WHY PRIVATE CAPITAL MATTERS:
LINKING WITH BANKS TO EXPAND
ACCESS TO CAPITAL–
POLICY LESSONS FROM
INDIA, SO. AFRICA, AND THE U.S.
John Taylor
President and CEO
National Community Reinvestment Coalition
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Title
Subtitle
Presentation overview:
About NCRC (www.ncrc.org)
Global Fair Banking Initiative
Innovative policy in INDIA
-- in SOUTH AFRICA
-- in the UNITED STATES
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NCRC is the United States’ trade association for over 600 local
government, social & community economic development
practitioners, community-based credit unions, faith-based
institutions, non-profit housing development organizations and
others working to build wealth for
traditionally excluded populations.
Rev. Jesse Jackson
U.S. Senator
Hillary Clinton
Federal Reserve Chairman
America’s leaders recognize
Alan Greenspan -- at
and respect NCRC’s work.
NCRC’s annual meeting
We now collaborate with
more than 20 nations to
Chairman Alan Greenspan expand planning and action
at NCRC Annual Meeting toward greater economic
opportunity around the globe.
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www.ncrc.org
NCRC’s Global Fair Banking Initiative:
~~~~~
AIM – To provide a forum for collaboration
on economic justice issues
MISSION –
1. Influence and augment global fair banking
patterns of the private financial sector
2. Build Principles of Fair Access to Capital and
Financial Services into national and
international mandates for banks
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Global Fair Banking/GFB -- ACTIVITIES:
1. Collaborative planning
2. GFB listserve – Sign up at:
<http://groups.yahoo.com/group/GlobalFairBanking>
3. GFB conferences & workshops
4. GFB website:
<www.globalfairbanking.org>
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Ideal scenario for sustainable development
for excluded populations around the globe:
Microfinance
PLUS
Global Fair Banking!
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Newest challenge for MFI leaders
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Proven fact – Microfinance works!
Heavy investment already in MF Industry
BUT – Funders seek to end subsidy
TIME OF TRANSITION: Mergers, consolidations, even
commercialization
~~~~~
How can MF Industry access
private capital without being forced
to compromise mission?
~~~~~
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THE CASE OF INDIA
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MFI market = 260 million people
500 million un-banked people
Credit need = US$9 billion
Banks sanction only US$400 million
THE CHALLENGE:
Link with banking sector for a sustainable
flow of credit, investment and financial
services for excluded populations
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Microfinance benefits India
• Microfinance feeds vibrant
local economies
• Government loans to MFIs and
runs its own MF programs
• However - Government & its
agencies have limited outreach
• Innovations & creative
partnerships key to success
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HOW INDIAN GOVERNMENT
REACHES MFIs & RURAL POOR
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•
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Cooperatives
Rural branches of banks
Non-banking financial institutions
Government-funded public banks
Differential rates of interest
Government-issued credit cards
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LIMITATIONS OF
GOVERNMENT PROGRAMS
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• Government agency restrictions –
In order to make large numbers of small
loans, they must be risk free
• Slow economy limits cash flow for loans
• Rampant corruption
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To reach massive population,
COLLABORATION IS KEY
• By themselves, public banks & MFIs
unable to raise sufficient funds
• Must link to private sector banks to
achieve sustainable finance on such
a large scale
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BANK LINKAGE PROGRAM
Successful model (small scale) now being
expanded nationwide
Potential MFI partners:
- 27 nationalized/public sector banks
- 36 foreign banks in 5 largest cities
- 1000 urban, rural & cooperative banks
- Thousands of non-banking financial institutions
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Potential constraint –
The limits to voluntarism
• Lack bank regulation to encourage private
banks to invest in low-income & rural
communities
• Only a voluntary “Fair Practices Code”
~~~~~~~
Need for legislation in India
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THE CASE OF
SOUTH AFRICA
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History of
limited access to finance
• In 2003, only 48% of population
had a transactions account
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• Only 49% had savings accounts
• Only 57% had a form of credit
• Only 42% had insurance
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Virtual monopoly in the
South African banking system
Government limits banks to 4 “pillars”:
1. Amalgamated Banks of South Africa/ABSA
2. Nedbank
3. First National Bank
4. Standard Bank
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Post-Apartheid Financial Sector:
Recent & pending legislation to increase access
& open opportunities for the poor:
