Financial Services

Global Asset Building Beyond Microfinance: the Forgotten Bottom and the Missing Middle

Jamie Zimmerman — Tue, 07 Oct 2008 21:32:00 -0400

On the horizon of this year's Clinton Global Initiative, I saw the next frontier for pioneers of the global asset-building field. At past CGIs, microfinance (and microcredit in particular) has been centrally celebrated and largely heralded as a panacea to global poverty. However, this year, there seemed to be an undercurrent of recognition the microfinance field, in its current construction, simply can't do it all. More specifically, there are two very important poor populations that microfinance simply doesn't reach - those in extreme poverty whose needs are too small for average microloans, and those who own small and medium-sized businesses too large for the average microloan but too small to access finance from formal banks. A big players are lining up to fill the void.

Oxfam has committed to expanding to ever-elusive access to savings services for the extreme and rural poor through its Savings for Change program. Sonal Shah, of the Google Foundation, spoke of its commitment to focus its efforts on expanding Small and Medium Enterprise (SME) development. A central challenge is figuring out how to facilitate "graduation" from microenterprise into small and then medium-sized enterprise, a theoretically natural transition that has unfortunately not materialized for most micro-entrepreneurs, even as microfinance has exploded around the world. Among the most striking commitments to SME development at CGI was the creation of the Aspen Network for Development Entrepreneurs (ANDE), a $300 million public-private partnership that will invest in SME development and technical assistance.

Looking outside of the microfinance box is an important step towards recognizing a more complex and dynamic reality of the needs of poor, low- and moderate-income people around the world. We are so far only skimming the surface of discovering innovations and changes that must be made to reach these very different populations and provide them with the services they need to be included and productive in their economies and societies. The expansive microfinance field just recently began acknowledging (in a significant way) the vast demand for savings among the poor. Now, there seems to be a desire to temper the enthusiasm around reach of the field and its ability to provide global financial inclusion and empowerment for all. Microfinance hasn't already lost its day in the sunshine, not by a long shot. But I applaud the CGI for reminding the global development community "forgotten bottom" and for including, in a major way, the "missing middle" in efforts to expand financial services and asset-building programs, products and policies for all populations in such desperate need of them.

CGI Closes: Amidst Glitz and Pomp, Substance

Jamie Zimmerman — Fri, 26 Sep 2008 18:32:00 -0400

The Clinton Global Initiative is coming to a close and as I sit here listening to Gordon Brown talk about the importance of the global economy and the gap between the rich and poor, I find myself also thinking about the images of Drew Barrymore, Matt Damon, Muhammad Yunus, Bono, Bill Gates, Wylclef Jean and Bill Clinton on my camera, and last nights performances of James Taylor and Yousoo Ndour's. Waking up from my day dream, I realize that this conference could have easily succumbed to three days of a star-studded, papparazzi-riddled social affair. And perhaps in some ways it is.

But as I go through the notes I've taken over the last three days, I am quite pleasantly surprised by the amount of substance and the breadth of issues and innovations covered over the last three days. Indeed, I'm so impressed that I find myself at the end of this conference in 30 minutes unwilling to end my blogging on its sessions and commitments. Over the next week, I plan to continue providing commentary on CGI sessions, issue areas and commitments. Here is a sampling of topics I plan to cover:

Asset Building Beyond Microfinance? The Forgotten Bottom and the Missing Middle
Rural Finance: a New Frontier for Global Asset Building?
Technology, Information and the New Age of Access
Energy, Climate Change and Sustainable Development: An Opportunity for Microfinance?
Food Prices Shifting Microfinance Focus?
CGI Commitments: My Top 10 List

Send questions, comments, and stay tuned!

CGI's Call for Integrated Solutions I: How About a Broader Perspective on Poverty?

Jamie Zimmerman — Thu, 25 Sep 2008 17:34:00 -0400

All day yesterday, I capitalized on the opportunity to unabashedly promote the asset building framework by putting a spotlight on its prominence in poverty alleviation discussions and commitments here at CGI. And I actually barely skimmed the surface of some of the specific asset-focused activities coming out of these sessions (Habitat, others). As much as I relished it, I also want to acknowledge that asset building and financial services for the poor are one piece of poverty alleviation in a complex global environment. The specific commitments are great, but what about the larger perspective?

