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Financial inclusion: Banks and clients must learn from each other

"Financial institutions have to move away from trying to address the poor using their ‘balance-sheet binoculars’, towards a ‘cash-flow kaleidoscope’ to better understand the realities of their financial lives."


Rod Newing
Financial Times23 June 2011

Financial inclusion has a big role to play in relieving poverty and increasing general economic prosperity. Yet the majority of people in emerging markets do not have access to a bank account.

"They choose to ‘stash’ their wages under a mattress, where it is at risk of being stolen; invest it in cattle which can become diseased and die; or in community saving schemes, which are often fraudulent," warns Pankaj Gulati, chief executive of MoreMagic Solutions, which provides mobile money services in emerging markets.

However, traditional banking products and branches have little to offer poor people, whether homeless, living in slums or in rural areas.

"Innovation lies not with products, but with the insight into consumer financial behaviour," says Julius Abensur, a financial services expert at PA Consulting Group.

Banking processes are highly structured, being based on customers visiting formal branches or using the internet, and they value reliability in customers.

"There is a natural creative tension between banks and poor people, who are not structured," says Peter Ryan, founder and chief executive of MicroLoan Foundation, a charity that provides small loans and business training to women in sub-Saharan Africa.

Mr Abensur adds that reliability is uncommon in the lives of the less privileged, whose income is low and irregular. Dealing with unpredictable cash flows is more important than calculating the best mix of risk and return, which is typical of more privileged customers.

He says: "Financial institutions have to move away from trying to address the poor using their ‘balance-sheet binoculars’, towards a ‘cash-flow kaleidoscope’ to better understand the realities of their financial lives."

Perhaps the biggest issue is creating trust between the vulnerable "unbanked" and a financial institution, especially global retail banks.

Mr Abensur warns: "Certain elite members of rural communities attack private business for political reasons that can be traced back to colonial times."

Solutions include working with local financial institutions, which are generally based on business banking in cities, to create nationwide retail operations, or to work with the voluntary sector. Banks must either establish informal "shops" near their customers, such as in slums, or visit them in their villages.

Rabobank Group, a Netherlands-based co-operative, is providing technical advice and taking minority investments in local institutions.

"It is close to our hearts, as we were created by poor farmers without any financial means," says Frank Nagel, head of project management for Africa. "It is similar to what we did in the rural Netherlands more than a century ago."

MicroLoan Foundation lends to groups of women in rural areas to start businesses. Its 120,000 loans affect 650,000 family members, and 99 per cent of money is repaid and then re-lent. "There is a creative tension between us and banks," says Mr Ryan. "Eighty per cent of what we do is training, mentoring and support."

Areas include how to work with MicroLoan, how to run a business, the concept of interest, how to work as a group and how to support each other. The foundation visits each client every two weeks to continue the process.

Rabobank teaches similar subjects. "Many people think if they get a loan they don’t have to repay it," says Mr Nagel. "You have to work on their literacy levels with very basic stuff, just as we did in the Netherlands."

Unlike traditional banking, the onus on ensuring microloans are repaid lies with the bank. Customers must not be punished with higher interest rates or late repayment fees.

Poverty is not restricted to the developing world and such schemes are needed in mature economies. The US Federal Deposit Insurance Corporation’s 2009 National Survey of Unbanked and Underbanked Households estimated 17m adults in the country do not have a bank account.

Grameen Bank, owned by its clients and the Bangladesh government, won a Nobel Peace Prize in 2006 for its work providing credit to poor women in rural parts of the country, without any collateral. Grameen America began its operations in New York City in 2008 and is expanding across the country.

MicroLoan has recently taken two UK organisations to Africa to see its work, so they can bring some of the lessons back.

"There is a tremendous opportunity for microfinance in developed economies," says Mr Ryan. "Poor people have not been educated in how to work together and support one another. They could set up very successful small businesses doing very simple things needed in every community, such as car washing, painting, decorating or gardening."

Mr Abensur sees some challenges to inclusion in mature markets. There is government pressure to support small business, not small people.

Automation, such as credit scoring, makes the cost of allowing exceptions unpalatably high and banks are driving alternatives to cash, when the poor are almost exclusively dependent on it.

Lastly, the poor in many western countries have actively resisted inclusion, even from non-banks such as postal services, so a change in behaviour and attitude is required.

Mr Gulati at MoreMagic says that mobile money services in African countries have seen household incomes increasing by up to 30 per cent.

Rabobank’s Mr Nagel concludes: "Banks have a responsibility to promote structure and self-discipline in the financial lives of the less privileged."

"Connection to financial services changes people’s lives by making them aware of their financial means, so they can plan their expenses and see the benefits of regular saving."

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