microfinance as retail banking · 2017-06-04 · microfinance is melting into financial sector bank...

Microfinance as Retail Banking

Martin Holtmann, Lead Financial Specialist

Microfinance Workshop

UNICONS Consultancy Ltd. / Bank of Sudan

Khartoum, Feb. 28, 2006

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Agenda

I. Commercial Banks in Microfinance

II. Dimensions to the Microfinance Market

III. Profitability, Volume, Manageable Risk

IV. Entering the Market: Six Strategies for Banks

V. Key Success Factors

VI. Where to Find Out More & Sample Action Plan

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Leverage existing infrastructure & distribution channels to increase access to financial services for low-income people

Integrate MF into the formal financial systems of all countries

Bankers are already taking note of microfinance

Increasing competition

Add to the bottom line

Make corporate infrastructure “work harder”

Diversify risk

Why is CGAP working with commercial banks?

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Financial System

Financial Services

for the Poor

MicrofinanceFinancial Services

for the Unbanked

Microfinance is melting into financial sector

Bank loans to MFIs 6x greater than donor funding

(Benin)

2 million Mzansi accounts opened in 1 year

(South Africa)

MTN Banking, Wizzit, FNB

launch mobile phone banking

(S. Africa)

50 countries implement MF

policies(global)

225 banks in the MF market already(CGAP survey)

MFI bank issues VISA credit cards

(Paraguay)

SMART processing 2 mil mobile banking transactions per day

(Philippines)

12 rating agencies rate MFIs

(Standard & Poor’s, Fitch, Moody’s)

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Agenda







6


3 Billion

~ 500 mil served by AFIs

2.5 billion Unbanked

3 Billion

Served or not economically active

Unserved

83% of global market yet to

be tapped

Source: CGAP, Financial Institutions with a Double Bottom Line (2004).

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Financial Services for Low Income People

Consumer and business loans

MoneyTransfers

Insurance

Housingloans

Pension and retirement

savings

Emergency loans

E-payments

Savings accounts

8

Banking in Developed Economies

Wells Fargo: 4th largest US bank with

business model built on mass retail

Citibank North America: +50% of

2003 profits from consumer/SME loans

Société Générale: Retail operations

helped support 600% growth in total

shareholder returns since 1990

Rabobank: Serves half the population

and businesses in Netherlands

Retail and small business clients can lead profits for banks

9

BANKS

Retail orientation

Competitive

sector

Highly liquid

Lack of retail

orientation

Limited competition

Incentives to invest

In government

obligations

(1)“LEAPFROG”

Banks adopt MF and drive outreach

(2)“CLASSIC”

MFIs transform and drive outreach

FundingDeposits

Local debt

FundingSubsidies

Foreign debt

INFRA-

STRUCTURE

Wide bank / postal

branch networks

Developed technology

infrastructure

(e.g. payments

systems)

Limited branch

networks

Under-developed

technology

infrastructure

ROLE OF

GOVERNMENT

Incentives for

rural lending

Universal service

obligations

Constraints on

rural lending

(e.g. Interest rate

ceilings

Highly subsidized

credit programs

Two Emerging Types of Financial Systems

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Developments in Leapfrog Markets

National financial switch

includes MF Bank (Teba)

32,000 POS devices to

reach unbanked(8 mil new accounts)

BRAZIL

40m

unbanked

S. AFRICA

16m

unbanked

INDIA

856m

unbanked

ICICI Bank contracts 61

MFIs to originateMF loans

Financial Charter implements

universal service obligation

1,400 rural POSreach

unbanked areas (FNB)

EnablingEnvironment(supportive regulation)

IndustryInfrastructure(epayments, creditbureaus, national IDs)

RetailInnovations(technology,partnerships,use of infrastructure)

Banks, MFIs discussing

credit bureaufor MF

Source: World Development Report < $2/day

Relaxed rules for account opening and use of agents

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Developments in Classic Markets

