Commercial Banks in Microfinance

1
Commercial Banks in Microfinance

• Prepared and Presented by
• Mr SEEKU JAABI
• Microfinance Department
• Central Bank of The Gambia
• West Africa English Speaking Regional Workshop
• On Innovations in addressing rural finance
  challenges
• in Africa held on March 31- April2, 2008 in The
  Gambia

2
Table of Content

• Introduction
• Banks absence in microfinance
• Banks participation in microfinance
• Modalities of participation- direct/indirect
• Merits of linkage banking
• Challenges in linkage banking
• Microfinance Lessons
• Conclusion

3
1. Introduction

• Banks in MF has been an issue of much debate
  among developing countries and development
  economists
• Many suggest banks involvement to increase
  capacity, efficient resource mgt
• Immediate post independence era, most state-owned
  banks took up the responsibility in the absence
  of private banks

4
1. Introduction cont.

• However, failed to address the main objects due
  to high NPLs, poor mgt, insider abuses, political
  interventions, among others
• Many were liquidated or reorganised during SAPs
  in the 1980s
• Govts reduce to providing right conducive
  environment
• MF is a high-yield emerging market that
  commercial markets cannot afford to ignore

5
1. Introduction cont.

• Globally, MFIs are operating successfully without
  subsidies, donor dependence or social
  requirements but charging sustainable interest
  rates, profit oriented and huge growth potentials
• Move to viable and sustainable funding sources,
  sound operations, job creation and extensive
  outreach to unbanked majority
• In Africa, Asia and Latin America, banks have
  recorded success stories in MF

6
2. Banks absence in MF

• No legal status, most in informal sector
• Poor is unbankable perception-unable to provide
  collateral, minimum balances, tiny transactions
• Risks in agric lending- main occupation of rural
  dwellers, erratic rainfall, drought, markets
• Lack of conducive policies and at times
  conflicting
• Lack of technologies to support outreach
• High transaction costs, poor infrastructure

7
3. Banks participation in MF

• Mission of bank- development, country-wide
  operations, promote key sectors of the economy
• Compulsion to provide financial services to rural
  areas- Some African Asian countries
• Long term sustainability objective
• Profitability motive- studies showed that
  repayment rate is higher in MF than mainstream
  financial sector

8
3. Banks participation in MF cont.

• Fewer alternative borrowing possibilities
• Women lack access to economic opportunities
• Less mobility of women to care children made them
  less delinquent to credit facilities
• Market and risk diversification-viable option
• Incentives in MF- credit guarantee schemes, tax
  holidays

9
4. Modalities of banks participation in
Microfinance

• Direct 2. Indirect/Linkage banking
• 1. DIRECT Approach

Banks
SHGs, Coops societies CBOs, low-income
10
4. Modalities of banks participation Direct cont.

• Banks act as retailers in the delivery of
  financial services
• Savings mobilised often used as collateral
• Delivery of credit through SHGs, SMEs
• Grameen Bank pioneered group lending
• Successes of the model replicated globally to
  reach the poor, reduce risks and tap profit
  potential

11
4. Modalities of banks participation- Direct Cont

• Bank Rakyat Indonesia 2004 data
• Head office, 15 Regional offices, 325 Branches,
  3595 Unit Desas/agencies and 392 service posts
• Unit TA 3.5bn -35 of BRI, loans 2.1bn- 28 of
  Total, Deposits 3.5bn- 42 of total 8.35bn
• 3.2 m borrowers, 31.3 million savers
• Repayment rate of 99.6, profit 233m
• ROA 6.8

12
4. Modalities of banks participation -BRI Culture

• High-level, experienced, committed management
• Professionalism responsibility
• Effective internal controls and supervision
• Transparency accountability
• Training incentives for staff based on unit
  profitability, stress on Unit Operational
  self-sufficiency
• Training for all staff in its 6 training schools
  yearly
• Financial education and customised products
  developed

13
4.Modalities -Direct Approach

• BRAC- Bangladesh
• NGO transform to a bank in July 2001 with special
  focus on SMEs
• Head office, 66 Regional offices 44 area
  offices, 694 Unit offices
• Outstanding loan US 179.81m Sept 2003 -99 of
  borrowers were women
• Average loan size of 120
• Repayment rate 99.19
• Savings deposits 99.48m
• Staff strength of 62,494 part and full time

14
4. Modalities- Direct Approach Equity Bank of
Kenya

• 1984-93 building society-deposits ksh 31m, loans
  ksh12m, loss 5m, reserves loss ksh35m, TA ksh 28m
• Restructuring with two strategic investors-IFC
  EIB in 2006 ksh12.7bn savings, 9.2bn loans,
  ksh18.2bn TA, profit ksh653m
• Minimum opening balance nil, no ledger fees,
  account opening nil, no restriction on frequency
  of withdrawal, no appointment to see managers,
  operate 36 branches, 56 mobile branches, flexible
  collateral
• Loans available to all account holders
• Same is true for k-rep bank, CERUDEB

