CGAP is pleased to announce the launch of its revised Funder Guidelines, the latest publication in its series of targeted resources for funders of financial inclusion. "A Market Systems Approach to Financial Inclusion: Guidelines for Funders" is the successor to the Good Practice Guidelines for Funders of Microfinance (2006) and builds upon the collective experience and learning of the last decade of funders supporting the development of inclusive financial services markets. These guidelines are the result of an extensive consultative process, both in person and through online collaborative platforms, involving individuals from over 40 international organizations representing a broad range of experience and expertise in the areas of low-income financial markets as well as market systems development. Through the dissemination of these guidelines and the collective experience contained within, it is CGAP’s goal to spur a broader discussion around evolving good practices, which will help improve the effectiveness of donor and investor efforts to promote financial inclusion globally.
The biggest change in the new Funder Guidelines is the shift it reflects from an institution-building approach to promoting inclusive finance to one that is rooted in the complexities and realities of the broader market systems around pro-poor financial services. This move is based on the growing recognition within the development community that a linear approach to project design and implementation has not been effective in scaling sustainable results. Markets are dynamic and involve a range of individual and institutional actors often with divergent incentives and shifting needs and priorities. Therefore, a market systems approach that takes into account the unpredictability and complexity of these environments is needed to build resilient financial services markets that benefit the poor.
Key takeaways for funders of financial inclusion
Focus on systems change: Funders should aim to catalyze change that is significant in scale, sustainable, and with built-in momentum for replication and adaption beyond the direct beneficiaries and timeframe of programs.
Facilitation, not direct provision: Funders should think of their role as facilitators who incentivize and enable market actors to provide services in the market, rather than providers of the missing services themselves. This involves working with a range of market actors to help them perform their functions more effectively.
Defining clear development outcomes: Funders should ensure that all theories of change specify how financial inclusion initiatives will contribute to national development outcome and create more inclusive financial markets for the poor. This involves identifying the specific target group(s) or market segment(s) to be supported and understanding the social and economic relationships, rules and norms and power dynamics that can catalyze or block a particular development outcome.
Understanding barriers to change: A new type of diagnostics is needed that identifies the root causes for, and not just the symptoms of, poor and low-income people’s exclusion from financial markets. This should involve an exploration of how poor people use financial services and the factors that constrain their uptake of new and existing services; why FSPs are not meeting the demand of low-income clients; who the drivers of change are; what the greatest leverage points for catalyzing change are; and how incentives can be created or modified to change the behavior of market actors.
Need for greater flexibility: Facilitation can take many different forms, depending on the needs and opportunities in the market and level of system change desired. This requires flexibility to be able to engage a variety of market players; enter and exit into partnerships as the need arises; adapt strategies based on changes; and use funding opportunistically to spur innovation or fund key activities necessary to nudge the change process.
Developing trust based partnerships: Funders should work to leverage their resources through partnerships with a range of local institutional actors. Partnerships should be based on a clear understanding of the incentives and motivations of the market actors and structured in a way that supports partners to improve, innovate, and adapt their functions, so that they can play their role more effectively in the future.
Commitment to crowding-in: Funders should aim to support long-term behavioral change among relevant market actors and have a plan for crowding-in market actors beyond their initial partners to institutionalize these improvements before the end of the program.
Need for different skills: Good facilitation requires a particular set of skills that are not always needed in traditional project management, such as systems level analysis, entrepreneurial instincts and relationship management. Even if outsourcing direct facilitation, funders should ensure internal staff has complementary skills to oversee the work of the facilitator and ensure that learning feeds back to the funder.
Assessing Change: A market systems approach requires frameworks for defining and measuring change at different levels of the market system. New methods that focus on contribution rather than attribution of the project on development outcomes are more suited to reporting a credible narratives of systemic change.
Applying a market systems approach to financial inclusion affects what funders do, with whom they work, and how they support interventions on the ground. As a community, we are still in the very early stages of this shift, with a limited number of good practice examples to guide us. However, CGAP is committed to greater knowledge generation on this topic and looks forward to collaborating with its members and the broader financial inclusion community to this end.
Market Systems for financial inclusion of poorer communities evolve according to the decades of societal practices embedded in their cultural milieu. These also get artificially created by the various policy initiatives undertaken over long period of times ( an example is self help groups- SHGs- having over 70 million members in India). Many market systems may develop rigidities, becoming difficult to change with the new understandings.. Yes funders have powerful tools of incentives/ disincentives to mould or even create more desirable market systems. Though one must welcome the changes in the approach as recommended, yet the institution building approach had many success stories- a case in point being ten Small Finance Bank licences awarded recently in India, of which as many as eight were MFIs, most of which were build up through international social capital and even hand holding and advisory services. Rather countries will need to be placed on a continuum, with many of those lacking basic institutions for FI will need to be still covered under the previous approach. Some flexibility may be called for for a few years more before giving finality to the guidelines. Institution building challenges remain formidable in the poorer societies.