Innovation in Microfinance From Rapidshare_2 pot

122 Cerstin Sander Integration of remittances in financial systems has partly been achieved through a combination of stricter regulation and more competition in the money transfer market

122 Cerstin Sander

Integration of remittances in financial systems has partly been achieved through a combination of stricter regulation and more competition in the money transfer market.19 Thus more of the funds are transacted through the formal financial sys-tem and can be used for refinancing (intermediation)

Recent research shows that remittances have an aggregate positive effect, creasing levels of deposits and credit to the private sector relative to GDP.20 Thus they contribute to financial sector development.21

in-The analysis and criteria used, however, do not assess whether or how income groups have in fact been better integrated in financial systems Statistical evidence is lacking, but illustrative observation of markets and actors provides a useful indicative picture:

low-The integration of low-income groups in financial systems through money transfer products is possible though far less obvious and developed than might be assumed Commercial banks’ interest in attracting this clientele has grown but is still lagging Cross-selling does not appear to be much pursued where money transfer is offered and could be coupled with or used to attract clients to ancillary financial services In part it is hampered by insufficient training and incentives for retail staff as well as by the absence of interfaces between money transfer systems and core banking systems, especially links to accounts

The hope that MFPs could be a significant part of better financial integration

is not yet realised to any great degree They are not currently the predestined service providers for money transfers For MFPs it makes good business sense and has the potential to be a good service where regulations and the market permit and the service network and institutional capacity are conducive When MFPs offer money transfer services they often still display the lag in integration

of this client segment in financial services generally, e.g as savers, as do mercial banks

com-Opportunities to engender major developments in the market – which ute to better access to money transfer services and also to greater financial inclu-sion – hinge in many respects on changes in three areas: regulations, systems and products

Remittance Money Transfers, Microfinance and Financial Integration 123 Enabling Regulations

Whether business models, technologies or partnerships can be made to work in a certain market is often a matter of the regulatory environment A market where a full bank licence is a prerequisite for offering money transfer services (MTS) tends to have fewer service providers and points of sale than a market where a money transfer service can be licensed separately Licensing of MTS is quite new

in most markets and, where it exists, has often been introduced in the context of AML and CTF measures The UK is an example where a separate license and regu-lation was put in place in 2002

Cost and simplicity of licensing is another factor that tends to affect the demand for licenses The United States is one of the most cumbersome markets to licence

an MTS: federal licensing requirements coupled with separate State licensing requirements have to be fulfilled wherever the service is to be offered The con-comitant costs for fees and bonds are high.22

Where non-banks and non-financial services such as retailers can be part of the point of sale network, the opportunities for outreach are much greater Grocery stores, petrol stations, or similar businesses which have high client traffic and cash

on hand are well placed Thus, for instance, in the United States, supermarkets or large retail chains are part of the agent network of money transfer companies, especially in locations where migrants shop regularly In Brazil, the regulator allows retail stores to join an agency network and similarly in Peru How it is done varies – for instance, Banco do Credito del Peru operates cashless ATMs (auto-mated teller machines) in retail stores The client uses it like any other ATM ex-cept that the ATM provides a printed record based on which the client receives the money from the store’s till.23 Allowing sub-agents of money transfer services that pay out only in local currency is another factor which facilitates the growth of a service network

Combining mobile phone technology with money transfer services is a very compelling idea.24 As those who have tried know, the technology or software is less of an issue than regulation Regulators looking after banking and financial services and those in charge of telecommunications need to be convinced in cases such as G-Cash and SMART in the Philippines, or CelPay once active in Congo, Zambia, and South Africa These are products of mobile phone companies or their subsidiaries using the short messaging system (SMS) to make payments in stores

22 For US State licensing requirements see, for instance, a list at www.westernunion.com/ info/aboutUsStateLicense.asp

23 For a recent presentation of the agent model, see www.nfx.nl/binaries/conference-website/ presentations/microfinance/bcp-microfinance nfx-format-.ppt#289,10, Slide 10

24 For examples see Migrant Remittances 2(1) April 2005; for a recent presentation by Xchange detailing their G-Cash business model, see www.nfx.nl/binaries/conference- website/presentations/mobile-banking/gcash-nfx-11-01-06rev.ppt#256,1,Mind the Gap: Bankable Approaches to Increase Access to Finance

to the prepayment accounts customers hold for mobile phone charges Regulators respond differently – in the Philippines positively or at least constructively and the services operate; in South Africa the regulator eventually required CelTel to sepa-rate its payment product from the mobile phone service leading to the sale of CelPay to a bank

