Task Force on
Microfinance
Eight Business Model
Breakthroughs for Microfinance
Presentation of Work in Progress, October 24, 2006
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)
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
Objectives
Public
Awareness
Specific
Microfinance
Projects
Private Sector
Engagement
Conducive
Regulatory
Environment
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
Microfinance is
about lending for
“productive”
purposes.
Loan officers are
the cornerstone of
good
microfinance.
Widely held “truths” may
block a breakthrough.
Every MFI
needs a
customtailored IT
system.
Microfinance
clients won’t
use new
technologies.
Four Dimensions of Breakthroughs
Prepare MFIs to
apply the
innovation
Adapt technology to fit
Microfinance clients
Examples:
credit
bureaus,
software
companies
Innovate for
MF Clients
Attract new
players,
support
structures
Upgrade MFI
capabilities
Foster policy
or regulatory
change
Innovations
bring need
to revise
regulations
Exercise
Breakthrough 1. Payment Systems
Client convenience and
security
Make
automated
payment
systems
available to
microfinance
clients
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 2. Mobile Phones
The ultimate in client
convenience
Turn cell
phones into
payments
devices
Benefits
Low income clients already
love cell phones
Cooperation between
Telcoms and Banks
Mechanisms
Challenges
Sim card becomes
payment vehicle
Text messaging to transfer
money
Infrastructure
preconditions
Per-transaction fees high
Security vulnerabilities
make regulators skeptical
Breakthrough 4. Improve MFI Information
Technology
Financial Management
and Reporting
Streamline
Customer Interface
Teller transactions
Loan Approvals
IT System
Basic Ops.
Connected
Networked
Recoverable
Connect to
Payment Systems
ATMs, Cards,
International Money
Transfer
Data Mining
Credit Scoring
Understanding Customers
Social Performance Monitoring
MFI systems must perform all
these functions well.
Breakthrough 5. New Channels to
Reach Customers: Retail Networks
Traditional
Model
MFI
Branch
Loan Officer/
Branch cashier
Customer
.
Retailer as Delivery Channel
Use of
Retail Agent
MFI
Branch -- ?
Retail Agent
(Pago Facil)
Customer
.
Retailer Becomes MFI
Retailer
(Elektra)
Retail Store
Cashier/Clerk
Customer
Many models are possible.
Breakthrough 6. Offer Clients a Full
Suite of Products
From Mono to Multi-product
Monoproduct
Credit:
• Group
• Individual
Credit Variety
Credit:
• Group
• Individual
• Housing
• Consumer
• Small
business
Credit & Savings
Credit:
Savings:
• Group
• current
accounts
• Individual
• Programmed
• Housing
• Consumer savings
• Fixed
• Small
deposits
business
Payments:
• Vehicle
• Fixed asset • Utility bills
• Pawn loans
Full Service
Credit:
• Individual
• Group
• Housing
• Consumer
• Vehicle
• Small
business
• Pawn loans
Savings:
• Current accounts
• Programmed savings
• Fixed deposits
Insurance:
• Life insurance
• Property insurance
• Health insurance
Money Transfers and
Payments:
• National
• International
• Utility bill payments
Breakthrough 7. Leverage the
Mainstream Financial System
Concept: MFIs Reach Clients More Effectively
Bank
Alliances
With MFIs
• 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)
Concept: Banks Have Advantages MFIs Cannot Duplicate
Banks as
Retailers
• 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
Basic
Minimum Conditions for Microfinance to Operate
• Stable macroeconomic and political situation
• Liberalized financial sector with quality supervisors
Microfinance-Specific Concerns
Microfinance • No interest rate caps – market-determined
• Government respects its role as rule-setter, not service provider
Friendly
• May have special categories for microfinance
Policies & Regulations Keep Pace with New Developments
Forward
Looking
• 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.