15
4. Modalities of banks participation in MF

• Indirect/Linkage Banking

Banks
Donors
MFIs
SHGs, CBOs
MSEs, SMEs, Low-income
16
4. Modalities of banks participation in MF

• Indirect
• Banks act as wholesalers of credit to MFIs for
  retailing
• MF requires specialised technologies and
  methodologies to outreach and banks often lack
  this capacity
• In line with Strauss Commission of 1996 in South
  Africa- banks finance equity of retailing MFI
• Studies showed that credit demand for MF clients
  is huge, financing gap is met through wholesale
  of funds

17
4. Modalities -Indirect

• Savings mobilised cannot cope to generate such
  funds
• Therefore wholesale funds will remain a genuine
  requirement for MF intermediation for long
• Rely on collateral substitutes as opposed to
  conventional collateral
• By The Gambian MF policies, wholesale funds are
  only accessed by licensed MFIs

18
The Gambia Financial Sector

• Financial Sector

Non- Banks
Commercial Banks 10
Finance Company 5
SACAs 63
Credit Unions 67
Bureau De Change 40
Fiduciary Institutions
19
Performance of MF Sector

• Dec 05 Dec
  06 Dec 07
• Deposits 111.4m 150.6m 262.7m
• Loans 103.8m 123.8m
  241.4m
• Clients Reached 73,488 88,538
  92,021

20
5. Merits of Linkage Banking

• Contributes significantly to deepen the financial
  system
• Encourages more resource flow, extensive
  outreach, increase access to finance
• Promotes savings mobilisation for re-investment
  ultimately to operational and financial
  self-sufficiency- OSS and FSS
• Linkage achieves double objectives-increase
  access to finance for poverty reduction and
  profitability for participants

21
5. Merits of Linkage Banking

• Women considered highly vulnerable were able to
  acquire assets and participate more in
  decision-making at community and family levels
• Reduce credit administration and ease loan
  recovery drive as MFIs have capacity to
  intermediate wholesale funds- know the terrain in
  MF service delivery

22
6. Challenges- Linkage Banking

• Lack of legal status for most MFIs hampered such
  business relationships
• Group commitments are at times questionable, if
  formed purely to obtain credit
• Some SHGs have leadership problems, have the
  tendency of diverting funds in transit
• VISACAs fear of being swallowed

23
7. Microfinance Lessons

• Poor households are bankable, they can save and
  repay loans timely
• Access to financial services is more important
  than the costs (high interest rates) to the poor
• Emphasis is on appraisal, timely disbursement of
  loan, training (financial education) and
  monitoring of loan, financial services have to be
  demand driven and flexible

24
7. Microfinance Lessons cont.

• MFIs are sustainable if integrated into the
  financial system
• MF contributes to achieving MDGs
• MFIs need to cover costs in order to operate
  sustainably
• Subsidised funds no longer needed for growing
  portfolios- unsustainable
• MF has limits i.e great difficulty in reaching
  the poorest but in collaboration with other
  bodies they can be reached eg BRAC Bangladesh

25
7. Microfinance Lessons Cont.

• The poor need efficient, sustainable financial
  services to help grow out of poverty. Credit
  cannot be a one-shot poverty alleviation
  mechanism- Credit Plus required
• Women repay MF loans more reliably (studies have
  shown) due to less access to alternative sources,
  vulnerable to peer pressure, less mobility, spend
  for the needs of their families
• Treat poor as valued customers not beneficiaries

26
8. Conclusions

• Linkage banking is high on CBGs agenda
• Recent policy changes encourages the
  participation of banks in MF either directly or
  indirectly
• Banks have sufficient funds but has not fully
  entered into MF but the informal sector has huge
  financing gap and very effective in repaying
  loans so linkage is considered the only way
  forward
• With use of wireless technology, branchless
  banking, linkages, poor could be reach even in
  remote areas

27
8. Conclusions

• Informal sector will develop, gradually
  formalised with effective integration into the
  financial sector
• Formal sector need to simplify, downscale to
  accommodate the informal sector
• Combine the strengths of the two sectors will
  enable efficient resource allocation, deepen
  financial sector, economic growth
• Comparative, absolute comparative advantages are
  relevant in linkage banking

28
THE END

• THANK YOU ALL FOR
• YOUR ATTENTION

29
Contact Address

• Mr Seeku Jaabi
• Microfinance Department
• Central Bank of The Gambia
• Tel [phone]
• Fax [phone]
• Email sjaabi_at_hotmail.com
• jaabiseeku_at_yahoo.com