Archive for: Regulation

With around 20 million borrower accounts estimated for March 2012, India still has one of the largest microfinance industries in the world – even though the number is much lower than 32 million in October 2010 when the microfinance crisis began.  However, in March 2012 it also had the dubious distinction of having perhaps the worst portfolio quality in the world (at the national level).  Since October 2010 commercial bank lending to MFIs, which made up over 70% of their funding, has been consistently drying up mainly because of perceived political risk. Read the rest of this page »

Financial inclusion today is about financial markets that serve more people with more products at lower cost. The term “microfinance,” once associated almost exclusively with small-value loans to the poor, is now increasingly used to refer to a broad array of products (including payments, savings, and insurance) tailored to meet the particular needs of low-income individuals. Two separate but related developments have spurred this more holistic approach to financial inclusion. First, a growing body of research is demonstrating that poor people use and need a wide array of financial products, not just credit. Second, innovative lower cost business models—especially electronic and agent banking models—hold the promise of reaching unbanked populations with a fuller range of products better suited to their needs.

Different products present different risks and delivery challenges, and it is unlikely that a single class of service providers will effectively provide all the products poor people need. Financial products have delivery, intermediation, and risk mitigation challenges that often can be more efficiently managed through a number of specialized institutions acting together rather than one institution acting alone. Skill sets, capacities, and tools needed to deliver products on the liabilities side of a bank’s balance sheet are different than those needed to deliver products that fall on the asset side. As a result, businesses tend to develop specialties on either side of the balance sheet. Further, businesses providing the service to the end consumer are often not specialized in managing other parts of the value chain.

Read the rest of this page »

Poor families in the informal economy need access to financial services as much as wealthier households, if not more so. Their income and expense streams are more irregular, and they have less of an economic cushion to begin with. Yet an estimated 2.7 billion working-age adults globally at the base of the economic pyramid have no access to formal financial services and, instead, have to rely on informal financial mechanisms that are typically incomplete, less reliable, and considerably more expensive. Read the rest of this page »

The year 2011 was not particularly easy for microfinance institutions (MFIs) in Eastern Europe and Central Asia (ECA).  Though overall many managed to overcome crisis, many MFIs have not yet returned to their pre-crisis growth rates, and delinquency levels were still higher last year than in 2007. One of the issues commonly faced has been client over-indebtedness in the most saturated markets, such as Azerbaijan, Read the rest of this page »

Much – too much – is hoped for from the Indian Microfinance Bill.  But this is nothing new in the global annals of microfinance.  For more than a decade stakeholders across the spectrum in countries around the world have pinned hopes on ‘just the right microfinance regulation’ solving problems only indirectly affected by regulatory policy.  In India, no kind of regulation will miraculously rebuild the repayment culture among the poor of Andhra Pradesh or mitigate over-indebtedness there.  It is not even clear whether the current legislative proposal could conclusively settle the jurisdictional battle between the central government and the AP state government that has fueled the crisis, or prevent other state governments from testing the limits of their authority to regulate financial sector matters when it suits their particular political purposes.    Read the rest of this page »

The prices we charge the poor are far from transparent.  How did we get here?
In most countries, pricing in microfinance has been extremely opaque for many years.  MFIs are generally selling products in markets lacking Truth-in-Lending legislation.  In the absence of that regulation, a small number of MFIs are motivated to mask their price, a few more follow suit, and then the resulting “downward spiral” traps nearly all MFIs into complicated pricing schemes.  The problem of keeping your price transparent is obvious — it’s difficult to show a true price that looks higher than the competition when, in fact, it is lower than that charged by others.

How complicated have we gotten?  The examples in Figure 1 show a variety of ways a loan’s price can be hidden.  The truly transparent price looks much more expensive than the other products, when the reverse is actually true.  The MFT “Transparency Index” at the bottom shows the amount of the true APR that is communicated through the nominal interest rate. 

What results from non-transparent pricing?  Since prices generate profits, non-transparent prices can be a means to generate very high profits by:  1) pulling clients away from lower-priced competitors, and 2) leading consumers to over-consume.  Transparent pricing corrects this market imperfection by increasing price competition and more informed decision-making by other stakeholders.

How do we calculate transparent pricing? Read the rest of this page »

The lean season¹  monetary policy statement has finally signaled Reserve Bank of India’s (RBI) intent to engage in the regulation of Microfinance Companies from a customer protection perspective.  These regulations would apply to 56 NBFCs (against a total of 264 MFIs that reported information to Sa-Shan²  last year).  But these 56 institutions account for an estimated 85% of clients and loan volumes.

