Building Domestic Financial Systems that Work for the Majority

Women’s World Banking

Women’s World BankingAffiliates, Associates, GNBI and AFMIN Members provide

financial services to about 18 million low income entrepreneurs, in about 40 countries

BoliviaBrazilChileColombiaDominican RepublicEcuadorHaitiMexicoParaguayPeru

LAC

BeninBurundiEthiopia

The GambiaGhana

GuineaIvory Coast

KenyaMali

NigerNigeria

South AfricaTogo

Uganda

BangladeshIndia

IndonesiaMongolia

NepalPakistan

The PhilippinesSri LankaThailand

Bosnia-HerzegovinaJordanMoroccoThe NetherlandsRussian FederationSwitzerland

USANorth

America

Africa

Europe,ME andNorthAfrica

Asia

Why Microfinance Can Changethe Way the World Works

500 million poor entrepreneurs and producers, mainly women

1. 4.3.2.

Microfinance:

• Lending

• Savings

• Insurance

• Housing

• Remittances

Increases:

• Income

• Assets

• Security

• Confidence in future

Better:

Health

Population

Education

Community participation

Banking for the majority

Building Financial Services thatRespond to What Poor Women Want

What Poor Women

Want

Asset Building, RiskMitigating Products • Voluntary savings• Health and life insurance

Variety of Products• Housing loans• Education loans• Life cycle products• Business development

services

Group Individual Loans

Flexible Loans• Small initial loan sizes• Larger loans over time• Longer terms

No Traditional Collateral

Service• Rapid, convenient

access• Respect, connection

Source: WWB research

Building Core Microfinance Services―Focus on Income and Assets

Core Offerings

Flexible Working Capital

LoansEducation Loans

Housing Finance

Insurance

SavingsRemittances for

Microfinance

Consumer

Finance

Transfer Payments

Debit and Credit Card Facilities

Other Non-core Offerings in Inclusive Financial Systems

Key Non-Financial Products and Services

• Financial counseling and training

• Commercial linkages

• Health and education

• Business advisory services

• Dealing with legal barriers

What Low Income Women Needto Build Income and Assets—

Needs That Microfinance Can Meet Profitably

Market Penetration of

Target Market in Most Countries

Credit to fuel growth of productive activities <10%

Ability to accumulate savings <10%

Ability to finance housing, education, health care <1%

Life and health insurance <1%

The Core Paradigm in Building Financial Systemsthat Work for the Poor Majority

Encourage a range of financial institutions and methodologies:

• Commercial banks

• Regulated MFIs

• Microfinance NGOs

• Finance companies

• Coops, credit unions

• Grassroots organizations

Adopt standards on performance in:

• Client reach

• Efficiency, profitability

• Financial integration

• Impact

• Portfolio size, growth

• Portfolio quality

Provide appropriate support modalities—institutions that meet high standards need:

• Policies, regulations and legal structures that fit microfinance

• Access to finance that fits the institution’s size and stage

• The ability to mobilize savings

1. 3.2.

Policy, Regulatory and Legal Frameworks are Needed for Microfinance Operations

Key Features of Microfinance

Transaction costs are high

Clients lack conventional collateral

Simple MIS, accounting

Savings important to client and MFI

Many small branches

Loan officers not traditional bankers

Institutions need to be able to charge relatively high interest rates

Microloans as loan class, with portfolio Quality and lending methods--not loan Collateral—used to evaluate risk.

Simple while rigorous reporting requirements – with microfinancestandards and benchmarks

Ability for high performing MFIs to mobilize deposits from borrowers and from the public

