micro capital monitor oct09 bonus

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MicroCapital MonitorTHE MICROFINANCE NEWSPAPER

OCTOBER 2009 BONUS ISSUE | VOLUME.4 ISSUE.10

BONUS PAPER WRAP-UP ISSUE

Acute Poverty Alleviation Through Womens Targeting by Microfinance Programsby Alexandra Dobra

Microfinance Mission Drift?by Roy Mersland and R. ystein Strm

Child Labour and Schooling Responses to Access to Microcredit in Rural Bangladeshby Asadul Islam and Chongwoo Choe

Competition and Wide Outreach of Microfinance Institutions

by Hisako KaiMicrofinance Policy and Regulatory Framework in Ugandaby General Caleb Akandwanaho S S

Do Interest Rates Matter? Credit Demand in the Dhaka Slumsby Rajeev Dehejia, Heather Montgomery and Jonathan Morduch

Who is Reaching Whom? Depth of Outreach of Rural Micro Finance Institutions in

Ghanaby Kofi Awusabo-Asare, Samuel Annim, Albert Abane and Daniel Asare-Minta

Global Recession and Sustainable Development: The Case of Microfinance Industry

in Eastern Europeby Dr Dragan Loncar, Christian Novak and Dr Svetlana Cicmil

Bringing Financial Services to Africas Poorby Kristin Helmore, Sybil Chidiac and Lauren Hendricks

Consumption, Commercial or Mortgage Loans: Does it Matter for MFIs in Latin

America?by Adrian Gonzalez

Strategies for Effective Loan Delivery to Small-Scale Enterprises in Rural Nigeriaby Benjamin Okpukpara

Building Social Business Models: Lessons from the Grameen Experienceby Muhammad Yunus, Bertrand Moingeon and Laurence Lehmann-Ortega

Asia Commercialise Microfinanceby Nicholas Kwan, Kelvin Lau and Elizabeth Lee

Microfinance Stakeholders - Guiding Hands

by Godfrey Supka

AML/CFT: Strengthening Financial Inclusion and Integrityby Jennifer Isern and Louis de Koker

Microinsurance: A Safety Net With Too Many Holesfrom Knowledge@Wharton

Financial Access 2009: Measuring Access to Financial Services around the Worldfrom CGAP (Consultative Group to Assist the Poor)

INSIDE Page

MicroCapital Briefs *

Microfinance news

Field Notes 2

Winds of Change in Arequipa

CGAP Microfinance Dealbook 3

Capital market transactions

Know a Fund 4

Microfinance Enhancement Facility

Market Indicators *

Courtesy of the MIX

Upcoming Events *

Industry conferences

Paper Wrap-ups 5

Latest research and reports

Subscribe to the Monitor 15

CGAP MICROFINANCE

DEALBOOK: Page 3

CAPITAL MARKET TRANSACTIONS

EVERY MONTH


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MICROCAPITAL MONITOR | BONUS ISSUE OCTOBER 2009 | VOLUME.4 ISSUE.10A

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EDITORIAL

Field Notes: Winds of Change in Arequipa

I have just returned from the XII Annual FOROMIC sponsored by theInter-American Development Banks Multilateral Investment Fund(MIF) in Arequipa, Peru, with the perception that the winds of changeare upon Latin Americas microfinance sector.

Over the past decade, commercial business models for microfinancehave been lauded as a sustainable mechanism for building inclusivefinancial sectors and providing economic opportunities for the largeunbanked populations in the region. Meanwhile, integrated models that

offer additional support such as business training, financial educationand health services fell out of favor, criticized primarily for not beingscalable. At this years FOROMIC, participants seemed more open tobusiness models that seek to help clients avoid over-indebtedness,become empowered and alleviate poverty for themselves and theirfamilies. Responsible lending was the catch phrase.

Experts are beginning to question the impact of purely commercialmodels on end users. Faced with deteriorating portfolio quality andweakened client loyalty, commercial microfinance institutions (MFIs)such as ProCredit, humbly stated that returns would be down

significantly in 2009 from 2008, but noted their commitment topromoting financial education for their clients going forward.Regulatory frameworks, in turn, may not be protecting loan consumersfrom an oversupply of loans. Rudy Araujo, Secretary General of the

Asociacion de Supervisores Bancarios de las Americas, suggested thatsupervisors have perhaps been wrong in assuming that market forceswould take care of the over-indebtedness problem on their own.

Mibanco, this years winner of MIFs Best Microfinance InstitutionAward has followed a nearly purist commercial model. This year, at theFOROMIC, Mibanco announced a partnership with MIF throughwhich the bank will offer business training for 100,000 of its womenclients. Dean Karlan and Martin Valdivias recent research in FINCAPeru (May 2009) shows that business training had a significant effect inreducing client desertion. This research suggests that integrated models

can make good business sense and begs the question of whether financialeducation can also have a positive impact on an MFIs bottom line. This

was a hot topic in Arequipa, where there was ample discussion about theneed to reduce over-indebtedness by offering financial education andgreater transparency.

The tone that I observed in Peru was perhaps sparked by the effects ofthe global financial crisis, but it was a long time coming. After a decadeof convincing commercial investors that microfinance is the best way toobtain a double bottom line, can the industry convince its investors toreconsider the business case for providing more than just financialservices? If we can re-shape the discourse, I have no doubt that we can

generate new and enthusiastic demand for socially responsibleinvestment in microfinance without sacrificing initiatives to providefinancial education and other important non-financial services by MFIsto their clients.

Ms Barbara Magnoni is President of EA Consultants of New York. An internationaldevelopment professional with over 14 years international finance and developmentexperience, she has worked at public and private organizations including GoldmanSachs, Chase, BBVA, EMPower and USAIDs Development Credit Authority. Shemay be reached at +1 212 734 6461 or [email protected].


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MICROFINANCE DEALBOOK

POWERED BY

TOP SEPTEMBER 2009 MICROFINANCE TRANSACTIONS

The CGAP Microfinance Dealbook publicizes microfinance capital market transactions in an effort to bring greater transparency to

the industry. Additional deals are published periodically at http://www.microcapital.org/cgap-microfinance-dealbook. Parties tomicrofinance transactions are also encouraged to submit their deals via this website.

Investor Investee Region Amount (USD) Type

Overseas Private Investment Corporation (70% risk participation) Citi * 250,000,000 Debt

Overseas Private Investment Corporation Microenterprise Growth Facility LAC 125,000,000 Debt

Banco de Credito del Peru Financiera Edyficar (Purchase from CARE) LAC 80,000,000 Equity

Small Industries Development Bank of India Bandhan SA ~51,900,000 Debt

Carlos Slim Foundation Grameen-Carso LAC 40,000,000 Debt

Dutch Ministry for Foreign Affairs Micro & Small Enterprise Fund (MASSIF) * 22,000,000 Unspecified

BlueOrchard Private Equity Asmitha Microfin Limited SA ~10,200,000 Equity

Inter-American Development Bank Microenterprise Growth Facility LAC 10,000,000 Equity

Banco de Credito del Peru Financiera Edyficar (Purchase from MicroVest) LAC 8,200,000 Equity

responsAbility Global Microfinance Fund ProCredit Kosovo ECA ~7,635,338 Debt

Sociedad Hipotecaria Federal Financiera Independencia LAC ~7,500,000 Debt

Micro & Small Enterprise Fund (MASSIF) Alios Finance Group SSA ~7,000,000 Debt

Impulse Microfinance Investment Fund (Incofin) ProCredit Holding WW ~5,844,000 Debt

responsAbility Global Microfinance Fund ProCredit Albania ECA ~5,090,225 Debt

Dexia Micro-Credit Fund (BlueOrchard Finance) VISION LAC 5,000,000 Debt

Triodos Microfinance Fund AccessBank ECA 5,000,000 Debt

Triodos Microfinance Fund India Financial Inclusion Fund SA 5,000,000 Equity

Triodos-Doen, Triodos Fair Share Fund & Triodos Microfinance Fund Prizma Mikro ECA 4,400,000 Debt

responsAbility SICAV Mikrofinanz-Fonds ProCredit Kosovo ECA 3,272,288 Debt

Hivos-Triodos Fund & Triodos-Doen KWFT SSA ~3,000,000 Debt

Dexia Micro-Credit Fund (BlueOrchard Finance) Opportunity Albania ECA 2,940,000 Debt