In general, better financial service regulations or even just a better application

of existing regulations can facilitate the range of service providers, products, and geographic accessibility of money transfers In addition, improved interplay of different regulatory regimes can open the way to new business models which can greatly increase outreach to new, previously unserved clients as well as allow for better services to current money transfer users in terms of lower cost, speed or accessibility

Better Systems

Payment systems are the backbone of any financial sector They are key to actional banking such as money transfer Availability, access and quality of the payment system affect the availability of money transfer services and their cost Systems have been developed largely without international standards, leading to low compatibility and high costs for transactions across payment systems

Money transfer service providers often use their proprietary systems to act client transfers This puts transaction cost and time within their control and reduces their need to connect to other existing payment systems to settling their accounts with agents Such stand-alone systems also typically lack a link to the main account and client information systems of banks or other financial service providers such as MFPs Client remittance information is thus typically delinked from client account information, limiting the prospects for a more integrated financial service to the client In interlinked systems remittance information could become part of the clients’ financial track record when considering a loan application.25

25 At least informally, credit officers often take into account remittance receipts as part of their overall loan approval assessment Based on bank supervision requirements, however, remittances typically can not be counted as regular income and part of the basis for loan approval

Remittance Money Transfers, Microfinance and Financial Integration 125 Attractive Products

A migrant’s choice to send money via formal services is largely a question of whether the formal service is sufficiently attractive compared to the informal al-ternative Market research indicates that familiarity and trust are often as impor-tant or more important than the cost of the service Some banks serving migrant neighbourhoods have staff of that diaspora working in their branches Being within ready physical reach of the sender as well as the recipient is another factor, such that branches or points of sale in neighbourhoods with migrants or with remit-tance recipients tend to show high transaction volumes Each client group can differ, however, so that blueprint assumptions based on market research done elsewhere are not always valid While proximity to the client is typically an attractive feature, re-cipients in Moldova preferred to use a payout point away from their village or neighbourhood for fear that others would learn about the arrival of cash

Informal services also indicate some of the product features which regulated vices have lacked Among them is the ability to specify a set of payments to be made from a single money transfer such as a payment to a builder or supplier of construction materials, an insurance or a utility payment, and a remittance to a fam-ily member In contrast, money transfer products offered in the regulated market are typically limited to a single instruction, i.e payout to a specific recipient

ser-Also worth considering is how accessible and attractive saving or investment is for migrants and remittance recipients Access to money transfer, even if through a bank, does not coincide with access to other financial services such as a current or savings account because minimum balances or account fees often deter low-income clients Even where access to an account is not a barrier, concerted strate-gic efforts to cross-sell savings or other products to migrants or remittance recipi-ents are still the exception rather than the norm Targeting migrants especially as clients and savers or investors is becoming more common – for instance Indian government bonds specifically targeting the Indian diaspora

In Closing …

Market observers concur that more accessible and cheaper money transfer services have come about in markets where competition has increased This has typically been fuelled by new services entering the market as they realised the potential, partly due to growing remittance flows It has also been fuelled where regulatory systems have set clear rules for money transfer licences and reasonable compli-ance and cost thresholds Similarly, regulatory contexts which are open to new business models regarding point of sales networks, and new types of service pro-viders taking advantage of technologies such as mobile phones, have provided opportunities for competition that results in more and better services

Though remittance money transfer services are not a panacea for banking the unbanked, some direct effects can be seen Moreover, the integration of remit-tances in financial systems is progressing and contributes to financial sector de-velopment by increasing deposits and credit to the private sector More is possible through attractive products, better systems and conducive regulations

CGAP 2004 ‘Crafting a Money Transfers Strategy: Guidance for Pro-Poor Financial Service Providers’ CGAP Occasional Paper

El-Qorchi, Mohammed, Samuel M Maimbo and John F Wilson 2002 ‘Hawala: How does this informal funds transfer system work, and should it be

regulated?’ Finance and Development, 39(4), December 2002

Freund, Caroline and Nikola Spatafora 2005 ‘Remittances: Transaction Costs, Determinants and Informal Flows’ World Bank Policy Research Paper 3704 Giuliano, Paola and Marta Ruiz-Arranz 2006 ‘Remittances, Financial Develop-ment, and Growth’ IMF Working Paper No 05/234, June 2006

Migrant Remittances Newsletter USAID and DFID, various issues, published since 2004

