HOW TECHNOLOGY CREATES MARKETS Trends and Examples for Private Investors in Emerging Markets This report contains eleven chapters that had been recently published as the following EM Compass Notes: Chapter 1, Productivity and the Role of Technology Adoption in Emerging Markets has been published previously as Florian Mölders, Global Productivity Slowdown and the Role of Technology Adoption In Emerging Markets, EM Compass Note 6, IFC, May 2016. Chapter 2, Energy Storage Business Solutions for Emerging Markets has been published previously as Sean Ong, Energy Storage Business Solutions for Emerging Markets, EM Compass Note 23, IFC, November 2016. Chapter 3, Creating Mobile Telecom Markets In Africa has been published previously as Edgardo Sepulveda, Creating Mobile Telecom Markets In Africa, EM Compass Note 19, IFC, September 2016. Chapter 4, How Emerging Market Leaders Can Spur Technological Gains has been published previously as Florian Mölders - Thomas Rehermann - Nana Esi Hammah, How Emerging Market Leaders Can Spur Technological Gains, EM Compass Note 15, IFC, September 2016. Chapter 5, Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and Buyers through Partnership and Technology has been published previously as Abenet Bekele Haile, Ariane Volk, Thomas Rehermann, Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and Buyers through Partnership and Technology, EM Compass Note 37, IFC, April 2017. Chapter 6, Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major Growth Opportunity for Banks has been published previously as Qamar Saleem, Martin Hommes, Aksinya Sorokina, Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major Growth Opportunity for Banks, EM Compass Note 39, IFC, June 2017. Chapter 7, Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion is forthcoming as Paola Elvira Del Carpio Ponce, Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion, EM Compass Note 54, IFC, May 2018. Chapter 8, How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective has been published previously as Alex J. Alexander - Lin Shi - Bensam Solomon, How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective, EM Compass Note 34, IFC, March 2017. Chapter 9, Digital Financial Services: Challenges and Opportunities for Emerging Market Banks has been published previously as Matthew Saal, Susan Starnes, Thomas Rehermann, Digital Financial Services: Challenges and Opportunities for Emerging Market Banks, EM Compass Note 42, IFC, August 2017. Chapter 10, Precision Farming Enables Climate-Smart Agribusiness has been published previously as Igal Aisenberg, Precision Farming Enables Climate-Smart Agribusiness, EM Compass Note 46, IFC, October 2017. Chapter 11, From Farm to Fork: Private Enterprise Can Reduce Food Loss Through Climate-Smart Agriculture has been published previously as Anthony Mills, From Farm to Fork: Private Enterprise Can Reduce Food Loss Through Climate-Smart Agriculture, EM Compass Note 47, IFC, October 2017. IFC 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 U.S.A. ifc.org/thoughtleadership IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise, and influence to create markets and opportunities in the toughest areas of the world. In FY17, we delivered a record $19.3 billion in long-term financing for developing countries, leveraging the power of the private sector to help end poverty and boost shared prosperity. For more information, visit www.ifc.org. All rights reserved First printing, April 2018 The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. Rights and Permissions The material in this publication is copyrighted. IFC encourages use and distribution of its publications. Content from this document may be used freely and copied into other formats without prior permission provided that clear attribution is given to the original source and that content is not used for commercial purposes. HOW TECHNOLOGY CREATES MARKETS Trends and Examples for Private Investors in Emerging Markets ABOUT THE AUTHORS IGAL AISENBERG is a leading Israeli executive in global agriculture and Agtech start-ups having spent 25 years at Netafim, Tel Aviv, Israel, including as its President and CEO from 2009–14 (Chapter 10) ALEX J. ALEXANDER, Chairman and CEO of CashDlite (Chapter 8) ABENET BEKELE HAILE, Chief Strategy Officer, Ethiopia Commodity Exchange, Addis Ababa, Ethiopia, and Research Assistant at Thought Leadership, Economics and Private Sector Development, IFC via the Milken Institute Capital Markets Program (Chapter 5) PAOLA ELVIRA DEL CARPIO PONCE, Research Assistant, Thought Leadership, Economics and Private Sector Development, IFC (Chapter 7) NANA ESI HAMMAH, Research Analyst, Thought Leadership, Economics and Private Sector Development, IFC (Chapter 4) MARTIN HOMMES is a Global SME Banking specialist and one of the co-champions of IFC’s Supply Chain Finance advisory program for financial institutions (Chapter 6) ANTHONY MILLS is CEO of C4 EcoSolutions, Cape Town, South Africa, focusing on innovative and evidence-based solutions for adapting to climate change and resulting opportunities for the private sector (Chapter 11) FLORIAN MÖLDERS, Operations Officer, Global Macro, Market and Portfolio Research, Economics and Private Sector Development, IFC (Chapters 1, 4) SEAN ONG, Renewable Energy Engineer (Chapter 2) THOMAS REHERMANN, Senior Economist, Thought Leadership, Economics and Private Sector Development, IFC (Introduction, Chapters 4, 5, 9) MATTHEW SAAL, Principal Industry Specialist and Head of Digital Finance, Financial Institutions Group, IFC (Chapter 9) QAMAR SALEEM is IFC’s global technical lead for the SME Banking Practice Group and also the global lead of IFC’s Supply Chain Finance advisory program for financial institutions (Chapter 6) EDGARDO SEPULVEDA, has more than 20 years of telecommunications consulting experience and has advised clients in more than a dozen countries in Sub-Saharan Africa and over 40 countries around the world, including in projects financed by the World Bank, IFC and other multilateral and bilateral organizations (Chapter 3) LIN SHI, Strategy Analyst, Thought Leadership, Economics and Private Sector Development, IFC (Chapter 8) BENSAM SOLOMON, Research Analyst, Thought Leadership, Economics and Private Sector Development, IFC (Chapter 8) AKSINYA SOROKINA is an SME banking officer at IFC, working across regions to help financial institutions become more competitive, efficient and innovative (Chapter 6) SUSAN STARNES, Global Lead, Trade and Commodity Finance Strategy, Sector Economics and Development Impact, Economics and Private Sector Development, IFC (Chapter 9) DAVIDE STRUSANI, Head, Telecom, Media, Technology, Venture Capital and Funds, Sector Economics and Development Impact, Economics and Private Sector Development, IFC (Introduction) ARIANE VOLK, Research Analyst, Thought Leadership, Economics and Private Sector Development, IFC (Chapter 5) CONTENT ADVISORS Economics and Private Sector Development | Neil Gregory, Davide Strusani, Thomas Rehermann Partnerships, Communications and Outreach | Esther Navarro, Nadine Shamounki Ghannam Telecom, Media, Technology, Venture Capital and Funds | Simon Andrews PROJECT AND CONTENT TEAM Project Manager | Thomas Rehermann Editors | Matt Benjamin, Ofeoritse Daibo Research Assistants | Paola Elvira Del Carpio Ponce, Jung Ryun Byun Composition and Design | Rikki Campbell Ogden CONTENTS 5 | EXECUTIVE SUMMARY 8 | INTRODUCTION COMPETITIVENESS 19 | CHAPTER 1: Productivity and the Role of Technology Adoption in Emerging Markets 24 | CHAPTER 2: Energy Storage Business Solutions for Emerging Markets RESILIENCE 30 | CHAPTER 3: Creating Mobile Telecom Markets In Africa INTEGRATION 35 | CHAPTER 4: How Emerging Market Leaders Can Spur Technological Gains 39 | CHAPTER 5: Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and Buyers through Partnership and Technology 44 | CHAPTER 6: Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major Growth Opportunity for Banks 51 | CHAPTER 7: Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion INCLUSIVENESS 59 | CHAPTER 8: How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective 65 | CHAPTER 9: Digital Financial Services: Challenges and Opportunities for Emerging Market Banks SUSTAINABILITY 75 | CHAPTER 10: Precision Farming Enables Climate-Smart Agribusiness 80 | CHAPTER 11: From Farm to Fork: Private Enterprise Can Reduce Food Loss Through Climate-Smart Agriculture 89 | REFERENCES EXECUTIVE SUMMARY Technological progress is often associated with the creation of novel and useful products through innovation and ingenuity. Yet in several emerging markets, including low-income economies, it is often more common to adopt, adapt, and scale technologies created elsewhere. By doing so, private enterprises in these countries could use technology to create markets and expand their product and service offerings to unserved and underserved residents, a process that produces new customers, buyers, sellers, and employees. This transforms the pursuit of profits into a driver of economic growth, as well as higher productivity and living standards, and gives technology a central role in emerging market development. Examples of technology-driven market creation Of course, none of these obstacles are insurmountable, range from Peru, where partnerships between and most will give way to cooperation between the telecom providers and banks bring financial services private sector, governments, and outside actors such as to unbanked populations, to Tanzania where solar development finance institutions. and energy storage technologies create business IFC and other development finance institutions aim opportunities in remote areas, to India, where to use technology to help accomplish the United advanced farming technologies drive agribusiness Nations 2030 Sustainable Development Goals. The opportunities for smallholder farmers. There are general strategy entails clearing a path to allow private several examples where private enterprises in emerging capital to be allocated at a sufficient scale to address economies leverage technologies to create markets and development gaps in emerging markets. accelerate growth and development. Each emerging market intervention has the potential to Adopting new technologies can also allow emerging alter the dynamics of markets by promoting one or several economies to “leapfrog” steps in the traditional of five distinct attributes. These include Competitiveness, development ladder. For example, low-income nations in which markets allow firms to enter and compete while that never established a telecommunications landline incentivizing innovation and efficiencies; Resilience, infrastructure or a retail banking system could bypass with markets less vulnerable to shocks, volatility, and those development stages due to the profusion of instability; Integration, with enhanced connectivity mobile phones and the innovative financial services within and across markets; Inclusiveness, with markets now available through them. accessible to groups still unserved or underserved; and Sustainability, with firms and individuals adopting Yet the path from technology adoption to market environmentally and socially sustainable technologies and creation and eventual fruition is not obstacle free. The practices. Technology is critical to each of these attributes. penetration and diffusion of adopted technologies in The second half of this report describes particular developing countries is often too low to sustain new instances where technology is creating markets and markets that depend on them. driving development. They are grouped according to the Moreover, technology alone is not sufficient to create five attributes described above, and together they paint fully functioning markets. It must be complemented by a picture of technology’s ability to expand access to appropriate government and regulatory policies. And products, services, and job opportunities for individuals; it is highly dependent on infrastructure improvements, access to markets, finance, and competition for businesses; especially in energy and telecommunications. and greater efficiency and responsiveness for governments. 5 COMPETITIVENESS CHAPTER 7. Modelo Peru: A Mobile Money Platform Offering Financial Inclusion CHAPTER 1. Productivity and the Role of A mobile money strategy in Peru emerged as a Technology Adoption in Emerging Markets collaboration between financial institutions, telecom There are ample opportunities for developing countries companies, and the government, with the goal of better to generate growth and reduce poverty, yet they will serving the nation’s unbanked and underbanked. need to make good use of available business models and productivity-enhancing technologies to do so. INCLUSIVENESS CHAPTER 2. Energy Storage Business Solutions CHAPTER 8. Fintech is Reaching the Poor in for Emerging Markets Africa and Asia: A Start-Up Perspective Energy storage technologies promise to deliver Traditional banks and financial technology companies, efficiency, productivity gains, and business or FinTechs, offer innovative digital financial services opportunities for remote areas of emerging countries. that grant unbanked individuals access to financial transactions. RESILIENCE CHAPTER 9. Digital Financial Services— CHAPTER 3. Creating Mobile Telecom Markets Challenges and Opportunities for EM Banks in Africa A host of non-bank innovators are offering new Mobile telecommunications can link communities and financial technology products and services in emerging citizens to financial services and help farmers improve market economies. crop yields. SUSTAINABILITY INTEGRATION CHAPTER 10. Precision Farming Enables CHAPTER 4. How Emerging Market Leaders Climate-Smart Agribusiness Can Spur Technological Gains Emerging market countries can benefit from advanced Emerging market leaders can take steps to help firms farming technologies that mitigate the effects of climate overcome barriers to technology implementation, from change and protect environmental resources. regulatory frameworks to education, trade, and access to finance. CHAPTER 11. Private Enterprise Can Reduce Food Loss Through Climate-Smart Agriculture CHAPTER 5. Creating Agricultural Markets There are many examples of private sector enterprises Through Commodity Exchanges that have tackled post-harvest loss successfully. They Commodity exchanges can provide emerging market focus on education, collaboration, and improved economies with orderly, transparent, and efficient storage and transport technology. n markets by acting as mechanisms that mitigate price risk, discover equilibrium prices, and connect buyers and sellers. CHAPTER 6. Technology-Enabled Supply Chain Finance Supply chain finance structures offer an alternative solution to finance the trade flows of small and medium enterprises in emerging markets. 6 7 INTRODUCTION Technological progress has been powered by innovation, human ingenuity, and the rate at which technology has been adopted, adapted, and spread. While advanced countries have an established history of innovation, most emerging markets do not, and they are still playing catch up.1 Private companies have seized on this opportunity to adopt and scale innovative technologies in these markets, a process that is creating new customers, buyers, sellers, and employees. These firms are profiting while simultaneously serving previously unserved or underserved consumers. This is a prime example of the private sector achieving economic success while at the same time advancing development and supporting economic growth.2 Today, new technologies and innovations are converging in new ways to change how people live, work, and organize their lives. Rapid cost reduction magnifies their growth and impact. Many breakthroughs offer such rapid, discontinuous improvements in capabilities or reductions in cost that they threaten the viability of existing development approaches. This wave of disruption has the potential to create new opportunities to achieve the Sustainable Development Goals (SDGs). This report focuses on how technology is contributing Technological change is a primary driver of to market creation and expansion in emerging markets. productivity growth and higher living standards.3 It includes analysis and examples of increased access Technology can bring structural changes to economies to products and services—energy, financial, and other and lead to societal change and human development, types—that have been unavailable to large population including reaching populations in need. In Africa, the segments. The report also looks at the impact of availability of faster internet via undersea fiber optic technology on market participants, ecosystems, and cable has contributed to a reduction in inequality, the existing players. creation of new business models, and the generation of new jobs, bringing new opportunities for unskilled workers to climb the economic ladder. Between 2009 and 2015, internet bandwidth grew twentyfold, and CREATING MARKETS mobile broadband alone supported around 3.8 million Creating markets, including through jobs in the continent in 2015.4 technology, has been part of IFC’s core Adaptation or adoption of new technologies from other mission since 1956, as described in its countries allows companies in emerging markets to Articles of Agreement. increase their productivity, better serve customer needs, Article I states: “The purpose of the Corporation reach previously underserved and unserved customers, is to further economic development by encouraging and be more competitive. In these countries, firms the growth of productive private enterprise typically operate far from the global technological in member countries, particularly in the less frontier. Here, productivity-raising innovation often developed areas …” IFC shall, among other means, “seek to stimulate, and to help create conditions can drive substantial cost reductions and allow scarce conducive to, the flow of private capital.” resources to be allocated to more productive uses.5 The extent of such “wealth effects”6 depends not only on the speed of technology introduction via innovation, 8 adaptation, and adoption, but also on the extent of its diffusion across the population—remain low among diffusion within a given market.7 developing and transition countries.8 For instance, despite the rapid proliferation of mobile phones in Emerging markets are adopting technologies at various Africa, only half of the population of Sub-Saharan paces. Yet penetration rates of those technologies—the Africa owns a mobile phone, and just a fourth can access percentage of workers in a country using them and their the internet on it, often with limited data transmission capability.9 (Figure 1 illustrates stark differences in how countries use and connect to the internet.) WHAT WE MEAN BY “TECHNOLOGY” We adopt a broad definition of technology in LEAPFROGGING THROUGH ADOPTION this paper, in line with its original meaning of OR ADAPTATION “skillful craft,” derived from the Greek words τέχνη (techne = skill, knowledge, manual Developing countries, especially those in Africa, still ability) and -λογία (logia from logos = word, face significant gaps in many development outcomes. reason). The term therefore refers not only to These gaps require disruptive solutions and innovative a piece of equipment but also to the means, thinking, including looking at typical constraints to skills, knowledge, processes, and methods investing in potential opportunities, attracting the associated with it. private sector, and creating a supportive environment for technological diffusion. Good coverage and usage Good coverage by limited usage Limited coverage and usage Not a WBG focus country 40% OF COUNTRIES 37% OF COUNTRIES 24% OF COUNTRIES CUTOFF >70% 3G coverage CONNECTED (3G+) NOT CONNECTED >60% internet usage USING THE INTERNET NOT USING THE INTERNET OPPORTUNITIES The digital economy is developed Although connected, the country The country is disconnected; and key enablers are in place; is gradually moving toward a WBG can develop digital there are opportunities for WBG to digital economy; WBG can develop infrastructure and enable the invest in disruptive use case (e.g. key foundational elements (e.g. private investment environment. e-health, online education, etc.) e-payments, etc.) FIGURE 1 Four Billion People Worldwide Still Do Not Participate in the Digital Economy Source: World Bank Group 9 An example of a disruptive solution is leapfrogging.10 opportunities to identify new pathways to development, It allows developing countries to skip steps in IFC will focus on harnessing the potential of the traditional development ladder via innovative technology to ‘Create Markets’. This strategy entails practices and technology adoption. This process responding to the challenges that keep private capital requires the support of physical and institutional from being allocated at a sufficient scale to address infrastructure, as well as the ability of education to major development gaps. By creating markets, systemic impart skills for absorbing technology and developing barriers to growth can be overcome and a pipeline and applying innovation. of investable projects can be expanded by building a The World Bank Group has synthesized its experience bridge between government and private sector needs.11 in six different sectors from Africa, illustrating As part of its Anticipated Impact Measurement and challenges and examples of leapfrogging based on Monitoring (AIMM) system, IFC assesses the degree innovative practices and technology adoption. These to which an intervention improves the structure sectors—agriculture, education, energy, finance, and functioning of markets. Each intervention has governance, and information and communications the potential to alter the dynamics of markets by technology (ICT)—exhibit spillover effects that create promoting any or several of five distinct objectives.12 dynamic synergies between them. These objectives are: For example, in the financial services sector, 1. Competitiveness: Competitive markets are those technological innovation provides multiple leapfrogging that firms can effectively enter, exit, and compete in, opportunities. And it can make capital more efficient, while innovating and striving for efficiency under risk management more targeted, hedging better matched, essential regulatory and government intervention. and trading less costly. In addition, it can help unbundle Competitive markets also support product or risk, improve liquidity, bring broader access to capital, process innovation, improve management practices, and lead to more optimal portfolio diversification. Such and/or reduce product costs. technological innovation increases the ability of both 2. Resilience: Improving the depth, structure, traditional banks and financial technology companies to regulation, and governance of markets makes them reach and include previously underserved populations. In more resilient to shocks. This includes supporting economies where large shares of the populations remain growth without excessive volatility or destabilizing unbanked, traditional banks and financial technological economic reversals. companies are both competing and collaborating to reach these potential clients. New technological 3. Integration: Promoting enhanced physical and/or platforms increase inclusiveness for the unserved, financial connectivity, within and across markets, for example through Modelo Peru or the Ethiopia supports greater market integration. Commodity Exchange. The most salient leapfrogging 4. Inclusiveness: Inclusive markets support fair phenomenon in the financial sector has been the impact and full access for marginalized groups (the poor, of mobile phones on financial inclusion. women, youth, rural populations, etc.) to goods and ICT infrastructure is critical to enable leapfrogging into services, finance, and economic opportunity. other sectors in which traditional alternatives remain 5. Sustainability: When firms and consumers adopt inadequate, such as traditional banking services, fixed environmental and social sustainability technologies telephone lines, and traditional energy solutions. and practices, they promote greater market sustainability. CONTRIBUTION TO MARKET CREATION IFC and other development institutions are working HOW TECHNOLOGY IS CHANGING THE GAME to mobilize the private financing needed to accomplish According to the World Development Report the United Nations Sustainable Development Goals 2016: Digital Dividends, the use of technology can (SDGs) by 2030. While technological changes provide facilitate market creation through various channels, 10 TABLE 1 Digital Solutions Are Transforming the Delivery of Products and Services OBJECTIVE SECTOR CHALLENGES DIGITAL SOLUTIONS 1 2 3 4 5 Digital solutions (mHealth, eHealth) are allowing more Traditional healthcare is Health doctor/hospital-centric and difficult/slow to scale. access and affordability and, together with artificial intelligence, show growing potential for diagnosis and preventive care. •• High costs of operations Financial Services and lack of consumer information. Online platforms and marketplaces are accelerating access to markets and credit. • •• Isolated farmers work in a Access to information helps farmers improve yield Agribusiness traditional and inefficient manner. and to connect with supply chains. Example: mKrishi increased farmer profitability by 45 percent in India. • • Due to limited grid Off-grid energy solutions linked to e-payments give Power coverage, rural populations lack electricity. access to remote populations (50M users out of 1.2B lacking access to energy). • • Source: World Bank Group; Objectives 1-5 are 1 = Competitiveness; 2 = Resilience; 3 = Integration; 4 = Inclusiveness; 5 = Sustainability. including: greater access to products, services, and job COMPETITIVENESS opportunities for individuals; access to markets, finance, and competition for businesses; and greater efficiency Innovation and adoption of new technologies can and reach for better responsiveness, for governments.13 allow markets to be more competitive. Many emerging markets still face important challenges regarding Several examples of digital solutions—and how they infrastructure gaps and service delivery, especially in create markets—are shown in Table 1. remote rural areas. Infrastructure is key to including It is clear that technology can be an effective, enabling unserved and underserved populations, yet technology tool for market creation. However, while technology costs such as mobile handsets, combined with low is necessary to market creation efforts, it is not always average revenue per user (ARPU), often discourage sufficient, and countries need to work to implement investment in these locations.16 policies that complement it. These policies include stronger regulations to ensure competition among However, the advance of technology and the businesses, programs to adapt labor force skills reduction of its costs are generating disruptions in to the demands of a changing labor market, and several markets, allowing for some infrastructure ensuring accountable institutions. Without effective to be “unbundled.” Natural monopolies offer an implementation of these policies, opportunities to example. These are typically utility companies with achieve inclusion, efficiency, and innovation may considerable economies of scale and large fixed costs. give way instead to limited control, inequality, and In the energy sector, so-called “smart-grid”—the concentration.14 Alignment between use of new application of digital communications technology technologies based on the ecosystems that support them to identify and adjust to local changes in electricity is also critical to maximizing the impact they can have in supply networks—has proved to be a disruptive disrupting the status quo and creating markets.15 catalyst that could enable new market entrants to This report will present some of the ways technological enter the electricity supply market.17 This has allowed change is impacting traditional paths for development firms to effectively enter and exit markets, offer and creating markets. The analysis will be classified product and process innovations, and deliver cost according to the five AIMM System attributes reductions to customers while generating productivity described above: Competitiveness, Resilience, and efficiency gains in more than one sector, as well Integration, Inclusiveness, and Sustainability. as new business opportunities.18 11 20,473,000 transaction costs (including search and information costs) and information asymmetries. Various sectors People in Africa who are currently meeting their basic electricity needs provide examples, including energy and agriculture through off-grid solar products meeting (farmer and big data, allowing market access) and non- Lighting Global Quality Standards. bank fintech financial services (payments, remittances, trade finance). 13,285,000 One example from the agriculture sector is the Quality-verified solar lighting products establishment of the Ethiopia Commodity Exchange, sold through local distributorships in which as a technologically advanced exchange offers Africa since 2009. trades based on an electronic warehouse receipt system that links data from warehouse operations, 3,986,000 clearing and settlement, and market-information onto Metric tons of GHGs avoided in Africa, a single platform. It has transformed the agriculture the CO2 -equivalent of taking 841,977 cars sector in Ethiopia, making it more dynamic and off the road for a year. efficient by providing enhanced transparency, access to market data, and the ability to trace and determine FIGURE 2 Lighting Africa’s Impact as of the quality of products, and thereby reducing December 2016 information costs considerably. 20 Source: Blimpo, Moussa P. et al. 2017. “Leapfrogging: The Key to Africa’s Development?” World Bank Group and China Development Bank, p. 56. RESILIENCE New technologies such as battery storage and off- Resilient markets can withstand physical and financial grid solutions are opening new opportunities for ICT shocks, support growth without excessive volatility, infrastructure deployment in remote locations, bringing and stabilize economies with improved structure telecommunication, internet connectivity, and power and regulated governance. Such markets can be to underserved locations. This has the potential to effectively achieved through technology advancement expand the reach of education and health services, thus and innovation. Technology in agribusiness, ICT, and creating new markets in these sectors.19 banking sectors provides resilience to climate change Extending broadband and internet access yields notable and improves transparency, accessibility, and feasibility benefits for small and medium-sized enterprises (SMEs), of goods and services. Beyond these advantages, supports innovation, and leads to the emergence of new technology platforms will eventually promote market enterprises in emerging countries. Due to improved competitiveness, integration, and sustainability. access to broadband and mobile internet, SMEs grow Technology innovations that can potentially improve through productivity gains and the decreased cost of resilience in the market include rapid adoption of risk selling final products. These SME gains have positive index insurance, including innovative payment and spillover effects on the rest of the economy, resulting in collateral options and lowering the time to develop greater market competitiveness and expansion. local currency denominated bonds. In general, there As technology becomes more central in all economic is potential for leapfrogging in agriculture financing, agents’ lives, available information is constantly agricultural index insurance, financial inclusion, local increasing and innovations are removing intermediaries currency financing, and infrastructure finance. involved in traditional transactions and value chains. Mobile telecommunications have several benefits, This allows for reductions in costs and time, and better from linking communities and citizens, to mobile tools for monitoring, among other benefits. Also, it applications that bring financial services to the facilitates the access of isolated actors to the market. unbanked and help farmers improve crop yields. There are several cases of disintermediation reducing Researchers estimate that an increase of mobile 12 broadband penetration by 1.8 percentage points will smaller markets and firms and, ultimately, vulnerable improve economic growth by 0.7 percentage points. 21 individuals in poorer countries. 22 Expanding broadband access brings countries huge Blockchain, combined with biometric identification, economic and social benefits. This can mean saving has the potential to mitigate the effects of de-risking by lives through improved health care, creating jobs for reducing regulatory compliance costs and increasing high-skilled workers, and improving education for the transparency of transactions, and thus increasing both children and adults. Technology advancement access to financial services. 23 enables developing countries to reduce health care Regarding innovation and identification for disparities between rural and urban areas, and brings development (ID4D), approximately 1.1 billion diagnostic abilities to physically remote locations. individuals around the world—primarily from low- In addition, the availability of online courses and and middle-income countries—are unable to prove information distribution through broadband access their identity. Without identification, they are unable helps to implement innovative education systems to access vital services and opportunities, including that promote education. Such benefits generate many financial services, social benefits, healthcare, education, economic and social opportunities that expand and and rights, among others. 24 Fortunately, rapidly develop new markets. declining costs of digital and biometric technologies Africa’s mobile telecom sector is a prime example. have created an opportunity to leapfrog traditional With the proper mix of regulation and competition, approaches to identification. This can help reach investment, and affordability, the sector (including individuals in remote and rural areas, giving them the mobile phones and broadband access) can flourish. The opportunity to participate in formal markets. This is liberalization process in Africa’s mobile sector took also relevant for risk mitigation, as the use of proper place in the presence of enabling telecommunications authentication protocols can help governments mitigate legislation. Appropriate legislation is required to risks of leakages, fraud, and corruption, and thereby provide certainty to the government and investors that make better use of scarce resources. 25 the liberalization process is legally sound. The development of a corresponding regulatory INTEGRATION framework is generally an ongoing process that occurs over time. Key among these measures is the INTEGRATION AND GLOBALIZATION establishment of a separate national regulatory agency, Historically, changes in technology and globalization which can instill confidence that the competitive have defined comparative advantage and the patterns process will be administered in a fair and transparent of manufacturing specialization. Beginning in the manner. By 2015, all but a few countries in Africa had late 20th century, the ICT revolution enabled the established their national regulatory agencies (NRAs). creation of global value chains (GVCs). This provided opportunities for developing countries to access new INFORMATION DISSEMINATION AND markets and diversify exports. Instead of learning and RISK MITIGATION establishing an entire production process, suddenly they New technologies such as blockchain can also act as could specialize in a narrower segment and improve mitigating tools for challenges related to de-risking. their competitiveness. In addition, participation in New regulations related to anti-money laundering and GVCs provides exposure to large firms with managerial combatting the financing of terrorism are increasing and technical expertise, allowing for the transfer of capital requirements and compliance costs for financial knowledge and know-how from advanced to emerging institutions. As a result, many banks are restricting economies as well as among emerging economies.26 In their relationships with clients—or with entire this way, the integration of emerging market firms into segments of clients—in order to avoid risk (this process GVCs plays a major role in disseminating knowledge of is known as de-risking). This issue affects mainly technology and business models.27 13 However, with the servicification of manufacturing, and “a big innovation in the market is using transactional advanced technologies such as smart automation, the data for risk assessment and mitigation. The data internet of things, advanced robotics, and 3D printing from physical value chains and payment data collected becoming more important, the relevance of high-skilled through technology providers can be used to enhance work and infrastructure for production is increasing. the knowledge of the credit-worthiness of a particular Technology is becoming a major part of production enterprise, industry, or region.”29 efficiency. Thus, emerging markets will need to adapt to Supply chain finance can help banks grow their SME the increasing demand for a well-educated workforce. portfolios in a sustainable and risk-mitigated manner. On the individual firm level, experienced management The industry is rapidly evolving, with local and is needed but often not available, as management in regional financial institutions realizing the inherent emerging market firms (and not only there) often do not opportunities within their corporate portfolios. handle innovation or adaptation well. This is codependent Market trade flows and the increased availability and with education and training policies. Companies rely proficiency of technology platforms have made supply on a sound primary and secondary education, but also chain finance portfolio growth more feasible. on robust vocational training, and these cannot always be provided by companies themselves. Competently PLATFORMS, MARKETPLACES AND trained workers are essential to following through on the NETWORK EFFECTS innovations of engineers and scientists, and to applying With increased use of big data, new algorithms and and improving them in the workplace.28 cloud computing are reconfiguring the structure of Technology-enabled supply chain finance structures economies. Digital platforms provide a set of shared offer an alternative solution to finance the trade flows techniques, technologies, and interfaces to a broad of small and medium enterprises, with benefits for all number of users. Thus, in a digital platform, social and stakeholders, including large enterprises, their SME economic interactions are mediated online.30 Market trade counterparts, and financial institutions. This disruptions that produce leapfrogging can be made type of financing helps banks extend working capital through products or platforms. Such platforms enable a finance to SMEs by leveraging commercial and trust new set of actors to realize profits (for example, profits relationships between the SMEs and corporates. It from the excess capacity of a guest bedroom or a car helps large corporates improve their working capital share). Platform-based disruptions can have effects on management and decreases supply chain disruptions. an industry and beyond its boundaries, and have the And it enables banks to better assess, measure, and capacity to produce societal shifts as well.31 manage the risks of extending financing to SMEs. Evidence shows that ICT adoption that puts platforms In recent years, there has been a shift toward in place is relevant to inclusive growth. Two cross- digitization and automation of both supply chain country studies highlight two additional channels. finance transitional flows and supply chain financial First, a market access effect that allows smaller firms to solutions. Leveraging the wide range of trade and access larger markets and gain productivity. Second, a transactional data, rapidly growing technology worker mobility effect, as access to the internet reduces platforms are now playing a crucial role in the cost of moving workers across sectors and regions, increasing transparency by providing risk profiling and increases labor-market efficiencies by allowing credit information for banks to gain a larger share better employer-employee matches.32 of the market. There are several kinds of platforms that allow the Technology-enabled supply chain finance not only inclusion of new actors in markets and have a positive provides insights on market trends but also helps effect on productivity. These include online learning banks better manage risks. André Casterman, a platforms that reach underserved populations or bring member of the ICC Banking Committee, states that more material to them; different payment platforms 14 for inclusive financial services; health-related widely used. This affects incentives for competition, platforms that allow greater care and coverage; and which can be between platforms or within a platform e-commerce platforms that enhance convenient, low- with interoperability. One example of the latter is the cost channels to link buyers and sellers and promote mobile wallet platform “Bim” in Peru that brought the inclusion and development of small enterprises. together mobile money issuers, telecom enterprises, However, the development, adoption, and uptake of and the government to create a single platform where these platforms requires investment in infrastructure. competition would be enabled.37 In general, it has been The greater the advances in telecommunications a challenge in the mobile operator sector to embrace capacity, the greater the potential impacts that these opportunities of open standards and collaboration since platforms can deliver. 