CASE STUDY: INVESTING IN RESPONSIBLE FINANCIAL INCLUSION. Profile of Smart Campaign Client Protection Certified Institutions

Transcription

1 CASE STUDY: INVESTING IN RESPONSIBLE FINANCIAL INCLUSION Profile of Smart Campaign Client Protection Certified Institutions January 30,

2 ABOUT THE PARTNERSHIP FOR RESPONSIBLE FINANCIAL INCLUSION (PRFI) The Partnership for Responsible Financial Inclusion (PRFI), formerly the Microfinance CEO Working Group, is a collaborative effort by ten leading international organizations supporting the responsible delivery of financial services to low-income populations around the world. Harnessing the power of the CEOs and their senior managers, the PRFI commits to accelerate financial inclusion by leveraging their joint expertise in the advocacy and delivery of innovative, scalable, and responsible financial services for poor and low income clients. Today, the members include Accion, Aga Khan Agency for Microfinance, BRAC, CARE, FINCA, Grameen Foundation, Opportunity International, Pro Mujer, VisionFund International, and Women s World Banking. These organizations, through more than 260 local partners, offer a diverse set of products and services to pull excluded populations and underserved clients into a healthy and vibrant financial services ecosystem. ABOUT THE ACCELERATING RESPONSIBLE MICROFINANCE PROJECT The IFC-PRFI Accelerating Responsible Microfinance Project is a three-year collaboration to accelerate responsible finance by supporting Smart Certification missions among the PRFI s network: Accion, Aga Khan Agency for Microfinance (joined in 2017), BRAC, CARE, FINCA International, Grameen Foundation, Opportunity International, Pro Mujer, VisionFund International, and Women s World Banking. The collaboration is aimed at building a critical mass of certified institutions to advance responsible microfinance globally. Participating FSPs are selected based on commitment, capacity, and client reach. By providing financial resources, the joint collaboration enables affiliated FSPs to prepare for and undergo certification to meet the Smart Campaign s Client Protection Principles. Making such practices an industry standard is central in realizing a vision where all clients are not only included, but both clients and institutional stability are also protected. ABOUT THE RESEARCH This report captures data from 89 financial service providers (FSPs) which were Smart certified as of July Some of the data was gathered from the database maintained by PRFI on its members as part of its work with the Smart Campaign. Assets, client reach (using active borrower), and portfolio-at-risk data was collected from the Mix Market, which publishes financial, operational and social performance data on over 1,300 FSPs and other financial service providers. Because the 2017 data is not available for most FSPs on the Mix Market, the report relies on for analysis. In addition, the currency used in this report is in USD, for asset size, and does not attempt to analyze any potential exchange rate fluctuations. To evaluate size of an institution, we utilized asset size over client outreach because size tiers in the market are based on asset size. 2

3 Table of Contents ABOUT THE PARTNERSHIP FOR RESPONSIBLE FINANCIAL INCLUSION (PRFI)... 2 ABOUT THE ACCELERATING RESPONSIBLE MICROFINANCE PROJECT... 2 ABOUT THE RESEARCH... 2 ACKNOWLEDGEMENTS... 5 INTRODUCTION... 6 MAIN FINDINGS... 7 DATA ANALYSIS... 8 REGIONAL DISTRIBUTION OF CERTIFIED FSPS... 8 Distribution by countries Regional Distribution of PRFI Network Members SIZE OF CERTIFIED FSPS Regional distribution and asset size CLIENT REACH PORTFOLIO AT RISK (PAR) > CONCLUSION: PRFI S ROLE IN ADVANCING CLIENT PROTECTION

4 Table of Figures Figure I: Certified FSPs (PRFI vs non-prfi)... 7 Figure II: Regional distribution of FSPs (Certified FSPs vs MIX FSPs)... 8 Figure III: Regulatory environment scores by region... 9 Figure IV: Number of certified FSPs by country Figure V: Top 15 certified FSPs with the largest asset sizes Figure VI: Number of certified FSPs (PRFI and Non-PRFI) by region Figure VII: FSPs with small and large asset sizes (outliers) Figure VIII: Number of FSPs by asset size Figure IX: Median asset size by region Figure X: Relationship between regulatory score, median asset size and certifications Figure XI: Active borrowers by region Figure XII: Median number of active borrowers and asset size by region Figure XIII: Average PAR > 30 of certified FSPs by region

