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The Dutch are in the driving seat

Mark Cliffe Chief Economist INGMicrofinance EventAmsterdam

6th March 2012

Microfinance reinvents itself

1

Contents

• Microfinance soars...but there is more to be done

• Financial crisis – a challenge to foreign funding?

• Commercialisation and its discontents

• Reinventing microfinance

• Transparency and responsibility initiatives

• Exploiting new technology

• Developing savings and other services

• SME financing – focus on the employers

• Welcome to Holland – the unique role of Dutch microfinance

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Microfinance soars...but there is more to be done

• Globally, 2.7 billion people are excluded from formal financial services…

• …of which 1.2 billion people are living under $1.25 a day.

• Declining poverty reflects• China’s development

• …and to a lesser extent India

• but poverty in Africa is on the rise

• Microfinance has grown rapidly, reaching 145 million clients living on less than $ 1.25 per day

• While this reaches perhaps 600 million people…

• …there is still a gap, which still requires $ 250-300 billion to close.

People reached by Microfinance (millions)

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

1990

1995

2000

2005

2011

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

People on less  than $1.25 per day, China included

People on less  than $1.25 per day, China excluded

Microfinance clients  on less  than $1,25 per day

People on $1,25 reached by microfinance (household = 4)

Source: ING Economics Department based on Worldbank and MIX

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• Microfinance sector totals $ 80 bn globally…

• …over 2/3 comes from domestic sources

• Of the $25 bn provided by foreign funders, the Dutch account for $ 2.1 bln. (8,4%)

• Foreigners provide money and knowledge

Domestic funding dominates……but foreign funders also bring crucial expertise

Sources of foreign funding

20%

7%

42%

5%

26%

0%

20%

40%

60%

80%

100% Investors

Foundations and NGOs

Development FinancialInstitutions

Bilateral agencies

Multilateral and UN agencies

• DFIs dominate the market (42%)

• Investors provide 26% of foreign funding.

• Dutch investors have a high market share (25%)

Source: ING Economics Department based on CGAP

Domestic vs foreign funding ($ bln, 2010)

25

55

Foreign funding Domestic funding

4

Developed world recovers slowly from the crisis……while the emerging world powers ahead

90

100

110

120

130

140

150

160

170

08 09 10 11 12 13

Index

90

100

110

120

130

140

150

160

170

China

India

B razil

P o land

US

Russia

Euro zo ne

Fo recasts1Q08=100

Emerging world output surges ahead of developed

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Developed world faces painful deleveraging

The sovereign debt crisis resulted from the fall-out of the financial crisis:

Banking Bail-outs

‘Great Recession’

Some banks are still dependent on state/ECB support, and most are looking for more capital

Weak bank lending may hurt economic growth and public finances

BUT banks are also big buyers of public debt…

…and policy-makers want them to continue…

The fiscal squeeze designed to improved fiscal solvency will mean monetary policy will have to remain loose

BANK

SOLVENCY

FISCAL

SOLVENCY

ECONOMIC

GROWTH

ASSET

PRICES

Sovereign and bank debt solvency intertwined

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Foreign microfinance funding keeps growing……albeit more slowly

• The financial crisis led to a dramatic drop in world trade and capital flows in 2009 - emerging markets suffered disproportionately

• Developed market investors withdrew capital from emerging markets to cover losses back home

• Despite this, foreign funding for microfinance has continued to grow, although more slowly

* 2007 based on estimated average annual growth rate for 2005-2007

Source: ING Economics Department based on CGAP

EM MSCI Index and Portfolio flows

400

600

800

1000

1200

1400

07 08 09 10 11 12

Index

-10

-5

0

5

10

15tn $

MSCI EM US$ Index (lhs )

Portfolio flows for EM externaland local debt m arkets (rhs)

c

Foreign funding

50%

23%

12%7%

5% 4%

0%

10%

20%

30%

40%

50%

60%

2007* 2008 2009 2010 2011F 2012F0

5

10

15

20

25

30

Growth in foreign funding (lhs, %) Foreign funding (rhs, $ billion)

• Banks’ and institutional investors’ balance sheets are under pressure, but they also want to deliver corporate responsibility

• Retail investors are increasing sustainable investments, but face wealth losses and, in some countries, less favourable tax regimes…

• Government funding is squeezed by austerity measures

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Dutch fiscal austerity bites into Development Aid

Dutch tax incentive sustainable investments

1,2% 1,2% 1,2% 1,2% 1,2%

1,3%1,0%

0,7%0,4%

0%

1%

2%

3%

2010 2011 2012 2013 2014

Box III ("vermogensrendementsheffing") Box I ("heffingskorting")

Source: Ministry of Foreign Affairs.

Source: Ministry of Finance

• Fiscal austerity is not confined to Europe’s periphery…• …the Netherlands is also tightening…• …with cuts to development aid and tax breaks for

sustainable investments

Dutch ODA budget 2011-2014

0

1.000

2.000

3.000

4.000

5.000

2011 2012 2013 20140%

5%

10%

15%

20%

25%

Total ODA (€ mln, lhs) Cut ODA budget (€ mln, lhs)

Cut ODA budget (%, rhs)

8

…but it remains twice the international average

Development aid DAC countries (% of GNI)

..