33 competition on digital platforms can be “asymmetric.” Platforms also benefit from cloud computing, which There is a trade-off because collaborators on the is yet another platform that enables and increases platform can target each other’s customers, generating productivity gains for firms, including SMEs. Cloud value leakage for each competitor.38 However, the computing can eliminate the need for expensive primary benefit of collaboration is the facilitation of stand-alone capital expenditure on information scaling rapidly and reaching new and additional users, technology infrastructure (for example, by utilizing and thus generating more value for all actors from shared resources through one or more providers).34 network effects.39 The technology is also enabling cross-regional interoperability benefits. An example is regionally integrated telecom markets, where providers allow INCLUSIVENESS seamless usage across several countries such as Kenya, TECHNOLOGY AND SERVICE DELIVERY Uganda, and Rwanda. With regard to financial services, many fintech Kenya has implemented a National Broadband Strategy innovations have allowed for payment systems, (NBS) to deliver high connection speeds and greater remittances, insurance, deposits, and other financial efficiency of access, with the goal of becoming a services without the need of intermediaries such as knowledge-based economy by 2030. This strategy has encouraged the growth of start-up and e-commerce banks. Blockchain technology is not only applicable to segments in Kenya that have spurred economic and financial services, but can serve as a “registry, inventory social benefits and created new markets. Under a system, and transaction platform for recording, development plan known as Vision 2020, Rwanda tracking, monitoring, and transferring rights to has begun work to transition from an agriculture- different asset classes, including intellectual property, based to a knowledge-based economy by offering votes, digital identity, health data, and real estate.”40 new levels of connectivity and integration in order to As mentioned above, the most salient leapfrogging offer broad network coverage throughout the country. experience in the financial sector in emerging markets The goal is to increase labor productivity and reduce has been the impact of mobile money bringing financial unemployment by leveraging digitalization to create services to the unbanked and underbanked, and Kenya’s jobs and markets. According to the World Economic M-Pesa is the best example of this. Forum, increasing digitalization by 10 percent reduces Furthermore, information dissemination and an economy’s unemployment rate by 1.02 percentage disintermediation also benefit service delivery in sectors points.35 Additional examples of beneficial platforms such as education and health. The use of technology include service-based (IT services) and agricultural is a cross-cutting enabler in the education sector. For platforms that increase export opportunities and example, the internet can help extend learning beyond capital expenditure optimization.36 classrooms, allowing it to reach millions of children Platforms tend to have network economies of scale. who lack access to quality education. “Students can use That is, more value is created as the platform is more technologies to access courses not offered at their school; 15 rural students can complete their studies without leaving CODEPENDENCY OF TECHNOLOGY ADOPTION their communities; and adults can benefit from a more AND INFRASTRUCTURE ACCESS flexible study schedule.”41 Digital technologies have the The use of technology innovations to foster inclusion potential to improve monitoring of different aspects is highly dependent on infrastructure improvements, of an education system, which can facilitate beneficial especially in energy and telecommunications. For education reforms. instance, the use of mobile money requires access to In the health sector, services such as mobile telecom services, which necessitates both mobile phones health (mHealth) and digital health (eHealth) can and the electricity to charge them.46 Opportunities provide various benefits. These include reaching for generating a significant impact in fields such as remote areas that physicians cannot easily access,42 education and healthcare also rely on the ability of improving diagnoses, surveillance and monitoring users to be sufficiently skilled in a technology,47 as the and reduction in the use of emergency services,43 uptake of new technologies is rarely automatic. Enabling improved coordination between service providers, services requires a scale of investments that governments and reduced times of patient data gathering through are not able to achieve alone, which is why it is crucial digital medical records.44 These technology innovations to create conditions that attract a sustainable flow of create competitive incentives for healthcare providers private investment and allow for both public and private to expand services they offer, generate jobs, and work sectors to work together to enable innovation.48 toward affordable prices for patients. Again, Modelo Peru’s Bim is an example, this time of SUSTAINABILITY technology-driven inclusiveness. The innovative mobile money strategy integrates government, banks, and Firms and consumers that adopt environmental and telecommunication companies with the goal of bringing social sustainability technologies and practices also financial services to large unbanked populations promote greater market sustainability. through its new distribution platform based on mobile Tanzania’s economy relies heavily on agriculture, and phone technology.45 climate change is already affecting the productivity FIGURE 3 Electrification and e-Learning Devices in Kenyan Primary Schools Source: Blimpo, Moussa P. et al. 2017. “Leapfrogging: The Key to Africa’s Development?” World Bank Group and China Development Bank, p. 42. 16 levels of key commodities. The East African country to obtain access to capital, technical advice, and is committed to increasing yields through Climate technological solutions for post-harvest loss in the Smart Agriculture by offering better input supplies emergence of NorMinVeggies, which greatly benefit (seeds, chemicals, and fertilizers), precision farming smallholder farms through quality assurance schemes, techniques, and improved irrigation systems production schedules, and traceability systems. to smallholder farmers. It also seeks to protect A simple, affordable, and effective mix of technologies smallholder farmers against climate related risks, is required to achieve benefits for small-scale farmers increase productivity levels through crop insurance, and to create sustainable investment opportunities. and use warehouse receipts to improve storage For instance, agro-advisory networks and imagery- efficiencies. These technologies allow the agricultural equipped drones for soil and crop monitoring in the supply chain to improve post-harvest practices, Indian and Sub-Saharan African rural areas constantly including improved transport and storage facilities, support crop planning and management.50 Such better farm management, and improved harvesting climate-smart agriculture practices could increase techniques. These will help to reduce crop losses and productivity levels and farming incomes, make rural maximize the portion of harvested output delivered communities more resilient, and ensure the sustainable to markets. In this way, billions of tons of food can use of water and energy. potentially be saved, leading to improved food security, Technology can be critical in accelerating and better nutrition, increased productivity, and greater supporting market creation, especially in time of political stability in developing countries. rapid transformation. Unless countries put into In addition to Tanzania’s warehouse financing, place foundational building blocks, they will not be Ghana’s agribusiness centers and the Philippines’ able to compete in the future global economy and NorMinVeggies illustrate that climate-smart take advantage of new pathways to growth. These agriculture across the food value chain can help reduce building blocks will enable the advancement of new post-harvest food loss, promote economic stability, markets, with the potential to shape basic necessities and encourage sustained growth in agribusiness and physical assets. To catalyze robust technology- in developing countries.49 Agribusiness centers in enabled growth that also protects data, infrastructure, Ghana offer farmers technologies to adopt climate- and services, the rate of technological adoption and smart agricultural practices and extension services. diffusion must increase in developing countries, along The centers build partnerships with microfinance with associated enabling environments. institutions to offer farmers inventory credit, creating In the next part of this report, we describe the role of economies of scale for smallholder farmers. Similarly, technology in creating markets along the five attributes smallholder farmers in the Philippines are able described in this introduction. n DAVIDE STRUSANI THOMAS REHERMANN Head, Telecom, Media, Technology, Venture Capital Senior Economist, Thought Leadership and Funds Economics and Private Sector Development, IFC Sector Economics and Development Impact Economics and Private Sector Development, IFC 17 COMPETITIVENESS EM COMPASS NOTE 6 CHAPTER 1 Productivity and the Role of Technology in Emerging Markets By Florian Mölders The global productivity slowdown is affecting mature as well as emerging economies and this pattern has been particularly prominent over the past five years. Productivity levels in mature economies are almost five times higher than those of emerging countries, providing ample catch-up opportunities for emerging markets in their efforts to generate growth and eradicate poverty. This article highlights the forces of new technologies and business models as key drivers for emerging and mature economies’ productivity and hence future growth patterns. However, emerging markets have to find a way to make good use of available productivity-enhancing technologies and business models that meet their economies’ needs and capabilities. The global growth rate of total factor productivity To reduce poverty and boost shared prosperity, (TFP), which measures the efficiency gains of labor and emerging markets have to rely on TFP increases— capital together, has come to a near standstill in the especially through the adoption of technological aftermath of the 2008-2009 financial crisis. It grew on innovations—rather than relying solely on demographic average 1.2 percent a year from 1999 to 2008, slowed factors such as population growth or natural resources. to 0.3 percent from 2009 to 2012, and has fallen to near zero since then. Most advanced economies, including the United States, WHY TOTAL FACTOR Japan, and the Euro Area, are experiencing zero or PRODUCTIVITY MATTERS negative productivity TFP growth (Figure 1), while It is the growth of productivity, not total developing countries are more of a mixed bag, with GDP, which determines the standard productivity growth rates that vary greatly. China and of living. Productivity measures how India experienced TFP growth of 0.8 percent and 1.0 effective a firm or a country turns inputs percent, respectively, from 2010 to 2014; Brazil and such as labor and capital into outputs. If Mexico saw TFP fall over that period, by 0.4 percent a firm produces twice as many cars as its (Brazil) and 0.9 percent (Mexico). competitor with a similar set of employees, machines, and other inputs, we can Nonetheless, in absolute terms, TFP levels in advanced conclude that the former firm is twice as economies remain almost five times as high as those of productive as the latter. Technology (in its emerging economies and there is also a substantial gap broadest sense, encompassing both physical in labor productivity levels, or value-added per worker technology as well as new knowledge (Figure 2). The large disparity in productivity levels and business models) is the main driver of between advanced and emerging economies suggests productivity changes. that there is ample room for emerging markets to accelerate productivity growth. 19 GLOBALIZATION PAUSE SHRINKING THE TECHNOLOGY GAP Prior to the financial crisis emerging markets The growth of TFP is driven primarily by the adoption experienced a few decades of strong growth, thanks of technological advancements. “New technologies in large part to globalization, increased market access, embody higher productivity. Therefore, an acceleration and ready consumer demand in advanced economies. in the rate at which new technologies arrive in [a] Emerging economies experienced record-high growth country raises aggregate productivity growth,” wrote rates from the early 1990s to 2008 (increasing their Diego Comin and Marti Ferrer in a 2013 paper on share of global GDP by a factor of 1.5, to 34 percent).51 the role of technology adoption in income divergences Yet since the crisis, the ongoing integration of the between advanced and emerging economies.54 world economy has lost momentum when measured Fortunately, emerging markets have been adopting by countries’ trade intensities, overall exports, and technologies much more rapidly in recent decades. Late foreign direct investment. And globalization cuts both nineteenth-century innovations such as telephones and ways: Less global trade, lower commodity prices, and electricity took decades to disseminate from western tighter financial conditions (including trade finance) to non-western countries. By contrast, more recent have resulted in slower growth rates in the developing technologies such as cellphones and the Internet spread world, led by China’s slowdown. Average GDP growth to these economies at a far higher rate. in emerging markets fell from 7.6 percent in 2010 to 4 percent in 2015 and is expected to decline further.52 However, productivity is also affected by the penetration rate—the percentage of workers in a Increasingly since 2010, the biggest drag on emerging country using the new technology. And while emerging market growth rates has come from domestic factors markets are adopting technologies more quickly, (as external conditions deteriorated), including bouts penetration rates and diffusion of these pre-existing, of policy uncertainty and a lack of fiscal and monetary new-to-market, or new-to-firm technologies remain stimulus. Looking at the contribution to the growth low among developing and transition countries.55 rate in emerging economies, the primary factor holding back economic growth in recent years has been a Factors that account for the low penetration levels can slowdown in productivity.53 By 2014, total factor be categorized under country-specific characteristics productivity growth in the developing world had fallen (for example political risk), firm-level characteristics well below its historical average. (such as level of managerial quality), and general FIGURE 1 Total Factor Productivity Growth Rates—Mature / Developed and Developing / Emerging Countries Source: The Conference Board, IFC Research COMPETITIVENESS 20 bottlenecks (access to finance, infrastructure, among other factors), that are common in emerging economies. Comin and Ferrer found that while adoption rates between advanced and emerging economies have converged over the last two centuries, penetration rates have diverged, and that divergence has played a dominant role in sustaining the gap in productivity levels between advanced and emerging countries. Innovations that lead to technological advances provide comparative advantages to companies that then generate higher revenues through market power over a limited period of time. However, innovations also come at a price, that of significant spending on research and development. Innovative activity is highly concentrated FIGURE 2 Labor Productivity—Emerging within high-income countries, yet economic catch-up and Advanced Economies among lower-income countries also leads to an increase Source: ILO, UNdata, IFC Research; calculated using 2011 PPP exchange rates in their R&D capacities (Figure 3). % of GDP 0.010 4.210 FIGURE 3 Gross Domestic Expenditures on R&D (GERD) as % of GDP Note: GERD refers to gross expenditures on R&D from the business enterprise, higher education, government, and private non-profit sectors. Latest available data from 2008–2014; Source: UNESCO Institute for Statistics. COMPETITIVENESS 21 CHANNELS FOR TECHNOLOGY ADOPTION the flow of technology and technical knowledge. While most innovations and new technologies are As discussed above, this development also has the produced in advanced economies, they find their way to potential to allow emerging economies to generate lower-income countries through a variety of channels. more innovative capacity. International trade, foreign direct investment, and “Buyer-seller relationships along the value chain are cross-country research collaborations are most highly effective ways to transfer both technological knowledge correlated with an increase in knowledge and technology and better working practices.”57 Vertical integration flows from advanced to emerging economies. along the value chain may be more conducive to • International trade: For example, an auto knowledge “spillovers” than horizontal integration, manufacturer produces a new model with fuel which can be impeded by competition between the efficiency significantly above that in models company with the technology (the new entrant into produced by its competitors. When the new model the market) and domestic/incumbent firms. However, is exported to another country, the importing market competition in general, and competition across country immediately gains access to the embodied borders in particular, do provide incentives for firms to technology, even if not in an intellectual property upgrade their production technology in order to retain sense (for example it cannot alter the model and their consumer base in domestic markets and to extend resell it on the global market). Foreign firms it into foreign markets. routinely gain technology from imported products, Of course, technology adoption by emerging especially through reverse engineering. As a result, economies also has the potential to slow the growth integration into global value chains via trade of international trade. Greater automation in networks and regional integration plays a major manufacturing industries in developing countries has role in disseminating knowledge of technologies and made production there less labor intensive, decreasing business models. those economies’ greatest cost advantage (inexpensive • Foreign Direct Investment: Should the labor). This has a potentially adverse effect on the labor abovementioned carmaker not only export cars market by reversing the trend of outsourcing labor- but also invest in another country—either through intensive manufacturing from high-income to low- a factory, a merger or acquisition, or a loan to a income countries, and hampering those low-income foreign supplier—flows of knowledge occur through countries’ ability to create new manufacturing jobs.58 the transfer of physical technology (machinery or software) or the streamlining of managerial practices THE CRITICAL ROLE OF DIGITAL (better accounting techniques, for example). The firm TECHNOLOGIES may also choose to train local employees and thereby The spread of digital technologies in an economy provide them with knowledge about the use of the provides the IT infrastructure that facilitates the new technology, an indirect channel of technology adoption of new technologies and business models.59 transfer through education. It increases an economy’s capacity to absorb and • Research and Development Collaboration: The same capitalize on business innovations that significantly automaker might choose to relocate some of its own reduce transaction costs through technologies such R&D activity to another country. Cost differences as online markets and mobile payment systems. Such between advanced and emerging economies, coupled technologies require information and communication with an increase in the stock of human capital in infrastructure in order to supply customers and allow emerging economies, can lead to a relocation of market entrants to develop new products and/or tailor research activities from higher to lower-income existing business models to the local market. countries. Recent empirical evidence56 suggests that There is a high correlation between a country’s per- an increase in R&D collaboration with countries that capita income level and the extent to which digital have lower levels of innovative capacity also increases technologies are available to key agents in its economy, COMPETITIVENESS 22 according to a Digital Adoption Index created by the New technologies arrive in emerging countries with World Bank and Microsoft (Figure 4). Most adopted high expectations among development actors and innovations do not advance the global technological great potential for citizens of those countries. Adopted frontier, but instead utilize existing technologies to help innovations and technologies can raise productivity firms boost their productivity. levels and living standards in these economies without relying on increased labor inputs. There is considerable OPPORTUNITIES AHEAD scope for emerging countries to adopt technologies, step-by-step moving closer to the technological frontier. According to the World Economic Forum, a fundamental shift is going on “in how we produce, consume and relate If it is to be effective, technology must take local to one another, driven by the convergence of the physical context into consideration. Ideally, low-income and world, the digital world and human beings ourselves.”60 low-productivity economies can find a path toward This has implications for service delivery by the private more efficient production activities that are also inclusive. While powerful, technology is merely one of sector in developing and emerging countries and also many tools needed for successful development. offers tremendous opportunities to advance development goals by providing access to financial, energy, and education services. CONCLUSION Global productivity growth has largely stalled since the global financial crisis, both in emerging and mature economies. The latter, however, continue to exhibit productivity levels five times higher than the former. This vast gap suggests that increasing the rate of productivity growth in developing countries is critical to a rebound in growth and broad-based increases in standards of living. The causes of the productivity growth slowdown in emerging markets are manifold and complex. Some are cyclical, while other, structural changes in domestic political economy and global financial and trade systems are highly uncertain. One thing however is for sure: Digital technology has lowered the threshold for technology-driven growth in emerging markets, an opportunity that should not be missed. n FIGURE 4 Digital Adoption Index The Business sub-index is the simple average of four normalized indicators: the percentage of businesses with websites, the number of secure servers per million residents, download speed (Kbps), and 3G coverage in the country. Note: Advanced/developed economies (UAE, Qatar and Kuwait excluded); Emerging markets (groups as defined by IMF); Source: World Bank Group, Microsoft (http://www.digitaladoptionindex.org/) COMPETITIVENESS 23 COMPETITIVENESS EM COMPASS NOTE 23 CHAPTER 2 Energy Storage Business Solutions for Emerging Markets By Sean Ong With the application of new storage capacity technologies, advances in the capabilities of energy networks promise to deliver not only efficiency and productivity gains but also business opportunities for remote areas in emerging countries. New technologies, including those in the fields of batteries and off-grid solutions, can potentially change the way electricity is delivered to rural and remote households, and can also supply businesses and infrastructure with energy. Communication and service delivery options can be boosted with access to information technology infrastructure. Such access is required to bridge the “digital divide” and realize the potential of digital services in low-income countries or frontier markets. Information and communications technology, or ICT, is critical in today’s global economy as education, work, and information are increasingly disseminated over digital platforms. Access to ICT contributes to economic growth and promotes new and innovative industries. Individuals and organizations with access to digital services enjoy a distinct economic advantage over populations that lack it. This gap, often referred to as the digital divide, has been a subject of intense focus in efforts to develop and support emerging markets.61 Large technology companies have also launched efforts to bring internet connectivity to rural areas of emerging market nations. For example, Google’s Project Loon62 and Facebook’s Project Aquila63 seek to provide internet access via weather balloons and solar-powered aircraft. Microsoft’s White Space project64 seeks to utilize unused frequency bands of the television spectrum for internet connectivity. According to a McKinsey Global Institute report, 0 100 increasing internet access in Africa could transform Rural electrification rate (%) sectors as diverse as agriculture, retail, and health care, and contribute as much as $300 billion per year FIGURE 1 Rural Access to Electricity in to Africa’s GDP within 10 years.65 The 2016 World Africa (2013) Development Report demonstrates that increased access Source: Data from World Energy Outlook 2015, International to ICT in developing regions contributes to job creation, Energy Agency; illustration by IFC Thought Leadership, 2016. COMPETITIVENESS 24 increased labor productivity, expansion of business and With these recent cost declines it is helpful to assess entrepreneurship, and additional consumer benefits.66 the cost effectiveness of powering ICT with renewable energy and energy storage. This can be done using COST DECLINES ENABLE NEW ICT IFC’s Storage Assessment Model (iSAM).72 OPPORTUNITIES Reducing battery installed costs to $300/kWh increases One reason the digital divide remains prevalent in cost effectiveness by an additional 20 percent to 30 emerging economies is the limited access that rural percent. Using today’s storage and solar costs, iSAM areas have to affordable and reliable electricity. model results show that providing off-grid power with Fortunately, recent cost declines in solar photovoltaics renewable resources is already more cost effective than and energy storage technologies are making micro- diesel generation. As solar and storage costs continue to grids in these remote areas an increasingly viable decline, so will the cost of providing power for ICT in strategy that can bridge the digital divide without the remote areas. use of capital-intensive transmission lines. The cost comparison with diesel generation is The Maarifa Information Centre in Tanzania67 and the important because most off-grid telecommunication EFACAP School in Lascahobas, Haiti, are examples of towers are powered with diesel fuel. A 2012 study off-grid renewable and battery storage projects bringing of telecom towers in East Africa showed that 23.5 ICT to rural areas (see boxes below).68,69 percent of them are located in areas without access to Solar energy prices have declined more than 63 percent grid infrastructure.73 Some 95 percent of these off-grid since 200070 and the cost of lithium-ion energy storage towers are powered using diesel fuel. Additionally, 69 has fallen by up to 70 percent over the last two years percent of grid-connected telecom towers include diesel and is expected to continue to drop.71 Energy storage generators for backup power. So there is enormous cost declines are primarily due to the recent increase in potential for solar and battery storage to offset diesel lithium-ion battery production for electric vehicles and generation for both off-grid and grid-connected other uses. telecom towers and other rural ICT infrastructure. FIGURE 2 Lithium-Ion Battery Prices Have Declined Sharply and Are Expected to Continue Declining Source: Rocky Mountain Institute, The Economics of Load Defection – How Grid-Connected Solar-Plus-Battery Systems will Compete with Traditional Electric Service, Why it Matters, and Possible Paths Forward, April 2015. COMPETITIVENESS 25 FIGURE 3 Micro-Grid Payback Times and Power Costs—$500/kWh and $300/kWh Lithium-Ion Battery Figure 3 illustrates micro-grid electricity cost results from five selected countries. Key assumptions include a 30 kWh lithium-ion battery bank with a capital cost of $500/kWh and a 20kW photovoltaic installation at $3.00/W. As shown, payback periods range from five to seven years (compared to being powered with only diesel generation). LCOE is levelized cost of energy With continued cost declines, solar and battery storage may also open up new opportunities for ICT infrastructure deployment in remote locations where SOLAR-POWERED INTERNET it has been cost-prohibitive for diesel power or where CONNECTIVITY IN LASCAHOBAS, transportation of diesel fuel has been a challenge. HAITI Using solar and storage to power information and Established in 2011, solar-powered Internet communications technology has several additional connectivity at the EFACAP School (Ecoles advantages. When reliance on diesel fuel is lowered fondamentales d’application et centre or eliminated, the overall project risk is reduced for d’application pédagogique) in Lascahobas, volatile fuel prices and fuel theft. Also, solar and Haiti, demonstrates innovative methods battery storage units have no moving parts, allowing for powering Internet and communications technology infrastructure in remote areas. for quiet operation and reduced maintenance compared with diesel generation. Using a 2.4 kW solar photovoltaic and battery system, a long distance wireless link GHANA CASE STUDY was established between the school and a communications tower located in downtown Ghana is an example of an emerging market nation Lascahobas. This allows some 400 students, in which access to the internet is limited in rural teachers and administrators to charge their areas but where solar and storage solutions can have devices and laptops and access the Internet a meaningful impact on the deployment of internet through a campus-wide WiFi hotspot array. and communications technology. Only 12 percent of The school is also considering other ways Ghana’s residents have access to a personal computer. that Internet access can be leveraged for the As of 2012, there were 3.5 million internet users, about community, beyond educational uses. 13 percent of the population. COMPETITIVENESS 26 The Watly machine, now being tested in Ghana, is a current effort to use off-grid solar and storage.74 The SONGAMBELE MAARIFA CENTRE IN 140 kWh solar and battery unit provides electricity and TANZANIA internet access within an 800-meter radius, in addition to water purification services that can deliver 5,000 The Songambele Maarifa Centre in Tanzania demonstrates how renewable energy and liters of safe drinking water each day. battery power can enable ICT access in Solar and battery installations in Ghana are not remote areas. without challenges, however. An assessment Powered by 1 kW of photovoltaic solar conducted by the Ghana Ministry of Energy found electricity, 1 kW of wind generation, and a that installations are poorly maintained and often battery system, the facility provides village abandoned after three years.75 There are also the residents with computer Internet access (via difficulties of removing the accumulation of dust and GSM network), educational videos and media, bird droppings from solar panels, system failures due to and other communication services. mishandling of battery charge regulators, and a lack of The facility became fully operational in April access to fuses and other maintenance components. 