88163 BRIEF Trends in International Funding for Financial Inclusion In recent years, the development community has sustained support for microfinance but broadened funding to encompass a wider goal of financial inclusion.1 International funders (referred to in this Brief as funders) have been adapting their priorities to meet this broader vision, as reflected in the 2012 CGAP Funder Survey. This Brief analyzes trends in the international funding landscape for financial inclusion. The 2012 survey methodology was updated to Commitments from private funders to the sector reflect more systematically the broader vision of grew at a much slower pace of 2 percent between financial inclusion. New types of projects were added, 2011 and 2012.2 Even though other surveys show including those that support access to finance for that microfinance investment intermediaries (MIIs), small enterprises, which were excluded in previous the main channel of private funding, increased their years as the focus was only on microenterprises, and investments to retail financial service providers (FSPs) the allocation of funding to a new purpose category in 2012, the increase was partially driven by drawing related to the increase of end-clients’ capabilities. A on an existing pool of assets that were committed prior qualitative aspect was also added to further understand to 2012 (Symbiotics 2013 and MicroRate 2013). Private the funding purpose of each project. The qualitative commitments to MIIs grew more modestly in 2012.3 framework presents barriers and challenges to Figure 1. Global Commitments to Financial Inclusion financial inclusion and their corresponding solutions 30B Global Estimated Commitments USD (see Methodology section for further details). 20B Funders committed at least $29 billion in 2012 to support financial inclusion—an estimated increase of 12 10B percent compared to 2011 (see Figure 1). This increase stems largely from an improved economic environment. 0B 2011 2012 Note, however, the growth may be overestimated in Sources: 2012-2013 CGAP Cross-Border Funder Survey, 2012-2013 Symbiotics MIV Survey Funder Type cases where the inclusion of funding for small enterprise Private Public finance could not be accurately reflected in data before 2012 (see Methodology section). Funders perceive the limited institutional capacity and Public funding is growing lack of suitable range of faster than private funding products of FSPs as major barriers to financial inclusion Public funding for financial inclusion represented more than 70 percent of the global estimate. Despite Most funding continues to finance the portfolios of continued pressure on public resources, public funders retail FSPs ($14.8 billion, representing 78 percent of increased their commitments by 16 percent between commitments), and survey respondents do not see the 2011 and 2012. They approved close to $3.4 billion lack of funding as a key barrier to financial inclusion in new projects in 2012—68 percent more than the (see Figure 2). Rather, they identify the lack of a previous year—while they closed fewer projects suitable range of products and services and the limited ($1.1 billion in 2012 versus $2.8 billion in 2011). institutional capacity of FSPs as the major barriers to 1 CGAP defines financial inclusion as a world in which all households and business can access and use a broad range of financial services that increase economic opportunity and reduce vulnerability to shocks, and that are responsibly and sustainably provided by the institutions permitted to do so. 2 Private funding in our estimate is a combination of data from the CGAP Funder survey with MII data from the Symbiotics MIV (microfinance investment vehicle) Surveys, and removing any double counting that may result from public funding going to MIVs, which is reflected in both surveys. CGAP also performs global MII market estimates based on the assumption that the average of indicators (portfolio, assets, undrawn commitments, etc.) apply to the entire universe of MIIs. 3 In 2012, private institutional investors remained the prominent source of funding for all MIVs reporting to the Symbiotics survey, with 61 December 2013 percent of total assets and a growth rate of 15 percent between 2011 and 2012. On the other hand, retail investor contributions to MIVs decreased by 13 percent. 