Poverty Alleviation, Micro-enterprise Finance, Access; The transformation of microfinance Robert Peck Christen President, Boulder Institute of Microfinance November 3, 2005
What is Microfinance? For many, microfinance is shorthand for broadening the access to financial services to most of the population, the bulk of whom are poor, to enhance their economic activities and reduce their vulnerability to life s shocks. For others microfinance really means providing tiny loans to very poor and marginalized individuals, mostly women, to help them become economically active and raise themselves out of poverty
Microfinance in South Asia Started as poverty alleviation tool Credit driven Lending through non-profits Deeply suspicious of profit motive Much of it sees credit as a temporary assistance, from which poor should be weaned
Microfinance in Latin America Started as microenterprise finance Credit driven Lending thru multiple institutional types Commercially oriented Not yet profitable for real venture capital
Microcredit Summit numbers combine the microenterprise approach with the poverty alleviation approach 80 million micro-loans as of 12/2004 50 million of these were to families who were among the poorest when they started
Market Penetration Rates in Large Countries Target Population Number of Microloans % Penetration Brasil 16,000,000 350,000 2 Mexico 10,000,000 500,000 5 Nigeria 12,000,000 1,000,000 8 Pakistan 10,000,000 400,000 4 China 120,000,000? India 100,000,000 17,000,0000 17 Bangladesh 15,000,000 10,000,000 66 Indonesia 20,000,000 8,000,000 40
Who Does Microfinance? While specially devoted microfinance institutions such as Grameen Bank and its replicators garner most attention, microfinance is highly successful in all sorts of organizations worldwide: Credit Unions, State Banks, NGOs, Private Banks, and Finance Companies
Is There a Right Method? Diversity is the hallmark of successful microfinance in most countries where it is most advanced (notable exception Bangladesh where government owned funder has deliberately repressed innovation).
Modern Microfinance has Evolved Broader range of financial services (savings, insurance, remittances) Broader range of clients (more rural, less and more wealthy)
Blurring of the Lines Micro-enterprise lenders are looking both up and down market, and out into rural areas for growth and profits Poverty lenders are linking with commercial banks as a vital source of funds, and place to keep client s deposits
Blurring of the Lines Consumer finance companies may be lending to more micro-enterprises than specialized programs in some countries Financial infrastructure is lowering transaction costs, which is key for poverty alleviation in some countries
Blurring of the Lines Micro-enterprise lenders have special knowledge required by consumer finance to improve service, profits Poverty lenders have community level access on large scale that may be critical for financial services providers
Why is this happening?
Returns to Microfinance 2002 AROA FSS OSS INDIVIDUAL 3.5 121 129 SOLIDARITY 5.6 120 128 VILLAGE BK 1.9 115 119 LOW 2.8 122 133 BROAD 3.0 116 124 HIGH 1.4 110 113
For most of the microfinance target market Cost Recovery Quest for Growth/Impact Leads to Profitability Commercialization For the harder to serve Competitive Market Commercialization defines areas needing further or continual subsidy
Cost Recovery / Commercialization Cost recovery IS commercialization If you need to charge 31% effective rate of interest to break even, it just isn t too difficult to charge 36% and have a return that builds your institution s capacity to sustain permanent growth. A 5% return on assets in a leveraged institution (5x) provides 25% return on equity, which in turn supports growth in portfolio of 25% annually, almost doubling every 3 years.
Success Breeds Success Being successful at reaching a large number of poor, will attract copycats occupying similar space We might call this competition Competition breeds greater commercialization in the basic approach
Microfinance and Access Started as tool for access in towns, villages, in Asia Savings driven, credit secondary Sustainability not questioned, but systems have been repeatedly bailed out (not unlike commercial banking system)
CGAP believes that there are over 750 million accounts in institutions geared towards serving lower-end markets and that many of the owners of these accounts/clients are likely to be poor people Financial Institutions with a Double Bottom Line : Implications for the Future of Microfinance by Robert Christen, Richard Rosenberg, and Veena Jayadeva
All Institutional Types - Accounts Loans Deposits Combined Africa 5,193 23,915 26,790 East Asia Pacific 88,133 253,634 319,406 {exclude China) {46,741} {110,215} {156,924} ECA 548 17,357 17,718 LAC 5,332 10,041 14,198 MENA 6,832 46,230 48,670 South Asia 46,217 221,999 238,245 {exclude India) {23,760} 178,347} {187,812} Total 152,255 573,176 665,028 % Total AFIs 100% 100% 100%
Transactions cost key to reaching down Scale and security arrangements are drivers of transaction costs Need to spread out large number of very small transactions in point close to residence/workplace to keep TC low for everyone True for both credit and deposit services
Economics of small balance accounts L.A. Cost per transaction at the teller window Medium sized MFI 3-5 dollars Commercial bank 1-3 dollars Postal Savings, other small retail 0.1-0.3 dollar Cost of administering $100 account for one year with 24 transactions (+overhead 50%) MFI $144 Commercial bank $ 72 Postal savings, other small retail $ 7
Brasil: : POS Access Initiative Recent accomplishments (May 2005): Points of service CEF (agências lotéricas) 12.027 Bradesco (agências dos correios) 5.490 Lemon Bank 3.242 Numbers Transactions Payments 783 million Savings accounts opened 7.4 million Credits 0.8 million Coverage All 5,800 municipalities in Brasil (added 1,600 had no prior service)
Breaking Down Barriers to Access in Brazil In 75 municípalities where the only means of access is by boat, ship, or private plane Autazes - AM 140 km da Agência Manaus AM (14 horas de barco) Santa Rosa do Purus - AC 500 km da Agência Rio Branco AC (acesso por avião ou barco)
The final solution for providing access to the world s poorest must necessarily pass through commercial alliances with large scale retail infrastructure in order to drive transactions cost to clients low enough to sustain the viability of very low balance accounts. In most cases, government holds the key to resolving the issue of access it controls the infrastructure, and the policy environment to make it available.