2015 and has enabled computer literacy among residents, increased crop harvests due to TANZANIA CASE STUDY information obtained at the center, increased learning among youths, and even provided Tanzania’s internet penetration is even lower than university education for some residents. The Ghana’s. Only 4 percent of residents have access to a facility was made possible by support from personal computer and 11 percent have internet access. Renewable World and coordination with the Nearly 96 percent of Tanzania residents not covered by Arid Lands Information Network, and the a cellular network live in a rural or off-grid location, Dodoma Environmental Network. suggesting that the focus of ICT growth in the region will be in these remote areas. breakage of solar panels as well as reliability issues According to the 2012 GMSA Green Power for Mobile due to weather variations.79 study, solar/battery/diesel hybrid solutions have great potential in Tanzania, where solar power has good BUSINESS OPPORTUNITIES availability, reliability, market acceptance, and supply chain readiness. Due to the recent cost declines in solar The benefits of increased access to internet and and storage solutions, these technologies are already communication technology in remote regions have long being deployed in large numbers across the country. been understood, yet the cost of infrastructure needed to provide it has been prohibitive. Now, however, with For example, the Tanzania Government has announced recent declines in energy storage costs, powering off- the One Million Solar Homes initiative76 which will grid ICT infrastructure using renewable resources is an deploy solar and battery storage solutions to a million increasingly attractive option. homes over three years. IFC is providing $7 million for the first phase of the initiative, which is expected Providing that access is also an opportunity for to reach 100,000 households and small businesses in established companies to reach new populations Tanzania.77 Currently, solar is being installed at a rate and potential customers. Expanded access will of 10,000 homes and businesses per month.78 also foster local innovation and may contribute to entrepreneurship and new business opportunities in Of course Tanzania too has challenges with this local communities. technology. There are barriers to adoption that include high initial capital costs, space requirements Telecom companies can also benefit from the increase at ICT infrastructure sites, and scarcity of funding. in data demand and offset declines in voice revenue There are also operational risks in terms of theft and (due to increased communication via text and data).80 COMPETITIVENESS 27 1. CPM FROM BASE TRANSCEIVER STATION (BTS) INFRASTRUCTURE i Outsource power solution to Energy Service Company (ESCo) for cost savings, who sells community energy services, OR ii Sell power from over-capacity of BTS power equipment (DG) ENERGY HUB 2. CPM FROM RETAIL DISTRIBUTION NETWORK Leveraging extensive rural sales dealer / retail network for distribution or sale of charing / lighting devices through commercial partnerships 3. CPM FROM PAYMENT TECHNOLOGY Opportunity for micro e-payments: High volumes of small payments for off-grid domestic and small MINI GRID business energy FIGURE 4 The Community Power From Mobile (Cpm) Model Illustrates How Clean Energy and Information Technology Enables New Business Opportunities Source: GSMA Green Power for Mobile. Cheaper storage and solar technologies will also create developed countries, primarily in the energy efficiency opportunities for independent power producers to industry where ESCos finance energy efficient upgrades invest in powering communications infrastructure. for buildings and receive payment from the utility bill These include collaborations between telecom savings.81 operators, local communication centers, schools, small For rural ICT infrastructure, the GSM Association and medium-sized enterprises, and other parties that estimates that the market potential for ESCos in East benefit from expanded ICT access and delivery. Africa alone is $155 million annually (in 2015), with One emerging business model for financing and the internal rate of return ranging from 22 percent to powering rural communications infrastructure is the 31 percent. Energy Service Company, or ESCo. In this arrangement Synergies also exist between the need to power internet the ESCo owns, operates, and maintains the on-site and communications infrastructure and the need to power generation equipment and sells power to the provide power to populations without access to the telecom company or other ICT infrastructure company. electric grid. The network or telecom company pays the ESCo just As illustrated in Figure 4, the “community power from as they would pay an electric utility if grid access were mobile” model is an opportunity for energy service available. This model helps to reduce the costs and companies to build “solar + storage” and diesel hybrid operational burdens of deploying power generation, power plants. These can provide power for telecom which have typically been the responsibility of the towers and base transceiver stations and establish mini- network operator or tower company. grids to serve homes, businesses, and “energy hubs” for The ESCo business model has a long track record in charging mobile phones. COMPETITIVENESS 28 The current lack of electricity access is a major barrier CONCLUSION to mobile phone use for off-grid subscribers, where the With rapidly declining costs for both solar photovoltaic cost of phone charging can be as high as 50 percent of and battery storage, new opportunities are emerging a mobile user’s monthly expenses.82 to power information and communications technology Further synergies and business opportunities between infrastructure in remote areas. ICT infrastructure, renewable power, and mobile As a result, powering telecom towers and other ICT subscribers come from innovative payment methods infrastructure in this way can be more cost effective such as pre-paid solar electricity services. Instead of than diesel generation. Coupled with the increase in the relying on typical payment collection methods (with supply of lithium-ion batteries, this cost effectiveness high transaction costs and losses), electricity bills gap will continue to grow. And new business models can now be paid by cellphone through mobile money are emerging that leverage synergies between the need services such as M-Pesa in Kenya and Tanzania. to power ICT infrastructure, the need to power off-grid This approach also generates a large amount of data populations, and the proliferation of mobile phones in that helps to establish credit histories for a previously emerging countries. underserved segment of the population. This enables As ICT infrastructure expands—bringing energy service companies or other energy suppliers to telecommunication, internet connectivity, and power identify new markets and to differentiate customers to remote regions—access to this infrastructure will based on varying levels of service, thus allowing them foster education, entrepreneurship, and new business to tailor the service to a customer’s ability to pay. opportunities, and open new markets. n COMPETITIVENESS 29 RESILIENCE EM COMPASS NOTE 19 CHAPTER 3 Creating Mobile Telecom Markets in Africa By Edgardo Sepulveda Mobile telecommunications has many benefits, from linking communities and citizens to mobile applications that bring financial services to the unbanked and help farmers improve crop yields. Yet at one time it looked as though Africa’s mobile sector might fare as poorly as its fixed line system did. Instead, an appropriate mix of regulation and competition, investment, and affordability allowed mobile phones and broadband access to flourish. Just two decades ago only one person in a hundred Coverage and penetration statistics are equally owned a telephone in Sub-Saharan Africa. It was this impressive. The percentage of the population covered by state of affairs in the region and other developing mobile networks climbed from almost zero in 1995 to economies that gave the oft-repeated 1995 statement more than 80 percent in 2015. Mobile penetration has that “half the world’s population has never made a tracked mobile coverage—as networks expanded and phone call” such galvanizing power.83 populations gained network access, the majority of the newly- covered became subscribers. Mobile broadband Historically the region had performed poorly in penetration has grown to about 20 percent in 2015. the provision of public infrastructure in general, and that was particularly the case with regard to Figure 1 shows that the difference in the evolution of telecommunications infrastructure, with demand far fixed and mobile penetration rates in the region has been dramatic: While fixed penetration has remained outstripping supply. Many fixed operators were slow relatively stable at around 1 percent, mobile penetration to expand service and households and businesses were surpassed fixed penetration by 2000 and reached 75 often forced to join waiting lists to receive service; percent in 2015.84 For most people in the region, the first many had to wait for several years to be connected. The phone they ever used was a mobile phone. waiting list in 1995 was about 1.5 million, or about a quarter of the six million lines in service. Mobile telephony, then burgeoning in advanced economies, could have taken the same sluggish path in Africa as had fixed telephony. In 1990 only two countries in Sub-Saharan Africa had introduced mobile cellular service, with fewer than ten thousand subscribers between them. Instead, a very different story unfolded. By 1995 half the countries in the region had introduced mobile service, with a total of about half a million subscribers. By 2000, virtually all countries in Sub- Saharan Africa had mobile service, with total subscribers surpassing ten FIGURE 1 Mobile / Fixed Penetration and million. Within five years subscribers had increased to Fixed Waiting List 90 million, expanding to almost 400 million subscribers Source: International Telecommunication Union (ITU) and by 2010 and about 750 million by 2015. author’s calculations RESILIENCE 30 LIBERALIZATION, COMPETITION, AND Key among these measures is the establishment of a REGULATION separate national regulatory agency, or NRA, which The initial liberalization process in Africa’s mobile tends to promote confidence that the competitive process sector was relatively more straightforward than reform will be administered in a fair and transparent manner. efforts in the fixed sector. Mobile service was new, so The first such institutions had been established in the initial reform efforts generally were not constrained region in the early 1990’s, but by 1995 only a handful by the need to deal with competition and privatization were operating. By the early 2000’s, however, more than issues relative to existing, state-owned fixed operators. half the countries in the region had established NRAs, Furthermore, the demonstration effect was important— and by 2015 all but a few countries had established them. by the mid-1990s mobile competition was the norm in Second, governments decide to license one or more advanced economies. new mobile operators. One of the first steps in this While there was significant variation across the region process is the government preparing and issuing a relative to the timing and sequencing of the liberalization bid or tender document for the process. Based on process, as well as important differences between the strategic considerations and legal, economic, and initial phases of the process (for example, the licensing other research, this document establishes the rules and of the first and second mobile operators) and later phases procedures, the selection criteria, and the operating (when third and subsequent mobile operators were environment, including the allocated spectrum, tariffs licensed), there were typically a number of common and interconnection matters, and roll- out obligations. elements in each process. Based on an evaluation of the submitted bids, the government agency awards the license to the selected First, liberalization generally takes place in the bidder. This process is repeated every time a new presence of enabling telecommunications legislation. mobile operator is licensed. Appropriate legislation is required to provide certainty to the government and investors that the liberalization And third, government establishes mechanisms to process is legally sound. The development of the finance the expansion of access and infrastructure. corresponding regulatory framework is generally In spite of impressive coverage gains by the mobile an ongoing process that is developed over time; it is industry, many governments in Sub-Saharan Africa often relatively “thin” in the initial phases while more established universal service funds and promoted developed in the later phases. public-private partnerships to finance the expansion of FIGURE 2 Number of Mobile Operators/Country, Number of NRAs Source: ITU, GSMA, World Bank and author’s calculations RESILIENCE 31 IMPROVING MOBILE COVERAGE IN MADAGASCAR With the objective of providing service in remote geographic areas of Madagascar that had remained unserved or under- served, the World Bank provided technical and financial assistance over the 2007–2015 period. It has provided more than two million Malagasy in 660 rural communities with access to new technologies. In the covered regions, Internet service penetration has improved from near zero in 2007, to 13.4 percent in 2015. This project is an example of the World Bank assisting the Government of Madagascar to FIGURE 3 Mobile Revenues finance a specific mechanism to expand access Source: ITU, GSMA, World Bank and author’s calculations to close the digital divide. Via this assistance a total of 68 telecommunication towers were installed by While some of the first mobile operators in countries private sector independent tower operators selected via a competitive selection process were subsidiaries of the existing state-owned fixed that allocated subsidy financing. The project operators, most were private sector operators. Virtually fostered economic activity in these often all second and subsequent mobile operators were private difficult-to-reach regions and facilitated sector. This ownership pattern reflects the prevailing commercial activity by improving access to trend around the world. Africa is also similar to other information and creating new opportunities. regions in that most mobile operators are subsidiaries or otherwise related to a large regional mobile group. access to unserved and underserved locations and to AFFORDABLE, PRE-PAID PHONES provide for other forms of infrastructure. Two other innovations made mobile service more Figure 2 shows the evolution of the mobile competitive accessible. First, certain device manufacturers focused landscape in the region. In 1995, only half the their attention on making basic affordable mobile countries had any mobile service; most that did had one handsets for the African market. And second, mobile operator, with only a handful having some competition service was offered under “pre-paid” terms (as well as with two or three operators. By 2000, almost all the traditional “contract” terms). As a result, in Sub- Sub-Saharan Africa countries had introduced mobile Saharan Africa pre-paid service has accounted for 85 service, and fully half had established a competitive percent to 95 percent of all mobile subscriptions. market with two or more operators. By 2005, about three-quarters of the countries in the region had two MOBILE REVENUES AND INVESTMENT or more operators, and a handful of countries had Mobile service revenues have increased along with introduced four or more operators. By 2010 the vast subscriptions. Revenues in the region totaled $100 majority of countries had three or four operators. million in 1995, accounting for only about 0.02 percent Figure 2 also shows that the growth in the region of of gross national income for the region (Figure 3). separate NRAs closely coincided with the introduction Revenues continued to grow much faster than national of mobile (two or more operators) competition. economies, so that relative to GNI, they peaked in RESILIENCE 32 FIGURE 4 Investment in Mobile Networks FIGURE 5 Market Shares and Countries Source: ITU, GSMA, World Bank and author’s calculations of Operations of Five Largest Regional Mobile Groups, 2015 Source: GSMA, World Bank and author’s calculations 2009 at 2.8 percent. Mobile revenues continued to 2007–2015 investment relative to revenues declined increase, reaching $40 billion in 2015, with the voice/ to the 20 percent to 30 percent range, consistent with data ratio approximately 85 percent to 15 percent. mature networks in other parts of the world. Most Mobile revenues are only one component of the of the investment over this period has come from direct and indirect contribution that the mobile outside the respective countries, often in the form of “ecosystem” makes to the region’s economies. Other foreign direct investment sponsored by one of the large direct contributions include content/apps,85 distribution Pan-African mobile groups.87 Indeed, Figure 5 shows and retailers, infrastructure providers, and handset that the five largest of such groups accounted for 60 manufacturers. Indirect contributions result from the percent of all subscriptions in the region, the next “multipliers” associated with the effect that the direct five largest groups accounted for 15 percent, and the expenditures have on related industries. And the use smaller groups and independent operators accounting of mobile technology results in increased efficiency for for the remaining 25 percent. Figure 5 also shows the workers and firms. In 2014 it was estimated that the diversified geographical provenance of these groups, direct, indirect and efficiency effects accounted for from within and outside the region. about 5.7 percent of regional GDP,86 or about 2.5 times greater than mobile revenues. WORLD BANK AND IFC ROLES Investment in mobile networks has increased The World Bank has provided extensive financing and commensurately. Figure 4 shows that investment technical assistance to the telecommunications sector reached $1 billion in 2000, jumped to $4 billion by in the region. Via its financing instruments,88 the Bank 2005, and plateaued at the $7-$9 billion range during has approved over two dozen telecommunications- the 2007–2015 period. Relative to mobile revenues, related projects in thirty countries since 1995 with investment was highest in the 1995–2000 period, as total financing of $1.2 billion.89 first and second mobile operators entered the market Broadly speaking, these lending projects included and built networks. Relative to revenues, investment both regulatory and infrastructure components.90 in the 2001–2006 period declined, as operators “filled About 20 percent of total financing went toward their networks” and increased their revenues. For strengthening telecommunications regulatory RESILIENCE 33 frameworks. In seven specific projects this regulatory tower operators, which have been a more recent financing strengthening included assistance in the licensing of segment, the portfolio is approximately balanced mobile operators. Most of the remaining 80 percent between loans and equity. IFC has provided financing to of the financing was infrastructure related, including mobile telecommunications operators during the launch, subsidies and other types of financing to increase expansion and rollout of new technologies. coverage and improve access. IFC has provided more than $1.4 billion in financing CONCLUSION to companies in the technology, media, and telecommunications (TMT) industries in the region since Fixed line telephony never quite took off in Sub-Saharan 1995. The bulk of these operations (44 of 58) were to Africa. Mobile telephony could have gone the same mobile telecommunications operators and independent way. Instead, because of the right mix of regulation tower operators.91 Across its entire portfolio, IFC and competition, investment and affordability— provides financing under four broad categories: loans, and assistance from development institutions like equity, guarantees and risk-management products. Over the World Bank and IFC—over three quarters of 90 percent of the financing to mobile telecom operators the region’s inhabitants now have direct access to was in the form of loans. However, for independent telecommunications and all the benefits it can bring. n RESILIENCE 34 INTEGRATION EM COMPASS NOTE 15 CHAPTER 4 How Emerging Market Leaders Can Spur Technological Gains By Florian Mölders, Thomas Rehermann, and Nana Esi Hammah New technologies help firms in emerging markets make significant gains. But these firms often face barriers to successfully incorporating new technologies into their businesses. Emerging- market leaders, however, can take steps to help firms overcome these barriers, including strengthening regulatory frameworks, improving education, fostering trade, and increasing access to finance. Access to technologies is critical for firms in emerging RULES OF THE GAME markets. Genuine innovations, as well as technologies Regulations and laws at all levels—national, regional, that have been adapted or adopted from other countries, and local— have a major impact on how firms allow firms to boost productivity, save time, better serve can benefit from new technologies. Well-designed customers, and ultimately become more competitive in intellectual property rights, for example, ensure that both domestic and international markets. firms profit from their innovations, and so encourage Emerging-market governments can play a major role them to invest in research and development. Emerging- in helping companies gain access to technology. By market governments can also lay the groundwork creating a proper environment for businesses to acquire for new technologies to take off by creating market new and existing technologies, they can improve the entry and exit rules, reducing corruption, cutting competitiveness of their countries’ firms and develop red tape, and building up high quality and reliable their economies. infrastructure, including communications technology, electricity, and water services. TRIBANCO IN BRAZIL ACCESS TO SKILLS Brazil’s strong regulatory framework for Firms also need an educated and well-trained workforce the financial sector allowed local financial to research and develop new technologies and to take institution Tribanco to boost business for advantage of existing technologies. By investing in high- its parent company, Grupo Martins, Latin quality education and research institutions, emerging- America’s largest wholesaler and distributor market governments can build such a workforce, of food, electronics, home improvement keep skilled workers from emigrating, and foster the supplies, and pet food. Tribanco was able to development of new technologies. provide new services to Grupo Martins’ clients such as business training, and new products Because skilled workers are critical for firms that want including as loans and customer credit cards, to adapt new technologies, they often invest in training enabling the company to maintain market their own workers, especially in regions that lack strong share against foreign competitors. universities and research institutions. Governments can support private sector efforts by fostering education and Source: IFC, Inclusive Business Case Study: Tribanco, 2012 training in much needed fields and connecting labor supply to potential employers. INTEGRATION 35 MARKET ACCESS AND EXPOSURE Competition, at both the national and international MILLICOM IN AFRICA AND levels, drives firms to invest in a new technology, LATIN AMERICA innovation, or business model. For example, when a Intense international competition in firm spots an opportunity in an international market, it the mobile services sector has driven may adopt a new technology to raise quality standards Luxembourg-based Millicom to build and and cut production costs in an attempt to generate maintain market share in 12 countries across customers abroad. By opening up markets beyond their Africa and Latin America. Millicom provides borders, emerging-market governments can help firms value-added services such as borrowing for expand their consumer bases. With more customers in urgent calls or text messages if customers more countries, firms may be able to reduce production are unable to top-up their accounts, and costs and improve production quality by taking text menus and services in countries with advantage of economies of scale. low smartphone penetration and data availability. Millicom also offers mobile In addition, an open trade policy can boost foreign financial services, such as person-to-person direct investment. Access to markets allows a firm money transfers, international remittances, to operate different stages of a production process in and payments to people who lack access to different countries or to establish production facilities formal banks. in a foreign country in order to avoid tariffs and other Source: IFC, Inclusive Business Case Study: Millicom, 2014 trade costs. Investments in modern infrastructure and transportation networks help countries gain even more from open markets. Access to education Access to energy Access to finance Access to ICT infrastructure BENEFITS FROM COSTS OF TECHNOLOGY ADOPTION TECHNOLOGY UPGRADING • Scale effects in production • Capital Technology Firm size • Faster adjustment to future changes on • Adjustment of complementary technology services availability the demand side • Costs from lost output • Access to new consumer bases (quality • Uncertainty about product quality upgrading) and new markets • Skills upgrading, training of staff • Build-up of new production capacities Regulatory Network effects environment FIGURE 1 What Matters for Technology Adoption? The green and red boxes highlight the benefits and costs of adopting a new technology, while the factors in gray outline the parameters that influence a firm’s ability to access technology. Source: IFC Thought Leadership INTEGRATION 36 Firms with access to finance are around 30 percent more likely to introduce a new product, according to BRIDGE INTERNATIONAL ACADEMIES the EBRD report,92 while companies that lack financial IN AFRICA resources are less innovative, and those that pay high Bridge International Academies is a private rates of interest struggle to upgrade technology.93 company that provides high quality and The public sector can help remedy the financing low-cost education to low-income students situation. It can boost the amount of credit available across Africa. Students pay $6 a month to attend classes. Bridge uses smartphones by promoting competition among existing financial and tablets to closely monitor teacher and institutions and promoting new financial start-ups. student performance, deliver standard Such start-ups gather data from multiple sources and lessons, and manage billing. In order to use that data to verify credit, help banks make better identify and train teachers, Bridge developed loans, and ultimately increase access to finance. an International Training Institute with a 235- hour intensive training course. In 2015 Bridge had 414 academies in Kenya, Uganda, and ENGRO IN PAKISTAN Nigeria. The company plans to expand to Asia in coming years. Since 2009 IFC has provided financing to Engro Foods Limited, the second largest producer Source: Brookings, “Bridge International Academies – of processed milk in Pakistan. Engro employs Delivering Quality Education at a Low Cost in Kenya, Nigeria, and Uganda,” 2016. 1,700 workers to manufacture, process, and sell dairy products, juice, ice cream, and frozen desserts. It has also brought 300,000 milk farmers into its supply chain. In addition to Beyond individual firms, entire economies can benefit a subordinated loan of up to $50 million, IFC from global trade ties, as high-value global production continues to provide Engro funding during creates skilled jobs and facilitates the sharing of difficult market conditions. This financing knowledge between economies. has allowed the company to develop a management information system called ACCESS TO FINANCE Engro Milk Automation Network that enables a village-wide procurement network. Engro New technologies can be expensive and risky to invest collects, transmits, and monitors real time in, and they require investments in worker training and data from its Milk Collection Centers. After production upgrades. Therefore firms also need ready testing and accepting milk from a farmer, a access to finance—including loans, equity, or bond unique magnetic card assigned to each farmer issuances—in order to adopt new technologies. is swiped at a point-of-sale terminal. Engro’s network uses that data to make improvements Firms may need one or more of these sources of to the process. In addition, the network can capital to invest in upgrades, depending on the pay farmers with direct electronic deposits technology. In its 2014 Transition Report, the or send money to collection centers, which European Bank for Reconstruction and Development pay farmers in cash. Farmers can also seek found that firms in Europe’s transition countries veterinary support for sick cattle, apply for tended to use bank loans to fund the licenses and loans, and top up their mobile phones. In technical capacity needed to adopt new technologies. the future, Engro may expand the role of the When those technologies needed to be modified or networks to include more banking services. adapted to the local context, larger investments were Source: IFC, “Shared Prosperity through Inclusive Business: required for research and development. For that they How Successful Companies Reach the Base of the often turned to alternate sources of funding such as Pyramid,” 2014 private equity or venture capital. INTEGRATION 37 ACCESSING NEW MARKETS New technologies have been crucial to the provision of products and services to the 4.5 billion people who live on $8 a day or less. These people have combined spending power of $5 trillion annually, but they often live in areas with poor infrastructure, an obstacle that prevents their participation in markets. Companies that want to serve these markets must offer affordable, accessible, and relevant products and services. The most successful companies have moved beyond merely selling to low-income consumers to working directly with them using local talent and business models. They use technology to overcome constraints such as inadequate physical infrastructure, lack of skills and financing, and weak regulatory environments. Utilizing Mobile Telephony. The growth and spread of information and communication technologies have spurred low-cost innovations in the field of mobile telephony. Mobile bank branches and innovations such as mobile money, which allows money transfers between mobile phone user accounts, have played a significant role in bringing financial services to low-income customers. About 80 percent of low-income customers without access to physical financial services now use digital financial services. In Bangladesh, for example, bKash facilitates salary payments, international remittances, and payments at local mom-and-pop shops around the country. It now has 23 million customers. Overcoming Constraints. ECOM Agroindustrial Corp, one of the world‘s leading commodity traders, provides direct financing and technical assistance to small, low-income coffee growers, helping them improve productivity, increase quality, and gain the certification necessary for premium pricing. As of 2012, ECOM had purchased more than 81,000 metric tons of certified coffee in the six years since its inclusive business model was established, paying farmers about $15 million. Adapting Processes. A Mexico City eye care provider, salaUno, uses a hub-and-spoke model to reach customers in far off locations and offer prices that are 40 percent lower than those of its competitors. All of the company’s processes are designed to increase efficiency and lower costs, while at the same time maintaining its high quality of care. Differentiating the Product. Vinte is a housing developer that offers affordable, quality homes to first-time low and middle-income home buyers in Mexico. The company incorporates technologies into its designs that not only increase the appeal of its homes but also lower the ongoing costs of home ownership. For example, Vinte’s homes are designed to reduce gas bills by 75 percent. They also provide the option of rooftop solar cells, which can significantly reduce fuel bills. Homeowners can monitor the electricity, gas, and water consumption with individual meters and adjust their habits as needed to save money. Source: Karolien Bais, “The Base of the Pyramid as a Development Strategy,” Oxfam Novib, 2008. Raphael Kaplinsky, “Bottom of the Pyramid Innovation and Pro-Poor Growth,” World Bank, 2011. Triki Thouraya and Faye Issa, “Financial Inclusion in Africa,” African Development Bank, 2013. World Bank, “World Development Report 2016: Digital Dividends.” IFC, “Shared Prosperity through Inclusive Business: How Successful Companies Reach the Base of the Pyramid,” 2014. CONCLUSION infrastructure. While there is no standard approach to Firms in emerging markets face numerous obstacles getting firms to adopt new technologies in emerging to incorporating beneficial new technologies in markets, significant investments in education, their operations. These obstacles include lack of infrastructure, and business environments, as well as access to financing, a shortage of qualified workers, improved access to finance, can help emerging-market obstructive regulatory frameworks, and substandard countries overcome these obstacles. n INTEGRATION 38 INTEGRATION EM COMPASS NOTE 37 CHAPTER 5 Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and Buyers through Partnership and Technology By Abenet Bekele Haile, Ariane Volk, and Thomas Rehermann Commodity exchanges can provide emerging market economies with orderly, transparent, and efficient markets by acting as mechanisms that mitigate price risk, discover equilibrium prices, and connect buyers and sellers. Exchanges can also reduce transaction costs and information asymmetries by using technology to disseminate market information while creating better supply chains. The Ethiopia Commodity Exchange is striving to transform Ethiopia’s agriculture sector from a fragmented one marked by high transaction costs and low quality standards to a thriving and reliable part of the country’s economy. Ethiopia’s exchange continues to expand its activity across the farming regions of the country. Commodity trading has existed for hundreds of years. the United States in 1867.94 Ethiopia now joins the ranks The first commodity exchanges were in Asia where of these nations with its Addis Ababa-based Ethiopia Japan established an exchange for rice in Osaka in the Commodity Exchange, or ECX, launched in 2008 with 17th century and traded with futures contracts as early the goal of transforming the country’s agricultural sector. as 1697, almost two centuries before they were used in THE PURPOSE OF COMMODITY EXCHANGES Commodity exchanges are organized market venues where buyers and sellers of a commodity meet to trade it or its derivatives. They are designed to help mitigate counterparty risk and ensure that payments are made through reliable financial service providers. Exchanges provide a framework for market actors, financial institutions, and commodity operators to interact based on rules that provide legal protections. Exchanges further reduce information asymmetry. This encourages competition among buyers and sellers by allowing them to discover the real value of commodities in the market. Commodity exchanges in emerging markets typically FIGURE 1Benefits of Commodity Exchanges to Emerging Markets trade with spot contracts that offer immediate delivery Source: Based on UNCTAD Report, Development Impact of of the traded good, while those in more advanced Commodity Exchanges in EM, 2009 economies tend to trade in futures and options contracts. INTEGRATION 39 Commodity exchanges are adaptable and can remedy equally high contract default rates, a lack of quality several risk factors in emerging markets, including standards, and an unreliable commodity supply. price risks, poor price discovery, and a lack of market Weak infrastructure in terms of electricity, roads, transparency (Figure 1). “If properly organized, a telecommunications, financial services, and warehouses, whole array of other problems, including problems with along with an absence of necessary market infrastructures, finding buyers or sellers, quality problems, difficulties including reliable and timely market information, in obtaining credit, and counterparty risks” can be standards, and reliable ways to connect buyers and sellers, solved through exchanges.95 all hampered the exchange’s initial progress.98 These exchanges further support the warehousing, In the eight years since its inception, the exchange has transportation, quality accreditation, financial evolved to handle larger trade volumes (Figure 2). The services, and telecom and insurance sectors, allowing volume of coffee and sesame traded has grown from them to flourish. 138,000 metric tons in 2008–2009 to 715,000 metric tons in 2015–2016. THE ETHIOPIA COMMODITY EXCHANGE MARKET As depicted in Figure 3, Ethiopia’s commodity Ethiopia’s exchange was formed to overhaul the exchange trade value of coffee and sesame have country’s agriculture sector and create a dynamic, remained buoyant—about 10 billion Ethiopian birr forward-looking, and efficient agricultural market (equivalent to $440 million) in the first half of 2017 system.96 The first modern commodity exchange in alone. Other traded commodities include green mung Sub-Saharan Africa outside South Africa and a pioneer beans, red kidney beans, wheat, and maize. for Rwanda’s East Africa Exchange, it now connects Ethiopia’s exchange was positioned to function as 3.5 million Ethiopian smallholder farmers to markets.97 an end-to-end service for commodity warehousing, Similar to those in most emerging markets, Ethiopia’s quality control, trading, clearing, and market data exchange was launched with an open outcry system dissemination. Its indigenous all-in-one model gave which deployed spot contracts for three staple foods— it the functions of an exchange, quality certifier, maize, wheat, and haricot beans—with one satellite warehouse operator, and clearinghouse. delivery center and two partner commercial banks. However, in order to advance the service provision, Before its launch, Ethiopia’s agriculture sector was this model was replaced in 2016 by a system placing fragmented and suffered from high transaction costs, the warehouse and quality control operations and FIGURE 2 Volume of Traded Coffee FIGURE 3 Transaction Value for Coffee and Sesame and Sesame Source: Ethiopia Commodity Exchange Strategy Planning Unit Source: Ethiopia Commodity Exchange Strategy Planning Unit Report, 2016. Report, 2016. INTEGRATION 40 the central depository functions under the Ethiopian A TECHNOLOGY-DRIVEN EXCHANGE Agricultural Commodities Warehousing Service Ethiopia’s technologically advanced exchange offers Enterprise, a separate business entity. A regulatory trades based on an electronic warehouse receipt system body, the Ethiopian Commodity Exchange Authority, that links data from warehouse operations, clearing was also established to oversee the overall operation of and settlement, and market-information onto one the exchange as well as its external operators. platform. The system also has a warehouse receipt A lack of awareness about structured markets was a financing component to provide short-term working daunting hurdle in the initial stage of the exchange’s capital loans to small-scale traders. implementation. The exchange has successfully The exchange also provides a fully secured clearing marketed itself through intensive campaigns and the and settlement service and central depository that are training of farmers. electronically linked to eleven commercial banks and a warehouse operator, which in turn is linked to a THE PARTNERSHIP network of warehouses across the country. Ethiopia’s exchange is a commercial non-profit These connected warehouses reduce price dispersion entity established as a public-private partnership. among regions and transaction costs for regional Unprecedentedly, it is jointly governed by private and farmers.102 The exchange’s secured payment system is public sector members of its Board of Directors, with digitally linked to the warehouse operator, financial five of the eleven board members from the private institutions, tax administration agency, and more than sector.99 Major decisions such as adjusting fees, 16,000 traders. reinvesting net profits, appointing chief executive The exchange settles transactions of more than $10 officers, and approving and amending exchange rules million per day with settlements made the following require a two-thirds majority vote. business day. Similarly, the exchange’s clearinghouse The exchange is demutualized, however, with has cleared more than $6 billion worth of transactions ownership (represented by the public sector) separated so far without default. from membership and management. Memberships Market participants in Ethiopia now have access to are classed into ordinary (trading and intermediary) reliable market data through various sources provided membership, which entitles the member to a permanent by the exchange, including a mobile push service that seat on the exchange, and special (limited trading and delivers up-to-date daily market information to farmers intermediary) membership, which is valid for a year. and agro-processors via text message and interactive Permanent membership seats are sold at auction and voice response services offered in Amharic, Oromoiffa, cost $75,000 per seat on average,100 giving the member Tigrigna, and English. the right to trade commodities on the exchange. As a result, small-scale farmers receive 70 percent of In total, Ethiopia’s exchange has 346 members, the final price of a trade, up from 38 percent prior to including 33 farm cooperatives, of which 7 percent the establishment of the exchange.103 are trading members.101 Ordinary members have the The exchange continues to innovate. In July 2015, right to govern the exchange by being elected as a with the help of a $2.2 million grant from the representative to the Board of Directors. Investment Climate Facility for Africa, it introduced a Members are expected to produce an audited financial $3.8 million electronic trading platform to replace the statement that satisfies the minimum net worth original open outcry system. This created the capacity requirement according to their membership class. to execute significantly more transactions than the To actively trade in the exchange, members (either former system, with greater speed and data capture a person or a business) must secure recognition as display functions, and the ability to cater to far more ‘exchange actors’ from the Ethiopian Commodity participants.104 The majority of the exchange’s trades Exchange Authority. are now made electronically. INTEGRATION 41 Ethiopia’s exchange is also expanding its activities Enterprise. The $4.5 million program, implemented throughout the country’s major agriculture producing in collaboration with the United States Agency for areas. The goal is to open more trading centers in International Development, was designed to function order to increase liquidity and accessibility to both with a bar code system to track commodity trades.106 commercial and smallholder farmers. The exchange’s The agriculture sector is now required to disclose second trading center, built in Hawassa, will begin data on quality, health and safety standards, as operations by the end of 2017. well as the movement of commodities along the supply chain, from the processing unit to the shelf. INTEGRATING TRACEABILITY INTO Businesses associated with the agriculture sector, THE EXCHANGE including commodity suppliers and warehouse Since its launch, Ethiopia’s exchange has traded operators, greatly benefit from the tracking, which more than 3.9 million metric tons of agricultural helps detect embezzlement and fraud as well as poor commodities. However, only a fraction of these quality products, and also helps warehouse operators commodities were traced to their source using a optimize storage space. traceability system. The traceability process (Figure 4): Bags of