Partnering for financial inclusion in informal economies

Introduction

A significant portion of the world’s population remains financially excluded, particularly in developing regions where informal, cash-based economies dominate. Aid organisations, digital platforms like Blipply, and financial institutions are increasingly collaborating to tackle this issue. By developing innovative loan programs backed by guarantees, these partnerships aim to reduce the barriers for individuals seeking to transition into formal financial systems. This article explores how such collaborations work and cites supporting evidence from published material, reinforcing the effectiveness of this approach.

The challenge of financial exclusion in informal economies

In many developing countries, a substantial percentage of people operate outside the formal financial system. Their reliance on cash transactions means they are unable to build credit histories or financial profiles, thus limiting their access to loans, savings accounts, and insurance products that could significantly improve their economic well-being. Aid organisations and financial providers are working together to create strategies that facilitate access to financial services for these excluded populations. The focus is on building systems that encourage individuals to transition from cash to digital financial behaviour, ultimately integrating them into the formal economy.

The role of aid organisations in facilitating financial inclusion

Aid organisations are pivotal in supporting financial inclusion by providing resources, reducing risks, and building capacity. By partnering with digital platforms like Blipply and financial institutions, aid organisations can design flexible and innovative loan programmes backed by loan guarantees. This approach lowers the entry barriers for excluded individuals and encourages them to engage in digital financial systems.

Loan guarantees as a tool for enhancing access to credit

A loan guarantee is a promise by an aid organisation to cover a percentage of a loan amount if a borrower defaults. This mechanism reduces the risk for financial institutions and digital platforms, making them more likely to lend to individuals who may lack traditional credit histories. According to a study published by the International Monetary Fund (IMF), loan guarantees can be effective in extending credit to underserved groups by addressing the primary risk concerns of lenders .

The benefits of loan guarantees include:

1. Risk reduction for loan providers: By absorbing a portion of the risk, aid organisations incentivise financial institutions to provide credit to informal sector participants who might otherwise be considered high-risk.
2. Flexible loan programmes: With reduced risk, digital platforms like Blipply and banks can offer loans with more flexible terms, including lower interest rates, smaller loan amounts, and adaptive repayment schedules. This flexibility is crucial for individuals with variable income patterns, common in informal economies.

How digital platforms support financial inclusion

Digital platforms like Blipply play a critical role in the partnership model, offering the technology and infrastructure needed to build financial profiles, track progress, and provide ongoing support. Platforms such as these are recognised by reports from organisations like the World Bank for their effectiveness in expanding financial access through technology.

1. Tracking financial behaviour: Blipply monitors users’ income and expenditure, documenting their transactions to build a comprehensive digital financial history. This is essential for individuals transitioning from a cash-based economy to a digital system, helping them establish the financial behaviours needed for loan qualification.
2. Credit scoring and behavioural assessment: By assigning credit scores based on users’ transaction histories, Fintech platforms offers a dynamic evaluation of creditworthiness, evolving as individuals increase their digital activity. This approach is highlighted in a report by CGAP (Consultative Group to Assist the Poor), which notes that digital platforms capable of tracking and scoring user behaviour are pivotal in extending credit to previously excluded populations.
3. Tiered loan programmes: As individuals demonstrate responsible financial behaviour (such as repaying small loans on time), Blipply’s platform allows users to progress through tiers, granting access to larger loans with improved terms. Research by the World Economic Forum supports this model, showing that gradual increases in credit access can be effective in building financial resilience.

Collaborative partnerships: a holistic approach

For financial inclusion to succeed on a large scale, aid organisations, digital platforms, and financial institutions must work together. Each partner brings a vital element to the table:

1. Aid organisations: Provide the capital for loan guarantees and educational resources to support behavioural change and digital adoption among individuals.
2. Digital platforms (e.g., Blipply): Offer the infrastructure and technology to monitor users, create digital financial profiles, and ensure continuous evaluation based on financial behaviour.
3. Banks and financial institutions: Extend credit and financial products to individuals, using data and support from digital platforms and aid organisations to reduce risk and tailor loan offerings.

Creating effective loan programmes: A practical framework

An example of this collaborative model might work as follows:

• Step 1: Establish the partnership: An aid organisation partners with a Fintech platform like Blipply and a local financial institution to launch a pilot programme for small business owners in an informal economy. The aid organisation commits to backing up to 70% of loan defaults.
• Step 2: Track and assess financial behaviour: The Fintech platform registers merchants, monitoring their digital financial activities such as sales and stock purchases to build financial histories and assign initial credit scores.
• Step 3: Offer tiered access to credit: Initially, small microloans are offered, supported by aid guarantees. As merchants demonstrate consistent digital activity and responsible financial behaviour, they move to higher credit tiers with improved access to larger loan amounts.
• Step 4: Provide behavioural support: The Fintech platform delivers insights and financial education through the app, while aid organisations supplement this with workshops to reinforce digital and financial literacy.
• Step 5: Continuous evaluation and scaling: With continuous data tracking, users’ credit scores gets updated, ensuring they are rewarded for positive changes in their financial behaviour. This real-time evaluation supports scalability, enabling the programme to expand to new regions.

Supporting evidence for the approach

A report by the United Nations Capital Development Fund (UNCDF) emphasises the importance of digital platforms in building credit histories and promoting financial inclusion among informal sector workers. The report highlights how digital financial service providers, when partnered with aid organisations and local banks, can offer tailored loan programmes that adapt to the needs of informal economies .

Additionally, the World Bank has published studies showing that using technology to track financial behaviour reduces risks and makes it possible for financial institutions to provide flexible loan products to underserved populations .

The impact: Transforming economies and empowering individuals

By leveraging loan guarantees and Fintech platforms like Blipply, aid organisations and financial institutions can empower individuals to transition from cash-based transactions to a digital financial system. This approach ensures that:

• Risk is mitigated: Aid organisations share the financial risk, making it viable for financial providers to extend loans.
• Efforts are scalable: Digital platforms enable efficient, scalable management of data and user progress without significant manual intervention.
• Long-term behavioural change is encouraged: As individuals shift to digital financial practices, they not only access credit but also build sustainable financial habits that promote economic growth.

Key takeaways

Aid organisations have the opportunity to significantly enhance financial inclusion by partnering with innovative Fintech platforms like Blipply and banks. Through innovative loan guarantees and technology, they can create flexible and customised programmes that reduce risk for financial providers while supporting individuals in transitioning from cash-based to digital financial behaviours. Evidence from published studies and reports shows that such collaborations are effective in creating scalable and sustainable financial inclusion solutions.

By working together, these partners can transform informal economies, empower individuals with access to credit, and build more inclusive and resilient economic systems.