BRIEF Taking Stock: Recent Trends in International Funding for Financial Inclusion This Brief highlights findings from CGAP’s annual Cross-Border Funder Survey. The 2016 survey reports funding commitments from the largest international funders of financial inclusion, as of 31 December 2015.1 CGAP has conducted the survey since 2008, and in partnership with MIX since 2012. The data from this year’s report come from 54 funders who report to the survey biannually.2 Funding for financial inclusion Development (OECD) show that cross-border aid across all development sectors grew slowly in the past two years.4 increased by $3 billion International funding commitments for financial inclusion, New commitments in 2015 increased total funding for however, were 10 percent higher in 2015 than in 2013, financial inclusion to $34 billion (see Figure 1). Between with more than two-thirds of the public funders and 2013 and 2015, about one-third of funders decreased private foundations in the CGAP survey reporting that their portfolios, while the remainder maintained or financial inclusion in 2015 represented the same or increased their commitments. higher share of their overall development portfolio.5 Going forward, nearly 80 percent anticipate maintaining Funding commitments increased among both public and or increasing their funding commitments to financial private funders, with public funders continuing to represent inclusion. Aid agencies are increasingly looking for ways just over 70 percent of total funding.3 Development finance to engage with the private sector and reduce poverty institutions (DFIs) provide the majority of funding, followed through economic development; it is possible that the by multilateral and bilateral development agencies. We relative growth in financial inclusion funding among such anticipate that public funding will continue to grow more funders is emblematic of this broader trend. One bilateral quickly than private funding, in part because data from funder interviewed explained that “cooperation with microfinance investment vehicles (MIVs) suggest that the private sector helps to promote financial inclusion 2016 will mark their slowest growth in the past decade. internally,” since it aligns with the new aid paradigm. Furthermore, impact investors report plans to decrease their allocations to microfinance and financial services, according to the most recent data from the Global Impact Funders are reviewing strategies Investing Network (Mudaliar, Schiff, and Bass 2016). and integrating financial inclusion While not directly comparable with CGAP data, Official The past two years marked a period of strategic Development Assistance (ODA) trends reported by reorientation for funders, many of whom reported that the Organisation for Economic Co-operation and their greatest challenge has been adapting their strategy. Figure 1. Global Estimated Commitments for Financial Inclusion 30B 28% 27% 32% 20B USD 73% 72% 10B 68% B 2011 2013 2015 Public Private Sources: 2012–2016 CGAP Cross-Border Funder Survey, 2012–2016 Symbiotics MIV Survey 1 Commitments refer to funds that have been approved for a specific investment/project, whether or not disbursed. 2 See Methodology on page 4. 3 Public funders include DFIs and bilateral and multilateral development agencies. Private funders include foundations and other donors and investors that use private funding sources. 4 ODA reports on funds disbursed, while CGAP tracks commitments. Cross-border ODA grew from $130.5 billion in 2013 to $132.7 billion in 2015, which represents an annualized growth rate just under 1 percent. Several European countries also reported large increases in spending on in-country costs related to the influx of refugees. If these domestic costs are included, the average annual growth rate of ODA from 2013 to 2015 jumps to 4.1 percent (OECD 2016). December 2016 5 Based on data from 32 funders who responded to this question. 2 Box 1. “Financial inclusion for: ” Adding “themes” to the survey in 2014 offered insights into how funders are leveraging financial inclusion to achieve broader development objectives. Of the 3,600 projects active in 2015, about 2,300 have been tagged with one or more theme. After medium and small enterprise financing (1,155 projects), the most commonly tagged themes are agricultural and rural finance (503 projects), digital finance (226 projects), gender equality (218 projects), market facilitation (95 projects), and green finance (81 projects). Agricultural and rural finance projects are most commonly funded by DFIs and multilaterals, with one-third of projects in Sub-Saharan (SSA) and a fifth in Latin America and the Caribbean (LAC). They are often channeled through governments in the form of debt. About half of the 218 projects that support gender equality are funded by multilateral agencies and a quarter by foundations. Thirty percent are in SSA, and 20 percent are in LAC. Like agricultural projects, these projects also tend to be loans to government. Green finance includes energy efficiency, access to renewable energy, and sustainable resource management projects. SSA (22 projects) and South Asia (18 projects) are home to the largest numbers of these projects, which are mostly funded by multilaterals and bilaterals through debt. Interviews revealed that at least eight major funders, who capability at the client level. More than two-thirds of together represent 30 percent of all commitments, are in overall funding is used to finance the lending portfolio the midst of re-evaluating their financial inclusion strategies. of FSPs, either directly or via