Food regulations in Europe and the United States commodities traded on the exchange are tagged with require traceability of commodities along the geo-referencing to washing and hulling stations or agricultural value chain, as part of international aggregation points throughout Ethiopia’s agricultural requirements to meet health and safety standards. regions. The bag-tagging system provides the The European Union General Food Law, for example, commodity exchange with continuous real-time data mandates that all food and feed producers and analytics. It is also capable of learning and predicting operators have a traceability system.105 the quality of commodities based on domestic growth Growing concern about a lack of traceability, and processing conditions.107 Bags containing close particularly for coffee, prompted Ethiopia’s exchange to 27,000 metric tons of coffee have been tagged and to initiate a traceability project on export-oriented traded by the exchange so far.108 commodities, including coffee and sesame, in 2013. Still at the pilot stage with only two locations, Ethiopia’s Two years later the exchange officially launched its cloud- traceability project—designed to satisfy trading partners’ based IBM-enabled national traceability system, which rules-of-origin requirements—is expected to become runs jointly with the warehouse operator Ethiopian a full-scale operation for both coffee and sesame Agricultural Commodities Warehousing Service commodities within the next few years.109 PROCESSING STATION BAG TRANSPORT TO ARRIVAL TRADED AS ARRIVAL AT PROCESSING IMPORTER TAGGING WAREHOUSE AT EACWSE TRACEABLE EXPORTER FOR EXPORT RECEIVE COMMODITY WAREHOUSE AS TRACEABLE TRACEABLE COMMODITY AGGREGATION POINT FIGURE 4 Traceability Process Flow Source: Traceability project 2014; EACWSE = Ethiopian Agricultural Commodities Warehousing Service Enterprise. INTEGRATION 42 CONCLUSION An efficient and reliable commodities exchange system can provide producers and agribusinesses in emerging markets with a competitive edge. The implementation of information technology in exchanges can have a transformational effect for emerging markets, delivering transparency, access to market data, and the ability to trace and determine the quality of products. It plays a crucial role in creating and promoting fair and orderly markets and mitigating price risks. Exchanges can also bring broad-based economic benefits, stimulating growth while linking smallholder farmers, financial institutions, and communications technology. n INTEGRATION 43 INTEGRATION EM COMPASS NOTE 39 CHAPTER 6 Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major Growth Opportunity for Banks By Qamar Saleem, Martin Hommes, and Aksinya Sorokina In most emerging markets, small and medium enterprises, or SMEs, lack access to the credit and liquidity they require for their daily working capital needs. This is partly due to the fact that the credit risk of such businesses is typically difficult to assess and their working capital needs are unpredictable. In most countries these businesses operate primarily in the retail and wholesale trade segments, and banks have generally not done enough to finance their domestic or international trade operations, especially open account transactions. Supply chain finance structures offer an alternative solution to finance the trade flows of these enterprises, with benefits for all stakeholders, including large enterprises, their SME trade counterparts, and financial institutions. This type of financing helps banks extend working capital finance to SMEs by leveraging commercial and trust relationships between the SMEs and corporates; it helps large corporates improve their working capital management and decreases supply chain disruptions; and it enables banks to better assess, measure, and manage the risks of extending financing to SMEs. Supply chain finance is a broad category of financing extending days payable outstanding, reducing days with multiple products, and it contributes significantly sales outstanding, reducing automation related costs, to global trade finance, which has an estimated and boosting trade volumes as a result of greater financing gap of $1.9 trillion annually around the economies of scale. “The strategic relationship world.110 According to the Aite Group, the estimated between supplier, buyer, and a bank would naturally potential volume of reverse factoring, one of the prevent either party from failing to deliver on mutual common supply chain finance products, ranges from contractual obligations,” according to Eugenio $255 to $280 billion, globally.111 Cavenaghi of Banco Santander.114 The compelling Growth in the supply chain finance sector is rising benefits of supply chain finance make it clear that it is steadily. In the period between 2008 and 2014, domestic a very attractive market opportunity for banks. factoring volume increased on average by six percent per Supply chain finance has traditionally been driven year across 70 countries in Europe, the Americas, Africa, by international banks that focused more on cross Asia and the Pacific. International factoring volume grew border trade, but its adoption has been slow due to on average 16.6 percent per year.112 Moreover, research weak recourse environments, as well as scalability conducted by Demica shows that supply chain financing and origination costs. However, in recent years there at major international banks is growing by a rate of 30 has been a shift toward digitization and automation to 40 percent a year, and much of the expected future of both supply chain finance transactional flows and growth will be driven by local supply chains.113 supply chain financial solutions. Leveraging the wide Companies can use supply chain finance to range of trade and transactional data, rapidly growing significantly increase their economic value by technology platforms are now playing a crucial role INTEGRATION 44 in increasing transparency by providing risk profiling AUTOMATION CONSIDERATIONS credit information for banks to gain a larger share of Technology, either in-house or multi-bank platforms, is the market. central to any successful supply chain finance program. According to Enrico Camerinelli of the Aite Group, the When selecting the technology, three important key trends in supply chain finance are its ability to: factors need to be considered. These are automation, • Transition from paper-based transactions to simplicity, and scalability (Figure 1). The nature of electronic invoicing supply chain finance platforms is quite diverse, making • Move from a buyer-centric model to a distributed selecting a well-suited supply chain finance platform network of buyers and suppliers with no defined a monumental task that requires banks to clearly central anchor understand the goals of the program, as well as current capabilities and gaps. • Use transactional data to assess the credit worthiness of potential borrowers115 Supply chain finance solutions can take various forms in order to address different challenges. A bank Supply chain finance not only provides market trends considering launching or scaling up its supply chain and prevents disruptions, but also helps banks better finance business typically has the following two manage risks. André Casterman, a member of the ICC Banking Committee states that “a big innovation in the options: (1) use a bank-led platform, either developing market is using transactional data for risk assessment an internal IT infrastructure or adopting another and mitigation. The data from the physical value bank’s platform; (2) contracting a bank-independent chains and payment data collected through technology platform through: (a) licensing the technology solution providers can be used to enhance the knowledge of the from a technology platform; (b) outsourcing the credit-worthiness of a particular enterprise, industry, or automation services to a third-party platform such region.” The playing field has changed, propelling the as Software as a Service; or (c) participating in a supply chain finance sector forward. marketplace as one of multiple funders. AUTOMATION SIMPLICITY SCALABILITY Key Features Key Features Key Features • Speed of transactional flow • Intuitive interface • Ability to scale up • Data collection from physical • Structured workflow, easy transactional volume supply chain flows accessibility by all parties • Efficient problem solving • Reporting functionality • Flexible connectivity to with integration and various core systems operationalization • Integration with the core banking system • Ability to extend offering to Key Benefits more than one product Key Benefits • Ease of use for ultimate user Key Benefits • Increased productivity • Minimum level of training required for staff and trade • Reduced number of errors • Timeliness of invoice delivery counterparts • Unconstraint business growth • Multi-party transaction visibility • Efficiency FIGURE 1 Success Factors for an Effective Supply Chain Finance Technology Solution Source: IFC INTEGRATION 45 BANK LED PLATFORMS Smaller financial institutions may also choose to Bank led platforms, especially those developed partner with another bank to use their technology internally, provide a high level of flexibility and can platform. This allows the institution to provide be highly configurable, enabling easy integration of additional financing while avoiding the credit process treasury, procurement, and IT work streams. In such and the additional cost of hosting a platform. However, a scenario, banks are the sole owner and funder of the this option is exercised more in a syndicated supply program, which establishes exclusivity rights to the chain finance transactions and is not prevalent due to supply chain solution and strengthens its connection data sharing issues. with clients, providing the bank with a competitive The number of independent third-party platforms has advantage. increased significantly. According to Casterman, “the However, developing such a platform from scratch can financing option provided by business-to-business be highly complex, delaying the launch of a supply platforms is an important development in the market.” chain finance program and invariably requiring a He adds that AP Ariba and Basware are among the substantial financial investment. largest Purchase-to-Payments networks facilitating Development, implementation and maintenance make financing. They collaborate with financial institutions this option expensive and less adaptive. Big banks to combine their transaction data with the participating such as Citibank, HSBC, ICICI Bank, Deutsche bank’s balance sheet to satisfy funding requirements.116 Bank, Santander, and JPMorgan Chase manage their So, depending on the needs and goals of the supply individual proprietary supply chain finance platforms. chain finance program for the bank and the businesses, However, these institutions are pioneers in supply chain the external platforms can be contracted in three finance and their systems are well integrated into their different ways: (1) licensed, (2) Software as a Service; transaction banking capabilities. or (3) marketplace. ENGAGEMENT Supply Chain Finance (SCF) Technology Bank-led Outsourced Internally Software as a Other Licensed Marketplace Developed Service (SaaS) FUNCTIONALITY Settlement Product Integrated FIGURE 2 Supply Chain Finance Technology Solutions Engagement Categorization Source: IFC (SCF = Supply chain finance; SaaS = Software as a Service). INTEGRATION 46 Licensed. Financial institutions can buy a readily available solution and license it. The license agreement with an external supply chain finance platform may include installation, integration with the core banking system, and ongoing support and maintenance—all undertaken under the platform’s brand. The financial SETTLEMENT institution can also white label the solution and present PROCESSING it under a new name. White-labeled solutions provide PRODUCT great marketing benefits, although they increase the OFFERING cost of implementation. Platforms such as Premium INTEGRATED Technology (FinShare), Orbian, and Demica work with SERVICES banks on white- label solutions, along with their own proprietary offerings. In addition, to ensure that first- comer benefits are fully explored in a given market, financial institutions could consider an exclusive FIGURE 3 Functionality of Supply Chain relationship for a given time period, on a case-to-case Finance Platforms basis, with an external technology provider. Source: IFC Software as a Service. The financial institution can specific transactions. The marketplace can also work also use an external software company’s services on as an auction, allowing various investors to bid and a ‘Software as a Service’ basis, where the provider participate in the invoice auctioning. Platforms such is responsible for data aggregation and hosting, for as Prime Revenue, Ariba, Orbian, Nafin, Bolero, and managing the transactions, and for communication the Receivables Exchange are examples of supply chain with stakeholders. In comparison to the licensed finance marketplaces. solution, this option features faster implementation, up-to-date technology, low integration requirements, SERVICE LEVEL FUNCTIONALITIES OF SUPPLY and low costs. CHAIN FINANCE PLATFORMS Such a solution typically has a standardized set of A bank can select the technology platform best functionalities and therefore may be less customized suited to its requirements from a range of vendors and tailored toward the specific needs of each financial and at varying degrees of functional complexity. institution. The bank also carries the business risk Market practitioners define various segmentation of the technology company by contractually hiring it methodologies of the platforms depending on their to manage the supply chain finance related business functionality. Alexander Malaket, a member of the processes. Some examples of the Software as a Service ICC Banking Committee, for example, defines three model used in the supply chain finance space include types of supply chain finance platforms: (1) payment Kyriba, Taulia, and Prime Revenue. processors for trade settlement, (2) package providers Marketplace. Technology solutions can be enabled for standardized products and financing, and (3) global for stakeholders along the supply chain through the trade management providers for payment settlement, marketplace, providing them with access to a wide distribution of risk, cash management, and other range of financial institutions and enabling them to comprehensive services. Banks can select platforms that sell invoices directly to investors, including banks, best match their needs and fill the gaps of their own hedge funds, and private equity firms. In such a technology infrastructure. model, the suppliers and buyers can choose a funder Settlement processing. Platforms such as Ariba, among investors registered on the platform and based Oxygen Finance, and GT Nexus support the electronic on the specifics of the transaction, geography, and flow of trade documents and information, document price. The bank can also agree or disagree on finance exchange, automation of payments, e-invoicing, INTEGRATION 47 data matching, and reconciliation between buyers It is important to consider that the above categorization and sellers. Such platforms provide banks with is not mutually exclusive and that there is a degree of transparency on buyer and supplier transactions, overlap owing to the emerging nature of the industry. simplifying financing decisions and allowing buyers Another dimension to consider when looking at and suppliers to collaborate on a single platform. technology platforms is the anchor focus and the product range. Product offering. In addition to process management, platforms such as PrimeRevenue, GT Nexus, Premium There are platforms that focus more on international Technology, GSCF, GTC, Misys, and Octet provide and tier one anchor companies, while the emerging financial institutions with an automated system platforms place greater focus on tier two and/or for managing their trade accounts through various regional and local corporates. In addition, the range structured supply chain finance products, including of products offered by the platforms varies, especially invoice discounting, purchase order financing, reverse when it comes to their ability to offer distributor factoring, and distributor finance. finance solutions.117 Integrated services. In order to ensure a seamless and EMERGING TRENDS IN SUPPLY CHAIN FINANCE efficient supply chain finance program it is crucial that all participating parties—both the supplier Supply chain finance securitization. Supply chain and buyer treasuries, sales, procurement, IT, legal, finance trade payables and receivables can be packaged and the financial institution—clearly understand into securities and distributed to capital markets along the processes, responsibilities, and pricing involved. with other types of derivatives. Some platforms (for Technology providers such as Demica and Prime example, the one offered by CRX Markets) offer an Revenue can provide an advisory role to stakeholders auction-based securitization platform that provides on various related matters, including assisting with the various types of investors with access to this type of complicated onboarding process. Such services might instrument. lie in the following areas: New solutions are appearing in the market that have the ability to reduce the risk of a single issuer, distribute Cash management and treasury solutions an exposure across several suppliers in a bundled security, issue it in capital markets, or sell it directly to Structuring the SCF process and private or institutional investors. Alexander Malaket organizational set up says that “securitization is part of the market and gains Onboarding and training of trade attention in periods where banks experience balance counterparts sheet limitations and constraints and must remove trade business from the balance sheet. Fintech companies Advise on data extraction and reporting will have a role to play in these securitization processes Analytics on trade volunes, performance, which strive to diversify the risks.”118 and trends Blockchain technology. With innovation occurring in the financial technology space, banks are looking Collaboration with collection agencies for new ways to compete. According to Casterman, Advise in the area of tax / accounting “blockchain technology can boost purchase order financing by providing greater security, better efficiency, Advise in the area of legal frameworks / and higher confidence in the data used for making documentation financial decisions. Today, purchase order financing is Continuous ad-hoc support quite underutilized, since it often requires a confirmation through letters of credit or other instruments. Source: IFC Blockchain can ease this requirement and enable purchase order financing for wider use by SMEs.”119 INTEGRATION 48 According to the Global Trade Review, a number structure, clear responsibilities, and streamlined of institutions including Standard Chartered Bank, processes. To achieve these it is important to quantify DBS Bank, and Infocomm Development Authority of the business opportunity for supply chain finance and Singapore are discussing the possibility of developing a gain a thorough understanding of the operating and blockchain-based invoice trading platform. It is based legal environment that will define the types of products on Ripple’s distributed ledger technology for tracking and service offerings required for a specific market. invoices, backing loans to suppliers, and reducing the It is equally critical to design good methodologies risk of invoice duplication while maintaining client to segment not only the corporate clients, but also confidentiality.120 Such a platform would allow banks their suppliers and distributors, along with having an to convert invoices into digital assets on a distributed appropriate coverage and commercial model to target, ledger. Participants get a cryptographic identity, while engage, and service clients in the supply chain. information on the status of invoices is accessible to all Products and Services. When designing the product users, allowing third parties to verify the authenticity strategy and choosing which type of supply chain of trade documents. finance products to offer, it is important to understand the market size and competitive landscape in order to BUILDING COMPETENCIES BEYOND innovate and find the appropriate offering that will TECHNOLOGY FOR SUSTAINABLE SUPPLY quickly gain a sizeable market share in the market, as CHAIN FINANCE SOLUTIONS well as the legal and financial infrastructure landscape Technology solutions are an important factor, although (such as moveable collateral registries) that will help they are not the only driver of success when launching to identify the most demanded and scalable supply a supply chain finance program. There are other chain finance products. A detailed product design important factors, summarized in Figure 4. with good accompanying credit policies and a product Operational model. A supply chain finance program implementation plan are key to successfully launching requires a clear operational structure within the bank. the new product supply chain finance offering. This includes a well-defined place in the organizational Sales and Delivery Channels. When designing the sales model, financial institutions must establish a cost- benefit analysis (for example, peer group comparison of working capital efficiency) for each corporate client Operational Model chosen to join the supply chain finance program. It must also create an onboarding mechanism for suppliers and Management Products & distributors, detailing the functionality of the program Dedication Services as well as the products, technology, and benefits of participating in the program. In addition, a suitable SCF SUCCESS sales outfit is required to allow the bank to rapidly FACTORS acquire, onboard, and manage a portfolio of new Credit Risk Sales clients. To achieve efficiency while keeping operational Management Channels costs low, financial institutions must tailor their service offering based on the size of the targeted business. HR & Systems HR & Systems. Banks need to create the proper incentive and reward mechanisms to align their sales force and achieve the growth and scale of the program. Training is often needed to equip the front line team, FIGURE 4 Competency Framework of a both corporate and SME staff, with the necessary Successful Supply Chain Finance Program technical and operational skills to sell and fully service Source: IFC clients in the supply chains. INTEGRATION 49 Credit Risk Management. A number of areas need requires a strong central coordination function with to be in place to successfully and safely scale up the a dedicated supply chain finance team. The team has supply chain finance program, including designing the to be responsible for gaining the buy-in from various appropriate credit policies detailing the anchor client stakeholders in the bank (for example, corporate/ classification criteria and corresponding buyers and commercial, retail/small business, credit, compliance, IT, suppliers. Industry benchmarks can also be established legal, and HR), which often entails clear profit sharing/ to improve the design of risk and pricing profiles. shadowing arrangements, and a strong commitment For more advanced cases, the use of application and from management to drive the program through behavioral scoring models can help to support the inception to implementation. credit differentiation process, while installing early In addition, this team also coordinates the external warning systems will help the bank to anticipate adverse relations with third parties and partners who work in movements in its portfolio and minimize expected the supply chain finance space. losses. A well-structured collections framework and an active client management approach at the corporate and SME level are key to minimizing losses when late CONCLUSION payment cases arise. Supply chain finance can help banks grow their SME portfolios in a sustainable and risk-mitigated manner. Management Dedication. According to Eugenio The industry is rapidly evolving, with local and Cavenaghi, Head of Trade, Export and Supply Chain regional financial institutions realizing the inherent Finance at Banco Santander, “the major challenge for opportunities within their corporate portfolios. banks in establishing a supply chain finance business is Market trade flows and the increased availability and aligning the interests of various internal stakeholders. Senior management and business line leaders should proficiency of technology platforms has made supply understand the importance and benefits of supply chain chain finance portfolio growth more feasible. finance which includes high returns, low risk, and a Fortunately for financial institutions, there are multiple strengthened relationship with the clients. Once the options beyond building an internal supply chain finance interests are aligned, the institution should mobilize the IT solution, including external technology providers. necessary resources. In order to establish a well-functioning At the same time, financial institutions need to supply chain finance business, the bank needs to allocate understand the market for supply chain finance and significant resources, both human and financial.”121 make the best use of technology to create a solid Creating a supply chain finance program involves supply chain finance program that is successful, a complex set of processes and procedures, which scalable, and sustainable. n INTEGRATION 50 INTEGRATION EM COMPASS NOTE 54 CHAPTER 7 Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion By Paola Elvira Del Carpio Ponce Like most emerging markets, Peru suffers from low banking penetration and faces challenges to providing financial services. Beginning in 2015, a strategy called Modelo Peru emerged as a collaboration between financial institutions, telecom companies, and the government, with the goal of launching a mobile money platform to better serve the nation’s unbanked and underbanked. The platform’s main innovative feature is interoperability among these three groups to achieve scale and breed competition among e-money issuers. Yet after two years the project continues to struggle to align all involved financial institutions toward its development objective, as well as ramp up the number and value of transactions the mobile platform handles. Important challenges to success include investing in a wider distribution network that more effectively reaches the unbanked, and building a strong digital ecosystem that makes the platform relevant and understandable to users. These challenges require better collaboration from the parties involved as well as strong political will. Absent those, mobile financial services in Peru will remain an alternative financial service rather than a tool for financial inclusion. Emerging markets face various challenges in their with the national average of 22 minutes, and just seven attempts at widespread provision of financial services. minutes on average in Lima and Callao Province.124 Peru is no exception. Despite having been one of Latin Thus, while the infrastructure of attention points America’s fastest growing economies between 2010 has increased considerably in recent years, disparities and 2014, only 29 percent of Peruvian adults own among regions remain significant. Currently, 68.9 an account in a financial institution, far below the percent of Peruvian districts have a financial system regional average of 51 percent.122 In fact, although it presence, 56.4 percent of which have access only to is considered an upper-middle income country, Peru’s agents. Still, 5 percent of the adult population—a group account penetration is similar to the average of the that is among the poorest in Peru125—has no access to countries with lowest income and banking interest rates any kind of financial attention point at all.126 in the region (33 percent).123 In this context, and with almost 70 percent of Among the reasons that Peruvians lack a bank account the Peruvian economy having a certain degree of is the perception that the costs of maintaining one— informality,127 the preference for cash is very strong. Some including commission, transaction, and transport costs— 90 percent of transactions in the country are made in outweigh the benefits. In rural areas, the average time cash.128 The main costs associated with the exclusive use it takes to access a financial attention point (a financial of cash are inconvenience (time, transportation, queues) institution office, ATM, or agent) is 1.5 hours, compared and security (risk of theft and counterfeit currency). INTEGRATION 51 By contrast, the mobile phone market has grown institutions, the government, and telecommunication considerably and is more widespread in the country. Peru companies to serve the unbanked and underbanked. reached a mobile subscriber rate of 66 percent in 2015, This innovative model has gained international above Latin America’s average rate of 65 percent.129 attention due to its design based on interoperability As a result, when officials looked for a logical solution to among the three groups. After almost two years in Peru’s lack of available financial services, they settled on a operation, it is useful to understand the advances and broad channel based on mobile phones. However, because challenges of the project, and to gather lessons for the availability of 3G networks is still limited throughout other similar cases in the future. the country, an inclusive solution required a technology that does not require a smartphone or mobile internet.130 THE POTENTIAL IMPACT OF MOBILE MONEY To address its banking issues, the Peruvian government Several countries with low banking penetration rates took a proactive stance, defined by a strong country have created mobile money platforms to promote commitment and a regulatory environment conducive financial inclusion. The first and most successful case to financial inclusion. And despite its many challenges, was Kenya’s M-Pesa, primarily used for person-to- Peru has been considered as the country with the best person (P2P) remittances. Before that technology enabling environment for financial inclusion in the became widespread, most transfers of money were world for several consecutive years, paving the way for made via cash or informally through third parties.132 creation of a mobile money platform.131 M-Pesa increased per-capita consumption levels and This note examines Modelo Peru’s Billetera Movil, brought 2 percent of Kenyan households out of poverty or Bim, “the world’s first fully-interoperable national between 2008 and 2014, increasing financial resilience mobile money platform” supported by financial and savings, especially for female-headed households.133 FIGURE 1 “The Banking-FinTech Development Space”—Peru Appears Currently in Quadrant IV Peru displays values similar to other countries with high shares of unbanked populations and relatively low activity in venture capital investment, a proxy for the development of technological ecosystems. Source: Saal, Matthew et al. 2017. “Digital Financial Services: Challenges and Opportunities for Emerging Market Banks.” EM Compass Note 42. IFC, August 2017. *The values for the US are outside the shown scale, i.e. 50 for x-axis and 94 percent for y-axis. The values for Peru are 1.6 for x-axis and 29 percent for y-axis. INTEGRATION 52 Access to mobile money reduces both fixed and variable created by the new legislation, can then offer these costs of transfers and makes consumption smoothing simplified bank accounts. more effective. It also enables families and individuals The Peruvian Bank Association (ASBANC) approached to protect themselves against shocks such as income Banco de la Nación—the bank that represents the and health risks, and allows individuals to reach a Peruvian government in commercial transactions—as wider network of social support, as physical proximity well as microfinance institutions and rural savings is not necessary for P2P money transfers. and credit union representatives, to create a joint Mobile financial services (MFS) providers are business interoperable platform large enough to reach the models as for-profit businesses. They can be mobile unbanked, and with the potential for rapid scale. network operators (MNOs) like Vodafone in the case One challenge when deploying such platforms is the of M-Pesa, or they can be companies that develop the reluctance to embrace opportunities of open standards platform and then partner with MNOs to provide and collaboration, as competition on digital platforms connectivity to end users, as is the case with Pagos is “asymmetric,” and there is a risk of collaborators Digitales Peruanos (PDP) in Peru. These companies competing for each other’s customers (scale versus also partner with banks, governments, and others to value leakage).135 allow customers to carry out different transactions, In Peru, most commercial banks are located in the generating a digital ecosystem.134 Regardless of the coastal regions, with 59 percent of bank branches business model, an effective distribution network is located in the capital city of Lima. By 2015, only 31 critical, including a network of agents or franchisees percent of the districts in Peru had access to the private to help customers set up accounts and make banking system. In the same year, Banco de la Nación transactions. Agents are entrepreneurs themselves, expanded the number of its branches, ATMs, and agents as they are paid a commission for every account they to increase access to financial services by 20 percent. open or transaction they facilitate. Customer care, service quality, and cash management depend directly As commercial banks—which hold the vast majority on these actors, which highlights their importance. of assets in the financial system—do not reach several locations in the country, building an inclusive digital BACKGROUND OF MODELO PERU’S CREATION ecosystem necessarily implied working jointly with other institutions. In addition, interoperability would In 2013, the Electronic Money Law was enacted also be needed between telecommunications providers in Peru, establishing a legal framework for mobile (telcos) within the platform, since these providers’ money to serve as a tool for financial inclusion. The mobile network coverage is just as uneven, with some law determined that enterprises authorized to issue zones only covered by one provider, and some with no electronic money can be considered either financial coverage at all. Therefore, an inclusive solution implied institutions or electronic money provider enterprises equal use of the platforms by users from different supervised by the regulator (Superintendency of mobile services providers. Banks, Insurance Companies and Private Pension Fund Managers-SBS). In addition, complementary In July 2015, Peru launched the National Strategy for norms were published, such as a regulation that Financial Inclusion, known as ENIF, to allow financial creates simplified accounts. These accounts reduce institutions, telcos, the regulator, and different Know-Your-Client and Anti-Money Laundering government actors to work together. requirements, and can be opened merely by presenting a valid identity card containing the PLATFORM DESIGN AND BUSINESS MODEL recipient’s full name and current address. However, Also in July 2015, ASBANC launched Pagos Digitales they also have limits on account balances (about Peruanos (PDP), the company in charge of designing, $600) and transaction size (about $300), with total maintaining and managing the joint interoperable transactions between two parties limited to $1,200 platform. PDP’s shares are 51 percent owned by per month. Electronic money provider enterprises, ASBANC’s nonprofit Center of Financial Studies (CEFI) INTEGRATION 53 and 49 percent by the rest of the electronic money platform users, enrolling new users to Bim, facilitating issuers. Telecom companies and the government have an transactions (payments, mobile top-ups, and transfers), interest in the platform working and are critical allies and performing cash-in and cash-out operations. By for Modelo Peru and ENIF to advance, but are not part early 2017, Bim already had 8,500 physical points of of the decision-making structure of PDP. sale (POS), 19 percent of the all available points in the Ericsson won the bid from a group of 22 different country. Most of the remaining points are not directly money solutions providers to develop the platform136— owned by any bank but operate through aggregator named Billetera Movil (Bim) and launched in February networks, that is, firms that are allowed to affiliate 2016—which connects banks and telecoms with the and manage agents’ operations for more than one unbanked population.137 Over 30 mobile money issuers financial institution. Most of them have not yet joined can operate on the platform, with each generating their Modelo Peru.140 own transactions report while having an intermediary Users can open an e-wallet account without a like the PDP settle all transactions.138 preexisting bank account, Internet access on their The platform is simple. It connects low-income phone, or credit.141 A new user merely needs to present residents to financial services via short message services a personal national identification number, select a (SMS) messaging. The process of signing up and passcode, and choose a financial institution with which opening an electronic wallet is completely free and can they will create an account. In line with regulation, the take less than a minute. In addition, all participating money stored in the e-wallet is safeguarded by a trust financial institutions offer their services through Bim fund created by each e-money issuer. so that the branding effort can be focused exclusively The platform allows users to perform the following around the name “Bim.”139 operations: Bim is innovative and maximizes the reach of all actors • Cash in (mainly through agents), on the platform: • Cash out (through agents and recently through • Electronic money issuers: Users can make ATMs of the banks BBVA and Banco de la Nación), transactions within the platform, regardless of the • Make person-to-person transfers, financial institution the other party is working with, without commissions for transactions between • Buy airtime, and institutions. Users don’t need to know what • Pay for specific services, e.g., person-to-business institution other parties are working with. (P2B) or person-to-government (P2G). • Telecommunications companies: Bim works with Currently, two payment options are possible: (1) Peru’s three main telecommunications companies RUS, a simplified tax for self-employed taxpayers (Movistar, Claro, and Entel), covering around 90 and microbusinesses payed to SUNAT (National percent of the mobile market, and is coordinating Superintendence of Tax Administration); and (2) to include Bitel, the telco that holds most of the payments to a technological institute called TECSUP. remaining market share. Fees are only applied for transfers and cash-out • Between cash-in/cash-out institutions: Users can transactions and are meant to cover the cost of SMS reach any agent in Bim’s network, regardless of their from PDP to the mobile network operators. contract. Pagos Digitales Peruanos is partnering with Banco de la Nación to provide government-to-person (G2P) OPERATION OF THE PLATFORM operations such as facilitating payments for cash Users can be individuals or non-financial businesses, transfer programs to the poor. In addition, PDP has including government actors, electronic money agreements with some enterprises to promote supplier issuers, and distribution networks such as agents and payments from shopkeepers via Bim (business-to- certain ATMs. Agents perform actions directly with business transactions, or B2B). INTEGRATION 54 PROMOTING GOVERNMENT-TO-PERSON TRANSACTIONS AMONG THE POOREST The Ministry of Development and Financial for people with less digital capabilities, including Inclusion is currently working on a pilot to the elderly, to adopt the use of the platform. evaluate the potential of digitizing payments Nicolas Besich, Principal Researcher at Videnza for cash transfer programs through Bim. The Consultores who conducted a project on potential beneficiaries of these programs are the promotion and use of Bim among Juntos among the poorest of the population. Currently, beneficiaries in Catacaos, Piura, highlighted cash transfers are made through deposits in that these users’ limited education levels could savings accounts (where there is a Banco de la complicate their adoption of Bim. Also, even Nación office available) or in cash, using transport when 77 percent of the users he contacted had companies that deliver the money at a designated a cellphone in the household, less than half of place and time. The latter transfer process is used the actual beneficiaries are effective owners of for around 20 percent of the total beneficiaries of the cellphone. However, the potential reduction Juntos and Pension 65 and implies significantly in transaction costs related to receiving money higher costs both for the government and would be significant if the distribution network the beneficiaries (who often must travel long reaches these populations.144 distances to reach a payment point). Other G2P operations may have more potential Carolina Trivelli, former Minister of Development to begin with. These include the National and Social Inclusion and former CEO of PDP, Scholarship Programs, per diem for health believes this is a positive initiative but is workers, salaries of military personnel based skeptical that it is a strategy that would build far from their homes, and subsidies for new a wide ecosystem to expand the use of Bim.142 mothers.24 Subnational government payments, Government-to-person operations with the most on the other hand, are desirable but pose a vulnerable populations may reduce costs for significant coordination challenge given the government but do not have clear benefits the fragmentation of payment systems and the poor in the short run because the remotest areas degree of autonomy over payments policy at the also do not have any cash-in/cash-out points for local level.146 Bim.143 Furthermore, it could take significant time SLOW ADOPTION The implementation of Peru’s National Strategy for Adoption of the Bim platform has been slow, Financial Inclusion by all the parties responsible for however. Peruvians in general continue to prefer cash it is critical for Bim to have a proper environment to transactions, and they maintain a high level of distrust operate. PDP message campaigns need to tackle this of financial institutions, which have traditionally been by convincing consumers that the new platform offers associated with excessive fees, and the difficulty and a simpler way to store money and make payments and inconvenience when needing to solve problems within other financial transactions, but that it also retains a the system are the main reasons for this perception. In concrete connection to financial institutions. addition, there is a widespread lack of understanding of Significant progress in this stage of Bim’s rollout would electronic money, and an associated fear of not having require agents to succeed, since they are instrumental in someone to contact or provide assistance if something building trust with the local population and instilling goes wrong.147 Clearly, substantial financial education confidence in them to use electronic money. However, is required to help the unbanked become more it has been difficult to work with banking agents that comfortable with digital payments. already had direct relationships with each bank. INTEGRATION 55 USERS NON-FINANCIAL PERSONS GOVERNMENT P2B BUSINESSES P2G P2P B2B B2P G2P PAGOS DIGITALES INTERMEDIARIES: AGENTS, BIMERS, ATMS* PERUANOS (PDP) • Creates e-wallet account Direct use • Administrates the platform • Cash-in: Receives cash and transfers emoney from its account to the users’ of cellphone • Generates strategic agreements for electronic with telcos and other relevant actors • Cash-out: Transfers e-money from users’ accounts to its own and delivers cash transfers and • Performs bilateral compensation • Facilitates transactions and trains users payments by the end of each day and informs e-money issuers E-MONEY ISSUER • Stores electronic money • Constitutes a trust for the protection of funds Actors • Liquidation of the result of the bilateral compensation Actions • Informs PDP about payments made and received FIGURE 2 Main Actors and Their Activity on the Platform Source: Abad, Liliana, Vásquez, Jose Luis and Milton Vega. 2016. “Regulación de Pagos Minoristas: Modelo Peru.” Revista Moneda 168. BCRP (Banco Central de Reserva del Peru); BBVA. 2013. “El marco regulatorio del dinero electrónico en el Peru y la inclusión financiera.” Observatorio Economico – Inclusion Financiera Peru; Antón-Díaz, Pablo, and Tomás Conde. 