CASE STUDYCASE STUDY

July 2009

MICROFINANCE :MICROFINANCE : The role of The role of Commercial Banks.Commercial Banks.

ALI I. ShakerChairman

Principal Bank for Developmentand Agricultural Credit

EGYPT

11. . MICROFINANCEMICROFINANCE..-- DEFINITIONDEFINITION-- CLIENTS.CLIENTS.-- SIZE & POTENTIAL DEMAND.SIZE & POTENTIAL DEMAND.-- Financial Services & Poor PeopleFinancial Services & Poor People..

22. . COMMERCIAL BANKS & MICROFINANCECOMMERCIAL BANKS & MICROFINANCE-- Reluctance to Service Microfinance.Reluctance to Service Microfinance.-- Despite having the “ Twin Advantages ”.Despite having the “ Twin Advantages ”.-- Obstacles for Commercial Banks in the Microfinance BusinessObstacles for Commercial Banks in the Microfinance Business-- Other Advantages of Commercial Banks in MicrofinanceOther Advantages of Commercial Banks in Microfinance

33. RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A . RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANKCOMMERCIAL BANK

44. SUCCESSFUL FEATURES of a MICROFINANCE PROGRAM. SUCCESSFUL FEATURES of a MICROFINANCE PROGRAM

55. Is Microfinance a Suitable Business Proposal for Commercial Banks?. Is Microfinance a Suitable Business Proposal for Commercial Banks?

66. Is It a Revenue Earner for Retail Banking ?. Is It a Revenue Earner for Retail Banking ?

CONCLUSION :CONCLUSION :

11//11 MICROFINANCEMICROFINANCE

DEFINITIONDEFINITION :q Microfinance is banking the low income households and

individuals who have uncertain and unstable income streamsthat are unprotected.

q Worldwide, Microfinance has been recognized as a powerful tooltargeting the poor with the aim of alleviating poverty, raisingliving standards, creating jobs and boosting economic growth.

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* * CLIENTSCLIENTS::

qq ““ DestituteDestitute ””::

unable to participate in the mainstream of the economy.

qq ““ EntrepreneurialEntrepreneurial PoorPoor ““ ::

active in income generation.

1/2 MICROFINANCEMICROFINANCE

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* SIZE & POTENTIAL DEMAND :

- There is a large unmet demand for microfinance among theentrepreneurial poor in the third world countries.

- A conservative estimate suggests that, for example, there areat least 3 - 5 million microenterprises in Egypt for the time being.While no formal estimates are available, it is believed thatonly (excluding agriculture sector) 10% approx. of potential borrowersare being served.

- This large unmet demand signals an important role for the commercialbanks to participate in the provision of such services.

1/3 MICROFINANCEMICROFINANCE

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* * Financial Services & Poor PeopleFinancial Services & Poor People ::

- Need for a variety of financial services.

- Lack of access to banking services.

- Existence of informal systems.

- Lack of professionalism & sustainability of activities, programs and institutions that channel funds in the form of microcredit.

1/4 MICROFINANCEMICROFINANCE

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* Reluctance to Service Microfinance:

- The belief it is costly & unprofitable.

- The belief it is risky.

- The belief it is time consuming

- The belief it is labor intensive.

- Lack of appropriate banking methodologies.

- Socio-economic barriers.

- Highly political nature of MF.

2/1 COMMERCIAL BANKS & COMMERCIAL BANKS & MICROFINANCEMICROFINANCE

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* * Despite having the “ Twin Advantages ”Despite having the “ Twin Advantages ”::

- Branch Network / Accessibility.

- Fund Raising Capacity.

2/2 COMMERCIAL BANKS COMMERCIAL BANKS & MICROFINANCE& MICROFINANCE

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* Obstacles for Commercial Banks in the Microfinance Business :

q Bank Commitment

q Organization Structure

q Lack of Financial Methodology

q Human Resources

q Cost Effectiveness

q Prohibitive Environment.

q Inconsistent Policies.

