Banco Palmas as a community bank

In Fortaleza, I saw an example of local innovation when visiting Banco Palmas. I was given a debit card made of bamboo, the local Palmas plant, pre-loaded with 50 Brazilian reais. The card was usable at local merchant points and served as a reminder of Brazil’s position at the frontier of climate change. For the consumers we visited, however, it was more practical: their first point of contact with a digital financial system.

Banco Palmas, one of Brazil’s first community development banks, was founded in 1998 as part of the ‘solidarity finance’ movement. It is a fascinating organization that reflects Brazil’s financial inclusion journey. Emerging from a need to address social inequities, the model has been enabled by the country’s digital transformation and is embedded deeply in the economic as well as the social fabric of the community.

Like many of Brazil’s large cities, Fortaleza houses a significant percentage of its population in favelas. Conjunto Palmeira, where Banco Palmas is located, is a neighborhood occupied by a community that had been displaced from the coasts to a flooded, swamp-filled region. By the 1990s, the urbanization of Fortaleza meant that Conjunto Palmeira received access to a sewage and drainage system, drinking water, and electricity. However, the area still lacked access to formal financial services and employment, and literacy was limited.

Long before financial diaries became popular in the inclusive finance sector as a method to understand financial lives, Banco Palmas’ founder Joaquim Melo and his team utilized a participatory approach to identify community needs. They interviewed 2,300 of the 18,000 residents of Conjunto Palmeira to map their financial lives, and using these insights, they created a community bank built around a local ‘currency’ – an e-money that could be used locally initially, and later became interoperable with the Brazilian reais. At the same time, they used their learnings to create an ecosystem of solutions with connections to the real economy, by organizing around producer cooperatives and bringing economic development and jobs to local neighborhoods by encouraging consumption of local products.

Today, Banco Palmas is part of a larger network of over 100 community banks, all grounded in the linkage between the financial and real economies and catering to some of the most vulnerable communities in Brazil: indigenous communities, fisherfolk in the Amazon, smallholder farmers, and residents of favelas across the country.

The beauty of the Banco Palmas model is that it began with consumer needs and responded with a financial service to meet those needs, but it didn’t end there. Banco Palmas also systematically continued to track the marketplace and its producer-consumer dynamics; in doing so, the institution channeled capital to places that most needed it, creating a strategic ‘moat’ for the model and resilience for the community.

This is embedded finance at its best, where community members can use financial services that are embedded within the real economy and, in turn, strengthen the real economy. The model continues to evolve to adapt to opportunities in the external environment and benefit from these linkages.

Lessons from Banco Palmas

There are three lessons I gleaned from Banco Palmas, which are relevant to the larger story of embedded financial services for inclusion and impact.

2. Move beyond income and expenses at household level to enable wealth creation at community level

Over the years, Banco Palmas has not only been extending credit to the local community, they have also been building on the initial learnings by systematically tracking shifts in local demand and consumption. The Banco Palmas enterprise offices reminded me of FarmVille, filled with hand-drawn charts that track data on demand and supply of milk, eggs, and other agricultural and consumer products from the community, to understand wealth generated within the community from local employment and sales of products, and surplus sold outside the community.

But this is not a game. This is a data-driven and analytical way to really understand the supply and demand dynamics of the community. And critically, enterprises are started and funded based on insights from this consumer demand data to inform what can be produced locally, allowing local entrepreneurs to both sustainable businesses and generate jobs for the community.

3. Finance to improve living conditions, but also to strengthen the social fabric of local communities

During the extended lockdown period catalyzed by the COVID pandemic, Banco Palmas realized that the local community faced food insecurity. Given the lack of space and irrigation facilities available to grow vegetables in the Conjunto Palmeira neighborhood, Banco Palmas trained people to grow vertical hydroponic gardens. A few years later, the produce from the gardens is not just used for consumption by local families, the surplus is used in other training programs the community runs like the Ceara Cuisine Festival that trains beneficiaries of the Bolsa Familia programs to display their culinary skills.

The skill-building programs extend beyond growing food to tailoring, and even nurturing artistic talent. A particularly inspiring example we saw was the ‘white hands’ choir, deaf singers who use Brazilian sign language to find dignity and voice through their art. In the Conjunto Palmeira community, finance is not just a tool to improve living conditions, but also build a supporting environment for vulnerable communities.  

