Asian Banker Prsenstation


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Asian Banker Prsenstation

  1. 1. THE PATHWAY OF MICROFINANCE What’s it should be: Inclusive Financial System for low income households and the poor By Mohamad Nazirwan, Head of BRI - IVP Asian Banker Summit 2007: Microfinance Forum for Commercial Bankers Jakarta March 25 th 2006
  2. 2. Microfinance development 1 2 Understanding microfinance 3 Key success factors AGENDA 4 Lesson from Bank Rakyat Indonesia
  3. 3. Indonesia Russia Country Poland Brazil Philippines Mexico India Estimated Population Without Bank Account 38% 25% 57% 80% 76% 41% 80% Lower 2.5 BB People Unbanked 40% of World Population Postal Banks 51% State Banks 19% Rural Banks 17% Cooperatives 6% NGOs 5% Informal Underbanked population: Huge business potential? Iceberg Phenomena Bankable Banking Horizon Viable MSE Prospective MSE Start-up MSE UNDERSTANDING MICROFINANCE The challenges ………….. Upper Middle Middle Mass Affluent High Net Worth
  4. 4. Microfinance Poverty Alleviation Low Income <ul><li>Low income </li></ul><ul><li>Lack of education </li></ul><ul><li>Operate microenterprise </li></ul><ul><li>Family based activities </li></ul><ul><li>CORE OF MICROFINANCE </li></ul><ul><li>Financing </li></ul><ul><li>Capital accumulation </li></ul><ul><li>Payments system & remittance </li></ul><ul><li>Risk management </li></ul><ul><li>Income generating </li></ul><ul><li>Financial access </li></ul><ul><li>Opportunities </li></ul><ul><li>Prosperity </li></ul><ul><li>Empowerment </li></ul>Financial Intermediaries UNDERSTANDING MICROFINANCE Social Intervention The inclusive financial system for low income households and poor people
  5. 5. M ICROFINANCE HOUSE HOLDS <ul><li>Business </li></ul><ul><li>Consumptions </li></ul><ul><li>Asset Building </li></ul><ul><li>Emergency </li></ul>INCOME EMPLOYMENT ENTERPRISES ECONOMICS SOCIAL CULTURAL P OLITICS LIVINGS SAVING <ul><li>Financial matters </li></ul><ul><li>Products </li></ul><ul><li>Services </li></ul>UNDERSTANDING MICROFINANCE <ul><li>Food </li></ul><ul><li>Education </li></ul><ul><li>Health </li></ul><ul><li>Housing </li></ul><ul><li>Transportation </li></ul><ul><li>Asset </li></ul>
  6. 6. MICROFINACE – INCLUSIVE FINANCIAL SYSTEM CORE OF MICROFINANCE <ul><li>Financing </li></ul><ul><li>Loan </li></ul><ul><li>Factoring </li></ul><ul><li>Leasing </li></ul><ul><li>Pawning </li></ul><ul><li>Asset Accumulation </li></ul><ul><li>Saving </li></ul><ul><li>Deposit </li></ul><ul><li>Investment </li></ul><ul><li>Pension </li></ul><ul><li>Payment & Remittance </li></ul><ul><li>Debit card </li></ul><ul><li>Credit card </li></ul><ul><li>Stored value card </li></ul><ul><li>Electronic fund transfer </li></ul><ul><li>Risk Mitigation </li></ul><ul><li>Microinsurance </li></ul>
  7. 7. <ul><li>Access at a reasonable cost of all households & enterprises </li></ul><ul><li>Multi financial services - savings, credit, leasing and factoring, mortgages, insurance, pensions, payments, remittance </li></ul><ul><li>Sound institutions - appropriate internal management systems, industry performance standards, and performance monitoring by the market, sound prudential regulation </li></ul><ul><li>Financial and institutional sustainability - providing access to financial services over time </li></ul><ul><li>Multiple providers of financial services – more alternatives to customers </li></ul><ul><li>Competitive - efficient and innovative, resulting in wide outreach to economically active poor and middle-income women and men </li></ul>MICROFINACE – INCLUSIVE FINANCIAL SYSTEM
