1 Microenterprises, Microcredit, Access to Finance: Building a regulatory framework for microfinance Robert Peck Christen Microenterprises, Microcredit, Access to Finance: Building a regulatory framework for microfinance Robert Peck Christen

2 As a central banker, how do you create a microfinance industry?

3 Nature of Microfinance Challenge in Big Markets Largest programs Negligible market penetration Stagnant growth in major urban areas Yet – continued claims of low rate banking services in urban neighborhoods…….

4 Microenterprise – key to employment Microcredit – tool poverty alleviation Access to finance – motor for economic development

5 Figure 1 – Latin American Microfinance by Institutional Type (#)(%)(#)(%) Total1,367100%3,989100% Commercial Banks29722%1,38235% Non Bank Financial Institutions (NBFIs)45133%59715% Non Governmental Organizations (NGOs)61945%2,01050% Source: CGAP Inventory of Microfinance Institutions in Latin America, 1999 and Global Numbers, 2003

6 Source: CGAP Inventory of Microfinance Institutions in Latin America, 1999

7 Microfinance in Latin America Started as microenterprise finance Credit driven Multiple institutional types lend Profitable Not yet profitable enough to attract real venture capital

8 Microfinance has Evolved Broader range of financial services (savings, insurance, remittances) Broader range of clients (more rural, less and more wealthy)

9 Blurring of the Lines Consumer finance companies may be lending to more microenterprises than specialized programs Financial infrastructure proposed by Access approach essential to lower transaction costs, poverty alleviation

10 Blurring of the Lines Microenterprise lenders have special knowledge required by consumer finance to improve service, profits Banking sector has far more liquidity than targeted lenders can ever use

11 20% Income Level Sector Formal Sector Informal RURALURBANURBRUR SALARIED Non SALARY COVERAGE MAP OF MICROFINANCE Banks Finance Company Ag Banks Microcredit Microenterprise

12 Your approach to building a system for access depends most fundamentally on whether you believe these services can be provided on a commercial basis.

13 If you take an access approach……. Regulatory issues tend to disappear as MF disappears into bank portfolios (Chile)

14 If you take a microenterprise, microcredit approach…….. Regulatory role is central to enable alternative institutional types, banking relationships (SCMs, banking correspondents) Inferior path – more work, higher cost, poorer service, higher systemic risk, more subsidy – Only worthwhile if you believe that commercial finance will not reach down or out to a substantial marginal population that requires service

15 System Support and Maintenance Costs Failure of system to provide for product development and standardization, staff training, access to liquidity leads inevitably to the failure of a number of individual entities. Support function is expensive and rarely self funded by individual entities in the system. Self regulation virtually never works

16 System Support and Maintenance Costs Management intervention and protection against systemic risk essential to long term survival. Represents a significant cost to individual entities, and to bank supervisors. 50 percent of supervision budget in Philippines 3% of total assets of supervised entities in Peru

17 Support and Supervision Costs HIGH Clients can pay But repressed interest rate regimes such as that of Brasil will not leave enough margin to cover these system costs – which means these activities won’t happen!

18 Suggestions for Microfinance Regulation in Brasil Establish MF profitability in Brasil Remove interest rate limits Level playing field among all players Consumer protection legislation and policy essential complement.

19 Suggestions for Microfinance Regulation in Brasil Infrastructure: POS, Data clearinghouse, clean-up legal Continue work to make public finance infrastructure available to MF intiatives.

20 Suggestions for Microfinance Regulation in Brasil Subsidize entrance of credit unions, banks other commercial players into hard to serve markets through auctions Mainstream MF knowledge, products

21 If you must develop alternative delivery vehicles Look to banks/investors for support, liquidity, product development functions, not to bank regulators or industry groups.

22 Policy Discussion Is it less expensive in the long run to follow an access approach, and let competition drive banks down market than to subsidize the creation of a large number of specialized MFIs that start down-market? Is it an institutional question?

23 Policy Discussion Or, is it a knowledge, technology question? Do we need to work harder to get the special knowledge about the poor, their money, and how to serve them with financial services into the commercial banking sectors?

24 Thank You!