Making microfinance work

Corporate governance dominates Day One of Asia Microfinance Forum in Colombo

By Cassandra Mascarenhas

Attracting over 500 delegates from 50 countries, the Asia Microfinance Forum 2010 convened by Asia’s regional microfinance association Banking With the Poor Network (BWTP) and organised by the Foundation for Development Cooperation kicked off its first Conference Day yesterday.

The forum looked to bring together leading microfinance practitioners, policymakers, financiers, academics and advocates as partners in order to achieve greater financial inclusion in Asia. Held at the Cinnamon Grand, there was not an empty seat available by the time the traditional opening ceremony began. Commencing on 12 October, the forum will go on for four days, wrapping up on 15 October.

Regulating Sri Lanka’s microfinance sector

The Deputy Governor of the Central Bank of Sri Lanka, Priyantha Fernando delivered the opening address at the milestone event.

“Many small scale entrepreneurs and businesses have now elevated themselves into medium and large scale companies”, he said while highlighting the importance of microfinancing to the economy of a country. However this was followed by a note of caution. “The growth of micro financing is a very obvious trend in Sri Lanka and while this is a welcome change it should be controlled and regulated”, Fernando cautioned.

Discussing the different ways in which microfinance institutions can be controlled by various government authorities, Fernando also brought up the new Microfinancing Act that is now being finalised as a means of settling various issues in the sector. The guidelines and restrictions imposed by this Act will establish controls which would in turn prove to be beneficial to customers and the economy assured Fernando.

The Credit Information Bureau of Sri Lanka is another entity that is being revamped in order to further strengthen the controls being put into place.

“After the recent extension of its services it also includes online access to banks and other institutions. The implementation of these proposals will further improve quality if the reports issued by the Bureau are favourable and deliver an accurate assessment of the creditworthiness of institutions which will in turn have a positive impact on the economy”, said the Deputy Governor.

 Other services to be implemented include the activation of mobile payments which would allow small value payments across banks to be undertaken by which fund transfers happen on the same day. By 2012, banks may go for a common ATM system – along with this comes the duty of the common stakeholder to educate the customers on shifting to electronic fund transfers for their own benefit.

Fernando also called for an end to unhealthy practices resorted to by the SME sector, for example, the issue of post dated cheques in order to deal with the problem of working capital shortage. Tactics of this nature lead to disputes and problems and tend to put a strain on the relationship between the bank and the customer. Therefore the Deputy Governor stressed on the importance of eradicating these and other unhealthy practices with concrete plans and enhanced and easy access to credit for all customers implemented in its place.

Achieving Financial Inclusion

The opening keynote panel on Conference Day 1 discussed the role of microfinance in achieving financial inclusion. Moderated by the Managing Director and Director of Risk, Citi Microfinance, Philip Brown, the panel was made up of the President and CEO, Women’s World Banking, Mary Ellen Iskenderian, the President and CEO of CARD MRI, Philippines, Dolores Torres and the Assistant Governor of the Central Bank of Sri Lanka, W.M. Karunaratne.

There is broad international agreement on the importance of financial inclusion as a policy goal for all governments, including the developing countries of Asia, which although has common characteristics is still a diverse segment and the panel looked to highlight the challenges of financial exclusion as well as scaling up the current business model and delivering products and services that would in turn contribute to financial inclusion.

Philip Brown, commencing with a brief fairly statistical presentation, revealed some interesting global financial facts.  He said as at 2009, it was estimated that 2.7 billion people in developing countries and a further 180 million in developed countries did not use formal financial services, and that when speaking of areas of reform amongst which are categories such as consumer protection, SME finance promotion and improving finance literacy, microfinancing came in at fourth place on this list.

The general concept of financial inclusion brings up the issues of how an institution can actually engage and retain clients. The microfinance model which is made up of the three aspects of clients, distribution products tends to differentiate from the general somewhat due to its engagement of the client but regulation plays a key role in both business models.