  8. 8. Commercial banks State dev banks Postal banks Insurance companies Leasing companies Money transfer firms Apex organizations Rural banks Co - operative banks Microfinance banks Credit unions Regulated MFIs Finance companies Unregulated MFIs NGOs Savings and credit associations Village banks Self - help groups Farmers’ organization Women’s associations Community savings clubs Formal Semiformal informal Money Lender UNDERSTANDING MICROFINANCE Microfinance institutions and providers
  9. 9. EVOLUTION OF MICROFINANCE Inclusive Financial Sector 1950 – 1970 <ul><li>Agricultural credit to support green revolution </li></ul><ul><li>State owned bank/financial institution </li></ul><ul><li>Subsidize interest rate </li></ul><ul><li>Government intervention </li></ul>1970’s <ul><li>Effort to alleviate chronic poverty in rural area </li></ul><ul><li>People – woman centered – empowerment </li></ul><ul><li>Concept of microcredit </li></ul><ul><li>Involve donors & NGOs </li></ul><ul><li>Paradigm shift from rural finance – microfinance </li></ul><ul><li>Demand driven products & services </li></ul><ul><li>Beyond credit: Saving & other financial services </li></ul><ul><li>Commercial based (Cost recovery) </li></ul>1980’s 1990 - Now <ul><li>Rapid development of commercial MFI </li></ul><ul><li>Broaden products (CORE MFI) </li></ul><ul><li>Adopt technology </li></ul><ul><li>Involve IFI & attract commercial funds from capital market </li></ul>
  10. 10. Microfinance in Asia <ul><li>Densely populated in rural area </li></ul><ul><li>Strong social orientation </li></ul><ul><li>A few institutions focus on enterprise credit </li></ul><ul><li>Has long historic government involvement (subsidized loan program) </li></ul><ul><li>Home of some of largest MFIs suhc as ASA, BRI, Grameen Bank etc. </li></ul><ul><li>Huge number of poorest performing MFIs </li></ul>Key statistics: Borrowers : 18 million Gross loans portfolio : $ 30 million Deposit/saver as % GNI/Capita : $ 25 ROA : -0.7% (Coops: 8.9%; Banks: 1%) Cost/borrowers : $ 50 (NGOs: $ 32; Banks: $75) Sources: CGAP & Brigit Helms (2006)
  11. 11. Microfinance in Latin America <ul><li>Focus on microenterprise finance </li></ul><ul><li>Maturing industry with many viable MFIs </li></ul><ul><li>Mostly regulated financial institutions </li></ul><ul><li>Commercial institutions serve 54% </li></ul><ul><li>Competition fierce in urban areas </li></ul><ul><li>Interest rate decline as a result of competition </li></ul><ul><li>Offering more variety financial products & services </li></ul>Key statistics: Borrowers : 1.5 million Gross loans portfolio : $ 22 million Deposit/saver as % GNI/Capita : $ 129 ROA : 1.4% (Banks: 1.4%; Cops: -0.3%)) Cost/borrowers : $ 176 (Banks: $224; Coop: $156) Sources: CGAP & Brigit Helms (2006)
  12. 12. Microfinance in Africa <ul><li>Diverse institutional models but under developed </li></ul><ul><li>Heavy donor dependence </li></ul><ul><li>High operating cost due to disperse locations </li></ul><ul><li>More commercial banks enter the microfinance sector </li></ul>Key statistics: Borrowers : 3 million Gross loans portfolio : $ 3 million Deposit/saver as % GNI/Capita : $ 49 ROA : -7.3% (NGOs: -16.8% Banks:-3.9%) Cost/borrowers : $ 237 (Banks: $346; NGOs: $256) Sources: CGAP & Brigit Helms (2006)
  13. 13. Microfinance in Eastern Europe & Central Asia <ul><li>New industry with few emerging MFIs </li></ul><ul><li>Dominated by NGO </li></ul><ul><li>Focus on loan to support job creation </li></ul><ul><li>Rapidly achieved financial self-sufficiency </li></ul><ul><li>Major constraint is regulation issue </li></ul>Key statistics: Borrowers : 200 thousand Gross loans portfolio : $ 7 million Deposit/saver as % GNI/Capita : $ 89 ROA : 0.6% (Banks: 1.9%; Cops: -0.2%) Cost/borrowers : $ 309 (Coops: $392 Banks: $362) Sources: CGAP & Brigit Helms (2006)
