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What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

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Page 1: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

What kinds of banks?

• Government banks

• Development banks

• Foreign-owned banks

• Cooperative/mutual banks

• “Southern” banks

Page 2: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Bank ownership: Africa and ROW

Bank ownership (Africa)

Equally shared

19%

Mainly local21%

Mainly govt7%

Mainly foreign

46%

Foreign+Govt7%

Bank ownership (Rest of Developing World)

Foreign+Govt9%

Mainly foreign

29%

Mainly govt12%

Mainly local25%

Equally shared

25%

Note prominence of foreign-owned banks in Africa

Page 3: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Estimated impact of foreign bank entry on domestic bank performance

-2

0

2

Net interest margin

Non interest income

Profit before

tax

Over-heads

Provisions

Percent of total assets

Page 4: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Nigeria’s DFIs in 2000

Annual losses=9% total assets

Cumulative losses=45% of total assets

Negative net worth=35% of total assets

78% of portfolio non-performing

Page 5: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Nigeria’s DFIs in 2000

Started vigorous and promising

But made poor loansNever built a strong credit appraisal capacity

Charged insufficient spreads

Incured excessive FX risks

As NPLs started to spiral, cash dried-up

Even those who could repay stopped given new lending prospects poor

Page 6: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Comparing the share of foreign and state ownership in crisis and noncrisis countries

Foreign-owned banks State-owned

banks

Noncrisis countries

Crisis countries

0

10

20

30

40Percent of total assets

Page 7: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Sources of banking crisis

• Government interference– Especially in countries with poor governance

• Market: Boom and bust– East Asia crisis 1997-8; Structured finance crisis,

2007-8

• Bad management and fraud– Venezuela, 1994, Dominican Republic 2003

Page 8: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Share of different intermediaries in outreachAll accounts

Postal or savings bank48%

Other bank / nearbank

21%

Credit Union or Coop21%

NGO10%

Africa

Share of different intermediaries in outreachBorrowers

Other bank / nearbank

35%

Credit Union or Coop17%

NGO48%

Africa

Share of different intermediaries in outreachAll accounts

Postal or savings bank48%

Other bank / nearbank

41%

Credit Union or Coop5%

NGO6%

World

Share of different intermediaries in outreachBorrowers

Other bank / nearbank

75%

Credit Union or Coop2%

NGO23%

World

Page 9: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Is microfinance different?

• Scale

• Subsidy

• Style

Page 10: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

A few relatively large MFIs dominate outreach (of the institutions reporting to the Microcredit Summit)

Top 10Next 10

Next 100

Remaining 2800

Beck, Demirguc-Kunt and Honohan, 2008

Page 11: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

MF likely helps poverty

• But scarcity of reliable evidence is not widely recognized

• Cf. Dichter and Harper: What’s wrong with microfinance?

Page 12: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Microfinance penetration and poverty headcount

0

1

2

3

4

5

6

7

0 20 40 60 80 100

Poverty headcount (% < $2 a day)

Mic

rofin

ance

pen

etra

tion

(%

po

pula

tion)

Page 13: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Direct impact channels of MF on poverty• Insure against current income falling below

poverty level• Reduction in cost of making small payments• Return to credit-financed investment• Insurance allowing high-yield high-risk ventures

…channels can be slow and complex (cf. child labor channel)

Page 14: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Difficulty of impact meta-analysis

• Multiple indicators allow cherry-picking by secondary sources…

…But hinder aggregation across studies

• Researchers don’t report rates of return (even though they may be very high)

• Technical problem: selection bias

Page 15: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Example: Bolivia study

Primary report cited 14 indicators; five significant, of which four unfavorable (only one favorable)

But reputable secondary sources cherrypick the one favorable finding: “incomes of 2/3 of clients had increased after joining the program”

http://www.cgap.org/docs/FocusNote_24.pdf

Page 16: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Selection biases

Success of household in accessing credit is already an indicator of otherwise unmeasured abilities - leads to upward bias of credit impact (solved by Coleman)

But on the other hand

NGOs may target disadvantaged areas - leads to opposite bias (solved by Pitt & Khandker)

Page 17: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Scale and MFI viability

MF remains fragmented with most individual MFIs operating well below efficient scale.

Larger firms (# clients, or total assets) tend to be more profitable (99% significance).

A doubling of scale implies between 6 and 10 percentage point improvement in the self-sufficiency index (income as % expenses)

Small loan size (in absolute terms) reduces profitability

Page 18: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Subsidy/Interest rates

• Is present in many if not most MFIs

• Any MF subsidy should be evaluated on its effectiveness relative other grant finance

• MF subsidies may constrain MF development– discouraging entry of the unsubsidized and– vulnerable to fluctuations in aid

• Are government-imposed interest rate ceilings good for the poor?

Page 19: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Interest ceilings: the simplest story

Page 20: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

There is no alchemy

Enormous diversity in style but…

…the essential features of microfinance technology are banal!

Common sense, cost control & skilled attention to the demands & sensitivities of the local clientele the main requirements, along with the ambition to achieve scale.

Page 21: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

The constraining factor

• Even if viable, MF is typically not high-profit

• It is intensive in managerial/entrepreneurial resources that are scarce in LDCs

• And these resources are also highly rewarded in other sectors

(Hence predominance of charitable sponsors)

Page 22: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Other measurement issues

Displacement effects

Decline in income variance could lower poverty rate even if mean (group) income does not increase

Access to credit could worsen poverty (e.g. funds squandered or appropriated by menfolk leaving rest of family overindebted)

Page 23: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Is finance-intensive growth pro-poor (or does the rising tide just raise all boats)?

Two views and some evidence

Page 24: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Not mainly for the rich

The optimistic view (cf. Rajan and Zingales: Saving Capitalism…from the Capitalists):

• Undeveloped financial system is “uncompetitive, clubby, conservative”

• Developed financial system can – Undermine the power of incumbent firms– Help households and small producers escape the

tyranny of middlemen

Page 25: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Not mainly for the rich (2)

The pessimistic view:

• Requires minimum scale/wealth in order to benefit from formal finance (Greenwood and Jovanovic, 1990)

• More financial system might mean that those excluded fall back even further?

Page 26: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Poverty and per capita income

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

0 20 40 60 80

% below $1 a day

GD

P p

c

Page 27: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Pro-poor financial development?

Honohan, 2004

-25

-20

-15

-10

-5

0

5

10

15

20

25

1 1.5 2 2.5 3 3.5 4 4.5 5

Financial development (bank credit to private sector as a % GDP, log)

Pov

erty

hea

dcou

nt (

%)

unex

plai

ned

by m

ean

inco

me

etc

Page 28: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks
Page 29: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Access to FinanceDistribution of countries in each region

0

10

20

30

40

50

60

70

80

90

100

AFR EAP ECA LAC MNA SAR

%

Page 30: What kinds of banks? Government banks Development banks Foreign-owned banks Cooperative/mutual banks “Southern” banks

Supplementary reading: Topic 3

• Demirgüç-Kunt, Asli, Thorsten Beck and Patrick Honohan. 2008 Finance for All? Policies and Pitfalls in Expanding Access (Washington DC: The World Bank). http://www.worldbank.org/financeforall. Overview and Summary

• Honohan, Patrick. 2004. “Financial Development, Growth and Poverty: How Close Are the Links?” World Bank Policy Research Working Paper WPS 3203.

• Honohan, Patrick. 2008. “Money Matters for Poor Countries.” Trinity College, Dublin, Mimeo