1、1,The Centre for Micro Finance A comprehensive approach of Microfinance,Karachi November 1st, 2006,2,Agenda,Microfinance in India: an overviewThe Centre for Micro FinanceResearch UnitMFI Strategy Unit,3,Microfinance: who are the targeted clients?,Poor and vulnerable households economically at the Bo
2、ttom of the Pyramid,How can microfinance improve their lives?,4,Microfinance: what is it?,whereas objectives are,Often perceived as,Suite of financial services Thrift / savings Credit Insurance and Investments Transfer Payments and RemittancesGroup and individual lendingSustainable activity,Micro-cr
3、editGroup lendingSocial/charitable activity,5,The challenge ahead: demand vs. supply gap to bridge,Supply,Demand,60% of MF services in South,Several un-served areas, 2M Households reached,500M un-served poor,Fast growing population and overall economy,Range of risks to be covered,Missing market link
4、ages / employment opportunities,Limited non-credit services,Improve access,Increase impact,Largely urban,Mostly rural,$1.5 Bn*,$50Bn,* Including loans against gold,6,Information Asymmetry No collateral No credit history Difficult to evaluate enterprises potential success,High Costs of Intermediation
5、 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 assessmentHigh transaction costs,How t
6、o release these constraints?,7,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 profess
7、ionals MFI Entrepreneurs development,Research,Assess and Increase impact on poverty alleviation Experiment and improve products,8,Agenda,Microfinance in India: an overviewThe Centre for Micro FinanceResearch UnitMFI Strategy Unit,9,CMFs objectives and mission,Established in 2005CMFs objectives To ad
8、dress knowledge gaps in micro finance sector Experiment on ground solutionsCMFs mission Systematically research links between access to financial services and participation of poor in larger economy Participate in maximizing access to financial services,Research on micro finance and livelihood finan
9、cing (RU),Strategy building for MFIs (MSU),10,CMFs Objectives,Research,Influence practice,Advocacy,Strategy building,Training,11,MSU and RU re-enforcement loop,Strategy (MSU),Research (RU),Impact of microfinance Impact Evaluation Studies Economics of micro enterprise Insights on HH “financial behavi
10、or“ Constraints on HH productivity Experimentation on product design Micro finance transaction costs,MFIs Strategy for growth Definition and implementation of innovative business models Market research, creation of linkages MFIS best practices sharing Design/test of new financial products Capacity b
11、uilding capital structure, HR, MIS, processes, customer segmentation, governance,12,CMF collaborates with existing active players in the microfinance sector,Manufacturing Companies,Insurance Companies,Funding Organizations,MFIs/NGOs/Trust,Banks/FinancialInstitutions,Universities/ Research Institutio
12、ns,Regulators/ Policy Makers,Government (Central and State),SMEs,CDF,CIRM,CAFS,CMF,13,Agenda,Microfinance in India: an overviewThe Centre for Micro FinanceResearch UnitMFI Strategy Unit,14,Understand better,Why are recovery rates so high? What is the financial behavior of clients? What is the impact
13、 of microfinance?,Improve qualityof services,New and innovative products Maximize the impact of credit through other services,Improve organizations Information management Role of HR policy and staff incentives More cost-effective processes,Goals of Research is to maximize microfinance impact through
14、 3 axes,Alternative channels SHGs Revive RRBs New channels (Kiosks, ATM, CF),Policy Regulation Competition and information sharing,Expand access,15,These objectives translate into 4 Research areas to maximize microfinance impact,Microfinance plus,Finance and Organizationalissues,Policy,Impact and pr
15、oduct design,1,2,4,3,Maximize impact On client,16,Impact and experimentation,“Micro-credit has been changing peoples lives and revitalizing communities”UN, 2005, Year of micro-credit,1,Impact,Experimentation,“The full promise of microfinance can only be realised by returning to the early commitments
16、 to experimentation, innovation and evaluation”Morduch 1999,Can we put numbers on this claim? Are there more cost-effective ways to achieve this goal?,17,Product design: credit,Selection,Monitoring,Enforcement,Individual/group liability Self/MFI selection Guarantors Collaterals Interest rate,Repayme
17、nt schedule Communication strategies Loan size Interest rate,Design the most cost-effective products by varying credit product components,Within group monitoring Staff supervision,1,18,What do low income clients want?,Insurance Weather Life and Health Livestock,Flexible loans Small initial sizes Lar
18、ger subsequent loans Longer terms,Housing loans Build new homes Improve existing homes,Savings,Group based Individual loans,Remittances products,Product diversification and communication strategies,1,Which delivery channels/communication strategies are effective?,19,Improve communication strategies,
19、How do households face shocks and risk? What drives savings and credit behavior? Why do people default (and why dont they)? Why dont households adopt the most profitable activities? Why dont people adopt useful financial services?,Design the most effective communication strategies,1,20,Microfinance
20、Plus: address contextual constraints,?,Impact,Health,infrastructure,entrepreneurship,Access to Financial services,Reduce risks of MFIs by combining microfinance with other development interventions (health, financial training) Provide products / services through credit,2,inputs,21,Organizational iss
21、ues: cost and profitability,Bank,Transaction?,Micro-loan,9%,25%,Return?,How to reduce transaction costs? Show investors risk return performance of micro-loans,3,22,Organizational and financial issues,What is the debt capacity of clients? Can they absorb higher loan sizes? How can MFIs analyze better
