Commercial Banks in Microfinance

1. Commercial Banks in Microfinance Prepared and Presented by: Mr SEEKU JAABI Microfinance Department Central Bank of The Gambia West Africa English Speaking Regional Workshop On ‘Innovations in addressing rural finance challenges in Africa’ held on March 31- April2, 2008 in The Gambia

2. Table of Content • Introduction • Banks absence in microfinance • Banks participation in microfinance • Modalities of participation- direct/indirect • Merits of linkage banking • Challenges in linkage banking • Microfinance Lessons • Conclusion

3. 1. Introduction • Banks in MF has been an issue of much debate among developing countries and development economists • Many suggest banks involvement to increase capacity, efficient resource mgt • Immediate post independence era, most state-owned banks took up the responsibility in the absence of private banks

4. 1. Introduction cont. • However, failed to address the main objects due to high NPLs, poor mgt, insider abuses, political interventions, among others • Many were liquidated or reorganised during SAPs in the 1980s • Govts reduce to providing right conducive environment • MF is a high-yield emerging market that commercial markets cannot afford to ignore

5. 1. Introduction cont. • Globally, MFIs are operating successfully without subsidies, donor dependence or social requirements but charging sustainable interest rates, profit oriented and huge growth potentials • Move to viable and sustainable funding sources, sound operations, job creation and extensive outreach to unbanked majority • In Africa, Asia and Latin America, banks have recorded success stories in MF

6. 2. Banks absence in MF • No legal status, most in informal sector • Poor is unbankable perception-unable to provide collateral, minimum balances, tiny transactions • Risks in agric lending- main occupation of rural dwellers, erratic rainfall, drought, markets • Lack of conducive policies and at times conflicting • Lack of technologies to support outreach • High transaction costs, poor infrastructure

7. 3. Banks participation in MF • Mission of bank- development, country-wide operations, promote key sectors of the economy • Compulsion to provide financial services to rural areas- Some African & Asian countries • Long term sustainability objective • Profitability motive- studies showed that repayment rate is higher in MF than mainstream financial sector

8. 3. Banks participation in MF cont. • Fewer alternative borrowing possibilities • Women lack access to economic opportunities • Less mobility of women to care children made them less delinquent to credit facilities • Market and risk diversification-viable option • Incentives in MF- credit guarantee schemes, tax holidays

9. 4. Modalities of banks participation in Microfinance • Direct 2. Indirect/Linkage banking 1. DIRECT Approach Banks SHGs, Coops societies CBOs, low-income

10. 4. Modalities of banks participation Direct cont. • Banks act as retailers in the delivery of financial services • Savings mobilised often used as collateral • Delivery of credit through SHGs, SMEs • Grameen Bank pioneered group lending • Successes of the model replicated globally to reach the poor, reduce risks and tap profit potential

11. 4. Modalities of banks participation- Direct Cont Bank Rakyat Indonesia – 2004 data • Head office, 15 Regional offices, 325 Branches, 3595 Unit Desas/agencies and 392 service posts • Unit TA $3.5bn -35% of BRI, loans $2.1bn- 28% of Total, Deposits $3.5bn- 42% of total $8.35bn • 3.2 m borrowers, 31.3 million savers • Repayment rate of 99.6%, profit $233m • ROA 6.8%

12. 4. Modalities of banks participation -BRI Culture • High-level, experienced, committed management • Professionalism & responsibility • Effective internal controls and supervision • Transparency & accountability • Training & incentives for staff based on unit profitability, stress on Unit Operational self-sufficiency • Training for all staff in its 6 training schools yearly • Financial education and customised products developed

13. 4.Modalities -Direct Approach BRAC- Bangladesh • NGO transform to a bank in July 2001 with special focus on SMEs • Head office, 66 Regional offices 44 area offices, 694 Unit offices • Outstanding loan US $179.81m Sept 2003 -99% of borrowers were women • Average loan size of $120 • Repayment rate 99.19% • Savings deposits $99.48m • Staff strength of 62,494 part and full time

14. 4. Modalities- Direct Approach Equity Bank of Kenya • 1984-93 building society-deposits ksh 31m, loans ksh12m, loss 5m, reserves loss ksh35m, TA ksh 28m • Restructuring with two strategic investors-IFC & EIB in 2006 ksh12.7bn savings, 9.2bn loans, ksh18.2bn TA, profit ksh653m • Minimum opening balance nil, no ledger fees, account opening nil, no restriction on frequency of withdrawal, no appointment to see managers, operate 36 branches, 56 mobile branches, flexible collateral • Loans available to all account holders • Same is true for k-rep bank, CERUDEB

