Policies, regulations and systems that promote sustainable financial services to the poor and the poorest

Chairperson: Ms. Nancy Barry, President, Women’s World Banking, USA

Panelists:

* Dr. Fakhruddin Ahmed, Governor, Bangladesh Bank

* Mr. Mawlana Ibrahim, Deputy Governor of Bank Indonesia, Bank Indonesia

* Dr. Ishrat Husain, Governor of the State Bank of Pakistan, Pakistan

* Mr. Ram Babu Pant, Deputy Governor, Nepal Rastra Bank, Nepal

* Mr. Ricardo P. Lirio, Managing Director, Supervision and Examination Sector, Central Bank of the Philippines, Philippines

* Mr. M. A. Mannan, Managing Director of CDF, Bangladesh

Abstract of the Speech of Chairperson: Ms. Nancy Barry

In her speech, Ms. Barry said that the policies for sustainable financial services should reflect the needs of the poor which include: speedy and convenient loan delivery, access to larger and flexible loans including housing loans, low interest rate, health and life insurance, short, medium and long term savings products and above all, respect and recognition. In this connection, she observed that women borrowers prefer individual loan to group loan. To provide effective services there is a need of a range of institutions, many methodologies and structures. According to her, the pillars of sustainable MFIs are:

1. Transparency and performance standards

2. Regulations as to whether the portfolio will be in the hands of the banks or in the hands of the MFIs

3. Legal structures to convert NGOs to regulated MFIs,

4. Institutional infrastructure

For implementation of the standards for microfinance bodies such as rating agencies, wholesale financing institutions like PKSF and MF networks would come to a great help. All these would contribute to creating domestic capital market rather than outsourcing donor funds.

She suggested that policies for MF should incorporate the key features of its operation such as a relatively high interest rate, collateral free loan, portfolio quality and good methodology, simple MIS and accounting, savings, approval of branching and salary structures of loan officers. While converting NGOs into MFIs, their legal structures should be decided considering the following issues:

1. Regulation.
2. Relatively low minimum capital requirement.
3. Appropriate capital adequacy ratio.
4. Ownership structures.
5. High performance standard.
6. Appropriate tax treatment.

As to the role of government, Ms. Barry gave a number of suggestions:

· Govt. agencies should not be providing retail microfinance.

· Govt. must not back only one model, but a variety of models and technologies, thus initiating competition.

· Govt. must not place ceiling on interest rate.

She concluded her speech by citing the challenges ahead in the MF sector—

¨ Extend outreach to millions of people by increasing MFI capacity, involving mainstream banks and mobilizing the domestic capital market.

¨ Building assets on the borrowers’ part.

¨ Building a culture among MFIs, bankers, policy makers and funders of MF, based on trust, transparency, shared standard, generosity and mutual accountability for results.

¨ Building financial policies and systems that work for the poor.

Abstract of the Papers Presented by the Panelists
Dr. Fakhruddin Ahmed, Governor, Bangladesh Bank

Dr. Fakhruddin Ahmed said that the microfinance sector is currently playing an important role in the financial markets of developing countries as a semi-formal sector. The failure of the formal financial sector to reach the poor led to the growth of this semi-formal path to fulfill the financial needs of the poor. Microfinance has helped to alleviate poverty by providing self-employment for poor women and by contributing to an additional income for their families. It is now the task of the policy makers to promote and to extend its support in order to further develop this sector.

Dr. Ahmed said that the first task would be to identify key areas where governments, microfinance leaders and policy makers can focus their attention so that microfinance could reach more of the poor, and empower them, especially the poor women.

Plenary Session on Policies and Regulations in Progress

Dr. Ahmed agreed with Ms. Barry on the need for protecting savings, larger loans, adopting macro policies, ownership structure of MFIs, external public and private sector support and impact assessment. He suggested inclusion of women clients in the ownership of MFIs. He rightly observed that the conventional approach of regulation would not be appropriate for MFIs. Hence it should be based on the best practices available in the country. With regard to Bangladesh, he informed that a committee under his leadership, with membership drawn from both the government and MFIs, had prepared a set of guidelines for this sector to ensure transparency and accountability in financial matter, including internal and external audit guidelines, some templates for collecting information on savings and deposits, an MIS format to build up a reliable database on this sector that will help in monitoring and supervision, and a guideline to measure the performance of these institutions, which would come in effect in near future.

