Standard and Poor’s Rating Services is developing a MF rating methodology with tailored ranking system to compare MFIs in and between countries of different asset classes.Moody’s partnership with KIVA
Compartamos is rated by S&P.
Grameen America include collateral-free lending, savings programs, credit establishment services, financial education and remittance services.
2008 numbers. PAR>30 days 4%, loan loss rate -1.26%
-Khan uses a broad, multi‐product business model to target its customers, most of whom are rural, low‐income and have small enterprises.-Khan’s top management is highly dependent on DAI contractors and input. CEO Peter Morrow has led the bank since 2000 and is the recognized ‘face’ of the bank.-Transparent no‐tolerance policy, and it has dealt with frauds in the past by terminating employees on the spot. (not surprising that doesn’t tolerate corruption, but impressive that it is SO strict and has a system to deal with it)
- Agricultural loans are high risk for bankBut Khan targets rural customersMitigated by reducing as a percentage of overall portfolio from the current 21% to 9% in 2010- Projects its urban business to overtake its rural business. is this good?Yes for OSSNo for “social bottom line” and if they emphasize helping rural people“Mongolia views microfinance and SME lending as important for its effort to reduce poverty.”Portfolio per loan officer has increased a lot – because of size of loans or lower loan office to client ratio?
-NGOs may operate even if not a large market thoughKhan is experiencing increased competition in microfinance, SME, consumer finance and commercial banking. Competition is leading to interest rate reduction wars on loans (and interest rate hikes on deposits) as well as the introduction of new products to obtain market share.MF in Mongolia will reach saturation and unviable MFIs will drop out“Competition is pushing interest rates down even while inflation is pushing costs up, and several MFI’s reportedly are losing money.”Khan Bank will stay in business – good employer, provides range of services to rural and urban areas – but will build up urban focus, including increasing services to corporate and commercial customer base, and may stray from providing services for rural customers
Where several products are trying to get to the poor populations, some generic company will come up with a cheap way to get at the furthest away rural areas.
B241 - Microfinance Issues and Breakthroughs Class Review
B241:MICROFINANCE<br />Review of Major Class Topics<br />Surprises<br />Lingering Questions<br />Predictions<br />Fall 2009<br />
Surprises<br />Low income communities are saving in forms other than currency - farm animals, small objects, etc.<br />Households create large sums of money (much greater than their income) by pooling money from various resources - microloans, savings from ROSCAs<br />2<br />
How are widely used customary finance tools unique in different cultural contexts?<br />How are ROSCAs viewed by their users? We celebrate the model, but are members really happy using them? Would they change to formal financial savings techniques if they were available?<br />More to discuss<br />3<br />
Increased incorporation of customary finance techniques as a way to meet flexible needs of low-income population -- we can already see the incorporation of savings groups in some MFIs<br />Communities will maintain customary finance in addition to semi-formal/formal financial services to maintain traditions, social group benefits, or meet immediate financing needs<br />Predictions <br />4<br />
The Informal Economy: Surprises<br />A ton of organized financial activity occurring here: ROSCAs, savings groups, etc. . . . .<br />Greater flexibility and convenience in meeting financial needs than the formal banking sector<br />High levels of financial cash flow: lower incomes = more, not less active financial management<br />A lot of saving happening, but in different ways than in the formal economy<br />Greatest issue (?): Assets cannot be used to create capital<br />6<br />
The Informal Economy: Points for Further Discussion<br />How much does poverty alleviation entail helping poor entrepreneurs move from the informal to the formal sector? Costs and benefits?<br />Should MFIs help with this movement?<br />“Re-creation” of informal-sector financial services by outside agents (i.e. NGOs forming savings groups, etc.). How is this working/not working?<br />7<br />
The Informal Economy: Predictions<br />Not going away anytime soon! May even be expanding in a lot of places . . .<br />It’s going to take a long time before the majority of MFIs fully match the flexibility/convenience of informal sector financial services<br />8<br />
