In the framework of the 2015 Global Forum on Development, which focused on “Financing sustainable development”, the OECD Development Centre, the United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Improving citizens’ access to financing is key to support more inclusive social and economic development. Today’s post from Kameshnee Naidoo of UNCDF highlights the challenges of ensuring financial inclusion for smallholder farmers.
Joacquim is a subsistence farmer from Etatara in Mozambique. At 46 years, he is his family’s sole breadwinner, responsible for supporting his wife and three orphaned grandchildren. He lives in a traditional house, which he is unable to use as collateral and grows maize, sorghum, cassava and beans. They consume a lot of the produce themselves, and what is not consumed is sold. Joacquim earns $300-500 per month depending on the season and his produce.
In the attempt to understand the real livelihoods of lower-income individuals and households in markets such as Mozambique, the lack of data and field-based insights are challenging. UNCDF’s Making Access to Financial Services Possible (MAP) project, for instance, seeks to place demand-side analysis at the centre of the research process to focus the minds of multiple stakeholders on the end consumer. Better provision of appropriate financial services is an ancillary tool to wider development goals of enabling more sustainable livelihoods for low-income populations.
Millions of smallholder farmers like Joacquim live in or close to poverty and rely on agriculture for their livelihoods. Agriculture is fundamental to poverty reduction, driving economic transformation and ensuring growth includes the poor. Pathways out of poverty – whether through farming, employment, non-farm processing and trade or migration – are all heavily reliant on agriculture. As stressed in a report to the G20 co-ordinated by OECD and FAO, improving agricultural productivity — while conserving and enhancing natural resources — is an essential requirement for farmers to increase global food supplies on a sustainable basis and enhance their livelihoods. Over the longer term, increasing agricultural productivity plays an even greater role in economic development by enabling economic transformation through a new green revolution.
For agriculture to work better and improve the livelihoods of the rural poor, however, financial services need to work better in helping the poor to diversify their source of livelihoods and reduce hunger, become more resilient to periodic shocks, and prevent them from falling into poverty traps. The rural economy requires a wide range of financial services and products, and no single type of financial institution is capable of efficiently providing such a range. Microfinance, for example, can help to meet the short-term needs of farmers and other low-income residents and help to finance microbusinesses but it is not so suitable for larger businesses or for the accumulation of capital and innovations to raise productivity.
The OECD’s Multi-dimensional Review of Myanmar found that of all the segments of the country’s economy, the rural sector is the most underserved by the formal financial system. Only about 2.5% of total loans go to the rural sector, even though it accounts for 30% of GDP and two-thirds of employment. The rural population has considerably less access to formal financial services than the population in urban areas and some groups, such as landless farmers, are effectively cut off from such services.
The current rural financial system is unlikely to be able to support the broader development of the rural economy in Myanmar, particularly the improvements in productivity and the creation of non-farm job opportunities that will be necessary to allow the rural population to share in rising living standards and to avoid a disruptive exodus from rural to urban areas.
Apart from the basic loan products, other financial products and services have been quite limited. For instance, remittance services are particularly important to Myanmar’s rural sector, given that an estimated 2-5 million of its citizens are working in other (mainly ASEAN) countries and annually send a substantial amount of funds back to their families.
Finance is also needed for the agricultural investment that is a major catalyst for job creation, higher incomes and increased productivity across the economy as a whole. Financing agriculture and rural development more broadly, however, is complex. All of the challenges that hinder financial outreach in regular markets are larger in a rural context. Rural populations are poor, sparsely distributed, poorly literate and mostly engaged in informal activities. Data from the FinScope surveys and the MAP diagnostics indicate that agricultural activity — mostly smallholder farming — has low returns and is subject to high risks. Information failures like moral hazard, adverse selection, poor enforcement and danger of exploitation all exist on a large scale. For suppliers of financial services, the cost of operating in rural areas is often extremely high which, when combined with the low and risky returns available, leads to a large under-supply of financial services.
If financial services are to work better for rural and agricultural populations, they need to be based on an understanding of the needs of the users, which can be very different to those of urban populations. But financial service providers, governments and donors do not have a good understanding of the financial behaviour, usage and needs of rural populations and this restricts the effectiveness of rural outreach.
