a comprehensive approach of microfinance

7/28/2019 A Comprehensive Approach of Microfinance

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The Centre for Micro Finance

A comprehensive approach of Microfinance

Karachi

November 1st, 2006


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Agenda

Microfinance in India: an overview


Research Unit

MFI Strategy Unit


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Microfinance: who are the targetedclients?

Poor and vulnerable householdseconomically at the Bottom ofthe Pyramid

Low Income

Middle

Class

HNI

Ultra poorHow can microfinanceimprove their lives?


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Microfinance: what is it?

whereas objectives areOften perceived as

Suite of financial services

Thrift / savings Credit

Insurance and Investments

Transfer Payments andRemittances

Group and individual lending

Sustainable activity

Micro-credit

Group lending

Social/charitable activity


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The challenge ahead: demand vs. supplygap to bridge

SupplyDemand

60% of MF services in South Several un-served areas

< 2M Households reached 500M un-served poor

Fast growing populationand overall economy

Range of risks to becovered

Missing market linkages /employment opportunities

Limited non-credit services

Improveaccess

Increaseimpact

Largely urban Mostly rural

$1.5 Bn* $50Bn

* Including loans against gold


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Information Asymmetry

No collateral No credit history Difficult to evaluate

enterprises potential

success

High Costs of Intermediation

Low value transactions Geographical isolation High supervision costs (no financial literacy) Informal activities: need flexible access

Illiteracy: traditional services inappropriate High cash handling costs

Constraints overcome those challenges?

Difficult risk assessment

High transaction costs

How to release these constraints?


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Systems

Finance

Thus the need for institutions building

Venture capital for start ups

Cheaper cost of funds for on lending

Capacities

Product development

Technology platform Clients authentication by unique ID

Staff Skills strengthening / Training

Recruiting of professionals

MFI Entrepreneurs development

Research Assess and Increase impact on poverty alleviation

Experiment and improve products


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Agenda



Research Unit

MFI Strategy Unit


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CMFs objectives and mission

Established in 2005

CMFs objectives

To address knowledge gaps in micro finance sector

Experiment on ground solutions

CMFs mission

Systematically research links between access to financialservices and participation of poor in larger economy

Participate in maximizing access to financial services

Research on micro finance and livelihood financing (RU)

Strategy building for MFIs (MSU)


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CMFs Objectives

ResearchInfluencepractice

Advocacy

Strategybuilding

Training


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MSU and RU re-enforcement loop

Strategy (MSU)

Research (RU)

Impact of microfinance

Impact Evaluation Studies

Economics of micro enterprise

Insights on HH "financial behavior"

Constraints on HH productivity

Experimentation on product design

Micro finance transaction costs

MFIs Strategy for growth

Definition and implementation ofinnovative business models

Market research, creation of linkages

MFIS best practices sharing

Design/test of new financial products

Capacity building

capital structure, HR, MIS, processes,customer segmentation, governance


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CMF collaborates with existing activeplayers in the microfinance sector

ManufacturingCompanies

InsuranceCompanies

FundingOrganizations

MFIs/NGOs/TrustBanks/Financial

InstitutionsUniversities/

Research Institutions

Regulators/ PolicyMakers

Government (Centraland State)

SMEs CDF

CIRMCAFS

CMF


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Agenda



Research Unit

MFI Strategy Unit


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Understandbetter

Why are recovery rates so high? What is the financial behavior of clients?

What is the impact of microfinance?

Improve quality

of services

New and innovative products

Maximize the impact of credit through otherservices

Improve organizations Information management

Role of HR policy and staff incentives More cost-effective processes

Goals of Research is to maximizemicrofinance impact through 3 axes

Alternative channels SHGs Revive RRBs New channels (Kiosks, ATM, CF)

Policy Regulation Competition and information sharing

Expand access


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These objectives translate into 4 Researchareas to maximize microfinance impact

Microfinance

plus

Finance andOrganizational

issues

Policy

Impact and

product design

1 2

4 3

Maximize impact

On client


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Product design: credit

Selection Monitoring Enforcement

Individual/groupliability

Self/MFI selection

Guarantors

Collaterals

Interest rate

Repayment schedule Communication

strategies

Loan size

Interest rate

Design the most cost-effective products byvarying credit product components

Within groupmonitoring

Staff supervision

1


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What dolow

incomeclientswant?

InsuranceWeatherLife and HealthLivestock Flexible loans

Small initial sizes

Larger subsequentloansLonger terms

Housing loansBuild new homes

Improve existinghomes

Savings

Group based

Individual loans

Remittancesproducts

Product diversification andcommunication strategies

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Which delivery channels/communication strategies are effective?


