Microfinance reinvents itself


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Nederlandse particulieren, bedrijven en instellingen spelen een belangrijke rol in microfinanciering. Er gaat wereldwijd naar schatting tachtig miljard dollar om in deze sector die naar verwachting in 2012 met 4% groeit. Hiervan wordt 25 miljard dollar verstrekt door buitenlandse investeerders. Het Nederlandse aandeel bedraagt 2,1 miljard dollar wat resulteert in een marktaandeel van 8,4%. Naast financiële steun leveren de Nederlanders ook kennis en lopen zij voorop bij de implementatie van initiatieven die transparantie en het maatschappelijk rendement van de sector vergroten.

Het rapport werd op 6 maart door Nick Jue aangeboden aan Hare Koninklijke Hoogheid Prinses Máxima der Nederlanden in het Tropen Instituut in Amsterdam. Op het congres sprak ING’s hoofdeconoom Mark Cliffe over de manier waarop de sector zich opnieuw uitvindt.

De leden van het Nederlands Platform voor Microfinanciering spelen een leidende rol in deze transitie. Door slimmer te werken verhogen zij hun inzet met minder middelen.

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Microfinance reinvents itself

  1. 1. Microfinance reinvents itself The Dutch are in the driving seatMark CliffeChief Economist INGMicrofinance EventAmsterdam6th March 2012 0
  2. 2. 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 1
  3. 3. Microfinance soars...but there is more to be done • Globally, 2.7 billion people are excluded from People reached by Microfinance (millions) formal financial services…2.000 2.0001.800 1.8001.600 1.600 • …of which 1.2 billion people are living under1.400 1.400 $1.25 a day.1.200 1.2001.000 1.000 • Declining poverty reflects 800 800 • China’s development 600 600 • …and to a lesser extent India 400 400 200 200 • but poverty in Africa is on the rise 0 0 1990 1995 2000 2005 2011 • Microfinance has grown rapidly, reaching 145 million clients living on less than $ 1.25 per day People on less than $1.25 per day, China included People on less than $1.25 per day, China excluded • While this reaches perhaps 600 million Microfinance clients on less than $1,25 per day people… People on $1,25 reached by microfinance (household = 4) • …there is still a gap, which still requires $ 250- Source: ING Economics Department based on Worldbank and MIX 300 billion to close. 2
  4. 4. Domestic funding dominates… …but foreign funders also bring crucial expertise Domestic vs foreign funding ($ bln, 2010) Sources of foreign funding 100% Investors 25 26% 80% 5% Foundations and NGOs 60% 42% Development Financial Institutions 40% 55 Bilateral agencies 7% 20% 20% Foreign funding Domestic funding Multilateral and UN agencies 0% Source: ING Economics Department based on CGAP• Microfinance sector totals $ 80 bn globally… • DFIs dominate the market (42%)• …over 2/3 comes from domestic sources • Investors provide 26% of foreign funding.• Of the $25 bn provided by foreign funders, • Dutch investors have a high market share (25%) the Dutch account for $ 2.1 bln. (8,4%)• Foreigners provide money and knowledge 3
  5. 5. Developed world recovers slowly from the crisis……while the emerging world powers ahead Emerging world output surges ahead of developedIndex Fo recasts 1Q08=100170 170 C hina160 160 India B razil150 P o land 150 US140 R ussia 140 Euro zo ne130 130120 120110 110100 10090 90 08 09 10 11 12 13 4
  6. 6. Developed world faces painful deleveragingSovereign and bank debt solvency intertwined  The sovereign debt crisis resulted from the fall-out of the financial crisis: ASSET  Banking Bail-outs PRICES  ‘Great Recession’  Some banks are still dependent on state/ECB BANK support, and most are looking for more capital FISCAL SOLVENCY SOLVENCY  Weak bank lending may hurt economic growth and public finances  BUT banks are also big buyers of public debt… ECONOMIC  …and policy-makers want them to continue… GROWTH  The fiscal squeeze designed to improved fiscal solvency will mean monetary policy will have to remain loose 5
  7. 7. Foreign microfinance funding keeps growing… …albeit more slowly Index EM MSCI Index and Portfolio flow s tn $ Foreign funding1400 15 60% 30 50% 50% 251200 10 40% 201000 5 30% 15 23% c 20% 10 800 0 12% 10% 7% 5 5% 4% MSCI EM US$ Index (lhs ) 600 -5 0% 0 Portfolio flows for EM external and local debt m arkets (rhs ) 2007* 2008 2009 2010 2011F 2012F Growth in foreign funding (lhs, %) Foreign funding (rhs, $ billion) 400 -10 * 2007 based on estimated average annual growth rate for 2005-2007 07 08 09 10 11 12 Source: ING Economics Department based on CGAP• The financial crisis led to a dramatic drop in world • Banks’ and institutional investors’ balance sheets are under trade and capital flows in 2009 - emerging markets pressure, but they also want to deliver corporate responsibility suffered disproportionately • Retail investors are increasing sustainable investments, but• Developed market investors withdrew capital from face wealth losses and, in some countries, less favourable tax emerging markets to cover losses back home regimes…• Despite this, foreign funding for microfinance has • Government funding is squeezed by austerity measures continued to grow, although more slowly 6
