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As more and more private investors are getting involved in microfinance, the sector is experiencing an investment boom. Between 2004 and 2006, the stock of foreign capital investment in microfinance institutions more than tripled to reach US$4billion. So far, the vast bulk of private investment in microfinance is socially motivated, says this Focus Note, written by Xavier Reille and Sarah Forster.
A Case Study on Microfinance Interest Rates and Profits
Does competition result in lower interest rates to microcredit customers? To address this question, this Focus Note analyses the experiences of Uganda, Bangladesh, and Bolivia, home to some of the early regional and even global pioneers of microcredit.
Many microfinance institutions in developing and transition economies receive foreign funding. This Focus Note looks at these "foreign investors" and the demand for their services. It presents a view of the market and addresses key questions, including How much foreign investment in MFIs is really private? How much of this investment is really commercial? Where is the investment being placed, in terms of region, number, and type of MFIs? Are investors competing to invest in MFIs? As MFIs grow and absorb more funding, what is the likely role of foreign investment compared with domestic sources? Does foreign debt create inappropriate currency risks for MFIs? and What practical lessons emerge from this analysis?
There is a vast potential market for retail financial services among low-income clients, and a growing number of commercial banks have successfully entered this market. Compared with many existing providers of microfinance, commercial banks have potential competitive advantages in a number of areas, such as recognizable consumer brand names, existing infrastructure and systems, and access to capital. Given the differences between classic banking and microfinance, commercial banks need to view microfinance as a new business line and conduct the same kind of research that any company would entering a new market. No bank should expect to make a 'quick buck' from microfinance, but the evolving models are encouraging more banks to see the long-term business rationale. This Focus Note highlights recent CGAP research about the different ways in which commercial banks have successfully entered the microfinance market.
Retail financial institutions remain the backbone of financial systems that serve low-income clients. They need complex skills to offer poor people quality financial services on a permanent basis. In most countries, inadequate retail capacity is the main bottleneck to scaling up microfinance. This brief addresses how funding agencies - public donors, international NGOs, private foundations, and investors - can help meet the challenge of developing retail capacity.
Estimating market potential and assessing regulatory obstacles
This report was commissioned by the FinMark Trust and CGAP (The Consultative Group to Assist the Poor), in order to highlight the potential demand for cross-border remittance services in southern Africa, evaluate the potential business and technological opportunities in the remittance market, identify regulatory barriers to doing business (in both financial and immigration legislation), and propose policy and regulatory changes to facilitate the development of the market.
Little is known about how consumer protection might apply to financial services for the poor. As commercialization and competition increase, vulnerable borrowers may be more exposed to potentially abusive lenders. Low-income borrowers may be functionally illiterate, first-time consumers, or insufficiently informed about their rights and can be pressured into making poor borrowing decisions. Strategically, enhanced consumer protection measures can be a more constructive alternative to new or lowered interest rate ceilings. This paper discusses two primary approaches to enforcement of such measures - voluntary codes and state regulation - in the context of developing countries.
Formal remittances constitute the second largest source of external funding for developing countries, ahead of capital market flows and development assistance. From the viewpoint of financial service providers, transferring remittances can be a lucrative business, and smaller providers have begun to explore market segments not yet penetrated. This paper explores operational and strategic considerations involved in launching a money transfer product.
This CGAP study reveals that governments and multilateral agencies have funded nearly 90% of the US$ 1.1 billion in total investment in microfinance through quasi-commercial debt, equity, and guarantees. Privately managed microfinance investment funds are expected to double their capital by mid-2004. Microfinance institutions and investors must become more transparent about their performance before commercial capital reaches the volumes needed to fund massive outreach. However, the dominant source of funds for microfinance will likely remains deposits and domestic capital sources.
Scoring is a new way to judge the risk of whether the self-employed poor will repay their microcredit debts as promised This paper discusses how scoring works, what microlenders can expect from it, how to use it, and what its implications are for microcredit.
The impact of commercialization and increased competition on the strategy and performance of MFIs in Latin America is examined, with particular focus given to mission driftthat is, whether or not commercialization drives microfinance institutions to deviate from their original missions. Drawing on an analysis of 205 Latin American MFIs, the paper describes the state of the industry in the region, the rapid changes it has undergone over time, and the challenges it now faces.
This note highlights how international financial institutions can serve as catalysts in the development of microfinance retail capacity. Tthe World Bankemployed a patient, phased support to Brazil's Banco do Nordeste as it designed, launched, and nurtured its CrediAmigo microfinance program. Its early progress suggests useful lessons for microfinance donors.
This synopsis of a study written by Mayada Baydas, Douglas Graham, and Liza Valenzuela for Development Alternatives, Inc. (Washington, DC) describes issues faced by commercial banks interested in offering microfinance services. It briefly documents the experience of 17 commercial banks with microfinance programs.
BancoSol, a Bolivian MFI, faced significant financial and management challenges as it underwent a transition from NGO to licensed commercial bank. The publication summarizes an Ohio State University paper by Claudio Gonzalez-Vega, Mark Schreiner, Richard L. Meyer, Jorge Rodriguez, and Sergio Navajas.
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