Dexia Micro-Credit Fund (BlueOrchard Finance) FINCA Kosovo ECA 2,917,000 Debt

Dexia Micro-Credit Fund (BlueOrchard Finance) Confianza LAC ~2,563,664 Debt

responsAbility SICAV Mikrofinanz-Fonds ProCredit Albania ECA 2,181,525 Debt

Impulse Microfinance Investment Fund (Incofin) Grameen FSPL SA ~2,078,790 Equity

Vision Microfinance Fund (Absolute Portfolio Management) CRAC Senor de Luren LAC 2,000,000 Debt

Rural Impulse Fund (Incofin) Crezcamos LAC ~1,562,175 Equity

Incofin CVSO Crecer LAC 1,500,000 Debt

Lok Capital Asirvad Microfinance Private Ltd SA 1,500,000 Equity

Dexia Micro-Credit Fund (BlueOrchard Finance) PRIZMA ECA 1,433,500 Debt

Regions: EAP - East Asia and Pacific, ECA - Europe and Central Asia, LAC - Latin America and Caribbean, MENA - Middle East and North Africa,SA - South Asia, SSA - Sub-Saharan Africa, * - Investee location may not indicate the final destination of the funding because investee is an intermediary

Amounts: Deals denominated in local currency are indicated by a tilde (~); a double asterisk (**) indicates that the transaction included funding of non-microfinance services and the amount shown is an estimate of the allocation specifically to microfinance


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SPONSORED CONTENT

KNOW A FUNDMicrofinance Enhancement Facility:An interview with Mark Berryman of theInternational Finance Corporation

Microfinance Enhancement Facility

The Microfinance Enhancement Facility (MEF) is a microfinance investment vehicle that was established this year in response to the global credit crisis to refinance loans towell-established microfinance institutions (MFIs). MEF was founded by the International Finance Corporation (IFC) and KfW Entwicklungsbank. IFC, a member of theWorld Bank Group, made new investments totaling USD 16.2 billion in fiscal 2008. IFCs microfinance investment activities reached nearly USD 1.3 billion in 2009 throughover 160 projects in over 60 countries. Mark Berryman, of IFCs Global Financial Markets Microfinance Group, recently spoke with MicroCapital:

MicroCapital: Please briefly describe the founding of MEF and its fundraising.

Mark Berryman: MEF held a signing and launch ceremony on February5, 2009, at which the first USD 280 million was committed: USD 130million by KfW and 150 million by IFC. Thereafter, the AustrianDevelopment Bank invested USD 25 million, the German governmentinvested USD 36 million and the European Investment Bank investedUSD 50 million; so USD 391 million is now subscribed. The next twoclosings will take MEF to its target size of USD 500 million.

MC: What is the lending activity to MFIs?

At the fund launch in February 2009, we held the first InvestmentCommitment meeting and approved the first set of loans to MFIs. OnMay 13, MEF disbursed its first loans totaling USD 30 million dollars toeight MFIs. The next disbursement will take place in coming weeks, andthe volume will be USD 80 million.

MC: What has demand been like?

MB: The demand differs across regions. In October and November, theneed was over USD 1 billion dollars of refinancing for MFIs. This islooking at a survey of approximately twohundred top MFIs. These estimates were

based on growth projections that havechanged with the unfolding of the crisisover the last three to six months. MFIs ingeneral have reduced their demand, andmany are focusing on portfolio quality andat the same time beefing up riskmanagement. These are generalizedoutcomes of the financial crisis and, again,

its going to differ by country andinstitution.

MC: Please describe the product offered.

MB: MEF provides short-term seniorloans (2 to 3 years) to MFIs pari passu withother notes outstanding at the MFI level.

It offers both fixed and floating rates andwill offer local currency going forward.

The product offering may change asdetermined by the Board in accordancewith changes in the financial markets.

MC: What is the pricing?

MB: The pricing of individual loans toMFIs is market based. MEF was set up tokick in where private funds are notavailable.

MC: Are all the MFIs that have received funding existing members of the three fundmanagers portfolios: Blue Orchard Finance, Cyrano Management andresponsAbility?

MB: Not all MFIs will be existing clients of the fund managers. Anyinterested MFI is welcome.

MC: When do you anticipate full disbursement of the fund?MB: Full disbursement will depend on demand. The funds will be lent tothose who have the largest need for refinancing. MEF is not a bailoutfacility. It was built to support strong institutions experiencing fundinggaps due to the crisis. Depending on the geography of the demand, theMEF will be able to supply refinancing on an as-needed basis. MEFinvestors agree that project should be a temporary solution, and whenthe crisis turns around the project will either evolve or it could getwound up by shareholders.

MC: What was the primary challenge faced in bringing the project together?

MB: There were many challenges, but everyone agreed it was importantto move quickly because private funding was disappearing. We got it up

and running in record time of less than twomonths.

MC: What would you say enabled that recordtime?

MB: The key factor was total support fromIFC management and also our closecollaboration with KfW.

MC: Do you have a long working relationship withKfW? Can you give examples of such partnerships?

MB: KfW is one of our closest partners inmicrofinance. This includes setting upgreenfields in markets with little to noaccess to finance and working withnetwork partners and microfinanceinvestment vehicles.

MC: What else would you like the public to knowabout this project?

MB: The project is flexible to meet theneeds of MFIs as they change with theevolving financial situation and financialsector. In our view, these types of vehiclesshould not crowd out the private sector.The facility was set up to help stabilizefunding for systematically important MFIsand their clients.

JUST THE FACTS

Fund name: Microfinance Enhancement Facility

Date established: February 5. 2009

Portfolio: $30m, 8 microfinance institutions

Share classes: Euros, US dollars, local currencies

Net asset value: $391m as of October 2009

Target net asset value: $500m

Founders: International Finance Corporation andKfW Entwicklungsbank

Investors: International Finance Corporation, KfWEntwicklungsbank and the Austrian Development

Bank

Managers: BlueOrchard Finance, CyranoManagement and responsAbility Social

Investments

Fund Secretariat: InnPact S.ar.l.

Hedging advisor: Cygma Corp.

Custodian: Credit Suisse

Website: http://www.ifc.org/ifcext/about.nsf/Content/FinancialCrisis_MEF


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PAPER WRAP-UPS

Acute Poverty Alleviation Through

Womens Targeting by Microfinance

Programs

By Alexandra Dobra, published by the MunichPersonal RePEc Archive, March 2009, 8 pages,available at: http://mpra.ub.uni-muenchen.de/16874/1/MPRA_paper_16874.pdf

This paper is literature review regarding themerits of female-targeted microfinance. Firstly,the author points out that as of 2005 womenare a majority of the poor, making up 70percent of people in the world living on USD 1per day. She also points out their likelihood ofstaying poor due to oppressive patriarchalnorms. Although women are precariouspublic economic agents, they tend to havemultiple responsibilities in the private sphereand therefore have various potentialities fordevelopment.

The author also states that women tend tospend earned income on the family, thushelping to decrease household poverty rates.

According to the Womens EntrepreneurshipDevelopment Trust Fund, women spend 18percent of their microfinance income onschooling, 55 percent on medical services andhousehold goods and 15 percent on clothes.The author also refers to a World Bank findingthat female loan repayment rates tend to behigher that that of men. The World Bank alsoshows that gender inequality is a retardant togrowth itself.

The author also looks to female empowermentas an important effect of microfinance. Shestates that access to self-employment forwomen promotes self-confidence and thecapacity to play an active role in society.