2017. “Modelo Peru: Unique Model, Unique Challenges, Bright Future.” Brief 001. Center for Financial Inclusion and Institute of International Finance. Bim’s launch meant twice the work for these agents. prioritize existing networks on the platform rather than They needed to operate using two separate technologies develop new ones, taking advantage of an alternative (phone and point of sale), and had to render accounts transaction channel while gathering transactional twice to the bank. As agents are not used to working information from clients. with phones, it took them twice as long to learn how to According to Trivelli, it is especially challenging to operate Bim’s interface, compared with the use of POS. accomplish the needed investment from financial Also, as Bim is not yet widely used, some agents routinely institutions in more agents throughout the country forget to charge their phones or do not prefund their because it is costly to implement and, after the platform Bim accounts. This generates a self-reinforcing problem: is widely used, they will be used less.149 In addition, it even if there is demand for the use of the agent, their must be noted that expanding agent networks is also inability to help potential Bim customers discourages user challenging, as they perform banking services and adoption of the platform, and this lack of interest further require a certain size and degree of formality to be limits incentives for the agents to use it.148 accepted as agents by the regulator. Bim has yet to gain a presence in rural or unbanked PDP has now postponed the goal of reaching areas, due to the limited number of agents in these unbanked areas immediately and has refocused efforts regions. Historically, banks have not ventured far on peri-urban areas—where there remains a large into rural areas due to high transaction costs and proportion of the population with limited access to the low profit margins. They have been more inclined to financial system. INTEGRATION 56 FIGURE 3 Number of Users (in thousands) FIGURE 4Average Value of Transactions in Source: Semana Económica. 2017. “Dinero electrónico: los planes de Peruvian Sol (PEN) la Billetera Móvil en el 2018”. http://semanaeconomica.com/article/ Source: Semana Económica. 2017. “Dinero electrónico: los planes de mercados-yfinanzas/banca-y-finanzas/257808-dinero-electronico- la Billetera Móvil en el 2018”. 20 soles are equal to ca. $6. losplanes-de-la-billetera-movil-en-el-2018/ To address challenges related to agents using two incentivize people to use the platform more frequently. systems instead of one (a cellphone and a POS) and also By April 2018, it is expected that Bim will be connected to add more attention points for customers, PDP has connect to the POS network of the company working partnered with Ericsson and three banks: BCP, BBVA, with Mastercard, which will enable users to transact and Banco de la Nación, to ensure that:150 with some 80,000 businesses.152 • All BCP agent networks can now be used for Other future projects include: incorporating the cash-in and cash-out operations (approximately six payment of more services such as utilities and thousand agents), international remittances; including the fourth most • All BBVA agent networks can now be used for cash- important telco operator (Bitel) in the platform; in and cash-out operations (approximately 1000 and creating a mobile app for smartphones to bring agents), and more than 1,800 ATMs can be used for additional functionality to those users who own cash-out operations, one.153 Also, government-to-person and person- • All Banco de la Nación agents (6500), ATMs (900), to-government operations will be promoted at the and branches (600) can now be used for cash out national and subnational levels. These operations operations. represent an important opportunity to strengthen the digital ecosystem, but they will also require strong PDP is piloting a strategy with some small businesses coordination with the government.154 Engaging and in Lima known as “Bimers.” These businesses act as promoters of the platform, creating their own Bim coordinating with the government at different levels is e-wallets, making cash-in operations in an agent pivotal for PDP to develop the ecosystem required for for their wallet, and then performing operations for the use of the platform. other people and gaining a small commission for each Despite challenges, it is expected that the Bim facilitation. This model is said to be an “uberization” platform will continue to gain broader use among of agents, as it includes promoters that do not require a Peruvians, though progress may continue to be slow. license but only an ID to operate. The practice has been Expansion will be driven by growing agent networks accepted by the regulator.151 and increased use of Bim for government-to-person As for the future, PDP has planned other partnerships transactions, which will render it necessary for certain to build a stronger digital ecosystem that will groups of the population. INTEGRATION 57 Bim is still in a nascent stage, and similar platforms have tackle the negative perceptions of financial institutions, been operation much longer. Kenya’s M-Pesa platform, address financial literacy issues, and promote the for example, has been operating for over 10 years. concept and convenience of electronic money given the society’s strong preference for cash. In addition, the prevalence of P2P internal remittances within the CONCLUSION country is significant in Peru and should be seen as an The use of mobile money in Peru can help the country opportunity for Bim. Among the young population achieve nation-wide financial inclusion, while also involved in internal migration, 38 percent sent increasing financial resilience for the poor. Modelo remittances to their former household and 60 percent Peru emerged as a result of collaboration between received remittances in 2013.155 financial institutions, telecom companies, and the Peruvian government, in a context where financial As to the supply side, PDP is already working on new inclusion was a priority for the government and partnerships and strategies, with government-to- regulatory policy was favorable. person being one possibility, as described above. These initiatives could be complemented with others such as Modelo Peru’s Bim platform is innovative because of its person-to-government (payment of local and national interoperability on three levels—government, telecoms, taxes), person-to-business (payment for services), and and financial institutions. And in contrast to other business-to-person (payment of salaries, for example). mobile money platforms, competition is provided inside the Bim platform and not between platforms. However, Different incentive schemes could be established to interoperability has also brought the challenge of promote the use of Bim over other channels for these aligning all relevant parties’ incentives. And use of Bim types of payments (for instance, longer deadlines or has lagged expectations. discounts when paying through Bim). All of these initiatives, however, will require a strong coordination The primary challenge to more widespread use of Bim among several actors in addition to political will from among Peru’s underbanked and unbanked in the short different governmental actors. run is the size and scope of the distribution network throughout the country. This requires a significant To date, the adoption and popularity of Bim investment on a distribution network whose use will demonstrate that well implemented regulation is diminish as the platform is more widely used and the necessary but not sufficient to the success of a mobile money stays in the network rather than having the money platform. Political will and the cooperation of constant need for cash-out operations. As challenging all related actors are also critical. as this may be, it is pivotal for the success of Modelo Without ensuring a wider distribution network and Peru, as evidence has shown the importance of developing the required ecosystem, Modelo Peru distribution strategies for FinTech solutions. It is will likely remain an alternative financial service expected that the new approach of “Bimers” will help where banking services are already available, instead achieve this more rapidly. of effectively promoting financial inclusion for the In addition, it is critical that a digital ecosystem is unbanked and underbanked. However, this platform developed, so that the platform is created for various still has plenty of space to mature. If it can address the transfers and payments. To this end, PDP will need to challenges it faces, it has the potential to produce an work on both the demand and the supply sides. important development impact and create a precedent Regarding the demand side, campaigns will need to for other interoperable financial inclusion efforts. n INTEGRATION 58 INCLUSIVENESS EM COMPASS NOTE 34 CHAPTER 8 How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective By Alex J. Alexander, Lin Shi, and Bensam Solomon This note explores the way traditional banks and financial technology companies, or FinTechs, interact in Africa and Asia, and their ability to offer innovative digital financial services that grant unbanked individuals access to financial transactions. The FinTech sector is experiencing explosive growth in both continents, but while Asian banks have managed to efficiently integrate with FinTech solutions, African banks have been slower to adapt to this change. Still, the outlook for mobile banking remains positive, and its prevalence will boost the financial industry in both regions. The digital age has unleashed a disruptive movement which provide innovative financial technologies across the financial industry allowing financial that offer a greater number of individuals access to institutions to attract previously “unbanked” financial products and services. individuals in emerging markets, while retaining This note will use the terms digital financial services, already existing traditional bank clientele.156 financial technology companies, and FinTech Digitalization has ushered in digital financial services, interchangeably. FIGURE 1 Some 73 Percent of the World’s Unbanked Reside in 25 Countries (Predominantly in Asia, Access is Low in Africa) Shaded Countries = IDA International Development Association (poorest countries); Sources: Global Findex 2014, IMF Financial Access Survey 2012. INCLUSIVENESS 59 Figure 1 illustrates the portions of 25 countries that lack markets, these services are instrumental to private access to banking or financial services, as of 2014. Given sector productivity. that more than half of the world’s unbanked live in Asia, Digitalization of the traditional banking sector and many more live in populous African countries like transforms the way banks react to their customers, Nigeria and Ethiopia, the focus is on these regions in offering them digital solutions such as: particular. • Virtual in-branch investment advisors Although the banking sector is relatively developed in • Online and mobile banking products and services Asia, the large populations in China and India mean there are still significant unbanked populations in that • Increased use of social media and data analytics region, while access to banking in Africa is generally low. to communicate with customers, and lower operational costs158 DIGITAL FINANCIAL SERVICES, A BUSINESS Figure 2 illustrates the massive disruption banks in OPPORTUNITY FOR EMERGING MARKETS emerging markets face—despite proactive adoption of digital financial technology—from the emergence of Since approximately two billion people in emerging FinTechs. markets are unbanked, the provision of digital financial services is as much about creating markets for these The FinTech sector is experiencing explosive growth, future clients as it is about altering current bank- attracting $12.2 billion from investors in 2014, three customer relationships. Such services, according to times more than the previous year,159 and a massive $19 the Consultative Group for the Assistance of the Poor billion in 2016. The industry’s outlook remains positive. (CGAP), have a “significant potential to provide a range Strongly backed by venture capitalists, FinTech of affordable, convenient and secure banking services companies are set to influence the financial industry in to poor people in developing countries.”157 In emerging three significant ways: EMERGING TRENDS & DISRUPTION BANKS’ RESPONSE • Growing global adoption—183m people in • Aditya Puri, CEO, HDFC Bank: “…the only way we could Africa alone own a mobile wallet be disintermediated is if we buried our heads in the Virtual Aware & sand and did not come out with our own solution.” Wallets • More mobile wallets are becoming Active interoperable • Agricultural Bank of China’s Innovation Lab, Wells Fargo Startup Accelerator, Citibank Innovation Lab, etc. • Mobile wallets and other prepaid instruments, Data driven / • P2P lending, platform lending Internet NFC-enabled payment systems • Alibaba’s MYbank, an online lender that also • Banks have tied up with Telcos—India Payments Banks, Lending, takes deposits Savings Launch Mbank-Orange Poland Products • Banks are adapting to online lending and credit • Comparison / fulfillment portals underwriting (CBA, Barclays); also entering ecommerce Financial • Personal finance and wealth management to retain customers (China banks) e-commerce • Wealthfront took only 2 years to reach • Acquiring FinTech start-ups—BBVA Santander acquired US$1 billion in AUM Simple; HSBC, Citibank, Mandiri have VC-like structures in place for FinTech / DFS Invest / • mPoS as a medium of transaction and lending Acquire / • Citigroup has partnered with Lending Club to lend Infrastructure • White label ATMs Partner US$150 million through its online platform • Payments gateways, switches • Specialized digital subsidiaries—ING Direct, First Direct HSBC, B-Kash (Brac Bank) However, most banks have not yet fully responded to the emerging threats and opportunities. FIGURE 2 Supply Side: Financial Industry’s Response to Emerging Trends Source: Holtmann, Martin, Digital Financial Services – Challenges and opportunities for Banks, Presentation provided at the Sixteenth Annual Conference on Policy Challenges for the Financial Sector - Finance in Flux: The Technological Transformation of the Financial Sector, June 1-3, 2016, Washington, DC. Abbreviations in figure: AUM = Assets under Management; mPOS = mobile point of sale; NFC = National Finance Center, a federal agency within the US government. INCLUSIVENESS 60 First, drive efficient financial services, as more banks ASIA in emerging markets turn to FinTech innovations to improve their digital service delivery. ASIA’S TRADITIONAL BANKING SECTOR Second, redefine the industry’s perception of what it Asian banks were resistant to the effects of the 2008- takes to be called a bank. FinTechs not only offer bank- 2009 global financial crisis due to relatively fewer like services, including receiving financial transactions financial linkages with Europe and the United States, and making loans, they also innovate faster and are as well as lower levels of debt. As a result, they able to rapidly grow their customer base. Unlike outperformed the global banking sector. Emerging traditional banks, they have the flexibility to provide middle class income, and stable macroeconomic cheap and accessible products and services and are fundamentals were further contributing factors. quicker to tailor their service offering based on changes Headwinds created by the crisis also enabled a number to behavioral consumer data. of local banks to gain greater market share as they replaced deleveraging foreign banks that withdrew. Third, become an intricate part of the banking sector, while distinguishing itself from traditional banks under The region’s banking sector has become competitive, international regulatory guidelines. making great strides in innovative technologies. BKASH, BANGLADESH—PROMOTING FINANCIAL INCLUSION THROUGH MOBILE PAYMENTS Home to 160 million people, Bangladesh has Currently, despite more than 20 mobile financial an extremely low banking penetration rate, service licenses approved by the central bank with over 70 percent of its population having of Bangladesh, bKash has a clear monopoly, no access to a bank account. Its banking sector commanding over 80 percent of mobile banking lacks adequate technology to reach the poor, transactions made in Bangladesh. bKash is now which translates into a unique opportunity for used by over 17 million Bangladeshis and handles bKash, a mobile money platform. more than 70 million transactions a day, BKash Limited, a subsidiary of BRAC Bank Limited according to the company. bKash CEO Kamal (Bangladesh) was launched in 2011 to provide Quadir attributes the company’s fast growth to mobile financial services, including payments its focus on providing mobile financial services and money transfers, to both the unbanked through mobile platforms. and banked populations of Bangladesh. Upon In 2013, the IFC made a $10 million equity registration, each bKash user receives a mobile investment in bKash to help the company wallet that serves as a bank account. expand its distribution network. According to Through bKash’s vast agent network of over the Consultative Group to Assist the Poor, a 90,000 retail points, users are able to deposit global partnership of 34 leading organizations, electronic money into their bKash accounts, 22 percent of Bangladesh’s adults use mobile receive disbursements, including salaries, money and over 80 percent of transactions loans, and domestic remittances, cash-out are made through bKash, partnering with the electronic money, and perform peer-to- MasterCard and Western Union. bKash peer transactions. BKash’s main goal is to announced in April 2016 that its account serve lower income households in the country holders now have access to international by offering free registration and cashing- remittances on their mobile phones, a in services. It also provides users with the breakthrough that will benefit 22 million cheapest handset in the world (approximately people living in the eighth largest country for $15) for accessing bKash’s simple user interface. remittances in the world. INCLUSIVENESS 61 FINTECH MARKET PENETRATION AND ITS IMPACT ON TRADITIONAL BANKS IN ASIA UNDERSTANDING BIG DATA Digital payments used in advanced countries now According to the International Data Corporation, global Internet traffic will rise reach Asia’s middle-class through international and to 44 Zettabytes (ZB) in 2020, ten times what local debit and credit card networks such as India’s it was in 2013 (a Zettabyte is one trillion Rupay and China’s UnionPay, among others. To gain a Gigabytes.) FinTechs are using their ability to competitive edge and respond to the growing middle- draw insights from vast amounts of consumer class demand to access the e-commerce space, Asian data, while applying innovative solutions to banks turned to digital technologies offered by FinTech monetize this data. companies.161 They proactively sought ways to reduce Two types of data analytics that help banks costs and meet customer needs, choosing to partner to minimize regulatory compliance costs and rather than compete with FinTechs. Asian governments identify risky consumers are: (1) Know Your and regulators have been similarly supportive, Customer analytics, which provide a history encouraging FinTechs to provide funding to small of how customers have interacted with businesses, and innovative solutions to banks.162 financial products and services; and (2) Anti- money laundering and counter financing of These solutions have however not adequately served terrorism AML-CFT applications, which use unbanked or poorer households who use less formal a combination of descriptive analytics and retail outlets like street vendors and local markets and statistical techniques to prevent fraudulent have less access to bankcards or Point of Sale devices to activities. The second technique is termed make payments. diagnostic analytics for its ability to identify possible reasons for certain behavior or In Asia, both banks and FinTechs benefit from a outcomes by highlighting customer habits symbiotic relationship. While FinTechs view banks and trends. The combination of block-chain as a gateway into a panoply of markets, banks turn and big data will soon create a financial to FinTechs to stay current in the rapid unfolding of ecosystem that can identify trends, track end- financial innovations, while keep abreast of sudden to-end data, make judicious decisions based shifts in regulatory mandates, and gaining access to big on this data, and use the entire data set for data to help improve their customer relationships. financial forecasts. EMERGING PATHS FOR ASIA’S TRADITIONAL BANKS AND FINTECHS However, shadow banking remains a major source of Asian banks’ successful partnerships with FinTechs financing for corporates and individuals due to limited allow them to connect to new customers through the access to bank loans. For China, shadow banking made digital space, a less costly way to gain market share up 40% to 70% of GDP in 2017, from 35% at the end of particularly in locations where they have a limited 2015, according to Bloomberg. supply of physical distribution channels.163 Banks can The value of wealth management products more gain access to a market like China where foreign banks than tripled between the end of 2015 and three years have a combined market share of less than two percent. earlier.160 Part of this expansion can be linked to India, one of the pioneers of digital banking in Asia FinTech innovations, especially its impact on payments. has successfully created an environment for FinTech Traditional banks are eager to capitalize on these innovative solutions to flourish and feed into the innovations. established traditional banking sector. India’s banking In India there is a consolidated banking sector with well- sector does however refer closely to the central bank for developed digital offerings. Banks encourage customers regulation guidance with regards to FinTechs, slowing to manage their finances using mobile phones. down service dissemination into the market. INCLUSIVENESS 62 FinTechs must thus find ways to test their latest 2018, according to the Financial Times. It has giving innovative solutions through a Proof of Concept rise to small business solutions like Rainfin backed process required by financial institutions. Every by Barclays bank, which is currently the largest peer- successful Proof of Concept provides a benchmark for to-peer (P2P) lending business in South Africa with the industry, allowing FinTechs to offer their products transactions of more than one million rand per day. to overseas markets.164 However, FinTech solutions are often country specific and serve rather narrow niche markets. With a AFRICA weak distribution strategy, a FinTech solution may work successfully in one country but fail miserably ROLE OF TRADITIONAL BANKING IN AFRICA in another. M-Pesa is a perfect example where its Other than South Africa’s developed financial sector, operations took off in Kenya but failed to launch in the footprints of banks in neighboring African countries South Africa. Founded in 2007 by Safaricom, M-Pesa have historically been low, especially in the rural areas. allows subscribed users to perform traditional banking Bank penetration in Sub-Saharan Africa is below 35 services using their mobile phones. percent.165 Approximately 80 percent of Africa’s 1 billion The service boasts 19 million mobile subscribers population166 lack access to formal banking services. in Kenya and 6 million in Tanzania, compared to Africa’s banking sector is held back by currency a mere 76,000 active users in South Africa out of fluctuations, and in particular a low supply of products only one million subscribers (based on 2015 data).171 for savings, insurance, credit, and payment transactions M-Pesa’s timing and deployment strategies in Kenya to large segments of populations in these countries. and Tanzania were impeccable. Safaricom seized the There is a prevalent perception that banking is for the opportunity to enter both markets based on its position rich, in a continent where financial services such as as the dominant mobile network operator. It further opening a bank account can be painfully bureaucratic. deployed a vast agent distribution network.172 Poor infrastructure, including inadequate roads, electricity, M-Pesa’s difficulty to replicate its success story in South intergovernmental data connectivity, and utilities also Africa was based on three factors: (1) An inadequate hampers access to bank branches and ATMs.167 distribution network; (2) low mobile network subscription rates; and (3) South Africa’s stricter digital In contrast, although 389 million people live on less than wallet regulations. $1.90 a day (based on 2013 data), the continent has one of the highest mobile penetration rates in the world.168 M-Pesa’s low adoption rate in India (operated by This is making the region a fertile backdrop for the Vodafone, a network with 173 million customers) is emergence of FinTech. The FinTech industry took off in another example of the difficulties to replicate its success. the wake of the global financial crisis in 2008169, despite Only 370,000 users subscribed to the service in September barriers such as poor infrastructure, and limited Internet 2014, after more than two years of operation.173 penetration.170 In 2012, Safaricom and the Commercial Bank of Africa launched M-Shwari, which provides mobile FINTECH MARKET PENETRATION AND bank accounts offering savings and micro-credit ITS IMPACT ON TRADITIONAL BANKS IN products. M-Shwari, succeeded in rapid market SUB-SAHARAN AFRICA penetration in Kenya174 and expanded to other Africa’s FinTech revolution owes its success to the countries, including Tanzania. industry’s deep understanding of customers at grass- root levels and adequately meeting their needs. The SCENARIOS FOR AFRICA’S TRADITIONAL industry is attracting ample attention from venture BANKS AND FINTECHS capitalists with funding of the tech sector expected South Africa’s well-regulated banking sector and to rise from $414 million in 2014 to $608 million in aggressive digital banking roadmap is already INCLUSIVENESS 63 developing its own system of innovative FinTech is clear is that FinTech companies offering global solutions, which represents a major entry barrier for financial solutions, such as big data will play a pivotal venture capital-backed FinTechs.175 Banks in the rest of role in boosting the traditional banking sector. Africa are in direct competition with FinTech solutions, unlike Asia where both work harmoniously. CONCLUSION The pace of the FinTech industry in Sub-Saharan FinTechs have had a positive impact in Asia’s banking Africa is somewhat dictated by existing mobile network sector, giving it access to a larger market at a lower operators and their relationships with central banks. cost. Countries such as China and India have To enter a new market, depending on the country, successfully created an environment for assisting mobile network operators like Safaricom must either FinTech innovative solutions to flourish and integrate file a bank license, which can take months to obtain, or with the traditional banking sector. find an alternative route into the banking sector. Both In contrast, domestic FinTech innovations in Africa, options are expensive, and represent an obstacle for often deployed by mobile network operators, operate FinTechs to make a major impact on the continent. separately from and are often in direct competition The outlook for FinTechs in Africa remains unclear. with banks. This is changing however, as illustrated by Traditional banks remain internationally accepted the success of M-Shwari, demonstrating the potential entities for cross-border transactions.176 However, what for integrated services. n INCLUSIVENESS 64 INCLUSIVENESS EM COMPASS NOTE 42 CHAPTER 9 Digital Financial Services: Challenges and Opportunities for Emerging Market Banks By Matthew Saal, Susan Starnes, and Thomas Rehermann A digital transformation is taking place in the financial services industry, with a host of non- bank innovators offering both customer facing and back office financial technology products and services. This transformation includes emerging market economies, and in many places offers a viable digital alternative to traditional banks, which have left significant populations underbanked. This note explores the challenges and opportunities that financial technology innovations present for banks in these nations. The digital transformation that has upended industries are mediated by online marketplaces and distributors, from retail and media to transport and business-to- and assisted by back-end support operations and data business commerce is now sweeping the financial services analysis that together drive better risk assessment, faster industry. This was inevitable, as ubiquitous computing fulfillment and more efficient customer service. power, pervasive connectivity, mass data storage, and The same types of disruptive market innovations advanced analytical tools can easily and efficiently be and reconstituted value chains are now emerging in applied to financial services. After all, money was already the financial services industry.177 This poses distinct extensively (though not exclusively) created, used, stored, challenges for incumbent providers such as banks, processed, and delivered electronically. finance companies, microfinance institutions, and Immediacy and personalization have become the norm insurance companies, as financial technology—or FinTech—innovators enter their markets. Incumbents, for consumer goods and services. Consumers have rapidly too, can benefit from these developments, which will become accustomed to making purchases with a touch enable them to broaden financial access, introduce of their finger wherever they may be, receiving tailored new products and services, and serve customers more recommendations, choosing customized products, and efficiently by deploying new technologies internally or enjoying delivery of almost any item directly to their in partnership with external innovators. front door. Businesses failing to adapt quickly to these technological developments can fail dramatically, and DIGITAL TRANSFORMATION IN many have already done so, including Tower Records, FINANCIAL SERVICES Borders Books, Blockbuster Video, and countless travel Although financial services have been computerized agents and brick-and-mortar retailers. Consumers’ new for decades, with products such as retail brokerage expectations apply to financial services as well. using digital channels for some 20 years, a more radical Technology has transformed business-to-business transformation of the industry was delayed due to and within- business interactions, too, enabling market advantages of traditional financial services reconfiguration of design, production, marketing, providers. These included the established trust of delivery, and service functions through distributed supply customers, regulatory barriers to entry in banking and chains, freelance design, outsourced manufacturing, and insurance, and supervisory approaches that created a contract warehousing and delivery. These reconfigurations bias to internalizing all or most of the value chain. INCLUSIVENESS 65 The 2008 financial crisis reduced trust in financial invoice finance, small and medium-sized enterprises institutions, and the regulatory response to the (SMEs), lending, and insurance. crisis, including increased capital requirements and Innovations are also directed at processes such as compliance costs, and made it more difficult and Anti-Money Laundering-Know Your Customer (AML- expensive for banks to lend.178 Paradoxically, this KYC) compliance, credit scoring, underwriting and created an opportunity for less regulated, technology risk management, customer service, collections and enabled non-banks to thrive. They could offer financial recovery, capital markets activities, asset securitization, services more cheaply and efficiently than incumbents middle- and back-office reporting, trade processing, burdened with legacy infrastructure and regulation. and connectivity between banking systems. In addition, digital transformations of other industries While this note largely takes a functional or product made customers more trusting of and comfortable with oriented approach, the potential also exists for tech-based financial solutions. It also increased their innovative technologies to change the scope of what demand for immediacy and customized products and is possible in financial services and disrupt traditional services. Some of the most prominent FinTech companies intermediation roles. Technologies with radically are meeting these consumer demands with low cost, transformative potential include digital identities and convenient ways to transfer money, borrow, and invest. currencies, distributed ledgers, big data, artificial The impact of FinTech on financial services, however, intelligence, and machine learning. These are already goes beyond retail and customer-facing applications being incorporated into specific products and solutions and services to include all elements of the financial in familiar institutions, but may in time fundamentally services production process. The transformations in transform financial intermediation. other industries demonstrated how increased availability of data and speed of information transmission could IMPACT ON FINANCIAL SERVICES address key issues in contracting and monitoring that VALUE CHAINS had determined the structures of firms and the degree of Some FinTechs aim to operate separately from—and internalization of activities. For example, the ability to compete directly with—banks. Others offer solutions send designs across the world and monitor the quality to banks. Virtually all of them need to connect to of production has enabled the separation of design other financial services and to existing infrastructure and marketing from manufacturing and logistics in (for funds transfers, for example). And banks, whether companies such as Apple and Nike. they want to or not, will be dragged into this age of Yet commercial banks are still internalizing almost all reconfiguration by market forces and, in some cases, by aspects of channels, product design, and operations as government interoperability mandates. well as a fair amount of private infrastructure (with call Where unitary proprietary bank systems once precluded centers being an occasional exception, though many connection to external solutions, interoperability such operations were offshored rather than outsourced). that will help FinTechs to carve off profitable slices New FinTech entrants can optimize a single link of the of banks’ businesses is now mandated in some financial services value chain to provide a bank-beating jurisdictions, notably the European Union.179 The digital solution that can connect to the rest of the financial transformation of financial services is likely to result in ecosystem. That might mean delivering services directly more competition, with significant portions of banks’ to users’ mobile devices instead of using bank branches, products and profitability at risk. Barriers to entry dispensing with proprietary communication lines by may have risen in terms of core bank compliance costs, using encrypted Internet transmissions, or avoiding the but regulators’ willingness to countenance non-bank cost of data centers by utilizing cloud computing. competitors in product areas traditionally dominated There are FinTechs offering point solutions in product by banks has increased, and the economics of banking areas such as payments, remittances, savings and have shifted. Cloud infrastructure and mobile channels investments, personal financial management, trade and mean that the provision of financial services no longer INCLUSIVENESS 66 requires high fixed-cost mainframe data centers and use of standardized Application Program Interfaces branch networks, so costs are more variable. (APIs) and the availability of plug-and-play third-party While there may be consolidation in certain lines technologies, as well as an increasing willingness to of business that have very large scale or network partner to deliver value to a jointly shared client base. economies, at the same time it is increasingly easy for While sharing customers is difficult, collaboration has niche providers to offer tailored solutions to a particular been increasing. market and be profitable with a much smaller asset base. FinTechs have come to realize that most will not reach Fintechs have taken market share in high margin slices scale without leveraging the customer base and capital of banking such as remittances and asset management, that banks have already accumulated, while banks and technology-enabled challenger banks have emerged now acknowledge that internal product innovation as serious contenders in a number of markets. processes do not always meet customer expectations in The reconfiguration of value chains is also crossing terms of time to market or quality.182 Both can benefit industry boundaries. SoFi, an online personal finance from partnerships that reconfigure financial services company offers career coaching, while Holvi, a Finnish- value chains. based financial startup, provides bookkeeping services WHAT IS DIFFERENT IN EMERGING MARKET and cash flow tracking.180 Similarly, data analytics ECONOMIES? company Atsora, a Polish provider of SME financial management tools, offers its products to SMEs through E-commerce, online media, and new models in banks and in turn leverages the data to create cash flow transport are making inroads in developing economies. based scoring the banks can use to lend.181 Financial services transformation is also underway— and in some countries has outpaced the adoption of As the financial services industry becomes increasingly technology-driven business models in other industries. contestable, decomposable, and reconfigurable, the Mobile money adoption in Kenya and Bangladesh capacity to innovate will be a key success factor. is an example. Still, there are specific challenges for Banks that learn to adopt new technologies, adapt the digital transformation of financial services and their products and processes, and become more adept at delivering tailored solutions to their customers will succeed. Given banks’ preoccupation with the global CHALLENGES FOR BANKS financial crisis and regulatory requirements, non-bank AND FINTECH COMPANIES IN innovators have been leading, or have acted as catalysts EMERGING MARKETS for, the digital transformation of financial services. 