what kinds of banks? government banks development banks foreign-owned banks cooperative/mutual banks...
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What kinds of banks?
• Government banks
• Development banks
• Foreign-owned banks
• Cooperative/mutual banks
• “Southern” banks
Bank ownership: Africa and ROW
Bank ownership (Africa)
Equally shared
19%
Mainly local21%
Mainly govt7%
Mainly foreign
46%
Foreign+Govt7%
Bank ownership (Rest of Developing World)
Foreign+Govt9%
Mainly foreign
29%
Mainly govt12%
Mainly local25%
Equally shared
25%
Note prominence of foreign-owned banks in Africa
Estimated impact of foreign bank entry on domestic bank performance
-2
0
2
Net interest margin
Non interest income
Profit before
tax
Over-heads
Provisions
Percent of total assets
Nigeria’s DFIs in 2000
Annual losses=9% total assets
Cumulative losses=45% of total assets
Negative net worth=35% of total assets
78% of portfolio non-performing
Nigeria’s DFIs in 2000
Started vigorous and promising
But made poor loansNever built a strong credit appraisal capacity
Charged insufficient spreads
Incured excessive FX risks
As NPLs started to spiral, cash dried-up
Even those who could repay stopped given new lending prospects poor
Comparing the share of foreign and state ownership in crisis and noncrisis countries
Foreign-owned banks State-owned
banks
Noncrisis countries
Crisis countries
0
10
20
30
40Percent of total assets
Sources of banking crisis
• Government interference– Especially in countries with poor governance
• Market: Boom and bust– East Asia crisis 1997-8; Structured finance crisis,
2007-8
• Bad management and fraud– Venezuela, 1994, Dominican Republic 2003
Share of different intermediaries in outreachAll accounts
Postal or savings bank48%
Other bank / nearbank
21%
Credit Union or Coop21%
NGO10%
Africa
Share of different intermediaries in outreachBorrowers
Other bank / nearbank
35%
Credit Union or Coop17%
NGO48%
Africa
Share of different intermediaries in outreachAll accounts
Postal or savings bank48%
Other bank / nearbank
41%
Credit Union or Coop5%
NGO6%
World
Share of different intermediaries in outreachBorrowers
Other bank / nearbank
75%
Credit Union or Coop2%
NGO23%
World
Is microfinance different?
• Scale
• Subsidy
• Style
A few relatively large MFIs dominate outreach (of the institutions reporting to the Microcredit Summit)
Top 10Next 10
Next 100
Remaining 2800
Beck, Demirguc-Kunt and Honohan, 2008
MF likely helps poverty
• But scarcity of reliable evidence is not widely recognized
• Cf. Dichter and Harper: What’s wrong with microfinance?
Microfinance penetration and poverty headcount
0
1
2
3
4
5
6
7
0 20 40 60 80 100
Poverty headcount (% < $2 a day)
Mic
rofin
ance
pen
etra
tion
(%
po
pula
tion)
Direct impact channels of MF on poverty• Insure against current income falling below
poverty level• Reduction in cost of making small payments• Return to credit-financed investment• Insurance allowing high-yield high-risk ventures
…channels can be slow and complex (cf. child labor channel)
Difficulty of impact meta-analysis
• Multiple indicators allow cherry-picking by secondary sources…
…But hinder aggregation across studies
• Researchers don’t report rates of return (even though they may be very high)
• Technical problem: selection bias
Example: Bolivia study
Primary report cited 14 indicators; five significant, of which four unfavorable (only one favorable)
But reputable secondary sources cherrypick the one favorable finding: “incomes of 2/3 of clients had increased after joining the program”
http://www.cgap.org/docs/FocusNote_24.pdf
Selection biases
Success of household in accessing credit is already an indicator of otherwise unmeasured abilities - leads to upward bias of credit impact (solved by Coleman)
But on the other hand
NGOs may target disadvantaged areas - leads to opposite bias (solved by Pitt & Khandker)
Scale and MFI viability
MF remains fragmented with most individual MFIs operating well below efficient scale.
Larger firms (# clients, or total assets) tend to be more profitable (99% significance).
A doubling of scale implies between 6 and 10 percentage point improvement in the self-sufficiency index (income as % expenses)
Small loan size (in absolute terms) reduces profitability
Subsidy/Interest rates
• Is present in many if not most MFIs
• Any MF subsidy should be evaluated on its effectiveness relative other grant finance
• MF subsidies may constrain MF development– discouraging entry of the unsubsidized and– vulnerable to fluctuations in aid
• Are government-imposed interest rate ceilings good for the poor?
Interest ceilings: the simplest story
There is no alchemy
Enormous diversity in style but…
…the essential features of microfinance technology are banal!
Common sense, cost control & skilled attention to the demands & sensitivities of the local clientele the main requirements, along with the ambition to achieve scale.
The constraining factor
• Even if viable, MF is typically not high-profit
• It is intensive in managerial/entrepreneurial resources that are scarce in LDCs
• And these resources are also highly rewarded in other sectors
(Hence predominance of charitable sponsors)
Other measurement issues
Displacement effects
Decline in income variance could lower poverty rate even if mean (group) income does not increase
Access to credit could worsen poverty (e.g. funds squandered or appropriated by menfolk leaving rest of family overindebted)
Is finance-intensive growth pro-poor (or does the rising tide just raise all boats)?
Two views and some evidence
Not mainly for the rich
The optimistic view (cf. Rajan and Zingales: Saving Capitalism…from the Capitalists):
• Undeveloped financial system is “uncompetitive, clubby, conservative”
• Developed financial system can – Undermine the power of incumbent firms– Help households and small producers escape the
tyranny of middlemen
Not mainly for the rich (2)
The pessimistic view:
• Requires minimum scale/wealth in order to benefit from formal finance (Greenwood and Jovanovic, 1990)
• More financial system might mean that those excluded fall back even further?
Poverty and per capita income
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
0 20 40 60 80
% below $1 a day
GD
P p
c
Pro-poor financial development?
Honohan, 2004
-25
-20
-15
-10
-5
0
5
10
15
20
25
1 1.5 2 2.5 3 3.5 4 4.5 5
Financial development (bank credit to private sector as a % GDP, log)
Pov
erty
hea
dcou
nt (
%)
unex
plai
ned
by m
ean
inco
me
etc
Access to FinanceDistribution of countries in each region
0
10
20
30
40
50
60
70
80
90
100
AFR EAP ECA LAC MNA SAR
%
Supplementary reading: Topic 3
• Demirgüç-Kunt, Asli, Thorsten Beck and Patrick Honohan. 2008 Finance for All? Policies and Pitfalls in Expanding Access (Washington DC: The World Bank). http://www.worldbank.org/financeforall. Overview and Summary
• Honohan, Patrick. 2004. “Financial Development, Growth and Poverty: How Close Are the Links?” World Bank Policy Research Working Paper WPS 3203.
• Honohan, Patrick. 2008. “Money Matters for Poor Countries.” Trinity College, Dublin, Mimeo