Additionally, empowerment has been found bythe World Bank to have a positive correlationwith indices of development relating togender inequality as well as with the Human

Development Index, a quality of life measurebased on life expectancy, education, adultliteracy, gross enrollment and gross domesticproduct. A study by the WomensEmpowerment Program in Nepal showed that68 percent of women with access to credit alsomake familial scheduling, schooling [andmarriage] decisions. The URWEGOOpportunity Bank of Rwanda showed that

credit access led to 68 percent of female clientsgaining increased self-respect and 38 percentincreasing notions of enterprisemanagement. A program in Tanzania fromthe Womens Entrepreneurship DevelopmentTrust Fund reports that economicempowerment went so far as to providewomen the ability to emancipate themselves.

Despite all this, the author still believes there isroom for improvement in microfinance as itrelates to gender. She points to creatingmicrofinance programs that are more sensitiveto cultural norms. For instance, it might beimportant to distinguish between societal

gender inequality that is based on highseparation of the public/private sphere [and]low social mobility, and the type that is morerooted in gender distinction in access toresources.

Microfinance Mission Drift?

By Roy Mersland and R. ystein Strm, published byElsevier Ltd, July 2009, 9 pages, available forpurchase at: http://www.sciencedirect.com/

This paper studies the tendency ofmicrofinance institutions (MFIs), as they grow,to cater to groups that are different from thosenormally considered to fall under the

mission of microfinance. Generally, thismission includes serving low-income peoplewho have less access to credit - often poor,rural women. To investigate this possiblemission drift, loan size, lending methodology

and gender bias were studied in 379 MFIs in74 countries using data taken over 4 to 6 years.

Average loan size did not increase from 1999to 2007. There has not been a move fromgroup-liability to individual-liability loans. Norhas there been an increased proportion ofurban loans compared to rural loans.However, there is less gender bias now,meaning that the tendency to lend to femalesmore than to males has decreased. Overall, theauthors feel that there has not been a mission

drift in microfinance.

The average loan size from 1999 to 2007 wasUSD 747, adjusted for purchasing powerparity (PPP). The authors consider this to be arelatively small loan size. Furthermore, theaverage loan size has decreased by 2.2 percentfrom 1999 to 2007. This is seen by the authorsas evidence that low-income borrowers are stillbeing targeted by MFIs.

Lending methodology was measured tocompare group and individual lending. Theauthors found that most loans are made toindividuals. However, group lending increased

by 3.3 percent during this period compared toindividual lending. The authors view this as asign that microfinance continues to meet itsmission.

It has also been tradition that MFIs wouldtarget rural regions more than cities as theformer are generally thought to have lessaccess to mainstream credit. The authorsfound that rural lending grew by 9.5 percentfrom 1999 to 2007 compared to urbanlending.

Lastly, the authors find that there has been adecrease of 35 percent from 1999 to 2007 interms of preference for female clients. Though

this may seem inconsistent with themicrofinance mission, it does indicate lessgender bias. Therefore, the authors do not seethis result as particularly harmful and claimthat it does not necessarily indicate missiondrift.

MicroCapital Monitor - 2009 MicroCapital - ISSN 1935-505XThe MicroCapital Monitor is published monthly by MicroCapital

Editor David SatterthwaiteDirector of Operations Bob Summers

Writers Radhika Chandrasekhar, Chinq Yee Chong, Diya Chopra,

Kenny Kline, Chris Maggio, Stefanie Rubin and Zoran Stanisljevic

Design assistance provided by Diego Guerra Tavara

For questions, comments or suggestions, please write to

[email protected] or call +1 617 648 0043, Boston, USA

MicroCapital would like to recognize the individuals at CGAP, the MicrofinanceInformation Exchange and the Microfinance Gateway for their outstanding workdisseminating information on microfinance. Thank you!


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Child Labour and Schooling Responses to

Access to Microcredit in Rural Bangladesh

By Asadul Islam and Chongwoo Choe, published byMunich Personal RePEc Archive, January 2009, 49pages, available at http://mpra.ub.uni-muenchen.de/16842/1/schooling-child_work_Bangladesh_

Asad.pdf

This study presents a statistical analysis on theadverse effects of microcredit on child laborand childrens schooling in Bangladesh.Designed to be nationally representative, itcompares 2,034 households in 13 districts

across 91 villages. The study involves atreatment group, which received microcreditand a control group of people from the same

villages who did not receive microcredit butare observationally similar.

Dr Asadul and Dr Chou refute the claimsmade by scholars that access to credit [has] apositive effect on childrens education,especially when given to women, whogenerally prefer spending income on their

childrens health and education. They arguethat microcredit has an adverse effect onchildren largely because loans result in theestablishment of household enterprises thatrequire extra labor. Since the amount of theloan is usually not large enough to coverexternal labor, child labor is used.Furthermore, short repayment periods andhigh interest rates may also cause parents totemporarily resort to child labor. According tothe authors, while microcredit programs canalleviate poverty and contribute to ruraleconomy in the short term, they can also resultin unintended consequences adversely affecting

childrens schooling, which could exacerbatepoverty in the longer term.

The empirical findings of the study are dividedinto the following four sections:

1. Impact Estimates by Childrens School Age:The study finds that the adverse effect ofmicrocredit is most significant on primaryschool children. Girls in primary school areparticularly affected, and more so whenmicrocredit is obtained by men. Schoolenrollment for girls decreases by 33 percentwhen credit is obtained by women, comparedto 41 percent when credit is obtained by men.

At the secondary school level, there is still a

negative impact on girls schooling whenwomen obtain credit, but there is no effectwhen men obtain credit. The effect on boys atthe secondary school age was statisticallyinsignificant.

2. Impact Estimates by Household Income:Since participation in microcredit has apositive effect on income, using income as a

variable would conflict with the very nature ofthis study. Therefore, to try to eliminate bias,the authors used parental education as asubstitute for income, believing that increased

education would have a positive correlationwith increased income. The results showedthat the more education parents received, themore likely it would be that their childrenattended school and did not work. Inhouseholds in which parents only completedprimary school, childrens school enrolmentdecreases by 29 percent and child laborincreases by 9 percent.

3. Microcredit, Household Income and ChildSchooling: When microcredit is given to high-income households, the probability of childlabor decreases and childrens schoolingimproves. A 10 percent increase in credit givento high-income families reduces child labor by0.4 percent and improves schooling by 0.8percent.

4. Impact Estimates by Land Ownership: Landownership is used here as a symbol of wealth.In poorer households, or those with less land,microcredit decreases the probability of schoolenrollment for girls, but also decreases the

probability of child labor for boys. In less poorhouseholds, the result is reversed, perhaps dueto the greater need for boys to work on theland.

According to this study, the most vulnerable -girls, young children, those with less educationand those with the lowest incomes - are themost adversely affected. To decrease thenecessity of households to resort to child labor,the authors suggest extending repaymentperiods, reducing interest rates and increasingloan sizes to allow for the employment ofexternal labor. In addition, they propose morefinancing at the village level rather than thehousehold level. Finally, they emphasize the

need for other policies that directly targetchildrens education to complementmicrofinancing.

Competition and Wide Outreach of

Microfinance Institutions

By Hisako Kai, published by Munich Personal RePEcArchive, September 9, 2009, 12 pages, available athttp://mpra.ub.uni-muenchen.de/17143/

Hisako Kai describes how most microfinanceinstitutions (MFIs) that aim for socioeconomicimprovements, which are termed socially-motivated MFIs, gear their efforts towards

expanding their levels of outreach, both interms of providing to the poorest people(width outreach) and maximizing theirnumber of clients (length outreach).

Attaining wide levels of outreach requiresMFIs to utilize external subsidies and cross-subsidies, where gains from more profitableclients are used to subsidize loans tounprofitable borrowers. It is assumed thatpoorer clients tend to have higher default rates,while the relatively wealthy clients receivelarger loans and are thus more profitable toMFIs.

