Javier M. Flores Moreno, CEO of the BBVAMF
The enormous transformation in the technology environment, well managed, will allow successful institutions to construct systems that operate with lower costs, are more inclusive and reach out to segments currently still outside the scope of the microfinance industry
Much has been written and much has been argued about poverty. It is a complex, multidimensional phenomenon. The most widespread definition is associated to limits on the income required to afford a basket of essential goods and services to provide a decent quality of life. However, a broader definition covers multiple different dimensions, including privation, social exclusion and lack of participation. Elements such as access to education and health and the quality of such services, the features of the surroundings in which people live, and limited access to markets, are becoming increasingly important in the definition of poverty.
Economic growth takes a long time to benefit the poor and the effect of demographic growth is much greater among the least well-off. The sum of these two factors makes it enormously difficult to alleviate poverty throughout the world. Quite apart from the technical, conceptual and measurement problems always found in quantifying poverty and quite apart from the subsequent differences that different methodologies throw up, the figures themselves are just overwhelming.
Financial exclusion places an obvious obstacle in the way of development for the poorest people and their communities. Even in environments where an entrepreneurial spirit prevails, imperfect and asymmetric information make it very hard for talented but poor people to access external funds to start or consolidate a business.
Deprived of inclusive financial services, poor people and small businesses have to rely on their own economic resources to seize opportunities within their reach. On the other hand, financial policies that foster the right incentives and help people overcome financial barriers are essential, not just to attain stability, but also for growth, for reducing poverty and for a more equitable distribution of resources and capabilities.
Financial inclusion remains on the “to-do” list in society’s least favoured communities, especially in the emerging countries. Although the improvements already made have meant that the number of people excluded from the financial system has fallen by 20% between 2011 and 2014, there are still two billion people with no access to finance. This is a major obstacle for them in their struggle to improve their living conditions and their development. It prevents them from being able to get out of poverty in many cases.
In some cases, these levels of financial exclusion are due to a poorly-developed financial sector, unable to reach the entire population because of its lack of scale, inefficiency, poor corporate governance models and difficulties in accessing funding. But in other contexts, even where a more highly developed financial sector exists; there are many people who simply cannot access its services. The geographic dispersion of poor communities, the considerable size of the informal sector of the economy, the existence of precarious jobs with low and volatile wages, the absence of guarantees or collateral and the lack of a financial culture are just some of the causes underlying this problem.
In 2007, BBVA created the BBVA Microfinance Foundation as part of its corporate social responsibility policy. It is a non-profit entity whose mission is to foster the sustainable and inclusive economic and social development of the least well-off sections of society through Responsible Productive Finance. We put small-scale economically vulnerable entrepreneurs at the centre of our business, providing them with a full range of financial products and services together with technical assistance and training, with the aim of helping them to success in the long term.
The cornerstone of this model is individualised knowledge of our customers, their circumstances and the real situation of their home or their business. In each case, the model takes into account their profiles and vulnerabilities in order to support entrepreneurs to sustainably generate increasing revenues. Not only do these have an impact on their welfare and on their personal development, but also, the final outcome is a long-term relationship in which customers know that the institution will always be there for them, accompanying them in their needs, both present and future.
This is relationship banking. The key is being able to recognise the potential to generate wealth (albeit on a small scale) in entrepreneurs and in their projects. Such potential does not only manifest itself through the more conventional tangible quantifiers, but also –and to a large extent– through intangible attributes, such as intelligence, imagination, commitment, willingness to pay, perseverance, resilience, empowerment, sense of responsibility, etc.
The BBVA Microfinance Foundation currently supports 1.7m entrepreneurs in seven countries, 84% of whom belong to economically highly vulnerable sectors of the population; 61% are female entrepreneurs, in many cases, heads of household. The aggregate amount paid out in productive loans since 2007 amounts to USD 7bn, with a direct impact on over 6.7m people.
The results we have seen so far are very promising. Customers that remain with the Foundation entities, see their sales grow at an annual rate of 15%, their surpluses by 18% and their assets by 28%. Our metrics indicate that 30% of the customers who joined the entity as poor (according to the ECLAC definition) had climbed out of this category when we measured their situation two years later. And although they are exposed to multiple risks that could drag them back into poverty, we have seen that the longer they remain within the system, the less vulnerable and the more resilient their economic situation becomes.
These results reinforce the motivation that drove us to create the BBVA Microfinance Foundation: the conviction that the financial system plays an important role in both the growth of the economy and in improving people’s living conditions, irrespective of the social or economic strata to which they belong.
Over the last eight years, we have seen microfinance takes enormous strides forward, driven by an ever-more formalised and professional sector. Over 90% of successful experiences coincide with a trend towards formal microfinance institutions, most of them regulated. The success stories of institutions that made the transition from NGOs to regulated banks is characterised by a relentless commitment to the institution’s mission; a sound corporate governance structure that eliminates problems of agency, and excellent risk management and control.
At the same time, the regulatory frameworks for microfinance have also progressed. In many cases, recognising the reality of the wide range of institutional models, they address them by different kinds of legislation for banks and co-operatives and in some cases draw up specifically targeted microfinance legislation.
The challenges imposed by high transformation costs in relation to the size of microfinance loan transactions has required the sector to migrate towards distribution models that use alternative channels of distribution and processes to the conventional ones. By involving the active co-operation of third-parties in the operation, we have been able to get closer to our customers, who are not usually living in or even close to sizeable population clusters, especially those living in rural areas, where many of the excluded segments are found.