5 ACKNOWLEDGEMENTS Project Directors Sharlene Brown, Executive Director, PRFI Bridget Dougherty, Project Manager, PRFI Research Team Fernando Morales, PRFI Kaede Kawauchi, PRFI Data Providers: Social Performance Peer Group Members Ellen Bauer Accion Julia Gray Aga Khan Agency for Microfinance Sitara Merchant Aga Khan Agency for Microfinance Sahed Shams Azad BRAC Aeriel Emig FINCA Scott Graham FINCA Bobbi Gray Grameen Foundation Devahuti Choudhury Grameen Foundation Calum Scott Opportunity International Nicole Wong Opportunity International Leila Freedman Pro Mujer Johanna Ryan Darrel Flores Jaclyn Berfond VisionFund International VisionFund International Women s World Banking 5

6 INTRODUCTION Through its membership, the Partnership for Responsible Financial Inclusion (PRFI) aims to support the delivery of responsible financial services for lowincome communities around the world. Given this commitment, the PRFI supports major industry initiatives working to ensure client-centered business practices that contribute to a healthy ecosystem for financial services providers (FSPs). An important aspect of this work has been advocating for and supporting the work of the Smart Campaign, which is a global financial inclusion industry-wide effort centered on the idea of client protection. The PRFI has done this by encouraging both FSPs and regulators to adopt the Campaign s Client Protection Principles. Specifically, we have encouraged local partners to undergo the Smart certification process, which became available to stakeholders in Since 2015, we have been encouraging regulators to strengthen and adopt the Model Legal Framework for Financial Consumer The Smart Campaign works to embed client protection practices into the institutional culture and operations of the financial inclusion industry through a set of seven core principles. These principles, also called the Client Protection Principles, include appropriate product design and delivery, prevention of over-indebtedness, transparency, responsible pricing, fair and respectful treatment of clients, privacy of client data, and mechanisms for complaint resolution. Protection - a legal framework for financial consumer protection based on the Campaign s Client Protection Principles. Through its collaboration with the International Finance Corporation (IFC) on the Accelerating Responsible Microfinance project, the PRFI has been working to accelerate responsible financial services by supporting local partners within our member networks to adhere to the best practices of consumer protection. Between 2013 and July 2017, 46 local partners of PRFI networks have been certified. Among the PRFI network of certified FSPs are organizations that have self-financed the cost of certification, received funding from PRFI members, have been co-funded by the PRFI through the IFC grant, or those having received other third-party support. By July 2017, about half of the total number of certified institutions were PRFI network local partners (Figure I). 6

7 FIGURE I: CERTIFIED FSPS (PRFI VS NON-PRFI) Certified FSPs (PRFI vs Non-PRFI) Non-PRFI Network 48% PRFI Network 52% Through this case study, the PRFI seeks to identify: The characteristics of institutions that correlate to successful completion of Smart certification Environmental factors that may be positive contributors of successful client protection practices MAIN FINDINGS The research segments certified FSPs by region, asset size, client reach, PAR>30, and PRFI network vs non-network members to provide profile snapshots. Several key findings emerged from the data: 1. FSPs from Africa are underrepresented (due to low passage rate) in the certified portfolio whereas those from Europe and Central Asia are overrepresented 2. A noticeable number of certified FSPs are from Cambodia and India 3. Certified FSPs tend to be large and mature institutions, with median asset size of $143million 4. The certification has protected 28% of overall FSP clients globally 5. PAR>30 is low for certified FSPs 7