  8. 8. Dutch fiscal austerity bites into Development Aid Dutch ODA budget 2011-2014 5.000 25% 4.000 20% 3.000 15% 2.000 10% 1.000 5% 0 0% 2011 2012 2013 2014 Total ODA (€ mln, lhs) Cut ODA budget (€ mln, lhs) Cut ODA budget (%, rhs) Source: Ministry of Foreign Affairs. Dutch tax incentive sustainable investments 3% 2% 1,3% 1,0% 0,7% 0,4%• Fiscal austerity is not confined to Europe’s periphery… 1%• …the Netherlands is also tightening… 1,2% 1,2% 1,2% 1,2% 1,2%• …with cuts to development aid and tax breaks for 0% sustainable investments 2010 2011 2012 2013 2014 Box III ("vermogensrendementsheffing") Box I ("heffingskorting") Source: Ministry of Finance 7
  9. 9. …but it remains twice the international average Development aid DAC countries (% of GNI) 1988  2009 1,21,00,8 2012 UN target 0.70,6 Gap 0.390,40,2 .. Greece Luxembourg Sweden France DAC total Denmark Norway Germany Belgium United Kingdom Austria Portugal Japan Spain Canada Netherlands United States Italy Ireland Switzerland New Zealand Finland Australia Source: Worldbank • 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. 8
  10. 10. Is commercialisation the answer? Gross Loan portfolio ($ billion) 60 • With limited resources available, can Profit Non‐profit commercialisation lead to more sustainable 40 growth in microfinance? • Growth in profit-driven MFIs has exceeded 20 growth in nonprofits • After all, people respond to incentives and 0 seek profit... 1995 2000 2005 2010 Number of active borrowers (millions) 80 BUT there have been problems and criticisms: Profit Non‐profit 1. Focus on microcredit caused over-lending 60 2. Excessive interest rates 40 3. Credit for consumption vs income 20 generation 4. Neglect of the poor 0 Source: MIX 1995 2000 2005 2010 9
  11. 11. Reinventing microfinance (1)Becoming more transparent and responsible 10
  12. 12. Reinventing microfinance (2)Exploiting new technologyMobile banking• Increases outreach (rural areas)• Reduces operational costsBiometric devices• Reliable client identification• Helps in preventing multiple loans• Clients take out smaller loans knowing they will be identified in the futureAdministration systems• Digital contracts• Better risk management: monitoring loan- and portfolio performance, establishing credit ratings 11
  13. 13. Reinventing microfinance (3)Developing savings and other services Households with deposit account in a formal 100% institution 91% 80% 60% 50% 42% 42% 40% 40% 22% 20% 12% 0% High Europe East Asia Middle East Latin South Asia Sub- income and & Pacific % North America & Saharan countries Central Africa Caribbean Africa Asia Source: CGAP & The World Bank Group • 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 12
  14. 14. Reinventing microfinance (4) SME financing – focus on the employersSome 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. 13
  15. 15. Reinventing microfinance (4)SME-funding…a growth opportunity for the Dutch SME financing by The Netherlands • SME financing supports entrepreneurs and their 3% employees… 4% 3% 5% 5% 4% • …SMEs are critical for sustainable economic growth. 50% • Employers may be less poor but they do provide jobs 52% 59% to the community • The Dutch currently provide limited SME financing… • …this could be an opportunity to improve outreach but 43% 40% requires a different view on depth and breadth of 30% outreach… • …and it does carry risks: Donors MIVs Investors • MFIs have lack of knowledge of SME financing Low end Broad end • Danger of “mission drift” High end Small business • Increased exposure per investment Source: ING Economics Department based on CGAP 14
  16. 16. Dutch microfinance is unique in many waysDirect vs indirect funding (% of $ committed) 9% • Dutch microfinance is not just impressive in 21% terms of scale… 53% • …it is based on a long tradition in development aid and microfinance 79% • Use of direct funding: being on top of your investments to have maximum impact 37% • High private sector involvement: making microfinance cost effective Dutch Offer The Rest of the World Direct Indirect Unspecified Source: ING Economics Department based on CGAP 15
  17. 17. Serving 94 countries…both low and middle income Top 5 countries ($ million) 250 226 200 152 150 117 100 77 65 50 0 India Peru Cambodia Bolivia Azerbaijan Dutch Offer The Rest of the WorldSource: ING Economics Department based on CGAP 16
  18. 18. Conclusion - The Dutch are in the driving seatBreadth of outreach (% of MFIs funded) 24% # of a cti ve borrowers 32% 43% > 30,000 • Many different type of actors: donors, 25% investors and MIVs with unique profiles 25% # of a cti ve borrowers 31% between 10,000 to 30,000 • High cooperation to create synergies 51% 43% 26% # of a cti ve borrowers • Thought-leader and frontrunner on < 10,000 Donors Investors MIVs transparency and responsibility initiatives… Financial return Dutch funders8% 7% • …addressing questions raised by recent6% 6% challenges4% • More effective measurement… 2%2% 1% 1% • …will help us to become smarter with limited 0%0% resources. Donors Investors MIVs Return on Equity (ROE) Return on Assets (ROA)Source: ING Economics Department based on CGAP 17
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