Financial inclusion also includes making appropriate financial products and services accessible to individuals as well as making sure that said individuals have the skills, knowledge and understanding to make the best use of these products and services.

The objective of microfinancing could be briefly and simply summed up as delivering the broadest range of appropriate products as efficiently as possible to the highest number of people at the lowest possible price.

A common dilemma faced by most micro financing institutions is striking a balance between having a very comprehensive product array and being out to the total population.

The microfinance segment in Asia is of course a substantial one, with South Asia alone accounting for more than 50% of borrowers worldwide. The overall microfinance loan portfolio was calculated to be around $64 billion as of 2009.

Women and microfinance

This was followed by an informative talk by Mary Ellen Iskenderian who spoke of the role that micro financing plays in the lives of women in low income groups globally.

The President and CEO of the Women’s World Banking (WWB), she leads the global team which is based in New York providing hands-on technical services and strategic support to 40 top-performing microfinance institutions and banks in 28 countries in Asia, Africa, Eastern Europe, Latin America and the Middle East. It is the world’s largest network of microfinance institutions and banks in terms of number of clients, serving more than 24 million micro entrepreneurs, 80% of whom are women.

“Financial inclusion and microfinance will only be able to happen if a third strength of microfinancing comes into play — sustainability, in the sense where such institutions should be able to produce an array of products and services in order to actively play a role in financial institutions”, she stated.

Microfinance can play an important role in this global push towards greater financial inclusion with the role to reach the unbanked poor directly tying in with the need to reach out to women as 70% of the unbanked poor in the world consist of women.

Women do face special challenges as they lack mobility in many countries therefore their ability to bank is severely restricted due to busy schedules, household responsibilities, taking care of children etc.

Although quite a few women in many countries may have access to finance, their ability to control the money is a very different thing; so the WWB now looks to design products with those specific concerns in mind.

There is also a huge rush of commercial capital coming into the sector and this influx has in turn brought about concerns. A great untapped demand of people still exists, of those people who are waiting for further microfinance products and services.

WWB has performed some interesting research where they looked at 27 microfinance institutions ranging from NGOs to regulated financial institutions. Those companies that had made the transition from NGO to regulated financial institutions enjoyed several benefits such as improved governance, transparency, being able to attract further capital sources etc.

However if looking at these same institutions a year prior to their transition, one would notice at the time, 88% of their clients consisted of women whereas four years into the transition this falls to about 63% although their figures of women bankers would have increased due to an overall increase in clients, allowing one to come to the conclusion that the percentage of women clients served falls as the institution moves upmarket.

“There is a very strong trend in the industry, commercialisation in particular which is warring against the reach out to women and poor and institutions need to see how they can be more supportive to each other rather than warring”, Iskenderian stressed.

Most microfinance institutions also do not realise the important role that marketing plays in building trust for institutions and therefore tend not to invest in it. This however means that they in turn lose out on market research which would allow the companies to design products to suit their customers’ needs as well as assist in capacity building which is a major factor in the successful development of microfinance institutions.

A local viewpoint – The Philippines and Sri Lanka

Dolores Torres in her presentation gave a quick rundown of CARD Bank, Inc. based in the Philippines of which she is one of the founding board members.

 “We were able to initially launch a credit and savings system initially for both men and women but then the men failed to pay; so we focused simply on the women but even then we were losing although we let them manage their businesses the way they wanted”, she said in her opening lines.

Following in the footsteps of the Grameen Bank and adopting their policies, they were soon back on track and were able to establish themselves as a formal financial institution 100% owned and managed by the clients themselves. Torres detailed research undertaken amongst their clients in order to come out with products tailor made to their specific needs.  Today CARD Bank, Inc. has been able to grow to $1.1 billion as of June 2010, their growth portfolio expanding from $46.7 million in 2007 to $92.9 million in 2010 and boasts a customer base of 365000. Growth in savings has increased from 35% in 2008 to 65% in 2009 and caters to mostly women who make up 98% of their base.

