Microfinance for Bankers and Investors_3

52 • Microfinance for Bankers and Investors If parts of this description sound more like a mass-market retailer than a commercial bank, it should come as no surprise that some of the most suc-cessful entrants into inclusive finance, like Banco Azteca in Mexico, come from retail sectors already known to customers. Latin American banks and retailers are more likely than those in other regions to go into direct service provision, as in the case of Banco Azteca, Banco Bradesco in Brazil, and Banco Pichincha in Ecuador. Their motiva-tions include stiff competition in mainstream markets (such as invasion of their markets by large international banks), demonstrated profitability of microfinance institutions, and the presence in some cases of underutilized branch infrastructure. The outcomes of direct delivery strategies have varied widely from attempts that never reach many people and are abandoned after a short time, to major successes reaching millions of people—which points to a second set of impor-tant corporate choices. In-House vs.Partnerships For those bold enough to go into direct delivery, the next major choice becomes whether to go it alone or in partnership with other organizations. Few companies have all the attributes needed for successful entry, so they must decide whether to build the new competencies themselves, acquire them, or partner with others. In-House Some organizations decide to build their own capacity, thus capturing the whole revenue stream from the operation and avoiding the difficulties inher-ent in partnering arrangements. Companies that follow this route generally already have most of the key attributes we mentioned above. Even for the best suited organizations, entry into inclusive finance cannot be treated simply as new product development. It often requires the creation of new structures. Grupo Elektra, which had an extensive retail structure, client connections, IT capability, and a history of financing con-sumer purchases, still needed to create Banco Azteca in order to take full advantage of the inclusive finance opportunity. It created the bank in part for regulatory reasons, but also to ensure focus in the new operation. Banco Corporate Choices • 53 Pichincha of Ecuador created a new brand, Credifé, to market itself directly to BOP clients without affecting its main brand. Sogebank in Haiti created distinct branch infrastructure to accommodate the flood of new clients microlending generated. Many companies find that the greatest obstacles to increasing involvement in inclusive finance are internal. Their traditional core business units simply have not considered low-income people worthy clients. One solution to this problem is the service company model. Banco Pichincha, the largest Ecuadorian bank; Sogebank, the largest Haitian bank; and Banco Real, the Brazilian arm of an international bank, all opted to use a service company model developed together with ACCION International in which all loan sales, underwriting, and risk management are performed by a legally distinct subsidiary. The service company allows banks to create a workforce with its own corporate values and incentive systems.3 Bank Rakyat Indonesia, one of the early giants of microfinance, also chose to work through a separate set of outlets, the unit desas, though it did not have to create a new legal body to do so. In contrast to these companies, which provided space for microfinance operations to develop somewhat apart from the main lines of business, a few banks, such as Banco Caja Social of Colombia, pursue microfinance as part of the main structure of the bank. While Banco Caja Social has been successful, we are inclined to think that most institutions will find that greater separation allows for a more effective focus on the BOP clientele. Partnerships If an institution lacks a critical competence, a partnership may be the best solution. For example, partnerships can exploit synergies to lower costs, espe-cially at the last mile. All financial-services customers value convenience, but none more than BOP customers. A microentrepreneur whose banking transactions require a bus fare, a long wait, confusing procedures, and disrespectful treatment by bank staff may avoid the bank altogether. In this market segment, transaction timing and location matters—a lot. But bricks and mortar are expensive, hence the search for cost-effective delivery channels. Most of the partnerships we consider here cover the last mile by taking advantage of specialized delivery channels. There are also partnerships that involve outsourcing of functions such as IT. 54 • Microfinance for Bankers and Investors Direct providers, such as Banco do Nordeste in Brazil, Bank Rakyat Indone-sia, and Banco Pichincha, took advantage of physical branches constructed for other purposes—in the first two cases by government. The existence of these branches brought down fixed costs to a level that produced an attractive busi-ness model in each case, without reliance on external partners. Where this is lacking, providers look around to identify existing networks they can ride on. In Brazil, this search led to the banking correspondent model, described in Chapter 8 and the Banco Bradesco case, which is prac-ticed by many institutions and enshrined in Brazilian regulations. Banco Bradesco partners with Correios do Brasil, the postal system, which has out-lets in every small town and village. Post office employees handle payments transactions, accepting deposits and paying withdrawals on