Microfinance and Urban Development

Presentation to the Urban Cluster

Mike Goldberg

October, 2004

Microfinance in Urban Settings: Why?

Linked to access to credit for productive opportunities (working capital si, fixed asset lending no!)

Linked to land purchase and registration; urban infrastructure hookups

Linked to business formalization (maybe, but…) Linked to employment generation (yes, but…) Linked to business start-ups (no, but…) Linked to social capital (but causation in reverse) Linked to Competitiveness (maybe, but…)

Financial Systems Approach: 5 Levels

Government (financial sector regulation, supervision, legal framework – taxation, equity concentration, savings mobilization)

Commercial banks, finance companies Specialized microfinance non-governmental

organizations Community groups (sector-specific associations,

community leaders) Microbusiness operators

Methodologies Individual (character, collateral “lite”) – works best with larger micros

with greater asset base, diversified clients with larger loans (US$250 – 700)

Solidarity groups (character-based joint liability mechanism, groups of 4 to 7) – works well in urban street markets with very small loans (starting at $50)

Community banks (character-based joint liability mechanism, groups of 20 to 40) – works best when social capital and organization is high.

Credit unions and S&L cooperatives (members hold shares, savings options, requires legal registration) – heavily dependent on member discipline; rarely effective when (I) more than 50 members, (ii) external financing 10%+

Competition between methodologies in a market very useful

Elements of Success in Urban Markets

Microfinance operational “basics” Supportive or neutral legal framework Private sector investment replaces donors, govt. Commercial orientation of Board of Directors,

management Diversified source of commercially priced funds

(not living on donations) Mimic the local financial culture Build on what’s there?? Or start from scratch??

Performance Indicators in microfinance

Client level – user surveys to measure satisfaction, retention rates, on-time repayment performance

Financial institution level – trend toward financial sustainability (CGAP definition); AROE, AROA

Market level – increased coverage (first time users), increased depth of services, lower transaction costs, lower interest rates

Leading institutions in urban markets

Specialized NGOs Commercial banks Finance companies (SOFOL in Mexico; Confia

and Findesa in Nicaragua) Combinations (MFIs with commercial bank

investors, lenders) The informal sector! (moneylenders, pawn

brokers, check cashers, Western Union…) Family and friends Supplier credit

What goes wrong?

Elections!!! Economic downturns? Not really… Financial mismanagement (inadequate reserves,

poor MIS, lack of strategic approach, inadequate audits, human resource issues/corruption)

Donor dependence Counter-productive changes in legal framework Lack of clear supervision strategy

Future directions More commercial bank participation? Specialized finance companies on the rise Diversified service menu (moving beyond

working capital) Consumer credit meets productive uses Microbusiness – infocenters and beyond Bigger role for Superintendents of Banks and

other financial institutions (against their will?) Cooperatives on the rebound in several countries Harnessing “cadenas productivas”