CGAP’s recently released New Funder Guidelines has taken a clear position in support of a market systems approach for funders promoting financial inclusion. When planning an intervention, this involves considering the whole market for financial services (starting with the supply and demand exchange) and understanding how the range of market actors, rules, and norms work together to influence access to and use of financial services for low-income people.
This is a shift from strategies that have governed the sector for the last decade, where financial service providers (FSPs) were considered the backbone of financial inclusion. Under this approach, support to infrastructure and legal regulatory environments, if provided, was seen only in terms of creating the enabling environment to allow for more effective and efficient FSP service delivery.
This change has major implications for the diagnostic process that donors undertake to form the basis of program design. Traditional diagnostics attempt to map out the barriers and challenges at the micro, meso and macro level and then design a program to fix it. A market systems approach, by comparison, seeks to identify the root causes that prevent low-income people from accessing and using financial services. As such, the diagnostic process should be seen as a phased approach, drawing on different sources of information at different points in the project cycle to inform project design and feed the implementation process once the intervention is underway.
Phase I: establishing the baseline
This first phase is more of a landscape mapping to get a clear picture of financial inclusion in the country and where your intervention fits. Regardless of the sub sector or segment of the market being supported, if the overriding goal of the project is to contribute to financial inclusion, it is important to know what financial inclusion in the country looks like and how your intervention will contribute to national financial inclusion targets.
Drawing on existing data sources, funders should use this mapping exercise to identify gaps in the market and to define and/or validate the market system selected for support, whether that be the market system around the delivery of a particular product, such as housing finance or digital financial services, or to a specific market segment, such as women, youth or rural communities. These global demand- and supply-side surveys serve as useful reference points by providing nationally comparable data sets around access and usage of financial services, which can be used to define project goals and objectives and to track high-level progress over time.
Phase II: validating the theory of change (TOC)
Once the market system within the financial inclusion space has been defined, deeper analysis will be needed to understand the causes of exclusion for a particular target group or barriers to uptake of a specific product, and to validate the assumptions underpinning the theory of change.
The analysis should take into account social and economic relationships in the market system and focus on understanding formal and informal rules and norms, the capacity of market actors, power dynamics and incentives, information flows, as well as pinpointing actors and leverage points that can catalyze the greatest change. It should take a deeper look at the specific supporting functions that influence the core exchange of financial services for the target group, such as credit information sharing, capacity-building services, financial education, or business development services, where the root causes of exclusion often lie.
Wherever possible, in-country sources of information should be utilized, such as official national financial inclusion strategies or donor financial inclusion diagnostics like UNCDF’s Making Access Possible (MAPs). This provides for a more granular analysis around the quality of existing services and barriers to delivery and access at the different levels of the market. In addition, there are a growing number of national diagnostics being done by donors, often working together or in partnership with local government agencies, on specific market systems (e.g. consumer protection and financial literacy, housing finance, digital financial services) that can inform project design. Where information is not available, a number of tools and resource guides have been developed specifically for use in the financial services market (see list below).
As we reexamine the diagnostic process for a more market systems approach, some key thoughts are important to keep in mind:
- Funders should make sure they use existing data and explore opportunities to commission joint diagnostics or market studies wherever possible.
- When conducting diagnostics, explore opportunities for how this data can help address information gaps in the market in the long-term. For example, work with local research centers and statistical offices to identify data that is relevant for local stakeholders and build local capacity to collect, analyze and store data.
- See diagnostics not only as a step in project design, but also as an entry point for building relationships. A diagnostics process is already an opportunity for facilitating dialogue among stakeholders.
My colleague and I recently wrote a blog post using our experience in Bangladesh. The two main takeaways from this experience are:
First, receiving credits or opening a bank account is an important step towards financial inclusion. Yet financial inclusion is more than credits and bank accounts; it constitutes access, use and quality of a range of financial products and services from multiple providers.
Second, successful financial inclusion requires understanding key drivers and root causes. Users are heterogeneous and mostly financially active. Focusing on broader financial ecosystem enables understanding root causes and what functions and by which actors need to be undertaken to address the problems. Solutions also need to take into account practical business plans and adequate financial literary, as well as delivery mechanisms (e.g. digital finance) to reach poor and disadvantaged people who often live in remote areas.
Read the full blog post here: http://blog.helvetas.org/beyond-credits-financial-inclusion-in-banglade…