behalf of Banco Bradesco, for a fee. The cost structure makes everyone happy, but success depends on well-structured agreements and careful training and monitoring of banking agents. The banking correspondent concept appeals to bank reg-ulators who want to support financial inclusion. It spread rapidly across Latin America and has been adapted in India. Corporations have found microfinance institutions to be especially impor-tant partners, because they know the clients so well and already have suc-cessful relationships with them. MFIs may also be more willing to experiment in the interests of their clients than are profit-oriented companies. For exam-ple, when Vodafone developed its first mobile phone banking pilot in Kenya, it partnered with the MFI Faulu Kenya to work with Faulu’s client base. Faulu was prepared to enter into the M-Pesa pilot project even though immediate profitability was not assured. American International Group (AIG), one of the first entrants into microin-surance, used MFIs as an entry strategy. It launched its first products through what it called the partner-agent model for life insurance in Uganda. The partner-agent model allowed AIG to reach the whole client base of an MFI at once. MFIs entered such a partnership eagerly because they saw how finan-cially devastating death in the family could be for clients in a country reeling from the AIDS crisis. Other major insurers, such as Zurich, Swiss Re, and Munich Re, have established lines of microinsurance activities, working with a variety of partners. Partnerships can involve an even broader range of institutions. In another example, ANZ Bank partners with the United Nations Development Program in Fiji. UNDP offers financial education programs that prepare client com-munities to use the banking services ANZ offers. Corporate Choices • 55 In structuring such partnerships, it is essential to ensure that solid business principles prevail and that no line of a company’s business will depend on an ongoing subsidy for its success, though start-up subsidies often help reduce the risk of experimentation. Long-run subsidy dependence usually dooms projects to small scale—or ultimate failure. This issue is closely connected to the last element of corporate choice we consider here: social responsibility positioning. Social Responsibility Positioning When thinking about inclusive finance, companies are advised to be clear about where they place themselves on the spectrum of corporate social respon-sibility (CSR). Will they approach financial inclusion on purely commercial terms, or at the other extreme—as a philanthropic activity? Will they pursue a double bottom line, and, if so, how? Can attention to social value enhance financial value? Some players see their involvement in inclusive finance strictly as corpo-rate social responsibility. An international bank’s head of microfinance, quoted in Euromoney, commented, “Anyone who tells you that they’re in this for busi-ness reasons alone is lying to you … We have a trillion-dollar balance sheet. Do you think this really matters for our bottom line? You couldn’t do three big deals with all the money in microfinance.”4 Zach Fuchs, the Euromoney reporter who interviewed this person, found him to be an outlier. He observed that the corporate leaders he spoke with were shifting their outlook from char-ity toward investment. ACCION believes that for-profit businesses can and should incorporate social goals. Moreover, the transfer of social objectives from CSR to main-stream strategy is one of the harbingers of success for inclusive finance. Pro-jects viewed through the CSR lens and handled by CSR departments tend to stay limited because they lack the full weight of the company behind them. Scale becomes possible when these projects move into the mainstream arena. Corporate champions like Nachiket Mor and Bob Annibale may be moti-vated by their own desire to make a difference to the poor. They may operate from passion and conviction, concepts strongly on the social side of the spec-trum. However, they have succeeded by crafting strategies that leverage the core business strengths of their institutions. The companies cited in this book have motivations ranging from the highly commercial (Banco Azteca) to the highly social (ANZ Bank). Yet all the 56 • Microfinance for Bankers and Investors examples we selected approach inclusive finance in a businesslike manner, using sound business principles. All expect to earn profits. Companies can find many opportunities to address important social and economic challenges if they seek them creatively. An excellent example comes from the education services of Equity Bank in Kenya, which contribute to the education of hundreds of thousands of students, address one of Kenya’s highest social values, and earn Equity Bank both profits and enormous good-will. Social goals must also include a strong commitment to consumer pro-tection. When financial institutions do not protect consumers, as in the case of the subprime mortgage debacle in the United States, the damage can spread far beyond a single offending bank. It tarnishes the reputation—and the returns—of the entire sector. Consumer protection is only a minimum standard, however. There is much to gain when companies pursue inclusive finance in a positive way, with client needs at the top of their minds. When they ask, “How can we improve lives through financial services?” this question may help them dis-cover the answer to “How can we build a profitable line of business?” ... - tailieumienphi.vn