The financial sector, through its products and services, is one of the key mechanisms that allows poor women and men and MSMEs to connect with markets to improve their livelihoods, diversify their sources of livelihoods, support resilience to periodic shocks and prevent the poor from falling into poverty. However, for suppliers of financial services, the fixed and operational cost of working in these markets and with this modest client base, tends to be high, which, when combined with high information asymmetries and the low and risky returns available, leads to an under-supply of financial services.
Despite this, for all suppliers of financial services, the fixed and operational cost of working with the financially excluded, be they women, micro-enterprises or SMEs, tends to be high, which, when combined with major information asymmetries and the low and risky returns available, leads to an under-supply of financial services. Serving these markets therefore requires new approaches, which is what the SHIFT Fund Facility can serve to catalyse. These new approaches can include forms of technology transfer, developing new products and services and utilising new business models generally. What is required is not necessarily innovation in its classic sense, but simply new ways of doing things in the financial markets of the CLMV (most of which would have been pioneered elsewhere, often in developing / emerging markets).
A key determinant of the successful application of existing positive trends in ASEAN will be access to finance for the innovators and financial and business support for those taking the concepts through to piloting, scaling up and rolling out.
Fund Facility as one of the answers
If this innovation is successfully applied, it holds the potential for demonstration, replication and wider systemic impact. The SHIFT Fund Facility will therefore stimulate innovations to support greater access and new products for the financially excluded in the region by specifically targeting and focusing on:
- Greater financial access for economically and socially marginalised populations, particularly focusing on: women, poor, rural and remote populations where poverty is more entrenched, and conventional banking services are poorly provided, if at all; and MSMEs, particularly those at the micro end and those that employ and serve women and economically marginalised populations;
- Combatting account dormancy by moving access to usage through focusing on product design (ensuring that people want to use the product as it solves a problem in their real lives) or financial literacy (ensuring that people know how and why to use the product);
- Changing financial institutions' product mix by providing more of the savings, payments and insurance services that are both more demanded and more needed by target populations;
- Developing systems to lower the risk of over-indebtedness;
- Encouraging a regional approach with CLMV at the core;
- Linking finance to the real economy in CLMV.
The role of the Fund Facility within the context of the broader SHIFT programme is to provide a channel through which SHIFT can provide financial incentives to financial service providers in order to trigger innovation. This is a critical component of the programme as it provides the major touch point with FSPs and has the greatest potential to catalyse large scale change in the market (as evidenced by the Financial Deepening Challenge Fund’s grant to M-Pesa during its early years). The SHIFT Fund will complement and leverage the other areas of the SHIFT programme, for example by providing incentives for innovation for a more highly-trained work force, or by using evidence from the data and analytics component to identify new market gaps that can be targeted with new challenges.
To reach the ultimate beneficiaries of the programme, the SHIFT Fund Facility needs to put poverty reduction at its core. Financial inclusion is not an end in itself, rather it is a means to achieve sustained reductions in poverty and support more inclusive economic growth.
SHIFT should go where financial exclusion and social and economic exclusion overlap. This means focussing on:
- Poor, rural and remote populations where poverty is more entrenched, and conventional banking services are poorly provided, if at all;
- MSMEs, particularly those that are small and growing businesses; and those that employ and serve women and economically marginalised populations.
Extending the access frontier to women and other excluded groups means finding and supporting new delivery models developed by the primary partners and main drivers of change of the SHIFT programme- policymakers, regulators, financial sector professionals, FSPs and TSPs. These new delivery models can extend services to harder to reach, rural areas while keeping costs sufficiently low to still allow profitable service delivery. To do this, FSPs need to be supported to develop the ideas and take them to scale.