Yesterday's afternoon CGI held a plenary on profits, jobs and equitable growth. The stifling of poverty alleviation around the world is not simply due to lack of access to effective financial services, but also to lack of access to property, to opportunity, to education and to healthcare. Exclusion from any combination of these often results market inefficiencies, slack productivity, an inability for an individual to live to their full human potential. Hernando de Soto called for property rights and legal empowerment of the poor to give them the tools they need to achieve their version of the American Dream.

Still wearing me asset-building hat, I applauded when members were reminded of the threat and persistence of poverty traps, but were instead described as inequality traps. But the panel didn't go far enough: the term "inequality" was largely used in the context of income. In fact, President Clinton remarked that income inequality has increased every year in the United States since 1973. This seems a dramatic statement, but imagine how much more impact it would have had if he had instead stated the rise of wealth inequality, much starker (by some estimates 50 times more) than income inequality.

If we are going to develop any successful, integrated solutions to poverty alleviation (the subject of this morning's plenary too, and more to come on that), then the very least we could do is stop describing poverty so very narrowly as a lack of income. Instead, why not describe it as a lack of assets (financial, human, social) that the enterprising poor can leverage in any number of ways to improve their lives?

Savings and Asset Building at CGI Part II: Working Group Session II – Financial Services for the Poor

Jamie Zimmerman — Wed, 24 Sep 2008 20:09:00 -0400

There is still much to learn about the financial tools needed to help the world's poor mitigate risks and build assets in order to build an economic base and contribute to long-term economic development. This session primarily focused on "building assets in the developing world."

Sylvia Matthews , director of Global Development at the Bill and Melinda Gates Foundation opened the second working group session stating that 2.3 billion with no access to financial services for the poor, even though evidence suggests they would make perfect customers. She asked her panelists: "What do people need, what works, what are some solutions and how do we reach scale?" Again, asset building and asset protection products reigned supreme:

Bob Rubin, the first Director of National Economic Council, then Secretary of the Treasury, and now a Director at Citigroup, Inc remarked on the health of the financial system and impact on financial services for the poor. "We need to stem the crisis of confidence in the US now, but we also need to put into place effective responses to longer-term problems the country faces, like healthcare, education and economic opportunities for the poor."

Fazle Abed, the Founder and Chairman of BRAC, spoke about BRAC's ability to reach the poor at scale. Abed described a simple model of success for BRAC, which now reaches millions of clients and has collected 200 million in savings deposits of the poor: "We started small, then tried to make it effective, then efficient, then expanded." Savings coupled with lending is a critical part of their model, which he says "happens like clock-work." It gives clients discipline and regularity, and loans repaid weekly in small sums. In his view, the biggest challenge faced to provide financial services in most countries, is that MFIs cannot mobilize savings -- a huge regulatory hurdle to reaching the poor with savings and other financial services. When financial institutions can't take savings, they lose out on that access to capital and have to borrow equity from capital markets, stifling the growth of some institutions. Abed called for a structure permits these organizations to take deposits so that they can expand programs in un-reached areas quickly.

James Mwangi, CEO of Equity Bank, Africa's largest microfinance institution and now large regulated bank, described the sweeping success of the bank's pro-poor model. Equity holds 52% of all bank accounts in Kenya. Equity's client base also doubled since their last CGI visit, from 1.4 million depositors to 2.8 million. Equity has been able to scale (7 of 10 accounts opened in Kenya today are opened at Equity) because they tried to remodel the bank to meet the needs of the poor. For instance, they structured a low-cost, simple savings product to be more competitive than otherwise available to population (typically under than mattress). Getting the product right, as well as the system to deliver it, has helped Equity become one of the most innovative, fastest growing, pro-poor financial institutions in the world, none of which would be possible, he says, if the bank were unable to collect savings in Kenya.

At the end of the panel, the Working Group was asked: Given the challenges and needs of the poor, what do you believe are two to three actions that different sectore should take in order to meet the financial needs of the poor?

To the global asset building community, I ask: What do you think?

