Microfinance for Bankers and Investors_1 ppt

The UnitedNations defines an inclusive financial sector as “a continuum of financial insti-tutions that together offer appropriate financial products and services to all serv-Preface • ix..

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UNDERSTANDING THE OPPORTUNITIES

AND CHALLENGES OF THE MARKET AT THE

BOTTOM OF THE PYRAMID

ELISABETH RHYNE

Copyright © 2009 by Elisabeth Rhyne All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form

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Preface vii

Introduction xiii

Part 1 Understanding Clients, the Market, and the Opportunities

1 The BOP Market Up Close (and Personal) 3

2 Who Serves the BOP Market—and Who Doesn’t? 11

3 Four Critical Challenges in the BOP Market 18

4 Products for the BOP Market 27

5 Three Products: Insurance, Housing Finance,

and Remittances 34

Part 2 Models and Corporate Choices

6 Corporate Choices 47

7 Commercial Banks as Microlenders 57

8 Partners at the Last Mile: Retailers, Banking Agents, andInsurance Companies 66

9 Models of Financing Inclusive Finance 77

Part 3 The Emerging Industry of Inclusive Finance

10 Building the Infrastructure for Inclusive Finance:

The Enabling Environment 95

11 Credit Bureaus and Credit Scoring 103

12 Last-Mile Technologies 111

13 The Technological Base: Payment Systems and

Banking Software 120

14 Building the Market for Investing in Microfinance 126

Part 4 Socially Responsible Returns

15 Approaches to Social Responsibility 139

16 Client Protection and Proconsumer Inclusive Finance 148

17 Measuring the Social Bottom Line 158

• v •

Cases 1 Banking Models

ICICI Bank: Shaping Inclusive Finance in India 167Citigroup Fosters Commercial Relationships with

Microfinance Institutions 175

Banco Pichincha and the Service Company Model 181Banco Bradesco: Twenty-First Century Postal Banking 188

Cases 2 New Players: Retailers, Insurers, and Telecoms

Banco Azteca: A Retailer Surprises Mexico’s

Financial Giants 195

Vodafone: A Bold Move into Financial Services for

Kenya’s Poor 204

G-Cash: Filipinos Text Their Way to Mobile Banking 209

Cases 3 Industry Developers

Visa: Social Benefit Systems That Benefit Everyone 219Temenos: Creating Core Banking Systems for

Microfinance 226

Creditinfo: First Credit Bureau in Kazakhstan 231

Cases 4 Financing Models

MF Analytics and Citibank: The Securitization of

Cases 5 Social Responsibility

ANZ Bank: If the Mountain Will Not Come to Us,

Then We Must Go to the Mountain 261

Equity Bank Goes to Schools 266

Triodos Bank and the Global Reporting Initiative 272Acknowledgments 279

Endnotes 281

References 299

Index 317

vi • Contents

On my office wall I keep a photograph of Xavier, who sells frozen fish and

a few groceries at a dusty intersection on the outskirts of Maputo, bique Wearing a crisp white shirt and tie, he poses before an electric type-writer in his kiosk Everything about the picture, including the pride in hisface as he looks at the camera, reflects his striving to become a successful busi-nessman On the afternoon when Xavier told me his story, I learned that thebig institutions of society had either failed or ignored him, except for theCoca-Cola distributor that brought him cases of soft drinks to sell Xavier wasputting the pieces of prosperity together for his family on his own by buildinghis business He had a loan from a microfinance cooperative, but it was small,suitable only for financing a little extra stock

Mozam-Xavier could be a loyal customer for many other financial services—savingsaccounts to help him build for the future, a home-improvement or fixed assetloan, health insurance, and remittance services to send money to his relatives

in South Africa A suite of financial services designed with an eye for his needscould help him create the better life he craves for himself and his family—ifonly there were institutions prepared to provide them

