Summary

• Who serves the market?

WHO SERVES THEBOP MARKET—AND

WHO DOESN’T?

Microfinance Institutions

• From tiny nonprofit beginnings in the 1970s and 1980s, microfinance has become a significant global force that increasingly operates as part of the financial sector.

Microfinance Institutions

• According to the Microfinance Information Exchange (MIX), the data custodian for the microfinance community, the 1,330 microfinance institutions that report to it lend to 57 million people worldwide.

Microfinance Institutions

• The Microcredit Summit, an advocacy organization, casts a wider net, including quasiformal providers like self-help group movements and some public-sector development banks.

Microfinance Institutions

• Its 2007 report records 133 million active borrowers in 3,316 microfinance institutions.

Microfinance Institutions

• ACCION International, as a promoter and developer of microfinance institutions, has come to inclusive finance through the microfinance movement.

Microfinance Institutions

• There are good reasons to learn from and connect with microfinance, in addition to the fact that it already reaches tens of millions of clients.

Microfinance Institutions

• First, leading microfinance institutions show how inclusive finance can be profitable. Consider Mibanco in Peru. Most of its 250,000 clients are women, including Delia, profiled in the previous Lecture.

Microfinance Institutions

• For clients like Delia, Mibanco provides a full suite of services including Micapital (working capital for her shop), Micasa (which helped her build the rooms she rents), and Chasqui (a fast-cash loan named after the swift-running messengers of the Inca Empire).

Microfinance Institutions

• In 2007, Mibanco had a loan portfolio of $500 million, with an average loan size near $1,700. Its return on equity was 37 percent, making it one of the more profitable banks in Peru.

Microfinance Institutions

• Equity Bank is a Kenyan commercial bank focused on microfinance. It boasts over a million small savers. In 2006, Equity successfully issued shares to the public, and in 2007 Euromoney recognized it as the best bank in Kenya. Now, private equity investors are competing to buy newly issued shares.

Microfinance Institutions

• A second reason to consider microfinance institutions is their potential for partnering with the private sector.

Microfinance Institutions

• Microfinance organizations are repositories of knowledge about the BOP market and how to serve it, and many of them offer portals to the market because of their client base and branch networks. Moreover, they are often enthusiastic experimenters ready to test new ways to benefit clients.

Consumer Lenders

• Consumer lenders come to BOP finance from a very different angle than most microfinance institutions. While microfinance began with credit for the owners of tiny informal businesses,

Consumer Lenders

• consumer lenders began by helping salaried workers buy things. Today, especially in Latin America, the two approaches are starting to meet and compete.

Consumer Lenders

• The clients of consumer lenders tend to come from the upper end of the BOP market, especially workers employed by large stable companies.

Consumer Lenders

• Increasingly, purchase finance is just the starting point. In Mexico, big-box retailers Elektra and Wal-Mart began with purchase finance but are rapidly expanding into full retail-banking services.

Consumer Lenders

• Elektra created Banco Azteca for this purpose in 2001 and has an enormous head start over Wal-Mart, which obtained a banking license for Mexico in 2007.

Consumer Lenders

• Consumer lenders and microfinance institutions may start with entirely different motivations and philosophies, yet they increasingly compete for the same customers. Consumer lending tends to be aggressively commercial, with a strong focus on scale and profit.

Consumer Lenders

• Growth rates among consumer lenders are often extremely high, and markets can quickly become very competitive. Consumer lenders are not always beloved by society at large. The U.S. payday-loan industry is frequently vilified in the press for high interest rates and lack of transparency.

Consumer Lenders

• And crises in consumer lending suggest that the industry has a dangerous tendency to overheat. A few years back, Bolivia saw a boom and bust in consumer lending from which it has not yet fully recovered, and excesses in consumer lending in South Africa sparked the creation of a regulatory agency focused on client protection.

Consumer Lenders

• In contrast, microfinance institutions begin with a social bottom line. They are more likely than consumer lenders to reach poorer clients, and especially the self-employed. Their intent is to better the lives of their clients.

Consumer Lenders

• Financial return is valued primarily because it enables scale and staying power. MFIs don’t treat profit as an end in itself. Some MFIs with a strong antipoverty orientation keep interest rates close to the break-even level, as advocated by Grameen Bank’s Muhammad Yunus.

Consumer Lenders

• With its nonprofit origins, microfinance has not yet had access to the sophisticated technologies that have enabled consumer lenders to reach scale. Nevertheless, MFIs have a deep understanding of BOP customers and can fit microfinance products to their needs.

Consumer Lenders

• That know-how underpins an impressive worldwide body of institutions, including some commercial microfinance banks and finance companies that are attracting great interest among investors.

Consumer Lenders

• Compartamos Banco in Mexico and Equity Bank in Kenya, for instance, have had successful public offerings.

Consumer Lenders

• Many leaders in microfinance worry about how to engage with the mainstream financial sector. They want the technology and financial backing the private sector can bring, but also want to ensure that if they turn over their know-how or clients, they won’t be sacrificing the social commitment that has driven and inspired them.

Consumer Lenders

• This difference in perspective between consumer lenders and microfinance sets up one of the most interesting dynamics at play in inclusive finance.

Consumer Lenders

• Particularly in Latin America, consumer lenders are specifically targeting core microfinance clients—informal microentrepreneurs—while some (though not all) microfinance institutions are developing consumer lending products.

Consumer Lenders

• To a client, the providers may look similar. Both may offer a loan of approximately the same size, maturity, and interest rate.

Consumer Lenders

• Such competition has not yet developed in other regions but may be coming soon. In India, the recent growth of both microcredit for the poor and consumer finance for the middle class has been astonishing.

Consumer Lenders

• The border between the two segments, previously far from one another, may soon blur and then disappear.

Consumer Lenders

• Prospective new entrants into the inclusive finance sector will need to evaluate the behavior and positioning of the microfinance and consumer lending subsegments in their countries before making their own moves.

Consumer Lenders

• As I consider the future of inclusive finance, I wonder how the energy, resources, and mastery of technology of the consumer lenders can be married to the deep knowledge about and concern for low-income customers that microfinance brings. I would love to help match-make such a marriage.

Summary

• WHO SERVES THE BOP MARKET—ANDWHO DOESN’T?

Next Lecture

• FOUR CRITICAL CHALLENGES IN THE BOP MARKET