On occasion, Emerging Markets ESG publishes a special interview with an academic, expert or practitioner about a specific topic with relevance to environmental, social and/or governance (ESG) issues.
This month’s interview, the 21st in the special interview series, is about financial inclusion and is with Dr. Ascanio Graziosi, author of the e-book entitled, “Financial Inclusion: Give people a job, not a loan.”
Dr. Ascanio Graziosi is a well-known innovator in the development finance arena with extensive field experience matched with publishing. He has a banking background with a specialization in financial inclusion. He has a Degree in Economics (equivalent to US Master) from the University of Rome, a Diploma in Business Administration, a Diploma in Marketing Research and a Certificate in European Union Foreign Relations. Upon completion of his studies he began work with the Central Institute of Statistics of Italy, then in 1966 started his overseas career with the Central Bank of Somalia, at that time under management of the Bank of Italy. Upon returning to Italy, he joined the Lombardy Savings Bank in Milan, the world largest savings bank by deposits. In 1974, he began work with a consulting firm in Rome and was appointed branch director in Kinshasa, Democratic Republic of Congo.
He has over 30 years of work experience in 28 countries, with long-term knowledge of Africa as well as familiarity with other emerging markets and transition economies. He has cooperated with the major international development organizations including: Ministry of Foreign Affairs of Italy, Danish Cooperation, European Commission (Aid, EDF, Meda, Tacis and Phare), FAO, UNDP, WHO and World Bank Group as well as private firms in Africa, the Caribbean, Central Asia, Eastern Europe and Russia Federation.
Currently he provides advisory services in the area of financial inclusion and on this matter he launched the “Colloquium with Decision Makers,” which is neither training nor a course of lessons, but instead a colloquium on strategic issues with microfinance senior executives in their own hub. Recently, he joined International Valuators, to offer an opportunity to the financially underserved African entrepreneurs to both Start-up and Growth-up business. He is also the founder and owner of Financial & Economic Inclusion on LinkedIn.
Dr. Graziosi is the author of the e-book, “Financial Inclusion: Give people a job, not a loan,” which appeared in 2016 with Amazon.
Emerging Markets ESG: How would you define financial inclusion?
Dr. Ascanio Graziosi: Each and every one likes to give his/her own definition; I would like to refer to the definitions provided by both the Basel III Committee – “provision of financial services to unserved and underserved customers” – and the Consultative Group to Assist the Poor (CGAP) – “a state where both individuals and businesses have opportunities to access, and the ability to use a diverse range of appropriate financial services that are responsibly and sustainably provided by formal financial institution” – because they do complement each other.
The former definition is for market regulations and supervision purposes and it is simple as well as open to any integration. Attention: it talks about customers and not people; this means that a link with a finance provider is a pre-condition for whatsoever intervention. Under the circumstances, dealing with the unserved (poor) people should be done by different actors, along with economic policy instruments. The latter definition mainly focuses on market approaches and management, and it centers on accessibility, responsibility and sustainability of the activities.
Combining the two above-mentioned definitions can produce a synergic push to achieve the UN Agenda of the Sustainable Development Goals (SDGs), which become a function of the concerned actors’ capability to bring together financial and economic inclusion. In my book, I elaborate on the matter and work out a paradigm along with a project to disseminate the concept of financial and economic inclusion.
I think that consulting firms, donors, funding agencies, governments and industry insiders may take it on.
Emerging Markets ESG: In developing countries and emerging markets a large percentage of the population is employed informally and does not participate in the financial system. Why?
Dr. Ascanio Graziosi: The features of the labor market should be seen in the context of a country’s economic policy. Rather than participate, I would say these people are excluded from the formal financial system, which has its own credit policy and procedures when it comes to establishing a relationship with a financial institution. Usually, among the eligibility criteria is the requirement that the applicant demonstrate his/her status with an employer; this provides a guarantee to the financial institution.