2/3 COMMERCIAL BANKS COMMERCIAL BANKS & MICROFINANCE& MICROFINANCE

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* Other Advantages of Commercial Banksin Microfinance :

- Regulated institutions

- Physical infrastructure / Branch Network

- Effective internal control structure

- Sound governance structure

- Availability of funds

- Products diversification

2/4 COMMERCIAL BANKS COMMERCIAL BANKS & MICROFINANCE& MICROFINANCE

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3/1 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK

Main critical factors responsible for thesuccess and durability of a commercialmicrofinance program :

a) Commitment, Vision and Drive of senior management :- Belief in the potential role of microfinance- Dedicated staff

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b) Public Policy Environment :

- Supportive public policy

- No restrictions related to pricing, incentives……

- No obstacles to using mobile branches

- No restrictions in dealing with informal enterprises

- Government incentives

3/2 RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A COMMERCIAL BANK

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c) Organizational Structure :

- Specialized microfinance dept.- Independent microfinance units.- Establishing semi independent units within

branches.- Flexibility for clients to graduate.- Flexibility of unit managers to develop products.- Centralized support.- Central performance monitoring system.

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d) Financial Methodology :

- No collateral is formally required- Commercial interest rates- New and flexible lending techniques- Sequential lending & simple procedures- Prompt loan collection procedures- Effective MIS system- Contractual insurance

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e) Human Resources :- Staff recruited from local communities- Adequate training- Well defined incentives system- Long term career perspective

f) Institutional Innovation :- Mobile banking- Well defined loan approval process

g) Cost Effectiveness :- Independent cost & profit centers- Centralized support & liquidity management.

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4/1 SUCCESSFUL FEATURESof a MICROFINANCE PROGRAM

The actual case of a “ Regional Development Bank” :The actual case of a “ Regional Development Bank” :

- Sustainability of the program of more than 20 years.

- Matching credit funds from its own resources after donors’ supportended.

- Providing employment opportunities to 400 university graduatesworking in its program.

- Program replicable to virtually all geographical areas within thecountry.

- Strong reflows of principal and market interest rates that arerecycled into the credit fund.

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- Interest rates and fees are set to cover all program expenses andprovide a return for reinvestment and expansion of services.

- Program operating throughout large of network of branches.

- The program attracted and increased savings awareness among itsclients.

- Program has provided a contractual life insurance cover to itsclients against unexpected adverse conditions.

4/2 SUCCESSFUL FEATURESof a MICROFINANCE PROGRAM

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5/1 Is Microfinance a Suitable Business Proposal for Commercial Banks?

- It’s relatively new.

- It developed due to:

• Increasing cost of funding.

• Increasing competition.

• Increasing risks in institutional products.

• Decreasing profit margin in traditional products.

• Decreasing banking service revenues.

• Decreasing market share of banks with many branches.

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* How did microfinance develop?* How did microfinance develop?

§ It became crucial to decrease the cost of funding.

§ A new requirement: to reduce risk through diversification.

§ The banks began to search for selling opportunities with higher profitmargins.

§ It became a must to obtain new customers.

§ The speed increased and the transaction costs decreased by thetechnology.

§ As a result, banks began to look for new sources of revenue otherthan traditional institutional banking products.

5/2 Is Microfinance a Suitable Business Proposal for Commercial Banks?

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5/3 Is Microfinance a Suitable Business Proposal for Commercial Banks?

* We believe that Microfinance changed the world.* A changed world changed the needs and the demand of the

customers.

û Will the Banks respond & take up the challenge?

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66//11 Is It a Revenue Earner forIs It a Revenue Earner forRetail Banking ?Retail Banking ?

- Competition is forcing many banks to look at new markets.

- Microenterprises represent approx. 90% of the private sector and account for approx. 50-55% of private employment.

- Diversify the banking services and products.

- Reach a wider customer base.

- Meet the tremendous demand for financial services, particularly loans among low income households.

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• Practices proved that microcredit borrowers are willing to payreasonable costs, in terms of both interest rates and fees, forconvenient and timely services.

• Microlending involves the development of long-term relationships.

• Use bank’s own deposit base to finance microfinance portfolios.

• Educate borrowers about important financial practices.

• The main direct sources of revenue are high credit interest rate, fees,and the mandatory savings deposit.

• The main sources of indirect sources of revenue are a life insurancefee, a penalty fee and prepayment fee.

66//22 Is It a Revenue Earner Is It a Revenue Earner for Retail Banking ?for Retail Banking ?

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CONCLUSION :CONCLUSION :

û Experience has proved that the poor can be served profitably on a large scale and a long term basis.

û Microfinance units can outperform mainstream commercial banking business in return and portfolio quality.

û Commercial banks have a major and instrumental role to play in the microfinance field.

û Microfinance has to be integrated in the country’s financial system.

“ MICROFINANCE IS PROFITABLE “ …………

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