Microfinance and Urban
Development
Presentation to the Urban Cluster
Mike Goldberg
October, 2004
Microfinance in Urban Settings: Why?
 Linked to access to credit for productive opportunities






(working capital si, fixed asset lending no!)
Linked to land purchase and registration; urban
infrastructure hookups
Linked to business formalization (maybe, but…)
Linked to employment generation (yes, but…)
Linked to business start-ups (no, but…)
Linked to social capital (but causation in reverse)
Linked to Competitiveness (maybe, but…)
Financial Systems Approach: 5 Levels
 Government (financial sector regulation,
supervision, legal framework – taxation, equity
concentration, savings mobilization)
 Commercial banks, finance companies
 Specialized microfinance non-governmental
organizations
 Community groups (sector-specific associations,
community leaders)
 Microbusiness operators
Methodologies
 Individual (character, collateral “lite”) – works best with larger micros




with greater asset base, diversified clients with larger loans (US$250 –
700)
Solidarity groups (character-based joint liability mechanism, groups of
4 to 7) – works well in urban street markets with very small loans
(starting at $50)
Community banks (character-based joint liability mechanism, groups
of 20 to 40) – works best when social capital and organization is high.
Credit unions and S&L cooperatives (members hold shares, savings
options, requires legal registration) – heavily dependent on member
discipline; rarely effective when (I) more than 50 members, (ii)
external financing 10%+
Competition between methodologies in a market very useful
Elements of Success in Urban Markets
 Microfinance operational “basics”
 Supportive or neutral legal framework
 Private sector investment replaces donors, govt.
 Commercial orientation of Board of Directors,
management
 Diversified source of commercially priced funds
(not living on donations)
 Mimic the local financial culture
 Build on what’s there?? Or start from scratch??
Performance Indicators in microfinance
 Client level – user surveys to measure
satisfaction, retention rates, on-time
repayment performance
 Financial institution level – trend toward
financial sustainability (CGAP definition);
AROE, AROA
 Market level – increased coverage (first
time users), increased depth of services,
lower transaction costs, lower interest rates
Leading institutions in urban markets
 Specialized NGOs
 Commercial banks
 Finance companies (SOFOL in Mexico; Confia
and Findesa in Nicaragua)
 Combinations (MFIs with commercial bank
investors, lenders)
 The informal sector! (moneylenders, pawn
brokers, check cashers, Western Union…)
 Family and friends
 Supplier credit
What goes wrong?
 Elections!!!
 Economic downturns? Not really…
 Financial mismanagement (inadequate reserves,
poor MIS, lack of strategic approach, inadequate
audits, human resource issues/corruption)
 Donor dependence
 Counter-productive changes in legal framework
 Lack of clear supervision strategy
Future directions
 More commercial bank participation?
 Specialized finance companies on the rise
 Diversified service menu (moving beyond
working capital)
 Consumer credit meets productive uses
 Microbusiness – infocenters and beyond
 Bigger role for Superintendents of Banks and
other financial institutions (against their will?)
 Cooperatives on the rebound in several countries
 Harnessing “cadenas productivas”