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Market Building Through Financial Sector Deepening In Africa

Mayada El-Zoghbi started this blog series by challenging us, in the donor community, to focus less on institution building and instead shift our attention to the more ambitious task of bringing about systemic change in financial markets. There is, as she suggests, a much bigger picture (to do with the complexity of people’s financial needs) which an exclusive focus on institution building would miss. I agree. I would argue that the systemic approach is important not just because it can be incredibly effective but also, in an era of increasingly scarce resources, it is compelling on value for money grounds.

A women carries seaweed on the beach. Photo Credit: Wim Opmeer
A women carries seaweed on the beach. Photo by Wim Opmeer.

How do we support a market-building approach in practice? The current advice is to either become a market facilitator or fund one. But what is a market facilitator; what do they do?

Financial Sector Deepening trusts, so-called FSDs, offer one model of a market facilitator. Here, special purpose nonprofit vehicles (e.g. trusts or companies limited by guarantee) are given funding by donors with an explicit mandate to engage in activities that aim to change the way the market system works. Generally, they do not provide funding to individual institutions to support expansion, Instead, they concentrate on identifying and combating the constraints that prevent markets from reaching as many people as they could. 

Over the past decade, various regulatory and informational constraints have been tackled by FSDs, funded by DFID and others. Examples include:

  • Finding practical solutions to address high transaction costs. An example is working on allowing exemptions for low-value bank balances or payments to the regulatory pressure to apply global anti-money laundering standards in developing markets.
  • Making information available to the market on how underserved population groups manage their money.  Research, such as FinScope surveys or Financial Diaries, made available as a public good, has stimulated both policy change and commercial innovation in ways that have benefited the poor.

What do we mean by facilitation? There are perhaps three dimensions to market facilitation.

First, market facilitation is about creating the conditions that allow certain things to happen that would not otherwise happen. This speaks to the catalytic role that market facilitators play – that is, starting a process of change by bringing influential stakeholders together behind an idea and furnishing them with the information they need to fulfil certain functions. Facilitators play a critical convening and connecting role, creating opportunities for policymakers, financial institutions, academics or market researchers to come together to solve common problems.  The intentionality, or mission, behind this effort is key. Special purpose facilitators such as FinMark Trust or FSD Kenya can be thought of as think tanks – but they have an explicit purpose. They are mission-driven - neither research houses, with random research projects, nor consultancy firms providing paid-for services.

Secondly, facilitation is about empowering other people, giving them the capacity (the motivation, skills or know-how and occasionally money) to do things that help achieve the facilitator’s mandate (e.g. to increase financial inclusion). A single entity cannot hope to achieve systemic change on its own: it needs to work with and through others. Information put into the hands of major commercial banks or mobile phone companies which already have established branch or agent networks will be far more transformative than proprietary information in the hands of a donor-funded greenfield institution. Leveraging the capacity of others is also critical for building systemic sustainability.

Thirdly, facilitation is about making processes easier by unblocking logjams or taking risk out of a situation – for example, by defraying start-up costs or subsidising upfront research. Complex policy change processes requiring the interaction of multiple stakeholders can be overwhelming for governments in weak capacity environments and facilitators can play a useful lubricating role, contracting researchers for key interventions or managing stakeholder workshops, working alongside government or other partners.

The systemic, market-building approach works because of its analytical rigor. Using credible evidence to unite multiple stakeholders behind a common cause is essential for target setting, resource mobilization and identifying binding constraints. Secondly, the market-building approach works because it stimulates “crowding in” effects of private sector actors, as well as government, such as rule makers, standard setters and regulators. Finally, the approach emphasizes sustainability, eschewing short term “stunts” that may be exciting, but ephemeral, in favor of genuine lon- term impact.

The FSD experience over the past decade has generated some important lessons for donors which might help to de-mystify the market-building approach. Above all, facilitators need to be neutral, credible and trusted: political economy arrangements can “make or break” an initiative. Secondly, facilitators should be provided with adequate, committed funding for a long enough period – preferably not less than five years. Market building is a long-term proposition. Lastly, programs need to strike the right balance between interventions at the macro, meso and micro levels. All three are important for long-term market building.

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