Research & Analysis

New Funder Guidelines: Market Systems Approach to Financial Inclusion

Impressive gains have been made toward increasing access to finance for poor and low-income people since Good Practice Guidelines for Funders of Microfinance was published in 2006. During this time we have seen major progress in terms of achieving sustainability and scale with the introduction of new product offerings, development of innovative business models, technology-enabled delivery channels, and the engagement of a much broader range of private and public actors, both in terms of financial service providers (FSPs) as well as funders. Policy makers have increasingly recognized that access to and use of formal financial services not only have a positive impact at the client and household levels but, if done sustainably and at scale, can have a broader positive impact on national economic development by helping to lower transaction costs, manage risks, and even mitigate economic inequality, a development objective shared by funders and policy makers alike (Karpowicz 2014; Dabla-Norris, et al. 2015; Turegano and Garcia-Herrero 2015).

Understanding the potential impact of financial services for households and economies, policy makers, practitioners, and funders have shifted their focus from classic microfinance, the provision of financial services to the poor by specialized service providers, to financial inclusion, a state where both individuals and businesses have opportunities to access, and the ability to use a diverse range of appropriate financial services that are responsibly and sustainably provided by formal financial institutions. This move reflects a growing recognition that microfinance is just one entry point among many (e.g., government-to-people payment schemes, small and medium enterprise finance, digital financial services [DFS], “no-frills” bank accounts, etc.) for achieving universal financial inclusion and its associated social and economic development goals.

However, despite this global shift toward responsible financial inclusion, there is still substantial variation in the diversity, quality, and use of financial services available in the market, with 2 billion adults remaining without access (Klapper 2015). Poor and low-income people—particularly women, youth, and those living in rural areas—are the most excluded and must depend on less reliable and often more costly informal mechanisms to manage their financial needs. At the same time micro, small, and medium enterprises (MSMEs), many of which are part of the informal economy, are limited in their ability to sustain and grow their businesses due to a lack of working capital. Seventy percent of MSMEs in developing countries lack access to formal financial services, with informality being a major constraint (Stein, Goland, and Schiff 2012). This leaves much work to be done toward achieving the vision for universal financial inclusion.

Sub-topics: Funder Guidance