Eight Business Model Breakthroughs for MicrofinancePresentation of Work in Progress, October 24, 2006

Task Force on Microfinance

The Challenge of Scale in Microfinance

Microfinance is a recognized tool for addressing poverty and empowering the poor.

Despite the important accomplishments of microfinance institutions, most of the potential clients of microfinance still lack access to quality financial services. Why?

Needed: Business models that can bring microfinance to scale

The Forum of Young Global Leaders (YGL)

A unique, multi-stakeholder community of the world’s most extraordinary leaders who are 40 years old or younger and who are ready to dedicate a part of their time and energy to jointly work towards a better future.

The 2020 Initiative – defining a vision for a world where sustainable economic development replaces the plague of poverty around the globe.

In association with the World Economic Forum

YGL Microfinance Task Force

Objectives

Public Awareness

Private Sector Engagement

Conducive Regulatory Environment

Specific Microfinance Projects

The Breakthroughs Project of the YGL Task Force

• Search for business model breakthroughs, especially related to scale and efficiency.

• Leaders from microfinance join counterparts from business and other sectors to exchange experience.

• ACCION International facilitates.• Eight key breakthroughs identified and presented here.• Work will continue on: Potential impact

Obstacles to expansion

Pathways to widespread adoption

Final paper to be presented at the World Economic Forum in early 07.

Conventional Wisdom in Microfinance

Widely held “truths” may block a breakthrough.

Loan officers are the cornerstone of

good microfinance.

Microfinance is about lending for

“productive” purposes.

Every MFI needs a custom-

tailored IT system.

Microfinance clients won’t

use new technologies.

Four Dimensions of Breakthroughs

Innovate for MF Clients

Adapt technology to fitMicrofinance clients

Upgrade MFI capabilities

Prepare MFIs to apply the innovation

Attract new players, support structures

Examples: credit bureaus, software companies Foster

policy or regulatory change

Innovations bring need to revise regulations

Breakthrough 1. Payment SystemsExerciseExercise

Make automated payment systems

available to microfinance

clients

Benefits to Clients and MFIs

Client convenience and security

Increased MFI efficiency; lower cost

Penetrate difficult locations

Mechanisms Card products: debit, credit, prepaid, etc.

Devices: ATMs, POS, cell phones

Challenges Few MFIs are members in payment networks

Products designed for middle class market

Clients are used to cash, as are vendors they use

Breakthrough 2. Mobile PhonesExerciseExercise

Turn cell phones into payments devices

Benefits

The ultimate in client convenience

Low income clients already love cell phones

Mechanisms

Cooperation between Telcoms and Banks

Sim card becomes payment vehicle

Text messaging to transfer money

Challenges

Infrastructure preconditions

Per-transaction fees high

Security vulnerabilities make regulators skeptical

IT System Basic Ops.

Connected Networked

Recoverable

IT System Basic Ops.

Connected Networked

Recoverable

Breakthrough 4. Improve MFI Information Technology Financial Management

and Reporting

Data MiningCredit Scoring

Understanding CustomersSocial Performance Monitoring

Connect to Payment Systems

ATMs, Cards, International Money

Transfer

Streamline Customer Interface

Teller transactionsLoan Approvals

MFI systems must perform all these functions well.

Breakthrough 5. New Channels to Reach Customers: Retail Networks

Traditional Model

MFI Branch

.

Loan Officer/

Branch cashierCustomer

Use of Retail Agent

.

Many models are possible.

MFI Branch -- ?Retail Agent

(Pago Facil)Customer

Retailer as Delivery Channel

Retailer

(Elektra)Retail Store Cashier/Clerk

Retailer Becomes MFI

Customer

Breakthrough 6. Offer Clients a Full Suite of Products

Monoproduct Full ServiceCredit Variety Credit & Savings

Credit:• Group• Individual

Credit:• Group• Individual• Housing• Consumer • Small

business

Credit:• Individual• Group • Housing• Consumer• Vehicle• Small

business• Pawn loans

Savings:• Current accounts• Programmed savings• Fixed deposits

Insurance:• Life insurance• Property insurance• Health insurance

Money Transfers and Payments:

• National• International• Utility bill payments

Credit:• Group • Individual• Housing• Consumer• Small

business• Vehicle• Fixed asset• Pawn loans

Savings:• current

accounts• Programmed

savings• Fixed

deposits

Payments:• Utility bills

From Mono to Multi-product

Breakthrough 7. Leverage the Mainstream Financial System

Bank Alliances

With MFIs

Concept: MFIs Reach Clients More Effectively• Conventional bank loan to MFI (many examples worldwide)• Investment banking services (Citibank and Compartamos bonds)• Bank purchases MFI portfolio (ICICI partnership model)• Bank uses MFI as deposit collection agent (Brazil model of banking

correspondents)

Banks as Retailers

Concept: Banks Have Advantages MFIs Cannot Duplicate

• NGO-MFIs become banks (BancoSol, Mibanco, Compartamos, etc.)• Bank establishes microfinance subsidiary (Pichincha, Sogebank)• Bank adapts consumer lending to microfinance market (Banco de

Trabajo, Peru) • Bank provides savings and payments services but not loans (Post

Office Savings Banks)

Mainstream banks offer: low cost of funds, known brand, branch infrastructure, technology, connection to payment systems.

Breakthrough 8. Create a Supportive Policy Environment

BasicMinimum Conditions for Microfinance to

Operate• Stable macroeconomic and political situation• Liberalized financial sector with quality supervisors

MicrofinanceFriendly

Microfinance-Specific Concerns• No interest rate caps – market-determined• Government respects its role as rule-setter, not service provider• May have special categories for microfinance

ForwardLooking

Policies & Regulations Keep Pace with New Developments

• Policymakers pursue access to financial services for all as goal• Regulators work with industry to ensure security for new

technologies such as cell phones• Regulators and industry cooperate to ensure consumer protection

A country’s policy environment may determine whether or not microfinance takes off.