World Bank Seminar on Financial Stability and Development

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World Bank Seminar on Financial Stability and
Development
ASSESSING NON-BANK FINANCIAL INTERMEDIATION
SCOPE, OUTREACH, AND EFFECTIVENESS
Yira Mascaró Senior Financial Economist The World
Bank
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Structure Of Presentation

• I. Types of non-bank financial institutions
  (NBFIs)
• Wide scope of institutions and markets
• Wide scope of products and roles
• II. Importance of NBFIs
• Stability
• Financial development
• III. Key characteristics to assess
• Depth and outreach
• Cross country comparisons
• Effectiveness market structure, prices, and
  regulatory framework
• Quantity and quality of products
  structural,institutional, and policy factors

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Structure Of Presentation

• IV. Differentiated analysis by type
• Microfinance institutions (MFIs)
• Mortgage banks, cooperatives, Savings Loans
  (SLs)
• Development Financial Institutions (DFIs)
• Leasing and factoring firms
• Insurance and pensions markets
• Securities markets
• V. Concluding remarks

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I. Types of Non-Bank Financial Institutions
(NBFIs)

• Wide scope of institutions and markets
• Near banks
• Microfinance institutions (MFIs) including NGOs,
  cooperatives
• Mortgage banks, cooperatives, and savings and
  loans (SL) institutions
• development financial institutions (DFIs)
  state-owned
• Leasing and factoring firms
• Other NBFIs
• Insurance companies, pensions and collective
  investment managers, securities markets firms
• markets
• Insurance, pensions, securities

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I. Types of non-bank financial institutions
(NBFIs)

• Wide scope of products and roles
• Demand and supply side
• Deposit-type accounts (near banks, at a smaller
  scale, and insurance co.)
• Specialized financing products (including longer
  term, alternative collateral)
• Complementarities across some types (e.g.
  pensions and insurance)
• Various roles
• Deposit mobilization and store of value (often
  more valuable than credit)
• Diversification and transformation of risks
• Management and allocation of capital funds

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II. Importance of NBFIs

• Stability
• Tend to have a small share of the market in dev.
  countries, but
• potentially large undisclosed links with banks
  (e.g. insurance sector in Jamaica), leading to
  indirect systemic risk
• Need to address issues related to consolidated
  accounting and supervision
• Financial development
• Enhance variety of financial product and complete
  markets
• Often designed to target underserved sectors,
  increasing outreach
• Increase depth of markets
• Increase competition with typically predominant
  banks, motivating broad enhancement in financial
  services
• Most effective if independent from banking groups

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II. Key characteristics to assess

• Depth and outreach
• Enhancing variety of financial products and
  complete markets
• Measuring share of total assets (relative to
  banks and to GDP)
• Regional and geographical coverage
• Main beneficiaries
• Cross country comparisons
• Potential for growth based on international
  experience
• Institutional framework and supporting
  infrastructure
• Quantitative benchmarking

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II. Key characteristics to assess

• Effectiveness market structure, prices, and
  regulatory framework
• Explicit or implicit subsidies, entry
  restrictions
• Specialized supervisory or regulatory provisions
• Quantity and quality of products Structural,
  institutional and policy factors
• financial infrastructure (legal, information,
  regulatory, payments and settlements etc.)
• regulatory, tax policy, and corporate governance
  issues
• Macroeconomic and scale constraints
• Other economic factors (e.g., education, physical
  infrastructure)

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III. Differentiated analysis by type MFIs

• MFIs (including NGOs, coops)
• Wide variety of products
• Specialized lending technology (i) to micro and
  small firms (investment and operating capital,
  housing, consumption, credit lines, agriculture)
  (ii) to salaried individuals (housing,
  consumption)
• Savings and term deposits
• Remittances, payment of basic services (water
  etc.), tax and public sector payments
• Large operating and administrative costs
• Due to nature of clients that typically have
  limited credit history, lack of financial
  statements or cash-flow projections, little or no
  collateral
• Intensive screening and monitoring (group versus
  individual technologies)

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III. Differentiated analysis by type MFIs

• Successful technology lower NPLs, higher
  profitability
• Nature of operations with high adaptability
  (resilience to crisis), closer monitoring, etc
• Selected key issues- MFIs
• Dollarization and maturity mismatch
• Enabling legal and regulatory environment
• Prudential regulation and supervision for
  smaller, self-regulation and reporting
• Information infrastructure credit bureaus,
  scoring methods etc (over-indebtedness)
• Sustainability (aspects on performance,
  funding-specially for NGOs, subsidies)
• Strategic alliances
• Massive debt forgiveness plans damage credit
  culture
• Market interest rates Example from Bolivia
• Composition of MFIs rates compared to bank rates

