Summary of the Last Lecture. Financing vs. Delivery In house vs. partnerships. MODELS AND CORPORATE CHOICES. Social Responsibility Positioning.
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When thinking about inclusive finance, companies are advised to be clear about where they place themselves on the spectrum of corporate social responsibility (CSR). Will they approach financial inclusion on purely commercial terms, or at the other extreme—as a philanthropic activity?
Some players see their involvement in inclusive finance strictly as corporate social responsibility. An international bank’s head of microfinance, quoted in Euromoney, commented, “Anyone who tells you that they’re in this for business reasons alone is lying to you … We have a trillion-dollar balance sheet.
Do you think this really matters for our bottom line? You couldn’t do three big deals with all the money in microfinance.” Zach Fuchs, the Euromoneyreporter who interviewed this person, found him to be an outlier.
ACCION believes that for-profit businesses can and should incorporate social goals. Moreover, the transfer of social objectives from CSR to mainstream strategy is one of the harbingers of success for inclusive finance.
Corporate champions like NachiketMor and Bob Annibale may be motivated by their own desire to make a difference to the poor. They may operate from passion and conviction, concepts strongly on the social side of the spectrum.
Companies can find many opportunities to address important social and economic challenges if they seek them creatively. An excellent example comes from the education services of Equity Bank in Kenya, which contribute to the education of hundreds of thousands of students, address one of Kenya’s highest social values, and earn Equity Bank both profits and enormous goodwill.
Social goals must also include a strong commitment to consumer protection. When financial institutions do not protect consumers, as in the case of the subprime mortgage debacle in the United States, the damage can spread far beyond a single offending bank. It tarnishes the reputation—and the returns—of the entire sector.
Banks can participate in inclusive finance in many ways. In this lecture we focus on one mode, often called bank “downscaling.” In downscaling, banks provide working capital credit directly to microentrepreneursusing techniques derived from microfinance institutions.
For a few brave banks that have launched their own microenterprise finance operations, downscaling has already provided rewards in the form of growth, profits, and social value added. ACCION has assisted seven banks to start microlending, first in Latin America and more recently in Africa and Asia.
All of the operations more than two years old are consistently profitable, and together they reach more than 450,000 active borrowers. There are numerous other examples carried out by a variety of actors, notably several newly rising banks in Eastern Europe and Central Asia.
And the original microfinance bank, Bank Rakyat Indonesia (BRI), although a public-sector bank, implemented what was in many ways the first successful downscaling effort in the mid–1980s, which is still going strong. BRI’s microfinance division, with 3.5 million borrowers and 21.2 million savers, has been consistently the most profitable part of BRI.
External factors have often helped convince banks to downscale. Regulatory changes such as financial-sector liberalization and removal of interest-rate caps created conditions that allowed banks to operate profitably in the lower segment.
They also created intense competition in the mainstream corporate sector, which pushed some banks toward underserved markets. In addition, banks seek to improve their images by providing services to the poor.
Motives such as these have created interest in downscaling, but many banks needed an additional risk-reducing nudge. These banks have taken advantage of research and start-up subsidies from donors and multilateral institutions
like the International Finance Corporation and United States Agency for International Development. Such up-front subsidies support initial trial-and-error experimentation and shorten the time to break even.
Banks in the market for a long time are well-known and have a recognized brand even among lower-income people. Some large banks already have connections to the BOP population through savings accounts or payment services.
Banks can directly access local and international financial markets, and established banks have a broad deposit base. They can raise large amounts of funds that can be loaned quickly and at relatively low cost.
Even if a bank recognizes that microfinance can be profitable, the resulting portfolio size may be viewed as too small relative to the management “bandwidth” required to manage a microfinance operation.
Banks often attempt to serve the market with inappropriate credit methodologies; for example, adaptations of traditional commercial or consumer lending approaches. When these methodologies fail, they reinforce the idea that microfinance is not promising.
The banking sector is fast adopting technologies that reduce the number of costly face-to-face transactions. Bankers may see the labor-intensive and personal nature of microenterprise credit as the antithesis of their drive toward more automation and less infrastructure.
The long tradition of banking is closely tied to specific ways of doing business. With a conservative outlook, banks may tend to burden microfinance with traditional policies and procedures that prevent its success.