SURPRISES<br />Reliance on Social Collateral in Group Model<br />MFIs trust clients to use discretion in self-selecting themselves for groups, reducing overall risk and transaction costs<br />How “Do No Harm” applies to Microfinance<br />Maryoux: potential disempowerment in select cultures<br />Do MFIs understand local capacity?<br />Debate of double bottom line<br />Tension: feminist vs. economic empowerment<br />10<br />
PREDICTIONS & NAGGING QUESTION<br />Prediction:<br />There will be a shift from evaluation on outcomes at the institutional level to outcomes at the household level to identify consequences to users of microfinance services. <br />Nagging Question<br />Can the establishment of micro finance industry in Third World countries further complicate their pervasive poverty problems--based on the premise that the lack of microcredit is no the cause of the Third World's deplorable poverty situation. Also, as we have read microfinance ventures in the Third World has the potential to create private groups, which have vested interests in perpetuating their prevailing poverty situation.<br />11<br />
Financial Performance (Part I)<br />Surprising<br />Despite general consensus on the Financial Definitions Guidelines and a standard set of 16 financial ratios, there is no generally accepted standard for reporting financial performance.<br />
Financial Performance (Part I)<br />A Nagging, Unresolved Question<br />What will eventually compel national and international regulation of the microfinance industry – proactive choice or crisis response?<br />
Financial Performance (Part I)<br />A Prediction<br />The quest for greater financial sustainability will result in increasing segmentation of very poor and not so poor clients between for-profit and not-for-profit MFIs<br />
Financial Performance (Part II)<br />Surprising<br />That some MFIs are recreating the wheel by seeking out new organizations and rating systems to audit their financial performance while well-established agenices already exist with the ability to evaluate efficiency, effective management, and profitability.<br />
Financial Performance (Part II)<br />A Nagging, Unresolved Question<br />Will MFIs with fundamentally social missions like Grameen Bank voluntarily submit themselves to the same financial performance ratings as for-profit MFIs like Compartamos?<br />
Financial Performance (Part II)<br />A Prediction<br />The main MFIs, which account for most of the market, will eventually be rated by the same agencies that do so for mainstream financial institutions.<br />
Grameen Bank<br />Surprising<br />Grameen Bank recently created Grameen America in January 2008. Grameen America is currently serving 1400 borrowers in New York and Nebraska and has a loan portfolio of $3 million. <br />
Grameen Bank<br />A Nagging, Unresolved Question<br /> How much of Grameen Bank’s $640 million loan portfolio are loans which have been refinanced or are at risk? <br />
Grameen Bank<br />A Prediction<br />Grameen Bank has garnered enough positive publicity including most recently, the Presidential Medal of Freedom that despite loan portfolio concerns and harassment of borrowers they will continue to receive grants and function successfully. <br />
3 Main Models for Micro-Lending<br />Readings from:<br /><ul><li>Beth Rhyne (The Yin and Yang of Microfinance: Reaching the Poor and Sustainability)
Christopher Dunford, (The Holy Grail of Microfinance: Helping the Poor and Sustainable)
David Roodman, Microfinance Book, Chapter 4: “Background Check”, in-progress</li></li></ul><li>What Surprised Us<br /><ul><li>The terms of the loan structure and the constraints were much more extensive than we imagined they would be. For example, depending on the model, the terms of the loan were set, the number of participants who could borrow were set, the amount of the loans automatically escalated
There was a clear lack of flexibility for the borrowers
The degree of differences in points of view regarding the social role versus the importance of “sustainability”</li></li></ul><li>Our Predictions<br /><ul><li>The model of microfinance will gravitate towards the sustainability end of the spectrum as opposed to keeping the social mission first and foremost. In other words, microfinance does not look destined to help the poorest of the poor
As this industry evolves, more flexible and consumer-friendly products will be created and offered
Formal savings programs will play a larger role in the development of the credit product model</li></li></ul><li>Nagging Questions<br /><ul><li>How well can we hope to measure the social impact that these institutions will have on “lifting people out of poverty”?
How will the MFI industry reach the rural poor effectively?
