Out of approximately ten thousand providers of microfinance services, only about two hundred are profitable. New forms of public-private partnerships can facilitate the entry of the private sector and the integration of microfinance into the commercial financial sector.
Partnerships to Mobilise Savings and
Partnerships to Leverage Private Investment
Goodman's theme at the 2005 conference was the role of investment funds that invest all or part of their assets in the equity of MFIs (microfinance institutions). In Chapter 4, Kylie Charlton explores the potential role that equity investment can play for the wider investor audience.
New Partnerships for Sustainability and Outreach
Reducing transaction costs – the entry tickets to the financial markets – is the first form of innovation in the financial sector. Abrams (2006) “The market for foreign investment in microfinance: opportunities and challenges”, in I. von Pischke, ed., Microfinance Investment Funds – Leveraging Private Capital for Economic Growth and Poverty Reduction.
Raising MFI Equity Through Microfinance Investment Funds
Most microfinance investment funds require some form of participation in the management of the MFIs in which they invest. Commercial microfinance investment funds would logically be the least involved in MFI management.
Market Transparency: The Role of Specialised MFI Rating Agencies
These professionals are part of their assessment committee to provide independent oversight of the assessment process. As mentioned earlier, the rating service has been successful in terms of the number of completed assessments. The main objective of the rating service – to facilitate the flow of financing to MFIs – is essentially fulfilled.
The use of the rating process and report for capacity building purposes has gained momentum. In general, the experience with the specialized assessors' tools has been very good from the start. The issue of investor confidence is currently investors' perception of the credibility of specialist assessments.
Some efforts have been made with the support of specialized rating agencies that have important databases, mainly M-CRIL and MicroRate.
MFI Equity: An Investment Opportunity for the Broader Public?
Private equity funds in emerging markets in Latin America averaged single-digit returns over the same period. The use of limited liability partnerships reflects the accepted structure of traditional private equity funds. MFIFs' investment cycle now mirrors that of private equity: fundraising, investment, monitoring and exit.
Exit is the most vexing issue for MFIFs, as it is for emerging market private equity funds. Broadening the investment objectives of MFIFs to include second-generation MFIs and fulfill a venture capital role for the microfinance industry, positioning themselves as a subset of private equity in emerging markets. Fenn, George, Liang, Nellie and Prowse, Stephen (1996) "The Economics of Private Equity Markets", Federal Reserve Bulletin, January 1996.
Leeds, Roger and Sunderland, Julie (2003) 'Private Equity Investing in Emerging Markets', Journal of Applied Corporate Finance, Vol.
Microfinance and Economic Growth – Reflections on Indian Experience
It is estimated that a large part of the demand for credit in this stratum is currently met by informal sources. Different approaches have been taken by government agencies and non-governmental organizations (NGOs) to improve the condition of the rural population. One of the objectives of bank nationalization in 1969 and 1980 was to increase the flow of rural credit.
While much of the growth in the early years was financed by loans on favorable terms from funding agencies, from 2001 onwards this was followed up by equity from domestic as well as international agencies and by loans from the banking sector. The advantage of this structure is that it separates the risk of the MFI from the risk of the portfolio. Here, the intermediary or MFI assumes a fraction of the credit risk (to the extent of risk sharing), which leads to a reduction of the capital requirement.
This product gives the bank the advantage of differentiating between the MFI's financial and operational risk, while credit enhancement improves the portfolio's rating and enables competitive pricing.
Microfinance Investments and IFRS
The Fair Value Challenge
When debt investments are held at amortized cost, the fair value of the investment may be referenced in the balance sheet notes for informational purposes. The initial price of the investment itself can be used as the fair value, or the price of a recent investment in the same entity by another investing party can be used. Parties to the transaction were exclusively management or employees of the investment entity investing their own funds.
The KfW guidelines also provide for extraordinary events that change the value of the investment and exclude the use of the last market transaction as a basis for determining fair value.24. The International Private Equity and Venture Capital Valuation Guidelines (IPEVCVG) do not have a valuation hierarchy per se, but specify that in the absence of an active market, fair value should be estimated using one of the specified valuation methodologies. For example, in a recent DCF MFI model, a 1% change in the discount rate produced a 6.3% change in the net present value of the MFI being valued.
Financial Accounting Standards Board, Fair Value Group (2005): “Minutes of Board Meeting June 29, 2005 – Definition, Transaction Price Assumption, Hierarchy”.
Technology Partnerships to Scale up Outreach
But what about 'the last mile', the limit beyond which these three global developments have not yet been overcome. The focus of Chapter 9 of Gautam Ivatury is on using technology to build financial systems capable of serving large numbers of low-income customers. In Chapter 10, Laura Frederick describes and addresses the magnitude of the challenges and complexities associated with the delivery and use of information technology.
