When the inclusive finance industry was created, many supporters saw the possibility that it would contribute significantly to poverty alleviation. Indeed, the idea that the poorest could access funding fostered optimistic outlooks, such as improved standards of living and economic growth for underdeveloped countries.
Inclusive finance wasn’t welcomed by all. Mainstream banks viewed IFIs as disrupters of the financial sector – partly because they couldn’t compete against them. Informal lenders saw IFIs as a threat to their captive market. IFIs subsequently enjoyed decades of continuous growth while improving the lives of millions of people in third-world nations.
However, things have changed: evolutions in regulations that enabled the formation of more aggressive business-driven microlending organisations, and the expansion of mobile network infrastructures that enable banks to increase their outreach at lower cost, has resulted in tighter competition for bottom of the pyramid client segments, The result is that, more than ever, inclusive financial institutions now need to address a series of challenges if they are to stay in business. In a report released in July 2014, the Center for the Study of Financial Inclusion (CSFI) identified three key issues that could potentially threaten the existence of inclusive finance practitioners:
- Technology. Technological change is arguably the main driver of the revolution taking place in the inclusive finance industry. The rapid expansion of mobile network infrastructure and the rapid decrease in the cost of mobile phones is resulting in previously bricks-and-mortar-only financial institutions reaching further afield, and mobile phone companies driving financial service distribution.
- New product development. With an increasing number of financial services available to previously underserved clients, they (will) have more ability to pick and choose which company to go to. Differentiation is therefore a key element for one financial institution to stand out from the rest, and yet most IFIs still currently offer very similar products.
- Client management. Directly related to the above – customers are increasingly having more and more choice, and possessing more and more knowledge about the options available to them, and the “old” model of customers coming to an IFI because it’s the only one in the area is rapidly changing. Continually engaging with customers in order to build a relationship and maintain loyalty has often not previously been necessary, and many IFIs are uncertain how they should do this.
How should IFIs respond?
According to the report, few IFIs have yet to recognise the importance of these strategic challenges facing the industry – and in itself, this lack of urgency could result in IFIs being overtaken by other lenders with tighter business strategies. Even if/when these challenges are recognised, many IFIs lack the knowledge, internal capacity or budget to seriously consider how to respond to rapidly changing market dynamics.
Fern has decided to rise to this challenge. As part of our ongoing commitment to supporting inclusive financial institutions (credit unions, MFIs, MSME lenders and development banks) for the past 36 years, our new blog series – “The Agility Hub” – will bring insightful articles, expert opinions, case studies, and a range of useful reading material. All of this will be carefully chose to provide valuable and practical ideas and suggestions on ways to make your financial institution more “agile” – able to recognise and respond to a rapidly-changing environment. Sign up here to receive our fortnightly bulletin straight to your inbox.