Many previous theoretical studies claim thatcompetition has adverse impacts onprofitability and cross-subsidization of socially-motivated MFIs, which could lead tolimitations on the width of their outreachcapabilities. First, they show that competitioncauses a decrease in dynamic incentive,which refers to the event where clients are ableto obtain loans from other lenders without

paying back their original loans to their initiallender, thus decreasing their paybackincentives. As clients borrow from multiplelenders, default rates increase and profitabilityand cross-subsidies of MFIs fall. Second, thesestudies argue that competition may lead to adecrease in productive clients for socially-motivated MFIs. Profit-centered MFIs thatenter the industry target larger loans at thewealthiest of the pool of poor clients, whichcauses these clients to switch over from

incumbent, socially-motivated MFIs thatprovide smaller loans. Third, new MFIentrants may lead to a fall in interest rates.Though this may benefit borrowers, the overallincome that MFIs generate from interest rateswill decline, leading to a drastic decrease incross-subsidies used for poorer clients. Theseanalyses claim that that the adverse effects ofcompetition place a budget constraint onsocially-motivated MFIs, and lead to lessenedfinancial self-sufficiency or a less wide level ofoutreach.

Despite the fact that theoretical literaturesuggests that competition among MFIs leads tothese effects, Ms Kai argues that there isinsufficient empirical research to conclude thatcompetition affects wide outreach or causespoorer borrowers to drop out of the

microfinance market. Through an empiricalanalysis of data from 2003 to 2006 on 450MFIs from 71 countries, she aims to study theimpact of competition among MFIs on (1) thewidth of outreach to assess whether they canstill reach the poorest of the poor and (2) thefinancial self-sufficiency of socially-motivatedMFIs.

The results of the empirical research depictthat intense competition between differenttypes of MFIs does decrease the wide outreachcapabilities of socially-motivated MFIs, whichleads to poorer borrowers dropping out of themarket. However, it does not worsen financial

self-sufficiency or lead to an increase in subsidydependence, which shows that competitiondoes not increase MFI dependence on externalsubsidies. Ms Kai also concludes that the harmof competition on wide outreach decreases asMFIs gain experience. More experiencedMFIs limit the reduction of their wideoutreach, as they have greater market powerand greater possibilities for technologicaladvancement, making them less vulnerable toincreased competition.


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Microfinance Policy and Regulatory

Framework in Uganda

By General Caleb Akandwanaho S S; published byUgandas Ministry of State for Finance, Planning and

Economic Development; July 24, 2009; 8 pages;available at: http://www.finance.go.ug/docs/

Introduction%20to%20Microfinance%20bklet.pdf

In 1999, the Bank of Uganda (BOU) createdthe Policy Statement on MicrofinanceRegulation as a framework for Ugandanmicrofinance institutions (MFIs). Thestatement served the policy needs of Tier 1, 2and 3 MFIs; however, it was unable to providefor Tier 4 institutions. Furthermore, theexistence of multiple laws scattered across

various policy documents, as opposed to aconsolidated legal framework afforded to Tiers1 to 3 MFIs, has made it difficult for Tier 4MFIs to protect savings and provideconsistently reliable service.

To consolidate the existing policies and toensure the safety of savings at Tier 4 financialinstitutions, this paper addresses the issues ofregulation for Tier 4 institutions and proposesplans through 2015 to implement acorresponding legal framework.

Five objectives of a new policy framework inthe Ugandan microfinance sector are outlined:

1. Increase Access to Microfinance ServicesCountrywide

Challenge: One of the biggest challengesfacing the microfinance sector in Uganda is the

concentration of financial institutions in urban

and peri-urban areas, as indicated by a highconcentration of people per financialinstitution.

Solution: Financial intermediaries, whoseoutreach is more diverse in rural areas, areneeded to assist MFIs that are overwhelmedwith borrowers. Savings and CreditCooperatives (SACCOs) can act asintermediaries between MFIs and borrowers.

While conventional banks require a minimum

deposit of USD 67, the Kenya Union ofSavings and Credit Cooperatives Ltd, forexample, accepts deposits of USD 2.70.

2. Improve Safety of Savings ThroughEffective Regulation and Supervision

Challenge: Taking deposits and lending toentrepreneurs has resulted in losses wheretransparency is not practiced.

Proposed solution: Intermediaries must ensurethat the depositor is able to access his/hersavings when they want them (according to

agreed withdrawal terms). This can beachieved through close supervision andthorough operations management by aMicrofinance Regulatory Authority (MFA) toensure repayment of loans and that properprocedures are followed by intermediaries.

3. Enhance Microfinance InstitutionalSustainability

Challenge: Capacity building serves primarilyurban areas, is generally only targeted to MFImanagers rather than MFI members and canbe very costly. MFI members are not inclinedto hold managers accountable for fraudulentbehavior and mismanagement.

Solution: The Uganda Cooperative Savingsand Credit Union (UCSCU) must beginforming SACCOs and giving them the tools tobuild capacity amongst microfinancemanagement, staff and members. This includes

logistical support, certification in operations

and management, certification in corporategovernance, management tools, governancetools and enhanced monitoring and evaluationtechniques.

4. Improve Consumer Awareness andDemand for Cost Effective Financial ServiceDelivery

Challenge: Several institutions that onceplayed a role in increasing public awareness,such as the Co-operative Education andPublicity Programme (CEPP), collapsed duringthe decline of the cooperative movement.

Secondly, the authors argue that inadequate,

inaccurate and delayed and warningsregarding fraudulent behaviour have left theunsuspecting public more vulnerable to Get

Rich Quick schemes.

Solution: Borrowers must be trained torecognize healthy MFIs. The MFA should bein charge of developing and monitoring healthindicators for Tier 4 MFIs. Under thisdevelopment scheme, Consumer educationmessages will be designed and standardizedtraining modules developed. Furthermore,transparency regarding pricing andperformance must be practiced by MFIs.

5. Develop Institutional and Product Range in

the Microfinance Industry through Researchand Training

Challenge: Research on Ugandas financialsector is lacking, particularly where informalfinancial institutions are concerned. Second,microloans and other activities in the informalsector are not being documented scrupulously

and consistently. Third, service delivery acrossdifferent tiers of the financial sector is verycostly.

Do Interest Rates Matter? Credit Demand

in the Dhaka Slums

By Rajeev Dehejia, Heather Montgomery and JonathanMorduch, published by the Financial Access Initiativeand New York University Wagner School, May 2009,41 pages, available at: http://financialaccess.org/

sites/default/files/Do%20Interest%20Rates%20Matter%20May%2009_0.pdf

This study attempts to show how sensitiveborrowers are to rises in interest rates. Itmeasures the change in overall demand forloans after an increase in the interest rate. Thestudy was done at SafeSave, a creditcooperative in Dhaka, Bangladesh. SafeSave

has the convenience of a credit cooperative asthe loan officers visit borrowers homes, butalso the flexibility of a bank in terms ofrepayment schedule within a given month.However, outstanding interest must be paid ona monthly basis. For the study, interest rates

were unexpectedly raised from 2 percent permonth to 3 percent per month in two branchesof SafeSave but not a third branch, which wasthe control set. The data from 1999 to 2001was collected monthly on 5,147 customers, notall of whom participated throughout the study.

Average loan size ranged from USD 48 in thebranches that underwent interest rate change,to USD 37 in the branch that did not.

The primary result of the study is thatborrowers at SafeSave decreased loan demandsignificantly as a result of the increase in theinterest rate. The change was measured interms of elasticity, the percentage change inloan balance after the change in interest rate.

A one percentage point increase in the interestrate resulted loan demand decrease rangingfrom 36 percent to 44 percent over the courseof 12 months. Overall, this decrease isexplained by borrowers taking smaller and

more frequent loans after the interest ratejump and repaying them more quickly.

Additionally, less wealthy borrowers appear todecrease their loan demand more thanwealthier borrowers due to the increase ininterest rates. The categorization of lesswealthy and wealthy was based on initialsavings balances. The interest rate jump from2 to 3 percent per month resulted in the loan

demand of less wealthy borrowers decreasingby 43 percent and the loan demand of

wealthier borrowers to decrease by 13 percent.


