DIVERSITY IN THE PROVISION OF

FINANCIAL SERVICES

By Dr. Jennifer RiriaCEO, KWFT

SEPTEMBER 2005

INTRODUCTIONPOVERTY STINKS

You see it, The mothers in the village including my own, carrying heavy loads on their backs,Heavy with child in succession throughout their fertile lives – (will then have 10-12 children)Working 18 hours a day and no voice to call for help

Yes, Poverty Stinks!It stank when I was there, walking on cold wet July days up and down the Mt Kenya Hills on bare feet – no shoes.Wearing on worn out uniform even as my Sunday Best, sharing my bed with three of my sisters and a relative; and under the tiny bed, a bed for chicken;Disrespected,Lonely among many Dehumanized by lack of access to basic necessities of life.

A donkey Ayah, malnourished because culture enhances it. However, my grandmother, my mother and I did not sign any Contract with poverty; The poor do not have a Contract with Poverty. I am a living testimony to that fact.

Poverty cannot be addressed by cash only; financial services is just a means to an end.There is need to break the cycle of poverty that has various dimensions:PsychologicalEmotionalAttitudinal to selfLack of access Resource

Information Opportunities

EconomicalPolitical – no voice

When you are poor, you lack self esteem, voice, power, you are the underdog. This cannot be addressed by access to credit alone.

THE BIG QUESTION

How then do we address diversity in development, and in particular in provision of financial services??

CREDIT PLUS should be part of the new vocabulary in provision of financial services. It means that we have to be more than ever now focused on what poor people want.

What Poor Clients Want in Microfinance

Value speed and convenienceWant access to larger loansWant respect and recognitionCare about interest rates

Microfinance clients want more, faster and

better

Want business and housing loansWant short, medium and long term savings productsWant health and life insuranceWilling to pay what it costs for responsive, sustainable services

Low income women and men define

microfinance broadly

As their experience grows, clients of group loans want larger loans and resent the time taken in group meetings and the need to guarantee repayment by other members of the group

Poor people prefer individual loans over

group loans

Building Financial Systems that Work for the Poor Majority

Encourage a range of institutions and

methodologies:

• Commercial banks

• Regulated MFIs

• Microfinance NGOs

• Finance companies

• Coops, credit unions

• Grassroots organizations

Adopt standards on performance in:

• Outreach to poor clients

• Portfolio quality

• Efficiency

• Financial sustainability

• Financial integration

• Impact

Provide appropriate support modalities.

Institutions that meet high standards need:

• Policies, regulations and legal structures that fit what works in microfinance

• Access to finance and capacity building that fit the institution’s size and stage

• Ability to mobilize voluntary savings

1. 3.2.

Policy, Regulatory and Legal Frameworks are Needed for Microfinance Operations

Key Features of Microfinance

Transaction costs are high

Clients lack conventional collateral

Simple MIS, accounting

Savings important to client and MFI

Many small branches

Loan officers not traditional bankers

Institutions need to be able to charge relatively high interest rates

Microloans as loan class, with portfolio Quality and lending methods--not loan Collateral—used to evaluate risk.

Simple while rigorous reporting requirements – with microfinancestandards and benchmarks

Ability for high performing MFIs to mobilize deposits from borrowers and from the public

Ability to establish branches and agencies rapidly

Flexibility in hiring, andperformance-based incentives

ResponsiveFramework

Policy, Regulatory and Legal Frameworks are Needed for Microfinance Operations

Key Features of Microfinance

Transaction costs are high

Clients lack conventional collateral

Simple MIS, accounting

Savings important to client and MFI

Many small branches

Loan officers not traditional bankers

Institutions need to be able to charge relatively high interest rates

Microloans as loan class, with portfolio Quality and lending methods--not loan Collateral—used to evaluate risk.

Simple while rigorous reporting requirements – with microfinancestandards and benchmarks

Ability for high performing MFIs to mobilize deposits from borrowers and from the public

Ability to establish branches and agencies rapidly

Flexibility in hiring, andperformance-based incentives

ResponsiveFramework

PARADIGM SHIFT IN RETAIL BANKING WITH THE POOR

Low interest rates

Low repayments

Low “know your customer”

Minimal loan amounts

Low Sporadic, and shallow Outreach relative to demand

Interest rates that cover costs, enable profits

Excellent Portfolio quality

Understand household economies, Economic activities of the poor.

Financial products and processes thatRespond to poor households , enterprises

High outreach, impact.

CONCLUSION

Challenges for This Decade

• Expand outreach to millions more low income entrepreneurs―by increasing MFI capacity, mobilizing mainstream banks, and building domestic capital markets

Outreach

• Help poor people build assets―not just debt―through business loans, voluntary savings, housing finance, insurance

Assets

• Cut transaction costs in microfinance―new technologies and channelsCosts

• Build a culture among MFIs, bankers, policy makers and funders in microfinance―trust and transparency, shared performance standards, generosity in sharing innovations and lessons, mutual accountability for results

Culture

• Financial policies and systems that work for the poor majoritySystems