96286 BRIEF Spotlight on International Funders’ Commitments to Financial Inclusion Although international funders have been longstanding supporters of financial inclusion, their commitments have been put to the test in the past five years. The financial crisis led to a more challenging economic environment and budget cuts at public donor agencies. Results of impact studies made the expectations of microfinance more realistic. Yet, international funding continues to grow. In 2013, international funders committed at least $31 billion to support financial inclusion—an estimated increase of 7 percent on average per year between 2011 and 2013. This Brief analyzes trends in the international funding landscape based on CGAP research. Public funding continues to funders reported that they prioritize the insufficient range of suitable products and services and the limited dominate, while private funding institutional capacity of FSPs. In 2013, they committed decreased for the first time. $1.8 billion toward building the capacity of FSPs Overall, public funding for financial inclusion represented (Figure 2). In contrast, funders reported they give less approximately 75 percent of the global estimate priority to the lack of funding as a barrier to financial (see Figure 1). Despite continued pressure on public inclusion, but most funding was used to finance the resources, public funders increased their commitments growth of FSPs ($17.9 billion, representing 76 percent in the past two years by an estimated average of of commitments). A closer look at the solutions these 11 percent annually. Although they approved more new projects are trying to provide gives a more granular projects during this period compared to 2009–2011 (on picture of their purpose and what funders are trying to average $3.8 billion per year between 2011 and 2013 achieve. Excluding financing, funders reported 1,387 versus $3.4 billion between 2009 and 2011), growth in projects to enhance FSPs’ capacity, and the majority commitments is also explained by fewer projects that supported product development (371 projects) and closed between 2011 and 2013 ($1.6 billion per year on improving the operations of FSPs (351 projects).5 average) compared to 2009–2011 ($2.4 billion per year Funders committed $0.5 billion to enhance the capabilities on average).1 of future and existing clients of FSPs. Multilateral In contrast, commitments from private funders decreased organizations and foundations provided most of the by an estimated average of 2 percent per year between funding for this purpose in 2013. The majority of the 2011 and 2013.2 Microfinance investment intermediaries projects focused on improving the financial capability of (MIIs)3 channel most of the private funding. Even though poor people (126 projects out of 293 projects focused microfinance investments vehicles (MIVs) increased their on enhancing current and future FSP clients’ capabilities). investments in financial services providers (FSPs), the Inclusive financial markets also require an effective increase was partially driven by drawing on an existing infrastructure and a legal and regulatory environment pool of assets that were committed before 2013 that can support their development while protecting (Symbiotics 2014 and 2013). Private commitments to customers. Funders committed $0.6 billion to support MIIs decreased in the past two years.4 the market infrastructure and $0.5 billion to develop Most funders focus on enabling policy environments. While these amounts are small compared to funding for FSPs, projects addressing supply-side barriers. with these purposes require less funding and more Because a wide range of constraints impede financial technical expertise. Multilaterals and bilaterals traditionally inclusion, individual funders often choose to address have been the most active funders in these areas. In the a particular subset of challenges based on their own past couple of years though, foundations have stepped strategic direction, comparative advantages, budget, up to improve the market infrastructure. Out of 793 and staff capacity. The majority of international market infrastructure projects, the majority focused on 1 Most funder projects extend over several years, with average maturity at around five years. Funders normally have a pipeline of new projects that replace current projects as they mature. 2 Private funding in our estimate is based on a combination of data from the CGAP Funder Surveys and MII data from the Symbiotics MIVs surveys. Double counting that may result from public funding going to MIVs has been removed. 3 MIIs are investment entities that have microfinance as one of their core investment objectives and mandates. They include a broad spectrum of players: MIVs, holding companies, and nonspecialized microfinance investment funds. 4 Symbiotics surveys show that, between 2011 and 2013, institutional investor contributions grew by a rate of 3 percent per year on average and retail investor contributions decreased by 6 percent per year on average. March 2015 5 Because one project may aim at multiple solutions, the breakouts presented in this analysis will exceed the total number of projects reported. 2 Figure 1. Global Estimated Commitments to policy environment. So, why is there little funding and Financial Inclusion (in USD billion) fewer projects supporting these two areas? 30 B Debt dominates in terms of volume, but grants are the most 25 B commonly used instrument. Estimated Commitments in USD 20 B Debt financing continues to be the most important instrument in terms of volume of commitments 15 B with $13.8 billion in 2013 (see Figure 3). Total debt commitments grew by an annual average of 12 percent 10 B between 2011 and 2013. Close to half was used to directly finance the loan portfolio of FSPs ($6.8 billion). 