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Page 9

Who is Reaching Whom? Depth of

Outreach of Rural Micro Finance

Institutions in Ghana

By Kofi Awusabo-Asare, Samuel K. Annim, Albert M.Abane and Daniel Asare-Minta, published by theInternational NGO Journal, April 2009, 10 pages,available at: http://www.academicjournals.org/ingoj/PDF/Pdf2009/Apr/Asare%20et%20al.pdf

This paper studies the socioeconomic status ofclients being reached by different types ofmicrofinance institutions (MFIs) in Ghana.Using a poverty index, the study shows whichtype of MFIs reach relatively poor or richclients. The study also attempts to explainthese results through reasons relating to thesource of funds, strategies for outreach andmission of the institution. Lastly, MFI policyrecommendations are made.

The study uses a Microfinance PovertyAssessment Tool, to measure socioeconomicstatus. This measure, developed by CGAP

(Consultative Group to Assist the Poor),calculate a household relative poverty indexbased on housing characteristics, food securityand vulnerability, livestock and consumption.The study included 1,600 clients. The MFIswere separated into rural and communitybanks, non-governmental organizations(NGOs), savings and loans companies, creditunions and susu collectors (mobile bankers

running a small savings a loan operation).Sixteen MFIs were selected in addition to onemakeshift MFI that was simply a group ofsusu collectors.

The index was divided into five quintiles,

namely, the lowest (poorest), below average,average, above average and the highest (richestof the poor). It was found that rural and

community banks and NGOs reached thebroadest group, ranging from the poorestpeople to the richest. Credit unions reachedthose in the range of below average to therichest. Lastly, savings and loan companies andsusu collectors reached from the averageclients to the richest.

The authors found that institutions thatemploy peer selection and loan qualificationrequirements tend to cater to higher-incomeclients. Peer selection involves potential clientsforming a group, choosing members believedto be trustworthy in terms of repayment. Thisis likely to eliminate the poorest clients. The

same can be said for a situation in whichpotential clients must prove to the institutionthat they qualify for a loan based on theireconomic characteristics such as income andassets. On the other hand, institutions that

select clients by committees reach lowerincome clients, especially when theseinstitutions rely on donors who have a specificinterest in reaching poor clients. Committee

selection involves technical advisers,representatives of the district assembly, loanofficers of the rural bank and representative ofthe donor institution voting on which clientsto select. If the donor institution specificallywants to reach the poorest clients, this outcomeis often met. Generally, rural and communitybanks employ peer selection and/or committeeselection. NGOs use peer selection, but allowe

non-financial contributions such as produce inorder to open credit access to poorer clients.Susu collectors generally have a groupinsurance scheme. Therefore clients self-selectbased on their ability/willingness to make acontribution, thus eliminating the poorestclients. Similarly, credit unions and savingsand loan companies have economicrequirements for loan qualifications that maysegment out poorer clients.

The authors point out that social and politicalinterference, such as political patronage, wasthe main thing preventing selectioncommittees from reaching poor clients.

Therefore, they believe that avoiding thispitfall should be an important policyconcentration for MFIs. Also, they mentionedthe success of financial NGOs that allowedclients to make non-financial contributionssuch as vegetables. They believe this is one wayfor MFIs to reach the poorest clients.


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Page 10

Global Recession and Sustainable

Development: The Case of Microfinance

Industry in Eastern Europe

By Dr Dragan Loncar, Christian Novak and DrSvetlana Cicmil, published September 2009, 10 pages,available at http://www.microfinancegateway.org/

gm/document-1.9.39138/MICROFINANCE%20PAPER-%20FINAL%20VERSION.pdf

This research paper addresses why themicrofinance industry in Eastern Europeperforms cyclically and is more vulnerable tocontemporary economic trends than ismicrofinance in other regions. The paper isdivided into three sections: generalmicrofinance trends, microfinance trends inEastern Europe and the impact of the currentglobal recession on microfinance in EasternEurope.

According to the paper, the microfinanceindustry is considered to be resilient to theeconomic cycles. Since the poor are less

dependent on global economic trends,repayment rates have remained relativelystable, with top-tier microfinance institutions(MFIs) reporting average repayment rates wellabove 90 percent. From 2003 to 2007, themicrofinance sector expanded its customerbase by about 25 percent per year, reachingmore than 100 million clients globally by theend of 2007 with an estimated loan volume of

USD 25 billion. This rapid growth hasattracted institutional investors, developmentagencies and NGOs, all seeking to makesocially responsible investments (SRIs) whileenjoying a high rate of return. Due to thenature of the microfinance business and [its]

trends, top-tier MFIs have been reportingmore favorable results than conventionalcommercial banks in many countries.

The authors point out, however, that thecounter-cyclic nature of the microfinance

industry does not apply to Eastern Europe.Repayment rates were at 98 percent in 2007,but fell to 80 percent in 2009. It is expectedthat women, who make up over 80 percent ofMFI clients in the region, will be the hardesthit. This is partially due to large loan sizes(averaging around USD 1,600) and apreference for individual lending instead oflending groups, which help mitigatedelinquency and default risk. Furthermore, inthe majority of countries in the region,microfinance is not fully integrated into localfinancial systems due to a lack of adequatelegal and regulatory frameworks. In Serbia, forexample, the Law on Banks allows only the

traditional commercial banks to lend money,forcing MFIs to operate via commercial banks,thus increasing their administrative costs andinterest rates.

The peculiarity of microfinance in the region,the authors claim, predominantly lies in themacroeconomic structure of the EasternEuropean economies, including the followingpoints:

Incomplete economic transition in theformer communist countries

High inflation (sustained high food prices)and drop in real income

Higher cost of capital after a long periodof unsustainably cheap funding madeavailable to MFIs

Dominance of individual lending (asopposed to group lending), whichincreases the cost per borrower and risk ofdefault

High average size of microloans, whichconcentrates credit risks and in manycases puts MFIs in direct competitionwith conventional commercial banks

Lack of local deposit base due toincomplete regulation of the microfinance

business in many countries

Withdrawals of the existing deposit baseover the recent months

High dependence on foreign funding inhard currency coupled with localcurrency depreciation

High dependence of borrowers onremittances from abroad, which havedecreased

Unstable internal organizational structureof MFIs and poor networking amonglocal MFIs (within national associations),resulting in low negotiation power

Relatively underdeveloped MFImanagement and lack of adequate riskmanagement

Despite the negative outlook for themicrofinance industry in Eastern Europe, theauthors remain optimistic that MFIs willprobably emerge as stronger organizations.They suggest that MFIs should slow theirgrowth plans, reward clients who have paid ontime with further loans, improve internalefficiency and turn to a deposit-led approach.Many of these suggestions, however, wouldrequire regulation changes.

Bringing Financial Services to Africas

Poor

By Kristin Helmore, Sybil Chidiac and LaurenHendricks, published by CARE, September 2009, 143pages, available at: http://www.care.org/getinvolved/advocacy/access-africa/

This report addresses CAREs approach to

providing Africas poor with financial services.CAREs Village Savings and LoanAssociations (VSLAs) give poor women themeans and confidence to build moreprosperous futures for themselves and their

families.

CARE VSLAs are built by women living onless than USD 2 a day who collectively savepennies each week and make small loans toeach other to support new business ventures,such as farming, jewelry making or beer-brewing. Because members borrow from eachother, there is a low default rate on loans andmuch lower interest rates, compared to the 100percent sometimes charged by traditional

moneylenders.

CAREs VSLA approach is part of its largerAccess Africa program that aims to bringfinancial services to 30 million people in 39

African countries over the next 10 years. Atleast 70 percent of people served will bewomen.

Consumption, Commercial or Mortgage

Loans: Does it Matter for MFIs in Latin

America?

By Adrian Gonzalez, published by the MicrofinanceInformation Exchange, September 2009, 16 pages,

available at: http://www.themix.org/sites/default/files/MIX%20Data%20Brief%20No%203%20Sept%202009_0.pdf

This study explores whether loan product mixaffects the performance of a microfinanceinstitution (MFI) using data the MicrofinanceInformation Exchange (MIX) collected oncredit types from 322 MFIs throughoutMexico, Latin America and the Caribbean.

When compared to microenterprise loans,higher shares of consumption loans areassociated with higher yields, higherprofitability, yet lower portfolio quality.


