Microfinance and Urban Development

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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!) - PowerPoint PPT Presentation

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  • Microfinance and Urban DevelopmentPresentation to the Urban ClusterMike GoldbergOctober, 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 hookupsLinked 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 LevelsGovernment (financial sector regulation, supervision, legal framework taxation, equity concentration, savings mobilization)Commercial banks, finance companiesSpecialized microfinance non-governmental organizationsCommunity groups (sector-specific associations, community leaders)Microbusiness operators

  • MethodologiesIndividual (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 MarketsMicrofinance operational basicsSupportive or neutral legal frameworkPrivate 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 cultureBuild on whats there?? Or start from scratch??

  • Performance Indicators in microfinanceClient level user surveys to measure satisfaction, retention rates, on-time repayment performanceFinancial institution level trend toward financial sustainability (CGAP definition); AROE, AROAMarket level increased coverage (first time users), increased depth of services, lower transaction costs, lower interest rates

  • Leading institutions in urban marketsSpecialized NGOsCommercial banksFinance 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 friendsSupplier credit

  • What goes wrong?Elections!!!Economic downturns? Not reallyFinancial mismanagement (inadequate reserves, poor MIS, lack of strategic approach, inadequate audits, human resource issues/corruption)Donor dependenceCounter-productive changes in legal frameworkLack of clear supervision strategy

  • Future directionsMore commercial bank participation?Specialized finance companies on the riseDiversified service menu (moving beyond working capital)Consumer credit meets productive usesMicrobusiness infocenters and beyondBigger role for Superintendents of Banks and other financial institutions (against their will?)Cooperatives on the rebound in several countriesHarnessing cadenas productivas

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