5785 file SEEP Workshop Lessons Learned from Banki

Lessons Learned from Banking for the Poor in Africa: 

Lessons Learned from Banking for the Poor in Africa SEEP Annual Conference October 25, 2007

Slide2: 

Building Microfinance Banks in Africa from the Ground Up Colin McCormack, Managing Director, Africa

Opportunity Banks in Africa: 

Opportunity Banks in Africa Owned: KENYA – MFI > commercial bank RWANDA – Start up microfinance bank + merger UGANDA – MFI > Tier 2 bank MALAWI – Start up commercial bank MOZAMBIQUE – MFI acquisition > commercial bank SOUTH AFRICA – Finance company GHANA – Savings & loan > commercial bank Also: NGO MFIs in Ghana, Uganda, Zambia and Zimbabwe

Country Entry Criteria: 

Country Entry Criteria Population size & concentration Poverty level / demand Language capacity Regulations favorable to microfinance banking Affordable minimum capital requirement Ability to take controlling stake Willing and able leadership team

Two Key Challenges to Microfinance Banking in Africa: 

Two Key Challenges to Microfinance Banking in Africa Human capital High level of expertise and willingness to work for little $ in sometimes volatile environments Training staff for commercial banking (often from NGO culture) Staff retention Succession planning (the same names, again and again) High cost of product and service delivery Need for sustainability, efficiency and innovation (inefficiency = high interest rates)

Framework for Success: 

Framework for Success Move from NGO to owned banks Decentralized quality management Control and accountability Corporate performance targets & rewards Regulated deposit-taking institutions Multi-channel, easy access

Framework for Success (cont.): 

Framework for Success (cont.) People, policy, process + capital Robust operating system (fixed/mobile) Automation & standardization (Denver MIS Centre) One big change at a time (danger of compounding errors until capacity growth) Get to sustainability fast, then invest for growth Protection in the event donor funds falter

Choice of Startup Methodology: 

Choice of Startup Methodology Greenfield or merger/acquisition? When is it beneficial to merge and acquire existing operations? (Good for NGO, good for clients, good for Opportunity) What are the particular challenges of this approach? Culture / Mission alignment Quality – staff, name, size, transparency, locations, etc The size of the challenge relative to the upside /alternatives Bureaucracy

Choice of Startup Methodology: 

Choice of Startup Methodology What Opportunity brings to merger/acquisition: CAPITAL Technical expertise (banking and systems experts) Client access to the broad range of services of a formal banking institution Strong Network dedicated to high performance standards: Corporate performance targets Governance standards

Product and Service Delivery: 

Product and Service Delivery Treat customers with respect and answer demands Low minimum balances and few forms Want money immediately (no long lines or a lot of travel) Response to high health risk – savings products with integrated insurance features

Product and Service Delivery: 

Product and Service Delivery Satellite branches, mobile banks, ATMs, smart cards, POS devices, cell phones Reach marginalized entrepreneurs and farmers Need to preserve sufficient capital to cover losses while at the same time using capital to expand - need for ways to reach clients cost-effectively Cover cost of small depositors through lean structures and streamlining operations

Overcoming the Challenges to Commercial Banks’ Entry into Microfinance in Africa: 

Overcoming the Challenges to Commercial Banks’ Entry into Microfinance in Africa SEEP Conference – Lessons Learned from Banking for the Poor in Africa Brian Kuwik, Program Manager – East & Southern Africa 25 October 2007 at Washington, DC, USA

Rationale for African banks to engage in microfinance : 

Rationale for African banks to engage in microfinance Create new revenue streams Diversify investment portfolio Expand the customer base Deepen the retail strategy Use excess bank liquidity profitably Contribute to national economic development Further enhance image at national and local level Bank must decide how to engage & to what degree.

Rationale for African banks to engage in microfinance: 

Rationale for African banks to engage in microfinance Experience has shown that microfinance - when well researched and properly implemented - provides sustainable profit to commercial banks Some examples of ROE performance from 2006 from various business models: Bangente in Venezuela (financial subsidiary): 22.3% Credi Fe in Ecuador (service company): 99.2% SOGESOL in Haiti (service company): 57.0% (FY to Sep-06) Akiba Commercial Bank in Tanzania (integrated): 29.7%

What characteristics of banks facilitate entry into retail microfinance?: 

What characteristics of banks facilitate entry into retail microfinance? Extensive delivery channel infrastructure (if strong retail network) Existing pool of human resources, especially those with skills in HR, IT, marketing, legal and financial management Market presence and brand recognition Distribution of fixed costs among many financial products Access to plentiful and low-cost funds Banks can launch and expand retail microfinance services more efficiently than pure start-ups.

What factors prevent banks from decisive entry into microfinance?: 

What factors prevent banks from decisive entry into microfinance? Market knowledge & experience is lacking so consider too risky & expensive Inappropriate business processes and products to reach this segment successfully Higher frequency of face-to-face transactions Differences in mission and organizational culture within supporting departments (“silos”) Cost structure and expectations of microfinance staff Regulatory & supervisory environment

Key Challenge:: 

How do we overcome the obstacles in order to leverage the advantages of downscaling the bank? Buy-in and commitment from various levels of the bank and across the “silos” Right business model/institutional structure from the bank’s perspective Sufficient autonomy for microfinance operations Key Challenge:

The right business model for the bank: 

The right business model for the bank Different elements help determine the right approach for each bank based on: Mission & vision Appetite for risk Cost efficiency considerations Regulatory & competitive environments Each model has distinct legal & shareholding structures. These structures suggest but do not dictate the organization of retail operations.

