Eight Business Model Breakthroughs for MicrofinancePresentation of Work in Progress, October 24, 2006
Task Force on Microfinance
The Challenge of Scale in Microfinance
Microfinance is a recognized tool for addressing poverty and empowering the poor.
Despite the important accomplishments of microfinance institutions, most of the potential clients of microfinance still lack access to quality financial services. Why?
Needed: Business models that can bring microfinance to scale
The Forum of Young Global Leaders (YGL)
A unique, multi-stakeholder community of the world’s most extraordinary leaders who are 40 years old or younger and who are ready to dedicate a part of their time and energy to jointly work towards a better future.
The 2020 Initiative – defining a vision for a world where sustainable economic development replaces the plague of poverty around the globe.
In association with the World Economic Forum
YGL Microfinance Task Force
Objectives
Public Awareness
Private Sector Engagement
Conducive Regulatory Environment
Specific Microfinance Projects
The Breakthroughs Project of the YGL Task Force
• Search for business model breakthroughs, especially related to scale and efficiency.
• Leaders from microfinance join counterparts from business and other sectors to exchange experience.
• ACCION International facilitates.• Eight key breakthroughs identified and presented here.• Work will continue on: Potential impact
Obstacles to expansion
Pathways to widespread adoption
Final paper to be presented at the World Economic Forum in early 07.
Conventional Wisdom in Microfinance
Widely held “truths” may block a breakthrough.
Loan officers are the cornerstone of
good microfinance.
Microfinance is about lending for
“productive” purposes.
Every MFI needs a custom-
tailored IT system.
Microfinance clients won’t
use new technologies.
Four Dimensions of Breakthroughs
Innovate for MF Clients
Adapt technology to fitMicrofinance clients
Upgrade MFI capabilities
Prepare MFIs to apply the innovation
Attract new players, support structures
Examples: credit bureaus, software companies Foster
policy or regulatory change
Innovations bring need to revise regulations
Breakthrough 1. Payment SystemsExerciseExercise
Make automated payment systems
available to microfinance
clients
Benefits to Clients and MFIs
Client convenience and security
Increased MFI efficiency; lower cost
Penetrate difficult locations
Mechanisms Card products: debit, credit, prepaid, etc.
Devices: ATMs, POS, cell phones
Challenges Few MFIs are members in payment networks
Products designed for middle class market
Clients are used to cash, as are vendors they use
Breakthrough 2. Mobile PhonesExerciseExercise
Turn cell phones into payments devices
Benefits
The ultimate in client convenience
Low income clients already love cell phones
Mechanisms
Cooperation between Telcoms and Banks
Sim card becomes payment vehicle
Text messaging to transfer money
Challenges
Infrastructure preconditions
Per-transaction fees high
Security vulnerabilities make regulators skeptical
IT System Basic Ops.
Connected Networked
Recoverable
IT System Basic Ops.
Connected Networked
Recoverable
Breakthrough 4. Improve MFI Information Technology Financial Management
and Reporting
Data MiningCredit Scoring
Understanding CustomersSocial Performance Monitoring
Connect to Payment Systems
ATMs, Cards, International Money
Transfer
Streamline Customer Interface
Teller transactionsLoan Approvals
MFI systems must perform all these functions well.
Breakthrough 5. New Channels to Reach Customers: Retail Networks
Traditional Model
MFI Branch
.
Loan Officer/
Branch cashierCustomer
Use of Retail Agent
.
Many models are possible.
MFI Branch -- ?Retail Agent
(Pago Facil)Customer
Retailer as Delivery Channel
Retailer
(Elektra)Retail Store Cashier/Clerk
Retailer Becomes MFI
Customer
Breakthrough 6. Offer Clients a Full Suite of Products
Monoproduct Full ServiceCredit Variety Credit & Savings
Credit:• Group• Individual
Credit:• Group• Individual• Housing• Consumer • Small
business
Credit:• Individual• Group • Housing• Consumer• Vehicle• Small
business• Pawn loans
Savings:• Current accounts• Programmed savings• Fixed deposits
Insurance:• Life insurance• Property insurance• Health insurance
Money Transfers and Payments:
• National• International• Utility bill payments
Credit:• Group • Individual• Housing• Consumer• Small
business• Vehicle• Fixed asset• Pawn loans
Savings:• current
accounts• Programmed
savings• Fixed
deposits
Payments:• Utility bills
From Mono to Multi-product
Breakthrough 7. Leverage the Mainstream Financial System
Bank Alliances
With MFIs
Concept: MFIs Reach Clients More Effectively• Conventional bank loan to MFI (many examples worldwide)• Investment banking services (Citibank and Compartamos bonds)• Bank purchases MFI portfolio (ICICI partnership model)• Bank uses MFI as deposit collection agent (Brazil model of banking
correspondents)
Banks as Retailers
Concept: Banks Have Advantages MFIs Cannot Duplicate
• NGO-MFIs become banks (BancoSol, Mibanco, Compartamos, etc.)• Bank establishes microfinance subsidiary (Pichincha, Sogebank)• Bank adapts consumer lending to microfinance market (Banco de
Trabajo, Peru) • Bank provides savings and payments services but not loans (Post
Office Savings Banks)
Mainstream banks offer: low cost of funds, known brand, branch infrastructure, technology, connection to payment systems.
Breakthrough 8. Create a Supportive Policy Environment
BasicMinimum Conditions for Microfinance to
Operate• Stable macroeconomic and political situation• Liberalized financial sector with quality supervisors
MicrofinanceFriendly
Microfinance-Specific Concerns• No interest rate caps – market-determined• Government respects its role as rule-setter, not service provider• May have special categories for microfinance
ForwardLooking
Policies & Regulations Keep Pace with New Developments
• Policymakers pursue access to financial services for all as goal• Regulators work with industry to ensure security for new
technologies such as cell phones• Regulators and industry cooperate to ensure consumer protection
A country’s policy environment may determine whether or not microfinance takes off.