For decades, donors have been devoting significant resources to microfinance and financial inclusion. Over $25 billion had been committed as of December 2011, according to the most recent CGAP funder survey. Largely as a result of such funding, in many countries today there are successful microfinance institutions and other providers of financial services to the poor. Yet 2.5 billion adults still lack access to formal financial services. Notwithstanding limited successes in a handful of countries, building financial markets that serve the poor appears to be elusive. Why?
We have learned over the years that building a financial market that serves the poor and the excluded is not just about supporting microfinance institutions or other providers interested in the “base of the pyramid.” It’s not just about educating consumers. Or drafting a law. Or creating a credit bureau. It is not about any one of these things on its own. It is about all of these things working together in a system that adapts and innovates to serve the poor.
Photo credit: Gayanath Wimaladasa
So what goes into building an adaptive and innovative market system that serves the poor? In CGAP’s latest focus note on Facilitating Market Development to Advance Financial Inclusion, we make the case and show emerging evidence that developing a financial market that works for the poor is best done through the use of an informed, locally-based, trusted third-party – a “facilitator.” Such a facilitator operates using its broad and deep knowledge and understanding of the market, its actors, and the emerging opportunities and challenges for evolving the market system to the next level. The facilitator can, based on such knowledge and understanding, disseminate information about the market and its participants, provide incentives for market actors to take on new risks, and help to build the capacity of market participants. Market facilitation also requires a skilled sequencing of interventions, influencing of key stakeholders and guiding change over time.
Who or what can undertake this facilitation? An example of a successful facilitator is Financial Sector Deepening Trust in Kenya (FSD–Kenya), a multi-donor funded special purpose vehicle established in 2005. A recent evaluation of FSD-Kenya by Oxford Policy Management found certain remarkable increases in access, as measured by the number of commercial bank accounts and the number of money transfers per month. Some of the key factors that are attributed to the success of FSD-Kenya include rigorous information-gathering, effective donor coordination, and remaining independent and trusted by the market. A different structure or having more than one facilitator may also work. However, individual donors and DFIs might be challenged to fulfill this role directly as facilitation requires both intense interest and investment in the market as well as a lack of self-interest in the market. In addition, the long-term framework for building markets and the need to be close to the market for information-gathering purposes may not be workable for most donors and DFIs, especially given their increased pressure to demonstrate results in a short time-frame.
This leads us to the question: if donors and DFIs are not the best at being facilitators themselves, how can they contribute to market development? For each funder segment (grant donors, DFIs with primarily debt and equity, and multi-laterals with primarily loans to government), there is a clear role in contributing to creating adaptive market systems. The upcoming blogs in this series will discuss how different donor segments can contribute to building adaptive market systems.
We are at the beginning of understanding how facilitation can be used more effectively in advancing financial inclusion. We know that each market will develop differently depending on its foundations: its size and structure (local, urban, rural, national, regional), its history, the economy (trade, agricultural, services) and the financial institutions, the legal framework and the financial market infrastructure. However, early evidence from countries where financial market facilitation has been the modus operandi gives us much reason to be hopeful. And facilitated market development has had success in other private sector work, giving further reason for optimism.