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Microfinance Plus: address contextualconstraints

? ImpactAccess to

Financial services

Reduce risks of MFIs by combining microfinance with otherdevelopment interventions (health, financial training)Provide products / services through credit

2


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Organizational issues: cost and profitability

Bank Transaction? Micro-loan9% 25%

Return?

How to reduce transaction costs? Show investors risk return performance of

micro-loans

3


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Policy issues

What are regulatory obstacles to MFIs?

What are the consequences of competition and

how to manage it?

Why is there no information sharing? How can acredit bureau be set up?

How to make MFIs more transparent?

How to improve microfinance reputation?

4


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Research: other initiatives

Construction of a panel database in Tamil Nadu for on-going research With Yale Center for Economic growth (Mark Rosenzweig, Dean Karlan, Chris

Udry, Paul Schultz, Rohini Pande) 10,000 households in Tamil Nadu, rural and urban, every 4 years Study vulnerability, consumption patterns over time Document migration patterns, access to financial services over time

Economics of micro finance, by Adel Varghese, Texas University

Evaluating social programs, by Poverty Action Lab

MBA course elective on microfinance, by Rock Rock Magleby-Lambert, BostonUniversity

Total immersion program in Finance and development

Paneldatabase

Seminarseries

Academics and practitioners

Foregone seminars Prof Ashok Jhunjhunwala, IIT Chennai Prof Vaidyanathan, Madras Institute of Development studies Prof Sendhil Mullainathan, Harvard GN Bajpai, ex chairman of SEBI

Shekhar Shah, World Bank

Courses


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Agenda



Research Unit

MFI Strategy Unit


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MSU: Objectivesand areas of work

Advice MFIs to define and execute a growth strategy byaddressing their main challenges

Horizontal growth (Same Products & Same Customers Profile)

Vertical growth (New Products &/or New Customers Profile)

Refine Business strategyand model

Improve internalOrganizational structure

Support MFIs growth(vertical & horizontal)

Recommend

Implement

DiagnoseScale up


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MSU: Areas of work with MFIs

Business strategyOrganizational structure

3y strategic plan definition

Competitive position assessment

(SWOT analysis)

Marketing strategy

Customer segments to target

Products to develop to serve thesesegments (IL, insurance)

Portfolio management

Market linkages creation

Leverage of ICICI MFIs andcorporations clients

Thematic consultations

Capital structure (equity/debt)and access to financial markets

(VC, securitization)

HRrecruiting, training, incentives

Organizational design

MIS

Processes of operations Governance

2

4

1

3


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Reduction of MFIs cost of funds: Supply-demand match assessment

Supply Demand

Identify potential assets tosecuritize/buy out

Evaluate investorsrisk/return appetite for

MFIs paper

Check demand / supplyrequirements match

Facilitate / structure thedeal

1


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4 options to explore and 4 types of playersto interview to reduce MFIs costs of funds

1

PortfolioSecuritization

Bond issuePortfolioBuyout

Directmedium/long

term loan

Foreignbanks

Domesticbanks

Funds

Facilitator

Minimum volume of investment?

Investment currency and hedging mechanism?

Tenure / maturity of investment?

Pooled vs single MFI portfolio investment?

Investor risk/return profile?

Portfolio / MFI rating requirement?

Guaranty requirement (FLDG/SLDG)?

Investment seasonality (PSL requirement)?

Investor reporting / monitoring requirements?

Willingness / capacity of the MFIs to receive funds andcomply with investors requirements?

Impact on MFIs CoF?


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HR training, recruiting, incentives

Potential partnersOrganizational structure

MFIs careers, Hunt Third sector

Awareness program

Recruitment: facilitate

recruitment for the entire sector

in the next 3-5 y => 20K FTEs to

hire (TBD)

Financial training for top mngt

Training for middle mngt &

fieldstaff

Incentive schemes

IFMR centers (CAFS, insurance)

ICICI trainings

HBS, Duke, IIM

Coordinate existing providers

MicroSave, Care India, Basix schoolof livelihood, EDA

Set up new facilities (if required)

Cocoon?

2


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MIS: partnership with FINO

3

To develop a common end to end delivery platform sharedacross Indian MFIs

Created as sectoral resource to serve 700M customers

Objective

To access reliable data on MFIs operations performance

Easier portfolio rating through creation of historical data

Benefits forMFIs

Benefits for

investors

To reduce initial CAPEX required per MFI

To improve product depth and capability

To improve business management and reduce transaction costs

data reliability and timeliness (product, clients)

To better service liabilities and investments

To allow single-window monitoring of customer relationships

Currentstatus

Currently sized for 12-50M customers

Proof of concepts completed, final contract negotiations (IBM/iflex)

Entire infrastructure, hosting, operations outsourced

First phase launch with 5 partners by May 2006


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Market linkage creation: approach

Corporates

MFI

Local presence in identified region?