Rapoport, Hillel and Frédéric Docquier 2004 ‘The Economics of Migrants’ Remittances.’ In Handbook on the Economics of Reciprocity, Giving and Altruism, ed L.-A Gerard-Varet, S.-C Kolm, and J Mercier Ythier Amsterdam Elsevier North-Holland

Sander, Cerstin 2005 ‘How money moves in cash-based markets: money transfer

services in Kenya, Tanzania and Uganda.’ in Shaw, Judith (ed.) Remittances,

Microfinance and Development: building the links, Volume 1: a global view,

The Foundation for Development Cooperation, Brisbane, 2005

Sander, Cerstin, Doina Nistor, Andrei Bat, Viorica Petrov, and Victoria Seymour

2005 ‘Migrant Remittances and the Financial Market in Moldova’ Study prepared for USAID (BASIS/CRSP), February 2005

Sander, Cerstin and S.M Maimbo 2005 ‘Migrant Remittances in Africa – A Regional Perspective’ In Samuel Munzele Maimbo and Dilip Ratha (eds.):

Remittances – Development Impact and Future Prospects World Bank,

Washington, D.C

Sander, Cerstin 2005 ‘Migrant Remittances: A Profitable Proposition for the

Financial Services Sector’ Developing Alternatives, 10 (1), winter 2005

Remittance Money Transfers, Microfinance and Financial Integration 127

Sander, Cerstin 2004, ‘Capturing a Market Share? Migrant Remittances and

Money Transfers as a Microfinance Service in Sub-Saharan Africa’ Small

Enterprise Development Journal, special issue on migrant remittances, March

2004

Sander, Cerstin, Issa Barro, Mamadou Fall, Mariell Juhlin et Coumba Diop 2003

‘Etude sur le transfert d’argent des émigrés au Sénégal et les services de transfert en microfinance’ Working Paper / Document de Travail No 40, Employment Sector, Social Finance Unit / Le Programme Finance et Solidarité, International Labour Office (ILO/BIT), Geneva

Sander, Cerstin 2003 ‘Migrant Remittances to Developing Countries – A Scoping Study: Overview and Introduction to Issues for Pro-Poor Financial Services’ Prepared for DFID

Spatafora, Nikola 2005 ‘Two Current Issues Facing Developing Countries’ IMF World Economic Outlook, chapter 2, April 2005

World Bank 2006 Global Development Finance: The Development Potential of

Surging Capital Flows, Volume I: Review, Analysis and Outlook

C HAPTER 8:

Remittances and MFIs: Issues and Lessons from Latin America*

1 Senior Associate, Inter-American Dialogue

2 Project Director, Chemonics International

Introduction

Remittance flows to Latin American and the Caribbean reached $45 billion in

2004 For countries such as El Salvador, Nicaragua, Jamaica and others, tances represent 10 percent or more of GDP and are one of the most important sources of foreign currency (IAD 2004) At the household level, remittances are a critical source of income for families living in poverty Poor households receiving remittances have significant purchasing power relative to peer households that do not receive them (Orozco 2004) However, recipient households have limited ac-cess to financial institutions that provide financial services such as secure remit-tance delivery, safe interest-earning savings instruments, and loans

remit-The recent entry of microfinance institutions (MFIs) into the remittance market has increasingly been advocated as a mechanism for leveraging remittance flows

in ways that would achieve development goals.1 Donors have begun to provide technical assistance to help MFIs develop linkages with formal money transfer organisations (MTOs) and have enthusiastically supported such partnerships Do-nors’ underlying assumption is that, due to their close proximity to recipient communities and experience in serving low-income households, MFIs are in a unique position to reach recipients with low-cost transfer services and other finan-

* A similar paper by these authors was published earlier as “Remittances and MFI

Inter-mediation: Issues and Lessons,” in Judith Shaw, ed., Remittances, Microfinance and Development: Building the Links Vol 1, The Foundation for Development Cooperation

130 Manuel Orozco and Eve Hamilton

cial products Moreover, by providing these services — often through partnerships with MTOs — MFIs can expand their operations and increase their revenues Despite these assumptions, little empirical evidence has been collected on the practices and performance of MFIs in the remittance market Are MFIs located in areas where current or potential remittance recipients reside? Can they effectively compete with MTOs? Do remittance recipients obtain a broader range of financial services? To begin answering questions such as these, we present a framework for assessing the development impact of MFI entry into the remittance market We then propose a series of indicators linked to that framework and provide an initial analysis of the performance of the 27 MFIs and two credit union federations we studied.2 We conclude with suggestions for further research

