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Role of the Government in Providing Access to Financial Services to the Poor
Kiatchai Sophastienphong Sriyani HulugalleSenior Financial Specialist Senior Economist
Private and Financial Sector Unit South Asia Region
World Bank
Professional Bankers Association – Annual Convention 2007September 22, 2007
Importance of Access to Finance
Sri Lanka’s lack luster economic growth and poverty reduction has not kept pace with the East Asian countries
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002
GN
I per
cap
ita (c
urre
nt U
S$)
M alaysiaThailandSri LankaKorea, Rep.
Economic Growth 1960-2005
Country attracts significantly lower amounts of both domestic and foreign investment than many of its competitors
0123456
India
Malays
iaSri L
anka
Philiph
ines
Thaila
nd
Chilie
China
Vietnam
Net FDI to Sri Lanka and comparator countries
As percentage of GDP - 2005
Growth is concentrated in the western province and there is a lop sided development phenomena in the country
50.8%
8.9 6.3 8.4 4.4 4.8 8.9 4.3 3.1
0
20
40
60
11%
25% 28% 27%21%
37% 34%
0%
10%
20%
30%
40%
Wes
tern
Cen
tral
Sou
rther
n
Nor
th-
Wes
tern
Nor
th-
Cen
tral
Uva
Sab
ara-
gam
uwa
Provincial Vale Added (% of GDP) 2005
Poverty Head count by province 2002
Cost of finance remains one of the most important constraints toenterprise and access to finance is a problem in the rural sector
Top Five Urban Constraints (and their rural ratings)
UrbanRural
0
10
20
30
40
50 UrbanRural
Electricity Policyuncertainty
Macroinstability
Finance(cost)
Laborregulations
N/A10th5th
Urban rank15th2nd
3rd2nd1st
Rural rank
5th4th
0
10
20
30
40
50
Electricity Policyuncertainty
Macroinstability
Finance(cost)
Laborregulations
N/A10th5th
Urban rank15th2nd
3rd2nd1st
Rural rank
5th4th
10
20
30
40
50
Transport
Rural
Urban
10
20
30
40
50
Finance(cost)
Finance(access) DemandElectricity
9thUrban rankRural rank
Top Five Rural Constraints(and their urban ratings)
1st 2nd
5th 12th
3rd
NA4th
1st
5th
Some Common Constraints → Finance and ElectricitySome Urban Area Constraints → Labor Regulation and Policy Uncertainty
Some Rural Area Constraints → Market Demand, Transport, and Access to Finance
Current Financial Landscape
3,9313,5162,9462,219Total No. of Bank Branches
and Other Outlets
39353232Other outlets
22201615Private Savings and Development Banks
28272726Housing Finance Institutions
11112323Long-term Lending Institutions
114114112112National Savings Bank
201197196194Regional Development Banks
376369374370Branches
415404406402II. Total No. of LSB Branches and
Other Outlets
3222Private Savings and Development
Banks
2333Housing Finance Institutions
2222Long-term Lending Institutions
1111National Savings Bank
6666Regional Development Banks
14141414I. Total No. of LSBs
Licensed Specialized Banks (LSBs)
• Banking Sector dominates the financial sector
• State and the largest 5 commercial banks have a wide branch network.
• Foreign bank work only in niche areas.
1,8001,501978310Student Savings Units
186194188188Pawning Centres
39373340Foreign Bank Branches and Other Outlets
1,4911,3801,3411,285Domestic Bank Branches
1,5301,4171,3741,319Branches (c)
3,5163,1122,5401,817
II. Total No.of LCB Branches and Other Outlets
12111111Foreign banks
11111111Domestic banks
23222222I. Total No. of LCBs
Licensed Commercial Banks (LCBs)
Housing Finance Sector
• Housing demand is 5 million households and the existing stock is around 4.7 million.
• The national housing shortage is 7.5% of the existing stock (350,000).
• Half of the population can service a mortgage loan but have no access.
• Effective demand for home loan is one in 7 householders and is mostly confined to upend of income groups.
n.a.12.4%62.27.72Registered finance companies
0.1%24%16,5874,010Regional development banks
0.3%98%8,6108,475State Mortgage and Investment Bank
0.2%99%7,9007,850Housing Development Finance Corp. Bank
0.4%44%25,50011,120National Savings Bank
2.3%11%647,90076,223Licensed commercial banks
As a % of total assets
As a % of total loans
Total loans (advances)
Total mortgage loans 2005 (Rs. Mn.)
