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WHY PRIVATE CAPITAL MATTERS:
LINKING WITH BANKS TO EXPAND ACCESS TO CAPITAL–
POLICY LESSONS FROM INDIA, SO. AFRICA, AND THE U.S.
John TaylorPresident and CEO
National Community Reinvestment Coalition
WHY PRIVATE CAPITAL MATTERS:
LINKING WITH BANKS TO EXPAND ACCESS TO CAPITAL–
POLICY LESSONS FROM INDIA, SO. AFRICA, AND THE U.S.
John TaylorPresident and CEO
National Community Reinvestment Coalition
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TitleSubtitle
TitleSubtitle
About NCRC (www.ncrc.org)
Global Fair Banking Initiative
Innovative policy in INDIA -- in SOUTH AFRICA -- in the UNITED STATES
Presentation overview:
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U.S. SenatorHillary Clinton
Chairman Alan Greenspan at NCRC Annual Meeting
NCRC is the United States’ trade association for over 600 local government, social & community economic development practitioners, community-based credit unions, faith-based institutions, non-profit housing development organizations and others working to build wealth for traditionally excluded populations.
America’s leaders recognize and respect NCRC’s work. We now collaborate with more than 20 nations to expand planning and action toward greater economic opportunity around the globe.
Rev. Jesse Jackson
www.ncrc.org
Federal Reserve Chairman Alan Greenspan -- at NCRC’s annual meeting
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NCRC’s Global Fair Banking Initiative:~~~~~
AIM – To provide a forum for collaboration on economic justice issues
MISSION –
1. Influence and augment global fair banking patterns of the private financial sector
2. Build Principles of Fair Access to Capital and Financial Services into national and international mandates for banks
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Global Fair Banking/GFB -- ACTIVITIES:
1. Collaborative planning
2. GFB listserve – Sign up at:
<http://groups.yahoo.com/group/GlobalFairBanking>
3. GFB conferences & workshops
4. GFB website: <www.globalfairbanking.org>
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Ideal scenario for sustainable development for excluded populations around the globe:
Microfinance PLUS
Global Fair Banking!
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Newest challenge for MFI leaders
Proven fact – Microfinance works! Heavy investment already in MF Industry BUT – Funders seek to end subsidy TIME OF TRANSITION: Mergers, consolidations, even
commercialization
~~~~~
How can MF Industry access private capital without being forced
to compromise mission?~~~~~
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THE CASE OF INDIA
• MFI market = 260 million people
• 500 million un-banked people
• Credit need = US$9 billion
• Banks sanction only US$400 million
• THE CHALLENGE: Link with banking sector for a sustainable flow of credit, investment and financial services for excluded populations
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Microfinance benefits India
• Microfinance feeds vibrant local economies
• Government loans to MFIs and runs its own MF programs
• However - Government & its agencies have limited outreach
• Innovations & creative partnerships key to success
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HOW INDIAN GOVERNMENT REACHES MFIs & RURAL POOR
• Cooperatives • Rural branches of banks• Non-banking financial institutions • Government-funded public banks• Differential rates of interest• Government-issued credit cards
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LIMITATIONS OF GOVERNMENT PROGRAMS
• Government agency restrictions – In order to make large numbers of small loans, they must be risk free
• Slow economy limits cash flow for loans
• Rampant corruption
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To reach massive population, COLLABORATION IS KEY
• By themselves, public banks & MFIs unable to raise sufficient funds
• Must link to private sector banks to achieve sustainable finance on such a large scale
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BANK LINKAGE PROGRAM
Successful model (small scale) now being expanded nationwide
Potential MFI partners:- 27 nationalized/public sector banks
- 36 foreign banks in 5 largest cities
- 1000 urban, rural & cooperative banks
- Thousands of non-banking financial institutions
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Potential constraint – The limits to voluntarism
• Lack bank regulation to encourage private banks to invest in low-income & rural communities
• Only a voluntary “Fair Practices Code”~~~~~~~
Need for legislation in India
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THE CASE OF SOUTH AFRICA
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History of limited access to finance
• In 2003, only 48% of population had a transactions account
• Only 49% had savings accounts
• Only 57% had a form of credit
• Only 42% had insurance
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Virtual monopoly in the
South African banking system
Government limits banks to 4 “pillars”:
1. Amalgamated Banks of South Africa/ABSA
2. Nedbank
3. First National Bank
4. Standard Bank
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Post-Apartheid Financial Sector:
Recent & pending legislation to increase access & open opportunities for the poor:
• Financial Advisory & Intermediary Services Act of 2002 • Home Loan & Mortgage Disclosure Act of 2000• Banks Act of 1990 & Amendment of 2000• Mutual Banks Act of 1993 & Amendment of 1999• Dedicated Banks Bill of 2003• Community Reinvestment Bill• Financial Services Act
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CASE OF THE UNITED STATES
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Before effective law was created:
• Despite existing law, lenders avoided whole communities
• Evidence became clear – Access to credit key to renewing economies in low-wealth neighborhoods
• Government lacked resources to solve it all
• Consensus grew that private financial institutions must become partners for a fair economy
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In 1977, U.S. Congress passed the Community Reinvestment Act
~~~~~• Made illegal the practice of
discrimination by banks on a neighborhood or geographic basis
• Required that safe & sound credit be made available in a fair manner, regardless of class/class/gender
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• Lending Test• Investment Test• Financial Services Test
~~~~~Rating Scale:
• 1. Outstanding• 2. Satisfactory
3. Needs to Improve • 4. Substantial Non-Compliance
The Mechanics of CRA
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PERFORMANCE INDICATORS:
• Lending activity
• Geographic activity
• Borrower characteristics
• Community Development Lending
• Innovative or flexible lending practices
Big Bank test(for banks with assets over $250 million)
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PERFORMANCE INDICATORS
The dollar amount of qualified investmentsThe dollar amount of qualified investments
The innovativeness or complexity of the qualified investments
The innovativeness or complexity of the qualified investments
The responsiveness of the qualified investments to credit and community development needs
The responsiveness of the qualified investments to credit and community development needs
The degree to which the qualified investments are not routinely provided by private investors
The degree to which the qualified investments are not routinely provided by private investors
1. Demographic data on median income levels, distribution of household income, nature of housing stock, housing costs, and other data.2. Lending, investment, and service opportunities in the bank’s assessment area(s).3. The bank’s product offerings and business strategy.4. The institutional capacity and constraints, including the size and financial condition of the bank, the economic climate (national, regional, and local), safety and soundness limitations, and other considerations.5. The bank’s past performance and the performance of similarly situated lenders.6. The bank’s public file.
1. Demographic data on median income levels, distribution of household income, nature of housing stock, housing costs, and other data.2. Lending, investment, and service opportunities in the bank’s assessment area(s).3. The bank’s product offerings and business strategy.4. The institutional capacity and constraints, including the size and financial condition of the bank, the economic climate (national, regional, and local), safety and soundness limitations, and other considerations.5. The bank’s past performance and the performance of similarly situated lenders.6. The bank’s public file.
PERFORMANCE CONTEXT
CRA RATING ON INVESTMENT TEST:• Outstanding• High Satisfactory• Low Satisfactory• Needs to Improve• Substantial Noncompliance
CRA RATING ON INVESTMENT TEST:• Outstanding• High Satisfactory• Low Satisfactory• Needs to Improve• Substantial Noncompliance
THE INVESTMENT TEST: Banks With Assets >= $250 Million
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More Mechanics of CRA
• CRA Public Evaluations
• Lending Data
• Public Hearings on Mergers
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CRA’s Impact
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Measuring CRA SUCCESS• CRA has encouraged collaboration between banks &
community groups (NGOs) across the U.S. – CRA Agreements
• Lending to low/moderate-income borrowers way up
• Minority homeownership rose over 200% in 10 years
• Huge growth in # of NGOs funded by banks to serve low-wealth populations
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Measuring CRA SUCCESS[continued]
• Small business & micro-loans to woman & minorities is up across the U.S.
• Investments now in the 10’s of billions of U.S. dollars• Traditionally poor neighborhoods recovering rapidly –
in some instances with unwanted “gentrification”• Multiple studies confirm CRA benefits• CRA lending has proven to be safe, sound and
profitable
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Steady Increase in CRA $ Commitments (in millions)
Total CRA $ Commitment
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
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Distribution of bank commitments by category
2001 CRA Agreement by Activity & Dollar Amount of Agreements
46%
16%
33%
0%
5%
Single Family Home
Small Business
Community Development
Operating Support
Other
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79.5
185.8
29.6
90.6
51.4
0
20
40
60
80
100
120
140
160
180
200
Black Hispanic White Low/Mod Middle Inc.
Borrower Group
Percent Increase in Home Mortgage Lending: 1993 - 2002
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CRA Challenges
• Globalization of banking can result in safety & soundness issues, as well as less bank loyalty to local communities
• Hybrid financial institutions, with predatory or extortionist lending practices strip assets
• Financial education is also key to success in helping poor people build wealth
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In conclusion
1. Critical importance of understanding the role of private sector capital in building communities
2. Need laws & regulations that encourage and support banks to collaborate with MFIs and other NGOs to achieve outreach
3. As finance goes global, NGOs must also organize across borders to achieve innovative and collaborative strategies for combating poverty and exclusion
4. WE INVITE YOU TO JOIN US to help “get the framework right” for the global financial sector