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Summary of Last Lecture • The Benefits of Private-Sector Engagement in Inclusive Finance • Benefits from the Private Sector • The Road to Inclusive Finance Size, Risk & Growth in the Microfinance Industry Size of the Microfinance Industry • During 1995 and 1996 the Sustainable Banking with the Poor Project compiled a worldwide inventory of MFIs. The list included nearly 1,000 institutions that provided microfinance services, reached at least 1,000 clients, and had operated for a minimum of three years. Size of the Microfinance Industry • From this inventory, more than 200 institutions responded to a two-page questionnaire covering basic institutional characteristics. Size of the Microfinance Industry • According to the survey results, by September 1995 about US$7 billion in outstanding loans had been provided to more than 13 million individuals and groups. • In addition, more than US$19 billion had been mobilized in 45 million active deposit accounts. Size of the Microfinance Industry The general conclusions of the inventory were: • Commercial and savings banks were responsible for the largest share of the outstanding loan balance and deposit balance. Size of the Microfinance Industry • Credit unions represented 11 percent of the total number of loans in the sample and 13 percent of the outstanding loan balance. • NGOs made up more than half of the sample, but they accounted for only 9 percent of the total number of outstanding loans and 4 percent of the outstanding loan balance. Size of the Microfinance Industry • Sources of funds to finance loan portfolios differed by type of institution. NGOs relied heavily on donor funding or concessional funds for the majority of their lending. Banks, savings banks, and credit unions funded their loan portfolios with client and member deposits and commercial loans. Size of the Microfinance Industry • NGOs offered the smallest loan sizes and relatively more social services than banks, savings banks, or credit unions. • Credit unions and banks are leaders in serving large numbers of clients with small deposit accounts. Size of the Microfinance Industry • The study also found that basic accounting capacities and reporting varied widely among institutions, in many cases revealing an inability to report plausible cost and arrears data. Size of the Microfinance Industry • This shortcoming, notably among NGOs, highlights the need to place greater emphasis on financial monitoring and reporting using standardized practices (a primary purpose of this handbook). Size of the Microfinance Industry • Overall, the findings suggest that favorable macroeconomic conditions, managed growth, deposit mobilization, and cost control, in combination, are among the key factors that contribute to the success and sustainability of many microfinance institutions. Why is Microfinance Growing? Microfinance is growing for several reasons: 1. The promise of reaching the poor. Microfinance activities can support income generation for enterprises operated by lowincome households. • 2. The promise of financial sustainability. Microfinance activities can help to build financially self-sufficient, subsidy-free, often locally managed institutions. Why is Microfinance Growing? • 3. The potential to build on traditional systems. Microfinance activities sometimes mimic traditional systems (such as rotating savings and credit associations). Why is Microfinance Growing? • They provide the same services in similar ways, but with greater flexibility, at a more affordable price to microenterprises and on a more sustainable basis. This can make microfinance services very attractive to a large number of low-income clients. Why is Microfinance Growing? • 4. The contribution of microfinance to strengthening and expanding existing formal financial systems. Microfinance activities can strengthen existing formal financial institutions, Why is Microfinance Growing? • such as savings and loan cooperatives, credit union networks, commercial banks, and even state-run financial institutions, by expanding their markets for both savings and credit— and, potentially, their profitability. Why is Microfinance Growing? • 5. The growing number of success stories. There is an increasing number of welldocumented, innovative success stories in settings as diverse as rural Bangladesh, urban Bolivia, and rural Mali. Why is Microfinance Growing? • This is in stark contrast to the records of staterun specialized financial institutions, which have received large amounts of funding over the past few decades but have failed in terms of both financial sustainability and outreach to the poor. Why is Microfinance Growing? • 6. The availability of better financial products as a result of experimentation and innovation. The innovations that have shown the most promise are solving the problem of lack of collateral by using group-based and characterbased approaches; Why is Microfinance Growing? • solving problems of repayment discipline through high frequency of repayment collection, the use of social and peer pressure, and the promise of higher repeat loans; Why is Microfinance Growing? • solving problems of transaction costs by moving some of these costs down to the group level and by increasing outreach; designing staff incentives to achieve greater outreach and high loan repayment; and providing savings services that