microfinance investment One factor contributing to the need for strategy reviews intermediaries (MIIs) and other intermediaries such as is that organizations increasingly view financial inclusion banks and apexes (see Figure 2). Another 7 percent as an enabler of other development objectives and not supports capacity building of FSPs, especially through as a standalone goal. Subsequently, funders report that improving operations, management, and governance. embedding or integrating financial inclusion within projects However, this year, commitments that address barriers at that target multiple goals is becoming more common the client level reached nearly $1 billion and doubled as (see Box 1). Several funders reported that it was becoming a percentage of total funding—up to 4 percent in 2015. increasingly difficult to isolate the exact amount of funding Funding for market infrastructure also grew significantly, within each project that supports financial inclusion. For matching commitments at the client level at just under those familiar with the history of microfinance, this trend may $1 billion. More than half of the projects that focus on provoke concerns that the sector is returning to the directed market infrastructure are in sub-Saharan Africa (SSA), and credit projects that were once popular in development a quarter are in South Asia (SA). Market infrastructure but relied heavily on subsidies and could not be delivered projects often focus on information and transparency sustainably. Thus far though, experience suggests that this (through credit bureaus, for example), payment systems, “second-wave” of financial inclusion integration means or working with providers of capacity building services. using financial services, often delivered digitally, to increase access to a critical service, such as energy or education. Funding—mostly still through loans—targets increasingly Funders slowly look beyond diverse recipient types traditional supply-side support Funders continue to use debt for more than half of total Financial and technical assistance to retail financial funding, although the real value of debt funding decreased service providers (FSPs) continues to represent the due to the decline of the euro. Debt mostly comes from bulk of international funding for financial inclusion, but DFIs and multilaterals: DFIs typically invest in FSPs, either funders are slowly increasing their focus on improving directly or indirectly via MIIs, while multilaterals often market infrastructure and strengthening financial channel their loans through governments. Figure 2. Funding Purpose 2015 Financing for FSPs Unspecified Market 69% 14% Infrastructure 4% Clients 4% Capacity Building for FSPs 7% Policy 2% Source: 2016 CGAP Cross-Border Funder Survey, N 5 54 funders 3 Box 2. DFS Deep Dive Funders continue to prioritize digital financial services as a way to accelerate financial inclusion. The following high-level insights emerged from the latest data. 1. Almost half of funding for digital finance goes to SSA and a quarter to multi-country or global projects. Multilaterals are the largest funder subtype by volume, but foundations run the highest number of projects. 2.  Government is the single biggest recipient of funding for digital finance, accounting for about 20 percent of projects 3.  and focusing primarily on regulation and supervision. One in 10 projects targets MNOs and mobile money operators. While debt is the largest instrument in every region, the members of the Financial Sector Deepening network ratio of grants to debt is highest in SSA and the Middle in SSA, and $166 million is committed to multilateral East and North Africa (MENA), where grants account for development agencies on behalf of other funders. 31 percent and 25 percent of total funding, respectively. And although debt is the largest instrument by volume, Funding to SSA surpasses grants remain the most common instrument by number SA for first time of projects: 40 percent of projects in 2015 contain a grant component. Bilateral development agencies account for Funders have sharpened their focus on SSA, with more than half of grant funding, but our data suggest that at funding to SSA surpassing that to SA for the first time least some bilateral funders are increasing their use of debt. (see Figure 3). One-third of all projects are located in SSA, and SSA now ranks as the second highest funded Equity is the third instrument by volume. It is primarily region. ECA is the highest funded region, but funding used by DFIs and is most common in middle-income in real terms declined in the past two years due to countries. Guarantees and structured finance are the least significant exchange fluctuations and a slowdown in common instruments, together comprising 11 percent project approval. About 40 percent of the decline in of total funding. Both instruments are primarily used funding to ECA is attributable to decreased flows to by DFIs and typically target projects that are global, in Russia, which has faced economic sanctions since 2014. Europe and Central Asia (ECA) or MENA. After steadily Funding to Latin America and the Caribbean (LAC) decreasing in recent years, structured finance appears to increased in the past two years, although the number be on the rise, particularly among DFIs. of projects declined. Part of this trend can be explained by an increasing percentage of funding being channeled More than half of funding is channeled to FSPs or MIIs, through MIVs or other intermediaries. Funding to MENA the top two recipient categories with 37 percent and grew 9 percent annually using a constant