Assistant Governor of the Central Bank followed with a quick statistical breakdown of the current macroeconomic situation in Sri Lanka, including the country’s performance in the post war era and the efforts to meet the challenging but achievable targets posed by the microfinance sector as the country on several ways is now ready to face the challenges.

The audience speaks out

The Q and A session that came right after this had the panel speakers answering many questions about the work undertaken by both Women’s World Banking and CARD Bank, Inc.

One member of the audience called for the clarification of the term financial inclusion asking if it also included increasing outreach, product diversification, creating new product schemes and then questioned the panel on how financial inclusion could be achieved on a broader context.

“All of what you mentioned is inclusive in financial inclusion. If we are talking about bringing the millions of unbanked people to the financial sector, MFIs are not the only institutions but they are the institutions that are touching that segment most effectively, but all of what you mentioned should be looked at”, confirmed the President of the WWB.

Another question raised by a Sri Lankan in the audience was the pressing need for subsidised credit for micro financing institutions because the initial stages and outreach programs can prove to be very expensive. The question was taken on by Karunaratne who readily admitted that this has been an issue for some time however assured the issue would be addressed in the micro financing Act that is to finalised soon.

“Unfortunately getting outside funds and additional funding is a problem due to our Exchange Control Act which does not provide a provision for this. We have complained about this issue and are now in negotiations to find a suitable solution. We understand that only established commercial banks and institutions to get low rate funds if any and we accept this issue is at large but we can assure you that action will be taken”, the Deputy Governor assured.

Although unable to give an exact solution or response to the question at the moment, he did call to the micro financing industry to step up and come forward with some suitable solutions of their own.

Governance and Management

After breaking up for lunch, the crowd gathered once again for the plenary session on governance and management. This was moderated by the Managing Director and CEO of HNB, Sri Lanka Rajendra Theagarajah and consisted of three panelists – Regional Representative for South Asia, CGAP, USA, Greg Chen, CEO of Microfinance Institutions Network, India, Alok Prasad and General Manager and CEO of SANASA Development Bank, Sri Lanka Nimal Mamaduwa.

 The three panelists opened the session by giving brief presentations on the subject. Greg Chen touched on governance on a market level without limiting it to just a particular segment, discussing examples of various successful MFIs in South Asia. He also discussed four countries namely Bosnia and Herzegovina, Morocco, Nicaragua and Pakistan as examples of how growth and market development could bring about risks from which these four diverse markets suffered.

Nimal Mamaduwa gave a detailed description of the SANASA Development Bank’s early beginnings and how it had grown to what it is today.

Alok Prasad wrapped up the presentations with an insightful and quantitative chat about corporate governance amongst Indian companies.

The first question brought up at the Q and A session following the panel discussion was regarding attracting talent to the three different segments that the MFIs can be classified into.

Prasad acknowledged that the different segments would attract different talents pools, for example Tier One would find it much easier to find talent. When one goes to Tier Two, the talent at the top levels of the organisation tend to be strong but weaken towards the bottom of the structure. Tier Three, he admitted does face challenges as institutions at this level tend to be very small.

The next question posed was about how one could entice a professional to spend time in a smaller MFI, at which Prasad reminded that one should not overlook some of the benefits and professionalism that could come from of the smaller MFIs especially in India. “It is a challenge for smaller institutions to find professionals but the benefits of such organisations should not simply be dismissed”, said the CEO.

Answering yet another question about the role the legal system plays in management and governance, the panel drew upon examples in South Asia itself — societies that heavily dominate in Bangladesh and microfinance banks in Pakistan where board members have to be approved by the Central Bank. A problem faced by many institutions though are figurehead board members there as a name to add to the board but do not participate in the activities of the organisation. They did state that governance needs to be legislated in terms of the gap posed by MFIs that are not listed and therefore not regulated.