to offer credit products to their customer base.
  • Marketplace platforms. Marketplaces, like Loan Frame in India, are digital platforms that use proprietary algorithms to match a borrower with the right lender. Lenders typically use these types of platforms to acquire new customers, and they pay an origination fee to the platform. Once funds are dispersed, the customer relationship is direct with the lender.
  • Supply chain lender. Firms such as Tienda Pago and M-Kopa Solar provide digital short-term working capital loans for microenterprises to purchase inventory from their distributors or for pay-as-you-go financing of an asset purchase. The distribution network enforces repayment through penalties if necessary. For example, suppliers might withhold deliveries of goods or turn off utilities in the case of late payment.
  • Mobile money lenders. Firms such as Kopo Kopo partner with mobile network operators to offer mobile money loans to their customer base, leveraging mobile phone data for credit scoring. In this model, physical agent networks where customers can go to complete cash-in/ cash-out transactions supplement the digital interface of the mobile phone.
  • Tech-enabled lenders. These are traditional lenders who have embraced technology to digitize part of their otherwise manual lending process. This digitization could include adding digital acquisition channels or digital repayment options. Tech-enabled lenders like Aye Finance in India and Accion Microfinance Bank in Nigeria, supplement their physical distribution networks with technology — providing a ‘tech and touch’ approach.

Adding to the complexity of the digital lending ecosystem is its dynamic nature, which makes strict categorization difficult. Key players continue to test, refine, and evolve their business models and value propositions based on customer needs and market experience.

For example, Creditas, a digital lender in Brazil, started solely as a marketplace platform but has subsequently moved into credit scoring, customer engagement, and financing solutions for customers, to become an online lender. JUMO, an online lender in Kenya, started as an end-to-end mobile money lender but is moving away from funding its own portfolio and becoming a marketplace platform.

Innovation and market expectations will continue to alter and refine the digital lending landscape. However, the similarities shared by today’s successful models are likely to remain prominent: they digitally source customer data, rely on hundreds, and even thousands, of data points to score customers, offer instant and remote approval, create data-driven mechanisms to drive repayment, and engage customers digitally. Advanced digital lenders have leapfrogged over traditional lenders to provide customers with a faster, more transparent, and convenient service. Traditional banks will have to give customers similar benefits if they hope to compete.

This post was originally published on Accion’s website.

From Bust to Trust

Paul Smith
21 Mar 2018

In The Big Short, Steve Carell plays Mike Baum — the fictionalized version of Steve Eisman of FrontPoint Partners — and emphatically voices the fiduciary responsibilities of many professionals in the lead-up to the US housing market collapse in 2007–2008. His earnestness, his frustration, and his rage about the breadth of deception suck you in to a movie that is riveting. The depth of his intensity is palpable, and what he stumbles upon has global ramifications; we all remember where we were when Bear Stearns collapsed eight years ago.

Finance professionals are still pounding the pavement to regain trust — on behalf of our industry, on behalf of our firms, and as a reflection of our personal integrity and business ethics. And it looks like we have turned the corner. During our latest investor survey, From Trust to Loyalty: A Global Survey of What Investors Want, CFA Institute partnered with Edelman Berland and interviewed more than 3,300 retail and 500 institutional investors; what they told us is worth repeating here and exploring a bit further.

  • As an investment manager running a pension fund, endowment, foundation, or family office, are you a partner for your client? Do you know your client’s business priorities? The complexities of internal politics? – Investors tell us they want their investment managers to go beyond the mandate.
  • Have you re-evaluated your client communications lately? The frequency? What’s disclosed? Do you go beyond what’s required? Have you asked what you can do to improve your communications? – Investors want transparency — clear, forthright, regular communications.
  • Did you know that retail and institutional investors similarly prioritize the reasons they would leave an investment firm? – Survey results indicate the following reasons for leaving an investment firm (listed in order of importance): underperformance, increases in fees, data/confidentiality breach, lack of communications/responsiveness, and regulatory sanctions.

The survey also raised another issue we’re all familiar with: the importance of “the human touch” and the tradeoffs involved in choosing between humans and machines.

With the exception of those in China and India, retail investors strongly prefer (by a two-to-one margin) people they can count to a brand they can trust. This indicates that an investment firm’s brand is only as good as its people. That said, we all know things are changing. Take a look at China, India, and (to a lesser extent) Singapore, where 50% or more of retail investors say that having access to the latest technology and tools is preferred when executing an investment strategy. Does this mean that financial advisory services are ripe for disintermediation?

Modular Financial Services: The New Shape of the Industry, the latest annual report on the financial services industry by Oliver Wyman (a Marsh & McLennan Company), uncovers trends in customer behavior that match the trends our survey found in China and India. The Wyman report reveals four “shocks” that have occurred, are happening now, or will happen in the future: (1) changing customer expectations, (2) new technology, (3) tighter regulation, and (4) new competition. These are familiar themes to all of us. Deeper in the report are two takeaways that struck a chord with me: first, is that successful firms of the future will understand their customer problems, and second, that firms need to identify their strengths.