The success of microfinance institutions in making small loans to peoplelike Xavier has begun a revolution in financial sectors around the world Theconsequent media attention to microfinance is leading the business commu-nity to consider what their roles might be in bringing financial services to pop-ulation groups that have long been marginalized The gaps we see in Xavier’sfinancial needs point toward many opportunities that await entrepreneurialcompanies prepared to engage the low-income market

• vii •

ACCION and the Private Sector

ACCION International, a nonprofit organization dedicated to fighting globalpoverty through microfinance, has advocated private-sector engagement foralmost two decades We are finally in sight of a tipping point

But in the 1970s when ACCION first started working in what has becomemicrofinance, only nonprofits were willing to serve the people ACCIONwanted to support These were the millions of people streaming into LatinAmerica’s burgeoning cities looking for a better life No one was likely to offerthem a job, so they created tiny enterprises to survive ACCION’s partnerslearned how to offer credit to support their corner groceries and seamstressshops By the early 1990s, models of microfinance reached significant scaleand were financially viable This opened the way for the transformation ofnonprofits into financial institutions, starting with BancoSol in Bolivia,ACCION’s original flagship institution and the first private commercial bankdevoted to microfinance

At that point, María Otero, at ACCION, and I, then at the United StatesAgency for International Development (USAID), began to envision how micro-finance could evolve to change the whole financial system María was seeking

to expand ACCION’s reach, and, as part of a donor agency, I was seeking to alyze the microfinance community at large We developed what we called the

cat-“financial systems approach,” which has guided ACCION’s thinking and enced the microfinance community ever since.1We saw that moving from theprevailing elite-oriented financial systems to financial systems that serve themajority of the population could only occur with private-sector buy-in In fact,the private sector would need to become the leading actors

influ-ACCION first demonstrated the potential for scale and profitability of finance through BancoSol and its sister organizations, such as Mibanco in Peruand Banco Solidario in Ecuador Once these institutions became commercialbanks, they started to outperform many of the mainstream banks in their coun-tries BancoSol was repeatedly named Bolivian bank of the year, based onreturn on assets and equity, portfolio quality, and other top line financial indi-cators This kind of success captured the attention of the private sector, but didnot yet provide a way for the private sector to enter into microfinance.ACCION then created vehicles for the private sector to invest in microfi-nance, such as the Bridge Fund (a guarantee fund) and ACCION Investments(an equity fund), making connections possible between Wall Street investorsand the poor on the back streets

micro-viii • Preface

The next step involved the private sector more actively—as direct serviceproviders ACCION worked with pioneering commercial banks like Soge-bank in Haiti and Banco Pichincha in Ecuador, which decided to serve thelow-income market directly These prominent local banks led the way in theircountries at a time when other banks remained hesitant Both institutionsnow have thousands of loyal clients in this market segment.

As the financial systems approach moved to each new stage, we often feltlike we were pushing against a reluctant private sector Most business leadersjust did not believe low-income people could be profitable customers It was,

in fact, discouraging! But there were always a few committed champions inour partner institutions to keep us going

Awakening Interest in Microfinance

Today ACCION and the whole microfinance community are finally feeling

a strong pull coming from the private sector, though the 2008-2009 financialcrisis is putting some of that pull on hold as this book goes to press In theyears until the crisis, private business interest in financial inclusion soared, aresult of many factors The growth and increasing purchasing power of thevast global market of low-income people attracted private-sector attentionacross sectors In finance, the success of the microfinance movement demon-strated the business viability of financial services for the poor The microfi-nance “industry” now serves between 60 and 130 million borrowers,depending on who is counting,2many of them reached by profit-making insti-tutions And new technologies promised to bring down costs, making smallertransactions and accounts profitable When the world economy pulls out ofits slowdown, we look for this momentum to rebound We have confidencethat our vision of universal financial inclusion can be realized

