Baku, Azerbaijan
May 27, 2006
Olga Tomilova,
CGAP-MFC Central Asia Microfinance Center
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 Microfinance Consortium of 31 public and private development agencies working together to expand access to financial services for the poor in developing countries.
 Resource center and standard setting body for the entire microfinance industry.
 CGAP serves four groups of clients:
 development agencies,
 financial institutions including microfinance institutions (MFIs),
 government policymakers and regulators, and
 other service providers, such as auditors and rating agencies.
 Specialized services: advisory services, training, research and development, consensus building on standards, and information dissemination.
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MF has made a relatively rapid impact, has achieved significant outreach, and can become sustainable within relatively short period of time
Access to finance enhances growth and helps reduce poverty
MF is now a real industry
BUT:
Big differences between regions (LAC, SA, ECA, MENA), and between countries
2 billion people still lack access to formal financial services
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750 million accounts in “social” financial institutions, many likely to be poor
Commercial
Banks
2%
NGOs/NBFI
5%
COOPs
6%
Postal
Banks
51%
Rural Banks
17%
Ag & State
Banks
19%
Source: CGAP, 2004
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Commercial banks move into MF
50 countries discuss and implement microfinance policies
MFIs are audited and comply with the IFRS
12 rating agencies rate MFIs
(Standard & Poor’s,
Moody’s)
Financial System
Unregulated
MFIs report to national credit bureaus
(Turkey, Peru) MFI bank issues VISA credit cards (Paraguay)
MFI clients access international ATM networks
(Dominican Republic)
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• Stage of financial sector development
• Existence of infrastructure
• Population density
• Levels of poverty
• Competition
Self-Help
Groups
Credit Unions
Financial
NGOs
State Banks
Commercial
Banks
Co-ops
Postal Banks
Rural Banks
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Leveraging existing + new infrastructure to offer multiple access points
State
Banks
Commercial
Banks
MFIs
Lottery Agent
Loan Service
Agent
Self-Help Groups
PC Kiosk
Point-of-Sale
Networks
Traders and
Processors
ATMs
CLIENTS
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Using a range of risk in their engagements
Higher level of engagement
Bank creates loan service company
Bank invests equity in
MFI
Bank buys MFI portfolio and / or contracts MFI operations
Wholesale lending
Sharing / Renting facilities
Bank provides front or back office functions
Sogebank, Haiti
Created loan service company Sogesol in 2000
Jammal Trust Bank and Credit Libanais, Lebanon
Have equity stake in Ameen, a CHF microfinance program
ICICI Bank, India
Contracts microfinance operations with self-help groups and MFIs
Raffeissen Bank, Bosnia
Lends to multiple MFIs in Bosnia
Garanti Bankasi, Turkey
Provides front office functions through branch network to Maya Enterprise for Microfinance
Microfinance Bank, Georgia
Rents space in its offices to Constanta, a local NGO
Lower level of engagement
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Most efficient, effective, client service oriented institutions will prevail and have access to funding sources
Grameen
Prodem
~10,000
MFIs
M&A
Failures
Formal FIs
Top-tier
NGO/MFIs
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Downscaling: A bank or other formal financial institution expands its services to work with clients traditionally served, if at all, only by MFIs.
Such an expansion can mean serving microfinance clients in one or many financial areas
History: First “multi-global” operations financed by IDB in early 1990s.
