Overview� Financial Systems approach to microfinance

� Basic roles and functions of government and donors at various points within the financial sector

Khan bank serving 50% of

rural households (Mongolia)ProCredit

launches in multiple

countries

Smart cards, biometrics, mobile phone banking and ATMs (Bolivia,

Mexico, India, S. Africa, Kenya)

Links to insurance

companies and banks (Uganda, Peru) and direct

insurance (India)

Financial System

The Borders of Microfinance are Blurring

Financial Financial

ASA reaching 4.5 million clients with franchising model

(Bangladesh)Indian banks reach millions in

partnership with SHGs

Credit bureaus cutting cost and risk (Haiti,

Bosnia, Peru, Bolivia)

50+ countries working on

policy frameworks

that integrate microfinance

Microfinance

Financial Financial

Services for the Services for the

PoorPoor

Savings

Permanent

access to

financial

Financial Services for

the Poor

Loans

InsuranceTransfer

Payments

financial

services for

significant

numbers of

poor people

What Is the Financial Systems Approach to

Microfinance?

Clients

Micro: Suppliers of Microfinance

• Money lenders

• Input-Suppliers

Informal Suppliers of Microfinance

• Savings and Credit Cooperatives

• Self-Help Groups

• Savings Clubs

• Village Banks

Member owned

ClientsClientsClientsClients

• Village Banks

• Multi Purpose NGOs

• NGOs with Financial Sector Programs

NGOs

• Commercial Banks

• Non-Bank Financial Institutions

• Postal Banks

• Insurance Companies

• Remittance Companies

• Telecos

• Debit card providers

Formal Institutions

The Micro Level: A continuum of

institutions and delivery channels

Pros and Cons of Different Financial Service

Providers

Service Provider Examples Strengths Weaknesses

Informal Moneylenders

ROSCAs

Input suppliers

• Convenient and fast

• Close to clients

• Low cost operations

• Accessible to poor and

remote

• Some are insecure

and unstable

• Limited scope of

operations

• Rigid (clubs)

• Expensive

(moneylenders)

Member-owned Financial

cooperatives

SHGs

FSAs

CVECAs

• Indigenous

• Low cost operations

• Accessible to poor and

remote

• Profits used to benefit

• Governance

challenges

• Often lack effective

supervision

• Scale of operations • Profits used to benefit

members

• Scale of operations

limited

• Limited products

offered

NGOs Int’l network

affiliates

Domestic NGOs

• Knowledge of poor

clients

• Social mission driven

• More willing and able

to take risks to work at

frontier

• Often donor

dependent

• Limited range of

services; often no

voluntary savings

• Mostly small scale

• High cost of

operations

Formal Financial

Institutions

State banks

Rural or

community banks

NBFIs

Commercial banks

• Broad range of services

• Large branch

infrastructure and

points of scale

• Own capital

• Resources to invest in

technology and

innovation

• Profit motive may

dilute social mission

• Difficult to reach

very poor and

remote clients

• Products often do

not meet needs of

very poor

Meso: Infrastructure for

Microfinance

• Property/collateral registries

• credit reporting bureaus

• Apex Funds

• Payments systems

• Telecommunications links

Supportive Infrastructure

ClientsClientsClientsClients

• Business Development Services

• Trainers for Microfinance Practitioners

• Accounting and Reporting Standards

• Specialised consulting services

• Auditing and Rating agencies

• Industry Associations

• MIS Vendors

Supporting Institutions

Meso LevelFinancial Infrastructure

Transparency and Information

Payments and clearingSystems, interoperable POS andATMs

MIS, internal controls, ratings,benchmarking, auditing, super-vision and monitoring, credit

Technical Support Services

Business Associations and Networks

vision and monitoring, credit information

Specialized training, informationand onsite consultancies, links toValue chain and business training

Policy advocacy, informationdissemination, capacity building,performance monitoring

TelecommunicationsOnline MIS, links to POS, ATMS, Mobile phone banking

Meso Level: Debates� Should infrastructure and services be

microfinance specific or should microfinance experience be within mainstream providers?

� Are domestic service providers more appropriate � Are domestic service providers more appropriate than international ones?

� Should support services be provided on a purely market basis or on a subsidized basis?

The debate rages on!