2 financial inclusion. Efforts to address these barriers are While most funding is seen through significant commitments to strengthen channeled indirectly, direct the capacity of FSPs ($1.8 billion or 10 percent of total funding to FSPs is on the rise funding).4 Analysis of the reported solutions by projects further confirms this conclusion. The number of projects Depending on the funders’ institutional structure pursuing a given solution is used as a proxy to gauge and resources, projects can be funded directly or the relative importance of each solution for the funders. indirectly. Direct funding to FSPs increased by 29 One project may aim at multiple solutions and so the percent between 2011 and 2012, reaching $6.5 breakouts presented below when totaled will exceed billion. Funding channeled indirectly through the total number of projects reported. Over half of intermediaries such as MIIs, local banks and apexes, or all projects supporting other areas besides financing other indirect means6 accounted for 30 percent of the FSPs focused on designing suitable products and funding in 2012 ($5.8 billion). Funding to MIIs grew services (365 projects) and improving operations (366 at a much slower pace (+1 percent) whereas funding projects); while a similar number focused on improving via apexes decreased by 8 percent compared to last management and governance (323 projects) and on year. Funding channeled via national governments improving responsible finance practices (273 projects). represented 25 percent of the total ($4.7 billion) as multilateral funders are often mandated to use this Figure 2. Funding by Level of Intervention in 2012 channel. There was no increase in funding allocated Retail Capacity through this channel, however. Building Retail Financing MI Funders have increased their use of debt and Unspecified Policy Client grant instruments Source: 2013 CGAP Cross-Border Funder Survey, N=22 Funders 276,181,284 14,762,918,210 Debt financing continues to be the most important funding instrument with $12 billion committed in 2012 Funders committed $0.28 billion to enhance the (see Figure 3). Development finance institutions (DFIs) capabilities of current or potential clients of FSPs.5 usually use debt to finance the loan portfolio of FSPs, but Their projects focused mainly on improving financial multilateral agencies also provide loans to governments capability (54 projects) and strengthening self-managed that are then on-lent to FSPs and/or used to support organizations (26 projects). Most funders’ efforts to capacity-building initiatives at all levels of the financial enhance clients’ capabilities were concentrated in system. After a drop last year in debt commitments, South Asia (SA) and Sub-Saharan Africa (SSA). they grew significantly (+19 percent) as DFIs increased their retail financing after the global economic crisis Funders committed smaller amounts to the market especially in Eastern Europe and Central Asia (ECA). infrastructure ($0.5 billion) and policy levels ($0.4 billion). However, this growth is also explained by a change in Although projects at these levels usually require less the survey methodology (see Methodology section). funding, they do require specialized expertise that only a Grants totaled $2.3 billion in 2012 and were mostly few funders have. Market infrastructure projects focused targeted for retail capacity building of FSPs. Only a few on capacity-building services (322 projects), information funders drove the 15 percent growth in grant funding, and transparency (304 projects), and payment systems in particular in the Middle East and North Africa (MENA) (218 projects). Policy projects focused on enhancing and East Asia and the Pacific (EAP). Growth in equity traditional financial regulation and supervision (312 commitments ($2.6 billion) was modest (+2 percent), projects) and consumer protection (258 projects). due to a decrease in commitments to MIIs. 4 To better understand how this funding was allocated, the number of projects was used as a proxy to signal importance as funders are not able to provide commitments for each purpose (see Methodology section). 5 While in terms of commitments and number of projects the client level received the least attention, some projects implemented by FSPs, market infrastructure actors, or policy makers may have a client component that cannot be captured explicitly. 6 Other indirect means include funding to another international funder or channeling funds through specific programs or vehicles created for a particular project. 3 Figure 3. Trends by Instrument commitments to advance financial inclusion in 2012. Debt Equity Grant Guarantee Funders indicated that they will focus primarily on making the management and governance of 10B Total Committed USD FSPs more effective and improving responsible practices of FSPs in the next three years. These 5B efforts undoubtedly will be reinforced by funders’ current engagements in improving FSPs’ capacities, 0B helping design better products, enabling greater 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 information flows and transparency, and building a Sources: 2010-2013 CGAP Cross-Border Funder Survey, Same Set: N=18 Funders more protective policy environment. SSA has become a top-priority While the future outlook is encouraging, funders also region for international funders reported facing key internal challenges that, if not addressed, could limit their efforts. Many continue For the first time, commitments to SSA, totaling $2.7 to grapple to adapt their strategy in the evolving billion, exceeded commitments to Latin America and financial inclusion landscape and operationalize it with the Caribbean (LAC) ($2.2 billion), indicating a shift in the appropriate internal systems (e.g., procedures, funders’ regional priorities (see Figure 4). Moreover, staff capacity, monitoring, etc.). With 2.5 billion adults SSA will remain the region where funders focus the still lacking access to formal financial services and a most in the next three years. Commitments to LAC more complex financial inclusion landscape, funders decreased by 5 percent due to the closure of some need to find better ways to build an adaptive and large projects. ECA and SA continued to receive innovative market system that serves the poor (El- the most funding for financial inclusion with $4.7 Zoghbi and Lauer 2013). billion and $3.4 billion, respectively. ECA, one of the regions most affected by the global financial crisis, Methodology experienced a high growth in funding (+25 percent) due to increased commitments by DFIs as global This Brief is based on data from the CGAP Cross- economic conditions improved. However, some of Border Funder Surveys. In 2013, CGAP surveyed 22 the growth is explained by the survey’s methodology international funders, which represented 86 percent update to include commitments to micro and small of commitments reported the previous year (for the enterprises (MSEs) (see Methodology section). MENA list of funders surveyed, go to www.cgap.org/data). and EAP continue to receive the least funding, but Total global commitments to financial inclusion are commitments in both regions increased (25 percent estimated on data from this sample and publicly in MENA and 17 percent in EAP). available data from Symbiotics MIV Surveys (www. syminvest.com). Other trend data are available on a Looking ahead subset of 18 funders. With improved economic conditions, international In addition, the 2013 survey methodology was funders, especially public funders, increased their updated to reflect more systematically the broader Figure 4. Trends of the Regional Allocation of Commitments World Bank Region / Date East Asia and the Eastern Europe and Latin America and the Middle East and North Global Pacific Central Asia Caribbean Africa South Asia Sub-Saharan Africa Total Committed USD 4B 2B 0B 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Sources: 2008-2013 CGAP Cross-Border Funder Survey, Same Set: N=18 Funders December 2013 All CGAP publications vision of financial inclusion. One important change is each grouping of solutions, there is a comprehensive, are available on the CGAP Web site at the inclusion of projects that support access to finance but not mutually exclusive, set of detailed solutions www.cgap.org. for small enterprises. While in previous surveys, CGAP (detailed solutions are available on www.cgap.org/ attempted to remove this portion of the projects’ data). Funders identified which of these detailed CGAP commitments to focus only on microfinance, in 2013 solutions the reported projects aim to address. One 1818 H Street, NW MSN P3-300 funders reported on MSEs. Projects supporting project may have multiple detailed solutions listed as Washington, DC medium enterprises are not included, but funders’ its purpose. We use the number of projects pursuing 20433 USA reporting systems do not always allow excluding this a given solution as a proxy to gauge the relative Tel: 202-473-9594 portion, and adjustments were made on a case-by- importance of each solution for the funders since Fax: 202-522-3744 case basis. survey respondents are not always able to provide disaggregated project commitments for each Email: Another change is the inclusion of funding allocated purpose. cgap@worldbank.org to the client level in addition to the retail FSP, market © CGAP, 2013 infrastructure, and policy levels of the financial system Additional data are available on www.cgap.org/data. included in previous surveys. The goal of projects at this level is to enhance current and future FSP clients’ References capabilities. El-Zoghbi, Mayada, and Kate Lauer. 2013. “Facilitating Historical data were updated where possible to reflect Market Development to Advance Financial Inclusion.” these changes. However, because projects closed Focus Note 89. Washington, D.C.: CGAP, October. before 2012 could not all be added retroactively, the historical data do not fully represent the commitments MicroRate. 2013. “The State of Microfinance to financial inclusion in prior years. This may result in Investment 2013: Survey and Analysis of MIVs, 8th over-estimation when reporting growth trends. Edition.” http://www.microrate.com/the-state-of- microfinance-investment-2013-survey-and-analysis- Finally, we introduced a qualitative aspect to the of-mivs-8th-edition survey to further understand the purpose of reported projects. The framework has been organized in two Symbiotics. 2013. “Symbiotics 2013 MIV Survey main categories: barriers and challenges to financial Report.” http://www.syminvest.com/papers inclusion and their corresponding solutions. Within AUTHORS: Edlira Dashi, Estelle Lahaye, and Ralitsa Rizvanolli