approach
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The Centre for Micro Finance
A comprehensive approach of Microfinance
KarachiNovember 1st, 2006
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Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
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Microfinance: who are the targeted clients?
Poor and vulnerable households economically at the Bottom of the Pyramid
Low IncomeLow Income
Middle Class
HNI
Ultra poorHow can microfinance improve their lives?
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Microfinance: what is it?
…whereas objectives areOften perceived as…
• Suite of financial services– Thrift / savings– Credit– Insurance and Investments– Transfer Payments and
Remittances
• Group and individual lending
• Sustainable activity
• Micro-credit
• Group lending
• Social/charitable activity
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The challenge ahead: demand vs. supply gap to bridge
SupplyDemand
• 60% of MF services in South• Several un-served areas
• < 2M Households reached• 500M un-served poor
• Fast growing population and overall economy
• Range of risks to be covered
• Missing market linkages / employment opportunities
• Limited non-credit services
Improve access
Increase impact
• Largely urban • Mostly rural
• $1.5 Bn*• $50Bn
* Including loans against gold
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Information Asymmetry
• No collateral• No credit history• Difficult to evaluate
enterprises’ potential success
High Costs of Intermediation
• Low value transactions• Geographical isolation• High supervision costs (no financial literacy)• Informal activities: need flexible access• Illiteracy: traditional services inappropriate• High cash handling costs
Constraints overcome those challenges?
Difficult risk assessment
High transaction costs
How to release these constraints?
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Systems
Finance
Thus the need for institutions’ building
• Venture capital for start ups• Cheaper cost of funds for on lending
Capacities
• Product development• Technology platform• Clients’ authentication by unique ID
• Staff Skills strengthening / Training• Recruiting of professionals• MFI Entrepreneurs development
Research• Assess and Increase impact on poverty alleviation• Experiment and improve products
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Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
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CMF’s objectives and mission
• Established in 2005
• CMF’s objectives– To address knowledge gaps in micro finance sector– Experiment on ground solutions
• CMF’s mission– Systematically research links between access to financial
services and participation of poor in larger economy
– Participate in maximizing access to financial services
Research on micro finance and livelihood financing (RU)
Strategy building for MFIs (MSU)
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CMF’s Objectives
ResearchInfluence practice
Advocacy
Strategybuilding
Training
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MSU and RU re-enforcement loop
Strategy (MSU)
Research (RU)
Impact of microfinance• Impact Evaluation Studies• Economics of micro enterprise• Insights on HH "financial behavior"• Constraints on HH productivity• Experimentation on product design• Micro finance transaction costs
MFIs Strategy for growth•Definition and implementation of
innovative business models–Market research, creation of linkages
•MFIS best practices sharing•Design/test of new financial products •Capacity building
–capital structure, HR, MIS, processes, customer segmentation, governance…
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CMF collaborates with existing active players in the microfinance sector
Manufacturing Companies
Insurance Companies
Funding Organizations
MFIs/NGOs/Trust Banks/Financial
Institutions Universities/
Research Institutions
Regulators/ Policy Makers
Government (Central and State)
SMEs CDF
CIRMCAFS
CMF
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Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
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Understand better
• Why are recovery rates so high?• What is the financial behavior of clients? • What is the impact of microfinance?
Improve quality of services
• New and innovative products• Maximize the impact of credit through other
services
• Improve organizations– Information management– Role of HR policy and staff incentives– More cost-effective processes
Goals of Research is to maximize microfinance impact through 3 axes
• Alternative channels– SHGs– Revive RRBs– New channels (Kiosks, ATM, CF…)
• Policy– Regulation– Competition and information sharing
Expand access
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These objectives translate into 4 Research areas to maximize microfinance impact
Microfinance plus
Finance andOrganizational
issues
Policy
Impact and product design
1 2
4 3
Maximize impact On client
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Product design: credit
Selection Monitoring Enforcement
• Individual/group liability
• Self/MFI selection• Guarantors• Collaterals• Interest rate
• Repayment schedule• Communication
strategies• Loan size• Interest rate
Design the most cost-effective products by varying credit product components
• Within group monitoring
• Staff supervision
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What do low
income clients want?
Insurance•Weather •Life and Health•Livestock Flexible loans
•Small initial sizes•Larger subsequent loans
•Longer terms
Housing loans•Build new homes•Improve existing homes
Savings
•Group based•Individual loans
Remittances products
Product diversification and communication strategies
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Which delivery channels/communication strategies are effective?
