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| Volume 2, Issue 3: August '04 | ||||
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In This Issue Workshop Discussion - Successful Management Strategies to Reduce Cost and Improve Efficiency Plenary Session – Policies, Regulation, Governance and Systems that Promote Sustainable Financial Institutions for Poor and the Poorest. REGISTER NOW for Middle East/Africa Region Microcredit Summit Meeting of Councils Archived Issues
Vol 2 Iss 2 July '04 |
Plenary Session – Policies, Regulation, Governance and Systems that Promote Sustainable Financial Institutions for Poor and the Poorest.Presentation by Ms. Nancy Barry, President Women's World Banking (WWB), USA
Many of you in this room are really the leaders in building financial services that work for the poor majority. The panelists at this table have an equally important role to play in ensuring that the policies, regulations and legal structures fit what poor people need, and what the institutions that serve poor people need. Hopefully all of you know that WWB is a global network, which is comprised of over 50 institutions that together provide lending services to over 15 million poor people and saving services to millions more. In Asia, the members of our network in Bangladesh are Shakti, ASA, and Delta Life Insurance. In India, SHARE, SEWA, FWWB, and the newest member is ICICI. In Indonesia, Bank Rakyat Indonesia. In Nepal CSD, S.B. Bank, in Pakistan-Kashf. In the Philippines Negros, and CARD. In Sri Lanka, SEEDS and Janashakti, and in Thailand-BAAC, and GSP. So as you can see, these are institutions that have very different legal structures, some are small, some are medium, some are large. What they have in common is the commitment to building financial services that work for the poor majority. They use their leadership to work with many of the actors sitting at this podium to make sure that financial policies and systems work for the poor majority. At global and local levels, we've been involved for the last 10 years in trying to get financial policies to work for microfinance. So, when we talk about building policies, we need to begin by understanding what poor clients, particularly poor women, want in microfinance. The pillars of sustainable financial systems for the poor are first building transparency and performance standards for all institutions in microfinance. Secondly, having banking regulations that fit the needs of microfinance portfolios whether those portfolios are in the hands of a bank, or a specialized MFI, we need legal structures that enable NGOs to convert into regulated MFIs because they want to mobilize savings from the public. We also need institutional infrastructure which reflects financing capacity building, and standards. Low income women and men define microfinance broadly. They want business and housing loans, they want short , medium, and long-term savings products. They want health and life insurance, and they are willing to pay what it costs to provide them sustainable access to these services. So we clearly are not talking about microcredit only, and that is why we refer to microfinance. And finally, and this might be controversial in this room, in the 20 countries — including Bangladesh, Bosnia, Morocco, etc, when asked, poor women say they prefer individual loans to group loans. Over time they resent the time it takes to stay in groups, and they resent the need to guarantee their repayments by others. This in no way says that groups are not important, but we need to be thinking how to help migrate poor people from group lending approaches to individual lending. So that translates into recognizing that poor people have no traditional collateral — most central bankers are used to evaluating risks on the basis of collateral of loans. They want a variety of products on the asset building as well as on the borrowing side.
After 10 years of this narrow focus, what we find is less than one percent of the outreach globally, and 5% in Latin America, where most of this effort has been focused, is in converted MFIs, and we expect that — so the policies need to request these 3 major sets of actors: Banks, NGOs, and cooperatives. The pillars of sustainable financial systems for the poor are first building transparency and performance standards for all institutions in microfinance. Secondly, having banking regulations that fit the needs of microfinance portfolios whether those portfolios are in the hands of a bank, or a specialized MFI, we need legal structures that enable those NGOs that want to convert because they want to mobilize savings from the public into regulated MFIs and we need institutional infrastructure which reflects financing capacity building, and standards. On promotion of standards, this is I think the base of everything. And the transparency and performance standards help all MFIs and banks improve performance and to integrate into the domestic financial system. There is a lot of attention paid among donors to donor-funded equity funds and hard currency loans. The key is actually building domestic capital markets that work for microfinance. Networks have a major role to play. Country level networks, if you look at SADAN in India, if you look at the coalition on standard now the council in the Philippines, if you look at many of the networks in this region, they actually begin by building an agreement on the definition and performance indicators that all institutions will use, and then getting institutions to actually fork over the data using these common definitions, which is often very difficult, and then publishing that data on individual and aggregate levels. That alone, can be an extremely important policy move. We also see the role of wholesaling organizations, such as PKSF and similar organizations in Nepal and the Philippines have very important roles that they can and do play in having rigorous standards for who they finance; it again creates transparency and performance in the industry. And finally we have the emergence of rating agencies, such as MCRIL, Planet Finance, and MicroRate, which again, are important in providing assurances to local and foreign sources of funding that these institutions are being operated on a sound basis. The key in terms of microfinance operations in understanding the idiosyncrasies of microfinance, you cannot just take the banking system and push it down to MFIs. You need to recognize the transaction costs are high in microfinance. Therefore, institutions need to be able to charge what it costs to provide sustainable access, which means relatively high interest rates. Clients lack conventional collateral; we see many countries, including the Philippines that have created micro loans as a loan class, along with consumer lending, corporate finance, etc. With portfolio quality and a good methodology for evaluating risks, in lieu of collateral.
