Creating an enabling environment to include refugee and host communities in financial systems

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Activities, stakeholders and guidelines

Creating an enabling environment to include refugee and host communities in financial systems

Practical tips and guidelines on key activities and stakeholders involved

Click on one activity below to see detailed guidelines

Stakeholders involved
Government representatives (national),
Financial service providers-commercial banks and microfinance institutions,
Public guarantee institutions,
Private sector
Guidelines
Encourage policy-makers and financial services providers to understand the financial realities and needs of refugees and host communities, including the unique challenges they face, such as limited capital and distrust of financial institutions.
The ILO course Making Microfinance Work (MMW) is adapted to better address the financial-inclusion needs of refugees, forcibly displaced people and their host communities. Renamed Making Finance Work for Refugees, Displaced and Host Communities (MFWR), this condensed, one-week course targets financial professionals, policy-makers and private sector actors. It focuses on identifying and addressing the market barriers that prevent refugees and host community members from accessing financial services.
Training staff from national institutions in financial education (FE) can help provide them with a deeper understanding of the ILO programme and its potential to advance inclusive financial systems.
Review requirements for opening bank accounts, accessing loans and obtaining credit to ensure they do not exclude refugees and host communities.
Advocate for the development and implementation of national legislation and policies that promote financial inclusion for all segments of society, including refugees and host communities.
In some instances, PROSPECTS worked with financial institutions to develop action plans to extend financial services in refugee-hosting areas, including building a bank branch inside a refugee settlement.

Stakeholders involved
Financial services providers- commercial banks and microfinance institutions
Guidelines
Within displaced populations, distinct subsegments face unique challenges and obstacles. Key variables, such as the duration of displacement and area of settlement, can affect levels of accumulated knowledge, social capital and, in some cases, assets. These factors help predict an individual’s readiness to access formal financial systems, while also highlighting varying needs at different stages of displacement, which require tailored financial and capacity-building support.
In Uganda, PROSPECTS and Opportunity Bank invested both time and resources in defining subsegments of the refugee population. They developed tailored financial literacy training, group loans and individual loans, organized into three tiers of services: financial literacy training for customers who had been in Uganda for two years or less and lacked capital; group loans for those who had been living in Uganda for between two and five years and had a limited amount of individual capital; and individual loans for customers who had been in Uganda for five years or more, had an existing business and a bank account.
Similarly, in Lebanon, the partner Al Majmoua defined three segments of the refugee and host communities that reflected varying levels of financial capital and knowledge. Those without any capital or knowledge of finance were excluded from the initial pilot, whereas more resources were used to support those with limited-to-moderate levels of capital and knowledge. Find out more about PROSPECTS’ partnership with Al Majmoua in Lebanon.

Stakeholders involved
Financial services providers- commercial banks and microfinance institutions
Guidelines
Help FSPs recognize practical barriers for refugees to accessing finance, such as issues related to Know Your Customer (KYC) requirements and refugee recognition, and the lack of nationally recognized documentation of refugees.
Start small and scale up gradually by piloting financial products with FSPs. New and adapted financial services take time to become established, particularly when targeted towards groups that are traditionally outside of formal financial systems. In doing so, FSPs are able to assess the uptake of the products and collect feedback to inform adaptations, as needed.
Try out innovative delivery strategies to reach refugees and host communities, especially those in remote locations. These include village agent models, mobile banking and digital banking agents.
Provide additional measures to encourage commercial banks to serve refugees, IDPs and host communities where there is a perceived risk of non-payment. For example, in Iraq, the ILO used PROSPECTS funds as guarantees on behalf of IDP and host community clients. For more details, see the case study.

Stakeholders involved
Financial services providers- commercial banks and microfinance institutions
Guidelines
The long-term engagement of FSPs in forced displacement settings depends on the profitability of new products and services and their alignment with the FSPs’ missions. While donor finance can offset the initial costs and associated risks, return on investment needs to be evident for engagement in the long term.
The potential scale of business with refugees, IDPs and host communities is large, as these populations are largely unserved by FSPs and concentrated in the same geographical areas (such as densely populated settlements, camps and urban neighbourhoods). The size of each transaction will, however, be low.
One of the key reasons why financial services providers are reluctant to serve refugees, IDPs and even vulnerable groups within the host community is their perception that these groups are high risk and therefore susceptible to not repaying loans and interest. This is known as “flight risk” by financial institutions. Refugees, in particular, fall into this category, as their status in the host country is perceived as temporary and the belief is that they will return home before a loan can be repaid.
One related consideration is the duration of displacement, with refugees’ readiness, willingness and capacity to access financial services being higher the longer they are in the host country. In protracted situations, needs become more varied as the target population establishes itself in the country. The longer refugees are in a host country, the more they need diverse financial services.
Most countries in which loan products have been launched have seen repayment rates of more than 94 per cent (Iraq, Ethiopia, Kenya, Lebanon). In Arab states, there was a drop-off in repayments among refugees, largely due to the increasing return of Syrian refugees.

Stakeholders involved
Savings and Credit Cooperatives (SACCOs),
Village Loan and Savings Associations (VLSAs)
Guidelines
Recognize the role of informal financial systems, such as Savings and Credit Cooperatives (SACCOs) and Village Loan and Savings Associations (VLSAs), and support their formalization, where appropriate.
PROSPECTS teams supported both the formation and strengthening of VSLAs and SACCOs, combining financial education, access to financial products and cooperative training as a means to build capacity. See case study from Lebanon for more details on how this can be done.
Group loans were used in Uganda and Ethiopia, in part because the concept was familiar but also because they offset the individual risk of non-payment. In Ethiopia, a commercial bank opened group accounts for refugee and host community entrepreneurs.

Stakeholders involved
Financial services providers- commercial banks and microfinance institutions,
(I)NGOs,
Private sector,
Donors
Guidelines
A blended product that combines grants with loans at lower interest rates can be used to help businesses transition to formal financial systems. This needs to be managed carefully, however, with a view to targeting grants to those without sufficient capital and avoiding market distortion.
In post-conflict settings where there is some level of stability, the legacy of grant provision will remain. Grants can still provide a relevant lifeline to MSMEs that have faced physical loss of infrastructure, capital and market opportunities, but they are best suited to business reactivation and recovery.
Overuse of grants constitutes a market disturbance and is therefore not a sustainable approach for medium-/long-term development.
Loan products that use subsidized interest rates as a form of blended finance offers one approach that has been used by PROSPECTS. Using microfinance helps individuals and businesses (re)build a solid credit history, which is essential for accessing larger loan amounts in the future and thus more sustainable for business growth. Additionally, loans require repayment, which instils a sense of financial discipline and responsibility – crucial for sustainable resource management and preventing dependency on aid.

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Building trust and improving financial literacy

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Creating an enabling environment to include refugee and host communities in financial systems

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