Given our understanding of the importance of other financial products as both counterparts and contributors to the success of micro-borrowing, what is our prognosis for the development of these (specifically: savings vehicles and insurance products)?</li></li></ul><li>7SOCIAL PERFORMANCE<br />
Social Performance<br />Surprising<br />It’s impressive that the industry has social rating services such as M-Cril, and that there is an attempt to quantify relevant classifications (like Mark Schreiner’s poverty score-card).<br />
Social Performance<br />A Nagging, Unresolved Question<br />I really wonder how much these ratings will make a difference to MFI operations (will donors use them as part of their criteria for lending?)<br />
Social Performance<br />A Prediction<br />I don’t think social performance-focused MFIs are going anywhere, despite the entrance of private sector actors. Microfinance is only becoming more sexy as an avenue where people can realize their philanthropic goals (just look at growth of Kiva).<br />
Surprises<br />Targets rural and low-income customers, small enterprises<br />Dependent on CEO <br />Competitive market<br />33<br />
More to Discuss<br />What will happen if the “face of the bank” leaves?<br />Agricultural loans are high risk for bank<br />Projects its urban business to overtake its rural business<br />How do we determine whether we invest?<br />How does Khan continue to target rural customers but stay self-sufficient?<br />34<br />
Predictions<br />Increased competition and MF market saturation unviable MFIs will drop out, interest rates balance out<br />Khan will stay in business, but build urban and commercial customer focus<br />Social bottom line will give way to purely profit-driven?<br />35<br />
Enter the Banks<br />Surprise! The case of ADOPEM in the DR seems like a rare example of an MFI that has transformed into a formal bank without fundamentally changing its social mission. ADOPEM maintained its focus on serving low-income female borrowers, holding true to its mission and founding principles. Perhaps under certain conditions, including good leadership, the double bottom line is possible…<br />
Enter the Banks<br />Prediction: The field of providing financial services to the poor will continue to become more competitive and more regulated, and corporate banks will increasingly fill the gaps in services that originally gave rise to the field of microfinance.<br />
Enter the Banks<br />Nagging Question: Is this process of “enter the banks” a social good in and of itself and an important part of “development” (i.e. institution building)?<br />
Branchless Banking: Surprises<br /><ul><li>Evolving from poverty alleviation to facilitating money remittances, the service has expanded into a medium for savings and engaging in more sophisticated financial activities
Formal financial institutions (at least in Kenya) welcome this idea despite more competition introduced against its own product offerings
UK’s DFID (Dept. for International Development) proves that government agencies can be effective in coordinating private/public collaborations</li></li></ul><li>Branchless Banking: Predictions<br /><ul><li>Safaricom (or Vodafone) will spin off this business and make it into the non-profit or CSR business of its entire telecommunications operation
Mobile-microfinance will proliferate in other developing markets that lack road and landline infrastructure
Rural-urban transfers will continue to dominate the usage, and international transfers of money will remain difficult due to logistical and regulatory issues </li></li></ul><li>Branchless Banking: Unanswered Questions<br /><ul><li>Who will be responsible for regulating this service, the telecommunications sector or the financial sector?
What kind of social impact will mobile-microfinance have on the rural-urban dynamics in Kenya?
If a for-profit company decides to fold this project (e.g. Safaricom) what happens to all the subscribers? Who takes responsibility for them?</li></li></ul><li>12MICROINSURANCE<br />
Microinsurance<br />Surprise: NGOs as distribution channel of value chain (including claims management)<br />Prediction: Increased prevalence of market research (performed on both for-profit and non-profit basis)<br />Open question: Pricing on crop/weather insurance; health insurance<br />47<br />
Irrelevant products prior to KickStart<br />Time and cost savings doesn’t necessarily mean sales<br />Subsidy goes to supply chain, rather than the product itself<br />Surprises<br />49<br />
Value-chain financing and technology developments will be the next “big thing” in development<br />Issue is that traditional aid and assistance programs, or subsidized microfinance programs, might not continue to receive the funding that they need<br />Predictions<br />50<br />
Given that much of KickStart’s success can be <br />attributed to the leadership of Martin Fischer and Nick Moon, <br />how replicable is this approach? Is there<br />incentive / enabling conditions for similar <br />ventures to crop up in the future?<br />How does KickStartcompare to other <br />“value chain” approaches? (e.g. VisionSpring)<br />Issue of financing: <br />Could this product have been <br />developed and marketed <br />without subsidy? Why or why not?<br />For further discussion<br />51<br />
Competition for sales to the poor<br />Combining “e-learning” with self-help group economic activities<br />Surprises<br />53<br />
What does a good market analysis to the rural poor look like?<br />How does SHCG economic activities and their “e-learning” build off each other? Is that an effective model?<br />More to Discuss<br />54<br />
Consolidated supply chains<br />More market research around poor <br /> communities<br />With more options about where to spend money, the rural poor will have an even greater need for appropriate financial management tools.<br />Predictions<br />55<br />
Micro-franchising: Surprises<br /><ul><li>Micro-franchising has been successful in traditionally aid-driven enterprises such as health provision (e.g. VisionSpring).
Replication and standardization is possible at a low cost even in areas with poor infrastructure and communications.
Motivation, education level and ability to follow procedures are the strongest predictors of microfranchisee success, even more so than entrepreneurial spirit and business experience</li></li></ul><li>Micro-franchising: Predictions<br /><ul><li>Micro-franchising is likely to benefit the more educated entrepreneurs, not the “poorest of the poor”.
Concerns about quality control and standard service provision, especially in advanced health care, will prevent some businesses from adopting the micro-franchising model.
Micro-franchises will partner with MFIs for financing of micro-franchise operations.
Most microloans for ‘copycat’ businesses anyway</li></li></ul><li>Micro-franchising: Unanswered Questions<br /><ul><li>How do we mitigate the risk of franchisor failure with potentially disastrous effect on franchisees?