The findings presented here are based on interviews with 27 MFIs and 2 credit union federations operating in Latin America and the Caribbean The institutions were asked approximately 25 questions relating to their presence in communities receiving remittances, their remittance transfer services, cross-selling efforts, in-formation technology, and management information systems The information gathered was quantified to get a sense of overall trends, and to serve as a basis for future research and identification of best practices Due to the sample size, com-parisons and conclusions are tentative

Microfinance Institutions and Remittance Markets

Empirical analysis requires a preliminary working definition of the intersection between remittances and microfinance, accompanied by measurable indicators that relate to development We define this intersection between remittances and

microfinance as a condition in which microfinance institutions offer remittance

transfers in underserved areas through an effective market presence, selling lored financial services based on a systematic understanding of the remittance recipient market These factors are summarised in Box 1, explained below and

tai-used as bases for analyses

Geographic Presence: For remittances and microfinance to intersect, MFIs must

at a minimum operate near remittance recipients The first factor to explore, which

is perhaps the most taken for granted, is the presence of MFIs in or near ties receiving remittances

communi-Market Position refers to the ability of MFIs to compete effectively in the

remit-tance market At a minimum, this is achieved through a combination of ships with money transfer companies, the offer of low-cost transfers, and distribu-tion capacity inferred by the number of transfers completed

2 To our knowledge, there were fewer than 100 MFIs in Latin America and the Caribbean offering remittance transfers in 2005

Remittances and MFIs: Issues and Lessons from Latin America 131

Box 1: Factors That Build MFI Capacity to Increase the

Development Impact of Remittances

Geographic Presence

• Relative position of MFI vis a vis competitor branches

Market Position

• Type of MFI-MTO partnership

• Branch transaction rate

• Transfer cost

Financial Service Provision

• Existence of cross selling

• Design of remittance-linked products

Management Information System

• Data management linked to remittance market base

Transfer Technologies

• Basic back end transfer system

Provision of Financial Services: MFIs’ commitment and capacity to provide a

broad range of financial services to low-income people who are often ignored by

traditional commercial banks is at the heart of the link between MFIs, remittances, and development Institutions that offer a range of financial services such as sav-ings accounts, loans, and insurance to remittance clients create opportunities for cross-selling Successful provision of these services by MFIs, however, depends

on the existence and/or design of financial products attractive to customers and the effectiveness of marketing strategies

Systematic Information Management: Effective data management is another

criti-cal factor that improves the link between remittance transfers and other financial services Among other benefits, efficient data management systems strengthen the decision-making capacity of financial institutions by facilitating access to market and client information that informs marketing strategies Marketing is important to the successful expansion of broader financial services as well as to the growth of MFI remittance services

132 Manuel Orozco and Eve Hamilton

Technology provides a conduit for data gathering, organisation and transmission

MFIs increasingly rely on technology to improve their effectiveness and efficiency

in managing and delivering services To compete in the remittance market, MFIs

must adopt back end technologies that ensure efficient wire transfers as well as adaptable data transmission to the institution’s information management systems.3

Analysing the Intersecting Issues

Based on an initial framework for analysis, using a few key indicators and able data, we provide preliminary indications of MFIs’ successes in leveraging the development impact of remittances The analysis that follows is based on inter-views with MFIs operating predominantly in El Salvador and Guatemala How-ever, MFIs in other countries, including Mexico, Paraguay and Haiti, were also considered (Table 1) Subjects were selected randomly, but an effort was made to include large and small MFIs, including regulated and credit-only institutions

avail-Table 1 Countries and MFIs studied

Region or country Microfinance Institution

Andean Bolivia: BancoSol

Ecuador: Banco Solidario Peru: Praxis Fina

El Salvador Acacu, Acacciba, Acocomet, Acodjar, Fundación

Napoleon Duarte (MiCrédito), AMC, FEDECACES, Fedecrédito, Fundación Campo, Integral, ProCredit Guatemala Banrural, Bancáfe, Cosadeco, Empresarial,

FENECOAC, Genesis Guayacán, Salcajá Mexico AMUCCS (Xuu Nuu), BANSEFI (Red de la Gente),

Credemich, Fincoax Southern Cone Paraguay: El Comercio

Honduras: ODEF

Note: Annex 1 contains statistics as of 2004 or 2005 for each of these entities

3 Another important consideration is the regulatory or legal environment Some countries

do not allow unregulated institutions to transfer funds This element goes beyond our research framework