Savings and Asset Building at CGI Part I: Poverty Alleviation Working Group Commitment Lunch

Jamie Zimmerman — Wed, 24 Sep 2008 18:43:00 -0400

When I walked around yesterday's CGI exchange, getting a convention-style glimpse into the organizations and corporations making commitments to poverty alleviation this year, I was particularly excited to see not only institutions focused on financial services for the poor, but particular, savings and asset-building. Yes, the actual word - asset-building - at the CGI. Considered by some as an inaccessible term to describe wealth creation opportunities for the poor, I am thrilled to see it permeate the global microfinance field (as I assumed it would). Oweesta, the CDFI running IDA and other asset intervention work in native American communities in the USA, seems the only organization focused on empowerment of native communities, and if carrying the AB message in all of their materials. And Oxfam, who have been running a Gates-funded Savings for Change program (informal rotating savings groups mobilizing deposits for those still completely untouched by formal microfinance) for a few years around the world, have added the term asset building to the September version of the program's one pager.

Asset-building is catching on, and in the microfinance field, savings is the catalyst. For example, in the first working group session on poverty alleviation (just wrapped up at 1), three of the biggest names in microfinance (Christopher Crane of Opportunity International, Elizabeth Littlefield of CGAP and Maria Otero of Accion International) discussed their experience with their organizations commitments to the poor. For two of of these microfinance leaders, savings took center stage.

For Christopher Crane, CEO of Opportunity International made a commitment in 2005 to scale to 50 million people into financial services and 5oo million dollars in the field within 5 years Just three years, later, OI has already mobilized 600 million dollars, and amazingly half of that (300 million dollars) comes from the savings of clients in Africa. Obviously, this is an indication of a tremendous demand for savings. And itÕs also a sign of things to come. Crane foresees the MicroFinance field consolidating; bigger, stable, formal institutions will be best able to use new technology to digitize transaction (smart cards, mobile banking, etc), and they also will have greater access to capital not only through their ability access the capital markets, but also through their ability to mobilize savings)

Elizabeth Littlefield of CGAP spoke of their 2005 commitment to figure out how to get mobile banking to poor people in developing countries. Technology reduces the transaction costs that are largely the main obstacle to banking services for the poor, though it often needs to be used in conjunction with a cash point (i.e., banking agent). The lessons CGAP has learned from its 10 pilots are both good and bad. The good news is that it works and its popular (20 telecom operators experimenting with mobile banking and demand is huge (3 million subscribers in 18 months in Kenya)). In her view, though the bad new is that mobile banking has not figured out savings. In the next two years, CGAP is committing to understanding the needs of the poor in order to tweak the system, create better policy environment, do more experiments, and in the end, create good products that will reach 25 million people with effective mobile banking services.

All this on savings and asset building, and we haven't even started the working group session on financial services for the poor... Stay tuned...

Child Savings Accounts: Fad or Phenomenon at the Bottom of the Pyramid?

Jamie Zimmerman — Wed, 03 Sep 2008 22:00:00 -0400

In the United States and many developed nations, banks offering savings to children as a means of social and economic inclusion and empowerment may seem tired tradition of the thrift era that has long passed. Gone are the days of widespread school banking programs once so common in the US. And in the very few developed nations where efforts to provide children social and/or economic opportunity through financial inclusion exist, they typically come in the form of social policy (UK's Child Trust Fund, Singapore's Baby Bonus, USA's ASPIRE Act). In developing nations, however, we're witnessing a wholly different phenomenon: financial institutions are, out of their own volition and with no push from the government, choosing to target the child market segment.

This week, East Africa Business Week newspaper published an interview with Stephen Mkweli, managing director of PostBank Uganda, to discuss the focus annual meeting of the Association of Savings Banks of East Africa (ABSEA) - Child Savings. Mr. Mkweli spends his interview extolling the virtues and benefits of child savings and inculcating a culture of savings among children at an early age. He states that, "The benefits of savings include the fact that the customer is assured of a brighter future since he/she can...own future by planning for it. It instills the discipline of financial planning ahead of time...and also increases the deposit base of the institutions and therefore avails the money for government to borrow for its developmental programmes." ABSEA banks plan to capture this special market segment by holding contests, offering piggybanks, and working with networks to expand the reach of the accounts.