On the supply side, an increasing number of traditional and non-traditional financial service providers are innovating in the agricultural space, driven by a combination of declining profitability in more advanced markets and the huge potential offered by the unbanked millions in rural areas. Innovation is taking place in delivery models led by technology and building alliances between those who have assets and those who have low cost outreach; in risk management enabled by big data and leveraging existing relationships within the value chain (buyers and sellers, farmers’ associations, co-ops); in products driven by a better understanding of what farmers need, matching tenor and interest and repayment schedules to agricultural cash flows and addressing agricultural development with finance.
If the goal is to alter the dynamics of markets so that they work more effectively for the poor and economic transformation, we need to recognise the interaction of these market systems. In this regard, understanding how agriculture shapes the demand for financial services and how the rural context in which it takes place affects the costs, risks and returns to supplying financial services is central. A key component of the MAP diagnostic is to build a target market profile based on the main income generating activities of consumers, and their financial services access, usage and needs. The analysis is informed by the context of the country and ultimately seeks to meet the policy objectives of financial inclusion as a tool to improve welfare and poverty alleviation. As a large number of the countries in which the MAP diagnostics have been undertaken are LDC’s reliant on agriculture, it is able to present a more complete picture of the nature of demand and usage of financial services and potentially inform better ways of serving farmers ‘s needs.
In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre, the United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post from Beth Porter and Nancy Widjaja of UNCDF and Keiko Nowacka of the OECD Development Centre highlights gender differences in financial inclusion.
Women play multiple economic roles within society. They are consumers, business owners, farmers, employees and entrepreneurs. Regardless of what they do or where they live, women are dependent on market systems and they need access to finance to manage their livelihoods.
The gap between women and men in access to formal financial services is great. In developing economies, women are 20 percent less likely than men to have a bank account and 17 percent less likely to have borrowed from a formal institution in the past year. This disparity, particularly within the population at the bottom of the socio-economic pyramid, has knock-on effects: women’s inability to access finance also impedes them tapping into market opportunities, thus widening the gender gap.
Legal frameworks and cultural norms condition market dynamics and may limit the space in which women can operate and interact. OECD analysis has shown that in many countries (in the Middle East and North Africa region, for example), legal and customary frameworks insist on male signatures for women to open bank accounts. Moreover, women are typically found to have lower awareness and knowledge than men about financial matters, and have lower confidence than men about their financial skills. This can present significant challenges to women in making decisions about their income or assets.
To close the gender gap in financial inclusion — and to expand women’s overall level of access — policymakers and financial services providers need to understand what women value when it comes to financial products and services. In a variety of settings, the answers given by women are strikingly similar: convenient, reliable, secure, private. When these attributes are taken into consideration, the benefits to women — in terms of greater economic participation and empowerment as well as greater account ownership and asset accumulation — are significant.
There is also great value in drawing lessons from informal financial systems in order for financial service providers to cater to women’s financial needs and preferences, as women are often found within this sphere. Because of collateral and other requirements imposed by formal financial institutions, informal services such as microcredit represent an easier source of revenue for women, who are less likely to own land or assets. In the 2014 edition of the OECD’s Social Institutions and Gender Index (SIGI), two-thirds of the countries surveyed had discriminatory laws or practices that restrict women’s access to land, assets and financial services.
Correspondingly, commercial viability must be part of the business proposition to target women and in order to be able to cope with growing demand and be sustainable. This is particularly important, as financial service providers still perceive women as a higher risk, less profitable client group — despite the fact that women in many contexts have been proven to be reliable clients.
The use of digital financial services has the potential to address women’s preferences in new and exciting ways, as well as to reduce the cost and time of service delivery. In Malawi, for example, with UNCDF support, Women’s World Banking and NBS Bank designed the Papfupi Savings Account to give “mtima myaa” or “peace of mind” to its clients. It does so by using mobile phones in rural areas as a transaction point to make deposits and withdrawals, and with the help of the mobile sales team, clients can even open an account in ten minutes from anywhere. The product conveys information simply and visually so that the customer does not need to be literate.
