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Microenterprises, Microcredit, Access to Finance: Building a regulatory framework for microfinance

Robert Peck Christen

Microenterprises, Microcredit, Access to Finance: Building a regulatory framework for microfinance

Robert Peck Christen

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As a central banker, how do you create a microfinance

industry?

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Nature of Microfinance Challenge in Big Markets

•Largest programs•Negligible market penetration•Stagnant growth in major urban areas

Yet – continued claims of low rate banking services in urban neighborhoods…….

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• Microenterprise – key to employment

• Microcredit – tool poverty alleviation

• Access to finance – motor for economic development

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Figure 1 – Latin American Microfinance by Institutional Type

19982003

(#) (%) (#) (%)

Total 1,367 100% 3,989 100%

Commercial Banks 297 22% 1,382 35%

Non Bank Financial Institutions (NBFIs) 451 33% 597 15%

Non Governmental Organizations (NGOs) 619 45% 2,010 50%

Source: CGAP Inventory of Microfinance Institutions in Latin America, 1999 and Global Numbers, 2003

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Number of Clients 1998

NBFIs

Banks

NGOs

Portfolio Outstanding 1998

NBFIs

Banks

NGOs

Source: CGAP Inventory of Microfinance Institutions in Latin America, 1999

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Microfinance in Latin America•Started as microenterprise finance

•Credit driven

•Multiple institutional types lend

•Profitable

•Not yet profitable enough to attract real venture capital

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Microfinance has Evolved

Broader range of financial services(savings, insurance, remittances)

Broader range of clients (more rural, less and more wealthy)

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Blurring of the Lines

Consumer finance companies may be lending to more microenterprises than specialized programs

Financial infrastructure proposed by Access approach essential to lower transaction costs, poverty alleviation

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Blurring of the Lines

Microenterprise lenders have special knowledge required by consumer finance to improve service, profits

Banking sector has far more liquidity than targeted lenders can ever use

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20%

20%

20%

20%

20%

Income Level

Sector Formal

Sector Informal

RURAL URBAN URB RUR

SALARIED

SALARIED

Non SALARY

COVERAGE MAP OF MICROFINANCE

Banks

FinanceCompany

Ag Banks

Microcredit

Microenterprise

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Your approach to building a system for access depends most

fundamentally on whether you believe these services can be

provided on a commercial basis.

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If you take an access approach…….

Regulatory issues tend to disappear as MF disappears into bank portfolios

(Chile)

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If you take a microenterprise, microcredit approach……..

Regulatory role is central to enable alternative institutional types, banking relationships

(SCMs, banking correspondents)

Inferior path – more work, higher cost, poorer service, higher systemic risk, more subsidy – Only worthwhile if you believe that commercial finance will not reach down or out to a substantial marginal population that requires service

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System Support and Maintenance Costs

Failure of system to provide for product development and standardization, staff training, access to liquidity leads inevitably to the failure of a number of individual entities.

Support function is expensive and rarely self funded by individual entities in the system.

Self regulation virtually never works

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System Support and Maintenance Costs

Management intervention and protection against systemic risk essential to long term survival.

Represents a significant cost to individual entities, and to bank supervisors.

50 percent of supervision budget in Philippines3% of total assets of supervised entities in Peru

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Support and Supervision Costs

HIGH

Clients can pay

But repressed interest rate regimes such as that of Brasil will not leave enough margin to

cover these system costs – which means these activities won’t happen!

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Suggestions for Microfinance Regulation in Brasil

Establish MF profitability in BrasilRemove interest rate limits

Level playing field among all players

Consumer protection legislation and policy essential complement.

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Suggestions for Microfinance Regulation in Brasil

Infrastructure: POS, Data clearinghouse, clean-up legal

Continue work to make public finance infrastructure available to MF intiatives.

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Suggestions for Microfinance Regulation in Brasil

Subsidize entrance of credit unions, banks other commercial players into hard to serve markets through auctions

Mainstream MF knowledge, products

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If you must develop alternative delivery vehicles

Look to banks/investors for support, liquidity, product development functions, not to bank regulators or industry groups.

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Policy Discussion

Is it less expensive in the long run to follow an access approach, and let

competition drive banks down market than to subsidize the creation of a

large number of specialized MFIs that start down-market?

Is it an institutional question?

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Policy Discussion

Or, is it a knowledge, technology question?

Do we need to work harder to get the special knowledge about the poor,

their money, and how to serve them with financial services into the commercial banking sectors?

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Thank You!