8 DATA ANALYSIS REGIONAL DISTRIBUTION OF CERTIFIED FSPS The 89 certified FSPs are mainly concentrated in Europe and Central Asia (ECA) and Latin American and the Caribbean (LAC). Together, these two regions make up 52% of the certified portfolio. In contrast, there is a dearth of FSPs from Sub-Saharan Africa (SSA) and Middle East and North Africa (MENA) as illustrated in Figure II. The geographic breakdown of the 1,380 institutions that reported to MIX in 2017 indicate that most of the FSPs are based in Latin America and the Caribbean (30%), followed by Sub-Saharan Africa (25%). 1 While the portion of certified FSPs from the LAC region seems to be representative of the overall ubiquity of Latin American FSPs, institutions from SSA region seem to be underrepresented and those from the ECA region are overrepresented in the certified portfolio. FIGURE II: REGIONAL DISTRIBUTION OF FSPS (CERTIFIED FSPS VS MIX FSPS) Regional Distribution of FSPs (Certified vs MIX) 35% 30% 25% 20% 15% 10% 5% 0% East Asia- Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa % of portfolio (Certified) % of portfolio (MIX) The regional disparity in the number of certified FSPs may stem from regulatory environments. It appears that countries with an unsupportive regulatory environment make it harder for institutions to adhere to good practice. The Global Microscope 2016 assessed the regulatory environment for financial inclusion in 55 countries across 12 indicators measuring how financial inclusion is enabled in the markets including: 1 8

9 1. Government support for financial inclusion 2. Regulatory and supervisory capacity for financial inclusion 3. Prudential regulation 4. Regulation and supervision of credit portfolios 5. Regulation and supervision of deposit-taking activities 6. Regulation of insurance targeting low-income populations 7. Regulation and supervision of branches and agents 8. Requirements for non-regulated lenders 9. Electronic payments 10. Credit-reporting systems 11. Market conduct rules 12. Grievance redress and operation of dispute-resolution mechanisms 2 Each of the 55 countries was given a score out of a total of 100 points across these 12 indicators. An analysis of the regulatory scores shows that the top three (3) regions with the highest points are South Asia, Latin America and Caribbean, and Europe and Central Asia (Figure III). FIGURE III: REGULATORY ENVIRONMENT SCORES BY REGION East Asia- Pacific Global Microscope 2016 Regional Scores for Regulatory Environment Middle East & North Africa Sub-Saharan Africa Europe & Central Asia Latin America and Caribbean South Asia Similarly, regions with the largest number of certified FSPs are also these three regions. Given the prevalence of certification in markets in South Asia, LAC, and ECA, it may be that regulatory environments that enable financial inclusion incorporate requirements that 2 pdf 9

10 ease FSPs ability to meet the certification requirements. In addition, FSPs may find certification as a complimentary way to adhere to government regulations. For example, in India, after the crisis in the microfinance sector in Andhra Pradesh in 2010, a regulatory framework was developed to improve the protection of clients. The recommendations put forth by the Malegam Committee in 2010, headed by the Reserve Bank of India s Central Board Director Y. H. Malegam, was mainly in response to the Andhra Pradesh crisis and compelled the Reserve Bank of India to protect the interests of small savers and borrowers, including provisions to provide small loans with reasonable interest, and ensure proper terms of credit. 3 As a result, the central bank working with industry associations created guidelines on client protection through the unified Industry Code of Conduct. The regulatory guidelines and the Code of Conduct directives provide strong incentives for Indian FSPs to embed client protection within their institutions. Given the push from the Indian government for client-centric practices, the Smart certification is a complimentary channel through which FSPs can adhere to domestic regulatory standards while receiving advisory support on how to go about the process. 4 In a survey of certified FSPs around the world conducted by the Smart Campaign in December 2016, 80% of surveyed FSPs indicated that their certification helped them comply with local regulation. 5 On the other hand, institutions from Sub-Saharan Africa may find it difficult to meet the rigorous certification requirements, especially if they have not been required to operate at these standards. For example, in Ghana, where there are no Smart certified FSPs, there is yet to be a clear consumer protection law. 6 A research report published by the Center for Financial Inclusion at Accion on Ghana found that many borrowers who were surveyed in the report faced severe challenges in repaying their loans and highlighted the need for Ghanaian FSPs to focus more on borrower experiences, including the improvement of transparency about the rights of borrowers in the collection process. 7 DISTRIBUTION BY COUNTRIES Further analysis of the regional concentrations highlights that many of the certified FSPs are from India and Cambodia (Figure IV). Eleven (11) of these organizations are also 3 Better_Off_than_Non-regulatory_Ones_A_Comparison_of_Performance_and_Sustainability summary-of-client-protection-in-ghana

