103209 BRIEF Current Trends in International Funding for Financial Inclusion The 2015 Cross-Border Funder Survey reports commitments from the largest international funders of financial inclusion, as of 31 December 2014.1 CGAP has conducted the survey annually since 2008, and in partnership with MIX since 2012. Funding for financial inclusion was stable in 2014, although the weaker euro caused a slight decrease in dollar terms. (See Box 1). To a greater degree than in previous surveys, funders this year emphasized that due to other global priorities it was difficult to promote financial inclusion internally. Nevertheless, their commitments generally followed the same patterns as in years past, with the majority of funding directed at retail-level financial service providers (FSPs) through debt, which accounts for half of all commitments. There was an increasing interest in digital financial services and a rapid and sustained growth in funding to the Middle East and North Africa (MENA). Going forward, funders report that they will increase their funding to sub-Saharan Africa (SSA) and continue to focus on supporting FSPs, as well as payment systems and consumer protection programs. Funding commitments held Twenty-three funders participated in the 2015 survey, steady in 2014 at $31 billion accounting for 66 percent of this year’s global estimate.3 After steadily increasing in previous years, international Among the 21 funders who have reported annually, funding of financial inclusion is estimated to have commitments grew by 3 percent in 2013 U.S. dollars, plateaued at $31 billion in 2014. These data align with but marked a small decline in current exchange rates Official Development Assistance (ODA) trends reported due to a weaker euro at the end of 2014. The 3 percent by OECD, which showed that international aid (across growth rate is lower than in previous years (cf. 8 percent all development sectors) also stabilized in 2014.2 in 2013 and 13 percent in 2012), which is partially The ratio between public and private funding was explained by the closure of some large projects.4 largely unchanged, with public funding comprising 72 However, some funders also cited a shift in priorities percent of global funding (see Figure 1). toward other financial sector areas. It is important Box 1. Exchange Rates From December 2013 to December 2014, the euro fell more than 10 percent against the dollar, the largest year-to- year change since the survey began. This depreciation complicates the interpretation of the data, since we report funding trends in dollars, but about 40 percent of this year’s commitments come from euro-zone funders. In nominal terms, commitments from this group of funders actually grew 4 percent from 2013 to 2014. Yet after converting to dollars, a downward trend emerges. There are two things to keep in mind when looking at this year’s data. First, funders report commitments in the survey, as opposed to disbursements. Many projects are multi-year, with disbursements spread across several years. Therefore, the impact of currency fluctuations in 2014 may average out over the lifetime of the projects. In other cases, funders may renegotiate projects and adjust commitments over time to account for exchange rate fluctuations. Second, by reporting all funding in U.S. dollars, we give priority to the EUR-USD exchange rate. However, determining the real value of these commitments for project recipients would require tracking exchange rates between the funder’s domestic currency and every local currency where projects are implemented. For the sake of simplicity, we track all commitments using funders’ domestic currencies (USD, EUR, and GBP in this year’s survey), and then aggregate in U.S. dollars. Note: All graphs in this brief use annual end-of-year exchange rates. 1 Commitments refer to funds that have been approved for a specific investment/project, whether or not disbursed. 2 OECD collects data on ODA from the 28 countries of the OECD Development Assistance Committee. For more information, see http:// www.oecd.org/newsroom/development-aid-stable-in-2014-but-flows-to-poorest-countries-still-falling.htm. 3 To calculate the global estimate, we combine data from this year’s sample, estimates based on the previous year’s trends (which drew from 56 funders), and data from the Symbiotics Microfinance Investment Vehicles (MIV) Survey. 4 Given that the survey shows a snapshot of commitments as of 31 December 2014, some projects were actually in the process of renewal or December 2015 renegotiation, but were reported as “closed” in the funders’ survey submissions. 2 Figure 1. Estimated Cross-Border Commitments budgets and low portfolio performance due to to Financial Inclusion (in USD billions) operational difficulties facing their partners/investees. Private funders, on the other hand, identified the 30B “lack of appropriate capital across the risk/return 27% 29% 28% spectrum” and shortage of investment opportunities Commitments in USD as their two major constraints, according to a 2015 20B J.P. Morgan/Global Impact Investing Network (GIIN) survey of impact investors (Saltuk et al. 2015). The survey also reported that microfinance is the sector 73% 72% for which the highest number of investors plan to 71% 10B decrease their allocations in 2015, compared to sectors such as energy and agriculture, where the majority of investors plan to increase their allocations. Allocations to financial services (other 0B 2012 2013 2014 than microfinance) were slated to increase