Pyramids and frontiers of finance measuring access to finance. Forum for the Future. 24 October Mark Napier FinMark Trust

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1 1 Pyramids and frontiers of finance measuring access to finance Forum for the Future Mark Napier FinMark Trust 24 October 2006

2 2 The concepts Access frontier Finance at the BoP Centrality of the consumer Technology Opportunities for capital markets Concluding thoughts Presentation structure

3 South Africa LSM 6-10 (11.4m) 3 Access strands can be used to monitor trends and highlight differences within national markets Financially served - 80% Formally included - 77% Banked - 71% Financially excluded 20% Formal Other (Only) 6% Informal (Only) - 3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% South Africa all 16+ adults (30.7m) Formally included 54% Banked 46% Informal (Only) Financially excluded 29% South Africa LSM 1-5 (19.3m) Financially served 54% Formally included 49% Banked 31% Financially excluded 46% Formal Other (Only) Formal Other (only) Informal (Only) - 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Access strands - comparative data

4 Current frontier Market potential 4 Already use Have access but Could have access Unlikely to ever do not use but do not have access Current market Enablement Development Redistribution supra market Need to measure trajectory, speed and volatility of market development zone Access frontier

5 5 Remittances (incl grants) Indirect access Employment creation (SME) Current market Enablement Development Redistribution Market development can impact those in the supra-market zone

6 6 255, ,677 LSM ,153,064 (71%) (71%) 2,465,452 (22%) (2%) (5%) 302,506 LSM 1-5 6,172,474 2,922,394 (32%) (15%) 9,863,560 (51%) (2%) 0% 20% 40% 60% 80% 100% Banked Not banked other formal Informal but no formal None SA savings access strands Source: FinScope 2005.

7 Developmental microfinance (NGO) total clients (2003) 124,000 SEF alone has 32,000 (2005) total principal outstanding R56m (2003) total savings R34m (2003) poverty alleviation focus 7 Commercial microfinance (for profit) total microfinance book cr30bn massive growth (1995 R3.6bn, 1997 R10.1bn) buoyed by exemption from Usury Act leading to interest rates of 30% per month but new legislation will change this mainly consumption lending to salaried workers A tale of two credit markets (SA)

8 Established 2001 Headline earnings (Rm) CAGR 57% 8 ROE (%) branches, 2,000 employees Interim results 78% increase in earnings Deposits 375,000 (Feb 2006) accounts with R840 average deposit Innovation and consumer knowledge Capitec a BOP case study

9 9 Totally out of HML bounds R10,000+ Marginal to highly dubious developmental rationale & little to no competitive advantage R7,500 to R10,000 Predominant income profile of HML Borrowers, but marginal to bad risk profiles decrease viability R5,000 to R7,500 R3,000 to R5,000 With possible exception of Pensioners, mostly grant / subsidy / social welfare approaches most appropriate R1,000 to R3,000 <R1,000 Housing micro-lenders pyramid

10 10 Large market (numbers of people), small in relation to financial system (especially credit) R21.1bn microfinance (total credit R1.18 trillion less than 2%) as at February 2006 Credit is reaching very few of the poorest (directly), but: Social grants play a big role Positive developmental impacts of consumption lending? Karlan study: 2 nd most popular use of a microloan was transport to get a job Grameen style models do not scale in SA Bottom of the salaried pyramid is contested but rates remain resolutely high why? Legislation will require new credit frontiers to be tested SA s microcredit market - issues

11 11 Transaction banking Credit Cellphone banking Banking into rural areas Branchless banking Non-salaried Housing finance SME Insurance Non-mortgage (ie unsecured) Equity Household risks (fire, theft etc.) Non-funeral life New frontiers for finance in Africa

12 billion >$21,730 PPP per capita Prahalad - beware of malaise of measurement - what matters is dimensionality and directionality 4.0 billion 2.0 billion $3,260 - $21,730 PPP per capita <$3,260 PPP per capita ($458) Practical solutions that change the quality of life of the underserved Many African examples.in formal sector in finance alone Prahalad on data

13 13 have enabled credit access to a million clients ,000,000 Number of clients , , ,980 Mar 02 Mar 03 Mar 04 Mar 05 See

14 14 The concepts Access frontier Finance at the BoP Centrality of the consumer Technology Opportunities for capital markets Concluding thoughts Presentation structure

15 Characteristics of Small Business 15

16 Characteristics of Small Business 16

17 17 Comprehensive demand-side survey of consumers and financial markets Products, needs, attitudes and behaviour Segmentation model - FSM Baseline data, nationally representative, repeated over time FULLY FUNDED BY THE PRIVATE SECTOR

18 FSM population mapped by Census area boundaries 18

19 FSM population mapped by suburb 19

20 20 The concepts Access frontier Finance at the BoP Centrality of the consumer Technology Opportunities for capital markets Concluding thoughts Presentation structure

21 21 $1.0 $0.9 $1.72 $0.8 $0.7 $0.6 Approximate cost range per ATM transaction $0.5 $0.4 $0.3 $0.2 $0.1 $0.0 USA Brazil South Africa Kenya Malaysia Nigeria India From An inter-country survey of the relative costs of bank accounts Genesis (2005) for FinMark Trust Technology impact on costs per transaction

22 Banking outreach Beck, Demirguc-Kunt, Martinez Reaching Out (2005) 22 SA India Brazil Branches per 1,000 sq km Branches per 100,000 people ATMs per 1,000 sq km 6.5 n/a 3.7 ATMs per 100,000 people 17.5 n/a 17.8 Brazil and agency banking reduced number of municipalities from 26% (2000) to zero (2003) ATM densities in Africa are extremely low 1 ATM per 600,000 people in Tanzania capital investment deficit too great? Cross-cutting issues eg. power supplies, payment system interoperability Agency banking should be considered too 0.5% of the cost of establishing a full service branch ATM technology but also branchless

23 23 Technology promise should be celebrated how else to combat low population densities and huge distances? But, to be effective, it needs to (i) change supply landscape and (ii) be accepted by consumers Regulatory environment requires openness and certainty Must encourage diversity of supply Suppliers must pass on benefit of lower costs to consumers transparency! to send R300 to Botswana, costs R18.50 on the internet, R through Nedbank Consumer adoption issues Consumer need to experience benefits of network externalities Low levels of financial literacy generally Consumers prepared to use technology (65% - FinScope) but also prefer to deal with someone face to face (56%) Trust Need to keep perspective on technology promise

24 24 The concepts Access frontier Finance at the BoP Centrality of the consumer Technology Opportunities for capital markets Concluding thoughts Presentation structure

25 Scale up philanthropic initiatives Citigroup, Deutsche, Goldman, private equity industry Look for new ways of investing in microfinance for a return What happens when all the big MFIs have been upscaled? Equity focus angel networks Support market development/enablement initiatives in developing markets Technical support to capital markets development Collaborative investment in think tanks Help build information environment Direct innovation support product factory 25 How can capital markets engage?

26 26 Unmet demand is very great Access strands (and other tools) point us in a practical way towards the BOP Understanding the needs of consumers is paramount Lack of access is not the only reason people are unbanked but we can at least research and combat reasons for lack of access Technology Celebrate its potential but keep a perspective too Capital markets organisations can play a valuable role, even from afar Concluding thoughts

27 27 Key Key FinScope Africa 1st phase FinScope first Africa round 2nd completed phase FinScope Potential in initial FinScope stages Africa of roll-out 2 nd phase Identified for next phase of roll-out FinScope Africa concluded Country selection FinScope roll-out phases

28 28 Thank you