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Eight Business Model Breakthroughs for Microfinance Presentation of Work in Progress, October 24, 2006. Task Force on Microfinance. The Challenge of Scale in Microfinance. Microfinance is a recognized tool for addressing poverty and empowering the poor.

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Eight Business Model Breakthroughs for MicrofinancePresentation of Work in Progress, October 24, 2006

Task Force on Microfinance

the challenge of scale in microfinance
The Challenge of Scale in Microfinance

Microfinance is a recognized tool for addressing poverty and empowering the poor.

Despite the important accomplishments of microfinance institutions, most of the potential clients of microfinance still lack access to quality financial services. Why?

Needed: Business models that can bring microfinance to scale

the forum of young global leaders ygl
The Forum of Young Global Leaders (YGL)

A unique, multi-stakeholder community of the world’s most extraordinary leaders who are 40 years old or younger and who are ready to dedicate a part of their time and energy to jointly work towards a better future.

The 2020 Initiative – defining a vision for a world where sustainable economic development replaces the plague of poverty around the globe.

In association with the World Economic Forum

ygl microfinance task force
YGL Microfinance Task Force

Objectives

Public Awareness

Private Sector Engagement

Specific Microfinance Projects

Conducive Regulatory Environment

the breakthroughs project of the ygl task force
The Breakthroughs Project of the YGL Task Force
  • Search for business model breakthroughs, especially related to scale and efficiency.
  • Leaders from microfinance join counterparts from business and other sectors to exchange experience.
  • ACCION International facilitates.
  • Eight key breakthroughs identified and presented here.
  • Work will continue on: Potential impact

Obstacles to expansion

Pathways to widespread adoption

Final paper to be presented at the World Economic Forum in early 07.

conventional wisdom in microfinance
Conventional Wisdom in Microfinance

Microfinance is about lending for “productive” purposes.

Loan officers are the cornerstone of good microfinance.

Widely held “truths” may block a breakthrough.

Microfinance clients won’t use new technologies.

Every MFI needs a custom-tailored IT system.

four dimensions of breakthroughs

Prepare MFIs to apply the innovation

Adapt technology to fit

Microfinance clients

Innovate for MF Clients

Upgrade MFI capabilities

Examples: credit bureaus, software companies

Attract new players, support structures

Foster policy or regulatory change

Innovations bring need to revise regulations

Four Dimensions of Breakthroughs
breakthrough 1 payment systems

Client convenience and security

Benefits to Clients and MFIs

Increased MFI efficiency; lower cost

Penetrate difficult locations

Mechanisms

Card products: debit, credit, prepaid, etc.

Devices: ATMs, POS, cell phones

Challenges

Few MFIs are members in payment networks

Products designed for middle class market

Clients are used to cash, as are vendors they use

Exercise

Breakthrough 1. Payment Systems

Make automated payment systems available to microfinance clients

breakthrough 2 mobile phones

The ultimate in client convenience

Benefits

Low income clients already love cell phones

Cooperation between Telcoms and Banks

Mechanisms

Sim card becomes payment vehicle

Text messaging to transfer money

Infrastructure preconditions

Challenges

Per-transaction fees high

Security vulnerabilities make regulators skeptical

Exercise

Breakthrough 2. Mobile Phones

Turn cell phones into payments devices

breakthrough 4 improve mfi information technology

Financial Management and Reporting

Connect to Payment Systems

ATMs, Cards, International Money Transfer

Streamline Customer Interface

Teller transactions

Loan Approvals

Data Mining

Credit Scoring

Understanding Customers

Social Performance Monitoring

Breakthrough 4. Improve MFI Information Technology

IT System Basic Ops.

Connected Networked

Recoverable

MFI systems must perform all these functions well.

breakthrough 5 new channels to reach customers retail networks

Retailer as Delivery Channel

MFI

Branch -- ?

Retail Agent

(Pago Facil)

Customer

Retailer Becomes MFI

Retailer

(Elektra)

Retail Store

Cashier/Clerk

Customer

Breakthrough 5. New Channels to Reach Customers: Retail Networks

MFI

Branch

Loan Officer/

Branch cashier

Customer

Traditional

Model

.

Use of

Retail Agent

.

Many models are possible.

breakthrough 6 offer clients a full suite of products

From Mono to Multi-product

  • Credit:
  • Group
  • Individual
  • Housing
  • Consumer
  • Small business
  • Vehicle
  • Fixed asset
  • Pawn loans
  • Credit:
  • Group
  • Individual
  • Savings:
  • current accounts
  • Programmed savings
  • Fixed deposits
  • Payments:
  • Utility bills
  • Savings:
  • Current accounts
  • Programmed savings
  • Fixed deposits
  • Insurance:
  • Life insurance
  • Property insurance
  • Health insurance
  • Money Transfers and Payments:
  • National
  • International
  • Utility bill payments
  • Credit:
  • Group
  • Individual
  • Housing
  • Consumer
  • Small business
  • Credit:
  • Individual
  • Group
  • Housing
  • Consumer
  • Vehicle
  • Small business
  • Pawn loans

Monoproduct

Credit Variety

Credit & Savings

Full Service

Breakthrough 6. Offer Clients a Full Suite of Products
breakthrough 7 leverage the mainstream financial system
Breakthrough 7. Leverage the Mainstream Financial System

Bank

Alliances

With MFIs

  • Concept: MFIs Reach Clients More Effectively
  • Conventional bank loan to MFI (many examples worldwide)
  • Investment banking services (Citibank and Compartamos bonds)
  • Bank purchases MFI portfolio (ICICI partnership model)
  • Bank uses MFI as deposit collection agent (Brazil model of banking correspondents)

Banks as

Retailers

  • Concept: Banks Have Advantages MFIs Cannot Duplicate
  • NGO-MFIs become banks (BancoSol, Mibanco, Compartamos, etc.)
  • Bank establishes microfinance subsidiary (Pichincha, Sogebank)
  • Bank adapts consumer lending to microfinance market (Banco de Trabajo, Peru)
  • Bank provides savings and payments services but not loans (Post Office Savings Banks)

Mainstream banks offer: low cost of funds, known brand, branch infrastructure, technology, connection to payment systems.

breakthrough 8 create a supportive policy environment
Breakthrough 8. Create a Supportive Policy Environment

Basic

  • Minimum Conditions for Microfinance to Operate
  • Stable macroeconomic and political situation
  • Liberalized financial sector with quality supervisors

Microfinance

Friendly

  • Microfinance-Specific Concerns
  • No interest rate caps – market-determined
  • Government respects its role as rule-setter, not service provider
  • May have special categories for microfinance

Forward

Looking

  • Policies & Regulations Keep Pace with New Developments
  • Policymakers pursue access to financial services for all as goal
  • Regulators work with industry to ensure security for new technologies such as cell phones
  • Regulators and industry cooperate to ensure consumer protection

A country’s policy environment may determine whether or not microfinance takes off.