Lecture Micro financing and micro leasing - An Introduction - Lecture 7

Consumer lenders come to BOP finance from a very different angle than most microfinance institutions. While microfinance began with credit for the owners of tiny informal businesses, consumer lenders began by helping salaried workers buy things. Today, especially in Latin America, the two approaches are starting to meet and compete.

• Who serves the market?

WHO SERVES THE BOP MARKET—AND

WHO DOESN’T?

Microfinance Institutions

• According to the Microfinance Information Exchange (MIX), the data custodian for

the microfinance community, the 1,330

microfinance institutions that report to it

lend to 57 million people worldwide

Microfinance Institutions

• The Microcredit Summit, an advocacy

organization, casts a wider net, including quasiformal providers like self-help group movements and some public-sector

development banks

Microfinance Institutions

• Its 2007 report records 133 million active borrowers in 3,316 microfinance

institutions

Microfinance Institutions

• ACCION International, as a promoter and developer of microfinance institutions, has come to inclusive finance through the

microfinance movement

Microfinance Institutions

• There are good reasons to learn from and connect with microfinance, in addition to the fact that it already reaches tens of

millions of clients

Microfinance Institutions

• First, leading microfinance institutions

show how inclusive finance can be

profitable Consider Mibanco in Peru Most

of its 250,000 clients are women, including Delia, profiled in the previous Lecture

Microfinance Institutions

• For clients like Delia, Mibanco provides a full suite of services including Micapital

(working capital for her shop), Micasa

(which helped her build the rooms she

rents), and Chasqui (a fast-cash loan

named after the swift-running messengers

of the Inca Empire)

Microfinance Institutions

• In 2007, Mibanco had a loan portfolio of

$500 million, with an average loan size near $1,700 Its return on equity was 37 percent, making it one of the more

profitable banks in Peru

Microfinance Institutions

• Equity Bank is a Kenyan commercial bank focused on microfinance It boasts over a million small savers In 2006, Equity

successfully issued shares to the public,

and in 2007 Euromoney recognized it as

the best bank in Kenya Now, private

equity investors are competing to buy

newly issued shares

Microfinance Institutions

• A second reason to consider microfinance institutions is their potential for partnering with the private sector

Microfinance Institutions

• Microfinance organizations are

repositories of knowledge about the BOP market and how to serve it, and many of them offer portals to the market because

of their client base and branch networks Moreover, they are often enthusiastic

experimenters ready to test new ways to benefit clients

Consumer Lenders

• Consumer lenders come to BOP finance from a very different angle than most

microfinance institutions While

microfinance began with credit for the

owners of tiny informal businesses,

Consumer Lenders

• consumer lenders began by helping salaried workers buy things Today, especially in Latin America, the two approaches are starting to meet and compete

Consumer Lenders

• Increasingly, purchase finance is just the starting point In Mexico, big-box retailers Elektra and Wal-Mart began with purchase finance but are rapidly expanding into full retail-banking services

Consumer Lenders

• Elektra created Banco Azteca for this

purpose in 2001 and has an enormous head start over Wal-Mart, which obtained

a banking license for Mexico in 2007

Consumer Lenders

• Consumer lenders and microfinance

institutions may start with entirely different motivations and philosophies, yet they

increasingly compete for the same

customers Consumer lending tends to be aggressively commercial, with a strong

focus on scale and profit

Consumer Lenders

• Growth rates among consumer lenders

are often extremely high, and markets can quickly become very competitive

Consumer lenders are not always beloved

by society at large The U.S payday-loan industry is frequently vilified in the press for high interest rates and lack of

transparency

recovered, and excesses in consumer

lending in South Africa sparked the

creation of a regulatory agency focused

on client protection

Consumer Lenders

• In contrast, microfinance institutions begin with a social bottom line They are more

likely than consumer lenders to reach

poorer clients, and especially the

self-employed Their intent is to better the lives

of their clients

Consumer Lenders

• Financial return is valued primarily

because it enables scale and staying

power MFIs don’t treat profit as an end in itself Some MFIs with a strong antipoverty orientation keep interest rates close to the break-even level, as advocated by

Grameen Bank’s Muhammad Yunus

commitment that has driven and inspired them.

Consumer Lenders

• This difference in perspective between

consumer lenders and microfinance sets

up one of the most interesting dynamics at play in inclusive finance

Consumer Lenders

• Particularly in Latin America, consumer

lenders are specifically targeting core

Consumer Lenders

• To a client, the providers may look similar Both may offer a loan of approximately the same size, maturity, and interest rate

Consumer Lenders

• Such competition has not yet developed in other regions but may be coming soon In India, the recent growth of both

microcredit for the poor and consumer

finance for the middle class has been

astonishing

Consumer Lenders

• The border between the two segments,

previously far from one another, may soon blur and then disappear

Consumer Lenders

• Prospective new entrants into the inclusive finance sector will need to evaluate the

behavior and positioning of the

microfinance and consumer lending

subsegments in their countries before

making their own moves

Consumer Lenders

• As I consider the future of inclusive

finance, I wonder how the energy,

resources, and mastery of technology of the consumer lenders can be married to the deep knowledge about and concern for low-income customers that

microfinance brings I would love to help match-make such a marriage

• WHO SERVES THE BOP MARKET— AND

WHO DOESN’T?

Next Lecture

• FOUR CRITICAL CHALLENGES IN THE BOP MARKET