Item
Contractual Savings
• There are also large contractual savings institutions
– Employees Provident Fund (EPF)– Employees Trust Fund (ETF)– Approved Provident Funds– Insurance
• These account for 28% of the GDP
Let’s focus on access to finance by the poor !!
SME Sector
0.64Long-term Debt/Equity
40Credotrs (days)
2.3Current Ratio
LIQUIDITY
34Debtors
Inventory days (Work-in-progress)
30Inventory days (RM)
ASSET MANAGEMENT (Days)
21Return on investment
39Average gross margin
14Growth in turnover
PROFITABILIYTY
43.6Sales Turnover (Rs. Mn.)
21.1Asset Size (Rs. Mn)
SME AverageGeneral Profile of Firms - SME
• Constitutes 80-89% of the total establishments in the country.
• Accounts for 20% of the value added.• Accounts for 70% of the employment in the
business sector.• Average gross margins are in the region of 39%.
4.727.755.210.510.9%
PrimarySchool.
Mid school
High Schoo
lGradPost GradPhD
Education of Owner
6.328.240.3223.2%
>6051-6041-5030-40<30Age of owner (Yrs)
14.219.718.115.816.715.5%
>10041-10021-4011-206-101-5Employees
4029.416.910.33.4%
>2011-206-103-50-2Age of firm (Yrs)
5.819.82747.3%
>70 mn.
31-70 Mn.
30-11 Mn.
0-10 Mn.
Assets (LKR Mn)
GENERAL PROFILE OF FIRMS
Micro Finance• There is wide range of intuitions formal and
informal.
• Participation of the private commercial banks in micro finance is minimal.
• Reportedly there are about 14,000 units all over the country providing Micro finance.
• Majority are not specialized in micro finance; combine with development and welfare programs.
• Tsunami has exacerbated this situation further.
• Government plays a major role through Samurdhi with 1,038 banking units.
• HNB has been working over 15 years in micro finance and has about 12,500 borrowers.
Micro Finance
• Most of LSBs (RDB, SDB) and one finance company (LOLC) engage in financial services to the low-income category.
•The cooperative sector has about 1,500 CRBs while there are about 3,400 unregulated cooperatives in the country.
•Money lenders account for about 6.2% according to CBSL.
•National Development Trust Fund (NDTF) is engaged in wholesale lending.
•In 2004, there were 15 million deposits and outstanding loan portfolio of Rs 48 billion (CGAP Study)
Issues relating to Access to Finance• Lack of long term credit due to GOSL
preempting funds from contractual savings institutions.
• Lack of Policy framework for SME and Micro finance.
• Dominance of state sector in the SME and micro finance.
• Lack of capacity in development lending.
• Lack of coordination among micro finance donors.
• Lack of capacity of the CBSL to supervise all the MFIs.
• Lack of a more comprehensive regulatory framework for housing finance.
• Lack of comprehensive data base for housing finance.
• Lack of risk management in mortgage lending.
Cross Country ExperienceIs lending to the poor profitable?
• Are the poorest of the poor not being served ?
• Is the solution would be to provide loans at low interest rates and not enforce good practices including loan recoveries?
• Is a recovery rate of 50 % acceptable?
Why is lending to the poor profitable and thus sustainable? (1)
• Training would be minimal and focus on the credit technology rather than the business needs of the client.
• The clients are natural entrepreneurs.
• Every client needs a loan and can use it effectively
• Markets are available
• The clients would be more than happy to receive the loan.
• Governments will fulfill their responsibilities, etc.
Why is lending to the poor profitable and thus sustainable? (2)
• The poor can afford to attend meetings.
• The poor can pay weekly too, since all their undertakings can produce cash everyday.
• The poor can also save…but compulsorily.
• Need enforcement of the contracts.
• Need a legal /regulatory framework to protect lenders and commercialize microfinance to tap cheap sources of funds and extend outreach.
The Bangladesh Experience (1)• Muhammad Yunus’s Grameen Bank established in
1976.
• Replication of Grameen Model around the world.
• Lending networks in small communities with individuals compelled to repay loans by group pressure.
• From a donor-backed enterprise to a sustainable self-financed operation.