By our account, ABSEA is not alone in its efforts to expand access to savings accounts for children. In 2007, the Global Assets Project researched dozens of financial institutions and non-profits who are offering specialized savings accounts targeted toward financially excluded and/or economically disadvantaged children (we call them Child Savings, Accounts, or CSAs). But with the likelihood of small and inconsistent deposits from such a population, the question remains: why?

In our recently released white paper, "Child Savings Accounts: Global Trends in Design and Practice," we review various reasons why different institutions are choosing to offer CSAs, as well as a variety of common features chosen in designing such products. While there is great variation in design based on the institutions purpose for offering the accounts, among the financial institutions we interviewed for this paper, there are some common threads for establishing a business case for CSAs. First, in the rush to "bank" the bottom of the pyramid, the child segment is seen as an important market niche. Not only is this a largely untapped market, but if retained, these children will likely become long-term clients of the financial institutions. Second, the financial competence they gain by early exposure to and habit of using savings services will make them more savvy users of the banks other products. The child's savings account may be a loss for the bank today, but does it mean greater market share and a more lucrative relationship with the client tomorrow?

To be sure, there are numerous other purposes beyond making a profit that institutions (though not necessarily commercial banks) give for offering such accounts, including economic opportunity, poverty reduction and social inclusion. And interestingly enough, Fred Ssewamala's research on specialized and targeted savings accounts toward poor and vulnerable children in Uganda has shown significant improvements in health and education outcomes, particularly in relation to an improved future orientation. The children with accounts have an outlook on life that children without savings don't (and likely can't) share. But this is a special kind of products, with features that most any bank could not reasonably offer without outside support or government subsidy.

So, whether this interest in child savings in developing countries is simply part of the gold rush to capture the bottom of the pyramid or is a sincere effort to provide, earlier in life, financial inclusion and opportunity to the excluded and vulnerable around the world, I watch this trend with interest and a cautious optimism. If they can get the product right, CSAs could be a new phenomenon in poverty reduction thru financial services. We need serious inquiry to find out if this is the case.

[More information on Child Savings Accounts and/or the research of Fred Ssewamala can be found on the Global Assets Project website]

The Next Big Thing in Microfinance: Savings

Jamie Zimmerman — Wed, 06 Aug 2008 16:18:00 -0400

Last month, I argued that USAID inaptly named a three-day virtual conference on savings as "The Forgotten Half of Microfinance." Instead, I posited:

"As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions."

Looks like I got this one right.

Probably to the surprise of the organizers, the USAID/Microlinks Speaker's Corner on savings was overwhelmingly active, with 324 participants from 53 countries. For those who didn't attend this virtual, email-based conversation, you missed out on the experience of 72 full hours of non-stop emails (we're talking hundreds) from both the novice and the seasoned, from non-profit, public and private sectors, all eager share their many ideas and experiences and learn from others how to expand opportunities for savings for the poor, marginalized and excluded around the globe. It was an inspiring and educational experience. You can access the entire forum at www.microlinks.org/sc/savings. Or you can download the compilation document, which contains all postings from the forum. Its 200 pages long.

Not only is savings indeed not forgotten, but a recent article in the Wall Street Journal confirms my contention this is in fact "the next big thing." On July 31, the WSJ published Robert A Guth's piece, "Giving a lot for savings a little," which announced the Bill and Melinda Gates Foundation intention to "donate hundreds of millions over the next few years to programs to spur savings in poor countries." In the article, Bob Christen, Director of the Financial Services for the Poor division of the Foundation, says the foundation intends to invest heavily to get savings back on the world agenda. So, if it's not already there (as I claimed it to be), then it will be soon-and in a big way.

The Global Assets Project is working inform this new movement towards savings and financial inclusion by promoting savings products, policies and programs that facilitate asset building and wealth creation for these populations. Indeed, the WSJ article was printed one day after the Global Asset Project's launch of its newest report: Global Savings, Assets and Financial Inclusion: Lessons, Challenges and Directions. The report addresses emerging global trends, opportunities and collaborations across the fields of asset building, microfinance, policy and financial education. It describes lessons, challenges and opportunities for thinking about how the poor, in developed and developing countries, can build their assets and wealth. Finally, it includes possible next steps that the diverse range of actors working within these fields should take to move this emerging body of work forward.

