1. Microfinance and Urban Development Presentation to the Urban Cluster Mike Goldberg October, 2004

2. Microfinance in Urban Settings: Why?  Linked to access to credit for productive opportunities (working capital si, fixed asset lending no!)  Linked to land purchase and registration; urban infrastructure hookups  Linked to business formalization (maybe, but…)  Linked to employment generation (yes, but…)  Linked to business start-ups (no, but…)  Linked to social capital (but causation in reverse)  Linked to Competitiveness (maybe, but…)

3. Financial Systems Approach: 5 Levels  Government (financial sector regulation, supervision, legal framework – taxation, equity concentration, savings mobilization)  Commercial banks, finance companies  Specialized microfinance non-governmental organizations  Community groups (sector-specific associations, community leaders)  Microbusiness operators

4. Methodologies  Individual (character, collateral “lite”) – works best with larger micros with greater asset base, diversified clients with larger loans (US$250 – 700)  Solidarity groups (character-based joint liability mechanism, groups of 4 to 7) – works well in urban street markets with very small loans (starting at $50)  Community banks (character-based joint liability mechanism, groups of 20 to 40) – works best when social capital and organization is high.  Credit unions and S&L cooperatives (members hold shares, savings options, requires legal registration) – heavily dependent on member discipline; rarely effective when (I) more than 50 members, (ii) external financing 10%+  Competition between methodologies in a market very useful

5. Elements of Success in Urban Markets  Microfinance operational “basics”  Supportive or neutral legal framework  Private sector investment replaces donors, govt.  Commercial orientation of Board of Directors, management  Diversified source of commercially priced funds (not living on donations)  Mimic the local financial culture  Build on what’s there?? Or start from scratch??

6. Performance Indicators in microfinance  Client level – user surveys to measure satisfaction, retention rates, on-time repayment performance  Financial institution level – trend toward financial sustainability (CGAP definition); AROE, AROA  Market level – increased coverage (first time users), increased depth of services, lower transaction costs, lower interest rates

7. Leading institutions in urban markets  Specialized NGOs  Commercial banks  Finance companies (SOFOL in Mexico; Confia and Findesa in Nicaragua)  Combinations (MFIs with commercial bank investors, lenders)  The informal sector! (moneylenders, pawn brokers, check cashers, Western Union…)  Family and friends  Supplier credit

8. What goes wrong?  Elections!!!  Economic downturns? Not really…  Financial mismanagement (inadequate reserves, poor MIS, lack of strategic approach, inadequate audits, human resource issues/corruption)  Donor dependence  Counter-productive changes in legal framework  Lack of clear supervision strategy

9. Future directions  More commercial bank participation?  Specialized finance companies on the rise  Diversified service menu (moving beyond working capital)  Consumer credit meets productive uses  Microbusiness – infocenters and beyond  Bigger role for Superintendents of Banks and other financial institutions (against their will?)  Cooperatives on the rebound in several countries  Harnessing “cadenas productivas”