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Page 11

Strategies for Effective Loan Delivery to

Small-Scale Enterprises in Rural Nigeria

By Benjamin Okpukpara, published by the Journal ofDevelopment and Agricultural Economics, May 2009,8 pages, available at: http://academicjournals.org/

JDAE/PDF/Pdf2009/May/Okpukpara.pdf

This work studies the determinants of

microbusiness loan acquisition for ruralentrepreneurs in Nigeria. In order to increaseaccess to formal credit to rural areas, thegovernment has enacted various microcreditprograms specifically targeting the rural poor.

However, according to the author, most ofthese programs have fallen short of their goalsdue to poor targeting and a lack oforganized ways of administering loan to therural enterprises. Therefore, this studyattempts to ascertain which strategies canovercome the problem of low access tomicrofinance services.

The study took place in the poor, rural statesof Abia and Anambra. A total of 136

microenterprises from these states wereselected at random and surveyed.Entreprenuers were asked questions relating towhat factors determine whether or not theyobtain a loan. Additionally, survey informationwas collected from 20 informal financialinstitutions and 14 formal financial institutions.

Of the 136 enterprises, 34 were able to obtainloans, 27 of these from informal financialinstitutions. However, not all enterprisesattempted to obtain loans. Of those who did,

55 percent of formal loan applications wereaccepted, and 94 percent of informal loanapplications were accepted. According to

entrepreneurs surveyed, informal institutionsdo not generally require asset collateral, andthey do not have a bureaucratic applicationprocess, thus making their loans easier toobtain. However, those surveyed claimed thatboth formal and informal loans are more easilyobtained when the applicant has a good loanrepayment record, when there is morecompetition between institutions, and whenthe interest rate is higher. In the case ofinterest rates, higher rates often equate togreater loan access because borrowers are

willing to lend to more, perhaps riskierclients when the interest rate is higher.

Additionally, it is important to note thatinterest rate changes did not greatly effect thedesire of entrepreneurs to obtain a loan.

To determine loan provision institutions relyheavily on, in order of average importance:loan history, enterprise type, experience,gender (males preferred) and collateral. Asstrong repayment history generally predictsreliability for future repayment, it was, on

average, the most highly valued indicator ofcredit-worthiness by financial institutions.

Agricultural enterprises were found to have a

lower likelihood of receiving credit than othertypes of enterprises. This is important becausemost rural enterprises in Nigeria areagricultural. Financial institutions citeduncertainty and risk in agriculture as thereason for this discrimination. In bothagricultural and non-agricultural enterprises,entrepreneurs with a higher level of experiencewere more likely to obtain loans. It was also

the case that men were more likely thanwomen to receive loans. This can be explainedby a range of factors from lack of assets totraditional and customary factors in Africaninstitutions. Lastly, possession of a fixed asseton the part of an applicant made them morelikely to receive a loan, but the relationshipwas relatively weak. Formal institutions did,however, generally require fixed assets ascollateral, but informal institutions often didnot.

Based on this information, the authorrecommends policies that should be put forthby both the government and financial

institutions. He recommends business trainingto increase productivity and to help to buildrepayment history. He also seesmicroinsurance as important to minimizing therisk involved in agriculture. Finally, to remedygender discrimination, the author suggests thatlenders institute quotas to make sure that acertain percentage of their loans go to female

borrowers. This would encourage not onlyacceptance of female applicants, but could alsocatalyze a proactive effort to seek out femaleentrepreneurs.

Building Social Business Models:

Lessons from the Grameen Experience

By Muhammad Yunus, Bertrand Moingeon andLaurence Lehmann-Ortega, published as a workingpaper by the HEC International Business School,February 2009, 27 pages, http://www.microfinancegateway.org/gm/document-1.9.39135/

Building%20Social%20Business%20Models.pdf

The authors argue that governments,

nonprofit organizations (NPOs), multilateralinstitutions and existing for-profit companiescannot sufficiently address poverty.Governments tend to be inefficient and proneto corruption, NPOs are highly dependent ondonations for funding, multilateral institutionshave not made a sufficient impact and for-profit companies that claim to exhibitcorporate social responsibility (CSR) willalways prioritize financial profit over all else.Therefore, the authors justify the need forsocial businesses that integrate aspects ofboth profit-maximizing companies andsocially-motivated NPOs.

The paper first defines the concept of a socialbusiness, which has risen from the experiencesof the Grameen Group, a network of 27organizations linked to the Grameen Bank of

Bangladesh. Social businesses borrow aspectsof structure, functions and objectives fromboth profit-maximizing companies and NPOs.They are similar to NPOs in that theyprioritize societal improvements, but operatelike for-profit businesses in that they aim torecover their cost of operations to maintainself-sustainability. However, social businessesonly rely on investors at the beginning of a

development project, and unlike for-profitbusinesses they do not distribute revenues toshareholders, but rather reinvest in thebusiness to benefit their social cause.

The authors first provide an example of whatthey consider a successful social businessmodel. Grameen Danone Food Limited(GDFL) is introduced as one of the first socialbusiness experiments. It was created in 2006 asa joint venture between the Grameen Groupand the French Groupe Danone, one of theworlds leading health food companies, inorder to bring health through food to amaximum number of people.

Using empirical examples, drawing from theexperiences of organizations linked to theGrameen Bank, the paper introduces generalrecommendations on how to build effective

social business models: (1) Social businessesshould challenge conventional business modelsby coming up with innovative business modelsthat will provide high quality products at lowcosts, making them affordable to low-incomeconsumers; (2) Businesses ought to findcomplementary organizations with which theycan set up long-term partnerships in order toleverage and broaden both expertise andresources; and (3) A continuous process of

experimentation is encouraged to fine-tune thebusiness model.

The authors also offer more specific examplesof how to maintain the priority of social profitwhile also keeping stakeholders in mind: (1)The models must be designed to favor socialprofit-oriented shareholders. They must bereframed to favor all stakeholders that supportthe companys social mission, instead of merelyshareholders, customers, partners andsuppliers. (2) The authors emphasize theimportance of clearly specifying the socialobjectives, criteria and constraints of thebusiness. Without this, the companys objectivemay be unclear to investors, since it plans to

aim for both financial profit and socialbenefits. (3) The model must make adjustmentsto the traditional business model framework toreflect the companys social goals.

The authors conclude by saying that creatingsocial business models is a difficult but possibleprocess. They believe that there will be agrowing interest in the sector since theGrameen Group will encourage others toconsider similar ventures and learn from eachother.


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Page 12

Asia Commercialise Microfinance

By Nicholas Kwan, Kelvin Lau and Elizabeth Lee,published by Standard Chartered Bank, August 31,2009, available at: http://microfinancegateway.org/

gm/document-1.9.37784/Asia%20Commercialise%20Microfinance.pdf

This is paper describes the role ofcommercialization in the transformation of themicrofinance industry. The authors note that,though microfinance has been growing inpopularity throughout the world in the pastfew decades, Asia has not maximized itspotential in this investment sector. The authorsuse the term commercialization ofmicrofinance to refer to the idea ofmicrofinance institutions (MFIs) becominghighly integrated into the for-profit businessand financial sector, rather than the nonprofit,subsidized sector. The authors argue that,especially considering Asias growing economy,

Asian MFIs are well positioned to become

more involved in commercialized microfinanceand cross-border investment. Many AsianMFIs have begun to further integratethemselves with commercial banks and thefinancial sector.

This report first examines the increasing role ofcommercial banks in bridging the gap betweendemand and supply of microfinance loans, aswell as the lack of funding sources for nonprofitMFIs. The authors note that, though themicrofinance industry has grown at an

unprecedented rate, there is still an excessdemand for microfinance loans from a globalmarket of 3 billion people. As the microfinance

industry has gained popularity in recent yearsand has shown that it can be profitable, morecommercial banks and other for-profitorganizations have begun to enter the industryto fill this gap between demand and supply.Therefore, they argue that commercializationis a tool for banks and organizations topenetrate the market and tap into those thathave not yet been reached by existing MFIs.

The authors state that commercialization alsohelps fill the funding gap that exists in themicrofinance industry. In addition, it providesMFIs with new opportunities to access localsavings pools and capital markets, accept

deposits from the public or even go public, likeMexicos Banco Compartamos did in 2007.