meet the needs of small savers. What Are the Risks of Microfinance? • Sound microfinance activities based on best practices play a decisive role in providing the poor with access to financial services through sustainable institutions. However, there have been many more failures than successes: What Are the Risks of Microfinance? • Some MFIs target a segment of the population that has no access to business opportunities because of lack of markets, inputs, and demand. Productive credit is of no use to such people without other inputs. • Many MFIs never reach either the minimal scale or the efficiency necessary to cover costs. What Are the Risks of Microfinance? • Many MFIs face non supportive policy frameworks and daunting physical, social, and economic challenges. • Some MFIs fail to manage their funds adequately enough to meet future cash needs and, as a result, they confront a liquidity problem. What Are the Risks of Microfinance? • Others develop neither the financial management systems nor the skills required to run a successful operation. • Replication of successful models has at times proved difficult, due to differences in social contexts and lack of local adaptation. What Are the Risks of Microfinance? • Ultimately, most of the dilemmas and problems encountered in microfinance have to do with how clear the organization is about its principal goals. Does an MFI provide microfinance to lighten the heavy burdens of poverty? What Are the Risks of Microfinance? • Or to encourage economic growth? Or to help poor women develop confidence and become empowered within their families? And so on. What Are the Risks of Microfinance? • In a sense, goals are a matter of choice; and in development, an organization can choose one or many goals—provided its constituents, governance structure, and funding are all in line with those goals. What Are the Risks of Microfinance? • In a sense, goals are a matter of choice; and in development, an organization can choose one or many goals—provided its constituents, governance structure, and funding are all in line with those goals. The Evidence: Real Companies, Real Cases • At the heart of the course are case studies researched and written by members of the inclusive finance team from the Center for Financial Inclusion at ACCION, a group dedicated to industry development. The Evidence: Real Companies, Real Cases • Center for Financial Inclusion at ACCION identified 16 examples from across the globe in which private companies are contributing to financial inclusion in significant or innovative ways. The Evidence: Real Companies, Real Cases • The companies in the cases range from wellknown multinationals (Citibank) to important local companies (Equity Bank of Kenya). The Evidence: Real Companies, Real Cases • The company cases bring the opportunities and challenges of inclusive finance to life. They recount the motivations that led companies into inclusive finance, the opportunities and obstacles they saw, and the results they have experienced so far. The Evidence: Real Companies, Real Cases • The cases are chosen on three qualities: demonstrating scale, profitability, replication, and impact on clients. Not every company scores well on all of these dimensions, but all cases have at least some important elements of success. The Evidence: Real Companies, Real Cases • Several cases presented in this project have been written about before, usually to describe or highlight specific innovations. In this course we seek rather to understand why and how major corporations approached the opportunity. The Evidence: Real Companies, Real Cases • A few of the cases stand out for me with compelling messages. Banco Azteca built a financial-services empire serving 8 million borrowers in five years. This case highlights the potential of retailers to alter the shape of the financial industry. It is a wake-up call to everyone who thinks of scale in terms of thousands rather than millions of clients. The Evidence: Real Companies, Real Cases • The case of Sequoia Capital India and SKS Microfinance helps us understand how hardnosed investors evaluate the growth prospects of a leading microfinance institution. Sequoia bet on Google before it showed profits; time will tell whether it showed similar market acumen to bet on SKS when it had only just crossed the profitability line. The Evidence: Real Companies, Real Cases • A favorite case of mine is that of Equity Bank in Kenya, which created a set of educationlinked products that support low-income students, their families, teachers, and schools. Equity found a way to help Kenyans meet a deeply meaningful social need through profitearning services, a wonderful example of proactive social responsibility. The Evidence: Real Companies, Real Cases • The time is ripe for a massive move by the private sector to tackle inclusive finance. Technology holds out the promise of cutting through cost and infrastructure barriers that until recently appeared insurmountable. The Evidence: Real Companies, Real Cases • Economic growth is putting more money in the hands of low-income people, making it obvious that this market constitutes a substantial opportunity. If the private sector responds, the next decade may well see the contest for the inclusive finance market largely fought and won. Summary • Size of the Microfinance Industry • Why is Microfinance Growing? • What Are the Risks of Microfinance?