Opportunities In Microfinance Amidst the Financial Crisis

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  • 1. 2009 RBAP-MABS National Roundtable Conference May 12-13, 2009 Hyatt Hotel and Casino Manila John V. Owens Chief of Party, MABS
  • 2. Microfinance Still Hums, Despite Global Financial Crisis
    • Microfinance operates differently from US subprime lending
    • Sector is more resilient
    • Methodology – Cash-flow & Character-Based rather than Asset-Based
    • Loan Characteristics – small & short-term
    • Innovative risk-management techniques
  • 3. Optimism Amid the Anxiety
    • Dominoes of the crisis are hitting microfinance in very different ways worldwide
      • C redit crunch
      • Inflation
      • Currency Devaluation
      • Global Recession
      • Drop in Remittances
      • Higher Unemployment
    • Nimble clients are actually benefiting from hard times adapting strategies to meet frugal customer demands
  • 4. Challenge for the Philippines – Remittances?
  • 5. Stability of Deposits
    • Rural banks, with a broad base of deposits, are less exposed to refinancing and global crisis risks
    • Challenges:
    • Note that some deposits are more stable than others
    • In a world where SMS allows communication in seconds, bank failures and closures can lead to a loss of confidence in banks
    • Opportunities:
    • Higher deposit insurance coverage could lead to more confidence and higher deposits in rural banks
  • 6. MABS Participating Banks
    • So far, banks are stable, growing & report little or no direct impact from the crisis. Still, there are some troubling signs:
    • Slight deterioration in portfolio quality
      • Slight increase in portfolio at risk over the past 12 months
      • Causes - primarily due to bank issues rather than global crisis
    • Slower growth rate of microfinance portfolio, especially compared to past growth rates
      • Banks more hesitant to extend credit
      • Tightening up due to PAR & focus on collections
    • Deposit mobilization is stable (Legacy issue is in the past)
  • 7. Microfinance – Opportunity for Rural Banks during the Crisis
    • Banks looking at MF as a sound strategic investment decision
    • Loans are short-term, small, diversified
    • Solid cash generation potential
    • Solid track record of profitability
    • Sound risk assessment: methodology based on capacity to repay and character-based
  • 8. Strategies being recommended for Banks
    • Shore up financial position by increasing equity
      • Retain more earnings; pay out lower dividends
    • Diversify funding sources & secure additional funds
      • Focus on deposits (low income savers vs. institutional savers)
      • Negotiate credit lines
    • Rationalize operations but diversify
      • Reduce operating costs (to address decreasing profit margins)
      • Tighten risk management controls (to maintain healthy portfolios)
      • Manage portfolio growth: emphasis on those products that are short term, have smaller loan sizes and are more profitable
      • Diversify products and services
  • 9. Strategies being recommended for Banks
    • Marketing/Increase Public Confidence
      • Marketing campaign to focus on the importance of savings
      • Improve your image - Publish financial statements – MixMarket.org
      • Ratings – Get rated & publish reports
      • Maintain an image of safety
      • Follow improved transparency & fairness in dealing with clients
  • 10. Broader Range of Services to their Microfinance Clients…
    • Offering the MABS Approach to new banks – “GO BACK TO BASICS”
    • Product Diversification:
      • Expansion of Micro Agri Loans
      • Housing Microfinance Loans
      • Microinsurance
    • Improve Efficiency & Collections
      • Mobile Phone Banking Services
      • Support RB access to the Credit Bureau System
      • Small Claims Court Initiative
    • Training & Capacity Building
      • – MABSTeRS
      • Distance Learning
  • 13. Crisis as Opportunity?
    • Financial crisis could actually produce long-term benefits, even if they are painful – CGAP
    • Slower but stable growth
    • Stronger credit policies & procedures
    • Support for credit bureau
    • Better products
    • Consolidation of weaker banks into stronger ones
    • Boost to implement appropriate client protection policies & practices
    • Value of deposit-led approach
  • 14. Be savings-led and inspire your clients to save, match savings with loans, avoid funding mismatch, develop an array of savings and deposit products, be market driven…lend short and lend small, … race up on savings mobilization C.J. Agwu, Agric Banking FMFB