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During Uniglobal 14th Global Microfinance Forum in Munich on 15-16 March 2018 we had a chance to interview Mr. Riccardo Aguglia, Senior Investment Manager of the European Investment Fund, Luxembourg

Since the last few years, the provider-client relationships in the microfinance sector are getting complex. The number of providers (Banks, NBFCs, SFBs, NGOs, Mobile phone Operators…) has increased heavily for a decreasing number of vulnerable people. There is a shift from Demand>Supply to Supply>Demand of financial services. What’s your point of view? 

From a European perspective, we cannot say that there is a shift because Europe is situated in a younger market compared to the developing countries. In Europe, the market is still demand-driven.

Nevertheless, he understands that in developing countries there is a shift since the market is more mature and developed in a way. According to Mr. Aguglia, a demand-connected question should be asked, namely “why this shift is happening”? Even though, there is a shift, there is still a huge need of microfinance in developing countries. There are some obstacles persisting that are linked to regulation and business support services of MSMSEs, something that make kind of easy the implementation of projects for microfinance services.

In Europe, we are working on these 2 drivers. Regulation on one side and also the support of micro-enterprises are two huge important topics that the European Investment Fund is trying to catalyze along with other financial instruments.

There are very clear indicators developed to assess the efficiency, the financial performance and the risks faced by MFIs but what about their social impact measurement? Does a global social impact measurement tool exist nowadays?

The EIF has developed its internal score system based on some good practices that were developed, such as the SPI4 developed by Series. At investor level, there are these international standards that are very important and give a sort of indication of the parameters to follow.  The impact is crucial in the work that we do and it is more and more part of any investment activity.  We cannot do investment without being sure to reach social objectives. Furthermore, the EIF has also the European code of good conduct that is a good reference for their financial and social performance assessment. 

Among other requisitions, the economic and political stability of a country wherein the MFI is situated is from great importance for an investment fund to invest in. Do you see a difference in the microfinance models between Western and Eastern Europe?

When we talk about Microfinance in the European Union, I think political risk is quiet stable for all of Europe. Maybe if you include the border countries, not part of Europe, there could be an additional political risk. What is really different between the East and the West is the approach on the social sphere. In Western countries, you have a very well developed social policy that comes from historical reasons; this has for sure affected the entire concept of microfinance. In Eastern countries, you don’t have the same social policies due to another historical background, namely the period of communism. When it ended, the financial system wasn’t at all developed. That’s why microfinance institutions developed rapidly in this region to respond to the people’s financial needs. The MFIs focused heavily on their financial performance and less on their social impact. Furthermore, that’s why the microfinance institutions are more focused on their financial performance.

Besides the European programs (Easi, EPFM, Jasmine…) backed up by the European Institutions are there a lot of investors investing in MFIs in Europa? Isn’t a consequence of strict regulations that there are fewer private funds available?

According to Mr. Aguglia, it is difficult to attract private investors for MFIs in Europe. The market is still young which brings a high perception of risk to the possible private investors. That’s why, to attract private investment funds, the European Commission along with the European Investment fund is trying to build financial instruments relying on European public funds. For instance, several funds (agriculture, support to MFIs and SMEs, etc.) were or are being created where blended finance is used. This means that the public sector invests alongside the private sector and will cover a certain amount of ‘first loss’ money if needed. As consequence, this secures the way for private investors to invest money in the fund.

What do you think about the conference?

The 14th Annual Global Microfinance forum was very interesting. Conferences like this are always useful; even it is more focused on developing countries. During these 2-days, we are able to do some networking but even more important to exchange practices. For instance, our guarantee product with all the respect could easily be replicated in some developing countries. It is a matter to use some public funds and leverage on that, it could be a good way to mix private and public funds. Furthermore, it is also interesting to see how the market is developing.  