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III. Differentiated analysis by type MFIs

• Bolivian MFIs lending interest rates by
  components
• (components as percentages of average gross
  rates as of August 31, 2005)

Component Banks MFIs Difference
Interest income 10.02 21.31 11.29
Other income 5.34 2.39 -2.95
Interest expenses -3.49 -5.47 -1.98
Provisioning expenses -0.73 -1.90 -1.17
Operating and administrative expenses -10.70 -14.51 -3.81
Net profit margin 0.44 1.82 1.38
Source Asofín (association of regulated MFIs in
Bolivia) excludes to banks, considered among
regulated MFIs (Bancosol, Andes) Only regulated
MFIs are associated to Asofín (2 banks, 5 FFPs, 1
converting to FFP)
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III. Differentiated analysis by type mortgage
banks, coops, SLs

• Housing finance
• Intermediaries, products, and market
• Availability of intermediaries (mortgage banks,
  coops, SLs, banks) often segmented by income
  levels
• Range of products households (purchases and
  renovations) and construction firms
• Data on housing financing (mortgage loans
  outstanding in US and as of GDP)
• Performance analysis of intermediaries
  (Camel-like) interest rates and maturities
• Funding Deposits, mortgage backed securities
  (tax benefits)
• Information collection and transparency
• Transaction and foreclosure costs
• Housing needs
• House prices, construction trends

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III. Differentiated analysis by type mortgage
banks, coops, SLs

• Selected key issues- housing
• Regulatory arbitrage, including positive and
  negative tax differential
• Partial default guarantees with risk-based
  premiums
• Maturity mismatch (supply constraints and
  prudential issues) interest rates macroeconomic
  instability (fixed) and inflationary environments
  (flexible or requiring indexed products)
• Land tenure, titling, and registration
  inadequate legal framework, lengthy processes
• Foreclosure processes and frameworks
• Enabling legal and regulatory framework for new
  products and markets to develop mortgage backed
  securities (quality of portfolio), secondary
  mortgage market
• Construction standards
• Income distribution of available financing
  skewed (coops)
• Subsidies programs limited managing capacity,
  corruption, negative credit culture
• typically insufficient to cover housing deficits
  need private sector

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III. Differentiated analysis by type DFIs

• Development financial institutions (DFIs)
  state-owned
• Policy objectives and mandates clarity and
  conflicts
• Sisiphus sindrome (de la Torre, 2002)
• Funding and subsidies
• credit lines, deposits, trust funds, direct and
  indirect subsidies
• Measurement of performance
• Camel-type analysis
• Complementary measures SDI, output index
  (assessing attainment of objectives)
• Regulation and supervision
• Corporate governance

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III. Differentiated analysis by type DFIs

• Selected key issues-DFIs
• Political influence
• Complex corporate governance
• Prevalence of low access to finance in spite of
  subsidies
• Market distortions
• Poor management and enforcement
• Credit culture (subsidies and repeated bailouts)
• Limit mobilization of deposits to reduce exposure
  to losses- development agency?

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III. Differentiated analysis by type Leasing and
factoring firms

• Leasing and factoring firms
• Market size and types of firms
• Sometimes not officially reported (apparently,
  only 4 countries in Africa-http//www.factors-chai
  n.com/continent/AFR but)
• Associations of leasing and factoring firms
  lobbying, reporting, competition to banks
• Adequate framework, including legal clarity for
• Types of permitted leasing transactions
  (operational and financial)
• Definition of collateral leased asset (leasing),
  account receivables (factoring)
• Creditor rights to enable rapid collateral
  execution and contracts enforcement
• Property registries
• Tax issues (e.g. VAT excluded, as factoring is
  not the actual sale of assets)

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III. Differentiated analysis by type Leasing and
factoring firms

• Links to banks and financial groups
• Funding issues, priorities within the group
  (captive subsidiaries of banks)
• Individual exposures to a given firm
• Accounting standards and consolidated supervision
• Potentially large role for SMEs, typically
  under-served
• Enhancing credit profile of firms with limited
  history or insufficient collateral
• Enabling financing for working capital
  (factoring)
• Improving cash-flow, acquiring of key fixed
  assets (factoring) such as machinery and
  equipment (not specialized)
• Supported by enabling infrastructure to reach
  broader set of clients and financing (e.g. Nafin
  in Mexico)

