challenges of the microfinance sector in asia: the asian development bank’s experience...

Challenges of the Challenges of the Microfinance Sector in Microfinance Sector in

Asia: The Asian Asia: The Asian Development Bank’s Development Bank’s

ExperienceExperiencePresentation by

Nimal A. FernandoPrincipal Finance Specialist (Microfinance)

Asian Development Bank

Workshop on Microcredit-Financing and Poverty Alleviation in OIC Member States

Istanbul, 9-10 July 2007

2

OutlineOutline

PART IPART I• Brief History of ADB OperationsBrief History of ADB Operations• Microfinance Development Strategy of ADBMicrofinance Development Strategy of ADB• Current Loan Portfolio and its main featuresCurrent Loan Portfolio and its main features• Other Microfinance Activities of ADBOther Microfinance Activities of ADB

PART IIPART II• Asian Microfinance Industry: Current StatusAsian Microfinance Industry: Current Status• Challenges of the IndustryChallenges of the Industry• Concluding RemarksConcluding Remarks

3

Brief History of ADB Brief History of ADB OperationsOperations

• The modest beginning in 1988 with focus on NGOs

• Gradual expansion: geographic and institutional types

• 1998-99 Review of ADB’s MF Operations• Main findings on Early Projects included:

– focused on credit delivery– lack of emphasis on other financial services– little attention to financial viability– Allowed subsidized interest rates

4

• Why did ADB need a Strategy?- The industry was rapidly evolving- Need to adopt a systematic approach was

recognized- A general framework was needed to guide

operations- A consistent basis was needed for policy

dialogue- A Strategy can help improve quality of

assistance

Microfinance Microfinance Development Strategy Development Strategy

(MDS) of ADB(MDS) of ADB

5

• Extensive consultation process for fact finding– Internal in ADB– Internal in developing member

countries– External consultations

• Consultation on the Draft Strategy• The final version approved by the

Board in May 2000

MDS: The Formulation MDS: The Formulation ProcessProcess

6

• Goal: ensure permanent access to institutional financial services for a majority

• Purpose: support development of sustainable MF systems that can provide diverse services of high quality

MDS: The ContentMDS: The Content

7

MDS: Strategic Focus MDS: Strategic Focus Areas of MDSAreas of MDS

• Creating a supportive policy environment

• Developing financial infrastructure• Building viable institutions• Supporting pro-poor innovations• Supporting social intermediation

8

Current Loan Portfolio Current Loan Portfolio and Its Main Featuresand Its Main Features

• Over $1.3 billion• Heavy concentration in 4 countries

– India/Pakistan/Philippines/Sri Lanka• Support diverse set of institutions• Encourage private sector and social

entrepreneurs• Sector development projects are

prominent now• Microfinance component projects:

questionable quality

9

Other Microfinance Other Microfinance Activities of ADBActivities of ADB

• Research and knowledge sharing• Pioneering studies in microfinance

- Rural Financial Markets in Asia (2000)- Role of Central Banks (2000)- Commercialization of Microfinance (2001-2004)- Study on rural financial markets in Central Asia (2006)

• Quarterly Newsletter on Microfinance (since July 2000)

• Assistance for capacity building and policy advise

• Networking: pioneering member of the CGAP

10

PART IIPART IICurrent Status of the Asian Current Status of the Asian

Microfinance IndustryMicrofinance Industry• Many institutions, but large institutions account for

bulk of the outreach• Three giants in Bangladesh: Grameen

Bank/ASA/BRAC• Market in India has become vibrant• Banks and non-bank financial institutions: more

important now.• India and People’s Republic of China: lowest market

penetration• Private risk capital involvement is still small• Significant government involvement in service

delivery

11

Current status (cont’d…)Current status (cont’d…)

• A number of viable and very efficient institutions

• Most institutions are subsidy dependent and not financial viable

• Most focus on credit and offer rigid products

• Group lending methodology is widespread• Deposit, money transfer, and insurance

services: limited• Quality of services remains questionable• Outreach to the poorest is only marginal

12

Overarching ChallengeOverarching Challenge

• Expanding scale of quality financial services

- to millions of under-served clients- and to millions of unserved, including

the poorest

• And doing these in a sustainable manner

13

Meeting the Overarching Meeting the Overarching ChallengeChallenge

• A number of challenges must be overcome

• Further improve enabling policy environment

- Policy constraints continue in many countries in different forms

- Interest rate caps on small loans (India/PRC)- Tendency to re-introduce interest rate ceilings- Constraints on foreign investments/ownership

• Policy dialogue with central and state/provincial governments

- Policy makers change frequently- Their time horizon is short- Building supportive constituencies: slow process

14

Regulatory Barriers and Regulatory Barriers and Weak Supervisory Weak Supervisory

CapacityCapacity• Regulations are not compatible

with the industry requirements• Too rigid regulations• Supervisory authorities lack

adequate capacity• Most small scale deposit taking

institutions are not regulated and supervised properly

15

Building Sustainable and Building Sustainable and Adequate Retail CapacityAdequate Retail Capacity

• Retail capacity to provide a broad spectrum of services is limited

• Massive efforts are needed to build this capacity

• Increase the currently limited number of sustainable institutions

• Tough decisions are needed to ensure viability (example: pricing policy)

• A large amount of resources and technical assistance is needed for capacity building

• Reforming state-owned financial institutions to serve the poor

16

Reducing Transaction Reducing Transaction CostsCosts

• Cost of small value transactions remain high

• This translates into high prices• High prices reduce access for some

poor people• Innovations, improvements in

efficiency and productivity are needed

17

Integration of Microfinance Integration of Microfinance into the Broader Financial into the Broader Financial

SystemSystem

• Walls remain between the two• Walls must be dismantled• Large-scale conventional financial

institutions must be brought in• This remains a formidable task

18

Concluding RemarksConcluding Remarks

• Asian microfinance industry has grown dramatically during the last two decades

• But many challenges remain• Majority of the poor remain without

adequate access• Industry development is an unfinished

business• Funding agencies like ADB have to play a

key role• Funding agencies have to adjust their

course to respond to emerging trends and opportunities

19

Thank you.Thank you.

For more information on ADB’s microfinance operations,

www.adb.org/microfinance