EBRD adapted and applied the concept in Russia and other NIS countries. Approach is again becoming popular (IFC/Accion, WWB)
Significance LAC: 27 out of top 32 MFIs in LAC are commercial institutions, RoA for this group: 4.8%. Examples: Banco del Trabajo and
Banco del Cr édito (Peru), Banco Caja Social (Colombia), Financiera
Vision (Paraguay)
Significance ECA: Russia, Kazakhstan and Ukraine – 137,000 borrowers,
$ 712 m LPF; commercial banks and greenfield banks have highest growth rates in the region
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Dec-02
Kazakhstan 73.39
Ukraine 29.64
Russia 173.49
Kyrgyzstan 0.57
Dec-03
148.99
55.51
228.98
2.59
Dec-04
251.02
Performance
(Dec02-
Dec04)
Share in
Total (Dec03)
Share in
Total (Dec04)
+242% 33% 35%
104.59
+253% 12% 15%
307.79
11.3
+77%
+1882%
50%
1%
43%
2%
TOTAL 277.09
436.07
674.7
+145%
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% Borrowers by Type of MFI 2002 g e t a r c e n
P e
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
5
0.7
94
EAP
Source: MIX Database
45
24
5
8
20
0.4
20
96
55
EECA
63
LAC
0.9
3
MENA
60
Africa
26
S Asia
74
Non-Profit
OTHER
CU/COOP
NBFI/Bank
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 Downscaling model is one (but increasingly important) element in sensible approach to access to finance
 Secured lending and credit bureaus will make positive impact
 Commercial banks unlikely to reach the poorest segments of potential retail customers
 Commercial banks unlikely to solve rural finance dilemma
 Other (complementary) approaches:
Greenfield banks
CUs
Upgrading NGOs
Linking (cooperation between MFIs and Banks)
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 Access to Finance and especially downscaling can and should be integral part of successful regional development strategy
 Government support is needed to ensure conducive environment for investment and growth of financial services industry
 Don’t subsidize interest rates, don’t cap interest rates
 Subsidize TA
 Don’t build monopolies, enhance competition
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 Multiplying points of service allows exponential growth
 Technology and infrastructure are key drivers to scale
 Commercial and state banks will become core providers
 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)
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 Survey of 54 foreign microfinance investors conducted by CGAP, MIX and ADA (June – September 2004)
 Purpose – ascertain legal structures, investment focus and history, availability of uncommitted funds, and financial performance
 Data on “direct” investments in 505 MFIs and “indirect” investments in 25 MF funds
 Amount of foreign investments (disbursed and committed):
 $1.2 billion – direct
 $611 million - indirect
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 Foreign investment in MFIs takes the form of:
 Equity
 Debt
 Guarantees
 Only regulated MFIs are legally structured to receive all three forms of investments – non-regulated cannot receive equity investments
 Among 505 MFIs surveyed, 166, or 33% are regulated institutions
 Heavy concentration of foreign investment in certain regions – 87% in Latin America and Eastern
Europe/Central Asia
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By instrument:
 Debt – 69%
 Equity – 24%
 Guarantees – 8%
 By legal status – 82% to regulated MFIs
 By size of investment – 89% over $1 million
 By suppliers – nearly half of all investment is provided by four IFIs: IFC, EBRD, KfW and USAID’s Development
Credit Authority
 Two thirds of investment is provided by 6 of 54 funds
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 Numerous anecdotal suggestions that investors are not finding it easy to place funds in MFIs that meet their standards
 Tendency for multiple investors to invest in a single
MFI – for example, 20 out 54 funded Banco Solidario
(Ecuador), 15 funded Confianza (Peru), and 11 funded
Fundacion Nieberowski (Nicaragua)
 The reason is not small investment amounts, but rather excess of supply over demand from suitable MFIs, i.e. those that meet the investors’ quality and risk profile
 Instances of a single investor funding the same institution through several indirect channels
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Motivating factor
Lower interest rate
Easier collateral requirements
Investor’s willingness to negotiate
Length of loan
Speed of disbursement
Ability to attract other lenders and investors
% of respondents rating factor as
“extremely important” and “important”
36 Regulated 112 Unregulated
86% 78%
69%
69%
72%
66%
61%
56%
56%
66%
65%
60%
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 Regulated MFIs will continue to seek more debt than equity from foreign sources:
 High levels of equity capital  greater interest in increasing liabilities
 Most MFIs have lower levels of legally allowed leverage
 Council of MF Equity Funds revealed that only 115 out of several thousands of MFIs would be candidates for foreign equity investments, given their legal status, profitability and size
 Regulated MFIs are increasingly seeking domestic deposits to fund their liabilities
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 Unregulated MFIs – more numerous, but are not structured to take equity investments  more likely to seek foreign debt than regulated MFIs:
 Less access to domestic banks
 Generally prohibited from taking deposits
 Foreign lenders will be attractive if they would lend beyond 1-to-1 debt-to-equity ratio and lower collateral requirements
 Unregulated MFIs may have a relatively greater interest in foreign debt investment compared to regulated MFIs
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 Most of MFI assets tend to be denominated in local currency  creates foreign exchange risk if they borrow foreign currency loans
 Local currency in many developing countries is more likely to devalue than to appreciate
 92% of debt issued to MFIs is in hard currency
 Many MFIs are not alert to this issue – out of 105 MFIs surveyed, only 25 fully hedged their currency risk
 In most developing countries, adequate hedging mechanisms are not available or too expensive
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 Foreign investors would add more value to the market if they were able to tolerate more risk, and thus work with less-well-established MFIs
 Regulated MFIs should be helped to access more local funding  use of guarantee mechanisms; improving credibility of MFIs with local funding sources
 MFIs and investors need to be alert to the foreign exchange risk entailed by hard-currency loans
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UNCDF