0,2

0,4

0,6

0,8

1,0

1,2

Sweden

Norway

Luxembo

urg

Denmark

Netherlands

Belgium

Finland

Ireland

United Kingdo

m

Switzerland

France

Spain

Germany

Austria

Canada

Australia

New

 Zealand

Portugal

United States

Greece

Japan

Italy

DAC total

1988  2009 

UN target 0.72012

Gap 0.39

• The Dutch cut back on Development Aid to 0.7% in 2012…

• …but still meet the UN target…

• …and the budget is twice the average of DAC countries.

Source: Worldbank

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Is commercialisation the answer?

• With limited resources available, can commercialisation lead to more sustainable growth in microfinance?

• Growth in profit-driven MFIs has exceeded growth in nonprofits

• After all, people respond to incentives and seek profit...

BUT there have been problems and criticisms:

1. Focus on microcredit caused over-lending

2. Excessive interest rates

3. Credit for consumption vs income generation

4. Neglect of the poorSource: MIX

Gross Loan portfolio ($ billion)

0

20

40

60

1995 2000 2005 2010

Profit

Non‐profit

Number of active borrowers (millions)

0

20

40

60

80

1995 2000 2005 2010

Profit

Non‐profit

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Reinventing microfinance (1)Becoming more transparent and responsible

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Reinventing microfinance (2)Exploiting new technology

Mobile banking• Increases outreach (rural areas)

• Reduces operational costs

Biometric devices• Reliable client identification

• Helps in preventing multiple loans

• Clients take out smaller loans knowing they will be identified in the future

Administration systems• Digital contracts

• Better risk management: monitoring loan- and portfolio performance, establishing credit ratings

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Reinventing microfinance (3)Developing savings and other services

• Developing countries have huge potential for domestic savings

• Provides a safer and more efficient alternative than savings in gold and cattle

• Provides an alternative for redistribution of wealth to the poor

• But challenges remain:

• banking system often not mature enough to redistribute money

• legal framework does not always allow non bank institutions to take deposits

Households with deposit account in a formal institution91%

50%

42% 42% 40%

22%

12%

0%

20%

40%

60%

80%

100%

Highincome

countries

Europeand

CentralAsia

East Asia& Pacif ic

Middle East% NorthAfrica

LatinAmerica &Caribbean

South Asia Sub-SaharanAfrica

Source: CGAP & The World Bank Group

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Reinventing microfinance (4)

SME financing – focus on the employers

Some critics say the very poor need jobs, not loans – not everyone is able or willing to become an entrepreneur …supporting SMEs may be a less direct, but more effective way of reaching out to the poor.

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43%30%

40%

50%59%

52%

3% 5% 4%4% 5% 3%

Donors MIVs Investors

Low end Broad end

High end Small  business

• SME financing supports entrepreneurs and their employees…

• …SMEs are critical for sustainable economic growth.

• Employers may be less poor but they do provide jobs to the community

• The Dutch currently provide limited SME financing…

• …this could be an opportunity to improve outreach but requires a different view on depth and breadth of outreach…

• …and it does carry risks:

• MFIs have lack of knowledge of SME financing

• Danger of “mission drift”

• Increased exposure per investment

SME financing by The Netherlands

Reinventing microfinance (4)SME-funding…a growth opportunity for the Dutch

Source: ING Economics Department based on CGAP

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Dutch microfinance is unique in many ways

• Dutch microfinance is not just impressive in terms of scale…

• …it is based on a long tradition in development aid and microfinance

• Use of direct funding: being on top of your investments to have maximum impact

• High private sector involvement: making microfinance cost effective

Direct vs indirect funding (% of $ committed)

79%

37%

21%

53%

9%

Dutch Offer The Rest of the World

Direct Indirect Unspecified

Source: ING Economics Department based on CGAP

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Serving 94 countries…both low and middle income

Top 5 countries ($ million)

226

152

117

7765

0

50

100

150

200

250

India Peru Cambodia Bolivia Azerbaijan

Dutch Offer

The Rest of the World

Source: ING Economics Department based on CGAP

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Conclusion - The Dutch are in the driving seat

Financial return Dutch funders

1%

6%

7%

0% 1%

2%

0%

2%

4%

6%

8%

Donors Investors MIVs

Return on Equity (ROE) Return on Assets  (ROA)

• Many different type of actors: donors, investors and MIVs with unique profiles

• High cooperation to create synergies

• Thought-leader and frontrunner on transparency and responsibility initiatives…

• …addressing questions raised by recent challenges

• More effective measurement…

• …will help us to become smarter with limited resources.

Breadth of outreach (% of MFIs funded)

51% 43%26%

25%25%

31%

24% 32%43%

Donors Investors MIVs

# of active  borrowers> 30,000

# of active  borrowersbetween 10,000 to30,000

# of active  borrowers< 10,000

Source: ING Economics Department based on CGAP

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