It concludes that the introduction of technology combined with business process change gives the greatest return; that innovative technologies that can be scaled up are essential for successful delivery in emerging markets; and that the costs of building the necessary infrastructure are beyond the capacity of individual MFIs. Credit risk can be specified to include, for example, potential losses and potential delinquency periods. The risks in question extend beyond credit risk to include borrower behavior in general, such as the probability that the borrower will not take out another loan.
Scoring can lead to over-indebtedness because the debt capacity of the loan applicant is not rigorously quantified.
Remittance Money Transfers, Microfinance and Financial Integration: Of Credo, Cruxes,
And what would entice money transfer customers to use other financial services such as savings or loans?. The regulatory context for microfinance and also for money transfer services varies widely by country. A different and perhaps more manageable proposition for MFIs is money transfer services in their domestic market.
The integration of low-income groups into financial systems through money transfer products is possible, although much less visible and developed than might be assumed. When MFIs offer money transfer services, they often still show a lag in integrating this customer segment into financial services in general, e.g. The availability, accessibility and quality of the payment system affect the availability of money transfer services and their cost.
In contrast, money transfer products offered on the regulated market are typically limited to a single instruction, i.e.
Remittances and MFIs: Issues and Lessons from Latin America *
Latin American Microfinance Institutions
Using Technology to Build Inclusive Financial Systems *
Financial Institutions That Use E-Payments to Serve the Poor
AFR Kenya Kenya Cooperative Bank Co-op POS, ATM Deposits AFR Kenya K-Rep Bank Bank ATM N/A. AFR Malawi Opportunity International Bank ATM, POS Deposits, withdrawals, bill payments,. AFR South Africa Teba Bank Bank POS, ATM, Deposits, withdrawals, account payments, Internet, money transfers, account opening, Mobile phone government grant distribution AFR South Africa WIZZIT Bank POS, ATM, Account payments, account opening,. AFR Tanzania Tanzania Post Bank Bank ATM Withdrawals, Account Payments AFR Tanzania CRDB Bank POS Deposits, Withdrawals, Account Payments,.
AFR Zimbabwe Jewel Bank Bank POS, ATMs AFR Zimbabwe Central Africa Building Building POS, ATM, Deposits/Withdrawals. ECA Tajikistan AgroInvest Bank Bank POS, ATMs, withdrawals, bill payments LAC Bolivia FFP Prodem S.A. NBFI POS, ATM, Withdrawals, Money Transfers,. LAC Brazil Lemon Bank Bank POS, ATM, Deposits, Withdrawals, Bill Payments, Internet Money Transfers, Loan Disbursements, Account. opening, money transfers, insurance payments LAC Brazil Banco Postal Bank POS, ATM, Savings, loans, transfers, checking,.
LAC Ecuador Banco Solidario Bank ATM Transfer LAC Guatemala Banrural Bank POS, ATM, Withdrawals, Deposits, Bill Payments, Internet Money Transfers, Loan Disbursements.
Financial Institutions That Participated in CGAP’s E-Payments Survey
Region Country Type of financial institution Technology Description LAC Colombia Fundacion Social NBFI Mobile phone Deposits, withdrawals, money transfers,. LAC Mexico Banamex Bank Internet Payroll Consumer Lending LAC Paraguay El Comercio MFI POS, ATM, Consumer Loans, Savings, Loans. Internet Cards and Credit Unions LAC Paraguay Vision MFI POS, ATM Deposits, Withdrawals, Payments LAC Peru Banco de Trabajo Bank ATM N/A.
SA Bangladesh Janata Bank ATM, Internet Withdrawal SA India BASIX NBFI Online Loan Disbursement SA India Canara Bank Bank POS, ATM Deposit/Withdrawal SA India Corporation Bank Bank POS, ATM Deposit/Withdrawal SA India ICICI Bank Online Remittance, . Financial institutions with a 'double bottom line': Implications for the future of microfinance. CGAP Case Document No. AML/CFT Regulation: Implications for Financial Service Providers Serving Low-Income People.” CGAP Focus Note No.
Harness the power of technology to deliver financial services to the poor.” Small Business Development, December 2004.
Information Technology Innovations That Extend Rural Microfinance Outreach
To be successful, the potential impact and value of the final results must be consistent with the goals of all members of the consortium. If the technology provider is not committed to the MF providers' results, the relationship is unlikely to be viable. The Grameen Foundation, through the Grameen Technology Center, a member of the MFT consortium, is leading two additional efforts to develop open source applications.
10 Dailey, James and McKiernan, Lynn, “The Case for Automating Microfinance with an Open Source Architecture,” The Grameen Technology Center, 2003, p. Reaching the "last mile" requires a diversity of new products and a range of services that can be delivered online and offline through a single point of access. A limited number of financial transactions, such as paying off loans and savings deposits alone, will not be able to cover the capital and recurring costs of the supply channel.
Additional transactions, such as benefits or pension payments, the purchase of airtime, or even healthcare or e-government services, can be added to cover delivery channel costs in remote areas.
Banking the Unbanked: Issues in Designing Technology to Deliver Financial Services
