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Philanthropy, digital payments and financial inclusion

Access to financing can contribute to inclusive social and economic development. How might digital transactions help? Here’s how.

What do a family foundation based in Canada, a semi-public foundation established in the United Arab Emirates (UAE) and a corporate foundation from one of the world’s leading banks have in common? At first sight, not much beyond the fact that they are all charitable organisations. But a closer look tells us that they all dedicate time and resources to the same cause: financial inclusion.

There is growing evidence that financial sector development offers the opportunity to address inequality through interventions to ensure that economic growth translates into poverty reduction and employment. These efforts help to alleviate worries that economic integration and liberalisation of financial markets will lead to narrow, impervious corridors of spectacular growth surrounded by a hinterland of poverty. According to a report by the World Bank Development Research Group, governments can save up to 75% with electronic payment programmes–because the costs of handling, securing and distributing cash and administering these cash programmes is so expensive.

By empowering poor households to take a long-term view of education and health, financial inclusion complements government policy. It also helps reap the demographic dividend by ensuring that healthier and educated young people raise productivity and attract further investments in the real economy.

Many foundations work to support those living in developing countries who do not have access to formal financial services, such as loans, insurance and savings accounts. They may also lack the skills needed to manage their financial assets in a sustainable way. Through financial inclusion, foundations empower individuals to lift themselves out of poverty, enhance their livelihoods and avoid excessive indebtedness.

Why do foundations get involved? Firstly, foundations are generally more willing to take risks and have more flexible means of operation than traditional aid agencies. They have also taken the lead in innovation, for example by inventing and making new digital payment systems accessible to the poor. An OECD Development Centre study on venture philanthropy paints a generally positive picture of the approaches used by foundations.

The Lundin Foundation works with farmers and small enterprises in sub-Saharan Africa to enhance employment opportunities and bring their products to market. Because farmers often do not have access to formal financial services–which constrains their ability to scale up–the foundation makes financial services accessible to these farmers. Lundin recently invested in Agriculture and Climate Risk Enterprise Ltd (ACRE), which provides affordable insurance to farmers against climate risk, and sponsored the development of West Africa’s first dedicated agribusiness SME venture capital fund.

In the UAE, where 70% of Emiratis under the age of 30 are indebted, rising depression among youth is often attributed to financial stress. Increasing divorce rates in the country have also been linked to excessive debt. Faced with a problem of such magnitude and because no nationwide initiative was addressing the issue, the Emirates Foundation for Youth Development decided to make financial inclusion and literacy one of their six core programmes. Through the Esref Sah (“spend true”) programme, the foundation raises awareness among the Emirati youth on the importance of managing their assets and provides adequate capacity building training. In 2014, the Emirates Foundation has engaged 2,434 youth and parents through a series of workshops across the country.

Similarly, the Citi Foundation follows a “more than philanthropy” approach, by giving not only money to their grantees, but also coaching and training in order to reinforce their capabilities. In addition to financial literacy programmes delivered around the globe, the foundation seeks to strengthen microfinance institutions (MFIs) that offer small loans to low-income individuals, by helping them build their institutional and management capacity.

While these programmes gain considerable momentum, a larger range of development actors are also coming together to leverage their comparative advantages in support of financial inclusion. The Better Than Cash Alliance for example is a unique UN-based group that is funded by three major foundations (Bill and Melinda Gates Foundation, Ford Foundation and the Omidyar Network), three financial services providers (Citi Foundation, MasterCard and Visa) and one bilateral donor (USAID).

Housed at the United Nations Capital Development Fund, the Better Than Cash Alliance provides expertise in the transition to digital payments to achieve the goals of empowering people and growing emerging economies. In addition to raising awareness of the benefits of replacing physical cash with electronic payments, the alliance facilitates the transition for governments, the development community and the private sector. While physical cash payments are more effective than distributing in-kind goods, there is a growing body of evidence that digitising payments can create lasting benefits for people, communities and economies. Why? Because they are a more cost-effective, efficient, transparent and safer means of disbursing and collecting payment.

The support from the three foundations to the Better Than Cash Alliance and their commitment to work with governments, private sector and development partners is deeply rooted in their own vision for increased financial inclusion in developing countries. Bill Gates, the co-chair of the Bill and Melinda Gates Foundation, predicts that in the future all “transactions will be digital, universal and almost free”.
Increasing financial inclusion at a national level is a complex task and requires a number of actors, in order to ensure that the vast range of products, services, policies and regulations, as well as infrastructure upgrades, are met. This will require both technical skill, significant human capital to ensure the change happens and deep financial resources. Thus, a multitude of players will be required for multi-dimensional sectoral change at country level and there is no doubt that foundations have a key role to play in increasing financial inclusion globally.

This article originally appeared on oecdinsights.org on 19 December 2014.

Visit www.oecd.org/dev/development-philanthropy/

©OECD Observer No 301, Q4 2014