5B Out of this, 73 percent was in hard currency ($5 billion) and most had a tenor of one to five years with an 0B 2011 2013 average loan size of $15.2 million. Local currency debt Sources: 2012-2014 CGAP Cross-Border Funder Survey, 2012-2014 SymbioƟcs MIV reached $1.1 billion, and half was committed to Eastern Survey Europe and Central Asia (ECA).Twenty-nine percent Funder Type of debt funding was channeled through governments7 Private Public and then on-lent to FSPs and/or used to support a broad range of activities toward financial inclusion. capacity-building services (258 projects), information and transparency (237 projects), and payment systems (195 While grants represented only 12 percent of the projects). Funders also reported a total of 480 projects commitments in 2013 ($2.9 billion), the majority of that focus on policy and most aimed at improving the international funders used this instrument to support regulation and supervision of FSPs (243 projects) and financial inclusion (43 out of 56 funders and 1,289 out consumer protection policies (198 projects). of 3,128 projects).8 Grants funding grew at an annual average of 2 percent in the past two years. Close At a high level, these findings highlight some interesting to one-third of grant funding was used to build the information; they also raise important questions capacity of FSPs ($0.9 billion) and almost one-quarter to regarding the role of funders.6 For example, are funders finance the growth of FSPs ($0.7 billion). Sub-Saharan that provide financing to FSPs doing it in a way that Africa (SSA) is by far the region receiving the most encourages the development of local funding markets? grant funding with 40 percent of grant commitments Are projects that focus on product development in 2013 ($1.2 billion). incorporating the characteristics and financial behavior of low-income people? Are they incentivizing FSPs Equity funding continues to grow steadily and reached to innovate? Are funders’ projects addressing the $3.7 billion in 2013. Two-thirds were invested in MIIs, root causes of barriers to ensure long-term growth such as holding companies and MIVs, and 19 percent and access? Often root causes of barriers to financial of commitments in equity was used to strengthen the inclusion relate to the market infrastructure and the capital base of FSPs. Figure 2. Commitments by Purpose as of December 2013 (in % of commitments) Mkt. Unspecified Infra. 10% 3% Retail Financing Policy 76% 2% Retail Capacity Building 8% Client 2% Source: 2014 CGAP Cross-Border Funder Survey, N=56 Funders. 6 The CGAP Funder Survey asks respondents to report their projects’ commitments by purpose. The reporting framework has been kept simple because funders’ reporting systems do not usually track the specific purpose(s) at a project level; let alone in terms of commitments. The efforts made for the survey are a step in the right direction, and the analysis provides useful information at a high level. But it begs for more detailed information to capture more nuances and shed more light on how funders contribute to advance financial inclusion. 7 One of the main funding instruments used by multilateral donors are loans to developing countries. Often these loans are channeled through and managed by state-owned institutions such as apexes, development banks, or project implementation units. 8 Because one project may use several instruments, the breakouts presented in this analysis will exceed the total number of projects reported. 3 Figure 3. Trends in Commitments by Instrument (in USD billion) Box 1. Funding to country facilitators There is emerging evidence that developing Debt Equity Grant Guarantee inclusive financial markets is best done through an 14B independent facilitator. An independent facilitator is close to the market and thereby able to monitor 12B developments on an ongoing basis. Based on this knowledge, the facilitator can disseminate information about the market and its participants, 10B provide incentives for market actors to take on Commitments in USD new risks, and help to build the capacity of market 8B participants (El-Zoghbi and Lauer 2013). 6B A handful of bilaterals and foundations have helped with the creation of country facilitators. Today, half a dozen are operating, mostly in SSA. Examples of 4B country facilitators include FSD Kenya, FinMark Trust in South Africa, and EFInA in Nigeria. In 2013, funders 2B committed $133 million to support such actors. Facilitators decide how their funding is allocated 0B based on market needs. The purpose of funding 2009 2011 2013 2009 2011 2013 2009 2011 2013 2009 2011 2013 reported by survey participants is used as a proxy to Sources: 2012–2014 CGAP Cross-Border Funder Survey, Same Set Funders N=54 capture facilitators’ interventions. Thirty-eight percent of commitments to facilitators were reported to SSA is a priority region for support market infrastructure activities, 22 percent to develop an enabling policy environment, 12 percent international funders, but most to finance FSPs, and 9 percent to build their capacity. commitments still focus on ECA. (The remaining 19 percent were not specified.) SSA topped funders’ financial inclusion projects with 788 projects out of 3,128. Commitments to this region these consistently large amounts of debt funding to FSPs grew by an average of 11 percent annually in the past contributed to developing local funding markets? two years to reach $3.5 billion in 2013. Debt and grants are the main instruments in SSA, comprising 38 and 34 All other regions experienced steady growth in the percent of commitments, respectively, to the region in past two years, with the exception of Latin America and 2013. Development finance institutions (DFIs) are the the Caribbean (LAC), where commitments decreased most active and largest funders in the region with $1.6 by an average of 2 percent per year between 2011 and billion in commitments, working mostly with FSPs either to 2013. This decline is largely explained by the fact that provide financing or enhance their capacity. Most of their during the past two years multilaterals closed many debt funding is provided in hard currency with an average more projects than approved new ones. In contrast, loan size of $12 million and a maturity of six to 10 years. DFIs are the only funder segment that increased their commitments to LAC with an average annual growth International funders committed most of their funding