11 Azerbaijan Bangladesh Bolivia Bosnia/Herz Botswana Cambodia China Colombia Dominican Ecuador El Salvador Georgia Honduras India Indonesia Kazakhstan Kosovo Kyrgyzstan Mexico Moldova Mongolia Morocco Nicaragua Nigeria Pakistan Paraguay Peru Philippines Serbia Sri Lanka Tajikistan Tunisia Zambia among the 15 largest certified FSPs: six (6) are from India and five (5) from Cambodia (Figure V), extending credit to approximately 22.6 million borrowers. FIGURE IV: NUMBER OF CERTIFIED FSPS BY COUNTRY Number of Certified FSPs by Country FIGURE V: TOP 15 CERTIFIED FSPS WITH THE LARGEST ASSET SIZES Institution Country 1 ACLEDA Cambodia 2 Janalaskmi (JFSPL) India 3 BRAC Microfinance Bangladesh Bangladesh 4 BancoSol Bolivia 5 SKS India 6 Compartamos Banco Mexico 7 Ujjivan Financial Services Pvt Ltd. India 8 PRASAC Cambodia 9 Sathapana Bank Cambodia Cambodia 10 XacBank Mongolia 11 Satin Creditcare Network Limited (SCNL) India 12 AMRET Cambodia 13 HKL Cambodia 14 Equitas India 15 Grameen Koota India The high representation of FSPs from Cambodia and India may be the result of the targeted and long-term efforts by Smart Campaign and other key actors in these two countries. In 11

12 December 2015, Cambodia only had one institution which had been certified. However, the Cambodia Microfinance Association (CMA), through a project funded by the French Development Agency (AFD), worked with high-performing Cambodian FSPs to align their internal practices with the Smart Campaign Client Protection Principles. 8 Similarly, in India, a Smart Campaign project was launched in 2011 with the support of the IFC 9 to help FSPs not only meet but operate above the country s new regulatory standards on client protection, the Industry Code of Conduct, created in the same year. From , 94 FSPs across India were trained, out of which 18 were selected for Smart Assessments. This project has contributed to the higher concentration of certified entities being in India. In both countries, the Smart Campaign, in collaboration with other supporting institutions, has committed significant resources to support the FSPs to meet the standards of certification. India now has fourteen (14) certified FSPs and Cambodia has nine (9). These country-level examples suggest that regulations, coupled with education, technical assistance, and financial support by those who cared about the stability of the market (i.e. AFD and IFC) are important drivers for institutions being able to successfully complete the certification process. REGIONAL DISTRIBUTION OF PRFI NETWORK MEMBERS The regional distribution of the 46 certified FSPs in the PRFI network and the 43 non-prfi FSPs is similar. However, there are two distinct differences. Among the certified FSPs that are affiliated with the PRFI members, there are a large number of FSPs from Latin America and the Caribbean (LAC). These certified LAC FSPs are PRFI local partners of Women s World Banking, Grameen Foundation, Pro Mujer, Opportunity International, FINCA, VisionFund International and Accion. On the other hand, there are no FSPs from the Sub- Saharan Africa region represented among certified FSPs in the PRFI network despite the fact that there are over 60 Sub-Saharan Africa (SSA) FSPs in the PRFI network. However, it should be noted that there is a low-passage rate in the region, and in total, there are only five (5) certifications in SSA. These regional differences are likely due to variations in the maturity of regional markets, individual histories of PRFI member organizations (i.e. Accion was exclusively focused on Latin America in the early years of its programming), FSP institutional maturity, and historic donor trends that influenced the allocation of resources available for technical assistance in different parts of the world

