The Centre for Micro Finance
A comprehensive approach of Microfinance
Karachi
November 1st, 2006
1
Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
2
Microfinance: who are the targeted
clients?
HNI
Middle
Class
Poor and vulnerable households
economically at the Bottom of
the Pyramid
Low Income
Ultra poor
How can microfinance
improve their lives?
3
Microfinance: what is it?
Often perceived as…
• Micro-credit
…whereas objectives are
• Suite of financial services
–
–
–
–
Thrift / savings
Credit
Insurance and Investments
Transfer Payments and
Remittances
• Group lending
• Group and individual lending
• Social/charitable activity
• Sustainable activity
4
The challenge ahead: demand vs. supply
gap to bridge
Demand
Supply
• $50Bn
• $1.5 Bn*
• 500M un-served poor
• < 2M Households reached
• Several un-served areas
• 60% of MF services in South
• Largely urban
• Mostly rural
• Range of risks to be
covered
• Fast growing population
and overall economy
• Limited non-credit services
* Including loans against gold
• Missing market linkages /
employment opportunities
Improve
access
Increase
impact
5
Constraints overcome those challenges?
Information Asymmetry
High Costs of Intermediation
•
•
•
•
•
•
•
•
•
No collateral
No credit history
Difficult to evaluate
enterprises’ potential
success
Low value transactions
Geographical isolation
High supervision costs (no financial literacy)
Informal activities: need flexible access
Illiteracy: traditional services inappropriate
High cash handling costs
Difficult risk assessment
High transaction costs
How to release these constraints?
6
Thus the need for institutions’ building
Finance
• Venture capital for start ups
• Cheaper cost of funds for on lending
Systems
• Product development
• Technology platform
• Clients’ authentication by unique ID
Capacities
• Staff Skills strengthening / Training
• Recruiting of professionals
• MFI Entrepreneurs development
Research
• Assess and Increase impact on poverty alleviation
• Experiment and improve products
7
Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
8
CMF’s objectives and mission
• Established in 2005
• CMF’s objectives
– To address knowledge gaps in micro finance sector
– Experiment on ground solutions
• CMF’s mission
– Systematically research links between access to financial
services and participation of poor in larger economy
– Participate in maximizing access to financial services
Research on micro finance and livelihood financing (RU)
Strategy building for MFIs (MSU)
9
CMF’s Objectives
Training
Research
Advocacy
Influence
practice
Strategy
building
10
MSU and RU re-enforcement loop
Strategy (MSU)
MFIs Strategy for growth
•Definition and implementation of
innovative business models
–Market research, creation of linkages
•MFIS best practices sharing
•Design/test of new financial products
•Capacity building
–capital structure, HR, MIS, processes,
customer segmentation, governance…
Impact of microfinance
• Impact Evaluation Studies
• Economics of micro enterprise
• Insights on HH "financial behavior"
• Constraints on HH productivity
• Experimentation on product design
• Micro finance transaction costs
Research (RU)
11
CMF collaborates with existing active
players in the microfinance sector
Universities/
Research Institutions
Banks/Financial
Institutions
SMEs
Manufacturing
Companies
Funding
Organizations
CDF
Insurance
Companies
CMF
CAFS
MFIs/NGOs/Trust
CIRM
Government (Central
and State)
Regulators/ Policy
Makers
12
Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
13
Goals of Research is to maximize
microfinance impact through 3 axes
Understand
better
• Why are recovery rates so high?
• What is the financial behavior of clients?
• What is the impact of microfinance?
• Improve organizations
– Information management
– Role of HR policy and staff incentives
– More cost-effective processes
Expand access
• Alternative channels
– SHGs
– Revive RRBs
– New channels (Kiosks, ATM, CF…)
• Policy
– Regulation
– Competition and information sharing
Improve quality
of services
• New and innovative products
• Maximize the impact of credit through other
services
14
These objectives translate into 4 Research
areas to maximize microfinance impact
1
2
Impact and
product design
Microfinance
plus
Maximize impact
On client
4
Policy
3
Finance and
Organizational
issues
15
1
Product design: credit
Selection
• Individual/group
liability
• Self/MFI selection
• Guarantors
• Collaterals
• Interest rate
Monitoring
• Within group
monitoring
• Staff supervision
Enforcement
• Repayment schedule
• Communication
strategies
• Loan size
• Interest rate
Design the most cost-effective products by
varying credit product components
17
1
Product diversification and
communication strategies
Insurance
•Weather
•Life and Health
•Livestock
Savings
Housing loans
•Build new homes
•Improve existing
homes
What do
low
income
clients
want?
Flexible loans
•Small initial sizes
•Larger subsequent
loans
•Longer terms
•Group based
•Individual loans
Remittances
products
Which delivery channels/communication strategies are effective?
18
2
Microfinance Plus: address contextual
constraints
Access to
Financial services
?