The situation has left important segments of the population out of the financial system and this gap has been bridged by grass roots organizations like micro-finance institutions (MFIs), non-governmental organizations (NGOs), Popular Banks and Rural Banks. Often these are located in the countryside, closer to the communities they service. Under these circumstances, credit risk is mitigated with the formation of groups of borrowers. Moreover, in this environment people know each other and this helps a lot when the finance provider has to judge the character of the persons, which may replace his/her credit history.
However, there is a lot of work to do to broadcast the meaning of financial inclusion and the financial establishment is expected to do this job, as it did for microfinance.
Emerging Markets ESG: What is the difference between microfinance and financial inclusion?
Dr. Ascanio Graziosi: This is a good question because some people think that financial inclusion is a continuation of microfinance and this is decidedly incorrect. It is important to know that the same institutions that over the past three decades promoted microfinance later phased it out. According to CGAP there is “a growing recognition that microfinance is just one entry point among many for achieving universal financial inclusion and its associated social and economic development goals.” With this understanding “the CGAP funders have shifted their focus from classic microfinance, the provision of financial services to the poor by specialized service providers, to financial inclusion,” as defined above.
As per the two definitions provided above, financial inclusion means providing people with opportunities to improve their life conditions through sustainable services at affordable prices. In the past, these two basic concepts have been neglected, the services were often provided in the absence of either a paradigm or a legally-regulated activity. This situation created a “no-man’s land” – every lender jumped on the bandwagon playing an unreliable “everybody deserves a loan” piano score.
As a matter of fact, a re-thinking of microfinance began after the industry’s implosions in Bangladesh, Bosnia, Cambodia, India, Morocco, Pakistan and Nicaragua, where some MFIs were beset with financial problems originated by mismanagement. The collapse of microfinance in the southern Indian state of Andhra Pradesh led to mass suicides and had a worldwide echo. The poignancy of the moment created by this dark side of microfinance was the origin of review and revision of the whole industry. Before this tragedy, few commentators argued about the fundamentals of this appealing yet dangerous way of providing credit.
Emerging Markets ESG: In your e-book you see a dangerous nexus among the financial crisis, microfinance and financial inclusion. Could you please explain?
Dr. Ascanio Graziosi: In the past, microfinance was a closed market and thanks to this situation, it wasn’t affected by the financial crisis that blew up in 2008, as we learned from the above case, which have revealed situations that have been in contradiction with the fundamentals of fair contractual terms, along with inappropriate assumptions and inconsistency of the methodological approach. Among other factors, this led to multiple loans and rising indebtedness, which should be avoided decidedly.
Currently microfinance is no longer an isolated market but instead is integrated in the financial system; with increasing integration, the risks of any financial implosion at the epicentre of the system will be inevitably magnified in the peripheral areas and have a negative impact on microfinance activities.
Because microfinance providers are the primary vehicles for achieving financial inclusion, risks arising from the markets’ interconnectivity are evident – in a situation of credit crunch or restrictions, investors can no longer see microfinance as an appealing market and could be reluctant to channel resources to microfinance activities.
Emerging Markets ESG: If implemented properly, on both micro- and macro-/policy levels, what can financial inclusion realistically achieve?
Dr. Ascanio Graziosi: Financial inclusion can do a lot, provided that the following conditions are met – sustainability of the intervention; accessibility of the proposed product/service, which should suit the demand for it; and transparency of policy and procedures.
I would like to say that recently released documents and papers by the financial establishment – such as Basel II, CGAP, the World Bank and others – have marked significant changes on the approach to tackle development finance issues. More precisely, I see a “move from credit-based economy to community-based economy,” at least this is what I detect. I synthetized this concept in the subtitle of my book “Give people a job not a loan,” thus redesigning the entire architecture of the approach in favor of unserved people and underserved customers, taking inspiration from above mentioned documents. In this understanding, financial leverage to the economy will continue to be important, of course, but mitigated with the sustainability factor: a concept as much known as neglected.
However, the most of the achievement can come with countries’ tangible economic policies along with global solidarity and the participation of all countries, all stakeholders and all people, as pointed out in the 2030 UN Agenda for SDGs.