The Project: From Microfinance to

Inclusive Finance

“Inclusive finance” heralds a new stage in the effort to bring financial ices to the poor, building upon and going beyond microfinance The UnitedNations defines an inclusive financial sector as “a continuum of financial insti-tutions that together offer appropriate financial products and services to all

serv-Preface • ix

segments of the population.”3No longer is it enough to offer a single uct, such as a microloan for a small enterprise Poor people need an array offinancial services Inclusive finance emphasizes contributions by a variety ofplayers While microfinance is a tight community of like-minded institutions,inclusive finance challenges all financial-sector participants to play a role.This book is about how private businesses can engage in financial inclusion.

prod-It grew out of a project conceived by the private-sector members of the UNAdvisors Group on Inclusive Financial Sectors, a high-level body formed tospur governments, the private sector, and others to more vigorous action tobroaden the reach of financial services Visa Inc and ACCION, each repre-sented on the UN Advisors panel, took up the challenge of communicating tothe private sector—bankers, investors, and supporting companies—about theopportunities Visa and ACCION provided financial support, and the Centerfor Financial Inclusion, ACCION’s industry-building arm, carried out the work

We knew that the best way to convince businesses about opportunities ininclusive finance was to draw on the stories of companies already leading theway We begin by surveying the landscape of opportunities in financial inclu-sion, explaining who is serving whom We then delve into specific areas wherethe private sector can powerfully alter the landscape Private players have thepotential to meet needs with new products, develop creative delivery chan-nels to complete the last mile, and apply technologies to bring down the cost

of reaching the poor Investors can provide finance to microfinance tions We illustrate all these possibilities in the second half of the book through

institu-16 case studies featuring both global brands and lesser known companies thatare already making strides in inclusive finance

Inclusive Finance and the Global Financial Crisis

As this book neared completion, the world witnessed a dramatic financial-sectorcontraction leading into a recession Many of the rapid growth trends we cite,which continued through the first half of 2008, have slowed dramatically andwill recover only gradually Yet even in this context, inclusive finance remainsrelevant, perhaps even more relevant than before The financial sector is wak-ing up to the idea that a resilient financial system may need to place greaterreliance on smaller players distributed throughout the sector rather than on afew players concentrated at the center Inclusive finance could become oneimportant element of a stronger and more just financial system

x • Preface

Though inclusive finance aims to serve low-income people, as did the subprime mortgage market that provoked the financial crisis, many of the prac-tices of the best inclusive-finance providers, like leading microfinance institu-tions, differ in fundamental and refreshing ways from subprime lending.First, most lending to low-income customers in developing countries—espe-cially microenterprise lending—is based on an assessment of current ability topay, not speculation about the future value of assets What stands out as a les-son in this regard is the risk associated with a failure to follow sound consumerprotection practices The microfinance industry is increasingly aware of thevalue of client protection for long-run business success.

Second, few of the financial institutions involved in inclusive finance areinvolved in the chains of selling and reselling assets that—in the financial collapse—separated those responsible for managing risks from the conse-quences of poor judgment Moreover, the informal sector, where many of theclients of inclusive finance operate, is somewhat countercyclical When for-mal economies shrink, many individuals are driven into this sector, whichplays a cushioning role In past recessions in countries like Indonesia andBolivia, microfinance institutions proved more resilient than mainstreambanks Investor analysts argue that the countercyclical nature of microfinancemakes it a good part of a risk diversification strategy These claims will betested during the global recession

We are confident that the provision of financial services to the world’s poor

is a sound business proposition, and that when financial sectors are once againlooking for new lines of business, inclusive finance will be among them Wehope that this book opens the eyes of private-sector leaders to the enormousopportunity represented by a billion Xaviers and that it leads them to decidehow their companies can seize that opportunity

Elisabeth Rhyne and the Center for

Financial Inclusion Team

Preface • xi

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Imagine a world in which a farm couple in the highlands of Nicaragua savesenough money to provide for their old age, a slum dweller in Mumbai whofalls ill gets medical treatment without sacrificing her life savings, and a snackvendor in Uganda borrows money and builds a small restaurant

