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Financing Microfinance for Poverty Reduction
Chairperson: Dr. Jacques
Attali, President and Chairman, PlaNet Finance, France
Panelists:
* Prof. David S. Gibbons, Managing Director, CASHPOR Financial and
Technical Services, Malaysia
* Ms Marilou Jane D. Uy Director, OPD, World Bank USA
* Mr. Richard Boulter, Head of Financial Services Unit, DFID, UK
* Dr. Atiqur Rahman, Lead Strategist and Policy Coordinator, IFAD,
Italy
* DR. S.M. Ahsan, Professor, Concordia University, Canada
Prof. David S. Gibbons,
Managing Director, CASHPOR Financial and Technical Services, Malaysia
Mr. Gibbons in his discussion mentioned that a strong demand exists
for microfinance services among the poor. More than 19 million of
the poorest households around the world now have access to financial
services, which is encouraging because this has increased substantially
since the Microcredit Summit Campaign was launched in 1997. Still,
81 million poorest families are yet to be reached to achieve the
Campaign target of 100 million. He told that only 10% of the 1580
MFIs, presently serving the poorest, required scaling up to serve
an average of 500,000 very poor households each to achieve the target.
Panelists in Plenary Session : 5
In his discussion, Mr. Gibbons pointed out that
a lot of effort is being put in building institutional capacity
of MFIs. New effective management tools are being created and training
being provided by the CGAP and network of MFIs around the world.
On the other hand, much less thought and effort has been put into
fund sourcing and right kind of capital that will be needed to scale-up
the next generation of micro-finance. In this regard, he added that
the issue is not a lack of on lending funds, rather the capital
structure and meeting inevitable operating deficits that arise with
rapid scaling up.
To overcome this major hurdle, he observed that a new financing
paradigm is needed, and he proposed the following:
i) Increase the availability of funds to meet operating deficits
through quasi- equity;
ii) Minimize the amount of equity and equity-like financing MFIs
must raise; and
iii) Maximize their ability to leverage on lending funds from banks
and other commercial and semi-commercial sources.
He mentioned that the three steps outlined above is a feasible approach
to financing scaling up.
Finally, he said that the CGAP as the leader in organizing support
services for the microfinance industries, would take the lead in
mobilizing quasi-equity from its members’ donors, for MFIs
to build the necessary institutional capacity, including the necessary
transparency, to reach large numbers of the poorest.
Financing Microfinance for Poverty
Reduction
Ms. Marilou Jane D. Uy, Director, OPD, World Bank, USA
Ms. Marilou Jane D. Uy, Director, Financial Sector Operation and
Policy, World Bank in her discussion focused on certain global trends
that she noted in the structure and the financing of the microfinance
industry. She also shared some thoughts on the role of appropriate
regulations as the industry moves ahead.
She mentioned that microfinance institutions are gradually growing,
extending their reach and developing new products and services for
their clients. She also mentioned that to set example of changes
in microfinance and the diversity of approaches the Grameen Bank,
BRAC and RIC in Bangladesh, have introduced new approaches, such
as credit pension, savings, insurance products and remittance service
as well as targeting the highly vulnerable group.
Ms. Uy also noted that in many countries, the structure of the industry
today in terms of institutional type and diversity of services differs
strikingly from that of the mid 90s. This diversity, especially
among the demand or savings services, has brought more and more
regulated financial institutions, and with them, new modalities
of financing the business into the industry.
Ms. Uy also pointed out that as the microfinance industry evolves,
the importance of sustainability and profitability will only grow.
In this regard, she, quoted from the Micro Banking Bulleting that
nearly one-half of the MFIs are not financially self sustaining,
and this is likely to be a sample tilted towards better performing
MFIs.
She told that foreign investment is taking place in the industry
in the form of private sector funding arms of bilateral and multilateral
agencies and partly from private capital that is termed as Social
Investment Fund.
Ms. Uy elaborately discussed on two issues that policy makers, donors
and MFIs ought to adopt to the changing environment for microfinance.
