What do we know about MFs?

Introduction to MF June 25, 2021 1

 We know microfinance has already transformed the lives
of millions of people, many of them womenby:
 helping them build businesses,
 increase incomes,
 acquire household equipment,
 Reduce their vulnerability in times of economic stress,
 Lift themselves and their families out of poverty.
 We also know that microfinance offer low repayment rates
that big banks and other financial institutions envy. 

Introduction to MF June 25, 2021 2

 As recently as a few years ago, the term
“microfinance” was easily understood: a
credit methodology that employs effective
collateral substitutes to deliver and
recover short-term, working-capital loans
to micro entrepreneurs (or potential micro
entrepreneurs).  

Introduction to MF June 25, 2021 3

Challenges & Visions of MF June 25, 2021 4
 VISION

 Diverse Financial Services

 Diverse Institutions and Methodologies

 Improved Information

 Sound Policy and Legal Environment

Challenges & Visions of MF June 25, 2021 5

 Class work

 What are the challenges that MFs face?

Perceived High Risk of Micro Entrepreneurship and Small
High Costs Involved in Small Transactions/Microlending
Lack of Debt and Equity Funds for MFIs to Pass on to the

Poor
Difficulty in Measuring the Social Performance of MFIs
The poor’s inability to offer marketable collateral for loans
Poor institutional viability of micro enterprises
Lack of knowledge about microfinance services

June 25, 2021 7

 Diverse Institutions and Methodologies/Delivery
Systems
 Achieving large-scale sustainable microfinance
requires engaging a more diverse range of delivery
organizations with different objectives, services, and
needs for subsidy.
 Strong microfinance NGOs must continue to be
strengthened and their successes replicated
wherever possible.
 In some countries, however, reaching scale may
mean using national distribution networks of
selected state banks or credit unions. In others, it
may mean using alternative delivery mechanisms.
 Experiments with alternative delivery mechanisms
such as post offices, supermarkets, beverage
suppliers, or manned telephone booth networks,
have already begun and may offer additional
prospects for reaching large numbers.

Challenges & Visions of MF June 25, 2021 8

 Diverse Financial Services
 Poor people need a wide array of flexible
financial services.
 A demand-driven approach will encourage
portfolio diversity by offering the poor savings,
insurance, and cash transfer services in
addition to various loan products.
 Client-satisfaction surveys of microfinance
customers and field research on market
demand among the poor, suggest that they
believe too few financial services are available
and that terms are often inflexible. 
 Customers seek a wide array of flexible
services such as individual loans, deposit
services, transfer payments, and insurance.

Challenges & Visions of MF June 25, 2021 9

 Improved Information
 Ensuring the availability of high-quality,
reliable information on the financial and
social performance of MFIs is critical to
integrating microfinance into the formal
financial sector.
 Accurate information will raise the
quality and lower the cost of supervision,
audits, and ratings; encourage greater
flows of commercial and private funding;
and allow microfinance providers to track
their performance against one another.

Challenges & Visions of MF June 25, 2021 10

 Sound Policy and Legal Environment
 Rather than act as direct providers of
financial services, governments need to
create an environment that encourages a
diversity of institutions and financial
products to serve the poor.
 Sound policy and laws must safeguard
poor people’s money, promote
competition, and develop the technical
expertise of their supervisory and
regulatory authorities.
 An example is eliminating interest-rate
caps that hamper long-term viability.

Challenges & Visions of MF June 25, 2021 11

What works better for MF clients?
Whose task is it?

Designing MF products June 25, 2021 12

 Challenges Opportunities
• Huge unmet • Increase client
demand for wider outreach and
range of services impact
• Poor client • Improve client

retention rates loyalty and

• Existing products
retention
• Ensure permanent
not viable
and sustainable
access
une 25, 2021 13
Designing MF products
 Informal systems
◦ Family
◦ Neighborhood networks
◦ Moneylenders
◦ Savings clubs
 Cash under mattress
 Assets used as savings
 Credit from input suppliers
 For some:  institutional services offered by
financial cooperatives, post banks, MFIs, etc.

14 June 25, 2021 Designing MF products

 What are the limitations of the
available financial services?

