Commercial Banks in Commercial Banks in MicrofinanceMicrofinance
Prepared and Presented by:Prepared and Presented by:
Mr SEEKU JAABIMr SEEKU JAABI
Microfinance DepartmentMicrofinance Department
Central Bank of The GambiaCentral Bank of The Gambia
West Africa English Speaking Regional West Africa English Speaking Regional WorkshopWorkshop
On On ‘Innovations in addressing rural ‘Innovations in addressing rural finance challengesfinance challenges
in Africa’in Africa’ held on March 31- April2, 2008 in held on March 31- April2, 2008 in The GambiaThe Gambia
Table of ContentTable of Content
IntroductionBanks absence in microfinanceBanks participation in microfinanceModalities of participation-
direct/indirectMerits of linkage bankingChallenges in linkage bankingMicrofinance LessonsConclusion
1. Introduction1. IntroductionBanks in MF has been an issue of much
debate among developing countries and development economists
Many suggest banks involvement to increase capacity, efficient resource mgt
Immediate post independence era, most state-owned banks took up the responsibility in the absence of private banks
1. Introduction cont.1. Introduction cont.However, failed to address the main objects
due to high NPLs, poor mgt, insider abuses, political interventions, among others
Many were liquidated or reorganised during SAPs in the 1980s
Govts reduce to providing right conducive environment
MF is a high-yield emerging market that commercial markets cannot afford to ignore
1. Introduction cont.1. Introduction cont.Globally, MFIs are operating successfully
without subsidies, donor dependence or social requirements but charging sustainable interest rates, profit oriented and huge growth potentials
Move to viable and sustainable funding sources, sound operations, job creation and extensive outreach to unbanked majority
In Africa, Asia and Latin America, banks have recorded success stories in MF
2. Banks absence in MF2. Banks absence in MFNo legal status, most in informal sectorPoor is unbankable perception-unable to
provide collateral, minimum balances, tiny transactions
Risks in agric lending- main occupation of rural dwellers, erratic rainfall, drought, markets
Lack of conducive policies and at times conflicting
Lack of technologies to support outreachHigh transaction costs, poor infrastructure
3. Banks participation in MF3. Banks participation in MFMission of bank- development, country-
wide operations, promote key sectors of the economy
Compulsion to provide financial services to rural areas- Some African & Asian countries
Long term sustainability objectiveProfitability motive- studies showed that
repayment rate is higher in MF than mainstream financial sector
3. Banks participation in MF cont.3. Banks participation in MF cont.
Fewer alternative borrowing possibilitiesWomen lack access to economic
opportunitiesLess mobility of women to care children
made them less delinquent to credit facilities
Market and risk diversification-viable option
Incentives in MF- credit guarantee schemes, tax holidays
4. 4. Modalities of banks participation Modalities of banks participation in Microfinancein Microfinance
1. Direct 2. Indirect/Linkage banking1. DIRECT Approach
Banks SHGs, Coops societiesCBOs, low-income
4. Modalities of banks participation 4. Modalities of banks participation Direct cont.Direct cont.
Banks act as retailers in the delivery of financial services
Savings mobilised often used as collateral
Delivery of credit through SHGs, SMEsGrameen Bank pioneered group lendingSuccesses of the model replicated
globally to reach the poor, reduce risks and tap profit potential
4. 4. Modalities of banks participation- Modalities of banks participation- Direct ContDirect Cont
Bank Rakyat Indonesia – 2004 dataHead office, 15 Regional offices, 325
Branches, 3595 Unit Desas/agencies and 392 service posts
Unit TA $3.5bn -35% of BRI, loans $2.1bn- 28% of Total, Deposits $3.5bn- 42% of total $8.35bn
3.2 m borrowers, 31.3 million saversRepayment rate of 99.6%, profit $233mROA 6.8%
4. 4. Modalities of banks participation -Modalities of banks participation -BRI CultureBRI Culture
High-level, experienced, committed managementProfessionalism & responsibilityEffective internal controls and supervisionTransparency & accountabilityTraining & incentives for staff based on unit
profitability, stress on Unit Operational self-sufficiency
Training for all staff in its 6 training schools yearlyFinancial education and customised products
developed
4.Modalities -Direct Approach4.Modalities -Direct ApproachBRAC- BangladeshNGO transform to a bank in July 2001
with special focus on SMEsHead office, 66 Regional offices 44 area
offices, 694 Unit officesOutstanding loan US $179.81m Sept 2003
-99% of borrowers were womenAverage loan size of $120Repayment rate 99.19%Savings deposits $99.48mStaff strength of 62,494 part and full time
4. 4. Modalities- Direct Approach Modalities- Direct Approach Equity Bank of KenyaEquity Bank of Kenya
1984-93 building society-deposits ksh 31m, loans ksh12m, loss 5m, reserves loss ksh35m, TA ksh 28m
