Bridging Gaps and Building Trust

Authors: Naim Frewat and Daria Fiodorov.

On March 14, e-MFP was pleased to launch the European Microfinance Award (EMA) 2024, which is on ‘Advancing Financial Inclusion for Refugees and Forcibly Displaced People’. This is the 15th edition of the Award, which was launched in 2005 by the Luxembourg Ministry of Foreign and European Affairs, Defence, Development Cooperation and Foreign Trade, and which is jointly organised by the Ministry, e-MFP, and the Inclusive Finance Network Luxembourg, in cooperation with the European Investment Bank.

In the seventh in e-MFP’s annual series of guest blogs on this topic, the International Rescue Committee’s Naim Frewat and Daria Fiodorov describe some of the barriers FDPs face in accessing financial services; the barriers faced by institutions in serving them; and the role of digital literacy, savings and credit groups and other initiatives in overcoming them.

The International Rescue Committee (IRC’s) Economic Recovery and Development (ERD) financial inclusion work aims to ensure that vulnerable women, men and youth have equitable access to (and genuine usage of) financial services and products. IRC creates linkages between financial service providers, local stakeholders and Forcibly Displaced Populations (FDPs) to support them in leveraging financial services to achieve long-term economic stability.

But while financial inclusion is critical for ensuring the sustainable integration of FDPs, as most of them are unlikely to return to their homes of origin, they still face major constraints in accessing financial services.

Financial Institutions (FIs), such as banks, are regulated and governed by local and international laws and conventions to help combat the global funding of terrorism, tax fraud, money laundering and human trafficking.  While these measures contribute to a healthy world economy, complying with them requires banks to demand documents and guarantees on the side of depositors, including through the application of Know Your Client (KYC) measures and Anti-Money Laundering (AML) regulations.

When clients want to open bank accounts, they are expected to show up at banks, produce recognised identifying documents (IDs) by the country in question, in addition to proof of residence, utilities bills, employment letter, business registration documents, etc. FDPs frequently lack most of these documents or their IDs are frequently unrecognized by the host country. Marginalised host communities frequently face movement restrictions due to restrictive customs mostly imposed on women, for example, who make up 55% of the world’s unbanked population (Findex 2021).

Applying for loans from banks necessitates customers providing collateral, the assessed value of which needs to be sufficient to allow the bank to cover its losses. Additionally, a guarantor could be expected to co-sign the loan repayment contract. Lastly, to ascertain good financial behaviour, banks check the applicant’s credit scoring informing the applicant’s current debt exposure and past repayment behaviour.

In a 2020 review of the state of Financial Inclusion, the IMF notes that the credit market is characterized by information asymmetry; lenders, i.e., banking institutions, have inadequate information about borrowers, causing lenders to exclude certain borrowers from their services, in order to control the default risk while remaining competitive in the market. Without access to bank accounts, FDPs and marginalised host communities resort to informal – and frequently harmful – pathways to access capital and often pay exorbitant interest rates. They become locked in debt cycles and resort to negative coping mechanisms.

Access to loans has been shown to contribute to the growth of the private sector, in countries ranging from Jordan, to Kosovo, Nigeria and Kenya. The Global Compact on Refugees emphasises the critical need to facilitate access to financial services and products for FDPs and host communities to achieve inclusive growth for both. In seeking to advance full financial inclusion for vulnerable populations, the IRC has had successful experiences in sequencing and layering various solutions to help businesses thrive.

a.      Financial Literacy

Financial literacy is the cornerstone of financial inclusion. FDPs may harbour mistrust due to their unfamiliarity with financial services. They may conflate banks, MFIs, and other FSPs with loan sharks or cash and business assistance with loans.  Financial literacy demystifies these concepts in accessible language and introduces financial management topics and tools that help FDPs set savings goals, separate business from household expenses, factor in seasonality and put these concepts into practice. For example, in rural contexts, applied financial literacy has been shown to help smallholders increase savings to successfully get through lean seasons. Ensuring FDPs are comfortable with financial concepts is a foremost request from banking institutions when setting up bank accounts or providing loans to FDPs. IRC recommends partnering with FIs to jointly develop financial literacy programs that are context-relevant, accessible to women and marginalised populations, and are applicable in the day-to-day management of household and business finances. Where contexts permit, the IRC promotes the delivery of Digital Literacy curricula to further increase Digital Financial Services uptake, which are increasingly favoured by women.

b.      Savings & Credit Groups (SCGs)