As this next big thing grows ever bigger, my hope is that the insights, challenges and recommendations in this report can help inform those policymakers, funders and practitioners in the drivers seat.

Getting Homownership--And Its Alternatives--Right

Ellen Seidman — Wed, 25 Jun 2008 16:09:00 -0400

In Monday's New York Times, Paul Krugman raises the question whether the United States has gone overboard in promoting home ownership. Krugman points out not only that the bursting of the subprime bubble has also burst the homeownership bubble, but also that homeownership brings risks of excessive leverage (if prices go down some, an equity stake can be totally lost); "stickiness" (making it hard to move when jobs dry up); and the high expense of commuting (when families chase low house prices well beyond where the jobs are).

Krugman got much right, but before we throw homeownership overboard, it's worth pausing a minute to consider both the benefits of homeownership done right and what we need to do to make rental housing a reasonable alternative, both as shelter and as a way to build assets.

When done well-a home that is affordable, financed with a fixed-rate mortgage with taxes and insurance escrowed, and a homeowner who understands the responsibilities of homeownership-homeownership means having a place of one's own for the long term, in which to bring up family without the risk of eviction because the rent suddenly goes up. It's the opportunity to build up equity through the forced savings of a fixed-rate amortizing mortgage and through positive financial leverage. And it means the psychological satisfaction of owning a substantial asset, often for the first time in many generations. Hundreds of non-profit organizations and community development financial institutions across the country have helped hundreds of thousands of Americans do homeownership right, and from all reports, those homeowners are making it through this crisis OK.

So the first point is that we need to do a much better job of doing homeownership right, for many more people. And the ongoing energy challenge means that we need to add energy efficiency, both of the building and of its location, to what we mean by affordable.

But homeownership isn't necessarily the best option for every family at every point in their lives, even when some home, somewhere, would appear to be affordable. For some families, the additional debt burden-frequently on top of heavy student loans-is unsustainable. For those whose job prospects are unstable or likely to require frequent moves, renting enables greater flexibility. For others, the maintenance responsibilities of homeownership may be more than they want or can handle. And finally, especially with high gas prices and energy prices that are likely to stay that way, renting may simply be a better financial deal; rental housing may be closer to jobs or public transit, and heating and air conditioning a unit in a multi-family building is almost always less expensive than sustaining a stand-alone single-family house.

But our previous policy of responding to almost all housing needs by assuming they will be met by ownership cannot simply be abandoned. Instead, we need to accompany our effort to do homeownership right with:

Quality, affordable, well-located rental housing, which will require a reinvigorated federal housing policy, supported with sufficient funding;
High quality, well-structured financial systems and products that will help people save and grow their assets without the leverage of homeownership; and
Respect for the choices people make, and in particular, valuing the role of all of us-renters and owners alike-in the civic life of our communities.

Identity, Assets and Empowerment of the Poor: Comments on UNDP Report Released Today

Jamie Zimmerman — Tue, 03 Jun 2008 21:10:00 -0400

I want to flag today's global launch of the Commission on Legal Empowerment of the Poor's timely and important report, "Making the Law Work for Everyone." Co-chairs Madeleine Albright and Hernando de Soto briefly discussed the Commission's findings and this report this morning at a press conference at the United Nations as well as in their recent Time op-ed. As eloquently as they both discussed the foundations and findings of the report in a few short minutes, the full report is brilliant, powerful and well worth the read for anyone in the asset-building community.

For the asset-building field, their report eloquently provides a richer perspective on how and why wealth (among other) inequalities persist within societies. It delves deep into the persistence of poverty through lack of access to justice and such essential rights as an identity, in most countries a requisite for access to anything asset-building related - property, real estate, pensions, social transfers, micro-credit or even the most basic financial services. Essentially, the lack of identity makes this vulnerable population virtually invisible to the formal economy or society, which in turn denies them basic rights necessary for them to access the opportunities and protections afforded to and taken for granted by the rest of us. [slideshow]

I found their focus on the power and importance of assets and asset protection as a vital component of legal, economic and social empowerment encouraging and I certainly applaud it. My only disappointment from the asset-building perspective on their conceptualization of legal empowerment was their decision to discuss access to finance narrowly under their new term, "business rights." While they mention access to basic financial services here, they are essentially referring to the accessible provision of affordable micro-credit to micro-entrepreneurs, which is only a small piece of the financial needs (perhaps even rights?) of the poor.