1. Low levels of formal financial services Yet incumbents are increasingly catching on. Just as (cash dominance in transactions, informal brick-and-mortar giants Wal-Mart and Target responded credit and savings) to the online threat from Amazon with strengthened 2. Lower income and financial literacy levels online presences of their own as well as modified (low value transactions, smaller fees, need physical channels such as pick-up locations, almost every for user education) financial services provider, from banks to credit unions, 3. Underdeveloped technology and venture now has Internet and mobile channels, and many capital ecosystems (shortage of skilled are adopting new technologies across products and tech/finance entrepreneurs, small markets, processes as well. FinTech innovations can help banks limited revenue potential) deliver enhanced risk assessment, reduce transaction 4. Relatively weak infrastructure costs, make operational back offices more efficient, (underdeveloped payment systems, lower fixed asset investment requirements, and enter customer credit data, legal enforcement new markets. At the same time, banks can help FinTech mechanisms for payment obligations, innovators address their target markets. Adoption of power, telco/Internet coverage). new technologies by incumbents has been aided by the INCLUSIVENESS 67 the development of FinTech in most emerging market Quadrant II (Upper Right): “Partnering” countries. Four key challenges that have affected the In this quadrant banks are well entrenched and serve digital transformation of financial services in these most of the population. However, the strong tech markets, relative to advanced economies, are: ecosystem will support innovations offering new value • Low penetration of formal financial services propositions or seeking to take market share from • Low income and financial literacy levels incumbents. • Underdeveloped technology ecosystems Banks can in turn leverage technology to compete. Some FinTechs will scale up on their own, while others • Weak infrastructure will partner with banks for better access to customers, Not all of these factors are present to the same degree capital, payments systems, or other operating assets. across emerging market economies, but they shape the Examples include OnDeck Capital, which partnered landscape for the provision of financial services both by with JPMorganChase for customer origination and banks and FinTechs, as well as the interactions between balance sheet placement while providing the loan those two types of financial service providers. decision making and servicing, and TransferWise, which markets itself as a bank disruptor while THE BANKING-FINTECH DYNAMIC partnering with banks for distribution. DEVELOPMENT SPACE: A CROSS-COUNTRY COMPARISON Quadrant III (Lower Right): “Tech Dominance” To provide a more quantitative comparison across Countries in this quadrant have well developed tech countries, in Figure 1 we use two indicators as proxies ecosystems, while banks have left large segments for these four challenges: We measure formal banking of the market underserved. This has created an penetration (representing the first two challenges, and opportunity for non-bank innovators to enter the displayed along the y-axis) and venture capital (VC) financial services market. investment relative to GDP (representing the last two The regulatory environment and the extent to which challenges, and displayed along the x-axis). The bubble it is open to the FinTech sector varies across countries. sizes correspond to the estimated number of unbanked This is a key variable in determining the balance in each country. between FinTech and more traditional banks. China, for Taking the average venture capital penetration and the example, has been relatively open to big tech companies least-squares trend line for the interaction of the two entering financial services. Ant Financial, a Chinese variables as dividing lines, we get the four quadrants FinTech, has more than 450 million clients, ten times the shown in Figure 1: number served by any one of the world’s largest banks and equivalent to about 60 percent of the number of Quadrant I (Upper Left): “Bank Dominance” bank accounts in China.184 India, on the other hand, This quadrant includes economies in which the has introduced new types of financial services licenses traditional banking sector is already well established while continuing to require that these new services be and will likely continue to dominate the market. In- conducted by licensed and regulated institutions. sector competition may create a positive dynamic of This regulatory environment has resulted in more service innovation among banks. Examples include cross-sector convergence as some tech companies Alior, Idea, and mBank in Poland.183 obtain financial services licenses while others partner With only nascent local tech ecosystems, innovation with banks, and banks seek new functionality via may come from foreign FinTechs. Regulators may seek partnerships with FinTechs. to create an open environment for non-bank entry in order to foster competition and product and service Quadrant IV (Lower Left): “Race to the Finish” innovation, but entrenched local banks enjoy a “home Here we see low levels of bank penetration and field” advantage. underdeveloped technology ecosystems. Telecom INCLUSIVENESS 68 FIGURE 1 The Banking-FinTech Development Space Source: IFC staff calculations; World Development Indicators, The World Bank, 2016; Global Findex, The World Bank; PitchBook Data, Inc. 2016. The values for the US are outside the shown scale, i.e. 50 for x-axis and 94% for y-axis. companies tend to be the most significant local Three country examples illustrate the dynamics of Tech tech players, and in some countries have led the Dominance and Race to the Finish in selected countries. digitalization of the financial industry through mobile money products. However, banks have a chance to Example 1: “Tech Dominance” (Quadrant III)—China catch up if they choose to adopt innovations before the Although China’s average income is relatively low, telecom firms corner the market. the size of its middle class is roughly similar to the For example, in Peru the Association of Banks, along population of Europe. with individual banks, mobile phone companies, and This, coupled with China’s advanced educational the government launched BIM (billetera movil or system and its active participation in global supply mobile wallet) in 2015 as a mobile money platform chains, has resulted in a strong tech ecosystem for interoperable services offered by both financial including large local tech firms, strong engineering and institutions and mobile phone companies.185 business skillsets, and active private equity and venture This created an opportunity for banks to innovate capital investors. Thus, the challenge of developing alongside telecoms in providing digital financial services. technology and VC ecosystems has largely been overcome in China. EMERGING MARKET BANKS: CHALLENGES AND Investment in financial infrastructure such as China OPPORTUNITIES IN QUADRANTS III AND IV UnionPay—the only authorized interbank network Most developing countries fall into Quadrants III and in China—has also created a different set of initial IV are characterized by lower levels of both funding conditions relative to the infrastructure challenges noted for technology innovation and of banking penetration. above. There were 5.4 billion outstanding payment cards INCLUSIVENESS 69 issued in China by the end of 2015, or about four per are waking up to the innovation imperative and the person.186 Purchasing volume by payment cards grew underserved market of SMEs and innovators.195 At the to $8.4 trillion in 2015, equivalent to 77 percent of same time, retail depositors have learned that promises GDP.187 China’s non-bank payment institutions handle of high returns from some peer-to-peer lenders were 54 percent of transactions, compared with 46 percent by too good to be true. traditional lenders.188 Although FinTechs linked to tech businesses like China’s retail loan penetration rate is around 20 percent, Tencent, Alibaba, and Baidue are building significant among the lowest in the world.189 Its banking sector financial services brands, it may prove challenging for a prioritized state- owned enterprises and influential broad range of standalone startups to develop sufficient borrowers over SMEs and the wider retail market. client trust to compete at scale with China’s tech giants or traditional banks. Responding to the market gap, over two thousand peer-to-peer lending platforms are in operation in the Example 2: “Tech Dominance” (Quadrant III)—India country, with the volume of peer-to-peer transactions Like China, India has a world-class tech industry as high as RMB 252.8 billion (USD 37 billion) in value set against the backdrop of a financial services by the end 2014, and that figure quadrupled in 2015.190 industry that does not yet serve the mass market However, a number of prominent platform failures and small enterprises. A robust tech sector based on resulted in new regulation on loan sizes and required world-leading software and information technology custodian arrangements for investor funds. Growth companies has developed over recent decades. This slowed in the first half of 2016, with more than 500 has created a tech ecosystem, including skills and platforms closing down. Further consolidation is likely capital, that is supporting a burgeoning FinTech as compliance costs kick in and unsound platforms are sector, including innovators in payments, digital weeded out.191 small enterprise and retail lending, personal financial The large and growing middle-income segment created management, and insurance. market momentum and critical mass for service India’s tech sector had been held back by regulation that providers who can leverage that base of activity to serve limited unlicensed entities from performing banking poorer segments as well. As a result, China’s alternative activities while maintaining high barriers to obtaining a finance sector, which includes not only the peer-to-peer banking license. However, new regulations announced lenders but also big tech companies active in financial in 2014 will enable tech companies to compete. Many services and other FinTechs, rapidly outpaced most FinTechs have already obtained or sought licenses. developed and developing markets. While peer- to-peer Important advances in infrastructure, especially digital transactions will continue to grow, tech companies will identity that can be linked to bank accounts, have play a bigger role in the financial sector. provided an opportunity to reduce the cost of customer In 2015 alone, Alibaba’s online payment platform, on-boarding and ongoing compliance. This enables Alipay, had 451 million annual active users and 153 financial institutions to reach hundreds of millions million daily transactions.192 Alibaba’s Ant Financial of new customers. These advances in regulation has become the largest FinTech company in the and infrastructure are paving the way for increased world by market value.193 Beyond online payments, provision of financial services from both traditional the tech giants of China expanded their reach to and non-traditional providers. lending services in 2016. Tencent, Alibaba and Baidu The demonetization of notes announced in November established WeBank, MYBank and Baixin bank 2016 has accelerated the shift from paper to electronic respectively, with the aim of helping SMEs gain easier payments and added momentum to the technology- access to capital.194 driven transformation of financial services in India. While tech companies seem to have the growth Payments banks were conceptualized by the edge relative to banks, there is evidence that banks Reserve Bank of India in 2014 as a new model to INCLUSIVENESS 70 increase access to financial services for unbanked or rather than a debit card, in order to perform financial underbanked groups such as small businesses, low- transactions at a banking correspondent. The Unified income households and migrant workers. The two Payments Interface allows a bank account to be linked main differences between a payments bank and a to phones and apps. traditional bank are that the former can only accept At the start of 2017 the government launched an inter- deposits of up to 100,000 Rupees ($1,550) per account operable payment app, Bharat Interface for Money, and are not allowed to issue loans or credit cards.196 which became a popular download. 202 DigiLocker, Low-cost, paperless operation through mobile phones a platform for issuing and verifying digitally signed could allow payments banks to address market segments documents and certificates, was recently integrated characterized by low value/high volume transaction. with UIDAI and will allow further streamlining of In 2015, the Reserve Bank granted eleven companies, financial services. including the country’s biggest mobile service providers, This “India Stack” of technology built upon Aadhar will “in-principle” licenses to launch payments banks.197 improve credit availability as well. Lenders can link a The first live payments bank was launched in January customer’s identity to digital transaction data, enabling 2017 by Airtel, a mobile network operator. India’s more efficient credit appraisals, and use the payments largest digital goods and mobile commerce platform, and document functions for efficient underwriting, Paytm aims to have its new payments bank open 200 processing, disbursing and loan collection.203 million banking and mobile wallet accounts within the India has a large SME funding gap that is as much about coming year.198 market size (the number of towns and cities dwarfs the A key element of the support infrastructure needed branch numbers of even the largest banks) as it is about to reach more customers has been provided by the traditional banks’ reluctance to lend except to known Unique Identification Authority of India (UIDAI). borrowers who have sufficient collateral. This government agency, which is the world’s largest national identification number project, has enrolled As in some of the developed markets (Quadrant II), more than a billion residents of India since September there has been strong growth of non-bank alternative 2010.199 UIDAI issues Aadhaar identification numbers, lenders addressing this gap in small firm financing collecting demographic, biometric and other details with innovative digital solutions, quicker turnaround, during enrollment. The Aadhaar number can be used analytics and credit-scoring driven underwriting and for paperless identity verification when opening a cost effective customer acquisition. financial account, reducing the risk of identity fraud. These include NeoGrowth, LendingKart, and Capital This allows banks to fulfill their Know Your Customer, Float, technology platforms that lend to SMEs or KYC, requirements for hundreds of millions of across the country. These lenders use cash flow data, new customers. Aadhaar-enabled e-KYC processes digital transaction history, and other non-traditional could halve costs and time relative to paper-heavy information to build credit profiles. processes.200 Some 34 banks have used e-KYC to open Others, such as KredX, are creating digital platforms for over three million bank accounts across the country, invoice finance.204 Lenders must either obtain a license contributing to a fourfold year-on-year increase in or book the loans through a bank or Non-Banking India’s mobile banking transaction value by the end of Financial Company (NBFC); thus a number of tech December 2015. 201 companies have partnered with licensed institutions. The identity infrastructure can be linked to the Since the new lending platforms lack a low-cost deposit payments infrastructure of the National Payments base, most of these lenders are funded by banks and Corporation of India to access funds and route institutional investors. Peer-to-peer lending, which serves payments to an individual’s phone or bank account. a combination of retail and micro/small and medium The Aadhaar Enabled Payment System allows the enterprise borrowers, has also been growing rapidly. individual to use Aadhaar data for authentication Currently covered only by the Negotiable Instruments INCLUSIVENESS 71 Act, these lenders may be put under a new non-bank companies enabled so much of the business process finance company category of Reserve Bank licensing.205 outsourcing and offshoring that has changed corporate In November 2016 the Indian government announced operations in developed markets, is now demonstrating the demonetization of large denomination bills, with how banks can partner with FinTechs to reconfigure the aim of combatting tax fraud, counterfeiting, and product delivery in the home market. corruption. This removed 86 percent of currency in Example 3: “Race to the Finish” (Quadrant IV)—Kenya circulation, spurring a sharp increase in electronic payments, including interbank fund transfers, retail An early adaptor of mobile money, 211 Kenya appears bankcard, and mobile wallet transactions. 206 in Quadrant IV just below Quadrant I, highlighting the expanded reach of its financial sector thanks Mobile banking and digital payments service providers to Kenya’s mobile-money system, M-PESA, which such as FreeCharge, Ola Money, Oxigen, and Paytm, was launched in 2007 by Safaricom, the country’s as well as bank offerings including ICICI Pockets largest mobile-network operator. Mobile transactions and Axis Bank’s LIME have benefitted. Whether this are transforming Kenya’s payments system; they momentum will persist after new cash notes come into hit a record $33 billion in 2016 and accounted for circulation remains to be seen, but even a return to the 67 percent of transactions tracked by the National previous trend will mean a continued shift to electronic Payments System. 212 payments. In March 2017 Amazon was awarded a mobile wallet license, adding another big player to the In November 2012 Safaricom, together with market207, and in May 2017, SoftBank announced a Commercial Bank of Africa (CBA), introduced $1.4 billion investment into Paytm, joining previous M-Shwari, leveraging the M-Pesa network to provide investor Ant Financial in helping to expand the deposit and lending products directly onto a phone company, which aims to serve 500 million customers in handset. M-Shwari grew rapidly; by 2014 it had been three years. 208 able to mobilize deposits of $1.5 billion and had disbursed loans of $277.2 million. CBA’s market share With its investment in digital identification, tiered of deposits rose to 6 percent in 2015 from 4.7 percent licensing for financial services, and other innovations in in 2012, and its share of the total number of bank financial infrastructure, India has addressed Challenges accounts grew to 37 percent (12.9 million accounts) 3 and 4 (Box 1), creating an opportunity for financial from 7 percent in 2012 (1.1 million accounts). services providers to focus on Challenges 1 and 2, reaching low-income customers with targeted and CBA’s contribution to opening bank accounts tailored information and services. 209 represented close to 12 million of the total 19 million new accounts in Kenya from 2012-2015, and Equity Some are actively partnering with FinTechs to expand bank accounted for another 5 million. 213 While M-Pesa services and reach and improve efficiency. For example, provided the pipes for CBA’s growth, the capture of Fullerton India, an SME-focused credit provider, has value-add in financial services appeared to shift back to partnered with Creditvidya, a startup that leverages the banking sector. alternative data for credit scoring, to perform automated authentication and verification checks to M-Pesa has enabled a number of other advances. improve the efficiency of Fullerton’s loan processing. 210 Innovators have built on top of the payments infrastructure provided by M-Pesa, developing merchant Given the market gaps and the strong tech ecosystem acquisition networks and innovative pay-as-you-go in India, FinTechs and new forms of banks have strong models for durable goods such as solar lights and panels. potential to dominate significant market segments. The viability of some of the current business models, That business model innovation has now been replicated however, has yet to be proved, and policy driven changes in other markets and regions, enabling microleasing of to pricing, market conditions, and permitted activities devices that can be remotely controlled and paid for. will continue to present challenges to standalone tech This has resulted in a follow-on financial innovation players. It seems fitting that this market, whose tech as the solar hardware companies have become de INCLUSIVENESS 72 facto leasing companies. Once a device is paid off 1. Low levels of formal financial services: it can become collateral for further general purpose Innovations such as mobile money can take hold more lending. More recently, the entry of FinTechs using completely in emerging markets where there is a strong mobile phone data for credit scoring to extend micro- need and no incumbent service to displace. Building on loans (Tala and Branch, for example) may shift the the mobile money ecosystem, innovators in emerging innovation lead back to the technology side. markets have leapfrogged conventional financial In another play for the market, Safaricom has recently infrastructures to offer a range of financial services eliminated fees on low value transactions and reduced engineered to sustainably service dispersed or low- the minimum transfer amount from ten to one Kenya income populations. shilling with M-Pesa Kadogo. This essentially makes 2. Low income levels: mobile money a costless cash replacement, and potentially positions Safaricom at the center of the Operating bank branches is expensive in emerging merchant payment ecosystem. and developed markets alike, and the shift to digital channels helps reach more customers at lower cost It is still not clear who will dominate the provision of across markets. The imperative for complete digital financial services in Kenya. For now, consumers are transformation from front-end customer channels, benefiting from reduced prices and increased availability through the credit and payments engines, to servicing of services, and a recent study has demonstrated the and processing is greater, though, in emerging markets contribution of mobile money to poverty reduction where financial access is a goal. through increased financial resilience and improved labor prospects.214 In wealthier markets, mobile channels and improved processing efficiency are add-on benefits to help meet The availability of the core payments infrastructure has customer expectations and improve profitability. enabled reconfiguration of the value chain from one Among low-income communities, however, these are in which the banking system provided savings, loan, must-have features that enable the sustainable provision and payments products to one in which an external of financial services to lower income consumers. payment infrastructure is interwoven into banks’ products and services. 3. Underdeveloped technology and VC ecosystems: This has underpinned the success of new financial Flying under the radar of the global tech/venture products as well as new business models in other capital community can create space for local innovators sectors such as pay-as-you-go solar. It has also spurred to serve their markets while the giants are looking development of the local innovation ecosystem, as elsewhere. For banks, this can also create opportunities demonstrated by a thriving community of startups, if they can lead in introducing unique local value accelerators, and venture capitalists. propositions, as CBA did with m-Shwari in Kenya. OPPORTUNITIES FOR EMERGING 4. Weak infrastructure: MARKET BANKS While forward thinking regulators in some countries Globally, the digital transformation of banking have created an environment favorable to digital services allows an expansion of access by leveraging financial services, whether by offering a flexible digital channels and customer information, and a regulatory environment (Kenya) that allowed non- reconfiguration of product and process value chains bank infrastructure to develop, or investing in critical to offer new products and serve customers more identity and payments infrastructure and a tiered efficiently. In this new context, each of the four licensing system (India), in many countries much work challenges facing emerging market digital financial remains to be done. transformation, as enumerated in the box on page 57, Where general-purpose financial infrastructure is also presents opportunities. lacking, the networks and infrastructure of incumbent INCLUSIVENESS 73 banks retain significant value. The opportunity for banks of marketplace lenders has emerged, and a number is to leverage their position of already having payments, of tech companies have made significant inroads identity and trust assets in place as new infrastructure into financial services, notably in payments and comes on-line. Banks can leverage their capital, customer investments. India has also seen a proliferation of new bases, and brands to expand rapidly in partnership lenders and payment offerings. with Fintechs that can help fill gaps in banks’ channels, While the marketplace lending and wallet booms in product sets, and processing capabilities. these countries may not be sustained, the big tech companies in China are well positioned to play a CONCLUSION significant role in financial services going forward. In India, the banking regulator has taken a more While the final structure of a digitally transformed conservative approach: innovators must partner financial services sector could take different forms, with banks or obtain one of the tiered licenses now the degree to which banks continue to play a role will available. Convergence may be the result. As the depend on a combination of initial conditions and infrastructure for digital financial services is rolled out, adaptability. banks are increasingly partnering with innovators even In markets where the formal banking system is as tech players are looking to obtain payments bank or well-entrenched and had been providing reasonable other licenses. services to the mass market, banks may continue to play a dominant role—even where the technology Across all Quadrants in our mapping, technology ecosystem can support significant FinTech incursions. enables expanded reach and the reconfiguration of In markets where the banking sector has lagged, product delivery in the financial sector, as it has in FinTechs have a greater chance of taking over other industries. Market position and regulatory functions and market share. privilege provide a window in which banks can continue to lead in the provision of financial services In countries where the tech ecosystem is relatively in the digital age, but this window will only remain weak, with only isolated solutions such as mobile open as long as they innovate to provide what money being offered by tech companies, banks have customers need. Banks don’t need to accomplish all this thus far been able to catch up. Kenya is an example innovation by themselves. where an extensive FinTech infrastructure for payments was put in place by a telecommunications company, Banks have an opportunity to learn from the but the financial services value add has been reclaimed experiences of the automobile, electronics, retail, and by banks. Even so, an array of new entrants leveraging other industries where product design, production, that technology infrastructure may shift a portion of branding, marketing, delivery, and servicing no longer financial services out of the banking sector. take place within a single corporate entity, but value chains have been constructed to optimize the best China and India offer examples of different potential solution at each link. outcomes in markets where broad penetration of formal banking was low, leaving a large underserved As markets develop, more will shift to Quadrant II, market, while the tech ecosystems were strong. In in which banks partner with technology innovators China, where the regulator has permitted significant to provide enhanced products and services to an ever innovation outside the banking system, a huge number wider customer base. n INCLUSIVENESS 74 SUSTAINABILITY EM COMPASS NOTE 46 CHAPTER 10 Precision Farming Enables Climate-Smart Agribusiness By Igal Aisenberg Emerging market countries, particularly India and nations in Sub-Saharan Africa, can benefit from advanced farming technologies that mitigate the effects of climate change and protect environmental resources. Water scarcity is an issue that can be overcome by adopting climate-smart technologies such as micro-irrigation. There are several precision agriculture investment opportunities available to the private sector, including agricultural extension via digital advisory services, drip irrigation, solar pumps, and crop and soil monitoring. Existing and developing technologies will have a (Figure 2), there is near zero adoption of drought major role in food production and food security in tolerant seeds and little adoption of precision emerging markets. According to the International Food agriculture tools, drip irrigation, and sprinkler Policy Research Institute (IFPRI), the largest yield irrigation in Sub-Saharan Africa and most of India. 216 gain potential across the world’s key staple crops— maize, rice, and wheat—in percentage terms are in INDIA’S POTENTIAL MODEL FOR CHANGE Africa, South Asia, and parts of Latin America. In a Building capabilities to sustain the adoption of comprehensive attempt to identify the drivers of yield more precise farming practices, rather than the full increase, IFPRI’s selection of technologies included:215 implementation of single factors, will produce the • No- and low-till farming quantum leap necessary in India and Sub-Saharan Africa. (In fact, building access to crop and site-specific • Precision agriculture • Soil fertility management (including nitrogen use) • Drip and sprinkler irrigation • Drought and heat tolerant seeds • Crop protection While IFPRI’s interim conclusions rank no-till farming as the practice most conducive to yield increase in the three crops tested, it notes that the interaction of multiple practices applied simultaneously will almost certainly produce the best results Along the same lines, field tests over the past 30 years FIGURE 1 Soil and Crop Monitoring: Measuring the Water Deficit showed that applying soluble or liquid fertilizers The image shows water deficits in individual fields, measured by a NASA through drip systems contributed to input saving, direct aircraft flying over the Maricopa Agricultural Center in Arizona, USA. plant utilization, and reduced chemical pollution. Green and blue colors indicate wet soil; red indicates dry soil. Source: NASA, https://earthobservatory.nasa.gov/IOTD/view.php?id=1139 Despite the definitive advantages of these technologies SUSTAINABILITY 75 Irrigation Systems, or MIS. Unique features of the scheme include bank loan support for farmers and insurance coverage for both the system and the farmer for one year. The strength of the scheme lies in its flexibility and transparency, including discretion for participating farmers to choose the type of MIS they prefer. Farmers can also choose the area to be covered under MIS and the suppliers who install it, provide agronomical services for one year, and maintain the system for a period of five years. The scheme enabled the transition of over one million hectares to MIS in the last decade. 