Microfinance for Bankers and Investors_2

16 • Microfinance for Bankers and Investors workers buy things. Today, especially in Latin America, the two approaches are starting to meet and compete. The clients of consumer lenders tend to come from the upper end of the BOP market, especially workers employed by large stable companies. Increas-ingly, purchase finance is just the starting point. In Mexico, big-box retailers Elektra and Wal-Mart began with purchase finance but are rapidly expand-ing into full retail-banking services. Elektra created Banco Azteca for this pur-pose in 2001 and has an enormous head start over Wal-Mart, which obtained a banking license for Mexico in 2007. 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. Growth rates among consumer lenders are often extremely high, and markets can quickly become very competitive. Con-sumer 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 trans-parency. And crises in consumer lending suggest that the industry has a dan-gerous 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. 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. 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.11 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. That know-how underpins an impres-sive worldwide body of institutions, including some commercial microfinance banks and finance companies that are attracting great interest among investors. Compartamos Banco in Mexico and Equity Bank in Kenya, for instance, have had successful public offerings. Many leaders in microfinance worry about how to engage with the main-stream financial sector. They want the technology and financial backing the Who Serves the BOP Market—and Who Doesn’t? • 17 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. This difference in perspective between consumer lenders and microfinance sets up one of the most interesting dynamics at play in inclusive finance. 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. To a client, the providers may look similar. Both may offer a loan of approxi-mately the same size, maturity, and interest rate. Such competition has not yet developed in other regions but may be com-ing soon. In India, the recent growth of both microcredit for the poor and con-sumer finance for the middle class has been astonishing. The border between the two segments, previously far from one another, may soon blur and then disappear. Prospective new entrants into the inclusive finance sector will need to eval-uate the behavior and positioning of the microfinance and consumer lending subsegments in their countries before making their own moves. 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. 3 FOUR CRITICAL CHALLENGES IN THE BOP MARKET “ ow can poor people save money if they can barely put food on the table? How can they afford to pay high—or any—interest rates?” “Aren’t informal entrepreneurs risky customers? Won’t they default and dis-appear into the slums?” “Can an illiterate woman learn to use an ATM machine?” We sometimes hear questions like these from businesspeople who have little exposure to the clients of the bottom-of-the-pyramid (BOP) market. While the questions may reveal a lack of sector knowledge, and some verge on the politically incorrect, they are not frivolous. In fact, they address real challenges inherent in making a successful business that serves low-income people. They demand answers. To surface more potential doubts and hesitations, we can also ask: What’s different about the low-income market? Do they want the same products as the middle class? How can we reduce the cost of making small loans and processing tiny transactions? Is technology the solution? What is the best way to reach clients in rural areas and urban slums? How can we reduce the bricks and mortar costs? • 18 • Four Critical Challenges in the BOP Market • 19 Are low-income clients as risky as we fear? Where exactly do the risks lie? How do microfinance institutions manage risk? Can the private sector use the same techniques? In the past most private companies had good reasons to avoid serving the BOP market, because they had no good answers to questions like these. No longer. We know from our experience that good answers exist and that they can be applied effectively if companies adapt their business models to market demands. Advances in technology, financial innovations, and greater market understanding provide potential solutions to the core challenges of the BOP market. Above all, success is found in nearly two decades of experience with commercial microfinance and in the experience of private-sector companies that entered the low-income financial market early on. Four Critical Challenges We can reduce all the many questions just mentioned into four challenges inherent in providing financial services to BOP customers: 1. Understanding the clients. Speaking broadly, the poor need the same kinds of financial services as middle-class customers. However, it is a classic mistake to treat products for the poor simply as scaled-down versions of those for higher-income customers. As with any market, a deep understanding of specific needs is required to get product design right. Local customs and economies, literacy, gender roles, religious taboos, or ethnic discrimination may need to be addressed. For example, microfinance institutions in the Middle East have learned how to approach Muslim clients who worry that it might be a sin to pay interest. Some banks, notably Barclays, have learned to relate to the informal lending circles—tontines and susus—that many West Africans join. 2. Reducing costs. The small size of accounts and transactions associated with the poor is the fundamental challenge to profitability. The cost barrier is highest for the poorest clients and those in rural and remote areas. Rather than just squeezing costs down, serious rethinking is needed. Radical product simplification is one key, and 20 • Microfinance for Bankers and Investors technology may be another. When a Nepali woman can receive money from her husband working in Delhi without leaving her village, it will be technology and creative distribution channels that make it possible. 3. Informality and risk management. BOP clients appear risky because they are economically vulnerable and operate informally. Much of the risk is only a perception, however, and actual risks can be managed with the right techniques. Microfinance institutions using these best practices demonstrate consistently high repayment performance, so much so that in a 2008 survey of top risks, microfinance providers and investors ranked credit risk only tenth, well behind costs (which was fourth) and a range of institution management issues.1 4. Building the industry. Few providers possess the strength to create or enter a virgin market alone. Other providers help develop the market, attract supporting businesses (for example, information-technology providers or payments networks), and speak with a united voice before regulators. Avenues for cooperation in industry-building need to be identified. Addressing the Challenges Many private companies have already found ways to meet the four challenges. Our cases include international, regional, and national banks (Citibank, ANZ Bank of the South Pacific, and Equity Bank in Kenya). They include con-sumer lenders (Banco Azteca) and microfinance institutions (Compartamos Banco), telecoms and technology companies (Vodafone, Visa Inc., Temenos), investors (Sequoia Capital), and investment banks (Credit Suisse). In short, many different players operating in many different ways have found a prof-itable market niche in inclusive finance. Let’s look at some of the challenges in more detail. The remainder of the book will show how businesses are solv-ing each of them. Challenge 1: Understanding Clients Poor people have much to gain from good financial services, and therefore are likely to value them highly and perform well as clients. The economic gains that clients reap from better services allow them to pay for the services and create the income stream providers need. But this virtuous relationship ... - tailieumienphi.vn