How did you get involved in inclusive finance and what excites you the most about CFI? 

NG: I have spent much of my life thinking about human security challenges and what drives conflict and how to prevent it. When I was 17 years old, I came to the United States during my senior year of high school as part of a student exchange program. While I was in the U.S. in 1992, my homeland of Bosnia and Herzegovina turned into a war zone, and I was unable to return home to my family. I remained in the U.S. and attended the College of William and Mary in Virginia. There, I took a course on development economics that changed my life. As I was reading about microcredit, I kept thinking about what Bosnia would need once the war ended. I decided that I would dedicate my life to working on financial inclusion as a precursor to economic activity.  

As I was reading about microcredit, I kept thinking about what Bosnia would need once the war ended. I decided that I would dedicate my life to working on financial inclusion as a precursor to economic activity.

After college, I landed a job working on women’s financial inclusion and returned to Bosnia soon after the war ended. Over the years, I have met many people working on innovative solutions to help drive financial inclusion, and it has been a true joy to see the sector evolve. Twenty years ago, I could never have imagined that we would be speaking about open banking and digital public infrastructure (DPI), that we would have financial services seamlessly integrated into consumer journeys through mobile banking apps, and that satellite images would be used to make decisions on insurance coverage. Of course, more remains to be done to enable underserved people to have access to responsible and inclusive financial solutions, but I am excited for what lies ahead! 

What do you see as the most pressing issues facing inclusive finance today? 

NG: If we look at the inclusive finance sector, 2023 was the year when we focused our conversations on artificial intelligence and open banking – two topics that I think are here to stay. We must continue to think deeply about the role of technology in facilitating the delivery of financial products and services and about how innovations in business models and recourse mechanisms can help achieve better outcomes for consumers. This year, we are also seeing more conversations around DPI and digital credit. We must focus our collective efforts to ensure that inclusive finance solutions are created in a way that is responsible for consumers, amid the rapid pace of technological trends. 

Looking ahead, we should look at where AI and client empathy meet and carefully consider infrastructure that is being built within countries, data trails that are generated, who is excluded, and the data governance mechanisms that need to be built. Developments on data governance in Brazil and India offer important learnings to the rest of the world. Within the space of inclusive finance, everything we do must benefit consumers and foster greater trust. Only by understanding and responding to their needs, and building safe and secure environments to transact, can we ensure our work has the right impact. 

How does the Responsible Finance Forum (RFF) help address these issues? 

NG: RFF is a global platform that brings stakeholders together to tackle critical questions and address consumer protection gaps within inclusive finance. Through working groups and global convenings, it provides an opportunity for people around the world to share research on consumer risks, emerging best practices and solutions to address these risks, as well as initiatives to responsibly scale inclusive financial services. 

Today, I think the sector needs evidence-based policy recommendations – and this is what the RFF helps provide. While we have seen tremendous progress to date, poverty and global inequality are on the rise, coupled with the destabilizing factors of climate change and conflict driven migration. Additionally, consumer trust in digital products — which CFI’s research has shown is a significant driver of financial inclusion — is declining. With data breaches, scams, and a lack of digital literacy education, in some markets, consumers are either refusing to go digital or reverting to cash-only. 

At this critical moment, we must ensure the progress made by our sector does not reverse.  

When our sector works together, there is great power and tremendous opportunity.

When our sector works together, there is great power and tremendous opportunity. CFI is uniquely positioned to facilitate collaboration and help the sector work together to unearth market gaps that need the most attention, driving lasting change for low-income clients. I am excited to lead the team as we undertake rigorous research and apply a systems-level approach to all our projects. In addition to our important recent research on bias in AI and data governance, we are working on an interesting pilot to explore how positive friction can be built “by design” into financial solutions.  

Why is it important for the sector to come together like this? 

NG: Since joining CFI six months ago, I have spoken with people across the inclusive finance sector. I have heard many innovative ideas and potential solutions to explore and am excited to collaborate with policymakers and practitioners to help translate good ideas into robust policy. My hope is that CFI’s research findings can help unlock new solutions for digital public infrastructure or Privacy by Design in practice. RFF provides a neutral space for actors within inclusive finance to come together and discuss what needs to be done and how we can do it together. We tackle difficult issues, provide a space for people to raise their opinions, and then work together toward real-world solutions.  