For those who know CFA Institute and are or aspire to be CFA charterholders, these themes are familiar and tie right back to both our 2016 Trust to Loyalty survey and The Big Short. During a time of crisis, the survey identified the top expectations investors have for their investment firms: action and communication. Specifically, investment firms should take decisive action to protect their customers’ portfolios, provide market updates in the context of portfolio construction, and communicate regularly. The top three strengths institutional investors look for in investment managers is acting ethically, fully disclosing fees, and having reliable data protection security measures. I know these themes will resonate with you; we should all be doing our part to both ensure and promote such behavior.

As for the two Florida mortgage brokers shamelessly selling NINJA subprime mortgages? Well, we know what happened to them. And no character could be further from what we all hold true: our fiduciary responsibilities.

This post was originally published on LinkedIn.

Solving the Puzzle of Responsible Exits in Impact Investing

Hannah Dithrich
21 Mar 2018

A responsible exit lays the foundation for long-term impact, and requires considerations as early as due diligence

Impact investors are motivated by two primary objectives: to generate a financial return and to create positive social or environmental impact. But how do they balance these dual goals throughout the investment process, and specifically at exit? It’s no easy feat.

Investors must consider what happens to impact when they exit an investment. For example, if a company received critical capital and resources from an investor, will it still be equipped to succeed and continue its mission when that investor exits? What if an investor sells her shares to a more commercially-minded buyer who deprioritizes the company’s impactful or sustainable practices?

In financial inclusion investments, the possibility of mission drift after exit can have real implications for impact. For example, if a microfinance institution is acquired by a firm with little experience with underbanked customers, it could increase loan sizes beyond what clients are able to pay back, ultimately leading them into cycles of debt. Impact investors seek to mitigate such risks by exiting their investments responsibly.

A 2014 paper called The Art of the Responsible Exit in Microfinance Equity Sales, by CFI and the Consultative Group to Assist the Poor (CGAP), explored the topic, outlining four decisions that microfinance equity investors can consider: i) the timing of their equity sale; (ii) buyer selection; (iii) governance and the use of shareholder agreements; and (iv) how to balance social and financial factors across multiple bids for their equity. Later this spring, the authors will publish a follow-on paper with guidance for all financial inclusion investors, beyond just those of microfinance institutions.

This year, the Global Impact Investing Network (GIIN) published Lasting Impact: The Need for Responsible Exitsa study that draws insights across sectors and asset classes that can be applied to financial inclusion investments. To produce this report, my colleagues and I interviewed over 30 leading practitioners, and found that investors plan for a responsible exit even before the investment is made. They lay the foundations for long-term impact throughout all stages of the investment process, from due diligence and capital structuring to exit.

During pre-investment due diligence, investors seek out companies or projects that present few risks to mission drift down the line – such as those with inherently impactful business models and those whose founders have a strong commitment to impact. They note that companies with impact ‘baked in’ to their business models face few tradeoffs between financial and impact objectives, so are unlikely to deviate from their mission. The question of ‘whom to exit to’ is key – echoed in CGAP and CFI’s paper – and investors note that they consider this during due-diligence, looking at likely exit options, which often depend on companies’ plans for growth. Annie Roberts of Open Capital Advisors noted that “if the planned exit for a given business is to a large strategic [buyer] that might not share the same impact motives, the investor takes this into account when deciding whether to make the investment in the first place.” CGAP and CFI’s paper also notes that investors typically “plan their exits before they enter”.

Once ready to deploy capital, investors can structure investments to help the company grow sustainably, without jeopardizing impact. Return expectations and structuring aspects like repayment timelines or holding periods and ownership stake in the company can all form part of a responsible exit strategy. For example, while equity investments can allow for more active involvement, they also tend to have relatively short time horizons (a 3-4 year holding period for a typical 10-year fund, for example) and growth expectations that could lead companies to prioritize expansion over sustainable practices. Debt investments, on the other hand, can be structured with flexible repayment schedules that avoid the pressure for rapid growth. Tying some portion of payments to revenue can free up needed cash for companies with variable cashflows, while also enabling investors to participate in a company’s success.

Investors can also use shareholder agreements and other structuring documents to solidify the company’s mission. Grassroots Capital’s concept note on “’Hardwiring’ Social Mission in MFIs” shows how anti-dilution clausesdual share structures, and golden shares can help preserve a company’s integrity or keep key decisions in the hands of mission-aligned founders. CGAP and CFI’s paper echoes this, with the example of Aavishkaar-Goodwell’s exit from Equitas. Equitas had a majority independent board (which could reject share sales resulting in over 24 percent ownership), shareholder agreements that set a cap on ROE, and commitments to donate 5 percent of its profits to charity. These governance clauses helped create a “self-selecting pool of potential investors”.

During investment, investors can instill positive practices and corporate governance policies that will last through changes in ownership. For example, investors can work with company management to improve governance policies like adhering to SPI4 standards, which assess an institution’s social performance, in the hopes that sound practices will continue through changes in ownership.

