Microfinance – Tool for Economic Inclusion

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  1. 1.
    • Microfinance Tool for Economic Inclusion
    Presentation by Mr Somak Ghosh President Corporate Finance & Development Banking, YES BANK Ltd for TBLI Europe 2006 (Europe)November 9, 2006
  2. 2. Microfinance Tool for Economic Inclusion
    • AnInclusive Economyis one thathelps people help themselves
    • to increase incomes, acquire capital, manage risk and work
    • their way out of poverty
    • Microfinance,through the provision ofsafe savings , appropriately
    • designedloansfor poor and low-income households and micro, small and
    • medium enterprises and appropriateinsuranceandpayment services:
    • Enables poor to smoothen consumption, manage risk, build assets, develop micro-enterprises, enhance income and earning capacity
    • Helps poor to actively participatein the economy and benefit from development opportunities
    • Empowers women
    • Contributes to overall development of financial system through integration of financial markets
  3. 3. Microfinance & Millennium Development Goals(MDGs)
    • Central theme of MDGs ispoverty reductionalong with an emphasis on human development indicators especially those relating to women and children
    • Microfinance increasingly looked upon as an effective tool to achieve MDGs
    • Financial sector, leveraging microfinance, can play a key role in reinforcing many objectives of MDGs involving savings, livelihoods and economic infrastructure apart from providing an efficient payments system
      • Poor participating in microfinance programmes are able to improve their well-being at both individual and household level
      • Poor households with access to financial services not only send their children to school but also allow them to stay in school longer
      • Access to financial services and resultant transfer of financial resources to women, over time, lead to women becoming more confident, assertive and better able to confront systemic gender inequities
    Impact of Microfinance
  4. 4. Banking with the poor is challenging and conventional banking is not poised to meet these demandshence the need forMicrofinance
    • Doorstep banking
    • Flexibility in timings
    • Timely availability of services
    • Low value and high volume transactions
    • Require simple processes with minimum documentation
    Nature of Demand
    • High cost of service delivery
    • Timings and procedures: Rigid and inflexible
    • High transaction cost for the customers
    • Expansion of branch network expensive and time taking
    Nature of Supply
  5. 5. Microfinance Origins Evolution of Microfinance 1900s
    • Concept of Microfinance is not new; savings and credit groups have operated for centuries
      • Sususin Ghana,Chit fundsin India,Tandasin Mexico,Arisanin Indonesia,Cheetuin Sri Lanka,Tontinesin West Africa,Pasanakuin Bolivia
    • 1700s- writer Jonathan Swift started micro-credit organisations in Ireland lending to rural poor
    • 1800s- more formal savings and credit institutions known as Peoples Banks and Credit Unions began to emerge in Europe
    Subsidised Credit
    • Focused onagricultural creditthrough state-owned development finance institutions
    • Rural development banks sufferedmassive erosion of capital basedue to subsidised lending rates & poor repayment discipline
    Experimental Programmes
    • Bangladesh, Brazil and few other countries
    • Based on solidarity group lending primarily women
    • Focus on credit for income generation activities
    Commercial Approach
    • High repayment rate and cost-recovery interest rates
    • Demonstrated that poor werewilling and ableto pay interest rates that allowed MFIs to recover costs
    Broadening of Offerings
    • Micro-creditreplaced byMicrofinanceto include not only credit but alsosavingsandother financial servicessuch as insurance and money transfers
  6. 6. Entry of Experts
    • Industry has seen a transition from philanthropy to business
    • MFIs continue to focus on community development objectives, albeit in a commercially viable and financially sustainable manner that allows them to:
      • Increase operational efficiencies
      • Access a wider pool of capital
      • Increase outreach
    • Institutions like ACCION, ProCredit, FINCA, Womens World Banking and Grameen all incorporate for-profit objectives in their operations across the world
      • Accion an early pioneer founded in 1970s; has helped found many viable institutions such as Bancosol - the worlds first commercial bank dedicated to microfinance
      • Self Employed Womens Association (SEWA) -registered as a trade union in 1972 in Gujarat (India), found SEWA BANK in 1973 to help members accessfinancial services
      • Grameen Bank in 1976 Prof. Muhammad Yunus designed experimental credit programmes aimed at poor; Grameen Bank founded in 1983 through donor support and now serves more than 4 million borrowers
  7. 7. A Bankable Business-Downscaling
    • The profitability of the microfinance business has captured the attention of some of the worlds largest and wealthiest commercial banks and insurers such as Citigroup, HSBC, ING, ABN Amro, Commerzbank and Deutsche Bank
      • Citigroup established relationships with MFIs in 20 countries; through its subsidiary Banamex (Mexico) provides life-insurance sold by MFIs
      • Deutsche Bank recently raised $ 75 m investment fund and syndicated a large loan on behalf of ProCredit (Germany)
      • ABN Amro owns a microfinance bank, Real Microcrdito in Brazil; provides credit to 5 MFIs in India
      • ICICI has close to 1.5 million customers that qualify as deeply poor and an associated loan portfolio of $ 265 m
    Source: The Economist, November 3, 2005
  8. 8. Decision Tree for Commercial Banks in Microfinance Successful Downscaling Models Source: Commercial Banks and Microfinance, CGAP, 2005
  9. 9. Building a Sustainable Microfinance Industry Role of Banks
    • A sustainable microfinance industry
    • requires services for the poor to be
    • integrated at all three levels of the
    • financial system:
    • Micro provision of robust retail institutions that provide services directly to clients
    • Meso provision of supporting infrastructure including quality auditors, rating agencies, professional networks, trade associations, credit bureaux, transfer and payment systems and information technology to reduce transaction costs, increase outreach, build capacity and foster transparency among retail institutions
    • Macro enabling a conducive and stable macroeconomic and policy environment is necessary to underpin a pro-poor financial system.