22、 their clients debt capacity and capacity to repay? Role of MIS in info management,Information management,Organizational structure,Processes,What organizational improvements will help MFIs to sustain themselves and to grow faster? What is effect of HR policies (ex, staff incentives),How can MFIs mak
23、e their business processes more efficient: activity-based costing What are the flows and successes during the implementation of the intervention? How to improve project implementation?,Financing,How to secure financing for MFIs? Start up capital Long-term loans Can securitization help access cheaper
24、 financing for MFIs and how can it be done?,3,23,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 a credit bureau be set up? How to make MFIs more transparent? How to improve microfinance r
25、eputation?,4,24,Microfinance plus,Finance and Organizationalissues,Policy,Impact and product design,Effect of staff incentivesTransaction costs break-up in MFIsActivity based costing For MFIs,Effect of smokeless Chulhas in Gram Vikas, OrissaImpact of treated bed-nets provided through Credit in Oriss
26、aDelivering Nutrition supplements through Microfinance groups,Maximize impact On client,Impact of micro-credit In Spandana, HyderabadExperiment on repayment schedules in VWS, Kolkota and KAS, OrissaImpact of weather Insurance and willingness to pay,Credit information Sharing in IndiaRegulatory imped
27、iments For micro finance,Research projects: examples,25,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
28、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 Ro
29、ck Rock Magleby-Lambert, Boston University Total immersion program in Finance and development,Panel database,Seminar series,Academics and practitioners Foregone seminars Prof Ashok Jhunjhunwala, IIT Chennai Prof Vaidyanathan, Madras Institute of Development studies Prof Sendhil Mullainathan, Harvard
30、 GN Bajpai, ex chairman of SEBI Shekhar Shah, World Bank,Courses,26,Agenda,Microfinance in India: an overviewThe Centre for Micro FinanceResearch UnitMFI Strategy Unit,27,MSU: Objectives and areas of work,Advice MFIs to define and execute a growth strategy by addressing their main challenges Horizon
31、tal growth (Same Products & Same Customers Profile) Vertical growth (New Products &/or New Customers Profile),Refine Business strategy and model,Improve internal Organizational structure,Support MFIs growth (vertical & horizontal),28,MSU: Areas of work with MFIs,Business strategy,Organizational stru
32、cture,3y strategic plan definition Competitive position assessment (SWOT analysis)Marketing strategy Customer segments to target Products to develop to serve these segments (IL, insurance) Portfolio managementMarket linkages creation Leverage of ICICI MFIs and corporations clients Thematic consultat
33、ions,Capital structure (equity/debt) and access to financial markets (VC, securitization)HR recruiting, training, incentivesOrganizational design MIS Processes of operations Governance,2,4,1,3,29,Reduction of MFIs cost of funds: Supply-demand match assessment,Supply,Demand,Identify potential assets
34、to securitize/buy out,Evaluate investors risk/return appetite for MFIs paper,Check demand / supply requirements match,Facilitate / structure the deal,1,30,4 options to explore and 4 types of players to interview to reduce MFIs costs of funds,1,Portfolio Securitization,Bond issue,Portfolio Buyout,Dir
35、ect medium/long term loan,Foreign banks,Domestic banks,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 req
36、uirement (FLDG/SLDG)? Investment seasonality (PSL requirement)? Investor reporting / monitoring requirements? Willingness / capacity of the MFIs to receive funds and comply with investors requirements?,Impact on MFIs CoF?,31,HR training, recruiting, incentives,Potential partners,Organizational struc
37、ture,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 mngtTraining for middle mngt & field staffIncentive schemes,IFMR centers (CAFS, insurance) ICICI trainings HBS, Duke,
38、IIM,Coordinate existing providers MicroSave, Care India, Basix school of livelihood, EDA Set up new facilities (if required),Cocoon?,2,32,Training / capacity building for MFIs: questions to be answered,Identify & prioritize immediate and recurring training needs at top/middle management levels and f
39、ield staff for top 10 MFIs Market review (cost, location, duration) of the existing facilities in India (Priority1) and internationally (Priority2) Identify gaps for supply to match demand = use MicroSave (CMF partner) study as a starting pointSet up new entities to fill these gaps (if necessary)Exp
40、lore funding solutions for MFIs to be trained= Interactions with top 10 MFIs , mainly CEO and HR director = Interviews of main training institutions and financial universities in India and abroad (HBS),2,33,MIS: partnership with FINO,3,To develop a common end to end delivery platform shared across I
41、ndian 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 for MFIs,Benefits for investors,To reduce initial CAPEX required per MFI To improve product depth and
42、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,Current status,Currently sized for 12-50M customers Proof of concepts co
43、mpleted, final contract negotiations (IBM/iflex) Entire infrastructure, hosting, operations outsourced First phase launch with 5 partners by May 2006,34,Market linkage creation: approach,Corporates,MFI,Local presence in identified region? Willingness/Capacity of MFI to Provide customized financial p
44、roducts? 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? Quali
45、ty? 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 / NGOs,Market dynamics,4,35,Mar
46、ket linkage example: cattle feed distribution through 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,Expec
47、ted Impact,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 and
48、educating 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 growing milk demand and therefore remains a m
49、arginal 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 marginal income: 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 the areas where Spandana (MFI with 700,000 clients) operates.,