• Other profitable NGOs include Association for Social Advancement (ASA), Bangladesh Rural Advancement Committee (BRAC),and Palli Karma-Sahayak Foundation (PKSF)
Mechanisms that can reach the poorBangladesh Story
• Total population is about 140 million, with 80% people in rural areas.
• Outreach of all microfinance institutions is about 21 million clients.
• Total hardcore poor not yet reached 12 million (May 2006).
• Despite 30 years of microcredit history, many MFIs still use hand calculators to prepare their financial statements.
• An estimated 50 % of the population live below the poverty line (< I dollar a day).
Ultra poor program of Palli-Karma Shahayak Foundation(PKSF)
• The ultra poor have no access to financial services.
• The hardcore poor have access to < 1800 calories per head per day and are deprived of basic human needs.
• No land, at most < than 13 decimals, no own house, no savings, weak asset base, earn meager income by selling manual labor for a few months in a year.
• Cannot have 3 meals a day, meet only minimum clothing needs and suffer instability and frustration in their everyday lives.
• These are : beggars, seasonal laborers, domestic help, old people, physically disabled and those without alternative sources of income.
Group lending with the following features :
• No fees backed with a flexible voluntary savings scheme…Tk.1-2 per week and not a requirement for taking out a loan.
• Flexibility in terms of repayment terms, weekly, monthly, six monthly, yearly etc.
• Six months seasonal loans with bullet payments.
• Reduced wholesale lending interest rates from 4.5% to 1 % and the PO (Partner Organizations) lends at 9-10% p.a.
• First loan size Tk.500-4000($10-$60) and progressively increases up to Tk. 5000 for the third loan.
• Grace period 1-6 weeks.
• Orientation and IGA training for self/wage employment.
• Special social assistance programs in health, social awareness, rights of women etc.
PHYSICAL COVERAGE
• 84 Participating POS
• $ 70 million in loans
• $ 5 million in savings
• Repayment rates of 99.57%
OTHER COUNTRY EXPERIENCES
• Afghanistan
• India
• Nepal
• Pakistan
AFGHANISTAN EXPERIENCE• Microfinance emerged in the reconstruction process in 2002 as a means of
social protection and employment promotion and, later, as part of the agenda for promoting alternative livelihoods to opium-growing.
• Experience international NGOs such as BRAC and AKFED were invited to establish microfinance services.
• In 2003, the government and donors supported the creation of theMicrofinance Investment Support Facility for Afghanistan (MISFA), financing and capacity-building apex institution.
• MISFA’s operations focuses on – scaling up outreach rapidly, development of sustainable MFIs, and ensuring that international NGO-managed microfinance operations become registered Afghan microfinance institutions.
• By 2005, MISFA was supporting 12 NGOs with microfinance programs. The first commercial banking license was granted to a microfinance bank, the Aga Khan-sponsored FirstMicrofinance Bank
INDIA EXPERIENCE (1)
• Cooperatives and Regional Development Banks (RDBs) met the needs of rural poor in the 1970s but plagued with corruption and other problems.
• Microfinance loans extended through the Integrated Rural Development Program (IRDP) but faced problems of high subsidy (25-50% of investment cost), misuse of funds, low repayment rates.
• Vacuum filled by development organizations like SEWA Bank, Working Women’s Forum, etc beginning in the late 1990s. This movement gained momentum with entrance of large number of NGOs.
INDIA EXPERIENCE (2)• Creation of mutually aided cooperative societies (MACSs) with 5 states
enacting the MACS Acts. Currently, over 1000 NGOs/MACS engaged in mobilizing savings and providing microfinance services to the poor. Initially funded by donor support through revolving funds and operating grants.
• Recent years seen development of Apex FIs such as Agriculture and Rural Development (NABARD), Small Industries Development Bank of India(SIDBI), etc.
• NABARD refinances commercial bank loans to Self Help Groups (SHGs). The bank-SHG link program has increased banking system outreach.
NEPAL EXPERIENCE (1)• As in India, the origins of microfinance began
with the credit cooperatives and government’s welfare-oriented rural development programs.
• This was followed by establishment of The Agricultural Development Bank of Nepal (ADBN) and the Small Farmer Development Program to provide credit to small groups of farmers on a group guarantee basis. These farmers’ groups evolved into the Small Farmer Cooperatives Ltd.
• Microfinance took off with the establishment of the first gender-focused program, Production Credit for Rural Women, in 1982. These group-based borrowings got their funding from commercial banks (NBL and RBB) and ADBN.