The results show that the benefits of these new services far outweigh the risks. This new environment does however, require the system to strike a healthy balance between allowing the kind of innovations that facilitate and accelerate access to financial services, while at the same time, establishing the necessary controls and preserving an optimum level of protection for micro-borrowers.
Regulation has been heading in this direction. The latest public-policy actions to foster financial inclusion in many Latin-American countries are aimed at encouraging the use of these ever-more simple channels and processes to bring in a broader spectrum of the disadvantaged segments of society, not just fostering entrepreneurship by providing access to credit, but also fostering savings, and considerably reducing transaction costs.
Regulation and supervision have progressed in promoting an environment for financial inclusion. By placing top priority on this debate –it is now squarely on the G20 agenda– it has been possible to improve the treatment of financial inclusion in standards, guidelines and assessments throughout the financial sector. The objective is to create a framework for action in which financial relations and interactions can occur with an appropriate control of the risks faced by microfinance institutions, and adequate protection of customers, while preserving the stability of the system and promoting market efficiency.
All these components are the mainstays of the modern regulatory framework that is being built around the sector: boosting financial inclusion, but also taking care of the entities’ financial stability and sustainability, ensuring good corporate governance and suitable management of different risks, and requiring the institutions to be more transparent. This whole process has enabled a set of new stakeholders to come into the sector in recent years, bringing innovation and new ways of participating in both the equity and the funding of these institutions.
The recent global financial crisis has given way to the construction of a risk-based global framework, in which capital requirements have become more sophisticated, with a strong macro-prudential focus and requiring anti-cyclical capital provisions. The spirit of these reforms has been incorporated into the changing regulation of the sector, and nowadays the principle of eliminating regulatory arbitrage prevails in these markets.
Moreover, the financial sector is undergoing a major transformation. The digital divide is narrowing. This is the foundation on which much of the design of future banking is being built, with a broad range of different digital technology co-existing in harmony: mobile devices, social media, big data and process digitalisation. Combined, all of these have the power to transform the market for customers and for all other stakeholders in the industry.
The financial entities will have to reconfigure their operations, forging new kinds of collaboration between themselves and with other sectors. New players will come into the game, some with very different business models. Accessibility is the key difference in this new wave of technological change. It will be driven by lower relative costs than in previous cycles.
The impact will be greater than in previous windows of opportunity, because of the changes in the way people save, raise finance and access credit, together with much greater operational efficiency, which is especially important in small transactions of the kind involved in microfinance.
The microfinance sector is and will be swept along by these trends in the financial sector. The main challenge is how to attain a virtuous combination between the new proposals and the possibilities springing from technology and digital transformation, and the model developed by microfinance over many years of learning. We have to be focused on reaching out to where these vulnerable customers live and work. We want a one-to-one understanding of their requirements and their homes and businesses, so that we can provide personalised attention to cover their real needs. This will benefit millions of people.
Digital transformation, with all its potential, if managed in the right way, will represent a strategic underpinning of incalculable value for the microfinance model, which has always placed the customer at the heart of its activity:
- It will mean greater responsiveness, flexibility and convenience. It will radically enhance the microfinance institutions’ capacity to gather information and operate more efficiently. Thus the potential to collect information, analyse it and use it to take decisions can be deployed in the homes of customers and placed at their service.
- At the same time, it has the potential to generate greater interaction with customers, so that customers and institutions will be able to have more frequent contact and more intense engagement.
- More efficient use of different channels will make transactions more convenient and more efficient.
- At the same time, technology provides the possibility of greater and better controls and monitoring of the different types of risk involved in microfinance transactions.
- All this will be accompanied by a radical improvement in the efficiency of front- and back-office processes.
- Greater efficiency will make it more feasible to reach out to the poorest communities and sectors that are not currently accessible.
We are moving towards a future in which customers will be able to choose their touch-points and the transactions they wish to engage in at their own convenience, and microfinance institutions will be able to overhaul their conception of traditional banking branches. They will have much lighter branch-network structures as they evolve towards sending microfinance executives far out into the field with mobile technology to deploy this greater flexibility and responsiveness to build up a system providing much better, more agile service to customers, with lower transaction costs and enhanced, more efficient supervision systems.
Regulatory frameworks will have to acknowledge these tendencies and lines of evolution, permitting innovations to generate the desired impact. But they will also have to guarantee that new players that may move into the game are also subject to a prudential oversight guaranteeing a level playing field for all. This will benefit the large groups of the population yet to be serviced, and ensure the sector is sustainable for the long-term future.
The digital and information revolution and the way that change is speeding up are making it possible to incorporate new dimensions of customer insight. It is becoming easier to adapt to the needs of low-income people throughout their life cycles, by drilling down deeper into their behavioural patterns and, consequently, into the classical models of risk assessment. The enormous transformation in the technology environment, well managed, will allow successful institutions to construct systems that operate with lower costs, are more inclusive and reach out to segments currently still outside the scope of the microfinance industry. In the BBVA Microfinance Foundation and in all the institutions within our group, we have been busily initiating this innovative change for some time now, and we can look towards the future with high hopes, recognising our responsibility by redoubling our unwavering commitment to our mission.