Remittances and MFIs: Issues and Lessons from Latin America 133

These MFIs represent a wide array of organisations Three have more than 200,000 members (Banrural, Bancafe and FENECOAC), and five have between 40,000 and 90,000 The remaining MFIs have fewer than 20,000 clients Ten MFIs started their business prior to 2000 (six in 1998), and five in 2004 Most of

these MFIs (60 percent) have over 70 percent of their branches in rural areas Geographic Presence

Where data are available, we would evaluate an MFI’s geographic presence by

comparing the geographic distribution of remittance recipients with the MFI’s area of operation and that of all MTO competitors in those areas To get such information, in addition to the MFI’s information, two datasets are necessary: the size of the remittance recipient community and the number and outreach of MTO competitors where the MFI operates This kind of extremely useful infor-mation is rarely available Alternatively, we can estimate the ratio between the distribution of MFI branches and competitor MTO branches in the same loca-tion, such as a district or city.4

Employing this alternative approach in El Salvador and Guatemala, we compare the number of branches of each MFI offering remittance transfers with the number

of outlets of a large company like Western Union, a major competitor on the bution side A ratio is obtained by dividing the total number of an individual MFI´s branches by the number of Western Union branches in that city Since MFIs gener-ally operate in underserved areas, a minimum ratio of 30% was selected as a thresh-old of significant presence in that area because it seems reasonable to expect an MFI

distri-to be one-third as strong as a major competidistri-tor in the same area

Using Western Union (WU) as a proxy for MTOs has advantages and limitations The two major advantages of using WU are that data are available and that WU is the world’s largest and most ubiquitous MTO As such, WU can serve as a reference point for the industry The obvious limitation is that WU is not equally important in all markets and in some (and possibly all) markets it would be helpful to include other companies This latter approach requires greater resources than were available for this survey, but remains a desirable goal for continued research

The geographic presence of these institutions is not necessarily related to their relative size nationwide For example, Salcajá in Guatemala has only four branches Similarly, AMC, which operates solely in rural areas, is smaller than

ProCredit, yet has a stronger position vis-a-vis Western Union

An important limitation of this approach is its assumption that a large MTO is present where remittances are received However, an MFI may be located in an area where there is no large MTO Consequently, the most comprehensive measure

of an MFI’s geographic presence would use national survey data to compare the

4 This alternative approach could be improved by calculating this ratio for lower income remittance recipient households However, obtaining data for such fine-tuning is difficult

134 Manuel Orozco and Eve Hamilton

Table 2 MFI ratio to WU agents

Source: MFI information and Western Union

institution’s operating zone with geographic data on the volume of remittances

sent, but such data are not always available The alternative approach described

above serves as a proxy An MFI analysing its remittance recipient base in the

community can use this procedure to compare its branches vis–a-vis the recipient

community and competitor companies

Market Position

MFI-MTO partnerships: Most of the institutions analysed have a partnership with

an MTO, and many types of partnerships exist Some MFIs work with large

com-panies like Western Union whereas others choose mid-level comcom-panies like Vigo

Corporation Partnerships result in part from an institution’s efforts to identify a

viable partner, but also from companies seeking to expand their network Many

companies look primarily for commercial financial institutions that can provide

payment points for recipients of remittances More recently, MTOs have looked

for MFIs operating in areas where other payers would not normally be present

This is the case of Western Union’s partnership with rural financial institutions

such as Banrural in Guatemala, El Comercio in Paraguay, and ProCredit in El

Salvador Another example is MoneyGram’s partnership with Bancafe, and Vigo

Corporation’s with FEDECACES and FENACOAC What these institutions have

in common is their strong presence in rural areas (greater than that of commercial

banks) as well as a tested payment capacity As discussed below, the choice of

Remittances and MFIs: Issues and Lessons from Latin America 135

partner(s) appears to have important implications for the number of transactions

processed and transfer fees offered

Transaction Rates: Achieving effective involvement in the remittance market has

been a major challenge for MFIs One measure of market involvement is the

trans-action rate per branch

Large competitors like Western Union or MoneyGram may have more than 100

branch agents in a given country and process an average of more than 200

transac-tions per branch per month This indicator helps compare small and large

institu-tions For example, the Guatemalan cooperative Salcajá’s 4 branches process a

branch average of 250 transactions a month, a rate similar to that of the larger

Western Union agents Only two institutions monitored in this study process more

than 1,000 transactions a month: Bancafe and Banrural in Guatemala, which are

agents of MoneyGram and Western Union, respectively Credit unions in

Guate-mala and El Salvador range in the middle, processing between 250 and 1,000

transactions monthly Table 3 provides a distribution of transaction rates

Table 3 Percentage distribution of transactions per branch per month