Sustainable microfinance: Sustainable microfinance: international - - PowerPoint PPT Presentation

Sustainable microfinance: Sustainable microfinance: international experience international experience international experience international experience

Nataliya Mylenko World Bank April 28, 2010

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2.7 billion people (70% of adult population) in emerging markets do not have access to basic financial services such as savings or checking account

2 Source: Financial Access 2010, World Bank Group

Microfinance emerged as a possible solution for financing needs for micro entrepreneurs and low income individuals for micro entrepreneurs and low income individuals

The first Microcredit Summit, gathered more than 2,900 people from 137 and launched a nine-year campaign to reach 100 from 137 and launched a nine year campaign to reach 100 million of the world’s poorest families, by the year 2005. The goal is nearly reached by 2005. The United Nations designates International Year of Microcredit, adopting the goal of building inclusive financial systems. Microcredit Summit campaign re-launched, with a goal for 2015

• f reaching 175 million of the world’s poorest families by 2015,

g p y and ensuring that 100 million families rise above the US$1 a day threshold.

G-20 countries commit to improving access to financial services for G-20 countries commit to improving access to financial services for the poor. “Agree to support the safe and sound spread of new modes of financial service delivery capable of reaching the poor and, building on the example of micro finance, will scale up the successful models of small and medium-sized enterprise financing.”

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p g

Over the years microfinance evolved and now represents a significant portion of financial systems in terms of the number of clients in many portion of financial systems in terms of the number of clients in many countries

i di Microcredit ‐ Providing only loans for micro‐ t

Microfinance

• Providing savings,

payments, insurance i i dditi t

entrepreneurs ‐ Granting small loans to solidarity (or joint liability groups)

services in addition to loans

• Individual and group

lending

liability groups) ‐ Mostly provided by NGOs and donor‐ funded initiatives

lending

• Provided by financially

sustainable financial institutions

funded initiatives

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Challenge: how to provide access to a full range of financial services to the poor in a cost effective and sustainable manner?

Cost of processing a large number of small loans is high especially for low income Cost of processing a large number of small loans is high, especially for low income and microenterprises due to: 1) Lack of collateral 1) Lack of collateral 2) Lack of documentation including financial records 3) Low levels of financial literacy of the potential clients 4) Geographical dispersion of clients 4) Geographical dispersion of clients

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Addressing the financing component: Possible models for providing microfinance – operational side

Delivery of microfinance in a sustainable manner requires the development of qualified financial service providers. 1) Commercial bank down-scaling – development of MSME banking 1) Commercial bank down-scaling – development of MSME banking skills and products leveraging strengths of existing operations

• f the commercial bank

2) Transformation of microfinance institution – transition from NGO

• r donor-funded initiatives to professionally managed provision
• r donor funded initiatives to professionally managed provision
• f a broad range of financial services

) C f 3) Community financial institutions – by building linkages with banks to ensure scale and sustainability

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Regulatory environment for microfinance needs to balance incentives for expanding access and maintaining soundness of financial for expanding access and maintaining soundness of financial institutions

1) Clearly identifying and separating out subsidy element in microfinance operations microfinance operations 2) Sustainable institutions need to diversify risks, and thus be able to provide a broad range of services (and often operate across a p g ( p number of market segments) 3) Credit may not be the most suitable financial product for the ( id lf ) poor (consider welfare) 4) Create regulatory incentives for existing financial institutions to provide financial services to the low income segment beyond provide financial services to the low income segment, beyond corporate and social responsibility

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Challenge – in the absence of clear indicators of social performance, measuring performance of double bottom line institutions is limited to financial performance – reducing incentives for financiers to support microenterprises

Financial Financial

• bjectives:
• utreach and

performance of a fi i l

?

financial institution

f

Measured on a regular basis, clear definitions and Measured on a regular basis, clear definitions and

?

Impact of microfinance

standards in place standards in place

Social objectives: improved income of the? income of the client, improved social outcomes

No clear standard, only a few institutions measure, on ad hoc No clear standard, only a few institutions measure, on ad hoc

?

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basis basis

Social Performance Principles – developed through social performance task force (SPTF)

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• Translate MFI’s mission and values into clear, measurable
• bjectives to capture intentional social benefits

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• bjectives to capture intentional social benefits.
• Design and implement systems for social responsibility,

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including client protection.

• Track understand and report on whether MFI is achieving

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• Track, understand and report on whether MFI is achieving

its social objectives.

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• Align its business processes to achieve both social and

financial objectives.

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• Ensure that decision‐making considers both social and

financial outcomes.

Conclusions Conclusions

Mi fi d ibl l ti f fi i

• Microfinance emerged as a possible solution for financing

needs for micro entrepreneurs and low income individuals

• Sustainable business model requires introduction of the

Sustainable business model requires introduction of the right products

• Delivery of microfinance in a sustainable manner requires

the development of qualified financial service providers and linkages with available distribution channels for financial services

• Effective measurement and evaluation framework for donors

and development agencies is important to put in place t i ti correct incentives

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Thank you!

Nataliya Mylenko Financial and Private Sector Development p East Asia and Pacific Region, The World Bank Group 1818 H Street, N.W., Washington, DC 20433 l k @ ldb k nmylenko@worldbank.org

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