Voices of Financial Inclusion: "It's the Clients, Stupid"

Financial inclusion is one of today's development buzzwords. Policymakers and central bankers gather in forums like the Alliance for Financial Inclusion (AFI) and the G-20's Global Partnership for Financial Inclusion to talk about how to build inclusive financial systems. Everyone wants to get in on the act. However, there is not much clarity about what financial inclusion really means, much less how to achieve it. And without that, how will we know we're on the right track or recognize the destination when we arrive?

At the Center for Financial Inclusion at ACCION International, we would love to see the sector set a target for itself of full financial inclusion by the year 2020. To provoke the dialogue on this, we asked industry participants around the world to name the ten biggest opportunities and obstacles they see to financial inclusion. A total of 301 people from around the world answered the survey, including financial service providers, investors and members of supporting organizations, mainly from the microfinance sector. The results provide a deeply illuminating view of how the industry is currently thinking.

To sum up the survey's main message, we are tempted to revise Bill Clinton's famous campaign slogan and say, "It's the clients, stupid."

The survey reveals participants in microfinance striving to come to terms with two unsettling challenges to their achievements:

• First, as country after country experiences crises of client overindebtedness, microfinance institutions face unprecedented criticism. The anti-microfinance actions of the state government in Andhra Pradesh, India have shaken the whole Indian microfinance sector, with aftershocks throughout the global industry.

• At the same time, research is showing that microcredit does not alone pull people out of poverty, as sometimes claimed, but has more diverse and modest effects. Research points to a range of financial needs.

As a result, industry players are moving beyond the "scale and sustainability" mantra that dominated microfinance during the past 15 years, with its laser focus on rapid growth and credit. Instead they are reaching back to where they began -- the clients. "The past ten years' emphasis on MFI institutional profit and success has been great for scaling microfinance but has also corresponded with a lack of attention to client needs and measurable client benefits beyond just repeat business," writes Tom Coleman, an investor.

A reading of the survey rankings and comments creates the following narrative, which may serve as a roadmap to financial inclusion: For too long, microfinance has been over-focused on a single credit product. This has placed the industry at risk of political interference. We must better understand the needs of the clients so that we can expand the product range, and we need to ensure that clients receive financial education so they have the capacity to use services safely and benefit from them. This requires the industry to invest in learning more about clients and building the capacity of more financial institutions that serve the poor.

It is amazing to think that just a few years ago, microfinance practitioners were very sure that they met the needs of clients. They (and by they I mean we) assumed that the task was to get microcredit to as many people as possible, fast and sustainably. That meant focusing on the hard work of creating viable institutions that could deliver microcredit. Microfinance succeeded well beyond expectations, but in so doing, perhaps it took client needs a little too much for granted.

"Provision of short-term credit is but a small (and on its own unstable) step towards financial inclusion," according to respondent Daniel Rozas, who writes extensively on the industry. "We're just beginning to understand client level needs and cash flows and have not yet done much to turn that information into products that serve clients best," according to Larry Reed, an experienced microfinance leader. "It is very important to develop new products based on the needs of local people. This demand is different in each context," from Marieke de Leede, an investor. "Generating a more holistic approach to meet the poor's financial needs requires far better demand-side information," from Camilla Nestor at Grameen Foundation. And finally, "An industry that is not responsive to client needs is doomed to fail," says Stewart Kondowe, from a support organization in Malawi.

This message came through so often that we're beginning to think of "meeting client needs" as the new microfinance mantra. The idea of broadening the product range has been around for some time, even while most microfinance institutions continued apace with the usual business of scaling credit. That's because it's one thing to recognize the need for a broader product range, and quite another to actually provide new products. Movement in this direction has been slow, in part because it often requires a serious retooling of business models.

Microfinance leaders now face a gap they are not quite sure how to cross. As Mercedes Canalda, the CEO of ADOPEM, a microfinance bank in the Dominican Republic, poignantly lamented: "One often does not know how to address the specific needs of the clients at the stage and moment of their lives." If the industry uses this challenge to spark a new wave of learning and innovation, full financial inclusion by 2020 could be within the realm of the possible.