The report refers to data from CGAP(Consultative Group to Assist the Poor)indicating that between 2004 and 2006 foreigncapital investment in microfinance tripled toUSD 4 billion, arguing that it showscommercialized microfinance hastremendously increased in appeal to thesocially responsible investment (SRI) market,

due to the sectors double bottom line offinancial profit and positive social impact.

The paper compares various countriesoutreach and success in attracting cross-bordermicrofinance investments. Of the regionssurveyed, Asia has the greatest number of

borrowers and savers, but is one of the worst,along with Africa, in terms of foreign capitalinvestment. The authors note, however, thatthis data must not be interpreted too literally,as one must also taken into consideration intra-regional differences in socio-political andeconomic situations, as well as structuraldisparities between MFIs.

Finally, as the authors recommendcommercialization is the best way for AsianMFIs to increase foreign investment andfurther develop the microfinance sector, theyidentify guidelines called the four Rs tohelp along this process, which are: resources,risk, return and regulations. Three of the Rscome from a paper presented at the 2007annual Commonwealth Finance Ministersmeeting by Standard Chartered Bank GroupChief Economist Dr. Gerard Lyons, and thefourth R was added by the authors to thisreport:

Resources: There ought to be morecareful cost control, expanded fundingand greater technology.

Risk and Return: MFIs ought to ensurethat the amount of risk that they aretaking on is justified by the returns theyare earning; product innovation anddiversification can help offset increasedrisk. Transparency within MFIs and theimportance of adopting standardreporting practices are also emphasized.

Regulations: The governments involvement isessential to developing the microfinance sector.

Microfinance Stakeholders -

Guiding Hands

By Godfrey Supka, published by the InternationalBanking Systems Journal, October 2009, 2 pages,available at: http://www.ibspublishing.com/index.cfm?section=MF09&action=view&id=13428

As part of a special issue on the role of

technological systems in microfinance, thisarticle explores how microfinance institution(MFI) stakeholders shape the market formicrofinance information systems (MIS). Thethrust of the article is that there is an importantdifference between the microfinance andcommercial banking sectors when it comes toinformation systems and that MFIs dependheavily on key stakeholders such as the Bill andMelinda Gates Foundation, CGAP

(Consultative Group to Assist the Poor),International Finance Corporation andGerman development agency GTZ forguidance and direction in making technologydecisions. The conclusion is that directly orindirectly, it is these stakeholders that influencepurchasing decisions by MFIs, on the business

case for investment, the process of selectionand which products to choose when it comesto MIS.

The article discusses the GrameenFoundations Mifos system, which is an opensource technology platform for themicrofinance industry, which means that it hasbeen developed by a global community oftechnology professionals and microfinancepractitioners. Grameen is helping four or fiveMFIs use the Mifos system, but there may bemany other MFIs using the system without itsassistance or knowledge. Grameen is nowworking on a shared platform where Mifos will

be made available as a subscription-basedservice over the internet for customers in the

Philippines.

Rather than backing one particular MIS,CGAP offers grants of up to USD 25,000 forMFIs to improve their MIS. CGAP technologyprogramme senior advisor Xavier Faz wasquoted as stating that The grants enableMFIs to hire a consultant to do a well-formed,technically sound assessment of the investmentand to make sure that it is well-aligned to thebusiness plans of the financial institution. Mr

Faz observed that USD 1.2 million has beendisbursed so far, with 80 projects complete andanother 40 ongoing.

As to why MFIs should invest significant fundsin a new IT system, Ignacio Mas, a formerleader of CGAPs technology programme andthe Deputy Director of the Bill and MelindaGates Foundation, was quoted as stating thatIts actually really hard to sell the propositionthat MFIs need a better IT system, given thehigh initial capital investment. He added that

Branchless banking offers an entirely newvalue proposition of why [MFIs] should beupgrading their IT platforms, a real businesscase based on extra business, extra revenue,not just based on cost. Mr Mas also statedthat MFIs need a new IT system so that they

can handle transactions through any storewithout more branches, more tellers and morecost, thereby overcoming the inconvenienceof not being able to transact in the area where[clients] live and work. Branchless bankingalso promotes rapid and robust transactionprocessing, as transaction volumes are notlimited to the number of tellers and how fastthey can enter transactions.


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Page 13

AML/CFT: Strengthening Financial

Inclusion and Integrity

By Jennifer Isern and Louis de Koker, published byCGAP (Consultative Group to Assist the Poor), August2009, 12 pages, available at:http://www.cgap.org/

gm/document-1.9.37862/FN_56_ENG.pdf

This CGAP Focus Note argues that financial

inclusion and an effective financial integrityregime can - and should - be complementarynational policy objectives. Therecommendations of the Financial Action TaskForce (FATF) are the international standard

for anti-money laundering and combating thefinancing of terrorism (AML/CFT) regulation.FATF advises countries and financialinstitutions to enhance their internal controlsto address AML/CFT risks, perform duediligence on all new and existing clients,conduct heightened surveillance of suspicioustransactions and report suspect activity tonational authorities. But what effect do thesemeasures have on access to financial services

for the poor?

The FIRST Initiative funded a five-countrystudy to analyze the effects of AML/CFTregulation on access to finance in Indonesia,Kenya, Mexico, Pakistan and South Africa. Itconcluded that AML/CFT measures cannegatively affect access to, and use of, financial

services if the measures are not properlydesigned.

According to the study, access-friendlyAML/CFT controls should be tailored to thespecific domestic environment and risks,

should only be as tight as the country contextrequires and should realistically match thecapacity of local institutions to carry them out.

While FATF envisions controls that areuniform enough worldwide to preventdisplacing ML/FT from one area to another,It also encourages countries and institutionsto focus on people and activities that pose ahigh risk, says lead author Jennifer Isern.This means that, in some situations, countriesmight be able to exclude various financialservices for low-income people from

AML/CFT regulation.

Several countries have already successfullydesigned their AML/CFT laws to minimizeadverse effects on financial inclusion as well aspromote financial integrity, says Isern. The

three countries included in the FIRST surveythat had enacted comprehensive AML/CFTregimes - Indonesia, Mexico and South Africa- as well as Pakistan were able to amend their

AML/CFT controls according to real risksonce initial rules were found to discourage theuse and provision of financial services to poorclients.

While inappropriate AML/CFT controls cancertainly have a negative effect on the servicesand client base of these providers, well-designed AML/CFT controls can actuallyprovide them with protection andopportunities. AML/CFT controls can helpinstitutions understand their customers better -allowing them to design and market betterproducts and provide better customer service.

Financial services providers also find it easierto engage with other institutions (investors,creditors, etc.) if they manage their AML/CFTcontrols. AML/CFT controls can also helpstrengthen an institutions overall anti-fraudcontrols.

Ultimately, when low-income clients areexcluded from formal financial services, thegoals of the AML/CFT policy cannot beachieved. While its challenging to bothincrease access to financial services and fightML/FT, customizing AML/CFT policies tothe local context and implementing themsensitively are well worth it in the end, says

Isern.

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2007 - 2008: Readership ofThe

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14/15


Page 14

Microinsurance:

A Safety Net With Too Many Holes

Published by Knowledge@Wharton, September 2009,4 pages, available at: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2346

This paper contains a detailed discussion of thechallenges facing microinsurance. The article

notes that there has been some recentinnovation in the microinsurance sector, amarket that has experienced relatively slowgrowth compared to the microfinance sector ingeneral.

A new Bangladeshi product, which involves sixNGOs (non-governmental organizations) andBangladesh-based Pragati Life Insurance Ltd,will include life insurance with somehospitalization coverage. It has an initial targetof 26,000 customers and plans to scale upsignificantly after two years. The coverage willbe over three- or five-year terms, relativelyshort time periods, according to Mosleh Uddin

Ahmed, CEO of UK-based Micro InsuranceResearch Centre (MIRC). Mr Ahmed is inBangladesh to help launch the project and was

quoted as stating that a long tenor would notwork given the precarious incomes of thetarget market. Another innovative feature ofthis pilot is that policyholders will receive arefund of life premiums paid in addition to 5percent of their investment income if theymake no claims during the life of the product.