Willingness/Capacity of MFI to

Provide customized financial products?

Identify entrepreneurs (if necessary)?

Provide/coordinate technical training

at the field level?

Volume generated (absorbed)?

Quality?

Cost of production?

Capacity to contract & payback loan?

Existing capabilities/training need?

Product to be sourced (retailed)?

Region? Volume? Price? Quality?

Required investments (capital or capabilities) for tie up?

Expected return (in value)?

Timeframe of return?

Risk undertaken by company (quality)?

Previous pilot already undertaken?

Customers

Demand

Supply

ICICI Commercial teams

ICICI Sectoral team Sectoral experts / NGOsMarket dynamics

4


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Market linkage example: cattle feed distributionthrough Godrej Agrovet-Spandana (1/2)

4

Objective To increase farmers revenues from milk production through improved

yield and quality of milk produced by cattle feed utilization

To reduce the risk on Spandanas loans that go toward buffalo purchase

ExpectedImpact

Expected net revenue increase in Guntur

300-600Rs/month/household with a single buffalo fed with cattle feed

up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after

demonstration effect on one buffalo

Marketing the feed product to traditional / low income farmers andeducating them to utilization of such product

Designing a credit product that caters to the clients needs

Challenges

*: average monthly household income of 60 families surveyed was 7000Rs

Dairy activity is a low revenue activity for farmers in spite of a growingmilk demand and therefore remains a marginal source income

Milk yields from buffaloes is low because these are not fed good quality feed

Farmers perceive dairying as a subsidiary activity because it only offers marginalincome: they have no incentive to own more that 1 or 2 buffaloes

Farmers however willing to invest in dairy (cattle feed, high quality breeds,artificial insemination) often lack the funds to do so

Godrej Agrovet, a concentrate cattle feed producer, is not presence in theareas where Spandana (MFI with 700,000 clients) operates.

InitialSituation


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Market linkage example: cattle feed distributionthrough Godrej Agrovet-Spandana (2/2)

Godrej Agrovet

Spandana

Provide credit at 0% int. rate

for the purchase of feed Delivers the product to weekly

center meeting

Has assigned 1 project leader

Does not make any profit out ofthis initiative

Increase yields and fat %

Increase income by 10-20 Rs/day

Are offered doorstep delivery

Are able to purchase the feed oncredit at 0%

Delivers concentrate feed in 50 kg bags to centrallocations from where Spandana receives theproduct

Region: Guntur

Price: 325Rs/50 Kg

Has assigned 2 officers to coordinate project

Customers

Demand

Supply

4


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Godrej Agrovet-Spandana: productivityimprovement

Initial situation

Dealer

Godrej

Distributor

Farmer

Dealer

Dairy

After Spandana-Godrej partnership

To bepiloted

Spandana

Farmer

Godrej

Spandana

Chiller Entrp.

Dairy

Milk

Cattle feed

Cattle feed

Piloted

Loan

Sales

Sales

Loan

4


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Handicraft

Fisheries / Seaweed

Trees plantation

Food processing

Vegetables / Mint cropping

Market linkage creation: other projects

4


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Thank youFor any question

[email protected] or [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Information Asymmetry No collateral No credit history Difficult to evaluate

enterprises potentialsuccess

High Costs of Intermediation Low value transactions Geographical isolation High supervision costs (no financial literacy) Informal activities: need flexible access Illiteracy: traditional services inappropriate High cash handling costs

Constraints to scaling access for the poor

Provision of

microfinance isconstrained by

Regulatory Issues

Staff Incentives not aligned to maximiseaccess to financial services for poor

High transaction costs

Poor Technology


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How to release these constraints?

To improve impact of microfinance on the poor

To increase access to the relevant suite of financial services


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CMF: Who are we?

Permanent staff: 23 Research associates and 8 MSUAssociates from Kennedy School, Yale, IFMR, XIMB, IRMA

Short-term Interns: Masters and Phd students from KennedySchool, Harvard, Yale, MIT, DSE etc.

Research Committee to give advice on submitted proposals :

Jonathan Morduch (NYU), Abhijit Banerjee (MIT), Byomkesh (SKS),

Mr. Thiagarajan (MCFI), Chandrasekar (IFMR), Bindu Ananth (CMFRfounder)


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CMFs Objectives

ResearchInfluencepractice

Advocacy

Strategybuilding

Training

a comprehensive approach of microfinance

Documents