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Microfinance Plus: address contextual constraints
? Impact
Health
infrastructure
entrepreneurship
Access toFinancial services
•Reduce risks of MFIs by combining microfinance with other development interventions (health, financial training…) •Provide products / services through credit
2
inpu
ts
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Organizational issues: cost and profitability
Bank Transaction? Micro-loan9% 25%
Return?
• How to reduce transaction costs?• Show investors risk return performance of
micro-loans
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Policy issues
• What are regulatory obstacles to MFIs?
• What are the consequences of competition and how to manage it?
• Why is there no information sharing? How can a credit bureau be set up?
• How to make MFIs more transparent?
• How to improve microfinance reputation?
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Research: other initiatives
• Construction of a panel database in Tamil Nadu for on-going research• With Yale Center for Economic growth (Mark Rosenzweig, Dean Karlan, Chris
Udry, Paul Schultz, Rohini Pande)• 10,000 households in Tamil Nadu, rural and urban, every 4 years• Study vulnerability, consumption patterns over time• Document migration patterns, access to financial services over time
• Economics of micro finance, by Adel Varghese, Texas University• Evaluating social programs, by Poverty Action Lab• MBA course elective on microfinance, by Rock Rock Magleby-Lambert, Boston University• Total immersion program in Finance and development
Panel database
Seminar series
• Academics and practitioners• Foregone seminars
– Prof Ashok Jhunjhunwala, IIT Chennai – Prof Vaidyanathan, Madras Institute of Development studies– Prof Sendhil Mullainathan, Harvard– GN Bajpai, ex chairman of SEBI– Shekhar Shah, World Bank
Courses
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Agenda
• Microfinance in India: an overview
• The Centre for Micro Finance
– Research Unit
– MFI Strategy Unit
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MSU: Objectives and areas of work
• Advice MFIs to define and execute a growth strategy by addressing their main challenges– Horizontal growth (Same Products & Same Customers Profile)– Vertical growth (New Products &/or New Customers Profile)
Refine Business strategy and model
Improve internal Organizational structure
Support MFIs growth (vertical & horizontal)
Recommend Implement Diagnose Scale up
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MSU: Areas of work with MFIs
Business strategyOrganizational structure
• 3y strategic plan definition– Competitive position assessment
(SWOT analysis)
• Marketing strategy – Customer segments to target– Products to develop to serve these
segments (IL, insurance…)– Portfolio management
• Market linkages creation– Leverage of ICICI MFIs and
corporations clients– Thematic consultations
• Capital structure (equity/debt) and access to financial markets (VC, securitization…)
• HR recruiting, training, incentives
• Organizational design– MIS– Processes of operations– Governance
2
4
1
3
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Reduction of MFIs cost of funds: Supply-demand match assessment
Supply Demand
Identify potential assets to securitize/buy out
Evaluate investors risk/return appetite for
MFIs’ paper
Check demand / supply requirements match
Facilitate / structure the deal
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4 options to explore and 4 types of players to interview to reduce MFIs costs of funds
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Portfolio Securitization
Bond issuePortfolio Buyout
Direct medium/long
term loan
Foreign banks
Domestic banks
Funds
Facilitator
• Minimum volume of investment?• Investment currency and hedging mechanism?• Tenure / maturity of investment?• Pooled vs single MFI portfolio investment?• Investor risk/return profile?
– Portfolio / MFI rating requirement?– Guaranty requirement (FLDG/SLDG)?
• Investment seasonality (PSL requirement)?• Investor reporting / monitoring requirements?• Willingness / capacity of the MFIs to receive funds and
comply with investors requirements?
Impact on MFIs CoF?
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HR training, recruiting, incentives
Potential partnersOrganizational structure
• MFIs careers, Hunt – Third sector• Awareness program
• Recruitment: facilitate recruitment for the entire sector in the next 3-5 y => 20K FTEs to hire (TBD)
• Financial training for top mngt
• Training for middle mngt & field staff
• Incentive schemes
• IFMR centers (CAFS, insurance…)• ICICI trainings• HBS, Duke, IIM
• Coordinate existing providers– MicroSave, Care India, Basix school
of livelihood, EDA
• Set up new facilities (if required)
• Cocoon?