The article notes that innovation is a good wayto encourage growth in the placidmicroinsurance market. Microinsurance hasbeen a hard sell among the worlds poor

partly because of a lack of understanding of

how insurance products work, the poorpopulations general reticence to part withwhat little financial resources they have, badlydesigned products and a shortage of localizedrisk management knowledge amongproviders. Mr Ahmed points out that even inBangladesh, where there are thousands ofregistered MFIs, only 11 licensed life insurancecompanies offer microinsurance products.

The article highlights the importance ofmicroinsurance in the current marketplace,where sharp fluctuations in commodity pricesand diminishing government support forpoorer communities are becoming common.Some commentators believe that This is anideal time for microinsurance to workalongside the more established microfinancelending and play a bigger role in alleviating the

problem of poverty. The idea is that Peoplework themselves out of poverty usingmicrolending, and Microinsurance helpsprevent them from falling back into it,according to Dirk Reinhard, Vice Chairman ofthe Munich RE Foundation.

Apart from the need for innovation, a keychallenge is the need for large volumes toachieve economies of scale. In addition, therisk relationships are reversed inmicroinsurance, a factor which makes the needto secure clients trust very important. Asstated by Craig Churchill, head of theInternational Labour Organizations Micro

Insurance Innovation Facility, The providerputs up the capital and trusts the customer topay it back in microfinance but inmicroinsurance, the policyholder pays up frontand hopes the provider keeps its promise.

He added that for a tranche of society thatprobably has never used - let alone heard of -these insurance products, its an enormous leapof faith.

Equally important is the need for flexibilityand customization, as local risks can varygreatly from one village or trade to the next.

An insurer cant simply offer rich-worldproducts at lower prices. Instead a product

really has to be redesigned after assessingwhat the local needs are.

An initiative launched by Max India Ltd andNew York Life, called Max Vijay, offersinsurance and long-term savings for low-income Indians. 70,000 policies havereportedly been sold within the first year of itslaunch.

A Max Vijay customer fills in a one-page form,provides a proof of identity and pays aminimum enrollment premium ranging fromthe equivalent of USD 20 to USD 52.Subsequent premiums over the 10 years of thepolicy are optional and investments areguaranteed. In the case of natural death, theclaimant receives the guaranteed sum assuredand the account value. In the case of

accidental death, the claimant receives theaccount value and double the amount of sumassured. In addition, Max Life has signed anagreement with a national retail chain, I-SERV, to let policyholders manage theirpolicies at 12,500 of its stores, ensuring itsaccessibility and easy distribution. It is notedthat life insurance is easier to localize than

health, weather, property, agriculture andcatastrophe insurance products. Non-lifeproducts typically require more extensive on-the-ground knowledge in terms of not onlyproduct design, but also administration andmonitoring.

Related to the issue of distribution is the role ofNGOs in facilitating insurers access to remotemarkets. NGOs tend to be more in touch withthe client base and in a better position tounderstand whats crucial for their well-

being. Partnerships between NGOs, insurers,MFIs and community organisations can bebeneficial for all concerned. The article notesthat governments can in some cases play animportant role, for example by providingindividual ID cards to enable faster customeridentification and reduce fraud-detection costs,or providing regional health, livestock andweather databases to collect much-needed datato help insurers develop and monitor

products.

Once the microinsurance market becomesmore established, the authors expect the sectorwill face many of the same issues that plaguethe microfinance market today, notablyquestions about whether it is indeed helping tolift people out of poverty.


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Page 15

Financial Access 2009: Measuring Access

to Financial Services around the World

Published by CGAP (Consultative Group to Assist thePoor), September 2009, 92 pages available at:http://www2.cgap.org/gm/document-1.9.38735/FA2009.pdf

In seeking to give poor people access to criticalfinancial services, policy makers around theworld are often hampered by the lack ofinformation they need to tackle this challenge.There often is little data available to answerbasic, but important, questions: Who hasaccess to savings or loan accounts? What kindof institutions do these customers use? Whichpolicies actually help to bring financial servicesto poor people? How do branchless bankingand cell phone transactions increase the reachof services?

This CGAP (Consultative Group to Assist thePoor) report provides global indicators and a

range of policy recommendations that can helppolicy makers and regulators broaden access tofinancial services for poor people. It draws oninformation provided by financial regulators in139 countries and identifies barriers that keepformal banking services restricted to thewealthiest people around the world.

The report indicates that people in emergingmarkets on average have one quarter thedeposits and loans of those in developedcountries. This means that many poor peopledo not have important tools that can help theminvest in their businesses, spend more onhousehold items or have the funds to cope with

crises.

In addition to confirming the vast gulf in the

number of savings and loan accounts betweenrich and poor countries, the report also notesthat remarkably few countries collectcomprehensive data relating to financialaccess, outside the value of accounts in theirfinancial systems.

For example, only 30 of the 139 countriessurveyed have data on the number ofdepositors in their regulated financial systems,and just 27 have data on the number ofborrowers.

A lot of countries are considering financialsector reforms in the wake of the global crisis.This can be a great opportunity to alsoconsider policies to broaden financial access topoor people, says Nataliya Mylenko, leadauthor of Financial Access 2009. But withoutthe kind of data in this survey, policy makerswould find it extremely challenging to tailorpolicies to their countrys needs.

The report, drawing on a range of estimatesand survey results, puts the number of bankaccounts worldwide at 6.2 billion, or morethan one account for every person on theplanet. However, as expected, most of theseaccounts reside in the worlds wealthiestnations: 70 percent of adults in developingcountries do not use formal financial services,

compared to 20 percent of those in developedcountries.

Banking sectors in developing countries oftentarget only the wealthiest in the population,according to the report. Poor people often lackthe official forms of identification, credithistory or even a physical address to secure themost basic financial services.

Governments can address obstacles theseknow your customer requirements pose byensuring the level of requirements isproportionate to the size of the accounts andtransactions of the poor people in theircountries.

They can also facilitate access by channelingmore payments to poor people directly to bankaccounts, potentially benefiting banks,governments and clients. But out of the 139countries surveyed, only 40 reported that theyencourage or mandate government transfersthrough the banking system; 14 of these arehigh-income countries and 10 countries are inLatin America. Few countries in other regionsare promoting such transfers.

Banks in some countries are increasingly usingagents to deliver some services - predominantlythose that allow customers to pay utility bills or

make loan repayments or deposits. In Brazil,for example, the number of agents handlingfinancial activities is 10 times the number ofactual bank branches. Governments canfurther promote financial access by removinghurdles financial institutions (includingmicrofinance institutions) face when they want

to establish new branches or develop agentnetworks. On the credit side, borrowers indeveloping countries rely heavily onunregulated lenders or regulated nonbankfinancial institutions rather than banks, whichonce again tend to focus on the wealthiersegments of society. This report argues thatgovernments need to address consumer

protections and balance them against costsborne by the financial institutions themselvesto encourage lenders to make credit availableto lower income borrowers.

Governments should throw their supportbehind the establishment of comprehensivecredit information bureaus and adequateconsumer protection. In high-income countriesand Latin America, where retail credit is moredeveloped, more than 90 percent of countrieshave consumer protection and disclosurerequirements, compared to only half of thecountries in South Asia and Africa. Of thecountries surveyed, 109 have disclosure

requirements on loan interest rates. In all, 47percent of countries have disclosure

requirements rather than usury ceilings, while30 percent of countries use both.

The authors stress that it is important forregulators and governments to gather moreinformation about the characteristics andbehavior of their financial systems. Thisinformation will help them design policies thatcorrectly target barriers to poor peopleaccessing financial services and that anticipatefuture changes in behavior and financialsystems.

Finally, governments also need to examine

ways to prevent over-indebtedness amongborrowers. As some countries considercapping loan interest rates and, in somecases, actual loan amounts, further analysis isneeded to assess the effectiveness of thesepolicies.

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