Overall though, I found their conceptualization compelling, and their argument for this being both smart politics and economics persuasive. Indeed pieces of their arguments as well as their prescriptions for systemic change compliment, if not mirror, the foundations of the asset-building agenda - creating institutions, policies and markets that provide and encourage opportunities for wealth accumulation (or empowerment, more generally speaking) for all, not just the already-fortunate-few.

While I encourage everyone to read the document in the entirety, I leave you with a snippet from its executive summary: "Thus it is not the absence of assets or the lack of work that hold [the poor] back, but the fact that the assets and work are insecure, unprotected, and far less productive that they might be....In too many countries, the laws institutions, and policies governing economic, social and political affairs deny a large part of the society the chance to participate on equal terms. The rules of the game are unfair."

Indeed.

Battle of the Bulges: Obesity, Financial Illiteracy and the Role of Behavior

Jamie Zimmerman — Wed, 28 May 2008 21:56:00 -0400

I've recently been thinking about the similarities between our national epidemics of obesity and financial illiteracy. Both are socio-cultural phenomena created through generations of misinformation, misunderstanding and perverse incentives. Factors like (but not limited to) easy credit and encouraged consumerism without proper consumer disclosure and easy access to abundant, cheap astonishingly unhealthy foods has created a culture of overindulgence on so many levels. Both problems tend to fall disproportionately on poor, low and even some moderate-income households, which lack easy access to alternative options (like banks red-lining disadvantaged neighborhoods; public school cafeterias serving french fries most everyday yet not offering physical education classes). And both are believed to have huge social and economic costs that are now reaching epic proportions. If similar forces are causing and/or driving these problems, then shouldn't efforts to tackle both childhood obesity and financial illiteracy also be similar? Only recently has this become apparent to those fighting the battle of such rhetorical bulges.

At the high-level International Conference on Financial Education host this month by the US Department of Treasury and the Organization of Economic Cooperation and Development, INSEAD Professor Klaus Wertenbroch presented his research on psychological biases in financial decision-making. He told a story of how explaining to a high school aged girl how much money she could save (and earn through compound interest on savings and investments) if she did not buy that one Coke each day out of the vending machine at school. He explained this as "a message that clicked" with the student that she can make good financial decisions just by changing her attitude toward money. But the message about the coke in the vending machine everyday "clicked" with me in another way - it's the same sort of message those in the fight again obesity make as well. Overall, the messages are similar - yes, knowledge is important, but healthy habits (behavior) stem also from attitudes. We seemed to reach this consensus at the OECD/Treasury Conference but failed to come up with any agreement on concrete solutions to the financial literacy glut in the United States. The problem is, creative messaging to change attitudes will only go so far if access to more "healthy" options (access to financial services; physical education classes and salads in schools) are not - and have not traditionally been - readily available.

However, one buzzword that had stemmed from new insights of behavioral economics might offer an innovative approach - Nudge, as recently made popular by the new book by Thaler and Sunstein. The power of the "nudging" (some wonks like to call it libertarian or soft paternalism) people in the right direction and the idea seems to be catching on in both health and financial education circles. As Dr. Wertenbroch put it "we need to create choice environments to coax people in the right direction." And while he referred explicitly to financial decision-making, this could obviously be applied to healthy eating and living habits as well. For instance, why don't we do more to default people into the more "healthy" options (healthy school lunches offered; auto-defaults into retirement accounts or other financial products such as savings accounts)? Why not use new media more actively to "nudge" people toward physical and financial fitness? Marcin Polak presented on the Polish government's investment in "edutainment," which used popular mass media and internet to launch an effective campaign against financial illiteracy, is actually quite amazing. I don't see why we couldn't emulate something similar in the United States.

It seems like experts and policymakers alike are finally realizing that in order to win the fight to effectively change unhealthy behaviors - and the perverse environments our society has created that enable and indeed encourage such behaviors - some creative and active "nudging" back in the right direction is going to be necessary.