In Niger, evidence from the social cash transfer programme demonstrates that the greater privacy and control of mobile transfers compared to manual cash transfers shifts intra-household decision-making in favour of women.
In Kenya, the arrival of mobile money transfers increased women’s economic empowerment in rural areas by making it easier to request remittances from their husbands who migrated to urban areas for work.
In India, trust was a particularly important issue for women, especially when dealing with unfamiliar mobile technology. In these settings, agents played an essential role in training and supporting women in their use of the technology.
Digital financial services can be offered in many forms including Automated Teller Machines (ATMs), point of sale terminals, cards (pre-loaded or debit), and, particularly promising for women, mobile phones. However, the “digital divide” between women and men cannot be ignored. In many contexts, women have less access and are less adept in the use of technology. For example, the large gaps in mobile subscriptions (there are some 300 million fewer women subscribers than men worldwide) and ownership (women in developing countries are 21 percent less likely to own a mobile phone than men) means that if digital financial services are going to deliver on their promise to women, these gaps in awareness, access and use of technological devices need to be taken into consideration.
Take, for example, the Benazir Income Support Programme (BISP) in Pakistan. It was thought that mobile phones would be a low-cost and convenient way for women in remote areas to interact with a bank. The reality was that many of the women neither had a phone nor knew how to use it. This experience and others like it point to the importance of ensuring that the product is simple and easy to use, and that adequate customer support or training is provided — particularly for illiterate women who have little experience with technology, financial services or both.
Governments also have an essential role by creating an enabling regulatory environment, establishing an appropriate financial consumer protection framework and catalysing a digital ecosystem. They also have a responsibility to remove discriminatory practices and laws for women’s access to finance.
The links between financial inclusion — particularly for women — and broader development goals is increasingly being recognised on the global stage. Greater inclusion has a strong potential to push the frontiers of markets. Addressing the demand and supply issues of financial inclusion for women could offer pathways to new and additional market opportunities that eventually lead to the growth of economies as a whole, not only for women. Indeed, the latest draft of the post-2015 Sustainable Development Goals features financial inclusion as a key enabler to multiple goals. The links between financial inclusion, digitisation and the global growth agenda are priorities for the Turkish G20 Presidency.
Digital financial services have the potential to close the access and usage gap between men and women. Deliberate efforts on the part of governments and providers can help put the tools in the hands of the women ready to use them.
In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre, United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post is by Emilie Romon of the OECD Global Network of Foundations Working for Development (netFWD) and Sabrina Sidhu, from the Better Than Cash Alliance.
What do a family foundation based in Canada, a semi-public foundation established in the United Arab Emirates (UAE) and a corporate foundation from one of the world’s leading banks have in common? At first sight, not much beyond the fact that they are all charitable organisations. But a closer look tells us that they all dedicate time and resources to the same cause: financial inclusion.
There is growing evidence that financial sector development offers the opportunity to address inequality through interventions to ensure that economic growth translates into poverty reduction and employment. These efforts help to alleviate worries that economic integration and liberalisation of financial markets will lead to narrow, impervious corridors of spectacular growth surrounded by a hinterland of poverty. According to a report by the World Bank Development Research Group, governments can save up to 75% with electronic payment programmes – because the costs of handling, securing and distributing cash and administering these cash programmes is so expensive.
By empowering poor households to take a long-term view of education and health, financial inclusion complements government policy. It also helps reap the demographic dividend by ensuring healthier and educated young people raise productivity and attract further investments in the real economy.
Many foundations work to support those living in developing countries who do not have access to formal financial services such as loans, insurance, savings accounts, etc. They may also lack the skills needed to manage their financial assets in a sustainable way. Through financial inclusion, foundations empower individuals to lift themselves out of poverty, enhance their livelihoods and avoid excessive indebtedness.
Why do foundations get involved? Firstly, foundations are generally more willing to take risks and have more flexible means of operation than traditional aid agencies. They have also taken the lead in innovation, for example by inventing and making new digital payment systems accessible to the poor. An OECD Development Centre study on venture philanthropy paints a generally positive picture of the approaches used by foundations.