2
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MIS: partnership with FINO3
• To develop a common end to end delivery platform shared across Indian MFIs
• Created as sectoral resource to serve 700M customers
Objective
• To access reliable data on MFIs operations performance• Easier portfolio rating through creation of historical data
Benefits for MFIs
Benefits for investors
• To reduce initial CAPEX required per MFI• To improve product depth and capability • To improve business management and reduce transaction costs
– data reliability and timeliness (product, clients) – To better service liabilities and investments– To allow single-window monitoring of customer relationships
Current status
• Currently sized for 12-50M customers• Proof of concepts completed, final contract negotiations (IBM/iflex)• Entire infrastructure, hosting, operations outsourced• First phase launch with 5 partners by May 2006
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Market linkage creation: approach
Corporates
MFI
• Local presence in identified region?• Willingness/Capacity of MFI to
−Provide customized financial products?−Identify entrepreneurs (if necessary)?−Provide/coordinate technical training at
the field level?
• Volume generated (absorbed)?• Quality?• Cost of production?• Capacity to contract & payback loan?• Existing capabilities/training need?
• Product to be sourced (retailed)?−Region? Volume? Price? Quality?
• Required investments (capital or capabilities) for tie up?−Expected return (in value)?−Timeframe of return?
• Risk undertaken by company (quality…)?• Previous pilot already undertaken?
Customers
Dem
and
Supply
ICICI Commercial teams
ICICI Sectoral team Sectoral experts / NGOsMarket dynamics
4
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Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (1/2)
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Objective• To increase farmers revenues from milk production through improved
yield and quality of milk produced by cattle feed utilization• To reduce the risk on Spandana’s loans that go toward buffalo purchase
Expected Impact
• Expected net revenue increase in Guntur – 300-600Rs/month/household with a single buffalo fed with cattle feed– up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after
demonstration effect on one buffalo
• Marketing the feed product to traditional / low income farmers and educating them to utilization of such product
• Designing a credit product that caters to the clients’ needsChallenges
*: average monthly household income of 60 families surveyed was 7000Rs
• Dairy activity is a low revenue activity for farmers in spite of a growing milk demand and therefore remains a marginal source income
– Milk yields from buffaloes is low because these are not fed good quality feed– Farmers perceive dairying as a subsidiary activity because it only offers marginal
income: they have no incentive to own more that 1 or 2 buffaloes– Farmers however willing to invest in dairy (cattle feed, high quality breeds, artificial
insemination…) often lack the funds to do so
• Godrej Agrovet, a concentrate cattle feed producer, is not presence in the areas where Spandana (MFI with 700,000 clients) operates.
Initial Situation
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Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (2/2)
Godrej Agrovet
Spandana
• Provide credit at 0% int. rate for the purchase of feed
• Delivers the product to weekly center meeting
• Has assigned 1 project leader• Does not make any profit out of
this initiative
• Increase yields and fat %• Increase income by 10-20 Rs/day• Are offered doorstep delivery• Are able to purchase the feed on
credit at 0%
• Delivers concentrate feed in 50 kg bags to central locations from where Spandana receives the product
• Region: Guntur• Price: 325Rs/50 Kg• Has assigned 2 officers to coordinate project
Customers
Dem
and
Supply
4
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Godrej Agrovet-Spandana: productivity improvement
Initial situation
Dealer
Godrej
Distributor
Farmer
Dealer
Dairy
After Spandana-Godrej partnership
To be piloted
Spandana
Farmer
Godrej
Spandana
Chiller Entrp.
Dairy
Milk
Cattle feed
Cattle feedPiloted
Loan
Sales
Sales
Loan
4
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• Handicraft
• Fisheries / Seaweed
• Trees plantation
• Food processing
• Vegetables / Mint cropping
Market linkage creation: other projects4
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Thank youFor any question…
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Information Asymmetry• No collateral• No credit history• Difficult to evaluate
enterprises’ potential success
High Costs of Intermediation • Low value transactions• Geographical isolation• High supervision costs (no financial literacy)• Informal activities: need flexible access• Illiteracy: traditional services inappropriate• High cash handling costs
Constraints to scaling access for the poor
Provision of microfinance is
constrained by…Regulatory Issues
Staff Incentives not aligned to maximise access to financial services for poor
High transaction costs
Poor Technology
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How to release these constraints?
• To improve impact of microfinance on the poor• To increase access to the relevant suite of financial services
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CMF: Who are we?
• Permanent staff: 23 Research associates and 8 MSU Associates from Kennedy School, Yale, IFMR, XIMB, IRMA…
• Short-term Interns: Masters and Phd students from Kennedy School, Harvard, Yale, MIT, DSE etc.
• Research Committee to give advice on submitted proposals :– Jonathan Morduch (NYU), Abhijit Banerjee (MIT), Byomkesh (SKS),
Mr. Thiagarajan (MCFI), Chandrasekar (IFMR), Bindu Ananth (CMFR founder)
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CMF’s Objectives
ResearchInfluence practice
Advocacy
Strategybuilding
Training