MEXICO

27m

unbanked

SENEGAL

7.5m

unbanked

UGANDA

24m

unbanked

Bansefi linking 20 FIs into epayments

network

Donor-driven common MFI performance

reporting

EnablingEnvironment(supportive regulation)

IndustryInfrastructure(epayments, creditbureaus, national IDs)

RetailInnovations(technology,partnerships,use of infrastructure)

CMS transformed into regional coop bank

DRC

50m

unbanked

CelPay w/ +3 mil phone

transactions per month

MDI Law opens regulatory

window for MFIs to mobilize deposits

50% of MFIs in ECA report

partnerships with banks

(MFC)

GLOBAL

2,5+ bil

unbanked

MF-friendly regulationadoptedin many markets

Telecom companies exploring

mobile phone payment systems

Source: World Development Report < $2/day

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Agenda







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III. Focus on Profitability

MiBanco

Peruvian banks

Avg. Adjusted ROA of microfinance provider

Avg. ROA of banks (same market)

Sources: Ratings, BankScope, End FY 03

ROA of Select MFIs vs. Banks (2001 to 2003)

Amret

Cambodian banks

0% 2% 4% 6% 8% 10% 12%

PADME

Beninese banks

PAMECAS

Senegalese banks

Equity Bank

Kenyan banks

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Focus on Profitability

Sources: MicroBanking Bulletin, BankScope

ROA: MFIs vs. Commercial

Banks, 2001-2003

1.92.8

0

0.5

1

1.5

2

2.5

3

278 MFIs 1147 Com. Banks

Weig

hte

d R

OA

Globally, MFIs outperforming commercial banks

MFI ROA ~ 50% higher

278 MFIs vs. 1,147 banks in 38 countries

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Aim for Large Volume

Institution

Number of

Borrowers

Gross Loan

Portfolio

(USD mil)

Number of

Savers

Total

Deposits

(USD mil)

BRI (Indonesia) 3 100 358 1 720,1 29 869 197 3 244,87

Compartamos (Mex) 309 637 101,0 0 0

ACSI (Ethiopia) 288 681 25,4 110 724 10,9

Teba Bank (S. Africa) 157 776 176,3 492 154 125,8

Banco Solidario

(Ecuador) 135 855 177,1 72 787 180,8

Khan Bank

(Mongolia) 128 227 49,0 377 424 75,5

Credit Rurale

(Guinea) 127 573 5,6 14 635 1,8

CMS (Senegal) 33 598 40,7 158 883 54,3

Data Dec. 2004 except Khan (Feb. 2004), BRI & ACSI (Dec. 2003). Source: The MIX

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Excellent Portfolio Quality

Institution

PAR >30

days

Gross Loan

Portfolio

(USD mil)

Number of

Borrowers

SHARE (India) 0,19% 40,2 368 996

Compartamos (Mexico) 0,56% 101,1 309 637

Banco Solidario (Ecuador) 1,54% 177,1 72 787

ASA (Bangladesh) 1,68% 201,1 2 772 719

PADME (Benin) 1,81% 44,1 37 661

NovoBanco (Mozambique) 3,38% 6,9 11 350

Centenary Bank (Uganda) 4,21% 44,6 52 682

CMS (Senegal) 4,21% 40,7 33 598

Data end 2004. Source: The MIX

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Agenda







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IV. Entering the Market

Weaknesses Products not adapted to microfinance market

Staff not accustomed to serving microfinance

clients in a high transaction volume business

Administrative cost structure for traditional

banking often too heavy for profitability in

microfinance

Strengths Extensive infrastructure close to clients

Capacity to offer diverse financial products

Recognized brand name

Well-established controls and accounting systems

Private capital structure encourages sound governance structures and prudent management

Access to capital

Threats Increasing competition in traditional markets

Risk concentrated in certain client groups

Regulatory environment

Investment required to adapt products and

systems, train staff, launch new operation

Opportunities Gain access to a sizable, profitable and largely

untapped market segment

Deploy excess liquidity at acceptable risk

Make fixed assets “work harder”

Bring new clients into traditional products

Improve public perception of the institution

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Different Banks, Different Approaches

Key Factors

Provide

Services

Directly

Work Through

Existing

Providers

Internal Unit

Specialized

Financial Instit.

