Challenges of the Microfinance Sector in Asia: The Asian Development Bank

1
Challenges of the Microfinance Sector in Asia
The Asian Development Banks Experience

• Presentation by
• Nimal A. Fernando
• Principal Finance Specialist (Microfinance)
• Asian Development Bank
• Workshop on Microcredit-Financing and Poverty
  Alleviation in OIC Member States
• Istanbul, 9-10 July 2007

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Outline

• PART I
• Brief History of ADB Operations
• Microfinance Development Strategy of ADB
• Current Loan Portfolio and its main features
• Other Microfinance Activities of ADB
• PART II
• Asian Microfinance Industry Current Status
• Challenges of the Industry
• Concluding Remarks

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Brief History of ADB Operations

• The modest beginning in 1988 with focus on NGOs
• Gradual expansion geographic and institutional
  types
• 1998-99 Review of ADBs MF Operations
• Main findings on Early Projects included
• focused on credit delivery
• lack of emphasis on other financial services
• little attention to financial viability
• Allowed subsidized interest rates

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Microfinance Development Strategy (MDS) of ADB

• Why did ADB need a Strategy?
• The industry was rapidly evolving
• Need to adopt a systematic approach was
  recognized
• A general framework was needed to guide
  operations
• A consistent basis was needed for policy dialogue
• A Strategy can help improve quality of assistance

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MDS The Formulation Process

• Extensive consultation process for fact finding
• Internal in ADB
• Internal in developing member countries
• External consultations
• Consultation on the Draft Strategy
• The final version approved by the Board in May
  2000

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MDS The Content

• Goal ensure permanent access to institutional
  financial services for a majority
• Purpose support development of sustainable MF
  systems that can provide diverse services of high
  quality

7
MDS Strategic Focus Areas of MDS

• Creating a supportive policy environment
• Developing financial infrastructure
• Building viable institutions
• Supporting pro-poor innovations
• Supporting social intermediation

8
Current Loan Portfolio and Its Main Features

• Over 1.3 billion
• Heavy concentration in 4 countries
• India/Pakistan/Philippines/Sri Lanka
• Support diverse set of institutions
• Encourage private sector and social entrepreneurs
• Sector development projects are prominent now
• Microfinance component projects questionable
  quality

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Other Microfinance Activities of ADB

• Research and knowledge sharing
• Pioneering studies in microfinance
• Rural Financial Markets in Asia (2000)
• Role of Central Banks (2000)
• Commercialization of Microfinance (2001-2004)
• Study on rural financial markets in Central Asia
  (2006)
• Quarterly Newsletter on Microfinance (since July
  2000)
• Assistance for capacity building and policy
  advise
• Networking pioneering member of the CGAP

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PART IICurrent Status of the Asian Microfinance
Industry

• Many institutions, but large institutions account
  for bulk of the outreach
• Three giants in Bangladesh Grameen Bank/ASA/BRAC
• Market in India has become vibrant
• Banks and non-bank financial institutions more
  important now.
• India and Peoples Republic of China lowest
  market penetration
• Private risk capital involvement is still small
• Significant government involvement in service
  delivery

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Current status (contd)

• A number of viable and very efficient
  institutions
• Most institutions are subsidy dependent and not
  financial viable
• Most focus on credit and offer rigid products
• Group lending methodology is widespread
• Deposit, money transfer, and insurance services
  limited
• Quality of services remains questionable
• Outreach to the poorest is only marginal

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Overarching Challenge

• Expanding scale of quality financial services
• to millions of under-served clients
• and to millions of unserved, including the
  poorest
• And doing these in a sustainable manner

13
Meeting the Overarching Challenge

• A number of challenges must be overcome
• Further improve enabling policy environment
• Policy constraints continue in many countries in
  different forms
• Interest rate caps on small loans (India/PRC)
• Tendency to re-introduce interest rate ceilings
• Constraints on foreign investments/ownership
• Policy dialogue with central and state/provincial
  governments
• Policy makers change frequently
• Their time horizon is short
• Building supportive constituencies slow process

14
Regulatory Barriers and Weak Supervisory Capacity

• Regulations are not compatible with the industry
  requirements
• Too rigid regulations
• Supervisory authorities lack adequate capacity
• Most small scale deposit taking institutions are
  not regulated and supervised properly

15
Building Sustainable and Adequate Retail Capacity

• Retail capacity to provide a broad spectrum of
  services is limited
• Massive efforts are needed to build this capacity
• Increase the currently limited number of
  sustainable institutions
• Tough decisions are needed to ensure viability
  (example pricing policy)
• A large amount of resources and technical
  assistance is needed for capacity building
• Reforming state-owned financial institutions to
  serve the poor

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Reducing Transaction Costs

• Cost of small value transactions remain high
• This translates into high prices
• High prices reduce access for some poor people
• Innovations, improvements in efficiency and
  productivity are needed

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Integration of Microfinance into the Broader
Financial System

• Walls remain between the two
• Walls must be dismantled
• Large-scale conventional financial institutions
  must be brought in
• This remains a formidable task

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Concluding Remarks

• Asian microfinance industry has grown
  dramatically during the last two decades
• But many challenges remain
• Majority of the poor remain without adequate
  access
• Industry development is an unfinished business
• Funding agencies like ADB have to play a key role
• Funding agencies have to adjust their course to
  respond to emerging trends and opportunities

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Thank you.

• For more information on ADBs microfinance
  operations,
• www.adb.org/microfinance