expanding the role for innovations inunderlies a portfolio sa-dhan, now is putting out at a biannual...

Expanding

“Secular Growth”:

The role for innovations in

microfinance

Introduction

� Secular growth

� Growth is the result of a robust market

Secular growth

of microfinance

Provision of financial

services to the excluded

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Introduction of innovation

Why innovations?

The market for financial services

for the poor today

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� evidence of exclusion

� non-participation

� influenced by “political” concerns

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The market

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ition

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The market

Why innovations?

The market for financial services

for the poor today

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� Refinement of existing positions and interventions of organisations

� Refinement of process and products

� Development of public goods and

knowledge

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ition

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The market

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ition

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The market

Why innovations?

� Microfinance - two fundamental constraints:

1. “credit” market contract/product

2. cost of servicing or delivering any product

4

Why innovations?

reduction of costs

enable/overcome constraintsinterventions

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What are the innovations?

two sets of “costs” in an operation

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1. public good

� The debate as promotional

� Building of infrastructure for the industry

2. can be priced into their operation and

recovered by the service providing institutions.

� Provision of the service

� Cost of overcoming asymmetries

� Strengthening of institutions that enhance enforcement

a. Innovations and stakeholders

� Reducing the transaction costs of the contract

� Reducing overall risk of the service

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This paper therefore identifies

1. The seven stakeholders, and their contributions

to the development of a market.

2. Identifies what kind of innovations - concluding

observations

3. Possibilities in taking the sector forward



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1. Dialogue and debate on microfinance

a. Context of retailers

b. Apex banks

c. Central banks and government



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2. The challenge

a. Step away

b. Secular growth of the market will require -

stakeholders

1. To be active

2. Hold a market-enhancing position

3. Intervention



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3. historical-distortions

a. Organisations and products designed on

credit-market principles from the ’60

b. Designed and structured to perform a

diverse set of functions, many times in

contradiction to each other



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4. Require a fundamental attention to redesigning

organisation/schemes/programs.


Innovations and the microfinance market

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stakeholders:

Government, Central Banks

Development Banks and Apex institutions

Retail Banks

Community Development Finance Institutions

and Third Party institutions, such as auditors, rating

agencies and other such like bodies.

a. Innovative government policy

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Democratic process

Governments under pressures

Demands of its citizens


Make provision of financial

services to the poor,

marginalised and excluded


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� Government as promoter - crucial in developing the

market for financial services

� Government as management - has affected the poor

the worst

� The Need

� Allow organisations – state-owned - to

becoming competitive firms

� Responsive to extreme diverse contexts of the

poor entrepreneur in India confronts

� Result

� Financial deepening of the market



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� Expanding financial services markets how ?

� Government - spelling out its priorities and

resources

� Translating them into tangible benefits for the

poor

� Efficient management of “public good” resources

too

� Meet objectives of grant-based resources


b. Innovative Central Banks

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� Regulators - respond, only when the

contours of a sector are well defined

The two approaches

1. Identify nature of the market opportunity and appreciate its different dimensions (demand

and on the supply side): Ingenious period

2. understand constraints that lead to failure or

success of the intervention


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� Result:Shaping regulatory policy - take cognisance of the nature of the contracts and the constraints

- find solutions – market expansion


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� NeedFundamentally changing the method to identifying solutions


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� Current Scenarioworking groups or committees – Do not lead to knowledge creation limited progress

Focus on

� Building knowledge and understanding

“impact” on market

� Design of interventions which could possibly

responsible for carrying out the task of regulation

� Type of regulation that might best fit the conditions


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� How?

� To identify a unique and distinct solution to what

the Indian context might require

� Move towards a solution that is unique to the

constraints of both buyers and suppliers of such

a service in India/ Eg: Clients and illieteracy,

price-discovery in monopoly markets,

� Work with the “constraints”, staff-training and

certification etc.

� Identify processes and mechanisms that will

lead to overcoming them


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� Examples of this kind of an approach

worldwide

� Indonesian : low cost delegated supervision

� South Africa: hybrid and focussed supervision


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� Focus

� The cost or risk related features of transactions

� Design and agree on a possible intervention

� Primary focus to enhance efficiencies

c. Innovative Apexes

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Apex, organisations serve an important function of undertaking to demystify the risk that new

market-segments potentially carry


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� Risk-perceptions in financial market� Subjective of the assessor

� Objective component based on the data

� Focus on reducing this risk related views on these operations� Interventions

� Innovative

� Assist in taking on the burden of the microfinance sector


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� Early market development

� Use of data - popularise the asset quality that underlies a portfolio

� Sa-Dhan, now is putting out at a biannual data set on

its members operations

� Risk related to expanding the market through essentially signalling the market is stable

� Activities can include, putting in equity

� Getting to diversify bank-lenders to mfis, funding staff training to increase effectivness

� Improving quality of audits and analysis of delivery and organisations etc.