In addition to the RFF convenings and working groups, the deliberations aim to help provide investors, innovators, and regulators with guidance to ensure consumers have access to inclusive and responsible products. Having worked across the financial inclusion space, my personal hope is to bring the perspectives of many different stakeholders — from financial service providers to investors and other funders — to the conversations. I believe that having worn many hats, I can help to further CFI’s partnerships.  

I firmly believe that the responsible finance space will thrive when policymakers, financial service providers, nonprofits, and others all work together. I look forward to helping further CFI’s vision to work towards a world where all people can use financial services and participate in the economy to improve their lives and prosper. 

Why Are DFS Risks Greater for Women?

For the most part, digital financial products and services do not take into account the difference in women’s needs and capabilities relative to men’s, thereby increasing the risk to women of exclusion and misuse. If we do not urgently address these risks, many of the recent gains in increasing women’s inclusion could be lost.

Given that women are not well represented in use cases and data scientists do not research women’s experiences, they are often excluded or underserved resulting in reduced economic opportunities and other challenges.

So, What is Needed?

How can we address the risks that digital financial services pose for women to create a more inclusive, fair, and equitable digital financial system? And in doing so, be truly “responsible”? Below are several suggested areas for focus:

1. Economic recovery from the pandemic remains a priority for several nations.

The pandemic heavily impacted micro- and small- enterprises (MSEs) and women – two large consumer groups who are often excluded from formal financial services. The pandemic exposed that despite recent progress in narrowing the gender gap, it remains a priority focus area for the sector. GSMA’s mobile gender gap reports reveal that women’s digital inclusion is slowing across low- and middle-income countries for the second consecutive year, and several other reports have shown that we need to address the challenges women have in using financial services to see the full gains of access.

3. The wide adoption of new technologies in the financial sector, if not correctly governed, poses a significant risk of further excluding and exploiting vulnerable populations.

This is especially true as AI becomes more entrenched in every facet of financial products and services and distribution channels, and instances of fraud and cybercrime are on the rise.

To deliver financial services responsibly, we must address current and emerging exclusions, anticipate possible sources of vulnerability, and consider who might be adversely affected. The inclusive finance sector has the potential to develop products and services that allow consumers, especially the most vulnerable, to become more resilient and adapt to their new realities.

In response to these challenges, RFF launched three working groups: 1) Responsible Recourse, led by the Better than Cash Alliance (BTCA) and Bangko Sentral ng Pilipinas; 2) Responsible Digital Credit, led by CGAP, and 3) Responsible AI, led by the office of the UNSGSA and CFI. Each group aims to influence and build a collective effort towards a more responsible finance ecosystem and will present its findings at the upcoming event in India.

RFF convenes July 5-7, 2023, in Bengaluru, India, under the theme of Shaping a Responsible Digital Finance Ecosystem. Visit the RFF website to view the full agenda.

Growing Distrust in Financial Services Industry

Stories of fraud, a lack of recourse, and irresponsible practices abound. Therefore, it’s no surprise that there is growing distrust of financial institutions across developed and developing markets — a fact echoed in a global report by Edelman. For example, since 2019, Colombia experienced a 10 percent decline in trust in the financial services sector.

Let’s Stop the Cycle of Insanity and Think Afresh

Breaking out of the cycle of insanity means that the inclusive finance sector must do things differently. Sessions at the upcoming Responsible Finance Forum (RFF) will assess the sector’s achievements over the last decade and determine where to refocus our collective efforts. RFF has undergone a transformation process, broadening the stakeholders around the table and the scope of responsible finance to address all emerging risks that low-income people face. Partners have spent the past year identifying concrete solutions to old and new risks. BTCA, CGAP, and CFI have been leading working groups on responsible recourse, responsible digital credit, and responsible AI, respectively. They will reveal their findings and discuss their insights at the RFF 2023 convening in July. The three-day event will also dedicate time to home in on two emerging risks that demand greater attention: cybercrimes and climate risks.

What more can we do to remove responsible finance from the cycle of insanity? We need to consider the incentives that guide provider behavior and our roles in unleashing harm or enabling responsible practices. Here are a few of my thoughts on how we can improve ecosystem incentives.

Consumer protection by design.

Ensuring companies use data responsibly, disclosures that customers can understand, and interfaces that help customers make informed decisions — these are not afterthoughts. Organizations should not provide funding for innovation without attention to consumer protection and responsible data practices in the design process.