The Lundin Foundation works with farmers and small enterprises in Sub-Saharan Africa to enhance employment opportunities and bring their products to market. Because farmers often do not have access to formal financial services — which constrains their ability to scale up — the foundation makes financial services accessible to these farmers. Lundin recently invested in Agriculture and Climate Risk Enterprise, Ltd. (ACRE), which provides affordable insurance to farmers against climate risk, and sponsored the development of West Africa’s first dedicated Agribusiness SME Venture Capital Fund.
In the UAE, where 70% of Emiratis under the age of 30 are indebted, rising depression amongst youth is often attributed to financial stress. Increasing divorce rates in the country have also been linked to excessive debt. Faced with a problem of such magnitude and because no nationwide initiative was addressing the issue, the Emirates Foundation for Youth Development decided to make financial inclusion and literacy one of their six core programmes. Through the Esref Sah (“Spend true”) programme, the foundation raises awareness among the Emirati youth on the importance of managing their assets and provides adequate capacity building training. In 2014, the Emirates Foundation has engaged 2 434 youth and parents through a series of workshops across the country.
Similarly, the Citi Foundation follows a ‘more than philanthropy’ approach, by giving not only money to their grantees, but also coaching and training in order to reinforce their capabilities. In addition to financial literacy programmes delivered around the globe, the foundation seeks to strengthen microfinance institutions (MFIs) that offer small loans to low-income individuals, by helping them build their institutional and management capacity.
While these programmes gain considerable momentum, a larger range of development actors are also coming together to leverage their comparative advantages in support of financial inclusion. The Better Than Cash Alliance for example is a unique UN-based Alliance that is funded by three major foundations (Bill and Melinda Gates Foundation, Ford Foundation and the Omidyar Network), three financial services providers (Citi Foundation, MasterCard and Visa) and one bilateral donor (USAID).
Housed at the United Nations Capital Development Fund, the Better Than Cash Alliance provides expertise in the transition to digital payments to achieve the goals of empowering people and growing emerging economies. In addition to raising awareness of the benefits of replacing physical cash with electronic payments, the Alliance facilitates the transition for governments, the development community and the private sector. While physical cash payments are more effective than distributing in-kind goods, there is a growing body of evidence that digitizing payments can create lasting benefits for people, communities and economies. Why? Because they are a more cost-effective, efficient, transparent and safer means of disbursing and collecting payment.
The support from the three foundations to the Better Than Cash Alliance and their commitment to work with governments, private sector and development partners is deeply rooted in their own vision for increased financial inclusion in developing countries. Bill Gates, the co-chair of the Bill and Melinda Gates Foundation, predicts that in the future all “transactions will be digital, universal and almost free”.
Increasing financial inclusion at a national level is a complex task and requires a number of actors, in order to ensure that the vast range of products, services, policies and regulations as well as infrastructure upgrades are met. This will require both technical skill, significant human capital to ensure the change happens and deep financial resources. Thus, a multitude of players will be required for multi-dimensional sectoral change at country level and there is no doubt that foundations have a key role to play in increasing financial inclusion globally.
In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre, United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post by James Eberlein of the OECD Development Centre and Kameshnee Naidoo of UNCDF provides an overview of the Financial Access Landscape and the usage of financial services by consumers in Myanmar. These findings are some of the highlights from the recent “Making Access Possible” (MAP) diagnostic undertaken in Myanmar and draws on the OECD’s Multi-dimensional Country Review of Myanmar.
U Chit Po is 49 years old and runs a grocery store in Myanmar. He is responsible for his wife and two children. He recently had a major health scare and consequently would like to retire soon. U Chit Po has no medical coverage, as there is no license for the health insurance market in Myanmar. His income consists of profit from his small business and interest on loans to others, which he lends at 20% interest per day. He has never saved in a formal banking institution, but his knowledge about the value and complexities of saving are highly sophisticated. He feels that banks have so much red tape, especially for provisions which he might need to access at short notice, and the interest offered by banks on savings is so little, that it is not worth the hassle.