Service

Company

Provide Systems

& infrastructure

Commercial

Loans to MFIs

Outsource

Business goals

Competition

Regulatory environment

Market size

Existing infrastructure and systems

Other factors

Source: CGAP, Commercial Banks and Microfinance: Emerging Models of Success (2005).

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Internal Microfinance Unit

Key Features

Neither independent entity nor regulated separately

Requires adaptation of systems and procedures

Banks may decide to give unit further autonomy

Opportunities for synergy with other parts of bank

Khan Bank (Mongolia)

2003: most profitable among 16 banks (ROE: 44.2%)

$19 mil in SME loans, arrears consistently <2%

Keys to success: diversified client base, and

leveraged one of its biggest assets (384 branches)

DIRECT

Internal Unit

Specialized

Financial Instit.

Service

Company

INDIRECT

Outsource

Commercial

Loans to MFIs

Provide Systems

& Infrastructure Sources: CGAP, Commercial Banks and Microfinance: Emerging Models of Success, (2005). DFID/DAI, Banking the Underserved (2005)

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Specialized Financial Institution

DIRECT

Internal Unit

Specialized

Financial Instit.

Service

Company

INDIRECT

Outsource

Commercial

Loans to MFIs

Provide Systems

& Infrastructure

Key Features

Separately licensed and regulated

May be wholly-owned, or joint venture

Separate corporate identity, governance, staff,

management, and systems from parent bank

May use parent bank infrastructure

Financial Bank / FINADEV (Benin)

Staged entry into microfinance, 1995-2001

14,000 borrowers, $9.8 mil outstanding, PAR ~1%

ROE of 5.2%

Rents offices from parent, top 2 employees seconded

Sources: CGAP, Commercial Banks and Microfinance: Emerging Models of Success, (2005). Interview with FINADEV (2004).

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Service Company

DIRECT

Internal Unit

Specialized

Financial Instit.

Service

Company

INDIRECT

Outsource

Commercial

Loans to MFIs

Provide Systems

& Infrastructure

Key Features

Separate but non-financial legal entity

Originates loans and sells other financial products,

which are registered on parent bank’s books

Can involve expert TA and external equity

Leverages bank’s infrastructure, liquidity and brand

Banco del Pichincha / CREDIFE (Ecuador)

2001-2003: Loan portfolio grew to $28 mil

Contribution to BDP Net Income $1.44 mil

Advantage to bank: higher utilization of fixed

assets, cross-selling, graduation of clients

Sources: CGAP, Commercial Banks and Microfinance: Emerging Models of Success, (2005). USAID/DAI, Case Study on Profitability: CREDIFE (2005)

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Outsource Retail Operations

DIRECT

Internal Unit

Specialized

Financial Instit.

Service

Company

INDIRECT

Outsource

Commercial

Loans to MFIs

Provide Systems

& Infrastructure

Key Features

Higher-caliber MFI contracted as bank’s agent

Services may be branded by bank or MFI, or jointly

May delegate credit decisions

MFI and bank share risks and incentives

ICICI Bank & Spandana (India)

$3 mil in loans to 20,000 clients in first 5 months

Spandana and ICICI split interest income

Risk sharing built in: deposit & overdraft mechanisms

Sources: CGAP, Commercial Banks and Microfinance: Emerging Models of Success, (2005). Interview with ICICI (2004).

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Commercial Loans to MFIs

DIRECT

Internal Unit

Specialized

Financial Instit.

Service

Company

INDIRECT

Outsource

Commercial

Loans to MFIs

Provide Systems

& Infrastructure

Key Features

Bank provides term loans of lines of credit to MFIs

for working capital or onlending

Variety of terms possible: unsecured, secured by

assets or cash, 3rd party guarantee

Characteristics of good MFI customers: full and

accurate financial information, quality management,

high-quality portfolio, prospects for growth

Examples

Bank of Africa (Benin, Burkina Faso, Madagascar)

Banque Agricole et Commerciale du Burkina Faso

Banque National de Developpement Agricole du Mali

Caisse National de Credit Agricole (Senegal)

Stanbic Bank Uganda Ltd.

