Transcript Title

Challenges of the
Microfinance Sector in Asia:
The Asian Development
Bank’s Experience
Presentation by
Nimal A. Fernando
Principal Finance Specialist (Microfinance)
Asian Development Bank
Workshop on Microcredit-Financing and Poverty Alleviation in OIC Member
States
Istanbul, 9-10 July 2007
Outline
PART I
• Brief History of ADB Operations
• Microfinance Development Strategy of ADB
• Current Loan Portfolio and its main features
• Other Microfinance Activities of ADB
PART II
• Asian Microfinance Industry: Current Status
• Challenges of the Industry
• Concluding Remarks
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Brief History of ADB
Operations
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The modest beginning in 1988 with focus on
NGOs
Gradual expansion: geographic and
institutional types
1998-99 Review of ADB’s MF Operations
Main findings on Early Projects included:
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focused on credit delivery
lack of emphasis on other financial services
little attention to financial viability
Allowed subsidized interest rates
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Microfinance Development
Strategy (MDS) of ADB
• Why did ADB need a Strategy?
- The industry was rapidly evolving
- Need to adopt a systematic approach was
recognized
- A general framework was needed to guide
operations
- A consistent basis was needed for policy dialogue
- A Strategy can help improve quality of assistance
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MDS: The Formulation
Process
• Extensive consultation process for fact
finding
– Internal in ADB
– Internal in developing member countries
– External consultations
• Consultation on the Draft Strategy
• The final version approved by the Board
in May 2000
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MDS: The Content
• Goal: ensure permanent access to
institutional financial services for a
majority
• Purpose: support development of
sustainable MF systems that can
provide diverse services of high quality
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MDS: Strategic Focus Areas
of MDS
• Creating a supportive policy
environment
• Developing financial infrastructure
• Building viable institutions
• Supporting pro-poor innovations
• Supporting social intermediation
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Current Loan Portfolio and
Its Main Features
• Over $1.3 billion
• Heavy concentration in 4 countries
– India/Pakistan/Philippines/Sri Lanka
• Support diverse set of institutions
• Encourage private sector and social
entrepreneurs
• Sector development projects are prominent
now
• Microfinance component projects:
questionable quality
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Other Microfinance Activities
of ADB
• Research and knowledge sharing
• Pioneering studies in microfinance
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Rural Financial Markets in Asia (2000)
Role of Central Banks (2000)
Commercialization of Microfinance (2001-2004)
Study on rural financial markets in Central Asia (2006)
• Quarterly Newsletter on Microfinance (since July
2000)
• Assistance for capacity building and policy advise
• Networking: pioneering member of the CGAP
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PART II
Current Status of the Asian
Microfinance Industry
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Many institutions, but large institutions account for
bulk of the outreach
Three giants in Bangladesh: Grameen Bank/ASA/BRAC
Market in India has become vibrant
Banks and non-bank financial institutions: more
important now.
India and People’s Republic of China: lowest market
penetration
Private risk capital involvement is still small
Significant government involvement in service delivery
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Current status (cont’d…)
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A number of viable and very efficient
institutions
Most institutions are subsidy dependent and
not financial viable
Most focus on credit and offer rigid products
Group lending methodology is widespread
Deposit, money transfer, and insurance
services: limited
Quality of services remains questionable
Outreach to the poorest is only marginal
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Overarching Challenge
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Expanding scale of quality financial
services
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to millions of under-served clients
and to millions of unserved, including the
poorest
And doing these in a sustainable
manner
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Meeting the Overarching
Challenge
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A number of challenges must be overcome
Further improve enabling policy
environment
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Policy constraints continue in many countries in
different forms
Interest rate caps on small loans (India/PRC)
Tendency to re-introduce interest rate ceilings
Constraints on foreign investments/ownership
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Policy makers change frequently
Their time horizon is short
Building supportive constituencies: slow process
Policy dialogue with central and
state/provincial governments
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Regulatory Barriers and
Weak Supervisory Capacity
• Regulations are not compatible with the
industry requirements
• Too rigid regulations
• Supervisory authorities lack adequate
capacity
• Most small scale deposit taking
institutions are not regulated and
supervised properly
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Building Sustainable and
Adequate Retail Capacity
• Retail capacity to provide a broad spectrum of
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services is limited
Massive efforts are needed to build this capacity
Increase the currently limited number of
sustainable institutions
Tough decisions are needed to ensure viability
(example: pricing policy)
A large amount of resources and technical
assistance is needed for capacity building
Reforming state-owned financial institutions to
serve the poor
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Reducing Transaction Costs
• Cost of small value transactions remain
high
• This translates into high prices
• High prices reduce access for some
poor people
• Innovations, improvements in efficiency
and productivity are needed
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Integration of Microfinance
into the Broader Financial
System
• Walls remain between the two
• Walls must be dismantled
• Large-scale conventional financial
institutions must be brought in
• This remains a formidable task
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Concluding Remarks
• Asian microfinance industry has grown
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dramatically during the last two decades
But many challenges remain
Majority of the poor remain without adequate
access
Industry development is an unfinished business
Funding agencies like ADB have to play a key
role
Funding agencies have to adjust their course to
respond to emerging trends and opportunities
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Thank you.
For more information on ADB’s
microfinance operations,
www.adb.org/microfinance
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