Restructuring with two strategic investors-IFC & EIB in 2006 ksh12.7bn savings, 9.2bn loans, ksh18.2bn TA, profit ksh653m
Minimum opening balance nil, no ledger fees, account opening nil, no restriction on frequency of withdrawal, no appointment to see managers, operate 36 branches, 56 mobile branches, flexible collateral
Loans available to all account holdersSame is true for k-rep bank, CERUDEB
4. Modalities of banks participation in MF 4. Modalities of banks participation in MF
Indirect/Linkage Banking
Donors Banks
MFIs
MSEs, SMEs, Low-income
SHGs, CBOs
4. 4. Modalities of banks Modalities of banks participation in MF participation in MF
IndirectBanks act as wholesalers of credit to MFIs for
retailingMF requires specialised technologies and
methodologies to outreach and banks often lack this capacity
In line with Strauss Commission of 1996 in South Africa- banks finance equity of retailing MFI
Studies showed that credit demand for MF clients is huge, financing gap is met through wholesale of funds
4. Modalities -Indirect4. Modalities -Indirect
Savings mobilised cannot cope to generate such funds
Therefore wholesale funds will remain a genuine requirement for MF intermediation for long
Rely on collateral substitutes as opposed to conventional collateral
By The Gambian MF policies, wholesale funds are only accessed by licensed MFIs
The Gambia Financial SectorThe Gambia Financial Sector
Financial Sector
CommercialBanks 10
Non- Banks
Finance Company 5
SACAs 63
Credit Unions 67
FiduciaryInstitutions
Bureau DeChange
40
PerformancePerformance of MF Sector of MF Sector
Dec 05 Dec 06 Dec 07
Deposits 111.4m 150.6m 262.7m
Loans 103.8m 123.8m 241.4m
Clients Reached 73,488 88,538 92,021
5. Merits of Linkage Banking5. Merits of Linkage BankingContributes significantly to deepen the
financial systemEncourages more resource flow,
extensive outreach, increase access to finance
Promotes savings mobilisation for re-investment ultimately to operational and financial self-sufficiency- OSS and FSS
Linkage achieves double objectives-increase access to finance for poverty reduction and profitability for participants
5. Merits of Linkage Banking5. Merits of Linkage Banking
Women considered highly vulnerable were able to acquire assets and participate more in decision-making at community and family levels
Reduce credit administration and ease loan recovery drive as MFIs have capacity to intermediate wholesale funds- know the terrain in MF service delivery
6. 6. Challenges- Linkage BankingChallenges- Linkage BankingLack of legal status for most MFIs
hampered such business relationshipsGroup commitments are at times
questionable, if formed purely to obtain credit
Some SHGs have leadership problems, have the tendency of diverting funds in transit
VISACAs fear of being swallowed
7. Microfinance Lessons7. Microfinance Lessons
Poor households are bankable, they can save and repay loans timely
Access to financial services is more important than the costs (high interest rates) to the poor
Emphasis is on appraisal, timely disbursement of loan, training (financial education) and monitoring of loan, financial services have to be demand driven and flexible
7. Microfinance Lessons cont.7. Microfinance Lessons cont.MFIs are sustainable if integrated into
the financial systemMF contributes to achieving MDGsMFIs need to cover costs in order to
operate sustainablySubsidised funds no longer needed for
growing portfolios- unsustainableMF has limits i.e great difficulty in
reaching the poorest but in collaboration with other bodies they can be reached eg BRAC Bangladesh
7. Microfinance Lessons Cont.7. Microfinance Lessons Cont.The poor need efficient, sustainable
financial services to help grow out of poverty. Credit cannot be a ‘one-shot’ poverty alleviation mechanism- Credit Plus required
Women repay MF loans more reliably (studies have shown) due to less access to alternative sources, vulnerable to peer pressure, less mobility, spend for the needs of their families
Treat poor as valued customers not beneficiaries
8. Conclusions8. ConclusionsLinkage banking is high on CBG’s agendaRecent policy changes encourages the
participation of banks in MF either directly or indirectly
Banks have sufficient funds but has not fully entered into MF but the informal sector has huge financing gap and very effective in repaying loans so linkage is considered the only way forward
With use of wireless technology, branchless banking, linkages, poor could be reach even in remote areas
8. Conclusions8. Conclusions
Informal sector will develop, gradually formalised with effective integration into the financial sector
Formal sector need to simplify, downscale to accommodate the informal sector
Combine the strengths of the two sectors will enable efficient resource allocation, deepen financial sector, economic growth
Comparative, absolute comparative advantages are relevant in linkage banking
THE ENDTHE END
THANK YOU ALL FOR YOUR ATTENTION
Contact AddressContact Address
Mr Seeku Jaabi
Microfinance Department
Central Bank of The Gambia
Tel 00220- 4223168 / 9911775
Fax 00220 – 4226969 / 4201405
Email: [email protected]
