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Building Financial Systems for the Poor WB Finance Forum September 24, 2004

Building Financial Systems for the Poor WB Finance Forum September 24, 2004. Global providers of microfinance services. 750 million accounts in “social” financial institutions, many likely to be poor. Source: CGAP. Microfinance is melting into financial sector. Financial System.

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Building Financial Systems for the Poor WB Finance Forum September 24, 2004

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  1. Building Financial Systems for the PoorWB Finance ForumSeptember 24, 2004

  2. Global providers of microfinance services 750 million accounts in “social” financial institutions, many likely to be poor Source: CGAP

  3. Microfinance is melting into financial sector Financial System Microfinance Financial Services for the Poor Financial Services for the Poor MFIs are audited and comply with the IFRS 50 countries discuss and implement microfinance policies 12 rating agencies rate MFIs (Standard & Poor’s, Moody’s) Unregulated MFIs report to national credit bureaus (Turkey, Peru) ATM, Point of Sale (POS), Networks handle MF transactions (Dominican Republic, Senegal) MFI bank issues VISA credit cards (Paraguay)

  4. Access points are multiplying Lottery Agent Traders and Processors Self-Help Groups Loan Service Agent Point-of-SaleNetworks PC Kiosk ATMs Leveraging existing + new infrastructure to offer multiple access points State Banks Commercial Banks MFIs CLIENTS

  5. Each country’s model is different Financial NGOs Credit Unions State Banks Commercial Banks Co-ops Postal Banks Rural Banks • Stage of financial sector development • Existence of infrastructure • Population density • Levels of poverty • Competition Self-Help Groups

  6. Using a range of risk in their engagements Higher level of engagement Sogebank, HaitiCreated loan service company Sogesol in 2000 Jammal Trust Bank and Credit Libanais, LebanonHave equity stake in Ameen, a CHF microfinance program ICICI Bank, IndiaContracts microfinance operations with self-help groups and MFIs Raffeissen Bank, BosniaLends to multiple MFIs in Bosnia Garanti Bankasi, TurkeyProvides front office functions through branchnetwork to Maya Enterprise for Microfinance Microfinance Bank, GeorgiaRents space in its offices to Constanta, a local NGO Bank creates loan service company Bank invests equity in MFI Bank buys MFI portfolioand / or contracts MFI operations Wholesale lending Sharing / Rentingfacilities Bank provides front or back office functions Lower level of engagement MFI- Bank partnerships taking off

  7. (I) Potential-to-leapfrog markets / sleeping giants e.g. India, Turkey, South Africa / e.g. China, Nigeria Leveraging assets spurs innovation and depth of outreach ICICI Bank (India) - 20 MFI loan agents and PC kiosks to reach unserved rural population Retail orientation Access to commercial funding and deposits FNB (South Africa) - 4,000 rural points of service in retail shops Caixa Economica (Brazil) - 9,000 lottery kiosks and point-of-sale network to reach the unbanked Existing infrastructure

  8. (II) “Classic” MF markets show Increasing split… (e.g. Bosnia, Bolivia, Uganda, Philippines) Leaders are making great progress but others are stagnant Profitability surpasses commercial banks ROE of 32.3% for financially sustainable MFIs Average growth is steady Average 25% growth in borrowers Money transfers, automated credit approval using credit scoring Client service and diversifying products Source: MBB, Issue No. 9, July 2003

  9. (llI) … and much remains to be done ..but even leaders face sticking points Wide range of growth rates Growth rates range from -19% to 63% during 2000-2002 (MFN) Avg. Operating Expense Ratio 23% in 2000, 25% in 2002 Efficiency not improving Use of technology to reach sparsely populated areas still unproven Sparsely populated areas remain underserved

  10. Pioneer, breakout, consolidation and maturity? Most efficient, effective, client service oriented institutions will prevail and have access to funding sources M&AFailures ~10,000MFIs Formal FIs Top-tier NGO/MFIs GrameenProdem

  11. Funding sources are shifting slowly Sources of Funding Donors: US$ 500 millionto US$ 1 billion per year Development Investors (public funding): US$ 1 billion invested Social Investment Funds (private investors): US$ 125 million invested DomesticBank Loans Grants andSubsidized Loans Foreign Equityand Debt Deposits

  12. Predictions? • “Middle income” and less developed markets will diverge • Multiplying points of service allows exponential growth • Technology and infrastructure are key drivers to scale • Commercial and state banks will become core providers • Money transfer revenues will drive profits

  13. Predictions? • Major consolidation of MFIs will occur through buy outs by banks, mergers, partnerships, and wind-downs • Domestic sources of funds will become even more important (savings, commercial debt) • Donors will focus on frontier markets (very poor and rural)

  14. The way forward WB comparative advantage Industry Level Capacity Building Initiatives Policy RegulationSupervision

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