though, Private Public which may reflect the transition from traditional Sources: 2012–2015 CGAP Cross-Border Funder Survey, 2012–2015 microfinance to broader financial inclusion. Symbiotics MIV Survey Despite the changing landscape and the shifts in to highlight that the stagnation in funding was challenges cited by funders, trends in commitments not universal across all funders. Several reported did not change significantly from previous years, increased portfolios, others reported that portfolios with retail-level financing continuing to dominate the shrank, and the rest reported stable commitments. thematic allocation of international funding, as shown When combined, these individual movements in Figure 2. About 70 percent of overall funding is balanced out to reveal a relatively flat overall trend. used to finance the lending portfolio of FSPs. Another 8 percent is intended for capacity building of financial Shifting challenges but institutions, especially through improving operations, stable priorities management, and governance of FSPs. In the prior two surveys, covering data from 2012 As in prior years, funders also committed 2 percent of and 2013, funders consistently ranked “adapting our their financial inclusion portfolios for projects aiming strategy” as one of their most pressing challenges. to enhance the financial capability of poor clients. This year, funders highlighted that other global The majority of funding for this purpose (about 60 priorities (such as climate change, migration, and percent) is channeled through governments. Another currency instability) made it harder to promote financial 4 percent of global funding for financial inclusion inclusion within their own organizations. In response, was allocated for improving market infrastructure many funders emphasized financial inclusion’s role as and the policy environment. (For more details, visit an enabler of other development objectives, citing the interactive dataset at http://www.cgap.org/data/ the increasing overlap between financial inclusion and international-funding-financial-inclusion-2015). other priorities, including green inclusive finance, digital Given the different nature of interventions across financial services in the context of disaster and conflict, levels of the financial sector, volume may not provide and a deeper understanding of the link between a full picture of funders’ commitments to financial financial inclusion and macroeconomic stability. inclusion. Retail financing projects typically entail In addition to the challenge of internal promotion of significant funding, while capacity building, market financial inclusion, public funders cited lower overall infrastructure, and policy projects are less capital- Figure 2. Commitments by Purpose as of December 2014 Retail Financing Unspecified Mkt. 71% 14% Infra. 2% Policy 2% Retail Capacity Building Client 8% 2% Source: 2015 CGAP Cross-Border Funder Survey, N=23 funders 3 Figure 3. Trends in Cross-Border Commitments by Instrument (in USD billions), 2008–2014 Debt Equity Grant Guarantee Structured Finance Commitments in USD 10B 5B 0B Source: 2009–2015 CGAP Cross-Border Funder Survey, N=21 funders intensive but require more expertise and engagement MENA boasts sustained with the recipient. Thus, rather than looking only at funding volume, the number of projects offers an growth, while funding to alternative perspective on funders’ priorities agenda. ECA continues to dominate Out of the 2,235 projects active in 2014, 7 percent included a component targeting the enhancement of Eastern Europe and Central Asia (ECA) continue to client capability (compared to 2 percent of funding receive the bulk of funding in terms of volume (31 volume), 13 percent aim to improve policy, and 15 percent of 2014 commitments), but SSA has the percent contained a focus on improving the market largest number of projects (553 projects). infrastructure that enables financial inclusion. The exchange rate fluctuations and closure of several large projects to local intermediaries resulted in a Debt accounts for the majority decline of funding for ECA, South Asia (SA), and of financing, while one-third of Latin America and the Caribbean (LAC). However, projects have a grant element in contrast with LAC where financial inclusion efforts have matured enough to rely extensively on local Despite its 9 percent decline in real terms in 2014, debt funding, the number of projects in ECA and SA is still continues to dwarf the other financing instruments used growing, even as funding volume falls. These trends by funders in the sample, reflecting the funders’ focus indicate that funders have adapted their strategies in on FSP financing. The weakened euro accounts for these regions, shifting toward a greater number of two-thirds of the decrease, and the closure of several projects with smaller amounts of funding. large projects explains the rest. Commitments in equity and grants, the second and third largest instruments, Even after accounting for exchange rates, funding to are each one-fifth the amount of commitments in debt, MENA boasts significant growth, as seen in Figure shown in Figure 3. Funders channel equity primarily to 4, and funding to this region is the fastest growing. microfinance investment intermediaries (MIIs); grants Funding to SSA also increased in nominal terms, but mostly target recipients in the “other” category, which not as quickly as in MENA. includes service providers and market facilitators. Grants account for a third of the $3 billion