Models for banks to engage in retail microfinance: 

Models for banks to engage in retail microfinance Flexible partnership with MFI Outsourcing to established MFI Financial Subsidiary Service Company Integrated Microfinance Services Focus of bank Unit or product

Model chosen by ACCION partners in Africa: Financial Subsidiary: 

Model chosen by ACCION partners in Africa: Financial Subsidiary Joint venture with other investors to share risk and obtain microfinance knowledge & expertise Non-bank operating license subject to: Different interest rate regimes Lower capital requirements Loans, deposits and other transactions are on books of financial subsidiary Responsible for client/account origination, loan underwriting, administration, and loan collections

Model chosen by ACCION partners in Africa: Financial Subsidiary: 

Model chosen by ACCION partners in Africa: Financial Subsidiary Uses bank delivery channels for cash management, disbursements, repayments, etc. via service agreement Can also use other supporting departments/services of the bank by paying a fee to the bank Debt & equity provided by bank, investors and other commercial banks Separate board, management and staff from bank More stand-alone than the Service Company model

Financial Subsidiary: 

Financial Subsidiary Advantages: Full commitment to best practices without interference or upsetting the balance within bank Risk can be shared more with local & international investors who may also provide expertise Ability to leverage brand but develop a separate corporate identity (due to different mission, target market, image, etc.) Greater flexibility to fulfill the special requirements of operating an MFI: hire specialized staff, adapt specialized policies and procedures, & develop MF products

Financial Subsidiary: 

Financial Subsidiary Disadvantages: Higher administrative costs than other models (because more duplication of overhead) Probability that cannot take advantage of lower cost of funds (which Service Company & Internal Unit often benefit from) Potential conflict of interest with bank

Key Factors in Decision: 

Key Factors in Decision Objectives to deepen retail strategy & link to brand Service Company & Integrated Unit: Portfolios remain on the bank’s books Loans subject to interest rate regime for banks Concerns about risks associated with “unknown” market segments

Lessons Learned: Integration of Microfinance Services into the Bank: 

Lessons Learned: Integration of Microfinance Services into the Bank Bank must ensure that microfinance subsidiary or unit has sufficient control over the following: Recruitment and training of own management and staff Flexibility to determine compensation structure - Performance based commission system Development of own business policies, procedures & practices - Decision-making process remains rapid & efficient Ability to access support from bank’s supporting departments such as Back Office, Human Resources, Internal Audit, Marketing, ICT or to out-source where necessary

Example: Adjusting the Lending Process: 

Example: Adjusting the Lending Process MFI Model Bank/Consumer Model Generalist Loan Officer involved in all steps including: Promotion Evaluation & verification in the field Approval as member of credit committee in branch Collections during initial delinquency period Non-relationship / Mass Market Relationship-based Specialized functions: Promotion – Specialized unit or company Evaluation in the branch – Analyst in branch Approval – Analyst at Credit Center Sporadic system overrides Verification – Verifier at Credit Center Collections: Specialized unit Hybrid Model

Successful Lending to Micro Segment from within Bank: 

Successful Lending to Micro Segment from within Bank Commitment to international best practices such as evaluation of willingness & capacity to repay Distinct microfinance policies, procedures & practices Customer focused approach (e.g. rapid approval) Market-based pricing to cover higher administrative cost Compensation of staff based on performance MIS provides detailed data on transaction history and repayment status of clients

Successful Lending to Micro Segment from within Bank: 

Commitment to high recovery rate and rigorous reporting of repayment and portfolio at risk indicators Pro-active, face-to-face collections Strong support from bank leadership when confronted with pressures that microfinance operations may place on the bank Successful Lending to Micro Segment from within Bank

Slide29: 

Building and expanding sustainable, commercial microfinance programs worldwide. 29 ﴀ

Slide30: 

Julie Earne, Investment Officer, Africa Microfinance Advisory October 2007 Financial Innovation for Microfinance in Africa

Strategy: 

Strategy Lower barriers to access, interest rate policy, standards Diverse range of institutions & delivery mechanisms Training firms, audit firms, credit bureaus, IT companies

Strategy: 

microfinance is a poverty reduction tool only large scale = meaningful development impact private sector resources vital for large scale sustainable microfinance private capital invests only in profitable businesses build large sustainable MF business cases development impact Strategy

Market Segmentation: 

Market Segmentation Institutional Maturity (age and scale) Commercial Orientation

Market Segmentation: 

Market Segmentation Institutional Maturity (age and scale) Commercial Orientation Mobilize local financial resources to “crowd-in” the financial sector

Financing Tools: 

Financing Tools Linking Investment and Advisory Services

Lessons Learned in Africa: 

Lessons Learned in Africa From the Fundamentals: Sustainability and impact go hand in hand The market is liquid and products need to reflect this Microfinance is becoming mainstream – inclusive financial sector Donor can’t ignore the meso and macro levels To the Future: Greater access to capital markets Product development Diverse providers and alternative distribution

Thank you: 

Thank you