13 FIGURE VI: NUMBER OF CERTIFIED FSPS (PRFI AND NON-PRFI) BY REGION Number of Certified FSPs (PRFI & Non-PRFI) by Region 0 East Asia-Pacific Europe & Central Asia Latin America & the Caribbean Middle East & North Africa South Asia Sub-Saharan Africa PRFI Network Non-PRFI Network SIZE OF CERTIFIED FSPS The 89 certified FSPs have an average asset size of about $371 million and a median asset size of $143 million. However, there are outlier institutions such as Viator Microcredit in Azerbaijan which has an asset size a little over $5 million and ACLEDA in Cambodia with assets over $4000 million, as illustrated in Figure VII. When such outliers are excluded from the dataset, the average and median portfolio sizes decline to $179 MFI Name Country Asset Size million and $114 million respectively. Viator Microcredit Azerbaijan $5million This implies that despite the presence of PRASAC Cambodia $1,200 million outliers, certified institutions are Ujjivan India $1,300 million primarily Tier I entities, as defined Compartamos Banco Mexico $1,500 million below, and tend to be at least two times BancoSol Bolivia $1,500 million larger than the $50 million starting SKS India $1,500 million threshold for entities in this tier. MicroRate categorizes microfinance institutions into three (3) categories using asset size as a proxy for maturity. FIGURE VII: FSPS WITH SMALL AND LARGE ASSET SIZES (OUTLIERS) BRAC Bangladesh $2,000 million JFSPL India $2,200 million ACLEDA Cambodia $4,700 million * Asset size is 2016 data from the MIX Market Tier 1 MFIs with total assets larger than $50 million are considered large and stable. Tier 2 MFIs are small or medium sized with assets ranging from $5-$50 million. 13

14 # of FSPs Tier 3 MFIs are those with assets below $5 million and are considered start-up MFIs or small NGOs that are still immature. 10 Using these categories, the portfolio of certified FSPs was further analyzed to better understand the distribution across Tier 1-3. Currently, Tier 3 organizations are not represented in the mix of certified institutions. This may be because FSPs that have not achieved scale may struggle financially and be unable to take on the cost of certification, which can range from $9,000 to $18,000 on average for the mission (varying by region), and there are additional costs for FSPs that need to make operational changes required to achieve compliance with the Client Protection Principles. In contrast, certified FSPs tend to be mature and financially sustainable. FIGURE VIII: NUMBER OF FSPS BY ASSET SIZE Number of FSPs by Asset Size 0 Tier 1 >$50mm Tier 2 $5 - $50mm Tier 3 <$5mm REGIONAL DISTRIBUTION AND ASSET SIZE Regional differences in asset size also exist. While certified FSPs in East Asia Pacific, MENA, and South Asia are typically large with median assets in excess of $200 million, those in Sub-Saharan Africa, Latin America and the Caribbean, and Europe and Central Asia are on the smaller end of the Tier 1 spectrum. In particular, the asset size of European and Central Asian FSPs tend to be at the lower threshold at $53 million (Figure IX) Institution-Tier-Definitions.pdf 14

15 Millions FIGURE IX: MEDIAN ASSET SIZE BY REGION Median Asset Size by Region $450 $300 $150 $0 East Asia-Pacific Europe and Central Asia Latin America and the Caribbean Middle East & North-Africa South Asia Sub-Saharan Africa Comparing the Microscope regulatory scores alongside the number of certified institutions by region suggests that regulatory environments with enabling financial inclusion practices may contribute to lower barriers for FSPs that are seeking certification. It also appears that certified institutions in these regulatory environments tend to be relatively smaller within the Tier 1 band. Both Europe and Central Asia and Latin America and the Caribbean have relatively high regulatory scores but the median asset sizes are 53 and 67 million, respectively. In regions where the regulatory environment scores are significantly lower, FSPs that become certified need to be mature institutions with sufficient capital and resources to take themselves through the process. The exception to this is FSPs in South Asia, with a high regulatory score, a high number of certifications, and large asset sizes (above $200 million). FIGURE X: RELATIONSHIP BETWEEN REGULATORY SCORE, MEDIAN ASSET SIZE AND CERTIFICATIONS Region Regulatory Score Median Asset Size (MM) # of Certified FSPs Middle East & North-Africa 26 $258 4 East Asia-Pacific 28 $ Sub-Saharan Africa 33 $92 5 Europe and Central Asia 47 $53 22 Latin America and the Caribbean 58 $67 24 South Asia 64 $

