Lecture Micro financing and micro leasing - An Introduction - Lecture 2

This lecture argues that through inclusive finance, companies can make money and help solve the global problem of poverty. By inclusive finance we mean opening access to high-quality financial services to everyone who needs them, especially low-income and previously excluded people. We also discuss how microfinance—until recently a small, close-knit community of institutions offering microloans—is evolving into an essential part of global financial systems and engaging with new private-sector players.

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Micro Financing & Micro

Leasing

An Introduction

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Summary of last Lecture

• Microfinance Background and

Introduction.

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• Xavier sells frozen fish and a few

groceries at a dusty intersection on the outskirts of Maputo, Mozambique

• Wearing a crisp white shirt and tie, he

poses before an electric typewriter in his kiosk Everything about the picture,

including the pride in his face as he looks

at the camera, reflects his striving to

become a successful businessman

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• Big institutions of society had either failed

or ignored him, except for the Coca-Cola distributor that brought him cases of soft drinks to sell Xavier was putting the

pieces of prosperity together for his family

on his own by building his business He

had a loan from a microfinance

cooperative, but it was small, suitable only for financing a little extra stock

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• Xavier could be a loyal customer for many other financial services—savings accounts

to help him build for the future, a

home-improvement or fixed asset loan, health

insurance, and remittance services to

send money to his relatives in South Africa

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• Xavier could be a loyal customer for many other financial services—savings accounts

to help him build for the future, a

home-improvement or fixed asset loan, health

insurance, and remittance services to

send money to his relatives in South

Africa

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• The success of microfinance institutions in making small loans to people like Xavier has begun a revolution in financial sectors around the world

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• The consequent media attention to

microfinance is leading the business

community to consider what their roles might be in bringing financial services to population groups that have long been marginalized

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• The gaps we see in Xavier’s financial needs point toward many opportunities that await entrepreneurial companies prepared to engage the low-income

market

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• Imagine a world in which a farm couple in the highlands of Nicaragua saves enough money to provide for their old age, a slum dweller in Mumbai who falls ill gets

medical treatment without sacrificing her

life savings, and a snack vendor in

Uganda borrows money and builds a small restaurant

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• Imagine that these examples are not

special cases, but are multiplied hundreds

of millions of times across the world

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• Now imagine that these fortunate events are made possible by financial services 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, reducing global

poverty goes hand in hand with profitable business operations and strong market valuation

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• This course argues that through inclusive finance, companies can make money and help solve the global problem of poverty

By inclusive finance we mean opening

access to high-quality financial services to everyone who needs them, especially low-income and previously excluded people

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• We also discuss how microfinance—until recently a small, close-knit community of institutions offering microloans—is

evolving into an essential part of global financial systems and engaging with new private-sector players

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• Today, perhaps only a fraction of

low-income people around the world have

such life-supporting financial services But many of the building blocks for universal access to financial services are now in

place Profitable models of financial

service delivery exist, and private

companies can emulate them and bring

them to scale

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• Ten years ago, when people first started to talk with major corporations about their

role in inclusive finance, the only people

who would listen were from corporate

philanthropy departments The Citibank

Foundation, one of the most prescient,

began working with microfinance

organizations, in the 1980s

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• As valuable as this support was to the

growth of microfinance, it did not come

close to tapping the real potential of

Citibank to contribute to financial inclusion

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• And, while the foundation work contributed

to Citi’s reputation for corporate

citizenship, it made no direct contribution

to Citi’s bottom line Citibank knew this

and did something about it But that’s a

story for later

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What Has Changed?

• New technologies and delivery channels improve the cost equation for handling the small transactions of the poor And leading microfinance institutions not only prove

that low-income people can be loyal

customers, they also show how to serve

these customers profitably

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• An increasing number of countries have

an environment favorable for inclusive

finance: political and economic stability, an improved regulatory framework, and a

growing domestic market with increasing spending power

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• University of Michigan Business professor

C K Prahalad and Stuart L Hart

summarize the benefits to business and society when businesses operate at what they call the “bottom of the pyramid.”

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• This is a time for multinational

corporations (MNCs) to look at

globalization strategies through a new lens

of inclusive capitalism For companies with the resources and persistence to compete

at the bottom of the world economic

pyramid, the prospective rewards include growth, profits, and incalculable

contributions to humankind

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• Until fairly recently, barriers to entry kept most private actors out of inclusive

finance These barriers were both real—

like the high cost of processing small

transactions—and imagined—like the idea that low-income people would be

unreliable customers What has changed?

