Financing Small Enterprises: What Role for Microfinance Institutions?

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The objective of this CGAP survey is to better understand the current and potential role of microfinance institutions (MFIs) with regards to serving and financing small enterprises.

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  • In December 2011 CGAP conducted a survey to understand the role of MFIs in serving micro and small businesses. Around 300 MFIs responded to the survey sent to a larger number of institutions (including those in the MIX Market database), mostly from SSA, ECA, and LAC. Some countries predominantly represented in the survey include Azerbaijan, India, Philippines, and Tajikistan. By institutional type, most participating MFIs were nonbank financial institutions and NGOs/foundations. Additional information was gathered from ASA Philippines, Women World Banking Colombia, Cooperative Housing Foundation (CHF), Cresol Brazil, Access Tanzania, ACEP Senegal, InternationaleProjekt Consult (IPC), IFC’s A2F Risk Management Department and the Small Business Banking Network (SBBN).
  • Financing Small Enterprises: What Role for Microfinance Institutions?

    1. 1. Role of MFIs in Serving Micro and Small Enterprises Survey Results May 2012
    2. 2. PublicationThe survey results in this presentation are published in CGAP Focus Note 81: “Financing SmallEnterprises: What Role for Microfinance Institutions?” by Jasmina Glisovic and Meritxell Martinez(July 2012).For more information please visit: www.cgap.org/publications 2
    3. 3. Outline1 Research objective, sample, and methodology ▫ Objective ▫ Regional distribution by institutional type2 Understanding the difference between micro and small enterprises ▫ Informality levels of micro and small enterprises ▫ Women-led micro and small enterprises ▫ Growth from micro to small enterprises3 Focus on serving small enterprises ▫ MFIs strategies: Why serving small enterprises? ▫ Growth trend of small enterprise portfolio ▫ Growth trend by region ▫ MFIs definition of small enterprises ▫ MFIs product offering ▫ Market segmentation of small enterprises ▫ Competition for small enterprise clients ▫ MFIs systems to serve small enterprises (staff/department/monitoring portfolio) ▫ Main challenges faced by MFIs ▫ Key success factors 3
    4. 4. 1 RESEARCH OBJECTIVE, SAMPLE AND METHODOLOGY 4
    5. 5. 1 Research objective To better understand the current and potential role of Microfinance Institutions (MFIs) with regard to serving small enterprises 5
    6. 6. 1 Sample and research methodology• Industry survey with over 350 MFIs conducted in Nov-Dec 2011 in 3 languages (French, Spanish, English)• Quantitative and qualitative analysis of responses• MFIs from 69 countries Sample distribution by region Institutional type Commercial bank 5% Rural bank 3% Credit union/Financial cooperative/SACCO EAP 12% SSA 11% 21% ECA Non-bank financial 24% institution 31% Microfinance bank SA 16% 13% MENA 10% LAC NGO/Foundation 21% 33% NOTE: ECA: Eastern Europe and Central Asia; EAP: East Asia and Pacific; LAC: Latin America and the 6 Caribbean; MENA: Middle East and North Africa; SA: South Asia; SSA: Sub-Saharan Africa.
    7. 7. Diverse regional distribution by institutional1 type 35 Commercial Bank 30 Credit union/Coop MF Bank 25 NGO/Foundation NBFIs 20 Rural bank 15 10 5 0 EAP ECA LAC MENA SA SSA NOTE: ECA: Eastern Europe and Central Asia; EAP: East Asia and Pacific; LAC: Latin America and the Caribbean; MENA: Middle East and North Africa; SA: South Asia; SSA: Sub-Saharan Africa. 7
    8. 8. 2 UNDERSTANDING THEDIFFERENCES BETWEEN MICRO AND SMALL ENTERPRISES 8
    9. 9. 2 Informality levels of micro and small enterprises MICRO SMALL SSA 82% ECA 24% SA 85% SSA 50%MENA 85% MENA 58% LAC 88% LAC 44% ECA 57% EAP 60% EAP 88% SA 81% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Up to 25% informal Between 25-50% More than 50% Up to 25% Between 25-50% More than 50% informal informal informal informal informal informal N= 206 (*) MFIs estimates N= 189 While small enterprises are more formal than micro, informality is widespread in all regions with the exception of ECA. 9
    10. 10. 2 Women-led micro and small enterprises MICRO SMALL EAP EAP SA SA SSA SSA WOMEN WOMEN MEN MEN LAC LAC ECA ECAMENA MENA 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% N= 209 N= 192 (*) MFIs estimates Compared to micro enterprises, small enterprises are less often led by women, specially in MENA and ECA. 10 N=
    11. 11. 2 Growth from micro to small enterprises % of enterprises that grow from micro to small 40% 28% 18% 7% 8% Less than 10% 10-20% 20-50% Over 50% Dont know 40% of MFIs said that less than 10% of their microenterprise clients grow to become small. 11 N= 213
    12. 12. 3 SERVING SMALL ENTERPRISES: INSIGHTS FROM MFIs 12
    13. 13. For most MFIs, serving small enterprises is3 part of their business strategy Is serving small enterprises part of your strategy? Yes No Not yet 16% 6% 78% 13 N= 186