rate of 5 percent in the past two years. Their increased to ECA with $6.2 billion in 2013. Ninety-five percent of commitments begs the question: How do they consider commitments to the region served to finance FSPs and their funding to be additional where local funding mainly in the form of debt. DFIs are the main funders in the markets are more developed than other regions? region. Most of their debt funding is done in hard currency with an average loan size of $17.6 million and a maturity of In terms of funding concentration, the five countries one to five years. In a region where local sources of funding receiving the most international funding accounted are less prevalent compared to other sources, how have for 25 percent of total commitments. These countries Figure 4. Trends in Commitments by Region (in USD billion) ECA SSA SA LAC EAP MENA Global Commitments in USD 6B 4B 2B 0B 2009 2011 2013 2009 2011 2013 2009 2011 2013 2009 2011 2013 2009 2011 2013 2009 2011 2013 2009 2011 2013 9 In 2015 Turkey assumed the Presidency of the G20 and has set new priorities for financial inclusion. More information is available at https:// www.infine.lu/g20-turkish-presidency-2015-priorities-financial-inclusion/. 4 March 2015 All CGAP publications are mature markets, which benefit primarily from DFI of financial inclusion. One important change is the are available on the funding; they comprise of India ($2.6 billion), Turkey inclusion of projects that support access to finance CGAP Web site at www.cgap.org. ($1.6 billion), Indonesia ($0.6 billion), Egypt ($0.6 billion), for small enterprises. While in previous surveys, and Peru ($0.4 billion). On the other hand, countries CGAP attempted to remove this portion of the CGAP with the largest number of active funders are India projects’ commitments to focus on microfinance 1818 H Street, NW (26 funders), Kenya (24 funders), Uganda (23 funders), only, in 2013 funders reported on access to finance MSN P3-300 Tanzania (19 funders), and Peru (18 funders). projects for micro and small enterprises. Projects Washington, DC supporting access to finance for medium enterprises 20433 USA Looking ahead is not included, but funders’ reporting systems do not Tel: 202-473-9594 always allow excluding this portion, and adjustments In 2010, financial inclusion became a priority for the G20. Fax: 202-522-3744 were made on a case-by-case basis. Another change Since then, and despite a challenging environment, is the inclusion of funding allocated to a new purpose Email: international funders have demonstrated their category: client capabilities. It comes in addition to the cgap@worldbank.org commitment to this development goal, in particular retail FSP, market infrastructure, and policy purpose through increased funding. It will be interesting to look © CGAP, 2015 categories included in previous surveys. The goal of at how the new G20 priorities9 for financial inclusion projects in this new category is to enhance current and translate into funder commitments. To date, most future FSP clients’ capabilities. of their commitments have focused on developing strong FSPs. In the next three years, funders indicated Historical data were updated where possible to reflect that their interventions will continue to focus on the these changes. However, because not all projects supply side by expanding the range of products, before 2012 may have been added retroactively, improving responsible finance practices, and improving the historical data may not fully represent the management and governance. commitments to financial inclusion in prior years. This may result in over-estimation when reporting growth However, many funders are simultaneously seeing the trends. limits to supply-side interventions that do not always translate into broader market-level impact beyond the Finally, CGAP introduced a qualitative aspect to the FSP. There is a growing understanding and awareness survey to further understand the purpose of reported that more needs to be done to ensure that funders can projects. The framework has been organized in two catalyze systemic change that serves the needs of the main categories: barriers to financial inclusion and poor and benefits the entire market system and not just their corresponding solutions. Within each grouping the funders’ investee. As this shift takes a firmer hold of solutions, there is a comprehensive but not and funders slowly adapt their strategies and how they mutually exclusive set of detailed solutions (available work, we expect to see meaningful changes in how this on www.cgap.org/data). Funders identified which of funding is channeled and for what purpose. these detailed solutions the reported projects aim to provide. One project may have multiple detailed Methodology solutions listed. We use the number of projects The Brief is based on data from the CGAP Cross- pursuing a given solution as a proxy to gauge the Border Funder Surveys conducted in partnership with relative importance of each solution for the funders MIX. In 2014, CGAP used data from 56 international since respondents are not always able to provide funders. Their total commitment was $23.6 billion and disaggregated project commitment for each purpose. represented 76 percent of the global estimate. The For more information on the methodology, go to global estimate is calculated on data from this sample www.cgap.org/data. and publicly available data from Symbiotics Surveys (www.syminvest.com). Other trend data are available only biannually on a subset of 54 funders. Growth rates References were annualized using a compound rate formula. For El-Zoghbi, Mayada, and Kate Lauer. 2013. “Facilitating example, the annualized growth rate between 2011 Market Development to Advance Financial Inclusion.” and 2013 was calculated as follows: [(Commitments Focus Note 89. Washington, D.C.: CGAP, October. 2013/Commitments 2011)^(1/2)]-1. In 2013, the survey methodology was updated Symbiotics. 2014. “Symbiotics 2014 MIV Survey to reflect more systematically the broader vision Report.” www.syminvest.com/papers AUTHORS: Estelle Lahaye and Edlira Dashi with Eda Dolke and Matthew Soursourian