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State of the Microcredit Summit Campaign Report 2002

Plenary Session: Policies, Regulations and Systems That Promote Sustainable Financial Services to the Poor and Poorest

Asia/Pacific Regional Microcredit Summit Meeting of Councils

Poverty Targeting Trainings Begin in Asia

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Plenary Session: Policies, Regulations and Systems That Promote Sustainable Financial Services to the Poor and Poorest

Questions and Answers for Plenary Panelists

Question #1, read by plenary Chair Zephirin Diabré: The regulatory framework of Bolivia has been touted as a model. Do you see it as a model? Why or why not?

Nancy Barry: I think what can be said about Bolivia is that it has been successful in helping regulated microfinance institutions mobilize commercial capital. The things that we need to look deeply at are what has happened in terms of institutions migrating away from financing the poor. What we’ve seen in Bolivia is that most of the growth, in terms of client outreach, has come over the last five years, from unregulated financial institutions. We have also seen, because of donor financing of equity, that there has not been ownership growing by local institutions

"What we’ve seen in Bolivia is that most of the growth, in terms of client outreach, has come over the last five years, from unregulated financial institutions. We have also seen, because of donor financing of equity, that there has not been ownership growing by local institutions. We also see limited efforts being made on savings mobilization from the public."

We also see limited efforts being made on savings mobilization from the public. So, as Antonio has said, it’s very important to look at elements of different country models. We think the Philippines, where the microfinance institutions had a major role in shaping that policy, is a good model to look at, in that it provides for a range of institutions, it does not require foreign equity, and we’ve seen many microfinance institutions moving into that structure without changing their core mission. We think India is also emerging as an important model to look at in that it is reflecting on the range of institutions that need to get involved in microfinancing, taking fundamental action in mobilizing interest rates on microfinance, and working on both building regulation for specialized microfinance institutions, but also looking at the banks and recognizing the important role of microfinance NGOs and grassroots groups.

Question #2: In an attempt to speed the development of microfinance in many countries, some donors have pushed regulation of microfinance in the hope that this will lead to commercialization and to more growth. However, this has led to some bad regulation like limits on interest rates, strict capital requirements, onerous reporting etc. How can we as an industry and the Summit here, in particular, correct or address this situation?

Vani Sharma: The question of regulation needs to be addressed clearly, whether they are going to regulate an MFI to protect the depositors, to protect the investors, to protect the borrowers, to protect the donors. I would say that if it is to protect the borrowers, investors, or donors, there is no need to regulate as far as the central bank is concerned. It is only in the context of protecting the depositors that the question of regulation arises. And here again, we found that the cost of regulation to the institution is such that it is quite likely that it would move away from the poor and move away from the rural areas. And it is quite likely that the regulation would help the institutions to access large deposits and commercial borrowing rather than mobilize the deposits from the poor for which they came to be regulated. So I think that when we address the regulation issue we should keep this in mind.

Question #3: Is there a coordinated effort to lobby governments to promote pro-microfinance regulatory schemes by the Summit Campaign, UN, European Union and developed nation governments?

Nancy Barry: I want to reflect on that in relation also to the last question... As Grace says, it takes a while, because these are actors: finance ministers, central bankers, microfinance practitioners, commercial bankers, and donors often do not communicate as equals. And so when you look at a process such as that promoted by the microfinance network in Uganda, with close collaboration with the central bank, and really co-opting the donors into that process, they have created a shape for the microfinance institutions that recognizes the role of NGOs, creates a structure in which those MFIs that want to mobilize savings from the public can convert without drifting out of poverty-based lending and sees the role of cooperatives and commercial banks. I think what we do at a global level is work on and with organizations like CGAP, like the World Bank, like the infrastructure in Basel, to create the financial architecture so that it works for microfinance. But many decisions, really all decisions happen locally and so we all need to speak the language of the central bankers and to shape financial systems so that they work for the poor.

Question #4: You suggest not to have ceilings on interest rates. Will you support MFIs that charge very high rates of interest? You say an MFI needs to charge a relatively high interest rate to be sustainable. Can you give us an idea of what you mean by relatively high interest rates? What is the range…what do you think about not putting a cap on interest rates?

Nancy Barry: I think this is a fundamental issue which has been largely resolved in the field of microfinance. All poor women that I know and all microfinance institutions that I know will say that you have got to charge what it costs to provide sustainable access. That is really to build autonomous local institutions that will be able to last and grow with or without donor support. What that translates into is that you’ve got to cover your operating costs—which for the best institutions, like ASA in Bangladesh and PADME in Benin and WWB in Colombia—their costs to deliver very small loans is between 5 percent and 11 percent. We all know that most microfinance institutions cost more like 15 to 20 percent. And then you need to charge the cost of funds, assuming that you're not dependent on donors. That means what you pay savers, or the cost of borrowing. In Latin America, the cost of funds itself can be 30 percent so you have to add 30 percent plus 15 percent and all of a sudden you get high interest rates that reflect inflation and devaluation. In Asia, the cost of funds tends to be lower. So it’s 9 percent plus 15 percent which gets you to a more comfortable interest rate. So the key is not to force interest rates down to a level that will not allow institutions to be sustainable, but rather promote a range of institutions. And what we’ve seen is that poor women do care about interest rates. They are very happy to get high rates for microfinance institutions because the comparison is with money lenders. But over time the costs come down and the interest rates come down with competition, capacity building, and innovation.

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Policies, Regulations and Systems That Promote
Sustainable Financial Services to the Poor and Poorest