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Financial Advisory & Intermediary Services Act of 2002
Home Loan & Mortgage Disclosure Act of 2000
Banks Act of 1990 & Amendment of 2000
Mutual Banks Act of 1993 & Amendment of 1999
Dedicated Banks Bill of 2003
Community Reinvestment Bill
Financial Services Act
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CASE OF THE
UNITED STATES
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Before effective law was created:
• Despite existing law, lenders avoided whole
communities
• Evidence became clear – Access to credit key to
renewing economies in low-wealth neighborhoods
• Government lacked resources to solve it all
• Consensus grew that private financial institutions
must become partners for a fair economy
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In 1977, U.S. Congress passed the
Community Reinvestment Act
~~~~~
• Made illegal the practice of
discrimination by banks on a
neighborhood or geographic basis
• Required that safe & sound credit be
made available in a fair manner,
regardless of class/class/gender
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The Mechanics of CRA
• Lending Test
• Investment Test
• Financial Services Test
~~~~~
Rating Scale:
• 1. Outstanding
• 2. Satisfactory
3. Needs to Improve
• 4. Substantial Non-Compliance
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Big Bank test
(for banks with assets over $250 million)
PERFORMANCE INDICATORS:
• Lending activity
• Geographic activity
• Borrower characteristics
• Community Development Lending
• Innovative or flexible lending practices
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THE INVESTMENT TEST: Banks With Assets >= $250 Million
PERFORMANCE INDICATORS
The dollar amount of qualified investments
The innovativeness or complexity of the qualified
investments
The responsiveness of the qualified investments to credit
and community development needs
The degree to which the qualified investments are not
routinely provided by private investors
PERFORMANCE CONTEXT
1. Demographic data on median income levels,
distribution of household income, nature of
housing stock, housing costs, and other data.
2. Lending, investment, and service opportunities
in the bank’s assessment area(s).
3. The bank’s product offerings and business
strategy.
4. The institutional capacity and constraints,
including the size and financial condition of the
bank, the economic climate (national, regional, and
local), safety and soundness limitations, and other
considerations.
5. The bank’s past performance and the
performance of similarly situated lenders.
6. The bank’s public file.
CRA RATING ON
INVESTMENT TEST:
• Outstanding
• High Satisfactory
• Low Satisfactory
• Needs to Improve
• Substantial
Noncompliance
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More Mechanics of CRA
• CRA Public Evaluations
• Lending Data
• Public Hearings on Mergers
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CRA’s Impact
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Measuring CRA SUCCESS
• CRA has encouraged collaboration between banks &
community groups (NGOs) across the U.S. –
CRA Agreements
• Lending to low/moderate-income borrowers way up
• Minority homeownership rose over 200% in 10 years
• Huge growth in # of NGOs funded by banks to serve
low-wealth populations
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Measuring CRA SUCCESS
[continued]
• Small business & micro-loans to woman & minorities
is up across the U.S.
• Investments now in the 10’s of billions of U.S. dollars
• Traditionally poor neighborhoods recovering rapidly –
in some instances with unwanted “gentrification”
• Multiple studies confirm CRA benefits
• CRA lending has proven to be safe, sound and
profitable
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Steady Increase in CRA $ Commitments
(in millions)
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Distribution of bank commitments by category
2001 CRA Agreement by Activity & Dollar
Amount of Agreements
5%
0%
Single Family Home
33%
46%
Small Business
Community Development
Operating Support
Other
16%
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Percent Increase in Home Mortgage Lending:
1993 - 2002
185.8
200
180
160
140
120
100
90.6
79.5
80
51.4
60
29.6
40
20
0
Black
Hispanic
White
Low/Mod
Middle Inc.
Borrower Group
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CRA Challenges
• Globalization of banking can result in safety & soundness
issues, as well as less bank loyalty to local communities
• Hybrid financial institutions, with predatory or extortionist
lending practices strip assets
• Financial education is also key to success in helping poor
people build wealth
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In conclusion
1.
2.
3.
4.
Critical importance of understanding the role of private
sector capital in building communities
Need laws & regulations that encourage and support
banks to collaborate with MFIs and other NGOs to
achieve outreach
As finance goes global, NGOs must also organize
across borders to achieve innovative and collaborative
strategies for combating poverty and exclusion
WE INVITE YOU TO JOIN US to help “get the
framework right” for the global financial sector
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Thank you
Please contact me at
<jtaylor@ncrc.org>
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