091102-financial sector approach final.ppt tbruett.ppt
TRANSCRIPT
Overview� Financial Systems approach to microfinance
� Basic roles and functions of government and donors at various points within the financial sector
Khan bank serving 50% of
rural households (Mongolia)ProCredit
launches in multiple
countries
Smart cards, biometrics, mobile phone banking and ATMs (Bolivia,
Mexico, India, S. Africa, Kenya)
Links to insurance
companies and banks (Uganda, Peru) and direct
insurance (India)
Financial System
The Borders of Microfinance are Blurring
Financial Financial
ASA reaching 4.5 million clients with franchising model
(Bangladesh)Indian banks reach millions in
partnership with SHGs
Credit bureaus cutting cost and risk (Haiti,
Bosnia, Peru, Bolivia)
50+ countries working on
policy frameworks
that integrate microfinance
Microfinance
Financial Financial
Services for the Services for the
PoorPoor
Savings
Permanent
access to
financial
Financial Services for
the Poor
Loans
InsuranceTransfer
Payments
financial
services for
significant
numbers of
poor people
What Is the Financial Systems Approach to
Microfinance?
Clients
Micro: Suppliers of Microfinance
• Money lenders
• Input-Suppliers
Informal Suppliers of Microfinance
• Savings and Credit Cooperatives
• Self-Help Groups
• Savings Clubs
• Village Banks
Member owned
ClientsClientsClientsClients
• Village Banks
• Multi Purpose NGOs
• NGOs with Financial Sector Programs
NGOs
• Commercial Banks
• Non-Bank Financial Institutions
• Postal Banks
• Insurance Companies
• Remittance Companies
• Telecos
• Debit card providers
Formal Institutions
The Micro Level: A continuum of
institutions and delivery channels
Pros and Cons of Different Financial Service
Providers
Service Provider Examples Strengths Weaknesses
Informal Moneylenders
ROSCAs
Input suppliers
• Convenient and fast
• Close to clients
• Low cost operations
• Accessible to poor and
remote
• Some are insecure
and unstable
• Limited scope of
operations
• Rigid (clubs)
• Expensive
(moneylenders)
Member-owned Financial
cooperatives
SHGs
FSAs
CVECAs
• Indigenous
• Low cost operations
• Accessible to poor and
remote
• Profits used to benefit
• Governance
challenges
• Often lack effective
supervision
• Scale of operations • Profits used to benefit
members
• Scale of operations
limited
• Limited products
offered
NGOs Int’l network
affiliates
Domestic NGOs
• Knowledge of poor
clients
• Social mission driven
• More willing and able
to take risks to work at
frontier
• Often donor
dependent
• Limited range of
services; often no
voluntary savings
• Mostly small scale
• High cost of
operations
Formal Financial
Institutions
State banks
Rural or
community banks
NBFIs
Commercial banks
• Broad range of services
• Large branch
infrastructure and
points of scale
• Own capital
• Resources to invest in
technology and
innovation
• Profit motive may
dilute social mission
• Difficult to reach
very poor and
remote clients
• Products often do
not meet needs of
very poor
Meso: Infrastructure for
Microfinance
• Property/collateral registries
• credit reporting bureaus
• Apex Funds
• Payments systems
• Telecommunications links
Supportive Infrastructure
ClientsClientsClientsClients
• Business Development Services
• Trainers for Microfinance Practitioners
• Accounting and Reporting Standards
• Specialised consulting services
• Auditing and Rating agencies
• Industry Associations
• MIS Vendors
Supporting Institutions
Meso LevelFinancial Infrastructure
Transparency and Information
Payments and clearingSystems, interoperable POS andATMs
MIS, internal controls, ratings,benchmarking, auditing, super-vision and monitoring, credit
Technical Support Services
Business Associations and Networks
vision and monitoring, credit information
Specialized training, informationand onsite consultancies, links toValue chain and business training
Policy advocacy, informationdissemination, capacity building,performance monitoring
TelecommunicationsOnline MIS, links to POS, ATMS, Mobile phone banking
Meso Level: Debates� Should infrastructure and services be
microfinance specific or should microfinance experience be within mainstream providers?
� Are domestic service providers more appropriate � Are domestic service providers more appropriate than international ones?
� Should support services be provided on a purely market basis or on a subsidized basis?
The debate rages on!