Interviewed by Emilie de Gerlache

During Uniglobal 14th Global Microfinance Forum in Munich we interviewed Mr. Alfonso Vega A., CFA, Associate Director, Financial Institutions, SME and Blended Finance of the EBRD, UK 

Financing MSMEs will create jobs, national income growth and will certainly generate a way out of poverty. This positive impact is visible but why then is there such a tremendous credit gap? 

Indeed, the benefits are clear and well documented. To improve the access to finance to Micro, Small and Medium Enterprises definitely will have such a positive outcome. The question is not so much whether this is not happening because it is good or bad but because the lending technology and the ‘how to do it’ is missing. What is happening is that you have market failures, information asymmetry, moral hazard, and adverse selection. If you are an institution that is formal and you do not know a client very well, you need to have a lot of evidence that sometimes is very difficult for those types of companies to produce. You need to have banks standards that are audited or some other documentation of your income, balance sheet. This is usually difficult the smaller you go, and less sophisticated market you are talking about. Therefore, you end up limited with informal sources of finance basically from your friends and family. The more formal financing that is more professional standardized, efficient and also more sustainable because you can achieve large scale through leverage and banking products. Unfortunately, these are unavailable because of the lack of information, data and capacity to show that you have the credit worthiness.

Micro and SMEs or the ‘missing middle’ remain significantly underserved by financial institutions… According to the World Bank, the credit gap that formal SMEs are confronted with is about $1 trillion. What is the role of the ERBD in reducing this gap?

Why isn’t this naturally happening? SMEs or the ‘missing middle’ are neither here or there. Obviously, banks and larger financial institutions know very well how to invest in larger companies because they have all the information they need (income statement, balance sheet…) to invest in.  On the other extreme, micro entrepreneurs have been able to benefit from a specific lending technology because of the big success of micro lending, micro insurance and other microfinance services. This replaces what the corporates are able to produce. Instead of having audited financial statements, reliable documents or collateral, MFIs are able to replace them with social pressure for repayment or in general monitoring them very closely, increasing the amount of information they gather from different sources (neighbors, etc.) as you would normally do on informal basis. The micro lending technology for MFIs ironically is more developed than for the SMEs. The SMEs end up being in the middle. There are too big for that type of lending in which you do cash flow analysis and there are still not able to produce collateral or information that a bank would use, so they are a kind of stuck.

At EBRD, we are trying to expand the sources of finance to SMEs through the model of providing specific product development, capacity building and teaching the partner financial institutions (banks, authorities) on how to tackle the knowhow of this segment in a sustainable way. For instance, instead of relying on a real estate collateral, it would be easier for an SME to rely on moveable collateral such as the assets (machinery) needed for the production. Without it, they can’t move forward.

If it is too risky for private investors to invest in these MSMEs, could the rise of ‘blended finance’ change the norm of things? 

Blended finance is surely ‘one big hope’ for the future. At the EBRD, we are looking very closely on how we can integrate the private sector into the lending market to SMEs. The problem today is that the private sector still has very high expectations of return that are difficult to meet. For the moment, blended finance is limited until we learn how to cater for those returns. Partly, due to the low interest rates environment, which doesn’t give the right compensation for the amount of risks taken. Within the SME market, the EBRD uses blended finance to unlock certain areas that are missing such as agribusiness, women-led businesses and green projects. Moreover, the next challenge will be to scale up the entire market by bringing in private capital. 

With the rise of digital finance and other innovative approaches (Social/Development impact bonds, Social/Impact investing…) how do you see the evolution of SME financing in 5 years from now (2023)?

This is one of the areas that have a lot of promises. Perhaps five years is too short of a period to make a major disruption. We are seeing technology making efficient changes and improving existing processes and methods of lending in a more larger period of time. It is a cycle process. At the moment, we are at the stage of concepts and in a period of new hype.

 What do you think about the conference? 

This is excellent. What is nice about a global conference is to hear what other regions are doing in their own specified market since every organization has its own market. Learning more about the different approaches makes the conference very interesting.