Impact
•Reduce risks of MFIs by combining microfinance with other
development interventions (health, financial training…)
•Provide products / services through credit
20
3
Organizational issues: cost and profitability
Bank
9%
Transaction?
25%
Micro-loan
Return?
• How to reduce transaction costs?
• Show investors risk return performance of
micro-loans
21
4
Policy issues
• What are regulatory obstacles to MFIs?
• What are the consequences of competition and
how to manage it?
• Why is there no information sharing? How can a
credit bureau be set up?
• How to make MFIs more transparent?
• How to improve microfinance reputation?
23
Research: other initiatives
Panel
database
• Construction of a panel database in Tamil Nadu for on-going research
• With Yale Center for Economic growth (Mark Rosenzweig, Dean Karlan, Chris
Udry, Paul Schultz, Rohini Pande)
• 10,000 households in Tamil Nadu, rural and urban, every 4 years
• Study vulnerability, consumption patterns over time
• Document migration patterns, access to financial services over time
• Academics and practitioners
• Foregone seminars
Seminar
series
Courses
–
–
–
–
–
Prof Ashok Jhunjhunwala, IIT Chennai
Prof Vaidyanathan, Madras Institute of Development studies
Prof Sendhil Mullainathan, Harvard
GN Bajpai, ex chairman of SEBI
Shekhar Shah, World Bank
• Economics of micro finance, by Adel Varghese, Texas University
• Evaluating social programs, by Poverty Action Lab
• MBA course elective on microfinance, by Rock Rock Magleby-Lambert, Boston
University
• Total immersion program in Finance and development
25
Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
26
MSU: Objectives and areas of work
• Advice MFIs to define and execute a growth strategy by
addressing their main challenges
– Horizontal growth (Same Products & Same Customers Profile)
– Vertical growth (New Products &/or New Customers Profile)
Support MFIs growth
(vertical & horizontal)
Improve internal
Organizational structure
Diagnose
Recommen
d
Refine Business strategy
and model
Impleme
nt
Scale up
27
MSU: Areas of work with MFIs
Organizational structure
1
2
3
•
Business strategy
Capital structure (equity/debt)
and access to financial markets
(VC, securitization…)
•
•
HR recruiting, training, incentives
•
•
Organizational design
– MIS
– Processes of operations
– Governance
3y strategic plan definition
– Competitive position assessment
(SWOT analysis)
Marketing strategy
– Customer segments to target
– Products to develop to serve these
segments (IL, insurance…)
– Portfolio management
4
•
Market linkages creation
– Leverage of ICICI MFIs and
corporations clients
– Thematic consultations
28
1
Reduction of MFIs cost of funds: Supplydemand match assessment
Supply
Demand
Identify potential assets to
securitize/buy out
Evaluate investors
risk/return appetite for
MFIs’ paper
Check demand / supply
requirements match
Facilitate / structure the
deal
29
1
4 options to explore and 4 types of players
to interview to reduce MFIs costs of funds
Portfolio
Securitization
Foreign
banks
Domestic
banks
Funds
Facilitator
•
•
•
•
•
Bond issue
Portfolio
Buyout
Direct
medium/long
term loan
Minimum volume of investment?
Investment currency and hedging mechanism?
Tenure / maturity of investment?
Pooled vs single MFI portfolio investment?
Investor risk/return profile?
– Portfolio / MFI rating requirement?
– Guaranty requirement (FLDG/SLDG)?
•
•
•
Investment seasonality (PSL requirement)?
Investor reporting / monitoring requirements?
Willingness / capacity of the MFIs to receive funds and
comply with investors requirements?
Impact on MFIs CoF?
30
2
HR training, recruiting, incentives
Organizational structure
Potential partners
• Recruitment: facilitate
recruitment for the entire sector
in the next 3-5 y => 20K FTEs to
hire (TBD)
•
•
MFIs careers, Hunt – Third sector
Awareness program
• Financial training for top mngt
•
•
•
IFMR centers (CAFS, insurance…)
ICICI trainings
HBS, Duke, IIM
• Training for middle mngt &
field staff
•
Coordinate existing providers
• Incentive schemes
– MicroSave, Care India, Basix school
of livelihood, EDA
•
Set up new facilities (if required)
•
Cocoon?
31
3
MIS: partnership with FINO
Objective
Benefits for
MFIs
Benefits for
investors
Current
status
• To develop a common end to end delivery platform shared
across Indian MFIs
• Created as sectoral resource to serve 700M customers
• To reduce initial CAPEX required per MFI
• To improve product depth and capability
• To improve business management and reduce transaction costs
– data reliability and timeliness (product, clients)
– To better service liabilities and investments
– To allow single-window monitoring of customer relationships
• To access reliable data on MFIs operations performance
• Easier portfolio rating through creation of historical data
•
•
•
•
Currently sized for 12-50M customers
Proof of concepts completed, final contract negotiations (IBM/iflex)
Entire infrastructure, hosting, operations outsourced
First phase launch with 5 partners by May 2006
33
4
Market linkage creation: approach
ICICI Commercial teams
Corporates
• Product to be sourced (retailed)?