Is the “triple bottomline” of healthcare micro-franchises a realistic goal? What might be sacrificed on each front?
Can micro-franchising become scalable and profitable to the same extent that some MFIs have? </li></li></ul><li>17ENVIRONMENTAL SUSTAINABILITY<br />
Environmental Sustainability: Surprises<br />Best practice of Microfinance: Microfinance as a tool toward environmental sustainability. <br />Triple bottom line: profits – people – planet <br />However, often, financial component of environmental projects are not sustainable<br />High upfront costs in S-T but will reduce operational costs in L-T with increasing profits.<br />
Environmental Sustainability:Predictions<br /><ul><li>The growing focus of the international community over environmental issues, including Climate Change, will encourage the implementation of development programs which promote sustainable development in developing countries.
Therefore, we predict an increase in environmentally friendly development projects financed and managed by MFIs; MFIs will gradually increase their capacity to outreach the double bottom line between social (poverty reduction) and environmental objectives (less Co2 emissions). (ex. MFIs financing the implementation of low carbon-intensive stoves for rural households).
We shouldn’t disregard the prohibitive initial costs of many greener alternatives. The direction of the business will be towards a more sustainable development, but the process towards this direction might be slow. </li></li></ul><li>Environmental Sustainability: Questions<br />Carbon intensity urban dwellers > rural dwellers<br />Why Envt. Sustainability focus on rural MF? <br />Environmental Sustainability &MF Sustainability<br />Mutually Compatible?<br />
BRAC and the Value Chain: Surprises<br />BRAC heavily invested in its supply chain that helps clients - from finding business opportunities/ feasibility to launching the products into the market.<br />Sustainable for BRAC<br />Improve productivity for clients<br />The projects are very flexible and are truly driven by customers’ needs.<br />
BRAC and the Value Chain: Predictions<br /><ul><li>Bigger involvement of the Governments in each step of BRAC’s value chain. In Bangladesh the Government is already playing a more active role and, acknowledged the success of the organization, it will try to gain more exposure in order to claim some of the benefits achievable through BRAC’s projects.
The increasing involvement by Governments (partnership) will also be facilitated in the event that the institutions will not adjust their overall financial performance (i.e. ROE, ROA, Debt/Equity - http://www.mixmarket.org/mfi/brac/data)
BRAC will further expand its business geographically in many other African Countries than the ones covered today. As a result of this, its gross loan portfolio and number of active borrowers will continue to increase. </li></li></ul><li>BRAC and the Value Chain: Questions<br /><ul><li>If BRAC collapses:
Should Bangladesh start ‘bailing out’ MFIs?</li></li></ul><li>19AFGHANISTAN CASE<br />
Microcredit in Kabul: A surprise from the reading<br />The MFI in the reading appeared completely unaware of the context in which it was operating.<br />No basic understanding or cultural sensitivity vis-à-vis working with women in an Islamic country.<br />No understanding of the economics of the village in the study and the villagers’ ability to repay credit.<br />The MFI did not evaluate or seem interested in whether their was even a need for credit.<br />The surprise? The MFI was BRAC.<br />71<br />
Microcredit in Kabul:A prediction or two<br />BRAC will realize that it can’t simply export its model from Bangladesh to any other country without modifications.<br />One hopes that BRAC will learn from its mistakes in Afghanistan, although Professor Wilson indicated that they turned a blind eye to the criticism in the study.<br />Aid agencies will be more careful in pushing micro-credit as a panacea, especially in “post-” conflict areas such as Afghanistan.<br />72<br />
Microcredit in Kabul:A question or two<br />Is there any indication that aid agencies, etc., are becoming more aware of the problems created by pushing supply-driven MFIs in conflict areas or elsewhere?<br />Has BRAC started operations in any other new countries since its experience in Afghanistan, and has it had better success?<br />73<br />
Prudential V. Non-prudential regulation<br />Prudential Regulation<br />Aims to protect financial system as a whole.<br />Regulates capital adequacy norms, reserves and liquidity requirements.<br />Dictated by government, State, or official third- party laws and mandates<br />Non-Prudential Regulation<br />Governs conduct of business practices<br /> Regulates disclosure of interest rates, standardized contracts, transparency of terms, and fraudulent marketing practices.<br />Safeguards interest and rights of consumers. <br />75<br />
Policy to cope with high interest rates<br />76<br />
New Models for MF Regulation<br />Stronger consumer protection laws and enforcement. (South Africa)<br />Alternative Dispute Resolution Forums<br />Hot-lines for complaints<br />Debt-relief agencies<br />Consumer-rights education.<br />Interest caps that have product and market relevance.<br />77<br />