  14. 14. COMMERCIALIZATION ROAD MAP Progress Toward Commercialization Applying commercial principles Full commercialization Increased cost recovery Operational self-sufficiency Financial self-sufficiency Market-based sources of funds Fully profit oriented Social Public Commercial Bi - & Multilateral donors Foundations I F I Private Funds Commercial Investors Capital market
  15. 15. Commercial Banks in Microfinance Source: EIBE/ Netherlands, “A Billion to Gain”, 2006 quoted from Robert Anibale presentations. <ul><li>Commercial Banks can provide </li></ul><ul><li>Extensive networks </li></ul><ul><li>Technology Infrastructure </li></ul><ul><li>Recognized Brand Name </li></ul><ul><li>Access to Capital and Financial Markets </li></ul><ul><li>Regulatory scope for wider access of services </li></ul><ul><li>but lack… </li></ul><ul><li>Trust and experience with this segment </li></ul><ul><li>Close Relationships with clients </li></ul><ul><li>Local distribution networks </li></ul><ul><li>Lower operation costs </li></ul><ul><li>Innovative, targeted products </li></ul>
  16. 16. INVESTMENT IN MICROFINANCE 0 1985 1990 1995 2000 2005 2007 2010 Funding Source Concessionary Public Commercial $32B
  17. 17. MICROFINANCE: Best Practices <ul><li> Offer services that fit client needs </li></ul><ul><ul><li>Relatively unrestricted uses (rational client assumption) </li></ul></ul><ul><ul><li>Regular repayment, not lump sum </li></ul></ul><ul><ul><li>Public image of welcoming low income clients </li></ul></ul><ul><ul><li>Less than client needs at first, then increasing amounts </li></ul></ul><ul><li>Streamline operations </li></ul><ul><ul><li>Decentralization (autonomous decision) </li></ul></ul><ul><ul><li>Standardize process </li></ul></ul><ul><ul><li>Low fixed assets & premises </li></ul></ul><ul><ul><li>Simple product </li></ul></ul><ul><ul><li>Lean organization </li></ul></ul>
  18. 18. <ul><li> Motivate clients to repay loans on time </li></ul><ul><ul><li>Guaranteed access to next loan </li></ul></ul><ul><ul><li>Prompt repayment rebate </li></ul></ul><ul><ul><li>Preferential interest rate for good performers </li></ul></ul><ul><ul><li>Clear enforcement rules, fines, no flexibility for loan officers </li></ul></ul><ul><li> Charge full-cost interest rates and fees </li></ul><ul><ul><li>Cover all costs of service delivery -- administrative expenses, inflation, cost of capital, profit margin </li></ul></ul><ul><ul><li>Keep competition in mind </li></ul></ul><ul><ul><li>Effective interest rate vs access often more important than interest rate </li></ul></ul>MICROFINANCE: Best Practices
  19. 19. BANK RAKYAT INDONESIA’s Microfinance 1968 BRI State-owned Bank BIMAS Rice 2003 1983 Financial Deregulation Interest Rates Free 1984 Transformation Commercial Approach 1986 Profitable 1997 East Asia Crisis IPO 3,600 BRI-Unit Public Listed Company 1895 Established 1970 Sustainable
  20. 20. BASIC PRINCIPLES OF BR I- Unit <ul><li>SIMPLICITY - organization, products & operation </li></ul><ul><li>ACCESSIBILITY - close to community, in business centers </li></ul><ul><li>MARKET DRIVEN - fit to customer needs, market based pricing </li></ul><ul><li>SUSTAINABILITY - cost recovery + profit </li></ul><ul><li>TRANSPARENCY - terms & conditions easily understood and informative </li></ul><ul><li>INDEPENDENT - all business decision with out any intervention from outside parties and government </li></ul>