Although informal in their setup structure, SCGs allow FDPs to have first-hand experience with the concepts of savings, loan capital and repayment. SCGs, which tend to be more appealing to women, have proven to work because members voluntarily join them, commit to saving and attending meetings and build trust with one another. SCGs work best when they build on programming that helps FDPs generate income. Banks are increasingly favourably inclined to lending to registered groups and in recent years, the IRC has been promoting the use of Digital Savings Groups to support FDPs develop a credit history that facilitates their access to formal financial services. Continuing to share data and evidence about the financial behaviours of FDPs with banking institutions helps increase financial visibility and reduce information asymmetry between banks and borrowers.

c.       Loan Guarantee Funds (LGFs)

One approach that the IRC has been exploring with the support from the IKEA Foundation through the Re:BUiLD project in Uganda and Kenya is the use of financial instruments such as Loan Guarantee Funds (LGFs). LGFs are a non-bank financial instrument that provide credit guarantees to mitigate the risk of default and non-repayment. LGFs are successful when integrated into a suite of financial inclusion services such as financial literacy and SCGs. Sequencing services contributes to reducing knowledge gaps and information asymmetries, allowing FDPs time to be familiar with financial management, and banks and FIs with the financial behaviour of FDPs.

In Kenya, through the Re:BUiLD program, the IRC identified Equity Bank as an institution that has demonstrated a commitment to serving refugee populations. The IRC provided tailored advisory support enabling the bank to develop insights on the market dynamics of urban refugees. A proof of concept was developed to demonstrate the business case of extending formal financing to approximately 100 urban refugees initially through a first loan guarantee mechanism and establish potential to scale more broadly in Kenya and beyond. Through this facility, a proof-of-concept amount of KES 2.3M (USD 17,831) would be allocated to facilitate access to loans to Re:BUiLD clients over an 18-month period. A maximum of up to KES 50,000 (USD 388) will be provided to the refugees.

Re:BUiLD incorporates a 50/50 fund split in the LGF facility, with a 50% deposit made upfront to the bank and held in escrow with the bank, and 50% of the funds to be disbursed for results achieved against pre-determined targets for loan origination and possibly impact. If this model proves successful, IRC intends to scale up this facility with support of other donors, to similarly serve at least 5,000 additional beneficiaries with formal financial services by 2025.

d.      Advocating for less restrictive KYC measures

The IRC partnered with Tufts University and KU to research how financial services played a role in refugees and migrants’ integration in Jordan, Kenya, Mexico, and Uganda. The FIND report recommends tiered KYC and customer due diligence requirements based on a proportionate risk-based approach. FIs can adopt alternative methods of identity verification, such as biometric data or government-issued refugee IDs. Remote KYCs conducted in tandem with government institutions permit women and hard-to-reach populations to setup bank accounts.  Simplifications to KYC obligations for FDPs and vulnerable host communities do not compromise compliance with AML and counter-terrorism financing (CTF) regulations, but they open critical pathways for FDPs to access essential financial services.

In advancing financial inclusion and access to loans for FDPs, humanitarian actors should continue disseminating research findings on the bundling and sequencing of oft-mentioned pilots and programs and their impact on the economic wellbeing of FDPs. Guided by this objective, the Community of Practice (CoP) on financial inclusion of FDPs brings together governments, humanitarian and development organisations, academia, private and financial sector actors. By allowing its members to share experiences, data, and lessons learned from their diverse sectors and perspectives, the CoP helps individual stakeholders to advance access to financial services to vulnerable populations and implement the Roadmap to the Sustainable and Responsible Financial Inclusion of FDPs.

Implementing sequential programmatic steps and fostering robust information sharing are key solutions to help build FSPs’ confidence in FDPs’ financial reliability, and ultimately enhancing their access to essential financial services and promoting economic inclusion. It is only through a combination of piloted innovations in financial inclusion programming and the dissemination of their results to financial institutions, financial regulators and policy makers, that financial inclusion can achieve economic wellbeing impact at scale.

Naim Frewat is a Technical Advisor for the Economic Recovery & Development Unit at the International Rescue Committee (IRC). Naim has worked on Active Labor Market Programmes in Lebanon before joining the IRC working on the Syria Refugees Crisis. In recent years, Naim works on advancing IRC’s Financial Inclusion programming. 

Daria Fiodorov is a Policy Officer for the Economic Recovery & Development Unit. Before joining the IRC, she worked in programmatic and legal roles, specializing in forced displacement, human rights, economic development, conflict resolution, peacebuilding, and Disengagement, Demobilization, and Reintegration (DDR).