The issues are:
I) Creating an appropriate regulatory environment for microfinance;
and
II) Developing market institutions such as improved financial infrastructure
and information sharing; which can support an efficient and competitive
microfinance industry.
Regarding regulatory framework, she cautioned that it was important
to have a balance between excessive regulation that hinder the dynamism
of the microfinance industry, and the need to safeguard the financial
system, and poor people’s savings in particular. Besides voicing
caution, she also put an option that can be considered for microfinance
operations. It is a tiered regulatory structure, where the extent
of supervision varies according to the extent of savings mobilized
and size of organization. She also said that as the microfinance
industry develops toward a more commercial setting, it will benefit
greatly from better financed information and knowledge sharing.
Financing Microfinance for Poverty
Reduction
Mr. Richard Boulter, Head of Financial Services Unit, DFID, UK
Mr. Richard Boulter, Head of Financial Services Unit, DFID, UK started
his discussion saying that equity is vital and quasi-equity will
remain important in microfinance. He then raised some important
questions if equity should be the solution and institutions would
be ready to accept outside shareholding.
He also discussed about assessing the legal environment and encouraging
outside equity & partnership.
Mr. Boulter mentioned that DFID has been involved in Africa to promote
equity in MFIs. DFID, along with other donors working in Africa,
has gained six lessons, viz.
1) Donors can reduce risk to commercial investors by taking different
forms of debt.
2) Donors can provide technical assistance and capacity building
support for the preparation stage before an NGO commences its commercial
operation.
3) International partners sometimes have bad experiences in different
countries with MFIs.
4) Donors can help publicize success stories and equity investment
by making the whole idea available in website so that more investors
interested in MFIs can learn about.
5) Donors can work with the government on legal and regulatory environment.
6) Donors can also help to distinguish between donors’ help
and to make the program sustainable.
Mr. Boulter also said that we should remind ourselves of the approaches
by which microfinance ensures equity. In this regard, he cited countries
such as India that has many ways to invest in microfinance and the
equity experience of Latin America.
Mr. Boulter thinks that outside-equity could help MFIs to expand
their outreach and reduce cost, which ultimately will reduce interest
rate. In this way, MFIs could be efficient and can serve the poor
in large scale.
Mr. Boulter concluded his discussion with the remark that equity
will remain a very important subject in financing MFIs.
Financing Microfinance
for Poverty Reduction
Dr. Atiqur Rahman, Lead Strategist and Policy Coordinator, IFAD,
Italy
Dr. Atiqur Rahamn, Lead Strategist and Policy Coordinator, IFAD
Italy, informed that by the end of December 2001, 2186 MFIs reported
to the Microcredit Summit Campaign that they had reached 54.9 million
clients with loans. Of these, 26.8 million were among the poorest
of the poor when they started with the program. During the last
decade, much progress has been made with regard to rural microfinance.
In his view the constraints on microfinance lending included: i)
lack of institutional capacity; ii) lack of a conducive environment;
iii) lack of capital of small and emerging MFIs; and iv) inadequate
financial infrastructure.
Dr. Rahman also spoke about the financing strategies for microfinance
development. The strategies mainly concentrated on 1) Financing
MFI development, where the role of donors, MFI clients/members and
banks were discussed and 2) Establishing a favorable environment,
where the role of government was highly emphasized.
In the last stage of his discussion, Dr. Rahman spoke about the
IFAD Rural Finance Policy and Experience. According to the policy,
by December 2003, two-thirds of IFAD’s current projects had
a rural finance component and about 18% of its resources were dedicated
to rural finance. IFAD’s target groups, mainly comprising
small producers, are engaged in agricultural and non-agricultural
activities in the areas having widely varying potentials raising
productivity and income. Dr. Rahman also mentioned that some of
the IFAD’s loan funds are used for a quasi-equity contribution
that match members’ contribution by 4:1 on average during
the first three years of each CMP’s (A net work of local unions:
Caisses Mutuelles de Proximite:CMP) operation.