    CGAP (2004) Building Inclusive Financial Systems Donor Guidelines on Good Practice in Microfinance , December 2004
    • Mainstreaming microfinance into the
    • formal financial system requires Banks
    • to:
    • Have broader strategy commitment from Board and senior management
    • View financial inclusion as a business strategy for growth
    • Understand the microfinance market and develop products suited to the clientele
    • Develop infrastructure keeping in mind convenience to clients
    • Develop data sets to evolve risk assessment models for proper rating and pricing
    • Adapt systems and procedures to microfinance operations
    • Use innovative products, services and delivery mechanisms aided by information technology to help speed up transaction time and reduce costs
    • Adopt appropriate staff training methodologies
  10. 10.
    • Government Policies & Efforts
      • Development policy direction since Independence
        • find ways and means to finance poor, reduce burden upon them
      • Gap in policy and quality of efforts
        • defects in policy design, infirmities in implementation, popular decisions loan waivers
    • Consequences
      • Banking system not able to internalize lending to poor as a viable activity seen as social obligation
      • Poor became beneficiaries and not borrowers for banks, mindsets hardened as poor not bankable, lending to poor not commercially viable
    • Late 80s - Microfinance started in rural, both govt. and NGOs programmes in late 80s
      • Took a decade for concept of MF to become credible
    Microfinance Case Study India
  11. 11.
    • 1992 NABARD conducts pilot project refinancing SHG programmes
    • 1996 Encouraged by the above pilot project, the govt. appoints the working group made important recommendations including inclusion in the priority sector list.
    • 1999 A task force on NBFCs made recommendations on microfinance
    • 2000 The RBI announces broad guidelines to banks on microfinance in its credit &monetary policy
    • 2002 Informal Group set up to suggest to the govt. on microfinance
    • 2005 Khan Report (RBI) on policy options, development and regulatory issues
    Microfinance in IndiaMilestones
    • Recent Developments
    • Microfinance Development & Equity Fund increased from Rs. 100 cr to Rs. 200 cr.
    • ECBs upto USD 5 million allowed for MFIs (meeting certain criteria)
    • Exim Bank ties up witha number of NGO/MFIs for funding/promoting cluster projects
    • New equity funds for microfinance industry Lok Capital, Bellwether, & Aavishkar fund
    • RBI guidelines on MFIs as banking correspondents
  12. 12. Microfinance in India -Opportunity
    • MF market segment 130 mn
    • households (> 60% of India)
    • Facts
    • Low penetration of organized financial services sector
    • Financial services traditionally availed from expensive unorganized sector need to shift to organized financial sector
    • Opportunities
    • MF segment performing better than commercial banking peers
    • Discounting Rates ~ 15 24%
    • Repayment Rates 96 100%
    • Top rung MFIs in India posting a ROAA in range of 1% to 1.5%
    • Low competitive bars to entry and sizeable mind space
    • Savings / Equity / Insurance are still largely untapped in these markets
    Source: Census 2001; BCG Analysis Xxx (xx) Annual household income #households Household income stratification >600k (6.3 Mn) 240k-400k (8.1Mn) 120k-240 (18.8Mn) 80k-120k (22.4Mn) 40k-80k (58.6Mn)

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