exchange 22 percent, respectively. Governments receive about rate from 2013. In real terms, though, funding has 20 percent, and other intermediaries receive just remained stable, since two-thirds of funding comes under 10 percent. However, funding to recipients beyond from Eurozone funders. Funding to East Asia and the these traditional categories has grown in recent years. Of Pacific grew significantly, primarily due to the approval the $3 billion in funding channeled to “other” recipients, of several large projects in China and Indonesia in 2015. more than half is committed to nonfinancial service Conversely, funding to SA declined in 2015 due to the providers or nongovernment organizations, who are often closure of a large multi-year project in India. responsible for implementing programs on behalf of funders. At least $200 million targets actors in the digital The countries receiving the most funding in 2015 finance ecosystem, with $130 million going to mobile are Turkey, India, Indonesia, Mexico, and Pakistan. network operators (MNOs) or mobile money providers Together, they account for 25 percent of all single- and the rest spread among payments platforms, money country funding. Between 2013 and 2015, the number transfer services, and FinTech firms (see Box 2). About of active funders increased by at least seven in Myanmar, $167 million goes to market facilitators, which include six in Mozambique, and four in Cote d’Ivoire. Figure 3. Regional Funding Trends Multi-Country/ ECA SSA LAC EAP SA MENA Global 7B 6B 5B 4B USD 3B 2B 1B B 09 11 13 15 09 11 13 15 09 11 13 15 09 11 13 15 09 11 13 15 09 11 13 15 09 11 13 15 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: 2010–2016 CGAP Cross-Border Funder Survey, N 5 46 funders December 2016 All CGAP publications Figure 4. Trends in Commitments by Country Income Classification are available on the CGAP Web site at 25B www.cgap.org. 14% 16% CGAP 20B 13% 1818 H Street, NW 13% MSN IS7-700 15B Washington, DC USD 20433 USA 10B 86% 84% 87% Tel: 202-473-9594 87% Fax: 202-522-3744 5B Email: cgap@worldbank.org B 2009 2011 2013 2015 © CGAP, 2016 LDCs Other Countries Source: 2010–2016 CGAP Cross-Border Funder Survey, N 5 46 funders Funding to Least Developed Countries (LDCs) is growing further integrated into projects and within institutions. about six times faster than funding to non-LDC countries, at Nevertheless, financial inclusion interventions remain 6.5 percent annually from 2013 to 2015 (versus 1.1 percent a key tool in building resilience, expanding livelihood growth to non-LDCs) (see Figure 4). Although LDCs receive opportunities, and improving the lives of poor people. just 16 percent of 2015 funding commitments, half of the growth in commitments between 2013 and 2015 target these countries. This marks a significant change from Methodology previous years, when LDCs received 20 percent or less of net This Brief is based on data from the 2016 CGAP Cross- new commitments. Almost all funder types are contributing Border Funder Survey conducted in partnership with to this growth, although bilateral funders account for the MIX. Each year, the survey alternates between a full set largest amount of funding to LDCs. While grants have been of funders (50-plus) and a smaller set (20-plus). For this the primary funding instrument for LDCs historically, debt year’s survey of 2015 data, CGAP collected data from funding has increased and by 2015 nearly equaled grants 54 international funders, whose commitments made in volume. Funding to the 25 Universal Financial Access up 74 percent of global estimated funding for financial (UFA) priority countries (which account for 73 percent of all inclusion. Multi-year trends are based on the 46 funders financially excluded people) grew on average 5.5 percent who have reported bi-annually since 2009. The global annually between 2013 and 2015, whereas funding to non- estimate is calculated by combining data from our samples UFA priority countries decreased slightly.6 and publicly available data from the Symbiotics MIV Survey (www.syminvest.com). For more information on the Looking Ahead methodology, visit www.cgap.org/2016-Funding-Data. Funders project that the upward trend of funding for financial inclusion will continue in the next three years. Sources They will continue to focus on the retail level primarily to Mudaliar, Abhilash, Hannah Schiff, and Rachel Bass. expand the range of products and services, but in contrast 2016. “2016 Annual Impact Investor Survey.” New York: to prior years, funders report that they will prioritize Global Impact Investing Network. using financial inclusion to address specific objectives such as agricultural productivity or energy efficiency. OECD. 2016. Development Co-operation Report Regarding regional allocation of funding, funders plan to 2016: The Sustainable Development Goals as Business redouble their efforts in SSA, while deprioritizing ECA. Opportunities. Paris: OECD Publishing. We anticipate that as funders’ perspectives on financial inclusion continue to evolve—shifting from a stand-alone Symbiotics. 2016. “2016 Symbiotics MIV Survey, Market Data objective to an enabler of other goals—it will become & Peer Group Analysis,” 10th edition. Geneva: Symbiotics. 6 In 2015, the World Bank, IFC, and a coalition of partners committed to increasing by 1 billion the number of people with access to transaction accounts by 2020. The initiative prioritizes 25 countries that are home to the majority of financially excluded people. For more information, go to ufa.worldbank.org. AUTHORS: Matthew Soursourian and Edlira Dashi, with Eda Dokle