Financial Intermediary Lending and Microfinance

1
Financial Intermediary Lending and Microfinance

• Carlos E. Cuevas, FSD

2
Microfinance as a practice

• Defined by the size, terms and conditions of the
  transactions
• Small, unsecured loans or secured with
  non-conventional guarantees
• Small deposits (opening balances and average
  balances)
• Small, regular transfers (remittances)
• small relative to GDP or to financial sector
  averages

3
Outreach and Sustainability in Microfinance

• More likely when institution has
• Large scale,
• Diversified clientele (income levels and economic
  activities), and/or
• highly specialized, technologically advanced
• Commercially oriented
• Which usually means regulated and supervised

4
MF outside formal (regulated) finance

• Unregulated financial cooperatives
• NGOs
• Investment funds, Social funds (usually with NGOs
  as retailers)
• To be avoided, if possible

5
MF outside formal (regulated) finance (cont.)

• Many problems
• Heterogeneity Std. Deviations of key indicators
  much larger than the mean
• Instability ownership, governance, internal
  controls, external oversight, donor dependence
  issues
• New, inexperienced
• Unreliable data
• (several thousands in the world, about 110 report
  to the Microbanking Bulletin)

6
MF outside formal (regulated) finance (cont.)

• Resources exist
• Do it yourself
• CGAP Appraisal Report
• Selected indicators for outreach and
  sustainability
• Rating agencies for MFIs
• CGAP, IADB supporting expansion of ratings
  services
• Quality of ratings still untested, not yet
  standardized
• Data quality problems

7
MF outside formal (regulated) finance (cont.)

• Fairly common in investment operations with
  credit components
• In social funds, rural investment funds,
  community development funds

8
FIL versus Investment Operation with a Credit
Component

• ltltWhen an investment operation that is not a FIL
  includes a credit component, Regional Staff
  consult with the Financial Sector Board on the
  basis of that consultation, the Project Concept
  Review meeting decides to what extent OP and
  BP8.30 apply to the componentgtgt (BP8.30, July
  1998, emphasis added)

9
What is wrong with this picture?

• Bank procedure not specific enough
• How many such operations are brought to the FS
  Board?
• Do QATs look at PCDs that include credit
  components with OP8.30 in mind?
• Do QATs know what to look for?

10
Improving the quality of MF operations

• Regular review of OP8.30 applicability at entry
  level - Regional QA mechanism to apply the policy
• Minimum standards, good practice lessons and
  advice GP8.30 (how to)
• Engage staff with the necessary skills to do due
  diligence and apply good practice to operations
  design.