Breaking down the regulation

This policy for MFIs is based on the considerable work done by the Malegam Committee and the sector wide consultations that followed. While the committee’s recommendations were positive in terms of intent and direction they were found wanting in pragmatism and enforceability. In a commendable effort, RBI had held wide consultations with several stakeholders and accommodated valid representations before finalizing its views. As a result the statement issued by the RBI starts with saying that it accepts the broad framework of regulations recommended by the Malegam Committee, implying that the practical aspects required rethink. Read the rest of this page »

My colleague and I were once asked at a conference, “So, how exactly does a bank account reduce poverty?” Great question.

If you are a low-income household, among the myriad range of challenges competing for your time and attention; there are two that very likely claim the lion’s share: the everyday problem of managing income-consumption timing mismatches; and the problem of building, over a long term, lump sums that help finance the households’ lifecycle goals such as education, housing and marriage. Portfolios of the Poor provides insightful narratives on the nature of these challenges. In recent years, the imperative to find high-quality solutions to these problems has been well-recognised.

By and large, these problems boil down to one issue: lack of convenient access to ‘accounts’ where one can receive, store and withdraw flexible amounts of value in a safe and remunerative way. This account need not necessarily be a bank savings account. Based on the client needs, the nature of this ‘account’ may change as do priorities around key features—liquidity, returns, and inflation protection. Read the rest of this page »

Tunisia was one of the first Arab countries to have a microcredit law, back in 1999. That law put a very low ceiling on interest rate (5% declining inclusive all commissions and fees) which prevented any of the Tunisia’s 280+ microcredit associations which were established by the Governmental Tunisian Bank of Solidarity (BTS) to become sustainable. Only Enda Inter-arabe (Enda-IA) managed to become sustainable in 2003. Read the rest of this page »

In early June, Finance Ministers and Central Bank Governors of the G20 called on international standard- setting bodies to consider how they can further contribute to encouraging financial inclusion, consistent with their respective mandates. One key standard-setter is well on its way to heeding the G20’s call.

Under the 2009-2010 Dutch Presidency of Paul Vlaanderen, the Financial Action Task Force (FATF) – the international standard-setting body committed to preventing money laundering and terrorist financing – made significant progress in putting financial inclusion on its agenda.

At the recent FATF plenary meeting in Amsterdam, in-coming FATF President Luis Corral of Mexico committed FATF to continue assisting financial inclusion initiatives by putting it among the key priorities of his Mexican Presidency. He stressed the complementary nature of financial inclusion and financial integrity: “financial inclusion should be of particular interest to FATF as financial inclusion’s main effect is to capture sectors of the informal economy” that are outside money laundering and terrorist financing controls.

Many regulators, concerned by the prospect of a negative money laundering and terrorist financing evaluation, have been very conservative in using the flexibility of FATF’s recommendations which, when appropriately used, could include those currently excluded from financial services. One such recommendation requires that financial service providers verify a customer’s identity “using reliable, independent source documents, data or information.”

Read in a rigid way, such requirement would exclude many poor and low-income customers as they simply do not have such documentation, and would be denied access to financial services as a result. However, FATF does permit “risk-based” approaches to implementing its standards. One benefit of such risk-based approaches is to bring unbanked people into the formal economy – thereby serving the dual goals of (i) fighting terrorist financing and money laundering and (ii) promoting financial inclusion.

This win-win scenario was further highlighted by the plenary’s keynote speaker – Netherlands Crown Princess Máxima, a long-time advocate of financial inclusion for the poor and the UNSG’s special advocate for inclusive finance for development. “Bringing people and businesses into the formal financial system helps communities thrive,” the Princess declared. “It helps regulators and supervisors monitor and trace the movement and sources of money. It helps law enforcement by diminishing the anonymity of informal transactions. In short, financial inclusion contributes to financial integrity. “The challenge now is to build on FATF’s commitment to financial inclusion, and to develop “best practices” and improved guidance to jurisdictions, regulators, and supervisors to translate FATF’s commitment into real progress on the ground. The World Bank and CGAP will continue to coordinate efforts towards this end.

Jean Pesme is the manager of the World Bank’s Financial Integrity Unit and Michael Tarazi is a senior regulatory specialist at CGAP.