Sources: CGAP, Commercial Banks and Microfinance: Emerging Models of Success, (2005). CGAP, Commercial Lending to MFIs, (2004)

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Provide Systems and Infrastructure

DIRECT

Internal Unit

Specialized

Financial Instit.

Service

Company

INDIRECT

Outsource

Commercial

Loans to MFIs

Provide Systems

& Infrastructure

Key Features

Bank provides MFI with access to its capabilities:

branches, ATMs, cashier services, back office functions

Bank receives fees, commissions, and/or rents

Transaction processing most common, lowest risk

Garanti Bank & Maya (Turkey)

Garanti provides branch and E-banking for all Maya

loan disbursements and payments

Maya invests dormant capital, does payroll through GB

Maya clients establish accounts plus ATM cards at GB

Source: CGAP, Commercial Banks and Microfinance (2005).

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Agenda







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Serving the Majority - Success Factors

Success Factors

Staff training &

incentives

Adapted systems

and procedures

Infrastructure

close to clientsProducts specially

adapted to market

Knowledge of MF

best practices

Commitment

Source: CGAP, Commercial Banks and Microfinance (2005).

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Agenda







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VI. Where to Go for Help

Web-basedResources

CGAPAdvisoryServices

TechnicalAssistanceProviders

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Technical Assistance Providers

DAI

Accion

CHF

IPC

Chemonics

Horus

WSBI

ING

Bank

Rabo-

bank

Micro

Save

TA

And more…

ECI

AfricaGenesis

KDA

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Resources on the Web

CGAP (www.cgap.org)

Best practices, case studies, technical tools, industry surveys

Microfinance Gateway (www.microfinancegateway.com)

Library of +5000 documents, new & events, now in French & Arabic

Microlinks (www.microlinks.org)

Knowledge-sharing on USAID microfinance activities

The MIX (www.themix.org)

Leading source of performance benchmarks for MFIs and investors

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CGAP: Stakeholders and Services

Advisory services

Incubation and experimentation

Training & information

dissemination

Consensus building on

standards

for the poor

Development agencies

Financial institutions

Policymakers and regulators

Other service providers

(including auditors, rating

agencies, etc.)

Core Stakeholders Core Services

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Deepening CGAP System Work in Africa

Market Study

Identified current funder activities in region

Donors fund +480 MF programs in Africa; primarily at the retail level

Priority Actions

Targeted communications; tailored outreach

Identify good practices case studies with diversity of models

Map innovations on linkages to financial infrastructure

Promote existing transparency initiatives

Policy advice & reg. and sup. technical assistance

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Increasing Access to Money Transfers

Overview on Money Transfers in microfinance

Market Studies in Southern Africa and China

Implications of anti-money laundering policies for clients and institutions

Results to date

Next Steps

Guide on strategic, operational issues and negotiating alliances with MTCs

Pilots to launch or improve MT services

Advising on country studies with goal: to propose risk-based approach to

anti-money laundering compliance

Domestic and regional money transfers are

needed by poorer migrants

Poorer clients have less access and pay

higher prices

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Retail Advisory Service

Approach

RAS facilitates breakthroughs in retail financial services via large

(branch) networks and proven delivery mechanisms (ATM, POS, etc.)

