Financial Services that Clients Need - The 3.0 Business Models - Reconciling Outreach with Sustainability

Transcription

1 Financial Services that Clients Need - The 3.0 Business Models - Reconciling Outreach with Sustainability Berlin, 29 November 2012 Robert Peck Christen Maxwell School of Citizenship and Public Affairs, Syracuse University Boulder Institute of Microfinance and Sustainable Development Session 3 KfW Financial Sector Development Symposium 2012

2 Formal finance can improve the lives of the population The development of finance is linked to overall economic growth Microfinance has contributed to improve lives by supporting income- generating opportunities, smoothing consumption; helping meet important family goals 2

3 Formal finance can improve the lives of the population Barriers for Banks to Serve the Poor INSTITUTIONAL PERSPECTIVE Transacting with the poor is very expensive for brick and mortar banks, so they avoid it. High Cost for Providers to Serve the Poor The poor are regarded as risky. Banks can earn more doing other businesses with the general public. CLIENT PERSPECTIVE Banks are not nearby, easy to use, affordable High Cost of Products for the Poor Low Value of Products for the Poor Products are inappropriately designed or sized and cumbersome to obtain 3

4 Relative market penetration of microcredit 4

5 Primary Livelihood Segmentation of World s 2.6 Billion Poor Living on < $2/day 1 Stated target of microcredit movement Source: Oliver Wyman. 1 We recognize that microfinance organizations reach many others outside of this target population and above $2 / day, particularly small holder farmers in Asia, and that, while we have segmented the poor by their primary livelihood, most have diverse income sources. 5

6 Life-cycle events Education: People need lump sums of money available two to three times per year to pay for their children s school tuition, textbook costs, and exam fees Income & Consumption: Many rural households manage multiple, irregular, and seasonal income streams (e.g., farming, casual labor, etc.) Health: Unexpected doctor visits or surgery require payments in cash, and can cost between 7-66% of annual household income Life Events: Weddings, rituals, or deaths require lump sums of money as they can cost 3-20% of annual household income and can be unexpected Protection from Bumps and Shocks: The poor try to insure against unexpected illness, economic crises, or natural disasters by saving money and diversifying their income and assets Enterprise Growth: For micro business and growing farms, working capital loans and savings are needed to buy equipment, purchase inventory, and invest in customer outreach 1 Source: Chen, M. and Snodgras, D. Managing Resources, Activities and Risk in Urban India: The Impact of Sewa Bank (2001); Cohen M. Microfinance, Risk Management and Poverty (2001). 1 Accessing working capital loans or building up savings are especially important for enterprise growth, because purchasing raw materials and supplies in larger volumes can lead to lower prices 6

7 Client centered innovations that build on the core products and delivery channels Designing next generation products for clients (examples): Specialized micro-credit Agricultural microfinance that can make loans that respond to the specific cash flow needs of small farmers Small business finance that uses appropriate loan origination techniques for more complex businesses that are still mostly family owned/operated Saving mobilization Products linked to the specific goals and agenda of the families (commitment accounts for educational fees, farming inputs) Micro-insurance Move beyond credit-life products The MILK project is looking at the value for clients to sharpen design 7

8 Version 3.0 business models that take advantage of new delivery channels to improve client service Agent banking (including mobile money) represents the potential to dramatically drive down transaction costs Dramatically lowered transaction costs have the potential to allow for dramatic design improvements in the design of products that can be tailored more precisely to the cash flows and financial objectives of the poor, Success with new delivery channels will require partnerships among very different organizations, with objectives that do not always align with each other (ie. Telcos, banks, retail chains, insurance companies, and microlenders. The existence of agent banking networks does not guarantee the poor will be served; the only thing that will is the commitment of socially oriented organizations in the mix. They will continue to require support. 8

9 Strong institutions are necessary to serve clients with more tailored individualized financial services Only strong institutions can provide a range of sophisticated and individually tailored products, Volume and scale-economies will be fundamental to success, Fortunately, microfinance is highly concentrated in most countries; the 5 largest MFIs reach more than 80% of clients nationally, But there are still many countries where no MFI is ready to help build (Version 3.0) agent banking business models. 9

10 Largest MFI Largest 2 MFIs Largest 3 MFIs Large microfinance organizations dominate national markets A few MFIs serve the majority of borrowers in a country 1 '' 4 MFIs '' 5 MFIs Median Market Share (percentages) Source: Combined MIX & MCS data 1 Gonzalez, Adrian and Richard Rosenberg (2006) The State of Microfinance Outreach, Profitability, and Poverty Findings from a database of 2600 microfinance institutions, World Bank. 30 May State of the Microcredit Summit Campaign Report Worldwide concentration: MFIs and Borrowers % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Weighted Average Growth Rate MFIs Borrowers 1,425 smaller MFIs 145 larger MFIs Annual Growth Rate in # Borrowers (weighted average)- all MFIs and Regions 2 2 Profitable Not Profitable Weighted by number of borrowers 10

11 IMPROVED FINANCIAL SERVICES AT THE DOORSTEP OF THE POOR: A world in which these opportunities are harnessed to enable poor families to access the portfolio of financial products they need most, in sizes they can afford, in places they can get to easily, and on a commercially viable basis Valuable and Safe Products: Savings, Insurance, Credit and Money Transfers/Remittances Accessible in the Neighborhoods of the Poor At prices that work for both the poor and providers Improved financial services will increase the wealth and assets of the poor so they can spend more on health, education, consumption, and other investments for their future 11

12 Thank you for your attention. Berlin, 29 November 2012 Robert Peck Christen Maxwell School of Citizenship and Public Affairs, Syracuse University Boulder Institute of Microfinance and Sustainable Development Session 3 KfW Financial Sector Development Symposium 2012