NEPAL EXPERIENCE (2)
• In 1994, NGOs played a role in converting these intermediaries into MFIs. Microfinance got a boost in 1992 with the establishment of Regional Rural Development Banks (RRDBs). The role of NGOs and cooperatives grew until 2001 when insurgency’s activities brought it to a halt. ADB then supported the establishment of Rural Microfinance Development Center (RMDC) to provide wholesale fund to MFIs.
• As in Pakistan, microfinance gains prominence with the establishment of an enabling legal framework and provision of funding through apex institutions
PAKISTAN EXPERIENCE (1)
• The Aga Khan Rural Support Program (AKRSP) began its integrated rural development program in 1982 and became the first NGO to transform itself into a privately-owned microfinance bank. Its growth was initially supported by grant funding from bilateral donors. Later its operation was sustained by investment income from employment of surplus funds rather than income from its lending operation.
• AKRSP spawned the rural support program (RSP) which today accounts for 70% of the NGO outreach in microfinance. Grant funding began to flow to NGOs in a big way during the early 1980s.
PAKISTAN EXPERIENCE (2)
• Two other RSPs including National Rural Support Program (NRSP) were established in 1989 and 1992. It depends on subsidized funding from PPAF and commercial borrowings.
• Other players began to enter the market including Network Leasing Company (1994), Bank of Khyber (1995) owed by a provincial bank, The First Women’s Bank, and KashfFoundation (set up exclusively to provide microfinance services to women). Kashf became the first MFI to be profitable after adjusting for subsidies.
• In 1999, Musharraf government made microfinance promotion one of the pillars of its poverty reduction strategy. PPAF –which was modeled after PKSF in Bangladesh - became operational in 2000 with government and World Bank funding.
PAKISTAN EXPERIENCE (3)
• In 2000, the government established Khushhali Bank, a microfinance bank set up under a special ordinance. Funding came from the government, private banks, and multilateral financial institutions.
• The MFI Ordinance was passed in 2001 to permit the creation of microfinance banks under the supervision of the State Bank of Pakistan. The First MicroFinance Bank was established by AKRSP and the Aga Khan Fund for Economic Development (AKFED) under this Ordinance. Six microfinance banks have so far been set up
SUGGESTIONS FOR IMPROVEMENTShort-Term
• Eliminate\minimize subsidized interest rates (LPB, Samurdhi, CBSL).
• Encourage and show case good practices (SLP, CRIB, Forward Sales Contracts).
• Encourage public private partnerships (SLP and commercial banks).
• Reduce state involvement where the private sector and NGO sectorare effective and utilize the existing institutional structure.
• Reconsider the role for Lankaputra as a second tier agency for SMEs.
• Enhance skills development in banks and MFIs.
SUGGESTIONS FOR IMPROVEMENTShort-Term
• De-link welfare and banking.
• Increase the threshold for MFI supervision to a more manageable level and introduce self regulatory guidelines to the others.
• Establish a functional land registration and titling system for the development of primary mortgage markets.
• A data base property and house price indices to develop active and efficient mortgage markets.
SUGGESTIONS FOR IMPROVEMENTMedium-Term
• Reduce active state participation in delivery of credit (LPB, Samurdhi, RDB).
• Introduce new products (Micro insurance, Micro leasing, weather insurance) after assessing the capacity of the MFIs.
• Share technology platforms\infrastructure (ATMs).
• Continue the current government strategy of housing finance liberalization and withdrawal from directed credit and other government interventions.
• More aggressive growth in primary mortgage markets is constrained by the availability of long term funds.
• Replace existing interest rate subsidies which are distortive and costly to the budget with transparent, direct, and well targeted subsidies to lower income groups.
CONCLUSIONS AND RECOMMENDATIONS
• Need genuine partnership arrangements between institutions and governments, at national and local levels.
• Evaluation of the current credit delivery mechanisms.
• Donors attention should be focused on provision of funds for social mobilization and assistance to support good inclusive financial services delivery mechanisms.
• Reduction poverty through provision of financial services to the hardcore poor should be prepared to support a combination of financial services delivery mechanisms and social assistance programs.
• Last but not least…the graduation of the hardcore poor to sustainable microfinance implies a reduction in the government social costs and could enhance accountability of the political leaders that spend most of their efforts in applying economic models that do not work for the poor.
THANK YOU.