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• MNC investment at “the bottom of the

pyramid” [BOP] means lifting billions of

people out of poverty and desperation,

averting the social decay, political chaos, terrorism, and environmental meltdown

that is certain to continue if the gap

between rich and poor countries continues

to widen

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• 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 opportunities they represent

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• We use the term here as a convenient

shorthand for the people inclusive finance targets In fact, we are indebted to

Prahalad for alerting business leaders to the BOP market opportunity Prahalad

focuses on multinationals

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• We note that this increasingly includes

businesses from developing countries, like CEMEX of Mexico and ICICI Bank of

India, which are becoming regional or

global players And we highlight the

importance of smaller, local companies

serving their own markets

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The Benefits of Private-Sector

Engagement in Inclusive Finance

• Benefits to the Private Sector

• Today, the business executives are hoping

to achieve through inclusive finance the

following:

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• Short-term profits Low-income people

are good clients They will pay for quality financial services The success of Mexican retailer Grupo Elektra in launching Banco Azteca demonstrates that companies can tap existing know-how to create profitable business lines for this sector

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• Long-term growth and market share

Phone maker Nokia assumes that the

majority of the world’s next billion mobile

subscribers will come from emerging

markets

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• This may also hold for the next billion

banking customers Companies that

connect with the broad base of the world’s population will have a much stronger

foundation for the future

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• Learning for innovation Creative

solutions to reach low-income clients may

be relevant for other lines of business

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• For example, some companies are

learning from the dynamics of group

lending and peer pressure in microfinance

to resolve payment issues in other areas.Akhuwat Foundation

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• These points suggest the untapped

market opportunity that inclusive finance

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 unknown market space, untainted by

competition.”

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• They argue that when new demand is

created, with few contestants for market

share, profitable and rapid growth

becomes possible

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• Blue ocean opportunities arise most often when the boundaries of an existing

industry change, and inclusive finance

involves just this kind of radical shift in the boundaries of the financial system, to

include the previously excluded

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• Additional benefits can accrue to

companies from the social value

associated with inclusive finance

• Goodwill Creating social value enhances

a company’s brand and reputation It

builds goodwill with increasingly socially

minded stakeholders—shareholders,

governments, and community leaders

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• Employee loyalty and satisfaction

Employees take pride in being part of a

business that is making a difference

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• Of course, companies may also find other benefits specific to their own situations

• For example, Banco Pichincha of Ecuador initiated microlending in part to leverage

its underused bank branches and earn

more revenue from its excess liquidity

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• Building a business case for inclusive

finance requires delving into the

challenges each company will encounter

on the road

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• The challenges are at least as important to consider as the benefits, and we will

explore them thoroughly throughout the

course

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• Serving low-income markets with financial services requires good solutions—and

often new solutions—to familiar business elements, like marketing, product design, technology, finance, and alliances We do not claim that inclusive finance is easy; but then, few successful new business efforts are

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Benefits from the Private

Sector

• Private involvement in inclusive finance brings a number of benefits to society,

starting with the direct and obvious

benefits of making a difference to

customers’ lives When people become valued financial-services customers, they come one step closer to social and

economic enfranchisement

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Sector

• Many of them use financial services to

move their families out of poverty or to

build their businesses

• The human impact of financial services

can be an enormous source of motivation for businesspeople to get involved, as

long as it is coupled with business

success

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Sector

• 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 financial

services, especially (as we will see) in

reaching out to ever more difficult market segments

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Sector

• Yet there are tremendous economic

benefits when the private sector gets

involved, starting with the greater potential

of private markets to reach all those who need services

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Sector

• Moreover, as commercial scale becomes the driver of inclusive finance, it frees

philanthropic and public resources to

tackle still unsolved problems in other

sectors

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Sector

• Equally important, the dynamics of

competitive markets stimulate innovation and reward efficiency The result is better service quality and lower costs, as has

already become evident in some highly

competitive microlending markets like

Bolivia and Peru, where interest rates

have fallen and product range has grown

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Sector

• The close interaction that is emerging

between business and nonprofits in

microfinance may also have the indirect effect of introducing proven business

methods and models to help nonprofits become more effective, accountable, and sustainable

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The Road to Inclusive Finance

• This course provides a road map for

business executives and investors

thinking about greater involvement in

inclusive finance The map looks

something like this

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• We start, in Part 1, with the market,

beginning up close with portraits of three clients from different continents and then stepping back to the scale and purchasing power of the global market We describe who is serving the market today—and who

is not

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• This sketch sets up the next topic: how to take advantage of the opportunities Then

we will examine the unique challenges of providing financial services for low-income people and how companies can solve

these challenges in designing products

like microleasing, housing finance,

microinsurance, and remittances

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• Part 2 asks about strategic entry points

We highlight three main business models that companies are using to get involved: banks launching their own microfinance

operations (“downscaling”), partnerships between banks and retail networks to get services closer to customers, and

investors putting debt and equity into

microfinance institutions

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

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• Part 3 discusses the building blocks of an inclusive financial system, where some of the most exciting new developments are taking place, like the penetration of card-based payments, mobile phone banking, and credit scoring This section also looks

at the supporting role played by capital

markets and governments

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• In Part 4 we turn to social responsibility

We argue that inclusive finance gives

companies a great opportunity to align

social value with long-run business

success if they incorporate social issues creatively into strategy

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• The explicit incorporation of social aims

into business strategy has been one of the distinguishing features of microfinance

and can become a hallmark of successful inclusive finance as well

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• In this part we also discuss the downside risk—for customers, providers, and the

industry—of failing to protect customers

from harm The section ends with the

challenge of measuring the social bottom line

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