Vision and Mission Statement for Building Inclusive Financial Sectors

Strategy for Building Inclusive Financial Sectors

UNCDF's vision of inclusive finance is of large-scale access to a variety of financial services for poor and low-income people and micro and small enterprises. Inclusive financial sectors are defined by a continuum of financial institutions that together offer appropriate financial products and services to all segments of the population. To operate effectively, inclusive financial sectors need to be supported by sound policy, legal and regulatory frameworks. Overall they are characterized by[1]:

1. Access at a reasonable cost of all households and enterprises to a broad range of financial services including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances;

2. Sound institutions guided by appropriate internal management systems, industry performance standards, performance monitoring, institutional transparency, accountability and sound prudential regulation;

3. Financial and institutional sustainability as a means of providing access to financial services over time;and

4. Multiple providers of financial services, wherever feasible, so as to bring cost-effective and a wide variety of alternatives to customers.

Financial services for poor and low-income people and micro and small enterprises should be seen as an important and integral component of the financial sector. This sector should also includea variety of financial institutions, each with its own comparative advantages and business models. The provision of financial services is primarily a private sector activity, with the role of government focused on creating an enabling environment.

UNCDF's strategy to implement this vision is to promote a sector-based approach to financial inclusion, as well as a number of thematic initiatives that support and strengthen the impact of this sector-based approach.

UNCDF's sector-based approach to financial inclusion:

UNCDF' Inclusion Finance (IF) practice area made a strategic shift in 2002 to a sector development approach to building inclusive financial sectors. This sector-based approach is aligned with the Paris Declaration on Aid Effectiveness[2] and its call for greater national[3] ownership, donor alignment with national strategies, harmonization of donor support and management for results and mutual accountability.

The sector development approach to building inclusive financial sectors is a flexible tool that can be tailored to the gaps, opportunities and constraints in each country. It follows these key steps: (i) a sector review[4] focused on analyzing the key opportunities and constraints for access to financial services for the poor and low-income people, from the macro- (policy), meso- (financial infrastructure) and micro- (retailer) perspectives; (ii) an assessment of on-going initiatives by key stakeholders (including donors) and of the gaps that need to be filled at those three levels of intervention; and (iii) the development of a programming framework (in the form of a National Microfinance Strategy, Action Plan or other), that stems from the above analysis to build an inclusive financial sector in that country.

Financial sector development programmes are designed to create enabling environments for a variety of retail Financial Service Providers (FSPs). FSPs include commercial banks, non-banking financial institutions (NBFIs), microfinance institutions (MFIs), credit unions, cooperatives, insurance providers, money transfer companies, and other institutions providing financial services. This approach also seeks to address gaps in the supportive infrastructure (meso: audit, ratings, networks) and the policy, legal, and regulatory constraints that prevent a financial sector from being inclusive. This results in a dynamic process, tailored to the realities of each country.

Building inclusive financial sectors is a complex task that requires a range of specialized expertise that goes beyond UNCDF's internal capacities and calls for technical partnerships. For sector approaches to work, a range of actors must all contribute based on their comparative advantage. UNCDF's role in the promotion of a sector-based approach is both of a facilitator and an investor.

UNCDF's role as a facilitator stems from being accepted by a range of actors as a neutral broker. Through its strong field presence of technical staff at the national and regional levels, UNCDF is positioned to facilitate the consultative process that underpins the development of frameworks for a range of actors to coordinate their support. while encouraging key actors to lead in their respective areas of comparative advantage[5]. This includes UNCDF forming strategic partnerships with key actors who are not based at country level, such as CGAP's cadre of policy experts for work in the area of financial regulations.

As an investor, UNCDF concentrates its own resources in the areas of greatest need and opportunity at the macro, meso or micro levels, after taking due account of the comparative advantages of others. This often means that it focuses on what often remains as the largest constraint: lack of retail capacity. At the micro-level, UNCDF uses its flexibility to fund retail Financial Service Providers (FSPs) through grants, loans or guarantees. UNCDF can flexibly use its investment instruments (grants, loans, loan guarantees, technical assistance, training) to support what is needed for financial sector development. Grants help build capacity and the capital base of FSPs. UNCDF works to ensure that FSP business plans link to commercial sources of funding so that UNCDF grants do not 'crowd out' but rather engage commercial sources of funds. UNCDF actively dialogues with microfinance investors looking for a pipeline of investable institutions. At the meso level, UNCDF often supports national microfinance associations in their advocacy and efforts to structure the microfinance community at the country level. At the macro level, UNCDF would typically support, in close partnership with other donors / partners, building the capacity of the Central Bank in its regulatory and supervisory capacity vis-à-vis the microfinance industry. For example this may include training (Boulder/Turin course Policy Track) / study tours to lead Central Banks in their region, or engaging the CGAP Policy Cadre on specific regulatory issues.