Like U Chit Po, most adults in Myanmar do not use formal financial services. More than half of all credit in the country is sourced informally, through people like U Chit Po who on-lend their savings as a way of generating additional income. While such local intermediation plays an important role in the local economy, from a public policy perspective it means that such funds are not available for national investment.
Nature of financial services usage in Myanmar
Source: FinScope Myanmar, 2013
For people who do use formal financial services, it is common for such usage to be limited to one service — a phenomenon known as being thinly served. 30% of the total adult population have access to a regulated financial service from a regulated institution, but only 6% have access to more than one (a combination of credit, savings, insurance and payments); this is higher for urban adults than rural, as shown in the figure above.
The development of the rural financial system is particularly critical. Of all the segments of Myanmar’s economy, the rural sector is the most underserved by the formal financial system: only 2.5% of all loans go to this sector, even though it represents 30% of GDP and two-thirds of employment. Improving access to finance in rural areas could catalyse a process of agricultural modernisation and the creation of non-farm jobs, which will be critical for the future.
Thinly-served populations results in adults using ‘inappropriate’ financial services to meet a particular financial need. Like U Chit Po, 31% of the adult population in Myanmar experienced illness within their household or family that resulted in medical expenses. However, in the absence of health insurance, 47% of adults reported using credit, 27% sold assets or reduced expenditure, 22% used their savings and 4% did nothing. In all these responses, adults are forced to rely on wealth-depreciating mechanisms, leaving them more vulnerable to shocks in the future and undermining the productive allocation of resources.
The UNCDF’s Making Access Possible (MAP) programme unpacks the realities of adults like U Chit Po, across various economic groups based on their income profile, to understand the needs of different segments of the population and to position the supply-side response within the current contextual and market challenges. These include a heavy reliance on paper-based banking systems, a rapidly changing political economy and a modernising financial sector that will require new skills and approaches to meet needs on the ground.
MAP targets low-income consumers, as well as small and micro businesses, and hence its application in Myanmar is supporting the Government’s objectives to improve access to financial services, reduce poverty and catalyse jobs and economic activity. The figure below gives an idea of the levels of income and the size of these different groups of consumers that are not being efficiently served.
Target markets for financial inclusion in Myanmar
Source: FinScope Myanmar, 2013
To achieve this, UNCDF, in partnership with the Ministry of Finance, developed a roadmap for financial inclusion. By analysing the various options available, timelines and resources required, it will assist the Ministry in developing policy and setting out its priorities for financial inclusion in the short, medium and long terms, and in attracting development partners to support specific areas of financial or other need.
The roadmap was presented at the ASEAN Financial Inclusion Conference hosted in October by the Ministry of Finance of the Government of the Republic of the Union of Myanmar in Yangon. The event took place in the framework of Myanmar’s contribution as the Chair of the 18th ASEAN Finance Minister’s Meeting and offered a space to develop a collective agenda. It concluded with the Yangon Outcomes for Financial Inclusion, a set of recommendations to accelerate financial inclusion in the ASEAN region.
The Conference was part of UNCDF’s new programme, Shaping Inclusive Finance Transformations (SHIFT) which aims to double financial inclusion in the ASEAN region by 2020, and will focus on interventions at country level while bringing cross-border and regional solutions to problems that cannot be addressed by any single country. It also seeks to take advantage of economies of scale, including training and policy research and advocacy to make financial inclusion a key outcome of the financial integration process.
With the recent changes in government and new investor interest, Myanmar is poised for growth. In its 2015 Economic Outlook for Southeast Asia, China and India, the OECD Development Centre forecasts that Myanmar’s economy will grow by nearly 7.8% over the next five years. This has the potential to move millions of people out of poverty. There is growing evidence that financial inclusion can play a critical role in contributing to equitable growth policies that reduce poverty and inequality.
Given the current level of development of the financial sector in Myanmar, much work needs to be done to further expand access and, importantly, to improve the quality and depth of services offered to those already financially included. Thus the roadmap will provide a structured approach to that that the benefit of economic growth is shared across the poor and marginalised groups.
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