Interviewed by Emilie de Gerlache

Constanze Lehmann, Financial Inclusion Specialist at Mambu

Founded in 2011, Mambu has been growing exponentially for the past 6 years. But speaking about your clients, how exactly do you help them to grow their business?

Mambu stands with our clients through each stage of their business evolution and we believe, as our clients do, in providing better financial services for all.  

Whether they are starting up, transforming or diversifying their business partnering with Mambu means our clients can access all the enterprise-level tools, security and scalability they would expect from a traditional core system in a Software as a Service model.  We support our clients in launching entirely new offerings or diversifying into new product and geographies by providing them with a quick and cost effective route to market through which they can grow and innovate with confidence and ease.  For those who are transforming their businesses moving their entire operation, or selected business units, to a cloud-based SaaS platform enables them to adopt a strategic digital first approach.  This model enables businesses at any stage to bring their ideas to market significantly faster and cheaper than offline and legacy systems.

Our SaaS model and the digitization of near all processes keeps initial investment and ongoing maintenance costs low, allowing our clients to focus precious resources on more impactful activities such as product innovation.  The rich data gathered by our platform and the ease of integration to advanced analytics tools helps clients better understand their customers. They can respond to these insights, any advances in technology or changes in their regulatory environment by leveraging Mambu’s product development capability.  Utilising our developer tools, such as APIs and webhooks, they can simply integrate, automate, test and scale.  This allows them to dynamically align their offerings to stay ahead in an increasingly digital world, meet market needs and differentiate themselves from the increasing tech-driven competition.  

Put simply Mambu enables our clients to attract new customers, investors and donors by quickly and easily creating better products and services at a lower cost and in a more agile way.

Produced by the Centre for the Study of Financial Innovation (CSFI), the 2016 Banana Skins report ranks technology as the fourth greatest and fastest rising risk to the financial inclusion industry. How exactly does your platform address this risk?

Mambu sees technology as a huge enabler for the financial inclusion industry,  none of what has been achieved in the last ten years would have been possible without it. What’s more we believe that it has the potential to bring financial inclusion to most, if not all, of the currently underserved.  

However, we understand the challenge new technologies pose to providers. Those who fail to keep pace with advances will lag behind their competitors and eventually become sidelined.  In the race to meet consumer demands and gain market share they will be overtaken by technology focused, resource rich players, such as Telcos, commercial banks and smart fintech startups.  Yet the cost and complexity involved in selecting, integrating and implementing new technologies can be prohibitive for many stuck on antiquated core platforms.

Mambu helps our clients deal with this changing landscape in two ways. Firstly, the low cost of ownership, implementation and maintenance of our cloud-based core platform means that clients can focus valuable resources on differentiating themselves from the competition through the selection and implementation of new technologies.  Secondly, the simplicity of Mambu’s developer tools, such as our REST APIs, combined with the training and support provided by our in-house team means that providers can launch, iterate and evolve more easily than ever before.  Enabling them to bring their ideas to market at least three times faster and cheaper than with traditional core systems.  

By breaking down the barriers to new technologies Mambu is empowering our clients to deliver better financial services to an ever increasing number of people and businesses worldwide.  

You have just opened your first office in APAC region, in Singapore. What are your plans for 2017?

In 2017 we will continue building on the momentum and success we have gained over the past six years.  Our plans include opening an office in Miami to better serve our clients and prospects in the Americas, doubling our team, increasing investment in the platform and continuing to grow at over one hundred percent year-on-year.  We aim to be the engine driving the worldwide lending and banking revolution, challenging the old ways of delivering financial services, making things simpler, cheaper and more accessible for all. We are proud to say it is a really exciting time for our company and we look forward to the challenges and opportunities ahead!

What are you going to talk about in your presentation at 13th Global Microfinance Forum in Prague and what do you expect from the conference?

