Challenges of the Microfinance Sector in Asia: The Asian Development Bank’s Experience Presentation by Nimal A. Fernando Principal Finance Specialist (Microfinance) Asian Development Bank Workshop on Microcredit-Financing and Poverty Alleviation in OIC Member States Istanbul, 9-10 July 2007

2 Outline PART I Brief History of ADB Operations Brief History of ADB Operations Microfinance Development Strategy of ADB Microfinance Development Strategy of ADB Current Loan Portfolio and its main features Current Loan Portfolio and its main features Other Microfinance Activities of ADB Other Microfinance Activities of ADB PART II Asian Microfinance Industry: Current Status Asian Microfinance Industry: Current Status Challenges of the Industry Challenges of the Industry Concluding Remarks Concluding Remarks

3 Brief History of ADB Operations The modest beginning in 1988 with focus on NGOs Gradual expansion: geographic and institutional types Review of ADB’s MF Operations Main findings on Early Projects included: – focused on credit delivery – lack of emphasis on other financial services – little attention to financial viability – Allowed subsidized interest rates

4 Why did ADB need a Strategy? -The industry was rapidly evolving -Need to adopt a systematic approach was recognized -A general framework was needed to guide operations -A consistent basis was needed for policy dialogue -A Strategy can help improve quality of assistance Microfinance Development Strategy (MDS) of ADB

5 Extensive consultation process for fact finding –Internal in ADB –Internal in developing member countries –External consultations Consultation on the Draft Strategy The final version approved by the Board in May 2000 MDS: The Formulation Process

6 Goal: ensure permanent access to institutional financial services for a majority Purpose: support development of sustainable MF systems that can provide diverse services of high quality MDS: The Content

7 MDS: Strategic Focus Areas of MDS Creating a supportive policy environment Developing financial infrastructure Building viable institutions Supporting pro-poor innovations Supporting social intermediation

8 Current Loan Portfolio and Its Main Features Over $1.3 billion Heavy concentration in 4 countries –I–India/Pakistan/Philippines/Sri Lanka Support diverse set of institutions Encourage private sector and social entrepreneurs Sector development projects are prominent now Microfinance component projects: questionable quality

9 Other Microfinance Activities of ADB Research and knowledge sharing Pioneering studies in microfinance -R-Rural Financial Markets in Asia (2000) -R-Role of Central Banks (2000) -C-Commercialization of Microfinance ( ) -S-Study on rural financial markets in Central Asia (2006) Quarterly Newsletter on Microfinance (since July 2000) Assistance for capacity building and policy advise Networking: pioneering member of the CGAP

10 PART II Current Status of the Asian Microfinance Industry Many institutions, but large institutions account for bulk of the outreach Three giants in Bangladesh: Grameen Bank/ASA/BRAC Market in India has become vibrant Banks and non-bank financial institutions: more important now. India and People’s Republic of China: lowest market penetration Private risk capital involvement is still small Significant government involvement in service delivery

11 Current status (cont’d…) A number of viable and very efficient institutions Most institutions are subsidy dependent and not financial viable Most focus on credit and offer rigid products Group lending methodology is widespread Deposit, money transfer, and insurance services: limited Quality of services remains questionable Outreach to the poorest is only marginal

12 Overarching Challenge Expanding scale of quality financial services -to millions of under-served clients -and to millions of unserved, including the poorest And doing these in a sustainable manner

13 Meeting the Overarching Challenge A number of challenges must be overcome Further improve enabling policy environment -Policy constraints continue in many countries in different forms -Interest rate caps on small loans (India/PRC) -Tendency to re-introduce interest rate ceilings -Constraints on foreign investments/ownership Policy dialogue with central and state/provincial governments -Policy makers change frequently -Their time horizon is short -Building supportive constituencies: slow process

14 Regulatory Barriers and Weak Supervisory Capacity Regulations are not compatible with the industry requirements Too rigid regulations Supervisory authorities lack adequate capacity Most small scale deposit taking institutions are not regulated and supervised properly

15 Building Sustainable and Adequate Retail Capacity Retail capacity to provide a broad spectrum of services is limited Massive efforts are needed to build this capacity Increase the currently limited number of sustainable institutions Tough decisions are needed to ensure viability (example: pricing policy) A large amount of resources and technical assistance is needed for capacity building Reforming state-owned financial institutions to serve the poor

16 Reducing Transaction Costs Cost of small value transactions remain high This translates into high prices High prices reduce access for some poor people Innovations, improvements in efficiency and productivity are needed

17 Integration of Microfinance into the Broader Financial System Walls remain between the two Walls must be dismantled Large-scale conventional financial institutions must be brought in This remains a formidable task

18 Concluding Remarks Asian microfinance industry has grown dramatically during the last two decades But many challenges remain Majority of the poor remain without adequate access Industry development is an unfinished business Funding agencies like ADB have to play a key role Funding agencies have to adjust their course to respond to emerging trends and opportunities

19 Thank you. For more information on ADB’s microfinance operations,