MICROFINANCE PAPER WRAP-UP: “Fintech, Digital Finance and Funding: How the Development Sector Is Channeling Money to Digital Financial Services,” by Howard Miller

This paper outlines a system to “identify, classify and measure the funding flows going to DFS [digital financial services]” from funders such as development finance institutions and private foundations. The objective was to “help the inclusive finance sector better coordinate, fill gaps and identify new pathways for funding the sustainable development of digital financial services for financial inclusion.” Mr Miller’s primary findings were:

1) Development funders had USD 1.95 billion in outstanding commitments as of year-end 2018, 60 percent of which was allocated to “support functions” such as research, market development programs, and financial and information infrastructure projects. The remainder funded financial service providers (FSPs) and their customers as well as efforts to develop and implement improved regulation and policies. Of the USD 1.95 billion, 45 percent consisted of grants, 42 percent was equity funding and 12 percent was deployed in the form of loans. Eight percent of projects were supporting the development of DFS policies, a level that the author holds is insufficient to address challenges such as those associated with digital lending and the COVID-19 pandemic.

2) The plurality of DFS funding (36 percent) is deployed in Sub-Saharan Africa. There is a positive correlation between financial inclusion levels and the amount of funding provided to each country, with only 18 percent of funding going to countries with lowest financial inclusion rates. Funding for DFS in these countries primarily is earmarked for support functions as well as policy and regulation development. Mr Miller notes this is “potentially due to a limited number of providers with the capacity to absorb funding, and riskier investment profiles.”

3) The share of DFS funding to FSPs that was disbursed as grants fell from 40 percent during the 2015-2016 period to 7 percent during 2017-2018, while equity investments increased from approximately 55 percent to 79 percent over that time. Investments have also shifted to financial technology firms (fintechs) from mobile network operators (MNOs) and traditional FSPs. In the 2017-2018 period, funders only invested in fintechs, compared to a relatively even distribution of funding between MNOs, banks and fintechs in 2015-2016.

4) Seventy-nine percent of projects were focused primarily on “digital financial inclusion,” while 15 percent comprised a mix of broader “financial sector with some DFS,” an increasing trend reflecting that “DFS projects are slowly being embedded into non-traditional financial inclusion departments.” This can make it more difficult to measure the amount invested in DFS. Hence Mr Miller argues, “As we move into a new era of financial inclusion programming and DFS is increasingly mainstreamed (integrated with digital economy programming), funders will also need to develop new ways of linking DFS with real sector themes, such as agriculture, health or clean energy.”

By Jessica McLeod, Research Associate

This is a summary of a publication by Howard Miller; published by MIX and the Center for Financial Inclusion at Accion; July 2020; 26 pages; available at https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/07/MIX_DFS-Funding-Flows_July2020.pdf

Sources and Additional Resources

Accion homepage
https://www.accion.org/

Homepage of Accion’s CFI
https://www.centerforfinancialinclusion.org/

Homepage of CFI’s MIX (formerly known as the Microfinance Information Exchange)
https://www.themix.org/

More MicroCapital paper summaries
https://www.microcapital.org/?s=paper

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