16 CLIENT REACH As of July 2017, there were 89 certified FSPs with over 42.8 million active borrowers (based on MIX Market data from 2016). Based on the latest global data available from 2015, there were 1,045 FSPs that reached 129 million low-income borrowers. 11 Assuming an annual growth rate of 17%, the 2016 global client reach estimate is about 151 million. 12 This means that the certified FSPs reach about 28% of the clients accessing microfinance services globally. While the growth of certified institutions over the last four years has been notable, there is still much work to do to make certification an industry standard with a majority of clients being served by certified institutions. While East Asia Pacific and South Asian FSPs represent 17% and 21% of the certified portfolio and are the largest and the third largest in terms of median asset size, respectively (Figure XII), they differ in the scale of client reach. South Asian FSPs reach three-fourths (3/4) of the portfolio of certified-covered clients, while East Asia Pacific FSPs reach only seven (7) % (Figure XI). This finding illustrates that FSPs from South Asia are large FSPs with an equally large reach. East Asia Pacific FSPs, on the other hand, are large and mature FSPs but with a smaller number of active borrowers. FIGURE XI: ACTIVE BORROWERS BY REGION Active Borrowers by Region Sub-Saharan Africa 1% East Asia-Pacific 7% Europe and Central Asia 3% LAC 11% Middle East & North-Africa 2% South Asia 76% 11 MIX Market data

17 FIGURE XII: MEDIAN NUMBER OF ACTIVE BORROWERS AND ASSET SIZE BY REGION Region Median # of Active Borrowers Median Asset Size Europe and Central Asia 40,835 $ 52,599,086 Latin America and the Caribbean 53,641 $ 67,278,418 East Asia-Pacific 215,928 $ 404,438,467 Middle East and North-Africa 298,914 $ 257,575,707 Sub-Saharan Africa 327,469 $ 91,753,832 South Asia 876,321 $ 233,610,269 PORTFOLIO AT RISK (PAR) > 30 In theory, Smart certified FSPs should be more aligned with the needs of their clients and the financial performance of the organization should reflect this alignment. Using PAR >30 data as a proxy of the health of the 89 certified FSPs, the average PAR>30 was determined to be seven (7) % and the median was three (3) %. Comparatively, the industry standard for PAR>30 is less than five (5) percent. 13 FIGURE XIII: AVERAGE PAR > 30 OF CERTIFIED FSPS BY REGION Region Average of PAR > 30 Regulatory Score Sub-Saharan Africa 0.84% Middle East & North Africa 2.76% 26 East Asia-Pacific 2.78% 28 Latin America and the Caribbean 4.04% 58 South Asia 8.21% 64 Europe and Central Asia 12.50% 47 Total Average 7.03% In addition, some FSPs from Azerbaijan, India and Tajikistan brought up the average PAR>30, with rates above 10%. The high PAR>30 rates may be attributed to political interference in the financial sectors in these countries. For example, the Central Bank of Azerbaijan issued an interest rate cap of 25%, in 2015 in addition to the devaluation of the local currency, which led to the slowdown of financial institutions and layoffs. The cap impeded growth of financial inclusion, as it resulted in microfinance institutions Only one (of five) certified institution in SSA had PAR>30 data on the MIX Market 17

18 withdrawing from poor and remote areas of the countries. 15 The interest rate cap may also have had unintended consequences: FSPs introduced extra fees and commissions as loan provision became more expensive. 16 Similarly, Indian FSPs were affected by demonetization of high denomination banknotes by the government in The microfinance sector was hit hard with this new policy; collection efficiency decreased to 75%-80% compared to the usual 95%. In some districts, the collection rates sunk below 10% as clients struggled to make repayments. 17 CONCLUSION: PRFI S ROLE IN ADVANCING CLIENT PROTECTION Currently, over 50% of all Smart certified FSPs are local partners of the PRFI members. Given the PRFI s commitment to responsible financial inclusion and its desire to support the client protection efforts of the Smart Campaign, the PRFI will continue to support initiatives designed to increase representation of certified entities across all regions, but especially those like Sub-Saharan Africa where there have been few certifications globally, and none in the PRFI network. The observations from this case study are useful guidelines for the PRFI, as well as for other stakeholders in the financial inclusion industry, interested in driving the adoption of the Smart Campaign s Client Protection Principles. Notably, if our objective is to significantly increase the number of certified FSPs, then it is important to recognize that regulatory environment seems to be a strong contributing factor to the achievement of the Smart certification. To this end, PRFI will continue its advocacy efforts focused on encouraging regulators to adopt the Model Legal Framework for Financial Consumer Protection and promote its use as an audit tool to strengthen existing consumer protection regulatory frameworks