in funding About one-third of the active projects in 2014 contain a to SSA, a much higher portion than in other regions. grant component (763 projects).5 These projects often Projects aim to improve the capacity of FSPs, leverage focus on micro and small enterprises (121 projects), technology to enable a broader range of services, and rural and agriculture finance (112 projects), and digital foster greater transparency. Digital finance is a central finance (60 projects). Looking closer, we can see that theme for interventions in the region (see Box 2). grants are primarily used in interventions that aim to increase the capacity of the providers. About 15 Furthermore, multi-country and global projects grew percent of grant funding is allocated directly to FSPs, significantly in 2014. The majority of global funding and the rest goes to government, service providers, is channeled through MIIs, although commitments and market facilitators, who use the funds to improve to other types of recipients have also risen. These operations (199 projects), support management and projects are primarily related to providing digital governance (141 projects), and strengthen capacity- finance solutions, enhancing essential services, and building services for FSPs (130 projects). guidance on client protection. 5 Each project can contain multiple instruments. December 2015 All CGAP publications Figure 4. Trends in Cross-Border Commitments by Region (in USD billions), 2008–2014 are available on the CGAP Web site at EAP ECA LAC MENA SA SSA Global www.cgap.org. 6B CGAP Commitments in USD 1818 H Street, NW MSN P3-300 4B Washington, DC 20433 USA 2B Tel: 202-473-9594 Fax: 202-522-3744 0B Source: 2009–2015 CGAP Cross-Border Funder Survey, N=21 funders Email: cgap@worldbank.org Looking ahead Methodology © CGAP, 2015 Despite the slowed growth in funding volume, the This Brief is based on data from the 2015 CGAP Cross- majority of the funders reported that they expect Border Funder Survey conducted in partnership with their commitments to increase or remain at current MIX. Each year, the survey alternates between a full levels going forward. In addition to continuing their set of funders (50+) and a smaller set (20+). For this focus on the retail level, funders also plan to work year’s survey of 2014 data, CGAP collected data from on payment systems and consumer protection. In 23 international funders, whose commitments made terms of regional strategy, funders said that over up 85 percent of funding in the previous year’s survey the next three years they will increase investments of 56 funders. Multi-year trends are based on the in SSA, where they aim primarily to build the retail 21 funders who have reported annually since 2009. sector’s capacity and expand the range of products The global estimate is calculated by combining data and services. from our samples and publicly available data from the Symbiotics MIV Survey (www.syminvest.com). For In the past few years, the financial inclusion community more information on the methodology, visit www. has strengthened its focus on the potential of digital cgap.org/data. finance to rapidly expand access and use. We have also witnessed a strengthening of the links between financial inclusion and other global development Reference objectives. At the same time, many funders have adopted a market systems approach in their work,6 Saltuk, Yasemin, Ali El Idrissi, Amit Bouri, Abhilash which will affect how they allocate their funding in the Mudaliar, and Hannah Schiff. 2015. “Eyes on the future. We anticipate that funding for digital solutions Horizon: The Impact Investor Survey.” New York: J.P. will increase in the future, as will funding for cross- Morgan and GIIN, 4 May. http://www.thegiin.org/ sector projects and recipients beyond FSPs. knowledge/publication/eyes-on-the-horizon Box 2. Digital Finance In recent years, digital finance has grown in popularity and importance for many funders and in many markets. While digital financial services started primarily as a cash-in/cash-out person-to-person payments platform (with M-PESA in Kenya being the most well-known example), it has evolved into a multipurpose channel that can support government-to-person payments, mobile wallets, and even the delivery of credit products. The 2015 survey asked respondents to identify which projects contained elements focusing on digital finance. While the data may not capture 100 percent of the pertinent projects, it still offers insight into the evolving field. Funders reported a total of 97 projects aiming to expand digital financial services. More than half of these projects (51 out of 97) target SSA, and in 50 percent of these, the funding is channeled via national governments. The funding for digital finance typically originates from foundations and multilateral agencies. While these projects may encompass other objectives along with the provision of digital financial services, they are mainly focused on improving operations, strengthening regulation and supervision, and supporting information and transparency. 6 In contrast to the traditional funding approach that focuses on institution-building, a market systems approach to financial inclusion encourages funders to aim for systemic change through their investments and interventions. For more background on this approach, read CGAP’s New Funder Guidelines at http://www.cgap.org/publications/new-funder-guidelines-market-systems-approach-financial-inclusion. AUTHORS: Matthew Soursourian and Edlira Dashi with Eda Dokle