Mr  ali-shaker,first-day-second-meeting-16-8-2009
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Mr  ali-shaker,first-day-second-meeting-16-8-2009 Mr ali-shaker,first-day-second-meeting-16-8-2009 Presentation Transcript

  • CASE STUDYMICROFINANCE : The role of Commercial Banks. ALI I. Shaker Chairman Principal Bank for Development and Agricultural Credit EGYPT July 2009
  • 1. MICROFINANCE. MICROFINANCE. - DEFINITION - CLIENTS. - SIZE & POTENTIAL DEMAND. - Financial Services & Poor People.2. COMMERCIAL BANKS & MICROFINANCE - Reluctance to Service Microfinance. - Despite having the “ Twin Advantages ”. - Obstacles for Commercial Banks in the Microfinance Business - Other Advantages of Commercial Banks in Microfinance3. RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK4. SUCCESSFUL FEATURES of a MICROFINANCE PROGRAM5. Is Microfinance a Suitable Business Proposal for Commercial Banks?6. Is It a Revenue Earner for Retail Banking ? CONCLUSION :
  • 1/1 MICROFINANCEDEFINITION :q Microfinance is banking the low income households and individuals who have uncertain and unstable income streams that are unprotected.q Worldwide, Microfinance has been recognized as a powerful tool targeting the poor with the aim of alleviating poverty, raising living standards, creating jobs and boosting economic growth. 1 View slide
  • 1/2 MICROFINANCE* CLIENTS: CLIENTS:q “ Destitute ”: unable to participate in the mainstream of the economy.q “ Entrepreneurial Poor “ : active in income generation. 2 View slide
  • 1/3 MICROFINANCE* SIZE & POTENTIAL DEMAND :- There is a large unmet demand for microfinance among the entrepreneurial poor in the third world countries.- A conservative estimate suggests that, for example, there are at least 3 - 5 million microenterprises in Egypt for the time being. While no formal estimates are available, it is believed that only (excluding agriculture sector) 10% approx. of potential borrowers are being served.- This large unmet demand signals an important role for the commercial banks to participate in the provision of such services. 3
  • 1/4 MICROFINANCE* Financial Services & Poor People :- Need for a variety of financial services.- Lack of access to banking services.- Existence of informal systems.- Lack of professionalism & sustainability of activities, programs and institutions that channel funds in the form of microcredit. 4
  • 2/1 COMMERCIAL BANKS & MICROFINANCE* Reluctance to Service Microfinance:- The belief it is costly & unprofitable.- The belief it is risky.- The belief it is time consuming- The belief it is labor intensive.- Lack of appropriate banking methodologies.- Socio-economic barriers.- Highly political nature of MF. 5
  • 2/2 COMMERCIAL BANKS & MICROFINANCE* Despite having the “ Twin Advantages ”: ”:- Branch Network / Accessibility.- Fund Raising Capacity. 6
  • 2/3 COMMERCIAL BANKS & MICROFINANCE* Obstacles for Commercial Banks in the Microfinance Business :q Bank Commitmentq Organization Structureq Lack of Financial Methodologyq Human Resourcesq Cost Effectivenessq Prohibitive Environment.q Inconsistent Policies. 7
  • 2/4 COMMERCIAL BANKS & MICROFINANCE* Other Advantages of Commercial Banks in Microfinance :- Regulated institutions- Physical infrastructure / Branch Network- Effective internal control structure- Sound governance structure- Availability of funds- Products diversification 8
  • 3/1 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK Main critical factors responsible for the success and durability of a commercial microfinance program : a) Commitment, Vision and Drive of senior management : - Belief in the potential role of microfinance - Dedicated staff 9
  • 3/2 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK b) Public Policy Environment : - Supportive public policy - No restrictions related to pricing, incentives…… - No obstacles to using mobile branches - No restrictions in dealing with informal enterprises - Government incentives 10
  • 3/3 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK c) Organizational Structure : - Specialized microfinance dept. - Independent microfinance units. - Establishing semi independent units within branches. - Flexibility for clients to graduate. - Flexibility of unit managers to develop products. - Centralized support. - Central performance monitoring system. 11
  • 3/4 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK d) Financial Methodology : - No collateral is formally required - Commercial interest rates - New and flexible lending techniques - Sequential lending & simple procedures - Prompt loan collection procedures - Effective MIS system - Contractual insurance 12
  • 3/5 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK e) Human Resources : - Staff recruited from local communities - Adequate training - Well defined incentives system - Long term career perspective f) Institutional Innovation : - Mobile banking - Well defined loan approval process g) Cost Effectiveness : - Independent cost & profit centers - Centralized support & liquidity management. 13
  • 4/1 SUCCESSFUL FEATURES of a MICROFINANCE PROGRAM The actual case of a “ Regional Development Bank” : - Sustainability of the program of more than 20 years. - Matching credit funds from its own resources after donors’ support ended. - Providing employment opportunities to 400 university graduates working in its program. - Program replicable to virtually all geographical areas within the country. - Strong reflows of principal and market interest rates that are recycled into the credit fund. 14
  • 4/2 SUCCESSFUL FEATURES of a MICROFINANCE PROGRAM - Interest rates and fees are set to cover all program expenses and provide a return for reinvestment and expansion of services. - Program operating throughout large of network of branches. - The program attracted and increased savings awareness among its clients. - Program has provided a contractual life insurance cover to its clients against unexpected adverse conditions. 15
  • 5/1 Is Microfinance a Suitable Business Proposal for Commercial Banks? - It’s relatively new. - It developed due to: • Increasing cost of funding. • Increasing competition. • Increasing risks in institutional products. • Decreasing profit margin in traditional products. • Decreasing banking service revenues. • Decreasing market share of banks with many branches. 16
  • 5/2 Is Microfinance a Suitable Business Proposal for Commercial Banks? * How did microfinance develop? § It became crucial to decrease the cost of funding. § A new requirement: to reduce risk through diversification. § The banks began to search for selling opportunities with higher profit margins. § It became a must to obtain new customers. § The speed increased and the transaction costs decreased by the technology. § As a result, banks began to look for new sources of revenue other than traditional institutional banking products. 17
  • 5/3 Is Microfinance a Suitable Business Proposal for Commercial Banks? * We believe that Microfinance changed the world. * A changed world changed the needs and the demand of the customers. ž Will the Banks respond & take up the challenge? 18
  • 6/1 Is It a Revenue Earner for Retail Banking ? - Competition is forcing many banks to look at new markets. - Microenterprises represent approx. 90% of the private sector and account for approx. 50-55% of private employment. - Diversify the banking services and products. - Reach a wider customer base. - Meet the tremendous demand for financial services, particularly loans among low income households. 19
  • 6/2 Is It a Revenue Earner for Retail Banking ?• Practices proved that microcredit borrowers are willing to pay reasonable costs, in terms of both interest rates and fees, for convenient and timely services.• Microlending involves the development of long-term relationships.• Use bank’s own deposit base to finance microfinance portfolios.• Educate borrowers about important financial practices.• The main direct sources of revenue are high credit interest rate, fees, and the mandatory savings deposit.• The main sources of indirect sources of revenue are a life insurance fee, a penalty fee and prepayment fee. 20
  • CONCLUSION :ž Experience has proved that the poor can be served profitably on a large scale and a long term basis.ž Microfinance units can outperform mainstream commercial banking business in return and portfolio quality.ž Commercial banks have a major and instrumental role to play in the microfinance field.ž Microfinance has to be integrated in the country’s financial system. “ MICROFINANCE IS PROFITABLE “ ………… 21