Plenary: Is there room left for the ‘little guy’?: A debate on the relevance of Tier 2 & 3 MFIs
DISCUSSION
The closing plenary of EMW 2018 was organised as an Oxford Debate. The panel was divided in two opposing sides to argue over a motion: one side supporting the motion, the other side arguing against it. The motion was: “There is no place anymore for Tier 2 and Tier 3 MFIs in the inclusive finance area”. Using the CGAP definition Sam MENDELSON indicated that while many Tier 2 and 3 MFIs struggle to reach scale, they are considered as closer to the client. He then introduced the panel as specialists in emerging markets, blended and impact finance and financial inclusion.
The team supporting the motion argued that Tier 1 MFIs are vital to reach the SDGs. The inclusive finance sector has only been able to reach a fraction of excluded populations. A funding gap of USD 2.5 trillion was mentioned. Large, Tier 1 MFIs were considered as those best placed to fill the gap with their ability to scale-up innovations, delivery systems, FinTech solutions, products and models and work in regulated environments. They can benefit from economies of scale and invest in efficient operations to offer services at a low price.
Moreover, Tier 1 MFIs were seen as particularly well placed to attract institutional investors, as many investors only invest in rated institutions, and to access (domestic) capital markets. The panellists pointed to the existing shift in MIV portfolio, from 80% in Tier 2/3 to 80% in Tier 1, to support this argument.
The opposing team argued that Tier 2 and 3 MFIs continue to play an important role in the inclusive finance arena. Their operations are more agile, they are able to innovate and offer non-financial services, such as sensitisation, financial literacy, business development, social services etc. Most importantly, their social mission makes them ideally suited to ensure inclusion to otherwise excluded populations, be they rural or remote, or facing particular impediments in accessing financial products of larger institutions, such as handicapped people, migrants and refugees, women, farmers and the bottom-of-the-pyramid. Moreover, they argued that to close the finance gap, not only bigger, but also more institutions are needed. As all MFIs started small, and required investors to start, we should not disregard small MFIs to build the organisations of the future.
Sam Mendelson concluded that there are many different routes to financial inclusion. Financial needs and capacities are different, and different institutions are required to develop, pilot and offer services to meet these needs. Moreover, it was mentioned that size and adherence to social mission are not necessarily mutually exclusive, in particular considering an ever closer attention of investors to social performance, next to financial performance. Both MIVs, with different (impact) investment objectives, and MFIs themselves benefit from a diverse landscape. For example Tier 1 MFIs might serve clients who “graduate” from services of small MFIs, while small MFIs have more “room to manoeuvre”. They are often under less scrutiny from supervisors as they do not have a systemic role - e.g. they are not too big to fail.