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III. Differentiated analysis by type Insurance
and collective investors

• Insurance and pensions markets
• Insurance companies and markets
• life versus non-life (motor vehicle, fire,
  earthquakes) Insurance penetration (premium as
  of GDP) and density (premium per capita)
• International comparisons (e.g. Swiss Re Sigma)
  reinsurance
• Small size of market (asset-side) could be
  associated to low disposable income and lack of
  insurance culture
• Performance analysis
• Market concentration, range of products, pricing
  (actuarial considerations)
• Profitability by class of business claims ratios
  (claims incurred divided by premiums earned),
  expense ratios, ROE, asset mix
• Solvency capital and provisioning (actuarial
  considerations) asset-liability mismatch
• Maturity mismatch

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III. Differentiated analysis by type Insurance
and collective vehicle investors

• Selected key issues- insurance
• Consolidated accounting and supervision
• Technical skills of supervisors integrate
  Superintendencies or areas?
• Legal and regulatory framework crucial for
  insurance product innovations
• Tax considerations (e.g., life insurance versus
  other deposits)
• Maturity mismatch long-term financing
  (securities markets) for products such as
  annuities (Chile) for pensions
• Pension funds and markets
• Typology of plans with some level of funding
  Defined Benefits (DB), Defined Contributions
  (DC) State-sponsored (DB), group (occupational)
  plans (DB, DC), individual plans (DC) mandatory,
  voluntary
• Adequate reserves management and investment
  financial instruments government and corporate
  bonds, mortgage-back securities, international
  securities
• Legal and regulatory framework, including
  investment regulations and restrictions

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III. Differentiated analysis by type Insurance
and collective investors

• Selected key issues- pensions
• Funding ratio (DB) future imbalances
  (inter-generational disparities generous plans)
  and actuarial projections (subject to validity of
  assumption many years in the future)
• Reserve management (DB) governance, corruption,
  transparency
• Mixed results of reforms from DB to DC lower
  fiscal contingencies and increased equity low
  coverage, large fees, limited effect on
  securities markets
• Legal, regulatory, and supervisory framework
• investment rules large focus on government
  bonds limits development of securities markets
  (accumulating phase-DC) quantitative versus
  risk-based rules
• payout phase (DC) alternatives lump-sum, 401 K,
  annuities from insurance companies (with
  longevity insurance) relevance of insurance
  supervision (specially for solvency
  considerations)
• pension managers (DC) competition issues (i)
  fees and commissions (over salaries versus over
  funds), administrative costs (ii) low real
  returns of individual accounts, insufficient
  comparability across pension funds or net
  risk-adjusted returns

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III. Differentiated analysis by type Securities
Markets

• Securities markets
• Increase financial depth competition to bank
  financing
• Institutional investors investment alternatives
  governments and firms alternative financing
  SMEs Securitization (e.g. SPVs in Uruguay- tax
  on milk producers)
• Stock exchanges (sometimes too many for small
  size of market) and brokers (ownership issues)
• Markets equity or debt (public and private)
• Primary number and value of new securities
  issued, mode of issuance (public offering,
  private placement), cost of new issues ( of
  capital raised), issuers
• Secondary size (market capitalization for
  equity, debt outstanding for debt markets) as
  of GDP liquidity (value traded as of size)
  rates, individual or institutional demand for
  debt and equity products

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III. Differentiated analysis by type Securities
Markets

• Market infrastructure
• Trading systems
• Clearing, settlements, and depository systems
  (physical infrastructure, regulations)
• Selected key issues- Securities
• Legal and regulatory considerations to enhance
  products and depth e.g. Securitization (legal
  separation of trust)
• illiquid secondary markets incomplete yield
  curve (Government bond markets)
• Few corporate issuers concentrated wealth,
  family businesses, lack of information,
  transparency and adequate governance
• Large firms with access to international markets
  enhanced governance and transparency potential
  to increase financing to medium to large firms

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IV. Concluding remarks

• Limited issues related to financial stability in
  developing countries, but occasionally with large
  and costly implications
• Large potential for broadening financial
  services, specially for underserved sectors and
  institutional investors
• Key aspects related to
• Enhanced information, transparency, corporate
  governance
• Legal and regulatory frameworks
• Supervisory issues special considerations, but
  with even playing field
• Supporting infrastructure
• Some types more subject to political influence
  and governance issues