Five Questions about Inclusive Finance – Special Interview with Djamchid Assadi, Professor, Department of Marketing, Burgundy School of Business, Dijon, France – August 5, 2013

On the first Monday of each month 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 16th in the special interview series, is about inclusive finance and is with Djamchid Assadi, Professor, Department of Marketing, and member of the research team of the Banque Populaire Chair in Microfinance, Burgundy School of Business, Dijon, France.

Founded in 1899, Burgundy School of Business is a leading teaching and research school belonging to the network of top French academic institutions in management.  With its deep commitment to the values of responsibility, openness and creativity, its places entrepreneurial management firmly at the centre of its teaching and research mission: to train managers ready to act as entrepreneurs in both business and society at large.  On the strength of its illustrious history, its values and its organisation, and thanks to the support of companies and institutional authorities of the Burgundy region, Burgundy School of Business has set itself:  among the top French management schools, with a strong international dimension; as a reference European management institute in the areas of expertise in which Burgundy School of Business excels; and as a major academic force in entrepreneurial management.  Microfinance sits at the crossroads of two fundamental dimensions of the school’s mission: entrepreneurial management and social responsibility. In addition to this, Burgundy School of Business can also be proud of its expertise on finance issues. The creation of a Chair in Microfinance in April 2009 was the culmination of a project that has enabled the school to become a leader in France in this domain with regard to research, teaching and to action in the field. The main actors in Micro-Finance are partners in this Chair: ADIE (Association for the Right to Economic Initiative), PlanetFinance, Babyloan and CERMI (European Centre for Research in Micro-finance). The Chair is also funded by the Banque Populaire de Bourgogne Franche Comté and the Fédération Nationale des Banques Populaires.

Djamchid Assadi is a Professor of Marketing at the Burgundy School of Business and a member of the research team of the Banque Populaire Chair in Microfinance.  He is a specialist in strategy and online marketing. His research focuses on the impact of non-economic factors on the buying behavior and strategic behavior and “Peer-to-Peer” relations including “social lending”. He teaches the course “Microfinance Strategy and Marketing.”  He has taught at several universities in France and the United States.  He has written four books, several book chapters, articles and papers presented at numerous conferences.  He holds a Ph.D. in Marketing Strategies and Communication from the University of Paris at Dauphine, Paris, France.

Emerging Markets ESG:  How would you define inclusive finance?

ASSADI Djamchid02Djamchid Assadi:  I hope my answer does not disappoint you!  Because it is based on market-based economic arguments and is out of the current sphere of political correctness. From this perspective, the answer is: Inclusive finance is to deliver financial services to the unbanked, profitably and sustainably. I do not expect any special treatment for the unbanked, i.e., the working poor and the poor in general. Rather, I expect inclusive finance to find ways for providing tailored financial services to the poor and low-income individuals as a target markets like any other.

Let me tell you a story. Under the apartheid regime in South Africa, one day a reporter asked Nelson Mandela. “But finally, what do you want?” To this question, Nelson Mandela calmly replied. “It’s simple. This great democracy that exists in South Africa for the white, we want it for everyone.”

Now to your question, I would say, inclusive finance shall distribute to everyone, the financial services and products that exist today only for half the world.

Two major venues are open for this purpose. One is the venue of information technologies to reduce transaction costs and structure of cost to make serving the unbanked as profitable as possible. In 2007, a major mobile phone company in Kenya, Safaricom, began providing mobile payment service. In two years, the number of customers increased by 2,652 percent, and the number of money transfers by 4,627 percent. The transactions during the month of July 2009 amounted to $535 million (Kenya’s annual GDP in 2008 was $30.24 billion).

The other venue is the use of social innovation and collateral in order to reduce as much as much possible the risk of insolvency and repayment without referring to asset-based collateral (which the poor and low-income markets generally lack). After all, the modern initiative of microfinance by Muhammad Yunus was simply based on gaining access to loans – and later to other financial services – for the poor who had neither collateral nor credit history, and as a result, could not borrow from mainstream financial institutions. The model functions as follows: Individuals form a group, educate themselves and pass their oral exam, and then the microfinance bank provides the first two members with their loans. When these two loans are repaid, the next two members are granted their loans, and so on.