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� Experiments that can result in large scale innovation

� Application of technology

� Regulator - work on understanding the nuances

of the delivery models

� The apex in the field - stabilisation of these operating models

What can we do to overcome the fundamental

problem of small credit transactions – high

administrative costs?

attention to the important function not only, of developing innovative

ideas, but the application of innovation in refining old ideas

d. Innovative Banks

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� Growth in the economy - increasing demand by the

poor family for financial services

� Capitalising on an economic opportunity

� Need to use one of other services of savings,

insurance and money-remittance

� Banks to make a clear call

� Directly operate in this market

� Do it through other institutions

� Leads to opportunities to be innovative.

d. Innovative Banks

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� Working closely with these intermediaries in

undertaking product

� Examining opportunities of enhancing treasury

related functions, specially in reducing costs

� Providing support - lead to innovatively deepening

the market for services

� Expansion, needs to be more broad based, based

on economic sub-sectors in which poor families are

involved in.

d. Innovative Banks

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� Smaller banks� Can stir the market directly with MFIs

� Introduce competitive products, lower-prices, segment the market

� Work on refining and meeting the demand of entrepreneurs in the region

� complexity of this rural and micro-lending market -large possibilities that need attention � Can stir the market directly with MFIs

d. Innovative Donors

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� Current scenario

� Interventions attempt to cover all the ground in

any market

� Development of institutions that possess within

themselves, multiple functions

Donors - wholesome impact on sectors


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� Result

� Contradictions to each other

� Why?

� Concentrating loan and development functions

within the same institution

� Distortion of effectiveness of a possible lending

or grant funding decision being compromised.


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� Donors to work on two kinds of features

� Mix too much – promotional and lending -everything in one institution

� Support innovative and long-term institutional building ideas, with specialisation.

� Moving institutions and their interventions and or products towards being market-efficient towards segments, sub-sectors

� Funding specialised training and skill-building capacity

� Investing in industry infrastructure for documenting and building knowledge

f. Innovative Practitioners

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� Innovations in the field of retail lending

� Retailer arriving at price-efficiencies that are

passed on to the customer

� De-risking the loan portfolio, and diminish the

high risk bias that characterises agricultural

lending


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� Result

� Growing expansion in lending through MFIs

and self-help groups federations

� From, 35 crores of outstanding in 1999 to 434

crores and a cumulative lending of 1200 crores


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� Arriving at price efficiencies

� Encompass a set of measures

� Finding methods that reduce the costs of training and promoting groups

� Effective use of technology in managing product attributes

� Reduction of management layers

� Indentifying poor household issues in terms of

product delivery and attributes

� Managing challenges of working in hostile

environments


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� Result

� Advanced microfinance intermediaries have

moved effectively towards reducing prices


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� De-risking

� Received less attention

� Part of microfinance strategy

PRADAN have provided their client base

SEWA bank

� Enhance the productive capabilities of its

women borrowers

BASIX and SHARE have moved towards

� Transfer price-benefits to the consumption pattern of its borrowers (super-bazaars)


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� Result

� Fortify the portfolio

� Developed large-scale demonstration effects

� Benefit

� Merit in the categorisation of these innovations

and appreciating the short-term and the long-

term impact of this in the provision of financial

services.

f. Innovative third party service provider

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� Need

� Validation of data as an important function

� Needs support


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� How

� Banks, apexes and regulators, should seek to

use increasingly such tools

� Ideal condition - “reputation-capital”

� Develop “demand-agents”


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� Why

� Recommendations, must be driven by the

competency of such audit, rating

� Critically process and validate data


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� Success factor

� Active support of apex organisations

� Regulators signal the engagement with such

tools

Conclusion

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� Distinct roles that different kinds of organisations

have in these markets

� Focussing on these roles

� Refining the interventions

� Refinement of organisations role

Conclusion

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� Growth of the microfinance sector

� Policy environment seeks to broaden the sector

� Specialisation and functional efficiency of each

of the actors

� Right product or instrument to enhance the

markets rests with the right kind of institution

� Accelerating the staid nature of government

organisations

Conclusion

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� Discussion and appreciation of the roles of

different organisations and funds

� Ability to manage the debt portfolio and the

grants portfolio

� Specialise and develop core-competencies

around the different functions

� Separately manage organisations and funds

� Development of competitive products and

pricing

Conclusion

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� Document and learn from policy initiatives

� Development of Policy

� Built in incentives to experimentation and

growth.

� Who will define “appropriate” growth rates?

� What should be price targets to move towards?

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