Challenges & Visions of MF June 25, 2021 15

 High costs of informal services:
◦ Moneylender rates are exorbitant
◦ Buying inputs on credit is far more
expensive than in cash
 Risks of savings in kind (i.e., crops, livestock):
◦ Fluctuation in commodity prices
◦ Destruction by fire, insects, etc.
◦ Theft

16 June 25, 2021 Designing MF products

  Inflexibility of rotating savings/credit circles
◦ Rigid amounts and timing
◦ Small scope due to limited trust
◦ Not responsive to emergency needs/sudden
opportunities
 Limited services offered by financial
institutions
◦ Narrow range of financial products
◦ Inflexible terms

17 June 25, 2021 Designing MF products

 Product development is not a donor
activity
 Financial institutions should follow a
systematic process before engaging
in product development
 Ensure capacity and commitment of
financial institutions
 Measure success with appropriate
indicators
18 June 25, 2021 Designing MF products
 Howcan Donors support product
development?

Challenges & Visions of MF June 25, 2021 19

• Provide flexible innovation grants
• Look for demand-driven partners
• Support necessary organizational changes
• Offer technical assistance for testing new
products
• Reward performance and outreach
• Support information exchange
• Support regional and global initiatives

20 June 25, 2021 Designing MF products

 Credit is a useful way to
save but can be
expensive, inflexible
When poor people and inaccessible
have a choice,
they choose Saving safely provides
to save poor people with a
far more often cushion against shocks
than they choose
to borrow Saving may be more
important than credit in
helping raise incomes
and reduce risk
Designing Saving products 22 June 25, 2021
 Life Cycle Events Investment
• Birth Opportunities
• Education • Business
• Marriage
investments
• Funeral • Purchasing land
• Recurrent festivals and other
productive assets
• Home
Emergencies
improvement
• Sickness
• Injury
• Theft
• Natural disasters
Designing Saving products June 25, 2021 23
 Informal savings mechanisms
offer easy access and
convenience

 Invest in-kind (livestock,

jewelry)
 Hide cash at home (under a
mattress, buried in backyard)
 Keep savings with neighbors
 Participate in informal savings
groups

Designing Saving products 24 June 25, 2021

  Eradicate extreme poverty and hunger
 Achieve universal primary education
 Promote gender equality and empower women
 Reduce child mortality
 Improve maternal health
 Combat HIV/AIDS, malaria, and other diseases
 Ensure environmental sustainability
 Develop a global partnership for development

MDGs and MF 26 June 25, 2021

 See the attached

Challenges & Visions of MF June 25, 2021 27

 Material deprivation
(low food consumption, poor housing)

Lack of
Low human
voice &
development
(education, P O V E R T Y ability to
health) influence
decisions
Acute vulnerability to adverse shocks
(illness, economic crises, natural
disasters)

MDGs and MF June 25, 2021 28

 Access
Accessto
tofinancial
financialservices
services

•Increase
Increase && diversify
diversify incomes
incomes
•Build
Build assets
assets

•Plan
Plan for
for the
the future
future
•Make
Make choices
choices

•Increase
Increase food
food consumption
consumption
• Invest
Invest in
in education
education & health
health
•Invest
Invest in
in housing,
housing, water,
water, sanitation
sanitation

MDGs and MF June 25, 2021 29

 Regulation
The set of government
rules that apply to
microfinance

Supervision
The process of
enforcing compliance
with those rules

MF Regulation and Supervision June 25, 2021 31

 Should MFs be regulated or not?

Challenges & Visions of MF June 25, 2021 32

 Where safety of deposits is not at risk
 Where small or remote organizations
make effective supervision too
expensive or alternative savings are
riskier for clients

MF Regulation and Supervision June 25, 2021 33

 Removes policy barriers to the profitable
provision of loans, savings, insurance and
pension services to the poor
 Integratesmicrofinance into the financial
sector by allowing competent providers
access to deposits and commercial funding
sources
 Adjustsbanking requirements that would
impede profitable provision of microfinance
sources

MF Regulation and Supervision June 25, 2021 34

 The supervisory body responsible for commercial
banks is usually the most appropriate for microfinance
 Delegation has occasionally been successful when
central banks have delegated some supervision to third
parties, while retaining authority and oversight
 Self-supervision has not been effective when done by
bodies controlled by the supervised institutions
 Prudential supervision of savings and loan
cooperatives should be done by a specialized financial
authority, not by the government agency responsible for
all cooperative

Challenges & Visions of MF June 25, 2021 35