Yunus thought group membership would not only create support and protection but also smooth out the erratic behavior patterns of individual members, making each borrower more reliable in the process (Yunus, 2003). The construct of group membership creates trust within each of the borrowers. Default on a loan by one member of the group requires the fellow members of the group to pay off the debt, or all subsequent loans are denied to every member of the group. The borrowers were thus supposed to pay back their loans with interest. The average rate of repayment was high – about 96 percent! However, microfinance alone cannot expand financial access to the poor.

An inclusive financial sector should finally be able to deliver in a profitable and sustainable manner a broad range of financial services to the unbanked such as credit, insurance, mortgages, pensions, remittances and savings.

Emerging Markets ESG:  What distinguishes inclusive finance from mainstream finance? 

Djamchid Assadi: I am so afraid to disappoint you once more! I do not see any difference between inclusive and mainstream finance in essence. More precisely, I do not see any qualitative and essential difference; the difference, if you wish to call it so, is quantitative and a question of scaling up.

The challenge is thus to address the constraints that exclude three billion people around the world from formal financial services – or mainstream finance as you call it – such as credit, insurance, payment services and savings accounts.

Emerging Markets ESG:  Which challenges do financial institutions face in developing inclusive finance products and services for the bottom of the pyramid?

Djamchid Assadi: As previously mentioned, the challenge is to make providing financial services to the unbanked financially sustainable and even profitable.

However, this challenge should take into account the peculiarities around the world. More than half the populations in developing countries and more than 80 percent of households in most of Africa are financially excluded. As institutional and technological infrastructures and backgrounds are different in developed and developing countries, the financial inclusive strategies cannot be the same.

For example, mobile telephony, because of its affordable price and convenience, can reduce cost structure and transaction costs in both North and South. However, many other technologies can mainly be used only in developed countries.

Emerging Markets ESG:  Are you aware of current research about consumer behavior of the bottom of the pyramid?

Djamchid Assadi: While many research projects address the peculiarities of inclusive finance and markets; some others, less in number, consider the ways of making serving the unbanked financially sustainable.

With regard to this, the second strand explores the potential of social innovations such as group-based collateral, group pressure, club goods and, crowdsourcing.  It also explores the impact of information technologies such as information system and mobile telephony on bottom of the pyramid behavior and projects.

Arvind Ashta has edited a forthcoming book on information systems and microfinance.  Since the creation of the Chair in Microfinance in April 2009, currently called Chaire Banque Populaire en Microfinance, Arvind has encouraged market-oriented research projects in microfinance. Global experience also shows clearly that the poor can be reliable clients and partners for market-based transactions and partnerships.

Measuring the impact of inclusive finance is also another axis of research. The World Bank publishes indicators of financial access.

I personally read very often the reports of the Brookings Institute. One of the latest reports, “Alleviating Poverty: Mobile Communications, Microfinance and Small Business Development Around the World” shows how information technology can have positive impacts on financial inclusion.  (The report can be retrieved from the website of the Brookings Institution.)

In addition to research projects, I would like to mention pedagogic initiatives such as the multimedia library of the Alliance for Financial Inclusion, the world’s most prominent network of financial inclusion policymakers from developing and emerging economies.

Emerging Markets ESG:  What is the nexus between financial literacy, the bottom of the pyramid and inclusive finance?

Djamchid Assadi:  Coaching and training the micro- and small entrepreneurs who borrow seem to have a considerable positive impact on microfinance projects.

Once more, Muhammad Yunus’s initiative can illustrate the case. One of his tactics to help end poverty is education. In order to secure a loan at Grameen, the individuals must complete a seven-day training course, and then pass an oral exam. This helps the borrowers understand the loan and repayment process, and therefore fosters confidence.

The confidence in understanding how money works and how they can make it on their own not only inspires the first time borrowers, but also the next generation – their children.