Overview. Financial Systems approach to microfinance Basic roles and functions of government and donors at various points within the financial sector

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2 Overview Financial Systems approach to microfinance Basic roles and functions of government and donors at various points within the financial sector

3 The Borders of Microfinance are Blurring Khan bank serving 50% of rural households (Mongolia) ProCredit launches in multiple countries Smart cards, biometrics, mobile phone banking and ATMs (Bolivia, Mexico, India, S. Africa, Kenya) Financial System Financial Services Microfinance for the Poor Links to insurance companies and banks (Uganda, Peru) and direct insurance (India) 50+ countries working on policy frameworks that integrate microfinance ASA reaching 4.5 million clients with franchising model (Bangladesh) Indian banks reach millions in partnership with SHGs Credit bureaus cutting cost and risk (Haiti, Bosnia, Peru, Bolivia)

4 Financial Services for the Poor Savings Permanent access to financial services for significant numbers of poor people Loans Transfer Payments Insurance

5 What Is the Financial Systems Approach to Microfinance? Clients

6 Micro: Suppliers of Microfinance Informal Suppliers of Microfinance Money lenders Input-Suppliers Member owned Savings and Credit Cooperatives Self-Help Groups Savings Clubs Village Banks NGOs Clients Multi Purpose NGOs NGOs with Financial Sector Programs Formal Institutions Commercial Banks Non-Bank Financial Institutions Postal Banks Insurance Companies Remittance Companies Telecos Debit card providers

7 The Micro Level: A continuum of institutions and delivery channels

8 Pros and Cons of Different Financial Service Providers Service Provider Examples Strengths Weaknesses Informal Moneylenders ROSCAs Input suppliers Member-owned NGOs Formal Financial Institutions Financial cooperatives SHGs FSAs CVECAs Int l network affiliates Domestic NGOs State banks Rural or community banks NBFIs Commercial banks Convenient and fast Close to clients Low cost operations Accessible to poor and remote Indigenous Low cost operations Accessible to poor and remote Profits used to benefit members Knowledge of poor clients Social mission driven More willing and able to take risks to work at frontier Broad range of services Large branch infrastructure and points of scale Own capital Resources to invest in technology and innovation Some are insecure and unstable Limited scope of operations Rigid (clubs) Expensive (moneylenders) Governance challenges Often lack effective supervision Scale of operations limited Limited products offered Often donor dependent Limited range of services; often no voluntary savings Mostly small scale High cost of operations Profit motive may dilute social mission Difficult to reach very poor and remote clients Products often do not meet needs of very poor

9 Supportive Infrastructure Meso: Infrastructure for Property/collateral registries credit reporting bureaus Apex Funds Payments systems Telecommunications links Microfinance Supporting Institutions Clients Business Development Services Trainers for Microfinance Practitioners Accounting and Reporting Standards Specialised consulting services Auditing and Rating agencies Industry Associations MIS Vendors

10 Meso Level Financial Infrastructure Transparency and Information Technical Support Services Business Associations and Networks Payments and clearing Systems, interoperable POS and ATMs MIS, internal controls, ratings, benchmarking, auditing, super- vision and monitoring, credit information Specialized training, information and onsite consultancies, links to Value chain and business training Policy advocacy, information dissemination, capacity building, performance monitoring Telecommunications Online MIS, links to POS, ATMS, Mobile phone banking

11 Meso Level: Debates Should infrastructure and services be microfinance specific or should microfinance experience be within mainstream providers? Are domestic service providers more appropriate than international ones? Should support services be provided on a purely market basis or on a subsidized basis? The debate rages on!

12 Enabling Environment for Strategy, Legal, & Regulatory Interventions National Strategies for Microfinance Financial Inclusion Policies Microfinance Law on Banks (and Microfinance Banks), KYC, AML, CFT Clients Law on Microfinance Organizations Deposit Taking Non-Deposit taking Law on Savings and Credit Unions Laws on consumer protection Interest rate subsidies Rules governing financial institution creation

13 Role of Governments in Financial Systems 1. Set macroeconomic policies that affect the system 2. Promote inclusion by offering fiscal incentives for financial institutions to serve the poor 3. Review policies to remove barriers to financial inclusions 4. Integrate microfinance providers into banking systems 5. Require transparency and disclosure of providers 6. Direct and indirect delivery of financial services Not all of these roles are created equal!!!

14 Maintain Macroeconomic Stability Through Appropriate Monetary And Fiscal Policies Low inflation: inflation directly affects lending and saving interest rates Stable exchange rates: many MFIs borrow in foreign currency and must repay in foreign currency Solid financial infrastructure: promoting a strong financial sector creates opportunities for microfinance EXAMPLE: Adverse Effects of High Inflation In 2004, Zimbabwe s inflation rose to 600+%. The resulting need for frequent price changes disrupted MFIs, confused clients and ultimately decapitalized institutions. High inflation also created disincentives for savings.

15 Adjust Regulatory Frameworks Governments should adjust regulatory frameworks to allow different types of financial institutions to offer services to poor people Regulation should be proportionate to the risk Prudential regulation is generally only warranted when a critical mass of strong institutions exist Premature or restrictive regulations can stifle innovation EXAMPLE: Restrictive Regulations In the mid 1990s after the fall of the Soviet Union, many former Soviet republics like Russia and Ukraine had financial sector frameworks that made it illegal for any institution except a bank to make loans. This: limited poor people s choices and access to services limited the supply of institutions in the market. was overly restrictive without adding greater protection to users of the system.

16 Involve The Private Sector In Formulating Poverty Reduction Strategies Recognize the private sector s leading role in financial sector development (as opposed to government bodies). Recognize limits on government direct involvement in service provision and/or set time limits Promote active participation of the private sector to help to embed microfinance firmly within financial systems Remove constraints to private sector involvement and deploy various incentives Providing enough certainty for the private sector to operate, innovate, and expand without unfair competition is vital!

17 What Kinds Of Government Interventions Harm The Development Of Microfinance? Interest rate ceilings Provision of credit at the retail level Subsidized lending programs Political interference

18 Role of Donors in Financial System Approach Level Macro Meso Micro Client Possible Actions Supportproportionate regulation, provide support for regulator training, assist in donor strategies, link to global initiatives Build mesolevel actors, link microfinance providers to systems (information, payment, etc), build up service providers (audit, ratings), require transparency and consumer protection, avoid overspecialization Strengthenservice providers, support experimentation and innovative approaches, start-up capital or technical assistance, build local ownership, foster local capital Understand needs and demand of clients, enable others to repond, Support financial competency strategies, help establish baseline, support experimentation, innovative approaches to financial literacy

19 Key Principles for Microfinance 1. The poor need a variety of financial services not just loans. 2. Microfinance is a powerful instrument against poverty. 3. Microfinance means building financial systems that serve the poor. 4. Microfinance can pay for itself, and must do so, if it is to reach large numbers of poor people. 5. Microfinance is about building permanent local financial institutions. 6. Microcredit is not always the answer.

20 Key Principles cont. 7. Interest rate ceilings can damage poor people s access to financial services. 8. The government s role is as an enabler, not as a direct provider of financial services. 9. Donor subsidies should complement, not compete with the private sector. 10. The key bottleneck is the shortage of strong institutions and managers. 11. Transparency and outreach are of critical importance.

21 What is the role of YOUR institution?