    14. 14. Growth trend of MFIs’ small enterprise3 portfolio 69% 21% 9% Increasing Stable Decreasing N=193 14
    15. 15. Growth trend of MFIs’ small enterprise3 portfolio by region 79% 79% 78% Increasing 68% Stable Decreasing 55% 50% 32% 23% 23% 18% 16% 16% 18% 13% 12% 8% 9% 4% EAP LAC SSA MENA SA ECA N=193 15
    16. 16. 3 Why do MFIs serve small enterprises? Business growth opportunities 85% 69% Following micro clients over time Main reasons to serve small enterprises Increased competitions for micro clients 37% Higher profitability 35% Disbursement targets/pressure 21% Incentives from funders 17% Incentives from governments 15% 16 N= 150 Multiple answers
    17. 17. 3 MFIs typically characterize small enterprises by loan size Criteria used to define small enterprises (% of MFIs) 54% 33% 13% Loan size Number of Annual sales employees While “loan size” and “annual sales” differ by country/institution, “number of employees” typically ranges from 5 to 30 workers, outside household. N = 114
    18. 18. 3 Most MFIs offer small business loans Types of services offered 85% 71% 63% 49% 38% 37% 33% 25% 21% 17%croloan individual business loan Small Group loan Consumer loan Business BDS Deposit Insurance Payments Remmittances Overdraft Development Services 18 N= 235 Multiple answers
    19. 19. 3 Market segmentation of small enterprises How do MFIs sub-segment the small enterprise market? 5% Economic sector (e.g., agriculture, industry, s 17% 29% ervices) Geographic area (rural, urban) Business profitability of enterprises Revenue to the MFI 22% Other (e.g., gender) 27% 19 N= 159 Multiple answers
    20. 20. 3 Intense competition for small enterprise clients Level of competition among financial service providers serving small enterprises (% of MFI) Not intense 16% Very intense 44% Somewhat intense 40% 20 N= 197
    21. 21. 3 MFI systems to serve small enterprises Do you have a separate Separate risk methodology by methodology for small enterprise institutional type risk assessment? (% of MFIs) Commercial banks 72% Credit unions 71% Microfinance bank 60% Yes Yes 49% No NGO/Foundation 49% No 51% NBFIs 43% Rural bank 24% 0% 20% 40% 60% 80% 100% N=190 21
    22. 22. 3 44% of MFIs do not monitor micro and small enterprise portfolio separately Do you monitor micro and small enterprise portfolio separately? 44% Yes No 56% N=225
    23. 23. Most MFIs do not have dedicated3 staff/department to serve small enterprises Do you have dedicated staff for Do you have a dedicated small small enterprise clients? enterprise department? 61% 70% 30% 39% Yes Yes No No N=201 N=202 23
    24. 24. 3 Main challenges faced by MFIsTop three internal, external and enterprise-level challenges MFIsface in serving small enterprises: INTERNAL EXTERNAL ENTERPRISE-LEVEL • Lack of appropriate risk • High cost of operations • Lack of financial statements assessment methodologies • Lack of demand for MFI • Business are not registered • Management perceives segment products by enterprises as too risky • Lack of collateral to secure the • Restrictive regulations loan • Inadequate MFI products (e.g., lending regulations, tax regime) • No clear separation between • Lack of MFI staff capacity to household and business accounts analyze the business (e.g., loan • Lack of credit registry (i.e., credit officers) bureau) • Lack of internal processes (i.e. • Judicial system (i.e., court MIS systems) system) • High cost of operations • High competition (e.g., from banks, other providers) • Lack of basic infrastructure in the country (e.g., roads and electricity) 24
    25. 25. 3 Main challenges: What MFIs say… “Financial statements of small business are often not actual.” NBFI Manager, Armenia “The main challenge is the presence of competitors including government institutions.” NGO/MFI Chairman of Board and CEO, Iraq “In most cases we are not able to serve small businesses as we cannot provide all services they need. Even in the case of loans, since small business need larger loans with longer terms” NBFI Credit Manager, Bosnia 25
    26. 26. 3 Key success factors identified by MFIs  Client-focused approach  Commitment from top management and dedicated staff  Strong risk management  Flexible products and delivery Key success factors: What MFIs say… “KYC approach is not enough, to successfully serve small enterprises you need to have a BWYC (Be With Your Clients)” NGO/MFI Manager, the Philippines “Deep insights and strong relationship with the client” NGO/MFI Executive Director, Dominican Republic “Having separate, dedicated units for serving micro and small enterprises” Commercial Bank Manager, Kenya 26
    27. 27. We welcome your comments, questions and examples. CGAP contacts: ▫ Jasmina Glisovic jglisovicmeziere@worldbank.org ▫ Meritxell Martinez mmartinez1@worldbank.org 27
    28. 28. Advancing financial access for the world’s poor www.cgap.org www.microfinancegateway.org

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