Imagine that these examples are not special cases, but are multiplied dreds of millions of times across the world

hun-Now imagine that these fortunate events are made possible by financialservices provided by private companies These companies are touted in the

highest business circles as savvy and successful—and valued and trusted by

their low-income customers Finally, imagine that for these companies, ing global poverty goes hand in hand with profitable business operations andstrong market valuation

reduc-This book argues that through inclusive finance, companies can makemoney and help solve the global problem of poverty By inclusive finance wemean opening access to high-quality financial services to everyone who needsthem, especially low-income and previously excluded people We also discusshow microfinance—until recently a small, close-knit community of institutionsoffering microloans—is evolving into an essential part of global financial systems and engaging with new private-sector players

My colleagues and I at ACCION’s Center for Financial Inclusion believethat this vision is not a distant dream We trust that it is surprisingly close athand Today, perhaps only a fraction of low-income people around the worldhave such life-supporting financial services But many of the building blocksfor universal access to financial services are now in place Profitable models

of financial service delivery exist, and private companies can emulate themand bring them to scale

Ten years ago, when we first started to talk with major corporations abouttheir role in inclusive finance, the only people who would listen were fromcorporate philanthropy departments The Citibank Foundation, one of the

• xiii •

most prescient, began working with microfinance organizations, includingACCION, in the 1980s As valuable as this support was to the growth of micro-finance, it did not come close to tapping the real potential of Citibank to con-tribute to financial inclusion And, while the foundation work contributed toCiti’s reputation for corporate citizenship, it made no direct contribution toCiti’s bottom line Citibank knew this and did something about it But that’s

a story for later

What Has Changed?

Until fairly recently, barriers to entry kept most private actors out of inclusivefinance These barriers were both real—like the high cost of processing smalltransactions—and imagined—like the idea that low-income people would beunreliable customers What has changed? Several factors are now converging

to create a more compelling business case for serving the low-income ket An increasing number of countries have an environment favorable forinclusive finance: political and economic stability, an improved regulatoryframework, and a growing domestic market with increasing spending power.New technologies and delivery channels improve the cost equation for han-dling the small transactions of the poor And leading microfinance institutionsnot only prove that low-income people can be loyal customers, they also showhow to serve these customers profitably

mar-University of Michigan Business professor C K Prahalad and Stuart L.Hart summarize the benefits to business and society when businesses oper-ate at what they call the “bottom of the pyramid.”1

This is a time for multinational corporations (MNCs) to look at tion strategies through a new lens of inclusive capitalism For companieswith the resources and persistence to compete at the bottom of the worldeconomic pyramid, the prospective rewards include growth, profits, andincalculable contributions to humankind MNC investment at “thebottom of the pyramid” [BOP] means lifting billions of people out ofpoverty and desperation, averting the social decay, political chaos, terror-ism, and environmental meltdown that is certain to continue if the gapbetween rich and poor countries continues to widen.2

globaliza-The acronym BOP has become a popular way to refer to this market of

4 billion people who live on less than $3,000 per year and the economic

xiv • Introduction

opportunities they represent We use the term here as a convenient shorthandfor the people inclusive finance targets In fact, we are indebted to Prahaladfor alerting business leaders to the BOP market opportunity Prahalad focuses

on multinationals We note that this increasingly includes businesses fromdeveloping countries, like CEMEX of Mexico and ICICI Bank of India,which are becoming regional or global players And we highlight the impor-tance of smaller, local companies serving their own markets

The Benefits of Private-Sector Engagement in

Inclusive Finance

Benefits to the Private Sector

Today, when I sit down with business executives, I hear what they’re hoping

to achieve through inclusive finance:

• Short-term profits Low-income people are good clients They will

pay for quality financial services The success of Mexican retailerGrupo Elektra in launching Banco Azteca demonstrates that

companies can tap existing know-how to create profitable businesslines for this sector

• Long-term growth and market share Phone maker Nokia assumes

that the majority of the world’s next billion mobile subscribers willcome from emerging markets.3This may also hold for the next billionbanking customers Companies that connect with the broad base

of the world’s population will have a much stronger foundation for the future

• Learning for innovation Creative solutions to reach low-income

clients may be relevant for other lines of business For example, somecompanies are learning from the dynamics of group lending and peerpressure in microfinance to resolve payment issues in other areas.4