217 FIGURE 2 Yield Increase Response to No-Till As part of the effort to re-energize the second Green and Irrigation Under Less-Hot (left) and Revolution campaign, Gujarat’s model is now being Hotter (right) Climate Change—2050 emulated by other states. In parallel, community projects Source: IFPRI, 2014. supported by local governments group together thousands of small farmers to overcome the inherent disadvantages technical knowledge and developing management of scale (for example, Karnataka’s Ramthal Community capabilities is a precondition to improving yields Irrigation218 and Tamil Nadu’s Community Collaborative anywhere in the world.) In that context, some of India’s Water Management initiatives).219 Given the appropriate leading states may provide important lessons to be financial and human resources, Gujarat, Karnataka, and applied elsewhere. Tamil Nadu offer critical lessons that may be applicable in India is an agricultural giant with 194 million hectares of some Sub-Saharan African countries. gross-cropped area, 66 million hectares of net irrigated area, and 127 agro-climatic zones. India’s central and KEY BARRIERS AND THE PRIVATE SECTOR ROLE state governments have been proactive in addressing IFPRI’s agronomic assessment of potential drivers point obstacles to the agricultural sector, which employs about to necessary but insufficient factors to increase yields. half of the workforce and accounts for almost 7 percent Public and private initiatives must address additional of GDP. Despite robust subsidies for electricity, micro- local and regional factors that constrain investments at irrigation, and fertilizers, rates of adoption for these the farm level, including: technologies have been low, except in Gujarat. • Infrastructure transportation to serve domestic The lack of efficient knowledge dissemination tools markets, intra-regional trade and export is pervasive in India’s agriculture sector. Despite • Cold-chain transportation and storage government efforts to provide agronomic support, most farmers remain far from adopting available • Extension services that research and disseminate technologies due to a lack of effective transfer agricultural knowledge mechanisms. The model implemented by the Gujarat • Modern test-lab facilities and capabilities Green Revolution Company (GGRC) integrates input • Smartphone networks to support digital subsidies, primarily for micro-irrigation and fertilizers, communication in rural areas with manufacturers’ on-farm support and equipment performance warranty, both prerequisites to qualify as • Adequate commercial financing certified suppliers. • Safe and predictable power and water supply Gujarat’s Micro Irrigation Scheme gained popularity The public and the private sector can work together through the provision of electricity connections on in partnership to disseminate technology, knowledge, a priority basis to those farmers who adopt Micro and inputs. Public extension networks can set a SUSTAINABILITY 76 FIGURE 3 Food Demand Compared to Agricultural Output from Total Factor Productivity (TFP) Growth in Sub-Saharan Africa and South & South East Asia—2000–2030 TFP measures changes in the efficiency with which all inputs are transformed into outputs; here understood as farmers who use inputs more precisely and efficiently, or adopt improved cultivation and livestock practices. Source: Global Harvest Initiative, 2015 Global Agricultural Productivity Report, 2015, pp. 12-13. www.globalharvestinitiative.org/GAP/2015_GAP_Report.pdf competitive stage through policies and programs, and The reality is that it is still possible to farm relatively private extension systems can directly support projects. effectively and competitively with little precision The private sector can also fund research, commercial technology. financing, insurance, digital knowledge dissemination, Consequently, the adoption of new techniques in less crop quality assurance and more. developed areas should start with a basic, affordable, Yet there is no substitute to public investment in and effective mix of technologies and practices. In physical infrastructure in roads, communication, and a multiple-variables scenario, where all means are power, as well as institutional reforms that enable fair important, close examination invariably teaches that land consolidation, reduce bureaucratic barriers and they are not all equally important. unequivocally fight corruption. In that context, both Identifying the low hanging fruit is critical to setting a Sub-Saharan Africa and India face challenges that complex project in motion, certainly more so when the inhibit private investment. private sector is involved. And return on investment is a SMART AND PRECISE AGRICULTURE dominant factor. INVESTMENT OPPORTUNITIES The immediate benefits for small-scale farmers Can the most food-insecure countries dramatically and potential investment opportunities from the increase their farming productivity with minimal introduction of such a mix of inputs, technologies, and impact on the environment? A qualified “Yes” is the capabilities in Sub-Saharan Africa and India include: answer broadly agreed upon, as are the necessary 1. Agricultural Extension via Digital Advisory Services: measures to achieve that goal. “Technology alone is not a silver bullet,” according to Climate-smart agriculture is necessary to achieving the the Gujarat Green Revolution Company. Adoption of goal, and precision agriculture—at the appropriate level best practices is critical, and digital communication in food insecure countries—can also be a powerful tool is necessary to bridge the technology gap. Basic when applied appropriately, based on local crop and site smartphones can bring digital agronomic support specific conditions. provided by human advisors to millions of farmers. SUSTAINABILITY 77 Reaching out to millions while keeping the trust advice helped improve yields, natural resource of person-to-person advice is the challenge of management, consistency of produce quality, and net effective adoption. Communication should flow farm profits.220 The opportunity for investors may between advisors and individual farmers, and it be found in free and brand-neutral platforms that should support crop planning and management on a produce non-prescribing analytics that enrich human constant basis. Agro-advisory networks are crucial advisors. Free-of-charge systems should drive mass in the Indian and Sub-Saharan African agriculture utilization and Big Data value for large agribusiness sectors, given that the choice of inputs and players. At a later stage, investors may benefit methods of cultivation determine both the financial from Big Data’s appeal to mass communication viability of farms and the optimal conservation and advertising platforms. The main barriers to of land, water, and energy. Public support would DAS adoption are limited digital infrastructure be particularly beneficial for allowing platform and illiteracy, areas where India has significant building, including data platforms. Private advantages over most of Sub-Saharan Africa. engagement could then be increased via competition 2. Drip irrigation: In addition to its advantages over on the platform and extended reach of farmers other types of irrigation for improving yields, through it. drip irrigation is the best delivery system for No- and low-till farming greatly reduce soil soluble fertilizers. It also drastically reduces the disturbance, which reduces soil erosion, builds soil propagation of weeds and the need for herbicides. organic matter, and helps reduce machine energy The private sector is well prepared to lead here. cost and pollution. It must be done properly to Foreign—principally Israeli—and local leading avoid weed propagation. The accumulated and brands dominate the established micro irrigation frustrating experience in Sub-Saharan Africa and market in India. Additionally, local adjacent large other parts of the world show that introduction firms are considering or have already entered it. and implementation do not equal adoption. Digital The introduction of drip and micro irrigation Advisory Services, or DAS, can be the standard tool is estimated to cover no more than 10 percent for existing extension networks and holds the key (approximately $1 billion) of its over 40 million to adoption and, unlike other inputs, requires no hectares’ potential. Heavy governmental support investment from farmers. seems to be granted for the foreseeable future, and Agricultural extension plays a key role in technology absent technologic breakthroughs, investment in the dissemination, and the private sector is increasingly sector should consider acquisition of or partnership active in this domain. Today, Digital Advisory with incumbent firms. Services are either part of the offering of input Sub-Saharan Africa, with a few exceptions including providers or stand-alone for profit, typically start-up South Africa, is a relatively new frontier for micro platforms. In the first case and with few exceptions, irrigation, with no established market or market existing free DAS is a differentiation tool to promote leaders. The main barriers to adoption are capital the use of manufacturers’ core products. In the expenditure financing and advisory services. second case of for-profit stand-alone platforms, Despite the numerous obstacles to the technology, farmers are the revenue generators, and its the gap between a growing population and application to small farms in food-insecure areas is inefficient agriculture makes the region an attractive far-fetched. opportunity for long term investors. A recent assessment of privately supplied farmer 3. Solar Pumps: Solar pumps that lift well water advisory services examined the situation in ten to feed drip systems are a benefit multiplier. Yet countries. Four of the case studies came from India. the introduction of solar pumps is slow despite In these instances, the study identified considerable their zero-carbon footprint and low-maintenance benefits from extension by commercial actors. Their photovoltaic technology. According to official SUSTAINABILITY 78 estimates, over twenty million well pumps operate These technologies by no means discount the crucial today in India, roughly split between electric and role played by quality seeds, judicious pest and disease diesel. 221 At a solar unit cost ranging from $1,500 to control, and other ground-based or remote sensors, $10,000 for multiple farmers, this potential multi- all of which can be adopted by better informed billion dollar market is already a target for local and farmers. New technologies aimed at optimizing foreign manufacturers input utilization—for example robots, variable rate The initial cost of solar technology coupled with the seeding, and irrigation—are being developed and their established maturity of electric and diesel pumps (and introduction to small scale farms may be applicable subsidized electricity) are among the major barriers to in the future. At present, every solution should be integrated and should have basic characteristics: solar pump adoption. Changes to subsidy policies now underway may help pave the way for mass adoption • Easy-to-use systems: simple and fast setup, yet and hence further increase the role of private firms accurate enough to provide advice focused on the contributing to the proliferation of solar pumps. farmer’s needs. 4. Soil and Crop Monitoring: Imagery-equipped • Minimum requirements for support and drones are often technically and financially maintenance: minimal dependence on farm- affordable for small farmer communities or regional specific communication infrastructure and in-field operations. Accurate regional weather forecasts hardware. can provide data relevant to the spread of diseases • Flexible digital interfaces: easy and free building and pests. Monitoring and Predictive technologies capability for users. seem applicable while algorithm-based prescriptive systems may not suit most of the necessary support. Drones’ sensing is particularly suited for small CONCLUSION plots and contract farming. Small farms can benefit Climate smart farming techniques can increase from quality and timely information that can drive agricultural productivity and farmer income, make corrective actions and prevent crop failures due to rural communities more resilient, and mitigate defective irrigation and fertilization. climate change. Precision agriculture is part of the Contract farming is typically carried out by solution to feeding a population that is growing financially capable companies that depend on faster than available land supply, while also ensuring small suppliers. Early detection and correction of the sustainable use of water and energy. Per capita soil and crop deficiencies is a win-win proposition agricultural output in Sub-Saharan Africa and for both farmers and off-takers. If purchased and India is far below potential, mainly due to outdated operated by large agri-businesses, the investment in technologies and practices that result in low drones and imagery analysis can be factored into productivity and overdependence on nature. the produce price paid to farmers. Investments by Given the proper regulatory environment and cooperatives of farmers supported by soft credit institutional support, foreign and local private may reap similar benefits. Extending the usage of corporations seem willing to explore the opportunity equipment for soil and crop monitoring to farming and invest where needed. Small-scale farming, cooperatives and contract farms also benefits from which is not inherently conducive to capital intensive new forms of capex utilization led by the private modernization or the easy adoption of updated sector, now spreading from developed countries into agronomic knowledge and methods, should be emerging markets. 222 considered a challenge that we can meet. n SUSTAINABILITY 79 SUSTAINABILITY EM COMPASS NOTE 47 CHAPTER 11 From Farm to Fork: Private Enterprise Can Reduce Food Loss Through Climate- Smart Agriculture By Anthony Mills More than a billion tons of food are lost annually across global food supply chains. Spillage, spoilage, insects, and rodents cause this post-harvest loss. Addressing it is a daunting challenge due to the complexity of the many factors involved. But it is a worthwhile challenge because of the potential benefits, including improved food security, nutrition, economic productivity, and response to climate change. Poor or nonexistent public infrastructure is often an underlying cause of food not being transported or processed effectively. And climate change damages existing infrastructure and increases losses. Despite the numerous environmental, economic, and socio-cultural barriers involved, there are many examples of private sector enterprises that have tackled post-harvest loss successfully. They focus on education, collaboration, and markets. In developing countries, losses in food supply chains of Estimates of the amount of food lost are staggering. fruits, vegetables, and grains take place predominantly Some analyses estimate that one-third of global during production, post-harvest handling, storage, food production—or about 1.3 billion tons—is lost and processing stages (Figures 1 and 2). Spillage annually. 223 Losses of that magnitude compromise not and biological degradation of crops are the primary only global food security, but also the world’s climate causes of losses, with biological degradation usually via greenhouse gas emissions. responsible for the vast majority of them. Spillage is Indeed, the production and biological degradation of mainly a problem during harvesting, transportation, 1.3 billion tons of food results in emissions of more and processing, while biological degradation occurs at than 4 billion tons of carbon dioxide equivalent. That all stages, particularly during storage operations. is greater than the annual combined emisions of all Biological degradation includes bacterial and fungal countries other than China and the United States. 224 decomposition, insect infestations and rodent damage. There are also considerable economic costs related Managing any of these factors requires in-depth to post-harvest food loss. For example, the value of knowledge of what promotes them, what constrains grains lost annually in Sub-Saharan Africa alone has them, and which technologies can be employed cost- been estimated at $4 billion (Figure 3). This exceeds effectively to maintain the quality of the produce. the value of total food aid in that region over the last Obtaining the required knowledge on biological decade. So it is not surprising that reducing food loss degradation and using it to reduce post-harvest losses has been hailed as an important way to increase food is challenging, particularly in developing countries. security, increase income streams for smallholder And careful scrutiny of potential benefits and pitfalls is farmers, and mitigate climate change. Solutions to the required to answer critical questions: How much food problem of food loss, however, are complex and elusive. could practically be saved, and at what cost? And who Each country, region, farmer, and food supply chain would benefit from the savings? has a unique set of problems and potential solutions. SUSTAINABILITY 80 Importantly, the variability of post-harvest loss across the technologies available are clear, but effective regions and supply chains makes it challenging to implementation can be difficult and depends on a wide quantify accurately, particularly as losses in quality are range of factors. difficult to estimate. Despite this uncertainty, it is clear Indeed, despite the proven efficacy of the technologies that smallholder farmers in developing countries stand introduced to Sub-Saharan Africa, there has been a to benefit the most from reducing food losses. ‘deplorable lack of success’ according to a recent review While large commercial farms tend to have the of loss-reduction projects. Technologies are frequently knowledge and finance need to reduce post-harvest abandoned by small-holder farmers, particularly after losses, most smallholder farmers do not. By deploying being introduced by donor projects.227 It is important various technologies and techniques, large farmers to understand why this occurs and to apply lessons can reduce losses to below 2 percent of their harvest, learned that can inform future approaches. while the majority of smallholder farmers in developing Viewing value chain steps in isolation. One reason for countries regularly lose more than half of their crops to the lack of success in the past is that single solutions spillage, spoilage, insects, and rodents. 225 have been proposed and problems have been tackled in isolation. What is often needed instead are multiple TECHNOLOGY AND PROFITS TO THE RESCUE? interventions across the value chain. Although most The technologies available for reducing post-harvest losses occur during storage and milling, each step in food losses are varied and depend on the crop type and the chain can and often does result in significant losses the main factor to be averted, among other things. In that warrant remedies (Figure 1).228 some cases, simple adjustments such as changing the Furthermore, addressing only one step in the value containers used to transport crops can significantly chain is usually unlikely to achieve a major loss reduce spoilage and spillage. In other cases, investments reduction. A cold storage chain is a good example of into new storage and processing solutions are required. where the chain is only as strong as its weakest link, These include metal silos, sealed bags, threshing and a simple intervention in one link is likely to be of plants, and packaging facilities. 226 The benefits of little value if other links remain weak. Assessing the FIGURE 1 Estimated Losses From the Post-Harvest Chain for Rice in South Asia Source: Hodges, Rick J., Jean C. Buzby, and Ben Bennett. 2011. “Postharvest losses and waste in developed and less developed countries – Opportunities to improve resource use.” Journal of Agricultural Science. SUSTAINABILITY 81 FIGURE 2 Factors Potentially Resulting in Post-Harvest Losses in Grain Supply Chains in Developing Countries Source: Kumar, Deepak and Prasanta Kalita. 2017. “Reducing postharvest losses during storage of grain crops to strengthen food security in developing countries, Foods.” ADM Institute for the Prevention of Postharvest Loss. value chain of each crop as a whole is consequently of are often simple, yet they can require years to uncover critical importance prior to any intervention aiming at unless there is a detailed social survey conducted before reducing post-harvest losses. introducing a technology. There may also be a need for ongoing technical support and education. Ignoring the need for economies of scale. There are many technologies available to assist in reducing Three examples highlight these problems. First, metal post-harvest losses (Figure 2). 229 These include metal silos for storing grain have not been used in some areas silos, new transport systems, packaging facilities and of Africa because due to a strong cultural imperative processing plants. Such technologies, however, require to store grain in the home. Second, in some countries economies of scale, large volumes of produce, and it has been difficult for smallholder farmers to accept capital investment, and, therefore, are not readily that hermetically sealed bags for storing grain should have a higher price than traditional sack-cloth bags. available to the smallholder farmer. Some farmers in Tanzania, for example, are unable to Even ostensibly low-cost options such as hermetically comprehend price differences between bags that seem sealed bags have been perceived to be unaffordable outwardly similar. 231 by many small farmers due to cash flow constraints, And third, although diatomaceous earth dust232 kills particularly at the time of the year when the purchase insects by causing their cuticles to dry out, is non-toxic of bags is required. 230 to humans, and has long been used in China to protect Socio-cultural problems. Cultural norms and societal grain from insects, it’s likely that some farmers will perceptions also impede the uptake of low-cost need to be persuaded to mix their hard-won grain with technologies that can reduce food losses. These factors what is, in essence, a blend of earth and ancient algae. SUSTAINABILITY 82 Socio-cultural barriers to food loss remedies often seem For example, when fungi spoil grains they release obvious and easy to solve in retrospect, yet identifying dangerous mycotoxins which are subsequently ingested them can be difficult. by consumers. The effects of mycotoxins on human health and productivity can be extreme and should be It is increasingly recognized that, in addition to seen as a matter of grave concern by all participants in traditional economic models, the use of behavioural the value chain. 234 models— generated from within the relatively new behavioural sciences —are essential for guiding the Second, insect and rodent outbreaks are also expected adoption of new technologies by communities. 233 to increase as rainfall becomes more erratic. This is a result of intense rainfall events causing wetter than Climate change, pests and infrastructure. The expected normal soils. The combination of wet topsoils and impacts of climate change across Sub-Saharan Africa warm temperatures promotes the reproduction of insect include increased frequency and severity of both pests that attack crops both in the fields and in storage. droughts and floods. Crop growing seasons are also Growth and reproduction of rodents are also likely to shorten and air temperatures will inevitably promoted by flushes of vegetation that arise on increase. All of these impacts are likely to increase wet topsoils. Plagues of rodents can easily arise in post-harvest food losses in numerous ways, with such circumstances. If the vegetation then dies back potentially disastrous consequences for food security following climate change-induced dry spells and intense and human health. Three examples highlight the heat, rodents will tend to leave the fields and move dangers of climate change. into human habitations looking for food. Traditional First, bacterial and fungal spoilage of crops in storage storage systems in Africa are often not rodent-proof will greatly increase in environments that become and, consequently, large losses of stored crops can be moister and warmer. Spoilage not only reduces income expected during such plagues. and food availability, but may also result in severe And third, floods and landslides frequently damage negative impacts on human health. infrastructure used along food supply chains. A simple FIGURE 3 Estimated Cumulative Post-Harvest Weight Loss in 2007 in % from Production of Wheat, Sorghum, and Maize For Countries in East And Southern Africa Source: Hodges, Buzby, and Bennett. 2011. SUSTAINABILITY 83 example is a road network used to access markets fully sealed—tends to decline in time unless technical and crop storage facilities. Poor infrastructure in support from the supplier is ongoing. developing countries already constrains transport and Inadequate knowledge and skills also often impede non- storage of food, and is often identified as the main technical solutions to food loss. Warehousing, which factor underlying post-harvest food losses there. 235 includes warehouse receipt systems (WRS) and related Climate change-induced flooding is thus a danger that inventory credit, is an example.237 It allows farmers to threatens to greatly undermine food security not only store crops in a centralised, managed warehouse and through damage to agricultural productivity but also receive a transferable receipt. This provides farmers by increasing post-harvest losses. with much-needed liquidity, and stores crops effectively. The examples described here are just a few of the However, despite their apparent simplicity, such systems numerous effects of climate change on food supply have only been functioning well in several countries in chains. Such effects will warrant careful analysis by Sub-Saharan Africa. any entities wishing to resolve post-harvest losses in Although it remains unclear why such systems have developing countries. Climate-smart interventions will had only limited success, the most likely explanation need to be honed for each effect. is that stakeholders involved in warehousing and While climate change affects post-harvest losses, the warehouse receipts financing lack sufficient knowledge converse is also true, as noted above. Food products and have not been trained well enough to navigate carry an embedded carbon footprint, and food loss the complexities of fluctuating market prices of the increases this footprint unnecessarily. Additional land, stored stocks. 238 Furthermore, the large throughputs of water, and agricultural inputs are needed to produce crops that are required to make warehouse operations food that is ultimately wasted. economically viable often cannot be achieved by smallholder farmers. Indeed, at a global scale, producing food that is subsequently lost requires an estimated 1.4 billion extra For small-scale operations, inventory credit may be a hectares of agricultural cropland, land that could be preferable system; here, crop harvests are offered as a and should be supporting carbon-absorbing forests. guarantee for a cash loan. Microcredit can be issued Moreover, food waste that ends up in landfill sites against relatively small volumes of crops produced by produces methane, a greenhouse gas with approximately smallholder farmers, while larger loans can be designed twenty times more impact on global warming than to be accessible to farmer associations. carbon dioxide. Reducing post-harvest food losses, Although a lack of access to sufficient—or indeed therefore, has considerable potential for contributing any—credit frequently prevents smallholder farmers meaningfully to reducing greenhouse gases in the from purchasing suitable technologies for reducing atmosphere. post-harvest food losses, in many cases simple skills in Lack of knowledge and skills. Technologies to managing cash and taking investment decisions are the reduce post-harvest losses, whether they are simple main barriers. For example, the purchase of hermetically like hermetically sealed bags or complex like large sealed bags for storing grain was found to be a sensible processing and packaging facilities, require knowledge as well as affordable investment for smallholder farmers and skills to implement. As one study noted, even the in Tanzania, but very few farmers opted to buy them simple technologies for reducing post-harvest losses when the first became available. are ‘precision-oriented’ requiring ‘careful attention to This was primarily due to the fact that farmers’ cash small details’.236 Providers of new technologies in Sub- reserves were lowest at the end of the growing season Saharan Africa have often found that the use of the when the bags were needed, and also that a return on technology is effective at the outset but that the efficacy the investment two to three years after the purchase and hence adoption of the technologies decline through was a foreign and unwelcome concept. The farmers time. This is often because ‘attention to small details’— viewed the investment in a more favourable light such as ensuring hermetically sealed bags remain once the distributers of the technology had invested SUSTAINABILITY 84 time into explaining both the long-term benefits of to using local cooperatives. While a market-orientated the investment and the advantages of purchasing the approach ensures that actors are accountable for all costs, bags at the beginning of the growing season when the the use of local cooperatives frequently leads to a lack of expenditure was more affordable. accountability and associated unnecessary expenditures. Investments in the grain and fruit supply chains in SUCCESSFUL NAVIGATION THROUGH THE Ghana. Two companies in Ghana, Premium Foods MAZE OF PHL and Blue Sky Inc., demonstrate how education, Navigating the complex array of problems described communication, collaboration, and a market-orientated above is a daunting prospect for any private sector culture can combine effectively to reduce food loss entity wishing to contribute to solving the problem of in two different supply chains. Premium Foods has post-harvest loss in a particular food supply chain. As invested in an agribusiness centre that includes grain noted earlier, interventions are often required along drying, shelling, and storage facilities that are integrally numerous links in the chain. Economies of scale need linked with farmer organizations, banks, business to be created. service providers, and input suppliers.239 All social and cultural barriers need to be assessed Smallholder farmers using the agribusiness centre pay and appropriate interventions devised. Furthermore, for extension services and receive training on a wide skills and knowledge need to be imparted to ensure range of agronomic subjects. The centre receives grain that all interventions can be sustainably managed from the farmers before it has been dried. The grain is and maintained through time. Innovative solutions to then processed and sold by the centre. Loans from the insufficient and ailing public infrastructure, including input suppliers to farmers are paid off by the centre. ways to connect remote smallholder farmers in a cost- Post-harvest loss is greatly reduced as a result of the effective manner to markets, also need to be devised. shorter time period required to dry the grain compared Finally, the impacts of climate change on spoilage, pests with traditional methods. The reduction in drying time and infrastructure will need to be modelled and taken is also a climate-smart agricultural approach because into account when designing all responses to reduce drying grain is increasingly difficult for farmers under food loss. For example, technologies and infrastructure climate change conditions, which include increasingly employed will need to be climate-proofed. Despite the erratic and intense rainfall events. complexity of post-harvest loss, the private sector has Blue Sky, a fruit processor, was established by an risen to the challenge in many different food supply investor with strong ties to supermarkets in Europe. 240 chains and countries. Examples are discussed below, The company works closely with smallholder farmers from grain and fruit production in Ghana to vegetation and provides free training, free technical support, production in the Philippines and coffee production in and interest-free loans. Fair Trade and Ethical Trade South America. The common themes emerging from Organic certification are also facilitated by Blue Sky. these success stories include the following. The farmers are paid promptly and receive prices for First, there is a strong focus on educating all actors in their fruit. The prices are agreed upon annually, they the value chain on the importance of reducing post- are higher than the costs of production, and they are harvest loss and how to employ solutions that do so. adjusted for inflation. Second, there is an emphasis on effective communication The company also reduced post-harvest loss by and collaboration among different sets of actors. constructing a local road network that links fields and Collaboration among producers as well as between processing plants, moving the production of fruits closer producers and buyers in particular has been found to to the processing plants, establishing a juice processing greatly reduce costs by shortening the value chain and plant, building packaging facilities, and managing the improving the transfer of appropriate technologies logistics of airfreight to ensure that their fresh-cut fruit across the shortened chain. And third, there is a strong arrives on the shelves of European supermarkets within commitment to a market-orientated approach, as opposed 48 hours after harvesting. Since its establishment in SUSTAINABILITY 85 1998, Blue Sky has grown by scaling up its Ghanaian operations and replicating its model in Brazil, Egypt, WAREHOUSE FINANCING IN and South Africa. In 2010 the company sold 3,800 TANZANIA tonnes of processed fruit and generated sales of $24 Tanzania’s economy relies heavily on million from its Ghanaian operations alone. agriculture, and climate change is already Twinning commercial farmers with smallholder affecting the productivity levels of key farmers in the Philippines. The Northern Mindanao commodities. Tanzania is committed to Vegetable Producers Association, or NorMinVeggies, increasing yields through Climate Smart Agriculture by offering better input supplies is a new type of market facilitator linking smallholder (seeds, chemicals, fertilizers, etc.), precision vegetable producers in the Philippines to supermarket farming techniques, and improved irrigation chains, hotels, fast food chains and export markets. 241 systems to smallholder farmers. It also seeks The association was established in 1999 by a group to protect smallholder farmers against of farmers determined to capitalize on the emergence climate related risks, increase productivity of supermarkets across this Pacific archipelago. The levels through crop insurance, and the use of farmers comprised two distinct groups: smallholder warehouse receipts through approved efficient and mid-size farmers. Prior to the formation of the storage facilities. These allow the agricultural supply chain to improve post-harvest association, only the mid-size farmers had access to practices—improved transport and storage capital, technical advice and technological solutions facilities, better farm management, improved for PHL. Over time, the smallholder farmers learned harvesting techniques, etc.—which will reduce new agronomic techniques and commercial approaches crop losses and help maximize the portion of from the mid-sized farmers. the harvested output delivered to markets. The benefit for all farmers was that production IFC’s invested project entails a $40 million of all 12 different types of vegetables consistently credit line under the Global Warehouse Finance reached critical volumes that enabled NorMinVeggies Program (GWFP) to CRDB Bank Plc. in Tanzania. to negotiate from a position of strength with the By using warehousing receipts as collateral, supermarkets. To control quality, the association CRDB can extend loans to medium-sized introduced quality assurance schemes, production domestic traders and cooperatives, which schedules and traceability systems. These were typically have less financing options than global agro-exporters. By increasing access to finance rigorously adhered to, with lead farmers coaching in the agri-business sector, the project will other farmers and acting as quality managers. PHL on help integrate Tanzanian smallholder farmers smallholder farms was up to 25% greater before the into the global food supply chain, leveraging association introduced quality controls. By 2011 more Tanzania’s existing trade channels in key export than 5,000 farmers were operating under the umbrella cash crops such as coffee and cashew, and other of NorMinVeggies. food crops. IFC has provided advisory services for Coffee value chain in Central America. Beginning collateral managers who monitor agri products in 2003, this project funded by the Inter-American in storage for CRDB, funded by the Government Development Bank has selectively targeted cooperatives of Japan, to improve the monitoring techniques that can potentially contribute to reduce of smallholder coffee producers who grew coffee at post-harvest losses. Japan and IFC have more than 1,200 meters above sea level, a requirement common objectives to reduce such losses in for speciality coffee.242 The model implemented by the Sub-Saharan Africa by working with local bank project had three core components: access to markets, partners, agricultural players including farmer access to training and coordination, and building cooperatives, small- and medium-sized business collaboration across the value chain. aggregators, processors, and traders, as well as The bank also provided the project cooperatives with collateral managers. matching funds for investments in infrastructure such SUSTAINABILITY 86 as coffee washing stations, which reduced post-harvest irrigated farms, clinics, and schools. Addressing post- losses. The success of the project was evident in the harvest food loss in this way could lead to virtuous increase in the number of participating producers, from cycles not only for food security and nutrition, but also 3,000 at the outset to 6,000 at the close of the project the economy as a whole, health of nearby communities, in 2009; in the increased productivity of producers; and education of school children. Even if interventions to in the increase in quality of coffee produced; and in address food loss are not twinned with electrical power, the higher prices secured as a result of having larger virtuous cycles for local economies and communities volumes to trade. may occur when successful private sector enterprises that reduce food loss are successfully established. RECOMMENDATIONS: RUNNING THE PRIVATE The enterprises described above, from Ghana, the SECTOR GAUNTLET WITHIN A FOOD CHAIN Philippines, and Central America, demonstrate this point. It is an unfortunate reality that for every new private Incomes and skill sets of all the farmers involved with sector enterprise wanting to address post-harvest food these enterprises increased markedly. The infrastructure loss and associated problems within a particular food and technologies supporting their food chains were supply chain in developing countries, only a small modernised and maintained. Environmental management fraction will succeed and become large profitable was improved, ensuring that ecosystems supporting entities over the long-term. Intense research on all the their farming ventures were sustainably managed. And, factors discussed in this note is consequently crucial importantly, the volume and quality of food produced for before investing in such a venture. consumption within their value chains increased. Taking A critical aspect of such research would be to undertake the above into account, what are the potential low- small-scale interventions—metal silos and hermetically hanging fruit for private sector investment? sealed bags for storing grain, for example—that are Providing appropriate technologies. Across Sub- specifically aimed at understanding the socio-cultural Saharan Africa there are many successful enterprises environment of a particular area. Once data is gathered producing food-loss reduction products such as storage on actual interventions (as opposed to theoretical containers and hermetically sealed bags. Prior to hypotheses), investors in such technologies will be better investing in such enterprises, plans for overcoming prepared to make informed decisions. local social and economic barriers need to be studied. Large banking institutions need to be aware that Capacity building of local farmers, with respect successful large-scale interventions to reduce post- to using and financing the products, are crucial. harvest food loss in a value chain may require a Furthermore, technologies—and supply chains using combination of making sufficient finance available and them—need to be tailored to the infrastructure ensuring that sufficient lateral thinking has been done. available in a particular geographic area. A recent example from West Africa illustrates this Over large parts of Sub-Saharan Africa, large private point. The onion food supply chain in West Africa sector investments in modern technologies to reduce experiences considerable post-harvest loss because food loss first require investments in infrastructure by processing of the onions is usually undertaken the public sector. In Kenya, for example, entrepreneurs hundreds of kilometres away from farms. Investors in the avocado supply chain only started investing have considered the construction of processing factories in refrigerated containers after the government had closer to production areas to address the problem. provided appropriate port facilities to support a cold Ultimately, however, such investments have tended to storage chain. 