Microfinance and
the Millennium Development Goals: The Financing Issues
Dr. S.M. Ahsan, Professor, Concordia University, Canada
Dr. S. M. Ahsan, Professor, Concordia University, Canada, in the
plenary session on “Financing Micro-finance for Poverty Reduction”,
said that it is remarkable to reach nearly 42 million poor at the
end of 2002 from 7.6 million in 1997. At the same time, he pointed
out the regional asymmetry in that only 10% of those reached live
in Africa vis-à-vis nearly the half of the very poor are
there. He thinks that financing issue may well be a major obstacle
there. He then added that the above asymmetry suggests that a single-minded
focus on the head count measure may be inadequate as distribution
is totally ignored.
Mr. Ahsan put forward two questions during his discussion:
1) How to reach even greater numbers of the poor?
2) What can be done to attract both private and donor funds to augment
the equity base of
MFIs, particularly the start-ups?
To answer the former question, he stressed on overcoming shortages
of equity capital by taking recourse to “quasi equity”
as suggested by Gibbons & Meehan. He added one more point on
“Basel Norm” (Basel Committee norms: laid down in 1988),
which was proposed by Gibbons & Meehan that the Basel Committee
norms be also applicable to the MFI industry.
While answering the latter, Mr. Ahsan suggested adopting an MFI
accounting order. The principal components of an accounting order
include i) a set of norms; ii) sliding scale of CAR (capital adequacy
ratio) and iii) marking of subsidized debt.
In his discussion on ‘conclusion and follow-up measures’,
he talked about ratification. He mentioned that the Bank of International
Settlements may be approached to declare that these guidelines are
indeed consistent with those applied to the commercial banking system.
Dr. Ahsan further added that the national and international tax
rules may be an obstacle to private sector participation in MFI
equity. He said that the limited eventual profitability could be
a major handicap in attracting venture capital in the case of micro-finance.
Open Discussion
After the panel discussion, the audience asked a number of questions.
Regarding the Bank-MFI partnership it was asked what would be the
risk involved if banks take over the responsibilities of micro-borrower
and lend MFIs directly. In reply to this question, Mr. Gibbons said,
“There is always risk, I am not worried about it. We cannot
forget about the basic objective, which is access of microcredit
for poor. And banks are welcome if they can do it. I think banks
will not be able to do better than us or without us. But if banks
do it, it will always be risk.”
Regarding the creation of fund like PKSF, a question was posed from
the audience, “Why the World Bank cannot create a fund like
the PKSF to access equity as it is doing well?” In reply to
this question, Ms. Marilou Jane said that the World Bank is recognizing
moving towards financial sustainability in the microfinance industry.
It encourages an interest rate setting as well as policy framework
that could enable microfinance providers to be more sustainable.
In terms of lending to the users, the World Bank recognizes that
microfinance providers need some latitude to be able to set interest
rate while still encouraging them to make sure that operating cost
is still down so that interest rate goes down.
In response to a question why the World Bank is encouraging governments
to directly provide microfinance by soft loans, which will affect
the MFI movement, Ms. Marilou Jane replied:
“In terms of soft loan, I do not see the World Bank encourages
government to take soft loans”. On this, Prof. Gibbons said
that the Andhra Pradesh govt. in India recently has launched a microfinance
program using a soft loan provided by the World Bank.
On subsistence or assistance given to CASHPOR to carry out training
and capacity building program for borrowers, Prof. Gibbons said,
“As far as I know, there are no direct subsidies in the program.
Certainly, we do not want subsidies there, because we want to operate
on sustainable basis. I don’t think the World Bank particularly
will be interested in something that was not sustainable.”
Summing up by the Chairperson
The Chairman of the plenary session thanked all the panelists and
the audience for their active participation and valuable contribution
in the session.
First Lady of South Africa Madam Zanele
Mbeki visiting Exhibition Stalls
Another Exhibition Stall
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