Mr. Maulana Ibrahim, Deputy Governor of Bank Indonesia,
Bank Indonesia, Indonesia

In his speech, Dr. Maulana Ibrahim mentioned that Indonesia has a large number of MFIs. However, there are still fundamental problems in the microfinance industry that have to be solved. Microfinance in Indonesia is primarily concentrated in rural areas. Since the economic crisis of 1997, the macro-economic position of Indonesia has improved. GDP growth for 2003 is 4% and for 2004, it has been projected between 4-5%. Priority has been given to extend support to sustainable MFIs for the poor or poor households with micro-enterprises, particularly the women who would have to be out of poverty. Microfinance can alleviate poverty and can help the women to be empowered.

Dr. Ibrahim said that the regulation of microfinance in Indonesia was started in 1929 as the Village Credit Agency and in 1988 in the form of banking regulation for rural banks. The number of Village Credit Agencies is now about 5000 units and rural banks are about 2100 units. Now Indonesia’s primary objective is to have better regulation and supervision.

In April 2002, Bank Indonesia as the central bank and the government had already committed to alleviate poverty by signing a memorandum of understanding to set in the program of poverty alleviation. This program was promoted in September 2003. 965 PPR and 29 banks including PMM have been participating in this program. The legal framework of MFIs in Indonesia has to be improved to overcome the challenge of reducing poverty through increasing the ability of MFIs. It is expected that their efforts will bring significant improvement to microfinance in Indonesia.

Dr. Ishrat Husain, Governor of the State Bank of Pakistan, Pakistan

Dr. Ishrat Husain in his paper pointed out that when microfinance in most countries had grown
in the absence of specific financial sector policy, how could policies and regulations be instrumental in promoting financial services to the poor? However, he expressed confidence, citing the success of BRI in Indonesia, in the effectiveness of MF to poverty alleviation. He also dwelt on how Pakistan government had adopted the MF policy that has recognized the micro financial sector as an important component and encouraged private sector entry into banking with the poor. He emphasized that establishing a limited number of strong Microfinance Banks (MFBs) on a long-term basis were preferable to an unlimited number of under-capitalized MFBs. As to the control of MFBs, he mentioned that the State Bank of Pakistan had framed a separate set of Prudential Regulations. Partnership and collaboration with practitioners and stakeholders had enabled the central bank to develop sector-friendly policies and regulations. However, MF initiatives would have to be accompanied by other initiatives like substantial investment in infrastructure, education and health, to create business, investment and capacity building for the poor, thus enabling them to productively avail of MF services.

Mr. Ram Babu Pant, Deputy Governor, Nepal Rastra Bank, Nepal

Mr. Ram Babu Pant thanked PKSF and the Bangladesh Bank for inviting him to this summit and to allow him to express some of his views regarding policies, regulations and systems that promote sustainable financial services to the poor and the poorest in Nepal. Mr. Pant mentioned that Nepal had started noteworthy innovative programs. The small farmer development program, the production credit for rural women, priority sector credit program and more recently the Grameen banking replication in Nepal are some examples in this direction. Most of the programs were run either by the government agencies or by government-owned financial institutions.

Mr. Pant mentioned that in the last few years, Nepal Rastra Bank made the kind of its paradigm set and encouraged the NGOs, the private sector and preferably, the beneficiary groups that owned, managed and operated microfinance industries. In that respect, the government and the central bank have progressively withdrawn some activities such as managing the financial services industries to encourage the private sector and beneficiary groups. Under the current financial sector reform program that has been being implemented in Nepal for the last two or three years, the major thrust is to bring institutional reform and transparency into the system. Therefore, in that sense the commercial banks have also been allowed to focus their attention exclusively in commercial activities. Certain mandatory requirements fixed by the central bank have progressively been withdrawn. There was a provision in Nepal that at least 12% of the total loan outstanding by these commercial banks should be invested in agriculture services sector and in cottage industries. Now this priority sector mandatory credit program provision is being progressively withdrawn.