UNCDF moreover actively supports the establishment of national Investments Committees that other donors are encouraged to join, as mechanisms to help coordinate donor investment decisions, leverage their comparative advantages and various funding instruments, and harmonize reporting requirements from recipient institutions. To date UNCDF FIPA has partnered with the following Development Partners: Bill & Melinda Gates Foundation, World Bank, CGAP, UNDP, European Commission, KfW, GTZ, DFID, IFAD, CIDA, Luxembourg, SDC, USAID, ILO and Cordaid. UNCDF seeks to continue to expand this list of partners. UNCDF's sector-based approach thus actively reflects the spirit of and supports the objectives of the Paris Declaration.

UNCDF thematic initiatives to financial inclusion:

UNCDF's thematic initiatives support innovative approaches (including on financial service innovation) that contribute to building strong and inclusive financial sectors. Although distinct from national sector-based programs, they are highly complementary and are developed with the view to create strong synergies with the UNCDF sector-based approach at the country level. Since 2007, UNCDF has developed three main thematic initiatives.

The "MicroLead" Facility of USD 26 million (of which USD 19.97 million are funded by the Bill & Melinda Gates foundation) is helping leading microfinance institutions and financial service providers from the South to expand their operations in LDCs. Based on proven business models, these MFI/FSPs market leaders have shown they can rapidly scale-up their operations in new countries and offer a variety of products and services to a large number of poor families and small firms. Their entry into new markets can also inspire domestic MFIs/FSPs to improve their business practices resulting in an overall acceleration of access to financial services. The MicroLead Facility will provide the incentive for those leader MFIs/FSPs to expand their operations into LDCs as well, particularly the poorest and post-conflict LDCs that have remained under-serviced so far.

UNCDF is also promoting access to remittance services for the poor through its participation to the IFAD-managed USD 13 millions multi-donor Funding Facility for Remittances (FFR). Key objectives of the FFR include lowering costs to senders and recipients through institutional and technological innovations, increasing access to remittance services in remote areas, as well as linking remittances to other financial services, especially savings, which result in widening options for recipients.

UNCDF is finally promoting through a joint program with ILO a sector-based approach for the promotion of micro-insurance services, building on the ILO's specialized expertise in micro-insurance and UNCDF's long experience in building inclusive financial sectors. This approach to micro-insurance starts by understanding the key constraints that impede poor people's access to micro-insurance services at the macro, meso and retail levels, as well as the priorities that need to be addressed at those three levels. The first pilot country where this approach is being tested is Ethiopia, to be followed by other countries in Africa and Asia.

The three above thematic initiatives and UNCDF general sector-based approach closely complement and strengthen each other in helping to build inclusive financial sectors by complementing country frameworks with global thematic initiatives.

Key Principles for UNCDF's work on the promotion of inclusive financial sectors

UNCDF's strategy in inclusive finance is founded on these cross-cutting principles, respectively:

1. Commitment to best-practices: As a CGAP member, UNCDF is committed to following the key element of best practice as articulated in the Good Practice Guidelines for Funders of Microfinance[6] and other consensus guidelines and publications based on CGAP members experience.

2. Risk-taking: This is reflected by UNCDF's readiness to invest in young and promising MFIs, including in very challenging contexts. UNCDF is also willing to develop programs in post-conflict contexts at an early stage, provided minimal conditions of political and economic stability are met.

3. Result-based: UNCDF puts strong emphasis on the need to establish targets for results and track and monitor results achieved, as highlighted by the performance-based contracts signed with MFI/FSPs and the discipline for quarterly reporting (including end-of the year reporting on the web platform of the Microfinance Information Exchange).

4. Scalable: Considering its limited resources, UNCDF attaches great importance on the scalability of its intervention. This is reflected by the efforts to mobilize other funders (including the private sector) around national programme frameworks and national Investment Committees; the leveraging of the MicroLead resources; the development of normative tools to up-scale the development of innovative approaches (i.e the UNCDF/ILO guide to carry out micro-insurance sector-based review and the development of national strategies / action plans). These initial frameworks are designed to further leverage commercial (savings, loans, equity) sources of funds for further scaling up the provision of retail level services.