We will be discussing how technology can help bring true financial inclusion to all.  We at Mambu believe that digital financial services can be much more than just a payment instrument.  Breaking down the barriers to new technologies, reducing operational costs and complexities and gaining customer trust will enable providers to deliver a full suite of products and services aligned to market needs, which will generate growth for their business, increase adoption and improve inclusion.  The future of financial inclusion is in the provision of a full digital-first financial eco-system, offering individual and business customers the opportunity to choose from a broad range of providers, price points and products.  Enabling them to meet their evolving needs with confidence by giving them access to secure, reliable and affordable financial services including loans, deposits and insurance.  We will discuss how this opportunity can be realized to the benefit of providers and customers alike.

At the conference we look forward to sharing our experiences of the way digital-first companies are transforming the world of lending and banking.  We are excited to discuss how we can use the lessons learnt in the financial inclusion space with industry experts and thought leaders.  

Constanze Lehmann

Financial Inclusion Specialist, Mambu

Connect With Mambu

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Johannes Stoll, Head of Department Business Development at Commerzbank AG, shares his experience with new technology and change of attitude of the branch staff.

 In your opinion, what are the key factors to focus on in regard to branch optimization?

Still, branches are an important channel for customers to conduct banking activities. Over 90% of our branch visitors use the branch on a regular basis to fulfill their service and transaction needs.

There must be a differentiation between branch formats that reflect fast and efficient service on the one hand and more complex and sophisticated advisory on the other hand. Moreover, intelligent Self-Service devices are needed that provide a range of automated services. Opening hours need to be adjusted to the surroundings so clients are able to combine their daily tasks with banking matters. Furthermore, employees should focus on customer needs rather than their daily administrative tasks – processes need to be reconsidered. They spend too many hours ticking lists than focusing on the bank´s clients and their needs.

 Can banks only evolutionary adjust their branch network, or is a more strategic view and reconsideration of current distribution models needed?

It’s a mix of both: we need to adjust and complement the existing branch network.

We have to adjust individual branches where needed, because branches basically need to be located where clients need us which is not necessarily close to their homes. For an optimal positioned branch network we need different types of branch formats for countryside and for cities. Furthermore, they have to be different in their service offering, size and role. So, I would conclude that the format itself is a more strategic view, while the specific locations are evolutionary.

 Can you give us an example of how modern technology can help?

In the digital age, more customers use online banking, so they don´t need to visit their branch that often. They search online and they do their banking online with their different devices. For specific service matters or advisory they need to visit their branch.

In our pilot branches we experienced that certain technologies can lead to automatization and this in turn will lead to more time for our employees to look after their clients and to focus on advisory. To name an example: Less paper in branches due to the digitization of the customer onboarding process led to extra time that is available for our advisors to focus on financial planning.

Furthermore, video-supported advisory can bridge kilometers to the next big branch where specialists are located. Due to this technology it is possible to offer the customers the full range of services in rural areas or isolated regions.

 What are the key challenges that you had to tackle so far?

A key challenge is the aspect of “change” of the employees.

Earlier customers came into branches to do all of their businesses. Nowadays, customers don´t visit their branch on a regular intervals. They also have the possibilities to research online as well as complete their businesses online. Employees must change their view on how to talk to their customers. The information/financial knowledge gap between clients and our advisors is closing and it is more important to have the right piece of advice at the very exact moment. Otherwise clients can also educate themselves via internet.

 How resource-intensive a task this was for Commerzbank?

Due to the fact that we have many stakeholders to talk to and that we have to work together in order to build a multichannel-bank it is a resource intensive task. We are not starting greenfield, but we have to migrate our existing client base into a multi channel bank. That’s why we don’t want to make mistakes in the process of change.

 Do you engage your clients in this process? How?

Clients are an important factor. We engage our clients basically in three ways: First, we do market research so we evaluate the clients’ needs and to track customer evaluation. Second, we monitor customer satisfaction with the “net promoter score”. In this way we understand what clients like and don´t like about our advisory process and thus we have their direct feedback that we can implement. Third, we also have the “Kundenbeirat” that is involved in the development of counseling, service and product issues of the branch.

 Everyone talks about technology, but how important is the human factor?