15. 4. Modalities of banks participation in MF Indirect/Linkage Banking Banks Donors MFIs SHGs, CBOs MSEs, SMEs, Low-income

16. 4. Modalities of banks participation in MF Indirect • Banks act as wholesalers of credit to MFIs for retailing • MF requires specialised technologies and methodologies to outreach and banks often lack this capacity • In line with Strauss Commission of 1996 in South Africa- banks finance equity of retailing MFI • Studies showed that credit demand for MF clients is huge, financing gap is met through wholesale of funds

17. 4. Modalities -Indirect • Savings mobilised cannot cope to generate such funds • Therefore wholesale funds will remain a genuine requirement for MF intermediation for long • Rely on collateral substitutes as opposed to conventional collateral • By The Gambian MF policies, wholesale funds are only accessed by licensed MFIs

18. The Gambia Financial Sector Financial Sector Non- Banks Commercial Banks 10 Finance Company 5 SACAs 63 Credit Unions 67 Bureau De Change 40 Fiduciary Institutions

19. Performance of MF Sector Dec 05 Dec 06 Dec 07 Deposits 111.4m 150.6m 262.7m Loans 103.8m 123.8m 241.4m Clients Reached 73,488 88,538 92,021

20. 5. Merits of Linkage Banking • Contributes significantly to deepen the financial system • Encourages more resource flow, extensive outreach, increase access to finance • Promotes savings mobilisation for re-investment ultimately to operational and financial self-sufficiency- OSS and FSS • Linkage achieves double objectives-increase access to finance for poverty reduction and profitability for participants

21. 5. Merits of Linkage Banking • Women considered highly vulnerable were able to acquire assets and participate more in decision-making at community and family levels • Reduce credit administration and ease loan recovery drive as MFIs have capacity to intermediate wholesale funds- know the terrain in MF service delivery

22. 6. Challenges- Linkage Banking • Lack of legal status for most MFIs hampered such business relationships • Group commitments are at times questionable, if formed purely to obtain credit • Some SHGs have leadership problems, have the tendency of diverting funds in transit • VISACAs fear of being swallowed

23. 7. Microfinance Lessons • Poor households are bankable, they can save and repay loans timely • Access to financial services is more important than the costs (high interest rates) to the poor • Emphasis is on appraisal, timely disbursement of loan, training (financial education) and monitoring of loan, financial services have to be demand driven and flexible

24. 7. Microfinance Lessons cont. • MFIs are sustainable if integrated into the financial system • MF contributes to achieving MDGs • MFIs need to cover costs in order to operate sustainably • Subsidised funds no longer needed for growing portfolios- unsustainable • MF has limits i.e great difficulty in reaching the poorest but in collaboration with other bodies they can be reached eg BRAC Bangladesh

25. 7. Microfinance Lessons Cont. • The poor need efficient, sustainable financial services to help grow out of poverty. Credit cannot be a ‘one-shot’ poverty alleviation mechanism- Credit Plus required • Women repay MF loans more reliably (studies have shown) due to less access to alternative sources, vulnerable to peer pressure, less mobility, spend for the needs of their families • Treat poor as valued customers not beneficiaries

26. 8. Conclusions • Linkage banking is high on CBG’s agenda • Recent policy changes encourages the participation of banks in MF either directly or indirectly • Banks have sufficient funds but has not fully entered into MF but the informal sector has huge financing gap and very effective in repaying loans so linkage is considered the only way forward • With use of wireless technology, branchless banking, linkages, poor could be reach even in remote areas

27. 8. Conclusions • Informal sector will develop, gradually formalised with effective integration into the financial sector • Formal sector need to simplify, downscale to accommodate the informal sector • Combine the strengths of the two sectors will enable efficient resource allocation, deepen financial sector, economic growth • Comparative, absolute comparative advantages are relevant in linkage banking

28. THE END THANK YOU ALL FOR YOUR ATTENTION

29. Contact Address Mr Seeku Jaabi Microfinance Department Central Bank of The Gambia Tel 00220- 4223168 / 9911775 Fax 00220 – 4226969 / 4201405 Email: sjaabi@hotmail.com jaabiseeku@yahoo.com