Ability to establish branches and agencies rapidly

Flexibility in hiring, andperformance-based incentives

ResponsiveFramework

Focus for Country Actionsin the Next Three Years

• Retail capacity needs to be built in most countries

• Savings and other asset building products require attention

• Transaction costs need to be reduced

• Financing that fits different stages of MFIs is needed in many markets

• Country-level visions and strategies—built by key stakeholders

• Policies, regulation, legal structures need to be implemented

• Key elements of institutional infrastructure need to be constructed

• Performance indicators and standards need to be implemented

• Increased attention is needed in measuring impact of microfinance

• Government and private sector have important roles to play

Interest rates

Financial sector

policies

Governmentpolicy

Regulations, supervision

Legal structures

Legal systems

Performance indicators

Governmentrole

Policy

IndustryInfra-structure

Financing Microfinance – Domestic Capital Markets

Domestic capital

markets

Tech service providers

Wholesale financial

institutions

MF networks,

associations

Rating agencies

Credit bureaus

Tech applications

Payment systems

Donor support

Business services

Savings mobilization

Wholesale financing

Bonds, securitizations

Grants for smaller MFIs

Guarantee mechan-

isms

Transpar-ency

Healthy market overall

Commercial Banks

Micro-FinanceNGOs

RegulatedMFIs

Coopera-tives, Credit

Unions,

Savings Grass Roots Groups

OthersRetail Capacity, Supply

Product Offerings

Impact in Poor Households

Savings Microloans – Working Capital

Insurance Remittances, savings, assets

Income Assets Education, Health

Women’s Decision-making, Power

Community Participation

Building Blocks of Domestic Financial Markets That Work for the Poor Majority

The nine most important measures for building the policies, regulations and legal structures for financial systems

that serve the poor majority

1. Liberalized interest rates for microfinance, relying on competition and transparency to lower costs and rates

2. Inclusive financial sector policies that incorporate measures to ensure responsive, solid services to the poor

3. An explicit, supportive government policy and strategy for microfinance, with objectives, key policies and support, roles

4. Regulations and supervision capacities that respond to the characteristics of microfinance.

5. A range of suitable legal structures that enable organizations of different types and sizes to provide diversified microfinance products in a sustainable way.

6. Legal and judicial systems that support secured and unsecured lending7. Common performance indicators, definitions and standards8. Government’s role as an enabler, not retail provider9. Donor support to complement private capital, e.g., financing younger

institutions, capacity building, innovation and policy change

Key institutions and services that need to be in placeto support the build-up of solid,

responsive retail capacity in microfinance

• Technical service providers

• Wholesale finance institutions

• Microfinance networks, industry associations

• Rating agencies

• Credit bureaus

• IT platforms and application of technology

• Payment systems

• Information and business services for microentrepreneurs

• Domestic capital markets development

Key financial instruments and arrangements if the domestic financial market is to respond to the needs of MFIs

• Domestic savings mobilization

• Domestic wholesale financing

• Bonds and securitization issues

• Grants and soft loans to enable high potential MFIs to reach sustainable scale, and to support capacity building and innovation for MFIs at all stages

• Guarantee mechanisms

• Enhanced transparency, ratings, credit bureaus, information disclosure

• Healthy domestic capital market

Role of Government

DO DON’T

• Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system

• Create policies, regulations and legal structures that encourage responsive, sustainable microfinance

• Have government agencies provide retail microfinance

• Encourage a range of regulated and unregulated institutions that meet performance standards

• Back one model

• Support autonomous, wholesale structures

• Encourage competition, capacity building and innovation to lower costs and interest rates in microfinance

• Place interest rate ceilings on micro loans

Paradigm Shift in Retail Banking with the Poor

• Low interest rates

• Low repayments

• Low “know your customer”

• Minimal loan amounts

• Low, sporadic, and shallow outreach relative to demand

• Interest rates that cover costs, enable profits

• Excellent portfolio quality• Understand household

economies, economic activities of the poor

• Financial products and processes that respond to poor households, enterprises

• High outreach, impact

Compliance Culture Sustainable Microfinance

Leading banks and microfinance institutions are innovating to provide efficient, responsive,

sustainable services

InnovationsInnovations

Helping clients build assets and

mitigate risk

Cutting costs to clients and the

institutions

Mobilizing capital markets for

microfinance

Building new distribution

channels

• Average loan US$ 900

• Average savings account US$ $125

• Cross-selling of 3.4 products per client

• First banking experience for 50% of new clients

Moving to Customer Focus in Microfinance

Key areas for action

• Build retail capacity in microfinance

• Build the depth and diversity of product offerings

• Build domestic financial markets for microfinance

• Utilize technology to cut costs and expand outreach

• Build permanent state policies and country strategies

• Mobilize new actors, help them learn the business and play effective roles

Private Sector

Private Sector

WWBWWBNetworkMembers

Low Income Women

Low Income Women

Policy Makers, Donors

Policy Makers, Donors

Mobilizing Key Actors to Focus on the Majority

LARGEENTERPRISES

Middle Class

Low-Income Entrepreneurs and Households

Wealthy

Building Enterprise Systems that Treat the Poor as the Top Priority