Taking Market Development Approaches to Financial Access

How can aid agencies begin to ‘take’ market development thinking and practice into their efforts to enhance financial services for poor people? Drawing from wider experience, here are five basic starting points to consider.

1. Why change? It is important to recognize that there is ‘a problem’: The impetus for change must come from acknowledgement that we’re not being as successful as we should be. Mayada’s recent blog post makes the case for change eloquently. We have to be open to the limitations of funding conventional technical support in stimulating wide change. Admission of weakness, let alone failure, is difficult in the development world – all the incentives are to do the opposite - but it is a precursor to meaningful change.

2. We’re not so different and need to learn from other fields: The centrality of money management in people’s livelihoods makes financial services connected to diverse development sectors. And the differences are in degree not kind. The market system - like land, labour, services and commodities – has to be viewed as a whole. The claim that we (financial inclusion) are different – the illusory comfort of exceptionalism – doesn’t stand up.  And neither is financial access immune from the failings of the development experience in other fields.
 
3. Meet ‘the doughnut’ - giving meaning to financial market systems: What do we mean by ‘financial market system’ and ‘systemic change’? Figure 1 tries to help. The core of the market is transactions between demand and supply-sides – we want more, better, more beneficial transactions. What happens in the core is dependent on the rules (formal laws and regulations and informal norms/values) and supporting functions (related to, for example, information, resources and coordination) impinging on it. Functions are delivered and paid for by different players – public, private and not-for-profit.

Beyond a neat visual representation –yes, predictably known as ‘the doughnut’ – how is this useful? First, it simplifies a complex reality – the multi-function, multi-player nature of market systems (the term ecosystem has also been used in recent discussions). Second, it reveals the interconnectedness of the system – effective change requires that underlying causes are addressed; if we want improvement in the core we should look at the constraints in relation to supporting functions and rules. Third, it provides us with a tool both for analysis and to guide intervention.

4. Donors should support facilitators not providers. We need to clarify our strategic role. Figure 1 also sets out the major strategic role of agencies - to facilitate the development of more functional, sustainable financial market systems. Taking development rhetoric at its word (now there’s a thought!) the role is not to be a permanent subsidised presence in market systems but rather to be an external catalyst for change – addressing the constraints that prevent markets from working effectively. And there are many reasons why they don’t – especially for the poor - and why they don’t evolve themselves, Darwinian style, to a more advanced level. On the contrary, without active facilitation, constraints related to say information, incentives and capacity, are likely to persist and markets remain stuck in pathways of underperformance.

More inclusive market development is unlikely to just happen by itself. Nor will it happen without developing a strategic vision of how financial systems should work more effectively in the future. And while there doubtless can be exceptions for some roles and in some situations, essentially this should be a view of the future without aid agencies.

5. Active intervention - acting to effect change. Understanding the role of agencies sets the strategic direction for engagement. Within this, the specific focus of interventions should be shaped by analysis of constraints of ‘what’s wrong’ with the market – market development is an analysis-led approach. It doesn’t seek to change the world through the volume of lucre on offer – but through its ability to address underlying causes.

In that context, the specifics of what should be done – technical, financial, informational – and with whom – regulators, banks, service providers – varies.  But if there is no formulaic answer to the ‘what to do’ question, there is growing guidance on ‘how to’ intervene. This is emerging from the experience in different fields – and increasingly in financial services itself where programs such as FSD Kenya are exerting considerable positive influence on the development of more inclusive financial markets.

------------------- The author is the Director of the Springfield Centre, a research, training and consulting organisation based in the UK.