Enabling Environment for
MicrofinanceStrategy, Strategy, Strategy, Strategy, Legal, & Regulatory Legal, & Regulatory Legal, & Regulatory Legal, & Regulatory InterventionsInterventionsInterventionsInterventions
– National Strategies for Microfinance
– Financial Inclusion Policies
ClientsClientsClientsClients
– Financial Inclusion Policies
– Law on Banks (and Microfinance Banks), KYC, AML, CFT
– Law on Microfinance Organizations
– Deposit Taking
– Non-Deposit taking
– Law on Savings and Credit Unions
– Laws on consumer protection
– Interest rate subsidies
– Rules governing financial institution creation
Role of Governments in Financial Systems
1. Set macroeconomic policies that affect the system
2. Promote inclusion by offering fiscal incentives for financial institutions to serve the poor
3. Review policies to remove barriers to financial inclusions3. Review policies to remove barriers to financial inclusions
4. Integrate microfinance providers into banking systems
5. Require transparency and disclosure of providers
6. Direct and indirect delivery of financial servicesNot all of these roles are created equal!!!
Maintain Macroeconomic Stability Through Appropriate
Monetary And Fiscal Policies
�Low inflation: inflation directly affects lending and saving interest rates
�Stable exchange rates: many MFIs borrow in foreign currency and must repay in foreign currency
�Solid financial infrastructure: promoting a strong financial sector
creates opportunities for microfinance
EXAMPLE: Adverse Effects of High Inflation
In 2004, Zimbabwe’s inflation rose to 600+%. The resulting need for frequent price changes disrupted MFIs, confused clients and ultimately decapitalized institutions. High inflation also created disincentives for savings.
Adjust Regulatory Frameworks
� Governments should adjust regulatory frameworks to allow different types of financial institutions to offer services to poor people
� Regulation should be proportionate to the risk
� Prudential regulation is generally only warranted when a critical mass of strong institutions exist
� Premature or restrictive regulations can stifle innovation
EXAMPLE: Restrictive Regulations
In the mid 1990s after the fall of the Soviet Union, many former Soviet republics like Russia and Ukraine had financial sector frameworks that made it illegal for any institution except a bank to make loans. This:
� limited poor people’s choices and access to services� limited the supply of institutions in the market.� was overly restrictive without adding greater protection to users of
the system.
Involve The Private Sector In Formulating
Poverty Reduction Strategies
� Recognize the private sector’s leading role in financial sector development (as opposed to government bodies). Recognize limits on government direct involvement in service provision and/or set time limits
� Promote active participation of the private sector to help to embed microfinance firmly within financial systemsto embed microfinance firmly within financial systems
� Remove constraints to private sector involvement and deploy various incentives
Providing enough certainty for the
private sector to operate, innovate,
and expand without unfair competition
is vital!
What Kinds Of Government Interventions Harm
The Development Of Microfinance?
� Interest rate ceilings
� Provision of credit at the retail level
� Subsidized lending programs � Subsidized lending programs
� Political interference
Role of Donors in Financial System
Approach
Level Possible Actions
Macro Support proportionate regulation, provide support for regulator training, assist in donor strategies, link to global initiatives
Meso Build meso level actors, link microfinance providers to systems Meso Build meso level actors, link microfinance providers to systems (information, payment, etc), build up service providers (audit, ratings), require transparency and consumer protection, avoid overspecialization
Micro Strengthen service providers, support experimentation and innovative approaches, start-up capital or technical assistance, build local ownership, foster local capital
Client Understand needs and demand of clients, enable others to repond, Support financial competency strategies, help establish baseline, support experimentation, innovative approaches to financial literacy
Key Principles for Microfinance1. The poor need a variety of financial services not
just loans.2. Microfinance is a powerful instrument against
poverty.poverty.3. Microfinance means building financial systems
that serve the poor.4. Microfinance can pay for itself, and must do so,
if it is to reach large numbers of poor people.5. Microfinance is about building permanent local
financial institutions.6. Microcredit is not always the answer.
Key Principles cont.7. Interest rate ceilings can damage poor people’s
access to financial services.
8. The government’s role is as an enabler, not as a direct provider of financial services.direct provider of financial services.
9. Donor subsidies should complement, not compete with the private sector.
10. The key bottleneck is the shortage of strong institutions and managers.
11. Transparency and outreach are of critical importance.
What is the role of YOUR
institution?