Enabling Environment for

MicrofinanceStrategy, Strategy, Strategy, Strategy, Legal, & Regulatory Legal, & Regulatory Legal, & Regulatory Legal, & Regulatory InterventionsInterventionsInterventionsInterventions

– National Strategies for Microfinance

– Financial Inclusion Policies

ClientsClientsClientsClients

– Financial Inclusion Policies

– Law on Banks (and Microfinance Banks), KYC, AML, CFT

– Law on Microfinance Organizations

– Deposit Taking

– Non-Deposit taking

– Law on Savings and Credit Unions

– Laws on consumer protection

– Interest rate subsidies

– Rules governing financial institution creation

Role of Governments in Financial Systems

1. Set macroeconomic policies that affect the system

2. Promote inclusion by offering fiscal incentives for financial institutions to serve the poor

3. Review policies to remove barriers to financial inclusions3. Review policies to remove barriers to financial inclusions

4. Integrate microfinance providers into banking systems

5. Require transparency and disclosure of providers

6. Direct and indirect delivery of financial servicesNot all of these roles are created equal!!!

Maintain Macroeconomic Stability Through Appropriate

Monetary And Fiscal Policies

�Low inflation: inflation directly affects lending and saving interest rates

�Stable exchange rates: many MFIs borrow in foreign currency and must repay in foreign currency

�Solid financial infrastructure: promoting a strong financial sector

creates opportunities for microfinance

EXAMPLE: Adverse Effects of High Inflation

In 2004, Zimbabwe’s inflation rose to 600+%. The resulting need for frequent price changes disrupted MFIs, confused clients and ultimately decapitalized institutions. High inflation also created disincentives for savings.

Adjust Regulatory Frameworks

� Governments should adjust regulatory frameworks to allow different types of financial institutions to offer services to poor people

� Regulation should be proportionate to the risk

� Prudential regulation is generally only warranted when a critical mass of strong institutions exist

� Premature or restrictive regulations can stifle innovation

EXAMPLE: Restrictive Regulations

In the mid 1990s after the fall of the Soviet Union, many former Soviet republics like Russia and Ukraine had financial sector frameworks that made it illegal for any institution except a bank to make loans. This:

� limited poor people’s choices and access to services� limited the supply of institutions in the market.� was overly restrictive without adding greater protection to users of

the system.

Involve The Private Sector In Formulating

Poverty Reduction Strategies

� Recognize the private sector’s leading role in financial sector development (as opposed to government bodies). Recognize limits on government direct involvement in service provision and/or set time limits

� Promote active participation of the private sector to help to embed microfinance firmly within financial systemsto embed microfinance firmly within financial systems

� Remove constraints to private sector involvement and deploy various incentives

Providing enough certainty for the

private sector to operate, innovate,

and expand without unfair competition

is vital!

What Kinds Of Government Interventions Harm

The Development Of Microfinance?

� Interest rate ceilings

� Provision of credit at the retail level

� Subsidized lending programs � Subsidized lending programs

� Political interference

Role of Donors in Financial System

Approach

Level Possible Actions

Macro Support proportionate regulation, provide support for regulator training, assist in donor strategies, link to global initiatives

Meso Build meso level actors, link microfinance providers to systems Meso Build meso level actors, link microfinance providers to systems (information, payment, etc), build up service providers (audit, ratings), require transparency and consumer protection, avoid overspecialization

Micro Strengthen service providers, support experimentation and innovative approaches, start-up capital or technical assistance, build local ownership, foster local capital

Client Understand needs and demand of clients, enable others to repond, Support financial competency strategies, help establish baseline, support experimentation, innovative approaches to financial literacy

Key Principles for Microfinance1. The poor need a variety of financial services not

just loans.2. Microfinance is a powerful instrument against

poverty.poverty.3. Microfinance means building financial systems

that serve the poor.4. Microfinance can pay for itself, and must do so,

if it is to reach large numbers of poor people.5. Microfinance is about building permanent local

financial institutions.6. Microcredit is not always the answer.

Key Principles cont.7. Interest rate ceilings can damage poor people’s

access to financial services.

8. The government’s role is as an enabler, not as a direct provider of financial services.direct provider of financial services.

9. Donor subsidies should complement, not compete with the private sector.

10. The key bottleneck is the shortage of strong institutions and managers.

11. Transparency and outreach are of critical importance.

What is the role of YOUR

institution?