DIVERSITY IN THE PROVISION OF FINANCIAL SERVICES By Dr. Jennifer Riria CEO, KWFT SEPTEMBER 2005

INTRODUCTION POVERTY STINKS You see it, The mothers in the village including my own, carrying heavy loads on their backs, Heavy with child in succession throughout their fertile lives – (will then have children) Working 18 hours a day and no voice to call for help

Yes, Poverty Stinks! It stank when I was there, walking on cold wet July days up and down the Mt Kenya Hills on bare feet – no shoes. Wearing on worn out uniform even as my Sunday Best, sharing my bed with three of my sisters and a relative; and under the tiny bed, a bed for chicken; Disrespected, Lonely among many Dehumanized by lack of access to basic necessities of life.

A donkey Ayah, malnourished because culture enhances it. However, my grandmother, my mother and I did not sign any Contract with poverty; The poor do not have a Contract with Poverty. I am a living testimony to that fact.

Poverty cannot be addressed by cash only; financial services is just a means to an end. There is need to break the cycle of poverty that has various dimensions: Psychological Emotional Attitudinal to self Lack of access Resource Information Opportunities Economical Political – no voice

When you are poor, you lack self esteem, voice, power, you are the underdog. This cannot be addressed by access to credit alone. THE BIG QUESTION How then do we address diversity in development, and in particular in provision of financial services?? CREDIT PLUS should be part of the new vocabulary in provision of financial services. It means that we have to be more than ever now focused on what poor people want.

What Poor Clients Want in Microfinance Value speed and convenience Want access to larger loans Want respect and recognition Care about interest rates Microfinance clients want more, faster and better Want business and housing loans Want short, medium and long term savings products Want health and life insurance Willing to pay what it costs for responsive, sustainable services Low income women and men define microfinance broadly As their experience grows, clients of group loans want larger loans and resent the time taken in group meetings and the need to guarantee repayment by other members of the group Poor people prefer individual loans over group loans

Building Financial Systems that Work for the Poor Majority Encourage a range of institutions and methodologies: Commercial banks Regulated MFIs Microfinance NGOs Finance companies Coops, credit unions Grassroots organizations Adopt standards on performance in: Outreach to poor clients Portfolio quality Efficiency Financial sustainability Financial integration Impact Provide appropriate support modalities. Institutions that meet high standards need: Policies, regulations and legal structures that fit what works in microfinance Access to finance and capacity building that fit the institution’s size and stage Ability to mobilize voluntary savings

Policy, Regulatory and Legal Frameworks are Needed for Microfinance Operations Key Features of Microfinance Transaction costs are high Clients lack conventional collateral Simple MIS, accounting Savings important to client and MFI Many small branches Loan officers not traditional bankers Institutions need to be able to charge relatively high interest rates Microloans as loan class, with portfolio Quality and lending methods--not loan Collateral—used to evaluate risk. Simple while rigorous reporting requirements – with microfinance standards and benchmarks Ability for high performing MFIs to mobilize deposits from borrowers and from the public Ability to establish branches and agencies rapidly Flexibility in hiring, and performance-based incentives Responsive Framework

Policy, Regulatory and Legal Frameworks are Needed for Microfinance Operations Key Features of Microfinance Transaction costs are high Clients lack conventional collateral Simple MIS, accounting Savings important to client and MFI Many small branches Loan officers not traditional bankers Institutions need to be able to charge relatively high interest rates Microloans as loan class, with portfolio Quality and lending methods--not loan Collateral—used to evaluate risk. Simple while rigorous reporting requirements – with microfinance standards and benchmarks Ability for high performing MFIs to mobilize deposits from borrowers and from the public Ability to establish branches and agencies rapidly Flexibility in hiring, and performance-based incentives Responsive Framework

PARADIGM SHIFT IN RETAIL BANKING WITH THE POOR Low interest rates Low repayments Low “know your customer” Minimal loan amounts Low Sporadic, and shallow Outreach relative to demand Interest rates that cover costs, enable profits Excellent Portfolio quality Understand household economies, Economic activities of the poor. Financial products and processes that Respond to poor households, enterprises High outreach, impact.

CONCLUSION

Challenges for This Decade Expand outreach to millions more low income entrepreneurs―by increasing MFI capacity, mobilizing mainstream banks, and building domestic capital markets Outreach Help poor people build assets―not just debt―through business loans, voluntary savings, housing finance, insurance Assets Cut transaction costs in microfinance―new technologies and channels Costs Build a culture among MFIs, bankers, policy makers and funders in microfinance―trust and transparency, shared performance standards, generosity in sharing innovations and lessons, mutual accountability for results Culture Financial policies and systems that work for the poor majority Systems