We see MFIs have simple MIS in accounting, therefore they should not be loaded with heavy paperwork requirements — rigor but simplicity in reporting. We see the savings is as important to clients as is lending, and therefore we need to have the structures that allow high performing MFIs to mobilize deposits from borrowers and from the public — as regulated structures. We see that MFIs have many small branches. And central banks tend to be very stingy in passing out approval of new branches — they will argue that there are too many branches in the country. Actually there are not too many branches serving poor people in the country, so the small branches that are outreach vehicles need to get relatively rapid approval. Loan officers are not traditional bankers, and therefore often the salary structures that apply to mainstream banks do not work for microfinance and you need to be able to pay performance-based incentives. On legal structures for microfinance, MFIs that seek to mobilize savings from the public need to be regulated. MFIs that want to mobilize large amounts of equity and commercial loan funds may seek to be regulated, and the key features for the legal structures for regulated MFIs are relatively low minimum capital requirements, appropriate capital adequacy ratios, which we find can relatively similar to commercial banks, ownership structures really addressing the issue of local vs. foreign ownership. Unfortunately, in East Africa, the recent legislation on MFIs actually precludes local control of these institutions, by saying that the originating NGO cannot own more than 20 or 33% — who is going to provide the rest. It will be donors and donor-funded funds, which I think don't really know as much about microfinance as the local institutions that created them. So, in the Philippines for example, you can't have foreign leadership in rural banks, maybe that's going too far — but certainly local control is key. High performance standards, inappropriate tax treatment, if we want these MFIs not to migrate away from financing poor people, you need to look at the tax burden which can be very heavy and actually force institutions up market which — the world has plenty of banks, we are talking about banks for the poor. The rule of government, I find that this slide actually works in every single country because governments tend to do at least one of these things wrong. Governments need to promote microfinance as the key vehicle in tackling poverty and as a vital part of the financial system. Governments need to create the policies, regulations, and legal structures that encourage responsive sustainable microfinance. Government agencies should not be providing retail microfinance. Wherever we see that, it's politicized, clients don't repay, and it wrecks the market for the good institutions. Governments need to encourage a range of regulated and unregulated institutions and a variety of methodologies. Governments should not back one model. And that means either saying that every NGO should become a bank, or that every NGO should represent Grameen or ASA. We need a variety of models to keep the industry innovating. Governments should encourage competition, capacity building, and innovation to lower cost and interest rates in microfinance. And the single biggest thing that can ruin microfinance is governments placing ceilings on interest rates for microfinance. That is the guarantee that it will not be sustainable, that it will not grow, and we all know that poor clients do not get un-poor in their first, second, or third loan; so you actually need to build sustainable institutions that can cover their administrative cost, their finance charges, provisioning, and actually have a return so that they are able to grow their capital base. And, in return for no ceilings, I think the time has come for MFIs to really look at interest rates, because we cannot hide behind inefficiency, as was said since the first day, and we need to really work to get transaction costs down, and make sure that the interest rates follows.
And finally governments have a major role to play in supporting autonomous wholesale structures — that means wholesale structures that are free of political interference, that are able to make their own decisions on how quickly or slowly to disperse funds, based on the numbers of good small, medium, or large MFIs that are seeking finance, and this vehicle, I think, is critically important in the development of microfinance as we have seen here in Bangladesh. There is a need and a happening of a paradigm shift in retail banking with the poor from a compliant culture which tends to dictate low interest rates, low payments, low know-your-customer minimal loan amounts, low sporadic and shallow outreach relative to demand to a sustainable approach to microfinance. Interest rates that cover costs enable profits, excellent portfolio quality, understand household economies, economic activities of the poor, financial products and processes that respond to poor households and enterprises, high outreach and impact, and I think the experience of Bank Rakyat Indonesia, in migrating from this compliance culture to a sustainable, huge microfinance institution, has really led the way, and we will hear today how the other banks have followed suit with the financial sector crisis of the late 90's — the banks are very wary of corporate finance, and recognize that microfinance is the base and backbone. So, different actors have different roles to play, microfinance practitioners and networks have roles in building standards in organizing the voice of the industry, to be partners with policy makers and policy change. In capitalizing the creation of the needed institutional infrastructure, in developing the market — we just spent last week in India, where the members of our network actually were focused on how to build competitors, how to get the commercial banks involved, beyond self help groups in microfinance- so that the biggest single constraint in microfinance is not macro policy, it is retail capacity, and we as practitioners, need to focus on getting other institutions involved. Policy makers and regulators need to promote microfinance and integrate it into the financial system, encourage a range of structures and methodologies, adjust regulations and legal structures to fit microfinance, and promote the creation of institutional infrastructure. External actors, support building financial systems, provide funding that fits the institution's stage, help build local currency financing and domestic capital markets — we have enough hard currency floating around and MFIs do not need hard currency in most markets. And we need to have donors that actually not only encourage, but use their own high standards. As an ex-World Banker, I can say that donors often do not practice what they preach, and can fund the wrong end of the stick, and so we need to hold each other accountable. So challenges for this decade: outreach, expand outreach to millions more by increasing MFI capacity, mobilizing mainstream banks, and building domestic capital markets; focus on assets, help poor people build assets, not just debt; focus on cutting transaction costs in microfinance through new technology and channels; Culture — this I think is the most important thing, building a culture among MFIs, bankers, policy makers and funders in microfinance based on trust and transparency, shared standards generosity, insuring what works and what does not. And mutual accountability for results and building financial policies and systems that work for the poor majority. Now we will hear how in these extremely important countries of Asia, central bankers are building financial policies and systems that work for the poor majority. |