CGAP staff provide high-level strategic advice

Tailored TA, most often through local providers

Objectives

Rapidly scale up financial services via existing infrastructure

Foster growth of local and regional markets for consulting services to

downscaling banks

Provide catalytic (and temporary) function for an emerging market

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Sample Action Plan

1. Strategic Planning

2. Pilot Phase

3. Implementation

1. Strategic Planning Discuss business plan for MF operation

Appoint an operations manager from upper management

Develop a critical degree of commitment to vision in the institution

2. Pilot Phase Investigate market using institution’s own staff

Design products

Test the loan process and tailor internal microfinance procedures

Select microfinance staff

Prepare the IT system for microfinance operations

Identify pilot branches

Draft business plan

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Sample Action Plan:

3. Implementation

People- Training Plan

- Incentive System

Products- Refine design

- Explore cross

selling

Systems- MIS

- Risk management

- Internal control

& audit

Management- Commitment

- Rollout plan

Marketing- Marketing approach

- Media plan

38

UNCDF

Building Financial Systems

for the Poor

Thank you

39

Annex: Case Studies in Downscaling

I. Seven banks in Kazakhstan

II. Banco do Nordeste (Brazil)

III. BRI (Indonesia)

IV. SOGEBANK (Haiti)

V. Stanbic (Uganda)

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Case Study: Seven Kazakh Banks

Seven Private Commercial Banks

Seven banks introduced micro- and small enterprise (MSE) lending in 1999 via a EBRD-supported initiative

MSE departments opened in 185 branches in 39 different cities.

Approximately 90% of the clients never had a formal bank loan before

Results

Outstanding MSE portfolio: USD 328 million, 47,700 loans (June 2005)

Over 150,000 loans, total volume disbursed USD 944 million since 1999

Arrears of 0.50% as of June 2005

MSE Lending Catalyzed Positive Change in Banks

MSE training and recruitment methods are copied by competitors

Incentive-based pay schemes adapted for use in other departments

MSE loan officers are in great demand: frequently promoted within the bank, or hired by competitors

41

Case Study: Banco do Nordeste (Brazil)

Banco do Nordeste (BN)

Founded in 1954 as a state bank to serve Brazil’s poorest region

Primarily subsidized agricultural loans

In 1996, visionary bank leadership launched CrediAmigo

Success factors

BN charged real market interest rates from the beginning of CrediAmigo

Staff incentives fueled growth and performance

Credit decisions decentralized close to the borrower

Strong commitment – stuck through early difficulties

Results

140,000 loans, portfolio of USD 28.4 million (Dec. 03), 265 branches

Very low avg. loan balance ($270) – 6% of Brazil’s GNP per capita

42

Case Study: BRI (Indonesia)

Global Leadership in Commercial Microfinance

BRI – 100+ years old, a subsidized agricultural lender until 1983

Now, arguably the largest microfinance program in the world: 30 million depositors, 3 million borrowers

3500 branches, 22,000 staff

Success factors

Extreme standardization in operations and branch management

Patient approach to product development and deployment

Political will to reform Unit Desa system

Results

$5.49 billion outstanding to small and micro-enterprises

ROE 42%, ROA 5.77% (2004).

In 1997, BRI’s microfinance portfolio helped the bank stay afloat.

43

Case Study: SOGEBANK (Haiti)

SOGEBANK Entered microfinance as: (1) response to threat of losing customers,

(2) prospect of enhanced reputation as a socially responsible actor

To reduce risk, SOGEBANK created SOGESOL, a service company to provide microloan origination and portfolio management services.

Success factors Improved regulatory conditions with the elimination of interest rate

ceilings and reduction in required legal reserves

Already held a significant share of savings from small savers

Possessed internal capacity to process high transaction volumes.

Results Serving over 6,000 active clients after three years and managing an

outstanding portfolio valued at close to US $3 million.

Average ROE was over 30 percent for those three years.

44

Case Study: Stanbic (Uganda)

Stanbic (subsidiary of Standard Bank) Feb. 2002, Standard Bank bought a 90 percent stake in UCB

UCB possessed Uganda’s largest branch network (66)

Not an obvious match at first sight

Rationale for Stanbic

Forgo organic growth that would be costly and slow

Capture a dominant deposit base for low-cost source of capital

Gain a platform to build a nationwide payments system

Results from Acquisition

Added 150,000 accounts, doubled loan portfolio and grabbed one-quarter share of market for both small loans and deposits

End 2004: Largest bank by assets ($528 mil), and ROE double the industry average (76%)

microfinance as retail banking · 2017-06-04 · microfinance is melting into financial sector bank...

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