5. Comparative advantage among other funders: UNCDF monitors regularly the evolution of the broader landscape of microfinance funders in the regions and countries where it intervenes, in order to maximize its comparative advantage. In Sub-Saharan Africa where 79% of microfinance funding still comes from donors and only 21% from investors[7], UNCDF supports both the emergence of a new generation of FSPs and the expansion of market leaders, using its flexible funding instruments (smart grant, loans), while promoting the entry of new investors whenever feasible (i.e through referring investments opportunities that are identified through its country-level investment committees to potential investors). UNCDF monitors trends similarly in the LDCs where it intervenes in the other regions, including Asia and the Arab States.

6. UN-reform oriented: UNCDF strive to harness the strength and comparative advantages of other UN agencies through technical partnerships (with IFAD on remittances, with ILO on micro-insurance). All UNCDF sector programs are developed as joint programs with UNDP and UNCDF acts as the technical advisor to UNDP in its inclusive finance activities.

7. Innovative: UNCDF support innovation whenever it leads to enhanced access to financial services for the poor. UNCDF's ability to use its grant instrument flexibly and its ability to take risks positions it well to help "push the frontier" of promising innovation (use of technology, testing of innovative delivery channels, support to product diversification etc…).

8. Continued investment in Staff Capacity: Inclusive Finance is a rapidly changing field. To ensure that UNCDF technical staff can bring the best services to the Least Developed Countries, UNCDF will provide staff with appropriate technical training opportunities, encourage staff to participate in global and regional conferences and ensure funding is available on an annual basis.

9. Extracting Learning from Operations and commitment to Knowledge Management: UNCDF engages in an active learning agenda to capture lessons from its programming. It utilizes a range of tools for institutional learning (independent evaluations, peer and portfolio reviews, research and publications, Annual Global retreats for all technical staff, Community of Practice (Listserve, googlegroups) for all technical staff, staff debate around annual business plans and investments) to develop and share knowledge. UNCDF builds its learning agenda through an active engagement with technical and donor partners. Instead of creating a separate knowledge management and information sharing structure, UNCDF engages other interested partners in the research and shares the outcome of its knowledge management agenda through existing well-recognized platforms, such as CGAP or the ADA managed Francophone website (www.lamicrofinance.org).

10. Engage the private sector: The provision of financial services is primarily a private sector activity. To achieve the MDGs, it is increasingly becoming recognized that the power of the private sector must be harnessed. Traditionally, the private sector was viewed as a donor, a potential source of funds that would contribute to development efforts from a desire to meet corporate social responsibility objectives. More recently it is recognized that the private sector can make a significant contribution to achieving the MDGs when its core business focuses on profitably (sustainably) providing quality services at reasonable price to the lower segments of the market. Since UNCDF's primary tools are grants, the following guidelines will assist UNCDF in providing subsidy to market development:

    • Market Failure as a Pre-Requisite: UNCDF will provide subsidy to commercial providers to engage in a market only when the current supply is inadequate and unlikely to be met in a reasonable timeframe. This could include pushing the frontier of service provision to rural areas or the introduction of new products and services.

    • Level Playing Field: A subsidy to one provider rather than another provider competing in the same market has the potential to distort the market. UNCDF will be neutral with regard to the institutional type of institution (Commercial Bank, NGO-MFI, NBFI, Credit Union, etc.) that provides the service. UNCDF will avoid favoritism by awarding subsidy on the basis of an initial open, competitive request for application process that all potential providers (commercial and non-profit) have the opportunity to apply for. Once the initial public request has been made, then proposals could be considered on a rolling basis. UNCDF will seek to create competition by funding more than one provider of the service when practicable.

    • Leverage Resources: Selection criteria for partners will include the leveraging of donor subsidy with commitment of funds from the institution to grow and expand the business with their own resources, and by their leveraging additional funding from commercial sources of funds. Growing the business could be measured by value of loans outstanding by the end of the programme support. Leveraging additional funding could be measured by amount of own funds committed, and other sources of commercial funding (savings, loans, equity) brought to the business.

    • Time Bound: Donor subsidy will be limited in duration. The time frame should be determined by a business plan that leads to a sustainable/profitable provision of the service. Thus, the subsidy should be provided to the institution to reach sustainability, not the price of the product.

    • Performance Based: Payments will be tranched based on performance targets drawn from the business plan.