Mr. Pant mentioned that the central bank of Nepal introduced some regulatory guidelines for microfinance sector in April 2003. Direct attempts have been made to issue potential guidelines, which are very simple and which could be easily followed by the MFIs. Collateral free, group based lending approach also has been attempted. Regulations, designed and implemented by the central bank in consultation with the MFIs operating in Nepal, attempt to promote certain kind of performance standard to ensure transparency and to ensure long run sustainability of the financial sector industries.

Mr. Ricardo P. Lirio, Managing Director, Supervision and Examination Sector, Central Bank of the Philippines

Mr. R. P. Lirio summarized the strategies undertaken by his govt. to develop MF sector in the DREAM capsule, where ‘D’ stands for differentiate social from financial intermediation programs, implying less govt. intervention and more participation of the private sector in providing financial services to the poor; ‘R’ for revolutionize the financial system by lifting interest rate ceiling and liberalizing bank entry; ‘E’ for enact laws in favor of the essential regulatory environment to promote MF; ‘A’ for adopt a national strategy for a viable MF market; and ‘M’ for maintain synergized anti-poverty efforts to widen the outreach of services.

Mr. M. A. Mannan, Managing Director of CDF, Bangladesh

Mr. M. A. Mannan in his speech pointed out the problem of legal status of the NGOs and MFIs in the way of the growth of MF sector. This is one of the many reasons, he said, why regulations are urgently needed. A user-friendly regulatory framework, he remarked, would enable the MFIs to access commercial funds from both the state-owned and private banks and mobilize savings from the public as well. Participation by the banks in the MF lending program will turn the MF operators from zero cost but unreliable donor money and subsidized institutional funds, to domestic resources at market cost. Moreover, regulations would lessen the existing registration hassle. Above all, the expected regulation would act as building blocks for good governance across the civil society.

Depicting the prevailing microfinance sector in Bangladesh, Mr. Mannan mentioned that the emergence of PKSF and CDF were two significant developments affecting its growth. PKSF had successfully circumvented the legal tangle in Bangladesh and had been operating singularly well, drawing strength primarily from its own charter and a satisfied clientele, he said. On the other hand, CDF is the national network organization of MFIs, which has been engaged in meeting training and capacity needs of the sector besides undertaking research on and publication of microfinance statistics.

On the question of the need of the hardcore or ultra poor, he suggested that typical interventions would not work. That is why they should be catered with some other kind of flexible and innovative services.

Open Discussion

The audience posed a number of questions that the chairman arranged into two clusters. These are as follows:

First, what should the central bankers emphasize most on delivering financial services to the poor?

Second, how should they treat interest rates charged by the MFIs, which are generally considered higher than that of the formal banks?

Addressing the first question Mr. Ram Babu Pant suggested that emphasis should be given on how well the poor adjust themselves to the delivery mechanism of the financial services. He said that sustainability of microfinance depends on the adjustment capacity of the clients. As for interest rates, he said that the formal banks charge higher interest rates than MFIs. He argued that the transaction costs in obtaining credit from formal banks make their interest rate much higher than that of the MFIs. Therefore there should be no confusion about interest rates.

In reply to another question on imposing regulation in the context of thirty years of microfinance in Bangladesh, Dr. Fakhruddin Ahmed said that any financial activities must be brought under regulation. In this regard, he cited the instances of the Philippines and Pakistan where the governments already had paved the way for regulation of MFIs. However, he emphasized that these regulations should be different from those of the conventional banking system. Rather, policy for regulations should be in accordance with the best practices found in the region. As to the role of PKSF in regulating microfinance sector, he suggested that PKSF could greatly help through providing consultation services to the policy makers.

Summing up by the Chairperson

The chairperson thanked all the presenters for their valuable suggestions hoping the banking system of the developing countries would be concentrating more on the need of the majority of their population, rather than just imitating that of the West.

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