243 Similarly, private sector companies be constrained by unreliable power supplies. tend to construct large warehousing facilities for grain A potential solution to overcome such a barrier to storage in Sub-Saharan African where road networks investment is a private sector investment in a large solar to smallholder grain farms are relatively developed. power plant that provides reliable electricity to both Establishing agribusiness centers. Agribusiness centres— an onion processing plant and surrounding villages, those established by Premium Foods in Ghana are an SUSTAINABILITY 87 example—can help to reduce post-harvest food loss by value chain and also be a knowledge broker for best providing farmers with appropriate technologies and practices on reducing food losses. extension services. Such centers can become important nexus points for individual farmers, connecting them to other farmers, agri-suppliers, and buyers. CONCLUSION For private sector investors, the examples from Ghana, Agricentres can also create economies of scale for the Philippines, and Central America have considerable smallholder farmers, they can enable transport from potential for replication within food supply chains the field to a storage depot, and they can guide farmers across the developing world. Intense analyses by multi- on adoption of climate-smart agricultural practices. disciplinary teams will need to be conducted on socio- Where appropriate, agribusiness centres could partner cultural factors, as well as consideration of appropriate with microfinance institutions to offer farmers technologies to address post-harvest food losses, the inventory credit. The resulting increased liquidity from economic opportunities involved, and the likely climate cash loans would allow farmers to wait for favorable change impacts. market conditions. This would further reduce food waste as seasonal market ‘gluts’ are avoided when cash- Once this knowledge has been acquired, the structure strapped farmers are no longer forced to sell their crops and composition of potential private sector enterprises at unfavourable prices. to reduce food loss can be designed. For such enterprises to be successful they will need to focus Funding the modification of value chains. The multi- intensely on education, collaboration, and market- stakeholder nature of value chains makes modifying them a complex undertaking. However, there are existing oriented approaches that address the many factors that NGOs and other organisations that focus on reduction of reduce the supply of food traveling from farm to fork. post-harvest food loss by creating sustainable food value The economic and humanitarian rewards of doing chains. Such entities could potentially be supported by so cannot be overstated. Billions of tons of food can the private sector through a specialist fund that provides potentially be saved, leading to improved food security, financing and tailored technical support. Such a fund better nutrition, increased productivity, and greater could provide the credit for projects addressing an entire political stability in developing countries. n SUSTAINABILITY 88 REFERENCES 1 Low income economies are currently defined by the World Bank Group as countries with a Gross National Income (GNI) per capita of $1,005 or less; for lower middle-income economies the range is $1,006 to $3,955. 2 Porter, Michael E. and Mark R. Kramer. 2011. “Creating Shared Value: How to Reinvent Capitalism - And Unleash a Wave of Innovation and Growth.” Harvard Business Review, January–February 2011, 62-77. 3 Comin, Diego and Marti Mestieri Ferrer. 2013. “If Technology Has Arrived Everywhere, Why Has Income Diverged?” NBER Working Paper No. 19010. 4 Kordunsky, Anna. 2017. “In Africa, a Broadband Boom”. Columbia Business School, Economics & Policy. 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EM Compass Note 15, IFC, September 2016. 8 Comin and Ferrer. 2013. 9 “Beefing Up Mobile-Phone and Internet Penetration in Africa: Without Connectivity, Nothing Moves.” economist.com, Special Report, Nov 9, 2017. 10 The World Bank. 2017. “Africa Leapfrogging Through Innovation: From Constraints to Investment Opportunities.” See also: Broadman, Harry. “African Home-Grown Innovations Take Off.” 2016. EM Compass Note 7, IFC, September 2016; and Broadman, Harry. 2016. “How to Stimulate Innovation by Africa’s Private Sector.” EM Compass Note 8, IFC, September 2016. 11 Lankes, Hans Peter. 2017. “IFC’s Development Impact, One Market at a Time.” Capital Finance International. Summer 2017 Issue. 12 IFC. 2017. “Background on IFC’s Anticipated Impact Measurement and Monitoring (AIMM) System.” November 2017 (internal document). 13 World Bank. 2016. “World Development Report 2016: Digital Dividends.” Washington, DC. 14 Ibid. 15 Adner, Ron and Rahul Kapoor. 2016. “Right Tech, Wrong Time.” Harvard Business Review. November 2016 Issue. 16 WEF (World Economic Forum). 2014. “Delivering Digital Infrastructure – Advancing the Internet Economy,” in collaboration with the Boston Consulting Group. 17 Knight, Mark and Nora Brownell. 2010. “How Does Smart Grid Impact the Natural Monopoly Paradigm of Electricity Supply?” Grid- Interop Forum 2010. 18 Ong, Sean. 2016. “Energy Storage: Business Solutions for Emerging Markets.” EM Compass Note 23, IFC, November 2016. 19 Ong. 2016. 20 Haile, Abenet, Ariane Volk, and Thomas Rehermann. 2017. “Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and Buyers through Partnership and Technology.” EM Compass Note 37, IFC, April 2017. 21 GSMA. 2014. “Mobile Taxes and Fees.” 22 Starnes, Susan, Michael Kurdyla, and Alex Alexander. 2016 “De-risking by Banks in Emerging Markets – Effects and Responses for Trade.” EM Compass Note 24, IFC, September 2016. 23 Ramachandran, Vijaya and Thomas Rehermann. 2017. “Can Blockchain Technology Address De-Risking in Emerging Markets?” EM Compass Note 38, IFC, March 2017. 24 The World Bank. 2017. “Identification for Development (ID4D).” www.worldbank.org/en/programs/id4d. 25 The World Bank. 2016. “Identification for Development: Strategic Framework.” January 25, 2016. 26 Taglioni, Daria and Deborah Winkler. 2016. “Making Global Value Chains Work for Development.” World Bank Group, Trade and Development Series. 27 Mölders, Florian. 2016. “Global Productivity Slowdown and the Role of Technology Adoption in Emerging Markets.” EM Compass Note 6, IFC, May 2016. 28 See also: Mölders, Florian, Thomas Rehermann, and Nana Esi Hammah, “How Emerging Market Leaders Can Spur Technological Gains.” EM Compass Note 15, IFC, September 2016. 29 Saleem, Qamar, Martin Hommes, and Aksinya Sorokina. 2017. “Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major Growth Opportunity for Banks.” EM Compass Note 39, IFC, June 2017. 89 30 Kenney, Martin and John Zysman. 2016. “The Rise of the Platform Economy.” Issues in Science and Technology. 31 Sampere, Juan Pablo Vazquez. 2016. “Why Platform Disruption Is So Much Bigger than Product Disruption.” Harvard Business Review, April 8, 2016, www.hbr.com. 32 Hallward-Driemeier, Mary and Gaurav Nayyar. 2017. “Trouble in the Making? – The Future of Manufacturing-Led Development.” World Bank Group. 33 The World Bank. 2017. “Africa Leapfrogging Through Innovation: From Constraints to Investment Opportunities.” 34 Deloitte. 2015. “Google’s Economic Impact United Kingdom 2014.” 35 World Economic Forum. 2013. “Global Information Technology Report 2013, Digitalization for Economic Growth and Job Creation: Regional and Industry Perspectives.” 36 See: Bekele Haile, Abenet, Ariane Volk, and Thomas Rehermann. 2017. “Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and Buyers through Partnership and Technology.” EM Compass Note 37, IFC, April 2017; Aisenberg, Igal. 2017. “Precision Farming Enables Climate-Smart Agribusiness.” EM Compass Note 46, IFC, October 2017. 37 Saal, Matthew, Susan Starnes, and Thomas Rehermann. 2017. “Digital Financial Services: Challenges and Opportunities for Emerging Market Banks.” EM Compass Note 42, IFC, August 2017. 38 Del Carpio Ponce, Paola. 2018. “Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion.” EM Compass Note 51, IFC, April 2018. 39 GSMA. 2017. “The Mobile Economy 2017.” 40 Niforos, Marina. 2017. “Blockchain in Development - A New Mechanism of ‘Trust?’” EM Compass Note 40, IFC, July 2017. 41 The World Bank. 2017. “Africa Leapfrogging Through Innovation: From Constraints to Investment Opportunities.” 42 Bergström, Anna, et al. 2015. “mHealth: Can Mobile Technology Improve Health in Low- and Middle-Income Countries?” UCL Public Policy Briefing. 43 Iwaya, L.H., et al. 2011. “Mobile health in emerging countries: a survey of research initiatives in Brazil.” International Journal of Medical Informatics. 44 PWC. 2013. “Socioeconomic Impact of mHealth: An Assessment Report for Brazil and Mexico.” Report commissioned by the GSMA. 45 Del Carpio Ponce, Paola. 2018. 46 World Development Report 2016: Digital Dividends. World Bank Group, pp. 288-291. 47 World Economic Forum (WEF). 2014. “Delivering Digital Infrastructure – Advancing the Internet Economy” in collaboration with the Boston Consulting Group. 48 World Economic Forum. 2017. “4 ways governments can develop digital infrastructure.” https://www.weforum.org/agenda/2017/09/ governments-develop-digital-infrastructure-vodafone/. 49 Mills, Anthony. 2017. “From Farm to Fork: Private Enterprise Can Reduce Food Loss through Climate-Smart Agriculture.” EM Compass Note 47, IFC, October 2017. 50 Aisenberg, Igal. 2017. “Precision Farming Enables Climate-Smart Agribusiness.” EM Compass Note 46, IFC, October 2017. 51 Didier, Kose, Ohnsorge, Ye, “Slowdown in Emerging Markets: Rough Patch or Prolonged Weakness?” December 2015. 52 This is also the case for potential GDP growth rates: The IMF expects a decline of the potential output growth in the medium term due to aging populations, weaker investment, and lower productivity growth. (IMF World Economic Outlook, April 2015: “Uneven Growth: Short- and Long-Term Factors”). 53 Didier, Kose, Ohnsorge, and Ye, 2015. 54 Comin and Ferrer, “If Technology Has Arrived Everywhere, Why Has Income Diverged?” May 2013. 55 Ibid. 56 Belitz and Moelders, “International Knowledge Spillovers through High-Tech Imports and R&D of Foreign-Owned Firms,” January 2016; Ang and Madsen, “International R&D Spillovers and Productivity Trends in the Asian Miracle Economies,” April 2013. 57 Brookings Institution, “Understanding FDI Spillover Mechanisms,” November 2015. 58 “Technology at Work v2.0,” Citi GPS: Global Perspectives and Solutions, January 2016. 59 The World Bank, “World Development Report 2016: Digital Dividends,” http://www.worldbank.org/en/publication/wdr2016 60 World Economic Forum“5 Ways of Understanding the Fourth Industrial Revolution”, World Economic Forum, 2015. 61 World Bank, World Development Report 2016 – pp. 288-291. 62 Project Loon by Google. 2015. 63 Yael Maguire. 2015. “Building Communications Networks in the Stratosphere.” 64 Microsoft. 2016. “White Space Database.” 65 McKinsey Global Institute 2013; “Lions Go Digital: The Internet’s Transformative Potential in Africa.” 66 World Bank, World Development Report 2016 – pp. 104-118. 67 Songambele Maarifa Centre. 2015. 90 68 2012. “Final ISOC Report: Connecting the Community of Lascahobas, Haiti to the Internet.” 69 ICT4D Views from the Field. 2012. “Solar-Powered Internet Connectivity a Reality in Lascahobas, Haiti.” 70 Lawrence Berkeley National Laboratory. 2016. “Tracking the Sun IX”. 71 Steven Lacey, “Stem CTO: Lithium-Ion Battery Prices Fell 70% in the Last 18 Months”, greentechmdia.com, June 28, 2016. https://www. greentechmedia.com/articles/read/stem-cto-weve-seen-battery-prices-fall-70-in-the-last-18-months 72 The IFC Storage Assessment Model, developed in 2016, is intended to assess a range of off-grid and grid-connected storage + solar scenarios. For additional model details and assumptions, please contact Peter Mockel (pmockel@ifc.org) or Sean Ong (sean.ong@outlook.com). 73 GSMA Green Power for Mobile, 2012. “Powering Telecoms: East Africa Market Analysis.” 74 Kieron Monks. CNN 2016. “Watly: The computer that provides clean water, energy, internet access.” 75 Wisdom Ahiataku-Togobo. Ghana Ministry of Energy. 2004. “Challenges of Solar PV for Remote Electrification in Ghana.” 76 USAID 2016. “Reaching For the Roofs: One Million Solar-Powered Homes in Tanzania by 2017.” 77 Edgar Meza. PV Magazine 2015. “Tanzania Announces One Million Solar Homes Initiative.” 78 Becky Beetz. PV Magazine 2015. “Off Grid Electric Secures $45 Million for Solar, Storage Deployment in Tanzania.” 79 GSMA Green Power for Mobile, “Powering Telecoms: East Africa Market Analysis - Sizing the Potential for Green Telecoms in Kenya, Tanzania and Uganda”, GSMA 2012. 80 James Manyika et al., “Lions go digital: The Internet’s Transformative Potential in Africa”, McKinsey Global Institute, November 2013. 81 Lawrence Berkeley National Laboratory. 2016. “U.S. Energy Service Company (ESCO) Industry: Recent Market Trends.” 82 GSMA Community Power from Mobile-Charging Services. 2011. 83 Frances Cairncross. “The death of distance, a survey of telecommunications.” The Economist, September 30, 1995. 84 International Telecommunication Union (ITU) and author’s calculations. 85 These include mobile money transfer system, because much of the population remains outside of the formal financial system, as well as mobile apps that allows farmers to access information about the weather, real-time market prices, etc. 86 See http://gsmamobileeconomy.com/ssafrica/ 87 See “Africa’s ICT Infrastructure: Building on the Mobile Revolution” by Mark D. J. Williams et al. World Bank (2011). 88 The WB offers three types of financing instruments, 1) Investment Project Financing (“IPF”) provides IBRD loan, IDA credit/grant and guarantee financing to governments for activities that create the physical/social infrastructure necessary to reduce poverty and create sustainable development; 2) Development Policy Financing (“DPF”) provides IBRD loan, IDA credit/grant and guarantee budget support to governments for a program of policy and institutional actions to help achieve sustainable, shared growth and poverty reduction; 3) Program- for-Results links disbursement of funds directly to the delivery of defined results. For more information: http://www.worldbank.org/en/ projects-operations/products-and-services#2 89 The WB also provides financing projects related to the broader ICT portfolio, beyond the telecommunications sector, including the development of the IT industry, eGovernment, content promotion, etc. 90 WB has mechanisms other than “lending projects” by which it provides regulatory assistance in the region. A first set of mechanisms are financed “internally” by the WB through various “Bank Budget” projects, including those funded by one of the six Geographic Regions in the WB or directly by the Country Management Unit (“CMU”). A second set of mechanism are funded “externally”. For example, over the 2003- 2010 period, the WB executed 23 projects totaling $5.6 million via the Public-Private Infrastructure Advisory Facility (“PPIAF”) (see http:// www.ppiaf.org/), and 6 projects totaling $1.3 million via the ICT for Development (“IC4D”) Korea Trust Fund (“KTF”) (see http://www. worldbank.org/content/dam/Worldbank/document/EAP/Korea/KTF%20Booklet-web.pdf) 91 The establishment of independent tower operators is a worldwide trend; many mobile operators sell off tower assets with the objective of focusing on providing mobile service and leasing the necessary tower space. This also promotes infrastructure sharing in that multiple mobile operators are more likely to lease tower space from an independent tower operator. 92 European Bank for Reconstruction and Development, “Transition Report 2014: Innovation in Transition.” 93 Yuriy Gorodnichenko and Monika Schnitzer, “Financial Constraints and Innovation: Why Poor Countries Don’t Catch Up,” Journal of the European Economic Association, September 2013. 94 Bakken, Henry, “Futures Trading – Origin, Development and Present Economic Status”, 1966. 95 UNCTAD Report, “Emerging Commodity Exchanges: from Potential to Success”, UNCTAD,1997. UNCTAD Report, Development Impacts of Commodity Exchanges in Emerging Markets, UNCTAD, 2009. 96 Gebre-Medhin, Eleni, “The Devil is in the Details - Understanding a Commodity Exchange”, The Fortune Newspaper, December 2006. 97 ECX Report, Annual Report 2015/16, “ECX Strategy Planning Unit”, Addis Ababa,2016. 98 Gebre-Medhin, Eleni, “A Market for Abdu: Creating a Commodity exchange in Ethiopia”, IFPRI, 2012. 99 Ethiopia Commodity Exchange (ECX), “The Rule of the Exchange Commodity Exchange, Rev No.5/2010”, ECX, July 2010. House of People Representative (HPR), A proclamation to provide for the establishment of Ethiopia Commodity Exchange, Proclamation No. 550/2007 Federal Negarit Gazita Addis Ababa, September 4, 2007. 100 ECX Report, “Assessment on ECX Membership Transfer”, ECX Member Development Unit, Addis Ababa, 2016. 101 Ibid. 91 102 Andersson, Camilla, Bezabih, Mintewab, Mannberg, Andrea, The Ethiopian Commodity Exchange and Spatial Price Dispersion, Environment for Development, Discussion Paper Series 16-02, January 2016, 16-02. Mihretu, M Warehouse Financing: Lessons from Ethiopia, IFC, 2012. 103 Gebre-Medhin, Eleni, “A Market for Abdu: Creating a Commodity exchange in Ethiopia”, IFPRI, 2012. 104 See ECX to Launch online trading Operations, ICF, December12, 2013, available at http://www.icfafrica.org/news/ecx-to-launch-online- trade-operations 105 See Traceability, Wikipedia.com, Accessed on January 24, 2017, at https://en.wikipedia.org/wiki/Traceability 106 David Kahrmann, “ECX Launches independent food Traceability System”, USAID,2012, Available at https://www.usaid.gov/ethiopia/press- releases/ecx-launches-independent-food-traceability-system 107 Ibid. 108 ECX Report, Annual Report 2015/16, ECX Strategy Planning Unit, Addis Ababa, 2016. 109 Bekele, Abenet, “ECX’s Coffee Market: Traceability and New Developments”, 14th AFCA Conference & Exhibition. Dar es Salaam, February, 2016. https://afca.coffee/conference/wp-content/uploads/presentations/14AFCCE/Abenet%20Bekele%20-%20Ethiopian%20 Commodity%20Exchange%2C%20Traceability%20and%20New%20Developments.pdf 110 Malaket Alexander, “Leveraging Supply Chain Finance for Development,” International Centre for Trade and Sustainable Development, September, 2015. 111 Enrico Camerinelli, “A Study of the Business Case for Supply Chain Finance,” ACCA and Aite Group, 2014. 112 Factor Chain International Statistics (2008-2014), https://fci.nl/en/about-factoring/statistics. 113 David Bannister, “Demica report shows strong growth for supply chain finance,” bankingtech.com, May 29, 2013, http://www.bankingtech. com/144222/144222/. 114 Comment by Eugenio Cavenaghi to IFC staff, 2016. 115 Ibid. 116 Comment by André Casterman to IFC staff, 2016. 117 Distributor finance is also known as buyer finance and is defined as “the provision of financing for a distributor of a large manufacturer to cover the holding of goods for resale and to bridge the liquidity gap until the receipt of funds from receivables following the sale of goods to a retailer or end-customer.” See BAFT - Euro Banking Association (EBA) - Factors Chain International (FCI) - International Chamber of Commerce (ICC) - International Trade and Forfaiting Association (ITFA), Standard definitions for techniques of supply chain finance, 2016. 118 Comment by Alexander Malaket to IFC staff, 2016. 119 Comment by André Casterman to IFC staff, 2016. 120 “Banks develop blockchain platform for trade finance,” Global Trade Review, Dec. 17, 2015. 121 Comment by Eugenio Cavenaghi to IFC staff, 2016. 122 World Bank Global Findex Database. 2014. http://www.worldbank.org/en/programs/globalfindex 123 See classification by GSMA of commercial mobile financial services in Latin American and the Caribbean. Type I Markets (low income, low interest rates) under this classification are Bolivia, El Salvador, Guatemala, Nicaragua, and Paraguay. Under this classification, Peru is considered a “hybrid” since it has similar account penetration rates but higher GDP per capita than these markets. 124 SBS (Superintendencia de Banca, Seguros y AFP). 2017. “El sistema financiero está presente en casi el 70% de los distritos del Perú.” SBS Informa: Boletín Quincenal Nro.12. July 2017. 125 SBS (Superintendencia de Banca, Seguros y AFP). 2016. “Perú: Indicadores de inclusión financiera de los sistemas financiero, de seguros y de pensiones.” December 2016. 126 SBS (Superintendencia de Banca, Seguros y AFP). 2017. “El sistema financiero está presente en casi el 70% de los distritos del Perú.” SBS Informa: Boletín Quincenal Nro.12. July 2017. 127 ILO (International Labor Organization). “Key Indicators of the Labor Market.” ILOSTAT - ILO database of labor statistics. http://www.ilo.org/ global/statistics-and-databases/lang--en/index.htm 128 Quevedo, Vladimir and Javier Pereda. 2017. “Información sobre el uso y conocimiento del efectivo para gestión en la Banca Central.” Revista Moneda. BCRP (Banco Central de Reserva del Perú). March 2017. 129 GSMA Intelligence. 2016. “The Mobile Economy: Latin America and the Caribbean 2016.” It must be noted that there is great variance among the region’s countries’ unique mobile subscriber penetration, going from as low as 28% in Cuba to as high as 92% in Chile, Uruguay and Argentina. 130 Lewis, Robin J., John D. Villasenor, and Darrell M. West. 2017. “The 2017 Brookings Financial and Digital Inclusion Project Report: Building a Secure and Inclusive Global Financial Ecosystem.” Center for Technology Innovation at Brookings. 131 Ibid. 132 Jack, William and Tavneet Suri. 2014. “Risk Sharing and Transactions Costs: Evidence from Kenya’s Mobile Money Revolution.” American Economic Review Vol. 104 (1); Alexander, Alex J., Lin Shi and Bensam Solomon. 2017. “How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective.” EM Compass Note 34. IFC, April 2017; McKay, Claudia and Rafe Mazer, “10 Myths About M-PESA: 2014 Update,” CGAP blog, October 1, 2014. http://www.cgap.org/blog/10-myths-about-m-pesa-2014-update 133 Suri, Tavneet and William Jack. 2016. “The long-run poverty and gender impacts of mobile money.” Development Economics Vol. 354 Issue 6317. 92 134 World Bank. 2017. “Mobile Money: Transforming Financial Inclusion.” Inclusive Innovations. June 2017. 135 GSMA. 2017. “The Mobile Economy 2017.” 136 Antón-Díaz, Pablo, and Tomás Conde. 2017. “Modelo Peru: Unique Model, Unique Challenges, Bright Future.” Brief 001. Center for Financial Inclusion and Institute of International Finance. 137 Banking Tech. 2015. “Ericsson to Connect Banks, Telcos and the Unbanked.” http://www.bankingtech.com/382671/ericsson-to-connect- banks-telcos-and-the-unbanked/ 138 Trivelli, Carolina. 2017. “Modelo Peru.” Interview by Paola del Carpio. (September 12, 2017). 139 Bim (Billetera Móvil). “¿Cuánto cuesta usar Bim?” https://mibim.pe/tu-billetera-movil/cuanto-cuesta-usar-bim/ 140 Antón-Díaz, Pablo, and Tomás Conde. 2017. “Modelo Peru: Unique Model, Unique Challenges, Bright Future.” Brief 001. Center for Financial Inclusion and Institute of International Finance. 141 Ibid. 142 Carolina Trivelli is a Peruvian economist specialized in social policy, rural development, and financial inclusion issues. She is a senior researcher at the Peruvian think tank Instituto de Estudios Peruanos. She is also Chair of the Consultative Group to Assist the Poor (CGAP) housed at the World Bank, and chair of the board of Pagos Digitales Peruanos, the company that runs the interoperable platform for electronic money in Peru. Trivelli was the first Minister of Development and Social Inclusion in Peru (2011-2013). 143 Cash transfer programs reach areas in Peru where there is no bank coverage at all. In these cases, the transfer is made at a central point for different areas at a certain day and time. It is costly for the government because it must contract a security company that physically transfers cash. It is also costly for users because some of them must travel very long distances. 144 Besich, Nicolás, interview by Paola del Carpio. 2017. “Promotion and use of Bim among Juntos beneficiaries.” Videnza Consultores. 145 Trivelli, Carolina. 2017. “Modelo Peru.” Interview by Paola del Carpio. 146 See: Better Than Cash Alliance. 2016. “Building from a Strong Foundation: A Path Forward for digitizing Sub-national Government Payments in Peru.” 147 FEPCMAC (Federación Peruana de Cajas Municipales de ahorro y Crédito). 2016. “Las cajas municipales y el dinero electrónico: uso de Bim.” Caso Estudio. 148 Antón-Díaz, Pablo, and Tomás Conde. 2017. “Modelo Peru: Unique Model, Unique Challenges, Bright Future.” Brief 001. Center for Financial Inclusion and Institute of International Finance. 149 Trivelli, Carolina. 2017. 150 This information was provided by Jessica Salazar, Ecosystem Development Chief of Pagos Digitales Peruanos (PDP). 151 Better Than Cash Alliance. 2016. “Modelo Peru Webinar.” www.betterthancash.org/news/blogs-stories/modelo-peru-webinar. 152 Provided by Jessica Salazar, Pagos Digitales Peruanos. 153 Better Than Cash Alliance. 2016. “Modelo Peru Webinar.” www.betterthancash.org/news/blogs-stories/modelo-peru-webinar. 154 Ibid. 155 Franco Gavonel, Maria. 2017. “Patterns and Drivers of Internal Migration Among Youth in Ethiopia, India, Peru and Vietnam.” Young Lives Working Paper 169. Oxford. 156 Holtmann, Martin, “Digital Financial Services – Challenges and opportunities for Banks”, Presentation provided at the Sixteenth Annual Conference on Policy Challenges for the Financial Sector- Finance in Flux: The Technological Transformation of the Financial Sector, June 1-3, 2016, Washington, DC. 157 Consultative Group for the Assistance of the Poor (CGAG). http://www.cgap.org/topics/digital-financial-services 158 TLT, Digital banking: from revolution to evolution, TLT 2016. 159 Julian Skan, Julian – Dickerson, James – Masood, Samad, “The Future of FinTech and Banking: Digitally disrupted or reimagined?” Accenture 2015. 160 Kuen, Yap Leng, “Jump in China’s Shadow Banking Products Potentially Destabilizing”, Thestar.com, Feb 27, 2017; Tu, Lianting – Luo, Jun, “China Default Chain Reaction Threatens Products Worth 35% of GDP”, Bloomberg.com, May 29, 2016. 161 EY, “Banking in Asia-Pacific - Size Matters and Digital Drives Competition”, EY 2015. 162 Ibid. 163 Ibid. 164 KPMG, “FinTech in India – A Global Growth Story”, KPMG, June 2016. 165 Demirguc-Kunt, Asli – Klapper, Leora – Singer, Dorothe – Van Oudheusden, Peter, “The Global Findex Database 2014 – Measuring Financial Inclusion Around the World”, World Bank Policy Research Working Paper No. 7255, World Bank, April 2015. 166 World Bank World Development Indicators, retrieved March 8, 2017. http://data.worldbank.org/region/sub-saharan-africa. 167 Beck, Thorsten – Cull, Robert, “Banking in Africa”, CSAE Working Paper, WPS/2013-16, First Draft August 2013, Centre for the Study of African Economies. 168 The Economist stated at the end of Dec 2016 that there are almost 1 billion active phone subscriptions in Africa, where many people have multiple sim cards, which leads to the conclusion that ca. half of Africans have phones: N.N., “Mobile phones are transforming Africa”, economist.com, Dec 10, 2016; The GSMA estimates, similarly, for 2015 unique phone penetration rates for women to be 49% and for men 93 41%: GSMA, “The Mobile Economy in Africa 2015”, GSMA 2015. 169 See Galat, Bonnie – Ahn, Hyung, “The World Bank Group’s Response to the Crisis: Expanded Capacity for Unfunded and Funded Support for Trade with Emerging Markets”. In: Chauffour, Jean-Pierre – Malouche, Mariem (eds.), Trade Finance during the Great Trade Collapse, 2011, pp 301-317; see also Ramachandran, Vijaya, “Mitigating the Effects of De-Risking in Emerging Markets to Preserve Remittance Flows”, IFC EM Compass Note No. 22, November 2016; Starnes, Susan – Kurdyla, Michael – Alexander, Alex J., “De-Risking by Banks in Emerging Markets – Effects and Responses for Trade”, IFC EM Compass Note No. 24, November 2016. 170 Collett, Dominique, “The Unstoppable Rise of FinTech in Africa”, Disrupt Africa (web site), May 20, 2016; GSMA estimates that by 2020, 60% of the population in Africa still lacks access to internet services: GSMA, “The Mobile Economy in Africa 2015”, GSMA 2015. 171 N.N., “Vodafone M-Pesa Reaches 25 million Customers Milestone”, vodafone.com, April 25, 2016; Mbele, Lerato, “Why M-Pesa Failed in South Africa”, bbc.com, May 11, 2016. 172 Collett, Dominique, “The unstoppable rise of FinTech in Africa”, Disrupt Africa (web site), May 20, 2016. 173 Leach, Anna, “Mobile Money: Why isn’t the M-Pesa Effect Hitting More Countries?” The Guardian, April 16, 2015. 174 Cook, Tamara – McKay, Claudia, “How M-Shwari Works: The Story So Far”, Consultative Group to Assist the Poor (CGAP) and Financial Sector Deepe-ning (FSD) Kenya, Access to Finance Forum, Reports by CGAP and Its Partners No. 10, April 2015. Cook, Tamara – McKay, Claudia, Top 10 Things to Know about M-Shwari. World Bank Blog, April 10, 2015. 175 Gould, Elizabeth, “Africa’s Big Banks are Betting on FinTech Startups and Bitcoin to Beat Disruption”, Quartz Africa qz.com,February 19, 2016. 176 N.N., “FinTech vs. Traditional Trade - Surviving the Digital Transition”, Trade Finance Magazine Special Issue, September 2016. 177 See World Economic Forum, “The Future of Financial Services - How Disruptive Innovations are Reshaping the Way Financial Services are Structured, Provisioned and Consumed”, WEF, Final Report, June 2015; Manyika, James – Lund, Susan – Singer, Marc – White, Olivia – Berry, Chris, “How Digital Finance Could Boost Growth in Emerging Economies”, McKinsey Global Institute, Sept 2016; Citi GPS, “Digital Disruption – How FinTech is Forcing Banking to a Tipping Point”, Citi Global Perspectives and Solutions, March 2016; Holtmann, Martin, “Digital Financial Services – Challenges and Opportunities for Banks”, Presented at the Sixteenth Annual Conference on Policy Challenges for the Financial Sector - Finance in Flux: The Technological Transformation of the Financial Sector, June 1-3, 2016, Washington, DC; UBS, “Q-Series - Global Banks: Is FinTech a Threat or an Opportunity?” July 26, 2016; Dapp, Thomas F, “FinTech Reloaded – Traditional Banks as Digital Ecosystems”, Deutsche Bank Research, Current Issues, June 15, 2016; Kelly Sonja – Ferenzy, Dennis – McGrath, Allyse, “How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines”, IIF Institute of International Finance – Center for Financial Inclusion, Accion, July 2017. 178 Starnes, Susan – Kurdyla, Michael – Alexander, Alex J., “De-Risking by Banks in Emerging Markets – Effects and Responses for Trade”, IFC EM Compass Note No. 24, November 2016. 179 Ley, Stephen –Bailey, Steven, “PSD2 Opens The Door to New Market Entrants”, Deloitte UK, 2015. 180 Dietz, Mikols – Vinayak, HV – Lee, Gillian, “Bracing for Seven Critical Changes as Fintech Matures”, McKinsey & Company, November 2016. 181 Coleman, Alison, “Poland On Track To Becoming a Major European Tech Startup Hub”, Forbes, May 20, 2016. 182 Dietz, Miklos – Vinayak, HV –Lee, Gillian, “Bracing for Seven Critical Changes as Fintech Matures”, McKinsey & Company, November 2016. Foy, Henry, “Poland’s mBank Thrives on Disruption”, Financial Times, March 4, 2015. 183 Ibid. 184 Arnole, Martin, “How Finance is Being Taken Over by Tech”, Financial Times, January 17. 2017. 185 Center for Financial Inclusion, “BiM – The First Fully-Interoperable Mobile Money Platform: Now Live in Peru”, Center for Financial Inclusion Blog, Feb 17, 2016. 186 Mak, Liz, “China’s 55 Trillion Yuan Credit Card Clearing Market Now Open for Competition”, SCMP.com (South China Morning Post), June 8, 2016. 187 Cheng, Leng, “China Opens Bank Card Clearing Market”, Shanghaidaily.com, June 8, 2016; BI Intelligence, “China Prepares for Open Card Payments Ecosystem”, Businessinsider.com, June 10, 2016. 188 Woodhouse, Alice, “Chinese Fintechs Overtake Western Rivals in Innovation”, SCMP.com (South China Morning Post), December 6, 2016. 189 Mittal, Sachin – Lloyd, James, “The Rise of FinTech in China – Redefining Financial Services”, EY and DBS, November 2016, p. 13. 190 Asean Today, “Unqualified P2P Chinese Platforms Under New Policy”, Fintechnews.sg, September 19, 2016. 191 Alois, JD, “The China P2P Lending Market is Finally Slowing”, crowdfundinsider.com, January 12, 2017; Asean Today, Unqualified P2P Chinese Platforms Under New Policy, Fintechnews.sg, Sep 19, 2016. 192 Ant Financial, “Alibaba Investors’ Day Document”, Alibaba Group, June 2016 193 Reuters, “Alibaba’s Fintech Arm Says Its Focus Remains on Asia”, Fortune.com, Nov 1, 2016. 194 Yuanyuan, Deng, “Alibaba, Baidu and Tencent and Their New Online Banks”, fintechranking.com, December 26, 2016. 195 Chinese Bankers’ Survey 2015, China Banking Association and PWC, January 2016. 196 Reserve Bank of India (RBI), “Guidelines for Licensing of Payments Banks”, March 2, 2015. 197 Reserve Bank of India (RBI), “RBI Grants ‘In-Principle’ Approval to 11 Applicants for Payments Banks”, August 19, 2015. 198 Russell, Jon, “Paytm, India’s Top Mobile Payments Firm Gets Approval to Launch Its Own Digital Bank”, techcrunch.com, January 3, 2017. 94 199 TNN, “Learning with the times: What is Aadhaar?”, The Times of India, Oct 4, 2010. 200 Banerjee, Shweta, “Aadhaar: Digital Inclusion and Public Services in India”, World Development Report 2016 Background Paper – Digital Dividends, World Bank, Dec 2015. 201 Puneet Chopra – Paresh Rajde – Vivek Gupta – Priyank Mishra – Akshat Pathak, “e-KYC and the India Stack – A Transformative Blueprint for Emerging Markets”, MicroSave, March 2016. 202 Goyal, Vishal –Kuman, Ishank, “UBS Evidence Lab – India Banks: Fintech Challengers Gaining Ground”, UBS Global Research, February 2, 2017. 203 Memon, Niloufer – Goyal, Vibhor – Pande, Varad, “The Five-Minute Loan: How India Stack is Speeding Loans to Small Businesses”, Dalberg. com D. Blog, January 6, 2017. 204 Sachitanand, Rahul, “Meet the Alternative Lending Startups”, The Economic Times, August 13, 2016. 205 KPMG, “FinTech in India - A Global Growth Story”, KPMG, June 2016. 206 D’Monte, Leslie, “India’s Cash Conundrum: How Ready is India to Go Cashless?”, Livemint.com, January 28, 2017. 207 Russell, Jon, “Amazon Gains Wallet License to Boost its Business in India”, Techcrunch, April 12, 2017. 208 Mundy, Simon, “India’s Paytm raises $1.4bn from SoftBank”, ft.com. May 18, 2017. 209 KPMG, “FinTech in India – A Global growth Story”, KPMG, June 2016. See also Committee on Digital Payments, Medium Term Recommendations to Strengthen Digital Payments Ecosystem, Report by the Ministry of Finance, Government of India, December 2016; Unified Payment Interface Crosses 1mn hits Mark – Value soars to Rs 457cr, FE Bureau, Dec 27, 2016; N.N., World’s Best Digital Bank 2016: DBS, euromoney.com, 2016; UBS Evidence Lab, India Banks – Fintech Challengers Gaining Ground, UBS, Feb 2, 2017. 210 Srinivasan, Supraja, “CreditVidya Partners with Fullerton India for Authentication Service”, economictimes.indiatimes.com, December 7, 2016. 211 Cook, Tamara – McKay, Claudia, “How M-Shwari Works: The Story So Far, Consultative Group to Assist the Poor (CGAP) and Financial Sector Deepening (FSD) Kenya”, Access to Finance Forum, Reports by CGAP and Its Partners No. 10, April 2015. 212 Muthiora, Brian, “New Infographic: Mobile Money and the Digitisation of Kenya’s Retail Payments Systems”, GSMA, September 29, 2014. See for a definition of the Kenyan National Payments System and its components: https://www.centralbank.go.ke/national-payments-system/ 213 Bank Supervision Annual Reports 2015 and 2012, Central Bank of Kenya. 214 Suri, Tavneet –Jack, William, “The Long-Run Poverty and Gender Impacts of Mobile Money”, Science, Dec 9, 2016, Vol. 354, Issue 6317, pp. 1288-1292. 215 “Food security in a world of natural resource scarcity: The role of agricultural technologies”, International Food Policy Research Institute, 2014. 216 Ibid. 217 Gujarat Green Revolution Company Ltd.; http://ggrc.co.in/webui/home.aspx. 218 “Government of Karnataka and 2030 WRG launch Karnataka Multi-Stakeholder Platform for Water to Drive Large-Scale Transformation in Water Resources Management”, 2030 Water Resources Group, May 23, 2017. 219 “Community Collaborative: Water Management - Tamil Nadu Irrigated Agriculture Modernization and Water Bodies Restoration and Management Project”, World Bank Group, June 7, 2016, 220 Yuan Zhou and Suresh Babu, “Knowledge Driven Development: Private Extension and Global Lessons”, 2015. 221 Godyal, Anjali – Iha, Vikas, “Solar water pumps for efficient irrigation”, Indiawaterportal.org, Feb 18, 2017. 222 Otufodunrin, Lekan, “Hello Tractor is Africa’s Uber for the farm”, thehindu.com, June 24, 2017.; another example is the online platform Gold Farm, established in March 2016, to connect “small and marginal farmers” in Kolar and Gadag districts in the Karnataka state within India with farm equipment manufacturers, local entrepreneurs and in collaboration with Karnataka state government providing on-demand services for farm mechanization equipment. http://www.thehindubusinessline.com/specials/emerging-entrepreneurs/ondemand-services-taking-roots- in-farm-sector/article9444483.ece; see also: http://www.goldfarm.in/home/ 223 Gustavsson, Jenny, Christel Cederberg, and Ulf Sonesson. 2011. “Global food losses and food waste - Extent, causes and prevention.” FAO Food and Agricultural Organization of the United Nations. 224 These figures include emissions from associated agricultural inputs, deforestation and soil carbon declines in agricultural fields. 225 Hodges, Rick J., Jean C. Buzby, and Ben Bennett. 2011. “Postharvest losses and waste in developed and less developed countries – Opportunities to improve resource use.” Journal of Agricultural Science (149) 37-45; Kumar, Deepak, and Prasanta Kalita. 2017. “Reducing postharvest losses during storage of grain crops to strengthen food security in developing countries,” Foods 6 (1), 8. 226 Kumar and Kalita. 2017. 227 Affognon, Hippolyte, Christopher Mutungi, Pascal Sanginga, and Christian Borgemeister. 2015. “Unpacking postharvest losses in Sub- Saharan Africa – A meta-analysis.” World Development (66) 49–68. 228 Hodges, Buzby, and Bennett. 2011. 37-45. 229 Kumar and Kalita. 2017. 230 Daminger, Allison, Saugato Datta, and Dana Guichon. 2016. “Reducing post-harvest loss – A behavioral approach.” Ideas42.org. 231 Daminger, Datta, and Guichon. 2016. Manufacturers of the hermetically sealed bags have partially solved this problem by changing the appearance of the bags and providing detailed infor-mation on the benefits of hermetic sealing on the exterior of the bags. 95 Mined from ancient deposits of diatoms – a form of phytoplankton. 232 Daminger, Datta, and Guichon. 2016. 233 Kumar and Kalita. 2017. 234 Rosegrant, Mark W., Eduardo Magalhaes, Rowena A. Valmonte-Santos, and Daniel Mason-D’Croz. 2016. “Returns to investment in reducing 235 postharvest food losses and increasing agricultural productivity growth.” Paper prepared for the 2016 Agricultural & Applied Economics Association Annual Meeting, Boston, Massachu-setts, 31 July – 2 August. Daminger, Datta, and Guichon. 2016. 236 World Bank. 2011. “Missing Food – The case of postharvest grain losses in Sub-Saharan Africa.” 2011. World Bank – FAO – Natural 237 Resources Institute. World Bank Report 60371-AFR, 2011. Ibid. 238 Ibid. 239 Neven, David. 2014. “Developing sustainable food value chains – Guiding principles.” FAO Food and Agricultural Organization of the United 240 Nations, 2014. Ibid. 241 Ibid. 242 World Economic Forum, “Enabling Trade: From Farm to Fork”, 2014. 243 96 Photo Credits Cover: Getty Images; Page 4: Tom Perry / World Bank; Page 7: Anjali Garg / IFC; Page 18: Dominic Sansoni / WB IFC 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 U.S.A. ifc.org/ThoughtLeadership Contacts ESTHER NAVARRO | enavarro@ifc.org Head of Communications, Disruptive Technology and Digital Economy, Partnerships, Communications and Outreach THOMAS REHERMANN | trehermann@ifc.org Senior Economist, Thought Leadership, Economics and Private Sector Development NADINE SHAMOUNKI GHANNAM | nsghannam@ifc.org Communications Lead, Economics and Private Sector Development ©2018