Demand
− Region? Volume? Price? Quality?
• Required investments (capital or capabilities) for tie up?
− Expected return (in value)?
− Timeframe of return?
• Risk undertaken by company (quality…)?
• Previous pilot already undertaken?
ICICI Sectoral team
Market dynamics
Supply
MFI
• Local presence in identified region?
• Willingness/Capacity of MFI to
− Provide customized financial products?
− Identify entrepreneurs (if necessary)?
− Provide/coordinate technical training
at the field level?
Sectoral experts / NGOs
Customers
•
•
•
•
•
Volume generated (absorbed)?
Quality?
Cost of production?
Capacity to contract & payback loan?
Existing capabilities/training need?
34
4
Market linkage example: cattle feed distribution
through Godrej Agrovet-Spandana (1/2)
• Dairy activity is a low revenue activity for farmers in spite of a growing
milk demand and therefore remains a marginal source income
Initial
Situation
– Milk yields from buffaloes is low because these are not fed good quality feed
– Farmers perceive dairying as a subsidiary activity because it only offers marginal
income: they have no incentive to own more that 1 or 2 buffaloes
– Farmers however willing to invest in dairy (cattle feed, high quality breeds,
artificial insemination…) often lack the funds to do so
• Godrej Agrovet, a concentrate cattle feed producer, is not presence in the
areas where Spandana (MFI with 700,000 clients) operates.
Objective
Challenges
Expected
Impact
• To increase farmers revenues from milk production through improved
yield and quality of milk produced by cattle feed utilization
• To reduce the risk on Spandana’s loans that go toward buffalo purchase
• Marketing the feed product to traditional / low income farmers and
educating them to utilization of such product
• Designing a credit product that caters to the clients’ needs
• Expected net revenue increase in Guntur
– 300-600Rs/month/household with a single buffalo fed with cattle feed
– up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after
demonstration effect on one buffalo
*: average monthly household income of 60 families surveyed was 7000Rs
35
4
Market linkage example: cattle feed distribution
through Godrej Agrovet-Spandana (2/2)
Demand
Godrej Agrovet
• Delivers concentrate feed in 50 kg bags to central
locations from where Spandana receives the
product
• Region: Guntur
• Price: 325Rs/50 Kg
• Has assigned 2 officers to coordinate project
Supply
Spandana
• Provide credit at 0% int. rate
for the purchase of feed
• Delivers the product to weekly
center meeting
• Has assigned 1 project leader
• Does not make any profit out of
this initiative
Customers
•
•
•
•
Increase yields and fat %
Increase income by 10-20 Rs/day
Are offered doorstep delivery
Are able to purchase the feed on
credit at 0%
36
4
Godrej Agrovet-Spandana: productivity
improvement
Initial situation
After Spandana-Godrej partnership
Godrej
Godrej
Cattle feed
Distributor
Spandana
Cattle feed
Dealer
Loan
Farmer
Loan
Farmer
Piloted
Spandana
Sales
Milk
Chiller Entrp.
Sales
Dealer
To be
piloted
Dairy
Dairy
37
4
Market linkage creation: other projects
• Handicraft
• Fisheries / Seaweed
• Trees plantation
• Food processing
• Vegetables / Mint cropping
41
Thank you
For any question…
annie@ifmr.ac.in or sdjari@ifmr.ac.in
42
Constraints to scaling access for the poor
Information Asymmetry
• No collateral
• No credit history
• Difficult to evaluate
enterprises’ potential
success
High Costs of Intermediation
• Low value transactions
• Geographical isolation
• High supervision costs (no financial literacy)
• Informal activities: need flexible access
• Illiteracy: traditional services inappropriate
• High cash handling costs
High transaction costs
Provision of
microfinance is
constrained by…
Poor Technology
Regulatory Issues
Staff Incentives not aligned to maximise
access to financial services for poor
43
How to release these constraints?
• To improve impact of microfinance on the poor
• To increase access to the relevant suite of financial services
44
CMF: Who are we?
• Permanent staff: 23 Research associates and 8 MSU
Associates from Kennedy School, Yale, IFMR, XIMB, IRMA…
• Short-term Interns: Masters and Phd students from Kennedy
School, Harvard, Yale, MIT, DSE etc.
• Research Committee to give advice on submitted proposals :
– Jonathan Morduch (NYU), Abhijit Banerjee (MIT), Byomkesh (SKS),
Mr. Thiagarajan (MCFI), Chandrasekar (IFMR), Bindu Ananth (CMFR
founder)
45
CMF’s Objectives
Training
Research
Advocacy
Influence
practice
Strategy
building
46