These points suggest the untapped market opportunity that inclusivefinance presents, a “blue ocean” opportunity Kim and Mauborgne, in their

influential Harvard Business Review article, “Blue Ocean Strategy,” write,

“Blue oceans denote all the industries not in existence today—the unknownmarket space, untainted by competition.”5They argue that when new demand

is created, with few contestants for market share, profitable and rapid growth

Introduction • xv

becomes possible Blue ocean opportunities arise most often when the aries of an existing industry change, and inclusive finance involves just thiskind of radical shift in the boundaries of the financial system, to include thepreviously excluded.

bound-Additional benefits can accrue to companies from the social value ated with inclusive finance

associ-• Goodwill Creating social value enhances a company’s brand and

reputation It builds goodwill with increasingly socially mindedstakeholders—shareholders, governments, and community leaders

• Employee loyalty and satisfaction Employees take pride in being

part of a business that is making a difference

Of course, companies may also find other benefits specific to their own uations For example, Banco Pichincha of Ecuador initiated microlending inpart to leverage its underused bank branches and earn more revenue from itsexcess liquidity

sit-Building a business case for inclusive finance requires delving into the lenges each company will encounter on the road The challenges are at least

chal-as important to consider chal-as the benefits, and we will explore them thoroughlythroughout the book Serving low-income markets with financial servicesrequires good solutions—and often new solutions—to familiar business ele-ments, like marketing, product design, technology, finance, and alliances We

do not claim that inclusive finance is easy; but then, few successful new ness efforts are

busi-Benefits from the Private Sector

Private involvement in inclusive finance brings a number of benefits to ety, starting with the direct and obvious benefits of making a difference tocustomers’ lives When people become valued financial-services customers,they come one step closer to social and economic enfranchisement Many

soci-of them use financial services to move their families out soci-of poverty or to buildtheir businesses

The human impact of financial services can be an enormous source ofmotivation for businesspeople to get involved, as long as it is coupled withbusiness success

xvi • Introduction

But can’t the nonprofit or government sectors do this just as well? In fact,many nonprofits and governments do an excellent job of providing financialservices, especially (as we will see) in reaching out to ever more difficult mar-ket segments Yet there are tremendous economic benefits when the privatesector gets involved, starting with the greater potential of private markets toreach all those who need services Moreover, as commercial scale becomesthe driver of inclusive finance, it frees philanthropic and public resources totackle still unsolved problems in other sectors.

Equally important, the dynamics of competitive markets stimulate vation and reward efficiency The result is better service quality and lowercosts, as has already become evident in some highly competitive microlend-ing markets like Bolivia and Peru, where interest rates have fallen and prod-uct range has grown The close interaction that is emerging between businessand nonprofits in microfinance may also have the indirect effect of introduc-ing proven business methods and models to help nonprofits become moreeffective, accountable, and sustainable

inno-The Road to Inclusive Finance

This book provides a road map for business executives and investors thinkingabout greater involvement in inclusive finance The map looks somethinglike this We start, in Part 1, with the market, beginning up close with por-traits of three clients from different continents and then stepping back to thescale and purchasing power of the global market We describe who is servingthe market today—and who is not This sketch sets up the next topic: how totake advantage of the opportunities Chapters 3, 4, and 5 examine the uniquechallenges of providing financial services for low-income people and howcompanies can solve these challenges in designing products like housingfinance, microinsurance, and remittances

Part 2 asks about strategic entry points We highlight three main businessmodels that companies are using to get involved: banks launching their ownmicrofinance operations (“downscaling”), partnerships between banks andretail networks to get services closer to customers, and investors putting debtand equity into microfinance institutions

Part 3 discusses the building blocks of an inclusive financial system, wheresome of the most exciting new developments are taking place, like the pene-tration of card-based payments, mobile phone banking, and credit scoring

Introduction • xvii