The exit itself, of course, is also key. Whether exiting through a strategic sale, to a financial buyer, or through an IPO, investors can seek to exit at a time when the company is at a stable stage in its growth, and can benefit from another investor’s capital or resources. For example, the GIIN’s paper profiles LeapFrog Investments, which felt it was time to exit its investment in a Ghanaian life insurance company called Express Life once it saw the company growing steadily and in need of growth capital beyond what LeapFrog could provide.

When it comes time to exit, though, how do investors know if they’re selling to a follow-on investor that might later take the company in a different direction? CFI and CGAP’s paper highlights the importance of buyer selection, and the GIIN report shows how investors identify buyers that are aligned with the company’s business model or mission. For example, LeapFrog seeks buyers that recognize the commercial value in serving low-income consumers, as well as the impact inherent in these business models. It sold its stake in Express Life to Prudential Plc, which sought to establish a presence in Africa and understood both the value proposition and the impact created by providing critical financial services to low-income consumers.

This research can guide investors – those focused on financial inclusion and those targeting other themes – in sourcing, structuring, managing, and exiting investments to optimize for long-term positive outcomes. As the industry continues to mature, investors will further develop strategies for responsible investments and responsible exits that result in lasting impact.

This post was originally published on the Center for Financial Inclusion’s website

What Investors Want

Rebecca Fender
21 Mar 2018

To succeed in investment management, firms need two things: good (enough) returns and clients. Of course, the two are very much related.

What makes this challenging for the industry is that proving skill rather than luck takes a longer time series than most investors’ time horizons. And given the uncertainty of markets, there can be no guarantees.

What’s interesting and encouraging, however, is that performance is not the only thing that matters to clients. A recently released CFA Institute study, “From Trust to Loyalty: A Global Survey of What Investors Want,” outlines the factors that are most important to clients when working with an investment firm.

In total, the study surveyed 3,312 retail investors and 502 institutional investors in North America, Europe, Asia, and Australia to see what really matters to them and where they think the industry is falling short.

As it turns out, what retail investors most want in an investment firm is one that:

  • Fully discloses fees and other costs (80%).
  • Has reliable security measures to protect my data (79%).
  • Clearly explains all fees and costs before they are charged (79%).
  • Generates returns similar to or better than other firms (73%).

Slightly further down the list were two other traits:

  • Is forthright about disclosing and managing conflicts of interest (72%).
  • Provides investment reports that are easy for me to understand (72%).

Given the margin of error of ± 1.7%, the precise rankings are not entirely clear, but the top three items stand apart — and they aren’t actually about performance.

Indeed, two are related to the “performance equation,” as fees reduce net returns. In fact, fees are the part of the equation that are most guaranteed. Investor demand for lower priced exchange-traded funds (ETFs) has led firms like BlackRock, Charles Schwab, and Vanguard to reduce their fees.

Elsewhere in the survey, when participants were asked why a client would leave their investment manager, underperformance was the top answer and an increase in fees was second for both retail and institutional investors.

With the results of this survey in mind, we asked CFA Institute Financial NewsBrief readers — a financially savvy group — what they expected the answers to be.

CFA Institute recently surveyed retail investors globally to ask them how they rank the importance of different attributes of investment firms. Which do you think was the top answer?

Which attribute do you think investors believe is most important in investment firms?

Among the 662 respondents, fees and performance ranked highest, with both earning 31% of the vote. Surprisingly, the item participants least expected that clients would choose was data security (7%), which actually ranked second among the investors queried in “From Trust to Loyalty.” Clearly, data breaches across industries — from health care to retail — have shaken consumer confidence in financial services as well. This is understandable: Today our financial lives are almost entirely digital, so the stakes are high.

Our poll respondents also recognized the importance of clear communication, with 20% expecting that providing easy-to-understand reports would be the top demand. Meanwhile, despite ongoing regulatory debates about the nature of investment advice and conflicts of interest, only about 11% of participants ranked this as the top priority for clients.

Among institutional investors surveyed in “From Trust to Loyalty,” the top items desired also included fee disclosure, data security, and performance, though others in the top five were “acts in an ethical manner in all our interactions” and “has adopted a recognized code of conduct for the industry.” This is good news for CFA charterholders, who annually affirm the CFA Institute Code of Ethics and Standards of Professional Conduct, and asset managers who have adopted the Asset Manager Code of Professional Conduct.

Overall, it seems our readers have a relatively good sense of the needs of their clients. Perhaps the most compelling information may be where clients see the biggest gaps between what they want and what they get. Furthermore, there are some qualities and services they indicate they would even pay more for.

These additional findings are available in the report and are intended to give investment professionals a clear idea of how they can strengthen client relationships over the long run.

From Trust to Loyalty” was conducted as part of the Future of Finance initiative, an effort by CFA Institute to shape a trustworthy, forward-thinking financial industry that better serves society.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

This post was originally published on CFA’s website